What changed in this filing

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Item 1. Business

2021-12-08 compared with 2020-12-09 · 220 added, 243 removed, 1002 unchanged (32% of the section changed)

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(“Timberland Bancorp" or the "Company”), a Washington corporation, was organized on September 8, 1997 for the purpose of becoming the holding company for Timberland Bank (the "Bank").

At September 30, 2020, on a consolidated basis, the Company had total assets of $1.57 billion, net loans receivable of $1.01 billion, total deposits of $1.36 billion and total shareholders’ equity of $187.63 million.

At September 30, 2021, on a consolidated basis, the Company had total assets of $1.79 billion, net loans receivable of $968.45 million, total deposits of $1.57 billion and total shareholders’ equity of $206.90 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 consolidated financial statements and related data, relates primarily to the Bank and its subsidiary, Timberland Service Corporation.

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 24 branches (including its main office in Hoquiam).

Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank and its subsidiary, Timberland Service Corp.

The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 24 branches (including its main office in Hoquiam).

The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”).

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Other industries that support the economic base are tourism, agriculture, shipping, transportation and technology.

According to the Washington State Employment Security Department, the unemployment rate in Grays Harbor County increased to 10.0% at September 30, 2020 from 6.7% at September 30, 2019.

According to the Washington State Employment Security Department, the unemployment rate in Grays Harbor County decreased to 5.3% at September 30, 2021 from 10.0% at September 30, 2020.

The median price of a resale home in Grays Harbor County for the quarter ended June 30, 2021 increased 26.1% to $302,300 from $239,800 for the comparable prior year period.

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The economy in Pierce County is diversified with the presence of military related government employment (Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace related employment.

According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area increased to 8.6% at September 30, 2020 from 5.0% at September 30, 2019.

According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area decreased to 4.2% at September 30, 2021 from 8.6% at September 30, 2020.

The median price of a resale home in Pierce County for the quarter ended June 30, 2021 increased 26.7% to $516,800 from $407,800 for the comparable prior year period.

The number of home sales decreased 5.5% for the quarter ended June 30, 2020 compared to the same quarter one year earlier.

The number of home sales increased 11.3% for the quarter ended June 30, 2021 compared to the same quarter one year earlier.

The Bank has five branches located in Pierce County, and these branches have historically been responsible for a substantial portion of the Bank’s construction lending activities.

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Thurston County is home of Washington State’s capital (Olympia), and its economic base is largely driven by state government related employment.

According to the Washington State Employment Security Department, the unemployment rate for the Thurston County area increased to 7.1% at September 30, 2020 from 4.8% at September 30, 2019.

According to the Washington State Employment Security Department, the unemployment rate for the Thurston County area decreased to 3.5% at September 30, 2021 from 7.1% at September 30, 2020.

The median price of a resale home in Thurston County for the quarter ended June 30, 2021 increased 22.6% to $454,900 from $371,100 for the same quarter one year earlier.

The number of home sales decreased 2.5% for the quarter ended June 30, 2020 compared to the same quarter one year earlier.

The number of home sales increased 5.0% for the quarter ended June 30, 2021 compared to the same quarter one year earlier.

The Bank has seven branches located in Thurston County.

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The economic base of Kitsap County is largely supported by military related government employment through the U.S.

According to the Washington State Employment Security Department, the unemployment rate for the Kitsap County area increased to 6.8% at September 30, 2020 from 4.5% at September 30, 2019.

According to the Washington State Employment Security Department, the unemployment rate for the Kitsap County area decreased to 3.4% at September 30, 2021 from 6.8% at September 30, 2020.

The median price of a resale home in Kitsap County for the quarter ended June 30, 2021 increased 23.2% to $506,900 from $411,400 for the same quarter one year earlier.

The number of home sales decreased 3.4% for the quarter ended June 30, 2020 compared to the same quarter one year earlier.

The number of home sales increased 10.2% for the quarter ended June 30, 2021 compared to the same quarter one year earlier.

King County is the most populous county in the state and has a population of 2.3 million according to the U.S.

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King County’s economic base is diversified with many industries including shipping, transportation, aerospace, computer technology and biotech.

According to the Washington State Employment Security Department, the unemployment rate for the King County area increased to 7.0% at September 30, 2020 from 3.0% at September 30, 2019.

The median price of a resale home in King County for the quarter ended June 30, 2020 increased 2.0% to

$715,400 from $701,200 for the same quarter one year earlier.

The number of home sales decreased 0.5% for the quarter ended June 30, 2020 compared to the same quarter one year earlier.

According to the Washington State Employment Security Department, the unemployment rate for the King County area decreased to 4.3% at September 30, 2021 from 7.0% at September 30, 2020.

The median price of a resale home in King County for the quarter ended June 30, 2021 increased 21.1%

to $866,700 from $715,400 for the same quarter one year earlier.

The number of home sales increased 18.6% for the quarter ended June 30, 2021 compared to the same quarter one year earlier.

Lewis County has a population of 81,000 according to the U.S.

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The economic base in Lewis County is supported by manufacturing, retail trade, local government and industrial services.

According to the Washington State Employment Security Department, the unemployment rate in Lewis County increased to 8.1% at September 30, 2020 from 5.9% at September 30, 2019.

According to the Washington State Employment Security Department, the unemployment rate in Lewis County decreased to 4.3% at September 30, 2021 from 8.1% at September 30, 2020.

The median price of a resale home in Lewis County for the quarter ended June 30, 2021 increased 24.0% to $361,200 from $291,400 for the same quarter one year earlier.

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Lending Activities

Historically, the principal lending activity of the Bank has consisted of the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences, multi-family properties, commercial real estate, or by land and loans for the construction of one- to four-family residences.

The Bank’s net loans receivable totaled $1.01 billion at September 30, 2020, representing 64.7% of consolidated total assets, and at that date commercial real estate, construction (including undisbursed loans in process), multi-family and land loans were $783.69 million, or 69.1% of total loans.

Historically, the principal lending activity of the Bank has consisted of the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences, multi-family properties, commercial real estate, and on raw or developed land, and the origination of construction loans, primarily for the construction of one- to four-family residences.

The Bank’s net loans receivable totaled $968.45 million at September 30, 2021, representing 54.0% of consolidated total assets, and at that date, commercial real estate, construction (including undisbursed loans in process), multi-family and land loans were $811.35 million, or 75.0% of total loans.

Commercial real estate, construction, multi-family, and land loans typically have higher rates of return than one- to four-family loans;

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At September 30, 2021, the maximum amount which the Bank could have lent to any one borrower and the borrower’s related entities was approximately $40.47 million under this policy.

At September 30, 2020, the largest amount outstanding to any one borrower and the borrower’s related entities was $28.88 million (including $4.05 million in available lines of credit), which was secured by various commercial real estate and residential properties and other business assets located primarily in King County and were performing according to their loan repayment terms at September 30, 2020.

At September 30, 2021, the largest amount outstanding to any one borrower and the borrower’s related entities was $32.08 million (including $10.49 million in available lines of credit), which was secured by various commercial real estate and residential properties and other business assets located primarily in Thurston County and these borrowings were performing according to their repayment terms at September 30, 2021.

The next largest amount outstanding to any one borrower and the borrower’s related entities was $31.86 million (including $17.75 million of undisbursed construction loan proceeds).

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80% (90% for loans originated for sale in the secondary market to Freddie Mac or the FHLB).

At September 30, 2020, three one- to four-family loans totaling $659,000 were on non-accrual status.

At September 30, 2021, two one- to four-family loans totaling $407,000 were on non-accrual status.

See “Lending Activities - Non-performing Loans and Delinquencies.”

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Treasury Bill Index, the Prime Rate or a matched term FHLB borrowing, with principal and interest payments fully amortizing over terms of up to 30 years.

At September 30, 2020, the Bank’s largest multi-family loan had an outstanding principal balance o f $7.20 million and was secured by an apartment building located in Thurston County.

At September 30, 2021, the Bank’s largest multi-family loan had an outstanding principal balance o f $7.51 million and was secured by an apartment building located in Pierce County.

At September 30, 2021, this loan was performing according to its repayment terms.

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The Bank originates commercial real estate loans generally at variable interest rates with principal and interest payments fully amortizing over terms of up to 30 years.

These loans are secured by properties, such as office buildings, retail/wholesale facilities, mini-storage facilities, motels, nursing homes, restaurants and convenience stores, generally located in the Bank’s primary market area.

At September 30, 2020, the largest commercial real estate loan was secured by a medical building in Pierce County, had a balance of $7.82 million and was perf orming according to its repayment terms.

At September 30, 2020, fou r commercial real estate loans totaling $858 ,000 were on non-accrual status.

These loans are secured by properties, such as industrial warehouses, office buildings, retail/wholesale facilities, mini-storage facilities, motels, nursing homes, restaurants and convenience stores, generally located in the Bank’s primary market area.

At September 30, 2021, the largest commercial real estate loan was secured by a nursing home facility in Pierce County, had a balance of $7.70 million and was perf orming according to its repayment terms.

At September 30, 2021, two commercial real estate loans totaling $773,000 were on non-accrual status.

See “Lending Activities - Non-performing Loans and Delinquencies.”

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The Bank also originates

construction loans for multi-family properties, commercial properties, and land development projects.

construction loans for commercial properties, multi-family properties, and land development projects.

The Bank's construction loans generally provide for the payment of interest only during the construction phase, which is billed monthly, although during the term of some construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve.

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Balance Percent of

Total Outstanding

Balance Percent of

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At the completion of construction, the loan is converted to or refinanced into either a fixed-rate mortgage loan, which conforms to secondary market standards, or an ARM loan for retention in the Bank’s portfolio.

At September 30, 2020, custom and owner/builder construction loans totaled $129.57 million, or 59.0% of the total construction loan portfolio.

At September 30, 2020, the largest outstanding custom and owner/builder construction loan had an outstanding balance of $6.60 million (including $53,000 of undisbursed loans in process) and was performing according to its repayment terms.

At September 30, 2021, the largest outstanding custom and owner/builder construction loan had an outstanding balance of $838,000 (including $181,000 of undisbursed loans in process) and was performing according to its repayment terms.

Speculative one- to four-family construction loans are made to home builders and are termed “speculative”, because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either the Bank or another lender for the finished home.

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Speculative construction loans are generally originated for a term of 12 months, with current rates generally ranging from 5.00% to 6.50 %, an d with a loan-to-value ratio of no more than 80 % of the appraised value of the completed property.

At September 30, 2020, speculative one- to four-family construction loans totaled $14.59 million, or 6.7% of the total construction loan portfolio.

At September 30, 2020, the largest aggregate outstanding balance to one borrower for speculative one- to four-family construction loans to taled $3.05 million (including $2.18 million of undisbursed loans in process) and was comprised of eleven loans that were performing according to their repayment terms.

At September 30, 2021, the largest aggregate outstanding balance to one borrower for speculative one- to four-family construction loans to taled $4.84 million (including $2.41 million of undisbursed loans in process) and was comprised of ten loans that were performing according to their repayment terms.

The Bank also provides construction financing for multi-family and commercial properties.

At September 30, 2020, these loans amounted to $67.62 million, or 30.8%, of construction loan balances compared t o $75.83 million, or 33.9%, of construction loan balances at September 30, 2019.

At September 30, 2021, these loans amounted to $95.44 million, or 40.9%, of construction loan balances.

These loans are typically secured by apartment buildings, condominiums, mini-storage facilities, office buildings, hotels and retail rental space predominantly located in the Bank’s primary market area.

At September 30, 2020, the largest outstanding multi-family construction loan for $8.03 million was secured by an apartment building project in Thurston County which had not yet commenced construction.

At September 30, 2020, the largest outstanding commercial real estate construction loan was secured by an assisted living facility project in Salem, Oregon and had a balance of $5.31 million with no remaining undisbursed funds available.

At September 30, 2021, the largest outstanding multi-family construction loan was for $10.00 million secured by an apartment building project in Thurston County which had not yet commenced construction.

At September 30, 2021, the largest outstanding commercial real estate construction loan was a purchased participation loan secured by an assisted living facility project in Salem, Oregon and had a balance of $5.31 million with no undisbursed funds available.

This loan was performing according to its repayment terms at September 30, 2021.

All construction loans must be approved by a member of one of the Bank’s Loan Committees or the Bank’s Board of Directors, or in the case of one- to four-family construction loans that meet Freddie Mac guidelines, by the Regional Manager of Community Lending, the Loan Department Supervisor or a Bank underwriter.

See “- Lending Activities - Loan Solicitation

and Processing.” Prior to approval of any construction loan application, an independent fee appraiser inspects the site and prepares an appraisal on an "as completed" basis and the Bank reviews the existing or proposed improvements, identifies the market for the proposed project and analyzes the pro-forma data and assumptions on the project.

In the case of a speculative or custom construction loan, the Bank reviews the experience and expertise of the builder.

See “Lending Activities - Loan Solicitation and Processing.” Prior to approval of any construction loan application, an independent fee appraiser inspects the site and prepares an appraisal on an "as completed" basis, and the Bank reviews the existing or proposed improvements, identifies the market for the proposed project and analyzes the pro-forma data and assumptions on the project.

In the case of a speculative or

custom construction loan, the Bank reviews the experience and expertise of the builder.

After this preliminary review, the application is processed, which includes obtaining credit reports, financial statements and tax returns or verification of income on the borrowers and guarantors, an independent appraisal of the project, and any other expert reports necessary to evaluate the proposed project.

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generally with ten to 50 lots).

At September 30, 2020, land development loans totaled $7.71 million, or 3.5% of the total construction loan portfolio.

Currently, the Bank is originating land development loans on a limited basis.

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Land development loans secured by land under development involve greater risks than one- to four-family residential mortgage loans, because these loan funds are advanced upon the predicted future value of the developed property upon completion.

If the estimate of the future value proves to be inaccurate, in the event of default and foreclosure the Bank may be confronted with a property the value of which is insufficient to assure full

If the estimate of the future value proves to be inaccurate, in the event of default and foreclosure, the Bank may be confronted with a property the value of which is insufficient to assure full repayment.

The Bank has historically attempted to minimize this risk by generally limiting the maximum loan-to-value ratio on land and land development loans to 75% of the estimated developed value of the secured property.

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The Bank originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to use for recreational purposes.

At September 30, 2020, land loans totaled $25.57 million, or 2.3%, of the Bank’s total loan portfolio.

Land loans originated by the Bank generally have maturities of one to ten years.

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Consumer loans are made with both fixed and variable interest rates and with varying terms.

At September 30, 2020, consumer loans amounted to $35.65 million, or 3.1%, of the Bank's total loan portfolio.

At September 30, 2020, the largest component of the consumer loan portfolio consisted of second mortgage loans and home equity lines of credit, which totaled $32.08 million, or 2.8%, of the Bank's total loan portfolio.

Home equity lines of credit and second mortgage loans are made for purposes such as the improvement of residential properties, debt consolidation and education expenses, among others.

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Small Business Administration ("SBA") 7(a) program.

Loans made by the Bank under the SBA 7(a) program generally are made to small businesses to

provide working capital or to provide funding for the purchase of businesses, real estate, or equipment.

Loans made by the Bank under the SBA 7(a) program generally are made to small businesses to provide working capital or to provide funding for the purchase of businesses, real estate, or equipment.

These loans generally are secured by a combination of assets that may include equipment, receivables, inventory, business real property, and sometimes a lien on the personal residence of the borrower.

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SBA 7(a) loans are all adjustable rate loans based on the Prime Rate.

Under the SBA 7(a) program, the Bank can sell in the secondary market the guaranteed portion of its SBA 7(a) loans and retain the related unguaranteed portion of these loans, as well as the servicing on such loans, for which it is paid a fee.

Under the SBA 7(a) program, the Bank can sell in the secondary market the guaranteed portion of its SBA 7(a) loans and retain the related unguaranteed

portion of these loans, as well as the servicing on such loans, for which it is paid a fee.

The loan servicing spread is generally a minimum of 1.00% on all SBA 7(a) loans.

The Bank generally offers SBA 7(a) loans within a range of $50,000 to $1.50 million.

Within Timberland's commercial business loan portfolio are restaurant loans totaling $16.82 million at September 30, 2020 that were originated in conjunction with a third party firm.

Within Timberland's commercial business loan portfolio are restaurant loans and loans to other retail and service businesses totaling $9.20 million at September 30, 2021 that were originated in conjunction with a third-party firm.

As additional security for these loans, the Company holds cash collateral of 25% of the outstanding loan balance.

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As an accommodation, the Company has agreed to temporarily extend the purchase requirement to 12 weeks before a purchase is required from the loan portfolio.

All of these loans were performing at September 30, 2021.

Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending.

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The CARES Act authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program.

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020 through its conclusion on August 8, 2020.

As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020 through the program's initial conclusion in August 2020.

The CAA 2021, which was signed into law on December 27, 2020 renewed and extended the PPP until May 31, 2021, the final expiration date for PPP lending.

PPP loans have:

(a) an interest rate of 1.0%, (b) a two-year loan term to maturity for loans approved by the SBA prior to June 5, 2020 and a five-year maturity for loans approved thereafter, and (c) principal and interest payments deferred for at least six months from the date of disbursement.

(a) an interest rate of 1.0%, (b) a two-year loan term to maturity for loans approved by the SBA prior to June 5, 2020, (unless the borrower and the Company mutually agree to extend the term of the loans to five years) and a five-year maturity for loans approved thereafter, and (c) principal and interest payments deferred for at least six months from the date of disbursement.

The SBA guarantees 100% of the PPP loans made to eligible borrowers.

The entire principal amount of the borrower's PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA.

SBA PPP loans totaled $126.82 million, or 11.2% of the loan portfolio at September 30, 2020.

The largest SBA PPP loan had an outstanding balance of $2.00 million at September 30, 2021.

Loan Maturity.

The following table sets forth certain information at September 30, 2020 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity but does not include scheduled payments or potential prepayments.

The following table sets forth certain information at September 30, 2021 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity but does not include potential prepayments.

Loans having no stated maturity and overdrafts are reported as due in one year or less.

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_____________

(1) Includes $129.57 million of construction/permanent loans, a portion of which may convert to permanent mortgage loans once construction is completed.

(1) Includes $109.15 million of customer and owner/building construction/permanent loans, a portion of which may convert to permanent mortgage loans once construction is completed.

The following table sets forth the dollar amount of all loans due after one year from September 30, 2021, which have fixed interest rates and have floating or adjustable interest rates:

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Loan originations are obtained from a variety of sources, including walk-in customers and referrals from builders and realtors.

Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicant’s employment, income and credit

An appraisal of the real estate offered as collateral generally is undertaken by a certified appraiser retained by the Bank.

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These participation loans are underwritten in accordance with the Bank’s underwriting guidelines and are without recourse to the seller other than for fraud.

During the years ended September 30, 2020, the Bank did not purchase any loan participation interests.

During the years ended September 30, 2019 and 2018, the Bank purchased loan participation interests of $8.66 million and $8.40 million, respectively.

During the year ended September 30, 2021, the Bank purchased $9.04 million in loan participation interests.

During the year ended September 30, 2020, the Bank did not purchase any loan participation interests.

During the year ended September 30, 2019, the Bank purchased loan participation interests of $8.66 million.

Consistent with its asset/liability management strategy, the Bank’s policy generally is to retain in its portfolio all ARM loans originated and to sell fixed-rate one- to four-family mortgage loans in the secondary market to Freddie Mac;

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These sales are usually made to avoid concentrations in a particular loan type or concentrations to a particular borrower and to generate fee income.

During the years ended September 30, 2020, 2019 and 2018, the Bank sold loan participation interests of $6.26 million, $5.43 million and $253,000, respectively.

The following table shows total loans originated, purchased, sold and repaid during the periods indicated.

During the years ended September 30, 2021, 2020 and 2019, the Bank sold loan participation interests of $10.0 million, $6.26 million and $5.43 million, respectively.

The following table shows total loans originated, purchased, sold and repaid during the years indicated.

Year Ended September 30,

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Other items, net (6,572) (15,694) (10,284)

Net increase in loans receivable $ 127,213 $ 161,271 $ 35,027

Net increase (decrease) in loans receivable $ (45,421) $ 127,213 $ 161,271

Loan Origination Fees .

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The amount of fees charged by the Bank (excluding SBA PPP loans) is generally up to 2.0% of the loan amount.

In addition to the 1.0% interest earned on SBA PPP loans, the SBA pays bank fees for processing PPP loans in the following amounts:

(i) five percent of loans of not more than $350,000;

(ii) three percent for loans more than $350,000 and less than $2,000,000;

and (iii) one percent of loans of at least $2,000,000.

In addition to the 1.0% interest earned on SBA PPP loans, the Bank earns a fee from the SBA to cover processing costs, which is amortized over the life of the loan and recognized fully at payoff or forgiveness.

The Bank began processing loan forgiveness applications and receiving SBA PPP forgiveness payments during the three months ended December 31.

Banks may not collect any fees from the SBA PPP loan applicants.

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however, the borrower is given a 15-day grace period to make the loan payment.

When a mortgage loan borrower fails to make

a required payment when due, the Bank institutes collection procedures.

A notice is mailed to the borrower 16 days after the date the payment is due.

When a mortgage loan borrower fails to make a required payment when due, the Bank institutes collection procedures.

A notice is mailed to the borrower 16 days after the date the payment was due.

Attempts to contact the borrower by telephone generally begin on or before the 30 th day of delinquency.

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Commercial 773 858 779 — 213

Construction — — — — 367

Land 683 394 204 243 566

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recorded as non-accrual loans as of September 30, 2021, 2020, 2019, 2018 and 2017, respectively.

(5) Loans receivable, net for this table includes the deductions for the undisbursed portion of construction loans in process

and deferred loan origination fees and does not include the deduction for the allowance for loan losses.

The Bank’s non-accrual loans de creased by $128,000 to $2.91 million at September 30, 2020 from $3.03 million at September 30, 2019, primarily as a result of a $295,000 de crease in commercial business loans, a $62,000 decrease in consumer loans, and a $40,000 decrease in one- to four-family mortgage loans, on non-accrual status.

These decreases were partially offset by a $190,000 increase in land loans and a $79,000 increase on commercial real estate loans on non-accrual status.

(5) Loans receivable, net for purposes of this table includes the deductions for the undisbursed portion of construction loans in process and deferred loan origination fees and does not include the deduction for the allowance for loan losses.

The Bank’s non-accrual loans de creased b y $51,000 to $2.85 million at September 30, 2021 from $2.91 million at September 30, 2020, primarily as a result of a $252,000 decrease in one- to four-family mortgage loans, an $85,000 decrease in commercial mortgage loans, and a $31,000 decrease in consumer loans, on non-accrual status.

These decreases were partially offset by a $289,000 increase in land loans and a $28,000 increase on commercial business loans on non-accrual status.

A discussion of the Bank's largest non-performing loans is set forth below under “Asset Classification.”

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When property is acquired, it is recorded at the estimated fair market value less es timat ed costs to sell.

At September 30, 2020, the Bank had $1.05 million of OREO and other repossessed assets, a decrease of $633,000 from $1.68 million at September 30, 2019 .

T he OREO properties consisted of six land parcels totaling $1.05 million at September 30, 2020.

The largest OREO property at September 30, 2020 was an undeveloped land parcel with a balance of $702,000 located in Lewis County.

Restructured Loans.

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The Bank had TDRs at September 30, 2021 and 2020 totaling $2.55 million and $3.07 million, respectively, of which $182,000 and $203,000, respectively, were on non-accrual status.

The allowance for loan losses allocated to TDR loans at September 30, 2020 and 2019 was $3,000 and $56,000, respectively.

None of the allowance for loan losses was allocated to TDRs at September 30, 2021.

The allowance for loan losses allocated to TDR loans at September 30, 2020 was $3,000.

As previously noted, in late March 2020, the Bank announced COVID-19 loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic.

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During the year ended September 30, 2020, the Company made COVID-19 pandemic related modifications on 212 loans aggregating to $136.36 million.

The majority of these borrowers had resumed making payments as of September 30, 2020 and only five loans totaling $5.87 million remained on deferral status as of that date.

The majority of these borrowers had resumed making payments as of September 30, 2021, and only one loan with a balance of $323,000 remained on deferral status as of that date.

Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.

See Note 1 and Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

The following table sets forth the information with respect to loans still on COVID-19 modification status as of September 30, 2020 (dollars in thousands):

COVID-19 Loan Modifications

Mortgage loans Number Balance Percent

One- to four-family 1 $ 467 8.0 %

Commercial 2 3,951 67.2

Construction - commercial 1 1,402 23.9

Total mortgage loans 4 5,820 99.1

Consumer loans

Home equity and second mortgage 1 50 0.9

Total consumer loans 1 50 0.9

Total COVID-19 modifications 5 $ 5,870 100.0 %

"See Notes 1 and Note 5" of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

The CAA 2021 extended relief offered under the CARES Act related to restructured loans as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

During the year ended September 30, 2020, the Company made COVID-19 pandemic related modifications on 212 loans aggregating to $136.36 million.

The majority of these borrowers had resumed making payments as of September 30, 2021 and only one loan with a balance of $323,000 remained on deferral status as of that date.

Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.

See Notes 1 and 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

Asset Classification.

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When the Bank classifies problem assets as either substandard or doubtful, it is required to establish allowances for loan losses in an amount deemed prudent by management.

These allowances represent loss allowances which have been established to recognize the inherent risk associated

with lending activities and the risks associated with particular problem assets.

These allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities and the risks associated with particular problem assets.

When the Bank classifies problem assets as loss, it charges off the balance of the asset against the allowance for loan losses.

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(2) Includes non-performing loans.

Loans classified as substandard decreased by $1.67 million to $3.65 million at September 30, 2020 from $5.32 million at September 30, 2019.

Loans classified as substandard decreased by $45,000 to $3.60 million at September 30, 2021 from $3.65 million at September 30, 2020.

At September 30, 2021, 31 lo ans were classified as substandard.

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This loan was on non-accrual status at September 30, 2021.

The next largest loan classified as substandard at September 30, 2020 had a balance of $346,000 and was secured by a single family home in Pierce County.

This loan was performing according to its payment terms at September 30, 2020.

Loans classified as special mention increased by $3.32 million to $5.86 million at September 30, 2020 from $2.55 million at September 30, 2019, primarily as a result of two participation loans being downgraded to special mention status.

At September 30, 20 20, nine loans were classified as special mention.

The largest loan classified as special mention at September 30, 2020 had a balance of $2.88 million and was secured by a hotel in Clackamas County, Oregon.

The next largest loan classified as special mention at September 30, 2020 had a balance of $1.40 million and was secured by the same hotel in Clackamas County, Oregon.

Both of these loans were subject to COVID-19 related loan modification agreements at September 30, 2020.

The next largest loan classified as substandard at September 30, 2021 had a balance of $362,000 and was secured by land in Grays Harbor County.

This loan was on non-accrual status at September 30, 2021.

Loans classified as special mention decreased by $852,000 to $5.01 million at September 30, 2021 from $5.86 million at September 30, 2020.

At September 30, 20 21, seven loans were classified as special mention.

The largest credit relationship classified as special mention at September 30, 2021 had a balance of $4.40 million and was secured by a hotel in Clackamas County, Oregon.

The two loans in this credit relationship were performing according to their repayment terms at September 30, 2021.

Allowance for Loan Losses.

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The total estimated range of loss based on these two components of the analysis is compared to the loan loss allowance balance.

When determining the appropriate loss factors in fiscal 2020, management took into consideration the impact of the COVID-19 pandemic on such factors as the national and state unemployment rates and related trends, the amount of and timing of financial assistance provided by the government, consumer spending levels and trends, industries significantly impacted by the COVID-19 pandemic, and the Bank's COVID-19 loan modification program.

When determining the appropriate loss factors in fiscal 2021, management also took into consideration the impact of the COVID-19 pandemic on such factors as the national and state unemployment rates and related trends, the amount of and timing of financial assistance provided by the government, consumer spending levels and trends, industries significantly impacted by the COVID-19 pandemic, and the Bank's COVID-19 loan modification program.

Based on this review, management increased the qualitative factors for all loan categories due to deterioration of economic conditions as a result of the COVID-19 pandemic.

The increase in factors resulted in an increase in the allowance for loan losses during the current fiscal year.

The increase in factors resulted in a modest increase in the allowance for loan losses during the current fiscal year.

Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate.

If economic conditions worsen or do not improve in the near term, and if future government programs, if any, do not provide adequate relief to borrowers, it is possible the Bank's allowance for loan losses will need to increase in future periods.

If economic conditions worsen or do not improve in the near-term, and if future government programs, if any, do not provide adequate relief to borrowers, it is possible that the Bank's allowance for loan losses will need to increase in future periods.

In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan.

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The Board of Directors reviews the adequacy of the allowance for loan losses at least quarterly based on management's assessment of current economic conditions, past loss and collection experience, and risk characteristics of the loan portfolio.

At September 30, 2020, the Bank’s allowance for loan losses total ed $13.41 million.

The Bank’s allowance for loan losses as a percentage of total loans receivable and non-performing loans was 1.37% and 471.93%, respectively, at September 30, 2021 and 1.31% and 461.76%, respectively, at September 30, 2020.

The increase in the allowance for loan losses during the year ended September 30, 2020 was primarily due to the deteriorating economic conditions and probable loan losses driven by the impact of the COVID-19 pandemic on the U.S.

and global economies.

The $40.92 million balance of SBA PPP loans was omitted from the allowance for loan loss calculation at September 30, 2021 as these loans are fully guaranteed by the SBA and management expects that the great majority of 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.

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Credit discounts are included in the determination of fair value and, as a result, no allowance for loans losses is recorded for acquired loans at the acquisition date.

The discount recorded on acquired loans is not reflected in the allowance for loan losses or the related allowance coverage ratios, however we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the South Sound Acquisition.

The discount recorded on acquired loans is not reflected in the allowance for loan losses or the related allowance coverage ratios;

however we believe that it should be considered when comparing the current ratios to similar ratios in periods prior to the South Sound Acquisition.

The remaining fair value discount on loans acquired in the South Sound Acquisition was $449,000 at September 30, 2021.

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Although management believes that it uses the best information available to make its determinations, future adjustments to the allowance for loan losses may be necessary, and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

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

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

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

A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses which may adversely affect the Company's financial condition and results of operations.

The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated:

The following table sets forth an analysis of the Bank's allowance for loan losses for the years indicated:

Year Ended September 30,

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One- to four-family — 2 104 — 21

Multi-family — — — — —

Commercial — 6 166 — 1,061

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Mortgage loans:

One- to four-family — — — — (72)

Commercial — — — (28) (13)

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The Company's investment policy also permits investment in equity securities in certain financial service companies.

Investments in equity securities are stated at fair value.

Prior to October 1, 2018, changes in the fair value of investments in equity securities were excluded from earnings and reported in other comprehensive income (loss), net of income tax effects.

On October 1, 2018, the Company adopted ASU 2016-01 and reclassified its mutual funds as investments in equity securities.

Beginning October 1, 2018, changes in the fair value of investments in equity securities are recorded in other non-interest income.

At September 30, 2020, the Bank’s portfolio of investments in debt securities totaled $85.80 million, consisting of $27.39 million of mortgage-backed securities held to maturity, $500,000 bank issued trust preferred securities held to maturity and $57.91 million of mortgage-backed securities available for sale.

At September 30, 2021, the Bank’s investment portfolio was comprised of investments in debt securities that totaled $132.28 million, consisting of $28.76 million of U.S.

government agency securities, $39.84 million of mortgage-backed securities held to maturity, $500,000 of bank issued trust preferred securities held to maturity and $63.18 million of mortgage-backed securities available for sale.

The Bank does not maintain a trading account for any investments.

This compares with a total investment portfolio of $53.63 million at September 30, 2019, consisting of $3.00 million of U.S.

Treasury and U.S.

government agency securities held to maturity, $28.10 million of mortgage-backed securities held to maturity, and $22.53 million of mortgage-backed securities available for sale.

This compares with a total investment portfolio of $85.80 million at September 30, 2020, consisting of $27.39 million of mortgage-backed securities held to maturity, $500,000 of bank issued trust preferred securities held to maturity and $57.91 million of mortgage-backed securities available for sale.

The composition of the portfolios by type of security at the dates indicated is presented in the following table:

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Mortgage-backed securities 63,176 47.76 57,907 67.49 22,532 42.01

Mutual funds — — — — 917 6.57

Total portfolio $ 132,278 100.00 % $ 85,797 100.00 % $ 53,634 100.00 %

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Held to Maturity:

Treasury and U.S.

government agency securities

$ — — % $ 6,111 0.48 % $ 22,649 1.13 % $ — — %

Mortgage-backed securities

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There were no securities which had an aggregate book value in excess of 10% of the Bank’s total equity at September 30, 2021.

At September 30, 2020, the Bank had $229,000 of private label mortgage-backed securities in the held to maturity investment securities portfolio of which $209,000 were on non-accrual status.

For additional information regarding investment securities, see “Item 1A.

At September 30, 2021, the Bank had $13.93 million of private label mortgage-backed securities in the held to maturity investment securities portfolio, of which $159,000 were on non-accrual status.

For additional information

regarding investment securities, see “Item 1A.

Risk Factors – Our investment securities portfolio may be negatively impacted by fluctuations in market value and interest rates and result in losses” and Note 4 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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Deposit Activities.

The following table sets forth the deposit activities of the Bank for the periods indicated:

The following table sets forth the deposit activities of the Bank for the years indicated:

Year Ended September 30,

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The Bank had no outstanding balance on this borrowing line of credit at September 30, 2021.

The following table sets forth certain information regarding borrowings, including repurchase agreements, by the Bank at the end of and during the periods indicated:

The following table sets forth certain information regarding borrowings by the Bank at the end of and during the periods indicated:

At or For the

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Total borrowings outstanding at end of period $ 5,000 $ 10,000 $ —

________________________

The Bank did not have any short-term borrowings for the years ended September 30, 2021, 2020 and 2019.

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We cannot predict whether any such changes may occur.

The DFI and FDIC have extensive enforcement authority over all Washington state-chartered savings banks, including the Bank.

The Federal Reserve has the same type of authority over Timberland Bancorp.

This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease-and-desist orders and removal orders and initiate injunctive actions.

In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.

Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the regulators.

Regulation of the Bank

The Bank, as a state-chartered savings bank, is subject to regulation and oversight by the FDIC and the Division extending to all aspects of its operations.

Federal and State Enforcement Authority and Actions.

As part of its supervisory authority over Washington-chartered savings banks, the Division may initiate enforcement proceedings to obtain a consent order to cease and desist against an institution believed to have engaged in unsafe and unsound practices or to have violated a law, regulation, or other regulatory limit, including a written agreement.

The FDIC also has the authority to initiate enforcement actions against insured institutions for similar reasons and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

Both of these agencies may utilize less formal supervisory tools to address their concerns about the condition, operations or compliance status of a savings bank.

Insurance of Accounts and Regulation by the FDIC.

The deposit insurance fund (the "DIF") of the FDIC insures deposit accounts in the Bank up to $250,000 per separately insured deposit ownership right or category.

The Bank’s deposits are insured up to $250,000 per separately insured deposit ownership right or category by the Deposit Insurance Fund (‘DIF”) of the FDIC.

As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.

The Bank's deposit insurance premiums for the year ended September 30, 2020 were $204,000.

Under the FDIC's system for assessing insurance premiums, insured institutions that do not have assets of $10 billion are assessed based on CAMELS component ratings and certain financial ratios.

For these institutions, total base assessment rates range from 3 to 30 basis points, subject to adjustment.

Stronger institutions pay lower rates, while riskier institutions pay higher rates.

Assessments are applied to an institution's assessment base, which is its average consolidated total assets minus average tangible equity.

The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base, which is their average consolidated total assets minus its Tier 1 capital.

No institution may pay a dividend if it is in default on its federal deposit insurance assessment.

Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments.

The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank.

Management cannot predict what assessment rates will be in the future.

In a banking industry emergency, the FDIC may also impose a special assessment.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions.

It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF.

The FDIC also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF.

The FDIC also has the authority to take enforcement actions against banks and savings associations.

Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance.

A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank.

Capital Requirements.

Federally insured financial institutions, such as the Bank, are required to maintain a minimum level of regulatory capital.

The Bank is subject to capital regulations adopted by the FDIC, which establish minimum required ratios for common equity Tier 1 ("CET1"), leverage and Tier 1 capital ratios, and require an additional capital conservation buffer over the required minimum capital ratios, and defines what qualifies as capital for purposes of meeting the capital requirements.

Federal Reserve has adopted parallel regulations for bank holding companies.

These regulations implement the regulatory capital reforms required by the Dodd Frank Act and the "Basel III" requirements.

Under the capital regulations, the required minimum capital level ratios are (i) a CET1 capital ratio of 4.5%;

Federally insured financial institutions, such as the Bank and their holding companies, are required to maintain a minimum level of regulatory capital.

The Bank is subject to capital regulations adopted by the FDIC, which establish minimum required ratios for a common equity Tier 1 (“CET1”) capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets ratio and a Tier 1 capital to total assets leverage ratio.

The capital standards require the maintenance of the following minimum capital ratios:

(i) a CET1 capital ratio of 4.5%;

(ii) a Tier 1 capital ratio of 6%;

(iii) a total capital ratio of 8%;

and (iv) a leverage ratio of 4.0%.

CET1 generally consists of common stock;

retained earnings;

accumulated other comprehensive income ("AOCI") unless an institution elects to exclude AOCI from regulatory capital;

and certain minority interests;

all subject to applicable regulatory adjustments and deductions.

Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock.

Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets.

Total capital is the sum of Tier 1 and Tier 2 capital.

The leverage ratio is the ratio of Tier 1 capital to average consolidated assets as reported on Call Reports, minus certain items deducted from Tier 1 capital.

To be considered "well capitalized," a depository institution must have a (i) a total risk-based capital ratio of 10.0% or more, (ii) a CET1 risk-based capital ratio of 6.5% or more, (iii) a Tier 1 risk-based capital ratio of 8.0% or more, and (iv) a leverage ratio of 5.0% or more, and is not subject to any of certain specified requirements to meet and maintain a specific capital level for any capital measure.

and (iv) a Tier 1 leverage ratio of 4%.

Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies.

However, the Federal Reserve has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve.

The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), enacted in May 2018, required the federal banking agencies, including the FDIC, to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” or “CBLR” of between 8 to 10%.

Institutions with capital meeting or exceeding the ratio and

otherwise complying with the specified requirements (including off-balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements.

The CBLR was established at 9% Tier 1 capital to total average assets, effective January 1, 2020.

A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report.

An institution that temporarily ceases to meet any qualifying criteria is provided with a two-quarter grace period to again achieve compliance.

Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements.

The Bank has not elected to use the CBLR framework as of September 30, 2021.

In order to be considered well-capitalized under the prompt corrective action regulations, the Bank must maintain a CET1 risk-based ratio of 6.5%, a Tier 1 risk-based ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%, and the Bank must not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.

In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer that consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital ratios in order to avoid limitations on paying dividends, repurchasing shares and paying certain discretionary bonuses.

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Total capital 200,002 21.8 73,345 8.0 91,682 10.0

The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution's capital level is or may become inadequate in light of particular risks or circumstances.

Management of the Bank believes that, under the current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future.

For additional information regarding the Bank's regulatory capital requirements, see Note 18 of the Notes to the Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data" of this Form 10-K.

In September 2019, the FDIC and other federal banking agencies adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio ("CBLR") for institutions that have total consolidated assets of $10 billion or less and meet other qualifying criteria.

The CBLR provides a simple measure of capital adequacy for qualifying institutions.

Qualifying institutions that elect to use the CBLR framework and that maintain a leverage capital ratio of greater than 9% will be considered to have satisfied the general applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements.

The Bank has not elected to use the CBLR framework as of September 30, 2020.

The Financial Accounting Standards Board has adopted a new accounting standard for GAAP that will be effective for us for our first fiscal year beginning after December 15, 2022.

This standard, referred to as Current Expected Credit Loss, or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses

expected over the life of certain financial assets.

This standard, referred to as Current Expected Credit Loss, or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets.

CECL covers a broader range of assets than the current method of recognizing credit losses and generally results in earlier recognition of credit losses.

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well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors.

An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-

based capital measure, a leverage ratio capital measure and certain other factors.

An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally.

Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.

The final rule establishing an elective "community bank leverage ratio" regulatory capital framework provides that a qualifying institution whose capital exceeds the CBLR and opts to use the framework will be considered "well capitalized" for purposes of prompt corrective action.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized.

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Standards for Safety and Soundness.

The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to:

internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits.

The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.

Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities.

The information security program also must be designed to ensure the security and confidentiality of customer information, protect against any

unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information.

Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems.

If the FDIC determines that the Bank fails to meet any standard prescribed by the guidelines, it may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard.

FDIC regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems;

loan documentation;

credit underwriting;

interest rate risk exposure;

asset growth;

asset quality;

and compensation, fees and benefits.

In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.

If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance.

Management of the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a plan of compliance.

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The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on loan-to-value ratios for different categories of real estate loans.

Under the guidelines, the aggregate amount of all loans in excess of the supervisory loan-to-value ratios should not exceed 100% of total capital, and the total of all loans for commercial, agricultural, multi-family or other non-one- to four-family residential properties in excess of the supervisory loan-to-value ratio should not exceed 30% of total capital.

Under the guidelines, the aggregate amount of all

loans in excess of the supervisory loan-to-value ratios should not exceed 100% of total capital, and the total of all loans for commercial, agricultural, multi-family or other non-one- to four-family residential properties in excess of the supervisory loan-to-value ratio should not exceed 30% of total capital.

Loans in excess of the supervisory loan-to-value ratio limitations must be identified in the Bank’s records and reported at least quarterly to the Bank’s Board of Directors.

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An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain requirements are met.

Under the law of Washington State, Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the Director in certain situations.

Under the laws of Washington State, Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the DFI in certain situations.

In addition, Washington-chartered savings banks may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to Washington residents.

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Federal Reserve System.

The Federal Reserve requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits.

These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank.

Negotiable order of withdrawal ("NOW") accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to reserve requirements, as are any non-personal time deposits at a savings bank.

In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses.

The Federal Reserve requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts.

In response to the COVID-19 pandemic, the Federal Reserve reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses.

At September 30, 2021, the Bank was in compliance with the reserve requirements in place at that time.

Affiliate Transactions.

Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies.

Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of the bank subsidiary’s capital and surplus and, with respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus.

Transactions with Affiliates.

Timberland Bancorp, Inc.

and the Bank are separate and distinct legal entities.

The Bank is an affiliate of Timberland Bancorp, Inc.

Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates.

Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act between a bank and an affiliate are limited to 10% of the bank's capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank's capital and surplus.

Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts.

Federal law also requires that covered transactions and certain other transactions between a bank and its affiliates listed in Section 23B of the Federal Reserve Act and related regulations must be on terms as favorable to the bank as transactions with non-affiliates.

Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

Community Reinvestment Act.

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The amount of dividends payable by the Bank to the Company depends upon the Bank's earnings and capital position, and is limited by federal and state laws, regulations and policies.

According to Washington law, the Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (i) the amount required for liquidation accounts or (ii) the net worth requirements, if any, imposed by the Director of the Division.

According to Washington law,

the Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (i) the amount required for liquidation accounts or (ii) the net worth requirements, if any, imposed by the Director of the Division.

In addition, dividends on the Bank's capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of the Bank, without the approval of the Director of the Division.

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Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice.

Anti-Money Laundering and Customer Identification.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001.

The USA PATRIOT Act and the Bank Secrecy Act requires financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities.

If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S.

Treasury’s Office of Financial Crimes Enforcement Network.

These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts, and, effective in 2018, the beneficial owners of accounts.

Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications.

Privacy Standards.

The Bank is subject to FDIC regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.

These regulations require the Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices .

In addition, Washington and other state cybersecurity and data privacy laws and regulations may expose the Bank to risk and result in certain risk management costs.

Other Consumer Protection Laws and Regulations.

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The Company is supervised by the Federal Reserve under the BHCA.

Federal Reserve policy requires that a bank holding company serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.

In addition, the Federal Reserve provides that bank holding companies should serve as a source of strength to its subsidiary banks by being prepared to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks.

The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and may not conduct its operations in an unsafe or unsound manner.

In addition, the Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company should serve as a source of strength to its subsidiary bank by having the ability to provide

financial assistance to its subsidiary bank during periods of financial distress to the bank.

A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary bank will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both.

The Dodd-Frank Act essentially codified this policy.

No regulations have yet been proposed by the Federal Reserve to implement the source of strength provisions required by the Dodd-Frank Act.

Timberland Bancorp, Inc.

and any subsidiaries that it may control are considered “affiliates” within the meaning of the Federal Reserve Act, and transactions between the Bank and affiliates are subject to numerous restrictions.

With some exceptions, Timberland Bancorp, Inc.

and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by Timberland Bancorp, Inc.

or by its affiliates.

Acquisitions.

The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.

Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto.

These activities generally include, among others, operating a savings institution, mortgage company, finance company, escrow company, credit card company or factoring company;

These activities include:

operating a savings institution, mortgage company, finance company, credit card company or factoring company;

performing certain data processing operations;

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and, subject to certain limitations, providing securities brokerage services for customers.

Acquisitions.

The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.

A bank holding company that meets certain supervisory and financial standards and elects to be designated as a financial holding company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in nature or incidental to financial activities.

The Federal Reserve much approve the acquisition (or acquisition of control) of a bank or other FDIC-insured depository institution by a bank holding company, and the appropriate federal banking regulator must approve a bank's acquisition (or acquisition of control) of another bank or other FDIC-insured institution.

Interstate Banking.

The Federal Reserve may approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state except with respect to the acquisition of a bank that has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state.

The Federal Reserve may not approve an application if the applicant controls or would control more than 10% of the insured deposits in the U.S.

or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch.

Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies.

Individual states may also waive the 30% state-wide concentration limit contained in the federal law.

The federal banking agencies are authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a law prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks.

Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such acquisitions.

Interstate mergers and branch acquisitions are also generally subject to the nationwide and statewide insured deposit concentration amounts described above.

Federal Reserve policy limits the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company's capital needs, asset quality and overall financial condition, and that it is inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.

The Federal Reserve must approve the acquisition (or acquisition of control) of a bank or other FDIC-insured depository institution by a bank holding company, and the appropriate federal banking regulator must approve a bank’s acquisition (or acquisition of control) of another bank or other FDIC-insured institution.

Acquisition of Control of a Bank Holding Company.

Under federal law, a notice or application must be submitted to the appropriate federal banking regulator if any person (including a company), or group acting in concert, seeks to acquire “control” of a bank holding company.

An acquisition of control can occur upon the acquisition of 10% or more of the voting stock of a bank holding company or as otherwise defined by federal regulations.

In considering such a notice or application, the Federal Reserve takes into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition.

Any company that acquires control becomes subject to regulation as a bank holding company.

Depending on circumstances, a notice or application may be required to be filed with appropriate state banking regulators and may be subject to their approval or non-objection.

Federal Reserve policy limits the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality and overall financial condition, and that it is inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.

Under Washington corporate law, the Company generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than its total liabilities.

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Capital Requirements.

As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve under the BHCA and the regulations of the Federal Reserve.

For a bank holding company with less than $3.00 billion in assets, 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.

As discussed above, pursuant to the “Small Bank Holding Company” exception, effective August 30, 2018, bank holding companies with less than $3.00 billion in consolidated assets were generally no longer subject to the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank.

At the time of this change, Timberland Bancorp, Inc.

was considered “well capitalized” as defined for a bank holding company with a total risk-based capital ratio of 10.0% or more and a Tier 1 risk-based capital ratio of 8.0% or more, and was not subject to an individualized order, directive or agreement under which the Federal Reserve requires it to maintain a specific capital level.

If the Company were subject to regulatory guidelines for bank holding companies with $3.00 billion or more in assets, at September 30, 2021, the Company would have exceeded all regulatory requirements.

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Financial Statements and Supplementary Data" of this Form 10-K.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Among other requirements, the Dodd-Frank Act requires public companies, such as Timberland Bancorp, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a “say on pay” vote every one, two or three years;

(ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments;

(iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer;

and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer's annual total compensation to the median annual total compensation of all other employees.

For certain of these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.

2018 Regulatory Reform .

In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “2018 Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act.

While the 2018 Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.

Many of these changes could result in meaningful regulatory changes for community banks such as the Bank, and their holding companies.

The 2018 Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single CBLR of between 8 and 10 percent, as described above.

Any qualifying depository institution or its holding company that exceeds the CBLR will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules.

The 2018 Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion.

A major effect of this change is to exclude such holding companies from the minimum capital requirements of the Dodd-Frank Act.

In addition, the 2018 Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how any new standards under the 2018 Act will ultimately be applied to us or what specific impact the 2018 Act and the yet-to-be-written implementing rules and regulations will have on community banks.

Federal Securities Laws.

Timberland Bancorp, Inc.’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”).

The Company is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to Timberland Bancorp, Inc.

as a registered company under the Exchange Act.

The stated goals of these requirements are to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

The SEC and Sarbanes-Oxley-related regulations and policies include very specific additional disclosure requirements and corporate governance rules.

Federal Taxation

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The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company.

On December 22, 2017, the U.S.

Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).

The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.

For businesses, the Tax Act reduced the corporate federal income tax rate from a maximum of 35.0% to a flat 21.0%.

The corporate federal income tax rate reduction was effective January 1, 2018.

Since the Company has a fiscal year end of September 30, the reduced federal corporate income tax rate for fiscal year 2018 was the result of the application of a blended federal statutory tax rate of 24.5%, which was based on the applicable tax rates before and after the Tax Act and corresponding number of days in the fiscal year before and after enactment, and then a 21.0% federal corporate income tax rate for fiscal 2019 and thereafter.

The Tax Act also required a revaluation of the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate income tax rates and other provisions of the legislation.

As a result of the Company’s revaluation, the net deferred tax asset (“DTA”) was reduced through an increase to the provision for income taxes.

The revaluation of the DTA balance resulted in a one-time increase for the fiscal year ended September 30, 2018 to federal income tax of $548,000.

For additional details see Note 14 of the Notes to Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

Dividends-Received Deduction .

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Historically, its most direct competition for deposits has come from commercial banks, thrift institutions and credit unions in its primary market area.

In times of high interest rates, the Bank experiences additional significant competition for investors' funds from short-term money market securities and other corporate and government securities.

The Bank's competition for loans comes principally from mortgage bankers, commercial banks, thrift

institutions and credit unions.

In times of high interest rates, the Bank experiences additional significant competition for investors' funds from short-term money market securities and other corporate and

government securities.

The Bank's competition for loans comes principally from mortgage bankers, commercial banks, thrift institutions and credit unions.

Such competition for deposits and the origination of loans may limit the Bank's future growth and earnings prospects.

Subsidiary Activities

The Bank has one wholly-owned subsidiary, Timberland Service Corporation (“Timberland Service”), whose primary function is to provide escrow services.

The Bank has one wholly-owned subsidiary, Timberland Service Corp.

(“Timberland Service”), whose primary function is to provide escrow services.

Employees and Human Capital Resources

As of September 30, 2021, the Company had 276 full-time employees and 12 part-time and on-call employees.

The employees are not represented by a collective bargaining unit, and the Company believes its relationship with its employees is good.

The employees are not represented by a collective bargaining unit, and the Company believes that its relationship with its employees is good.

We believe our ability to attract and retain employees is a key to our success.

Accordingly, we strive to offer competitive salaries and employee benefits to all employees and monitor salaries in our market areas.

Our average tenure was 8.1 years as of September 30, 2021.

Our workforce was 80% female and 20% male, and women held 76% of the Bank's management roles (including department supervisors and managers, as well as executive leadership).

The average tenure of management was 13.7 years.

The ethnicity of our workforce was 82% White, 6% Hispanic or Latinx, 5% two or more races, 4% Asian, 1% Native Hawaiian or Pacific Islander, 1% African American or Black and 1% American Indian or Alaska Native.

The Company provides competitive comprehensive benefits to its employees.

The Company values the health and well-being of its employees and strives to provide programs to support this.

Benefit programs available to eligible employees may include 401(k) savings plan, employee stock ownership plan, health and life insurance, employee assistance program, paid holidays, paid time off, and other leave as applicable.

Response to COVID-19 pandemic.

As an essential business, the Company responded quickly to implement procedures to assist employees in navigating the challenging impact from the pandemic, as well as protect the safety of both employees and customers.

In response to Washington State's stay at home order, the Company moved eligible positions to remote work status.

Safety measures were promptly implemented to protect employees working on site, which included installation of protective partitions and fully equipping locations with personal safety supplies.

Employees who experienced a reduction in hours due to reduced branch operating hours continued to receive their full pay.

Additional sick leave was authorized for employees impacted directly by the COVID-19 virus.

As Washington State mandates change, the Company will continue to make adjustments to support employees and prioritize employee safety.

Training and education.

The Company recognizes that the skills and knowledge of its employees are critical to the success of the organization, and promotes training and continuing education as an ongoing function for employees.

The Bank's compliance training program provides annual training courses to assure that all employees and officers know the rules applicable to their jobs.

Executive Officers of the Registrant

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Name Company Bank

Sand 66 President and Chief Executive Officer

President and Chief Executive Officer

Brydon 53 Executive Vice President, Chief Financial Officer and Secretary

Executive Vice President, Chief Financial Officer and Secretary

Sand 67 President and Chief Executive Officer President and Chief Executive Officer

Brydon 54 Executive Vice President, Chief Financial Officer and Secretary Executive Vice President, Chief Financial Officer and Secretary

Drugge 70 Executive Vice President of Lending Executive Vice President of Lending

Fischer 46 Executive Vice President and

Chief Operating Officer

Executive Vice President and

Chief Operating Officer

Foster 63 Executive Vice President and

Chief Credit Administrator

Executive Vice President and

Chief Credit Administrator

Basich 51 Senior Vice President and

Fischer 47 Executive Vice President and Chief Operating Officer

Executive Vice President and Chief Operating Officer

Foster 64 Executive Vice President and Chief Credit Administrator

Executive Vice President and Chief Credit Administrator

Basich 52 Senior Vice President and Treasurer

Senior Vice President and Treasurer

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Sand had served as Executive Vice President and Secretary of the Bank since 1993 and as Executive Vice President and Secretary of the Company since its formation in 1997.

Brydon has been affiliated with the Bank since 1994 and has served as the Chief Financial Officer of the Company and the Bank since January 2000 and Secretary of the Company and Bank since January 2004.

Brydon has been affiliated with the Bank since 1994 and has served as the Chief Financial Officer of the Company and the Bank since January 2000 and Secretary of the Company and the Bank since January 2004.

Brydon is a Certified Public Accountant.

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

What changed 10-K

Item 1. Business