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 June 30,December 31, 2023

OR

 ☐           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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, $.01 par valueTSBKThe 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 AugustFebruary 1, 2023,2024, there were 8,095,1748,122,908 shares of the registrant's common stock, $.01 par value per share outstanding.



INDEX

 
Page
   
  Item 1.    
 
   
 
   
 
   
 
   
 
   
 
   
 
   
  Item 2.     
   
  Item 3.    
   
  Item 4.     
   
 
   
  Item 1.     
    
  Item 1A.     
   
  Item 2.     
   
  Item 3.     
   
  Item 4.
   
  Item 5.     
54 
   
  Item 6.     
   
 
Certifications  
 Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32 
Exhibit 101
Exhibit 104

2


PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements (unaudited)

TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30,December 31, 2023 and September 30, 20222023
(Dollars in thousands, except per share amounts)
June 30,
2023
September 30,
2022
(Unaudited)*
December 31,
2023
December 31,
2023
September 30,
2023
(Unaudited)(Unaudited)*
AssetsAssets  Assets  
Cash and cash equivalents:Cash and cash equivalents:  Cash and cash equivalents:  
Cash and due from financial institutionsCash and due from financial institutions$28,308 $24,808 
Interest-bearing deposits in banksInterest-bearing deposits in banks101,645 291,947 
Total cash and cash equivalentsTotal cash and cash equivalents129,953 316,755 
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)
16,931 22,894 
Investment securities held to maturity, at amortized cost (estimated fair value of $260,471 and $249,783)275,053 266,608 
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)
Investment securities held to maturity, at amortized cost (net of allowance for credit losses of $82 at December 31, 2023), (estimated fair value of $254,361 and $253,766)
Investment securities available for sale, at fair valueInvestment securities available for sale, at fair value43,842 41,415 
Investments in equity securities, at fair valueInvestments in equity securities, at fair value837 835 
Federal Home Loan Bank of Des Moines (“FHLB”) stock, at costFederal Home Loan Bank of Des Moines (“FHLB”) stock, at cost2,802 2,194 
Other investments, at costOther investments, at cost3,000 3,000 
Loans held for saleLoans held for sale— 748 
Loans receivable, net of allowance for loan losses of $15,307 and $13,7031,260,647 1,132,426 
Loans receivable, net of allowance for credit losses of $16,655 and $15,817
Loans receivable, net of allowance for credit losses of $16,655 and $15,817
Loans receivable, net of allowance for credit losses of $16,655 and $15,817
Premises and equipment, netPremises and equipment, net21,574 21,898 
Premises and equipment, net
Premises and equipment, net
Accrued interest receivable
Accrued interest receivable
Accrued interest receivableAccrued interest receivable5,451 4,483 
Bank owned life insurance (“BOLI”)Bank owned life insurance (“BOLI”)23,276 22,806 
GoodwillGoodwill15,131 15,131 
Core deposit intangible (“CDI”), netCore deposit intangible (“CDI”), net745 948 
Loan servicing rights, netLoan servicing rights, net2,321 3,023 
Operating lease right-of-use ("ROU") assetsOperating lease right-of-use ("ROU") assets1,845 1,980 
Operating lease right-of-use ("ROU") assets
Operating lease right-of-use ("ROU") assets
Other assetsOther assets4,305 3,364 
Total assetsTotal assets$1,807,713 $1,860,508 
Liabilities and shareholders’ equityLiabilities and shareholders’ equity  
Liabilities and shareholders’ equity
Liabilities and shareholders’ equity  
LiabilitiesLiabilities  Liabilities  
Deposits:Deposits:
Non-interest-bearing demand
Non-interest-bearing demand
Non-interest-bearing demand Non-interest-bearing demand$452,729 $530,058 
Interest-bearing Interest-bearing1,100,001 1,102,118 
Total depositsTotal deposits1,552,730 1,632,176 
FHLB borrowingsFHLB borrowings15,000 — 
FHLB borrowings
FHLB borrowings
Operating lease liabilitiesOperating lease liabilities1,939 2,066 
Other liabilities and accrued expensesOther liabilities and accrued expenses8,781 7,697 
Total liabilitiesTotal liabilities$1,578,450 $1,641,939 
* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements
3


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (continued)
June 30,December 31, 2023 and September 30, 20222023
(Dollars in thousands, except per share amounts)
 
June 30,
2023
September 30,
2022
(Unaudited)*
December 31,
2023
December 31,
2023
September 30,
2023
(Unaudited)(Unaudited)*
Commitments and contingent liabilities (see Note 12)Commitments and contingent liabilities (see Note 12)
Shareholders’ equityShareholders’ equity
Shareholders’ equity
Shareholders’ equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issuedPreferred stock, $0.01 par value; 1,000,000 shares authorized; none issued$— $— 
Common stock, $0.01 par value; 50,000,000 shares authorized;
8,094,174 shares issued and outstanding - June 30, 2023 8,221,952 shares issued and outstanding - September 30, 2022
35,401 38,751 
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;
8,120,708 shares issued and outstanding - December 31, 2023 8,105,338 shares issued and outstanding - September 30, 2023
Retained earnings
Retained earnings
Retained earningsRetained earnings194,606 180,535 
Accumulated other comprehensive lossAccumulated other comprehensive loss(744)(717)
Total shareholders’ equityTotal shareholders’ equity229,263 218,569 
Total liabilities and shareholders’ equityTotal liabilities and shareholders’ equity$1,807,713 $1,860,508 
* Derived from audited consolidated financial statements.


See notes to unaudited consolidated financial statements

4


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended June 30,December 31, 2023 and 2022
(Dollars in thousands, except per share amounts)
(Unaudited)

Three Months Ended June 30,Nine Months Ended
June 30,
2023202220232022
Interest and dividend incomeInterest 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
Loans receivable and loans held for saleLoans receivable and loans held for sale$16,215 $12,628 $45,622 $37,870 
Investment securitiesInvestment securities2,384 1,016 7,058 2,012 
Investment securities
Investment securities
Dividends from mutual funds, FHLB stock and other investments
Dividends from mutual funds, FHLB stock and other investments
Dividends from mutual funds, FHLB stock and other investmentsDividends from mutual funds, FHLB stock and other investments70 25 185 80 
Interest-bearing deposits in banks and CDsInterest-bearing deposits in banks and CDs1,220 958 5,524 1,528 
Interest-bearing deposits in banks and CDs
Interest-bearing deposits in banks and CDs
Total interest and dividend income
Total interest and dividend income
Total interest and dividend incomeTotal interest and dividend income19,889 14,627 58,389 41,490 
Interest expenseInterest expense  
Interest expense
Interest expense
Deposits
Deposits
DepositsDeposits3,123 645 6,729 1,902 
FHLB borrowingsFHLB borrowings132 — 132 17 
FHLB borrowings
FHLB borrowings
Total interest expense
Total interest expense
Total interest expenseTotal interest expense3,255 645 6,861 1,919 
Net interest incomeNet interest income16,634 13,982 51,528 39,571 
Provision for loan losses610  1,610  
Net interest income
Net interest income after provision for loan losses16,024 13,982 49,918 39,571 
Net interest income
Provision for (recapture of) credit losses
Provision for (recapture of) credit losses
Provision for (recapture of) credit losses
Provision for credit losses - loans
Provision for credit losses - loans
Provision for credit losses - loans
Recapture of credit losses - investment securities
Recapture of credit losses - investment securities
Recapture of credit losses - investment securities
Recapture of credit losses - unfunded commitments
Recapture of credit losses - unfunded commitments
Recapture of credit losses - unfunded commitments
Total provision for credit loss - net
Total provision for credit loss - net
Total provision for credit loss - net
Net interest income after provision for (recapture of) credit losses
Net interest income after provision for (recapture of) credit losses
Net interest income after provision for (recapture of) credit losses
Non-interest income
Non-interest income
Non-interest incomeNon-interest income  
Net recoveries on investment securitiesNet recoveries on investment securities16 
Gain on sale of investment securities available for sale, net95 — 95 — 
Net recoveries on investment securities
Net recoveries on investment securities
Service charges on deposits
Service charges on deposits
Service charges on depositsService charges on deposits970 1,052 2,810 2,979 
ATM and debit card interchange transaction feesATM and debit card interchange transaction fees1,335 1,345 3,861 3,868 
ATM and debit card interchange transaction fees
ATM and debit card interchange transaction fees
BOLI net earnings
BOLI net earnings
BOLI net earningsBOLI net earnings157 151 470 457 
Gain on sales of loans, netGain on sales of loans, net80 258 147 1,337 
Gain on sales of loans, net
Gain on sales of loans, net
Escrow feesEscrow fees27 41 85 164 
Valuation recovery on MSRs— — — 119 
Escrow fees
Escrow fees
Other, net
Other, net
Other, netOther, net209 250 741 687 
Total non-interest income, netTotal non-interest income, net2,875 3,102 8,216 9,627 
Total non-interest income, net
Total non-interest income, net


 See notes to unaudited consolidated financial statements
5


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (continued)
For the three and nine months ended June 30,December 31, 2023 and 2022
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30,Nine Months Ended
June 30,
2023202220232022
Non-interest expenseNon-interest expense  
Non-interest expense
Non-interest expense
Salaries and employee benefits
Salaries and employee benefits
Salaries and employee benefitsSalaries and employee benefits$5,860 $5,243 $17,806 $15,606 
Premises and equipmentPremises and equipment1,010 904 2,935 2,814 
Gain on sales/dispositions of premises and equipment, net(32)(6)(32)— 
Premises and equipment
Premises and equipment
AdvertisingAdvertising179 187 551 513 
OREO and other repossessed assets, net— (2)(18)
Advertising
Advertising
ATM and debit card interchange transaction fees
ATM and debit card interchange transaction fees
ATM and debit card interchange transaction feesATM and debit card interchange transaction fees491 515 1,463 1,429 
Postage and courierPostage and courier128 140 397 440 
Postage and courier
Postage and courier
State and local taxes
State and local taxes
State and local taxesState and local taxes297 265 894 754 
Professional feesProfessional fees577 580 1,479 1,173 
Professional fees
Professional fees
Federal Deposit Insurance Corporation ("FDIC") insurance
Federal Deposit Insurance Corporation ("FDIC") insurance
Federal Deposit Insurance Corporation ("FDIC") insuranceFederal Deposit Insurance Corporation ("FDIC") insurance191 123 517 377 
Loan administration and foreclosureLoan administration and foreclosure126 180 385 380 
Data processing and telecommunications944 698 2,612 1,980 
Loan administration and foreclosure
Loan administration and foreclosure
Technology and telecommunication expenses
Technology and telecommunication expenses
Technology and telecommunication expenses
Deposit operations
Deposit operations
Deposit operationsDeposit operations430 316 1,022 878 
Amortization of CDIAmortization of CDI68 79 203 237 
Amortization of CDI
Amortization of CDI
Other
Other
OtherOther658 652 2,173 1,909 
Total non-interest expense, netTotal non-interest expense, net10,927 9,874 32,406 28,472 
Total non-interest expense, net
Total non-interest expense, net
Income before income taxes
Income before income taxes
Income before income taxesIncome before income taxes7,972 7,210 25,728 20,726 
Provision for income taxesProvision for income taxes1,666 1,472 5,252 4,176 
Provision for income taxes
Provision for income taxes
Net income
Net income
Net income
Net income
$6,306 $5,738 $20,476 $16,550 
Net income per common shareNet income per common share  
Net income per common share
Net income per common share
BasicBasic$0.77 $0.69 $2.50 $1.99 
Basic
Basic
Diluted
Diluted
DilutedDiluted$0.77 $0.69 $2.47 $1.97 
Weighted average common shares outstandingWeighted average common shares outstanding  
Weighted average common shares outstanding
Weighted average common shares outstanding
BasicBasic8,156,831 8,279,436 8,203,255 8,324,371 
Basic
Basic
Diluted
Diluted
DilutedDiluted8,213,975 8,349,859 8,279,079 8,406,977 
Dividends paid per common shareDividends paid per common share$0.23 $0.22 $0.78 $0.65 
Dividends paid per common share
Dividends paid per common share

See notes to unaudited consolidated financial statements
6


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended June 30,December 31, 2023 and 2022
(Dollars in thousands)
(Unaudited) 
Three Months Ended 
June 30,
Nine Months Ended 
June 30,
2023202220232022
Comprehensive incomeComprehensive income
Comprehensive income
Comprehensive income
Net incomeNet income$6,306 $5,738 $20,476 $16,550 
Other comprehensive loss
Unrealized holding loss on investment securities available for sale, net of income taxes of $(66), $(122), $(8) and $(167), respectively
(249)(459)(29)(629)
Net income
Net income
Other comprehensive income (loss)
Other comprehensive income (loss)
Other comprehensive income (loss)
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $66 and $(5), respectively
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $66 and $(5), respectively
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $66 and $(5), respectively
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: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, $0, $1 and $1, respectively
— 
Total other comprehensive loss, net of income taxes(249)(458)(27)(624)
Accretion of OTTI on investment securities held to maturity, net of income taxes of $1, and $0, respectively
Accretion of OTTI on investment securities held to maturity, net of income taxes of $1, and $0, respectively
Accretion of OTTI on investment securities held to maturity, net of income taxes of $1, and $0, respectively
Total other comprehensive income (loss), net of income taxes
Total other comprehensive income (loss), net of income taxes
Total other comprehensive income (loss), net of income taxes
Total comprehensive incomeTotal comprehensive income$6,057 $5,280 $20,449 $15,926 
Total comprehensive income
Total comprehensive income



See notes to unaudited consolidated financial statements
7


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three and nine months ended June 30,December 31, 2023 and 2022
(Dollars in thousands, except per share amounts)
(Unaudited)
 Number of SharesAmount Accumulated
Other
Compre-hensive
Income (Loss)
 
 Common
Stock
Common
Stock
Retained
Earnings
Total
Balance, March 31, 20228,305,826$40,988$171,388$(107)212,269 
Net income5,7385,738
Other comprehensive loss(458)(458)
Repurchase of common stock(58,678)(1,502)(1,502)
Exercise of stock options2,3002727
Common stock dividends ($0.22 per common share)(1,827)(1,827)
Stock option compensation expense7272
Balance, June 30, 20228,249,448$39,585$175,299$(565)$214,319
Balance, March 31, 20238,203,174$37,979$190,177$(495)$227,661
Net income6,3066,306
Other comprehensive loss(249)(249)
Repurchase of common stock(110,000)(2,674)(2,674)
Exercise of stock options1,0001717
Common stock dividends ($0.23 per common share)(1,877)(1,877)
Stock option compensation expense7979
Balance, June 30, 20238,094,174$35,401$194,606$(744)$229,263
Common Stock Accumulated
Other
Compre-hensive
Income (Loss)
 
Number of SharesAmountRetained
Earnings
Total
Balance, September 30, 20218,355,469 $42,673 $164,167 $59 $206,899 
Common Stock Accumulated
Other
Compre-hensive
Income (Loss)
 
Number of SharesAmountRetained
Earnings
Total
Balance, September 30, 2022
Net incomeNet income— — 16,550 — 16,550 
Other comprehensive lossOther comprehensive loss— — — (624)(624)
Repurchase of common stockRepurchase of common stock(135,791)(3,651)— — (3,651)
Exercise of stock optionsExercise of stock options29,770 359 — — 359 
Common stock dividends ($0.65 per common share)— — (5,418)— (5,418)
Stock option compensation expense— 204 — — 204 
Balance, June 30, 20228,249,448 $39,585 $175,299 $(565)$214,319 
Balance, September 30, 20228,221,952 $38,751 $180,535 $(717)$218,569 
Net income— — 20,476 — 20,476 
Other comprehensive loss— — — (27)(27)
Repurchase of common stock(154,833)(4,119)— — (4,119)
Exercise of stock options
Exercise of stock optionsExercise of stock options27,055 534 — — 534 
Common stock dividends ($0.78 per common share)— — (6,405)— (6,405)
Common stock dividends ($0.32 per common share)
Common stock dividends ($0.32 per common share)
Common stock dividends ($0.32 per common share)
Stock option compensation expense— 235 — — 235 
Stock-based compensation expense
Balance, June 30, 20238,094,174 $35,401 $194,606 $(744)$229,263 
Stock-based compensation expense
Stock-based compensation expense
Balance, December 31, 2022
Balance, December 31, 2022
Balance, December 31, 2022
Balance, September 30, 2023
Balance, September 30, 2023
Balance, September 30, 2023
Net income
Net income
Net income
Other comprehensive income
Repurchase of common stock
Exercise of stock options
Exercise of stock options
Exercise of stock options
Common stock dividends ($0.23 per common share)
Common stock dividends ($0.23 per common share)
Common stock dividends ($0.23 per common share)
Stock-based compensation expense
Stock-based compensation expense
Stock-based compensation expense
Adoption of ASU 2016-13, net of tax
Balance, December 31, 2023

See notes to unaudited consolidated financial statements
8


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ninethree months ended June 30,December 31, 2023 and 2022
(Dollars in thousands)
(Unaudited)
Nine Months Ended June 30, Three Months Ended December 31,
20232022 20232022
Cash flows from operating activitiesCash flows from operating activities  Cash flows from operating activities  
Net incomeNet income$20,476 $16,550 
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 losses1,610 — 
Provision for credit losses
DepreciationDepreciation1,022 1,035 
Deferred income taxes/(benefits)(77)223 
Accretion of discount on purchased loans
Accretion of discount on purchased loans
Accretion of discount on purchased loansAccretion of discount on purchased loans(64)(154)
Amortization of CDIAmortization of CDI203 237 
Stock-based compensation expense
Stock-based compensation expense
Stock-based compensation expense
Stock option compensation expense235 204 
Gain on sale of investment securities available for sale, net(95)— 
Net recoveries on investment securities
Net recoveries on investment securities
Net recoveries on investment securitiesNet recoveries on investment securities(7)(16)
Change in fair value of investments in equity securitiesChange in fair value of investments in equity securities(2)83 
Amortization (accretion) of discounts and premiums on securities(922)123 
Gain on sales of OREO and other repossessed assets, net— (1)
Accretion of discounts and premiums on securities
Accretion of discounts and premiums on securities
Accretion of discounts and premiums on securities
Gain on sales of loans, netGain on sales of loans, net(147)(1,337)
Gain on sales/disposition of premises and equipment, net(32)— 
Gain on sales of loans, net
Gain on sales of loans, net
Loans originated for sale
Loans originated for sale
Loans originated for saleLoans originated for sale(6,062)(47,199)
Proceeds from sales of loansProceeds from sales of loans6,957 51,053 
Amortization of loan servicing rightsAmortization of loan servicing rights769 879 
Valuation recovery on loan servicing rights, net— (119)
BOLI net earnings
BOLI net earnings
BOLI net earningsBOLI net earnings(470)(457)
Increase (decrease) in deferred loan origination fees636 (1,192)
Increase in deferred loan origination fees
Increase in deferred loan origination fees
Increase in deferred loan origination fees
Net change in accrued interest receivable and other assets, and other liabilities and accrued expensesNet change in accrued interest receivable and other assets, and other liabilities and accrued expenses(800)(1,521)
Net cash provided by operating activitiesNet cash provided by operating activities23,230 18,391 
Cash flows from investing activitiesCash flows from investing activities  
Net decrease in CDs held for investment5,963 4,594 
Proceeds from sale of investment securities available for sale8,929 — 
Cash flows from investing activities
Cash flows from investing activities  
Net decrease (increase) in CDs held for investment
Purchase of investment securities held to maturity
Purchase of investment securities held to maturity
Purchase of investment securities held to maturityPurchase of investment securities held to maturity(15,601)(167,671)
Purchase of investment securities available for salePurchase of investment securities available for sale(16,994)— 
Proceeds from maturities and prepayments of investment securities held to maturityProceeds from maturities and prepayments of investment securities held to maturity8,000 8,737 
Proceeds from maturities and prepayments of investment securities available for saleProceeds from maturities and prepayments of investment securities available for sale5,784 16,977 
Purchase of FHLB stock(608)(91)
Redemption of FHLB stock
Redemption of FHLB stock
Redemption of FHLB stock
Increase in loans receivable, netIncrease in loans receivable, net(130,403)(118,167)
Increase in loans receivable, net
Increase in loans receivable, net
Purchases of premises and equipmentPurchases of premises and equipment(711)(822)
Proceeds from sales of premises and equipment45 — 
Proceeds from sales of OREO and other repossessed assets— 158 
Net cash used in investing activitiesNet cash used in investing activities(135,596)(256,285)
Net cash used in investing activities
Net cash used in investing activities

See notes to unaudited consolidated financial statements
9


TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the ninethree months ended June 30,December 31, 2023 and 2022
(Dollars in thousands)
(Unaudited)
Nine Months Ended June 30, Three Months Ended December 31,
20232022 20232022
Cash flows from financing activitiesCash flows from financing activities  Cash flows from financing activities  
Net increase (decrease) in depositsNet increase (decrease) in deposits$(79,446)$93,559 
Proceeds from (repayments of) FHLB borrowings15,000 (5,000)
Repayments of FHLB borrowings
Repayments of FHLB borrowings
Repayments of FHLB borrowings
Proceeds from exercise of stock optionsProceeds from exercise of stock options534 359 
Repurchase of common stock
Repurchase of common stock
Repurchase of common stockRepurchase of common stock(4,119)(3,651)
Payment of dividendsPayment of dividends(6,405)(5,418)
Net cash provided by (used in) financing activitiesNet cash provided by (used in) financing activities(74,436)79,849 
    
Net decrease in cash and cash equivalents(186,802)(158,045)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalentsCash and cash equivalents  Cash and cash equivalents  
Beginning of periodBeginning of period316,755 580,196 
End of periodEnd of period$129,953 $422,151 
Supplemental disclosure of cash flow informationSupplemental disclosure of cash flow information  
Income taxes paid$6,268 $3,642 
Supplemental disclosure of cash flow information
Supplemental disclosure of cash flow information  
Interest paid
Interest paid
Interest paidInterest paid$6,088 $1,955 
Supplemental disclosure of non-cash investing activitiesSupplemental disclosure of non-cash investing activities  
Supplemental disclosure of non-cash investing activities
Supplemental disclosure of non-cash investing activities  
Other comprehensive loss related to investment securities$(27)$(624)
Other comprehensive income (loss) related to investment securities
Other comprehensive income (loss) related to investment securities
Other comprehensive income (loss) related to investment securities
Operating lease liabilities arising from recording of ROU assets$71 $— 
Adjustment to retained earnings, net of deferred tax; - adoption of ASU 2016-13
Adjustment to retained earnings, net of deferred tax; - adoption of ASU 2016-13
Adjustment to retained earnings, net of deferred tax; - adoption of ASU 2016-13

See notes to unaudited consolidated financial statements
10


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, 20222023 (“20222023 Form 10-K”).  The unaudited consolidated results of operations for the ninethree months ended June 30,December 31, 2023 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2023.2024.

(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 one 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 June 30,December 31, 2023 presentation with no change to previously reported net income or total shareholders’ equity.

11


(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 June 30,December 31, 2023 and September 30, 20222023 (dollars in thousands):
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
June 30, 2023    
Held to maturity    
U.S. Treasury and U.S. government agency securities$171,385 $— $(9,927)$161,458 
Mortgage-backed securities ("MBS"):
U.S. government agencies53,347 10 (2,529)50,828 
Private label residential48,025 258 (2,295)45,988 
Taxable municipal securities1,796 — (47)1,749 
Bank issued trust preferred securities500 — (52)448 
Total$275,053 $268 $(14,850)$260,471 
Available for sale    
MBS: U.S. government agencies$44,772 $— $(930)$43,842 
Total$44,772 $ $(930)$43,842 
September 30, 2022
Held to maturity    
U.S. Treasury and U.S. government agency securities$170,676 $11 $(12,109)$158,578 
MBS:
U.S. government agencies43,995 (2,486)41,513 
Private label residential49,335 245 (2,392)47,188 
Taxable municipal securities2,102 — (67)2,035 
Bank issued trust preferred securities500 — (31)469 
Total$266,608 $260 $(17,085)$249,783 
Available for sale    
MBS: U.S. government agencies$42,309 $— $(894)$41,415 
Total$42,309 $ $(894)$41,415 
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Allowance for Credit Losses ("ACL")
December 31, 2023    
Held to Maturity    
U.S. Treasury and U.S. government agency securities$169,869 $— $(7,468)$162,401 $— 
Mortgage-backed securities ("MBS"):
U.S. government agencies53,185 (2,604)50,584 — 
Private label residential40,662 356 (1,934)39,084 73 
Municipal securities1,878 — (30)1,848 — 
Bank issued trust preferred securities491 — (47)444 
Total held to maturity266,085 $359 $(12,083)$254,361 $82 
11





December 31, 2023Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Available for Sale
MBS:    
U.S. government agencies$41,492 $— $(1,046)$40,446 
Total$41,492 $ $(1,046)$40,446 
September 30, 2023
Held to Maturity
U.S. treasury and U.S. government agency securities$171,626 $— $(10,088)$161,538 
MBS:
U.S. government agencies52,294 — (3,950)48,344 
     Private label residential44,011 295 (2,611)41,695 
Municipal securities1,787 — (47)1,740 
Bank issues trust preferred securities500 — (51)449 
Total$270,218 $295 $(16,747)$253,766 
Available for Sale
MBS: U.S. government agencies$43,132 $— $(1,361)$41,771 
$43,132 $ $(1,361)$41,771 

Held to maturity and available for sale investment securities with unrealized losses were as follows as of December 31, 2023 (dollars in thousands):
 Less Than 12 Months12 Months or LongerTotal
 Estimated
 Fair
 Value
Gross
Unrealized
Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized
Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized
Losses
Held to maturity
U.S. Treasury and U.S. government agency securities$9,614 $(12)$152,786 $(7,456)25 $162,400 $(7,468)
MBS:
U.S. government agencies18,442 (136)31,972 (2,468)52 50,414 (2,604)
Private label residential— — — 35,585 (1,934)30 35,585 (1,934)
Municipal securities— — — 1,748 (30)1,748 (30)
Bank issued trust
  preferred securities
— — — 453 (47)453 (47)
     Total
$28,056 $(148)10 $222,544 $(11,935)109 $250,600 $(12,083)
Available for sale
MBS: U.S. government agencies$11,953 $(134)$28,179 $(912)26 $40,132 $(1,046)
     Total
$11,953 $(134)4 $28,179 $(912)26 $40,132 $(1,046)


12





Held to maturity and available for sale investment securities with unrealized losses were as follows as of JuneSeptember 30, 2023 (dollars in thousands):
Less Than 12 Months12 Months or LongerTotal Less Than 12 Months12 Months or LongerTotal
Estimated
 Fair
 Value
Gross
Unrealized
Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized
Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized
Losses
Estimated
 Fair
 Value
Gross
Unrealized Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized Losses
Held to maturityHeld to maturityHeld to maturity  
U.S. Treasury and U.S. government agency securitiesU.S. Treasury and U.S. government agency securities$19,045 $(207)$142,413 $(9,720)25 $161,458 $(9,927)
MBS:MBS:
U.S. government agenciesU.S. government agencies26,124 (474)18 19,498 (2,055)42 45,622 (2,529)
U.S. government agencies
U.S. government agencies
Private label residentialPrivate label residential10,461 (265)32,351 (2,030)27 42,812 (2,295)
Taxable municipal securities— — — 1,749 (47)1,749 (47)
Municipal securities
Bank issued trust
preferred securities
Bank issued trust
preferred securities
— — — 448 (52)448 (52)
Total
Total
$55,630 $(946)27 $196,459 $(13,904)96 $252,089 $(14,850)
Available for saleAvailable for sale
Available for sale
Available for sale
MBS: U.S. government agenciesMBS: U.S. government agencies$22,328 $(188)10 $21,213 $(742)21 $43,541 $(930)
MBS: U.S. government agencies
MBS: U.S. government agencies
Total
Total
$22,328 $(188)10 $21,213 $(742)21 $43,541 $(930)
Total
Total

Held
During the three months ended December 31, 2023, the Company recorded a $1,000 net realized loss on 13 held to maturity and available for sale investment securities with unrealized lossesall of which had been recognized previously as credit loss. During the three months ended December 31, 2022, the Company recorded a $7,000 net realized loss on 14 held to maturity investment securities all of which had been recognized previously as 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 $204.13 million and $201.82 million at December 31, 2023 and September 30, 2023, respectively.

The contractual maturities of debt securities at December 31, 2023 were as follows as of September 30, 2022 (dollars in thousands):.  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
 Less Than 12 Months12 Months or LongerTotal
 Estimated
 Fair
 Value
Gross
Unrealized Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized Losses
QuantityEstimated
 Fair
 Value
Gross
Unrealized Losses
Held to maturity        
U.S. Treasury and U.S. government agency securities$115,504 $(7,224)17 $33,638 $(4,885)$149,142 $(12,109)
MBS:
U.S. government agencies35,896 (1,449)54 5,306 (1,037)41,202 (2,486)
 Private label
    residential
35,447 (2,166)27 8,708 (226)44,155 (2,392)
Taxable municipal securities2,035 (67)— — — 2,035 (67)
Bank issued trust preferred securities469 (31)— — — 469 (31)
     Total
$189,351 $(10,937)100 $47,652 $(6,148)20 $237,003 $(17,085)
Available for sale
MBS: U.S. government agencies$25,170 $(292)16 $15,705 $(602)13 $40,875 $(894)
     Total
$25,170 $(292)16 $15,705 $(602)13 $40,875 $(894)

 Held to MaturityAvailable for Sale
 Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Due within one year$94,888 $93,677 $387 $385 
Due after one year to five years91,471 85,469 2,568 2,553 
Due after five years to ten years8,932 8,140 5,793 5,758 
Due after ten years70,794 67,075 32,744 31,750 
Total$266,085 $254,361 $41,492 $40,446 







13





Credit Quality Indicators and Allowance for Credit Losses

Available for Sale Investment Securities

The Company has evaluatedassesses each available for sale investment security that is in an unrealized loss position to determine whether the investment securitiesdecline in the above tables and has determined that the declines in their fair value are temporary.below the amortized cost basis results from a credit loss or other factors. The Company did not record an ACL on any available for sale debt securities at December 31, 2023 or upon adoption of ASU 2016-13 on October 1, 2023. As of both dates, the Company considered the unrealized losses are primarily dueacross the classes of major security-type to changesbe related to fluctuations in market conditions, primarily interest rates, and spreadsnot reflective of a deterioration in credit value. The Company expects 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.sooner if market yields for such securities decline. The Company does not believe that these securities are other than temporarily impaired because of their credit quality or related to any issuer or industry specific event. The Company has the ability and the intent to hold the investments until the fair value recovers.  Further, as of June 30, 2023, management does not have the intent

Held 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).Maturity Investment Securities

The Company bifurcatesmeasures expected credit losses on held to maturity investment securities, which are comprised of U.S. government agency and U.S. government mortgage-backed securities, private label mortgage-backed securities, municipal, and other bonds. The Company’s agency and mortgage-backed securities that are issued by U.S. government entities and agencies are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, no ACL has been established for these securities. The ACL on the private label mortgage-backed securities, municipal, and other bonds within the held to maturity securities portfolio is calculated using the probability of default/loss given default ("PD/LGD") method. The calculation is completed on a quarterly basis using the default studies provided by an industry leading source. At December 31, 2023, the allowance for credit losses on the held to maturity securities portfolio totaled $82,000.

The following table sets forth information for the three months ended December 31, 2023 regarding activity in the ACL by portfolio segment (dollars in thousands):

Three Months Ended December 31, 2023
Held to MaturityBeginning AllowanceImpact of Adopting CECL (ASU 2016-13)Provision for (Recapture of) Credit LossesEnding Allowance
MBS:
Private label residential$— $82 $(9)$73 
Bank issued trust preferred securities— 10 (1)
Total$ $92 $(10)$82 

The ACL on held to maturity investment securities is included within investment securities held to maturity on the consolidated balance sheets. Changes in the ACL are recorded within provision for (recapture of) credit losses on the consolidated income statement.

Accrued interest receivable on held to maturity investment securities totaled $908,000 at December 31, 2023 and is included
within accrued interest income receivable on the consolidated balance sheet. This amount is excluded from the estimate
of expected credit losses. Held to maturity debt securities are typically classified as non-accrual when the contractual
payment of principal or interest has become 90 days past due or management has serious doubts about the further
collectability of principal or interest. When held to maturity debt securities are placed on non-accrual status, unpaid interest
credited to income is reversed. The Company had $85,000 of private label mortgage-backed held to maturity investment securities in non-accrual status at December 31, 2023.

The Company monitors the credit quality of debt securities held to maturity through the use of credit ratings from Moody's, S&P and Fitch. The Company monitors the credit ratings on a quarterly basis.




14








The following table sets forth the Company's held to maturity investment securities at December 31, 2023 by credit quality indicator:
Credit Ratings
As of December 31, 2023AAA/AA/ABBB/BB/BUnratedTotal
Held to Maturity
U.S. Treasury and U.S. government agency securities$169,869 $— $— $169,869 
Mortgage-backed securities ("MBS"):
U.S. government agencies53,185 — — 53,185 
Private label residential19,324 — 21,338 40,662 
Municipal securities1,778 — 100 1,878 
Bank issued trust preferred securities— — 491 491 
Total held to maturity$244,156 $ $21,929 $266,085 

Prior to adopting ASU 2016-13, the Company bifurcated 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 iswas required in this analysis that includes,included, 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 utilizedamounts written off due to measure management’s estimates of the credit loss componentremain and continue to be recovered on OTTI securities as of June 30, 2023 and 2022:
 RangeWeighted
Minimum Maximum Average 
June 30, 2023   
Constant prepayment rate6.00 %15.00 %9.84 %
Collateral default rate— %19.47 %10.96 %
Loss severity rate— %3.70 %1.34 %
June 30, 2022   
Constant prepayment rate6.00 %15.00 %10.15 %
Collateral default rate0.55 %22.28 %9.71 %
Loss severity rate— %7.85 %3.39 %



a cash basis.
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 ninethree months ended June 30,December 31, 2023 and 2022 (dollars in thousands):
 Nine Months Ended
June 30,
 20232022
Beginning balance of credit loss$836 $853 
Additions (subtractions): 
Net realized gain (loss) previously recorded
as credit losses
(10)
Recovery of prior credit loss(7)(13)
Ending balance of credit loss$819 $842 
 Three Months Ended
December 31,
 20232022
Beginning balance of credit loss$816 $836 
Subtractions: 
Net realized loss previously recorded as credit losses(1)(7)
Recapture of prior credit loss(4)(3)
Ending balance of credit loss$811 $826 





14



During the nine months ended June 30, 2023, the Company recorded a $10,000 net realized loss on 14 held to maturity investment securities all of which had been recognized previously as credit loss. During the nine months ended June 30, 2022, the Company recorded a $2,000 net realized gain on 16 held to maturity investment securities all of which had been recognized previously as 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 $204.13 million and $133.82 million at June 30, 2023 and September 30, 2022, respectively.

The contractual maturities of debt securities at June 30, 2023 were as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
 Held to MaturityAvailable for Sale
 Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Due within one year$86,147 $84,077 $— $— 
Due after one year to five years96,893 90,103 3,049 3,024 
Due after five years to ten years19,448 17,541 7,103 7,045 
Due after ten years72,565 68,750 34,620 33,773 
Total$275,053 $260,471 $44,772 $43,842 


(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
15





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 2023 goodwill impairment test during the quarter ended June 30, 2023 with the assistance of an independent third-party firm specializing in goodwill impairment valuations for financial institutions. 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, 2023.

15


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 June 30,December 31, 2023, management believes that there have been no events or changes in the circumstances since May 31, 2023 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 were deemed 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 June 30,December 31, 2023 and September 30, 20222023 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 June 30,December 31, 2023, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.

16





(4) LOANS RECEIVABLE AND ALLOWANCE FOR LOANCREDIT LOSSES



Loans receivable by portfolio segment consisted of the following at June 30,December 31, 2023 and September 30, 20222023 (dollars in thousands):
June 30,
2023
September 30,
2022
AmountPercentAmountPercent
Mortgage loans:Mortgage loans:    
Mortgage loans:
Mortgage loans:
One- to four-family (1)
One- to four-family (1)
One- to four-family (1)One- to four-family (1)$229,274 16.5 %$176,116 14.1 %
Multi-familyMulti-family111,777 8.1 95,025 7.6 
Multi-family
Multi-family
Commercial
Commercial
CommercialCommercial557,015 40.2 536,650 42.8 
Construction - custom and owner/builderConstruction - custom and owner/builder136,595 9.8 119,240 9.5 
Construction - custom and owner/builder
Construction - custom and owner/builder
Construction - speculative one- to four-family
Construction - speculative one- to four-family
Construction - speculative one- to four-familyConstruction - speculative one- to four-family12,522 0.9 12,254 1.0 
Construction - commercialConstruction - commercial42,657 3.1 40,364 3.2 
Construction - commercial
Construction - commercial
Construction - multi-family
Construction - multi-family
Construction - multi-familyConstruction - multi-family73,859 5.3 64,480 5.1 
Construction - land developmentConstruction - land development15,968 1.2 19,280 1.5 
Construction - land development
Construction - land development
LandLand25,908 1.9 26,854 2.1 
Land
Land
Total mortgage loans
Total mortgage loans
Total mortgage loansTotal mortgage loans1,205,575 87.0 1,090,263 86.9 
Consumer loans:Consumer loans:    
Consumer loans:
Consumer loans:
Home equity and second mortgage
Home equity and second mortgage
Home equity and second mortgageHome equity and second mortgage40,008 2.9 35,187 2.8 
OtherOther2,469 0.2 2,128 0.2 
Other
Other
Total consumer loans
Total consumer loans
Total consumer loansTotal consumer loans42,477 3.1 37,315 3.0 
Commercial loans:Commercial loans:
Commercial loans:
Commercial loans:
Commercial business
Commercial business
Commercial businessCommercial business137,114 9.9 125,039 10.0 
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loansU.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans519 — 1,001 0.1 
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans
Total commercial loans
Total commercial loans
Total commercial loans Total commercial loans137,633 9.9 126,040 10.1 
Total loans receivableTotal loans receivable1,385,685 100.0 %1,253,618 100.0 %
Total loans receivable
Total loans receivable
Less:Less:    
Undisbursed portion of construction loans in process104,774  103,168  
Less:
Less:
Undisbursed portion of construction loans in process (LIP")
Undisbursed portion of construction loans in process (LIP")
Undisbursed portion of construction loans in process (LIP")
Deferred loan origination fees, netDeferred loan origination fees, net4,957  4,321  
Allowance for loan losses15,307  13,703  
Deferred loan origination fees, net
Deferred loan origination fees, net
ACL
ACL
ACL
Subtotal
Subtotal
SubtotalSubtotal125,038 121,192 
Loans receivable, netLoans receivable, net$1,260,647  $1,132,426  
Loans receivable, net
Loans receivable, net
__________________________________________________________
(1) Does not include one- to four-family loans held for sale totaling $0 and $748 at June 30, 2023 and September 30, 2022, respectively.
_____________________________
_____________________________
(1) Does not include one- to four-family loans held for sale totaling $1,425 and $400 at December 31, 2023 and September 30, 2023, respectively.
(1) Does not include one- to four-family loans held for sale totaling $1,425 and $400 at December 31, 2023 and September 30, 2023, respectively.
(1) Does not include one- to four-family loans held for sale totaling $1,425 and $400 at December 31, 2023 and September 30, 2023, respectively.

Loans receivable at June 30,December 31, 2023 and September 30, 20222023 are reported net of unamortized discounts totaling $203,000$182,000 and $267,000,$192,000, respectively.
17








17




Allowance for Loan Losses

The following tables set forth information for the three and nine months ended June 30, 2023 and 2022 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

 Three Months Ended June 30, 2023
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
One- to four-family$2,052 $126 $— $— $2,178 
Multi-family938 74 — — 1,012 
Commercial6,904 125 — — 7,029 
Construction – custom and owner/builder726 73 — — 799 
Construction – speculative one- to four-family121 (11)— — 110 
Construction – commercial267 24 — — 291 
Construction – multi-family662 30 — — 692 
Construction – land development245 (12)— — 233 
Land363 26 — — 389 
Consumer loans:    
Home equity and second mortgage507 35 — — 542 
Other47 (1)— 51 
Commercial business loans1,866 115 — — 1,981 
Total$14,698 $610 $(1)$ $15,307 



 Nine Months Ended June 30, 2023
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
One-to four-family$1,658 $520 $— $— $2,178 
Multi-family855 157 — — 1,012 
Commercial6,682 347 — — 7,029 
Construction – custom and owner/builder675 124 — — 799 
Construction – speculative one- to four-family130 (20)— — 110 
Construction – commercial343 (52)— — 291 
Construction – multi-family447 245 — — 692 
Construction – land development233 — — — 233 
Land397 (8)— — 389 
Consumer loans:     
Home equity and second mortgage440 102 — — 542 
Other42 11 (2)— 51 
Commercial business loans1,801 184 (5)1,981 
Total$13,703 $1,610 $(7)$1 $15,307 

18


 Three Months Ended June 30, 2022
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
  One- to four-family$1,247 $109 $— $— $1,356 
  Multi-family735 153 — — 888
  Commercial6,931 (168)— — 6,763
  Construction – custom and owner/builder686 47 — — 733
  Construction – speculative one- to four-family126 (33)— — 93
  Construction – commercial463 (109)— — 354
Construction – multi-family436 (108)— — 328 
  Construction – land development126 113 — — 239 
  Land377 (17)— — 360
Consumer loans:     
  Home equity and second mortgage469 (35)— — 434
  Other44 15 (8)— 51
Commercial business loans1,793 33 — 1,834
Total$13,433 $ $(8)$8 $13,433 


 Nine Months Ended June 30, 2022
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
  One-to four-family$1,154 $202 $— $— $1,356 
  Multi-family765123 — — 888
  Commercial6,813(50)— — 6,763
  Construction – custom and owner/builder64489 — — 733
  Construction – speculative one- to four-family188(95)— — 93
  Construction – commercial784(430)— — 354
Construction – multi-family436 (108)— — 328 
  Construction – land development124 115 — — 239 
  Land470(110)— — 360
Consumer loans:     
  Home equity and second mortgage528(94)— — 434
  Other5010 (10)51
Commercial business loans1,513348 (49)22 1,834
Total$13,469 $ $(59)$23 $13,433 
19


The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at June 30, 2023 and September 30, 2022 (dollars in thousands):
 Allowance for Loan LossesRecorded Investment in Loans
 Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
TotalIndividually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Total
June 30, 2023      
Mortgage loans:      
One- to four-family$— $2,178 $2,178 $373 $228,901 $229,274 
Multi-family— 1,012 1,012 — 111,777 111,777 
Commercial— 7,029 7,029 2,988 554,027 557,015 
Construction – custom and owner/builder— 799 799 — 78,739 78,739 
Construction – speculative one- to four-family— 110 110 — 7,037 7,037 
Construction – commercial— 291 291 — 24,300 24,300 
Construction – multi-family— 692 692 — 52,941 52,941 
Construction – land development— 233 233 — 13,810 13,810 
Land— 389 389 150 25,758 25,908 
Consumer loans:     
Home equity and second mortgage— 542 542 390 39,618 40,008 
Other— 51 51 — 2,469 2,469 
Commercial business loans123 1,858 1,981 289 136,825 137,114 
SBA PPP loans— — — — 519 519 
Total$123 $15,184 $15,307 $4,190 $1,276,721 $1,280,911 
September 30, 2022      
Mortgage loans:      
One- to four-family$— $1,658 $1,658 $388 $175,728 $176,116 
Multi-family— 855 855 — 95,025 95,025 
Commercial— 6,682 6,682 2,988 533,662 536,650 
Construction – custom and owner/builder— 675 675 — 67,091 67,091 
Construction – speculative one- to four-family— 130 130 — 8,364 8,364 
Construction – commercial— 343 343 — 29,059 29,059 
Construction – multi-family— 447 447 — 34,354 34,354 
Construction – land development— 233 233 — 13,582 13,582 
Land— 397 397 450 26,404 26,854 
Consumer loans:      
Home equity and second mortgage— 440 440 394 34,793 35,187 
Other— 42 42 2,125 2,128 
Commercial business loans127 1,674 1,801 309 124,730 125,039 
SBA PPP loans— — — — 1,001 1,001 
Total$127 $13,576 $13,703 $4,532 $1,145,918 $1,150,450 

20


The following tables present an analysis of loans by aging category and portfolio segment at June 30, 2023 and September 30, 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
CurrentTotal
Loans
June 30, 2023       
Mortgage loans:       
One- to four-family$— $— $373 $— $373 $228,901 $229,274 
Multi-family— — — — — 111,777 111,777 
Commercial— — 686 — 686 556,329 557,015 
Construction – custom and owner/builder— — — — — 78,739 78,739 
Construction – speculative one- to four-family— — — — — 7,037 7,037 
Construction – commercial— — — — — 24,300 24,300 
Construction – multi-family— — — — — 52,941 52,941 
Construction – land development— — — — — 13,810 13,810 
Land— — 54 — 54 25,854 25,908 
Consumer loans:    
Home equity and second mortgage49 — 184 — 233 39,775 40,008 
Other— — — — — 2,469 2,469 
Commercial business loans22 186 289 — 497 136,617 137,114 
SBA PPP loans— — — — — 519 519 
Total$71 $186 $1,586 $ $1,843 $1,279,068 $1,280,911 
September 30, 2022       
Mortgage loans:       
One- to four-family$— $— $388 $— $388 $175,728 $176,116 
Multi-family— — — — — 95,025 95,025 
Commercial— — 657 — 657 535,993 536,650 
Construction – custom and owner/builder— — — — — 67,091 67,091 
Construction – speculative one- to four-family— — — — — 8,364 8,364 
Construction – commercial— — — — — 29,059 29,059 
Construction – multi-family— — — — — 34,354 34,354 
Construction – land development— — — — — 13,582 13,582 
Land— — 450 — 450 26,404 26,854 
Consumer loans:     
Home equity and second mortgage37 — 252 — 289 34,898 35,187 
Other— — — 2,125 2,128 
Commercial business loans— — 309 — 309 124,730 125,039 
SBA PPP loans— — — — — 1,001 1,001 
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.


21



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 June 30,December 31, 2023 and September 30, 2022,2023, 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 June 30,December 31, 2023 and September 30, 2022,2023, there were no loans classified as loss.

The following table sets forth the Company's loan portfolio at December 31, 2023 by risk attribute and year of origination as well as current period gross charge-offs (dollars in thousands):
Term Loans Amortized Cost Basis by Origination Fiscal Year
Type2024 2023 2022 2021 2020 PriorRevolving LoansTotal Loans Receivable
One-to four-family
Risk Rating
Pass$2,096 $33,948 $113,479 $50,623 $19,711 $42,663 $— $262,520 
Substandard— — 217 — — 385 — 602 
Total one- to four-family$2,096 $33,948 $113,696 $50,623 $19,711 $43,048 $ $263,122 
Multi-family
Risk Rating
Pass$12,250 $9,541 $28,037 $32,216 $19,196 $45,115 $966 $147,321 
Total multi-family$12,250 $9,541 $28,037 $32,216 $19,196 $45,115 $966 $147,321 
Commercial real estate
Risk Rating
Pass$5,022 $54,235 $128,949 $95,521 $60,026 $212,856 $5,898 $562,507 
Watch— — — — 3,111 7,995 — 11,106 
Substandard— — — — — 5,425 — 5,425 
Total commercial real estate$5,022 $54,235 $128,949 $95,521 $63,137 $226,276 $5,898 $579,038 
18





Term Loans Amortized Cost Basis by Origination Fiscal Year
Type20242023202220212020PriorRevolving LoansTotal Loans Receivable
Construction-custom & owner/builder
Risk Rating
Pass$2,618 $48,389 $12,914 $1,094 $— $— $— $65,015 
Watch— — 524 3,532 454 436 — 4,946 
Substandard— — — 150 — — — 150 
Total construction$2,618 $48,389 $13,438 $4,776 $454 $436 $ $70,111 
Construction-speculative one-to four-family
Risk Rating
Pass$567 $7,669 $644 $523 $— $— $— $9,403 
Total construction$567 $7,669 $644 $523 $ $ $ $9,403 
Construction-commercial
Risk Rating
Pass$— $15,780 $4,753 $1,293 $— $— $— $21,826 
Watch— 967 — — — — — 967 
Total construction$ $16,747 $4,753 $1,293 $ $ $ $22,793 
Construction-multi-family
Risk Rating
Pass$53 $20,186 $11,821 $1,287 $8,118 $— $— $41,465 
Total construction$53 $20,186 $11,821 $1,287 $8,118 $ $ $41,465 
Construction-land development
Risk Rating
Pass$— $2,648 $13,983 $— $— $— $— $16,631 
Total construction$ $2,648 $13,983 $ $ $ $ $16,631 
Land
Risk Rating
Pass$3,285 $6,694 $7,515 $5,410 $770 $2,939 $1,589 $28,202 
Watch— — — — — — 495 495 
Total land$3,285 $6,694 $7,515 $5,410 $770 $2,939 $2,084 $28,697 
Home equity
Risk Rating
Pass$1,632 $5,406 $2,086 $323 $696 $2,563 $26,405 $39,111 
Watch— — — — — 34 — 34 
Substandard— — — — — 258 — 258 
Total home equity$1,632 $5,406 $2,086 $323 $696 $2,855 $26,405 $39,403 
19





Term Loans Amortized Cost Basis by Origination Fiscal Year
Type20242023202220212020PriorRevolving LoansTotal Loans Receivable
Other consumer
Risk Rating
Pass$1,081 $568 $258 $117 $20 $746 $74 $2,864 
Watch— — — — — 33 29 62 
Total other consumer$1,081 $568 $258 $117 $20 $779 $103 $2,926 
Current period gross write-offs$$$— $— $— $— $— $
Commercial business
Risk Rating
Pass$6,102 $21,354 $40,471 $12,450 $9,714 $6,032 $38,818 $134,941 
Watch— — 171 57 — — — 228 
Substandard— 1,475 — — — 298 — 1,773 
Total commercial business$6,102 $22,829 $40,642 $12,507 $9,714 $6,330 $38,818 $136,942 
SBA PPP
Risk Rating
Pass$— $— $— $353 $70 $— $— $423 
Total SBA PPP$ $ $ $353 $70 $ $ $423 
Total loans receivable, gross (net of construction LIP)
Risk Rating
Pass$34,706 $226,418 $364,910 $201,210 $118,321 $312,914 $73,750 $1,332,229 
Watch— 967 695 3,589 3,565 8,498 524 17,838 
Substandard— 1,475 217 150 — 6,366 — 8,208 
Total loans receivable$34,706 $228,860 $365,822 $204,949 $121,886 $327,778 $74,274 $1,358,275 
Current period gross charge-off$$$— $— $— $— $— $

Allowance for Credit Losses

The Company adopted the new accounting standard for the ACL, commonly referred to as the current expected credit losses ("CECL") methodology, as of October 1, 2023. All disclosures as of and for the three months ended December 31, 2023 are presented in accordance with the new accounting standard. The comparative financial periods prior to the adoption of this new accounting standard are presented and disclosed under previously applicable GAAP's incurred loss methodology, which is not directly comparable to the new, CECL methodology. See also Note 10, Recent Accounting Pronouncements. As a result of implementing this new accounting standard, there was a one-time adjustment to the fiscal year 2024 opening allowance balance of $461,000 related to loans held for for investment. The Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. For loans that do not share similar risk characteristics and cannot be evaluated on a collective basis, the Company will evaluate the loan individually. The Company estimates the expected credit losses over the loans' contractual terms, adjusted for expected prepayments. The ACL calculation is
20





calculated for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. Management has adopted the discounted cash flow ("DCF") methodology for all segments. The Company incorporates a reasonable and supportable forecast that utilizes current period national gross domestic product ("GDP") and national unemployment figures. Each of the loan segments are impacted by these factors. Prepayments are established for each segment based on historical averages for the segments, which management believes is an accurate presentation of future prepayment activity. Loans that do not share common risk characteristics with other loans are evaluated individually and are not included in the collective analysis. The ACL on loans that are individually evaluated may be estimated based on their expected cash flows, or in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated selling costs.

When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the ACL. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; and/or the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.

Management's evaluation of the ACL is based on ongoing, quarterly assessments of the known and inherent risks in the loan portfolio. Loss factors are based on the Company's historical loss experience with additional consideration and adjustments made for changes in economic conditions, changes in the amount and composition of the loan portfolio, delinquency rates, changes in collateral values, seasoning of the loan portfolio, duration of the current business cycle, a detailed analysis of individually evaluated loans and other factors as deemed appropriate. Management also assesses the risk related to reasonable and supportable forecasts that are used. These factors are evaluated on a quarterly basis. Loss rates used by the Company are affected as changes in these factors increase or decrease from quarter to quarter. In addition, regulatory agencies, as integral part of their examination process, periodically review the Company's allowance for credit losses and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The following tables set forth information for the three months ended December 31, 2023 and 2022 regarding activity in the ACL by portfolio segment (dollars in thousands):

 Three Months Ended December 31, 2023
 Beginning
Allowance
Impact of Adopting CECL (ASU 2016-13)Provision for
(Recapture of) Credit Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
One- to four-family$2,417 $(408)$87 $— $— $2,096 
Multi-family1,156 (120)164 — — 1,200 
Commercial7,209 (494)107 — — 6,822 
Construction – custom and owner/builder750 542 (58)— — 1,234 
Construction – speculative one- to four-family148 (16)— — — 132 
Construction – commercial316 176 (62)— — 430 
Construction – multi-family602 204 (71)— — 735 
Construction – land development274 25 (1)— — 298 
Land406 318 33 — — 757 
Consumer loans:    
Home equity and second mortgage519 (243)10 — — 286 
Other53 (7)(2)— 46 
Commercial business loans1,967 484 168 — — 2,619 
Total$15,817 $461 $379 $(2)$ $16,655 


21





 Three Months Ended December 31, 2022
 Beginning
Allowance
Provision for
(Recapture of) Loan Losses
Charge-
offs
RecoveriesEnding
Allowance
Mortgage loans:     
  One- to four-family$1,658 $230 $— $— $1,888 
  Multi-family855 16 — — 871
  Commercial6,682 112 — — 6,794
  Construction – custom and owner/builder675 (2)— — 673
  Construction – speculative one- to four-family130 (5)— — 125
  Construction – commercial343 (20)— — 323
Construction – multi-family447 130 — — 577 
  Construction – land development233 (11)— — 222 
  Land397 (14)— — 383
Consumer loans:     
  Home equity and second mortgage440 53 — — 493
  Other42 — 47
Commercial business loans1,801 32 — — 1,833
Total$13,703 $525 $ $1 $14,229 


The following tables present information on the allowance for loan losses by portfolio segment at September 30, 2023 prior to the adoption of ASU 2016-13 (dollars in thousands):

 Allowance for Credit LossesRecorded Investment in Loans
 Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
TotalIndividually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Total
September 30, 2023      
Mortgage loans:      
One- to four-family$— $2,417 $2,417 $368 $252,859 $253,227 
Multi-family— 1,156 1,156 — 127,176 $127,176 
Commercial— 7,209 7,209 2,973 565,292 $568,265 
Construction – custom and owner/builder— 750 750 — 73,239 $73,239 
Construction – speculative one- to four-family— 148 148 — 9,361 $9,361 
Construction – commercial— 316 316 — 26,030 $26,030 
Construction – multi-family— 602 602 — 45,890 $45,890 
Construction – land development— 274 274 — 16,129 $16,129 
Land— 406 406 — 26,726 $26,726 
Consumer loans:
Home equity and second mortgage— 519 519 382 37,899 $38,281 
Other— 53 53 — 2,772 $2,772 
Commercial business loans123 1,844 1,967 286 135,516 135,802 
SBA PPP loans— — — — 466 466 
Total$123 $15,694 $15,817 $4,009 $1,319,355 $1,323,364 


22






Non-Accrual Loans

When a loan is 90 days delinquent the accrual of interest is generally discontinued and the loan is placed on non-accrual. All interest accrued but not collected for loans placed on non-accrual is reversed out of interest income. Generally, payments received on non-accrual loans are applied to reduce the outstanding principal balance of the loan. At times interest may be accounted for on a cash basis, depending on the collateral value and the borrowers payment history. A loan is generally not removed from non-accrual until all delinquent principal, interest and late fees have been brought current and the borrower demonstrates repayment ability over a a period of not less than six months and all taxes are current.

The following tables present an analysis of loans by aging category and portfolio segment at December 31, 2023 and September 30, 2023 (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
CurrentTotal
Loans
December 31, 2023       
Mortgage loans:       
One- to four-family$— $— $602 $— $602 $262,520 $263,122 
Multi-family— — — — — 147,321 147,321 
Commercial— — 683 — 683 578,355 579,038 
Construction – custom and owner/builder— — 150 — 150 69,961 70,111 
Construction – speculative one- to four-family— — — — — 9,403 9,403 
Construction – commercial— — — — — 22,793 22,793 
Construction – multi-family— — — — — 41,465 41,465 
Construction – land development— — — — — 16,631 16,631 
Land— — — — — 28,697 28,697 
Consumer loans:    
Home equity and second mortgage66 — 171 — 237 39,166 39,403 
Other— — — — — 2,926 2,926 
Commercial business loans— 171 1,760 — 1,931 135,011 136,942 
SBA PPP loans— — — — — 423 423 
Total$66 $171 $3,366 $ $3,603 $1,354,672 $1,358,275 
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.
23





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
CurrentTotal
Loans
September 30, 2023       
Mortgage loans:       
One- to four-family$— $— $368 $— $368 $252,859 $253,227 
Multi-family— — — — — 127,176 127,176 
Commercial— — 683 — 683 567,582 568,265 
Construction – custom and owner/builder151 — — — 151 73,088 73,239 
Construction – speculative one- to four-family— — — — — 9,361 9,361 
Construction – commercial— — — — — 26,030 26,030 
Construction – multi-family— — — — — 45,890 45,890 
Construction – land development— — — — — 16,129 16,129 
Land— — — — — 26,726 26,726 
Consumer loans:
Home equity and second mortgage— — 177 — 177 38,104 38,281 
Other— — — — — 2,772 2,772 
Commercial business loans— — 286 — 286 135,516 135,802 
SBA PPP loans— — — — — 466 466 
Total$151 $— $1,514 $— $1,665 $1,321,699 $1,323,364 
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

The following tables present an analysis of loans by credit quality indicator and portfolio segment at JuneSeptember 30, 2023 and September 30, 2022 (dollars in thousands):
Loan Grades 
June 30, 2023PassWatchSpecial
Mention
SubstandardTotal
Loan Grades
September 30, 2023
September 30, 2023
September 30, 2023PassWatchSpecial
Mention
SubstandardTotal
Mortgage loans:Mortgage loans:     Mortgage loans:  
One- to four-familyOne- to four-family$228,870 $30 $— $374 $229,274 
Multi-familyMulti-family111,777 — — — 111,777 
CommercialCommercial543,495 8,039 — 5,481 557,015 
Construction – custom and owner/builderConstruction – custom and owner/builder75,340 3,399 — — 78,739 
Construction – speculative one- to four-familyConstruction – speculative one- to four-family7,037 — — — 7,037 
Construction – commercialConstruction – commercial23,333 967 — — 24,300 
Construction – multi-familyConstruction – multi-family52,941 — — — 52,941 
Construction – land developmentConstruction – land development13,810 — — — 13,810 
LandLand25,253 505 — 150 25,908 
Consumer loans:Consumer loans:    
Home equity and second mortgageHome equity and second mortgage39,700 34 — 274 40,008 
Other2,442 27 — — 2,469 
Commercial business loans136,810 — — 304 137,114 
SBA PPP loans488 31 — — 519 
Total$1,261,296 $13,032 $ $6,583 $1,280,911 
September 30, 2022     
Mortgage loans:    
One- to four-family$175,687 $38 $— $391 $176,116 
Multi-family95,025 — — — 95,025 
Commercial522,741 7,940 237 5,732 536,650 
Construction – custom and owner/builder65,249 1,842 — — 67,091 
Construction – speculative one- to four-family8,364 — — — 8,364 
Construction – commercial29,059 — — — 29,059 
Construction – multi-family34,354 — — — 34,354 
Construction – land development13,557 — — 25 13,582 
Land25,882 522 — 450 26,854 
Consumer loans:    
Home equity and second mortgage
Home equity and second mortgageHome equity and second mortgage34,709 19 — 459 35,187 
OtherOther2,063 62 — 2,128 
Commercial business loansCommercial business loans124,712 — — 327 125,039 
SBA PPP loansSBA PPP loans1,001 — — — 1,001 
TotalTotal$1,132,403 $10,423 $237 $7,387 $1,150,450 


24






At December 31, 2023, the Company had $1.72 million of non-accrual loans with an ACL of $319,000 and $1.65 million of non-accrual loans with no ACL. The following table is a summary of the amortized cost of collateral dependent non-accrual loans as of December 31, 2023 (in thousands):
Recorded InvestmentRelated ACL
Mortgage loans:
One- to four-family$602 $— 
Commercial683 — 
Construction - custom & owner/builder150 — 
Consumer loans:
Home equity & second mortgage171 — 
Commercial business loans1,760 319 
Total$3,366 $319 


Impaired Loans
A
Prior to the adoption of CECL, a loan iswas considered impaired when it iswas probable that the Company willwould be unable to collect all amounts (principal and interest) when due according to the original 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 beenwas identified as being impaired, the amount of the impairment iswas 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 iswas 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 loancredit 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.  






















23
25






The following table is a summary of information related to impaired loans by portfolio segment prior to the adoption of CECL as of JuneSeptember 30, 2023 and for the three and nine monthsyear then ended (dollars in thousands):
Recorded
Investment
Unpaid Principal Balance (Loan Balance Plus Charge Off)Related
Allowance
Quarter to Date ("QTD") Average Recorded Investment (1)Year to Date ("YTD") Average Recorded Investment (2)QTD Interest Income Recognized (1)YTD Interest Income Recognized (2)QTD Cash Basis Interest Income Recognized (1)YTD Cash Basis Interest Income Recognized (2)
Recorded
Investment
Recorded
Investment
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:   
Mortgage loans:Mortgage loans:   
Mortgage loans:
Mortgage loans:
One- to four-family
One- to four-family
One- to four-familyOne- to four-family$373 $417 $— $376 $381 $$21 $$21 
Commercial
Commercial
CommercialCommercial2,988 2,988 — 2,894 2,939 40 121 31 94 
LandLand150 150 — 305 371 
Land
Land
Consumer loans:Consumer loans: 
Home equity and second mortgage
Home equity and second mortgage
Home equity and second mortgageHome equity and second mortgage390 390 — 488 444 
OtherOther— 48 — — — — — 
Commercial business loansCommercial business loans44 44 — 46 51 — — — — 
SubtotalSubtotal3,945 4,037 — 4,110 4,188 52 155 41 125 
With an allowance recorded:With an allowance recorded:   
With an allowance recorded:
With an allowance recorded:
Commercial business loans
Commercial business loans
Commercial business loansCommercial business loans245 245 123 247 247 — — — — 
SubtotalSubtotal245 245 123 247 247 — — — — 
Total:Total:   
Total:
Total:
Mortgage loans:
Mortgage loans:
Mortgage loans:Mortgage loans:   
One- to four-familyOne- to four-family373 417 — 376 381 21 21 
One- to four-family
One- to four-family
Commercial
Commercial
CommercialCommercial2,988 2,988 — 2,894 2,939 40 121 31 94 
LandLand150 150 — 305 371 
Land
Land
Consumer loans:Consumer loans:
Home equity and second mortgage
Home equity and second mortgage
Home equity and second mortgageHome equity and second mortgage390 390 — 488 444 
OtherOther— 48 — — — — — 
Commercial business loansCommercial business loans289 289 123 293 298 — — — — 
TotalTotal$4,190 $4,282 $123 $4,357 $4,435 $52 $155 $41 $125 

(1)For the three monthsyear ended June 30, 2023.
(2)For the nine months ended JuneSeptember 30, 2023.






















24
26






The following table is a summary of information related to impaired loans by portfolio segment prior to the adoption of CECL as of December 31, 2022 and for the yearthree months then ended September 30, 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
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-familyOne- to four-family$388 $432 $— $470 $31 $31 
CommercialCommercial2,988 2,988 — 3,041 152 123 
Commercial
Commercial
Land
Land
LandLand450 450 — 492 — — 
Consumer loans:Consumer loans:      Consumer loans:  
Home equity and second mortgageHome equity and second mortgage394 394 — 436 
OtherOther— — — 
Commercial business loansCommercial business loans59 108 — 121 — — 
SubtotalSubtotal4,282 4,375 — 4,567 189 159 
With an allowance recorded:With an allowance recorded:      
With an allowance recorded:
With an allowance recorded:  
Consumer loans:      
Home equity and second mortgage— — — 145 — — 
Commercial business loans
Commercial business loans
Commercial business loansCommercial business loans250 250 127 268 — — 
SubtotalSubtotal250 250 127 413 — — 
TotalTotal      Total  
Mortgage loans:Mortgage loans:      Mortgage loans:  
One- to four-familyOne- to four-family388 432 — 470 31 31 
CommercialCommercial2,988 2,988 — 3,041 152 123 
Commercial
Commercial
Land
Land
LandLand450 450 — 492 — — 
Consumer loans:Consumer loans:      Consumer loans:  
Home equity and second mortgageHome equity and second mortgage394 394 — 581 
OtherOther— — — 
Commercial business loansCommercial business loans309 358 127 389 — — 
TotalTotal$4,532 $4,625 $127 $4,980 $189 $159 

(1) For the yearthree months ended September 30,December 31, 2022.

Troubled debt restructurings ("TDRs")

On October 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments - Credit Losses (ASU 2016-13). This ASU eliminated the accounting guidance for TDR loans for creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. No loans to borrowers experiencing financial difficulty were modified in the three months ended December 31, 2023. At December 31, 2022, the Company had $2.58 million of TDRs, all of which were paying as agreed. There were no new TDRs for the three months ended December 31, 2022.

In accordance with the Company's policy guidelines, unsecured loans are generally charged-off when no payments have been received for three consecutive months unless an alternative action plan is in effect. The outstanding balance of a secured loan that is in excess of the net realizable value is generally charged-off if no payments are received for four or five consecutive months. However, charge-off's are postponed if alternative proposals to restructure, obtain additional guarantors, obtain additional assets as collateral or a potential sale of the underlying collateral would result in full repayment of the outstanding loan balance. Once any other potential source of repayment are exhausted, the impaired portion of the loan is charged-off. Regardless of whether a loan is unsecured or collateralized, once an amount is determined to be a confirmed loan loss it is promptly charged off.
27





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 $2.60 million and $2.62 million in TDRs included in impaired loans at June 30, 2023 and September 30, 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 June 30, 2023 and September 30, 2022. There were no TDRs for which there was a payment default within the first 12 months of the modification during the nine months ended June 30, 2023.


25


The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of June 30, 2023 and September 30, 2022 (dollars in thousands):
 June 30, 2023
 AccruingNon-
Accrual
Total
Mortgage loans:   
Commercial$2,302 $— $2,302 
Land96 — 96 
Consumer loans:   
   Home equity and second mortgage206 — 206 
Total$2,604 $ $2,604 

 September 30, 2022
 AccruingNon-
Accrual
Total
Mortgage loans:   
Commercial$2,330 $— $2,330 
Land— 88 88 
Consumer loans:   
   Home equity and second mortgage142 55 197 
Total$2,472 $143 $2,615 

There were no new TDRs recognized during the nine months ended June 30, 2023. There was one new TDR recognized during the year ended September 30, 2022. The following table sets forth information with respect to the Company's TDR, by portfolio segment, during the year ended September 30, 2022 (dollars in thousands):
September 30, 2022Number 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 
Total1$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

At June 30,December 31, 2023, the Company has operating leases for threetwo retail bank branch offices.offices and an administrative office. The Company's leases have remaining lease terms of two to eight years, and include options to extend the leases from two 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 operating lease ROU assets and lease 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 and nine months ended June 30,December 31, 2023 and 2022 (dollars in thousands):

Three Months Ended June 30,Nine Months Ended June 30,
Lease cost:2023202220232022
Operating lease cost$87$95$261 $283 
Short-term lease cost— — 
Total lease cost$87 $95 $261 $283 
26


Three Months Ended December 31,
Lease cost:20232022
Operating lease cost$93$88
Short-term lease cost
Total lease cost$93 $88 

The following tables provide supplemental information related to operating leases at or for the three and nine months ended JuneDecember 31, 2023 and year ended September 30, 2023 and 2022 (dollars in thousands):
At or For the Three Months Ended June 30, 2023At or For the
Nine Months Ended
June 30, 2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$79 $234 
Weighted average remaining lease term-operating leases6.9 years6.9 years
Weighted average discount rate-operating leases2.34 %2.34 %
At or For the Three Months Ended June 30, 2022At or For the
Nine Months Ended
June 30, 2022
At or For the Three Months Ended December 31, 2023
At or For the Three Months Ended December 31, 2023
At or For the Three Months Ended December 31, 2023
Cash paid for amounts included in the measurement of lease liabilities:
Cash paid for amounts included in the measurement of lease liabilities:
Cash paid for amounts included in the measurement of lease liabilities:Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leasesOperating cash flows from operating leases$87 $261 
Operating cash flows from operating leases
Operating cash flows from operating leases
Weighted average remaining lease term-operating leases
Weighted average remaining lease term-operating leases
Weighted average remaining lease term-operating leasesWeighted average remaining lease term-operating leases7.9 years7.9 years
Weighted average discount rate-operating leasesWeighted average discount rate-operating leases2.25 %2.25 %
Weighted average discount rate-operating leases
Weighted average discount rate-operating leases

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 lease liability was determined by utilizing the FHLB fixed-rate credit advance borrowing rate for the term correlating to the remaining term of each lease.

Maturities of operating lease liabilities at June 30,December 31, 2023 for future fiscal years are as follows (dollars in thousands):

Remainder of 2023$82 
2024333 
Remainder of 2024
20252025336 
20262026304 
20272027232 
2028
ThereafterThereafter820 
Total lease paymentsTotal lease payments2,107 
Less imputed interestLess imputed interest168 
TotalTotal$1,939 




28










(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.  Nonvested shares of restricted stock are included in the computation of basic earnings per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period. 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.  

27


Information regarding the calculation of basic and diluted net income per common share for the three and nine months ended June 30,December 31, 2023 and 2022 is as follows (dollars in thousands, except per share amounts):
Three Months Ended June 30,Nine Months Ended June 30,
2023202220232022
2023
2023
2023
Basic net income per common share computation
Basic net income per common share computation
Basic net income per common share computationBasic net income per common share computation  
Numerator – net incomeNumerator – net income$6,306 $5,738 $20,476 $16,550 
Numerator – net income
Numerator – net income
Denominator – weighted average common shares outstanding
Denominator – weighted average common shares outstanding
Denominator – weighted average common shares outstandingDenominator – weighted average common shares outstanding8,156,831 8,279,436 8,203,255 8,324,371 
Basic net income per common shareBasic net income per common share$0.77 $0.69 $2.50 $1.99 
Basic net income per common share
Basic net income per common share
Diluted net income per common share computationDiluted net income per common share computation  
Diluted net income per common share computation
Diluted net income per common share computation
Numerator – net income
Numerator – net income
Numerator – net incomeNumerator – net income$6,306 $5,738 $20,476 $16,550 
Denominator – weighted average common shares outstandingDenominator – weighted average common shares outstanding8,156,831 8,279,436 8,203,255 8,324,371 
Denominator – weighted average common shares outstanding
Denominator – weighted average common shares outstanding
Effect of dilutive stock options (1)
Effect of dilutive stock options (1)
Effect of dilutive stock options (1)Effect of dilutive stock options (1)57,144 70,423 75,824 82,606 
Weighted average common shares outstanding - assuming dilutionWeighted average common shares outstanding - assuming dilution8,213,975 8,349,859 8,279,079 8,406,977 
Weighted average common shares outstanding - assuming dilution
Weighted average common shares outstanding - assuming dilution
Diluted net income per common shareDiluted net income per common share$0.77 $0.69 $2.47 $1.97 
Diluted net income per common share
Diluted net income per common share

(1) For the three and nine months ended June 30,December 31, 2023 average options to purchase 256,503 and 203,823 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. For the three and nine months ended June 30, 2022, average options to purchase 201,150214,595 and 205,221182,000 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.

2829



(7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the three and nine months ended June 30,December 31, 2023 and 2022 are as follows (dollars in thousands):
Three Months Ended June 30, 2023
Changes in fair value of available for sale securities (1)Changes in OTTI on held to maturity securities (1)Total (1)
Three Months Ended December 31, 2023Three Months Ended December 31, 2023
Changes in fair value of available for sale securities (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 periodBalance of AOCI at the beginning of period$(486)$(9)$(495)
Other comprehensive loss(249)— (249)
Other comprehensive income
Balance of AOCI at the end of periodBalance of AOCI at the end of period$(735)$(9)$(744)
Balance of AOCI at the end of period
Balance of AOCI at the end of period
Nine Months Ended June 30, 2023
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$(706)$(11)$(717)
Other comprehensive income (loss)(29)(27)
Balance of AOCI at the end of period$(735)$(9)$(744)
Three Months Ended June 30, 2022
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$(95)$(12)$(107)
Other comprehensive income (loss)(459)(458)
Balance of AOCI at the end of period$(554)$(11)$(565)
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)
Balance of AOCI at the beginning of period$(706)$(11)$(717)
Other comprehensive income (loss)(19)(18)
Balance of AOCI at the end of period$(725)$(10)$(735)
Nine Months Ended June 30, 2022
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$75 $(16)$59 
Other comprehensive income (loss)(629)(624)
Balance of AOCI at the end of period$(554)$(11)$(565)
__________________________
(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
29


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 June 30,December 31, 2023, there were 4,7967,816 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 June 30,December 31, 2023, there were 199,100178,650 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 June 30,Stock option activity for the three months ended December 31, 2023 and 2022 is summarized as follows:
 Three Months Ended December 31, 2023Three Months Ended December 31, 2022
  Number of SharesWeighted
Average
Exercise
Price
 Number of SharesWeighted
Average
Exercise
Price
Options outstanding, beginning of period369,150 $24.00 421,925 $23.30 
Exercised(27,700)12.81 (19,815)20.01 
Forfeited(5,380)25.10 (1,800)29.68 
Options outstanding, end of period336,070 $24.91 400,310 $23.43 

30


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

There were no stock options granted during the three months ended December 31, 2023 and 2022.

The aggregate intrinsic value of options exercised during the three months ended December 31, 2023 and 2022 was $469,000 and $244,000, respectively.

At December 31, 2023, there were 124,640 unvested options with an aggregate grant date fair value of $725,000, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at December 31, 2023 was $704,000.  There were 100 options that vested during the three months ended December 31, 2023 with a total fair value of $326.

At December 31, 2022, there were 191,710 unvested options with an aggregate grant date fair value of $1.08 million. There were 200 options that vested during the three months ended December 31, 2022 with a total fair value of $652.
Additional information regarding options outstanding at December 31, 2023 is as follows:

 Options OutstandingOptions Exercisable
Range of
Exercise
Prices ($)
NumberWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
NumberWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
10.26-10.7126,250 10.62 1.526,250 10.62 1.5
15.67-19.1363,820 16.53 5.641,560 16.34 5.0
26.50-27.40102,880 27.31 7.842,000 27.23 6.8
28.23-29.69108,400 28.79 6.267,900 29.12 5.3
31.80-33.4034,720 31.85 4.933,720 31.80 4.8
 336,070 $24.91 6.1211,430 $24.36 5.0

The aggregate intrinsic value of options outstanding at December 31, 2023 and 2022 was $2.22 million and $4.28 million, respectively.

As of December 31, 2023, unrecognized compensation cost related to unvested stock options was $711,000, which is expected to be recognized over a weighted average life of 2.02 years.

At December 31, 2023, there were 26,150 unvested restricted stock awards. At December 31, 2022, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the ninethree months ended June 30,December 31, 2023 and 2022.

Stock option activity for the nine months ended June 30, 2023 and 2022 is summarized as follows:
 Nine Months Ended June 30, 2023Nine Months Ended June 30, 2022
  Number of SharesWeighted
Average
Exercise
Price
 Number of SharesWeighted
Average
Exercise
Price
Options outstanding, beginning of period421,925 $23.30 406,815 $21.62 
Exercised(27,055)19.77 (29,770)12.05 
Granted1,000 33.40 1,000 27.25 
Forfeited(7,800)28.23 (18,170)25.98 
Options outstanding, end of period388,070 $23.47 359,875 $22.20 
Time Based
Number of Unvested SharesWeighted Average Grant Date Fair Value
Outstanding, September 30, 202326,150 $27.37 
     Granted— — 
     Forfeited— — 
     Vested— — 
Outstanding, December 31, 202326,150 $27.37 

The fair value of restricted stock optionsawards is determined usingequal to the Black-Scholes valuation model.

The weighted average assumptions for options granted during the nine months ended June 30, 2023 were as follows:

Expected volatility33 %
Expected life (in years)5
Expected dividend yield2.99 %
Risk free interest rate3.58 %
Grant date fair value per share$8.65 

The aggregate intrinsic value of options exercised during the nine months ended June 30, 2023 and 2022 was $345,000 and $475,000, respectively.

At June 30, 2023, there were 186,910 unvested options with an aggregate grant date fair value of $1.05 million, allthe Company's stock on the date of which the Company assumes will vest.grant. The aggregate intrinsic value of unvested options at June 30, 2023 was $313,000.  There were 3,200 options vested duringrelated stock-based compensation expense is recorded over the nine months ended June 30, 2023 with a total fair value of $17,000.

requisite service period. At June 30, 2022, there were 173,670 unvested options with an aggregate grant date fair value of $830,000. There were 2,400 options that vested during the nine months ended June 30, 2022 with a total fair value of $9,400.
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Additional information regarding options outstanding at June 30, 2023 is as follows:

 Options OutstandingOptions Exercisable
Range of
Exercise
Prices ($)
NumberWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
NumberWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
  9.0014,000 $9.00 0.314,000 $9.00 0.3
10.26-10.7145,000 10.55 1.645,000 10.55 1.6
15.67-19.1374,500 16.53 6.138,410 16.18 4.9
26.50-27.40107,820 27.32 8.321,140 27.15 6.4
28.23-29.69111,950 28.77 6.855,550 29.33 5.2
31.80-33.4034,800 31.85 5.427,060 31.80 5.3
 388,070 $23.47 6.1201,160 $21.31 4.2

The aggregate intrinsic value of options outstanding at June 30, 2023 and 2022 was $1.58 million and $1.81 million, respectively.

As of June 30,December 31, 2023, unrecognized compensation cost related to unvested restricted stock optionsawards was $893,000,$676,000, which is expected to be recognized over a weighted average lifeperiod of 2.222.78 years.


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(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).


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The Company had no liabilities measured at fair value on a recurring basis at June 30,December 31, 2023 and September 30, 2022.2023. The Company's assets measured at estimated fair value on a recurring basis at June 30,December 31, 2023 and September 30, 20222023 were as follows (dollars in thousands):
June 30, 2023Estimated Fair Value 
December 31, 2023December 31, 2023Estimated Fair Value 
Level 1Level 2Level 3Total Level 1Level 2Level 3Total
Available for sale investment securitiesAvailable for sale investment securities    Available for sale investment securities  
MBS: U.S. government agencies MBS: U.S. government agencies$— $43,842 $— $43,842 
Investments in equity securitiesInvestments in equity securities
Mutual funds Mutual funds837 — — 837 
Mutual funds
Mutual funds
TotalTotal$837 $43,842 $— $44,679 
September 30, 2022Estimated Fair Value 
September 30, 2023
September 30, 2023
September 30, 2023Estimated Fair Value 
Level 1Level 2Level 3Total Level 1Level 2Level 3Total
Available for sale investment securitiesAvailable for sale investment securities    Available for sale investment securities  
MBS: U.S. government agencies MBS: U.S. government agencies$— $41,415 $— $41,415 
Investments in equity securitiesInvestments in equity securities
Mutual funds Mutual funds835 — — 835 
Mutual funds
Mutual funds
TotalTotal$835 $41,415 $ $42,250 

There were no transfers among Level 1, Level 2 and Level 3 during the ninethree months ended June 30,December 31, 2023 and the year ended September 30, 2022.2023.

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:

Individually Evaluated Collateral-Dependent Loans: Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are classified within level 3 of the fair value hierarchy.

Impaired Loans: ThePrior to the adoption of CECL, 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.

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The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at JuneDecember 31, 2023 and September 30, 2023 (dollars in thousands):
 Estimated Fair Value
December 31, 2023Level 1Level 2Level 3
ImpairedIndividually evaluated loans:   
  Commercial business loans$— $— $1221,401 
Total$ $$1,401


Estimated Fair Value
September 30, 2023Level 1Level 2Level 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 JuneDecember 31, 2023 and September 30, 2023 (dollars in thousands):
  Estimated
Fair Value
 Valuation
Technique(s)
 Unobservable Input(s)Range
ImpairedIndividually evaluated and impaired loans$122 Market approachAppraised value less estimated selling costsN/A

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2022 (dollars in thousands):
Estimated Fair Value
Level 1Level 2Level 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, 2022 (dollars in thousands):
 Estimated
Fair Value
 Valuation
Technique(s)
 Unobservable Input(s)
Impaired loans$123 Market approachAppraised value 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 June 30,December 31, 2023 and September 30, 2022.2023. 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.

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The recorded amounts and estimated fair values of financial instruments were as follows as of June 30,December 31, 2023 and September 30, 20222023 (dollars in thousands):
June 30, 2023 December 31, 2023
 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 assetsFinancial assets     Financial assets  
Cash and cash equivalentsCash and cash equivalents$129,953 $129,953 $129,953 $— $— 
CDs held for investmentCDs held for investment16,931 16,767 16,767 — — 
Investment securitiesInvestment securities318,895 304,313 161,458 142,855 — 
Investments in equity securitiesInvestments in equity securities837 837 837 — — 
FHLB stockFHLB stock2,802 2,802 2,802 — — 
Other investmentsOther investments3,000 3,000 3,000 — — 
Loans held for sale
Loans receivable, netLoans receivable, net1,260,647 1,219,328 — — 1,219,328 
Accrued interest receivable Accrued interest receivable5,451 5,451 5,451 — — 
Financial liabilitiesFinancial liabilities     
Financial liabilities
Financial liabilities  
Certificates of depositCertificates of deposit251,313 248,541 — — 248,541 
FHLB borrowingsFHLB borrowings15,000 14,665 — — 14,665 
Accrued interest payableAccrued interest payable881 881 881 — — 
September 30, 2022 September 30, 2023
 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 assetsFinancial assets     Financial assets  
Cash and cash equivalentsCash and cash equivalents$316,755 $316,755 $316,755 $— $— 
CDs held for investmentCDs held for investment22,894 22,519 22,519 — — 
Investment securitiesInvestment securities308,023 291,198 158,578 132,620 — 
Investments in equity securitiesInvestments in equity securities835 835 835 — — 
FHLB stockFHLB stock2,194 2,194 2,194 — — 
Other investmentsOther investments3,000 3,000 3,000 — — 
Loans held for saleLoans held for sale748 758 758 — — 
Loans receivable, netLoans receivable, net1,132,426 1,124,579 — — 1,124,579 
Accrued interest receivable Accrued interest receivable4,483 4,483 4,483 — — 
Financial liabilitiesFinancial liabilities     
Financial liabilities
Financial liabilities  
Certificates of depositCertificates of deposit122,584 120,807 — — 120,807 
FHLB borrowings
Accrued interest payableAccrued interest payable108 108 108 — — 

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(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 requiresrequired 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 changeschanged the accounting for PCI debt securities and loans. ASU
34


2016-13 retainsretained many of the current disclosure requirements in GAAP and expandsexpanded certain disclosure requirements. As a "smaller reporting company" filer with the U.S. Securities and Exchange Commission, ASU 2016-13 iswas effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a changeexperienced changes in the processes and procedures to calculate the allowance for loancredit losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practicepractices that utilizeswere utilized with the incurred loss model. In addition, the currentprior policy for OTTI on investment securities available for sale will bewas 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 ASU 2016-13 at the adoption date. At this time,On October 1, 2023, the Company does not expectadopted this ASU, which resulted in a net of tax charge of $488,000 to retained earnings, a $461,000 increase to the allowance for loancredit losses on loans, a $92,000 increase to materially change ascredit losses on investment securities, and a result$65,000 increase to credit losses on unfunded commitments for the cumulative effect of adopting this guidance. For more information related to the implementation, of ASU 2016-13see Note 4 Loans Receivable and expects to finalize the calculation in the first quarter of the fiscal year ending September 30, 2024.Allowance for Credit Losses, Note 2 Investment Securities and Note 12 Commitment and Contingent Liabilities.

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 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 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 would not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity 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 of ASU 2017-04 isdid not expected to have a material impact on the Company's future 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, 2024. The Company has not adopted ASU 2020-04 as of March 31, 2023. 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 thisThis ASU areis effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Theupon adoption of ASU 2022-02 is not expected to have a material impact on2016-13. On October 1, 2023, the Company's future consolidated financial statements.Company adopted this ASU at the same time ASU 2016-13 was adopted. The Company had no recoveries and write offs of $2,000 for the three months ended December 31, 2023.



(11) REVENUE FROM CONTRACTS WITH CUSTOMERS

ASU 2014-09 Revenue from Contracts with Customers ("ASC 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 June 30,December 31, 2023, the Company recognized $970,000$1.02 million in service charges on deposits, $1.34$1.26 million in ATM and debit card interchange transaction fees, $27,000$19,000 in escrow fees, and $1,000$2,000 in fee income from non-deposit investment sales.sales, all considered within the scope of ASC 606. For the ninethree months ended June 30, 2023,December 31,
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2022, the Company recognized $2.81 million$947,000 in service charges on deposits, $3.86$1.25 million in ATM and debit card interchange transaction fees, $85,000$30,000 in escrow fees, and $35,000 in fee income from non-deposit investment sales. For the three months ended June 30, 2022, the Company recognized $1.05 million
35


in service charges on deposits, $1.35 million in ATM and debit card interchange transaction fees, $41,000 in escrow fees, and $4,000 in fee income from non-deposit investment sales. For the nine months ended June 30, 2022, the Company recognized $2.98 million in service charges on deposits, $3.87 million in ATM and debit card interchanges transaction fees, $164,000 in escrow fees, and $14,000$30,000 in fee income from non-deposit investment sales.

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 June 30,December 31, 2023 and 2022 are listed below (in thousands):

June 30, 2023
Undisbursed portion of construction loans in process (see Note 4)$104,774 
Undisbursed lines of credit139,400 
Commitments to extend credit29,881 
$274,055 
December 31, 2023December 31, 2022
Undisbursed portion of construction loans in process (see Note 4)$104,683 112,096 
Undisbursed lines of credit135,250 133,932 
Commitments to extend credit11,810 14,126 
$251,743 $260,154 

The Company maintains a separate reserveallowance for credit losses related to unfunded loan commitments.  ManagementThe Company estimates expected losses on unfunded, off-balance sheet commitments over the amount of probable losses relatedcontractual period in which the exposure to credit risk from a contractual obligation to extend credit, unless the Company has determined that obligation is unconditionally cancellable. The allowance methodology for calculating the ACL on unfunded loan commitments by applyingis similar to the loss factors used inmethodology for calculating the allowance for loan loss methodology toACL on loans but also includes an estimate of the expected amountfuture utilization of funding and applies this adjusted factor to the unused portion ofcommitment as determined by
3637


historical commitment utilization. Credit risk associated with the unfunded commitments are consistent with the loss ratio for each loan commitments.segment within the allowance for credit losses for loans. The reserveACL for unfunded loan commitments totaled $327,000 at June 30, 2023. These amounts are includedis recognized in other liabilities and accrued expenses in the accompanying consolidated balance sheets. Increases (decreases) insheets and is adjusted as a provision (recapture of provision) for credit losses on the reserveconsolidated income statements. The ACL for unfunded loan commitments are recorded in non-interest expensetotaled $364,000 at December 31, 2023. 

The following table sets forth information for the three months ended December 31, 2023 and 2022 regarding activity in the accompanying consolidated statements of income.allowance for credit losses for unfunded loan commitments (dollars in thousands):

Allowance for Credit LossesDecember 31, 2023December 31, 2022
Beginning balance$332 $305 
Impact of adopting CECL (ASU 2016-13)65 — 
(Recapture of) provision for credit losses(33)15 
Ending allowance$364 $320 

The Bank has an employee severance compensation plan which expires in 2027 that provides for 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements contained in Item 1 of this Form 10-Q. The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and nine months ended June 30,December 31, 2023.  

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
38


to: potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from actsgrowth; continuing elevated levels of war including Russia's invasion of Ukraine, as well as increasing supply chain disruptions, higher inflation and the impact of current and future monetary policies of the Board of Governors of the Federal Reserve System ("Federal Reserve") in response thereto; the effects of any federal government shutdown; credit risks of lending activities, including 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 byany deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio may resultresulting in our allowance for loan lossesACL not being adequate to cover actual losses and requirethus requiring us to materially increase our loan loss reserves;ACL through the provision for credit losses; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources; transition away from the London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our
37


bank subsidiary by the FDIC,Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loancredit losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; 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; 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 in 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, 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 Financial Accounting Standards Board ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks described elsewhere in this Form 10-Q and in the Company's other reports filed with or furnished to the Securities and Exchange Commission, including our 20222023 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’smanagement'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 quarterly report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise.In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements.These risks could cause our actual results for fiscal year 20232024 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’sCompany's consolidated financial condition and results of operations as well as its stock price performance.








39


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 23 offices (including its main office in Hoquiam). At June 30,December 31, 2023, the Company had total assets of $1.81$1.90 billion, net loans receivable of $1.26$1.34 billion, total deposits of $1.55$1.63 billion and total shareholders’ equity of $229.26$237.37 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.

38


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

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since March 2022, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 500525 basis points, including 200 basis points during the first nine months of fiscal 2023, to a range of 5.00%5.25% to 5.25%5.50% as of June 30, 2023. Subsequent to June 30,December 31, 2023, the FOMC increased the target range for the federals funds rate by an additional 25 basis points taking benchmark borrowing costs to their highest level in more than 22 years.

The provision for (recapture of) loancredit 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 lossesACL on loans reflects the amount that the Company believesmanagement has determined is adequate to cover probable expected credit losses in the loan portfolio. As the loan portfolio increases, or due to an increase in probable expected losses inherent in itsthe loan portfolio.portfolio, the ACL may increase, resulting in a decrease to net interest income after the provision. Improvement in loan risk ratings, increase in property values, or receipts of recoveries of amounts previously charged off may partially or fully offset any required increases to ACL on loans due to loan growth or an increase in the probable expected credit losses. The Company recorded a provision for loancredit losses on loans of $610,000 and $1.61 million$379,000 for the three and nine months ended June 30,December 31, 2023 respectively,using the CECL methodology, primarily due to loan portfolio growth. There was noThe Company recorded a $525,000 provision for loan losses, using the prior incurred loss methodology, for the three and nine months ended June 30,December 31, 2022.

Net income is also affected by non-interest income and non-interest expense.  For the three and nine months ended June 30,December 31, 2023, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold, escrow fees and other operating income.  Non-interest income is also increased by net recoveries on investment securities and for periods prior to the adoption of CECL reduced by net OTTI losses on investment securities, if any.  Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any.  Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses.  Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest 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.

40






Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

The Company's critical accounting estimates are described in the Company’s 20222023 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. ThereOther than the adoption of CECL, there have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 20222023 Form 10-K.


39


Comparison of Financial Condition at June 30,December 31, 2023 and September 30, 20222023

The Company’s totalTotal assets decreasedincreased by $52.80$55.21 million, or 2.8%3.0%, to $1.81$1.90 billion at June 30,December 31, 2023 from $1.86$1.84 billion at September 30, 2022.2023.  The decreaseincrease in total assets was primarily due to a decreaseincreases in loans receivable and total cash and cash equivalents, which was partially offset by increasesdecreases in loans receivableinvestment securities and investment securities. Cash and cash equivalents were also used to fund theCDs held for investment. The quarterly increase in assets was primarily funded by an increase in deposits,which was partially offset by a decrease in total deposits.FHLB borrowings.

Net loans receivable increased by $128.22$33.98 million, or 11.3%2.6%, to $1.26$1.34 billion at June 30,December 31, 2023 from $1.13$1.30 billion at September 30, 2022,2023, primarily due to increases in one- to four-family, multi-family construction,loans, commercial real estate multi-family, and custom and owner/builder constructionloans, one- to four-family loans as well as smaller increases in several other loan categories. These increases to net loans receivable were partially offset by smallerdecreases in construction and land development loans as well as decreases in several other loan categories.  

Total deposits decreasedincreased by $79.45$66.13 million, or 4.9%4.2%, to $1.55$1.63 billion at June 30,December 31, 2023 from $1.63$1.56 billion at September 30, 2022,2023, primarily due to decreasesincreases in non-interest bearing account balances, NOW checking account balances, money market account balances, certificates of deposit balances, and savingsNOW checking account balances. These increases were partially offset by increasesdecreases in certificates ofnon-interest bearing deposit balances and savings account balances.
 
Shareholders’ equity increased by $10.69$4.30 million, or 4.9%1.8%, to $229.26$237.37 million at June 30,December 31, 2023 from $218.57$233.07 million at September 30, 2022.2023.  The increase in shareholders' equity was primarily due to net income and proceeds from stock options exercised and wasa reduction in accumulated other comprehensive loss during the current quarter. These increases were partially offset by the payment of dividends to common shareholders, a reduction of retained earnings related to adoption of the new CECL accounting standard and the repurchase of common stock.stock during the quarter.

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

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreasedincreased by $192.77$26.56 million, or 56.8%18.5%, to $146.88$170.47 million at June 30,December 31, 2023 from $339.65$143.91 million at September 30, 2022. 2023.
The decreaseincrease was primarily due to increased deposits and a result of deploying overnight liquidity into higher-earning loan originations anddecrease in investment securities, as well as to fund deposit withdrawals.which was partially offset by an increase in loans and a decrease in FHLB borrowings.

Investment Securities:  Investment securities (including investments in equity securities) increaseddecreased by $10.87$5.42 million, or 3.5%1.7%, to $319.73$307.38 million at June 30,December 31, 2023 from $308.86$312.80 million at September 30, 2022.2023. This increasedecrease was primarily due to the purchase of additional U.S. government agency securities and mortgage-backed investment securities during the nine months ended June 30, 2023, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period. These increases were partially offset by the sale of $8.83 million of available for sale investment securities (for a gain of $95,000) and to a lesser extent maturities, prepayments and scheduled amortization of other investment securities. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

41


FHLB Stock: FHLB stock increased $608,000,decreased $1.60 million, or 27.7%44.5% to $2.80$2.00 million at June 30,December 31, 2023 from $2.19$3.60 million at September 30, 2022, due to purchases required by the FHLB2023, due to the increase in total assetsrepayment of a portion of FHLB borrowings and borrowings.the restructuring of stock requirements by FHLB.

Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at $3.00 million at both June 30,December 31, 2023 and September 30, 2022.2023. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.

Loans: Net loans receivable increased by $128.22$33.98 million, or 11.3%2.6%, to $1.26$1.34 billion at June 30,December 31, 2023 from $1.13$1.30 billion at September 30, 2022.2023.  The increase was primarily due to increases of $53.16$20.15 million in one- to four- familymulti-family loans, $20.37$10.77 million in commercial real estate loans, $17.36$9.90 million in owner/builder and custom construction loans, $16.75 million in multi-family loans, $12.08 million in commercial businessone- to four-family loans and smaller increases in other categories. These increases were partially offset by an $8.76 million decrease in construction and land development loans, and smaller decreases in several other loan categories.

Loan originations decreased by $163.38$12.74 million, or 37.5%12.5%, to $272.54$88.93 million for the ninethree months ended June 30,December 31, 2023 from $435.92$101.67 million for the ninethree months ended June 30,December 31, 2022.  The decrease in loan originations was primarily due to a decrease in the amount of commercial real estate, one- to four-family loans and commercial business loans originated. The decrease was partially offset by increases in multi-family and consumer loan originations. The Company generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. Sales of fixed-rate one- to four-family mortgage loans decreasedincreased by $44.09$2.64 million, or 86.4%227.6%, to $6.96$3.8 million for the ninethree months ended June 30,December 31, 2023 from $51.05$1.16 million for the ninethree months ended June 30,December 31, 2022, primarily due to decreased refinance activity for one- to four-
40


familyfour-family construction loans duerefinancing to rising interest rates, declining homes sales and a decision to keep more single family loans originated during the period in the portfolio.permanent loans.

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

Premises and Equipment:  Premises and equipment decreased by $324,000,$58,000, or 1.5%0.3%, to $21.57$21.58 million at June 30,December 31, 2023 from $21.90$21.64 million at September 30, 2022.2023.  This decrease was primarily due to scheduled depreciation and to a lesser extent the sale of a vacant land parcel.depreciation.

OREO (Other Real Estate Owned):  At JuneDecember 31, 2023, total OREO and other repossessed assets consisted of one land parcel with no recorded value. At September 30, 2023, and September 30, 2022, total OREO and other repossessed assets consisted of two land parcels with no recorded value.

BOLI (Bank Owned Life Insurance): BOLI increased by $470,000$156,000 or 2.1%0.7%, to $23.28$23.12 million at June 30,December 31, 2023 from $22.81$22.97 million at September 30, 2022.2023. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.

Goodwill and CDI:  The recorded amount of goodwill remained unchanged at $15.13 million at both June 30,December 31, 2023 and September 30, 2022.2023. CDI decreased by $203,000,$56,000, or 21.4%8.3%, to $745,000$621,000 at June 30,December 31, 2023 from $948,000$677,000 at September 30, 20222023 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Loan Servicing Rights, Net: Loan servicing rights, net decreased by $702,000$199,000 or 23.2%9.4%, to $2.32$1.92 million at June 30,December 31, 2023 from $3.02$2.12 million at September 30, 2022,2023 primarily due to the amortization of servicing rights. The principal amount of loans serviced for Freddie Mac and SBA decreased by $18.92$3.25 million to $391.37$383.25 million at June 30,December 31, 2023 from $410.29$386.50 million at September 30, 2022.2023.

Deposits: Deposits decreasedincreased by $79.45$66.13 million, or 4.9%4.2%, to $1.55$1.63 billion at June 30,December 31, 2023 from $1.63$1.56 billion at September 30, 2022.2023. The decreaseincrease was primarily due to a $77.33$79.81 million decrease in non-interest bearing account balances, a $50.02 million decrease in NOW checking account balances, a $41.57 million decrease in savings account balances and a $39.26 million decreaseincrease in money market account balances. These decreases were partially offset by a $128.73balances, an $18.81 million increase in certificates of deposit balances and a $2.73 million increase in NOW checking account balances (including an increase of $38.32balances. These increases were partially offset by a $22.80 million in brokered deposits). The net decrease in depositsnon-interest bearing demand accounts and a $12.42 million decrease in savings account balances. The increase in money market account balances was primarily due to competitive pricing pressure and customers moving excess funds to alternative higher yielding investments as well as general declines in individual customer balances.several larger balance increases with commercial customers.





42


Deposits consisted of the following at June 30,December 31, 2023 and September 30, 20222023 (dollars in thousands):
June 30, 2023September 30, 2022 December 31, 2023September 30, 2023
AmountPercentAmountPercent
AmountAmountPercentAmountPercent
Non-interest-bearing demandNon-interest-bearing demand$452,729 29.2 %$530,058 32.5 %Non-interest-bearing demand$433,065 26.6 26.6 %$455,864 29.2 29.2 %
NOW checkingNOW checking397,761 25.6 447,779 27.5 
SavingsSavings241,651 15.6 283,219 17.4 
Savings
Savings
Money marketMoney market209,276 13.5 248,536 15.2 
Certificates of deposit under $250
Certificates of deposit under $250
Certificates of deposit under $250Certificates of deposit under $250148,142 9.5 100,754 6.1 
Certificates of deposit $250 and overCertificates of deposit $250 and over64,849 4.2 21,830 1.3 
Certificates of deposit - brokeredCertificates of deposit - brokered38,322 2.4 — — 
TotalTotal$1,552,730 100.0 %$1,632,176 100.0 %Total$1,627,069 100.0 100.0 %$1,560,935 100.0 100.0 %

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. FHLB borrowings increaseddecreased to $15.00$20.00 million at JuneDecember 31, 2023, from $35.00 million at September 30, 2023, as the Company borrowed funds consistent with its asset-liability objectives.2023. The borrowings consist of one $5.00 million short-term borrowing, with a scheduled maturity in September 2024, that bears interest at 5.52%, and one $5.00 million borrowing and one $10.00 million borrowing with scheduled maturities in May 2026, both of which bear interest at 3.95%. The Company did not have any FHLB borrowings outstanding at September 30, 2022.

Shareholders’ Equity:  Total shareholders’ equity increased by $10.69$4.30 million, or 4.9%1.8%, to $229.26$237.37 million at June 30,December 31, 2023 from $218.57$233.07 million at September 30, 2022.2023.  The increase was primarily due to net income of $20.48$6.30 million for the nine
41


months ended June 30, 2023 and proceeds of $534,000$355,000 from the exercise of stock options whichand a $257,000 reduction in the accumulated other comprehensive loss category for fair value adjustment on available for sale investment securities . This increase was partially offset by dividend payments to common shareholders of $6.40$1.87 million, a $488,000 adjustment to equity for the adoption of the new CECL accounting standard, and the repurchase of 154,83312,330 shares of the Company's common stock for $4.12 million.$362,000 during the current quarter.































43



Asset Quality:Quality and Commercial Real Estate Portfolio Breakdown:

Non-performing assets to total assets was 0.09%0.18% at June 30,December 31, 2023 and 0.12%0.09% at September 30, 2022.2023. Total non-performing assets decreasedincreased by $492,000,$1.86 million, or 22.7%116.2%, to $1.67$3.45 million at June 30,December 31, 2023 from $2.17$1.60 million at September 30, 2022.2023. The decreaseincrease in non-performing assets was due to a $473,000 decrease$1.85 million increase in non-accrual loans and a $19,000 decrease$3,000 increase in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at June 30,December 31, 2023 and September 30, 20222023 (dollars in thousands):
June 30,
2023
September 30,
2022
December 31,
2023
December 31,
2023
September 30,
2023
Loans accounted for on a non-accrual basis:Loans accounted for on a non-accrual basis:  Loans accounted for on a non-accrual basis:  
Mortgage loans:Mortgage loans: Mortgage loans: 
One- to four-family (1) One- to four-family (1)$373 $388 
Commercial Commercial686 657 
Commercial
Commercial
Construction – custom and owner/builder
Land54 450 
Consumer loans:
Consumer loans:
Consumer loans:Consumer loans:    
Home equity and second mortgage Home equity and second mortgage184 255 
Commercial business loansCommercial business loans289 309 
Commercial business loans
Commercial business loans
Total loans accounted for on a non-accrual basis Total loans accounted for on a non-accrual basis1,586 2,059 
Accruing loans which are contractually past due 90 days or moreAccruing loans which are contractually past due 90 days or more— — 
Accruing loans which are contractually past due 90 days or more
Accruing loans which are contractually past due 90 days or more
Total of non-accrual and 90 days or more past due loansTotal of non-accrual and 90 days or more past due loans1,586 2,059 
Total of non-accrual and 90 days or more past due loans
Total of non-accrual and 90 days or more past due loans
Non-accrual investment securities
Non-accrual investment securities
Non-accrual investment securitiesNon-accrual investment securities87 106 
Total non-performing assets (2) Total non-performing assets (2)$1,673 $2,165 
Total non-performing assets (2)
Total non-performing assets (2)
TDRs on accrual status (3)
TDRs on accrual status (3)
TDRs on accrual status (3)TDRs on accrual status (3)$2,604 $2,472 
Non-accrual and 90 days or more past due loans as a percentage of loans receivableNon-accrual and 90 days or more past due loans as a percentage of loans receivable0.12 %0.18 %
Non-accrual and 90 days or more past due loans as a percentage of loans receivable
Non-accrual and 90 days or more past due loans as a percentage of loans receivable0.25 %0.11 %
Non-accrual and 90 days or more past due loans as a percentage of total assets
Non-accrual and 90 days or more past due loans as a percentage of total assets
Non-accrual and 90 days or more past due loans as a percentage of total assetsNon-accrual and 90 days or more past due loans as a percentage of total assets0.09 %0.11 %0.18 %0.08 %
Non-performing assets as a percentage of total assetsNon-performing assets as a percentage of total assets0.09 %0.12 %
Non-performing assets as a percentage of total assets
Non-performing assets as a percentage of total assets0.18 %0.09 %
Loans receivable (4)
Loans receivable (4)
Loans receivable (4)Loans receivable (4)$1,275,954 $1,146,129 
Total assetsTotal assets$1,807,713 $1,860,508 
Total assets
Total assets

(1) As of June 30,December 31, 2023 and September 30, 2022,2023, there were no one- to four-family properties in the process of foreclosure.
(2) Does not include TDRs on accrual status.status as of September 30, 2023. For more information regarding TDRs please see Note 4 of the Notes to Unaudited Financial Statements contained in "Item 1 Financial Statements".
(3) Does not include TDRs totaling $0 and $142 reported as non-accrual loans at June 30, 2023 and September 30, 2022, respectively.2023. For more information regarding TDRs please see Note 4 of the Notes to Unaudited Financial Statements contained in "Item 1 Financial Statements".
(4)  Does not include loans held for sale, and loan balances are before the allowance for loan losses.ACL.







4244


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

CRE Loan Portfolio Breakdown by Collateral at December 31, 2023
($ in thousands)
Collateral TypeBalancePercent of CRE PortfolioPercent of Total Loan PortfolioAverage Balance per LoanNon-Accrual
Industrial warehouse$114,355 20 %%$1,132 $195 
Medical/dental offices80,767 14 %1,324 — 
Office buildings65,543 11 %745 — 
Other retail buildings50,003 %538 — 
Mini-storage37,131 %1,375 — 
Hotel/motel31,973 %2,906 — 
Restaurants27,346 %558 — 
Gas stations/convenience stores21,346 %970 — 
Nursing homes18,024 %2,575 — 
Shopping centers10,922 %1,820 — 
Mobile home parks10,917 %520 — 
Churches7,121 %475 — 
Other103,590 18 %719 488 
Total CRE$579,038 100 %40 %$898 $683 

CRE Loan Portfolio Breakdown by Collateral at September 30, 2023
($ in thousands)
Collateral TypeBalancePercent of CRE PortfolioPercent of Total Loan PortfolioAverage Balance per LoanNon-Accrual
Industrial warehouse$115,804 20 %%$1,135 $195 
Medical/dental offices76,498 14 %1,319 — 
Office buildings66,108 12 %760 — 
Other retail buildings51,730 %545 — 
Hotel/motel30,718 %3,072 — 
Mini-storage27,750 %1,156 — 
Restaurants27,640 %564 — 
Gas stations/convenience stores21,588 %939 — 
Nursing homes18,051 %3,008 — 
Shopping centers10,790 %2,158 — 
Mobile home parks9,696 %510 — 
Churches7,253 %484 — 
Other104,639 18 %731 488 
Total CRE$568,265 100 %40 %$893 $683 
45


Comparison of Operating Results for the Three and Nine Months Ended June 30,December 31, 2023 and 2022

Net income increaseddecreased by $568,000,$1.21 million, or 9.9%16.1%, to $6.31$6.30 million for the quarter ended June 30,December 31, 2023 from $5.74$7.51 million for the quarter ended June 30,December 31, 2022. Net income per diluted common share increaseddecreased by $0.08,$0.13, or 11.6%14.4%, to $0.77 for the quarter ended June 30,December 31, 2023 from $0.69$0.90 for the quarter ended June 30,December 31, 2022. The increasesdecreases in net income and net income per diluted common share for the three months ended June 30,December 31, 2023 were primarily due to a $2.65$1.74 million increasedecrease in net interest income.income and an $89,000 increase in non-interest expense.. This increasedecrease was partially offset by a $1.05 million$93,000 increase in non-interest expense, a $227,000 decrease in non-interest income, a $610,000 increase$189,000 decrease in the provision for loanscredit losses and a $194,000 increase in the provision for income taxes.

Net income increased by $3.93 million, or 23.7%, to $20.48 million for the nine months ended June 30, 2023 from $16.55 million for the nine months ended June 30, 2022. Net income per diluted common share increased by $0.50, or 25.4%, to $2.47 for the nine months ended June 30, 2023 from $1.97 for the nine months ended June 30, 2022. The increase in net income and net income per diluted common share was due to an $11.96 million increase in net interest income. This increase was partially offset by a $3.93 million increase in non-interest expense, a $1.41 million$335,000 decrease in non-interest income, a $1.61 million increase in the provision for loan losses and a $1.08 million increase in the provision for income taxes.

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

Net Interest Income: Net interest income increaseddecreased by $2.65$1.74 million, or 19.0%9.8%, to $16.63$16.00 million for the quarter ended June 30,December 31, 2023 from $13.98$17.74 million for the quarter ended June 30,December 31, 2022. The increase in net interest incomeThis decrease was primarily due to an increase in the weighted average yield on interest-earning assetscost of interest-bearing liabilities to 2.22% at December 31, 2023 from 0.50% at December 31, 2022 and, to a lesser extent, a $67.35 million increase in average balance of total interest-bearing liabilities. Partially offsetting the increase in funding costs, was an increase in the average balanceyields of loansinterest-earning assets to 5.07% for the current quarter from 4.34% at December 31, 2022, and investment securities, as the Company placed a portion of its excess overnight liquidity into higher-earning loans during the period. This increase was partially offset by an$16.18 million increase in the average cost oftotal interest-bearing liabilities.assets.

Total interest and dividend income increased by $5.26$3.38 million, or 36.0%17.7%, to $19.89$22.50 million for the quarter ended June 30,December 31, 2023 from $14.63$19.11 million for the quarter ended June 30,December 31, 2022, primarily due to increases in the average yield and average balance of investment securities, the average yield and average balance of loans receivable, and the average yieldyields on interest-bearing deposits in banks and CDs.CDs and investment securities. These increases were partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs.

The average balance of total interest-earning assets decreasedincreased by $109.96$16.18 million, or 6.1%0.9%, to $1.69$1.78 billion for the quarter ended June 30,December 31, 2023 from $1.80$1.76 billion for the quarter ended June 30,December 31, 2022. The average balance of investment securities increaseddecreased by $67.33$13.19 million, or 26.1%4.1% and the average balance of loans receivable increased by $181.11$168.60 million, or 16.9%14.5%, which was partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $358.86$140.19 million, or 77.9%52.6% between the periods. During the quarter ended June 30,December 31, 2023, the accretion of the purchase accounting fair value discount on acquired loans increased interest income on loans by $22,000$10,000 compared to $63,000$28,000 for the quarter ended June 30,December 31, 2022. The incremental accretion will change during any period based on the volume of prepayments but is expected to decrease over time as the balance of the net discount declines. During the quarter ended June 30,December 31, 2023, there was a total of $87,000$142,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $246,000$120,000 collected for the quarter ended June 30,December 31, 2022. The average yield on interest-earning assets increased by 14673 basis points to 4.72%5.07% for the quarter ended June 30,December 31, 2023 from 3.26%4.34% for the quarter ended June 30,December 31, 2022. The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 396176 basis points and 13622 basis points to 4.79%5.35% and 2.94%2.96%, respectively, for the quarter ended June 30,December 31, 2023 compared to the quarter ended June 30,December 31, 2022, while the average yield on loans receivable increased 4655 basis points to 5.17%5.52% during the same period.

Total interest expense increased by $2.61$5.12 million, or 404.7%374.2%, to $3.26$6.49 million for the quarter ended June 30,December 31, 2023 from $645,000$1.37 million for the quarter ended June 30,December 31, 2022. The increase in interest expense was due to an increase in the average cost and, to a lesser extent, an increase in the average balance of interest-bearing liabilities.liabilities, primarily deposits. The average cost of interest-bearing liabilities increased to 1.22%2.22% for the quarter ended June 30,December 31, 2023 from 0.23%0.50% for the quarter ended June 30,December 31, 2022. The average balance of interest-bearing liabilities decreasedincreased by $59.00$67.35 million, or 5.2%6.2%, to $1.07$1.16 billion for the quarter ended June 30,December 31, 2023 from $1.13$1.09 billion for the quarter ended June 30,December 31, 2022, primarily due to decreases in the average balances of NOW checking, saving and money market and savings accounts, partially offset by an increase in the average balance of certificate of deposit accounts and borrowings.

As a result of the increase in net interest income and the decrease in average balance of interest earning assets, net interest margin ("NIM")Interest expense on deposits increased by $4.77 million, or 348.7%, to 3.94%$6.14 million for the quarter ended June 30,December 31, 2023 from 3.11%$1.37 million for the quarter ended June 30, 2022.

43


Net interest income increased $11.96 million, or 30.2% to $51.53 million for the nine months ended June 30, 2023 from $39.57 million for the nine months ended June 30, 2022. The increase in net interest income was primarily due to a $16.90 million increase in total interest and dividend income that was partially offsetDecember 31, 2022, driven by a $4.94 million increase in total interest expense.

Total interest and dividend income increased by $16.90 million, or 40.7%, to $58.39 million for the nine months ended June 30, 2023 from $41.49 million for the nine months ended June 30, 2022, due to increases in the average yield on interest earning assets and the average balances on loans receivable and investment securities. The average yield on interest-earning assets increased to 4.52% for the nine months ended June 30, 2023 from 3.14% for the nine months ended June 30, 2022. The average balance of loans receivable increased $173.12 million, or 16.8% and the average balance of investment securities increased $121.79 million, or 59.2%.These increases were partially offset by a $335.01 million, or 64.8%, decrease in the average balance of interest-bearing deposits in banks and CDs between the periods, resulting in a $39.90 million decrease in the average balance of total interest-earning assets to $1.72 billion for the nine months ended June 30, 2022.

Total interest expense increased by $4.94 million, or 257.5% to $6.86 million for the nine months ended June 30, 2023 from $1.92 million for the nine months ended June 30, 2022. The increase in interest expense was primarily due to an increase in the average cost of interest- bearing liabilities.interest-bearing deposits in all categories and an increase in the average balance of certificates of deposit. The average cost of interest-bearing liabilitiesinterest bearing deposits increased 113 basis points to 2.17% for the three months ended December 31, 2023, which included a 297 basis point increase in the cost of certificates of deposit to 4.16%, compared to the same period last year. The average balance of certificates of deposit increased $175.89 million, or 129.8%, to $311.35 million for the three months ended December 31, 2023, compared to the same period last year, which includes $42.73 million in brokered certificates of deposit.

46


Interest expense on borrowing increased to 0.85%$348,000 for the nine monthsquarter ended June 30,December 31, 2023, from 0.23%compared to none for the nine monthsquarter ended June 30,December 31, 2022. The average balance of interest bearing liabilities decreased by $15.28borrowing was $28.80 million or 1.4%, to $1.08 billionand the average rate paid on borrowings was 4.05% for the nine monthsquarter ended June 30, 2023 from $1.10 billion for the nine months ended June 30, 2022, primarily due to decreases in the average balances of NOW checking, savings and money market accounts, partially offset by increases in the average balances of certificate of deposits and borrowings.December 31, 2023.

As a result of the increase in interest expense, the net interest income and the decrease in average balance of interest earning assets, NIM increasedmargin ("NIM") decreased to 3.99%3.60% for the nine monthsquarter ended June 30,December 31, 2023 from 2.99%4.03% for the nine monthsquarter ended June 30,December 31, 2022.

44


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 June 30, Three Months Ended December 31,
20232022 20232022
Average
Balance
Interest and
Dividends
Yield/
Cost
Average
Balance
Interest and
Dividends
Yield/
Cost
Average
Balance
Average
Balance
Interest and
Dividends
Yield/
Cost
Average
Balance
Interest and
Dividends
Yield/
Cost
Interest-earning assets:Interest-earning assets:
Loans receivable (1)(2)
Loans receivable (1)(2)
Loans receivable (1)(2)Loans receivable (1)(2)$1,254,044 $16,215 5.17 %$1,072,933 $12,628 4.71 %$1,332,971 $$18,395 5.52 5.52 %$1,164,369 $$14,457 4.97 4.97 %
Investment securities (2)Investment securities (2)324,844 2,384 2.94 257,513 1,016 1.58 
Dividends from mutual funds, FHLB stock and other investments Dividends from mutual funds, FHLB stock and other investments6,541 70 4.28 6,082 25 1.64 
Interest-bearing deposits in banks and CDs Interest-bearing deposits in banks and CDs101,798 1,220 4.79 460,657 958 0.83 
Total interest-earning assetsTotal interest-earning assets1,687,227 19,889 4.72 1,797,185 14,627 3.26 
Non-interest-earning assetsNon-interest-earning assets84,255   85,470   Non-interest-earning assets81,612    84,806    
Total assets Total assets$1,771,482   $1,882,655    Total assets$1,858,000   $1,845,010   
Interest-bearing liabilities:Interest-bearing liabilities:      
Interest-bearing liabilities:
Interest-bearing liabilities:  
SavingsSavings$255,463 118 0.19 $284,659 59 0.08 
Money marketMoney market205,023 429 0.84 258,240 191 0.30 
NOW checkingNOW checking387,426 982 1.02 462,085 161 0.14 
Certificates of depositCertificates of deposit210,950 1,594 3.03 125,132 234 0.75 
Brokered CDs
Short-term borrowingsShort-term borrowings3,464 46 5.33 — — — 
Long-term borrowingsLong-term borrowings8,791 86 3.92 — — — 
Total interest-bearing liabilitiesTotal interest-bearing liabilities1,071,117 3,255 1.22 1,130,116 645 0.23 
Non-interest-bearing depositsNon-interest-bearing deposits462,315 529,770 
Other liabilities
Other liabilities
Other liabilitiesOther liabilities10,199   10,170   11,878   11,002   
Total liabilitiesTotal liabilities1,543,631   1,670,056   Total liabilities1,623,725   1,624,782   
Shareholders' equityShareholders' equity227,851   212,599   Shareholders' equity234,275   220,228   
Total liabilities andTotal liabilities and    Total liabilities and    
shareholders' equityshareholders' equity$1,771,482 $1,882,655   shareholders' equity$1,858,000 $$1,845,010   
Net interest incomeNet interest income$16,634  $13,982  
Net interest income
Net interest income$16,004  $17,743  
Interest rate spread
Interest rate spread
Interest rate spreadInterest rate spread3.50 %  3.03 %2.85 %  3.84 %
Net interest margin (3)Net interest margin (3)3.94 %  3.11 %Net interest margin (3)3.60 % 4.03 %
Ratio of average interest-earning assets to average interest- bearing liabilitiesRatio of average interest-earning assets to average interest- bearing liabilities157.52 %  159.03 %Ratio of average interest-earning assets to average interest- bearing liabilities152.90 % 160.83 %
47


_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.

45


 Nine Months Ended June 30,
 20232022
Average
Balance
Interest and
Dividends
Yield/
Cost
Average
Balance
Interest and
Dividends
Yield/
Cost
Interest-earning assets:      
Loans receivable (1)(2)$1,206,294 $45,622 5.04 %$1,033,173 $37,870 4.89 %
Investment securities (2)327,457 7,058 2.87 205,667 2,012 1.30 
Dividends from mutual funds, FHLB stock and other investments6,202 185 3.98 6,004 80 1.78 
Interest-bearing deposits in banks and CDs182,312 5,524 4.04 517,323 1,528 0.39 
Total interest-earning assets1,722,265 58,389 4.52 1,762,167 41,490 3.14 
Non-interest-earning assets84,167   84,426   
Total assets$1,806,432   $1,846,593   
Interest-bearing liabilities:      
Savings$270,076 296 0.15 $275,684 171 0.08 
Money market221,131 1,116 0.67 241,734 530 0.29 
NOW checking413,372 2,322 0.75 448,028 439 0.13 
Certificates of deposit172,193 2,995 2.33 128,784 762 0.79 
Short-term borrowings1,157 46 5.32 — 0.23 
Long-term borrowings2,930 86 3.92 1,906 17 1.19 
Total interest-bearing liabilities1,080,859 6,861 0.85 1,096,139 1,919 0.23 
Non-interest-bearing deposits491,404 530,038 
Other liabilities9,896   9,938   
Total liabilities1,582,159   1,636,115   
Shareholders' equity224,273   210,478   
Total liabilities and    
shareholders' equity$1,806,432   $1,846,593   
Net interest income$51,528   $39,571  
Interest rate spread  3.67 %  2.91 %
Net interest margin (3)  3.99 %  2.99 %
Ratio of average interest-earning  assets to average interest- bearing liabilities  159.34 %  160.76 %
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.

Rate Volume Analysis

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
46


volume), and (iii) the net change (sum of the prior columns).  Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands).
Three months ended
June 30, 2023
compared to three months
ended June 30, 2022
increase (decrease) due to
Nine months ended
June 30, 2023
compared to nine months
ended June 30, 2022
increase (decrease) due to
RateVolumeNet
Change
RateVolumeNet
Change
Interest-earning assets:Interest-earning assets:   
Interest-earning assets:
Interest-earning assets:
Loans receivable and loans held for sale
Loans receivable and loans held for sale
Loans receivable and loans held for saleLoans receivable and loans held for sale$1,323 $2,264 $3,587 $1,237 $6,515 $7,752 
Investment securitiesInvestment securities1,049 319 1,368 3,382 1,664 5,046 
Investment securities
Investment securities
Dividends from mutual funds, FHLB stock and other investments
Dividends from mutual funds, FHLB stock and other investments
Dividends from mutual funds, FHLB stock and other investments Dividends from mutual funds, FHLB stock and other investments43 45 102 105 
Interest-bearing deposits in banks and CDs Interest-bearing deposits in banks and CDs1,508 (1,246)262 4,297 (301)3,996 
Interest-bearing deposits in banks and CDs
Interest-bearing deposits in banks and CDs
Total net increase in income on interest-earning assets
Total net increase in income on interest-earning assets
Total net increase in income on interest-earning assetsTotal net increase in income on interest-earning assets3,923 1,339 5,262 9,018 7,881 16,899 
Interest-bearing liabilities:Interest-bearing liabilities:   
Interest-bearing liabilities:
Interest-bearing liabilities:
Savings
Savings
SavingsSavings66 (7)59 128 (3)125 
Money marketMoney market285 (47)238 627 (41)586 
Money market
Money market
NOW checking
NOW checking
NOW checkingNOW checking851 (30)821 1,913 (30)1,883 
Certificates of depositCertificates of deposit1,110 250 1,360 1,902 331 2,233 
Certificates of deposit
Certificates of deposit
Short term FHLB borrowings
Short term FHLB borrowings
Short term FHLB borrowingsShort term FHLB borrowings23 23 46 23 23 46 
Long-term borrowings Long-term borrowings43 43 86 34 35 69 
Long-term borrowings
Long-term borrowings
Total net increase in expense on interest-bearing liabilities
Total net increase in expense on interest-bearing liabilities
Total net increase in expense on interest-bearing liabilitiesTotal net increase in expense on interest-bearing liabilities2,378 232 2,610 4,627 315 4,942 
Net increase in net interest income$1,545 $1,107 $2,652 $4,391 $7,566 $11,957 
Net decrease in net interest income
Net decrease in net interest income
Net decrease in net interest income

Provision for LoanCredit Losses: There was a $610,000A net $336,000 provision for loancredit losses was recorded for the quarter ended June 30,December 31, 2023, which consisted of a $379,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $10,000 recapture of credit losses on investment securities which is primarily due to maturities and principal payments, and a $33,000 recapture of credit losses on unfunded commitments which is primarily due to the increasechange in loans receivable during the period.mix of unfunded commitments. There was noa $525,000 provision made for loan losses, under the prior incurred loan loss method, for the quarter ended June 30,December 31, 2022. The Company adopted the CECL methodology as of October 1, 2023, which resulted in one-time upward adjustments to the ACL on loans of $461,000, to the ACL on investment securities of $92,000, and to the ACL on unfunded commitments of $65,000, resulting in an after-tax decrease to opening retained earnings of $488,000. Amounts reported prior to October 1, 2023 were calculated using the previous incurred loss methodology to compute our allowance for credit losses, which is not directly comparable to the new CECL methodology. The provision for credit losses for the three months ended December 31, 2023 also reflects assumptions related to forecasts concerning the economic environment as a result of local, national and global events, including recent bank failures. In addition, expected loss estimates consider
48


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

For the quarter ended June 30,December 31, 2023, there were net charge-offs of $1,000were $2,000 compared to no net charge-offsa $1,000 recovery for the quarter ended June 30,December 31, 2022. Non-accrual loans decreasedincreased by $473,000,$1.85 million, or 23.0%122.3%, to $1.59$3.36 million at June 30,December 31, 2023 from $2.06$1.51 million at September 30, 2022 and decreased2023. At December 31, 2023, non-accrual loans increased by $705,000,$1.32 million, or 30.8%64.7%, to $3.36 million from $2.29$2.04 million at June 30,December 31, 2022. Total delinquent loans (past due 30 days or more) and non-accrual loans decreasedincreased by $253,000,$1.94 million, or 12.1%116.4%, to $1.84$3.60 million at June 30,December 31, 2023, from $2.10$1.67 million at September 30, 20222023 and decreasedincreased by $689,000,$1.35 million, or 27.3%59.9%, from $2.53$2.25 million one year ago. 

The $519,000$423,000 balance of SBA PPP loans was omitted from the Company's normal allowance for loancredit losses calculation at June 30,December 31, 2023, as these loans are fully guaranteed by the SBA and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

There wasWhile management believes the estimates and assumptions used in the determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not have a $1.61 million provision for loan losses formaterial adverse impact on financial condition and results of operations. A further decline in national and local economic conditions, as a result of the nine months ended June 30, 2023, primarily due to theeffects of inflation, and a potential recession or slowed economic growth, among other factors, could result in a material increase in loans receivable during the period. There was no provision for loan losses made forACL and have a material adverse impact on the nine months ended June 30, 2022. Forfinancial condition and results of operations. In addition, the nine months ended June 30, 2023, there were net charge-offs of $6,000 compared to net charge offs of $36,000 for the nine months ended June 30, 2022.

The Company has established a comprehensive methodology for determining the allowance for loan losses.  On a quarterly basis, the Company performs an analysis that considers pertinent factors underlying the qualitydetermination of the loan portfolio.  These factors include changesamount of the ACL is subject to review by bank regulators as part of the routine examination process, which may result in the amountadjustment of reserves based upon their judgment of information available to them at the time of their examination and compositionhave a material adverse impact on the financial condition and results of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses. Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan.  The aggregate principal impairment reserve amount on impaired loans determined at June 30, 2023 was $123,000 and $127,000 at both September 30, 2022 and June 30, 2022. 
47


operations.

In accordance with GAAP, acquired loans are recorded at their estimated fair value, which results in a net discount to the loan's contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value, and, as a result, no allowancevalue. With the adoption of CECL, the loans are evaluated for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflectedimpairment in the allowance forsame manner as the rest of the loan losses or related allowance coverage ratios.portfolio. The remaining fair value discount associated with $13.92$11.2 million in loans that were acquired in the South Sound Acquisition was $203,000$182,000 at June 30,December 31, 2023. This discount will continue to accrete into income as these loans continue to pay down.

Based on its comprehensive analysis, management believes that the allowance for loan losses of $15.31 million at June 30, 2023 (1.20% of loans receivable and 965.1% of non-performing loans) was adequate to provide forprobable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date.  The allowance for loan losses was $13.70 million (1.20% of loans receivable and 665.5% of non-performing loans) at September 30, 2022 and $13.43 million (1.22% of loans receivable and 586.3% of non-performing loans) at June 30, 2022. While the Company believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to significantly increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate. A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowing economic growth, among other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations. 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 decreasedincreased by $227,000,$93,000, or 7.3%3.4%, to $2.88$2.80 million for the quarter ended June 30,December 31, 2023 from $3.10$2.71 million for the quarter ended June 30,December 31, 2022. This decreaseincrease was primarily due to a $178,000 decrease$76,000 increase in service charges on deposits, a $57,000 increase in net gain on sales of loans, an $82,000 decrease in service charges on deposits and smaller decreases in several other categories. These decreases were partially offset by a $95,000 gain on sale of investment securities, and smaller increases in several other categories. These increases were partially offset by small decreases in several other categories. The decreaseincrease in net gain on sales of loans was primarily due to a decreasean increase in the dollar amount of fixed-rate one- to four-family loans originated and sold during the current quarter reflecting reduceda slight increase in refinance activity compared to the same period last year. Gain on sale of loans was also impactedThese increases were partially offset by rising interest rates, declining homes sales and a decision to retain a higher percentage of single family loans originated during the quarter in the portfolio rather than selling them. The gain on sale of securities was due to the sale of $8.83 million of available for sale investment securities.

Total non-interest income for the nine months ended June 30, 2023 decreased by $1.41 million, or 14.7%, to $8.22 million from $9.63 million for the nine months ended June 30, 2022. This decrease was primarily due to a $1.19 million decrease in gain on sales of loans, a $169,000 decrease in service charges on deposits, a $119,000 decrease in the valuation recovery on loan servicing rights, and smallersmall decreases in several other categories. These decreases to non-interest income were partially offset by a $95,000 gain on sale of investment securities, and smaller increases in several other categories.

Non-interest Expense:  Total non-interest expense increased by $1.05 million,$89,000, or 10.7%0.8%, to $10.93$10.62 million for the quarter ended June 30,December 31, 2023 from $9.87$10.54 million for the quarter ended June 30,December 31, 2022. This increase was primarily due to an $617,000 increaseincreased expenses of $185,000 in salariestechnology and employee benefits, a $246,000 increasecommunications expense, $132,000 in data processingATM and telecommunicationdebit card interchange expense, a $114,000 increase$86,000 in deposit operations, a $106,000 increase in premises and equipment expenseFDIC insurance and smaller increases in several other categories, which were partially offset by a $176,000 decrease in professional fees expense and smaller decreases in several categories. The increase in salariestechnology and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2022). The increase in data processing and telecommunicationcommunications expense was primarily due to the addition of several technology products and increased processing volumes. The increase in deposits operationsFDIC insurance was primarily due to an increase in unrecovered overdrafts and fraud related expenses.deposit insurance rates by the FDIC in January 2023. The efficiency ratio for the current quarter improvedwas 56.50% compared to 56.01% from 57.80%51.52% for the comparable quarter one year ago. The deterioration in the efficiency ratio was due to lower total revenue coupled with slightly higher non-interest expense.

Total non-interest expense increased by $3.93 million, or 13.8%, to $32.41 million for the nine months ended June 30, 2023 from $28.47 million for the nine months ended June 30, 2022. This increase was primarily due to a $2.20 million increase in salaries and employee benefits, a $632,000 increase in data processing and telecommunication expense, and smaller increases in several other categories, which were partially offset by smaller decreases in several categories. The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2022). The increase in data processing and telecommunication expense was primarily due to the addition of several technology products and increased processing volumes.

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Provision for Income Taxes: The provision for income taxes increaseddecreased by $194,000,$335,000, or 13.2%17.8%, to $1.67$1.55 million for the quarter ended June 30,December 31, 2023 from $1.47$1.88 million for the quarter ended June 30,December 31, 2022. The provision for income taxes increased by $1.08 million, or 25.8%, to $5.25 million for the nine months ended June 30, 2023 from $4.18 million for the nine months ended June 30, 2022. The increasesdecrease in the provision for income taxes werewas primarily due to higher income before income taxes.lower pre-tax income. The Company's effective income tax rate was 20.9%19.6% for the quarter ended June 30,December 31, 2023 and 20.4%20.0% for the quarter ended June 30,December 31, 2022. The Company's effective tax rate was 20.4% for the nine months ended June 30, 2023 from 20.1% for the nine months ended June 30, 2022.
49




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 borrowings, if needed, from the FHLB and FRB .FRB.  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 June 30,December 31, 2023, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 15.59%13.07%.  At June 30,December 31, 2023, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which $15.00$20.00 million was outstanding. The Bank had $549.08$576.42 million available for borrowings with the FHLB at June 30,December 31, 2023. The Bank maintains two short-term borrowing lines with the FRB with total credit based on eligible collateral: Borrower-in-Custody ("BIC") and Bank Term Funding Program ("BTFP").  At June 30,December 31, 2023, the Bank had no outstanding balance on the BIC line, under which $85.00$74.03 million was available for future borrowings. At June 30,December 31, 2023, the Bank had no outstanding balance on the BTFP line, under which $57.00$20.00 million was available for future borrowings. The Bank also maintains a $50.00 million overnight borrowing line with Pacific Coast Bankers' Bank ("PCBB"). At June 30,December 31, 2023, the Bank did not have an outstanding balance on this borrowing line. Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposits withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

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 ninethree months ended June 30,December 31, 2023 and 2022, the Bank originated $272.54$88.93 million and $435.92$101.67 million of loans, respectively. At June 30,December 31, 2023, the Bank had loan commitments totaling $169.28$147.06 million and undisbursed construction loans in process totaling $104.77$104.68 million.  Investment securities purchased during the ninethree months ended June 30,December 31, 2023 and 2022 totaled $32.60$1.92 million and $167.67$31.31 million, respectively.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments.  During the ninethree months ended June 30,December 31, 2023 and 2022, the Bank sold $6.96$9.60 million and $51.05$1.16 million, respectively, in loans and loan participation interests.  During the three and nine months ended June 30,December 31, 2023, the Bank received $33.53 million and $130.21$44.35 million in principal repayments, respectively.repayments. During the three and nine months ended June 30,December 31, 2022, the Bank received $64.02 million and $249.16$50.71 million in principal repayments, respectively.repayments.

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities available for sale (including equity securities) decreasedincreased to $191.56$211.76 million at June 30,December 31, 2023 from $381.90$186.49 million at September 30, 2022.2023. CDs that are scheduled to mature in less than one year from June 30,December 31, 2023 totaled $206.18$274.31 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

Capital expenditures are incurred on an ongoing basis to expand and improve the Bank's product offerings, enhance and modernize technology infrastructure, and to introduce new technology-based products to compete effectively in the various markets. Capital expenditure projects are evaluated based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on
49


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 threenine months ending September 30, 20232024 that would materially impact liquidity.

50


For the remaining threenine months in the year ending September 30, 2023,2024, the Bank projects that fixed commitments will include $82,000$250,000 of operating lease payments. There are no scheduled payments and maturities ofOne FHLB borrowingsborrowing totaling $5.00 million will mature during the fiscal year 2023.2024. In addition, at June 30,December 31, 2023, there were other future obligations and accrued expenses of $8.78$8.88 million.

The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. In addition to is operating expenses, Timberland Bancorp is responsible for paying any dividends declared, if any, to its shareholders and funds paid for Company stock repurchases. Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends. At June 30,December 31, 2023, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $552,000.$1.01 million.

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. The current quarterly common stock dividend rate is $0.23$0.24 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders. Assuming continued payment during fiscal year 20232024 at the rate of $0.23$0.24 per share, the average total dividend paid each quarter would be approximately $1.86$1.95 million based on the number of current outstanding shares at June 30,December 31, 2023 (which assumes no increases or decrease in the number of shares).

FromIn addition, from time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. In February 2021, the Company’s board of directors announced a plan to repurchase 415,970 shares of the Company's common stock. On July 25, 2023, the Company terminated the February 2021 stock repurchase program, which had 74,212 shares remaining for future purchases, and announced the adoption of a new stock repurchase program. Under the new repurchase program pursuant to which the Company may repurchase up to 5%404,708 shares of the outstandingCompany common stock, of which 361,812 shares or 404,708 shares. The July 2023 repurchase program does not have a set expiration date and will expire upon repurchaseremained available for future purchases as of the full amount of authorized shares.December 31, 2023. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemdeemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares. For additional information on the Company’s stock repurchases, see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” contained in Part II of this report.



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 June 30,December 31, 2023, the Bank exceeded all regulatory capital requirements as of that date.requirements. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at June 30,December 31, 2023, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.











50
51


The following table compares the Bank’s actual capital amounts at June 30,December 31, 2023 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
Actual
Regulatory
Minimum To
Be “Adequately
Capitalized”
To Be “Well Capitalized”
Under Prompt
Corrective Action
Provisions
AmountRatioAmountRatioAmountRatio AmountRatioAmountRatioAmountRatio
Leverage Capital Ratio:Leverage Capital Ratio:      Leverage Capital Ratio:  
Tier 1 capitalTier 1 capital$214,600 12.14 %$70,723 4.00 %$88,404 5.00 %Tier 1 capital$222,238 12.06 12.06 %$73,718 4.00 4.00 %$92,147 5.00 5.00 %
Risk-based Capital Ratios:Risk-based Capital Ratios:
Common equity Tier 1 capitalCommon equity Tier 1 capital214,600 18.04 53,542 4.50 77,339 6.50 
Common equity Tier 1 capital
Common equity Tier 1 capital
Tier 1 capitalTier 1 capital214,600 18.04 71,390 6.00 95,186 8.00 
Total capitalTotal capital229,482 19.29 95,186 8.00 118,983 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 June 30,December 31, 2023, 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 June 30,December 31, 2023, Timberland Bancorp, Inc. would have exceeded all regulatory requirements. The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc. as of June 30,December 31, 2023 (dollars in thousands):
Actual
ActualActual
AmountRatio AmountRatio
Leverage Capital Ratio:Leverage Capital Ratio:  Leverage Capital Ratio:  
Tier 1 capitalTier 1 capital$215,634 12.27 %Tier 1 capital$223,774 12.14 12.14 %
Risk-based Capital Ratios:Risk-based Capital Ratios:
Common equity Tier 1 capitalCommon equity Tier 1 capital215,634 18.11 
Common equity Tier 1 capital
Common equity Tier 1 capital
Tier 1 capitalTier 1 capital215,634 18.11 
Total capitalTotal capital230,526 19.36 


Key Financial Ratios and Data
Three Months Ended June 30,Nine Months Ended
June 30,
2023202220232022
2023
2023
2023
PERFORMANCE RATIOS:
PERFORMANCE RATIOS:
PERFORMANCE RATIOS:
PERFORMANCE RATIOS:
   
Return on average assetsReturn on average assets1.42 %1.22 %1.51 %1.19 %
Return on average assets
Return on average assets
Return on average equity
Return on average equity
Return on average equityReturn on average equity11.07 %10.80 %12.17 %10.48 %
Net interest marginNet interest margin3.94 %3.11 %3.99 %2.99 %
Net interest margin
Net interest margin
Efficiency ratioEfficiency ratio56.01 %57.80 %54.24 %57.87 %
Efficiency ratio
Efficiency ratio


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 20222023 Form 10-K.

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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 (principal executive officer), Chief Financial Officer (principal 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 June 30,December 31, 2023, 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:  The Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 4 to the consolidated interim financial statements, effective October 1, 2023. Related to the adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses on loans and the reserve for unfunded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results. There have beenwere no other changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarterthree months ended June 30,December 31, 2023 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 20222023 Form 10-K.

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

(a)    Not applicable

(b)    Not applicable

(c)    Stock Repurchases








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The following table sets forth the shares repurchased by the Company during the quarter ended June 30,December 31, 2023:

PeriodTotal No. of Shares RepurchasedAverage Price Paid Per ShareTotal No. of Shares Purchased as Part of Publicly Announced PlanMaximum No. of Shares that May Yet Be Purchased Under the Plan (1)
4/1/2023 - 4/30/20235,293 $25.76 5,293 178,919 
5/1/2023 - 5/31/202350,707 23.68 50,707 128,212 
6/1/2023 - 6/30/202354,000 24.75 54,000 74,212 
Total110,000 $24.31 110,000 74,212 
PeriodTotal No. of Shares RepurchasedAverage Price Paid Per ShareTotal No. of Shares Purchased as Part of Publicly Announced PlanMaximum No. of Shares that May Yet Be Purchased Under the Plan (1)
10/1/2023 - 10/31/2023— $— — 374,142 
11/1/2023 - 11/30/202312,330 29.38 12,330 361,812 
12/1/2023 - 12/31/2023— — — 361,812 
Total12,330 $29.38 12,330 361,812 

(1) On February 24, 2021,July 25, 2023, the Company announced a plannew stock repurchase program to repurchase 415,970purchase 404,708 shares of the Company's common stock. This repurchase program was terminated on July 25, 2023. On July 25, 2023marked the Company announced the adoption of a newCompany's 19th stock repurchase program. Under the new repurchase program, Timberland may repurchase up to 5% or the outstanding shares, or 404,708 shares.plan. The new stock repurchase program replaces the existing stock repurchase program, which had 74,212 shares available to be repurchased. The July 2023 repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares. The repurchase programShares may be suspended, terminatedrepurchased from time to time in the open market or modified at any time for any reason, includingin privately negotiated transactions based upon market conditions and available liquidity. Cumulatively, since January 1998, the costCompany has repurchased 8,379,317 shares of repurchasing shares, the availabilityits common stock at an average price of alternative investment opportunities, liquidity, and other factors deem appropriate.$9.98 per share.

The Company is subject to certain restrictions on its ability to repurchase its common stock. The Company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.

Item 3.      Defaults Upon Senior Securities
Not applicable.

53



Item 4.     Mine Safety Disclosures
Not applicable.

Item 5.     Other Information
a.None to be reported.
b.None to be reported.
c.During the quarter ended December 31, 2023, no director or officer (as defined in Rule 16a-1(f) under the Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

54


Item 6.         Exhibits

(a)   Exhibits
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.710.10
31.1
31.2
32
101The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended June 30,December 31, 2023 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
104Cover 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 July 13, 2023.
(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 Registrant's Current Report on Form 8-K filed on May 27, 2022December 22, 2023.
(7)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.
(8)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 18, 2019.
5455


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: August 7, 2023February 12, 2024
By:  /s/ Dean J. Brydon                              
 Dean J. Brydon
 Chief Executive Officer 
 (Principal Executive Officer) 
  
 
 
Date: August 7, 2023February 12, 2024
By:  /s/Marci A. Basich                                
 Marci A. Basich
 Chief Financial Officer
(Principal Financial Officer)
5556