What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2024-02-12 · 211 added, 149 removed, 299 unchanged (55% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Form 10-Q, the terms “we,” “our” and “Company” refer to Timberland Bancorp, Inc.

As used in this Form 10-Q, the terms “we,” “us,” “our” and the “Company” refer to Timberland Bancorp, Inc.

and its consolidated subsidiaries, unless the context indicates otherwise.

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.

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

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.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and six months ended March 31, 2024.

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

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;

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

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;

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 ACL, 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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changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

the economic impact of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;

the economic impact of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest and other external events on our business;

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services;

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.

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 Annual Report on From 10-K for the fiscal year ended September 30, 2023 (the "2023 Form 10-K:).

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.

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

At 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.

At March 31, 2024, the Company had total assets of $1.91 billion, net loans receivable of $1.36 billion, total deposits of $1.64 billion and total shareholders’ equity of $238.68 million.

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

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

Since March 2022, in response to inflation, the 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.

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 March 31, 2024, 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.

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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.

The Company recorded a provision for credit losses on loans of $166,000 and $545,000 for the three and six months ended March 31, 2024 (using the CECL methodology), primarily due to loan portfolio growth.

The Company recorded a provision for loan losses (using the prior incurred loss methodology) of $475,000 and $1.00 million for the three and six months ended March 31, 2023.

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

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.

For the three and six months ended March 31, 2024, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, BOLI net earnings, 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.

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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, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses.

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

Non-interest expense in certain periods is reduced by gains on

the sale of premises and equipment and 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 of loan and deposit accounts.

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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 consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

Management's 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.

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 consolidated financial statements.

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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.

Comparison of Financial Condition at March 31, 2024 and September 30, 2023

Total assets increased by $67.33 million, or 3.7%, to $1.91 billion at March 31, 2024 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.

The 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 $56.81 million, or 4.4%, to $1.36 billion at March 31, 2024 from $1.30 billion at September 30, 2023, primarily due to increases in multi-family loans, one- to four-family loans, commercial real estate 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 smaller decreases in several other loan categories.

Total deposits increased by $77.62 million, or 5.0%, to $1.64 billion at March 31, 2024 from $1.56 billion at September 30, 2023, primarily due to increases in money market account and certificates of deposit balances.

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

Shareholders’ equity increased by $5.61 million, or 2.4%, to $238.68 million at March 31, 2024 from $233.07 million at September 30, 2023.

The increase in shareholders' equity was primarily due to net income and proceeds from stock option exercises along with a reduction in accumulated other comprehensive loss during the current period.

These increases were partially offset by the payment of dividends to common shareholders, repurchases of common stock and a reduction of retained earnings related to adoption of the new CECL accounting standard during the six months ended March 31, 2024.

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 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.

Cash and cash equivalents and CDs held for investment increased by $47.64 million, or 33.1%, to $191.55 million at March 31, 2024 from $143.91 million at September 30, 2023.

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

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.

Investment securities (including investments in equity securities) decreased by $38.39 million, or 12.3%, to $274.41 million at March 31, 2024 from $312.80 million at September 30, 2023.

This decrease was primarily due to maturities, prepayments and scheduled amortizations exceeding purchases.

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 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.

FHLB stock decreased $1.57 million, or 43.5% to $2.04 million at March 31, 2024 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 December 31, 2023 and September 30, 2023.

Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both March 31, 2024 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 $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.

Net loans receivable increased by $56.81 million, or 4.4%, to $1.36 billion at March 31, 2024 from $1.30 billion at September 30, 2023.

The increase was due to increases of $40.10 million in multi-family loans, $23.21 million in one- to four-family loans, $9.11 million in commercial real estate loans and smaller increases in other categories.

These increases were partially offset by a $46.49 million decrease in construction and land development loans, with the largest decreases occurring in commercial and multi-family construction loans, and smaller decreases in several other loan categories.

The increase in multi-family and one-to-four family loans and the decrease in construction loans were in part due to the construction portion of these loans beings completed and moved to permanent financing categories.

Loan originations decreased by $50.51 million, or 28.3%, to $128.30 million for the six months ended March 31, 2024 from $178.81 million for the six months ended March 31, 2023.

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

The decrease was partially offset by increases in multi-family and commercial business 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 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.

Sales of fixed-rate one- to four-family loans increased by $2.53 million, or 71.3%, to $6.07 million for the six months ended March 31, 2024 from $3.55 million for the six months ended March 31, 2023, primarily due to an increase in one- to four-family construction loans refinancing to permanent loans and being sold into the secondary market.

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 $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.

Premises and equipment increased by $76,000, or 0.4%, to $21.72 million at March 31, 2024 from $21.64 million at September 30, 2023.

This increase was primarily due to additions from remodeling projects that were partially offset by scheduled depreciation.

OREO (Other Real Estate Owned):

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

At March 31, 2024, 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 $156,000 or 0.7%, to $23.12 million at December 31, 2023 from $22.97 million at September 30, 2023.

BOLI increased by $312,000 or 1.4%, to $23.28 million at March 31, 2024 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 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.

The recorded amount of goodwill remained unchanged at $15.13 million at both March 31, 2024 and September 30, 2023.

CDI decreased by $113,000, or 16.7%, to $564,000 at March 31, 2024 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 $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.

Loan servicing rights, net decreased by $407,000 or 19.2%, to $1.72 million at March 31, 2024 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 $7.63 million to $378.87 million at March 31, 2024 from $386.50 million at September 30, 2023.

Deposits increased by $77.62 million, or 5.0%, to $1.64 billion at March 31, 2024 from $1.56 billion at September 30, 2023.

The increase was primarily due to a $122.12 million increase in money market account balances and a $53.85 million increase in certificates of deposit balances.

These increases were partially offset by a $50.11 million decrease in NOW checking accounts balances, a $30.96 million decrease in non-interest bearing demand account balances and a $17.28 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

Deposits consisted of the following at March 31, 2024 and September 30, 2023 (dollars in thousands):

March 31, 2024 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 decreased to $20.00 million at December 31, 2023, from $35.00 million at September 30, 2023.

FHLB borrowings decreased to $20.00 million at March 31, 2024, 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 $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.

Total shareholders’ equity increased by $5.61 million, or 2.4%, to $238.68 million at March 31, 2024 from $233.07 million at September 30, 2023.

The increase was primarily due to net income of $12.00 million and proceeds of $390,000 from the exercise of stock options along with a $339,000 reduction in the accumulated other comprehensive loss category for the fair value adjustment on available for sale investment securities.

This increase was partially offset by dividend payments to common shareholders of $3.82 million, the repurchase of 112,117 shares of the Company's common stock for $3.03 million and a $488,000 adjustment to equity for the adoption of the new CECL accounting standard.

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):

Non-performing assets to total assets was 0.19% at March 31, 2024 and 0.09% at September 30, 2023.

Non-performing assets increased by $2.09 million, or 130.8%, to $3.68 million at March 31, 2024 from $1.60 million at September 30, 2023.

The increase in non-performing assets was primarily due to a $2.09 million increase in non-accrual loans, with the largest increases occurring in the commercial business and commercial real estate portfolios.

The following table sets forth information with respect to the Company’s non-performing assets at March 31, 2024 and September 30, 2023 (dollars in thousands):

2024 September 30,

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

(1) As of March 31, 2024, there was one one- to four-family property in the process of foreclosure.

At 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.

(3) Does not include TDRs on non-accrual status 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

(4) Does not include loans held for sale.

Loan balances are before any reduction of the ACL.

The following tables provide a breakdown of commercial real estate ("CRE") loans by collateral types as of March 31, 2024 and September 30, 2023:

CRE Loan Portfolio Breakdown by Collateral at March 31, 2024

($ in thousands)

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Nursing homes 18,630 3 1 % 2,329 —

Shopping centers 10,922 2 1 % 1,820 —

Mobile home parks 10,869 2 1 % 494 —

Shopping centers 10,854 2 1 % 1,809 —

Churches 6,976 1 1 % 498 —

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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.

Comparison of Operating Results for the Three and Six Months Ended March 31, 2024 and 2023

Net income decreased by $955,000, or 14.3%, to $5.71 million for the quarter ended March 31, 2024 from $6.66 million for the quarter ended March 31, 2023.

Net income per diluted common share decreased by $0.10, or 12.5%, to $0.70 for the quarter ended March 31, 2024 from $0.80 for the quarter ended March 31, 2023.

The decreases in net income and net income per diluted common share for the three months ended March 31, 2024, were primarily due to a $1.52 million decrease in net interest income, a $47,000 increase in non-interest expense and a $21,000 decrease in non-interest income.

This decrease was partially offset by a $394,000 decrease in the provision for credit losses and a $235,000 decrease in the provision for income taxes.

Net income decreased by $2.17 million, or 15.3%, to $12.00 million for the six months ended March 31, 2024 from $14.17 million for the six months ended March 31, 2023.

Net income per diluted common share decreased by $0.23, or 13.5% to $1.47 for the six months ended March 31, 2024 from $1.70 for the six months ended March 31, 2023.

The decreases in net income and net income per diluted common share were due to a $3.26 million decrease in net interest income and a $136,000 increase in non-interest expense.

This decrease was partially offset by a $583,000 decrease in the provision for credit losses, a $571,000 decrease in the provision for income taxes and a $72,000 increase in non-interest income.

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

Net Interest Income:

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 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 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.

Net interest income decreased by $1.52 million, or 8.8%, to $15.64 million for the quarter ended March 31, 2024 from $17.15 million for the quarter ended March 31, 2023.

This decrease was primarily due to an increase in the weighted average cost of interest-bearing liabilities to 2.50% at March 31, 2024 from 0.84% at March 31, 2023 and, to a lesser extent, a $131.60 million increase in the 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 5.16% for the current quarter from 4.51% at March 31, 2023 and a $87.60 million increase in average total interest-earning assets.

Total interest and dividend income increased by $3.77 million, or 19.4%, to $23.16 million for the quarter ended March 31, 2024 from $19.39 million for the quarter ended March 31, 2023, 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, and investment securities.

The average balance of total interest-earning assets increased by $87.60 million, or 5.1%, to $1.81 billion for the quarter ended March 31, 2024 from $1.72 billion for the quarter ended March 31, 2023.

The average balance of loans receivable increased by $164.55 million, or 13.7%, which was partially offset by a decrease in the average balance of investment securities of $42.13 million, or 12.6% and a decrease in the average balance of interest-bearing deposits in banks and CDs of $34.63 million, or 19.5% between the periods.

During both quarters ended March 31, 2024 and 2023, there was a total of $99,000 of pre-payment penalties, non-accrual interest and late fees collected .

The average yield on interest-earning assets increased by 65 basis points to 5.16% for the quarter ended March 31, 2024 from 4.51% for the quarter ended March 31, 2023.

The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 109 basis points and 15 basis points to 5.39% and 3.09%, respectively, for the quarter ended March 31, 2024 compared to the quarter ended March 31, 2023, while the average yield on loans receivable increased 59 basis points to 5.57% during the same period.

Total interest expense increased by $5.29 million, or 236.4%, to $7.52 million for the quarter ended March 31, 2024 from $2.24 million for the quarter ended March 31, 2023.

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.

The average cost of interest-bearing liabilities increased to 2.50% for the quarter ended March 31, 2024 from 0.84% for the quarter ended March 31, 2023.

The average balance of interest-bearing liabilities increased by $131.60 million, or 12.2%, to $1.21 billion for the quarter ended March 31, 2024 from $1.08 billion for the quarter ended March 31, 2023, primarily due to increases in the average balances of money market accounts, certificate of deposit accounts and borrowings, partially offset by decreases in the average balance of NOW checking accounts, and savings accounts.

Interest expense on deposits increased by $5.07 million, or 226.5%, to $7.30 million for the quarter ended March 31, 2024 from $2.24 million for the quarter ended March 31, 2023, driven by an increase in the average cost of interest-bearing deposits in all categories and an increase in the average balance of money market accounts and certificates of deposit.

The average cost of interest bearing deposits increased 166 basis points to 2.50% for the three months ended March 31, 2024, which included a 212 basis point increase in the cost of certificates of deposit, including brokered certificates of deposit, to 4.34%, compared to the same period last year.

The average balance of certificates of deposit increased $165.06 million, or 96.8%, to $335.60 million

for the three months ended March 31, 2024, compared to the same period last year, which includes $40.40 million in brokered certificates of deposit.

Interest expense on borrowing increased to $220,000 for the quarter ended March 31, 2024, compared to none for the quarter ended March 31, 2023.

The average balance of borrowing was $20.0 million and the average rate paid on borrowings was 4.42% for the quarter ended March 31, 2024.

As a result of the increase in interest expense, the net interest margin ("NIM") decreased to 3.48% for the quarter ended March 31, 2024 from 3.99% for the quarter ended March 31, 2023.

Net income decreased $2.17 million or 15.3% to $12.00 million for the six months ended March 31, 2024 from $14.17 million for the six months ended March 31, 2023.

The decrease in net income was primarily due to a $3.26 million decrease in net interest income and a $136,000 increase in non-interest expense.

This decrease was partially offset by a $583,000 decrease in the provision for credit losses, a $571,000 decrease in the provision for income taxes and a $72,000 increase in non-interest income.

Total interest and dividend income increased $7.15 million, or 18.6%, to $45.65 million for the six months ended March 31, 2024 from $38.50 million for the six months ended March 31, 2023, 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 balances of interest-bearing deposits in banks and CDs, and investment securities.

Total interest expense increased by $10.41 million, or 288.6% to $14.01 million for the six months ended March 31, 2024 from $3.61 for the six months ended March 31, 2023.

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.

NIM decreased to 3.53% for the six months ended March 31, 2024 from 4.02% for the six months ended March 31, 2023.

Average Balances, Interest and Average Yields/Cost

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

Three Months Ended December 31,

Three Months Ended March 31,

Balance Interest and

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

Six Months Ended March 31,

Balance Interest and

Dividends Yield/

Balance Interest and

Dividends Yield/

Interest-earning assets:

Loans receivable (1)(2) $ 1,349,105 $ 37,304 5.53 % $ 1,182,420 $ 29,407 4.97 %

Investment securities (2) 301,218 4,556 3.03 326,783 4,674 2.86

Dividends from mutual funds, FHLB stock and other investments 6,418 173 5.39 6,032 115 3.81

Interest-bearing deposits in banks and CDs 134,643 3,618 5.37 222,569 4,304 3.87

Total interest-earning assets 1,791,384 45,651 5.10 1,737,804 38,500 4.43

Non-interest-earning assets 81,473 86,171

Total assets $ 1,872,857 $ 1,823,975

Interest-bearing liabilities:

Savings $ 217,153 245 0.23 $ 277,382 178 0.13

Money market 247,656 3,444 2.78 229,185 688 0.60

NOW checking 372,327 2,903 1.56 426,345 1,340 0.63

Certificates of deposit 281,842 5,731 4.07 152,814 1,400 1.84

Brokered CDs 41,570 1,121 5.39 — — —

Short-term borrowings 9,427 265 5.62 3 — 5.43

Long-term borrowings 15,000 303 4.04 — — —

Total interest-bearing liabilities 1,184,975 14,012 2.37 1,085,729 3,606 0.67

Non-interest-bearing deposits 440,976 505,949

Other liabilities 11,035 9,813

Total liabilities 1,636,986 1,601,491

Shareholders' equity 235,871 222,484

Total liabilities and

shareholders' equity $ 1,872,857 $ 1,823,975

Net interest income $ 31,639 $ 34,894

Interest rate spread 2.73 % 3.76 %

Net interest margin (3) 3.53 % 4.02 %

Ratio of average interest-earning assets to average interest- bearing liabilities 151.17 % 160.06 %

_______________

(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.

Rate Volume Analysis

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Three months ended

December 31, 2023

March 31, 2024

compared to three months

ended December 31, 2022

ended March 31, 2023

increase (decrease) due to Six months ended

March 31, 2024

compared to six months

ended March 31, 2023

increase (decrease) due to

Rate Volume Net

Change Rate Volume Net

Interest-earning assets:

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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.

An $81,000 provision for credit losses was recorded for the quarter ended March 31, 2024, consisting of a $166,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $3,000 provision for credit losses on investment securities, and an $88,000 recapture of credit losses on unfunded commitments which was primarily due to a decrease in the balance of unfunded loan commitments.

A $475,000 provision for loan losses, under the prior incurred loan loss method, was recorded for the quarter ended March 31, 2023.

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.

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

The provision for credit losses for the three months ended March 31, 2024 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.

We recorded a $417,000 provision for credit losses for the six months ended March 31, 2024, consisting of a $545,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $7,000 recapture of credit losses on investment securities which was primarily due to maturities and principal repayments, and a $121,000 recapture of credit losses on unfunded loan commitments which was primarily due to a decrease in the amount of unfunded loan

There was a $1.00 million provision for loan losses, calculated under the prior incurred loan loss method, recorded for the six months ended March 31, 2023.

For the quarter ended March 31, 2024, net charge-offs were $3,000 compared to $6,000 for the quarter ended March 31, 2023.

Non-accrual loans increased by $2.09 million, or 138.1%, to $3.61 million at March 31, 2024 from $1.51 million at September 30, 2023.

At March 31, 2024, non-accrual loans increased by $1.64 million, or 83.1%, to $3.61 million from $1.97 million at March 31, 2023.

Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $2.54 million, or 152.3%, to $4.20 million at March 31, 2024, from $1.67 million at September 30, 2023 and increased by $2.01 million, or 91.8%, from $2.19 million one year ago.

The $367,000 balance of SBA PPP loans was omitted from the Company's normal allowance for credit losses calculation at March 31, 2024, 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 its 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 will not have a material adverse impact on our financial condition and results of operations.

A further decline in national and local economic conditions, as a result of the effects of inflation, 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.

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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.

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

The remaining fair value discount associated acquired loans was $172,000 at March 31, 2024.

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

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Non-interest Income:

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.

Total non-interest income decreased by $21,000, or 0.8%, to $2.62 million for the quarter ended March 31, 2024 from $2.64 million for the quarter ended March 31, 2023.

This decrease was primarily due to a $63,000 decrease in ATM and debit card interchange transaction fees.

This decrease was partially offset by a $95,000 increase in service charges on deposits.

Total non-interest income for the six months ended March 31, 2024 increased $72,000, or 1.4%, to $ 5.41 million from $5.34 million for the six months ended March 31, 2023.

This increase was primarily due to a $171,000 increase in service charges on deposits, a $53,000 increase in gain on sale of loans and smaller increases in several other categories.

These increases were partially offset by a $50,000 decrease in ATM and debit card interchange transaction fees and smaller decreases in several other catergories.

Non-interest Expense:

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.

Total non-interest expense increased by $47,000, or 0.4%, to $10.99 million for the quarter ended March 31, 2024 from $10.94 million for the quarter ended March 31, 2023.

This increase was primarily due to increased expenses of $160,000 in technology and communications, $112,000 in ATM and debit card interchange transaction fees and $80,000 in premises and equipment, which were partially offset by a $154,000 decrease in professional fees.

The efficiency ratio for the current quarter was 60.22% compared to 55.31% 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.

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

Total non-interest expense increased $136,000, or 0.6%, to $21.62 million for the six months ended March 31, 2024 from $21.48 million for the six months ended March 31, 2023.

This increase was primarily due increased expenses of $346,000 in technology and communications, $244,000 in ATM and debit card interchange transaction fees and $129,000 in premises and equipment which were partially offset by a $330,000 decrease in professional fees.

Provision for Income Taxes:

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 provision for income taxes decreased by $235,000, or 13.8%, to $1.47 million for the quarter ended March 31, 2024 from $1.71 million for the quarter ended March 31, 2023.

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 effective income tax rate was 20.5% for the quarter ended March 31, 2024 and 20.4% for the quarter ended March 31, 2023.

The provision for income taxes decreased by $571,000, or 15.9%, to $3.02 million for the six months ended March 31, 2024 from $3.59 million for the six months ended March 31, 2023.

The decrease was primarily due to lower pre-tax income.

The Company's effective tax rate was 20.0% for the six months ended March 31, 2024 compared to 20.2% for the six months ended March 31, 2023.

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 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 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.

At March 31, 2024, 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 13.22%.

The Bank maintains a credit facility with the FHLB that provides for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral.

At March 31, 2024, the Bank had a total of $596.00 million available for borrowings with the FHLB of which $20.00 million was outstanding.

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

Borrower-in-Custody ("BIC").

At March 31, 2024, the Bank had no outstanding balance on the BIC line, under which $111.22 million was available for future borrowings.

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

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

At March 31, 2024, 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 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.

During the six months ended March 31, 2024 and 2023, the Bank originated $128.30 million and $178.81 million of loans, respectively.

At March 31, 2024, the Bank had undisbursed lines of credit and commitments to extend credit totaling $154.99 million and undisbursed construction loans in process totaling $77.50 million.

Investment securities purchased during the six months ended March 31, 2024 and 2023 totaled $24.13 million and $32.60 million, respectively.

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

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.

During the six months ended March 31, 2024 and 2023, the Bank sold $11.87 million and $3.55 million, respectively, in loans and loan participation interests.

During the six months ended March 31, 2024 and 2023, the Bank received $84.00 million and $179.94 million in principal repayments, respectively.

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment, and investment securities available for sale (including equity securities) increased to $254.14 million at March 31, 2024 from $186.49 million at September 30, 2023.

CDs that are scheduled to mature in less than one year from March 31, 2024 totaled $301.37 million.

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

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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 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.

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

For the remaining six months in the year ending September 30, 2024, the Bank projects that fixed commitments will include $167,000 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.

In addition, at March 31, 2024, there were other future obligations and accrued expenses of $8.28 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 December 31, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.01 million.

At March 31, 2024, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $962,000.

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 $0.24 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 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).

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 $1.93 million based on the number of current outstanding shares at March 31, 2024 (which assumes no change in the number of shares).

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

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

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 262,025 shares remained available for future purchases as of March 31, 2024.

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.

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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 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 December 31, 2023, the Bank was considered to be "well-capitalized" under applicable regulatory requirements.

Based on capital levels at March 31, 2024, 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 December 31, 2023 to its minimum regulatory capital requirements at that date (dollars in thousands):

The following table compares the Bank’s actual capital amounts at March 31, 2024, to its minimum regulatory capital requirements at that date (dollars in thousands):

Actual Regulatory

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

At March 31, 2024, 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 December 31, 2023, Timberland Bancorp, Inc.

were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at March 31, 2024, 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 December 31, 2023 (dollars in thousands):

as of March 31, 2024 (dollars in thousands):

Leverage Capital Ratio:

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Key Financial Ratios and Data

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended

2024 2023 2024 2023

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