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Item 7. Management’s Discussion and Analysis

2023-12-11 compared with 2022-12-09 · 159 added, 180 removed, 454 unchanged (43% of the section changed)

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Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company.

The information contained in this

section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.

The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland 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 300 basis points, including 150 basis points during the third calendar calendar quarter of 2022, to a range of 3.00% to 3.25% as of September 30, 2022.

In November 2022, the FOMC increased the target range for the federal funds rate another 75 basis points to a range of 3.75% to 4.00%.

We believe our balance sheet is structured to enhance our average yield on interest-earning assets as the lagging benefit of variable rate interest-earnings assets beginning to reprice occurs as well as a higher net interest margin if the FOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent Federal Reserve communications and interest rate forecasts.

Since March 2022, in response to inflation, the FOMC increased the target range for the federal funds rate by 525 basis points, including 225 basis points during the 2023 fiscal year, to a range of 5.25% to 5.50% as of September 30, 2023.

The FOMC has paused increases to the target federal funds rate but has not ruled out future increases and hinted that rates will remain higher for longer.

We believe our balance sheet is structured to enhance our average yield on interest-earning assets as the lagging benefit of variable rate interest-earnings assets continue to reprice but anticipate a decrease in net interest margin due to a higher cost of funds as deposit rates continue to increase.

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 $2.1 million for the year ended September 30, 2023, primarily due to increased loan portfolio growth.

The Company recorded a provision for loan losses of $270,000 for the year ended September 30, 2022, primarily due to increased loan portfolio growth.

The Company did not record a provision for loan losses for the year ended September 30, 2021, primarily reflecting the improving economy and the resulting decline in forecasted probable loan losses from COVID-19 during that fiscal year.

O n October 1, 2023, the Company adopted the CECL standard to determine estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses at inception of the loan.

The adoption of CECL will change the allowance calculation methodology from a historical incurred loss model to an expected future loss model.

The adjustment recorded upon our adoption of the CECL standard was not significant to the overall allowance for credit losses (including the reserve for unfunded commitments) as compared to the allowance for loan losses at September 30, 2023.

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

For the year ended September 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, 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.

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

Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any.

Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, amortization of CDI, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunications expenses, deposit operation expenses and other non-interest expenses.

Non-interest expense in certain periods are reduced by gains on the sale of premises and equipment and by gains on the sale of OREO.

Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, amortization of CDI, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, technology and communications expenses, deposit operation expenses and other non-interest expenses.

Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and by gains on the sale of OREO.

Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number and balances of loan and deposit accounts.

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We believe that strong asset quality is a key to our long-term financial success.

Non-performing assets have decreased to $1.60 million at September 30, 2023 from $2.17 million at September 30, 2022.

The percentage of non-performing loans to loans receivable, net was 0.11% and 0.18% at September 30, 2023 and 2022, respectively.

The Company's percentage of non-performing assets to total assets at September 30, 2023 was 0.09% compared to 0.12% at September 30, 2022.

Non-performing assets have decreased to $2.17 million at September 30, 2022 from $3.17 million at September 30, 2021.

We continue to seek to reduce the level of non-performing assets through collections, write-downs, modifications and sales of OREO.

We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions and accepting short payoffs on delinquent loans when such actions have been deemed appropriate.

Although the Company plans to continue to place emphasis on certain

lending products, such as commercial real estate loans, construction loans, and commercial business loans, the Company expects to continue to manage its credit exposures through the use of experienced bankers and an overall conservative approach to lending.

We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions and accepting short payoffs on delinquent

loans when such actions have been deemed appropriate.

Although the Company plans to continue to place emphasis on certain lending products, such as commercial real estate loans, construction loans, and commercial business loans, the Company expects to continue to manage its credit exposures using experienced bankers and an overall conservative approach to lending.

Selected Financial Data

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TDRs that are on accrual status are not included.

Critical Accounting Policies and Estimates

The Company has established various accounting policies that govern the application of GAAP in the preparation of the Company's Consolidated Financial Statements.

The Company has identified six policies that, as a result of judgments,

estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements.

These policies relate to the methodology for the determination of the allowance for loan losses, the determination of any OTTI in the fair value of investment securities, the valuation of loan servicing rights, the valuation of OREO, the valuation of assets acquired and liabilities assumed in acquisitions and the valuation of goodwill for potential impairment.

Management believes that the judgments, estimates and assumptions used in the preparation of the Company's Consolidated Financial Statements are appropriate given the factual circumstances at the time.

However, given the sensitivity of the Company's Consolidated Financial Statements to these critical policies, the use of other judgments, estimates and assumptions could result in material differences in the Company's results of operations or financial condition.

Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods.

There have been no significant changes in our application of accounting policies since September 30, 2022.

For additional information concerning critical accounting policies, see Note 1 of the Notes to Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data." and the following:

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP.

In doing so, we have to make estimates and assumptions.

Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time

the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Accordingly, actual results could differ materially from our estimates.

We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.

See "Note 1-Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in Item 8 of this report" for a summary of significant accounting policies and the effect on our financial statements and the following:

Provision and Allowance for Loan Losses

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and determination of loss factors to be applied to the various elements of the portfolio.

All of these estimates are susceptible to significant change.

All these estimates are susceptible to significant change.

We have established systematic methodologies for the determination of the adequacy of our allowance for loan losses.

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General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for.

The level of general reserves is based on an analysis of potential exposures

existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the consolidated financial statements are prepared.

The level of general reserves is based on an analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the consolidated financial statements are prepared.

The formula allowance is calculated by applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances.

Loss factors are based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking organizations, which in our judgment affect the collectability of the loan portfolio as of the evaluation date.

evaluation date.

The unallocated allowance is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances.

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The Company applies the acquisition method of accounting for business combinations.

Under the acquisition method, the acquiring entity in a business combination recognizes all of the identifiable assets acquired and liabilities assumed at their acquisition date fair values.

Under the acquisition method, the acquiring entity in a business combination recognizes all the identifiable assets acquired and liabilities assumed at their acquisition date fair values.

Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values.

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Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized.

Acquisition-related costs are expensed as incurred unless they are directly attributable to the issuance of the Company's common stock in a business

combination and the Company chooses to record these acquisition-related costs through stockholders' equity.

Acquisition-related costs are expensed as incurred unless they are directly attributable to the issuance of the Company's common stock in a business combination and the Company chooses to record these acquisition-related costs through stockholders' equity.

There were no business combinations during the years ended September 30, 2022, 2021 and 2020, respectively.

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Sharp increases or decreases in interest rates may adversely affect the Bank's earnings.

Management of the Bank monitors the Bank's interest rate sensitivity through the use of a model provided by NXTsoft Data Analytics, LLC (“NXTsoft”), a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry.

Based on a rate shock analysis prepared by NXTsoft using data at September 30, 2022, an immediate increase in interest rates of 100 basis points would increase the Bank’s projected net interest income by approximately 3.19%, primarily because a larger portion of the Bank's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one-year period.

Conversely, an immediate decrease in interest rates of 100 basis points would decrease the Bank's projected net interest income by approximately 6.28%.

Management of the Bank monitors the Bank's interest rate sensitivity using a model provided by NXTsoft Data Analytics, LLC (“NXTsoft”), a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry.

Based on an interest rate shock analysis prepared by NXTsoft using data at September 30, 2023, an immediate increase in interest rates of 100 basis points would leave the Bank’s projected net interest income virtually level (slight decrease of 0.06%).

An immediate decrease in interest rates of 100 basis points would decrease the Bank's projected net interest income by approximately 3.03% due to a larger portion of the Bank's interest rate sensitive assets repricing within a one-year period.

See “Quantitative Aspects of Market Risk” below for additional information.

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Although the Bank has sought to originate ARM loans, the ability to originate such loans depends to a great extent on market interest rates and borrowers' preferences.

In lower interest rate environments, borrowers often prefer fixed-rate loans.

Consumer, commercial business and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans and, accordingly, reduce the Bank’s exposure to fluctuations in interest rates.

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-300 (7,707) (10.82) (37,934) (11.03)

-400 (11,154) (15.65) (54,246) (15.77)

(1) Does not include loan fees.

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In the event of a 100 basis point decrease in interest rates, the Bank would be expected to experience a 2.67% decrease in EVE and a 3.03% decrease in net interest income.

In the event of a 100 basis point increase in interest rates, a 1.92% increase in EVE and a 3.19% increase in net interest income would be expected.

Based upon the modeling described above, the Bank's asset and liability structure generally results in increases in net interest income and EVE in a rising interest rate scenario and decreases in net interest income and EVE in a declining interest rate scenario.

In the event of a 100 basis point increase in interest rates, a 0.25% increase in EVE and a 0.06% decrease in net interest income would be expected.

Based upon the modeling described above, the Bank's asset and liability structure generally results in a neutral net interest income and a EVE in a rising interest rate scenario and decreases in net interest income and EVE in a declining interest rate scenario.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table.

For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.

Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.

Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag changes in market rates.

Additionally, certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset.

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

The Company's total assets increased by $68.33 million, or 3.8%, to $1.86 billion at September 30, 2022 from $1.79 billion at September 30, 2021.

The increase in assets was primarily due to an increase in held to maturity investment securities

and an increase in net loans receivable.

These increases were partially offset by a decrease in total cash and cash equivalents.

The increase in total assets was funded primarily by an increase in total deposits.

Net loans receivable increased by $163.97 million, or 16.9%, to $1.13 billion at September 30, 2022 from $968.45 million at September 30, 2021, primarily due to increases in commercial real estate loans, one- to four-family loans, commercial business loans and smaller increases in several other loan categories.

These increases to net loans receivable were partially offset by decreases in SBA PPP loans and an increase in the undisbursed portion of construction loans in process.

Total deposits increased by $61.62 million, or 3.9%, to $1.63 billion at September 30, 2022 from $1.57 billion at September 30, 2021, primarily due to increases in NOW checking account balances, money market account balances, and savings account balances.

These increases were partially offset by decreases in certificates of deposit account balances and non-interest bearing demand account balances.

Total assets decreased by $20.60 million, or 1.1%, to $1.84 billion at September 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, partially offset by increases in loans receivable and, to a lesser extent, investment securities.

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

Net loans receivable increased by $169.88 million, or 15.0%, to $1.30 billion at September 30, 2023 from $1.13 billion at September 30, 2022, primarily due to increases in one- to four-family loans, multi-family loans, commercial real estate loans, construction and land development loans, commercial business loans and smaller increases in several other loan categories.

Investment securities (including investments in equity securities) increased by $3.94 million, or 1.28%, to $312.80 million at September 30, 2023 from $308.06 million at September 30, 2022, primarily due to the purchase of additional held to maturity securities.

Total deposits decreased by $71.24 million, or 4.4%, to $1.56 billion at September 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 decreases were partially offset by increases in certificates of deposit account balances.

Shareholders' equity increased by $14.50 million, or 6.6%, to $233.07 million at September 30, 2023 from $218.57 million at September 30, 2022.

The increase was primarily due to net income for the year ended September 30, 2022 of $23.60 million which was partially offset by $7.23 million in dividends paid to shareholders and the repurchase of 170,237 shares of common stock for $4.58 million.

The increase was primarily due to net income for the year ended September 30, 2023 of $27.12 million, partially offset by $8.27 million in dividends paid to shareholders and the repurchase of 185,399 shares of common stock for $5.00 million.

A more detailed explanation of the changes in significant balance sheet categories follows:

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Cash and cash equivalents and CDs held for investment decreased by $194.74 million, or 57.6%, to $143.91 million at September 30, 2023 from $339.65 million at September 30, 2022.

The decrease was primarily due to the purchase of additional held to maturity investment securities and the funding of loan portfolio growth.

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 $3.94 million, or 1.28%, to $312.80 million at September 30, 2023 from $308.86 million at September 30, 2022.

The increase was primarily due to the purchase of additional held to maturity U.S.

The increase was primarily due to the purchase of $32.60 million additional investment securities, primarily consisting of U.S.

Treasury and U.S.

government agency investment securities, U.S.

government agency mortgage-backed investment securities and private label mortgage-backed investment securities, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the year ended September 30, 2022.

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

government agency investment securities and U.S.

government agency mortgage-backed investment securities 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 $8.93 million of available for sale investment securities (for a gain of $95,000) and $20.57 million of maturities, prepayments and scheduled amortization of other investment securities.

For additional details on investment securities, see "Item 1.

Business - Investment Activities" and Note 3 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

FHLB stock increased by $91,000 or 4.3%, to $2.19 million at September 30, 2022 from $2.10 million at September 30, 2021, due to purchases required by the FHLB as a result of the increase in total assets.

Business - Investment Activities" and "Note 3-Investment Securities of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

FHLB stock increased by $1.41 million, or 64.2%, to $3.60 million at September 30, 2023 from $2.19 million at September 30, 2022, due to purchases required by the FHLB as a result of the increase in total assets and borrowings.

Other Investments:

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Loans Held for Sale:

Loans held for sale decreased by $2.47 million, or 76.8%, to $748,000 at September 30, 2022 from $3.22 million at September 30, 2021, primarily due to the timing and volume of mortgage banking loan sales.

Loans held for sale decreased by $348,000, or 46.5%, to $400,000 at September 30, 2023 from $748,000 at September 30, 2022, primarily due to the timing and volume of mortgage banking loan sales.

The Company generally sells longer-term fixed-rate residential loans and the guaranteed portion of SBA commercial business loans for asset-liability management purposes and to generate non-interest income.

The Company sold $11.54 million in loans during the year ended September 30, 2023 compared to $73.50 million for the year ended September 30, 2022.

Sales of loans over the past year has decreased, primarily due to decreased refinance activity for one- to four-family loans due to the increase in mortgage interest rates.

Sales of loans over the past year has decreased, 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.

Loans Receivable, Net of Allowance for Loan Losses:

Net loans receivable increased by $163.97 million, or 16.9%, to $1.13 billion at September 30, 2022 from $968.45 million at September 30, 2021.

The increase was primarily due to a $66.00 million increase in commercial real estate loans, a $56.18 million increase in one- to four-family mortgage loans, a $50.46 million increase in commercial business loans and smaller increases in several other loan categories.

These increases were partially offset by a $39.92 million decrease in SBA PPP loans, and smaller decreases in several other loan categories.

The SBA PPP loan balances decreased primarily due to borrowers applying for forgiveness from the SBA and the loans being subsequently paid off by the SBA.

Loan originations (excluding SBA PPP loans) increased by $35.01 million, or 6.5%, to $572.46 million for the year ended September 30, 2022 from $537.45 million for the year ended September 30, 2021.

The increase in loan originations was primarily due to increases in commercial real estate, construction and commercial business loans.

These increases were

partially offset by a decrease in originations of one- to four-family loans and SBA PPP loans.

Net loans receivable increased by $169.88 million, or 15.0%, to $1.30 billion at September 30, 2023 from $1.13 billion at September 30, 2022.

The increase was primarily due to a $77.11 million increase in one- to four-family loans, a $32.15 million increase in multi-family loans, a $31.62 million increase in commercial real estate loans, an $18.23 million increase in construction and land development loans, a $10.76 million increase in commercial business loans and smaller changes in other categories.

Loan originations decreased by $210.68 million, or 36.8%, to $361.79 million for the year ended September 30, 2023 from $572.46 million for the year ended September 30, 2022.

The decrease in loan originations was primarily due to decreases in originations of one- to four- family loans, commercial real estate, construction and commercial business loans.

These decreases were partially offset by an increase in originations of multi-family loans.

For additional information on loans, see "Item 1.

Business - Lending Activities" and Note 4 to the Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

Business - Lending Activities" and "Note 4-Loans Receivable and Allowance for Loan Losses" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Premises and Equipment, Net:

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For additional information on premises and equipment, see "Item 2.

Properties" and Note 5 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

OREO and Other Repossessed Assets:

OREO and other repossessed assets decreased by $157,000, or 100.0%, to $0 at September 30, 2022 from $157,000 at September 30, 2021.

The decrease was primarily due to the sales of $157,000 in OREO properties.

For additional information on OREO and other repossessed assets, see "Item 1.

Business - Lending Activities - Other Real Estate Owned and Other Repossessed Assets" and Note 6 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

Properties" and "Note-5 Premises and Equipment" of the Notes of the Consolidated Financial Statements contained in Item 8 of this report.

Bank Owned Life Insurance ("BOLI"):

BOLI increased by $160,000, or 0.7%, to $22.97 million at September 30, 2023 from $22.81 million at September 30, 2022.

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

The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies and offset by a decrease in cash surrender value due to a death.

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

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As of September 30, 2023, management believes that there had been no subsequent events or changes in circumstances that would indicate a potential impairment of goodwill.

For additional information on goodwill, see Note 7 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

CDI decreased by $316,000, or 25.0% to $948,000 at September 30, 2022 from $1.26 million at September 30, 2021 due to scheduled amortization.

For additional information on CDI, see Note 7 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

For additional information on goodwill, see "Note 7-Goodwill and CDI" of the Consolidated Financial Statements contained in Item 8 of this report.

CDI decreased by $271,000 or 28.6%, to $677,000 at September 30, 2023 from $948,000 at September 30, 2022 due to scheduled amortization.

For additional information on CDI, see "Note 7-Goodwill and CDI" of the Consolidated Financial Statements contained in Item 8 of this report.

Loan Servicing Rights, Net:

Loan servicing rights decreased by $459,000, or 13.2%, to $3.02 million at September 30, 2022 from $3.48 million at September 30, 2021, primarily due to the amortization of servicing rights, partially offset by additional capitalized Freddie Mac servicing rights for loans being sold with servicing retained, and a $119,000 valuation recovery reflecting decreased prepayment speeds due to rising market interest rates.

Loan servicing rights decreased by $899,000, or 29.7%, to $2.12 million at September 30, 2023 from $3.02 million at September 30, 2022, primarily due to the amortization of servicing rights and partially offset by additional capitalized Freddie Mac servicing rights for loans being sold with servicing retained.

The principal amount of loans serviced for Freddie Mac and the SBA decreased by $23.79 million to $386.50 million at September 30, 2023 from $410.29 million at September 30, 2022.

For additional information on loan servicing rights, see Note 8 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

For additional information on loan servicing rights, see "Note 8-Loan Servicing Rights" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Operating Lease Right-of-Use Assets:

Operating lease ROU assets decreased by $208,000, or 10.5%, to $1.77 million at September 30, 2023 from $1.98 million at September 30, 2022, primarily due to the amortization of the ROU assets.

The operating lease ROU assets at September 30, 2022 represented the present value of two operating leases on branch facilities.

For additional information on leases, see Note 9 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

The operating lease ROU assets at September 30, 2023 represented the present value of two operating leases on branch facilities and one administrative office.

For additional information on leases, see "Note 9-Leases" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Other Assets:

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The increase was primarily due to increases in miscellaneous receivables (including income tax receivables) and prepaid expenses.

Deposits increased by $61.62 million, or 3.9%, to $1.63 billion at September 30, 2022 from $1.57 billion at September 30, 2021.

The increase consisted of a $38.11 million increase in money market account balances, a $22.53 million increase in savings account balances, and a $17.68 million increase in NOW checking account balances.

These increases were partially offset by a $11.55 million decrease in certificates of deposit account balances and a $5.15 million decrease in non-interest checking account balances.

The increase in deposits was primarily driven by organic growth in customer relationships.

Deposits decreased by $71.24 million, or 4.4%, to $1.56 billion at September 30, 2023 from $1.63 billion at September 30, 2022.

The decrease consisted of a $74.19 million decrease in non-interest checking account balances, a $61.05 million decrease in NOW checking account balances, a $54.85 million decrease in savings account balances and a $58.66 million decrease in money market account balances.

These decreases were partially offset by a $177.52 million increase in certificates of deposit account balances.

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.

For additional information on deposits, see "Item 1.

Business - Deposit Activities and Other Sources of Funds" and Note 10 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

Business - Deposit Activities and Other Sources of Funds" and N"ote 10-Deposits" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

FHLB Borrowings:

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At September 30, 2023, the Company had a borrowing capacity of $533.99 million.

The Company had no FHLB borrowings at September 30, 2022 compared to $5.00 million at September 30, 2021.

At September 30, 2021, FHLB borrowings consisted of a single $5.00

million borrowing, with a scheduled maturity in March 2025.

Due to favorable repayments terms, the Company repaid this borrowing in January 2022.

For additional information on FHLB borrowings, see Note 11 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data".

The Company had $35.00 million in FHLB borrowings at September 30, 2023 compared to no borrowings at September 30, 2022.

At September 30, 2023, FHLB borrowings consisted of two long-term borrowings totaling $15.00 million with scheduled maturities in May 2026 and both of which bear interest at 3.95%.

In addition, the Bank had three short-term borrowings totaling $20.00 million, which mature at various dates during the 2024 fiscal year and bear interest at rates ranging from 5.52% to 5.57%.

For additional information on FHLB borrowings, see "Note 11-FHLB Borrowings and Other Borrowings" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Operating Lease Liabilities:

Operating lease liabilities decreased by $199,000 or 9.6%, to $1.87 million at September 30, 2023 from $2.07 million at September 30, 2022, primarily due to required annual lease payments.

The operating lease liability at September 30, 2022 represented the present value of two operating leases on branch facilities.

For additional information on leases, see Note 9 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

The operating lease liability at September 30, 2023 represented the present value of two operating leases on branch facilities and one administrative office.

For additional information on leases, see "Note 9-Leases" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Other Liabilities and Accrued Expenses:

Other liabilities and accrued expenses increased by $330,000, or 4.48%, to $7.70 million at September 30, 2022 from $7.37 million at September 30, 2021.

The increase was primarily due to timing differences in the normal course of business.

Other liabilities and accrued expenses increased by $1.33 million or 17.3%, to $9.03 million at September 30, 2023 from $7.70 million at September 30, 2022.

The increase was primarily due to timing differences in the normal course of business and an increase in accrued interest payable.

Shareholders' Equity:

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The increase was primarily due to net income of $27.12 million for the year ended September 30, 2023, which was partially offset by the payment of $8.27 million in dividends to common shareholders and the repurchase of 185,399 shares of the Company's common stock for $5.00 million during the year ended September 30, 2023.

In addition, shareholder’s equity was adversely impacted by unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in a $717,000 accumulated other comprehensive loss, net of tax at September 30, 2022.

In addition, shareholder’s equity was adversely impacted by unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in a $1.08 million accumulated other comprehensive loss, net of tax at September 30, 2023.

For additional information on shareholders' equity, see the Consolidated Statements of Shareholders' Equity contained in "Item 8.

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Comparison of Operating Results for the Years Ended September 30, 2023 and 2022

Net income for the year ended September 30, 2022 decreased by $3.98 million, or 14.4%, to $23.60 million from $27.58 million for the year ended September 30, 2021.

Net income per diluted common share decreased by $0.45, or 13.8%, to $2.82 for the year ended September 30, 2022 from $3.27 for the year ended September 30, 2021.

The decrease in net income was primarily due to a $4.54 million decrease in non-interest income and a $4.04 million increase in non-interest expense, partially offset by a $3.98 million increase in net interest income and an $883,000 decrease in the provision for income taxes.

Net income for the year ended September 30, 2023 increased by $3.52 million, or 14.9%, to $27.12 million from $23.60 million for the year ended September 30, 2022.

Net income per diluted common share increased by $0.47, or 16.7%, to $3.29 for the year ended September 30, 2023 from $2.82 for the year ended September 30, 2022.

The increase in net income was primarily due to a $12.53 million increase in net interest income that was partially offset by a $4.75 million increase in non-interest expense, a $1.86 million increase in the provision for loan losses, a $1.48 million decrease in non-interest income and a $914,000 increase in the provision for income taxes.

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

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Net interest income increased by $12.53 million, or 22.4%, to $68.36 million for the year ended September 30, 2023 from $55.83 million for the year ended September 30, 2022.

The increase in net interest income was primarily due to increases in the average balances of investment securities and loans receivable and in the average yield on interest-bearing deposits in banks and CDs, and a decline in the average cost of interest-bearing liabilities.

This increase was partially offset by a decrease in the average yield on loans receivable due to a significant decrease in SBA PPP loan origination fees recognized as the volume of forgiven SBA PPP loans declined between the years.

Total interest and dividend income increased by $3.55 million, or 6.5%, to $58.51 million for the year ended September 30, 2022 from $54.96 million for the year ended September 30, 2021, primarily due to an increase in the average balance of interest-earning assets.

The average yield on interest-earning assets decreased to 3.31% for the year ended September 30, 2022 from 3.45% for the year ended September 30, 2021.

Average total interest-earning assets increased by $173.46 million, or 10.87%, to $1.77 billion for the year ended September 30, 2022 from $1.60 billion for the year ended September 30, 2021.

Interest income on loans receivable and loans held for sale decreased by $1.22 million, or 2.3%, to $51.32 million for the year ended September 30, 2022 from $52.54 million for the year ended September 30, 2021, primarily due to a decrease in the average yield on loans receivable to 4.86% for the year ended September 30, 2022 from 5.12% for the year ended September 30, 2021.

This decrease was partially offset by a $28.89 million increase in the average balance of loans receivable during the current year.

During the year ended September 30, 2022, the accretion of the purchase accounting fair value discount on loans acquired in the South Sound Acquisition increased interest income on loans by $182,000 compared to $340,000 for the year ended September 30, 2021.

The accretion of the net fair value discount on acquired loans increased the average yield on loans by two basis points for the year ended September 30, 2022 and three basis points for the year ended September 30, 2021.

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 $21.44 million, or 36.6%, to $79.95 million for the year ended September 30, 2023 from $58.51 million for the year ended September 30, 2022, primarily due to an increase in the average yield on interest-earning assets.

The average yield on interest-earning assets increased to 4.63% for the year ended September 30, 2023 from 3.31% for the year ended September 30, 2022.

Average total interest-earning assets decreased by $40.10 million, or 2.27%, to $1.73 billion for the year ended September 30, 2023 from $1.77 billion for the year ended September 30, 2022, due to a decrease in the average balance of interest-bearing deposits in banks and CDs which was partially offset by increased in the average balances of loans receivable and investment securities.

Interest income on loans receivable and loans held for sale increased by $11.83 million, or 23.1%, to $63.15 million for the year ended September 30, 2023 from $51.32 million for the year ended September 30, 2022, primarily due to a $174.47 million increase in the average balance of loans receivable coupled with an increase in the average yield on loans receivable to 5.13% for the year ended September 30, 2023 from 4.86% for the year ended September 30, 2022.

During the year ended September 30, 2023, the accretion of the purchase accounting fair value discount on loans acquired increased interest income on loans by $75,000 compared to $182,000 for the year ended September 30, 2022.

The accretion of the net fair value discount on acquired loans increased the average yield on loans by one basis point for the year ended September 30, 2023 and two basis points for the year ended September 30, 2022.

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

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During the year ended September 30, 2023, a total of $398,000 in non-accrual interest, pre-payment penalties and late fees was collected compared to $629,000 for the year ended September 30, 2022.

Also impacting the average yield and average interest-earning asset balances during the years ended September 30, 2022 and 2021 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.

For the year ended September 30, 2022, average PPP loans were $11.72 million, and the Company recorded $114,000 in interest income and accreted $1.79 million in PPP loan origination fees into income compared to average PPP loans of $107.00 million, $1.06 million in interest income and $5.07 million in PPP loan origination fees for the year ended September 30, 2021.

At September 30, 2022, the Company had $42,000 in PPP deferred loan origination fees, which will be accreted into interest income over the remaining life of the PPP loans.

Interest income on investment securities increased by $5.90 million, or 169.0%, to $9.38 million for the year ended September 30, 2023 from $3.49 million for the year ended September 30, 2022, primarily due to an increase in the average balance of held to maturity investment securities and an increase in the average yield on investment securities.

Interest income on interest-bearing deposits in banks and CDs increased by $2.46 million, or 220.1%, to $3.58 million for the year ended September 30, 2022 from $1.12 million for the year ended September 30, 2021, primarily due to an increase in the average yield to 0.74% from 0.24% due to market interest rates increasing and to a much lesser extent an increase in the average balance of interest-bearing deposits in banks and CDs.

Total interest expense decreased by $430,000, or 13.9%, to $2.67 million for the year ended September 30, 2022 from $3.10 million for the year ended September 30, 2021.

The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities, primarily deposits, which was partially offset by an increase in the average balance of interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased to 0.24% for the year ended September 30, 2022 from 0.32% for the year ended September 30, 2021 as market interest rates for deposits decreased.

Average interest-bearing deposits increased by $122.85 million, or 12.6%, to $1.10 billion for the year ended September 30, 2022 from $976.52 million for the year ended September 30, 2021 due primarily to a decline in the average cost and balance of certificates of deposit.

The average balance of interest-bearing deposits increased, however, interest expense on deposits decreased by $356,000 as a result of the decrease in the average cost of interest-bearing deposits

As a result if these changes, the net interest margin decreased nine basis points to 3.16% for the year ended September 30, 2022 from 3.25% for the year ended September 30, 2021.

Interest income on interest-bearing deposits in banks and CDs increased by $3.57 million, or 99.74%, to $7.14 million for the year ended September 30, 2023 from $3.58 million for the year ended September 30, 2022, primarily due to an increase in the average yield to 4.26% from 0.74% due to market interest rates increasing, partially offset by a $314.44 million decrease in the average balance of interest-bearing deposits in banks and CDs.

Total interest expense increased by $8.92 million, or 333.5%, to $11.59 million for the year ended September 30, 2023 from $2.67 million for the year ended September 30, 2022.

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

The average cost of interest-bearing liabilities increased to 1.06% for the year ended September 30, 2023 from 0.24% for the year ended September 30, 2022 as market interest rates for deposits increased.

Average interest-bearing deposits decreased by $9.23 million, or 0.84%, to $1.09 billion for the year ended September 30, 2023 from $1.10 billion for the year ended September 30, 2022, 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.

As a result of these changes, the net interest margin increased 79 basis points to 3.95% for the year ended September 30, 2023 from 3.16% for the year ended September 30, 2022.

Provision for Loan Losses:

There was a $270,000 provision for loans losses for the year ended September 30, 2022 primarily due to loan portfolio growth.

There was no provision for loan losses for the year ended September 30, 2021 due primarily to improvement in forecasted probable credit losses from the COVID-19 pandemic on the economy as of that date.

The Company had net charge-offs of $36,000 for the year ended September 30, 2022 and net recoveries of $55,000 for the year ended September 30, 2021.

The net charge-offs (recoveries) to average outstanding loans ratio was 0.0% for the year ended September 30, 2022 and 2021.

The level of delinquent loans (loans 30 or more days past due) decreased by $943,000, or 31.0%, to $2.10 million at September 30, 2022 from $3.04 million at September 30, 2021 and the level of loans graded substandard increased by $3.78 million, or 105.0%, to $7.39 million at September 30, 2022 from $3.60 million at September 30, 2021.

Special mention loans decreased by $4.78 million or 95.3%, to $237,000 at September 30, 2022 from $5.01 million at September 30, 2021.

A $2.13 million provision for loans losses was recorded for the year ended September 30, 2023 primarily due to loan portfolio growth compared to a $270,000 provision for loans losses for the year ended September 30, 2022 primarily due to loan portfolio growth.

The Company had net charge-offs of $18,000 for the year ended September 30, 2023 and net charge-offs of $36,000 for the year ended September 30, 2022.

The net charge-offs (recoveries) to average outstanding loans was 0.0% for the year ended September 30, 2023 and 2022.

The level of delinquent loans (loans 30 or more days past due) decreased by $431,000, or 20.6%, to $1.67 million at September 30, 2023 from $2.10 million at September 30, 2022 and the level of loans graded substandard decreased by $1.00 million, or 13.6%, to $6.39 million at September 30, 2023 from $7.39 million at September 30, 2022.

Special mention loans decreased by $237,000 or 100%, to $0 at September 30, 2023 from $237,000 at September 30, 2022.

Non-accrual loans decreased by $545,000, or 26.5%, to $1.51 million at September 30, 2023 from $2.06 million at September 30, 2022.

The $1.00 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at September 30, 2022, 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.

The $466,000 balance of SBA PPP loans was omitted from the Company's allowance for loan losses calculation at September 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.

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

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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 increase significantly its allowance for loan losses.

In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no

assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate.

A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowing economic growth, and any governmental or societal responses to the COVID-19 pandemic, among other factors, could result in a material increase in the allowance for loan losses which would adversely affect the Company's financial condition and results of operations.

In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate.

A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowing economic growth, among other factors, could result in a material increase in the allowance for loan losses which would adversely affect the Company's financial condition and results of operations.

On October 1, 2023, the Company adopted the CECL standard to determine estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses at inception of the loan.

The adoption of CECL will change the allowance calculation methodology from a historical incurred loss model to an expected future loss model.

For additional information, see "Item 1.

Business - Lending Activities -- Allowance for Loan Losses."

Business - Lending Activities -- Allowance for Loan Losses" and "Note 4-Loans Receivable and Allowance for Loan Losses" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Non-interest Income:

Total non-interest income decreased by $1.48 million, or 11.8%, to $11.14 million for the year ended September 30, 2023 from $12.62 million for the year ended September 30, 2022.

The decrease was primarily due to a $4.39 million reduction in gain on sales of loans and smaller decreases in other categories.

These decreases were partially offset by a $126,000 increase in ATM and debit card interchange transaction fees, and smaller increases in other categories.

The decrease in gain on sales of loans was primarily due to decreases in the dollar amount of fixed-rate one-to four-family loans originated and sold (as refinance activity for single family homes slowed due to higher mortgage interest rates) and in the average pricing margin compared to fiscal 2021.

The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the volume of debit card transactions.

The decrease was primarily due to a $1.27 million reduction in net gain on sales of loans and smaller decreases in other categories.

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

Sales of loans over the past year have decreased 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.

The increase in gain on sale of investment securities was primarily due to the sale of $8.86 million of available for sale investment securities.

Non-interest Expense:

Total non-interest expense increased by $4.75 million, or 12.3%, to $43.37 million for the year ended September 30, 2023 from $38.63 million for the year ended September 30, 2022.

The increase was primarily due to a $2.07 million increase in salaries and employee benefits expense, a $741,000 increase in professional fees expense, a $209,000 increase in data processing and telecommunications expense, a $144,000 increase in deposit operations expense, and smaller increases in several other expense categories.

These increases were partially offset by a $193,000 decrease in premises and equipment expense primarily due to a reduction in depreciation expense.

The increase in salaries and employee benefits expense was primarily due to annual salary adjustments.

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

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

The increase in deposit operations expense was primarily due to increased fraud expense and unrecovered overdrafts.

The efficiency ratio for the year ended September 30, 2022 was 56.42% compared to 50.12% for the year ended September 30, 2021.

The increase was primarily due to a $2.70 million increase in salaries and employee benefits, an $826,000 increase in technology and communications, a $331,000 increase in professional fees, a $158,000 increase in state and local taxes, a $148,000 increase in premises and equipment, a $133,000 increase in deposit operations, and smaller increases in several other expense categories.

The increase in salaries and employee benefits was primarily due to annual salary adjustments.

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

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

The increase in deposit operations was primarily due to increased fraud expense and unrecovered overdrafts.

The efficiency ratio for the year ended September 30, 2023 improved to 54.56% from 56.42% for the year ended September 30, 2022.

Provision for Income Taxes:

The provision for income taxes decreased by $883,000, or 12.9% to $5.96 million for the year ended September 30, 2022 from $6.85 million for the year ended September 30, 2021.

The decrease in the provision for income taxes was primarily due to lower income before income taxes.

The Company's effective income tax rate was 20.2% for the year ended September 30, 2022 and 19.9% for the 2021 fiscal year.

For additional information on income taxes, see Note 13 of the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

The provision for income taxes increased by $914,000, or 15.3% to $6.88 million for the year ended September 30, 2023 from $5.96 million for the year ended September 30, 2022.

The increase in the provision for income taxes was primarily due to higher income before income taxes.

The Company's effective income tax rate was 20.2% for the years ended September 30, 2023 and 2022.

For additional information on income taxes, see "Note 13-Income Taxes" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Comparison of Results of Operations for the Years Ended September 30, 2022 and 2021

See Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2022 previously filed with the SEC.

Average Balances, Interest and Average Yields/Cost

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The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs.

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.

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.

Year Ended September 30,

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year ended September 30, 2022 - $3,600 and year ended September 30, 2021 - $6,859) are included with interest and dividends.

Accretion of the fair value discount on loans acquired in the South Sound Acquisition for the years ended September 30, 2022, 2021 and 2020 of $182, $340 and $597, respectively, is included with interest and dividends.

Accretion of the fair value discount on loans for the years ended September 30, 2023, 2022 and 2021 of $75, $182 and $340 respectively, is included with interest and dividends.

(2) Average balances include loans and investment securities on non-accrual status.

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At September 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 15.3%.

At September 30, 2022, the Bank maintained an unused 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 balance was outstanding.

The Bank had $492.29 million available for borrowings with the FHLB at September 30, 2022.

The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.

At September 30, 2022, the Bank had no outstanding balance on this borrowing line, under which $77.09 million was available for future borrowings.

At September 30, 2023, the Bank maintained an unused 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 $35.00 million of the$533.99 million available for borrowings with the FHLB was outstanding at September 30, 2023.

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

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

At September 30, 2023, the Bank had no outstanding balance on either the BIC or BTFP borrowing lines, under which $89.26 million and $57.00 million was available for future borrowings, respectively.

The Bank also maintains a $50.00 million overnight borrowing line with PCBB.

At September 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 deposit

withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

Subject to market conditions, the

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

Liquidity management is both a short and long-term responsibility of the Bank's management.

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During the years ended September 30, 2023, 2022 and 2021, the Bank received $177.31 million, $324.23 million and $500.03 million, respectively, in principal repayments.

The Bank’s liquidity has been positively impacted by increases in deposit levels.

During the years ended September 30, 2022, 2021 and 2020, deposits increased by $61.62 million, $212.15 million and $290.18 million, respectively.

Our liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale decreased to $381.06 million at September 30, 2022 from $671.85 million at September 30, 2021 due to the purchase of higher yield investment securities during the year.

CDs that are scheduled to mature in less than one year from September 30, 2022 totaled $76.31 million.

The Bank’s liquidity has been negatively impacted by decreases in deposit levels.

During the year ended September 30, 2023, deposits decreased by $71.24 million.

During the years ended September 30, 2022 and 2021, deposits increased by $61.62 million and $212.20 million, respectively.

Our liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale decreased to $185.68 million at September 30, 2023 from $381.06 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.

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

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Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the fiscal year ending September 30, 2024 that would materially impact liquidity.

The current quarterly common stock dividend rate is $0.22 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 this rate of $0.22 per share, the average total dividend paid each quarter would be approximately $1.81 million based on the number of current outstanding shares (which assumes no increases or decreases in the number of shares).

For the fiscal year ending September 30, 2024, the Bank projects that fixed commitments will include $333,000 of operating lease payments.

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

There are $20.0 million in scheduled payments and maturities of FHLB borrowings during fiscal year 2024.

In addition, at September 30, 2023, there were other future obligations and accrued expenses of $9.03 million.

For additional information, see Note 12 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

For additional information, see "Note 12-FHLB Borrowings and Other Borrowings" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

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.

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses.

In addition to its operating expenses, Timberland Bancorp is responsible for paying dividends declared, if any, to its shareholders and funds paid for Company stock repurchases.

Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities.

At September 30, 2022, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.71 million.

At September 30, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $517,000.

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 2024 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 September 30, 2023.

In addition, from time to time, our Board of Directors has authorized stock repurchase plans.

In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders.

Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards.

On July 25, 2023, the Company announced the adoption of a new stock repurchase program pursuant to which the Company may repurchase up to 404,708 shares of Company common stock, of which 374,142 shares remained available for future purchases as of September 30, 2023.

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.

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

For additional information on the Company’s stock repurchases, see “Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” contained in Part II of this report.

Bank holding companies and federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital.

At September 30, 2022, Timberland Bancorp and the Bank were in compliance with all applicable capital

requirements.

For additional details, see Note 17 to the Consolidated Financial Statements contained in “Item 8.

Financial Statements and Supplementary Data” and “Item 1.

At September 30, 2023, Timberland Bancorp and the Bank were in compliance with all applicable capital requirements.

For additional details, see "Note 17-Regulatory Matters" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report and “Item 1.

Business - Regulation of the Bank - Capital Requirements".

New Accounting Pronouncements

For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data".

For a discussion of new accounting pronouncements and their impact on the Company, see "Note 1-Summary of Significant Accountion Policies" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Quantitative and Qualitative Disclosures About Market Risk

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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-K

Item 7. Management’s Discussion and Analysis