What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-09 · 156 added, 150 removed, 324 unchanged (49% of the section changed)

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When we refer to “Bank” in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc., and the Bank’s wholly-owned subsidiary, Timberland Service Corporation.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and six months ended March 31, 2023.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and nine months ended June 30, 2023.

Special Note Regarding Forward-Looking Statements

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These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to:

potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to new variants of the novel coronavirus disease 2019 ("COVID-19");

potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine, as well as increasing supply chain disruptions, higher inflation and the impact of current and future monetary policies of the Federal Reserve in response thereto;

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves;

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bank subsidiary by the FDIC, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;

the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

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The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 23 offices (including its main office in Hoquiam).

At March 31, 2023, the Company had total assets of $1.79 billion, net loans receivable of $1.21 billion, total deposits of $1.55 billion and total shareholders’ equity of $227.66 million.

At June 30, 2023, the Company had total assets of $1.81 billion, net loans receivable of $1.26 billion, total deposits of $1.55 billion and total shareholders’ equity of $229.26 million.

The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank.

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Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period.

Since March 2022, in response to inflation, the FOMC of the Federal Reserve has increased the target range for the federal funds rate by 475 basis points, including 175 basis points during the first six months of fiscal 2023, to a range of 4.75% to 5.00% as of March 31, 2023.

As it seeks to control inflation without creating a recession, the FOMC has indicated further increases may be implemented during calendar 2023.

Since March 2022, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 500 basis points, including 200 basis points during the first nine months of fiscal 2023, to a range of 5.00% to 5.25% as of June 30, 2023.

Subsequent to June 30, 2023, the FOMC increased the target range for the federals funds rate by an additional 25 basis points taking benchmark borrowing costs to their highest level in more than 22 years.

The provision for (recapture of) loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.

The allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio.

The Company recorded a provision for loan losses of $475,000 and $1.0 million for the three and six months ended March 31, 2023, respectively, primarily due to loan portfolio growth.

There was no provision for loan losses for the three and six months ended March 31, 2022.

The Company recorded a provision for loan losses of $610,000 and $1.61 million for the three and nine months ended June 30, 2023, respectively, primarily due to loan portfolio growth.

There was no provision for loan losses for the three and nine months ended June 30, 2022.

Net income is also affected by non-interest income and non-interest expense.

For the three and six months ended March 31, 2023, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold, escrow fees and other operating income.

For the three and nine months ended June 30, 2023, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold, escrow fees and other operating income.

Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any.

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There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2022 Form 10-K.

Comparison of Financial Condition at March 31, 2023 and September 30, 2022

The Company’s total assets decreased by $73.89 million, or 4.0%, to $1.79 billion at March 31, 2023 from $1.86 billion at September 30, 2022.

Comparison of Financial Condition at June 30, 2023 and September 30, 2022

The Company’s total assets decreased by $52.80 million, or 2.8%, to $1.81 billion at June 30, 2023 from $1.86 billion at September 30, 2022.

The decrease in total assets was primarily due to a decrease in total cash and cash equivalents, which was partially offset by increases in loans receivable and investment securities.

Cash and cash equivalents were also used to fund the decrease in total deposits.

Net loans receivable increased by $77.77 million, or 6.9%, to $1.21 billion at March 31, 2023 from $1.13 billion at September 30, 2022, primarily due to increases in one- to four-family, multi-family construction, commercial real estate, and multi-family loans, as well as smaller increases in several other loan categories.

Net loans receivable increased by $128.22 million, or 11.3%, to $1.26 billion at June 30, 2023 from $1.13 billion at September 30, 2022, primarily due to increases in one- to four-family, multi-family construction, commercial real estate, multi-family, and custom and owner/builder construction loans as well as smaller increases in several other loan categories.

These increases to net loans receivable were partially offset by smaller decreases in several other loan categories.

Total deposits decreased by $83.41 million, or 5.1%, to $1.55 billion at March 31, 2023 from $1.63 billion at September 30, 2022, primarily due to decreases in non-interest bearing account balances, NOW checking account balances, money market account balances, and savings account balances.

Total deposits decreased by $79.45 million, or 4.9%, to $1.55 billion at June 30, 2023 from $1.63 billion at September 30, 2022, primarily due to decreases in non-interest bearing account balances, NOW checking account balances, money market account balances, and savings account balances.

These increases were partially offset by increases in certificates of deposit account balances.

Shareholders’ equity increased by $9.09 million, or 4.2%, to $227.66 million at March 31, 2023 from $218.57 million at September 30, 2022.

Shareholders’ equity increased by $10.69 million, or 4.9%, to $229.26 million at June 30, 2023 from $218.57 million at September 30, 2022.

The increase in shareholders' equity was primarily due to net income and proceeds from stock options exercised and was partially offset by the payment of dividends to common shareholders and the repurchase of common stock.

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Cash and Cash Equivalents and CDs Held for Investment:

Cash and cash equivalents and CDs held for investment decreased by $177.00 million, or 52.1%, to $162.65 million at March 31, 2023 from $339.65 million at September 30, 2022.

Cash and cash equivalents and CDs held for investment decreased by $192.77 million, or 56.8%, to $146.88 million at June 30, 2023 from $339.65 million at September 30, 2022.

The decrease was primarily a result of deploying overnight liquidity into higher-earning loan originations and investment securities, as well as to fund deposit withdrawals.

Investment Securities:

Investment securities (including investments in equity securities) increased by $24.74 million, or 8.0%, to $333.60 million at March 31, 2023 from $308.86 million at September 30, 2022.

Investment securities (including investments in equity securities) increased by $10.87 million, or 3.5%, to $319.73 million at June 30, 2023 from $308.86 million at September 30, 2022.

This increase was primarily due to the purchase of additional U.S.

government agency securities and mortgage-backed investment securities during the six months ended March 31, 2023, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period.

These increases were partially offset by maturities, prepayments and scheduled amortization of other investment securities.

government agency securities and mortgage-backed investment securities during the nine months ended June 30, 2023, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period.

These increases were partially offset by the sale of $8.83 million of available for sale investment securities (for a gain of $95,000) and to a lesser extent maturities, prepayments and scheduled amortization of other investment securities.

For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

FHLB stock increased $8,000, or 0.4% to $2.20 million at March 31, 2023 from $2.19 million at September 30, 2022, due to purchases required by the FHLB due to the increase in total assets from their annual assessment date.

FHLB stock increased $608,000, or 27.7% to $2.80 million at June 30, 2023 from $2.19 million at September 30, 2022, due to purchases required by the FHLB due to the increase in total assets and borrowings.

Other Investments:

Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both March 31, 2023 and September 30, 2022.

Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both June 30, 2023 and September 30, 2022.

This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.

Net loans receivable increased by $77.77 million, or 6.9%, to $1.21 billion at March 31, 2023 from $1.13 billion at September 30, 2022.

The increase was primarily due to increases of $40.52 million in one- to four- family loans, $18.57 million in multi-family construction loans, $11.23 million in commercial real estate loans, $8.85 million in multi-family loans, $3.84 million in commercial business loans and smaller increases in other categories.

Net loans receivable increased by $128.22 million, or 11.3%, to $1.26 billion at June 30, 2023 from $1.13 billion at September 30, 2022.

The increase was primarily due to increases of $53.16 million in one- to four- family loans, $20.37 million in commercial real estate loans, $17.36 million in owner/builder and custom construction loans, $16.75 million in multi-family loans, $12.08 million in commercial business loans and smaller increases in other categories.

These increases were partially offset by smaller decreases in several other categories.

Loan originations decreased by $128.20 million, or 41.8%, to $178.81 million for the six months ended March 31, 2023 from $307.01 million for the six months ended March 31, 2022.

Loan originations decreased by $163.38 million, or 37.5%, to $272.54 million for the nine months ended June 30, 2023 from $435.92 million for the nine months ended June 30, 2022.

The decrease in loan originations was primarily due to a decrease in the amount of commercial real estate, one- to four-family loans and commercial business loans originated.

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The Company generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income.

Sales of fixed-rate one- to four-family mortgage loans decreased by $35.89 million, or 91.0%, to $3.55 million for the six months ended March 31, 2023 from $39.44 million for the six months ended March 31, 2022, primarily due to decreased refinance activity for one- to four-family loans due to rising interest rates, declining homes sales and a decision to keep more single family loans originated during the quarter in the portfolio.

Sales of fixed-rate one- to four-family mortgage loans decreased by $44.09 million, or 86.4%, to $6.96 million for the nine months ended June 30, 2023 from $51.05 million for the nine months ended June 30, 2022, primarily due to decreased refinance activity for one- to four-

family loans due to rising interest rates, declining homes sales and a decision to keep more single family loans originated during the period in the portfolio.

For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Premises and Equipment:

Premises and equipment decreased by $154,000, or 0.7%, to $21.74 million at March 31, 2023 from $21.90 million at September 30, 2022.

This decrease was primarily due to scheduled depreciation.

Premises and equipment decreased by $324,000, or 1.5%, to $21.57 million at June 30, 2023 from $21.90 million at September 30, 2022.

This decrease was primarily due to scheduled depreciation and to a lesser extent the sale of a vacant land parcel.

OREO (Other Real Estate Owned):

At March 31, 2023 and September 30, 2022, total OREO and other repossessed assets consisted of two land parcels with no recorded value.

At June 30, 2023 and September 30, 2022, total OREO and other repossessed assets consisted of two land parcels with no recorded value.

BOLI (Bank Owned Life Insurance):

BOLI increased by $313,000 or 1.4%, to $23.12 million at March 31, 2023 from $22.81 million at September 30, 2022.

BOLI increased by $470,000 or 2.1%, to $23.28 million at June 30, 2023 from $22.81 million at September 30, 2022.

The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.

Goodwill and CDI:

The recorded amount of goodwill remained unchanged at $15.13 million at both March 31, 2023 and September 30, 2022.

CDI decreased by $135,000, or 14.2%, to $813,000 million at March 31, 2023 from $948,000 at September 30, 2022 due to scheduled amortization.

The recorded amount of goodwill remained unchanged at $15.13 million at both June 30, 2023 and September 30, 2022.

CDI decreased by $203,000, or 21.4%, to $745,000 at June 30, 2023 from $948,000 at September 30, 2022 due to scheduled amortization.

For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Loan Servicing Rights, Net :

Loan servicing rights, net decreased by $488,000 or 16.1%, to $2.54 million at March 31, 2023 from $3.02 million at September 30, 2022, primarily due to the amortization of servicing rights.

The principal amount of loans serviced for Freddie Mac and the SBA decreased by $13.41 million to $396.88 million at March 31, 2023 from $410.29 million at September 30, 2022.

Deposits decreased by $83.41 million, or 5.1%, to $1.55 billion at March 31, 2023 from $1.63 billion at September 30, 2022.

The decrease was primarily due to a $50.78 million decrease in non-interest bearing account balances, a $44.32 million decrease in NOW checking account balances, a $38.15 million decrease in money market account balances, and a $13.70 million decrease in savings account balances.

These decreases were partially offset by a $63.53 million increase in certificates of deposit account balances.

Loan servicing rights, net decreased by $702,000 or 23.2%, to $2.32 million at June 30, 2023 from $3.02 million at September 30, 2022, primarily due to the amortization of servicing rights.

The principal amount of loans serviced for Freddie Mac and SBA decreased by $18.92 million to $391.37 million at June 30, 2023 from $410.29 million at September 30, 2022.

Deposits decreased by $79.45 million, or 4.9%, to $1.55 billion at June 30, 2023 from $1.63 billion at September 30, 2022.

The decrease was primarily due to a $77.33 million decrease in non-interest bearing account balances, a $50.02 million decrease in NOW checking account balances, a $41.57 million decrease in savings account balances and a $39.26 million decrease in money market account balances.

These decreases were partially offset by a $128.73 million increase in certificates of deposit account balances (including an increase of $38.32 million in brokered deposits).

The net decrease in deposits was primarily due to competitive pricing pressure and customers moving excess funds to alternative higher yielding investments as well as general declines in individual customer balances.

Deposits consisted of the following at March 31, 2023 and September 30, 2022 (dollars in thousands):

March 31, 2023 September 30, 2022

Deposits consisted of the following at June 30, 2023 and September 30, 2022 (dollars in thousands):

June 30, 2023 September 30, 2022

Amount Percent Amount Percent

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NOW checking 397,761 25.6 447,779 27.5

NOW checking - reciprocal 11,688 0.8 — —

Savings 241,651 15.6 283,219 17.4

Money market 209,276 13.5 248,536 15.2

Money market - reciprocal 5,575 0.4 4,617 0.3

Certificates of deposit under $250 148,142 9.5 100,754 6.1

Certificates of deposit $250 and over 64,849 4.2 21,830 1.3

Certificates of deposit - brokered 38,322 2.4 — —

Total $ 1,552,730 100.0 % $ 1,632,176 100.0 %

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The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral.

There were no FHLB borrowings outstanding at March 31, 2023 and September 30, 2022.

FHLB borrowings increased to $15.00 million at June 30, 2023, as the Company borrowed funds consistent with its asset-liability objectives.

The borrowings consist of one $5.00 million borrowing and one $10.00 million, with scheduled maturities in May 2026, both of which bear interest at 3.95%.

The Company did not have any FHLB borrowings outstanding at September 30, 2022.

Shareholders’ Equity:

Total shareholders’ equity increased by $9.09 million, or 4.2%, to $227.66 million at March 31, 2023 from $218.57 million at September 30, 2022.

The increase was primarily due to net income of $14.17 million for the six months ended March 31, 2023 and $517,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $4.53 million, and the repurchase of 44,833 shares of the Company's common stock for $1.45 million (an average price of $32.23 per share).

Total shareholders’ equity increased by $10.69 million, or 4.9%, to $229.26 million at June 30, 2023 from $218.57 million at September 30, 2022.

The increase was primarily due to net income of $20.48 million for the nine

months ended June 30, 2023 and proceeds of $534,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $6.40 million, and the repurchase of 154,833 shares of the Company's common stock for $4.12 million.

Asset Quality:

Non-performing assets to total assets was 0.12% at March 31, 2023 and September 30, 2022.

Total non-performing assets decreased by $103,000, or 4.8%, to $2.06 million at March 31, 2023 from $2.17 million at September 30, 2022.

Non-performing assets to total assets was 0.09% at June 30, 2023 and 0.12% at September 30, 2022.

Total non-performing assets decreased by $492,000, or 22.7%, to $1.67 million at June 30, 2023 from $2.17 million at September 30, 2022.

The decrease in non-performing assets was due to a $473,000 decrease in non-accrual loans and a $19,000 decrease in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at March 31, 2023 and September 30, 2022 (dollars in thousands):

The following table sets forth information with respect to the Company’s non-performing assets at June 30, 2023 and September 30, 2022 (dollars in thousands):

2023 September 30,

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Accruing loans which are contractually past due 90 days or more — —

Total of non-accrual and 90 days past due loans 1,969 2,059

Total of non-accrual and 90 days or more past due loans 1,586 2,059

Non-accrual investment securities 87 106

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(1) As of March 31, 2023 and September 30, 2022, there were no one- to four-family properties in the process of foreclosure.

(1) As of June 30, 2023 and September 30, 2022, there were no one- to four-family properties in the process of foreclosure.

(2) Does not include TDRs on accrual status.

(3) Does not include TDRs totaling $50 and $142 reported as non-accrual loans at March 31, 2023 and September 30, 2022, respectively.

(3) Does not include TDRs totaling $0 and $142 reported as non-accrual loans at June 30, 2023 and September 30, 2022, respectively.

(4) Does not include loans held for sale, and loan balances are before the allowance for loan losses.

Comparison of Operating Results for the Three and Six Months Ended March 31, 2023 and 2022

Net income increased by $1.34 million, or 25.1%, to $6.66 million for the quarter ended March 31, 2023 from $5.33 million for the quarter ended March 31, 2022.

Net income per diluted common share increased by $0.17, or 27.0%, to $0.80 for the quarter ended March 31, 2023 from $0.63 for the quarter ended March 31, 2022.

The increases in net income and net income per diluted common share for the three months ended March 31, 2023 were primarily due to a $4.26 million increase in net interest income.

Comparison of Operating Results for the Three and Nine Months Ended June 30, 2023 and 2022

Net income increased by $568,000, or 9.9%, to $6.31 million for the quarter ended June 30, 2023 from $5.74 million for the quarter ended June 30, 2022.

Net income per diluted common share increased by $0.08, or 11.6%, to $0.77 for the quarter ended June 30, 2023 from $0.69 for the quarter ended June 30, 2022.

The increases in net income and net income per diluted common share for the three months ended June 30, 2023 were primarily due to a $2.65 million increase in net interest income.

This increase was partially offset by a $1.05 million increase in non-interest expense, a $227,000 decrease in non-interest income, a $610,000 increase in the provision for loans losses and a $194,000 increase in the provision for income taxes.

Net income increased by $3.36 million, or 31.1%, to $14.17 million for the six months ended March 31, 2023 from $10.81 million for the six months ended March 31, 2022.

Net income per diluted common share increased by $0.42, or 32.8%, to $1.70 for six months ended March 31, 2023 from $1.28 for the six months ended March 31, 2022.

The increase in net income and net income per diluted common share was due to a $9.31 million increase in net interest income.

This increase was partially offset by a $2.88 million increase in non-interest expense, a $1.18 million decrease in non-interest income.

a $1.00 million increase in the provision for loan losses and a $882,000 increase in the provision for income taxes.

Net income increased by $3.93 million, or 23.7%, to $20.48 million for the nine months ended June 30, 2023 from $16.55 million for the nine months ended June 30, 2022.

Net income per diluted common share increased by $0.50, or 25.4%, to $2.47 for the nine months ended June 30, 2023 from $1.97 for the nine months ended June 30, 2022.

The increase in net income and net income per diluted common share was due to an $11.96 million increase in net interest income.

This increase was partially offset by a $3.93 million increase in non-interest expense, a $1.41 million decrease in non-interest income, a $1.61 million increase in the provision for loan losses and a $1.08 million increase in the provision for income taxes.

A more detailed explanation of the income statement categories is presented below.

Net Interest Income:

Net interest income increased by $4.26 million, or 33.0%, to $17.15 million for the quarter ended March 31, 2023 from $12.89 million for the quarter ended March 31, 2022.

The increase in net interest income was primarily due to an increase in the average yield on interest-bearing deposits in banks and CDs, an increase in the average yield and average balance of investment securities and an increase in average balance of loans, as the Company placed a portion of its excess overnight liquidity into higher-earning loans and investments during the period.

This increase was partially offset by an increase in the average cost of interest-bearing liabilities and a decrease in deferred SBA PPP loan origination fees recognized due to a decrease in the volume of forgiven SBA PPP loans between the periods.

Total interest and dividend income increased by $5.87 million, or 43.4%, to $19.39 million for the quarter ended March 31, 2023 from $13.52 million for the quarter ended March 31, 2022, primarily due to increases in the average yield and balance of investment securities, the average balance of loans receivable and the average yield on interest-bearing deposits in banks and CDs.

Net interest income increased by $2.65 million, or 19.0%, to $16.63 million for the quarter ended June 30, 2023 from $13.98 million for the quarter ended June 30, 2022.

The increase in net interest income was primarily due to an increase in the average yield on interest-earning assets and, to a lesser extent an increase in the average balance of loans and investment securities, as the Company placed a portion of its excess overnight liquidity into higher-earning loans during the period.

This increase was partially offset by an increase in the average cost of interest-bearing liabilities.

Total interest and dividend income increased by $5.26 million, or 36.0%, to $19.89 million for the quarter ended June 30, 2023 from $14.63 million for the quarter ended June 30, 2022, primarily due to increases in the average yield and average balance of investment securities, the average yield and average balance of loans receivable and the average yield on interest-bearing deposits in banks and CDs.

These increases were partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs.

The average balance of total interest-earning assets decreased by $30.72 million, or 1.8%, to $1.72 billion for the quarter ended March 31, 2023 from $1.75 billion for the quarter ended March 31, 2022.

The average balance of investment securities increased by $130.29 million, or 63.9%, the average balance of loans receivable increased by $171.29 million, or 16.6% and was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $332.46 million, or 65.2%, between the periods.

During the quarter ended March 31, 2023, the accretion of the purchase accounting fair value discount on acquired loans increased interest income on loans by $15,000 compared to $34,000 for the quarter ended March 31, 2022.

The average balance of total interest-earning assets decreased by $109.96 million, or 6.1%, to $1.69 billion for the quarter ended June 30, 2023 from $1.80 billion for the quarter ended June 30, 2022.

The average balance of investment securities increased by $67.33 million, or 26.1% and the average balance of loans receivable increased by $181.11 million, or 16.9%, which was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $358.86 million, or 77.9% between the periods.

During the quarter ended June 30, 2023, the accretion of the purchase accounting fair value discount on acquired loans increased interest income on loans by $22,000 compared to $63,000 for the quarter ended June 30, 2022.

The incremental accretion will change during any period based on the volume of prepayments but is expected to decrease over time as the balance of the net discount declines.

During the quarter ended March 31, 2023, there was a total of $99,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $246,000 collected for the quarter ended March 31, 2022.

The average yield on interest-earning assets increased by 142 basis points to 4.51% for the quarter ended March 31, 2023 from 3.09% for the quarter ended March 31, 2022.

The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 408 basis points and 178 basis points to 4.30% and 2.94%, respectively, for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, while the average yield on loans receivable increased eight basis points to 4.98% during the same period.

Also impacting the average yield on loans receivable and average interest-earning asset balances during the quarters ended March 31, 2023 and 2022 were SBA PPP loans.

These PPP loans have a prescribed interest rate of 1.00% and are also subject to loan origination fees which are accreted into interest income over the life of each loan .

Total interest expense increased by $1.61 million, or 256.6%, to $2.24 million for the quarter ended March 31, 2023 from $627,000 for the quarter ended March 31, 2022.

During the quarter ended June 30, 2023, there was a total of $87,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $246,000 collected for the quarter ended June 30, 2022.

The average yield on interest-earning assets increased by 146 basis points to 4.72% for the quarter ended June 30, 2023 from 3.26% for the quarter ended June 30, 2022.

The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 396 basis points and 136 basis points to 4.79% and 2.94%, respectively, for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, while the average yield on loans receivable increased 46 basis points to 5.17% during the same period.

Total interest expense increased by $2.61 million, or 404.7%, to $3.26 million for the quarter ended June 30, 2023 from $645,000 for the quarter ended June 30, 2022.

The increase in interest expense was due to an increase in the cost of interest-bearing liabilities.

The average cost of interest-bearing liabilities increased to 0.84% for the quarter ended March 31, 2023 from 0.23% for the quarter ended March 31, 2022.

The average balance of interest-bearing liabilities decreased by $15.87 million, or 1.5%, to $1.08 billion for the quarter ended March 31, 2023 from $1.09 billion for the quarter ended March 31, 2022, primarily due to decreases in the average balances of NOW checking, money market, and savings accounts, partially offset by an increase in the average balance of certificate of deposit accounts.

As a result of the increase in net interest income and the decrease in average balance of interest earning assets, net interest margin ("NIM") increased to 3.99% for the quarter ended March 31, 2023 from 2.95% for the quarter ended March 31, 2022.

Net interest income increased $9.31 million to $34.89 million for the six months ended March 31, 2023 from $25.59 million for the six months ended March 31, 2022.

The increase in net interest income was primarily due to an $11.64 million increase in total interest and dividend income that was partially offset by a $2.33 million increase in total interest expense.

Total interest and dividend income increased by $11.64 million, or 43.3%, to $38.50 million for the six months ended March 31, 2023 from $26.86 million for the six months ended March 31, 2022, due to increases in the average yield on interest earning assets and the average balances on loans receivable and investment securities.

The average yield on interest-earning assets increased to 4.43% for the six months ended March 31, 2023 from 3.08% for the six months ended March 31, 2022.

The average cost of interest-bearing liabilities increased to 1.22% for the quarter ended June 30, 2023 from 0.23% for the quarter ended June 30, 2022.

The average balance of interest-bearing liabilities decreased by $59.00 million, or 5.2%, to $1.07 billion for the quarter ended June 30, 2023 from $1.13 billion for the quarter ended June 30, 2022, primarily due to decreases in the average balances of NOW checking, money market, and savings accounts, partially offset by an increase in the average balance of certificate of deposit accounts and borrowings.

As a result of the increase in net interest income and the decrease in average balance of interest earning assets, net interest margin ("NIM") increased to 3.94% for the quarter ended June 30, 2023 from 3.11% for the quarter ended June 30, 2022.

Net interest income increased $11.96 million, or 30.2% to $51.53 million for the nine months ended June 30, 2023 from $39.57 million for the nine months ended June 30, 2022.

The increase in net interest income was primarily due to a $16.90 million increase in total interest and dividend income that was partially offset by a $4.94 million increase in total interest expense.

Total interest and dividend income increased by $16.90 million, or 40.7%, to $58.39 million for the nine months ended June 30, 2023 from $41.49 million for the nine months ended June 30, 2022, due to increases in the average yield on interest earning assets and the average balances on loans receivable and investment securities.

The average yield on interest-earning assets increased to 4.52% for the nine months ended June 30, 2023 from 3.14% for the nine months ended June 30, 2022.

The average balance of loans receivable increased $173.12 million, or 16.8% and the average balance of investment securities increased $121.79 million, or 59.2%.

These increases were offset by a $323.08 million, or 59.2%, decrease in the average balance of interest-bearing deposits in banks and CDs between the periods, resulting in a $6.85 million decrease in the average balance of total interest-earning assets to $1.74 billion for the six months ended March 31, 2022.

Total interest expense increased by $2.33 million, or 183.1% to $3.61 million for the six months ended March 31, 2023 from $1.27 million for the six months ended March 31, 2022.

These increases were partially offset by a $335.01 million, or 64.8%, decrease in the average balance of interest-bearing deposits in banks and CDs between the periods, resulting in a $39.90 million decrease in the average balance of total interest-earning assets to $1.72 billion for the nine months ended June 30, 2022.

Total interest expense increased by $4.94 million, or 257.5% to $6.86 million for the nine months ended June 30, 2023 from $1.92 million for the nine months ended June 30, 2022.

The increase in interest expense was primarily due to an increase in the average cost of interest- bearing liabilities.

The average cost of interest-bearing liabilities increased to 0.67% for the six months ended March 31, 2023 from 0.24% for the six months ended March 31, 2022.

The average balance of interest bearing liabilities increased by $6.58 million, or 0.61%, to $1.09 billion for the six months ended March 31, 2023 from $1.08 billion for the six months ended March 31, 2022, primarily due to increases in the average balances of certificates of deposit accounts, partially offset by decreases in the average balances of NOW checking and money market accounts.

As a result of the increase in net interest income, NIM increased to 4.02% for the six months ended March 31, 2023 from 2.93% for the six months ended March 31, 2022.

The average cost of interest-bearing liabilities increased to 0.85% for the nine months ended June 30, 2023 from 0.23% for the nine months ended June 30, 2022.

The average balance of interest bearing liabilities decreased by $15.28 million, or 1.4%, to $1.08 billion for the nine months ended June 30, 2023 from $1.10 billion for the nine months ended June 30, 2022, primarily due to decreases in the average balances of NOW checking, savings and money market accounts, partially offset by increases in the average balances of certificate of deposits and borrowings.

As a result of the increase in net interest income and the decrease in average balance of interest earning assets, NIM increased to 3.99% for the nine months ended June 30, 2023 from 2.99% for the nine months ended June 30, 2022.

Average Balances, Interest and Average Yields/Cost

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Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented (dollars in thousands).

Three Months Ended March 31,

Three Months Ended June 30,

Balance Interest and

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(3) Net interest income divided by total average interest-earning assets, annualized.

Six Months Ended March 31,

Nine Months Ended June 30,

Balance Interest and

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Three months ended

March 31, 2023

June 30, 2023

compared to three months

ended March 31, 2022

increase (decrease) due to Six months ended

March 31, 2023

compared to six months

ended March 31, 2022

ended June 30, 2022

increase (decrease) due to Nine months ended

June 30, 2023

compared to nine months

ended June 30, 2022

increase (decrease) due to

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Certificates of deposit 1,110 250 1,360 1,902 331 2,233

Short term FHLB borrowings 23 23 46 23 23 46

Long-term borrowings 43 43 86 34 35 69

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Provision for Loan Losses:

There was a $475,000 provision for loan losses for the quarter ended March 31, 2023, primarily due to the increase in loans receivable during the period.

There was no provision for loan losses for the quarter ended March 31, 2022.

For the quarter ended March 31, 2023, there were net charge-offs of $6,000 compared to net charge-offs of $35,000 for the quarter ended March 31, 2022.

Non-accrual loans decreased by $90,000, or 4.4%, to $1.97 million at March 31, 2023 from $2.06 million at September 30, 2022 and decreased by $682,000, or 25.7%, from $2.65 million at March 31, 2022.

Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $95,000, or 4.5%, to $2.19 million at March 31, 2023, from $2.10 million at September 30, 2022 and decreased by $750,000, or 25.5%, from $2.94 million one year ago.

The $572,000 balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at March 31, 2023, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

There was a $1.00 million provision for loan losses for the six months ended March 31, 2023, primarily due to the increase in loans receivable during the period.

There was no provision for loan losses made for the six months ended March 31, 2022.

For the six months ended March 31, 2023, there were net charge-offs of $5,000 compared to net charge offs of $36,000 for the six months ended March 31, 2022.

There was a $610,000 provision for loan losses for the quarter ended June 30, 2023, primarily due to the increase in loans receivable during the period.

There was no provision made for loan losses for the quarter ended June 30, 2022.

For the quarter ended June 30, 2023, there were net charge-offs of $1,000 compared to no net charge-offs for the quarter ended June 30, 2022.

Non-accrual loans decreased by $473,000, or 23.0%, to $1.59 million at June 30, 2023 from $2.06 million at September 30, 2022 and decreased by $705,000, or 30.8%, from $2.29 million at June 30, 2022.

Total delinquent loans (past due 30 days or more) and non-accrual loans decreased by $253,000, or 12.1%, to $1.84 million at June 30, 2023, from $2.10 million at September 30, 2022 and decreased by $689,000, or 27.3%, from $2.53 million one year ago.

The $519,000 balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at June 30, 2023, as these loans are fully guaranteed by the SBA and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

There was a $1.61 million provision for loan losses for the nine months ended June 30, 2023, primarily due to the increase in loans receivable during the period.

There was no provision for loan losses made for the nine months ended June 30, 2022.

For the nine months ended June 30, 2023, there were net charge-offs of $6,000 compared to net charge offs of $36,000 for the nine months ended June 30, 2022.

The Company has established a comprehensive methodology for determining the allowance for loan losses.

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Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan.

The aggregate principal impairment reserve amount determined at March 31, 2023 was $123,000 and $127,000 at September 30, 2022 and March 31, 2022.

In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loan's contractual amounts, of which a portion reflects a discount for possible credit losses.

The aggregate principal impairment reserve amount on impaired loans determined at June 30, 2023 was $123,000 and $127,000 at both September 30, 2022 and June 30, 2022.

In accordance with GAAP, acquired loans are recorded at their estimated fair value, which results in a net discount to the loan's contractual amounts, of which a portion reflects a discount for possible credit losses.

Credit discounts are included in the determination of fair value, and, as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date.

The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios.

The remaining fair value discount associated with $13.92 million in loans that were acquired in the South Sound Acquisition was $225,000 at March 31, 2023.

The Company believes that this should be considered by investors when comparing the Company's allowance for loan losses to total loans in periods prior to the South Sound Acquisition.

Based on its comprehensive analysis, management believes that the allowance for loan losses of $14.70 million at March 31, 2023 (1.20% of loans receivable and 746.5% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date.

The allowance for loan losses was $13.70 million (1.20% of loans receivable and 665.5% of non-performing loans) at September 30, 2022 and $13.43 million (1.28% of loans receivable and 506.7% of non-performing loans) at March 31, 2022.

The remaining fair value discount associated with $13.92 million in loans that were acquired in the South Sound Acquisition was $203,000 at June 30, 2023.

Based on its comprehensive analysis, management believes that the allowance for loan losses of $15.31 million at June 30, 2023 (1.20% of loans receivable and 965.1% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date.

The allowance for loan losses was $13.70 million (1.20% of loans receivable and 665.5% of non-performing loans) at September 30, 2022 and $13.43 million (1.22% of loans receivable and 586.3% of non-performing loans) at June 30, 2022.

While the Company believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to significantly increase its allowance for loan losses.

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Non-interest Income:

Total non-interest income decreased by $447,000, or 14.5%, to $2.64 million for the quarter ended March 31, 2023 from $3.08 million for the quarter ended March 31, 2022.

This decrease was primarily due to a $370,000 decrease in net gain on sales of loans, a $121,000 decrease in service charges on deposits and smaller decreases in several other categories.

These decreases to non-interest income were partially offset by a $28,000 increase in ATM and debit card interchange transaction fees and smaller increases in several other categories.

Total non-interest income decreased by $227,000, or 7.3%, to $2.88 million for the quarter ended June 30, 2023 from $3.10 million for the quarter ended June 30, 2022.

This decrease was primarily due to a $178,000 decrease in net gain on sales of loans, an $82,000 decrease in service charges on deposits and smaller decreases in several other categories.

These decreases were partially offset by a $95,000 gain on sale of investment securities, and smaller increases in several other categories.

The decrease in net gain on sales of loans was primarily due to a decrease in the dollar amount of fixed-rate one- to four-family loans originated and sold during the current quarter reflecting reduced refinance activity compared to the same period last year.

Gain on sale of loans was also impacted by rising interest rates, declining homes sales and a decision to retain a higher percentage of single family loans originated during the quarter in the portfolio rather than selling them.

Total non-interest income for the six months ended decreased by $1.18 million, or 18.1%, to $5.34 from $6.53 million for the six months ended March 31, 2022.

This decrease was primarily due to a $1.01 million decrease in gain on sales of loans, a $119,000 decrease in the valuation recovery on loan servicing rights, an $87,000 decrease in service charges on deposits, and smaller decreases in several other categories.

The gain on sale of securities was due to the sale of $8.83 million of available for sale investment securities.

Total non-interest income for the nine months ended June 30, 2023 decreased by $1.41 million, or 14.7%, to $8.22 million from $9.63 million for the nine months ended June 30, 2022.

This decrease was primarily due to a $1.19 million decrease in gain on sales of loans, a $169,000 decrease in service charges on deposits, a $119,000 decrease in the valuation recovery on loan servicing rights, and smaller decreases in several other categories.

These decreases to non-interest income were partially offset by a $95,000 gain on sale of investment securities, and smaller increases in several other categories.

Non-interest Expense:

Total non-interest expense increased by $1.61 million, or 17.3%, to $10.94 million for the quarter ended March 31, 2023 from $9.33 million for the quarter ended March 31, 2022.

This increase was primarily due to an $854,000 increase in salaries and employee benefits, a $211,000 increase in data processing and telecommunication expense, a $151,000 increase in professional fees and smaller increases in several other categories, which were partially offset by smaller decreases in several categories.

The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2022) and the hiring of additional lending personnel.

The increase in professional fees was primarily due to higher legal and consulting fees.

Total non-interest expense increased by $1.05 million, or 10.7%, to $10.93 million for the quarter ended June 30, 2023 from $9.87 million for the quarter ended June 30, 2022.

This increase was primarily due to an $617,000 increase in salaries and employee benefits, a $246,000 increase in data processing and telecommunication expense, a $114,000 increase in deposit operations, a $106,000 increase in premises and equipment expense and smaller increases in several other categories, which were partially offset by smaller decreases in several categories.

The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2022).

The increase in data processing and telecommunication expense was primarily due to the addition of several technology products and increased processing volumes.

The increase in deposits operations was primarily due to an increase in unrecovered overdrafts and fraud related expenses.

The efficiency ratio for the current quarter improved to 56.01% from 57.80% for the comparable quarter one year ago.

Total non-interest expense increased by $2.88 million, or 15.5%, to $21.48 million for the six months ended March 31, 2023 from $18.60 million for the six months ended March 31, 2022.

This increase was primarily due to a $1.58 million increase in salaries and employee benefits, a $386,000 increase in data processing and telecommunication expense, a $309,000 increase in professional fees and smaller increases in several other categories, which were partially offset by smaller decreases in several categories.

Total non-interest expense increased by $3.93 million, or 13.8%, to $32.41 million for the nine months ended June 30, 2023 from $28.47 million for the nine months ended June 30, 2022.

This increase was primarily due to a $2.20 million increase in salaries and employee benefits, a $632,000 increase in data processing and telecommunication expense, and smaller increases in several other categories, which were partially offset by smaller decreases in several categories.

The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2022).

The increase in data processing and telecommunication expense was primarily due to the addition of several technology products and increased processing volumes.

Provision for Income Taxes:

The provision for income taxes increased by $389,000, or 29.6%, to $1.71 million for the quarter ended March 31, 2023 from $1.32 million for the quarter ended March 31, 2022.

The provision for income taxes increased by $882,000, or 32.6%, to $3.59 million for the six months ended March 31, 2023 from $2.71 million for the six

months ended March 31, 2022.

The provision for income taxes increased by $194,000, or 13.2%, to $1.67 million for the quarter ended June 30, 2023 from $1.47 million for the quarter ended June 30, 2022.

The provision for income taxes increased by $1.08 million, or 25.8%, to $5.25 million for the nine months ended June 30, 2023 from $4.18 million for the nine months ended June 30, 2022.

The increases in the provision for income taxes were primarily due to higher income before income taxes.

The Company's effective income tax rate was 20.4% for the quarter ended March 31, 2023 and 19.8% for the quarter ended March 31, 2022.

The Company's effective tax rate was 20.2% for the six months ended March 31, 2023 from 20.01% for the six months ended March 31, 2022.

The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and FHLB borrowings (if needed).

The Company's effective income tax rate was 20.9% for the quarter ended June 30, 2023 and 20.4% for the quarter ended June 30, 2022.

The Company's effective tax rate was 20.4% for the nine months ended June 30, 2023 from 20.1% for the nine months ended June 30, 2022.

While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition.

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The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs.

At March 31, 2023, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 16.96%.

At March 31, 2023, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which no amounts were outstanding.

The Bank had $509.57 million available for borrowings with the FHLB at March 31, 2023.

At June 30, 2023, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 15.59%.

At June 30, 2023, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which $15.00 million was outstanding.

The Bank had $549.08 million available for borrowings with the FHLB at June 30, 2023.

The Bank maintains two short-term borrowing lines with the FRB with total credit based on eligible collateral:

Borrower-in-Custody ("BIC") and Bank Term Funding Program ("BTFP").

At March 31, 2023, the Bank had no outstanding balance on the BIC line, under which $82.32 million was available for future borrowings.

At March 31, 2023, the Bank had no outstanding balance on the BTFP line, under which $55.07 million was available for future borrowings.

At June 30, 2023, the Bank had no outstanding balance on the BIC line, under which $85.00 million was available for future borrowings.

At June 30, 2023, the Bank had no outstanding balance on the BTFP line, under which $57.00 million was available for future borrowings.

The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB").

At March 31, 2023, the Bank did not have an outstanding balance on this borrowing line.

At June 30, 2023, the Bank did not have an outstanding balance on this borrowing line.

Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposits withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

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The Bank's primary investing activity is the origination of loans and, to a lesser extent, the purchase of investment securities.

During the six months ended March 31, 2023 and 2022, the Bank originated $178.81 million and $307.01 million of loans, respectively.

At March 31, 2023, the Bank had loan commitments totaling $180.03 million and undisbursed construction loans in process totaling $99.25 million.

Investment securities purchased during the six months ended March 31, 2023 and 2022 totaled $32.60 million and $126.27 million, respectively.

During the nine months ended June 30, 2023 and 2022, the Bank originated $272.54 million and $435.92 million of loans, respectively.

At June 30, 2023, the Bank had loan commitments totaling $169.28 million and undisbursed construction loans in process totaling $104.77 million.

Investment securities purchased during the nine months ended June 30, 2023 and 2022 totaled $32.60 million and $167.67 million, respectively.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments.

During the six months ended March 31, 2023 and 2022, the Bank sold $3.55 million and $39.44 million, respectively, in loans and loan participation interests.

During the three and six months ended March 31, 2023, the Bank received $49.27 million and $99.98 million in principal repayments, respectively.

During the three and six months ended March 31, 2022, the Bank received $71.72 million and $179.94 million in principal repayments, respectively.

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale decreased to $218.34 million at March 31, 2023 from $381.90 million at September 30, 2022.

CDs that are scheduled to mature in less than one year from March 31, 2023 totaled $146.45 million.

During the nine months ended June 30, 2023 and 2022, the Bank sold $6.96 million and $51.05 million, respectively, in loans and loan participation interests.

During the three and nine months ended June 30, 2023, the Bank received $33.53 million and $130.21 million in principal repayments, respectively.

During the three and nine months ended June 30, 2022, the Bank received $64.02 million and $249.16 million in principal repayments, respectively.

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale (including equity securities) decreased to $191.56 million at June 30, 2023 from $381.90 million at September 30, 2022.

CDs that are scheduled to mature in less than one year from June 30, 2023 totaled $206.18 million.

Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

Capital expenditures are incurred on an ongoing basis to expand and improve the Bank's product offerings, enhance and modernize technology infrastructure, and to introduce new technology-based products to compete effectively in the various markets.

Capital expenditure projects are evaluated based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment.

The amount of capital investment is influenced by, among other things, current and projected demand for services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.

Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the remaining six months ending September 30, 2023 that would materially impact liquidity.

For the remaining six months ending September 30, 2023, the Bank projects that fixed commitments will include $155,000 of operating lease payments.

Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the remaining three months ending September 30, 2023 that would materially impact liquidity.

For the remaining three months in the year ending September 30, 2023, the Bank projects that fixed commitments will include $82,000 of operating lease payments.

There are no scheduled payments and maturities of FHLB borrowings during the fiscal year 2023.

In addition, at March 31, 2023, there were other future obligations and accrued expenses of $8.26 million.

In addition, at June 30, 2023, there were other future obligations and accrued expenses of $8.78 million.

The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.

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Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends.

At March 31, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.70 million.

At June 30, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $552,000.

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.

The current quarterly common stock dividend rate is $0.23 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders.

Assuming continued payment during fiscal year 2023 at the rate of $0.23 per share, the average total dividend paid each quarter would be approximately $1.89 million based on the number of current outstanding shares at March 31, 2023 (which assumes no increases or decrease in the number of shares).

Assuming continued payment during fiscal year 2023 at the rate of $0.23 per share, the average total dividend paid each quarter would be approximately $1.86 million based on the number of current outstanding shares at June 30, 2023 (which assumes no increases or decrease in the number of shares).

From time to time, our Board of Directors has authorized stock repurchase plans.

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In February 2021, the Company’s board of directors announced a plan to repurchase 415,970 shares of the Company's common stock.

The repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares.

The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

On July 25, 2023, the Company terminated the February 2021 stock repurchase program, which had 74,212 shares remaining for future purchases, and announced the adoption of a new stock repurchase program.

Under the new repurchase program, the Company may repurchase up to 5% of the outstanding shares, or 404,708 shares.

The July 2023 repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares.

The repurchase program does not obligate the Company to purchase any particular number of shares.

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The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Based on its capital levels at March 31, 2023, the Bank exceeded all regulatory capital requirements as of that date.

Based on its capital levels at June 30, 2023, the Bank exceeded all regulatory capital requirements as of that date.

Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC.

Based on capital levels at March 31, 2023, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

Based on capital levels at June 30, 2023, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.

The following table compares the Bank’s actual capital amounts at March 31, 2023 to its minimum regulatory capital requirements at that date (dollars in thousands):

The following table compares the Bank’s actual capital amounts at June 30, 2023 to its minimum regulatory capital requirements at that date (dollars in thousands):

Be “Adequately

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In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions.

At March 31, 2023, the Bank's CET1 capital exceeded the required capital conservation buffer.

At June 30, 2023, the Bank's CET1 capital exceeded the required capital conservation buffer.

Timberland Bancorp, Inc.

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If Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2023, Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2023, Timberland Bancorp, Inc.

would have exceeded all regulatory requirements.

The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc.

as of March 31, 2023 (dollars in thousands):

as of June 30, 2023 (dollars in thousands):

Leverage Capital Ratio:

5 unchanged sentences

Key Financial Ratios and Data

Three Months Ended March 31, Six Months Ended

Three Months Ended June 30, Nine Months Ended

2023 2022 2023 2022

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis