UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____ to _____.

Commission file number 000-23333

TIMBERLAND BANCORP, INC.

(Exact name of registrant as specified in its charter)


Washington			91-1863696
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)


624 Simpson Avenue, Hoquiam, Washington			98550
(Address of principal executive offices)			(Zip Code)

(360) 533-4747

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $.01 par value	TSBK	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ___

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes _☒_ No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ___ No _☒_

As of February ~~3, 2022,~~1, 2023, there were ~~8,349,996~~8,222,197 shares of the registrant's common stock, $.01 par value per share outstanding.

INDEX


PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets	3

	Consolidated Statements of Income	5

	Consolidated Statements of Comprehensive Income	7

	Consolidated Statements of Shareholders’ Equity	8

	Consolidated Statements of Cash Flows	9

	Notes to Unaudited Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Mine Safety Disclosures	4849

Item 5.	Other Information	4849

Item 6.	Exhibits	49

SIGNATURES
Certifications
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32
	Exhibit 101
	Exhibit 104

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, ~~2021~~2022 and September 30, ~~2021~~2022

(Dollars in thousands, except per share amounts)


		December 31, 2021		September 30, 2021			December 31, 2022		September 30, 2022
		(Unaudited)		*			(Unaudited)		*
Assets	Assets					Assets
Cash and cash equivalents:	Cash and cash equivalents:					Cash and cash equivalents:
Cash and due from financial institutions	Cash and due from financial institutions	$	20,539	$	26,316	Cash and due from financial institutions	$	31,237	$	24,808
Interest-bearing deposits in banks	Interest-bearing deposits in banks	537,789		553,880		Interest-bearing deposits in banks	193,659		291,947
Total cash and cash equivalents	Total cash and cash equivalents	558,328		580,196		Total cash and cash equivalents	224,896		316,755

Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value)	Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value)	24,648		28,482		Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value)	23,392		22,894
Investment securities held to maturity, at amortized cost (estimated fair value of $115,199 and $70,109)		114,600		69,102
Investment securities held to maturity, at amortized cost (estimated fair value of $263,978 and $249,783)						Investment securities held to maturity, at amortized cost (estimated fair value of $263,978 and $249,783)	278,585		266,608
Investment securities available for sale, at fair value	Investment securities available for sale, at fair value	56,552		63,176		Investment securities available for sale, at fair value	55,841		41,415
Investments in equity securities, at fair value	Investments in equity securities, at fair value	946		955		Investments in equity securities, at fair value	837		835
Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost	Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost	2,103		2,103		Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost	2,194		2,194
Other investments, at cost	Other investments, at cost	3,000		3,000		Other investments, at cost	3,000		3,000
Loans held for sale	Loans held for sale	3,700		3,217		Loans held for sale	—		748

Loans receivable, net of allowance for loan losses of $13,468 and $13,469		994,007		968,454
Loans receivable, net of allowance for loan losses of $14,229 and $13,703						Loans receivable, net of allowance for loan losses of $14,229 and $13,703	1,172,559		1,132,426

Premises and equipment, net	Premises and equipment, net	22,108		22,367		Premises and equipment, net	21,703		21,898
Other real estate owned (“OREO”) and other repossessed assets, net		157		157

Accrued interest receivable	Accrued interest receivable	3,938		3,745		Accrued interest receivable	5,508		4,483
Bank owned life insurance (“BOLI”)	Bank owned life insurance (“BOLI”)	22,347		22,193		Bank owned life insurance (“BOLI”)	22,962		22,806
Goodwill	Goodwill	15,131		15,131		Goodwill	15,131		15,131
Core deposit intangible (“CDI”), net	Core deposit intangible (“CDI”), net	1,185		1,264		Core deposit intangible (“CDI”), net	880		948
Loan servicing rights, net	Loan servicing rights, net	3,524		3,482		Loan servicing rights, net	2,770		3,023

Operating lease right-of-use ("ROU") assets	Operating lease right-of-use ("ROU") assets	2,206		2,283		Operating lease right-of-use ("ROU") assets	1,912		1,980
Other assets	Other assets	2,795		2,873		Other assets	3,374		3,364
Total assets	Total assets	$	1,831,275	$	1,792,180	Total assets	$	1,835,544	$	1,860,508

Liabilities and shareholders’ equity	Liabilities and shareholders’ equity					Liabilities and shareholders’ equity
Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Non-interest-bearing demand	Non-interest-bearing demand	$	523,518	$	535,212	Non-interest-bearing demand	$	494,370	$	530,058
Interest-bearing	Interest-bearing	1,083,113		1,035,343		Interest-bearing	1,106,720		1,102,118
Total deposits	Total deposits	1,606,631		1,570,555		Total deposits	1,601,090		1,632,176

FHLB borrowings		5,000		5,000

Operating lease liabilities	Operating lease liabilities	2,285		2,359		Operating lease liabilities	2,001		2,066
Other liabilities and accrued expenses	Other liabilities and accrued expenses	6,984		7,367		Other liabilities and accrued expenses	8,904		7,697
Total liabilities	Total liabilities	$	1,620,900	$	1,585,281	Total liabilities	$	1,611,995	$	1,641,939

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (continued)

December 31, ~~2021~~2022 and September 30, ~~2021~~2022

(Dollars in thousands, except per share amounts)


		December 31, 2021		September 30, 2021			December 31, 2022		September 30, 2022
		(Unaudited)		*			(Unaudited)		*
Commitments and contingent liabilities (see Note 12)						Commitments and contingent liabilities (see Note 12)
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued	Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued	$	—	$	—	Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued	$	—	$	—
Common stock, $0.01 par value; 50,000,000 shares authorized; 8,348,821 shares issued and outstanding - December 31, 2021 8,355,469 shares issued and outstanding - September 30, 2021		42,436		42,673
Common stock, $0.01 par value; 50,000,000 shares authorized; 8,231,197 shares issued and outstanding - December 31, 2022 8,221,952 shares issued and outstanding - September 30, 2022						Common stock, $0.01 par value; 50,000,000 shares authorized; 8,231,197 shares issued and outstanding - December 31, 2022 8,221,952 shares issued and outstanding - September 30, 2022	38,878		38,751

Retained earnings	Retained earnings	167,897		164,167		Retained earnings	185,406		180,535
Accumulated other comprehensive income		42		59
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)	(735)		(717)
Total shareholders’ equity	Total shareholders’ equity	210,375		206,899		Total shareholders’ equity	223,549		218,569
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	1,831,275	$	1,792,180	Total liabilities and shareholders’ equity	$	1,835,544	$	1,860,508

* Derived from audited consolidated financial statements.

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the three months ended December 31, ~~2021~~2022 and ~~2020~~2021

(Dollars in thousands, except per share amounts)

(Unaudited)


		Three Months Ended December 31,				Three Months Ended December 31,
		2021		2020				2022		2021
Interest and dividend income	Interest and dividend income						Interest and dividend income
Loans receivable and loans held for sale	Loans receivable and loans held for sale	$	12,622	$	13,318		Loans receivable and loans held for sale	$	14,457	$	12,622
Investment securities	Investment securities	405		301			Investment securities	2,214		405
Dividends from mutual funds, FHLB stock and other investments	Dividends from mutual funds, FHLB stock and other investments	27		28			Dividends from mutual funds, FHLB stock and other investments	51		27
Interest-bearing deposits in banks and CDs	Interest-bearing deposits in banks and CDs	288		310			Interest-bearing deposits in banks and CDs	2,390		288
Total interest and dividend income	Total interest and dividend income	13,342		13,957			Total interest and dividend income	19,112		13,342

Interest expense	Interest expense						Interest expense
Deposits	Deposits	631		904			Deposits	1,369		631
FHLB borrowings	FHLB borrowings	15		29			FHLB borrowings	—		15
Total interest expense	Total interest expense	646		933			Total interest expense	1,369		646

Net interest income	Net interest income	12,696		13,024			Net interest income	17,743		12,696

Provision for loan losses	Provision for loan losses	—		—			Provision for loan losses	525		—

Net interest income after provision for loan losses	Net interest income after provision for loan losses	12,696		13,024			Net interest income after provision for loan losses	17,218		12,696

Non-interest income	Non-interest income						Non-interest income

Net recoveries on investment securities	Net recoveries on investment securities	8		5			Net recoveries on investment securities	3		8

Service charges on deposits	Service charges on deposits	913		1,055			Service charges on deposits	947		913
ATM and debit card interchange transaction fees	ATM and debit card interchange transaction fees	1,277		1,156			ATM and debit card interchange transaction fees	1,251		1,277
BOLI net earnings	BOLI net earnings	154		149			BOLI net earnings	156		154
Gain on sales of loans, net	Gain on sales of loans, net	663		2,002			Gain on sales of loans, net	21		663
Escrow fees	Escrow fees	78		105			Escrow fees	30		78

Valuation recovery (allowance) on loan servicing rights, net		119		(236)
Valuation recovery on loan servicing rights, net							Valuation recovery on loan servicing rights, net	—		119

Other, net	Other, net	230		323			Other, net	297		230
Total non-interest income, net	Total non-interest income, net	3,442		4,559			Total non-interest income, net	2,705		3,442

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (continued)

For the three months ended December 31, ~~2021~~2022 and ~~2020~~2021

(Dollars in thousands, except per share amounts)

(Unaudited)


		Three Months Ended December 31,				Three Months Ended December 31,
		2021		2020				2022		2021
Non-interest expense	Non-interest expense						Non-interest expense
Salaries and employee benefits	Salaries and employee benefits	$	5,171	$	4,613		Salaries and employee benefits	$	5,900	$	5,171
Premises and equipment	Premises and equipment	928		957			Premises and equipment	924		928

Advertising	Advertising	166		156			Advertising	195		166
OREO and other repossessed assets, net	OREO and other repossessed assets, net	(18)		(26)			OREO and other repossessed assets, net	—		(18)
ATM and debit card interchange transaction fees	ATM and debit card interchange transaction fees	464		431			ATM and debit card interchange transaction fees	483		464
Postage and courier	Postage and courier	136		138			Postage and courier	121		136
State and local taxes	State and local taxes	255		283			State and local taxes	299		255
Professional fees	Professional fees	271		231			Professional fees	429		271
Federal Deposit Insurance Corporation ("FDIC") insurance	Federal Deposit Insurance Corporation ("FDIC") insurance	128		96			Federal Deposit Insurance Corporation ("FDIC") insurance	124		128
Loan administration and foreclosure	Loan administration and foreclosure	104		80			Loan administration and foreclosure	120		104
Data processing and telecommunications	Data processing and telecommunications	613		606			Data processing and telecommunications	789		613

Deposit operations	Deposit operations	299		284			Deposit operations	346		299
Amortization of CDI	Amortization of CDI	79		90			Amortization of CDI	68		79
Other	Other	668		471			Other	737		668
Total non-interest expense, net	Total non-interest expense, net	9,264		8,410			Total non-interest expense, net	10,535		9,264

Income before income taxes	Income before income taxes	6,874		9,173			Income before income taxes	9,388		6,874

Provision for income taxes	Provision for income taxes	1,389		1,883			Provision for income taxes	1,881		1,389

Net income	Net income	$	5,485	$	7,290		Net income	$	7,507	$	5,485

Net income per common share	Net income per common share						Net income per common share
Basic	Basic	$	0.66	$	0.88		Basic	$	0.91	$	0.66
Diluted	Diluted	$	0.65	$	0.87		Diluted	$	0.90	$	0.65

Weighted average common shares outstanding	Weighted average common shares outstanding						Weighted average common shares outstanding
Basic	Basic	8,356,066		8,313,493			Basic	8,232,273		8,356,066
Diluted	Diluted	8,448,900		8,412,744			Diluted	8,318,733		8,448,900

Dividends paid per common share	Dividends paid per common share	$	0.21	$	0.20		Dividends paid per common share	$	0.32	$	0.21

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three months ended December 31, ~~2021~~2022 and ~~2020~~2021

(Dollars in thousands)

(Unaudited)


		Three Months Ended December 31,				Three Months Ended December 31,
		2021		2020				2022		2021
Comprehensive income	Comprehensive income						Comprehensive income
Net income	Net income	$	5,485	$	7,290		Net income	$	7,507	$	5,485
Other comprehensive income (loss)
Unrealized holding loss on investment securities available for sale, net of income taxes of $(5) and $(3), respectively		(18)		(17)
Other comprehensive loss							Other comprehensive loss
Unrealized holding loss on investment securities available for sale, net of income tax benefits of $(5) and $(5), respectively							Unrealized holding loss on investment securities available for sale, net of income tax benefits of $(5) and $(5), respectively	(19)		(18)

Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes:	Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes:						Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes:

Accretion of OTTI on investment securities held to maturity, net of income taxes of $0 and $0, respectively	Accretion of OTTI on investment securities held to maturity, net of income taxes of $0 and $0, respectively	1		—			Accretion of OTTI on investment securities held to maturity, net of income taxes of $0 and $0, respectively	1		1
Total other comprehensive loss, net of income taxes	Total other comprehensive loss, net of income taxes	(17)		(17)			Total other comprehensive loss, net of income taxes	(18)		(17)

Total comprehensive income	Total comprehensive income	$	5,468	$	7,273		Total comprehensive income	$	7,489	$	5,468

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three months ended December 31, ~~2021~~2022 and ~~2020~~2021

(Dollars in thousands, except per share amounts)

(Unaudited)


		Common Stock				Accumulated Other Compre-hensive Income (Loss)								Common Stock						Accumulated Other Compre-hensive Income (Loss)
		Number of Shares	Amount		Retained Earnings					Total					Number of Shares		Amount				Accumulated Other Compre-hensive Income (Loss)			Total
Balance, September 30, 2020		8,310,793	$	42,396		$	145,173	$	61		$	187,630
Net income		—	—			7,290		—			7,290
Other comprehensive loss		—	—			—		(17)			(17)
Repurchase of common stock		(2,900)	(58)			—		—			(58)

Exercise of stock options		9,900	96			—		—			96

Common stock dividends ($0.20 per common share)		—	—			(1,662)		—			(1,662)

Stock option compensation expense		—	46			—		—			46

Balance, December 31, 2020		8,317,793	$	42,480		$	150,801	$	44		$	193,325

Balance, September 30, 2021	Balance, September 30, 2021	8,355,469	$	42,673		$	164,167	$	59		$	206,899	Balance, September 30, 2021			8,355,469		$	42,673			$	164,167	$	59	$	206,899

Net income	Net income	—	—			5,485		—			5,485		Net income			—		—				5,485		—		5,485
Other comprehensive loss	Other comprehensive loss	—	—			—		(17)			(17)		Other comprehensive loss			—		—				—		(17)		(17)
Repurchase of common stock	Repurchase of common stock	(15,548)	(433)			—		—			(433)		Repurchase of common stock			(15,548)		(433)				—		—		(433)

Exercise of stock options	Exercise of stock options	8,900	130			—		—			130		Exercise of stock options			8,900		130				—		—		130

Common stock dividends ($0.21 per common share)	Common stock dividends ($0.21 per common share)	—	—			(1,755)		—			(1,755)		Common stock dividends ($0.21 per common share)			—		—				(1,755)		—		(1,755)

Stock option compensation expense	Stock option compensation expense	—	66			—		—			66		Stock option compensation expense			—		66				—		—		66

Balance, December 31, 2021	Balance, December 31, 2021	8,348,821	$	42,436		$	167,897	$	42		$	210,375	Balance, December 31, 2021			8,348,821		$	42,436			$	167,897	$	42	$	210,375

Balance, September 30, 2022													Balance, September 30, 2022			8,221,952		$	38,751			$	180,535	$	(717)	$	218,569

Net income													Net income			—		—				7,507		—		7,507
Other comprehensive loss													Other comprehensive loss			—		—				—		(18)		(18)
Repurchase of common stock													Repurchase of common stock			(10,570)		(348)				—		—		(348)

Exercise of stock options													Exercise of stock options			19,815		397				—		—		397

Common stock dividends ($0.32 per common share)													Common stock dividends ($0.32 per common share)			—		—				(2,636)		—		(2,636)

Stock option compensation expense													Stock option compensation expense			—		78				—		—		78

Balance, December 31, 2022													Balance, December 31, 2022			8,231,197		$	38,878			$	185,406	$	(735)	$	223,549

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended December 31, ~~2021~~2022 and ~~2020~~2021

(Dollars in thousands)

(Unaudited)


		Three Months Ended December 31					Three Months Ended December 31,
		2021		2020			2022		2021
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	5,485	$	7,290	Net income	$	7,507	$	5,485
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses						Provision for loan losses	525		—
Depreciation	Depreciation	358		391		Depreciation	338		358
Deferred income taxes	Deferred income taxes	266		51		Deferred income taxes	—		266
Accretion of discount on purchased loans	Accretion of discount on purchased loans	(57)		(121)		Accretion of discount on purchased loans	(28)		(57)
Amortization of CDI	Amortization of CDI	79		90		Amortization of CDI	68		79

Stock option compensation expense	Stock option compensation expense	66		46		Stock option compensation expense	78		66

Net recoveries on investment securities	Net recoveries on investment securities	(8)		(5)		Net recoveries on investment securities	(3)		(8)
Change in fair value of investments in equity securities	Change in fair value of investments in equity securities	9		3		Change in fair value of investments in equity securities	(2)		9

Amortization (accretion) of discounts and premiums on securities	Amortization (accretion) of discounts and premiums on securities	101		(27)		Amortization (accretion) of discounts and premiums on securities	(298)		101
Gain on sales of OREO and other repossessed assets, net		—		(21)

Gain on sales of loans, net	Gain on sales of loans, net	(663)		(2,002)		Gain on sales of loans, net	(21)		(663)

Loans originated for sale	Loans originated for sale	(22,379)		(48,199)		Loans originated for sale	(389)		(22,379)
Proceeds from sales of loans	Proceeds from sales of loans	22,559		43,839		Proceeds from sales of loans	1,158		22,559
Amortization of loan servicing rights	Amortization of loan servicing rights	299		257		Amortization of loan servicing rights	263		299
Valuation recovery (allowance) on loan servicing rights, net		(119)		236
Valuation recovery on loan servicing rights, net						Valuation recovery on loan servicing rights, net	—		(119)
BOLI net earnings	BOLI net earnings	(154)		(149)		BOLI net earnings	(156)		(154)

Decrease in deferred loan origination fees		(604)		(987)
Increase (decrease) in deferred loan origination fees						Increase (decrease) in deferred loan origination fees	211		(604)
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	(978)		162		Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	170		(978)
Net cash provided by operating activities	Net cash provided by operating activities	4,260		854		Net cash provided by operating activities	9,421		4,260

Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Net decrease in CDs held for investment		3,834		15,916
Net (increase) decrease in CDs held for investment						Net (increase) decrease in CDs held for investment	(498)		3,834

Purchase of investment securities held to maturity	Purchase of investment securities held to maturity	(48,486)		—		Purchase of investment securities held to maturity	(14,317)		(48,486)
Purchase of investment securities available for sale	Purchase of investment securities available for sale	—		(10,267)		Purchase of investment securities available for sale	(16,993)		—
Proceeds from maturities and prepayments of investment securities held to maturity	Proceeds from maturities and prepayments of investment securities held to maturity	2,995		3,444		Proceeds from maturities and prepayments of investment securities held to maturity	2,626		2,995
Proceeds from maturities and prepayments of investment securities available for sale	Proceeds from maturities and prepayments of investment securities available for sale	6,502		2,360		Proceeds from maturities and prepayments of investment securities available for sale	2,559		6,502

Decrease (increase) in loans receivable, net		(24,892)		7,674
Additions to premises and equipment		(99)		(109)
Increase in loans receivable, net						Increase in loans receivable, net	(40,841)		(24,892)
Purchases of premises and equipment						Purchases of premises and equipment	(143)		(99)

Proceeds from sales of OREO and other repossessed assets		—		803
Net cash (used in) provided by investing activities		(60,146)		19,821

Net cash used in investing activities						Net cash used in investing activities	(67,607)		(60,146)

See notes to unaudited consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the three months ended December 31, ~~2021~~2022 and ~~2020~~2021

(Dollars in thousands)

(Unaudited)


		Three Months Ended December 31					Three Months Ended December 31,
		2021		2020			2022		2021
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Net increase in deposits		$	36,076	$	16,710
Net increase (decrease) in deposits						Net increase (decrease) in deposits	$	(31,086)	$	36,076

Proceeds from exercise of stock options	Proceeds from exercise of stock options	130		96		Proceeds from exercise of stock options	397		130

Repurchase of common stock	Repurchase of common stock	(433)		(58)		Repurchase of common stock	(348)		(433)
Payment of dividends	Payment of dividends	(1,755)		(1,662)		Payment of dividends	(2,636)		(1,755)
Net cash provided by financing activities		34,018		15,086
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(33,673)		34,018

Net increase (decrease) in cash and cash equivalents		(21,868)		35,761
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(91,859)		(21,868)
Cash and cash equivalents	Cash and cash equivalents					Cash and cash equivalents
Beginning of period	Beginning of period	580,196		314,452		Beginning of period	316,755		580,196
End of period	End of period	$	558,328	$	350,213	End of period	$	224,896	$	558,328

Supplemental disclosure of cash flow information	Supplemental disclosure of cash flow information					Supplemental disclosure of cash flow information

Interest paid	Interest paid	$	656	$	980	Interest paid	$	1,180	$	656

Supplemental disclosure of non-cash investing activities	Supplemental disclosure of non-cash investing activities					Supplemental disclosure of non-cash investing activities

Other comprehensive loss related to investment securities	Other comprehensive loss related to investment securities	$	(17)	$	(17)	Other comprehensive loss related to investment securities	$	(18)	$	(17)

See notes to unaudited consolidated financial statements

Timberland Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation: The accompanying unaudited consolidated financial statements of Timberland Bancorp, Inc. and its wholly-owned subsidiary, Timberland Bank (the "Bank") (collectively, "the Company") were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, ~~2021~~2022 (“~~2021~~2022 Form 10-K”). The unaudited consolidated results of operations for the three months ended December 31, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, ~~2022.~~2023.

(b) Principles of Consolidation: The unaudited consolidated financial statements include the accounts of the Company and the Bank’s wholly-owned subsidiary, Timberland Service Corporation. All significant inter-company transactions and balances have been eliminated in consolidation.

(c) Operating Segment: The Company has 1one reportable operating segment which is defined as community banking in western Washington under the operating name, "Timberland Bank."

(d) The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated balance sheets, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

(e) Certain prior period amounts have been reclassified to conform to the December 31, ~~2021~~2022 presentation with no change to previously reported net income or total shareholders’ equity.

(2) INVESTMENT SECURITIES

Held to maturity and available for sale investment securities have been classified according to management’s intent and were as follows as of December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2021
December 31, 2022										December 31, 2022
Held to maturity	Held to maturity									Held to maturity
U.S. Treasury and U.S. government agency securities	U.S. Treasury and U.S. government agency securities	$	67,195	$	95	$	(285)	$	67,005	U.S. Treasury and U.S. government agency securities	$	170,913	$	92	$	(10,616)	$	160,389
Mortgage-backed securities ("MBS"):	Mortgage-backed securities ("MBS"):									Mortgage-backed securities ("MBS"):
U.S. government agencies	U.S. government agencies	23,550		781		(192)		24,139		U.S. government agencies	55,517		231		(2,240)		53,508
Private label residential	Private label residential	23,355		292		(94)		23,553		Private label residential	49,563		272		(2,258)		47,577
Taxable municipal securities										Taxable municipal securities	2,092		—		(58)		2,034
Bank issued trust preferred securities	Bank issued trust preferred securities	500		2		—		502		Bank issued trust preferred securities	500		—		(30)		470
Total	Total	$	114,600	$	1,170	$	(571)	$	115,199	Total	$	278,585	$	595	$	(15,202)	$	263,978

Available for sale	Available for sale									Available for sale

MBS: U.S. government agencies	MBS: U.S. government agencies	$	56,481	$	180	$	(109)	$	56,552	MBS: U.S. government agencies	$	56,759	$	445	$	(1,363)	$	55,841
Total	Total	$	56,481	$	180	$	(109)	$	56,552	Total	$	56,759	$	445	$	(1,363)	$	55,841

September 30, 2021
September 30, 2022										September 30, 2022
Held to maturity	Held to maturity									Held to maturity
U.S. Treasury and U.S. government agency securities	U.S. Treasury and U.S. government agency securities	$	28,760	$	8	$	(99)	$	28,669	U.S. Treasury and U.S. government agency securities	$	170,676	$	11	$	(12,109)	$	158,578
MBS:	MBS:									MBS:
U.S. government agencies	U.S. government agencies	25,913		936		(122)		26,727		U.S. government agencies	43,995		4		(2,486)		41,513
Private label residential	Private label residential	13,929		302		(23)		14,208		Private label residential	49,335		245		(2,392)		47,188
Taxable municipal securities										Taxable municipal securities	2,102		—		(67)		2,035
Bank issued trust preferred securities	Bank issued trust preferred securities	500		5		—		505		Bank issued trust preferred securities	500		—		(31)		469
Total	Total	$	69,102	$	1,251	$	(244)	$	70,109	Total	$	266,608	$	260	$	(17,085)	$	249,783

Available for sale	Available for sale									Available for sale
MBS: U.S. government agencies	MBS: U.S. government agencies	$	63,080	$	210	$	(114)	$	63,176	MBS: U.S. government agencies	$	42,309	$	—	$	(894)	$	41,415

Total	Total	$	63,080	$	210	$	(114)	$	63,176	Total	$	42,309	$	—	$	(894)	$	41,415

Held to maturity and available for sale investment securities with unrealized losses were as follows as of December 31, ~~2021~~2022 (dollars in thousands):


		Less Than 12 Months					12 Months or Longer					Total					Less Than 12 Months					12 Months or Longer					Total
		Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses
Held to maturity	Held to maturity															Held to maturity
U.S. Treasury and U.S. government agency securities																U.S. Treasury and U.S. government agency securities	$	71,681	$	(2,552)	7	$	79,151	$	(8,064)	19	$	150,832	$	(10,616)
MBS:	MBS:															MBS:
U.S. government agencies	U.S. government agencies	$	40,171	$	(285)	10	$	—	$	—	—	$	40,171	$	(285)	U.S. government agencies	30,377		(1,175)		52	5,400		(1,065)		7	35,777		(2,240)
Private label residential	Private label residential	8,213		(192)		5	14		—		3	8,227		(192)		Private label residential	28,489		(1,043)		24	16,897		(1,215)		11	45,386		(2,258)
U.S. Treasury and U.S. government agency securities		17,041		(94)		9	1		—		1	17,042		(94)

Taxable municipal securities																Taxable municipal securities	2,034		(58)		1	—		—		—	2,034		(58)
Bank issued trust preferred securities																Bank issued trust preferred securities	—		—		—	470		(30)		1	470		(30)
Total	Total	$	65,425	$	(571)	24	$	15	$	—	4	$	65,440	$	(571)	Total	$	132,581	$	(4,828)	84	$	101,918	$	(10,374)	38	$	234,499	$	(15,202)

Available for sale	Available for sale															Available for sale
MBS:
U.S. government agencies		$	9,941	$	(66)	10	$	13,439	$	(43)	7	$	23,380	$	(109)
MBS: U.S. government agencies																MBS: U.S. government agencies	$	22,696	$	(630)	15	$	15,248	$	(733)	13	$	37,944	$	(1,363)
Total	Total	$	9,941	$	(66)	10	$	13,439	$	(43)	7	$	23,380	$	(109)	Total	$	22,696	$	(630)	15	$	15,248	$	(733)	13	$	37,944	$	(1,363)

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, ~~2021~~2022 (dollars in thousands):


		Less Than 12 Months					12 Months or Longer					Total					Less Than 12 Months					12 Months or Longer					Total
		Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses
Held to maturity	Held to maturity															Held to maturity
U.S. Treasury and U.S. government agency securities																U.S. Treasury and U.S. government agency securities	$	115,504	$	(7,224)	17	$	33,638	$	(4,885)	9	$	149,142	$	(12,109)
MBS:	MBS:															MBS:
U.S. government agencies	U.S. government agencies	$	8,091	$	(122)	5	$	15	$	—	3	$	8,106	$	(122)	U.S. government agencies	35,896		(1,449)		54	5,306		(1,037)		5	41,202		(2,486)
Private label residential	Private label residential	9,712		(23)		4	1		—		1	9,713		(23)		Private label residential	35,447		(2,166)		27	8,708		(226)		6	44,155		(2,392)
U.S. Treasury and U.S. government agency securities		18,795		(99)		5	—		—		—	18,795		(99)
Taxable municipal securities																Taxable municipal securities	2,035		(67)		1	—		—		—	2,035		(67)
Bank issued trust preferred securities																Bank issued trust preferred securities	469		(31)		1	—		—		—	469		(31)
Total	Total	$	36,598	$	(244)	14	$	16	$	—	4	$	36,614	$	(244)	Total	$	189,351	$	(10,937)	100	$	47,652	$	(6,148)	20	$	237,003	$	(17,085)

Available for sale	Available for sale															Available for sale
MBS:
U.S. government agencies		$	20,146	$	(103)	13	$	5,491	$	(11)	3	$	25,637	$	(114)
MBS: U.S. government agencies																MBS: U.S. government agencies	$	25,170	$	(292)	16	$	15,705	$	(602)	13	$	40,875	$	(894)

Total	Total	$	20,146	$	(103)	13	$	5,491	$	(11)	3	$	25,637	$	(114)	Total	$	25,170	$	(292)	16	$	15,705	$	(602)	13	$	40,875	$	(894)

The Company has evaluated the investment securities in the above tables and has determined that the declines in their fair value are temporary. The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities. The Company has the ability and the intent to hold the investments until the fair value recovers. Further, as of December 31, ~~2021,~~2022, management does not have the intent to sell any of the securities classified as available for sale for which the estimated fair value is below the recorded value and believes

that it is more likely than not that the Company will not have to sell such securities before a recovery of cost (or recorded value if previously written down).

The Company bifurcates OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports. Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of December 31, ~~2021~~2022 and ~~2020:~~2021:


		Range				Weighted			Range				Weighted
									Minimum		Maximum		Average
December 31, 2022								December 31, 2022
Constant prepayment rate								Constant prepayment rate	6.00	%	15.00	%	8.87	%
Collateral default rate								Collateral default rate	—	%	14.64	%	9.06	%
Loss severity rate								Loss severity rate	—	%	7.76	%	2.94	%
		Minimum		Maximum		Average
December 31, 2021	December 31, 2021							December 31, 2021
Constant prepayment rate	Constant prepayment rate	6.00	%	15.00	%	12.50	%	Constant prepayment rate	6.00	%	15.00	%	12.50	%
Collateral default rate	Collateral default rate	1.56	%	22.67	%	12.14	%	Collateral default rate	1.56	%	22.67	%	12.14	%
Loss severity rate	Loss severity rate	—	%	13.95	%	3.30	%	Loss severity rate	—	%	13.95	%	3.30	%

December 31, 2020
Constant prepayment rate		6.00	%	15.00	%	9.23	%
Collateral default rate		1.50	%	23.73	%	13.58	%
Loss severity rate		—	%	10.07	%	3.44	%

~~The following table presents the OTTI recoveries for the three months ended December 31, 2021 and 2020 (dollars in thousands):~~

Three Months Ended
December 31, 2021 Three Months Ended
December 31, 2020
Held To
Maturity Held To
Maturity
Total recoveries $ 8 $ 5
Net recoveries recognized in earnings (1) $ 8 $ 5

~~_________________~~

~~(1) Represents OTTI related to credit losses.~~

The following table presents a roll forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 (dollars in thousands):


		Three Months Ended December 31,					Three Months Ended December 31,
		2021		2020			2022		2021
Beginning balance of credit loss	Beginning balance of credit loss	$	853	$	885	Beginning balance of credit loss	$	836	$	853

Subtractions:
Additions (subtractions):						Additions (subtractions):
Net realized gain (losses) previously recorded as credit losses	Net realized gain (losses) previously recorded as credit losses	1		(3)		Net realized gain (losses) previously recorded as credit losses	(7)		1
Recovery of prior credit loss	Recovery of prior credit loss	(4)		(5)		Recovery of prior credit loss	(3)		(4)
Ending balance of credit loss	Ending balance of credit loss	$	850	$	877	Ending balance of credit loss	$	826	$	850

During the three months ended December 31, ~~2021,~~2022, the Company recorded a ~~$3,000~~$7,000 net realized loss ~~(as a result of investment securities being deemed worthless)~~ on 15 14 held to maturity investment securities. During the three months ended December 31, ~~2020,~~2021, the Company recorded a $3,000 net realized loss (as a result of investment securities being deemed worthless) on 15 held to maturity investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral and other non-profit organization deposits totaled ~~$89.58~~ $160.19 million and ~~$97.60~~$133.82 million at December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, respectively.

The contractual maturities of debt securities at December 31, ~~2021~~2022 were as follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.


		Held to Maturity				Available for Sale					Held to Maturity				Available for Sale
		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value			Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	Due within one year	$	—	$	—	$	744	$	743	Due within one year	$	6,010	$	5,877	$	—	$	—
Due after one year to five years	Due after one year to five years	35,148		35,214		3,710		3,709		Due after one year to five years	161,301		153,803		2,913		2,895
Due after five years to ten years	Due after five years to ten years	51,072		51,272		13,432		13,454		Due after five years to ten years	36,374		32,672		8,439		8,313
Due after ten years	Due after ten years	28,380		28,713		38,595		38,646		Due after ten years	74,900		71,626		45,408		44,633
Total	Total	$	114,600	$	115,199	$	56,481	$	56,552	Total	$	278,585	$	263,978	$	56,760	$	55,841

(3) GOODWILL AND CDI

Goodwill is initially recorded when the purchase price paid in a business combination exceeds the estimated fair value of the net identified tangible and intangible assets acquired and liabilities assumed. Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment. The Company performs an annual review during the third quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. For purposes of goodwill impairment testing, the services offered through the Bank and its subsidiary are managed as one strategic unit and represent the Company's only reporting unit.

The annual goodwill impairment test begins with a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its carrying amount. If an entity concludes that it is not "more likely than not" that the fair value of a reporting unit is less than its carrying amount, it need not perform a two-step impairment test. If the Company's qualitative assessment concluded that it is "more likely than not" that the fair value of its reporting unit is less than its carrying amount, it must perform the two-step impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the estimated fair value of the reporting unit with its carrying amount, or the book value, including goodwill. If the estimated fair value of the reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the second step of the impairment test is unnecessary.

The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit must determine fair value for all assets and liabilities, excluding goodwill. The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill. If the carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value.

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. The Company performed its fiscal year ~~2021~~2022 goodwill impairment test during the quarter ended June 30, ~~2021.~~2022. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount, and, therefore, goodwill was determined not to be impaired at May 31, ~~2021.~~2022.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the

Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

As of December 31, ~~2021,~~2022, management believes that there have been no events or changes in the circumstances since May 31, ~~2021~~2022 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future. If adverse economic conditions or any decreases in the Company's stock price and market capitalization ~~as a result of the novel coronavirus of 2019 ("COVID-19") pandemic~~ were ~~to be~~ deemed ~~to be~~ other than temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on the Company's results of operations and financial condition. The recorded amount of goodwill at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 remained unchanged at $15.13 million.

CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of a business combination compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. As of December 31, ~~2021,~~2022, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.

(4) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable by portfolio segment consisted of the following at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):


		December 31, 2021				September 30, 2021						December 31, 2022				September 30, 2022
		Amount		Percent		Amount		Percent				Amount		Percent		Amount		Percent
Mortgage loans:	Mortgage loans:										Mortgage loans:
One- to four-family (1)	One- to four-family (1)	$	129,151	11.6	%	$	119,935	11.1	%		One- to four-family (1)	$	200,285	15.4	%	$	176,116	14.1	%
Multi-family	Multi-family	84,180		7.5		87,563		8.1			Multi-family	96,831		7.4		95,025		7.6
Commercial	Commercial	497,361		44.5		470,650		43.5			Commercial	542,571		41.6		536,650		42.8
Construction - custom and owner/builder	Construction - custom and owner/builder	116,267		10.4		109,152		10.1			Construction - custom and owner/builder	117,592		9.0		119,240		9.5
Construction - speculative one- to four-family	Construction - speculative one- to four-family	18,255		1.6		17,813		1.6			Construction - speculative one- to four-family	11,220		0.9		12,254		1.0
Construction - commercial	Construction - commercial	42,611		3.8		43,365		4.0			Construction - commercial	36,825		2.8		40,364		3.2
Construction - multi-family	Construction - multi-family	54,710		4.9		52,071		4.8			Construction - multi-family	89,040		6.8		64,480		5.1
Construction - land development	Construction - land development	13,680		1.2		10,804		1.0			Construction - land development	17,015		1.3		19,280		1.5
Land	Land	18,568		1.7		19,936		1.8			Land	25,872		2.0		26,854		2.1
Total mortgage loans	Total mortgage loans	974,783		87.2		931,289		86.0			Total mortgage loans	1,137,251		87.2		1,090,263		86.9

Consumer loans:	Consumer loans:										Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	34,375		3.1		32,988		3.1			Home equity and second mortgage	35,967		2.8		35,187		2.8
Other	Other	2,462		0.2		2,512		0.2			Other	2,482		0.2		2,128		0.2
Total consumer loans	Total consumer loans	36,837		3.3		35,500		3.3			Total consumer loans	38,449		3.0		37,315		3.0

Commercial loans:	Commercial loans:										Commercial loans:
Commercial business	Commercial business	85,006		7.6		74,579		6.9			Commercial business	127,085		9.8		125,039		10.0
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans	U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans	21,397		1.9		40,922		3.8			U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans	631		—		1,001		0.1
Total commercial loans	Total commercial loans	106,403		9.5	%	115,501		10.7			Total commercial loans	127,716		9.8	%	126,040		10.1

Total loans receivable	Total loans receivable	1,118,023		100.0	%	1,082,290		100.0	%		Total loans receivable	1,303,416		100.0	%	1,253,618		100.0	%
Less:	Less:										Less:
Undisbursed portion of construction loans in process	Undisbursed portion of construction loans in process	106,009				95,224					Undisbursed portion of construction loans in process	112,096				103,168
Deferred loan origination fees, net	Deferred loan origination fees, net	4,539				5,143					Deferred loan origination fees, net	4,532				4,321
Allowance for loan losses	Allowance for loan losses	13,468				13,469					Allowance for loan losses	14,229				13,703
Subtotal	Subtotal	124,016				113,836					Subtotal	130,857				121,192
Loans receivable, net	Loans receivable, net	$	994,007			$	968,454				Loans receivable, net	$	1,172,559			$	1,132,426
_____________________________	_____________________________										_____________________________
(1) Does not include one- to four-family loans held for sale totaling $3,700 and $3,217 at December 31, 2021 and September 30, 2021, respectively.
(1) Does not include one- to four-family loans held for sale totaling $0 and $748 at December 31, 2022 and September 30, 2022, respectively.										(1) Does not include one- to four-family loans held for sale totaling $0 and $748 at December 31, 2022 and September 30, 2022, respectively.

Loans receivable at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 are reported net of unamortized discounts totaling ~~$392,000~~$239,000 and ~~$449,000,~~$267,000, respectively.

Allowance for Loan Losses

The following tables set forth information for the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):


		Three Months Ended December 31, 2021											Three Months Ended December 31, 2022
		Beginning Allowance		Provision for (Recapture of) Loan Losses		Charge- offs		Recoveries		Ending Allowance			Beginning Allowance		Provision for (Recapture of) Loan Losses		Charge- offs		Recoveries		Ending Allowance
Mortgage loans:	Mortgage loans:											Mortgage loans:
One- to four-family	One- to four-family	$	1,154	$	83	$	—	$	—	$	1,237	One- to four-family	$	1,658	$	230	$	—	$	—	$	1,888
Multi-family	Multi-family	765		(17)		—		—		748		Multi-family	855		16		—		—		871
Commercial	Commercial	6,813		(6)		—		—		6,807		Commercial	6,682		112		—		—		6,794
Construction – custom and owner/builder	Construction – custom and owner/builder	644		27		—		—		671		Construction – custom and owner/builder	675		(2)		—		—		673
Construction – speculative one- to four-family	Construction – speculative one- to four-family	188		(35)		—		—		153		Construction – speculative one- to four-family	130		(5)		—		—		125
Construction – commercial	Construction – commercial	784		(191)		—		—		593		Construction – commercial	343		(20)		—		—		323
Construction – multi-family	Construction – multi-family	436		24		—		—		460		Construction – multi-family	447		130		—		—		577
Construction – land development	Construction – land development	124		33		—		—		157		Construction – land development	233		(11)		—		—		222
Land	Land	470		(35)		—		—		435		Land	397		(14)		—		—		383
Consumer loans:	Consumer loans:											Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	528		4		—		—		532		Home equity and second mortgage	440		53		—		—		493
Other	Other	50		(1)		(1)		—		48		Other	42		4		—		1		47
Commercial business loans	Commercial business loans	1,513		114		—		—		1,627		Commercial business loans	1,801		32		—		—		1,833

Total	Total	$	13,469	$	—	$	(1)	$	—	$	13,468	Total	$	13,703	$	525	$	—	$	1	$	14,229


		Three Months Ended December 31, 2020											Three Months Ended December 31, 2021
		Beginning Allowance		Provision for (Recapture of) Loan Losses		Charge- offs		Recoveries		Ending Allowance			Beginning Allowance		Provision for (Recapture of) Loan Losses		Charge- offs		Recoveries		Ending Allowance
Mortgage loans:	Mortgage loans:											Mortgage loans:
One- to four-family	One- to four-family	$	1,163	$	(28)	$	—	$	—	$	1,135	One- to four-family	$	1,154	$	83	$	—	$	—	$	1,237
Multi-family	Multi-family	718		39		—		—		757		Multi-family	765		(17)		—		—		748
Commercial	Commercial	7,144		(8)		—		—		7,136		Commercial	6,813		(6)		—		—		6,807
Construction – custom and owner/builder	Construction – custom and owner/builder	832		(62)		—		—		770		Construction – custom and owner/builder	644		27		—		—		671
Construction – speculative one- to four-family	Construction – speculative one- to four-family	158		24		—		—		182		Construction – speculative one- to four-family	188		(35)		—		—		153
Construction – commercial	Construction – commercial	420		138		—		—		558		Construction – commercial	784		(191)		—		—		593
Construction – multi-family	Construction – multi-family	238		(52)		—		—		186		Construction – multi-family	436		24		—		—		460
Construction – land development	Construction – land development	133		(10)		—		—		123		Construction – land development	124		33		—		—		157
Land	Land	572		(103)		—		5		474		Land	470		(35)		—		—		435
Consumer loans:	Consumer loans:											Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	593		12		—		—		605		Home equity and second mortgage	528		4		—		—		532
Other	Other	71		(18)		—		4		57		Other	50		(1)		(1)		—		48
Commercial business loans	Commercial business loans	1,372		68		—		9		1,449		Commercial business loans	1,513		114		—		—		1,627

Total	Total	$	13,414	$	—	$	—	$	18	$	13,432	Total	$	13,469	$	—	$	(1)	$	—	$	13,468

The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):


		Allowance for Loan Losses						Recorded Investment in Loans							Allowance for Loan Losses						Recorded Investment in Loans
		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total			Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
December 31, 2021
December 31, 2022														December 31, 2022
Mortgage loans:	Mortgage loans:													Mortgage loans:
One- to four-family	One- to four-family	$	—	$	1,237	$	1,237	$	582	$	128,569	$	129,151	One- to four-family	$	—	$	1,888	$	1,888	$	383	$	199,902	$	200,285
Multi-family	Multi-family	—		748		748		—		84,180		84,180		Multi-family	—		871		871		—		96,831		96,831
Commercial	Commercial	—		6,807		6,807		3,037		494,324		497,361		Commercial	—		6,794		6,794		2,980		539,591		542,571
Construction – custom and owner/builder	Construction – custom and owner/builder	—		671		671		—		63,748		63,748		Construction – custom and owner/builder	—		673		673		—		66,840		66,840
Construction – speculative one- to four-family	Construction – speculative one- to four-family	—		153		153		—		8,760		8,760		Construction – speculative one- to four-family	—		125		125		—		8,032		8,032
Construction – commercial	Construction – commercial	—		593		593		—		32,290		32,290		Construction – commercial	—		323		323		—		27,432		27,432
Construction – multi-family	Construction – multi-family	—		460		460		—		27,122		27,122		Construction – multi-family	—		577		577		—		44,374		44,374
Construction – land development	Construction – land development	—		157		157		—		7,594		7,594		Construction – land development	—		222		222		—		12,918		12,918
Land	Land	78		357		435		675		17,893		18,568		Land	—		383		383		425		25,447		25,872
Consumer loans:	Consumer loans:													Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	—		532		532		456		33,919		34,375		Home equity and second mortgage	—		493		493		405		35,562		35,967
Other	Other	—		48		48		5		2,457		2,462		Other	—		47		47		2		2,480		2,482
Commercial business loans	Commercial business loans	176		1,451		1,627		459		84,547		85,006		Commercial business loans	127		1,706		1,833		304		126,781		127,085
SBA PPP loans	SBA PPP loans	—		—		—		—		21,397		21,397		SBA PPP loans	—		—		—		—		631		631
Total	Total	$	254	$	13,214	$	13,468	$	5,214	$	1,006,800	$	1,012,014	Total	$	127	$	14,102	$	14,229	$	4,499	$	1,186,821	$	1,191,320

September 30, 2021
September 30, 2022														September 30, 2022
Mortgage loans:	Mortgage loans:													Mortgage loans:
One- to four-family	One- to four-family	$	—	$	1,154	$	1,154	$	407	$	119,528	$	119,935	One- to four-family	$	—	$	1,658	$	1,658	$	388	$	175,728	$	176,116
Multi-family	Multi-family	—		765		765		—		87,563		87,563		Multi-family	—		855		855		—		95,025		95,025
Commercial	Commercial	—		6,813		6,813		3,143		467,507		470,650		Commercial	—		6,682		6,682		2,988		533,662		536,650
Construction – custom and owner/builder	Construction – custom and owner/builder	—		644		644		—		61,003		61,003		Construction – custom and owner/builder	—		675		675		—		67,091		67,091
Construction – speculative one- to four-family	Construction – speculative one- to four-family	—		188		188		—		9,657		9,657		Construction – speculative one- to four-family	—		130		130		—		8,364		8,364
Construction – commercial	Construction – commercial	—		784		784		—		38,931		38,931		Construction – commercial	—		343		343		—		29,059		29,059
Construction – multi-family	Construction – multi-family	—		436		436		—		22,888		22,888		Construction – multi-family	—		447		447		—		34,354		34,354
Construction – land development	Construction – land development	—		124		124		—		5,502		5,502		Construction – land development	—		233		233		—		13,582		13,582
Land	Land	76		394		470		683		19,253		19,936		Land	—		397		397		450		26,404		26,854
Consumer loans:	Consumer loans:													Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	—		528		528		516		32,472		32,988		Home equity and second mortgage	—		440		440		394		34,793		35,187
Other	Other	—		50		50		17		2,495		2,512		Other	—		42		42		3		2,125		2,128
Commercial business loans	Commercial business loans	171		1,342		1,513		458		74,121		74,579		Commercial business loans	127		1,674		1,801		309		124,730		125,039
SBA PPP loans	SBA PPP loans	—		—		—		—		40,922		40,922		SBA PPP loans	—		—		—		—		1,001		1,001
Total	Total	$	247	$	13,222	$	13,469	$	5,224	$	981,842	$	987,066	Total	$	127	$	13,576	$	13,703	$	4,532	$	1,145,918	$	1,150,450

The following tables present an analysis of loans by aging category and portfolio segment at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):


		30–59 Days Past Due		60-89 Days Past Due		Non- Accrual (1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans			30–59 Days Past Due		60-89 Days Past Due		Non- Accrual (1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
December 31, 2021
December 31, 2022																December 31, 2022
Mortgage loans:	Mortgage loans:															Mortgage loans:
One- to four-family	One- to four-family	$	23	$	—	$	582	$	—	$	605	$	128,546	$	129,151	One- to four-family	$	—	$	—	$	383	$	—	$	383	$	199,902	$	200,285
Multi-family	Multi-family	—		—		—		—		—		84,180		84,180		Multi-family	—		—		—		—		—		96,831		96,831
Commercial	Commercial	34		183		675		—		892		496,469		497,361		Commercial	209		—		658		—		867		541,704		542,571
Construction – custom and owner/builder	Construction – custom and owner/builder	—		143		—		—		143		63,605		63,748		Construction – custom and owner/builder	—		—		—		—		—		66,840		66,840
Construction – speculative one- to four-family	Construction – speculative one- to four-family	—		—		—		—		—		8,760		8,760		Construction – speculative one- to four-family	—		—		—		—		—		8,032		8,032
Construction – commercial	Construction – commercial	—		—		—		—		—		32,290		32,290		Construction – commercial	—		—		—		—		—		27,432		27,432
Construction – multi-family	Construction – multi-family	—		—		—		—		—		27,122		27,122		Construction – multi-family	—		—		—		—		—		44,374		44,374
Construction – land development	Construction – land development	—		—		—		—		—		7,594		7,594		Construction – land development	—		—		—		—		—		12,918		12,918
Land	Land	—		—		676		—		676		17,892		18,568		Land	—		—		425		—		425		25,447		25,872
Consumer loans:	Consumer loans:															Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	—		—		456		—		456		33,919		34,375		Home equity and second mortgage	—		—		263		—		263		35,704		35,967
Other	Other	—		—		5		—		5		2,457		2,462		Other	—		—		2		—		2		2,480		2,482
Commercial business loans	Commercial business loans	—		—		459		—		459		84,547		85,006		Commercial business loans	9		—		304		—		313		126,772		127,085
SBA PPP loans	SBA PPP loans	—		—		—		—		—		21,397		21,397		SBA PPP loans	—		—		—		—		—		631		631
Total	Total	$	57	$	326	$	2,853	$	—	$	3,236	$	1,008,778	$	1,012,014	Total	$	218	$	—	$	2,035	$	—	$	2,253	$	1,189,067	$	1,191,320

September 30, 2021
September 30, 2022																September 30, 2022
Mortgage loans:	Mortgage loans:															Mortgage loans:
One- to four-family	One- to four-family	$	—	$	180	$	407	$	—	$	587	$	119,348	$	119,935	One- to four-family	$	—	$	—	$	388	$	—	$	388	$	175,728	$	176,116
Multi-family	Multi-family	—		—		—		—		—		87,563		87,563		Multi-family	—		—		—		—		—		95,025		95,025
Commercial	Commercial	—		—		773		—		773		469,877		470,650		Commercial	—		—		657		—		657		535,993		536,650
Construction – custom and owner/builder	Construction – custom and owner/builder	—		—		—		—		—		61,003		61,003		Construction – custom and owner/builder	—		—		—		—		—		67,091		67,091
Construction – speculative one- to four-family	Construction – speculative one- to four-family	—		—		—		—		—		9,657		9,657		Construction – speculative one- to four-family	—		—		—		—		—		8,364		8,364
Construction – commercial	Construction – commercial	—		—		—		—		—		38,931		38,931		Construction – commercial	—		—		—		—		—		29,059		29,059
Construction – multi-family	Construction – multi-family	—		—		—		—		—		22,888		22,888		Construction – multi-family	—		—		—		—		—		34,354		34,354
Construction – land development	Construction – land development	—		—		—		—		—		5,502		5,502		Construction – land development	—		—		—		—		—		13,582		13,582
Land	Land	—		—		683		—		683		19,253		19,936		Land	—		—		450		—		450		26,404		26,854
Consumer loans:	Consumer loans:															Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	—		—		516		—		516		32,472		32,988		Home equity and second mortgage	37		—		252		—		289		34,898		35,187
Other	Other	—		—		17		—		17		2,495		2,512		Other	—		—		3		—		3		2,125		2,128
Commercial business loans	Commercial business loans	5		0		458		0		463		74,116		74,579		Commercial business loans	—		—		309		—		309		124,730		125,039
SBA PPP loans	SBA PPP loans	—		—		—		—		—		40,922		40,922		SBA PPP loans	—		—		—		—		—		1,001		1,001
Total	Total	$	5	$	180	$	2,854	$	—	$	3,039	$	984,027	$	987,066	Total	$	37	$	—	$	2,059	$	—	$	2,096	$	1,148,354	$	1,150,450

______________________

(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

Credit Quality Indicators

The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential. The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral. The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:

Pass: Pass loans are defined as those loans that meet acceptable quality underwriting standards.

Watch: Watch loans are defined as those loans that still exhibit acceptable quality, but have some concerns that justify greater attention. If these concerns are not corrected, a potential for further adverse categorization exists. These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.

Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan.

Substandard: Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

Doubtful: Loans in this classification have the weaknesses of substandard loans with the additional characteristic that the weaknesses make the collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. At December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, there were no loans classified as doubtful.

Loss: Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, there were no loans classified as loss.

The following tables present an analysis of loans by credit quality indicator and portfolio segment at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):


		Loan Grades											Loan Grades
December 31, 2021		Pass		Watch		Special Mention		Substandard		Total
December 31, 2022												December 31, 2022	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:	Mortgage loans:											Mortgage loans:
One- to four-family	One- to four-family	$	127,984	$	47	$	533	$	587	$	129,151	One- to four-family	$	199,864	$	36	$	—	$	385	$	200,285
Multi-family	Multi-family	84,180		—		—		—		84,180		Multi-family	96,831		—		—		—		96,831
Commercial	Commercial	483,057		5,326		2,919		6,059		497,361		Commercial	528,906		7,925		233		5,507		542,571
Construction – custom and owner/builder	Construction – custom and owner/builder	62,024		1,724		—		—		63,748		Construction – custom and owner/builder	64,708		2,132		—		—		66,840
Construction – speculative one- to four-family	Construction – speculative one- to four-family	8,760		—		—		—		8,760		Construction – speculative one- to four-family	8,032		—		—		—		8,032
Construction – commercial	Construction – commercial	30,773		—		1,517		—		32,290		Construction – commercial	27,432		—		—		—		27,432
Construction – multi-family	Construction – multi-family	27,122		—		—		—		27,122		Construction – multi-family	44,374		—		—		—		44,374
Construction – land development	Construction – land development	7,562		—		—		32		7,594		Construction – land development	12,896		—		—		22		12,918
Land	Land	17,288		549		—		731		18,568		Land	24,932		515		—		425		25,872
Consumer loans:	Consumer loans:											Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	33,635		145		—		595		34,375		Home equity and second mortgage	35,465		32		—		470		35,967
Other	Other	2,391		66		—		5		2,462		Other	2,419		61		—		2		2,482
Commercial business loans	Commercial business loans	84,473		—		33		500		85,006		Commercial business loans	126,764		—		—		321		127,085
SBA PPP loans	SBA PPP loans	21,397		—		—		—		21,397		SBA PPP loans	631		—		—		—		631
Total	Total	$	990,646	$	7,857	$	5,002	$	8,509	$	1,012,014	Total	$	1,173,254	$	10,701	$	233	$	7,132	$	1,191,320

September 30, 2021
September 30, 2022												September 30, 2022
Mortgage loans:	Mortgage loans:											Mortgage loans:
One- to four-family	One- to four-family	$	118,857	$	129	$	537	$	412	$	119,935	One- to four-family	$	175,687	$	38	$	—	$	391	$	176,116
Multi-family	Multi-family	87,563		—		—		—		87,563		Multi-family	95,025		—		—		—		95,025
Commercial	Commercial	456,188		10,285		2,921		1,256		470,650		Commercial	522,741		7,940		237		5,732		536,650
Construction – custom and owner/builder	Construction – custom and owner/builder	59,699		1,304		—		—		61,003		Construction – custom and owner/builder	65,249		1,842		—		—		67,091
Construction – speculative one- to four-family	Construction – speculative one- to four-family	9,657		—		—		—		9,657		Construction – speculative one- to four-family	8,364		—		—		—		8,364
Construction – commercial	Construction – commercial	37,414		—		1,517		—		38,931		Construction – commercial	29,059		—		—		—		29,059
Construction – multi-family	Construction – multi-family	22,888		—		—		—		22,888		Construction – multi-family	34,354		—		—		—		34,354
Construction – land development	Construction – land development	5,467		—		—		35		5,502		Construction – land development	13,557		—		—		25		13,582
Land	Land	18,648		558		—		730		19,936		Land	25,882		522		—		450		26,854
Consumer loans:	Consumer loans:											Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	32,190		145		—		653		32,988		Home equity and second mortgage	34,709		19		—		459		35,187
Other	Other	2,465		30		—		17		2,512		Other	2,063		62		—		3		2,128
Commercial business loans	Commercial business loans	73,992		49		37		501		74,579		Commercial business loans	124,712		—		—		327		125,039
SBA PPP loans	SBA PPP loans	40,922		—		—		—		40,922		SBA PPP loans	1,001		—		—		—		1,001
Total	Total	$	965,950	$	12,500	$	5,012	$	3,604	$	987,066	Total	$	1,132,403	$	10,423	$	237	$	7,387	$	1,150,450

Impaired Loans

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time that such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses, and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The categories of non-accrual loans and impaired loans overlap, although they are not identical.

The following table is a summary of information related to impaired loans by portfolio segment as of December 31, ~~2021~~2022 and for the three months then ended (dollars in thousands):


		Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Year to Date ("YTD") Average Recorded Investment (1)		YTD Interest Income Recognized (1)		YTD Cash Basis Interest Income Recognized (1)			Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Year to Date ("YTD") Average Recorded Investment (1)		YTD Interest Income Recognized (1)		YTD Cash Basis Interest Income Recognized (1)
With no related allowance recorded:	With no related allowance recorded:													With no related allowance recorded:
Mortgage loans:	Mortgage loans:													Mortgage loans:
One- to four-family	One- to four-family	$	582	$	625	$	—	$	495	$	8	$	8	One- to four-family	$	383	$	427	$	—	$	386	$	7	$	7

Commercial	Commercial	3,037		3,037		—		3,090		40		31		Commercial	2,980		2,980		—		2,984		33		42

Land	Land	313		313		—		317		—		—		Land	425		425		—		438		—		—
Consumer loans:	Consumer loans:													Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	456		456		—		486		—		—		Home equity and second mortgage	405		405		—		400		2		3
Other	Other	5		5		—		11		—		—		Other	2		2		—		3		—		—
Commercial business loans	Commercial business loans	160		163		—		163		—		—		Commercial business loans	55		103		—		57		—		—
Subtotal	Subtotal	4,553		4,599		—		4,562		48		39		Subtotal	4,250		4,342		—		4,268		42		52

With an allowance recorded:	With an allowance recorded:													With an allowance recorded:
Mortgage loans:

Land		362		362		78		362		—		—

Commercial business loans	Commercial business loans	299		299		176		297		—		—		Commercial business loans	249		249		127		249		—		—
Subtotal	Subtotal	661		661		254		659		—		—		Subtotal	249		249		127		249		—		—

Total:	Total:													Total:
Mortgage loans:	Mortgage loans:													Mortgage loans:
One- to four-family	One- to four-family	582		625		—		495		8		8		One- to four-family	383		427		—		386		7		7

Commercial	Commercial	3,037		3,037		—		3,090		40		31		Commercial	2,980		2,980		—		2,984		33		42

Land	Land	675		675		78		679		—		—		Land	425		425		—		438		—		—
Consumer loans:	Consumer loans:													Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	456		456		—		486		—		—		Home equity and second mortgage	405		405		—		400		2		3
Other	Other	5		5		—		11		—		—		Other	2		2		—		3		—		—
Commercial business loans	Commercial business loans	459		462		176		460		—		—		Commercial business loans	304		352		127		306		—		—
Total	Total	$	5,214	$	5,260	$	254	$	5,221	$	48	$	39	Total	$	4,499	$	4,591	$	127	$	4,517	$	42	$	52

(1)For the three months ended December 31, ~~2021.~~2022.

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, ~~2021~~2022 (dollars in thousands):


		Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		YTD Average Recorded Investment (1)		YTD Interest Income Recognized (1)		YTD Cash Basis Interest Income Recognized (1)			Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		YTD Average Recorded Investment (1)		YTD Interest Income Recognized (1)		YTD Cash Basis Interest Income Recognized (1)
With no related allowance recorded:	With no related allowance recorded:													With no related allowance recorded:
Mortgage loans:	Mortgage loans:													Mortgage loans:
One- to four-family	One- to four-family	$	407	$	450	$	—	$	655	$	58	$	52	One- to four-family	$	388	$	432	$	—	$	470	$	31	$	31

Commercial	Commercial	3,143		3,143		—		3,039		159		127		Commercial	2,988		2,988		—		3,041		152		123

Land	Land	321		321		—		292		2		2		Land	450		450		—		492		—		—
Consumer loans:	Consumer loans:													Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	516		516		—		552		1		1		Home equity and second mortgage	394		394		—		436		6		5
Other	Other	17		17		—		12		—		—		Other	3		3		—		7		—		—
Commercial business loans	Commercial business loans	164		168		—		200		—		—		Commercial business loans	59		108		—		121		—		—
Subtotal	Subtotal	4,568		4,615		—		4,750		220		182		Subtotal	4,282		4,375		—		4,567		189		159

With an allowance recorded:	With an allowance recorded:													With an allowance recorded:
Mortgage loans:
One- to four-family		—		—		—		97		—		—

Land		362		362		76		72		—		—

Consumer loans:														Consumer loans:
Home equity and second mortgage														Home equity and second mortgage	—		—		—		145		—		—

Commercial business loans	Commercial business loans	294		294		171		285		—		—		Commercial business loans	250		250		127		268		—		—
Subtotal	Subtotal	656		656		247		454		—		—		Subtotal	250		250		127		413		—		—
Total	Total													Total
Mortgage loans:	Mortgage loans:													Mortgage loans:
One- to four-family	One- to four-family	407		450		—		752		58		52		One- to four-family	388		432		—		470		31		31

Commercial	Commercial	3,143		3,143		—		3,039		159		127		Commercial	2,988		2,988		—		3,041		152		123

Land	Land	683		683		76		364		2		2		Land	450		450		—		492		—		—
Consumer loans:	Consumer loans:													Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	516		516		—		552		1		1		Home equity and second mortgage	394		394		—		581		6		5
Other	Other	17		17		—		12		—		—		Other	3		3		—		7		—		—
Commercial business loans	Commercial business loans	458		462		171		485		—		—		Commercial business loans	309		358		127		389		—		—
Total	Total	$	5,224	$	5,271	$	247	$	5,204	$	220	$	182	Total	$	4,532	$	4,625	$	127	$	4,980	$	189	$	159

(1) For the year ended September 30, ~~2021.~~2022.

A troubled debt restructured loan ("TDR") is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Examples of such concessions include, but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals. TDRs are considered impaired and are individually evaluated for impairment. TDRs are classified as non-accrual (and considered to be non-performing) unless they have been performing in accordance with modified terms for a period of at least six months. The Company had ~~$2.54~~$2.58 million and ~~$2.55~~$2.62 million in TDRs included in impaired loans at December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, respectively, and had no commitments at these dates to lend additional funds on these loans. There was no allowance for loan losses allocated to TDRs at December 31, ~~2021~~2022 and September 30, ~~2021.~~2022. There were no TDRs for which there was a payment default within the first 12 months of the modification during the three months ended December 31, ~~2021.~~2022.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers,

extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. On December 27, 2020, the Consolidated Appropriations Act, 2021 ("CAA 2021") was signed into law. Among other purposes, this act provided coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19, this provision ended on January 1, 2022.

In response to requests from borrowers and in accordance with the CARES Act and related regulatory guidance, the Company made payment deferral COVID-19 related modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. All of these borrowers had resumed making payments as of December 31, 2021. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. See Note 10 - Recent Accounting Pronouncements.

There were no loans with COVID-19 loan modifications on deferral status outstanding at December 31, 2021. The following table set forth information with respect to COVID-19 loan modifications on deferral status at September 30, 2021 (dollars in thousands):

COVID-19 Loan Modifications September 30, 2021
Mortgage loans Number Balance Percent
One- to four-family 1 $ 323 100.0 %
Total COVID-19 Modifications 1 $ 323 100.0 %

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):


		December 31, 2021							December 31, 2022
		Accruing		Non- Accrual		Total			Accruing		Non- Accrual		Total
Mortgage loans:	Mortgage loans:							Mortgage loans:

Commercial	Commercial	$	2,361	$	—	$	2,361	Commercial	$	2,322	$	—	$	2,322
Land	Land	—		116		116		Land	—		63		63
Consumer loans:	Consumer loans:							Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	—		62		62		Home equity and second mortgage	141		53		194

Total	Total	$	2,361	$	178	$	2,539	Total	$	2,463	$	116	$	2,579


		September 30, 2021							September 30, 2022
		Accruing		Non- Accrual		Total			Accruing		Non- Accrual		Total
Mortgage loans:	Mortgage loans:							Mortgage loans:

Commercial	Commercial	$	2,371	$	—	$	2,371	Commercial	$	2,330	$	—	$	2,330

Land	Land	—		119		119		Land	—		88		88
Consumer loans:	Consumer loans:							Consumer loans:
Home equity and second mortgage	Home equity and second mortgage	—		63		63		Home equity and second mortgage	142		55		197

Total	Total	$	2,371	$	182	$	2,553	Total	$	2,472	$	143	$	2,615

There were no new TDRs recognized during the three months ended December 31, ~~2021 or~~2022. There was one new TDR recognized during the year ended September 30, ~~2021.~~2022. The following table sets forth information with respect to the Company's TDR, by portfolio segment, during the year ended September 30, 2022:


September 30, 2022	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
Home equity and second mortgage loan (1)	1	$	136	$	145	$	142

Total	1	$	136	$	145	$	142






(1) Modification was a result of an increase in principal balance and a reduction in interest rate and monthly payment.

(5) LEASES

~~The Company adopted~~At December 31, 2022, the ~~Financial Accounting Standard Board's ("FASB's") Accounting Standards Codification ("ASC") 842,~~ ~~Leases~~ ~~("ASC 842") on October 1, 2019 and began recording operating lease liabilities and operating lease ROU assets in the consolidated balance sheets. The~~ Company has operating leases for ~~three~~two retail bank branch offices. ~~The ROU assets totaled $2.89 million at October 1, 2019.~~ The Company's leases have remaining lease terms of ~~sixteen months~~four to ~~eleven~~nine years, ~~some~~both of which include options to extend the leases for up to five years. Lease extensions are not certain, and the Company evaluates each lease based on the specific circumstances for the location to determine the probability of exercising the extensions in the calculation of ROU assets and liabilities.

The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 (dollars in thousands):

Three Months Ended December 31, 2021 Three Months Ended December 31, 2020
Lease cost:
Operating lease cost $ 94 $ 93
Short-term lease cost — —
Total lease cost $ 94 $ 93


	Three Months Ended December 31,
Lease cost:	2022		2021
Operating lease cost	$	88	$	94
Short-term lease cost	—		—
Total lease cost	$	88	$	94

The following ~~table provides~~tables provide supplemental information related to operating leases at or for the three months ended December 31, ~~2021~~2022 and ~~the~~ year ended September 30, ~~2021~~2022 (dollars in thousands):

At or For Three Months Ended December 31, 2021 At or For the
Year Ended
September 30, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 87 $ 327
Weighted average remaining lease term-operating leases 8.2 years 8.4 years
Weighted average discount rate-operating leases 2.24 % 2.24 %


	At or For the Three Months Ended December 31 , 2022			At or For the Year Ended September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	77		$	342
Weighted average remaining lease term-operating leases	7.5 years			7.7 years
Weighted average discount rate-operating leases	2.25		%	2.25		%

The Company's leases typically do not contain a discount rate implicit in the lease contracts. As an alternative, the weighted average discount rate used to estimate the present value of future lease payments in calculating the value of the ROU asset and liability was determined by utilizing the ~~September 30, 2019~~FHLB fixed-rate ~~advances issued by~~credit advance borrowing rate for the ~~FHLB, for all leases entered into prior~~term correlating to the ~~October 1, 2019 adoption date.~~

remaining term of each lease.

Maturities of operating lease liabilities at December 31, ~~2021~~2022 for future fiscal years are as follows (dollars in thousands):


Remainder of 2022		$	255
2023		310
Remainder of 2023				Remainder of 2023	$	233
2024	2024	313		2024	313
2025	2025	317		2025	317
2026	2026	284		2026	284
2027				2027	219
Thereafter	Thereafter	1,038		Thereafter	819
Total lease payments	Total lease payments	2,517		Total lease payments	2,185
Less imputed interest	Less imputed interest	232		Less imputed interest	184
Total	Total	$	2,285	Total	$	2,001

(6) NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding during the period without considering any dilutive items. Diluted net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period. Common stock equivalents arise from the assumed conversion of outstanding stock options to purchase common stock.

Information regarding the calculation of basic and diluted net income per common share for the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 is as follows (dollars in thousands, except per share amounts):

Three Months Ended December 31,
2021 2020
Basic net income per common share computation
Numerator – net income $ 5,485 $ 7,290
Denominator – weighted average common shares outstanding 8,356,066 8,313,493
Basic net income per common share $ 0.66 $ 0.88
Diluted net income per common share computation
Numerator – net income $ 5,485 $ 7,290
Denominator – weighted average common shares outstanding 8,356,066 8,313,493
Effect of dilutive stock options (1) 92,834 99,251
Weighted average common shares outstanding - assuming dilution 8,448,900 8,412,744
Diluted net income per common share $ 0.65 $ 0.87


	Three Months Ended December 31,
	2022		2021
Basic net income per common share computation
Numerator – net income	$	7,507	$	5,485





Denominator – weighted average common shares outstanding	8,232,273		8,356,066

Basic net income per common share	$	0.91	$	0.66

Diluted net income per common share computation
Numerator – net income	$	7,507	$	5,485





Denominator – weighted average common shares outstanding	8,232,273		8,356,066
Effect of dilutive stock options (1)	86,460		92,834

Weighted average common shares outstanding - assuming dilution	8,318,733		8,448,900

Diluted net income per common share	$	0.90	$	0.65

(1) For the three months ended December 31, ~~2021~~2022 and ~~2020,~~2021, average options to purchase ~~210,052~~182,000 and ~~137,650~~210,052 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share, because their effect would have been anti-dilutive.

(7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 are as follows (dollars in thousands):


		Three Months Ended December 31, 2021							Three Months Ended December 31, 2022
		Changes in fair value of available for sale securities (1)		Changes in OTTI on held to maturity securities (1)		Total (1)			Changes in fair value of available for sale securities (1)		Changes in OTTI on held to maturity securities (1)		Total (1)
Balance of AOCI at the beginning of period	Balance of AOCI at the beginning of period	$	75	$	(16)	$	59	Balance of AOCI at the beginning of period	$	(706)	$	(11)	$	(717)
Other comprehensive loss		(18)		1		(17)
Other comprehensive income (loss)								Other comprehensive income (loss)	(19)		1		(18)

Balance of AOCI at the end of period	Balance of AOCI at the end of period	$	57	$	(15)	$	42	Balance of AOCI at the end of period	$	(725)	$	(10)	$	(735)


		Three Months Ended December 31, 2020							Three Months Ended December 31, 2021
		Changes in fair value of available for sale securities (1)		Changes in OTTI on held to maturity securities (1)		Total (1)			Changes in fair value of available for sale securities (1)		Changes in OTTI on held to maturity securities (1)		Total (1)
Balance of AOCI at the beginning of period	Balance of AOCI at the beginning of period	$	87	$	(26)	$	61	Balance of AOCI at the beginning of period	$	75	$	(16)	$	59
Other comprehensive loss		(17)		—		(17)
Other comprehensive income (loss)								Other comprehensive income (loss)	(18)		1		(17)

Balance of AOCI at the end of period	Balance of AOCI at the end of period	$	70	$	(26)	$	44	Balance of AOCI at the end of period	$	57	$	(15)	$	42

__________________________

(1) All amounts are net of income taxes.

(8) STOCK COMPENSATION PLANS

Under the Company’s 2003 Stock Option Plan, the Company was able to grant options for up to 300,000 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2019 Equity Incentive Plan, the Company is able to grant options and awards or restricted stock (with or without performance measures) for up to 350,000 shares of common stock, of which 300,000 shares are reserved to be awarded to employees, including officers, and 50,000 shares are reserved to be awarded to directors and directors emeriti. Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally, options and restricted stock vest in 20% annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of grant. At December 31, ~~2021,~~2022, there were ~~21,520~~2,196 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2014 Equity Incentive Plan. At December 31 ~~2021,~~2022, there were ~~238,000~~196,700 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2019 Equity Incentive Plan.

At both December 31, ~~2021~~2022 and ~~2020,~~2021, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the three months ended December 31, ~~2021~~2022 and ~~2020.~~

2021.

Stock option activity for the three months ended December 31, ~~2021~~2022 and ~~2020~~2021 is summarized as follows:


		Three Months Ended December 31, 2021			Three Months Ended December 31, 2020				Three Months Ended December 31, 2022			Three Months Ended December 31, 2021
		Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price			Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Options outstanding, beginning of period	Options outstanding, beginning of period	406,815	$	21.62	395,349	$	18.45	Options outstanding, beginning of period	421,925	$	23.30	406,815	$	21.62
Exercised	Exercised	(8,900)	14.63		(9,900)	9.70		Exercised	(19,815)	20.01		(8,900)	14.63
Granted	Granted	1,000	27.25		1,500	19.13		Granted	—	—		1,000	27.25
Forfeited	Forfeited	(11,594)	25.28		(2,320)	26.69		Forfeited	(1,800)	29.68		(11,594)	25.28
Options outstanding, end of period	Options outstanding, end of period	387,321	$	21.70	384,629	$	18.62	Options outstanding, end of period	400,310	$	23.43	387,321	$	21.70

The fair value of stock options is determined using the Black-Scholes valuation model.

~~The weighted average assumptions for~~There were no options granted during the three months ended December 31, ~~2021 were as follows:~~


~~Expected volatility~~	34		%
~~Expected life (in years)~~	5
~~Expected dividend yield~~	~~3.49~~		%
~~Risk free interest rate~~	~~1.22~~		%
~~Grant date fair value per share~~	$	~~5.88~~

2022.

The aggregate intrinsic value of options exercised during the three months ended December 31, 2022 and 2021 was $244,000 and ~~2020~~$123,000, respectively.

At December 31, 2022, there were 191,710 unvested options with an aggregate grant date fair value of $1.08 million, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at December 31, 2022 was ~~$123,000 and $120,000, respectively.~~$1.61 million. There were 200 options vested during the three months ended December 31, 2022 with a total fair value of $652.

At December 31, 2021, there were 176,670 unvested options with an aggregate grant date fair value of ~~$844,000, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at December 31, 2021 was $568,000.~~$844,000. There were 200 options that vested during the three months ended December 31, 2021 with a total fair value of $1,000.

~~At December 31, 2020, there were 158,572 unvested options with an aggregate grant date fair value of $567,000. There were 200 options that vested during the three months ended December 31, 2020.~~

Additional information regarding options outstanding at December 31, ~~2021~~2022 is as follows:


				Options Outstanding				Options Exercisable							Options Outstanding				Options Exercisable
Range of Exercise Prices ($)	Range of Exercise Prices ($)			Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Range of Exercise Prices ($)			Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$5.86		-	6.00	4,000	$	5.93	0.8	4,000	$	5.93	0.8
9.00	9.00			26,000	9.00		1.8	26,000	9.00		1.8	9.00			14,000	$	9.00	0.8	14,000	$	9.00	0.8
10.26	10.26	-	10.71	57,875	10.57		3.2	57,875	10.57		3.2	10.26	-	10.71	47,000	10.56		2.2	47,000	10.56		2.2
15.67	15.67	-	19.13	92,300	16.52		7.5	40,980	16.04		5.9	15.67	-	19.13	77,700	16.53		6.6	40,410	16.18		5.4
26.50	26.50	-	27.25	43,016	27.13		7.8	17,596	27.13		7.8	26.50	-	27.40	110,660	27.31		8.7	22,180	27.14		6.8
28.23	28.23	-	29.69	125,050	28.81		8.2	40,200	29.69		5.8	28.23	-	29.69	115,950	28.78		7.2	57,150	29.35		5.7
31.80	31.80			39,080	31.80		6.8	24,000	31.80		6.8	31.80			35,000	31.80		5.8	27,860	31.80		5.8
				387,321	$	21.70	6.6	210,651	$	18.80	4.8				400,310	$	23.43	6.6	208,600	$	21.29	4.6

The aggregate intrinsic value of options outstanding at December 31, 2022 and 2021 ~~and 2020~~ was ~~$2.62~~$4.28 million and $~~2.88~~2.62 million, respectively.

As of December 31, ~~2021,~~2022, unrecognized compensation cost related to unvested stock options was ~~$844,000,~~$1.04 million, which is expected to be recognized over a weighted average life of 2.42 years.

(9) FAIR VALUE MEASUREMENTS

Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability based on the best information available in the circumstances.

The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1).

The Company had no liabilities measured at fair value on a recurring basis at December 31, ~~2021~~2022 and September 30, ~~2021.~~2022. The Company's assets measured at estimated fair value on a recurring basis at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 were as follows (dollars in thousands):


December 31, 2021		Estimated Fair Value
December 31, 2022										December 31, 2022	Estimated Fair Value
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Available for sale investment securities	Available for sale investment securities									Available for sale investment securities
MBS: U.S. government agencies	MBS: U.S. government agencies	$	—	$	56,552	$	—	$	56,552	MBS: U.S. government agencies	$	—	$	55,841	$	—	$	55,841
Investments in equity securities	Investments in equity securities									Investments in equity securities
Mutual funds	Mutual funds	946		—		—		946		Mutual funds	837		—		—		837
Total	Total	$	946	$	56,552	$	—	$	57,498	Total	$	837	$	55,841	$	—	$	56,678


September 30, 2021		Estimated Fair Value
September 30, 2022										September 30, 2022	Estimated Fair Value
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Available for sale investment securities	Available for sale investment securities									Available for sale investment securities
MBS: U.S. government agencies	MBS: U.S. government agencies	$	—	$	63,176	$	—	$	63,176	MBS: U.S. government agencies	$	—	$	41,415	$	—	$	41,415
Investments in equity securities	Investments in equity securities									Investments in equity securities

Mutual funds	Mutual funds	955		—		—		955		Mutual funds	835		—		—		835
Total	Total	$	955	$	63,176	$	—	$	64,131	Total	$	835	$	41,415	$	—	$	42,250

There were no transfers among Level 1, Level 2 and Level 3 during the three months ended December 31, ~~2021~~2022 and the year ended September 30, ~~2021.~~2022.

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis:

Impaired Loans: The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of the comparable collateral included in the appraisal and known changes in the market and in the underlying collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

~~Investment Securities Held to Maturity:~~ The estimated fair value of investment securities held to maturity is based upon the assumptions market participants would use in pricing the investment security. Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

~~OREO and Other Repossessed Assets, net:~~ OREO and other repossessed assets are recorded at estimated fair value less estimated costs to sell. Estimated fair value is generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale. Estimated costs to sell are based on standard market factors. The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at December 31, ~~2021~~2022 (dollars in thousands):

Estimated Fair Value
Level 1 Level 2 Level 3
Impaired loans:
Mortgage loans:
Land $ — $ — $ 284
Commercial business loans — — 123
Total impaired loans — — 407
Investment securities – held to maturity:
MBS - private label residential — 1 —
OREO and other repossessed assets — — 157
Total $ — $ 1 $ 564


	Estimated Fair Value
	Level 1		Level 2		Level 3
Impaired loans:









Commercial business loans	$	—	$	—	$	122




Total	$	—	$	—	$	122

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of December 31, ~~2021~~2022 (dollars in thousands):

Estimated
Fair Value

Valuation
Technique(s)

Unobservable Input(s)

~~Range~~

Impaired loans

~~407~~122

Market approach

Appraised value less estimated selling costs

~~OREO and other repossessed assets~~

~~157~~

~~Market approach~~

~~Lower of appraised value or listing price less estimated selling costs~~

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, ~~2021~~2022 (dollars in thousands):

Estimated Fair Value
Level 1 Level 2 Level 3
Impaired loans:
Mortgage loans:
Land $ — $ — $ 286
Commercial business loans — — 123
Total impaired loans — — 409
Investment securities – held to maturity:
MBS - private label residential — 10 —
OREO and other repossessed assets — — 157
Total $ — $ 10 $ 566


	Estimated Fair Value
	Level 1		Level 2		Level 3
Impaired loans:









Commercial business loans	$	—	$	—	$	123




Total	$	—	$	—	$	123

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, ~~2021~~2022 (dollars in thousands):

Estimated
Fair Value

Valuation
Technique(s)

Unobservable Input(s)

~~Range~~

Impaired loans

~~409~~123

Market approach

Appraised value less estimated selling costs

~~OREO and other repossessed assets~~

~~157~~

~~Market approach~~

~~Lower of appraised value or listing price less estimated selling costs~~

GAAP requires disclosure of estimated fair values for certain financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but for which may have significant value. The Company does not believe that it would be practicable to estimate a representative fair value for these types of items as of December 31, ~~2021~~2022 and September 30, ~~2021.~~2022. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with GAAP, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

3231

The recorded amounts and estimated fair values of financial instruments were as follows as of December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):


		December 31, 2021											December 31, 2022
						Fair Value Measurements Using:											Fair Value Measurements Using:
		Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3			Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets	Financial assets											Financial assets
Cash and cash equivalents	Cash and cash equivalents	$	558,328	$	558,328	$	558,328	$	—	$	—	Cash and cash equivalents	$	224,896	$	224,896	$	224,896	$	—	$	—
CDs held for investment	CDs held for investment	24,648		24,648		24,648		—		—		CDs held for investment	23,392		23,108		23,108		—		—
Investment securities	Investment securities	171,152		171,751		67,005		104,746		—		Investment securities	334,426		319,819		160,390		159,429		—
Investments in equity securities	Investments in equity securities	946		946		946		—		—		Investments in equity securities	837		837		837		—		—
FHLB stock	FHLB stock	2,103		2,103		2,103		—		—		FHLB stock	2,194		2,194		2,194		—		—
Other investments	Other investments	3,000		3,000		3,000		—		—		Other investments	3,000		3,000		3,000		—		—
Loans held for sale		3,700		3,790		3,790		—		—

Loans receivable, net	Loans receivable, net	994,007		1,004,899		—		—		1,004,899		Loans receivable, net	1,172,559		1,134,291		—		—		1,134,291
Accrued interest receivable	Accrued interest receivable	3,938		3,938		3,938		—		—		Accrued interest receivable	5,508		5,508		5,508		—		—

Financial liabilities	Financial liabilities											Financial liabilities
Certificates of deposit	Certificates of deposit	132,155		133,005		—		—		133,005		Certificates of deposit	152,821		151,441		—		—		151,441

Accrued interest payable	Accrued interest payable	124		124		124		—		—		Accrued interest payable	297		297		297		—		—


		September 30, 2021											September 30, 2022
						Fair Value Measurements Using:											Fair Value Measurements Using:
		Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3			Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets	Financial assets											Financial assets
Cash and cash equivalents	Cash and cash equivalents	$	580,196	$	580,196	$	580,196	$	—	$	—	Cash and cash equivalents	$	316,755	$	316,755	$	316,755	$	—	$	—
CDs held for investment	CDs held for investment	28,482		28,482		28,482		—		—		CDs held for investment	22,894		22,519		22,519		—		—
Investment securities	Investment securities	132,278		133,286		28,670		104,616		—		Investment securities	308,023		291,198		158,578		132,620		—
Investments in equity securities	Investments in equity securities	955		955		955		—		—		Investments in equity securities	835		835		835		—		—
FHLB stock	FHLB stock	2,103		2,103		2,103		—		—		FHLB stock	2,194		2,194		2,194		—		—
Other investments	Other investments	3,000		3,000		3,000		—		—		Other investments	3,000		3,000		3,000		—		—
Loans held for sale	Loans held for sale	3,217		3,290		3,290		—		—		Loans held for sale	748		758		758		—		—
Loans receivable, net	Loans receivable, net	968,454		981,905		—		—		981,905		Loans receivable, net	1,132,426		1,124,579		—		—		1,124,579
Accrued interest receivable	Accrued interest receivable	3,745		3,745		3,745		—		—		Accrued interest receivable	4,483		4,483		4,483		—		—

Financial liabilities	Financial liabilities											Financial liabilities
Certificates of deposit	Certificates of deposit	134,129		135,178		—		—		135,178		Certificates of deposit	122,584		120,807		—		—		120,807

Accrued interest payable	Accrued interest payable	134		134		134		—		—		Accrued interest payable	108		108		108		—		—

(10) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11. ASU 2016-13 replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changes the accounting for ~~purchased credit-impaired~~PCI debt securities

and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. As a

"smaller reporting company" filer with the U.S. Securities and Exchange Commission, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for OTTI on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to help ensure that it is fully compliant with ~~the amendments~~ASU 2016-13 at the adoption date. At this time, the Company anticipates that the allowance for loan losses will increase as a result of the implementation of ~~this ASU;~~ASU 2016-13; however, until its evaluation is complete, the magnitude of ~~the~~this increase will be unknown.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity ~~had~~has to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity ~~should~~would then recognize an impairment charge for the amount by

which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized ~~should~~would not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity ~~should~~would consider income tax effects from any tax

deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. The adoption ASU 2017-04 is not expected to a have a material impact on the Company's future ~~consolidated financial statements.~~

~~In December 2019, the FASB issued ASU 2019-12,~~ ~~Income Taxes (Topic 740), Simplifying the accounting for Income Taxes.~~ The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidelines. ASU 2019-12 was effective for fiscal years beginning after December 15, 2020,

~~including interim periods within those fiscal years. The Company adopted ASU 2019-12 effective October 1, 2021, and it did not have a material impact on the Company's~~ consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, ~~2022.~~2024. The Company has not adopted ASU 2020-04 as of December 31, ~~2021.~~2022. The adoption of ASU 2020-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) for creditors, require new disclosures for creditors for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty, and require public business entities to include current-period gross write-offs in the vintage disclosure tables. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU 2022-02 is not expected to have a material impact on the Company's future consolidated financial statements.

(11) REVENUE FROM CONTRACTS WITH CUSTOMERS

ASU 2014-09 Revenue from Contracts with Customers ("ASC ~~606~~606') applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of the Company's revenues are composed of interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, BOLI net earnings, servicing income on loans sold and other loan fee income, which are not within the scope of ASC 606. Revenue reported as service charges on deposits, ATM and debit card interchange transaction fees, merchant services fees, non-deposit investment fees and escrow fees are within the scope of ASC 606. All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense. For the three months ended December 31, 2022, the Company recognized $947,000 in service charges on deposits, $1.25 million in ATM and debit card interchange transaction fees, $30,000 in escrow fees, and $30,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the three months ended December 31, 2021, the Company recognized $913,000 in service charges on deposits, ~~$1.3~~$1.28 million in ATM and debit card interchange transaction fees, $78,000 in escrow fees, and $2,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the three months ended December 31, 2020, the Company recognized $1.1 million in service charges on deposits, $1.2 million in ATM and debit card interchange fees, $105,000 in escrow fees, and $3,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

3433

If a contract is determined to be within the scope of ASC 606, the Company recognizes revenue when it satisfies its performance obligation. Descriptions of the Company's revenue-generating activities that are within the scope of ASC 606 are as follows:

•Service Charges on Deposits: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed, as the contract duration does not extend beyond the service performed.

•ATM and Debit Card Interchange Transaction Fees: The Company earns fees from cardholder transactions conducted through third-party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis.

•Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property according to the customer's contract. Fees are recognized when the escrow contract closes.

•Fee Income from Non-deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer.

(12) COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk not recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. However, such loan to value ratios will subsequently change, based on increases and decreases in the supporting collateral values. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, land and income-producing commercial properties.

A summary of the Company's commitments at December 31, 2022 and 2021 are listed below (in thousands):


	December 31, 2022		December 31, 2021
Undisbursed portion of construction loans in process (see Note 4)	$	112,096	$	106,009
Undisbursed lines of credit	133,932		129,456
Commitments to extend credit	14,126		14,205
	$	260,154	$	249,670

The Company maintains a separate reserve for losses related to unfunded loan commitments. Management estimates the amount of probable losses related to unfunded loan commitments by applying the loss factors used in the allowance for loan loss methodology to an estimate of the expected amount of funding and applies this adjusted factor to the unused portion of unfunded loan commitments. The reserve for unfunded loan commitments totaled $320,000 and $362,000 at December 31, 2022 and 2021, respectively. These amounts are included in other liabilities and accrued expenses in the accompanying consolidated balance sheets. Increases (decreases) in the reserve for unfunded loan commitments are recorded in non-interest expense in the accompanying consolidated statements of income.

The Bank has an employee severance compensation plan which expires in 2027 and which provides severance pay benefits to eligible employees in the event of a change in control of Timberland Bancorp or the Bank (as defined in the plan). In general, all employees with two or more years of service will be eligible to participate in the plan. Under the plan, in the event of a change in control of Timberland Bancorp or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control would be entitled to a payment based on years of service or officer rank with the Bank. The maximum payment for any eligible employee would be equal to 18 months of the employee’s current compensation.

Timberland Bancorp has entered into employment contracts with certain key employees, which provide for contingent payment subject to future events.

Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the future consolidated financial position of the Company.

Item 2. 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. 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.

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, ~~2021.~~ 2022.

Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, ~~generally, resulting~~including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from ~~the ongoing COVID-19 pandemic~~acts of war including Russia's invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses ~~thereto;~~to new variants of the novel coronavirus disease 2019 ("COVID-19"); credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio ~~and~~ may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources; ~~uncertainty regarding the future of LIBOR, and the potential~~ transition away from ~~LIBOR~~the London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our bank subsidiary by the FDIC, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities,

including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or

impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules and including changes as a result of ~~Basel III; the impact of the Dodd Frank Wall Street Reform and Consumer Protection Act and implementing regulations;~~COVID-19; our ability to attract and retain deposits; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans onin our consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; the quality and composition of our securities portfolio and the impact if any adverse changes in the securities ~~markets;~~markets, including on market liquidity; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the ~~FASB,~~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 ~~any terrorist activities;~~terrorism. and other external events on our business; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services ~~including the CARES Act and theCAA 2021;~~ 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 ~~2021~~2022 Form 10-K.

Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements that we make are based upon management’s beliefs and assumptions at the time that they are made.We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and we caution readers not to place undue reliance on any forward-looking statements.These risks could cause our actual results for fiscal year ~~2022~~2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company’s consolidated financial condition and results of operations as well as its stock price performance.

Overview

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 2423 offices (including its main office in Hoquiam). At December 31, ~~2021,~~2022, the Company had total assets of ~~$1.83~~$1.84 billion, net loans receivable of ~~$994.01 million,~~$1.17 billion, total deposits of ~~$1.61~~$1.60 billion and total shareholders’ equity of ~~$210.38~~$223.55 million. The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the unaudited consolidated financial statements and related data, relates primarily to the Bank's operations.

The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. 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. Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed). 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~~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. ~~Because~~

Changes in market interest rates, the ~~length~~slope of the ~~COVID-19 pandemic~~yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the

~~efficacy~~ volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since March 2022, in response to inflation, the FOMC of the ~~extraordinary measures being put in place to address its economic consequences are unknown, including~~Federal Reserve has increased the ~~150 basis point reductions in~~target range for the ~~targeted~~ federal funds rate ~~in March 2020, until~~by 425 basis points, including 125 basis points during the ~~pandemic subsides,~~fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022. As it seeks to control inflation without creating a recession, the ~~Company expects that its net interest income and net interest margin will be adversely affected.~~FOMC has indicated further increases are expected during calendar 2023.

The provision for (recapture of) loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio. The Company ~~did not record~~recorded a $525,000 provision for loan losses for the three months ended December 31, ~~2021 and 2020,~~2022 primarily ~~reflecting the improving economy and resulting decline in forecasted probable~~due to loan portfolio growth. There was no provision for loan losses ~~from COVID-19 during these periods.~~

~~The Company maintains its commitment to supporting its community and customers during these unprecedented times as a result of~~for the COVID-19 pandemic. The Company remains focused on keeping its employees safe and the Bank running effectively to serve its customers. The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and public health authority guidelines. Some of the Company's employees are working remotely or have flexible work schedules, and protective measures within the Company's offices have been established to help ensure the safety of those employees who must work on-site.

The Company has worked with loan customers on loan deferral and forbearance plans. In response to requests from borrowers, the Company made payment deferral modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. All borrowers who were granted COVID-19 deferrals have resumed making regular payments as ofthree months ended December 31, 2021. The Company will continue to work on forbearance plans with customers impacted by the COVID-19 pandemic as needed going forward. The CARES Act also authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program ("PPP"). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans in April 2020 and originated $127.54 million in PPP loans through the program's initial conclusion in August 2020. The CAA 2021, which was signed into law on December 27, 2020, renewed and extended the PPP until May 31, 2021. As a result, the Company began originating PPP loans again in January 2021. As of December 31, 2021, the Company had $21.40 million in PPP loans to new and existing customers who are small to midsize businesses as well as non-profit organizations, independent contractors, and partnerships as allowed under PPP guidance.

Net income is also affected by non-interest income and non-interest expense. For the three months ended December 31, ~~2021,~~2022, 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 and other operating income. Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any. Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any. Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, OREO and other repossessed asset expenses, 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 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.

Results of operations may also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Critical Accounting Policies and Estimates

The Company has identified several accounting policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company’s ~~2021~~2022 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s ~~2021~~2022 Form 10-K.

Comparison of Financial Condition at December 31, ~~2021~~2022 and September 30, ~~2021~~2022

The Company’s total assets ~~increased~~decreased by ~~$39.10~~$24.96 million, or ~~2.2%~~1.3%, to ~~$1.831~~$1.84 billion at December 31, ~~2021~~2022 from ~~$1.792~~$1.86 billion at September 30, ~~2021.~~2022. The ~~increase~~decrease in total assets was primarily due to ~~an increase in held to maturity investment securities and an increase in loans receivable, which was partially offset by decreases~~a decrease in total cash and cash equivalents, which was partially offset by increases in loans receivable and ~~CDs held for investment. The increase in total assets was funded primarily by an increase~~investment securities. Cash and cash equivalents were also used to fund the decrease in total deposits.

Net loans receivable increased by ~~$25.55~~$40.13 million, or ~~2.6%~~3.5%, to ~~$994.01 million~~$1.17 billion at December 31, ~~2021~~2022 from ~~$968.45 million~~$1.13 billion at September 30, ~~2021,~~2022, primarily due to increases in one- to four-family loans, multi-family construction loans, commercial real estate loans ~~construction loans, one-to four-family~~ and ~~commercial business loans (other than SBA PPP loans) and~~smaller increases in several other loan categories. These increases to net loans receivable were partially offset by ~~a decrease in SBA PPP loans,~~ an increase in the undisbursed portion of construction loans in process, and smaller decreases in several other loan categories.

Total deposits ~~increased~~decreased by ~~$36.08~~$31.09 million, or ~~2.3%~~1.9%, to ~~$1.607~~$1.60 billion at December 31, ~~2021~~2022 from ~~$1.571~~$1.63 billion at September 30, ~~2021,~~2022, primarily due to ~~increases~~decreases in non-interest bearing account balances, NOW checking account balances, money market account balances, and savings account balances. These increases were partially offset by ~~decreases in non-interest bearing account balances and~~increases in certificates of deposit account balances.

Shareholders’ equity increased by ~~$3.48~~$4.98 million, or ~~1.7%~~2.3%, to ~~$210.38~~$223.55 million at December 31, ~~2021~~2022 from ~~$206.90~~$218.57 million at September 30, ~~2021.~~2022. The increase in shareholders' equity was ~~primarily~~ due to net income and proceeds from stock options exercised and was partially offset by the payment of dividends to common shareholders and the repurchase of common stock.

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

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreased by ~~$25.70~~$91.36 million, or ~~4.2%~~26.9%, to ~~$582.98~~$248.29 million at December 31, ~~2021~~2022 from ~~$608.68~~$339.65 million at September 30, ~~2021.~~2022. The decrease was primarily a result of deploying ~~funds earning a nominal yield~~overnight liquidity into higher-earning ~~loans~~loan originations and investment ~~securities.~~securities, as well as to fund deposit withdrawals.

Investment Securities: Investment securities (including investments in equity securities) increased by ~~$38.87~~$26.41 million, or ~~29.2%~~8.6%, to ~~$172.10~~$335.26 million at December 31, ~~2021~~2022 from ~~$133.23~~$308.86 million at September 30, ~~2021.~~2022. This increase was primarily due to the purchase of additional ~~mortgage-backed investment~~U.S. government agency securities and ~~U.S. Treasury~~mortgage-backed investment securities during the three months ended December 31, ~~2021~~2022, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period. These increases were partially offset by maturities, prepayments and scheduled amortization of other investment securities. 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: FHLB stock was ~~$2.10~~$2.19 million at December 31, ~~2021~~2022 and September 30, ~~2021.~~2022.

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, ~~2021~~2022 and September 30, ~~2021.~~2022. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.

Loans: Net loans receivable increased by ~~$25.55~~$40.13 million, or ~~2.6%~~3.5%, to ~~$994.01 million~~$1.17 billion at December 31, ~~2021~~2022 from ~~$968.45 million~~$1.13 billion at September 30, ~~2021.~~2022. The increase was primarily due to a ~~$26.71~~$24.17 million increase in one- to four- family loans, a $24.56 million increase in multi-family construction loans, a $5.92 million increase in commercial real estate ~~loans, a $12.32 million increase in construction loans, a $10.43 million increase in commercial business loans (other than SBA PPP loans), a $9.22 million increase in one- to four-family~~ loans and smaller increases in other categories. These increases were partially offset by a ~~$19.53 million decrease in SBA PPP loans, a $10.79~~$8.93 million increase in the undisbursed portion of construction loans in process, and smaller decreases in several other categories. ~~The SBA PPP loan balances decreased primarily due to borrowers applying for forgiveness from the SBA and the loans being subsequently paid off by the SBA.~~

Loan originations ~~increased~~decreased by ~~$20.02~~$74.93 million, or ~~12.8%~~42.4%, to $101.67 million for the three months ended December 31, 2022 from $176.60 million for the three months ended December 31, ~~2021 from $156.58 million for the three months ended December 31, 2020.~~2021. The ~~increase~~decrease in loan originations was primarily due to ~~an increase~~a decrease in the amount of commercial real estate and one- to four-family loans ~~and commercial business loans (non-PPP) funded.~~originated. The decrease was partially offset by increases in multi-family loan originations. The Company ~~continued to sell~~generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. ~~The Company also periodically sells the guaranteed portion of SBA loans.~~ Sales of fixed-rate

one- to four-family mortgage loans decreased by ~~$21.28~~$21.4 million, or ~~48.5%~~94.9%, to $1.16 million for the three months ended December 31, 2022 from $22.56 million for the three months ended December 31, 2021, ~~from $43.84 million for the three months ended December 31, 2020,~~ primarily due to decreased refinance activity for one- to four-family loans ~~as mortgage refinance activity diminished as market~~due to rising interest rates, ~~increased.~~declining homes sales and a decision to keep more single family loans originated during the quarter in the portfolio.

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

Premises and Equipment: Premises and equipment decreased by ~~$259,000,~~$195,000, or ~~1.2%~~0.9%, to ~~$22.11~~$21.70 million at December 31, ~~2021~~2022 from ~~$22.37~~$21.90 million at September 30, ~~2021.~~2022. This decrease was primarily due to ~~normal~~scheduled depreciation.

OREO (Other Real Estate Owned): ~~OREO and other repossessed assets was $157,000 at~~. At December 31, ~~2021~~2022 and September 30, ~~2021. At December 31, 2021,~~2022, total OREO and other repossessed assets consisted of ~~three~~two land parcels ~~totaling $157,000.~~with no recorded value.

BOLI (Bank Owned Life Insurance): BOLI increased by ~~$153,000~~$156,000 or ~~0.70%~~0.7%, to ~~$22.35~~$22.96 million at December 31, ~~2021~~2022 from ~~$22.19~~$22.81 million at September 30, ~~2021.~~2022. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.

Goodwill and CDI: The recorded amount of goodwill remained unchanged at $15.13 million at both December 31, ~~2021~~2022 and September 30, ~~2021.~~2022. CDI decreased by ~~$79,000,~~$68,000, or ~~6.3%~~7.2%, to ~~$1.19~~$880,000 million at December 31, ~~2021~~2022 from ~~$1.26 million~~$948,000 at September 30, ~~2021~~2022 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Loan Servicing Rights, Net: Loan servicing rights, net decreased by $253,000, or 8.4%, to $2.77 million at December 31, 2022 from $3.02 million at September 30, 2022, primarily due to the amortization of servicing rights.The principal amount of loans serviced for Freddie Mac and the SBA decreased by $12.46 million to $422.75 million at December 31, 2022 from $410.29 million at September 30, 2022.

Deposits: Deposits ~~increased~~decreased by ~~$36.08~~$31.09 million, or ~~2.3%~~1.9%, to ~~$1.61~~$1.60 billion at December 31, ~~2021~~2022 from ~~$1.57~~$1.63 billion at September 30, ~~2021.~~2022. The ~~increase~~decrease was primarily due to a $28.98 million increase in NOW checking account balances, a $12.03 million increase in money market account balances, and an $8.73 million increase in savings account balances. These increases were partially offset by an $11.69$35.69 million decrease in non-interest bearing account balances, an $18.89 million decrease in money market account balances, a $3.71 million decrease in savings account balances and a ~~$1.97~~$3.04 million decrease in NOW checking account balances. These decreases were partially offset by a $30.24 million increase in certificates of deposit account balances.

Deposits consisted of the following at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):


		December 31, 2021				September 30, 2021					December 31, 2022				September 30, 2022
		Amount		Percent		Amount		Percent			Amount		Percent		Amount		Percent
Non-interest-bearing demand	Non-interest-bearing demand	$	523,518	32.5	%	$	535,212	34.1	%	Non-interest-bearing demand	$	494,370	30.9	%	$	530,058	32.5	%
NOW checking	NOW checking	459,079		28.5		430,097		27.4		NOW checking	434,832		27.2		447,779		27.5
NOW checking - reciprocal										NOW checking - reciprocal	9,910		0.6		—		—
Savings	Savings	269,423		16.8		260,689		16.6		Savings	279,514		17.5		283,219		17.4
Money market	Money market	211,837		13.2		199,045		12.7		Money market	224,896		14.0		243,919		14.9
Money market - reciprocal	Money market - reciprocal	10,619		0.7		11,383		0.7		Money market - reciprocal	4,747		0.3		4,617		0.3
Certificates of deposit under $250	Certificates of deposit under $250	110,168		6.9		112,348		7.1		Certificates of deposit under $250	110,897		6.9		100,754		6.1
Certificates of deposit $250 and over	Certificates of deposit $250 and over	21,987		1.4		21,781		1.4		Certificates of deposit $250 and over	41,924		2.6		21,830		1.3

Total	Total	$	1,606,631	100.0	%	$	1,570,555	100.0	%	Total	$	1,601,090	100.0	%	$	1,632,176	100.0	%

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. There were no FHLB borrowings ~~were $5.00 million~~outstanding at December 31, ~~2021~~2022 and September 30, ~~2021, and consisted of one $5.00 million borrowing, with a scheduled maturity in March 2025. Due to favorable repayment terms, the Company repaid the borrowing in January~~ 2022.

Shareholders’ Equity: Total shareholders’ equity increased by ~~$3.48~~$4.98 million, or ~~1.7%~~2.3%, to ~~$210.38~~$223.55 million at December 31, ~~2021~~2022 from ~~$206.90~~$218.57 million at September 30, ~~2021.~~2022. The increase was primarily due to net income of ~~$5.49~~$7.51 million for the three months ended December 31, ~~2021~~2022 and ~~$130,000~~$397,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of ~~$1.76~~$2.64 million, and the repurchase of ~~15,548~~10,570 shares of the Company's common stock for ~~$433,000~~$348,000 (an average price of ~~$27.86~~$32.88 per share). ~~For additional information, see Item 2 of Part II of this Form 10-Q.~~

Asset Quality: The non-performing assets to total assets ratio was ~~0.17%~~0.12% at December 31, ~~2021 compared to 0.18% at~~2022 and September 30, ~~2021.~~2022. Total non-performing assets decreased by ~~$20,000,~~$32,000, or ~~0.6%~~1.5%, to ~~$3.15~~$2.13 million at December 31, ~~2021~~2022 from ~~$3.17~~$2.17 million at September 30, ~~2021.~~2022. The decrease in non-performing assets was due to a ~~$1,000~~$24,000 decrease in non-accrual loans and a ~~$19,000~~$8,000 decrease in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at December 31, ~~2021~~2022 and September 30, ~~2021~~2022 (dollars in thousands):

December 31,
2021 September 30,
2021
Loans accounted for on a non-accrual basis:
Mortgage loans:
    One- to four-family (1) $ 582 $ 407
    Commercial 675 773
    Land 676 683
Consumer loans:
    Home equity and second mortgage 456 516
Other 5 17
Commercial business loans 459 458
       Total loans accounted for on a non-accrual basis 2,853 2,854
Accruing loans which are contractually past due 90 days or more — —
Total of non-accrual and 90 days past due loans 2,853 2,854
Non-accrual investment securities 140 159
OREO and other repossessed assets, net (2) 157 157
       Total non-performing assets (3) $ 3,150 $ 3,170
TDRs on accrual status (4) $ 2,361 $ 2,371
Non-accrual and 90 days or more past due loans as a percentage of loans receivable 0.28 % 0.29 %
Non-accrual and 90 days or more past due loans as a percentage of total assets 0.16 % 0.16 %
Non-performing assets as a percentage of total assets 0.17 % 0.18 %
Loans receivable (5) $ 1,007,475 $ 981,923
Total assets $ 1,831,275 $ 1,792,180


	December 31, 2022			September 30, 2022
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family (1)	$	383		$	388

Commercial	658			657


Land	425			450
Consumer loans:
Home equity and second mortgage	263			255
Other	2			—
Commercial business loans	304			309
Total loans accounted for on a non-accrual basis	2,035			2,059

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

Total of non-accrual and 90 days past due loans	2,035			2,059

Non-accrual investment securities	98			106


Total non-performing assets (2)	$	2,133		$	2,165

TDRs on accrual status (3)	$	2,463		$	2,472

Non-accrual and 90 days or more past due loans as a percentage of loans receivable	0.17		%	0.18		%

Non-accrual and 90 days or more past due loans as a percentage of total assets	0.11		%	0.11		%

Non-performing assets as a percentage of total assets	0.12		%	0.12		%

Loans receivable (4)	$	1,186,788		$	1,146,129

Total assets	$	1,835,544		$	1,860,508

(1) As of December 31, ~~2021,~~2022 and September 30, 2022, there ~~was one~~were no one- to four-family ~~property in the process of foreclosure. At September 30, 2021, there were two one- to-four family~~ properties in the process of foreclosure.

(2) ~~As of December 31, 2021 and September 30, 2021, the balance of OREO did not include any foreclosed residential real estate property.~~

~~(3)~~ Does not include TDRs on accrual status.

~~(4)~~(3) Does not include TDRs totaling ~~$177~~$116 and ~~$182~~$142 reported as non-accrual loans at December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, respectively.

~~(5)~~(4) Does not include loans held for sale, and loan balances are before the allowance for loan losses.

The Company received inquiries and requests from borrowers for some type of payment relief due to the COVID 19-pandemic. In response, the Company made payment deferral modifications (typically 90-day payment deferral with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. All loans modified due to COVID-19 are separately monitored, and any request for continuation of relief beyond the initial modification is reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. At December 31, 2021, there were no loans on deferral status. For additional information on these loan modifications, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in "Item 1, Financial Statements."

Comparison of Operating Results for the Three Months Ended December 31, ~~2021~~2022 and ~~2020~~2021

Net income ~~decreased~~increased by ~~$1.81~~$2.02 million, or ~~24.8%~~36.9%, to $7.51 million for the quarter ended December 31, 2022 from $5.49 million for the quarter ended December 31, ~~2021 from $7.29 million~~2021. Net income per diluted common share increased by $0.25, or 38.5%, to $0.90 for the quarter ended December 31, ~~2020. Net income per diluted common share decreased by $0.22, or 25.3%, to~~2022 from $0.65 for the quarter ended December 31, ~~2021 from $0.87 for the quarter ended December 31, 2020.~~2021. The ~~decreases~~increases in net income and net income per diluted common share for the three months ended December 31, ~~2021~~2022 were primarily due to a ~~$1.12~~$5.05 million increase in net interest income. This increase was partially offset by a $1.27 million increase in non-interest expense, a $737,000 decrease in non-interest income, ~~an $854,000~~a $525,000 increase in ~~non-interest expenses,~~the provision for loans losses and a ~~$328,000 decrease in net interest income. These decreases were partially offset by a $494,000 decrease~~$492,000 increase in the provision for income ~~taxes.~~taxes .

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

Net Interest Income: Net interest income ~~decreased~~increased by ~~$328,000,~~$5.05 million, or ~~2.5%~~39.8%, to $17.74 million for the quarter ended December 31, 2022 from $12.70 million for the quarter ended December 31, ~~2021 from $13.02 million for the quarter ended December 31, 2020.~~2021. The ~~decrease~~increase in net interest income was primarily due to ~~the decrease~~an increase in the average yield on interest-bearing deposits in banks and CDs, an increase in the average yield and balance of ~~interest-earning assets, which~~investment securities and an increase in average balance of loans, as the Company placed a portion of its excess overnight liquidity into higher-earning loans and investments during the period. This increase was partially offset by an increase in the average ~~balance of interest-earning assets and a decline in the average~~ cost of interest-bearing ~~liabilities.~~liabilities and a decrease in deferred SBA PPP loan origination fees recognized due to a decrease in the volume of forgiven SBA PPP loans between the periods.

Total interest and dividend income ~~decreased~~increased by ~~$615,000,~~$5.77 million, or ~~4.4%~~43.2%, to $19.11 million for the quarter ended December 31, 2022 from $13.34 million for the quarter ended December 31, 2021, ~~from $13.96~~primarily due to increases in the average yield and balance of investment securities, the average balance of loans receivable and the average yield on interest-bearing deposits in banks and CDs. These increase were partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs.

Average total interest-earning assets increased by $20.43 million, or 1.2%, to $1.76 billion for the quarter ended December 31, ~~2020, primarily due to an decrease in the average yield on interest-earning assets partially offset by an increase in the average balance of interest-earning assets.~~

~~Average total interest-earning assets increased by $241.07 million, or 16.1%, to~~2022 from $1.74 billion for the quarter ended December 31, ~~2021 from $1.50 billion for the quarter ended December 31, 2020.~~2021. Average investment securities increased by ~~$67.89~~$167.35 million, or ~~77.0%~~107.3%, average loans receivable increased by $167.01 million, or 16.7% and was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs ~~increased by $205.96~~of $313.90 million, or ~~55.01% and average loans receivable decreased by $32.93 million, or 3.2%~~54.1%, between the periods. During the quarter ended December 31, ~~2021,~~2022, the accretion of the purchase accounting fair value discount on ~~loans~~ acquired ~~in the October 2018 acquisition of South Sound Bank ("South Sound Acquisition")~~loans increased interest income on loans by ~~$57,000~~$28,000 compared to ~~$120,000~~$57,000 for the quarter ended December 31, ~~2020.~~2021. 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, ~~2021,~~2022, there was a total of ~~$145,000~~$120,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to ~~$196,000~~$145,000 collected for the quarter ended December 31, ~~2020. Partially offsetting the increase in the average balance of interest-earning assets was a decrease in the average yield on interest-earning assets.~~2021. The average yield on interest-earning assets ~~decreased~~increased to 4.34% for the quarter ended December 31, 2022 from 3.07% for the quarter ended December 31, ~~2021 from 3.73%~~2021. The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 339 basis points and 170 basis points to 3.59% and 2.74%, respectively, for the quarter ended December 31, ~~2020.~~

2022 compared to the quarter ended December 31, 2021, while the average yield on loans receivable decreased nine basis points to 4.97% during the same period. Also impacting the average yield on loans receivable and average interest-earning asset balances during the ~~current quarter~~quarters ended December 31, 2022 and 2021 were SBA PPP ~~loans originated.~~loans. These ~~SBA~~ PPP loans have a prescribed interest rate of 1.00% and are also subject to loan origination fees which are accreted into interest income over the life of each ~~loan. For~~loan.

Total interest expense increased by $723,000, or 111.9%, to $1.37 million for the quarter ended December 31, 2021, average SBA PPP loans were $30.24 million, and the Company recorded $71,000 in interest income and accreted $927,000 million in SBA PPP loan origination fees into income. For the quarter ended December 31, 2020, average SBA PPP loans were $118.00 million and the Company recorded $295,000 in interest income and accreted $1.14 million in SBA PPP loan origination fees into income. At December 31, 2021, SBA PPP deferred loan origination fees of $907,000 remain to be accreted into interest income during the remaining life of the loans

~~Total interest expense decreased by $287,000, or 30.8%, to~~2022 from $646,000 for the quarter ended December 31, ~~2021 from $933,000~~2021. The increase in interest expense was due to an increase in the cost of interest-bearing liabilities and to a much lesser extent an increase in the average balance. The average cost of interest-bearing liabilities increased to 0.50% for the quarter ended December 31, 2020. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities, which was partially offset by an increase in the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to2022 from 0.24% for the quarter ended December 31, ~~2021 from 0.40%~~2021. Average interest-bearing liabilities increased by $28.54 million, or 2.7%, to $1.09 billion for the quarter ended December 31, ~~2020. Average interest-bearing liabilities increased by $131.68 million, or 14.1%, to~~2022 from $1.07 billion for the quarter ended December 31, 2021, ~~from $934.25 million for the quarter ended December 31, 2020,~~ primarily due to increases in the average balances of ~~savings accounts, NOW checking accounts, and~~ money market accounts, savings accounts, and certificate of deposit accounts that was partially offset by a decline in the average balance of ~~certificates of deposit~~NOW checking accounts.

As a result of these changes, the net interest margin ("NIM") ~~decreased~~increased to 4.03% for the quarter ended December 31, 2022 from 2.92% for the quarter ended December 31, ~~2021 from 3.48% for the quarter ended December 31, 2020.~~

2021.

Average Balances, Interest and Average Yields/Cost

The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented (dollars in thousands).


		Three Months Ended December 31,													Three Months Ended December 31,
		2021						2020							2022						2021
		Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost
Interest-earning assets:	Interest-earning assets:													Interest-earning assets:
Loans receivable (1)(2)	Loans receivable (1)(2)	$	997,358	$	12,622	5.06	%	$	1,030,289	$	13,318	5.17	%	Loans receivable (1)(2)	$	1,164,369	$	14,457	4.97	%	$	997,358	$	12,622	5.06	%
Investment securities (2)	Investment securities (2)	156,023		405		1.04		88,137		301		1.37		Investment securities (2)	323,368		2,214		2.74		156,023		405		1.04
Dividends from mutual funds, FHLB stock and other investments	Dividends from mutual funds, FHLB stock and other investments	6,054		27		1.78		5,896		28		1.90		Dividends from mutual funds, FHLB stock and other investments	6,028		51		3.38		6,054		27		1.78
Interest-bearing deposits in banks and CDs	Interest-bearing deposits in banks and CDs	580,337		288		0.20		374,376		310		0.33		Interest-bearing deposits in banks and CDs	266,439		2,390		3.59		580,337		288		0.20
Total interest-earning assets	Total interest-earning assets	1,739,772		13,342		3.07		1,498,698		13,957		3.73		Total interest-earning assets	1,760,204		19,112		4.34		1,739,772		13,342		3.07
Non-interest-earning assets	Non-interest-earning assets	83,563						84,077						Non-interest-earning assets	84,806						83,563
Total assets	Total assets	$	1,823,335					$	1,582,775					Total assets	$	1,845,010					$	1,823,335

Interest-bearing liabilities:	Interest-bearing liabilities:													Interest-bearing liabilities:
Savings	Savings	$	264,651	55		0.08		$	222,866	47		0.08		Savings	$	279,832	82		0.12		$	264,651	55		0.08
Money market	Money market	222,945		163		0.29		168,503		139		0.33		Money market	239,424		321		0.53		222,945		163		0.29
NOW checking	NOW checking	440,744		139		0.13		377,760		177		0.19		NOW checking	439,750		498		0.45		440,744		139		0.13
Certificates of deposit	Certificates of deposit	132,590		274		0.82		155,125		541		1.38		Certificates of deposit	135,467		468		1.37		132,590		274		0.82

Long-term borrowings	Long-term borrowings	5,000		15		1.19		10,000		29		1.15		Long-term borrowings	—		—		—		5,000		15		1.19
Total interest-bearing liabilities	Total interest-bearing liabilities	1,065,930		646		0.24		934,254		933		0.40		Total interest-bearing liabilities	1,094,473		1,369		0.50		1,065,930		646		0.24
Non-interest-bearing deposits	Non-interest-bearing deposits	538,865						448,350						Non-interest-bearing deposits	519,307						538,865
Other liabilities	Other liabilities	10,566						10,687						Other liabilities	11,002						10,566
Total liabilities	Total liabilities	1,615,361						1,393,291						Total liabilities	1,624,782						1,615,361
Shareholders' equity	Shareholders' equity	207,974						189,484						Shareholders' equity	220,228						207,974
Total liabilities and	Total liabilities and													Total liabilities and
shareholders' equity	shareholders' equity	$	1,823,335					$	1,582,775					shareholders' equity	$	1,845,010					$	1,823,335

Net interest income	Net interest income			$	12,696					$	13,024			Net interest income			$	17,743					$	12,696

Interest rate spread	Interest rate spread					2.83	%					3.33	%	Interest rate spread					3.84	%					2.83	%
Net interest margin (3)	Net interest margin (3)					2.92	%					3.48	%	Net interest margin (3)					4.03	%					2.92	%
Ratio of average interest-earning assets to average interest- bearing liabilities	Ratio of average interest-earning assets to average interest- bearing liabilities					163.22	%					160.42	%	Ratio of average interest-earning assets to average interest- bearing liabilities					160.83	%					163.22	%

_______________

(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 acquired in the South Sound Acquisition 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

The following table sets forth the effects of changing rates and volumes on the net interest income of the Company. Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns). Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands).


		Three months ended December 31, 2021 compared to three months ended December 31, 2020 increase (decrease) due to						Three months ended December 31, 2022 compared to three months ended December 31, 2021 increase (decrease) due to
		Rate		Volume		Net Change				Rate		Volume		Net Change
Interest-earning assets:	Interest-earning assets:								Interest-earning assets:
Loans receivable and loans held for sale	Loans receivable and loans held for sale	$	(275)	$	(421)	$	(696)		Loans receivable and loans held for sale	$	(243)	$	2,078	$	1,835
Investment securities	Investment securities	(85)		189		104			Investment securities	1,093		716		1,809
Dividends from mutual funds, FHLB stock and other investments	Dividends from mutual funds, FHLB stock and other investments	(2)		1		(1)			Dividends from mutual funds, FHLB stock and other investments	24		—		24
Interest-bearing deposits in banks and CDs	Interest-bearing deposits in banks and CDs	(153)		131		(22)			Interest-bearing deposits in banks and CDs	2,340		(238)		2,102
Total net decrease in income on interest-earning assets		(515)		(100)		(615)
Total net increase in income on interest-earning assets									Total net increase in income on interest-earning assets	3,214		2,556		5,770

Interest-bearing liabilities:	Interest-bearing liabilities:								Interest-bearing liabilities:
Savings	Savings	(1)		9		8			Savings	24		3		27
Money market	Money market	(17)		41		24			Money market	145		13		158
NOW checking	NOW checking	(65)		27		(38)			NOW checking	359		—		359
Certificates of deposit	Certificates of deposit	(196)		(71)		(267)			Certificates of deposit	188		6		194
FHLB borrowings		1		(15)		(14)
Total net decrease in expense on interest-bearing liabilities		(278)		(9)		(287)
Long-term borrowings									Long-term borrowings	(7)		(8)		(15)
Total net increase in expense on interest-bearing liabilities									Total net increase in expense on interest-bearing liabilities	709		14		723

Net decrease in net interest income		$	(237)	$	(91)	$	(328)
Net increase in net interest income									Net increase in net interest income	$	2,505	$	2,542	$	5,047

Provision for Loan Losses: There was a $525,000 provision for loan losses for the quarter ended December 31, 2022, primarily due to the increase in loans receivable during the period. There was no provision for loan losses for the ~~quarters~~quarter ended December 31, ~~2021 and December 31, 2020.~~2021. For the quarter ended December 31, ~~2021,~~2022, there were net ~~charge offs~~recoveries of $1,000 compared to net ~~recoveries~~charge-offs of ~~$18,000~~$1,000 for the quarter ended December 31, ~~2020.~~2021. Non-accrual loans ~~were~~decreased by $24,000, or 1.2%, to $2.04 million at December 31, 2022 from $2.06 million at September 30, 2022 and decreased by $818,000, or 28.7%, from $2.85 million at December 31, ~~2021 and September 30, 2021 and increased by $272,000, or 10.5%, from $2.58 million at December 31, 2020.~~2021. Total delinquent loans (past due 30 days or more) and non-accrual loans increased by ~~$197,000,~~$157,000, or ~~6.5%~~7.5%, to ~~$3.24~~$2.25 million at December 31, ~~2021,~~2022, from ~~$3.04~~$2.10 million at September 30, ~~2021~~2022 and ~~increased~~decreased by ~~$414,000,~~$983,000, or ~~14.7%~~30.4%, from ~~$2.82~~$3.24 million one year ago.

The ~~$21.40 million~~$631,000 balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at December 31, ~~2021,~~2022, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

The Company has established a comprehensive methodology for determining the allowance for loan losses. On a quarterly basis, the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses. Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan. The aggregate principal impairment reserve amount determined at September 30, 2022 and December 31, ~~2021~~2022 was ~~$254,000 compared to $247,000 at September 30, 2021~~$127,000 and ~~$87,000~~was $254,000 at December 31, ~~2020.~~ 2021.

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

Credit discounts are included in the determination of fair value, and, as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. The remaining fair value discount on loans acquired in the South Sound Acquisition was ~~$392,000~~$239,000 at December 31, ~~2021.~~2022. The Company believes that this should be considered by investors when comparing the Company's allowance for loan losses to total loans in periods prior to the South Sound Acquisition.

Based on its comprehensive analysis, management believes that the allowance for loan losses of ~~$13.47~~$14.23 million at December 31, ~~2021 (1.34%~~2022 (1.20% of loans receivable and ~~472.1%~~699.2% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date. The allowance for loan losses was ~~$13.47~~$13.70 million ~~(1.37%~~(1.20% of loans receivable and ~~471.9%~~665.5% of non-performing loans) at September 30, ~~2021~~2022 and ~~$13.43 mil1ion (1.32%~~$13.47 million (1.34% of loans receivable and ~~520.4%~~472.1% of non-performing loans) at December 31, ~~2020.~~2021. While the Company believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to significantly increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate. A further decline in national and local economic conditions, as a result of the ~~COVID-19 pandemic~~effects of inflation, a potential recession or slowing economic growth, among other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations. For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Non-interest Income: Total non-interest income decreased by ~~$1.12~~$737,000, or 21.4%, to $2.71 million ~~or 24.5%, to~~for the quarter ended December 31, 2022 from $3.44 million for the quarter ended December 31, ~~2021 from $4.56 million for the quarter ended December 31, 2020.~~2021. This decrease was primarily due to a ~~$1.34 million~~$642,000 decrease in net gain on sales of loans, a ~~$142,000~~$119,000 decrease in the ~~service charges~~net valuation recovery on ~~deposits, a $93,000 decrease in other non-interest income,~~loan servicing rights and smaller decreases in several other categories. These decreases to non-interest income were partially offset by a ~~$355,000 change in the valuation recovery (allowance) of loan servicing rights, a $121,000~~$34,000 increase in ~~ATM and debit card interchange transaction fees~~service charges on deposits and smaller increases in several other categories. The decrease in net gain on sales of loans was primarily due to a decrease in the dollar amount of fixed-rate one- to four-family loans originated and sold during the current quarter ~~and a decrease in the average pricing margin~~reflecting reduced refinance activity compared to the same period last year. ~~The valuation recovery~~Gain on ~~loan servicing rights~~sale of loans was ~~primarily due~~also impacted by rising interest rates, declining homes sales and a decision to ~~an decrease~~retain a higher percentage of single family loans originated during the quarter in the projected mortgage prepayment speeds, as mortgage interest rates increased during the quarter. The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the dollar volume of debit card transactions.portfolio rather than selling them.

Non-interest Expense: Total non-interest expense increased by ~~$854,000,~~$1.27 million, or ~~10.2%~~13.7%, to $10.54 million for the quarter ended December 31, 2022 from $9.26 million for the quarter ended December 31, ~~2021 from $8.41 million for the quarter ended December 31, 2020.~~2021. This increase was primarily due to a ~~$558,000~~$729,000 increase in salaries and employee benefits, a $176,000 increase in data processing and telecommunication expense, a ~~$197,000~~$158,000 increase in ~~the other non-interest expense category~~professional fees and smaller increases in several other categories, which were partially offset by smaller decreases in several categories. The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, ~~2021)~~2022) and the hiring of additional lending personnel. The increase in ~~the other non-interest category~~professional fees was primarily ~~related~~due to ~~refunds issued~~higher legal and consulting fees. The increase in data processing and telecommunication expense was primarily due to ~~customers for deposit account fees that were determined to have been charged in error after~~ the ~~Bank's core system conversion in 2019. The Bank discovered this issue during the current quarter. Bank staff reviewed the affected accounts~~addition of several technology products and ~~refunded all fees charged that were not consistent with the Bank's deposit account disclosures (including all subsequent fees incurred as a result of the fees charged in error).~~increased processing volumes. The efficiency ratio for the current quarter ~~increased~~improved to ~~57.40%~~51.52% from ~~47.83%~~57.40% for the comparable quarter one year ago.

Provision for Income Taxes: The provision for income taxes ~~decreased~~increased by ~~$494,000,~~$492,000, or ~~26.2%~~35.4%, to $1.88 million for the quarter ended December 31, 2022 from $1.39 million for the quarter ended December 31, ~~2021 from $1.88 million for the quarter ended December 31, 2020.~~2021. The ~~decrease~~increase in the provision for income taxes was primarily due to ~~lower~~higher income before income taxes. The Company's effective income tax rate was 20.0% for the quarter ended December 31, 2022 and 20.2% for the quarter ended December 31, ~~2021 and 20.5% for the quarter ended December 31, 2020.~~2021.

Liquidity

The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and FHLB borrowings (if needed). While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank must maintain an adequate level of liquidity to help ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At

December 31, ~~2021,~~2022, 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 ~~42.69%~~26.22%. At December 31, ~~2021,~~2022, 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 ~~$5.00 million was~~no amounts were outstanding. The Bank had ~~$401.04~~$513.48 million available for ~~additional~~ borrowings with the FHLB at December 31, ~~2021.~~2022. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral. At December 31, ~~2021,~~2022, the Bank had no outstanding balance on this borrowing line, under which ~~$75.36~~$84.89 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, ~~2021,~~2022, 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.

Liquidity management is both a short and long-term responsibility of the Bank's management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest-bearing deposits. Excess liquidity is invested generally in interest-bearing overnight deposits, CDs held for investment and short-term government and agency obligations. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, the FRB and PCBB.

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, ~~2021~~2022 and ~~2020,~~2021, the Bank originated ~~$176.60~~$101.67 million and ~~$156.58~~$176.60 million of loans, respectively. At December 31, ~~2021,~~2022, the Bank had loan commitments totaling ~~$143.51~~$148.06 million and undisbursed construction loans in process totaling ~~$106.01~~$112.10 million. Investment securities purchased during the three months ended December 31, 2022 and 2021 ~~and 2020~~ totaled ~~$48.49~~$31.31 million and ~~$10.27~~$48.49 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, ~~2021~~2022 and ~~2020,~~2021, the Bank sold ~~$22.56~~$1.16 million and ~~$43.84~~$22.56 million, respectively, in loans and loan participation interests. During the three months ended December 31, 2022 and 2021, the Bank received $50.71 million and $113.41 million in principal ~~repayments.~~repayments, respectively.

~~The Bank’s liquidity has been positively impacted by increases in deposit levels. During the three months ended December 31, 2021, deposits increased by $36.08 million from September 30, 2021.~~ The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities decreased to ~~$582.98~~$583.55 million at December 31, ~~2021~~2022 from ~~$608.68~~$648.51 million at September 30, ~~2021.~~2022. CDs that are scheduled to mature in less than one year from December 31, ~~2021~~2022 totaled ~~$80.69~~$108.05 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

Capital expenditures are incurred on an ongoing basis to expand and improve the Bank's product offerings, enhance and modernize technology infrastructure, and to introduce new technology-based products to compete effectively in the various markets. Capital expenditure projects are evaluated based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.

Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the remaining nine months ending September 30, ~~2022~~2023 that would materially impact liquidity. 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 ~~$0.22~~$0.23 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders. Assuming continued payment during fiscal year ~~2022~~2023 at the rate of ~~$0.22~~$0.23 per share, the average total dividend paid each quarter would be approximately ~~$1.84~~$1.90 million based on the number of current outstanding shares (which assumes no increases or decreases in the number of shares).

For the remaining nine months ending September 30, ~~2022,~~2023, the Bank projects that fixed commitments will include ~~$255,000~~$233,000 of operating lease payments. There are no scheduled payments and maturities of FHLB borrowings during the fiscal year ~~2022, but due to favorable borrowing terms, the Company decided in January 2022 that it was advantageous to payoff $5.00 million in FHLB borrowings.~~2023. In addition, at December 31, ~~2021,~~2022, there were other future obligations and accrued expenses of ~~$6.98~~$8.90 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.

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities. At December 31, ~~2021,~~2022, Timberland Bancorp (on an unconsolidated basis) had liquid assets of ~~$2.54~~$2.56 million.

Capital Resources

The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. 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, ~~2021,~~2022, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at December 31, ~~2021,~~2022, 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, ~~2021~~2022 to its minimum regulatory capital requirements at that date (dollars in thousands):


		Actual			Regulatory Minimum To Be “Adequately Capitalized”			To Be “Well Capitalized” Under Prompt Corrective Action Provisions				Actual			Regulatory Minimum To Be “Adequately Capitalized”			To Be “Well Capitalized” Under Prompt Corrective Action Provisions
		Amount	Ratio		Amount	Ratio		Amount	Ratio			Amount	Ratio		Amount	Ratio		Amount	Ratio
Leverage Capital Ratio:	Leverage Capital Ratio:										Leverage Capital Ratio:
Tier 1 capital	Tier 1 capital	$192,340	10.64	%	$72,336	4.00	%	$90,420	5.00	%	Tier 1 capital	$206,651	11.32	%	$73,054	4.00	%	$91,317	5.00	%
Risk-based Capital Ratios:	Risk-based Capital Ratios:										Risk-based Capital Ratios:
Common equity tier 1 capital		192,340	19.93		43,425	4.50		62,725	6.50
Common equity Tier 1 capital											Common equity Tier 1 capital	206,651	17.81		52,208	4.50		75,412	6.50
Tier 1 capital	Tier 1 capital	192,340	19.93		57,900	6.00		77,200	8.00		Tier 1 capital	206,651	17.81		69,612	6.00		92,815	8.00
Total capital	Total capital	204,424	21.18		77,200	8.00		96,500	10.00		Total capital	221,154	19.06		92,815	8.00		116,019	10.00

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, ~~2021,~~2022, the Bank's CET1 capital exceeded the required capital conservation buffer.

Timberland Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets (as of June 30th of the preceding year), the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp, Inc. were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, ~~2021,~~2022, 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, ~~2021~~2022 (dollars in thousands):


		Actual				Actual
		Amount	Ratio			Amount	Ratio
Leverage Capital Ratio:	Leverage Capital Ratio:				Leverage Capital Ratio:
Tier 1 capital	Tier 1 capital	$195,468	10.81	%	Tier 1 capital	$209,776	11.46	%
Risk-based Capital Ratios:	Risk-based Capital Ratios:				Risk-based Capital Ratios:
Common equity tier 1 capital		195,468	20.24
Common equity Tier 1 capital					Common equity Tier 1 capital	209,776	18.07
Tier 1 capital	Tier 1 capital	195,468	20.24		Tier 1 capital	209,776	18.07
Total capital	Total capital	207,564	21.49		Total capital	224,285	19.32

Key Financial Ratios and Data


		Three Months Ended December 31,				Three Months Ended December 31,
		2021		2020				2022		2021
PERFORMANCE RATIOS:	PERFORMANCE RATIOS:						PERFORMANCE RATIOS:
Return on average assets	Return on average assets	1.20	%	1.84	%		Return on average assets	1.63	%	1.20	%
Return on average equity	Return on average equity	10.55	%	15.39	%		Return on average equity	13.63	%	10.55	%
Net interest margin	Net interest margin	2.92	%	3.48	%		Net interest margin	4.03	%	2.92	%
Efficiency ratio	Efficiency ratio	57.40	%	47.83	%		Efficiency ratio	51.52	%	57.40	%

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in information concerning market risk from the information provided in the Company’s 2022 Form ~~10-K for the fiscal year ended September 30, 2021.~~10-K.

Item 4. Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of December 31, ~~2021,~~2022, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b)Changes in Internal Controls: There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended December 31, ~~2021,~~2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company continued, however, to implement suggestions from its internal auditor and independent auditors to strengthen existing controls. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; as over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor the Bank is a party to any material legal proceedings at this time. From time to time,

the Bank is involved in various claims and legal actions arising in the ordinary course of business.

Item 1A. Risk Factors

There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's 2022 Form ~~10-K for the fiscal year ended September 30, 2021.~~10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

The following table sets forth the shares repurchased by the Company during the quarter ended December 31, ~~2021:~~2022:

Period Total No. of Shares Repurchased Average Price Paid Per Share Total No. of Shares Purchased as Part of Publicly Announced Plan Maximum No. of Shares that May Yet Be Purchased Under the Plan (1)
10/1/2021 - 10/31/2021 — $ — — 399,282
11/1/2021 - 11/30/2021 6,652 28.267 6,652 392,630
12/1/2021 - 12/31/2021 8,896 27.561 8,896 383,734
Total 15,548 $ 27.863 15,548 383,734



Period	Total No. of Shares Repurchased	Average Price Paid Per Share		Total No. of Shares Purchased as Part of Publicly Announced Plan	Maximum No. of Shares that May Yet Be Purchased Under the Plan (1)
10/1/2022 - 10/31/2022	—	$	—	—	229,045
11/1/2022 - 11/30/2022	—	—		—	229,045
12/1/2022- 12/31/2022	10,570	32.88		10,570	218,475
Total	10,570	$	32.88	10,570	218,475

(1) On February 24, 2021, the Company announced a plan to repurchase 415,970 shares of the Company's common stock. AsThe repurchase program does not have a set expiration date and will expire upon repurchase of ~~December 31, 2021, 32,236 shares had been repurchased, and there were 383,734 shares still~~the full amount of authorized ~~to be repurchased under the plan.~~shares.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None to be reported.

Item 6. Exhibits

(a) Exhibits


			3.1			Articles of Incorporation of the Registrant (1 )
			3.2			Amended and Restated Bylaws of the Registrant (2 )
			4.1			Form of Certificate of Timberland Bancorp, Inc. Common Stock (1)
			10.1			Employee Severance Compensation Plan, as revised (3 )
			10.2			Employee Stock Ownership Plan (4 )
			~~10.4~~10.3			Form of Incentive Stock Option Agreement (5 )
			~~10.5~~10.4			Form of Non-qualified Stock Option Agreement (5 )
			~~10.7~~10.5			Employment Agreement with Michael R. Sand (6 )
			~~10.8~~10.6			Employment Agreement with Dean J. Brydon (67 )
			~~10.9~~10.7			Timberland Bancorp, Inc. 2014 Equity Incentive Plan (78 )
			~~10.10~~10.8			Timberland Bancorp, Inc. 2019 Equity Incentive Plan ~~(8)~~(9)
			31.1			Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes OxleyAct
			31.2			Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act
			32			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act
			101			The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended December 31, ~~2021,~~2022 formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Unaudited Consolidated Financial Statements
			104			Cover Page Interactive Data File, formatted in Inline XBRL and included in Exhibit 101

_________________

(1)Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (333-35817).

(2)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 10, 2022.

(3)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 16, 2007.

(4)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.

(5)Incorporated by reference to the Exhibit 99.2 included in the Registrant's Registration Statement on Form S-8 (333-1161163).

(6)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 29, 2013.

(7)Incorporated by reference to Registrant's Current Report on Form 8-K filed on May 27, 2022

(8)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.

~~(8)~~(9)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 18, 2019.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			Timberland Bancorp, Inc.


Date: February 8, ~~2022~~2023			By: /s/ ~~Michael R. Sand~~Dean J. Brydon
			~~Michael R. Sand~~ Dean J. Brydon
			Chief Executive Officer
			(Principal Executive Officer)

Date: February 8, ~~2022~~2023			By: /s/ ~~Dean J. Brydon~~Marci A. Basich
			~~Dean J. Brydon~~ Marci A. Basich
			~~President and~~ Chief Financial Officer
			(Principal Financial Officer)



	Three Months Ended December 31, 2021		Three Months Ended December 31, 2020
	Held To Maturity		Held To Maturity
Total recoveries	$	8	$	5

Net recoveries recognized in earnings (1)	$	8	$	5


COVID-19 Loan Modifications	September 30, 2021
Mortgage loans	Number	Balance		Percent
One- to four-family	1	$	323	100.0	%












Total COVID-19 Modifications	1	$	323	100.0	%