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 FY2024 Q2

Timberland Bancorp - 10-Q quarterly report FY2024 Q2


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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, 2024

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, 2024, there were 7,966,021 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.     
57 
   
  Item 6.     
   
 
Certifications  
 Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32 
Exhibit 101
Exhibit 104

2

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

TIMBERLAND BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2024 and September 30, 2023
(Dollars in thousands, except per share amounts)
June 30,
2024		September 30,
2023
(Unaudited)*
Assets  
Cash and cash equivalents:  
Cash and due from financial institutions$25,566 $25,390 
Interest-bearing deposits in banks133,347 103,331 
Total cash and cash equivalents158,913 128,721 
Certificates of deposit (“CDs”) held for investment (at cost, which
     approximates fair value)		10,458 15,188 
Investment securities held to maturity, at amortized cost (net of allowance for credit losses of $72 at June 30, 2024 and $0 at September 30, 2023), (estimated fair value of $166,761 and $253,766)
176,787 270,218 
Investment securities available for sale, at fair value74,515 41,771 
Investments in equity securities, at fair value836 811 
Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost2,037 3,602 
Other investments, at cost3,000 3,000 
Loans held for sale1,795 400 
Loans receivable, net of allowance for credit losses of $17,046 and $15,817
1,397,019 1,302,305 
Premises and equipment, net21,558 21,642 
Accrued interest receivable7,045 6,004 
Bank owned life insurance (“BOLI”)23,436 22,966 
Goodwill15,131 15,131 
Core deposit intangible (“CDI”), net508 677 
Loan servicing rights, net1,526 2,124 
Operating lease right-of-use ("ROU") assets1,550 1,772 
Other assets4,515 3,573 
Total assets$1,900,629 $1,839,905 
Liabilities and shareholders’ equity  
Liabilities  
Deposits:
     Non-interest-bearing demand$407,125 $455,864 
     Interest-bearing1,221,419 1,105,071 
Total deposits1,628,544 1,560,935 
FHLB borrowings20,000 35,000 
Operating lease liabilities1,649 1,867 
Other liabilities and accrued expenses9,213 9,030 
Total liabilities$1,659,406 $1,606,832 
* 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, 2024 and September 30, 2023
(Dollars in thousands, except per share amounts)
 
June 30,
2024		September 30,
2023
(Unaudited)*
Commitments and contingent liabilities (see Note 12)
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;
7,953,421 shares issued and outstanding - June 30, 2024 8,105,338 shares issued and outstanding - September 30, 2023
30,681 34,771 
Retained earnings211,087 199,386 
Accumulated other comprehensive loss(545)(1,084)
Total shareholders’ equity241,223 233,073 
Total liabilities and shareholders’ equity$1,900,629 $1,839,905 
* 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, 2024 and 2023
(Dollars in thousands, except per share amounts)
(Unaudited)

 Three Months Ended June 30,Nine Months Ended
June 30,
 2024202320242023
Interest and dividend income  
Loans receivable and loans held for sale$19,537 $16,215 $56,841 $45,622 
Investment securities2,335 2,384 6,892 7,058 
Dividends from mutual funds, FHLB stock and other investments94 70 266 185 
Interest-bearing deposits in banks and CDs2,173 1,220 5,791 5,524 
Total interest and dividend income24,139 19,889 69,790 58,389 
Interest expense  
Deposits7,938 3,123 21,383 6,729 
FHLB borrowings220 132 787 132 
Total interest expense8,158 3,255 22,170 6,861 
Net interest income15,981 16,634 47,620 51,528 
Provision for (recapture of) credit losses
Provision for credit losses - loans264 610 810 1,610 
Recapture of credit losses - investment securities(12)— (20)— 
Recapture of credit losses - unfunded commitments(8)— (130)— 
Total provision for credit loss - net244610660 1,610 
Net interest income after provision for (recapture of) credit losses15,737 16,024 46,960 49,918 
Non-interest income  
Net recoveries on investment securities2 2 9 7 
Gain on sale of investment securities available for sale, net— 95 — 95 
Service charges on deposits1,014 970 3,024 2,810 
ATM and debit card interchange transaction fees1,297 1,335 3,773 3,861 
BOLI net earnings158 157 470 470 
Gain on sales of loans, net68 80 188 147 
Escrow fees18 27 51 85 
Other, net234 209 689 741 
Total non-interest income, net2,791 2,875 8,204 8,216 


 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, 2024 and 2023
(Dollars in thousands, except per share amounts)
(Unaudited)
 Three Months Ended June 30,Nine Months Ended
June 30,
 2024202320242023
Non-interest expense  
Salaries and employee benefits$5,928 $5,860 $17,863 $17,806 
Premises and equipment1,011 1,010 3,065 2,935 
Gain on sales/dispositions of premises and equipment, net(3)(32)(3)(32)
Advertising211 179 556 551 
OREO and other repossessed assets, net— — 1 1 
ATM and debit card interchange transaction fees580 491 1,796 1,463 
Postage and courier130 128 401 397 
State and local taxes335 297 979 894 
Professional fees335 577 908 1,479 
Federal Deposit Insurance Corporation ("FDIC") insurance208 191 624 517 
Loan administration and foreclosure156 126 395 385 
Technology and communications1,086 944 3,101 2,612 
Deposit operations450 430 1,094 1,022 
Amortization of CDI56 68 169 203 
Other586 658 1,735 2,173 
Total non-interest expense, net11,069 10,927 32,684 32,406 
Income before income taxes7,459 7,972 22,480 25,728 
Provision for income taxes1,535 1,666 4,552 5,252 
     Net income
$5,924 $6,306 $17,928 $20,476 
Net income per common share  
Basic$0.74 $0.77 $2.22 $2.50 
Diluted$0.74 $0.77 $2.21 $2.47 
Weighted average common shares outstanding  
Basic8,004,552 8,156,831 8,067,068 8,203,255 
Diluted8,039,345 8,213,975 8,109,043 8,279,079 
Dividends paid per common share$0.24 $0.23 $0.71 $0.78 

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, 2024 and 2023
(Dollars in thousands)
(Unaudited) 
 Three Months Ended June 30,Nine Months Ended 
June 30,
 2024202320242023
Comprehensive income
Net income$5,924 $6,306 $17,928 $20,476 
Other comprehensive income (loss)
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $53, $(66), $142 and $(8), respectively
200 (249)530 (29)
Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes:  
Accretion of OTTI on investment securities held to maturity, net of income taxes of $0, $0, $2, and $1, respectively
— — 9 2 
Total other comprehensive income (loss), net of income taxes200 (249)539 (27)
Total comprehensive income$6,124 $6,057 $18,467 $20,449 



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, 2024 and 2023
(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, 20238,203,174$37,979$190,177$(495)$227,661 
Net income——6,306—6,306
Other comprehensive loss———(249)(249)
Repurchase of common stock(110,000)(2,674)——(2,674)
Exercise of stock options1,00017——17
Common stock dividends ($0.23 per common share)
——(1,877)—(1,877)
Stock-based compensation expense—79——79
Balance, June 30, 20238,094,174$35,401$194,606$(744)$229,263
Balance, March 31, 20248,023,121$32,338$207,086$(745)$238,679
Net income——5,924—5,924
Other comprehensive income———200200
Repurchase of common stock(70,000)(1,767)——(1,767)
Exercise of stock options 3005——5
Common stock dividends ($0.24 per common share)
——(1,923)—(1,923)
Stock-based compensation expense—105——105
Balance, June 30, 20247,953,421$30,681$211,087$(545)$241,223
 Common Stock Accumulated
Other
Compre-hensive
Income (Loss)		 
 Number of SharesAmountRetained
Earnings		Total
Balance, September 30, 20228,221,952 $38,751 $180,535 $(717)$218,569 
Net income— — 20,476 — 20,476 
Other comprehensive loss— — — (27)(27)
Repurchase of common stock(154,833)(4,119)— — (4,119)
Exercise of stock options27,055 534 — — 534 
Common stock dividends ($0.78 per common share)
— — (6,405)— (6,405)
Stock-based compensation expense— 235 — — 235 
Balance, June 30, 20238,094,174 $35,401 $194,606 $(744)$229,263 
Balance, September 30, 20238,105,338 $34,771 $199,386 $(1,084)$233,073 
Net income— — 17,928 — 17,928 
Other comprehensive income— — — 539 539 
Repurchase of common stock(182,117)(4,801)— — (4,801)
Exercise of stock options 30,200 395 — — 395 
Common stock dividends ($0.71 per common share)
— — (5,739)— (5,739)
Stock-based compensation expense— 316 — — 316 
Adoption of ASU 2016-13, net of tax
— — (488)— (488)
Balance, June 30, 20247,953,421 $30,681 $211,087 $(545)$241,223 

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, 2024 and 2023
(Dollars in thousands)
(Unaudited)
 Nine Months Ended June 30,
 20242023
Cash flows from operating activities  
Net income$17,928 $20,476 
Adjustments to reconcile net income to net cash provided by operating activities:  
Provision for credit losses660 1,610 
Depreciation1,088 1,022 
Deferred income taxes/(benefits)— (77)
Accretion of discount on purchased loans(29)(64)
Amortization of CDI169 203 
Stock-based compensation expense316 235 
Gain on sale of investment securities available for sale, net— (95)
Net recoveries on investment securities(9)(7)
Change in fair value of investments in equity securities(25)(2)
Accretion of discounts and premiums on securities(842)(922)
Gain on sales of loans, net(188)(147)
Gain on sales/disposition of premises and equipment, net(3)(32)
Loans originated for sale(10,330)(6,062)
Proceeds from sales of loans9,123 6,957 
Amortization of loan servicing rights684 769 
BOLI net earnings(470)(470)
Increase in deferred loan origination fees162 636 
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses(1,830)(800)
Net cash provided by operating activities16,404 23,230 
Cash flows from investing activities  
Net decrease in CDs held for investment4,730 5,963 
Proceeds from sale of investment securities available for sale— 8,929 
Purchase of investment securities held to maturity(1,919)(15,601)
Purchase of investment securities available for sale(36,089)(16,994)
Proceeds from maturities and prepayments of investment securities held to maturity96,052 8,000 
Proceeds from maturities and prepayments of investment securities available for sale4,105 5,784 
Purchase of FHLB stock— (608)
Redemption of FHLB stock1,565 — 
Increase in loans receivable, net(96,118)(130,403)
Purchases of premises and equipment(1,010)(711)
Proceeds from sales of premises and equipment8 45 
Net cash used in investing activities(28,676)(135,596)

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, 2024 and 2023
(Dollars in thousands)
(Unaudited)
 Nine Months Ended June 30,
 20242023
Cash flows from financing activities  
Net increase (decrease) in deposits$67,609 $(79,446)
Proceeds from (repayment of) FHLB borrowings(15,000)15,000 
Proceeds from exercise of stock options395 534 
Repurchase of common stock(4,801)(4,119)
Payment of dividends(5,739)(6,405)
Net cash provided by (used in) financing activities42,464 (74,436)
  
Net increase (decrease) in cash and cash equivalents30,192 (186,802)
Cash and cash equivalents  
Beginning of period128,721 316,755 
End of period$158,913 $129,953 
Supplemental disclosure of cash flow information  
Income taxes paid$4,884 $6,268 
Interest paid$21,854 $6,088 
Supplemental disclosure of non-cash investing activities  
Other comprehensive income (loss) related to investment securities$539 $(27)
Operating lease liabilities arising from recording of ROU assets$— $71 
Adjustment to retained earnings, net of deferred tax; - adoption of ASU 2016-13$(488)$— 

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, 2023 (“2023 Form 10-K”).  The unaudited consolidated results of operations for the nine months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2024.

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

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

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

(e)  Certain prior period amounts have been reclassified to conform to the June 30, 2024 presentation with no change to previously reported net income or total shareholders’ equity.

(2) INVESTMENT SECURITIES

Held to maturity and available for sale investment securities have been classified according to management’s intent and were as follows as of June 30, 2024 and September 30, 2023 (dollars in thousands):
 Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair Value		Allowance for Credit Losses ("ACL")
June 30, 2024    
Held to Maturity    
U.S. Treasury and U.S. government agency securities$92,233 $— $(6,349)$85,884 $— 
Mortgage-backed securities ("MBS"):
U.S. government agencies50,727 2 (2,440)48,289 — 
Private label residential31,996 238 (1,438)30,796 66 
Municipal securities1,337 — (10)1,327 — 
Bank issued trust preferred securities494 — (29)465 6 
Total held to maturity$176,787 $240 $(10,266)$166,761 $72 
11




June 30, 2024Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Available for Sale
U.S. Treasury and U.S. government agency securities$8,924 $— $(14)$8,910 
MBS:
U.S. government agencies66,280 137 (812)65,605 
Total$75,204 $137 $(826)$74,515 
September 30, 2023
Held to Maturity
U.S. Treasury and U.S. government agency securities$171,626 $— $(10,088)$161,538 
MBS:
U.S. government agencies52,294 — (3,950)48,344 
 Private label residential 44,011 295 (2,611)41,695 
Municipal securities1,787 — (47)1,740 
Bank issued trust preferred securities500 — (51)449 
Total$270,218 $295 $(16,747)$253,766 
Available for Sale
MBS:
U.S. government agencies$43,132 $— $(1,361)$41,771 
$43,132 $— $(1,361)$41,771 

12




Held to maturity and available for sale investment securities with unrealized losses were as follows as of June 30, 2024 (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$— $— — $85,884 $(6,349)18 $85,884 $(6,349)
MBS:
U.S. government agencies10,633 (88)8 37,477 (2,352)49 48,110 (2,440)
Private label residential— — — 26,476 (1,438)25 26,476 (1,438)
Municipal securities— — — 1,226 (10)1 1,226 (10)
Bank issued trust
  preferred securities
— — — 465 (29)1 465 (29)
     Total
$10,633 $(88)8 $151,528 $(10,178)94 $162,161 $(10,266)
Available for sale
U.S. Treasury and U.S. government agency securities$8,910 $(14)3 $— $8,910 $(14)
MBS:
U.S. government agencies11,018 (33)3 33,578 (779)28 44,596 (812)
     Total
$19,928 $(47)6 $33,578 $(779)28 $53,506 $(826)

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2023 (dollars in thousands):
 Less Than 12 Months12 Months or LongerTotal
 Estimated
 Fair
 Value		Gross
Unrealized Losses		QuantityEstimated
 Fair
 Value		Gross
Unrealized Losses		QuantityEstimated
 Fair
 Value		Gross
Unrealized Losses
Held to maturity        
U.S. Treasury and U.S. government agency securities$9,455 $(129)1 $152,082 $(9,959)26 $161,537 $(10,088)
MBS:
U.S. government agencies16,432 (549)13 31,703 (3,401)51 48,135 (3,950)
 Private label
    residential
1,288 (2)1 38,205 (2,609)32 39,493 (2,611)
Municipal securities— — — 1,740 (47)1 1,740 (47)
Bank issued trust preferred securities— — — 449 (51)1 449 (51)
     Total
$27,175 $(680)15 $224,179 $(16,067)111 $251,354 $(16,747)
Available for sale
MBS:
U.S. government agencies$10,635 $(308)3 $30,809 $(1,053)27 $41,444 $(1,361)
     Total
$10,635 $(308)3 $30,809 $(1,053)27 $41,444 $(1,361)


13




During the nine months ended June 30, 2024, the Company recorded a $1,000 net realized losses on 14 held to maturity investment securities. During the nine months ended June 30, 2023, the Company recorded a $10,000 net realized loss on 14 held to maturity investment securities all of which had been recognized previously as credit loss.

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 $212.16 million and $201.82 million at June 30, 2024 and September 30, 2023, respectively.

The contractual maturities of debt securities at June 30, 2024 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$27,648 $27,156 $8,961 $8,946 
Due after one year to five years79,040 73,530 2,497 2,496 
Due after five years to ten years6,345 5,675 5,653 5,640 
Due after ten years63,754 60,400 58,093 57,433 
Total$176,787 $166,761 $75,204 $74,515 


Credit Quality Indicators and Allowance for Credit Losses

Available for Sale Investment Securities

The Company assesses each available for sale investment security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis results from a credit loss or other factors. The Company did not record an ACL on any available for sale debt securities at June 30, 2024 or upon adoption of ASU 2016-13 on October 1, 2023. As of both dates, the Company considered the unrealized losses across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value. The Company expects the fair value of these securities to recover as the securities approach their maturity dates or sooner if market yields for such securities decline. The Company does not believe that these securities are impaired because of their credit quality or related to any issuer or industry specific event. The Company has the ability and intent to hold the investments until the fair value recovers.

Held to Maturity Investment Securities

The Company measures expected credit losses on held to maturity investment securities, which are comprised of U.S. government agency and U.S. government mortgage-backed securities, private label mortgage-backed securities, municipal, and other bonds. The Company’s agency and mortgage-backed securities that are issued by U.S. government entities and agencies are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, no ACL has been established for these securities. The ACL on the private label mortgage-backed securities, municipal, and other bonds within the held to maturity securities portfolio is calculated using the probability of default/loss given default ("PD/LGD") method. The calculation is completed on a quarterly basis using the default studies provided by an industry leading source. At June 30, 2024, the ACL on the held to maturity securities portfolio totaled $72,000.










14




The following tables set forth information for the three and nine months ended June 30, 2024 regarding activity in the ACL by portfolio segment (dollars in thousands):

Three Months Ended June 30, 2024
Held to MaturityBeginning AllowanceImpact of Adopting CECL (ASU 2016-13)Provision for (Recapture of) Credit LossesEnding Allowance
MBS:
Private label residential$77 $— $(11)$66 
Bank issued trust preferred securities8 — (2)6 
Total $85 $— $(13)(1)$72 
(1) The total provision for (recapture of) credit losses does not match the three months ended income statement due to rounding.

Nine Months Ended June 30, 2024
Beginning AllowanceImpact of Adopting CECL (ASU 2016-13)Provision for (Recapture of) Credit LossesEnding Allowance
Held to Maturity
MBS:
Private label residential— 82 (16)66 
Bank issued trust preferred securities— 10 (4)6 
Total$— $92 $(20)$72 

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

Accrued interest receivable on held to maturity investment securities totaled $663,000 at June 30, 2024 and is included
in accrued interest income receivable on the consolidated balance sheet. This amount is excluded from the estimate
of expected credit losses. Held to maturity debt securities are typically classified as non-accrual when the contractual
payment of principal or interest has become 90 days past due or management has serious doubts about the further
collectability of principal or interest. When held to maturity debt securities are placed on non-accrual status, unpaid interest
credited to income is reversed. The Company had $72,000 of private label mortgage-backed held to maturity investment securities in non-accrual status at June 30, 2024.

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

The following table sets forth the Company's held to maturity investment securities at June 30, 2024 by credit quality indicator:
Credit Ratings
As of June 30, 2024AAA/AA/ABBB/BB/BUnratedTotal
Held to Maturity
U.S. Treasury and U.S. government agency securities$92,233 $— $— $92,233 
MBS:
U.S. government agencies50,727 — — 50,727 
Private label residential17,000 — 14,996 31,996 
Municipal securities1,237 — 100 1,337 
Bank issued trust preferred securities— — 494 494 
Total held to maturity$161,197 $— $15,590 $176,787 

15




Prior to adopting ASU 2016-13, the Company bifurcated OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield.  The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports.  Significant judgment by management was required in this analysis that included, but not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.  The amounts written off due to credit loss remain and continue to be recovered on a cash basis.
The following table presents a roll forward of the credit loss component of held to maturity debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the nine months ended June 30, 2024 and 2023 (dollars in thousands):
 Nine Months Ended
June 30,
 20242023
Beginning balance of credit loss$816 $836 
Subtractions: 
Net realized loss previously recorded as credit losses(1)(10)
Recapture of prior credit loss(9)(7)
Ending balance of credit loss$806 $819 


(3) GOODWILL AND CDI

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

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

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

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. The Company performed its fiscal year 2024 goodwill impairment test during the quarter ended June 30, 2024. 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, 2024.

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
16




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, 2024, management believes that there have been no events or changes in the circumstances since May 31, 2024 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future. If adverse economic conditions or any decreases in the Company's stock price and market capitalization were deemed other than temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on the Company's results of operations and financial condition. The recorded amount of goodwill at June 30, 2024 and September 30, 2023 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, 2024, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI.

17




(4) LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

Loans receivable by portfolio segment consisted of the following at June 30, 2024 and September 30, 2023 (dollars in thousands):
 June 30,
2024		September 30,
2023
 AmountPercentAmountPercent
Mortgage loans:    
One- to four-family (1)$288,611 19.2 %$253,227 17.8 %
Multi-family177,950 11.8 127,176 8.9 
Commercial597,865 39.7 568,265 39.8 
Construction - custom and owner/builder128,222 8.5 129,699 9.1 
Construction - speculative one- to four-family11,441 0.8 17,099 1.2 
Construction - commercial32,130 2.1 51,064 3.6 
Construction - multi-family35,631 2.4 57,140 4.0 
Construction - land development19,104 1.3 18,841 1.3 
Land32,384 2.1 26,726 1.9 
Total mortgage loans1,323,338 87.9 1,249,237 87.6 
Consumer loans:    
Home equity and second mortgage43,679 2.9 38,281 2.7 
Other3,121 0.2 2,772 0.2 
Total consumer loans46,800 3.1 41,053 2.9 
Commercial loans:
Commercial business136,213 9.0 135,802 9.5 
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans314 — 466 — 
    Total commercial loans136,527 9.0 136,268 9.5 
Total loans receivable1,506,665 100.0 %1,426,558 100.0 %
Less:    
Undisbursed portion of construction loans in process ("LIP")87,196  103,194  
Deferred loan origination fees, net5,404  5,242  
ACL17,046  15,817  
Subtotal109,646 124,253 
Loans receivable, net$1,397,019  $1,302,305  
_____________________________
 (1) Does not include one- to four-family loans held for sale totaling $1.80 million and $400,000 at June 30, 2024 and September 30, 2023, respectively.

Loans receivable at June 30, 2024 and September 30, 2023 are reported net of unamortized discounts totaling $163,000 and $192,000, respectively.

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, 2024 there was one loan classified as doubtful which is supported by an SBA guarantee of the remaining balance. At September 30, 2023, there were no loans classified as doubtful.

Loss:  Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted.  This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At June 30, 2024 and September 30, 2023, there were no loans classified as loss.

The following table sets forth the Company's loan portfolio at June 30, 2024 by risk attribute and year of origination as well as current period gross charge-offs (dollars in thousands):

Term Loans Amortized Cost Basis by Origination Fiscal Year
Type20242023202220212020PriorRevolving LoansTotal Loans Receivable
One-to four-family
Risk Rating
Pass$7,097 $54,350 $116,235 $49,399 $19,427 $40,249 $— $286,757 
Watch— 1,800 — — — — — 1,800 
Substandard— — — — — 54 — 54 
Total one- to four-family$7,097 $56,150 $116,235 $49,399 $19,427 $40,303 $— $288,611 
Multi-family
Risk Rating
Pass$13,134 $19,474 $39,836 $33,292 $27,002 $44,042 $1,170 $177,950 
Total multi-family$13,134 $19,474 $39,836 $33,292 $27,002 $44,042 $1,170 $177,950 
Commercial real estate
Risk Rating
Pass$21,105 $64,307 $128,334 $91,470 $57,322 $197,318 $12,637 $572,493 
Watch— — — — 4,226 10,747 — 14,973 
Special Mention— — — — — 4,401 — 4,401 
Substandard— — — — — 5,998 — 5,998 
Total commercial real estate$21,105 $64,307 $128,334 $91,470 $61,548 $218,464 $12,637 $597,865 
18




Term Loans Amortized Cost Basis by Origination Fiscal Year
Type20242023202220212020PriorRevolving LoansTotal Loans Receivable
Construction-custom & owner/builder
Risk Rating
Pass$21,701 $42,271 $3,937 $— $— $— $— $67,909 
Watch— — 2,870 2,726 432 436 — 6,464 
Substandard— — — 152 — — — 152 
Total construction$21,701 $42,271 $6,807 $2,878 $432 $436 $— $74,525 
Construction-speculative one-to four-family
Risk Rating
Pass$3,468 $2,747 $— $518 $— $— $— $6,733 
Total construction$3,468 $2,747 $— $518 $— $— $— $6,733 
Construction-commercial
Risk Rating
Pass$991 $16,914 $1,045 $1,293 $— $— $— $20,243 
Watch— 968 — — — — — 968 
Total construction$991 $17,882 $1,045 $1,293 $— $— $— $21,211 
Construction-multi-family
Risk Rating
Pass$2,033 $18,249 $— $— $— $— $— $20,282 
Total construction$2,033 $18,249 $— $— $— $— $— $20,282 
Construction-land development
Risk Rating
Pass$1,903 $2,760 $11,918 $— $— $— $— $16,581 
Total construction$1,903 $2,760 $11,918 $— $— $— $— $16,581 
Land
Risk Rating
Pass$10,272 $5,740 $8,573 $4,085 $768 $2,045 $415 $31,898 
Watch— — — — — 486 — 486 
Total land$10,272 $5,740 $8,573 $4,085 $768 $2,531 $415 $32,384 
Home equity
Risk Rating
Pass$3,434 $4,873 $2,017 $315 $674 $2,297 $29,338 $42,948 
Watch— — — — 33 — — 33 
Substandard— — — — — 83 615 698 
Total home equity$3,434 $4,873 $2,017 $315 $707 $2,380 $29,953 $43,679 
Other consumer
Risk Rating
Pass$1,657 $459 $247 $60 $14 $543 $84 $3,064 
Watch— — — — — 57 — 57 
Total other consumer$1,657 $459 $247 $60 $14 $600 $84 $3,121 
Current period gross write-offs$5 $1 $— $— $— $— $2 $8 
19




Term Loans Amortized Cost Basis by Origination Fiscal Year
Type20242023202220212020PriorRevolving LoansTotal Loans Receivable
Commercial business
Risk Rating
Pass$12,815 $20,696 $37,436 $9,431 $8,637 $5,159 $39,404 $133,578 
Watch— — 210 43 272 10 180 715 
Substandard— 1,186 — — — 532 — 1,718 
Doubtful— 202 — — — — — 202 
Total commercial business$12,815 $22,084 $37,646 $9,474 $8,909 $5,701 $39,584 $136,213 
Current period gross write-offs$— $79 $— $— $— $— $— $79 
SBA PPP
Risk Rating
Pass$— $— $— $267 $47 $— $— $314 
Total SBA PPP$— $— $— $267 $47 $— $— $314 
Total loans receivable, gross (net of construction LIP)
Risk Rating
Pass$99,610 $252,840 $349,578 $190,130 $113,891 $291,653 $83,048 $1,380,750 
Watch— 2,768 3,080 2,769 4,963 11,736 180 25,496 
Special Mention— — — — — 4,401 — 4,401 
Substandard— 1,186 — 152 — 6,667 615 8,620 
Doubtful— 202 — — — — — 202 
Total loans receivable$99,610 $256,996 $352,658 $193,051 $118,854 $314,457 $83,843 $1,419,469 
Current period gross charge-off$5 $80 $— $— $— $— $2 $87 

Allowance for Credit Losses

The Company adopted the new accounting standard for the ACL, commonly referred to as the current expected credit losses ("CECL") methodology, as of October 1, 2023. All disclosures as of and for the three and nine months ended June 30, 2024 are presented in accordance with the new accounting standard. The comparative financial periods prior to the adoption of this new accounting standard are presented and disclosed under previously applicable GAAP's incurred loss methodology, which is not directly comparable to the new, CECL methodology. See also Note 10, Recent Accounting Pronouncements. As a result of implementing this new accounting standard, there was a one-time adjustment to the fiscal year 2024 opening allowance balance of $461,000 related to loans held for investment. The Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. For loans that do not share similar risk characteristics and cannot be evaluated on a collective basis, the Company will evaluate the loan individually. The Company estimates the expected credit losses over the loans' contractual terms, adjusted for expected prepayments. The ACL is calculated for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. Management has adopted the discounted cash flow ("DCF") methodology for all segments. The Company incorporates a reasonable and supportable forecast that utilizes current period national gross domestic product ("GDP") and national unemployment figures. Each of the loan segments are impacted by these factors. Prepayments are established for each segment based on historical averages for the segments, which management believes is an accurate presentation of future prepayment activity. Loans that are evaluated individually are not included in the collective analysis. The ACL on loans that are individually evaluated may be estimated based on their expected cash flows, or in the case of loans for which repayment is
20




expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated selling costs.

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

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

The following tables set forth information for the three and nine months ended June 30, 2024 and 2023 regarding activity in the ACL by portfolio segment (dollars in thousands):

 Three Months Ended June 30, 2024
 Beginning
Allowance		Provision for
(Recapture of) Credit Losses		Charge-
offs		RecoveriesEnding
Allowance
Mortgage loans:     
One- to four-family$2,185 $49 $— $43 $2,277 
Multi-family1,358 84 — — 1,442 
Commercial6,954 241 — — 7,195 
Construction – custom and owner/builder1,215 76 — — 1,291 
Construction – speculative one- to four-family142 (47)— — 95 
Construction – commercial451 (58)— — 393 
Construction – multi-family478 (121)— — 357 
Construction – land development255 35 — — 290 
Land840 (12)— — 828 
Consumer loans:    
Home equity and second mortgage305 9 — — 314 
Other45 2 (2)— 45 
Commercial business loans2,590 6 (79)2 2,519 
Total$16,818 $264 $(81)$45 $17,046 

21




 Nine Months Ended June 30, 2024
 Beginning
Allowance		Impact of Adopting CECL (ASU 2016-13)Provision for
(Recapture of) Credit Losses		Charge-
offs		RecoveriesEnding
Allowance
Mortgage loans:     
One-to four-family$2,417 $(408)$225 $— $43 $2,277 
Multi-family1,156 (120)406 — — 1,442 
Commercial7,209 (494)480 — — 7,195 
Construction – custom and owner/builder750 542 (1)— — 1,291 
Construction – speculative one- to four-family148 (16)(37)— — 95 
Construction – commercial316 176 (99)— — 393 
Construction – multi-family602 204 (449)— — 357 
Construction – land development274 25 (9)— — 290 
Land406 318 104 — — 828 
Consumer loans:     
Home equity and second mortgage519 (243)38 — — 314 
Other53 (7)7 (8)— 45 
Commercial business loans1,967 484 145 (79)2 2,519 
Total$15,817 $461 $810 $(87)$45 $17,046 

 Three Months Ended June 30, 2023
 Beginning
Allowance		Provision for
(Recapture of) Loan Losses		Charge-
offs		RecoveriesEnding
Allowance
Mortgage loans:     
  One- to four-family$2,052 $126 $— $— $2,178 
  Multi-family938 74 — — 1,012
  Commercial6,904 125 — — 7,029
  Construction – custom and owner/builder726 73 — — 799
  Construction – speculative one- to four-family121 (11)— — 110
  Construction – commercial267 24 — — 291
Construction – multi-family662 30 — — 692 
  Construction – land development245 (12)— — 233 
  Land363 26 — — 389
Consumer loans:     
  Home equity and second mortgage507 35 — — 542
  Other47 5 (1)— 51
Commercial business loans1,866 115 — — 1,981
Total$14,698 $610 $(1)$— $15,307 
22




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

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

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

23





Non-Accrual Loans

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

The following tables present an analysis of loans by aging category and portfolio segment at June 30, 2024 and September 30, 2023 (dollars in thousands):
 30–59
Days
Past Due		60-89
Days
Past Due		Non-
Accrual (1)		Past Due
90 Days
or More
and Still
Accruing		Total
Past Due		CurrentTotal
Loans
June 30, 2024       
Mortgage loans:       
One- to four-family$— $— $135 $— $135 $288,476 $288,611 
Multi-family— — — — — 177,950 177,950 
Commercial— — 1,310 — 1,310 596,555 597,865 
Construction – custom and owner/builder— — 152 — 152 74,373 74,525 
Construction – speculative one- to four-family— — — — — 6,733 6,733 
Construction – commercial— — — — — 21,211 21,211 
Construction – multi-family— — — — — 20,282 20,282 
Construction – land development— — — — — 16,581 16,581 
Land— — — — — 32,384 32,384 
Consumer loans:    
Home equity and second mortgage— 2 615 — 617 43,062 43,679 
Other— — — — — 3,121 3,121 
Commercial business loans50 62 1,908 — 2,020 134,193 136,213 
SBA PPP loans— — — — — 314 314 
Total$50 $64 $4,120 $— $4,234 $1,415,235 $1,419,469 
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.
24




30–59
Days
Past Due		60-89
Days
Past Due		Non-
Accrual (1)		Past Due
90 Days
or More
and Still
Accruing		Total
Past Due		CurrentTotal
Loans
September 30, 2023       
Mortgage loans:       
One- to four-family$— $— $368 $— $368 $252,859 $253,227 
Multi-family— — — — — 127,176 127,176 
Commercial— — 683 — 683 567,582 568,265 
Construction – custom and owner/builder151 — — — 151 73,088 73,239 
Construction – speculative one- to four-family— — — — — 9,361 9,361 
Construction – commercial— — — — — 26,030 26,030 
Construction – multi-family— — — — — 45,890 45,890 
Construction – land development— — — — — 16,129 16,129 
Land— — — — — 26,726 26,726 
Consumer loans:
Home equity and second mortgage— — 177 — 177 38,104 38,281 
Other— — — — — 2,772 2,772 
Commercial business loans— — 286 — 286 135,516 135,802 
SBA PPP loans— — — — — 466 466 
Total$151 $— $1,514 $— $1,665 $1,321,699 $1,323,364 
(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

The following tables present an analysis of loans by credit quality indicator and portfolio segment at September 30, 2023 (dollars in thousands):
Loan Grades
September 30, 2023PassWatchSpecial
Mention		SubstandardTotal
Mortgage loans:    
One- to four-family$252,859 $— $— $368 $253,227 
Multi-family127,176 — — — 127,176 
Commercial551,669 11,143 — 5,453 568,265 
Construction – custom and owner/builder68,181 5,058 — — 73,239 
Construction – speculative one- to four-family9,361 — — — 9,361 
Construction – commercial25,063 967 — — 26,030 
Construction – multi-family45,890 — — — 45,890 
Construction – land development16,129 — — — 16,129 
Land26,226 500 — — 26,726 
Consumer loans:
Home equity and second mortgage37,982 34 — 265 38,281 
Other2,716 56 — — 2,772 
Commercial business loans
135,502 — — 300 135,802 
SBA PPP loans466 — — — 466 
Total$1,299,220 $17,758 $— $6,386 $1,323,364 

25






At June 30, 2024, the Company had $1.91 million of non-accrual loans with an ACL of $243,000 and $2.21 million of non-accrual loans with no ACL. The following table is a summary of the amortized cost of collateral dependent non-accrual loans as of June 30, 2024 (in thousands):
Recorded InvestmentRelated ACL
Mortgage loans:
One- to four-family$135 $— 
Commercial1,310 — 
Construction - custom and owner/builder152 — 
Consumer loans:
Home equity and second mortgage615 — 
Commercial business loans1,908 243 
Total$4,120 $243 


Impaired Loans

Prior to the adoption of CECL, a loan was considered impaired when it was probable that the Company would be unable to collect all amounts (principal and interest) when due according to the original contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan was identified as being impaired, the amount of the impairment was 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 was 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 credit 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.  





















26






The following table is a summary of information related to impaired loans by portfolio segment prior to the adoption of CECL as of September 30, 2023 and for the year then ended (dollars in thousands):
Recorded
Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)Related
Allowance		Year to Date ("YTD") Average Recorded Investment (1)YTD Interest Income Recognized (1)YTD Cash Basis Interest Income Recognized (1)
With no related allowance recorded:   
Mortgage loans:   
One- to four-family$368 $412 $— $378 $29 $29 
Commercial2,973 2,973 — 2,987 167 129 
Land— — — 297 5 4 
Consumer loans:
Home equity and second mortgage382 382 — 390 12 10 
Other— — — 1 — — 
Commercial business loans41 90 — 49 — — 
Subtotal3,764 3,857 — 4,102 213 172 
With an allowance recorded:   
Mortgage loans:   
Commercial business loans245 245 123 247 — — 
Subtotal245 245 123 247 — — 
Total:   
Mortgage loans:   
One- to four-family368 412 — 378 29 29 
Commercial2,973 2,973 — 2,987 167 129 
Land— — — 297 5 4 
Consumer loans:
Home equity and second mortgage382 382 — 390 12 10 
Other— — — 1 — — 
Commercial business loans286 335 123 296 — — 
Total$4,009 $4,102 $123 $4,349 $213 $172 
______________________________________________
(1)For the year ended September 30, 2023.




















27





The following table is a summary of information related to impaired loans by portfolio segment prior to the adoption of CECL as of June 30, 2023 and for 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$373 $417 $— $376 $381 $7 $21 $7 $21 
Commercial2,988 2,988 — 2,894 2,939 40 121 31 94 
Land150 150 — 305 371 2 4 1 3 
Consumer loans:
Home equity and second mortgage390 390 — 488 444 3 9 2 7 
Other— 48 — 1 2 — — — — 
Commercial business loans44 44 — 46 51 — — — — 
Subtotal3,945 4,037 — 4,110 4,188 52 155 41 125 
With an allowance recorded:
Commercial business loans245 245 123 247 247 — — — — 
Subtotal245 245 123 247 247 — — — — 
Total:
Mortgage loans:
One- to four-family373 417 — 376 381 7 21 7 21 
Commercial2,988 2,988 — 2,894 2,939 40 121 31 94 
Land150 150 — 305 371 2 4 1 3 
Consumer loans:
Home equity and second mortgage390 390 — 488 444 3 9 2 7 
Other— 48 — 1 2 — — — — 
Commercial business loans289 289 123 293 298 — — — — 
Total$4,190 $4,282 $123 $4,357 $4,435 $52 $155 $41 $125 
_____________________________________________
(1) For the three months ended June 30, 2023.
(2) For the nine months ended June 30, 2023.






28




Troubled debt restructurings ("TDRs")

On October 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments - Credit Losses (ASU 2016-13). This ASU eliminated the accounting guidance for TDR loans for creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. No loans to borrowers experiencing financial difficulty were modified in the three and nine months ended June 30, 2024 and 2023. At June 30, 2023, the Company had $2.60 million of TDRs, all of which were paying as agreed. There were no defaults in these loans during the nine months ended June 30, 2024 and 2023.

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

(5) LEASES

At June 30, 2024, the Company has operating leases for two retail bank branch offices and an administrative office. The Company's leases have remaining lease terms of two to seven years, and include options to extend the leases from two to five years. Lease extensions are not certain, and the Company evaluates each lease based on the specific circumstances for the location to determine the probability of exercising the extensions in the calculation of operating lease ROU assets and lease liabilities.

The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the three and nine months ended June 30, 2024 and 2023 (dollars in thousands):

Three Months Ended June 30,Nine Months Ended June 30,
Lease cost:2024202320242023
Operating lease cost$98$87$283 $261 
Short-term lease cost——— — 
Total lease cost$98 $87 $283 $261 

The following tables provide supplemental information related to operating leases at or for the three and nine months ended June 30, 2024 and 2023 (dollars in thousands):
At or For the Three Months Ended June 30, 2024At or For the Nine Months Ended June 30, 2024
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$83 $249 
Weighted average remaining lease term-operating leases6.1 years6.1 years
Weighted average discount rate-operating leases2.34 %2.34 %
At or For the Three Months Ended June 30, 2023At or For the Nine Months Ended June 30, 2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$79 $234 
Weighted average remaining lease term-operating leases6.9 years6.9 years
Weighted average discount rate-operating leases2.34 %2.34 %
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The Company's leases typically do not contain a discount rate implicit in the lease contracts. As an alternative, the weighted average discount rate used to estimate the present value of future lease payments in calculating the value of the ROU asset and lease liability was determined by utilizing the FHLB fixed-rate credit advance borrowing rate for the term correlating to the remaining term of each lease.

Maturities of operating lease liabilities at June 30, 2024 for future fiscal years are as follows (dollars in thousands):

Remainder of 2024$83 
2025336 
2026304 
2027232 
2028219 
Thereafter601 
Total lease payments1,775 
Less imputed interest126 
Total$1,649 


(6) NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding during the period without considering any dilutive items.  Nonvested shares of restricted stock are included in the computation of basic earnings per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period. Diluted net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period.  Common stock equivalents arise from the assumed conversion of outstanding stock options to purchase common stock.  

Information regarding the calculation of basic and diluted net income per common share for the three and nine months ended June 30, 2024 and 2023 is as follows (dollars in thousands, except per share amounts):
 Three Months Ended June 30,Nine Months Ended June 30,
2024202320242023
Basic net income per common share computation  
Numerator – net income $5,924 $6,306 $17,928 $20,476 
Denominator – weighted average common shares outstanding8,004,552 8,156,831 8,067,068 8,203,255 
Basic net income per common share$0.74 $0.77 $2.22 $2.50 
Diluted net income per common share computation  
Numerator – net income$5,924 $6,306 $17,928 $20,476 
Denominator – weighted average common shares outstanding8,004,552 8,156,831 8,067,068 8,203,255 
Effect of dilutive stock options (1)34,793 57,144 41,975 75,824 
Weighted average common shares outstanding - assuming dilution8,039,345 8,213,975 8,109,043 8,279,079 
Diluted net income per common share$0.74 $0.77 $2.21 $2.47 
____________________________________________
(1) For the three and nine months ended June 30, 2024, average options to purchase 240,820 and 233,081 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, 2023, average options to purchase 256,503
30




and 203,823 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share because their effect would be anti-dilutive.


(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, 2024 and 2023 are as follows (dollars in thousands):
Three Months Ended June 30, 2024
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$(745)$— $(745)
Other comprehensive income200 — 200 
Balance of AOCI at the end of period$(545)$— $(545)

Nine Months Ended June 30, 2024
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$(1,075)$(9)$(1,084)
Other comprehensive income530 9 539 
Balance of AOCI at the end of period$(545)$— $(545)
Three Months Ended June 30, 2023
Changes in fair value of available for sale securities (1)Changes in OTTI on held to maturity securities (1)Total (1)
Balance of AOCI at the beginning of period$(486)$(9)$(495)
Other comprehensive loss (249)— (249)
Balance of AOCI at the end of period$(735)$(9)$(744)

Nine Months Ended June 30, 2023
Changes in fair value of available for sale securities (1)Changes in OTTI on held to maturity securities (1)Total (1)
Balance of AOCI at the beginning of period$(706)$(11)$(717)
Other comprehensive income (loss) (29)2 (27)
Balance of AOCI at the end of period$(735)$(9)$(744)
__________________________
(1) All amounts are net of income taxes.


(8) STOCK COMPENSATION PLANS

Under the Company's 2014 Equity Incentive Plan, the Company can grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2019 Equity Incentive Plan, the Company is able to grant options and awards or restricted stock (with or without performance measures) for up to 350,000 shares of common stock, of which 300,000 shares are reserved to be awarded to employees, including officers, and 50,000 shares are reserved to be awarded to directors and directors emeriti.  Shares issued may be purchased in the open market or may be issued from authorized and unissued shares.  The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally, options and restricted stock vest in 20% annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum
31

contractual term of ten years from the date of grant. At June 30, 2024, there were 15,576 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, 2024, there were 182,070 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2019 Equity Incentive Plan.

Stock option activity for the nine months ended June 30, 2024 and 2023 is summarized as follows:
 Nine Months Ended June 30, 2024Nine Months Ended June 30, 2023
  Number of SharesWeighted
Average
Exercise
Price		 Number of SharesWeighted
Average
Exercise
Price
Options outstanding, beginning of period369,150 $24.00 421,925 $23.30 
Exercised(30,200)13.07 (27,055)19.77 
Granted— — 1,000 33.40 
Forfeited(16,560)26.98 (7,800)28.23 
Options outstanding, end of period322,390 $24.87 388,070 $23.47 

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

There were no stock options granted during the nine months ended June 30, 2024.

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

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

The aggregate intrinsic value of options exercised during the nine months ended June 30, 2024 and 2023 was $501,000 and $345,000, respectively.

At June 30, 2024, there were 121,820 unvested options with an aggregate grant date fair value of $709,000, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at June 30, 2024 was $221,000.  There were 300 options that vested during the nine months ended June 30, 2024 with a total fair value of $2,000.

At June 30, 2023, there were 186,910 unvested options with an aggregate grant date fair value of $1.05 million. There were 3,200 options that vested during the nine months ended June 30, 2023 with a total fair value of $17,000.
32

Additional information regarding options outstanding at June 30, 2024 is as follows:

 Options OutstandingOptions Exercisable
Range of
Exercise
Prices ($)		NumberWeighted
Average
Exercise
Price 		Weighted
Average
Remaining
Contractual
Life (Years)		NumberWeighted
Average
Exercise
Price		Weighted
Average
Remaining
Contractual
Life (Years)
10.26-10.7126,250 $10.62 1.026,250 $10.62 1.0
15.67-19.1360,500 16.55 5.238,840 16.37 4.6
26.50-27.4098,820 27.31 7.339,060 27.23 6.3
28.23-29.69103,900 28.79 5.764,300 29.13 4.8
31.80-33.4032,920 31.85 4.432,120 31.60 4.3
 322,390 $24.87 5.6200,570 $24.29 4.5

The aggregate intrinsic value of options outstanding at June 30, 2024 and 2023 was $1.07 million and $1.58 million, respectively.

As of June 30, 2024, unrecognized compensation cost related to unvested stock options was $579,000, which is expected to be recognized over a weighted average life of 1.81 years.

At June 30, 2024, there were 26,150 unvested restricted stock awards. At June 30, 2023, there were no unvested restricted stock awards. There were no restricted stock awards granted during the nine months ended June 30, 2024 and 2023.

Time Based
Number of Unvested SharesWeighted Average Grant Date Fair Value
Outstanding, September 30, 202326,150 $27.37 
     Granted— — 
     Forfeited— — 
     Vested— — 
Outstanding, June 30, 202426,150 $27.37 

The fair value of restricted stock awards is equal to the fair value of the Company's stock on the date of the grant. The related stock-based compensation expense is recorded over the requisite service period. At June 30, 2024, unrecognized compensation cost related to unvested restricted stock awards was $597,000, which is expected to be recognized over a weighted average period of 1.98 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.
33


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

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

The Company had no liabilities measured at fair value on a recurring basis at June 30, 2024 and September 30, 2023. The Company's assets measured at estimated fair value on a recurring basis at June 30, 2024 and September 30, 2023 were as follows (dollars in thousands):
June 30, 2024Estimated Fair Value 
 Level 1Level 2Level 3Total
Available for sale investment securities    
   MBS: U.S. government agencies$8,910 $65,605 $— $74,515 
Investments in equity securities
   Mutual funds836 — — 836 
Total$9,746 $65,605 $— $75,351 
September 30, 2023Estimated Fair Value 
 Level 1Level 2Level 3Total
Available for sale investment securities    
   MBS: U.S. government agencies$— $41,771 $— $41,771 
Investments in equity securities
   Mutual funds811 — — 811 
Total$811 $41,771 $— $42,582 

There were no transfers among Level 1, Level 2 and Level 3 during the nine months ended June 30, 2024 and the year ended September 30, 2023.

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

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

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

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





34

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at June 30, 2024 and September 30, 2023 (dollars in thousands):
 Estimated Fair ValueTotal Estimated
June 30, 2024Level 1Level 2Level 3Fair Value
Individually evaluated loans:    
  Commercial business loans$— $— $1,168 $1,168 
Total$— $— $1,168 $1,168 

 Estimated Fair ValueTotal Estimated
September 30, 2023Level 1Level 2Level 3Fair Value
Impaired loans:    
  Commercial business loans$— $— $122 $122 
Total$— $— $122 $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, 2024 and September 30, 2023 (dollars in thousands):

  Valuation
Technique(s)		 Unobservable Input(s)Range
Individually evaluated and impaired loansMarket approachAppraised value less estimated selling costsN/A

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, 2024 and September 30, 2023. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with GAAP, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

35

The recorded amounts and estimated fair values of financial instruments were as follows as of June 30, 2024 and September 30, 2023 (dollars in thousands):
 June 30, 2024
  Fair Value Measurements Using:
 Recorded
Amount		 Estimated Fair Value 
Level 1		 
Level 2		 
Level 3
Financial assets     
Cash and cash equivalents$158,913 $158,913 $158,913 $— $— 
CDs held for investment10,458 10,458 10,458 — — 
Investment securities251,302 241,276 94,794 146,482 — 
Investments in equity securities836 836 836 — — 
FHLB stock2,037 2,037 2,037 — — 
Other investments3,000 3,000 3,000 — — 
Loans held for sale1,795 1,829 1,829 — — 
Loans receivable, net1,397,019 1,344,541 — — 1,344,541 
     Accrued interest receivable7,045 7,045 7,045 — — 
Financial liabilities     
Certificates of deposit361,541 359,818 — — 359,818 
FHLB borrowings20,000 19,752 — — 19,752 
Accrued interest payable1,713 1,713 1,713 — — 
 September 30, 2023
  Fair Value Measurements Using:
 Recorded
Amount		 Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets     
Cash and cash equivalents$128,721 $128,721 $128,721 $— $— 
CDs held for investment15,188 15,188 15,188 — — 
Investment securities311,989 295,538 161,538 134,000 — 
Investments in equity securities811 811 811 — — 
FHLB stock3,602 3,602 3,602 — — 
Other investments3,000 3,000 3,000 — — 
Loans held for sale400 407 407 — — 
Loans receivable, net1,302,305 1,246,538 — — 1,246,538 
     Accrued interest receivable6,004 6,004 6,004 — — 
Financial liabilities     
Certificates of deposit300,100 297,542 — — 297,542 
FHLB borrowings35,000 34,747 — — 34,747 
Accrued interest payable1,397 1,397 1,397 — — 

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(10) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11. ASU 2016-13 replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 required credit losses relating to available for sale debt securities to be recorded through an ACL rather than as a reduction of the carrying amount. ASU 2016-13 also changed the accounting for Purchase Credit Impaired ("PCI") debt securities and loans. ASU 2016-13 retained many of the current disclosure requirements in GAAP and expanded certain disclosure requirements. As a "smaller reporting company" filer with the U.S. Securities and Exchange Commission, ASU 2016-13 was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company experienced changes in the processes and procedures to calculate the ACL, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the accounting practices that were utilized with the incurred loss model. In addition, the prior policy for OTTI on investment securities held to maturity was replaced with an allowance approach. On October 1, 2023, the Company adopted this ASU, which resulted in a net of tax charge of $488,000 to retained earnings, a $461,000 increase to the ACL on loans, a $92,000 increase to ACL on investment securities, and a $65,000 increase to ACL on unfunded commitments for the cumulative effect of adopting this guidance. For more information related to the implementation, see Note 2 Investment Securities, Note 4 Loans Receivable and Allowance for Credit Losses and Note 12 Commitments and Contingent Liabilities.

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

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASU 2016-13): Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminate the accounting guidance for 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. This ASU is effective upon adoption of ASU 2016-13. On October 1, 2023, the Company adopted this ASU at the same time ASU 2016-13 was adopted.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this ASU are intended to provide more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income tax paid information. The ASU requires disclosure in the rate reconciliation of specific categories as well as additional information for reconciling items that meet a quantitative threshold. The amendment requires on an annual basis a reconciliation broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity should apply the amendments in this ASU on a prospective basis. The Company expects this ASU to only impact its disclosure requirement and does not expect the adoption of this ASU to have a material impact on its business operations or the Company's consolidated financial statements.




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(11) REVENUE FROM CONTRACTS WITH CUSTOMERS

ASU 2014-09 Revenue from Contracts with Customers ("ASC 606") applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of the Company's revenues are composed of interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, BOLI net earnings, servicing income on loans sold and other loan fee income, which are not within the scope of ASC 606. Revenue reported as service charges on deposits, ATM and debit card interchange transaction fees, merchant services fees, non-deposit investment fees and escrow fees are within the scope of ASC 606. All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense. For the three months ended June 30, 2024, the Company recognized $1.01 million in service charges on deposits, $1.30 million in ATM and debit card interchange transaction fees, $18,000 in escrow fees, and $3,000 in fee income from non-deposit investment sales included in "Other" on the Consolidated Statement of Income, all considered within the scope of ASC 606. For the nine months ended June 30, 2024, the Company recognized $3.02 million in service charges on deposits, $3.77 million in ATM and debit card interchange transaction fees, $51,000 in escrow fees, and $6,000 in fee income from non-deposit investment sales. For the three months ended June 30, 2023, the Company recognized $970,000 in service charges on deposits, $1.34 million in ATM and debit card interchange transaction fees, $27,000 in escrow fees, and $1,000 in fee income from non-deposit investment sales. For the nine months ended June 30, 2023, the Company recognized $2.81 million in service charges on deposits, $3.86 million in ATM and debit card interchange transaction fees, $85,000 in escrow fees, and $35,000 in fee income from non-deposit investment sales.

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

•Service Charges on Deposits: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed, as the contract duration does not extend beyond the service performed.
•ATM and Debit Card Interchange Transaction Fees: The Company earns fees from cardholder transactions conducted through third-party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis.
•Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property according to the customer's contract. Fees are recognized when the escrow contract closes.
•Fee Income from Non-deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer.


(12) COMMITMENTS AND CONTINGENT LIABILITIES

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

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

A summary of the Company's commitments at June 30, 2024 and 2023 are listed below (in thousands):

June 30, 2024June 30, 2023
Undisbursed portion of construction loans in process (see Note 4)$87,196 $104,774 
Undisbursed lines of credit118,050 139,400 
Commitments to extend credit14,278 29,881 
$219,524 $274,055 

The Company maintains a separate ACL related to unfunded loan commitments.  The Company estimates expected losses on unfunded, off-balance sheet commitments over the contractual period in which the exposure to credit risk from a contractual obligation to extend credit, unless the Company has determined that obligation is unconditionally cancellable. The methodology for calculating the ACL on unfunded loan commitments is similar to the methodology for calculating the ACL on loans but also includes an estimate of the future utilization of the commitment as determined by historical commitment utilization. Credit risk associated with the unfunded commitments are consistent with the loss ratio for each loan segment within the ACL for loans. The ACL on unfunded commitments is recognized in other liabilities and accrued expenses in the consolidated balance sheets and is adjusted as a provision (recapture of provision) for credit losses on the consolidated income statements. The ACL on unfunded loan commitments totaled $267,000 at June 30, 2024. 

The following table sets forth information for the three and nine months ended June 30, 2024 and 2023 regarding activity in the a ACL on unfunded loan commitments (dollars in thousands):

ACLThree Months Ended June 30, 2024Three Months Ended June 30, 2023
Beginning ACL$276 $320 
Provision for (recapture of) credit losses(9)(1)7 
Ending ACL$267 $327 
(1) The provision for (recapture of) credit losses does not match the three months ended income statement due to rounding.
ACLNine Months Ended June 30, 2024Nine Months Ended June 30, 2023
Beginning ACL$332 $305 
Impact of adopting CECL (ASU 2016-13)65 — 
Provision for (recapture of) credit losses(130)22 
Ending ACL$267 $327 

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

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

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

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements contained in Item 1 of this Form 10-Q. The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and nine months ended June 30, 2024.  


Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to:

•adverse impacts to economic conditions in our local markets or other markets where we have lending relationships
•effects of employment levels, labor shortages inflation, a recession or slowed economic growth;
•changes in the interest rate environment, including the past increases in the Board of Governors of the Federal Reserve System (“Federal Reserve”) benchmark rate and duration of such increased levels, which could adversely affect our revenues and expenses, the values of our assets and obligations, and the availability and cost of capital and liquidity;
•the impact of inflation and the Federal Reserve monetary policy;
•the effects of any Federal government shutdown;
•credit risks of lending activities, including loan delinquencies, write-offs, changes in our ACL, and provision for credit losses;
•fluctuations in the demand for loans, the number of unsold homes, land and other properties, and 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 regulatory authorities, which may the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our ACL, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;
•the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;
•legislative or regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules;
•our ability to attract and retain deposits;
•our ability to control operating costs and expenses;
•use of estimates in determining the fair value of assets, which may prove incorrect;
•disruptions or security breaches or other adverse events, failures or interruptions in or attacks on our information technology systems or on the third-party vendors;
•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, including expectations regarding key growth initiatives and strategic priorities;
•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;
•quality and composition of our securities portfolio and the impact of adverse changes in the securities markets;
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•inability of key third-party providers to perform their obligations;
•changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board (“FASB”);
•environmental, social and governance goals and targets;
•effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, civil unrest, and other external events;
•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 our other reports filed with or furnished to the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (the "2023 Form 10-K”).

Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this quarterly report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal 2024 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, 2024, the Company had total assets of $1.90 billion, net loans receivable of $1.40 billion, total deposits of $1.63 billion and total shareholders’ equity of $241.22 million.  The Company's business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including the unaudited consolidated financial statements and related data, relates primarily to the Bank's operations.

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

The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) credit losses.  Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, 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.

Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and non-interest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Since March 2022, through July 2023, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, to a range of 5.25% to 5.50%, where it remained as of June 30, 2024.

The provision for (recapture of) credit losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.  The ACL on loans reflects the amount that management has determined is adequate to cover probable expected credit losses in the loan portfolio. As the loan portfolio increases, or due to an increase in probable expected losses inherent in the loan portfolio, the ACL may increase, resulting in a decrease to net interest income after the provision. Improvement in loan risk ratings, increase in property values, or receipts of recoveries of amounts previously charged off may partially or fully offset any required increases to ACL on loans
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due to loan growth or an increase in the probable expected credit losses. The Company recorded a provision for credit losses on loans of $264,000 and $810,000 for the three and nine months ended June 30, 2024, respectively (using the CECL methodology), primarily due to loan portfolio growth. The Company recorded a provision for loan losses (using the prior incurred loss methodology) of $610,000 and $1.61 million for the three and nine months ended June 30, 2023, respectively.

Net income is also affected by non-interest income and non-interest expense.  For the three and nine months ended June 30, 2024, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, BOLI net earnings, servicing income on loans sold, escrow fees and other operating income.  Non-interest income is also increased by net recoveries on investment securities and for periods prior to the adoption of CECL reduced by net OTTI losses on investment securities, if any.  Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any.  Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses, amortization of CDI, and other non-interest expenses.  Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and gains on the sale of OREO. Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number of loan and deposit accounts.

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

Critical Accounting Estimates

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

The Company's critical accounting estimates are described in the Company’s 2023 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Estimates.” That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. Other than the adoption of CECL (for additional information on CECL, see Note 4 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”), there have been no material changes in the Company’s critical accounting policies and estimates as previously disclosed in the Company’s 2023 Form 10-K.

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

General: Total assets increased by $60.72 million, or 3.3%, to $1.90 billion at June 30, 2024 from $1.84 billion at September 30, 2023.  The increase in total assets was primarily due to increases in loans receivable, investment securities available for sale and total cash and cash equivalents, which was partially offset by decreases in investment securities held to maturity and CDs held for investment. The increase in assets was primarily funded by an increase in deposits, which was partially offset by a decrease in FHLB borrowings.

Net loans receivable increased by $94.71 million, or 7.3%, to $1.40 billion at June 30, 2024 from $1.30 billion at September 30, 2023, primarily due to increases in multi-family loans, one- to four-family loans, commercial real estate loans, as well as smaller increases in several other loan categories. These increases to net loans receivable were partially offset by decreases in various construction loan categories.  

Total deposits increased by $67.61 million, or 4.3%, to $1.63 billion at June 30, 2024 from $1.56 billion at September 30, 2023, primarily due to increases in money market account and certificates of deposit balances. These increases were partially offset by decreases in NOW checking account, non-interest bearing deposit and savings account balances.
 
Shareholders’ equity increased by $8.15 million, or 3.5%, to $241.22 million at June 30, 2024 from $233.07 million at September 30, 2023.  The increase in shareholders' equity was primarily due to net income, a reduction in accumulated other comprehensive loss and proceeds from stock option exercises during the current period. These increases were partially offset
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by the payment of dividends to common shareholders, repurchases of common stock and a reduction of retained earnings related to adoption of the new CECL accounting standard during the nine months ended June 30, 2024.

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

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment increased by $25.46 million, or 17.7%, to $169.37 million at June 30, 2024 from $143.91 million at September 30, 2023.
The increase was primarily due to an increase in deposits and a decrease in investment securities, which was partially offset by an increase in loans and a decrease in FHLB borrowings.

Investment Securities:  Investment securities (including investments in equity securities) decreased by $60.65 million, or 19.4%, to $252.15 million at June 30, 2024 from $312.80 million at September 30, 2023. This decrease was primarily due to maturities, prepayments and scheduled amortizations exceeding purchases. For additional information on investment securities, see Note 2 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”

FHLB Stock: FHLB stock decreased $1.56 million, or 43.5% to $2.04 million at June 30, 2024 from $3.60 million at September 30, 2023, due to the repayment of a portion of FHLB borrowings and the restructuring of stock ownership requirements by FHLB.

Other Investments: Other investments, consisting solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, was unchanged at $3.00 million at both June 30, 2024 and September 30, 2023. This investment is utilized to help satisfy compliance with the Bank's Community Reinvestment Act investment test requirements.

Loans: Net loans receivable increased by $94.71 million, or 7.3%, to $1.40 billion at June 30, 2024 from $1.30 billion at September 30, 2023.  The increase was primarily due to increases of $50.77 million in multi-family loans, $35.38 million in one- to four-family loans and $29.60 million in commercial real estate loans. These increases were partially offset by a $47.58 million decrease in various construction loan categories, with the largest decreases occurring in commercial and multi-family construction loans. The increase in multi-family and one-to-four family loans and the decrease in construction loans were in part due to the construction phase of these loans beings completed and then reclassified to permanent financing categories.

Loan originations decreased by $69.92 million, or 25.8%, to $202.62 million for the nine months ended June 30, 2024 from $272.54 million for the nine months ended June 30, 2023.  The decrease in loan originations was primarily due to a decrease in construction, commercial real estate, one- to four-family and commercial business loans originated. The decrease was partially offset by increases in multi-family and land loan originations. The Company generally sells longer-term fixed-rate one- to four-family mortgage loans for asset liability management purposes and to generate non-interest income. Sales of fixed-rate one- to four-family loans increased by $2.17 million, or 31.1%, to $9.12 million for the nine months ended June 30, 2024 from $6.96 million for the nine months ended June 30, 2023, primarily due to an increase in one- to four-family construction loans refinancing to permanent loans and being sold into the secondary market.

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

Premises and Equipment:  Premises and equipment decreased by $84,000, or 0.4%, to $21.56 million at June 30, 2024 from $21.64 million at September 30, 2023.  This decrease was primarily due to scheduled depreciation that was partially offset by additions from remodeling projects.

OREO (Other Real Estate Owned):  At June 30, 2024, total OREO and other repossessed assets consisted of one land parcel with no recorded value. At September 30, 2023, total OREO and other repossessed assets consisted of two land parcels with no recorded value.

BOLI (Bank Owned Life Insurance): BOLI increased by $470,000, or 2.0%, to $23.44 million at June 30, 2024 from $22.97 million at September 30, 2023. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies.

Goodwill and CDI:  The recorded amount of goodwill remained unchanged at $15.13 million at both June 30, 2024 and September 30, 2023. CDI decreased by $169,000, or 25.0%, to $508,000 at June 30, 2024 from $677,000 at September 30, 2023 due to scheduled amortization. For additional information on goodwill and CDI, see Note 3 of the Notes to Unaudited Consolidated Financial Statements contained in “Item 1, Financial Statements.”
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Loan Servicing Rights, Net: Loan servicing rights, net decreased by $598,000, or 28.15%, to $1.53 million at June 30, 2024 from $2.12 million at September 30, 2023 primarily due to the amortization of servicing rights. The principal amount of loans serviced for Freddie Mac and SBA decreased by $14.27 million to $372.23 million at June 30, 2024 from $386.50 million at September 30, 2023.

Deposits: Deposits increased by $67.61 million, or 4.3%, to $1.63 billion at June 30, 2024 from $1.56 billion at September 30, 2023. The increase was primarily due to a $137.29 million increase in money market account balances and a $61.44 million increase in certificates of deposit balances. These increases were partially offset by a $61.94 million decrease in NOW checking accounts balances, a $48.74 million decrease in non-interest bearing demand account balances and a $20.45 million decrease in savings account balances. The increase in money market account balances was primarily due to several larger balance increases with commercial customers.

Deposits consisted of the following at June 30, 2024 and September 30, 2023 (dollars in thousands):
 June 30, 2024September 30, 2023
AmountPercentAmountPercent
Non-interest-bearing demand$407,125 25.0 %$455,864 29.2 %
NOW checking324,795 19.9 386,730 24.8 
Savings207,921 12.8 228,366 14.6 
Money market327,162 20.1 189,875 12.2 
Certificates of deposit under $250195,022 12.0 170,221 10.8 
Certificates of deposit $250 and over117,788 7.2 91,714 5.9 
Certificates of deposit - brokered48,731 3.0 38,165 2.5 
Total$1,628,544 100.0 %$1,560,935 100.0 %

FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral. FHLB borrowings decreased to $20.00 million at June 30, 2024, from $35.00 million at September 30, 2023. The borrowings consist of one $5.00 million short-term borrowing, with a scheduled maturity in September 2024, that bears interest at 5.52%, and one $5.00 million borrowing and one $10.00 million borrowing with scheduled maturities in May 2026, both of which bear interest at 3.95%.

Shareholders’ Equity:  Total shareholders’ equity increased by $8.15 million, or 3.5%, to $241.22 million at June 30, 2024 from $233.07 million at September 30, 2023.  The increase was primarily due to net income of $17.93 million, proceeds of $395,000 from the exercise of stock options and a $539,000 reduction in the accumulated other comprehensive loss for the fair value adjustment on available for sale investment securities. This increase was partially offset by dividend payments to common shareholders of $5.74 million, the repurchase of 182,117 shares of the Company's common stock for $4.80 million and a $488,000 adjustment to equity for the adoption of the new CECL accounting standard.


















44

Asset Quality and Commercial Real Estate Portfolio Breakdown:

Non-performing assets to total assets was 0.22% at June 30, 2024 and 0.09% at September 30, 2023. Non-performing assets increased by $2.60 million, or 162.7%, to $4.19 million at June 30, 2024 from $1.60 million at September 30, 2023. The increase in non-performing assets was primarily due to a $2.61 million increase in non-accrual loans, with the largest increases occurring in the commercial business and commercial real estate portfolios.

The following table sets forth information with respect to the Company’s non-performing assets at June 30, 2024 and September 30, 2023 (dollars in thousands):
June 30,
2024		September 30,
2023
Loans accounted for on a non-accrual basis:  
Mortgage loans: 
    One- to four-family (1)$135 $368 
    Commercial1,310 683 
    Construction – custom and owner/builder152 — 
Consumer loans:  
    Home equity and second mortgage615 177 
Commercial business loans 1,908 286 
       Total loans accounted for on a non-accrual basis4,120 1,514 
Accruing loans which are contractually past due 90 days or more— — 
Total of non-accrual and 90 days or more past due loans 4,120 1,514 
Non-accrual investment securities72 82 
       Total non-performing assets (2)$4,192 $1,596 
TDRs on accrual status (3)$— $2,495 
Non-accrual and 90 days or more past due loans as a percentage of loans receivable0.29 %0.11 %
Non-accrual and 90 days or more past due loans as a percentage of total assets0.22 %0.08 %
Non-performing assets as a percentage of total assets0.22 %0.09 %
Loans receivable (4)$1,414,065 $1,318,122 
Total assets$1,900,629 $1,839,905 
___________________________________
(1) At June 30, 2024 and September 30, 2023, there were no one- to four-family properties in the process of foreclosure.
(2) Does not include TDRs on accrual status as of September 30, 2023. For more information regarding TDRs, see Note 4 of Notes to Unaudited Consolidated Financial Statements contained in "Item 1 Financial Statements".
(3) Does not include TDRs on non-accrual status at September 30, 2023. For more information regarding TDRs, see Note 4 of Notes to Unaudited Consolidated Financial Statements contained in "Item 1 Financial Statements".
(4)  Does not include loans held for sale. Loan balances are before any reduction of the ACL.








45

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

CRE Loan Portfolio Breakdown by Collateral at June 30, 2024
($ in thousands)
Collateral TypeBalancePercent of CRE PortfolioPercent of Total Loan PortfolioAverage Balance per LoanNon-Accrual
Industrial warehouse$126,605 21 %8 %$1,241 $195 
Medical/dental offices81,099 14 5 1,287 — 
Office buildings69,314 12 5 797 — 
Other retail buildings50,365 8 3 536 — 
Mini-storage38,908 6 3 1,441 — 
Hotel/motel31,450 5 2 2,859 — 
Restaurants27,294 5 2 557 161 
Gas stations/convenience stores25,406 4 2 1,059 — 
Nursing homes18,548 3 1 2,319 — 
Churches14,375 2 1 799 — 
Shopping centers10,788 2 1 1,798 — 
Mobile home parks9,942 2 1 473 — 
Other93,771 16 6 705 954 
Total CRE$597,865 100 %40 %$930 $1,310 

CRE Loan Portfolio Breakdown by Collateral at September 30, 2023
($ in thousands)
Collateral TypeBalancePercent of CRE PortfolioPercent of Total Loan PortfolioAverage Balance per LoanNon-Accrual
Industrial warehouse$115,804 20 %8 %$1,135 $195 
Medical/dental offices76,498 14 5 1,319 — 
Office buildings66,108 12 5 760 — 
Other retail buildings51,730 9 4 545 — 
Hotel/motel30,718 5 2 3,072 — 
Mini-storage27,750 5 2 1,156 — 
Restaurants27,640 5 2 564 — 
Gas stations/convenience stores21,588 4 1 939 — 
Nursing homes18,051 3 1 3,008 — 
Shopping centers10,790 2 1 2,158 — 
Mobile home parks9,696 2 1 510 — 
Churches7,253 1 1 484 — 
Other104,639 18 7 731 488 
Total CRE$568,265 100 %40 %$893 $683 
46

Comparison of Operating Results for the Three and Nine Months Ended June 30, 2024 and 2023

Net income decreased by $382,000, or 6.1%, to $5.92 million for the quarter ended June 30, 2024 from $6.31 million for the quarter ended June 30, 2023. Net income per diluted common share decreased by $0.03, or 3.9%, to $0.74 for the quarter ended June 30, 2024 from $0.77 for the quarter ended June 30, 2023. The decreases in net income and net income per diluted common share for the three months ended June 30, 2024, were primarily due to a $653,000 decrease in net interest income, a $142,000 increase in non-interest expense and an $84,000 decrease in non-interest income. These decreases were partially offset by a $366,000 decrease in the provision for credit losses and a $131,000 decrease in the provision for income taxes.

Net income decreased by $2.55 million, or 12.4%, to $17.93 million for the nine months ended June 30, 2024 from $20.48 million for the nine months ended June 30, 2023. Net income per diluted common share decreased by $0.26, or 10.53% to $2.21 for the nine months ended June 30, 2024 from $2.47 for the nine months ended June 30, 2023. The decreases in net income and net income per diluted common share were due to a $3.91 million decrease in net interest income, a $278,000 increase in non-interest expense and a $12,000 decrease in non-interest income. These decreases were partially offset by a $950,000 decrease in the provision for credit losses and a $700,000 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 decreased by $653,000, or 3.9%, to $15.98 million for the quarter ended June 30, 2024 from $16.63 million for the quarter ended June 30, 2023. This decrease was due to an increase in the weighted average cost of interest-bearing liabilities to 2.64% at June 30, 2024 from 1.22% at June 30, 2023 and, to a lesser extent, a $169.73 million increase in the average balance of total interest-bearing liabilities. Partially offsetting the increase in funding costs, was an increase in the average yields of interest-earning assets to 5.33% for the current quarter from 4.72% for the quarter ended June 30, 2023 and a $134.73 million increase in average total interest-earning assets.

Total interest and dividend income increased by $4.25 million, or 21.4%, to $24.14 million for the quarter ended June 30, 2024 from $19.89 million for the quarter ended June 30, 2023, primarily due to increases in the average yield and average balance of loans receivable and interest-bearing deposits in banks and CDs, and the average yield on investment securities. These increases were partially offset by a decrease in the average balance of investment securities.

The average balance of total interest-earning assets increased by $134.73 million, or 8.0%, to $1.82 billion for the quarter ended June 30, 2024 from $1.69 billion for the quarter ended June 30, 2023. The average balance of loans receivable increased by $137.54 million, or 11.0% and the average balance of interest-bearing deposits in banks and CDs increased by $59.62 million or 58.6%. These increases were partially offset by a decrease in the average balance of investment securities of $61.76 million or 19.0% between the periods. During the quarter ended June 30, 2024, there was a total of $133,000 of pre-payment penalties, non-accrual interest and late fees collected compared to $87,000 collected for the quarter ended June 30, 2023. The average yield on interest-earning assets increased by 61 basis points to 5.33% for the quarter ended June 30, 2024 from 4.72% for the quarter ended June 30, 2023. The average yield on interest-bearing deposits in banks and CDs and on investment securities increased 62 basis points and 63 basis points to 5.41% and 3.57%, for the quarter ended June 30, 2024 compared to the quarter ended June 30, 2023, respectively, while the average yield on loans receivable increased 48 basis points to 5.65% during the same period.

Total interest expense increased by $4.90 million, or 150.6%, to $8.16 million for the quarter ended June 30, 2024 from $3.26 million for the quarter ended June 30, 2023. The increase in interest expense was due to an increase in the average cost and, to a lesser extent, an increase in the average balance of interest-bearing liabilities, primarily deposits. The average cost of interest-bearing liabilities increased to 2.64% for the quarter ended June 30, 2024 from 1.22% for the quarter ended June 30, 2023. The average balance of interest-bearing liabilities increased by $169.73 million, or 15.8%, to $1.24 billion for the quarter ended June 30, 2024 from $1.07 billion for the quarter ended June 30, 2023, primarily due to increases in the average balances of money market accounts, certificate of deposit accounts and borrowings, partially offset by decreases in the average balance of NOW checking and savings accounts.

Interest expense on deposits increased by $4.82 million, or 154.2%, to $7.94 million for the quarter ended June 30, 2024 from $3.12 million for the quarter ended June 30, 2023, driven by an increase in the average cost of interest-bearing deposits in all categories and an increase in the average balance of money market accounts and certificates of deposit. The average cost of interest bearing deposits increased 144 basis points to 2.62% for the three months ended June 30, 2024, which included a 132 basis point increase in the cost of certificates of deposit, including brokered certificates of deposit, to 4.35%, compared to the same period last year. The average balance of certificates of deposit, including brokered certificate of deposits, increased $146.04 million, or 69.2%, to $356.99 million for the three months ended June 30, 2024, compared to the same period last year.

47

Interest expense on borrowings increased to $220,000 for the quarter ended June 30, 2024, compared to $132,000 for the quarter ended June 30, 2023, primarily due to an increase in the average balance of borrowings. The average balance of borrowings increased by $7.75 million to $20.0 million for the quarter ended June 30, 2024 compared to the same period last year. The average rate paid on borrowings increased slightly to 4.42% for the quarter ended June 30, 2024 compared to 3.95% for the same period last year.

As a result of increases in interest expense, the net interest margin ("NIM") decreased to 3.53% for the quarter ended June 30, 2024 from 3.94% for the quarter ended June 30, 2023.

Net income decreased $2.55 million or 12.4% to $17.93 million for the nine months ended June 30, 2024 from $20.48 million for the nine months ended June 30, 2023. The decrease in net income was primarily due to a $3.91 million decrease in net interest income, a $278,000 increase in non-interest expense and a $12,000 decrease in non-interest income. These decreases were partially offset by a $950,000 decrease in the provision for credit losses and a $700,000 decrease in the provision for income taxes.

Total interest and dividend income increased $11.40 million, or 19.5%, to $69.79 million for the nine months ended June 30, 2024 from $58.39 million for the nine months ended June 30, 2023, primarily due to increases in the average yield and average balance of loans receivable, and the average yields on interest-bearing deposits in banks and CDs and investment securities. These increases were partially offset by a decrease in the average balances of interest-bearing deposits in banks and CDs, and investment securities.

Total interest expense increased by $15.31 million, or 223.1%, to $22.17 million for the nine months ended June 30, 2024 from $6.86 million for the nine months ended June 30, 2023. The increase in interest expense was due to an increase in the average cost and, to a lesser extent, an increase in the average balance of interest-bearing liabilities, primarily deposits.

The NIM decreased to 3.53% for the nine months ended June 30, 2024 from 3.99% for the nine months ended June 30, 2023.
48

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,
 20242023
Average
Balance		Interest and
Dividends		Yield/
Cost		Average
Balance		Interest and
Dividends		Yield/
Cost
Interest-earning assets:
Loans receivable (1)(2)$1,391,582 $19,537 5.65 %$1,254,044 $16,215 5.17 %
Investment securities (2)263,087 2,335 3.57 324,844 2,384 2.94 
 Dividends from mutual funds, FHLB stock and other investments 5,867 94 6.41 6,541 70 4.28 
 Interest-bearing deposits in banks and CDs161,421 2,173 5.41 101,798 1,220 4.79 
Total interest-earning assets1,821,957 24,139 5.33 1,687,227 19,889 4.72 
Non-interest-earning assets82,008   84,255   
     Total assets$1,903,965   $1,771,482   
Interest-bearing liabilities:      
Savings $208,488 140 0.27 $255,463 118 0.19 
Money market326,023 2,882 3.56 205,023 429 0.84 
NOW checking 329,344 1,054 1.29 387,426 982 1.02 
Certificates of deposit311,545 3,261 4.21 201,375 1,472 2.93 
Brokered CDs45,442 601 5.32 9,575 122 5.11 
Short-term borrowings5,001 70 5.63 3,464 46 5.33 
Long-term borrowings15,000 150 4.02 8,791 86 3.92 
Total interest-bearing liabilities1,240,843 8,158 2.64 1,071,117 3,255 1.22 
Non-interest-bearing deposits413,494 462,315 
Other liabilities10,245   10,199   
Total liabilities1,664,582   1,543,631   
Shareholders' equity239,383   227,851   
Total liabilities and    
shareholders' equity$1,903,965 $1,771,482   
Net interest income$15,981  $16,634  
Interest rate spread2.69 %  3.50 %
Net interest margin (3)3.53 %  3.94 %
Ratio of average interest-earning  assets to average interest- bearing liabilities146.83 %  157.52 %
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.

49

 Nine Months Ended June 30,
 20242023
Average
Balance		Interest and
Dividends		Yield/
Cost		Average
Balance		Interest and
Dividends		Yield/
Cost
Interest-earning assets:      
Loans receivable (1)(2)$1,363,213 $56,841 5.57 %$1,206,294 $45,622 5.04 %
Investment securities (2)288,554 6,892 3.19 327,457 7,058 2.87 
Dividends from mutual funds, FHLB stock and other investments6,235 266 5.71 6,202 185 3.98 
Interest-bearing deposits in banks and CDs143,537 5,791 5.39 182,312 5,524 4.04 
Total interest-earning assets1,801,539 69,790 5.17 1,722,265 58,389 4.52 
Non-interest-earning assets81,650   84,167   
Total assets$1,883,189   $1,806,432   
Interest-bearing liabilities:      
Savings$214,275 386 0.24 $270,076 296 0.15 
Money market273,683 6,326 3.09 221,131 1,116 0.67 
NOW checking358,052 3,958 1.48 413,372 2,322 0.75 
Certificates of deposit291,707 8,989 4.12 169,001 2,872 2.27 
Brokered CDs42,856 1,724 5.37 3,192 123 5.15 
Short-term borrowings7,457 335 6.00 1,157 46 5.32 
Long-term borrowings15,000 452 4.03 2,930 86 3.92 
Total interest-bearing liabilities1,203,030 22,170 2.46 1,080,859 6,861 0.85 
Non-interest-bearing deposits431,849 491,404 
Other liabilities11,273   9,896   
Total liabilities1,646,152   1,582,159   
Shareholders' equity237,037   224,273   
Total liabilities and    
shareholders' equity$1,883,189   $1,806,432   
Net interest income$47,620   $51,528  
Interest rate spread  2.71 %  3.67 %
Net interest margin (3)  3.53 %  3.99 %
Ratio of average interest-earning  assets to average interest- bearing liabilities  149.75 %  159.34 %
_______________
(1)Does not include interest on loans on non-accrual status. Includes loans held for sale. Amortized net deferred loan fees, late fees, extension fees, prepayment penalties, and the accretion of the fair value discount on loans are included with interest and dividends.
(2)Average balances include loans and investment securities on non-accrual status.
(3)Net interest income divided by total average interest-earning assets, annualized.





50

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, 2024
compared to three months
ended June 30, 2023
increase (decrease) due to		Nine months ended
June 30, 2024
compared to nine months
ended June 30, 2023
increase (decrease) due to
 RateVolumeNet
Change		RateVolumeNet
Change
Interest-earning assets:   
Loans receivable and loans held for sale$1,458 $1,864 $3,322 $4,944 $6,275 $11,219 
Investment securities449 (498)(49)187 (353)(166)
 Dividends from mutual funds, FHLB stock and other investments 32 (8)24 80 1 81 
  Interest-bearing deposits in banks and CDs165 788 953 715 (448)267 
Total net increase in income on interest-earning assets2,104 2,146 4,250 5,926 5,475 11,401 
Interest-bearing liabilities:   
Savings 47 (25)22 111 (21)90 
Money market 2,074 379 2,453 5,164 46 5,210 
NOW checking 235 (163)72 1,755 (119)1,636 
Certificates of deposit 876 1,392 2,268 3,635 4,083 7,718 
Short-term FHLB borrowings3 21 24 205 84 289 
   Long-term borrowings2 62 64 3 363 366 
Total net increase in expense on interest-bearing liabilities3,237 1,666 4,903 10,873 4,436 15,309 
Net decrease in net interest income$(1,133)$480 $(653)$(4,947)$1,039 $(3,908)

Provision for Credit Losses: A $244,000 provision for credit losses was recorded for the quarter ended June 30, 2024, consisting of a $264,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $12,000 recapture of credit losses on investment securities, and an $8,000 recapture of credit losses on unfunded commitments which was primarily due to a decrease in the balance of unfunded loan commitments. A $610,000 provision for loan losses, under the prior incurred loan loss method, was recorded for the quarter ended June 30, 2023.

The Company adopted the CECL methodology as of October 1, 2023, which resulted in one-time upward adjustments to the ACL on loans of $461,000, to the ACL on investment securities of $92,000, and to the ACL on unfunded commitments of $65,000, resulting in an after-tax decrease to opening retained earnings of $488,000. Amounts reported prior to October 1, 2023 were calculated using the previous incurred loss methodology to compute our allowance for loan losses, which is not directly comparable to the ACL calculated under the CECL methodology. The provision for credit losses for the three months ended June 30, 2024 reflects assumptions related to forecasts concerning the economic environment as a result of local, national and global events. In addition, expected loss estimates consider various factors, including customer specific information, changes in risk ratings, projected delinquencies, and the impact of economic conditions on borrowers' ability to repay.

We recorded a $660,000 provision for credit losses for the nine months ended June 30, 2024, consisting of an $810,000 provision for credit losses on loans which was primarily due to an increase in loans receivable, a $20,000 recapture of credit losses on investment securities which was primarily due to maturities and principal repayments, and a $130,000 recapture of credit losses on unfunded loan commitments which was primarily due to a decrease in the amount of unfunded loan
51

commitments. There was a $1.61 million provision for loan losses, calculated under the prior incurred loan loss method, recorded for the nine months ended June 30, 2023.

For the quarter ended June 30, 2024, net charge-offs were $36,000 compared to $1,000 for the quarter ended June 30, 2023. Non-accrual loans increased by $2.61 million, or 172.1%, to $4.12 million at June 30, 2024 from $1.51 million at September 30, 2023. At June 30, 2024, non-accrual loans increased by $2.53 million, or 159.8%, to $4.12 million from $1.59 million at June 30, 2023. Total delinquent loans (past due 30 days or more) and non-accrual loans increased by $2.57 million, or 154.3%, to $4.23 million at June 30, 2024, from $1.67 million at September 30, 2023 and increased by $2.39 million, or 129.7%, from $1.84 million one year ago. 

The $314,000 balance of SBA PPP loans was omitted from the Company's allowance for credit losses calculation at June 30, 2024, as these loans are fully guaranteed by the SBA and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

While management believes the estimates and assumptions used in its determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions will not have a material adverse impact on our financial condition and results of operations. A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowed economic growth, among other factors, could result in a material increase in the ACL and have a material adverse impact on the financial condition and results of operations. In addition, the determination of the amount of the ACL is subject to review by bank regulators as part of the routine examination process, which may result in the adjustment of reserves based upon their judgment of information available to them at the time of their examination and have a material adverse impact on the financial condition and results of operations.

In accordance with GAAP, acquired loans are recorded at their estimated fair value, resulting in a net discount to the loans' contractual amounts, with a portion of this discount reflecting possible credit losses. Credit discounts are included in the determination of fair value. With the adoption of CECL, purchased loans are evaluated for impairment in the same manner as the rest of the loan portfolio. The remaining fair value discount associated with acquired loans was $163,000 at June 30, 2024. This discount will continue to accrete into income as these loans continue to pay down.

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 $84,000, or 2.9%, to $2.79 million for the quarter ended June 30, 2024 from $2.88 million for the quarter ended June 30, 2023. This decrease was primarily due to a $95,000 decrease in gain on sales of investment securities and a $38,000 decrease in ATM and debit card interchange transaction fees. These decreases were partially offset by a $44,000 increase in service charges on deposits.

Total non-interest income for the nine months ended June 30, 2024 decreased $12,000, or 0.2%, to $8.20 million from $8.22 million for the nine months ended June 30, 2023. This decrease was primarily due to a $95,000 decrease in gain on sales of investment securities, an $88,000 decrease in ATM and debit card interchange transaction fees, and smaller decreases in several other categories. These decreases were partially offset by a $214,000 increase in service charges on deposit accounts and smaller increases in several other categories.

Non-interest Expense:  Total non-interest expense increased by $142,000, or 1.3%, to $11.07 million for the quarter ended June 30, 2024 from $10.93 million for the quarter ended June 30, 2023. This increase was primarily due to increased expenses of $142,000 in technology and communications, $89,000 in ATM and debit card interchange transaction fees and $68,000 in salary and employee benefits, which were partially offset by a $242,000 decrease in professional fees. The efficiency ratio for the current quarter was 58.97% compared to 56.01% for the comparable quarter one year ago. The change in the efficiency ratio was due to lower total revenue coupled with slightly higher non-interest expense.

Total non-interest expense increased $278,000, or 0.9%, to $32.68 million for the nine months ended June 30, 2024 from $32.41 million for the nine months ended June 30, 2023. This increase was primarily due increased expenses of $489,000 in technology and communications, $333,000 in ATM and debit card interchange transaction fees and $130,000 in premises and equipment which were partially offset by a $571,000 decrease in professional fees.

52

Provision for Income Taxes: The provision for income taxes decreased by $131,000, or 7.9%, to $1.54 million for the quarter ended June 30, 2024 from $1.67 million for the quarter ended June 30, 2023. The decrease in the provision for income taxes was primarily due to lower pre-tax income. The Company's effective income tax rate was 20.6% for the quarter ended June 30, 2024 and 20.9% for the quarter ended June 30, 2023. The provision for income taxes decreased by $700,000, or 13.3%, to $4.55 million for the nine months ended June 30, 2024 from $5.25 million for the nine months ended June 30, 2023. The decrease was primarily due to lower pre-tax income. The Company's effective tax rate was 20.2% for the nine months ended June 30, 2024 compared to 20.4% for the nine months ended June 30, 2023.


Liquidity

The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities, maturing CDs held for investment and borrowings, if needed, from the FHLB and FRB.  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, 2024, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 12.49%. The Bank maintains a credit facility with the FHLB that provides for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral. At June 30, 2024, the Bank had a total of $602.28 million available for borrowings with the FHLB of which $20.00 million was outstanding. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral: Borrower-in-Custody ("BIC").  At June 30, 2024, the Bank had no outstanding balance on the BIC line, under which $83.17 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, 2024, the Bank did not have an outstanding balance on this borrowing line. Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposits withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

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, 2024 and 2023, the Bank originated $202.62 million and $272.54 million of loans, respectively. At June 30, 2024, the Bank had undisbursed lines of credit and commitments to extend credit totaling $132.33 million and undisbursed construction loans in process totaling $87.20 million.  Investment securities purchased during the nine months ended June 30, 2024 and 2023 totaled $38.01 million and $32.60 million, respectively.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments.  During the nine months ended June 30, 2024 and 2023, the Bank sold $14.92 million and $6.96 million, respectively, in loans and loan participation interests.  During the nine months ended June 30, 2024 and 2023, the Bank received $105.43 million and $130.21 million in principal repayments, respectively.

The Bank's liquid assets in the form of cash and cash equivalents, CDs held for investment, and investment securities available for sale (including equity securities) increased to $244.72 million at June 30, 2024 from $186.49 million at September 30, 2023. CDs that are scheduled to mature in less than one year from June 30, 2024 totaled $294.44 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.
53


Based on current objectives, there are no capital expenditures projected for the remaining three months of the fiscal year ending September 30, 2024 that would materially impact liquidity. For the remainder of the 2024 fiscal year, the Bank projects that fixed commitments will include $83,000 of operating lease payments. Further, one FHLB borrowing totaling $5.00 million will mature during the fiscal year 2024. In addition, at June 30, 2024, there were other future obligations and accrued expenses of $9.21 million.

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

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. In addition to is operating expenses, Timberland Bancorp is responsible for paying any dividends declared, if any, to its shareholders and funds paid for Company stock repurchases. Sources of capital and liquidity for Timberland Bancorp include distributions from the Bank and the issuance of debt or equity securities, although there are regulatory restrictions on the ability of the Bank to pay dividends. At June 30, 2024, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $214,000.

The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. The current quarterly common stock dividend rate is $0.24 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders. Assuming continued payment during fiscal year 2024 at the rate of $0.24 per share, the average total dividend paid each quarter would be approximately $1.91 million based on the number of current outstanding shares at June 30, 2024 (which assumes no change in the number of shares).

In addition, from time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On July 25, 2023, the Company announced the adoption of a new stock repurchase program pursuant to which the Company may repurchase up to 404,708 shares of Company common stock, of which 192,025 shares remained available for future purchases as of June 30, 2024. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.


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.

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, 2024, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.









54

The following table compares the Bank’s actual capital amounts at June 30, 2024, to its minimum regulatory capital requirements at that date (dollars in thousands):
 ActualRegulatory
Minimum To
Be “Adequately
Capitalized”		To Be “Well Capitalized”
Under Prompt
Corrective Action
Provisions
 AmountRatioAmountRatioAmountRatio
Leverage Capital Ratio:      
Tier 1 capital$226,808 12.07 %$75,156 4.00 %$93,945 5.00 %
Risk-based Capital Ratios:
Common equity Tier 1 capital226,808 17.93 56,923 4.50 82,222 6.50 
Tier 1 capital226,808 17.93 75,897 6.00 101,197 8.00 
Total capital242,639 19.18 101,197 8.00 126,496 10.00 

In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. At June 30, 2024, 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, 2024, Timberland Bancorp, Inc. would have exceeded all regulatory requirements. The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp, Inc. as of June 30, 2024 (dollars in thousands):
Actual
 AmountRatio
Leverage Capital Ratio:  
Tier 1 capital$227,458 12.04 %
Risk-based Capital Ratios:
Common equity Tier 1 capital227,458 17.97 
Tier 1 capital227,458 17.97 
Total capital243,296 19.22 


Key Financial Ratios and Data
 Three Months Ended June 30,Nine Months Ended
June 30,
2024202320242023
PERFORMANCE RATIOS:
   
Return on average assets1.25 %1.42 %1.27 %1.51 %
Return on average equity9.95 %11.07 %10.10 %12.17 %
Net interest margin3.53 %3.94 %3.53 %3.99 %
Efficiency ratio58.97 %56.01 %58.55 %54.24 %


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 2023 Form 10-K.
55

Item 4.  Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures:  An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer (principal executive officer), Chief Financial Officer (principal financial officer) and several other members of the Company’s senior management as of the end of the period covered by this report.  The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2024, 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 our internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial     reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; as over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II.   OTHER INFORMATION

Item 1.       Legal Proceedings
Neither the Company nor the Bank is a party to any material legal proceedings at this time.  From time to time,
the Bank is involved in various claims and legal actions arising in the ordinary course of business.

Item 1A.    Risk Factors
There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's 2023 Form 10-K.

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, 2024:

56

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)
04/01/2024 - 04/30/2024— $— — 262,025 
05/01/2024 - 05/31/202414,371 25.68 14,371 247,654 
06/01/2024 - 06/30/202455,629 25.13 55,629 192,025 
Total70,000 $25.24 70,000 192,025 

(1) On July 25, 2023, the Company announced a stock repurchase program to purchase up to 404,708 shares of the Company's common stock. This marked the Company's 19th stock repurchase plan. The existing repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions based upon market conditions and available liquidity. Cumulatively, since January 1998, the Company has repurchased 8,549,104 shares of its common stock at an average price of $10.30 per share.

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

Item 3.      Defaults Upon Senior Securities
Not applicable.

Item 4.     Mine Safety Disclosures
Not applicable.

Item 5.     Other Information
a.None to be reported.
b.None to be reported.
c.During the quarter ended June 30, 2024, no director or officer (as defined in Rule 16a-1(f) under the Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

57

Item 6.         Exhibits

(a)   Exhibits
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
31.1
31.2
32
101
The following materials from Timberland Bancorp Inc's Quarterly Report 10-Q for the quarter ended June 30, 2024 formatted on Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders' Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Unaudited Consolidated Financial Statements
104Cover Page Interactive Data File, formatted in Inline XBRL and included in Exhibit 101
_________________

(1)Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (333-35817).
(2)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 13, 2023.
(3)Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 16, 2007.
(4)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
(5)Incorporated by reference to the Exhibit 99.2 included in the Registrant's Registration Statement on Form S-8 (333-1161163).
(6)Incorporated by reference to Registrant's Current Report on Form 8-K filed on December 22, 2023.
(7)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.
(8)Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 18, 2019.
58

SIGNATURES

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

 
 Timberland Bancorp, Inc. 
  
  
Date: August 7, 2024
By:  /s/ Dean J. Brydon                              
 Dean J. Brydon
 Chief Executive Officer 
 (Principal Executive Officer) 
  
 
 
Date: August 7, 2024
By:  /s/Marci A. Basich                                
 Marci A. Basich
 Chief Financial Officer
(Principal Financial Officer)
59

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