Companies: 10,793     total market cap: $134.237 T
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Timberland Bancorp
TSBK
#7906
Rank
$0.31 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$40.35
Share price
0.22%
Change (1 day)
42.58%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Timberland Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2022 Q3

Timberland Bancorp - 10-Q quarterly report FY2022 Q3


Text size:
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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, 2022

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 August 1, 2022, there were 8,249,698 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.     
52 
   
  Item 6.     
   
 
Certifications  
 Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32 
Exhibit 101

2

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

TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2022 and September 30, 2021
(Dollars in thousands, except per share amounts)
June 30,
2022		September 30,
2021
(Unaudited)*
Assets  
Cash and cash equivalents:  
Cash and due from financial institutions$23,610 $26,316 
Interest-bearing deposits in banks398,541 553,880 
Total cash and cash equivalents422,151 580,196 
Certificates of deposit (“CDs”) held for investment (at cost, which
     approximates fair value)		23,888 28,482 
Investment securities held to maturity, at amortized cost (estimated fair value of $216,294 and $70,109)
228,196 69,102 
Investment securities available for sale, at fair value45,141 63,176 
Investments in equity securities, at fair value872 955 
Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost2,194 2,103 
Other investments, at cost3,000 3,000 
Loans held for sale700 3,217 
Loans receivable, net of allowance for loan losses of $13,433 and $13,469
1,087,967 968,454 
Premises and equipment, net22,154 22,367 
Other real estate owned (“OREO”) and other repossessed assets, net— 157 
Accrued interest receivable4,319 3,745 
Bank owned life insurance (“BOLI”)22,649 22,193 
Goodwill15,131 15,131 
Core deposit intangible (“CDI”), net1,027 1,264 
Loan servicing rights, net3,220 3,482 
Operating lease right-of-use ("ROU") assets2,051 2,283 
Other assets3,135 2,873 
Total assets$1,887,795 $1,792,180 
Liabilities and shareholders’ equity  
Liabilities  
Deposits:
     Non-interest-bearing demand$527,876 $535,212 
     Interest-bearing1,136,238 1,035,343 
Total deposits1,664,114 1,570,555 
FHLB borrowings— 5,000 
Operating lease liabilities2,135 2,359 
Other liabilities and accrued expenses7,227 7,367 
Total liabilities$1,673,476 $1,585,281 
* 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, 2022 and September 30, 2021
(Dollars in thousands, except per share amounts)
 
June 30,
2022		September 30,
2021
(Unaudited)*
Shareholders’ equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued
$— $— 
Common stock, $0.01 par value; 50,000,000 shares authorized;
8,249,448 shares issued and outstanding - June 30, 2022 8,355,469 shares issued and outstanding - September 30, 2021
39,585 42,673 
Retained earnings175,299 164,167 
Accumulated other comprehensive income (loss)(565)59 
Total shareholders’ equity214,319 206,899 
Total liabilities and shareholders’ equity$1,887,795 $1,792,180 
* 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, 2022 and 2021
(Dollars in thousands, except per share amounts)
(Unaudited)

 Three Months Ended June 30,Nine Months Ended 
June 30,
 2022202120222021
Interest and dividend income  
Loans receivable and loans held for sale$12,628 $13,298 $37,870 $39,406 
Investment securities1,016 292 2,012 877 
Dividends from mutual funds, FHLB stock and other investments25 28 80 83 
Interest-bearing deposits in banks and CDs958 247 1,528 816 
Total interest and dividend income14,627 13,865 41,490 41,182 
Interest expense  
Deposits645 690 1,902 2,358 
FHLB borrowings— 18 17 76 
Total interest expense645 708 1,919 2,434 
Net interest income13,982 13,157 39,571 38,748 
Provision for loan losses— — — — 
Net interest income after provision for loan losses13,982 13,157 39,571 38,748 
Non-interest income  
Net recoveries on investment securities5 6 16 14 
Service charges on deposits1,052 948 2,979 2,943 
ATM and debit card interchange transaction fees1,345 1,363 3,868 3,755 
BOLI net earnings151 150 457 445 
Gain on sales of loans, net258 1,607 1,337 5,367 
Escrow fees41 64 164 243 
Valuation recovery (allowance) on loan servicing rights, net— (179)119 23 
Other, net250 307 687 921 
Total non-interest income, net3,102 4,266 9,627 13,711 


 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, 2022 and 2021
(Dollars in thousands, except per share amounts)
(Unaudited)
 Three Months Ended June 30,Nine Months Ended 
June 30,
 2022202120222021
Non-interest expense  
Salaries and employee benefits$5,243 $4,554 $15,606 $13,944 
Premises and equipment898 995 2,814 2,949 
Advertising187 162 513 472 
OREO and other repossessed assets, net(2)5 (18)(89)
ATM and debit card interchange transaction fees515 464 1,429 1,341 
Postage and courier140 141 440 428 
State and local taxes265 284 754 822 
Professional fees580 262 1,173 675 
Federal Deposit Insurance Corporation ("FDIC") insurance123 100 377 301 
Loan administration and foreclosure180 148 380 319 
Data processing and telecommunications698 627 1,980 1,868 
Deposit operations316 289 878 818 
Amortization of CDI79 90 237 271 
Other652 492 1,909 1,455 
Total non-interest expense, net9,874 8,613 28,472 25,574 
Income before income taxes7,210 8,810 20,726 26,885 
Provision for income taxes1,472 1,786 4,176 5,320 
     Net income
$5,738 $7,024 $16,550 $21,565 
Net income per common share  
Basic$0.69 $0.84 $1.99 $2.59 
Diluted$0.69 $0.83 $1.97 $2.55 
Weighted average common shares outstanding  
Basic8,279,436 8,365,350 8,324,371 8,336,590 
Diluted8,349,859 8,465,393 8,406,977 8,440,861 
Dividends paid per common share$0.22 $0.21 $0.65 $0.72 

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, 2022 and 2021
(Dollars in thousands)
(Unaudited) 
 Three Months Ended 
June 30,		Nine Months Ended 
June 30,
 2022202120222021
Comprehensive income
Net income$5,738 $7,024 $16,550 $21,565 
Other comprehensive income (loss)
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $(122), $0, $(167), and $16, respectively
(459)1 (629)58 
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, $2, $1, and $1, respectively
1 7 5 10 
Total other comprehensive income (loss), net of income taxes(458)8 (624)68 
Total comprehensive income$5,280 $7,032 $15,926 $21,633 



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, 2022 and 2021
(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, 20218,361,457$42,949$155,473$121$198,543
Net income——7,024—7,024
Other comprehensive income———88
Repurchase of common stock(16,688)(469)——(469)
Exercise of stock options9,20097——97
Common stock dividends ($0.21 per common share)
——(1,758)—(1,758)
Stock option compensation expense—47——47
Balance, June 30, 20218,353,969$42,624$160,739$129$203,492
Balance, March 31, 20228,305,826$40,988$171,388$(107)$212,269
Net income——5,738—5,738
Other comprehensive loss———(458)(458)
Repurchase of common stock(58,678)(1,502)——(1,502)
Exercise of stock options 2,30027——27
Common stock dividends ($0.22 per common share)
——(1,827)—(1,827)
Stock option compensation expense—72——72
Balance, June 30, 20228,249,448$39,585$175,299$(565)$214,319
 Common Stock Accumulated
Other
Compre-hensive
Income (Loss)		 
 Number of SharesAmountRetained
Earnings		Total
Balance, September 30, 20208,310,793 $42,396 $145,173 $61 $187,630 
Net income— — 21,565 — 21,565 
Other comprehensive income— — — 68 68 
Repurchase of common stock(19,588)(527)— — (527)
Exercise of stock options62,764 616 — — 616 
Common stock dividends ($0.72 per common share)
— — (5,999)— (5,999)
Stock option compensation expense— 139 — — 139 
Balance, June 30, 20218,353,969 $42,624 $160,739 $129 $203,492 
Balance, September 30, 20218,355,469 $42,673 $164,167 $59 $206,899 
Net income— — 16,550 — 16,550 
Other comprehensive loss— — — (624)(624)
Repurchase of common stock(135,791)(3,651)— — (3,651)
Exercise of stock options 29,770 359 — — 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 

See notes to unaudited consolidated financial statements
8

TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2022 and 2021
(Dollars in thousands)
(Unaudited)
 Nine Months Ended June 30,
 20222021
Cash flows from operating activities  
Net income$16,550 $21,565 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation1,035 1,174 
Deferred income taxes223 57 
Accretion of discount on purchased loans(154)(291)
Amortization of CDI237 271 
Stock option compensation expense204 139 
Net recoveries on investment securities(16)(14)
Change in fair value of investments in equity securities83 17 
Amortization of discounts and premiums on securities123 49 
Gain on sales of OREO and other repossessed assets, net(1)(92)
Gain on sales of loans, net(1,337)(5,367)
Loans originated for sale(47,199)(119,669)
Proceeds from sales of loans51,053 126,186 
Amortization of loan servicing rights879 817 
Valuation recovery on loan servicing rights, net(119)(23)
BOLI net earnings(457)(445)
Decrease in deferred loan origination fees(1,192)(97)
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses(1,521)(1,552)
Net cash provided by operating activities18,391 22,725 
Cash flows from investing activities  
Net decrease in CDs held for investment4,594 34,327 
Purchase of investment securities held to maturity(167,671)(33,797)
Purchase of investment securities available for sale— (18,698)
Proceeds from maturities and prepayments of investment securities held to maturity8,737 9,524 
Proceeds from maturities and prepayments of investment securities available for sale16,977 9,013 
Purchase of FHLB stock(91)(181)
Decrease (increase) in loans receivable, net(118,167)12,698 
Purchases of premises and equipment(822)(658)
Proceeds from sales of OREO and other repossessed assets158 985 
Net cash provided by (used in) investing activities(256,285)13,213 

See notes to unaudited consolidated financial statements
9

TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the nine months ended June 30, 2022 and 2021
(Dollars in thousands)
(Unaudited)
 Nine Months Ended June 30,
 20222021
Cash flows from financing activities  
Net increase in deposits$93,559 $164,246 
Repayments of FHLB borrowings(5,000)(5,000)
Proceeds from exercise of stock options359 616 
Repurchase of common stock(3,651)(527)
Payment of dividends(5,418)(5,999)
Net cash provided by financing activities79,849 153,336 
  
Net increase (decrease) in cash and cash equivalents(158,045)189,274 
Cash and cash equivalents  
Beginning of period580,196 314,452 
End of period$422,151 $503,726 
Supplemental disclosure of cash flow information  
Income taxes paid$3,642 $4,642 
Interest paid$1,955 $2,554 
Supplemental disclosure of non-cash investing activities  
Other comprehensive income (loss) related to investment securities$(624)$68 

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, 2021 (“2021 Form 10-K”).  The unaudited consolidated results of operations for the nine months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2022.

(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, 2022 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, 2022 and September 30, 2021 (dollars in thousands):
 Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair Value
June 30, 2022    
Held to maturity    
U.S. Treasury and U.S. government agency securities$161,055 $17 $(9,191)$151,881 
Mortgage-backed securities ("MBS"):
U.S. government agencies25,575 11 (1,508)24,078 
Private label residential41,066 236 (1,442)39,860 
Bank issued trust preferred securities500 — (25)475 
Total$228,196 $264 $(12,166)$216,294 
Available for sale    
MBS: U.S. government agencies$45,841 $2 $(702)$45,141 
Total$45,841 $2 $(702)$45,141 
September 30, 2021
Held to maturity    
U.S. Treasury and U.S. government agency securities$28,760 $8 $(99)$28,669 
MBS:
U.S. government agencies25,913 936 (122)26,727 
Private label residential13,929 302 (23)14,208 
Bank issued trust preferred securities500 5 — 505 
Total$69,102 $1,251 $(244)$70,109 
Available for sale    
MBS: U.S. government agencies$63,080 $210 $(114)$63,176 
Total$63,080 $210 $(114)$63,176 

12

Held to maturity and available for sale investment securities with unrealized losses were as follows as of June 30, 2022 (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$139,507 $(9,038)24 $2,944 $(153)1 $142,451 $(9,191)
MBS:        
U.S. government agencies23,219 (1,506)9 296 (2)3 23,515 (1,508)
Private label residential29,820 (1,352)25 6,683 (90)3 36,503 (1,442)
Bank issued trust
  preferred securities
475 (25)1 — — — 475 (25)
     Total
$193,021 $(11,921)59 $9,923 $(245)7 $202,944 $(12,166)
Available for sale        
MBS: U.S. government agencies$27,616 $(257)12 $16,892 $(445)13 $44,508 $(702)
     Total
$27,616 $(257)12 $16,892 $(445)13 $44,508 $(702)

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2021 (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$18,795 $(99)5 $— $— — $18,795 $(99)
MBS:
U.S. government agencies8,091 (122)5 15 — 3 8,106 (122)
 Private label
    residential
9,712 (23)4 1 — 1 9,713 (23)
     Total
$36,598 $(244)14 $16 $— 4 $36,614 $(244)
Available for sale        
MBS: U.S. government agencies$20,146 $(103)13 $5,491 $(11)3 $25,637 $(114)
     Total
$20,146 $(103)13 $5,491 $(11)3 $25,637 $(114)

The Company has evaluated the investment securities in the above tables and has determined that the declines in their fair value are temporary.  The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities.  The Company has the ability and the intent to hold the investments until the fair value recovers.  Further, as of June 30, 2022, management does not have the intent to sell any of the securities classified as available for sale for which the estimated fair value is below the recorded value and believes that it is more likely than not that the Company will not have to sell such securities before a recovery of cost (or recorded value if previously written down).
13


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

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of June 30, 2022 and 2021:
 RangeWeighted
Minimum Maximum Average 
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 %
June 30, 2021   
Constant prepayment rate6.00 %15.00 %12.84 %
Collateral default rate1.83 %21.58 %13.09 %
Loss severity rate— %14.53 %4.82 %

The following table presents the OTTI recoveries for the three and nine months ended June 30, 2022 and 2021 (dollars in thousands):
 Three Months Ended
June 30, 2022		Three Months Ended
June 30, 2021
 Held To
Maturity		Held To
Maturity
Total recoveries $5 $6 
Net recoveries recognized in earnings (1)$5 $6 
 Nine Months Ended
June 30, 2022		Nine Months Ended
June 30, 2021
 Held To
Maturity		Held To
Maturity
Total recoveries$16 $14 
Net recoveries recognized in earnings (1)$16 $14 
_________________
(1) Represents OTTI related to credit losses.

14


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 nine months ended June 30, 2022 and 2021 (dollars in thousands):
 Nine Months Ended
June 30,
 20222021
Beginning balance of credit loss$853 $885 
Additions (subtractions): 
Net realized gain (losses) previously recorded
as credit losses
2 (5)
Recovery of prior credit loss(13)(14)
Ending balance of credit loss$842 $866 

During the nine months ended June 30, 2022, the Company recorded a $2,000 net realized gain on 16 held to maturity investment securities. During the nine months ended June 30, 2021, the Company recorded a $5,000 net realized loss (as a result of investment securities being deemed worthless) on 12 held to maturity investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral and other non-profit organization deposits totaled $114.81 million and $97.60 million at June 30, 2022 and September 30, 2021, respectively.

The contractual maturities of debt securities at June 30, 2022 were as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.
 Held to MaturityAvailable for Sale
 Amortized
Cost		Estimated
Fair
Value		Amortized
Cost		Estimated
Fair
Value
Due within one year$2,008 $1,970 $— $— 
Due after one year to five years135,710 130,419 3,524 3,512 
Due after five years to ten years47,075 42,740 10,375 10,307 
Due after ten years43,403 41,165 31,942 31,322 
Total$228,196 $216,294 $45,841 $45,141 


(3) GOODWILL AND CDI

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

The annual goodwill impairment test begins with a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its carrying amount. If an entity concludes that it is not "more likely than not" that the fair value of a reporting unit is less than its carrying amount, it need not perform a two-step impairment test. If the Company's qualitative assessment concluded that it is "more likely than not" that the fair value of its reporting unit is less than its carrying amount, it must perform the two-step impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the estimated fair value of the reporting unit with its carrying amount, or the book value, including goodwill. If the estimated fair value of the reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the second step of the impairment test is unnecessary.
15


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 2022 goodwill impairment test during the quarter ended June 30, 2022. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount, and, therefore, goodwill was determined not to be impaired at May 31, 2022.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

As of June 30, 2022, management believes that there have been no events or changes in the circumstances since May 31, 2022 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future. If adverse economic conditions or any decreases in the Company's stock price and market capitalization as a result of the novel coronavirus of 2019 ("COVID-19") pandemic were sustained in the future 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, 2022 and September 30, 2021 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, 2022, 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 LOAN LOSSES



Loans receivable by portfolio segment consisted of the following at June 30, 2022 and September 30, 2021 (dollars in thousands):
 June 30,
2022		September 30,
2021
 AmountPercentAmountPercent
Mortgage loans:    
One- to four-family (1)$144,682 12.0 %$119,935 11.1 %
Multi-family98,718 8.2 87,563 8.1 
Commercial532,167 44.1 470,650 43.5 
Construction - custom and owner/builder117,724 9.7 109,152 10.1 
Construction - speculative one- to four-family13,954 1.2 17,813 1.6 
Construction - commercial40,108 3.3 43,365 4.0 
Construction - multi-family54,804 4.5 52,071 4.8 
Construction - land development21,240 1.8 10,804 1.0 
Land24,490 2.0 19,936 1.8 
Total mortgage loans1,047,887 86.8 931,289 86.0 
Consumer loans:    
Home equity and second mortgage32,821 2.7 32,988 3.1 
Other2,545 0.2 2,512 0.2 
Total consumer loans35,366 2.9 35,500 3.3 
Commercial loans:
Commercial business122,822 10.2 74,579 6.9 
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans1,320 0.1 40,922 3.8 
    Total commercial loans124,142 10.3 %115,501 10.7 
Total loans receivable1,207,395 100.0 %1,082,290 100.0 %
Less:    
Undisbursed portion of construction loans in process102,044  95,224  
Deferred loan origination fees, net3,951  5,143  
Allowance for loan losses13,433  13,469  
Subtotal119,428 113,836 
Loans receivable, net$1,087,967  $968,454  
_____________________________
 (1) Does not include one- to four-family loans held for sale totaling $700 and $3,217 at June 30, 2022 and September 30, 2021, respectively.

Loans receivable at June 30, 2022 and September 30, 2021 are reported net of unamortized discounts totaling $295,000 and $449,000, respectively.







17



Allowance for Loan Losses

The following tables set forth information for the three and nine months ended June 30, 2022 and 2021 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):
 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 — 8 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-family765 123 — — 888 
Commercial6,813 (50)— — 6,763 
Construction – custom and owner/builder644 89 — — 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 
Other50 10 (10)1 51 
Commercial business loans1,513 348 (49)22 1,834 
Total$13,469 $— $(59)$23 $13,433 
18

 Three Months Ended June 30, 2021
 Beginning
Allowance		Provision for
(Recapture of) Loan Losses		Charge-
offs		RecoveriesEnding
Allowance
Mortgage loans:     
  One- to four-family$1,151 $(9)$— $— $1,142 
  Multi-family784 26 — — 810
  Commercial7,238 (277)— — 6,961
  Construction – custom and owner/builder695 (91)— — 604
  Construction – speculative one- to four-family148 36 — — 184
  Construction – commercial714 44 — — 758
Construction – multi-family323 125 — — 448 
  Construction – land development19 12 — — 31 
  Land407 (58)— 35 384
Consumer loans:     
  Home equity and second mortgage552 (1)— — 551
  Other56 — — — 56
Commercial business loans1,347 193 — — 1,540
Total$13,434 $— $— $35 $13,469 
 Nine Months Ended June 30, 2021
 Beginning
Allowance		Provision for
(Recapture of) Loan Losses		Charge-
offs		RecoveriesEnding
Allowance
Mortgage loans:     
  One-to four-family$1,163 $(21)$— $— $1,142 
  Multi-family71892 — — 810
  Commercial7,144(183)— — 6,961
  Construction – custom and owner/builder832(228)— — 604
  Construction – speculative one- to four-family15826 — — 184
  Construction – commercial420338 — — 758
Construction – multi-family238 210 — — 448 
  Construction – land development133 (102)— — 31 
  Land572(233)— 45 384
Consumer loans:     
  Home equity and second mortgage593(42)— — 551
  Other71(18)(1)4 56
Commercial business loans1,372161 (2)9 1,540
Total$13,414 $— $(3)$58 $13,469 
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, 2022 and September 30, 2021 (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, 2022      
Mortgage loans:      
One- to four-family$— $1,356 $1,356 $393 $144,289 $144,682 
Multi-family— 888 888 — 98,718 98,718 
Commercial— 6,763 6,763 3,013 529,154 532,167 
Construction – custom and owner/builder— 733 733 — 72,963 72,963 
Construction – speculative one- to four-family— 93 93 — 5,868 5,868 
Construction – commercial— 354 354 — 28,773 28,773 
Construction – multi-family— 328 328 — 24,284 24,284 
Construction – land development— 239 239 — 13,898 13,898 
Land— 360 360 652 23,838 24,490 
Consumer loans:     
Home equity and second mortgage
— 434 434 402 32,419 32,821 
Other— 51 51 4 2,541 2,545 
Commercial business loans127 1,707 1,834 312 122,510 122,822 
SBA PPP loans— — — — 1,320 1,320 
Total$127 $13,306 $13,433 $4,776 $1,100,575 $1,105,351 
September 30, 2021      
Mortgage loans:      
One- to four-family$— $1,154 $1,154 $407 $119,528 $119,935 
Multi-family— 765 765 — 87,563 87,563 
Commercial— 6,813 6,813 3,143 467,507 470,650 
Construction – custom and owner/builder
— 644 644 — 61,003 61,003 
Construction – speculative one- to four-family
— 188 188 — 9,657 9,657 
Construction – commercial— 784 784 — 38,931 38,931 
Construction – multi-family— 436 436 — 22,888 22,888 
Construction – land development— 124 124 — 5,502 5,502 
Land76 394 470 683 19,253 19,936 
Consumer loans:      
Home equity and second mortgage
— 528 528 516 32,472 32,988 
Other— 50 50 17 2,495 2,512 
Commercial business loans171 1,342 1,513 458 74,121 74,579 
SBA PPP loans— — — — 40,922 40,922 
Total$247 $13,222 $13,469 $5,224 $981,842 $987,066 

20

The following tables present an analysis of loans by aging category and portfolio segment at June 30, 2022 and September 30, 2021 (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, 2022       
Mortgage loans:       
One- to four-family$— $— $393 $— $393 $144,289 $144,682 
Multi-family— — — — — 98,718 98,718 
Commercial— 213 671 — 884 531,283 532,167 
Construction – custom and owner/builder— — — — — 72,963 72,963 
Construction – speculative one- to four-family— — — — — 5,868 5,868 
Construction – commercial— — — — — 28,773 28,773 
Construction – multi-family— — — — — 24,284 24,284 
Construction – land development— 28 — — 28 13,870 13,898 
Land— — 651 — 651 23,839 24,490 
Consumer loans:    
Home equity and second mortgage— — 260 — 260 32,561 32,821 
Other— — 4 — 4 2,541 2,545 
Commercial business loans— — 312 — 312 122,510 122,822 
SBA PPP loans— — — — — 1,320 1,320 
Total$— $241 $2,291 $— $2,532 $1,102,819 $1,105,351 
September 30, 2021       
Mortgage loans:       
One- to four-family$— $180 $407 $— $587 $119,348 $119,935 
Multi-family— — — — — 87,563 87,563 
Commercial— — 773 — 773 469,877 470,650 
Construction – custom and owner/builder
— — — — — 61,003 61,003 
Construction – speculative one- to four-family
— — — — — 9,657 9,657 
Construction – commercial— — — — — 38,931 38,931 
Construction – multi-family— — — — — 22,888 22,888 
Construction – land development— — — — — 5,502 5,502 
Land— — 683 — 683 19,253 19,936 
Consumer loans:     
Home equity and second mortgage— — 516 — 516 32,472 32,988 
Other— — 17 — 17 2,495 2,512 
Commercial business loans5 458 463 74,116 74,579 
SBA PPP loans— — — — — 40,922 40,922 
Total$5 $180 $2,854 $— $3,039 $984,027 $987,066 
______________________
(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, 2022 and September 30, 2021, 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, 2022 and September 30, 2021, there were no loans classified as loss.

22

The following tables present an analysis of loans by credit quality indicator and portfolio segment at June 30, 2022 and September 30, 2021 (dollars in thousands):
Loan Grades 
June 30, 2022PassWatchSpecial
Mention		SubstandardTotal
Mortgage loans:     
One- to four-family$144,245 $41 $— $396 $144,682 
Multi-family98,718 — — — 98,718 
Commercial519,866 6,287 242 5,772 532,167 
Construction – custom and owner/builder71,183 1,780 — — 72,963 
Construction – speculative one- to four-family5,868 — — — 5,868 
Construction – commercial27,256 1,517 — — 28,773 
Construction – multi-family24,284 — — — 24,284 
Construction – land development13,871 — — 27 13,898 
Land23,307 531 — 652 24,490 
Consumer loans:    
Home equity and second mortgage32,352 — — 469 32,821 
Other2,477 64 — 4 2,545 
Commercial business loans122,471 — — 351 122,822 
SBA PPP loans1,320 — — — 1,320 
Total$1,087,218 $10,220 $242 $7,671 $1,105,351 
September 30, 2021     
Mortgage loans:    
One- to four-family$118,857 $129 $537 $412 $119,935 
Multi-family87,563 — — — 87,563 
Commercial456,188 10,285 2,921 1,256 470,650 
Construction – custom and owner/builder59,699 1,304 — — 61,003 
Construction – speculative one- to four-family9,657 — — — 9,657 
Construction – commercial37,414 — 1,517 — 38,931 
Construction – multi-family22,888 — — — 22,888 
Construction – land development5,467 — — 35 5,502 
Land18,648 558 — 730 19,936 
Consumer loans:    
Home equity and second mortgage32,190 145 — 653 32,988 
Other2,465 30 — 17 2,512 
Commercial business loans73,992 49 37 501 74,579 
SBA PPP loans40,922 — — — 40,922 
Total$965,950 $12,500 $5,012 $3,604 $987,066 

Impaired Loans
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions.  Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties.  In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals.  Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time that such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses, and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The categories of non-accrual loans and impaired loans overlap, although they are not identical.  
23

The following table is a summary of information related to impaired loans by portfolio segment as of June 30, 2022 and for the three and nine months 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)
With no related allowance recorded:   
Mortgage loans:   
One- to four-family$393 $436 $— $486 $490 $8 $23 $8 $23 
Commercial3,013 3,013 — 3,018 3,054 39 118 30 93 
Land652 652 — 687 502 — — — — 
Consumer loans: 
Home equity and second mortgage402 402 — 408 447 2 3 2 3 
Other4 9 — 5 8 — — — — 
Commercial business loans63 112 — 110 136 — — — — 
Subtotal4,527 4,624 — 4,714 4,637 49 144 40 119 
With an allowance recorded:   
Mortgage loans:   
Land— — — — 181 — — — — 
Commercial business loans249 249 127 249 273 — — — — 
Subtotal249 249 127 249 454 — — — — 
Total:   
Mortgage loans:   
One- to four-family393 436 — 486 490 8 23 8 23 
Commercial3,013 3,013 — 3,018 3,054 39 118 30 93 
Land652 652 — 687 683 — — — — 
Consumer loans:
Home equity and second mortgage402 402 — 408 447 2 3 2 3 
Other4 9 — 5 8 — — — — 
Commercial business loans312 361 127 359 409 — — — — 
Total$4,776 $4,873 $127 $4,963 $5,091 $49 $144 $40 $119 
______________________________________________
(1)For the three months ended June 30, 2022.
(2)For the nine months ended June 30, 2022.

24

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2021 (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)
With no related allowance recorded:      
Mortgage loans:      
One- to four-family$407 $450 $— $655 $58 $52 
Commercial3,143 3,143 — 3,039 159 127 
Land
321 321 — 292 2 2 
Consumer loans:      
Home equity and second mortgage516 516 — 552 1 1 
Other17 17 — 12 — — 
Commercial business loans164 168 — 200 — — 
Subtotal4,568 4,615 — 4,750 220 182 
With an allowance recorded:      
Mortgage loans:      
One- to four-family— — — 97 — — 
Land362 362 76 72 — — 
Commercial business loans294 294 171 285 — — 
Subtotal656 656 247 454 — — 
Total      
Mortgage loans:      
One- to four-family407 450 — 752 58 52 
Commercial3,143 3,143 — 3,039 159 127 
Land683 683 76 364 2 2 
Consumer loans:      
Home equity and second mortgage516 516 — 552 1 1 
Other17 17 — 12 — — 
Commercial business loans458 462 171 485 — — 
Total$5,224 $5,271 $247 $5,204 $220 $182 
_____________________________________________
(1) For the year ended September 30, 2021.

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 $2.64 million and $2.55 million in TDRs included in impaired loans at June 30, 2022 and September 30, 2021, 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, 2022 and September 30, 2021. 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, 2022.

The Coronavirus Aid, Relief, and Economic Security Act of 2020, signed into law on March 27, 2020 ("CARES Act"), provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This included short-term (e.g., six months) modifications such as payment deferrals, fee waivers,
25

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

In response to requests from borrowers and in accordance with the CARES Act and related regulatory guidance, the Company made payment deferral COVID-19 related modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans. All of these borrowers had resumed making payments as of June 30, 2022. Loan modifications in accordance with the CARES Act and related regulatory guidance were still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.

There were no loans with COVID-19 loan modifications on deferral status outstanding at June 30, 2022. The following table sets forth information with respect to COVID-19 loan modifications on deferral status at September 30, 2021 (dollars in thousands):

COVID-19 Loan ModificationsSeptember 30, 2021
Mortgage loansNumberBalancePercent
     One- to four-family1$323 100.0 %
Total COVID-19 Modifications1$323 100.0 %


The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of June 30, 2022 and September 30, 2021 (dollars in thousands):
 June 30, 2022
 AccruingNon-
Accrual		Total
Mortgage loans:   
Commercial$2,342 $— $2,342 
Land— 101 101 
Consumer loans:   
   Home equity and second mortgage142 57 199 
Total$2,484 $158 $2,642 

 September 30, 2021
 AccruingNon-
Accrual		Total
Mortgage loans:   
Commercial$2,371 $— $2,371 
Land— 119 119 
Consumer loans:   
   Home equity and second mortgage— 63 63 
Total$2,371 $182 $2,553 

26

There was one new TDR recognized during the nine months ended June 30, 2022. There were no new TDRs recognized during the year ended September 30, 2021. The following table sets forth information with respect to the Company's TDRs, by portfolio segment, during the nine months ended June 30, 2022:
June 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 $144 $144 
Total1$136 $144 $144 
(1) Modification was a result of an increase in principal balance and a reduction in interest rate and monthly payment.


(5) LEASES

The Company adopted the Financial Accounting Standard Board's ("FASB's") Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") on October 1, 2019 and began recording operating lease liabilities and operating lease ROU assets in the consolidated balance sheets. The Company has operating leases for three retail bank branch offices. The ROU assets totaled $2.89 million at October 1, 2019. The Company's leases have remaining lease terms of thirteen months to eleven years, some of which include options to extend the leases for up to five years.

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, 2022 and 2021 (dollars in thousands):

Three Months Ended June 30,Nine Months Ended June 30,
Lease cost:2022202120222021
Operating lease cost$95$92$283 $277 
Short-term lease cost——— — 
Total lease cost$95 $92 $283 $277 

The following tables provide supplemental information related to operating leases at or for the three and nine months ended June 30, 2022 and 2021 (dollars in thousands):
At or For the Three Months Ended June 30 , 2022At or For the
Nine Months Ended
June 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$87 $261 
Weighted average remaining lease term-operating leases7.9 years7.9 years
Weighted average discount rate-operating leases2.25 %2.25 %
At or For the Three Months Ended June 30, 2021 At or For Nine Months Ended June 30, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$80 $240 
Weighted average remaining lease term-operating leases8.6 years8.6 years
Weighted average discount rate-operating leases2.23 %2.23 %

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
27

liability was determined by utilizing the September 30, 2019 fixed-rate advances issued by the FHLB, for all leases entered into prior to the October 1, 2019 adoption date.

Maturities of operating lease liabilities at June 30, 2022 for future fiscal years are as follows (dollars in thousands):

Remainder of 2022$80 
2023310 
2024313 
2025317 
2026284 
Thereafter1,038 
Total lease payments2,342 
Less imputed interest207 
Total$2,135 



(6) NET INCOME PER COMMON SHARE

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

Information regarding the calculation of basic and diluted net income per common share for the three and nine months ended June 30, 2022 and 2021 is as follows (dollars in thousands, except per share amounts):
 Three Months Ended June 30,Nine Months Ended June 30,
2022202120222021
Basic net income per common share computation  
Numerator – net income $5,738 $7,024 $16,550 $21,565 
Denominator – weighted average common shares outstanding8,279,436 8,365,350 8,324,371 8,336,590 
Basic net income per common share$0.69 $0.84 $1.99 $2.59 
Diluted net income per common share computation  
Numerator – net income$5,738 $7,024 $16,550 $21,565 
Denominator – weighted average common shares outstanding8,279,436 8,365,350 8,324,371 8,336,590 
Effect of dilutive stock options (1)70,423 100,043 82,606 104,271 
Weighted average common shares outstanding - assuming dilution8,349,859 8,465,393 8,406,977 8,440,861 
Diluted net income per common share$0.69 $0.83 $1.97 $2.55 
____________________________________________
(1) For the three and nine months ended June 30, 2022, average options to purchase 201,150 and 205,221 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, 2021, average options to purchase 134,365 and 135,876 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.

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(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, 2022 and 2021 are as follows (dollars in thousands):
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)$(107)
Other comprehensive income (loss)(459)1 (458)
Balance of AOCI at the end of period$(554)$(11)$(565)
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)$59 
Other comprehensive income (loss)(629)5 (624)
Balance of AOCI at the end of period$(554)$(11)$(565)
Three Months Ended June 30, 2021
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$144 $(23)$121 
Other comprehensive income1 7 8 
Balance of AOCI at the end of period$145 $(16)$129 
Nine Months Ended June 30, 2021
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$87 $(26)$61 
Other comprehensive income58 10 68 
Balance of AOCI at the end of period$145 $(16)$129 
__________________________
(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
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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, 2022, there were 26,696 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, 2022, there were 239,400 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, 2022 and 2021, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the nine months ended June 30, 2022 and 2021.

Stock option activity for the nine months ended June 30, 2022 and 2021 is summarized as follows:
 Nine Months Ended June 30, 2022Nine Months Ended June 30, 2021
  Number of SharesWeighted
Average
Exercise
Price		 Number of SharesWeighted
Average
Exercise
Price
Options outstanding, beginning of period406,815 $21.62 395,349 $18.45 
Exercised(29,770)12.05 (62,764)9.82 
Granted1,000 27.25 1,500 19.13 
Forfeited(18,170)25.98 (5,270)26.91 
Options outstanding, end of period359,875 $22.20 328,815 $19.96 

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

The weighted average assumptions for options granted during the nine months ended June 30, 2022 were as follows:
Expected volatility34 %
Expected life (in years)5
Expected dividend yield3.49 %
Risk free interest rate1.22 %
Grant date fair value per share$5.88 

The aggregate intrinsic value of options exercised during the nine months ended June 30, 2022 and 2021 was $475,000 and $1.12 million, respectively.

At June 30, 2022, there were 173,670 unvested options with an aggregate grant date fair value of $830,000, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at June 30, 2022 was $409,000.  There were 2,400 options vested during the nine months ended June 30, 2022 with a total fair value of $9,400.

At June 30, 2021, there were 157,892 unvested options with an aggregate grant date fair value of $564,000. There were 200 options that vested during the nine months ended June 30, 2021 with a total fair value of $1,000.
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Additional information regarding options outstanding at June 30, 2022 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)
$5.86-6.003,000 $5.91 0.33,000 $5.91 0.3
  9.0017,500 9.00 1.317,500 9.00 1.3
10.26-10.7150,575 10.56 2.750,575 10.56 2.7
15.67-19.1388,150 16.54 7.137,630 16.05 5.5
26.50-27.2540,700 27.12 7.316,880 27.12 7.3
28.23-29.69122,250 28.79 7.737,600 29.69 5.3
31.8037,700 31.80 6.323,020 31.80 6.3
 359,875 $22.20 6.3186,205 $19.44 4.5

The aggregate intrinsic value of options outstanding at June 30, 2022 and 2021 was $1.81 million and $2.91 million, respectively.

As of June 30, 2022, unrecognized compensation cost related to unvested stock options was $706,000, which is expected to be recognized over a weighted average life of 2.23 years.


(9) FAIR VALUE MEASUREMENTS

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

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

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

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

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


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The Company had no liabilities measured at fair value on a recurring basis at June 30, 2022 and September 30, 2021. The Company's assets measured at estimated fair value on a recurring basis at June 30, 2022 and September 30, 2021 were as follows (dollars in thousands):
June 30, 2022Estimated Fair Value 
 Level 1Level 2Level 3Total
Available for sale investment securities    
   MBS: U.S. government agencies$— $45,141 $— $45,141 
Investments in equity securities
   Mutual funds872 — — 872 
Total$872 $45,141 $— $46,013 
September 30, 2021Estimated Fair Value 
 Level 1Level 2Level 3Total
Available for sale investment securities    
   MBS: U.S. government agencies$— $63,176 $— $63,176 
Investments in equity securities
   Mutual funds955 — — 955 
Total$955 $63,176 $— $64,131 

There were no transfers among Level 1, Level 2 and Level 3 during the nine months ended June 30, 2022 and the year ended September 30, 2021.

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

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

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

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

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


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The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at June 30, 2022 (dollars in thousands):
 Estimated Fair Value
 Level 1Level 2Level 3
Impaired loans:   
  Commercial business loans$— $— $122 
Total impaired loans— — 122 
Investment securities – held to maturity:   
MBS - private label residential— 7 — 
Total$— $7 $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 June 30, 2022 (dollars in thousands):
  Estimated
Fair Value		 Valuation
Technique(s)		 Unobservable Input(s) Range
Impaired loans$122 Market approachAppraised value less estimated selling costsNA

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2021 (dollars in thousands):
 Estimated Fair Value
 Level 1Level 2Level 3
Impaired loans:   
Mortgage loans:   
Land$— $— $286 
  Commercial business loans— — 123 
Total impaired loans— — 409 
Investment securities – held to maturity:   
MBS - private label residential— 10 — 
OREO and other repossessed assets— — 157 
Total$— $10 $566 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2021 (dollars in thousands):
  Estimated
Fair Value		 Valuation
Technique(s)		 Unobservable Input(s) Range
Impaired loans$409 Market approachAppraised value less estimated selling costsNA
OREO and other repossessed assets$157 Market approachLower of appraised value or listing price less estimated selling costsNA

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, 2022 and September 30, 2021. 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, 2022 and September 30, 2021 (dollars in thousands):
 June 30, 2022
  Fair Value Measurements Using:
 Recorded
Amount		 Estimated Fair Value 
Level 1		 
Level 2		 
Level 3
Financial assets     
Cash and cash equivalents$422,151 $422,151 $422,151 $— $— 
CDs held for investment23,888 23,888 23,888 — — 
Investment securities273,337 261,433 197,480 63,953 — 
Investments in equity securities872 872 872 — — 
FHLB stock2,194 2,194 2,194 — — 
Other investments3,000 3,000 3,000 — — 
Loans held for sale700 717 717 — — 
Loans receivable, net1,087,967 1,082,395 — — 1,082,395 
     Accrued interest receivable4,319 4,319 4,319 — — 
Financial liabilities     
Certificates of deposit125,445 125,284 — — 125,284 
Accrued interest payable98 98 98 — — 
 September 30, 2021
  Fair Value Measurements Using:
 Recorded
Amount		 Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets     
Cash and cash equivalents$580,196 $580,196 $580,196 $— $— 
CDs held for investment28,482 28,482 28,482 — — 
Investment securities132,278 133,286 28,670 104,616 — 
Investments in equity securities955 955 955 — — 
FHLB stock2,103 2,103 2,103 — — 
Other investments3,000 3,000 3,000 — — 
Loans held for sale3,217 3,290 3,290 — — 
Loans receivable, net968,454 981,905 — — 981,905 
     Accrued interest receivable3,745 3,745 3,745 — — 
Financial liabilities     
Certificates of deposit134,129 135,178 — — 135,178 
Accrued interest payable134 134 134 — — 


(10) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11. ASU 2016-13 replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather
34

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

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax
deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. The adoption ASU 2017-04 is not expected to a have a material impact on the Company's future consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidelines. ASU 2019-12 was effective for fiscal years beginning after December 15, 2020,
including interim periods within those fiscal years. The Company adopted ASU 2019-12 effective October 1, 2021, and it did not have a material impact on the Company's consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has not adopted ASU 2020-04 as of June 30, 2022. The adoption of ASU 2020-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) for creditors, require new disclosures for creditors for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty, and require public business entities to include current-period gross write-offs in the vintage disclosure tables. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU 2022-02 is not expected to have a material impact on the Company's future consolidated financial statements.



(11) REVENUE FROM CONTRACTS WITH CUSTOMERS

ASU 2014-09 Revenue from Contracts with Customers ("ASC 606') which 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
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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, 2022, the Company recognized $1.05 million 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, all considered within the scope of ASC 606. 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 interchange transaction fees, $164,000 in escrow fees, and $14,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the three months ended June 30, 2021, the Company recognized $948,000 in service charges on deposits, $1.36 million in ATM and debit card interchange transaction fees, $64,000 in escrow fees, and $8,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the nine months ended nine months ended June 30, 2021, the Company recognized $2.94 million in service charges on deposits, $3.76 million in ATM and debit card interchange transaction fees, $243,000 in escrow fees, and $14,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

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.



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

As used in this Form 10-Q, the terms “we,” “our” and “Company” refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.  When we refer to “Bank” in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc., and the Bank’s wholly-owned subsidiary, Timberland Service Corporation.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and nine months ended June 30, 2022.  

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
36

to: potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the ongoing COVID-19 pandemic and any governmental or societal responses thereto; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; changes in general economic conditions, either nationally or in our market areas, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions; changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources; uncertainty regarding the future of LIBOR, and the transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System ("Federal Reserve") and of our bank subsidiary by the FDIC, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including as a result of Basel III; 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 on 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; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war (including the Russia/Ukraine conflict) or any terrorist activities; 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 2021 Form 10-K. Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements that we make are based upon management’s beliefs and assumptions at the time that they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal year 2022 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of us, and could negatively affect the Company’s consolidated financial condition and results of operations as well as its stock price performance.


Overview

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 23 offices (including its main office in Hoquiam). At June 30, 2022, the Company had total assets of $1.89 billion, net loans receivable of $1.09 billion, total deposits of $1.66 billion and total shareholders’ equity of $214.32 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.
37


The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail and business customers while concentrating its lending activities on real estate secured loans. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank also originates commercial business loans and other consumer loans.

The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) loan losses.  Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount that the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed).  Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest-bearing 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.

The provision for (recapture of) loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.  The allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio. The Company did not record a provision for loan losses for the three and nine months ended June 30, 2022 and 2021, primarily reflecting the improving economy and resulting decline in forecasted probable loan losses from COVID-19 during these periods.

Net income is also affected by non-interest income and non-interest expense.  For the three and nine months ended June 30, 2022, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, servicing income on loans sold and other operating income.  Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any.  Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any.  Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, OREO and other repossessed asset expenses, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses.  Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts.

Results of operations may also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities, including changes resulting from the COVID-19 pandemic and the government action taken to address it.

COVID-19 Impact to the Company

The Company is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic. The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As of June 30, 2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Critical Accounting Policies and Estimates

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

38


Comparison of Financial Condition at June 30, 2022 and September 30, 2021

The Company’s total assets increased by $95.62 million, or 5.3%, to $1.89 billion at June 30, 2022 from $1.79 billion at September 30, 2021.  The increase in total assets was primarily due to an increase in held to maturity investment securities and an increase in loans receivable, which was partially offset by decreases in total cash and cash equivalents. The increase in total assets was funded primarily by an increase in total deposits.

Net loans receivable increased by $119.51 million, or 12.3%, to $1.09 billion at June 30, 2022 from $968.45 million at September 30, 2021, primarily due to increases in commercial real estate loans, construction loans, one-to four-family and commercial business loans (other than SBA PPP loans) and smaller increases in several other loan categories. These increases to net loans receivable were partially offset by a decrease in SBA PPP loans, an increase in the undisbursed portion of construction loans in process, and smaller decreases in several other loan categories.  

Total deposits increased by $93.56 million, or 6.0%, to $1.66 billion at June 30, 2022 from $1.57 billion at September 30, 2021, primarily due to increases in NOW checking account balances, money market account balances, and savings account balances. These increases were partially offset by decreases in non-interest bearing account balances and in certificates of deposit account balances.
 
Shareholders’ equity increased by $7.42 million, or 3.6%, to $214.32 million at June 30, 2022 from $206.90 million at September 30, 2021.  The increase in shareholders' equity was primarily due to net income, partially offset by the payment of dividends to common shareholders and the repurchase of common stock.

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

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreased by $162.64 million, or 26.7%, to $446.04 million at June 30, 2022 from $608.68 million at September 30, 2021. The decrease was primarily a result of deploying overnight liquidity into higher-earning loan originations and held to maturity investment securities.

Investment Securities:  Investment securities (including investments in equity securities) increased by $140.98 million, or 105.8%, to $274.21 million at June 30, 2022 from $133.23 million at September 30, 2021. This increase was primarily due to the purchase of additional held to maturity U.S. Treasury and U.S. government agency securities and to a lesser extent mortgage-backed investment securities during the nine months ended June 30, 2022, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period. These increases were partially offset by maturities, prepayments and scheduled amortization of other investment securities. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

FHLB Stock: FHLB stock increased $91,000, or 4.3% to $2.19 million at June 30, 2022 from $2.10 million at September 30, 2021, due to purchases required by the FHLB due to the increase in total assets.

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

Loans: Net loans receivable increased by $119.51 million, or 12.3%, to $1.09 billion at June 30, 2022 from $968.45 million at September 30, 2021.  The increase was primarily due to a $61.52 million increase in commercial real estate loans, a $48.24 million increase in commercial business loans (other than SBA PPP loans), a $24.75 million increase in one- to four-family loans, a $14.62 million increase in construction loans, and smaller increases in other categories. These increases were partially offset by a $39.60 million decrease in SBA PPP loans, a $6.82 million increase in the undisbursed portion of construction loans in process, and smaller decreases in several other categories. The SBA PPP loan balances decreased primarily due to borrowers applying for forgiveness from the SBA and the loans being subsequently paid off by the SBA.

Loan originations decreased by $34.12 million, or 7.3%, to $435.92 million for the nine months ended June 30, 2022 from $470.04 million for the nine months ended June 30, 2021.  The decrease in loan originations was primarily due to a decrease in the amount of SBA PPP and one- to four-family loans originated. The decrease was partially offset by increases in commercial real estate loans, constructions loans and commercial business (non-PPP) loans originations. The Company continued to sell longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest
39

income. The Company also periodically sells the guaranteed portion of SBA loans.  Sales of fixed-rate one- to four-family mortgage loans decreased by $75.14 million, or 59.5%, to $51.05 million for the nine months ended June 30, 2022 from $126.19 million for the nine months ended June 30, 2021, primarily due to decreased refinance activity for one- to four-family loans, as mortgage refinance activity diminished as market interest rates increased.

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

Premises and Equipment:  Premises and equipment decreased by $213,000, or 1.0%, to $22.15 million at June 30, 2022 from $22.37 million at September 30, 2021.  This decrease was primarily due to scheduled depreciation.

OREO (Other Real Estate Owned):.  At June 30, 2022, total OREO and other repossessed assets consisted of two land parcels with no recorded value. At September 30, 2021, OREO and other repossessed assets were $157,000.

BOLI (Bank Owned Life Insurance): BOLI increased by $456,000 or 2.1%, to $22.65 million at June 30, 2022 from $22.19 million at September 30, 2021. 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, 2022 and September 30, 2021. CDI decreased by $237,000, or 18.8%, to $1.03 million at June 30, 2022 from $1.26 million at September 30, 2021 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.”

Deposits: Deposits increased by $93.56 million, or 6.0%, to $1.66 billion at June 30, 2022 from $1.57 billion at September 30, 2021. The increase was primarily due to a $46.56 million increase in money market account balances, a $44.12 million increase in NOW checking account balances, and a $18.90 million increase in savings account balances. These increases were partially offset by an $8.68 million decrease in certificates of deposit account balances and a $7.34 million decrease in non-interest bearing account balances.

Deposits consisted of the following at June 30, 2022 and September 30, 2021 (dollars in thousands):
 June 30, 2022September 30, 2021
AmountPercentAmountPercent
Non-interest-bearing demand$527,876 31.7 %$535,212 34.1 %
NOW checking474,217 28.5 430,097 27.4 
Savings279,592 16.8 260,689 16.6 
Money market251,451 15.1 199,045 12.7 
Money market - reciprocal5,533 0.3 11,383 0.7 
Certificates of deposit under $250102,752 6.2 112,348 7.1 
Certificates of deposit $250 and over22,693 1.4 21,781 1.4 
Total$1,664,114 100.0 %$1,570,555 100.0 %

FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. There were no FHLB borrowings at June 30, 2022 as compared to one $5.00 million borrowing at September 30, 2021,with a scheduled maturity in March 2025. Due to favorable repayment terms, the Company repaid this borrowing in January 2022.

Shareholders’ Equity:  Total shareholders’ equity increased by $7.42 million, or 3.6%, to $214.32 million at June 30, 2022 from $206.90 million at September 30, 2021.  The increase was primarily due to net income of $16.55 million for the nine months ended June 30, 2022 and $359,000 from the exercise of stock options, which was partially offset by dividend payments to common shareholders of $5.42 million, the repurchase of 135,791 shares of the Company's common stock for $3.65 million (an average price of $26.89 per share) and a change in the accumulated other comprehensive income (loss) category of $624,000 related to the unrealized holding loss on investment securities available for sale. For additional information, see Item 2 of Part II of this Form 10-Q.

Asset Quality: The non-performing assets to total assets ratio was 0.13% at June 30, 2022 compared to 0.18% at September 30, 2021. Total non-performing assets decreased by $765,000, or 24.1%, to $2.41 million at June 30, 2022 from $3.17 million
40

at September 30, 2021. The decrease in non-performing assets was due to a $563,000 decrease in non-accrual loans, a $157,000 decrease in OREO and other repossessed assets and a $45,000 decrease in non-accrual investment securities.

The following table sets forth information with respect to the Company’s non-performing assets at June 30, 2022 and September 30, 2021 (dollars in thousands):
June 30,
2022		September 30,
2021
Loans accounted for on a non-accrual basis:  
Mortgage loans:  
    One- to four-family (1)$393 $407 
    Commercial671 773 
    Land651 683 
Consumer loans:  
    Home equity and second mortgage260 516 
Other4 17 
Commercial business loans 312 458 
       Total loans accounted for on a non-accrual basis2,291 2,854 
Accruing loans which are contractually past due 90 days or more— — 
Total of non-accrual and 90 days past due loans 2,291 2,854 
Non-accrual investment securities114 159 
OREO and other repossessed assets, net (2)— 157 
       Total non-performing assets (3)$2,405 $3,170 
TDRs on accrual status (4)$2,484 $2,371 
Non-accrual and 90 days or more past due loans as a percentage of loans receivable0.21 %0.29 %
Non-accrual and 90 days or more past due loans as a percentage of total assets0.12 %0.16 %
Non-performing assets as a percentage of total assets0.13 %0.18 %
Loans receivable (5)$1,101,400 $981,923 
Total assets$1,887,795 $1,792,180 
___________________________________
(1) As of June 30, 2022, there were no one- to four-family properties in the process of foreclosure. At September 30, 2021, there were two one- to-four family properties in the process of foreclosure.
(2) As of June 30, 2022 and September 30, 2021, the balance of OREO did not include any foreclosed residential real estate property.
(3) Does not include TDRs on accrual status.
(4) Does not include TDRs totaling $158 and $182 reported as non-accrual loans at June 30, 2022 and September 30, 2021, respectively.
(5)  Does not include loans held for sale, and loan balances are before the allowance for loan losses.



41


Comparison of Operating Results for the Three and Nine Months Ended June 30, 2022 and 2021

Net income decreased by $1.29 million, or 18.3%, to $5.74 million for the quarter ended June 30, 2022 from $7.02 million for the quarter ended June 30, 2021. Net income per diluted common share decreased by $0.14, or 16.9%, to $0.69 for the quarter ended June 30, 2022 from $0.83 for the quarter ended June 30, 2021. The decreases in net income and net income per diluted common share for the three months ended June 30, 2022 were primarily due to a $1.16 million decrease in non-interest income and a $1.26 million increase in non-interest expense. These decreases were partially offset by an $825,000 increase in net interest income and a $314,000 decrease in the provision for income taxes .

Net income decreased by $5.02 million, or 23.3%, to $16.55 million for the nine months ended June 30, 2022 from $21.57 million for the nine months ended June 30, 2021. Net income per diluted common share decreased by $0.58, or 22.75%, to $1.97 for the nine months ended June 30, 2022 from $2.55 for the nine months ended June 30, 2021. The decrease in net income and net income per diluted common share for the nine months ended June 30, 2022 were primarily due to a $4.08 million decrease in non-interest income and a $2.90 million increase in non-interest expense. These decreases were partially offset by an $823,000 increase in net interest income and a $1.14 million decrease in the provision for income taxes .

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

Net Interest Income: Net interest income increased by $825,000, or 6.3%, to $13.98 million for the quarter ended June 30, 2022 from $13.16 million for the quarter ended June 30, 2021. The increase in net interest income was primarily due to an increase in the average yield on interest-bearing deposits in banks and CDs, an increase in the average balance of investment securities, as the Company placed a portion of its excess overnight liquidity into higher-earning investments during the period, and a decline in average cost of interest-bearing liabilities. This increase was partially offset by a decrease in deferred SBA PPP loan origination fees recognized due to a decrease in the volume of forgiven SBA PPP loans between the periods.

Total interest and dividend income increased by $762,000, or 5.5%, to $14.63 million for the quarter ended June 30, 2022 from $13.87 million for the quarter ended June 30, 2021, primarily due to increases in the average balance of investment securities and the average yield on deposits in banks and CDs. This increase was partially offset by a decrease in the average yield on loans receivable reflecting the decline in deferred SBA PPP loan origination fees recognized between the periods.

Average total interest-earning assets increased by $161.25 million, or 9.9%, to $1.80 billion for the quarter ended June 30, 2022 from $1.64 billion for the quarter ended June 30, 2021. Average investment securities increased by $147.77 million, or 134.6%, average loans receivable increased by $40.34 million, or 3.9% and partially offset by a decrease in the average balance of interest-bearing deposits in banks and CDs of $26.85 million, or 5.5%, between the periods. During the quarter ended June 30, 2022, the accretion of the purchase accounting fair value discount on loans acquired in the October 2018 acquisition of South Sound Bank ("South Sound Acquisition") increased interest income on loans by $63,000 compared to $84,000 for the quarter ended June 30, 2021. The incremental accretion will change during any period based on the volume of prepayments but is expected to decrease over time as the balance of the net discount declines. During the quarter ended June 30, 2022, there was a total of $246,000 of pre-payment penalties, non-accrual interest and late fees collected, compared to $443,000 collected for the quarter ended June 30, 2021. Partially offsetting the increase in the average balance of interest-earning assets was a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased to 3.26% for the quarter ended June 30, 2022 from 3.39% for the quarter ended June 30, 2021.

Also impacting the average yield and average interest-earning asset balances during the current quarter were SBA PPP loans. These SBA PPP loans have a prescribed interest rate of 1.00% and are also subject to loan origination fees which are accreted into interest income over the life of each loan. For the quarter ended June 30, 2022, average SBA PPP loans were $2.08 million, and the Company recorded $9,000 in interest income and accreted $146,000 in SBA PPP loan origination fees into income. For the quarter ended June 30, 2021, average SBA PPP loans were $118.05 million, and the Company recorded $293,000 in interest income and accreted $1.30 million in SBA PPP loan origination fees into income. At June 30, 2022, SBA PPP deferred loan origination fees of $52,000 remain to be accreted into interest income during the remaining life of the loans.
Total interest expense decreased by $63,000, or 8.9%, to $645,000 for the quarter ended June 30, 2022 from $708,000 for the quarter ended June 30, 2021. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.23% for the quarter ended June 30, 2022 from 0.28% for the quarter ended June 30, 2021. Average interest-bearing liabilities increased by $117.48 million, or 11.6%, to $1.13 billion for the quarter ended June 30, 2022 from $1.01 billion for the quarter ended June 30, 2021, primarily due to
42

increases in the average balances of savings, NOW checking, and money market accounts partially offset by a decline in the average balance of certificates of deposit accounts.

As a result of these changes, the net interest margin ("NIM") decreased to 3.11% for the quarter ended June 30, 2022 from 3.22% for the quarter ended June 30, 2021.

Net interest income increased by $823,000, or 2.1%, to $39.57 million for the nine months ended June 30, 2022 from $38.75 million for the nine months ended June 30, 2021. The increase in net interest income was primarily due to increases in the average balance of investment securities and the average yield on interest-bearing deposits in banks and CDs, and a decline in average cost of interest-bearing liabilities. This increase was partially offset by a significant decrease in SBA PPP loan origination fees recognized due to a decrease in the volume of forgiven SBA PPP loans between the periods.

Total interest and dividend income increased by $308,000, or 0.7%, to $41.49 million for the nine months ended June 30, 2022 from $41.18 million for the nine months ended June 30, 2021. The average yield on interest-earning assets decreased to 3.14% for the nine months ended June 30, 2022 from 3.50% for the nine months ended June 30, 2021. Average total interest-earning assets increased by $194.73 million, or 12.4%, to $1.76 billion for the nine months ended June 30, 2022 from $1.57 billion for the nine months ended June 30, 2021. Average loans receivable decreased by $2.56 million, or 0.2%, average investment securities increased by $107.81 million or 110.2%, and average interest-bearing deposits in banks and CDs increased by $89.44 million, or 20.9%, between the periods.

Total interest expense decreased by $515,000, or 21.2%, to $1.92 million for the nine months ended June 30, 2022 from $2.43 million for the nine months ended June 30, 2021. The decrease in interest expense was primarily due to a decrease in the average cost of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.23% for the nine months ended June 30, 2022 from 0.34% for the nine months ended June 30, 2021. Average interest-bearing liabilities increased by $125.31 million, or 12.9%, to $1.10 billion for the nine months ended June 30, 2022 from $970.83 million for the nine months ended June 30, 2021, primarily due to increases in the average balances of savings, NOW checking, and money market accounts, partially offset by a decline in the average balance of certificates of deposit accounts.

As a result of these changes, the NIM decreased to 2.99% for the nine months ended June 30, 2022 from 3.30% for the nine months ended June 30, 2021.


43

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,
 20222021
Average
Balance		Interest and
Dividends		Yield/
Cost		Average
Balance		Interest and
Dividends		Yield/
Cost
Interest-earning assets:
Loans receivable (1)(2)$1,072,933 $12,628 4.71 %$1,032,591 $13,298 5.15 %
Investment securities (2)257,513 1,016 1.58 109,746 292 1.06 
 Dividends from mutual funds, FHLB stock and other investments 6,082 25 1.64 6,093 28 1.84 
 Interest-bearing deposits in banks and CDs460,657 958 0.83 487,508 247 0.20 
Total interest-earning assets1,797,185 14,627 3.26 1,635,938 13,865 3.39 
Non-interest-earning assets85,470   87,638   
     Total assets$1,882,655   $1,723,576   
Interest-bearing liabilities:      
Savings $284,659 59 0.08 $253,147 52 0.08 
Money market258,240 191 0.30 196,187 141 0.29 
NOW checking 462,085 161 0.14 416,234 136 0.13 
Certificates of deposit125,132 234 0.75 141,301 361 1.02 
Long-term borrowings— — — 5,769 18 1.25 
Total interest-bearing liabilities1,130,116 645 0.23 1,012,638 708 0.28 
Non-interest-bearing deposits529,770 499,383 
Other liabilities10,170   11,217   
Total liabilities1,670,056   1,523,238   
Shareholders' equity212,599   200,338   
Total liabilities and    
shareholders' equity$1,882,655 $1,723,576   
Net interest income$13,982  $13,157  
Interest rate spread3.03 %  3.11 %
Net interest margin (3)3.11 %  3.22 %
Ratio of average interest-earning  assets to average interest- bearing liabilities159.03 %  161.55 %
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.

44

 Nine Months Ended June 30,
 20222021
Average
Balance		Interest and
Dividends		Yield/
Cost		Average
Balance		Interest and
Dividends		Yield/
Cost
Interest-earning assets:      
Loans receivable (1)(2)$1,033,173 $37,870 4.89 %$1,035,733 $39,406 5.07 %
Investment securities (2)205,667 2,012 1.30 97,857 877 1.19 
Dividends from mutual funds, FHLB stock and other investments6,004 80 1.78 5,964 83 1.86 
Interest-bearing deposits in banks and CDs517,323 1,528 0.39 427,881 816 0.25 
Total interest-earning assets1,762,167 41,490 3.14 1,567,435 41,182 3.50 
Non-interest-earning assets84,426   85,636   
Total assets$1,846,593   $1,653,071   
Interest-bearing liabilities:      
Savings$275,684 171 0.08 $237,456 147 0.08 
Money market241,734 530 0.29 181,115 414 0.31 
NOW checking448,028 439 0.13 396,140 467 0.16 
Certificates of deposit128,784 762 0.79 147,530 1,330 1.21 
Short-term borrowings3 — 0.23 1 — 0.30 
Long-term borrowings1,906 17 1.19 8,591 76 1.17 
Total interest-bearing liabilities1,096,139 1,919 0.23 970,833 2,434 0.34 
Non-interest-bearing deposits530,038 476,628 
Other liabilities9,938   10,757   
Total liabilities1,636,115   1,458,218   
Shareholders' equity210,478   194,853   
Total liabilities and    
shareholders' equity$1,846,593   $1,653,071   
Net interest income$39,571   $38,748  
Interest rate spread  2.91 %  3.16 %
Net interest margin (3)  2.99 %  3.30 %
Ratio of average interest-earning  assets to average interest- bearing liabilities  160.76 %  161.45 %
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans acquired in the South Sound Acquisition are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.







45

Rate Volume Analysis

The following table sets forth the effects of changing rates and volumes on the net interest income of the Company.   Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns).  Changes in rate/volume have been allocated to rate and volume variances based on the absolute values of each (dollars in thousands).
 Three months ended
June 30, 2022
compared to three months
ended June 30, 2021
increase (decrease) due to		Nine months ended
June 30, 2022
compared to nine months
ended June 30, 2021
increase (decrease) due to
 RateVolumeNet
Change		RateVolumeNet
Change
Interest-earning assets:   
Loans receivable and loans held for sale$(1,176)$506 $(670)$(1,439)$(97)$(1,536)
Investment securities192 532 724 87 1,048 1,135 
 Dividends from mutual funds, FHLB stock and other investments (3)— (3)(3)— (3)
  Interest-bearing deposits in banks and CDs726 (15)711 516 196 712 
Total net increase (decrease) in income on interest-earning assets(261)1,023 762 (839)1,147 308 
Interest-bearing liabilities:   
Savings 1 6 7 — 24 24 
Money market 4 46 50 3 113 116 
NOW checking 9 16 25 (39)11 (28)
Certificates of deposit (89)(38)(127)(414)(154)(568)
   FHLB borrowings(9)(9)(18)(29)(30)(59)
Total net decrease in expense on interest-bearing liabilities(84)21 (63)(479)(36)(515)
Net increase (decrease) in net interest income$(177)$1,002 $825 $(360)$1,183 $823 

Provision for Loan Losses: There was no provision for loan losses for the quarters ended June 30, 2022 and June 30, 2021. For the quarter ended June 30, 2022, there were no net charge offs compared to net recoveries of $35,000 for the quarter ended June 30, 2021. Non-accrual loans decreased by $563,000, or 19.7%, to $2.29 million at June 30, 2022 from $2.85 million at September 30, 2021 and increased by $262,000, or 12.9%, from $2.03 million at June 30, 2021. Total delinquent loans (past due 30 days or more) and non-accrual loans decreased by $507,000, or 16.7%, to $2.53 million at June 30, 2022, from $3.04 million at September 30, 2021 and decreased by $410,000, or 13.9%, from $2.94 million one year ago. 

The $1.32 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at June 30, 2022, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

There was no provision for loans losses for the nine months ended June 30, 2022 and 2021. For the nine months ended June 30, 2022, there were net charge-offs of $36,000 compared to net recoveries of $55,000 for the nine months ended June 30, 2021.

The Company has established a comprehensive methodology for determining the allowance for loan losses.  On a quarterly basis, the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio.  These factors include changes in the amount and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses. Impaired loans are subjected to an impairment analysis to determine an
46

appropriate reserve amount to be allocated to each loan.  The aggregate principal impairment reserve amount determined at June 30, 2022 was $127,000 compared to $247,000 at September 30, 2021 and $171,000 at June 30, 2021. 

In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loan's contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value, and, as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. The remaining fair value discount on loans acquired in the South Sound Acquisition was $295,000 at June 30, 2022. The Company believes that this should be considered by investors when comparing the Company's allowance for loan losses to total loans in periods prior to the South Sound Acquisition.

Based on its comprehensive analysis, management believes that the allowance for loan losses of $13.43 million at June 30, 2022 (1.22% of loans receivable and 586.3% of non-performing loans) was adequate to provide for probable losses inherent in the loan portfolio based on an evaluation of known and inherent risks in the loan portfolio at that date.  The allowance for loan losses was $13.47 million (1.37% of loans receivable and 471.9% of non-performing loans) at September 30, 2021 and $13.47 million (1.33% of loans receivable and 663.8% of non-performing loans) at June 30, 2021. While the Company believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to significantly increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate. A decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations. For additional information, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Non-interest Income: Total non-interest income decreased by $1.16 million, or 27.3%, to $3.10 million for the quarter ended June 30, 2022 from $4.27 million for the quarter ended June 30, 2021. This decrease was primarily due to a $1.35 million decrease in net gain on sales of loans, a $179,000 decrease in the net valuation allowance on loan servicing rights and smaller decreases in several other categories. These decreases to non-interest income were partially offset by a $104,000 increase in service charges on deposits and smaller increases in several other categories. The decrease in net gain on sales of loans was primarily due to a decrease in the dollar amount of fixed-rate one- to four-family loans originated and sold during the current quarter reflecting reduced refinance activity and a decrease in the average pricing margin compared to the same period last year.

Total non-interest income for the nine months ended June 30, 2022 decreased by $4.08 million, or 29.8%, to $9.63 million from $13.71 million for the nine months ended June 30, 2021. This decrease was primarily due to a $4.03 million decrease in net gain on sales of loans, and smaller decreases in several other categories. These decreases were partially offset by a $113,000 increase in ATM and debit card interchange transaction fees, a $96,000 increase in the net valuation recovery on loan servicing rights and smaller increases in several other categories.

Non-interest Expense:  Total non-interest expense increased by $1.26 million, or 14.6%, to $9.87 million for the quarter ended June 30, 2022 from $8.61 million for the quarter ended June 30, 2021. This increase was primarily due to a $689,000 increase in salaries and employee benefits, a $318,000 increase in professional fees and smaller increases in several other categories, which were partially offset by smaller decreases in several categories. The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2021) and the hiring of additional lending personnel. The increase in professional fees was primarily due to higher legal and consulting fees. The efficiency ratio for the current quarter increased to 57.80% from 49.43% for the comparable quarter one year ago.

Total non-interest expense increased by $2.90 million, or 11.3% to $28.47 million for the nine months ended June 30, 2022 from $25.57 million for the nine months ended June 30, 2021. This increase was primarily due to $1.66 million increase in salaries and employee benefits expense, a $498,000 increase in professional fess, a $454,000 increase in the other non-interest expense and smaller increases and decreases in several other categories. The increase in salaries and other employee benefits was primarily due to annual salary adjustments (effective October 1, 2021) and the hiring of additional lending personnel. The increase in professional fees was primarily due to higher legal and consulting fees. The increase in the other non-interest expense category was primarily related to refunds issued to customers for deposit account fees that were determined to have been charged in error after the Bank's core system conversion in 2019 and the increase in professional fees was primarily due to higher legal and consulting fees.

47

Provision for Income Taxes: The provision for income taxes decreased by $314,000, or 17.6%, to $1.47 million for the quarter ended June 30, 2022 from $1.79 million for the quarter ended June 30, 2021. The provision for income taxes decreased by $1.14 million, or 21.5% to $4.18 million for the nine months ended June 30, 2022 from $5.32 million for the nine months ended June 30, 2021. These decreases in the provision for income taxes were primarily due to lower income before income taxes. The Company's effective income tax rate was 20.42% for the quarter ended June 30, 2022 and 20.27% for the quarter ended June 30, 2021. The Company's effective tax rate was 20.15% for the nine months ended June 30, 2022 and 19.79% for the nine months ended June 30, 2021.

Liquidity

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

The Bank must maintain an adequate level of liquidity to help ensure the availability of sufficient funds to fund its operations. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs.  At June 30, 2022, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 37.28%.  At June 30, 2022, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which no amounts were outstanding. The Bank had $474.66 million available for borrowings with the FHLB at June 30, 2022. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.  At June 30, 2022, the Bank had no outstanding balance on this borrowing line, under which $87.72 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, 2022, the Bank did not have an outstanding balance on this borrowing line. Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposits withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

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

The Bank's primary investing activity is the origination of loans and, to a lesser extent, the purchase of investment securities. During the nine months ended June 30, 2022 and 2021, the Bank originated $435.92 million and $470.04 million of loans, respectively. At June 30, 2022, the Bank had loan commitments totaling $178.55 million and undisbursed construction loans in process totaling $102.04 million.  Investment securities purchased during the nine months ended June 30, 2022 and 2021 totaled $167.60 million and $52.50 million, respectively.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments.  During the nine months ended June 30, 2022 and 2021, the Bank sold $51.05 million and $126.19 million, respectively, in loans and loan participation interests.  During the three and nine months ended June 30, 2022, the Bank received $64.02 million and $249.16 million in principal repayments, respectively.

The Bank’s liquidity has been positively impacted by increases in deposit levels. During the nine months ended June 30, 2022, deposits increased by $93.56 million from September 30, 2021. The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment and investment securities decreased to $719.38 million at June 30, 2022 from $740.96 million at September 30, 2021. CDs that are scheduled to mature in less than one year from June 30, 2022 totaled $78.65 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

Capital expenditures are incurred on an ongoing basis to expand and improve the Bank's product offerings, enhance and modernize technology infrastructure, and to introduce new technology-based products to compete effectively in the various markets. Capital expenditure projects are evaluated based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.
48


Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the remaining three months ending September 30, 2022 that would materially impact liquidity. The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. The current quarterly common stock dividend rate is $0.22 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders. Assuming continued payment during fiscal year 2022 at the rate of $0.22 per share, the average total dividend paid each quarter would be approximately $1.83 million based on the number of current outstanding shares (which assumes no increases or decreases in the number of shares).

For the remaining three months ending September 30, 2022, the Bank projects that fixed commitments will include $80,000 of operating lease payments. There are no scheduled payments and maturities of FHLB borrowings during the fiscal year 2022, but due to favorable borrowing terms, the Company decided in January 2022 that it was advantageous to payoff $5.00 million in FHLB borrowings. In addition, at June 30, 2022, there were other future obligations and accrued expenses of $7.23 million.

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

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities. At June 30, 2022, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $2.37 million.


Capital Resources

The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Based on its capital levels at June 30, 2022, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at June 30, 2022, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.

The following table compares the Bank’s actual capital amounts at June 30, 2022 to its minimum regulatory capital requirements at that date (dollars in thousands):
 Actual
Regulatory
Minimum To
Be “Adequately
Capitalized”		To Be “Well Capitalized”
Under Prompt
Corrective Action
Provisions
 AmountRatioAmountRatioAmountRatio
Leverage Capital Ratio:      
Tier 1 capital$197,247 10.61 %$74,375 4.00 %$92,969 5.00 %
Risk-based Capital Ratios:
Common equity Tier 1 capital197,247 18.31 48,479 4.50 70,026 6.50 
Tier 1 capital197,247 18.31 64,639 6.00 86,186 8.00 
Total capital210,717 19.56 86,186 8.00 107,732 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
49

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

Timberland Bancorp, Inc. is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets (as of June 30th of the preceding year), the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp, Inc. were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at June 30, 2022, Timberland Bancorp, Inc. would have exceeded all regulatory requirements. The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc. as of June 30, 2022 (dollars in thousands):
Actual
 AmountRatio
Leverage Capital Ratio:  
Tier 1 capital$200,178 10.72 %
Risk-based Capital Ratios:
Common equity Tier 1 capital200,178 18.57 
Tier 1 capital200,178 18.57 
Total capital213,658 19.82 

Key Financial Ratios and Data
 Three Months Ended June 30,Nine Months Ended
June 30,
2022202120222021
PERFORMANCE RATIOS:
   
Return on average assets1.22 %1.63 %1.19 %1.74 %
Return on average equity10.80 %14.02 %10.48 %14.76 %
Net interest margin3.11 %3.22 %2.99 %3.30 %
Efficiency ratio57.80 %49.43 %57.87 %48.75 %


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 Form 10-K for the fiscal year ended September 30, 2021.


Item 4.  Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures:  An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this report.  The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2022, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
(b)Changes in Internal Controls:  There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.  The Company continued, however, to implement suggestions from its internal auditor and independent auditors to strengthen existing controls.  The Company does not expect that its disclosure controls and procedures
50

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 Form 10-K for the fiscal year ended September 30, 2021.

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

(a)    Not applicable

(b)    Not applicable

(c)    Stock Repurchases

The following table sets forth the shares repurchased by the Company during the quarter ended June 30, 2022:
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)
4/1/2022 - 4/30/2022— $— — 322,169 
5/1/2022 - 5/31/202255,165 25.63 55,165 267,004 
6/1/2022- 6/30/20223,513 25.07 3,513 263,491 
Total58,678 25.60 58,678 263,491 

(1) On February 24, 2021, the Company announced a plan to repurchase 415,970 shares of the Company's common stock. As of June 30, 2022, 152,479 shares had been repurchased, and there were 263,491 shares still authorized to be repurchased under the plan.


Item 3.      Defaults Upon Senior Securities
Not applicable.

51


Item 4.     Mine Safety Disclosures
Not applicable.

Item 5.     Other Information
None to be reported.

Item 6.         Exhibits

(a)   Exhibits
3.1
3.2
4.1Form of Certificate of Timberland Bancorp, Inc. Common Stock (1)
10.1
10.2
10.4
10.5
10.7
10.8
10.9
10.10Timberland Bancorp, Inc. 2019 Equity Incentive Plan (9)
31.1
31.2
32
101The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended June 30, 2022, formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Unaudited Consolidated Financial Statements
_________________

(1)Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (333-35817).
(2)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 10, 2022.
(3)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 16, 2007.
(4)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
(5)Incorporated by reference to the Exhibit 99.2 included in the Registrant's Registration Statement on Form S-8 (333-1161163).
(6)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 29, 2013.
(7)Incorporated by reference to Registrant's Current Report on Form 8-K filed on May 27, 2022
(8)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.
(9)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 18, 2019.
52

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 5, 2022
By:  /s/ Michael R. Sand                                   
 Michael R. Sand 
 Chief Executive Officer 
 (Principal Executive Officer) 
  
 
 
Date: August 5, 2022
By:  /s/ Dean J. Brydon                                    
 Dean J. Brydon 
 President and Chief Financial Officer
(Principal Financial Officer)
53

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