What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-12-11 compared with 2023-12-11 · 167 added, 199 removed, 414 unchanged (47% of the section changed)

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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 branches (including its main office in Hoquiam).

At September 30, 2023, the Company had total assets of $1.84 billion, net loans receivable of $1.30 billion, total deposits of $1.56 billion and total shareholders’ equity of $233.07 million.

At September 30, 2024, the Company had total assets of $1.92 billion, net loans receivable of $1.42 billion, total

deposits of $1.65 billion and total shareholders’ equity of $245.41 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, which is the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed).

Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest-bearing liabilities and the interest paid on those interest-bearing liabilities.

Management attempts to maintain a net interest margin placing it within the top quartile of its Washington State peers.

Management attempts to maintain a net interest margin and return on average assets ("ROA") placing it within the top quartile of its Washington State peers.

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

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

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

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

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

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

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, which stood at 4.75% to 5.00% as of September 30, 2024.

Subsequent to fiscal year end, the FOMC reduced the target federal funds rate by 25 basis points and has not ruled out future decreases.

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

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

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

The provision for (recapture of) credit losses on loans 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 the Company believes is adequate to cover expected credit losses inherent in its loan portfolio.

The Company recorded a provision for credit losses on loans of $1.25 million for the year ended September 30, 2024, primarily due to increased loan portfolio growth.

The Company recorded a provision for loan losses of $2.1 million for the year ended September 30, 2023, primarily due to increased loan portfolio growth.

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

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

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

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

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

For the year ended September 30, 2024, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, escrow fees and other operating income.

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

Non-interest income is also increased by a gain on sale and net recoveries of OTTI 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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The Company is a bank holding company which operates primarily through its subsidiary, the Bank.

The Company's primary objective is to operate the Bank as a well-capitalized, profitable, independent, community-oriented financial institution, serving customers in its primary market area of Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties.

The Company's primary objective is to operate the Bank as a well-capitalized, profitable, independent, community-oriented financial institution, serving

customers in its primary market area of Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties.

The Company's strategy is to provide products and superior service to small businesses and individuals located in its primary market area.

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Maintaining strong asset quality.

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

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

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

Non-performing assets, consisting of nonaccrual loans and investment securities, totaled $3.94 million at September 30, 2024, compared to $1.60 million at September 30, 2023.

The percentage of non-performing loans to loans receivable, net was 0.27% and 0.11% at September 30, 2024 and 2023, respectively.

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

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

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

loans when such actions have been deemed appropriate.

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

The percentage of non-performing assets to total assets at September 30, 2024 was 0.20% compared to 0.09% at September 30, 2023.

We remain focused on reducing the level of non-performing assets through collections, write-downs and modifications.

Our efforts include proactive steps to resolve our non-performing loans such as negotiating payment plans, forbearances, loan modifications and loan extensions, and accepting short payoffs on delinquent loans when appropriate.

While the Company continues to emphasize lending in areas such as commercial real estate loans, construction loans, and commercial business loans, we remain committed to managing credit risk through the expertise of seasoned bankers and a conservative lending strategy.

Selected Financial Data

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Net interest income 64,167 68,359 55,834 51,858 50,882

Provision for loan losses 2,132 270 — 3,700 —

Net interest income after provision for loan losses 66,227 55,564 51,858 47,182 51,160

Provision for credit losses - net 1,151 2,132 270 — 3,700

Net interest income after provision for credit losses 63,016 66,227 55,564 51,858 47,182

Non-interest income 11,136 11,140 12,624 17,161 17,188

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0.20 0.09 0.12 0.18 0.27

Allowance for loan losses as a percent of total loans receivable, net (7)

1.20 1.20 1.37 1.31 1.08

Allowance for loan losses as a percent of non-performing loans (8)

1,044.72 665.52 471.93 461.76 319.49

Allowance for credit losses as a percent of total loans receivable, net (7) 1.21 1.20 1.20 1.37 1.31

Allowance for credit losses as a percent of non-performing loans (8) 449.88 1,044.72 665.52 471.93 461.76

Net charge-offs (recoveries) to average outstanding loans — — — — —

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(3) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.

(4) Net interest income before provision for (recapture of) loan losses as a percentage of average interest-earning assets.

(4) Net interest income before provision for (recapture of) credit losses as a percentage of average interest-earning assets.

(5) Non-interest expenses divided by the sum of net interest income and non-interest income.

(6) Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing, non-accrual investment securities, OREO and other repossessed assets.

(7) Loans receivable is before the allowance for loan losses.

(7) Loans receivable is before the allowance for credit losses.

(8) Non-performing loans include non-accrual loans and loans past due 90 days or more and still accruing.

TDRs that are on accrual status are not included.

For periods prior to 2024, TDRs that were on accrual status are not included.

Critical Accounting Estimates

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

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

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

Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

Accordingly, actual results could differ materially from our estimates.

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

Provision and Allowance for Loan Losses

The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

The provision for loan losses reflects the amount required to maintain the allowance for loan losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves.

Determining the amount of the allowance for loan losses involves a high degree of judgment.

Among the material estimates required to establish the allowance for loan losses are:

overall economic conditions;

value of collateral;

strength of guarantors;

loss exposure at default;

the amount and timing of future cash flows on impaired loans;

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

All these estimates are susceptible to significant change.

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

The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans.

We increase our allowance for loan losses by charging provisions for probable loan losses against our income.

The allowance for loan losses is maintained at a level sufficient to provide for probable losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio.

These factors include, among others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans.

Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve.

Recoveries on previously charged off loans are credited to the allowance for loan losses.

The reserve is based upon factors and trends identified by us at the time consolidated financial statements are prepared.

Although we use the best information available, future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond our control.

The adequacy of general and specific reserves is based on our continuing evaluation of the pertinent factors underlying the quality of the loan portfolio as well as individual review of certain large balance loans.

Loans are considered impaired when, based on current information and events, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral less selling costs and the current status of the economy.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent.

We continue to assess the collateral of these loans and update our appraisals on large balance impaired loans on an annual basis.

To the extent that the property values decline, there could be additional losses on these impaired loans, which may be material.

Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported.

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment.

Loans that are collectively evaluated for impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans.

Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for impairment.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of several key elements, which include specific allowances, an allocated formula allowance and an unallocated allowance.

Losses on specific loans are provided for when the losses are probable and estimable.

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

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

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

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

evaluation date.

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

This methodology may result in actual losses or recoveries differing significantly from the allowance for loan losses in the Consolidated Financial Statements.

While we believe that the estimates and assumptions used in our determination of the adequacy of the allowance for loan losses 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 adversely impact our financial condition and results of operations.

In addition, the determination of the amount of the Banks’ allowance for loan losses 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.

Allowance for Credit Losses

The ACL is considered a critical accounting policy due to the significant judgment and subjectivity involved in its determination, as well as the potential for economic changes that could impact its adequacy.

Adjustments to the ACL are made through the provision (recapture) for credit losses to ensure the ACL remains at an appropriate level, based on management’s assessment of general and specific loss reserves.

Establishing the ACL involves material estimates, including economic conditions, collateral value, guarantor strength, loss exposure at default, the timing and amount of future cash flows on impaired loans, applicable loss factors for portfolio segments, and forecasted cash flow collectability over the contractual term of financial assets.

These estimates are inherently subject to change and require careful evaluation.

To ensure adequacy, we use systematic methodologies outlined in a formal policy that address both general valuation allowances and specific reserves for individual problem loans.

Adjustments to the ACL are reflected through provisions for credit losses, which increase the ACL, or recaptures, which reduce it, both of which impact current period earnings.

The ACL is maintained at a level sufficient to provide for expected credit losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio.

The ACL is comprised of a general component and a specific component.

The general component establishes a reserve rate using historical life-of-loan default rates, current loan portfolio information, economic forecasts, and business cycle data.

Statistical analysis determines life-of-loan default and loss rates for the quantitative component, while qualitative factors adjust expected loss rates for current and forecasted conditions.

The qualitative factor methodology involves a blend of quantitative analysis and management judgement, reviewed quarterly.

The specific component relates to loans that have been individually evaluated because all contractual amounts of principal and interest will not be paid as scheduled.

Based on the individual analysis, a specific reserve may be established.

The ACL is based upon factors and trends identified by us at the time financial statements are prepared.

Although we use the best information available, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions beyond our control.

While we believe the estimates and assumptions used in our 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 adversely impact our financial condition and results of operations.

In addition, the ACL is subject to review the by Bank's regulators as part of the routine examination process, which may result in adjustments to the ACL based upon their judgment of information available to them at the time of their examination.

Fair Value Accounting and Measurement

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Additionally, for financial instruments not recorded at fair value we disclose, where required, our estimate of their fair value.

For more information regarding fair value accounting, please refer to Note 21 in the Notes to the Consolidated Financial Statements.

For more information regarding fair value accounting, please refer to "Note 21-Fair Value Measurements" in the Notes to the Consolidated Financial Statements contained in Item 8 of this report.

Loan Servicing Rights

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The estimate of prepayment speeds is based on current market conditions.

Actual market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the loan servicing right.

market conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans being different which would change the fair value of the loan servicing right.

Capitalized loan servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

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Accordingly, the valuation of OREO is subject to significant external and internal judgment.

If the carrying value of the loan at the date a property is transferred into OREO exceeds the fair value less estimated costs to sell, the excess is charged to the allowance for loan losses.

If the carrying value of the loan at the date a property is transferred into OREO exceeds the fair value less estimated costs to sell, the excess is charged to the allowance for credit losses.

Management periodically reviews OREO values to determine whether the property continues to be carried at the lower of its recorded book value or fair value, net of estimated costs to sell.

Any further decreases in the value of OREO are considered valuation adjustments and are charged to non-interest expense in the consolidated income statements.

Any further decreases in the value of OREO are considered an allowance for credit losses.

Expenses and income from the maintenance and operations and any gains or losses from the sales of OREO are included in non-interest expense.

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The principal element in achieving this objective is to increase the interest rate sensitivity of the Bank's interest-earning assets by retaining in its portfolio, short-term loans and loans with interest rates subject to periodic adjustments.

The Bank relies on retail deposits as its primary source of funds.

relies on retail deposits as its primary source of funds.

As part of its interest rate risk management strategy, the Bank promotes transaction accounts and certificates of deposit with terms of up to five years.

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

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

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

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

Management of the Bank monitors the Bank's interest rate sensitivity using a model provided by Kinective, a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry.

Based on an interest rate shock analysis prepared by Kinective using data at September 30, 2024, an immediate increase in interest rates of 100 basis points would decrease the Bank’s projected net interest income by approximately 1.5%.

An immediate decrease in interest rates of 100 basis points would decrease the Bank's projected net interest income by approximately 1.4%.

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

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Quantitative Aspects of Market Risk.

The model provided for the Bank by NXTsoft estimates the changes in the economic value of equity ("EVE") and net interest income in response to a range of assumed changes in market interest rates.

The model provided for the Bank by Kinective estimates the changes in the economic value of equity ("EVE") and net interest income in response to a range of assumed changes in market interest rates.

The model first estimates the level of the Bank's EVE (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment.

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The change in EVE under the different interest rate scenarios provides a measure of the Bank's exposure to interest rate risk.

The following table is provided by NXTsoft based on data at September 30, 2023:

The following table is provided by Kinective based on data at September 30, 2024:

Hypothetical Net Interest Income (1) Economic Value of Equity

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-400 (5,441) (7.90) (36,435) (11.38)

(1) Does not include loan fees.

(2) Includes BOLI income, which is included in non-interest income in the Consolidated Financial Statements.

(1) Does not include loan fees and includes BOLI income, which is included in non-interest income in the consolidated financial statements.

(2) No rates in the model are allowed to go below zero.

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In the event of a 100 basis point decrease in interest rates, the Bank would be expected to experience a 2.2% decrease in EVE and a 1.4% decrease in net interest income.

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

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

In the event of a 100 basis point increase in interest rates, a 0.3% decrease in EVE and a 1.5% decrease in net interest income would be expected.

Based upon the modeling described above, the Bank's asset and liability structure generally results in modest decreases in net interest income and EVE in both rising and falling interest rate scenarios.

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

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

Total assets decreased by $20.60 million, or 1.1%, to $1.84 billion at September 30, 2023 from $1.86 billion at September 30, 2022.

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

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

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

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

Total deposits decreased by $71.24 million, or 4.4%, to $1.56 billion at September 30, 2023 from $1.63 billion at September 30, 2022, primarily due to decreases in non-interest bearing account balances, NOW checking account balances, money market account balances, and savings account balances.

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

Total assets increased by $83.57 million, or 4.5%, to $1.92 billion at September 30, 2024 from $1.84 billion at September 30, 2023.

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

Net loans receivable increased by $119.22 million, or 9.2%, to $1.42 billion at September 30, 2024 from $1.30 billion at September 30, 2023, primarily due to increases in one- to four-family loans, multi-family loans, commercial real estate loans, home equity loans and smaller increases in several other loan categories that were partially offset by decreases in construction and land development loans.

Investment securities (including investments in equity securities) decreased by $67.58 million, or 21.6%, to $245.22 million at September 30, 2024 from $312.80 million at September 30, 2023, primarily due to the maturities of U.S.

Treasury investment securities and to a lesser extent, scheduled amortization.

Partially offsetting these decreases, was the purchase of additional U.S.

government agency mortgage-backed investment securities and U.S.

Treasury investment securities, all of which were classified as available for sale.

Total deposits increased by $86.73 million, or 5.6%, to $1.65 billion at September 30, 2024 from $1.56 billion at September 30, 2023, primarily due to increases in money market and certificate of deposit account balances.

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

Shareholders' equity increased by $12.34 million, or 5.3%, to $245.41 million at September 30, 2024 from $233.07 million at September 30, 2023.

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Cash and Cash Equivalents and CDs Held for Investment:

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

The decrease was primarily 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 $31.03 million, or 21.6%, to $174.94 million at September 30, 2024 from $143.91 million at September 30, 2023.

The increase was primarily a result of increased deposits.

Investment Securities:

Investment securities (including investments in equity securities) increased by $3.94 million, or 1.28%, to $312.80 million at September 30, 2023 from $308.86 million at September 30, 2022.

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

Treasury and U.S.

government agency investment securities and U.S.

government agency mortgage-backed investment securities as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period.

These increases were partially offset by the sale of $8.93 million of available for sale investment securities (for a gain of $95,000) and $20.57 million of maturities, prepayments and scheduled amortization of other investment securities.

Investment securities (including investments in equity securities) decreased by $67.58 million, or 21.6%, to $245.22 million at September 30, 2024 from $312.80 million at September 30, 2023.

The decrease was primarily due $100.87 million of maturities, prepayments and scheduled amortization on held to maturity securities and $14.12 million in maturities, prepayments and scheduled amortization on available for sale investment securities.

These decreases were partially offset by the purchase of $43.03 million in available for sale investment securities and $1.90 million in held to maturity investment securities.

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

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

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

FHLB stock decreased by $1.57 million, or 43.5%, to $2.04 million at September 30, 2024 from $3.60 million at September 30, 2023, due to the repayment of a portion of FHLB borrowings and the restructuring of stock ownership requirement by FHLB.

Other Investments:

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Loans Held for Sale:

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

There were no loans held for sale at September 30, 2024 compared to $400,000 at September 30, 2023, primarily due to the timing and volume of mortgage banking loan sales.

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

The Company sold $14.75 million in loans during the year ended September 30, 2024 compared to $11.54 million for the year ended September 30, 2023.

Sales of loans over the past year has decreased, primarily due to decreased refinance activity for one- to four-family loans due to rising interest rates, declining homes sales and a decision to keep more single family loans originated during the period in the portfolio.

Loans Receivable, Net of Allowance for Loan Losses:

Sales of loans over the past year has increased slightly, primarily due to construction loans converting to permanent financing as higher interest rates have slowed down refinancing and purchase activity.

Loans Receivable, Net of Allowance for Credit Losses:

Net loans receivable increased by $119.22 million, or 9.2%, to $1.42 billion at September 30, 2024 from $1.30 billion at September 30, 2023.

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

The increase was primarily due to a $50.17 million increase in multi-family loans, a $45.90 million increase in one- to four-family loans, a $33.32 million decrease in the undisbursed portion of construction loans, a $30.95 million increase in commercial real estate loans, a $9.63 million increase in home equity loans and smaller changes in other categories.

These increases were partially offset by a $54.64 million decrease in gross construction loans, with the largest decreases occurring in commercial and multi-family construction loans as they converted to permanent financing and smaller decreases in several other loan categories.

Loan originations decreased by $110.35 million, or 30.5%, to $251.44 million for the year ended September 30, 2024 from $361.79 million for the year ended September 30, 2023.

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

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

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

For additional information on loans, see "Item 1.

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

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

Premises and Equipment, Net:

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BOLI increased by $645,000, or 2.8%, to $23.61 million at September 30, 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 and offset by a decrease in cash surrender value due to a death.

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

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

1 unchanged sentence

As of September 30, 2024, management believes that there had been no subsequent events or changes in circumstances that would indicate a potential impairment of goodwill.

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

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

CDI decreased by $226,000 or 33.4%, to $451,000 at September 30, 2024 from $677,000 at September 30, 2023 due to scheduled amortization.

9 unchanged sentences

Other Assets:

Other assets increased by $209,000, or 6.2%, to $3.57 million at September 30, 2023 from $3.36 million at September 30, 2022.

Other assets increased by $2.67 million, or 74.7%, to $6.24 million at September 30, 2024 from $3.57 million at September 30, 2023.

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

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

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

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

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

Deposits increased by $86.73 million, or 5.6%, to $1.65 billion at September 30, 2024 from $1.56 billion at September 30, 2023.

The increase consisted of a $137.05 million increase in money market account balances and a $68.21 million increase in certificate of deposit account balances.

The increases were partially offset by a $53.40 million decrease in NOW account balances, a $42.75 million decrease in non-interest bearing account balances and a $22.37 million decrease in savings account balances.

For additional information on deposits, see "Item 1.

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

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

FHLB Borrowings:

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.

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

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

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

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

At September 30, 2024, the Company had an available borrowing capacity of $606.04 million.

The Company had $20.00 million in FHLB borrowings at September 30, 2024 compared to $35.00 million at September 30, 2023.

At September 30, 2024, FHLB borrowings consisted of three long-term borrowings:

two totaling $15.00 million with scheduled maturities in May 2026, both bearing interest at 3.95% and one $5.00 million borrowing maturing in August 2026 with an interest rate of 4.03%.

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

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Other Liabilities and Accrued Expenses:

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

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

Other liabilities and accrued expenses decreased by $211,000, or 2.3%, to $8.82 million at September 30, 2024 from $9.03 million at September 30, 2023.

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

Shareholders' Equity:

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The increase was primarily due to net income of $24.28 million for the year ended September 30, 2024, which was partially offset by the payment of $7.65 million in dividends to common shareholders and the repurchase of 218,976 shares of the Company's common stock for $5.96 million during the year ended September 30, 2024.

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

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

Financial Statements and Supplementary Data".

In addition, shareholder’s equity was positively impacted by unrealized gains on available for sale securities reflecting the decrease in market interest rates during the year, resulting in a recovery of $1.10 million of accumulated other comprehensive loss, net of tax at September 30, 2024.

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

Comparison of Operating Results for the Years Ended September 30, 2024 and 2023

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

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

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

Net income for the year ended September 30, 2024 decreased by $2.84 million, or 10.5%, to $24.28 million from $27.12 million for the year ended September 30, 2023.

Net income per diluted common share decreased by $0.28, or 8.5%, to $3.01 for the year ended September 30, 2024 from $3.29 for the year ended September 30, 2023.

The decrease in net income was primarily due to a $4.19 million decrease in net interest income and a $373,000 increase in non-interest expense, partially offset by a $981,000 decrease in the provision for credit losses and a $753,000 decrease in the provision for income taxes.

Non-interest income remained relatively unchanged at $11.14 million for the years ended September 30, 2024 and 2023.

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

Net Interest Income:

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

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

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

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

Net interest income decreased by $4.19 million, or 6.1%, to $64.17 million for the year ended September 30, 2024 from $68.36 million for the year ended September 30, 2023.

The decrease was due to higher interest expense resulting from increases in both the average yields and balances of interest-bearing liabilities, which outpaced the increase in interest income and dividend income resulting from increases in the average yield and balance on loans and, to a lesser extent, the average yields on investment securities and interest-bearing deposit in banks and CDs.

Total interest and dividend income increased by $14.87 million, or 18.6%, to $94.83 million for the year ended September 30, 2024 from $79.95 million for the year ended September 30, 2023, due to an increase in the average yields on interest-earning assets, as well as an increase in the average balance of loans.

The average yield on interest-earning assets increased to 5.24% for the year ended September 30, 2024 from 4.63% for the year ended September 30, 2023.

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

Average total interest-earning

assets increased by $82.49 million, or 4.77%, to $1.81 billion for the year ended September 30, 2024 from $1.73 billion for the year ended September 30, 2023, due to an increase in the average balance of loans receivable which was partially offset by a decrease in the average balance of investment securities and interest-bearing deposits in banks and CDs.

Interest income on loans receivable and loans held for sale increased by $14.28 million, or 22.61%, to $77.43 million for the year ended September 30, 2024 from $63.15 million for the year ended September 30, 2023, primarily due to a $149.43 million increase in the average balance of loans receivable coupled with an increase in the average yield on loans receivable to 5.61% for the year ended September 30, 2024 from 5.13% for the year ended September 30, 2023.

During the year ended September 30, 2024, the accretion of the purchase accounting fair value discount on loans acquired increased interest income on loans by $37,000 compared to $75,000 for the year ended September 30, 2023.

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

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

The remaining net discount on these acquired loans was $192,000 at September 30, 2023.

The accretion of the net fair value discount on acquired loans had a minor effect on the average yield on loans for the year ended September 30, 2024 and a one basis point increase for the year ended September 30, 2023.

The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, and has decreased over time as the balance of the net discount declines.

The remaining net discount on acquired loans was $155,000 at September 30, 2024.

During the year ended September 30, 2024, a total of $376,000 in non-accrual interest, pre-payment penalties and late fees was collected compared to $398,000 for the year ended September 30, 2023.

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

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

Interest income on investment securities decreased by $255,000, or 2.7%, to $9.13 million for the year ended September 30, 2024 from $9.38 million for the year ended September 30, 2023, due to a $45.91 million decrease in the average balance of investment securities, partially offset by a 49 basis point increase in the average yield on investment securities.

Interest income on interest-bearing deposits in banks and CDs increased by $762,000, or 10.7%, to $7.91 million for the year ended September 30, 2024 from $7.14 million for the year ended September 30, 2023, due to an 112 basis point increase in the average yield resulting from increased market interest rates, partially offset by a $20.85 million decrease in the average balance of interest-bearing deposits in banks and CDs.

Total interest expense increased by $19.07 million, or 164.5%, to $30.66 million for the year ended September 30, 2024 from $11.59 million for the year ended September 30, 2023.

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

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

The average cost of interest-bearing liabilities increased to 2.52% for the year ended September 30, 2024 from 1.06% for the year ended September 30, 2023 as market interest rates for deposits increased.

Average interest-bearing deposits decreased by $9.23 million, or 0.84%, to $1.09 billion for the year ended September 30, 2023 from $1.10 billion for the year ended September 30, 2022, primarily due to competitive pricing pressure and customers moving excess funds to alternative higher yielding investments as well as general declines in individual customer balances.

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

Provision for Loan Losses:

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

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

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

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

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

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

The $466,000 balance of SBA PPP loans was omitted from the Company's allowance for loan losses calculation at September 30, 2023, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

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

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 subject to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan.

The aggregate principal impairment amount determined at September 30, 2023 was $123,000 compared to $127,000 at September 30, 2022.

Based on the comprehensive methodology, management believes that the allowance for loan losses of $15.82 million at September 30, 2023 (1.20% of loans receivable and 1044.72% of non-performing loans) was adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date.

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

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

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

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

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

Average interest-bearing deposits increased by $108.92 million, or 10.0%, to $1.19 billion for the year ended September 30, 2024 from $1.09 billion for the year ended September 30, 2023, primarily due to competitive pricing pressure which resulted in rate matching to retain deposits.

Average short-term borrowings increased by $5.42 million, or 555.8% to $6.4 million for the year ended September 30, 2024 from $975,000 for the year ended September 30, 2023.

Average long-term borrowings increased by $9.8 million, or 164.9% to $15.8 million for the year ended September 30, 2024 from $6.0 million for the year ended September 30, 2023.

As a result of these changes, the net interest margin decreased 41 basis points to 3.54% for the year ended September 30, 2024 from 3.95% for the year ended September 30, 2023.

Provision for Credit Losses:

A $1.15 million provision for credit losses was recorded for the year ended September 30, 2024 consisting of a $1.25 million provision for credit losses on loans which was primarily due to an increase in loans receivable, a $32,000 recapture of credit losses on investment securities which was primarily due to lower balances resulting from maturities and principal payments and a $71,000 recapture of credit losses on unfunded commitments which was primarily due to a decrease in the balance of unfunded loan commitments.

A $2.13 million provision for loan losses, under the prior incurred loan loss method, was recorded for the year ended September 30, 2023.

The Company had net charge-offs of $54,000 for the year ended September 30, 2024 compared to $18,000 for the year ended September 30, 2023.

Net charge-offs (recoveries) to average outstanding loans was 0.0% for the years ended September 30, 2024 and 2023.

The level of delinquent loans (loans 30 or more days past due) increased by $2.81 million, or 168.9%, to $4.48 million at September 30, 2024 from $1.67 million at September 30, 2023.

Loan classified as substandard increased by $2.05 million, or 32.1%, to $8.44 million at September 30, 2024 from $6.39 million at September 30, 2023, while loans classified as doubtful totaled $202,000 at September 30, 2024 compared to none at September 30, 2023.

Loans designated as special mention totaled $4.40 million at September 30, 2024 compared to none at September 30, 2023.

Non-accrual loans increased by $2.37 million, or 156.6%, to $3.89 million at September 30, 2024 from $1.51 million at September 30, 2023.

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 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, resulting in a net discount to the loans' contractual amounts, with a portion of this discount reflecting possible credit losses.

Credit discounts are included in the determination of fair value.

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 with acquired loans was $155,000 at September 30, 2024.

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

For additional information, see "Item 1.

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

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

Non-interest Income:

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

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

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

Sales of loans over the past year have decreased primarily due to decreased refinance activity for one- to four-family loans due to rising

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

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

Total non-interest income was $11.14 million for both the years ended September 30, 2024 and 2023.

Changes in non-interest income include a $128,000 decrease in ATM and debit card interchange transaction fees, a $95,000 decrease in net gain on sale of investment securities and smaller decreases in other categories, offset by a $238,000 increase in service charges on deposits and smaller increases in other categories.

Non-interest Expense:

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

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

Total non-interest expense increased by $373,000, or 0.9%, to $43.75 million for the year ended September 30, 2024 from $43.37 million for the year ended September 30, 2023.

The increase was primarily due to a $719,000 increase in technology and communications, a $397,000 increase in ATM and debit card processing fees, a $172,000 increase in deposit operations, a $168,000 increase in salaries and employee benefits, a $122,000 increase in FDIC insurance expense, a $103,000 increase in state and local taxes, a $83,000 increase in premises and smaller increases in several other expense categories.

These increases were partially offset by a $761,000 decrease in professional fees and smaller decreases in several other categories.

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

The increase in ATM and debit card processing fees and deposit operations was mainly due to fraud related expenses.

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

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

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

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

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

The efficiency ratio for the year ended September 30, 2024 was 58.09% compared to 54.56% for the year ended September 30, 2023.

The change in the efficiency ratio was the result of higher non-interest expenses, coupled with a decrease in overall revenues resulting from the decline in net interest income.

Provision for Income Taxes:

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

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

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

The provision for income taxes decreased by $753,000, or 11.0% to $6.12 million for the year ended September 30, 2024 from $6.88 million for the year ended September 30, 2023.

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

The Company's effective income tax rate was 20.1% for the year ended September 30, 2024 compared to 20.2% for the year ended September 30, 2023.

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

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Certificates of deposit accounts 298,039 12,337 4.14 188,534 5,096 2.70 127,277 1,011 0.79

Brokered deposits 44,330 2,397 5.41 11,942 629 5.27 — — —

Short-term borrowings 6,394 361 5.65 975 53 5.44 3 — —

43 unchanged sentences

Total net change in income on interest-earning assets 9,186 5,688 14,874 14,272 7,171 21,443

14,272 7,171 21,443 258 3,288 3,546

Interest-bearing liabilities:

5 unchanged sentences

Total net change in expense on interest-bearing liabilities 13,058 6,008 19,066 8,091 827 8,918

8,091 827 8,918 (452) 22 (430)

Net change in net interest income $ (3,872) $ (320) $ (4,192) $ 6,181 $ 6,344 $ 12,525

9 unchanged sentences

At September 30, 2024, the Bank maintained an unused credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which $20.00 million of the $626.04 million available for borrowings with the FHLB was outstanding at September 30, 2024.

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

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

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

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

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

At September 30, 2024, the Bank had no outstanding balance on the FRB borrowing line, under which $86.63 million was available for future borrowings.

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

At September 30, 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 deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the

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

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

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During the years ended September 30, 2024, 2023 and 2022, the Bank originated $251.44 million, $361.79 million and $572.46 million of loans, respectively.

At September 30, 2023, the Bank had loan commitments totaling $173.20 million and undisbursed construction loans in process totaling $103.19 million.

At September 30, 2024, the Bank had loan commitments, consisting of undisbursed lines of credit and commitment to extend credit, totaling $146.15 million and undisbursed construction loans in process totaling $69.88 million.

Investment securities purchased during the years ended September 30, 2024, 2023 and 2022 totaled $44.95 million, $32.60 million and $208.78 million, respectively.

1 unchanged sentence

During the years ended September 30, 2024, 2023 and 2022, the Bank sold $14.75 million, $11.54 million and $73.50 million, respectively, in loans and loan participation interests.

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

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

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

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

Our liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale decreased to $185.68 million at September 30, 2023 from $381.06 million at September 30, 2022.

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

During the years ended September 30, 2024, 2023 and 2022, the Bank received $142.78 million, $177.31 million and $324.23 million, respectively, in loan principal repayments.

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

During the year ended September 30, 2024, deposits increased by $86.73 million.

During the years ended September 30, 2023 and 2022, deposits decreased by $71.24 million and increased $61.60 million, respectively.

Our liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale increased to $247.19 million at September 30, 2024 from $185.68 million at September 30, 2023.

The increase was primarily a result of increased deposits and a decrease in total investment securities, due to maturities and prepayments outpacing purchases.

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

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For the fiscal year ending September 30, 2025, the Bank projects that fixed commitments will include $336,000 of operating lease payments.

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

There are no scheduled payments and maturities of FHLB borrowings during fiscal year 2025.

In addition, at September 30, 2024, there were other future obligations and accrued expenses of $8.82 million.

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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.

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

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.The current quarterly common stock dividend rate is $0.23 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders.

At September 30, 2024, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $1.43 million.

The current quarterly common stock dividend rate is $0.25 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 2025 at the rate of $0.25 per share, the average total dividend paid each quarter would be approximately $1.99 million based on the number of current outstanding shares at September 30, 2024.

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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 374,142 shares remained available for future purchases as of September 30, 2023.

On July 25, 2023, the Company announced the adoption of a stock repurchase program authorizing the repurchase of up to 404,708 shares of Company common stock, of which 155,166 shares remained available for future purchases as of September 30, 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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New Accounting Pronouncements

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

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

Quantitative and Qualitative Disclosures About Market Risk

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

What changed 10-K

Item 7. Management’s Discussion and Analysis