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Item 2. Management’s Discussion and Analysis

2024-02-12 compared with 2023-08-07 · 215 added, 247 removed, 233 unchanged (66% 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 nine months ended June 30, 2023.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations.

The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements contained in Item 1 of this Form 10-Q.

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

Special Note Regarding Forward-Looking Statements

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Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance.

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 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;

continuing elevated levels of inflation and the impact of current and future monetary policies of the Board of Governors of the Federal Reserve System ("Federal Reserve") in response thereto;

the effects of any federal government shutdown;

credit risks of lending activities, including any deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio resulting in our ACL not being adequate to cover actual losses and thus requiring us to materially increase our ACL through the provision for credit losses;

changes in general economic conditions, either nationally or in our market areas;

changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

transition away from the London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks;

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;

secondary market conditions for loans and our ability to sell loans in the secondary market;

results of examinations of us by the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our

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;

results of examinations of us by the Federal Reserve and of our bank subsidiary by the Federal Deposit Insurance Corporation (“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 credit 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;

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and other risks described elsewhere in this Form 10-Q and in the Company's other reports filed with or furnished to the Securities and Exchange Commission, including our 2023 Form 10-K.

Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements that we make are based upon management’s beliefs and assumptions at the time that they are made.

We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.

Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made.

We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this quarterly report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.

In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements.

These risks could cause our actual results for fiscal year 2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company’s consolidated financial condition and results of operations as well as its stock price performance.

These risks could cause our actual results for fiscal 2024 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's consolidated financial condition and results of operations as well as its stock price performance.

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank.

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 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.

At December 31, 2023, the Company had total assets of $1.90 billion, net loans receivable of $1.34 billion, total deposits of $1.63 billion and total shareholders’ equity of $237.37 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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The Bank also originates commercial business loans and other consumer loans.

The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) loan losses.

The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) credit losses.

Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed).

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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 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 $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.

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 525 basis points, to a range of 5.25% to 5.50% as of December 31, 2023, taking benchmark borrowing costs to their highest level in more than 22 years.

The provision for (recapture of) credit 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 ACL on loans reflects the amount that management has determined is adequate to cover probable expected credit losses in the loan portfolio.

As the loan portfolio increases, or due to an increase in probable expected losses inherent in the loan portfolio, the ACL may increase, resulting in a decrease to net interest income after the provision.

Improvement in loan risk ratings, increase in property values, or receipts of recoveries of amounts previously charged off may partially or fully offset any required increases to ACL on loans due to loan growth or an increase in the probable expected credit losses.

The Company recorded a provision for credit losses on loans of $379,000 for the three months ended December 31, 2023 using the CECL methodology, primarily due to loan portfolio growth.

The Company recorded a $525,000 provision for loan losses, using the prior incurred loss methodology, for the three months ended December 31, 2022.

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

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.

For the three months ended December 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.

Non-interest income is also increased by net recoveries on investment securities and for periods prior to the adoption of CECL 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.

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Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of these financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements.

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

Actual results may differ from these estimates under different assumptions or conditions.

The Company's critical accounting estimates are described in the Company’s 2022 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change.

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 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 $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 $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 $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.

The Company's critical accounting estimates are described in the Company’s 2023 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change.

Other than the adoption of CECL, there have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K.

Comparison of Financial Condition at December 31, 2023 and September 30, 2023

Total assets increased by $55.21 million, or 3.0%, to $1.90 billion at December 31, 2023 from $1.84 billion at September 30, 2023.

The increase in total assets was primarily due to increases in loans receivable and total cash and cash equivalents, which was partially offset by decreases in investment securities and CDs held for investment.

The quarterly increase in assets was primarily funded by an increase in deposits,which was partially offset by a decrease in FHLB borrowings.

Net loans receivable increased by $33.98 million, or 2.6%, to $1.34 billion at December 31, 2023 from $1.30 billion at September 30, 2023, primarily due to increases in multi-family loans, commercial real estate loans, one- to four-family loans as well as smaller increases in several other loan categories.

These increases to net loans receivable were partially offset by decreases in construction and land development loans as well as decreases in several other loan categories.

Total deposits increased by $66.13 million, or 4.2%, to $1.63 billion at December 31, 2023 from $1.56 billion at September 30, 2023, primarily due to increases in money market account balances, certificates of deposit balances, and NOW checking account balances.

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

Shareholders’ equity increased by $4.30 million, or 1.8%, to $237.37 million at December 31, 2023 from $233.07 million at September 30, 2023.

The increase in shareholders' equity was primarily due to net income and proceeds from stock options exercised and a reduction in accumulated other comprehensive loss during the current quarter.

These increases were partially offset by the payment of dividends to common shareholders, a reduction of retained earnings related to adoption of the new CECL accounting standard and the repurchase of common stock during the quarter.

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

Cash and Cash Equivalents and CDs Held for Investment:

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.

Cash and cash equivalents and CDs held for investment increased by $26.56 million, or 18.5%, to $170.47 million at December 31, 2023 from $143.91 million at September 30, 2023.

The increase was primarily due to increased deposits and a decrease in investment securities, which was partially offset by an increase in loans and a decrease in FHLB borrowings.

Investment Securities:

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 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.

Investment securities (including investments in equity securities) decreased by $5.42 million, or 1.7%, to $307.38 million at December 31, 2023 from $312.80 million at September 30, 2023.

This decrease was primarily due to 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 $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.

FHLB stock decreased $1.60 million, or 44.5% to $2.00 million at December 31, 2023 from $3.60 million at September 30, 2023, due to the repayment of a portion of FHLB borrowings and the restructuring of stock requirements by FHLB.

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 June 30, 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 December 31, 2023 and September 30, 2023.

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

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 $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.

The decrease was partially offset by increases in multi-family loan originations.

Net loans receivable increased by $33.98 million, or 2.6%, to $1.34 billion at December 31, 2023 from $1.30 billion at September 30, 2023.

The increase was due to increases of $20.15 million in multi-family loans, $10.77 million in commercial real estate loans, $9.90 million in one- to four-family loans and smaller increases in other categories.

These increases were partially offset by an $8.76 million decrease in construction and land development loans, and smaller decreases in several other loan categories.

Loan originations decreased by $12.74 million, or 12.5%, to $88.93 million for the three months ended December 31, 2023 from $101.67 million for the three months ended December 31, 2022.

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

The decrease was partially offset by increases in multi-family and consumer loan originations.

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 $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.”

Sales of fixed-rate one- to four-family mortgage loans increased by $2.64 million, or 227.6%, to $3.8 million for the three months ended December 31, 2023 from $1.16 million for the three months ended December 31, 2022, primarily due to one- to four-family construction loans refinancing to permanent loans.

For additional information on loans, 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 $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.

Premises and equipment decreased by $58,000, or 0.3%, to $21.58 million at December 31, 2023 from $21.64 million at September 30, 2023.

This decrease was primarily due to scheduled depreciation.

OREO (Other Real Estate Owned):

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

At December 31, 2023, total OREO and other repossessed assets consisted of one land parcel with no recorded value.

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

BOLI (Bank Owned Life Insurance):

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

BOLI increased by $156,000 or 0.7%, to $23.12 million at December 31, 2023 from $22.97 million at September 30, 2023.

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 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.

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

CDI decreased by $56,000, or 8.3%, to $621,000 at December 31, 2023 from $677,000 at September 30, 2023 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 $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 June 30, 2023 and September 30, 2022 (dollars in thousands):

June 30, 2023 September 30, 2022

Loan servicing rights, net decreased by $199,000 or 9.4%, to $1.92 million at December 31, 2023 from $2.12 million at September 30, 2023 primarily due to the amortization of servicing rights.

The principal amount of loans serviced for Freddie Mac and SBA decreased by $3.25 million to $383.25 million at December 31, 2023 from $386.50 million at September 30, 2023.

Deposits increased by $66.13 million, or 4.2%, to $1.63 billion at December 31, 2023 from $1.56 billion at September 30, 2023.

The increase was primarily due to a $79.81 million increase in money market account balances, an $18.81 million increase in certificates of deposit balances and a $2.73 million increase in NOW checking account balances.

These increases were partially offset by a $22.80 million decrease in non-interest bearing demand accounts and a $12.42 million decrease in savings account balances.

The increase in money market account balances was primarily due to several larger balance increases with commercial customers.

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

December 31, 2023 September 30, 2023

Amount Percent Amount Percent

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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.

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.

FHLB borrowings decreased to $20.00 million at December 31, 2023, from $35.00 million at September 30, 2023.

The borrowings consist of one $5.00 million short-term borrowing, with a scheduled maturity in September 2024, that bears interest at 5.52%, and one $5.00 million borrowing and one $10.00 million borrowing with scheduled maturities in May 2026, both of which bear interest at 3.95%.

Shareholders’ Equity:

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 0.09% 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 June 30, 2023 and September 30, 2022 (dollars in thousands):

Total shareholders’ equity increased by $4.30 million, or 1.8%, to $237.37 million at December 31, 2023 from $233.07 million at September 30, 2023.

The increase was primarily due to net income of $6.30 million and proceeds of $355,000 from the exercise of stock options and a $257,000 reduction in the accumulated other comprehensive loss category for fair value adjustment on available for sale investment securities .

This increase was partially offset by dividend payments to common shareholders of $1.87 million, a $488,000 adjustment to equity for the adoption of the new CECL accounting standard, and the repurchase of 12,330 shares of the Company's common stock for $362,000 during the current quarter.

Asset Quality and Commercial Real Estate Portfolio Breakdown:

Non-performing assets to total assets was 0.18% at December 31, 2023 and 0.09% at September 30, 2023.

Total non-performing assets increased by $1.86 million, or 116.2%, to $3.45 million at December 31, 2023 from $1.60 million at September 30, 2023.

The increase in non-performing assets was due to a $1.85 million increase in non-accrual loans and a $3,000 increase in non-accrual investment securities.

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

2023 September 30,

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Commercial 683 683

Construction – custom and owner/builder 150 —

Consumer loans:

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___________________________________

(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 $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 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 $3.93 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.

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

(2) Does not include TDRs on accrual status as of September 30, 2023.

For more information regarding TDRs please see Note 4 of the Notes to Unaudited Financial Statements contained in "Item 1 Financial Statements".

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

For more information regarding TDRs please see Note 4 of the Notes to Unaudited Financial Statements contained in "Item 1 Financial Statements".

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

The following tables provide a breakdown of commercial real estate ("CRE") loans by collateral types as of December 31, 2023 and September 30, 2023:

CRE Loan Portfolio Breakdown by Collateral at December 31, 2023

($ in thousands)

Collateral Type Balance Percent of CRE Portfolio Percent of Total Loan Portfolio Average Balance per Loan Non-Accrual

Industrial warehouse $ 114,355 20 % 8 % $ 1,132 $ 195

Medical/dental offices 80,767 14 6 % 1,324 —

Office buildings 65,543 11 5 % 745 —

Other retail buildings 50,003 9 3 % 538 —

Mini-storage 37,131 6 2 % 1,375 —

Hotel/motel 31,973 5 2 % 2,906 —

Restaurants 27,346 5 2 % 558 —

Gas stations/convenience stores 21,346 4 1 % 970 —

Nursing homes 18,024 3 1 % 2,575 —

Shopping centers 10,922 2 1 % 1,820 —

Mobile home parks 10,917 2 1 % 520 —

Churches 7,121 1 1 % 475 —

Other 103,590 18 7 % 719 488

Total CRE $ 579,038 100 % 40 % $ 898 $ 683

CRE Loan Portfolio Breakdown by Collateral at September 30, 2023

($ in thousands)

Collateral Type Balance Percent of CRE Portfolio Percent of Total Loan Portfolio Average Balance per Loan Non-Accrual

Industrial warehouse $ 115,804 20 % 8 % $ 1,135 $ 195

Medical/dental offices 76,498 14 5 % 1,319 —

Office buildings 66,108 12 5 % 760 —

Other retail buildings 51,730 9 4 % 545 —

Hotel/motel 30,718 5 2 % 3,072 —

Mini-storage 27,750 5 2 % 1,156 —

Restaurants 27,640 5 2 % 564 —

Gas stations/convenience stores 21,588 4 1 % 939 —

Nursing homes 18,051 3 1 % 3,008 —

Shopping centers 10,790 2 1 % 2,158 —

Mobile home parks 9,696 2 1 % 510 —

Churches 7,253 1 1 % 484 —

Other 104,639 18 7 % 731 488

Total CRE $ 568,265 100 % 40 % $ 893 $ 683

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

Net income decreased by $1.21 million, or 16.1%, to $6.30 million for the quarter ended December 31, 2023 from $7.51 million for the quarter ended December 31, 2022.

Net income per diluted common share decreased by $0.13, or 14.4%, to $0.77 for the quarter ended December 31, 2023 from $0.90 for the quarter ended December 31, 2022.

The decreases in net income and net income per diluted common share for the three months ended December 31, 2023 were primarily due to a $1.74 million decrease in net interest income and an $89,000 increase in non-interest expense..

This decrease was partially offset by a $93,000 increase in non-interest income, a $189,000 decrease in the provision for credit losses and a $335,000 decrease 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 $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.

Net interest income decreased by $1.74 million, or 9.8%, to $16.00 million for the quarter ended December 31, 2023 from $17.74 million for the quarter ended December 31, 2022.

This decrease was primarily due to an increase in the weighted average cost of interest-bearing liabilities to 2.22% at December 31, 2023 from 0.50% at December 31, 2022 and, to a lesser extent, a $67.35 million increase in average balance of total interest-bearing liabilities.

Partially offsetting the increase in funding costs, was an increase in the average yields of interest-earning assets to 5.07% for the current quarter from 4.34% at December 31, 2022, and a $16.18 million increase in average total interest-bearing assets.

Total interest and dividend income increased by $3.38 million, or 17.7%, to $22.50 million for the quarter ended December 31, 2023 from $19.11 million for the quarter ended December 31, 2022, primarily due to increases in the average yield and average balance of loans receivable, and the average yields on interest-bearing deposits in banks and CDs and investment securities.

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 $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 average balance of total interest-earning assets increased by $16.18 million, or 0.9%, to $1.78 billion for the quarter ended December 31, 2023 from $1.76 billion for the quarter ended December 31, 2022.

The average balance of investment securities decreased by $13.19 million, or 4.1% and the average balance of loans receivable increased by $168.60 million, or 14.5%, which was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $140.19 million, or 52.6% between the periods.

During the quarter ended December 31, 2023, the accretion of the purchase accounting fair value discount on acquired loans increased interest income on loans by $10,000 compared to $28,000 for the quarter ended December 31, 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 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 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 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 0.85% 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.

During the quarter ended December 31, 2023, there was a total of $142,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $120,000 collected for the quarter ended December 31, 2022.

The average yield on interest-earning assets increased by 73 basis points to 5.07% for the quarter ended December 31, 2023 from 4.34% for the quarter ended December 31, 2022.

The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 176 basis points and 22 basis points to 5.35% and 2.96%, respectively, for the quarter ended December 31, 2023 compared to the quarter ended December 31, 2022, while the average yield on loans receivable increased 55 basis points to 5.52% during the same period.

Total interest expense increased by $5.12 million, or 374.2%, to $6.49 million for the quarter ended December 31, 2023 from $1.37 million for the quarter ended December 31, 2022.

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

The average cost of interest-bearing liabilities increased to 2.22% for the quarter ended December 31, 2023 from 0.50% for the quarter ended December 31, 2022.

The average balance of interest-bearing liabilities increased by $67.35 million, or 6.2%, to $1.16 billion for the quarter ended December 31, 2023 from $1.09 billion for the quarter ended December 31, 2022, primarily due to decreases in the average balances of NOW checking, saving and money market accounts, partially offset by an increase in the average balance of certificate of deposit accounts and borrowings.

Interest expense on deposits increased by $4.77 million, or 348.7%, to $6.14 million for the quarter ended December 31, 2023 from $1.37 million for the quarter ended December 31, 2022, driven by an increase in the average cost of interest-bearing deposits in all categories and an increase in the average balance of certificates of deposit.

The average cost of interest bearing deposits increased 113 basis points to 2.17% for the three months ended December 31, 2023, which included a 297 basis point increase in the cost of certificates of deposit to 4.16%, compared to the same period last year.

The average balance of certificates of deposit increased $175.89 million, or 129.8%, to $311.35 million for the three months ended December 31, 2023, compared to the same period last year, which includes $42.73 million in brokered certificates of deposit.

Interest expense on borrowing increased to $348,000 for the quarter ended December 31, 2023, compared to none for the quarter ended December 31, 2022.

The average balance of borrowing was $28.80 million and the average rate paid on borrowings was 4.05% for the quarter ended December 31, 2023.

As a result of the increase in interest expense, the net interest margin ("NIM") decreased to 3.60% for the quarter ended December 31, 2023 from 4.03% for the quarter ended December 31, 2022.

Average Balances, Interest and Average Yields/Cost

1 unchanged sentence

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 June 30,

Balance Interest and

Dividends Yield/

Balance Interest and

Dividends Yield/

Interest-earning assets:

Loans receivable (1)(2) $ 1,254,044 $ 16,215 5.17 % $ 1,072,933 $ 12,628 4.71 %

Investment securities (2) 324,844 2,384 2.94 257,513 1,016 1.58

Dividends from mutual funds, FHLB stock and other investments 6,541 70 4.28 6,082 25 1.64

Interest-bearing deposits in banks and CDs 101,798 1,220 4.79 460,657 958 0.83

Total interest-earning assets 1,687,227 19,889 4.72 1,797,185 14,627 3.26

Non-interest-earning assets 84,255 85,470

Total assets $ 1,771,482 $ 1,882,655

Interest-bearing liabilities:

Savings $ 255,463 118 0.19 $ 284,659 59 0.08

Money market 205,023 429 0.84 258,240 191 0.30

NOW checking 387,426 982 1.02 462,085 161 0.14

Certificates of deposit 210,950 1,594 3.03 125,132 234 0.75

Short-term borrowings 3,464 46 5.33 — — —

Long-term borrowings 8,791 86 3.92 — — —

Total interest-bearing liabilities 1,071,117 3,255 1.22 1,130,116 645 0.23

Non-interest-bearing deposits 462,315 529,770

Other liabilities 10,199 10,170

Total liabilities 1,543,631 1,670,056

Shareholders' equity 227,851 212,599

Total liabilities and

shareholders' equity $ 1,771,482 $ 1,882,655

Net interest income $ 16,634 $ 13,982

Interest rate spread 3.50 % 3.03 %

Net interest margin (3) 3.94 % 3.11 %

Ratio of average interest-earning assets to average interest- bearing liabilities 157.52 % 159.03 %

_______________

(1) Does not include interest on loans on non-accrual status.

Includes loans held for sale.

Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans are included with interest and dividends.

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

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

Nine Months Ended June 30,

Three Months Ended December 31,

Balance Interest and

15 unchanged sentences

Certificates of deposit 268,628 2,681 3.97 135,467 468 1.37

Brokered CDs 42,725 578 5.38 — — —

Short-term borrowings 13,804 195 5.62 — — —

19 unchanged sentences

The following table sets forth the effects of changing rates and volumes on the net interest income of the Company.

Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior

volume), and (iii) the net change (sum of the prior columns).

Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands).

Three months ended

June 30, 2023

December 31, 2023

compared to three months

ended June 30, 2022

increase (decrease) due to Nine months ended

June 30, 2023

compared to nine months

ended June 30, 2022

ended December 31, 2022

increase (decrease) due to

Rate Volume Net

Change Rate Volume Net

Interest-earning assets:

12 unchanged sentences

Total net increase in expense on interest-bearing liabilities 3,968 1,154 5,122

Net increase in net interest income $ 1,545 $ 1,107 $ 2,652 $ 4,391 $ 7,566 $ 11,957

Provision for Loan Losses:

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.

On a quarterly basis, the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio.

These factors include changes in the amount and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses.

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 on impaired loans determined at June 30, 2023 was $123,000 and $127,000 at both September 30, 2022 and June 30, 2022.

Net decrease in net interest income $ (1,145) $ (593) $ (1,738)

Provision for Credit Losses:

A net $336,000 provision for credit losses was recorded for the quarter ended December 31, 2023, which consisted of a $379,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $10,000 recapture of credit losses on investment securities which is primarily due to maturities and principal payments, and a $33,000 recapture of credit losses on unfunded commitments which is primarily due to the change in mix of unfunded commitments.

There was a $525,000 provision made for loan losses, under the prior incurred loan loss method, for the quarter ended December 31, 2022.

The Company adopted the CECL methodology as of October 1, 2023, which resulted in one-time upward adjustments to the ACL on loans of $461,000, to the ACL on investment securities of $92,000, and to the ACL on unfunded commitments of $65,000, resulting in an after-tax decrease to opening retained earnings of $488,000.

Amounts reported prior to October 1, 2023 were calculated using the previous incurred loss methodology to compute our allowance for credit losses, which is not directly comparable to the new CECL methodology.

The provision for credit losses for the three months ended December 31, 2023 also reflects assumptions related to forecasts concerning the economic environment as a result of local, national and global events, including recent bank failures.

In addition, expected loss estimates consider

various factors, including customer specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers ability to repay.

For the quarter ended December 31, 2023, net charge-offs were $2,000 compared to a $1,000 recovery for the quarter ended December 31, 2022.

Non-accrual loans increased by $1.85 million, or 122.3%, to $3.36 million at December 31, 2023 from $1.51 million at September 30, 2023.

At December 31, 2023, non-accrual loans increased by $1.32 million, or 64.7%, to $3.36 million from $2.04 million at December 31, 2022.

Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $1.94 million, or 116.4%, to $3.60 million at December 31, 2023, from $1.67 million at September 30, 2023 and increased by $1.35 million, or 59.9%, from $2.25 million one year ago.

The $423,000 balance of SBA PPP loans was omitted from the Company's normal allowance for credit losses calculation at December 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.

While management believes the estimates and assumptions used in the determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not have a material adverse impact on financial condition and results of operations.

A further decline in national and local economic conditions, as a result of the effects of inflation, and a potential recession or slowed economic growth, among other factors, could result in a material increase in the ACL and have a material adverse impact on the financial condition and results of operations.

In addition, the determination of the amount of the ACL is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination and have a material adverse impact on the financial condition and results of operations.

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 $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.

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 and may adversely affect the Company's financial condition and results of operations.

Credit discounts are included in the determination of fair value.

With the adoption of CECL, the loans are evaluated for impairment in the same manner as the rest of the loan portfolio.

The remaining fair value discount associated with $11.2 million in loans that were acquired in the South Sound Acquisition was $182,000 at December 31, 2023.

This discount will continue to accrete into income as these loans continue to pay down.

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

Non-interest Income:

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.

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.

Total non-interest income increased by $93,000, or 3.4%, to $2.80 million for the quarter ended December 31, 2023 from $2.71 million for the quarter ended December 31, 2022.

This increase was primarily due to a $76,000 increase in service charges on deposits, a $57,000 increase in net gain on sales of loans, and smaller increases in several other categories.

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

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

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

Non-interest Expense:

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 $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.

Total non-interest expense increased by $89,000, or 0.8%, to $10.62 million for the quarter ended December 31, 2023 from $10.54 million for the quarter ended December 31, 2022.

This increase was primarily due to increased expenses of $185,000 in technology and communications expense, $132,000 in ATM and debit card interchange expense, $86,000 in FDIC insurance and smaller increases in several other categories, which were partially offset by a $176,000 decrease in professional fees expense and smaller decreases in several categories.

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

The increase in FDIC insurance was due to an increase in deposit insurance rates by the FDIC in January 2023.

The efficiency ratio for the current quarter was 56.50% compared to 51.52% for the comparable quarter one year ago.

The deterioration in the efficiency ratio was due to lower total revenue coupled with slightly higher non-interest expense.

Provision for Income Taxes:

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 20.9% 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.

The provision for income taxes decreased by $335,000, or 17.8%, to $1.55 million for the quarter ended December 31, 2023 from $1.88 million for the quarter ended December 31, 2022.

The decrease in the provision for income taxes was primarily due to lower pre-tax income.

The Company's effective income tax rate was 19.6% for the quarter ended December 31, 2023 and 20.0% for the quarter ended December 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 borrowings, if needed, from the FHLB and FRB.

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

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.

At December 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 13.07%.

At December 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 $20.00 million was outstanding.

The Bank had $576.42 million available for borrowings with the FHLB at December 31, 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 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.

At December 31, 2023, the Bank had no outstanding balance on the BIC line, under which $74.03 million was available for future borrowings.

At December 31, 2023, the Bank had no outstanding balance on the BTFP line, under which $20.00 million was available for future borrowings.

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

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

At December 31, 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 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.

During the three months ended December 31, 2023 and 2022, the Bank originated $88.93 million and $101.67 million of loans, respectively.

At December 31, 2023, the Bank had loan commitments totaling $147.06 million and undisbursed construction loans in process totaling $104.68 million.

Investment securities purchased during the three months ended December 31, 2023 and 2022 totaled $1.92 million and $31.31 million, respectively.

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

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.

During the three months ended December 31, 2023 and 2022, the Bank sold $9.60 million and $1.16 million, respectively, in loans and loan participation interests.

During the three months ended December 31, 2023, the Bank received $44.35 million in principal repayments.

During the three months ended December 31, 2022, the Bank received $50.71 million in principal repayments.

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) increased to $211.76 million at December 31, 2023 from $186.49 million at September 30, 2023.

CDs that are scheduled to mature in less than one year from December 31, 2023 totaled $274.31 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

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

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

For the remaining nine months in the year ending September 30, 2024, the Bank projects that fixed commitments will include $250,000 of operating lease payments.

One FHLB borrowing totaling $5.00 million will mature during the fiscal year 2024.

In addition, at December 31, 2023, there were other future obligations and accrued expenses of $8.88 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 June 30, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $552,000.

At December 31, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.01 million.

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 $0.24 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 $1.86 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.

Assuming continued payment during fiscal year 2024 at the rate of $0.24 per share, the average total dividend paid each quarter would be approximately $1.95 million based on the number of current outstanding shares at December 31, 2023 (which assumes no increases or decrease in the number of shares).

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.

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

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 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 deem appropriate.

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 361,812 shares remained available for future purchases as of December 31, 2023.

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 2.

Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.

Capital Resources

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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 June 30, 2023, the Bank exceeded all regulatory capital requirements as of that date.

Based on its capital levels at December 31, 2023, the Bank exceeded all regulatory capital requirements.

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 June 30, 2023, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

Based on capital levels at December 31, 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 June 30, 2023 to its minimum regulatory capital requirements at that date (dollars in thousands):

The following table compares the Bank’s actual capital amounts at December 31, 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 June 30, 2023, the Bank's CET1 capital exceeded the required capital conservation buffer.

At December 31, 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 June 30, 2023, Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 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 June 30, 2023 (dollars in thousands):

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

Leverage Capital Ratio:

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Key Financial Ratios and Data

Three Months Ended June 30, Nine Months Ended

2023 2022 2023 2022

Three Months Ended December 31,

PERFORMANCE RATIOS :

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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