What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-12-08 compared with 2020-12-09 · 317 added, 380 removed, 1838 unchanged (27% of the section changed)

15 unchanged sentences

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Timberland Bancorp, Inc.

To the Board of Directors and Shareholders of Timberland Bancorp, Inc.

Opinion on the Financial Statements

16 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to an account or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

Critical Audit Matter Description

As described in Notes 1 and 5 to the financial statements, the Company's allowance for loan losses (ALL) is a valuation account that reflects the estimated loan losses based on known and inherent risks in the loan portfolio to

the extent they are both probable and reasonable to estimate.

The ALL was approximately $13,469,000 as of September 30, 2021, which consists of specific and general components in the amounts of $247,000 and $13,222,000, respectively.

The specific component relates to loans that are classified as impaired.

The Company measures impairment and the related asset specific allowance for impaired loans based on the difference between the recorded investment of the loan and the present value of the expected future cash flows, discounted at the original effective interest rate of the loan.

However, if the loan is collateral-dependent, the Company measures impairment based upon the fair value of the underlying collateral, which the Company determines based on the current fair value of the collateral less estimated selling costs.

Loans are identified as collateral-dependent if the Company believes that collateral is the sole source of repayment.

The general component is based on historical losses, general economic conditions, and other qualitative risk factors – both internal and external to the Company.

The historical loss ratio and valuation allowance are established for each pool of similar loans and updated periodically based on actual charge-off experience and current events.

The qualitative risk factors are generally determined by evaluating, among other things:

policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;

(ii) national and local economic trends and conditions;

(iii) nature and volume of the portfolio and terms of loans;

(iv) experience, ability, and depth of lending management and staff;

(v) volume and severity of past due, classified, and nonaccrual loans, as well as other loan modifications;

(vi) quality of the Company's loan review system;

(vii) existence and effect of any concentrations of credit and changes in the level of such concentrations;

(viii) changes in the value of underlying collateral, and (ix) other external factors such as competition and legal and regulatory requirements.

The evaluation of the qualitative factor adjustments requires a significant amount of judgment by management and involves a high degree of subjectivity.

We identified the ALL as a critical audit matter, as auditing the underlying qualitative factors required significant auditor judgment given that amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.

How the Critical Audit Matter Was Addressed in the Audit

The primary audit procedures we performed to address this critical audit matter included the following, among others:

• We obtained an understanding of the relevant controls related to management’s establishment of the qualitative factors, assessment, and review and approval of the qualitative factors, and the data used in determining the qualitative factors.

• We obtained an understanding of how management developed the estimates and related assumptions, including:

◦ Testing completeness and accuracy of key data inputs used in forming assumptions or calculations and testing the reliability of the underlying data on which these factors are based by comparing information to source documents and external information sources, as well as evaluating the estimated correlation to potential loss.

◦ Evaluating the reasonableness of the qualitative factors established by management as compared to the underlying internal or external information sources.

• We obtained an understanding of the loans excluded from the general component calculation for propriety of classification as acquired or impaired loans.

/s/ Delap LLP

We have served as the Company's auditor since 2010.

We have served as the Company's auditors since 2010.

Lake Oswego, Oregon

18 unchanged sentences

Loans held for sale 3,217 4,509

Loans receivable, net of allowance for loans losses of $ 13,414 and $ 9,690

Loans receivable, net of allowance for loan losses of $ 13,469 and $ 13,414

968,454 1,013,875

5 unchanged sentences

Core deposit intangible (“CDI”), net 1,264 1,625

Servicing rights, net 3,095 2,408

Loan servicing rights, net 3,482 3,095

Operating lease right-of-use ("ROU") assets 2,283 2,587

47 unchanged sentences

Provision for loan losses — 3,700 —

Net interest income after provision of loan losses 47,182 51,160 39,055

Net interest income after provision for loan losses 51,858 47,182 51,160

Non-interest income

1 unchanged sentence

Adjustment for portion of other than temporary impairment ("OTTI") transferred from other comprehensive income (loss) (before income taxes)

— ( 12 ) ( 5 )

Net recoveries on investment securities 20 120 59

6 unchanged sentences

Servicing income on loans sold 7 193 466

Valuation allowance on servicing rights, net ( 221 ) ( 4 ) —

Valuation recovery (allowance) on loan servicing rights, net 110 ( 221 ) ( 4 )

Fee income from non-deposit investment sales 23 22 46

12 unchanged sentences

Loss (gain) on sales/dispositions of premises and equipment, net

( 98 ) 7 ( 102 )

Advertising 625 631 696

52 unchanged sentences

Net income — — — 24,020 — 24,020

Other comprehensive loss — — — — ( 5 ) ( 5 )

Other comprehensive income — — — — 116 116

Repurchase of common stock ( 20,440 ) ( 499 ) — — — ( 499 )

Common stock issued for business combination 904,826 28,267 — — — 28,267

Exercise of stock options 43,856 401 — — — 401

3 unchanged sentences

Stock option compensation expense — 159 — — — 159

Adoption of Accounting Standards Update ("ASU") 2016-01 — — — ( 63 ) 63 —

Balance, September 30, 2019 8,329,419 43,030 — 127,987 50 171,067

2 unchanged sentences

Repurchase of common stock ( 56,601 ) ( 1,238 ) — — — ( 1,238 )

Common stock issued for business combination 904,826 28,267 — — — 28,267

Exercise of stock options 37,975 391 — — — 391

3 unchanged sentences

Stock option compensation expense — 182 — — — 182

Adoption of Accounting Standards Update ("ASU") 2016-01 — — — ( 63 ) 63 —

Balance, September 30, 2020 8,310,793 42,396 — 145,173 61 187,630

12 unchanged sentences

Net income — — 27,583 — 27,583

Other comprehensive income — — — 11 11

Other comprehensive loss — — — ( 2 ) ( 2 )

Repurchase of common stock ( 19,588 ) ( 527 ) — — ( 527 )

2 unchanged sentences

— — ( 8,589 ) — ( 8,589 )

Earned ESOP shares, net of income taxes — 31 — — 31

Stock option compensation expense — 173 — — 173

20 unchanged sentences

Gain on sales of OREO and other repossessed assets, net ( 92 ) ( 35 ) ( 89 )

(Accretion) amortization of discounts and premiums on securities ( 183 ) 167 ( 17 )

Amortization (accretion) of discounts and premiums on securities 118 ( 183 ) 167

Provision for OREO losses — 173 24

Gain on sales of loans, net ( 5,904 ) ( 5,979 ) ( 1,754 )

(Gain) loss on sales/dispositions of premises and equipment, net ( 98 ) 7 ( 102 )

Loss (gain) on sales/dispositions of premises and equipment, net — ( 98 ) 7

Provision for loan losses — 3,700 —

1 unchanged sentence

Proceeds from sales of loans 140,202 160,987 67,600

Amortization of servicing rights 838 646 491

Valuation adjustment on servicing rights, net 221 8 —

Amortization of loan servicing rights 1,111 838 646

Valuation adjustment on loan servicing rights, net ( 110 ) 221 8

BOLI net earnings ( 597 ) ( 591 ) ( 613 )

BOLI death benefit in excess of cash surrender value — — ( 1,028 )

Increase in deferred loan origination fees 3,637 161 171

Increase (decrease) in deferred loan origination fees ( 1,293 ) 3,637 161

Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses

8 unchanged sentences

12,004 13,818 11,784

Proceeds from maturities and prepayments of investment securities

available for sale

Proceeds from maturities and prepayments of investment securities available for sale

13,162 5,802 1,412

2 unchanged sentences

Purchase of FHLB stock ( 181 ) ( 485 ) ( 42 )

Increase in loans receivable, net ( 133,953 ) ( 39,536 ) ( 35,522 )

Additions to premises and equipment ( 1,986 ) ( 2,151 ) ( 2,186 )

Decrease (increase) in loans receivable, net 47,054 ( 133,953 ) ( 39,536 )

Purchase of premises and equipment ( 895 ) ( 1,986 ) ( 2,151 )

Proceeds from sales of OREO and other repossessed assets 985 495 613

3 unchanged sentences

Escrow deposit for business combination — — 6,900

Net cash used in investing activities ( 154,668 ) ( 44,547 ) ( 68,269 )

Net cash provided by (used in) investing activities 37,445 ( 154,668 ) ( 44,547 )

S ee notes to consolidated financial statements

8 unchanged sentences

$ 212,149 $ 290,179 $ 27,183

Proceeds from FHLB borrowings 10,000 — —

Proceeds from (repayment of) FHLB borrowings ( 5,000 ) 10,000 —

Proceeds from exercise of stock options

37 unchanged sentences

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") (“GAAP”) and prevailing practices within the banking industry.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated balance sheets, and the reported amounts of income and expenses during the reporting period.

Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of any OTTI in the fair value of investment securities, the valuation of servicing rights, the valuation of OREO, the valuation of assets acquired and liabilities assumed in acquisitions and the valuation of goodwill for potential impairment.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the determination of any OTTI in the fair value of investment securities, the valuation of loan servicing rights, the valuation of assets acquired and liabilities assumed in acquisitions and the valuation of goodwill for potential impairment.

Certain prior year amounts have been reclassified to conform to the 2021 fiscal year presentation with no change to previously reported net income or shareholders’ equity.

33 unchanged sentences

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.

Changes in the fair value of investments in equity securities are recorded in other non-interest income.

The Bank, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.12 % of the Bank's total assets plus 4.00 % of any borrowings from the FHLB.

67 unchanged sentences

The Company has followed the loan modification criteria within the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), which was signed into law on March 27, 2020, and interagency guidance from the federal banking agencies when determining if a borrower's modification is subject to a TDR classification.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic.

The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification is implemented.

The agencies confirmed in working with the staff of the FASB that short-term modification made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings.

If it is determined that the modification does not meet the criteria under the CARES Act or interagency guidance to be excluded from TDR classification, the Company evaluates the loan modifications under its existing TDR framework.

12 unchanged sentences

Allowances are provided based on management’s continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, collateral values, geographic concentrations, seasoning of the loan portfolio, specific industry conditions, the duration of the current business cycle, and regulatory requirements and expectations.

When determining the appropriate historical loss and qualitative factors, 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 Company's COVID-19 loan modification program.

When determining the appropriate historical loss and qualitative factors, 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 and timing of financial assistance provided by the government, consumer spending levels and trends, industries significantly impacted by the COVID-19 pandemic, and the Company's COVID-19 loan modification program.

The appropriateness of the allowance for loan losses is estimated based upon these factors and trends identified by management at the time the consolidated financial statements are prepared.

1 unchanged sentence

Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment.

When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used.

When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used.

The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions.

3 unchanged sentences

Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received.

When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income.

If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses, and uncollected accrued interest is reversed against interest income.

If the ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

A provision for (recapture of) loan losses is charged (credited) to operations and is added to (deducted from) the allowance for loan losses based on a quarterly comprehensive analysis of the loan portfolio.

4 unchanged sentences

These factors may result in losses or recoveries differing significantly from those provided in the consolidated financial statements.

If real estate values decline and as updated appraisals are received on collateral for impaired loans, the Company may need to increase the allowance for loan losses appropriately.

If real estate values decline and as updated appraisals are received on collateral for impaired loans, the Company may need to increase the allowance for loan losses as appropriate.

In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

2 unchanged sentences

Depreciation is computed using the straight-line method over the following estimated useful lives:

buildings and improvements - five to 40 years and furniture and equipment - three to seven years.

buildings and improvements - five to forty years and furniture and equipment - three to seven years.

The cost of maintenance and repairs is charged to expense as incurred.

Gains and losses on dispositions are reflected in earnings.

Gains and losses on dispositions are reflected in current earnings.

Impairment of Long-Lived Assets

2 unchanged sentences

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the recorded amount of the assets exceeds the discounted recovery amount or estimated fair value of the assets.

No events or changes in circumstances have occurred during the years ended September 30, 2020 or 2019 that would cause management to evaluate the recoverability of the Company’s long-lived assets.

No events or changes in circumstances have occurred during the years ended September 30, 2021 or 2020 that would cause management to re-evaluate the recoverability of the Company’s long-lived assets.

OREO and Other Repossessed Assets

OREO and other repossessed assets consist of properties or assets acquired through or in lieu of foreclosure, and are recorded initially at the estimated fair value of the properties less estimated costs of disposal, establishing a new cost basis.

These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell.

These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell.

When the property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the allowance for loan losses.

4 unchanged sentences

Costs relating to development and improvement of the properties or assets are capitalized, while costs relating to holding the properties or assets are expensed.

BOLI policies are recorded at their cash surrender value less applicable cash surrender charges.

Income from BOLI is recognized when earned.

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2021 and 2020

BOLI policies are recorded at their cash surrender value less applicable cash surrender charges.

Income from BOLI is recognized when earned.

Goodwill is initially recorded when the purchase price paid in a business combination exceeds the estimated fair value of the net identified tangible and intangible assets acquired and liabilities assumed.

12 unchanged sentences

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and the share price of the Company's common stock.

The Company performed its fiscal year 2020 goodwill impairment test during the quarter ended June 30, 2020 with the assistance of an independent third-party firm specializing in goodwill impairment valuations for financial institutions.

The third-party analysis was conducted as of May 31, 2020 and the step one test concluded that the reporting unit's fair value was more than its recorded value and, therefore, step two of the analysis was not necessary.

Accordingly, the recorded value of goodwill as of May 31, 2020 was not impaired.

The Company performed its fiscal year 2021 goodwill impairment test during the quarter ended June 30, 2021.

Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount, and, therefore, goodwill was determined not to be impaired at May 31, 2021.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred.

8 unchanged sentences

No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future.

If adverse economic conditions or the recent decrease in the Company's stock price and market capitalization as a result of the COVID-19 pandemic were deemed to be other than temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges.

If adverse economic conditions or decreases in the Company's stock price and market capitalization as a result of the COVID-19 pandemic were deemed to be other than temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges.

Any impairment charge could have a material adverse effect on the Company's results of operation and financial condition.

1 unchanged sentence

CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years.

CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.

CDI is evaluated for impairment whenever

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2021 and 2020

Servicing Rights

events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.

Loan Servicing Rights

The Company holds rights to service (1) loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and (2) the guaranteed portion of U.S.

Small Business Administration ("SBA") loans sold in the secondary market.

Servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained.

Servicing rights are amortized to servicing income on loans sold approximately in proportion to and over the period of estimated net servicing income.

The value of servicing rights at the date of the sale of loans is estimated based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and expected prepayment rates on the underlying loans.

The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated future cash flows from the servicing assets to those estimated at the time the servicing assets were originated.

Loan servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained.

Loan servicing rights are amortized to servicing income on loans sold approximately in proportion to and over the period of estimated net servicing income.

The value of loan servicing rights at the date of the sale of loans is estimated based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and expected prepayment rates on the underlying loans.

The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated future cash flows from the loan servicing assets to those estimated at the time the loan servicing assets were originated.

Fair values are estimated using expected future discounted cash flows based on current market rates of interest.

For purposes of measuring impairment, the servicing rights must be stratified by one or more predominant risk characteristics of the underlying loans.

The Company stratifies its capitalized servicing rights based on product type and term of the underlying loans.

The amount of impairment recognized is the amount, if any, by which the amortized cost of the servicing rights exceeds their fair value.

For purposes of measuring impairment, the loan servicing rights must be stratified by one or more predominant risk characteristics of the underlying loans.

The Company stratifies its capitalized loan servicing rights based on product type and term of the underlying loans.

The amount of impairment recognized is the amount, if any, by which the amortized cost of the loan servicing rights exceeds their fair value.

Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that fair value is less than the recorded amount.

16 unchanged sentences

however, all ESOP debt was fully repaid during the year ended September 30, 2019.

The debt of the ESOP was payable to Timberland Bancorp, was recorded as other borrowed funds of the Bank, and was eliminated in the consolidated financial statements.

The shares of the Company's common stock pledged as collateral for the ESOP's debt were reported as unearned shares issued to the ESOP in the consolidated financial statements.

14 unchanged sentences

Common stock equivalents arise from the assumed conversion of outstanding stock options.

Shares owned by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted net income per common share.

Shares owned by the Bank’s ESOP that had not been allocated were not considered to be outstanding for the purpose of computing basic and diluted net income per common share.

Related Party Transactions

2 unchanged sentences

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers, which created FASB Accounting Standards Codification ("ASC") Topic 606 ("ASC 606").

The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

To achieve that core principle, an entity should apply the following steps:

(1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

ASC 606 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

The Company adopted ASC 606 on October 1, 2018 using the modified retrospective approach.

Therefore, the comparative information has not been adjusted and continues to be reported under the superseded ASC 605.

There was no cumulative effect adjustment as of October 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the year ended September 30, 2019;

however, additional disclosures were incorporated in the footnotes upon adoption.

The majority of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606.

The Company elected to apply the practical expedient pursuant to ASC 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less.

See Note 24 for additional information.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities .

ASU 2016-01 generally requires equity investments - except those accounted for under the equity method of accounting or those that result in consolidation of the investee - to be measured at fair value with changes in fair value recognized in net income.

However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

ASU 2016-01 is intended to simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.

ASU 2016-01 also eliminates certain disclosures related to the fair value of financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

ASU 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

within those fiscal years.

The Company adopted ASU 2016-01 on October 1, 2018.

As required by ASU 2016-01, on October 1, 2018 the Company recorded a one-time cumulative effect adjustment of $ 63,000 representing net unrealized losses on equity securities (mutual funds) between accumulated other comprehensive loss and retained earnings on the accompanying consolidated balance sheet.

Additionally, the fair values of financial instruments for disclosure purposes were computed using an exit price notion and deposits with no stated maturity are no longer included in the fair value disclosures in Note 22.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which created FASB ASC Topic 842 ("ASC 842") and is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements.

The principal change required by ASC 842 relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows.

For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.

If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.

ASC 842 also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures.

ASC 842 also provides an optional transition method for adoption, under which an entity initially applies ASC 842 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts ASC 842 will continue to be in accordance with current GAAP.

ASC 842 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

Early application of ASC 842 is permitted.

The Company adopted the provisions of ASC 842 effective October 1, 2019 utilizing the optional transition method and will not restate comparative periods.

The Company also elected the package of practical expedients permitted under ASC 842's transition guidance, which allows the Company to carryforward its historical lease classifications and its assessment as to whether a contract is or contains a lease.

The Company also elected to not recognize lease assets and lease liabilities for leases with an initial term of 12 months or less.

As a result of adopting ASC 842, ROU assets and operating lease liabilities increased by $ 2.89 million on October 1, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses , as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05.

This ASU replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments.

In addition, this ASU requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount.

ASU 2016-13 also changes the accounting for purchased credit-impaired debt securities and loans.

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses;

Measurement of Credit Losses on Financial Instruments , as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11.

ASU 2016-13 replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments.

In addition, ASU 2016-13 requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount.

ASU 2016-13 also changes the accounting for PCI debt securities and loans.

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

ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

As a "smaller reporting company" filer with the U.S.

Securities and Exchange Commission, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model.

In addition, the current policy for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach.

The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date.

At this time, the Company anticipates the allowance for loan losses will increase as a result of the implementation of this ASU;

In addition, the current policy for OTTI on investment securities available for sale will be replaced with an allowance approach.

The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to help ensure it is fully compliant with the amendments at the adoption date.

At this time, the Company anticipates that the allowance for loan losses will increase as a result of the implementation of ASU 2016-13;

however, until its evaluation is complete, the magnitude of the increase will be unknown.

8 unchanged sentences

Additionally, an entity should consider income tax effects from any tax

deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022.

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2021 and 2020

deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022.

The adoption ASU 2017-04 is not expected to a have a material impact on the Company's future consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20):

Premium Amortization on Purchased Callable Debt Securities.

This ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date.

This ASU was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018.

The Company adopted ASU 2017-08 effective October 1, 2019 and it did not have a material impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718):

Scope of Modification Accounting.

This ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award.

According to the ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award are the same after the modification as compared to the original award prior to modification.

ASU 2017-09 was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.

The Company adopted ASU 2017-09 effective October 1, 2018 and it did not have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting.

This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.

Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and were measured at the earlier of the commitment date or the date performance was completed.

The amendments in this ASU require nonemployee share-based payment awards to be measured at the grant-date fair value of the equity instrument.

ASU 2018-07 was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018.

The Company adopted ASU 2018-07 effective October 1, 2019 and it did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

9 unchanged sentences

ASU 2018-13 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company adopted ASU 2018-13 effective October 1, 2020 and it is not expected to have a material impact on the Company's future consolidated financial statements.

The Company adopted ASU 2018-13 effective October 1, 2020, and it did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract .

The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract.

The amendments align the requirements for capitalizing implementation costs incurred

in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for internal-use software costs.

2 unchanged sentences

ASU 2018-15 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company adopted ASU 2018-15 effective October 1, 2020 and it is not expected to have a material impact on the Company's future consolidated financial statements.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

The Company adopted ASU 2018-15 effective October 1, 2020, and it did not have a material impact on the Company's consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes.

1 unchanged sentence

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidelines.

ASU 2019-12 is effective for fiscal years beginning after December 15, 2021,

including interim periods within fiscal years.

The adoption of ASU 2019-12 is not expected to have a material impact on the Company's future consolidated financial statements.

ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2020, including interim periods within fiscal years.

The Company adoption ASU 2019-12 effective December 31, 2020 and it did not have a material impact on the Company's future consolidated financial statements.

In March 2020, the FASB issued ASU No.

6 unchanged sentences

The adoption of ASU 2020-04 is not expected to have a material impact on the Company's future consolidated financial statements.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Note 2 - Business Combination

3 unchanged sentences

The Company issued 904,826 shares of its common stock (valued at $ 28,267,000 based on the Company's closing stock price on September 30, 2018 of $ 31.24 per share) and paid $ 6,903,000 in cash in the transaction for total consideration paid of $ 35,170,000 .

The South Sound Acquisition constitutes a business combination as defined by GAAP, which establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed.

The South Sound Acquisition constitutes a business combination as defined by GAAP, which establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its consolidated financial statements the identifiable assets acquired and liabilities assumed.

The Company was considered the acquirer in this transaction.

35 unchanged sentences

— 2,483 2,483

Servicing rights

285 ( 4 ) 281

Loan servicing rights 285 ( 4 ) 281

1,087 ( 511 ) 576

9 unchanged sentences

Goodwill recognized

The acquired loan portfolio was valued using Level 3 inputs (see Note 22) and included the use of present value techniques, including cash flow estimates and incorporated assumptions that the Company believes marketplace participants would use in estimating fair values.

The acquired loan portfolio was valued using Level 3 inputs (see Note 22) and included the use of present value techniques, including cash flow estimates and incorporated assumptions that the Company believes that marketplace participants would use in estimating fair values.

The operating results of the Company for the years ended September 30, 2021, 2020 and 2019 include the operating results produced by the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date.

The Company determined

that the disclosure requirements related to the amounts of revenues and earnings from the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date is impracticable.

The Company determined that the disclosure requirements related to the amounts of revenues and earnings from the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date is impracticable.

The financial activity and operating results of the net assets acquired in the South Sound Acquisition were commingled with the Company's financial activity and operating results as of the acquisition date.

1 unchanged sentence

During the year ended September 30, 2019, the Company incurred acquisition-related expenses of $ 462,000 related to the South Sound Acquisition, of which $ 317,000 is included in data processing and $ 145,000 is included in

professional fees in the accompanying 2019 consolidated statement of income.

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2021 and 2020

professional fees in the accompanying consolidated statement of income.

During the year ended September 30, 2018, the Company incurred acquisition-related expenses of $ 616,000 related to the South Sound Acquisition, which are all included in professional fees in the accompanying consolidated statement of income.

South Sound Bank incurred acquisition-related expenses of $ 1,598,000 for the fiscal year ended September 30, 2018 related to the South Sound Acquisition.

Note 3 - Restricted Assets

1 unchanged sentence

In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratio to zero percent, effective March 26, 2020.

The amounts of the reserve requirement balances as of September 30, 2020 and 2019 were $ 0 and $ 1,898,000 , respectively.

Currently, the FRB has not announced plans to re-impose a reserve requirement, however, the FRB may adjust reserve requirement ratios in its sole discretion.

Note 4 - Investment Securities

3 unchanged sentences

Held to Maturity

Treasury and U.S.

government agency securities $ 28,760 $ 8 $ ( 99 ) $ 28,669

Mortgage-backed securities ("MBS"):

10 unchanged sentences

Private label residential 229 307 ( 1 ) 535

Treasury and U.S.

government agency securities 2,999 — ( 8 ) 2,991

Bank issued trust preferred securities 500 — ( 1 ) 499

Total $ 27,890 $ 1,942 $ ( 5 ) $ 29,827

11 unchanged sentences

Held to Maturity

Treasury and U.S.

government agency securities $ 18,795 $ ( 99 ) 5 $ — $ — — $ 18,795 $ ( 99 )

government agencies

2 unchanged sentences

9,712 ( 23 ) 4 1 — 1 9,713 ( 23 )

Bank issued trust preferred securities 499 ( 1 ) 1 — — — 499 ( 1 )

$ 36,598 $ ( 244 ) 14 $ 16 $ — 4 $ 36,614 $ ( 244 )

3 unchanged sentences

$ 20,146 $ ( 103 ) 13 $ 5,491 $ ( 11 ) 3 $ 25,637 $ ( 114 )

Held to maturity investment securities with unrealized losses were as follows as of September 30, 2019 (dollars in thousands):

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2020 (dollars in thousands):

Less Than 12 Months 12 Months or Longer Total

6 unchanged sentences

7 — 1 11 ( 1 ) 2 18 ( 1 )

Treasury and U.S.

government agency securities — — — 2,991 ( 8 ) 1 2,991 ( 8 )

Bank issued trust preferred securities 499 ( 1 ) 1 — — — 499 ( 1 )

$ 5,636 $ ( 3 ) 6 $ 50 $ ( 2 ) 6 $ 5,686 $ ( 5 )

Available for Sale

government agencies

$ 21,464 $ ( 68 ) 11 $ — $ — — $ 21,464 $ ( 68 )

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The Company has evaluated the investment securities in the above tables and has determined that the decline in their fair value is temporary.

6 unchanged sentences

The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

third-party analytic reports.

21 unchanged sentences

Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)

— ( 12 ) ( 5 )

Net recoveries recognized in earnings (2)

19 unchanged sentences

Balance, end of year $ 853 $ 885 $ 1,071

During the year ended September 30, 2021, the Company recorded a $ 12,000 net realized loss (as a result of investment securities being deemed worthless) on ninete en held to maturity investment securities, all of which had been recognized previously as a credit loss.

During the year ended September 30, 2020, the Company recorded a $ 66,000 net realized loss (as a result of investment securities being deemed worthless) on nineteen held to maturity investment securities, all of which had been recognized previously as a credit loss.

During the year ended September 30, 2019, the Company recorded a $ 23,000 net realized loss (as a result of investment securities being deemed worthless) on seventeen held to maturity investment securities, all of which had been recognized previously as a credit loss.

During the year ended September 30, 2018, the Company recorded an $ 80,000 net realized loss (as a result of investment securities being deemed worthless) on sixteen held to maturity investment securities, all of which had been recognized previously as a credit loss.

During the year ended September 30, 2019, the Company recorded an $ 23,000 net realized loss (as a result of investment securities being deemed worthless) on seventeen held to maturity investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits and FHLB collateral totaled $ 97,602,000 and $ 81,028,000 at September 30, 2021 and 2020, respectively.

35 unchanged sentences

Commercial business 74,579 69,540

Small Business Administration ("SBA") Paycheck Protection Program ("PPP") 126,820 —

SBA Paycheck Protection Program ("PPP") 40,922 126,820

Total commercial business and SBA PPP loans 115,501 196,360

95 unchanged sentences

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

Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values, and liquidation of

the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default.

Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the

liquidation of collateral in the event of a borrower default is often an insufficient source of repayment, because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use.

Accordingly, the repayment

of a commercial business loan depends primarily on the credit-worthiness of the borrower (and any guarantors), while the liquidation of collateral is a secondary and potentially insufficient source of repayment.

The Company attempts to mitigate

Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default.

Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment, because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use.

Accordingly, the repayment of a commercial business loan depends primarily on the credit-worthiness of the borrower (and any guarantors), while the liquidation of collateral is a secondary and potentially insufficient source of repayment.

The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of the borrowers and the guarantors.

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2021 and 2020

these risks by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of the borrowers and the guarantors.

The CARES Act, which was signed into law on March 27, 2020, authorized the SBA to temporarily guarantee loans under a new loan program called PPP.

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

The CARES Act authorized the SBA to temporarily guarantee loans under the PPP.

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 Consolidated Appropriations Act, 2021 ("CAA 2021"), which was signed into law on December 27, 2020, renewed and extended the PPP until May 31, 2021.

As a result, the Company began originating PPP loans again in January 2021.

The SBA guarantees 100% of PPP loans made to eligible borrowers, and the entire amount of the borrower's PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA.

PPP loans have:

(a) an interest rate of 1%, (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;

(a) an interest rate of 1%, (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 loan 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.

95 unchanged sentences

Total $ 247 $ 13,222 $ 13,469 $ 5,224 $ 981,842 $ 987,066

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The following table presents information on loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, 2020 (dollars in thousands):

29 unchanged sentences

Commercial business loans 38 1,334 1,372 430 69,110 69,540

SBA PPP loans — — — — 126,820 126,820

Total $ 41 $ 13,373 $ 13,414 $ 5,773 $ 1,027,952 $ 1,033,725

65 unchanged sentences

Commercial business loans 49 — 430 — 479 69,061 69,540

SBA PPP loans — — — — — 126,820 126,820

$ 52 $ 791 $ 2,905 $ — $ 3,748 $ 1,029,977 $ 1,033,725

17 unchanged sentences

If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

Loans in this classification have the weaknesses of substandard loans with the additional characteristic that the weaknesses make the collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.

At September 30, 2020 and 2019, there were no loans classified as doubtful.

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2021 and 2020

At September 30, 2021 and 2020, there were no loans classified as doubtful.

Loans in this classification are considered uncollectible and of such little value that continuance as an asset is not warranted.

19 unchanged sentences

$ 965,950 $ 12,500 $ 5,012 $ 3,604 $ 987,066

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The following table presents an analysis of loans by credit quality indicator and portfolio segment at September 30, 2020 (dollars in thousands):

14 unchanged sentences

Commercial business loans 68,904 59 94 483 69,540

SBA PPP loans 126,820 — — — 126,820

$ 1,012,666 $ 11,546 $ 5,864 $ 3,649 $ 1,033,725

25 unchanged sentences

Land 362 362 76 72 — —

Consumer loans:

Other — — — 7 — —

Commercial business loans 294 294 171 285 — —

28 unchanged sentences

Home equity and second mortgage 555 555 — 581 — —

Other 9 9 — 6 — —

Commercial business loans 182 182 — 176 — —

2 unchanged sentences

Mortgage loans:

One- to four-family 484 484 3 194 16 8

Land — — — 110 — —

31 unchanged sentences

Home equity and second mortgage 603 603 — 459 — —

Commercial business loans 189 291 — 142 30 30

5,237 5,446 — 4,731 331 287

1 unchanged sentence

Mortgage loans:

One- to four-family — — — 9 — —

Commercial — — — 760 28 21

Land 141 141 27 246 — —

Consumer loans:

Home equity and second mortgage — — — 310 16 13

Other 23 23 17 10 — —

Commercial business loans 536 536 128 350 30 30

6 unchanged sentences

Home equity and second mortgage 603 603 — 459 — —

Other 23 23 17 10 — —

Commercial business loans 725 827 128 492 60 60

5 unchanged sentences

The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs.

This includes short-term (e.g.

six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

In response to requests from borrowers, the Company made payment deferral modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans.

The majority of these borrowers had resumed making payments as of September 30, 2020 and only five loans totaling $ 5,870,000 remained on deferral status under COVID-19 loan modification forbearance agreements 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 under COVID-19 loan modification forbearance agreements 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.

The following table details the COVID-19 loan modifications, still on deferral status, as of September 30, 2020 (dollars in thousands):

The following table details the COVID-19 loan modifications on deferral status as of September 30, 2021 (dollars in thousands):

COVID-19 Loan Modifications

1 unchanged sentence

One- to four-family 1 $ 323 100.0 %

Total COVID-19 modifications 1 $ 323 100.0 %

The following table details the COVID-19 loan modifications on deferral 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

7 unchanged sentences

The Company had $ 3,071,000 in TDRs included in impaired loans at September 30, 2020 and had no commitments to lend additional funds on these loans.

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

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of September 30, 2021 and 2020 (dollars in thousands):

Accruing Non-

Accrual Total

Accruing Non-Accrual Total

Mortgage loans:

One- to four-family $ 483 $ — $ 483

Multi-family — — —

Commercial $ 2,371 $ — $ 2,371

7 unchanged sentences

September 30, 2021 and 2020

Accruing Non-

Accrual Total

Accruing Non-Accrual Total

Mortgage loans:

1 unchanged sentence

Commercial 2,385 — 2,385

Land — 130 130

Consumer loans:

Home equity and second mortgage — 73 73

Commercial business loans — 143 143

$ 2,868 $ 203 $ 3,071

There were no new TDRs recognized during the fiscal year ended September 30, 2020.

There were no new TDRs recognized during the years ended September 30, 2021 and 2020.

There was one new TDR during the year ended September 30, 2019.

There were three new TDRs during the year ended September 30, 2018.

The following tables set forth information with respect to the Company's TDRs, by portfolio segment, during the years ended September 30, 2019 and 2018 (dollars in thousands):

The following table sets forth information with respect to the Company's TDRs, by portfolio segment, added during the year ended September 30, 2019:

2019 Number of

4 unchanged sentences

Total 1 $ 85 $ 85 $ 82

Land loans (2) 1 $ 244 $ 155 $ 153

Commercial business loans (1) 2 183 183 170

Total 3 $ 427 $ 338 $ 323

(1) Modifications were a result of a reduction in interest rates or monthly payment amounts.

(2) Modification was a result of a reduction in principal balance.

There were no TDRs for which there was a payment default within the first 12 months of modification during the years ended September 30, 2021, 2020 or 2019.

13 unchanged sentences

September 30, 2021 and 2020

The Company leases certain premises under operating lease agreements.

Certain leases contain renewal options from five to ten years and escalation clauses.

Total rental expense was $ 377,000 , $ 332,000 and $ 206,000 for the years ended September 30, 2020, 2019 and 2018, respectively, which is included in premises and equipment expense in the accompanying consolidated statements of income.

See Note 10 for additional information on the Company's leases.

Note 7 – OREO and Other Repossessed Assets

3 unchanged sentences

Balance, beginning of year $ 1,050 6 $ 1,683 12

Addition due to South Sound Acquisition — — 25 1

Other additions 293 2

Writedowns — — ( 173 ) —

1 unchanged sentence

Balance, end of year $ 157 3 $ 1,050 6

At September 30, 2020, OREO and other repossessed assets consisted of six OREO properties in Washington, with balances ranging from $ 79,000 to $ 702,000 .

At September 30, 2019, OREO and other repossessed assets consisted of 12 OREO properties in Washington, with balances ranging from $ 13,000 to $ 874,000 .

At September 30, 2021 and 2020, OREO and other repossessed assets consisted of OREO properties in Washington.

The Company recorded net gains on sales of OREO and other repossessed assets of $ 92,000 , $ 35,000 , and $ 89,000 for the years ended September 30, 2021, 2020 and 2019, respectively.

Gains and losses on sales of OREO and other repossessed assets are recorded in the OREO and other repossessed assets, net category in non-interest expense in the accompanying consolidated statements of income.

At September 30, 2021, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession, and there was one one- to four-family property with a balance of $ 30,000 in the process of foreclosure.

At September 30, 2020, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession, and there were no one- to four-family properties in the process of foreclosure.

At September 30, 2019, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession and the amount of one- to four-family properties in the process of foreclosure totaled $ 150,000 .

Note 8 - Goodwill and CDI

There were no changes to the recorded amount of goodwill for both years ended September 30, 2021 and 2020.

The following table presents the change in the recorded amount of goodwill for the year ended September 30, 2019 (dollars in thousands).

Balance, beginning of year $ 5,650

Addition as a result of the South Sound Acquisition (see Note 2)

Balance, end of year

During the year ended September 30, 2019, the Company recorded a CDI of $ 2,483,000 in connection with the South Sound Acquisition.

The CDI amortization expense totaled $ 361,000 , $ 406,000 and $ 452,000 for the years ended September 30, 2021, 2020 and 2019, respectively.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Amortization expense for the CDI for fiscal years ending subsequent to September 30, 2021 is estimated to be as follows (dollars in thousands):

1 unchanged sentence

Total $ 1,264

Note 9 - Servicing Rights

Note 9 - Loan Servicing Rights

The Company services one- to four-family mortgage loans for Freddie Mac and also provides servicing for secondary market purchasers of the guaranteed portion of SBA loans;

such loans are not included in the accompanying consolidated balance sheets.

The principal amount of loans serviced for Freddie Mac at September 30, 2020, 2019 and 2018 was $ 418,559,000 , $ 386,357,000 and $ 370,928,000 , respectively.

The principal amount of loans serviced for Freddie Mac at September 30, 2021, 2020 and 2019 was $ 419,675,000 ,

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

$ 418,559,000 and $ 386,357,000 , respectively.

The guaranteed principal amount of SBA loans serviced for others at September 30, 2021, 2020 and 2019 was $ 6,761,000 , $ 8,022,000 and $ 12,765,000 , respectively.

The following is an analysis of the changes in Freddie Mac servicing rights for the years ended September 30, 2020, 2019 and 2018 (dollars in thousands):

The following is an analysis of the changes in Freddie Mac loan servicing rights for the years ended September 30, 2021, 2020 and 2019 (dollars in thousands):

2021 2020 2019

2 unchanged sentences

Amortization ( 1,022 ) ( 748 ) ( 563 )

Valuation allowance ( 211 ) — —

Valuation recovery (allowance) 92 ( 211 ) —

Balance, end of year $ 3,438 $ 2,980 $ 2,206

At September 30, 2021, 2020 and 2019, the estimated fair value of Freddie Mac servicing rights totaled $ 3,656,000 , $ 3,120,000 and $ 3,694,000 , respectively.

The Freddie Mac servicing rights' fair values at September 30, 2020, 2019 and 2018 were estimated using discounted cash flow analyses with average discount rates of 9.00 %, 9.00 % and 8.99 %, respectively, and average conditional prepayment rates of 14.42 %, 11.31 % and 8.10 %, respectively.

The Freddie Mac servicing rights' fair values at September 30, 2021, 2020 and 2019 were estimated using discounted cash flow analyses with an average discount rates of 9.00 % for all years , and average conditional prepayment rates of 12.71 % , 14.42 % and 11.31 %, respectively .

At September 30, 2021, there was a valuation allowance of $ 119,000 .

At both September 30, 2019 and 2018, there was no valuation allowance on the Freddie Mac servicing rights.

The following is an analysis of the changes in SBA servicing rights for the years ended September 30, 2020, 2019 and 2018 (dollars in thousands):

At September 30, 2020, there was a valuation allowance of $ 211,000 .

At September 30, 2019, there was no valuation allowance on the Freddie Mac servicing rights.

The following is an analysis of the changes in SBA loan servicing rights for the years ended September 30, 2021, 2020 and 2019 (dollars in thousands):

2021 2020 2019

4 unchanged sentences

Valuation allowance - South Sound Acquisition — — ( 4 )

Valuation allowance ( 10 ) ( 4 ) —

Valuation recovery (allowance) 18 ( 10 ) ( 4 )

Balance, end of year $ 44 $ 115 $ 202

At September 30, 2021, 2020 and 2019, the estimated fair value of SBA servicing rights totaled $ 99,000 , $ 115,000 and $ 202,000 , respectively.

The SBA servicing rights' fair values at September 30, 2020 and 2019 were estimated using discounted cash flow analyses with

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

average discount rates of 15.00 % for both years and average conditional prepayment rates of 16.29 % and 16.13 % respectively.

The SBA servicing rights' fair values at September 30, 2021, 2020 and 2019 were estimated using discounted cash flow analyses with an average discount rate of 15.00 % for all years and average conditional prepayment rates of 17.85 %, 16.29 % and 16.13 %, respectively.

At September 30, 2021, 2020 and 2019, there were valuation allowances of $ 0 , $ 18,000 and $ 8,000 , respectively, on SBA servicing rights.

At September 30, 2018, the SBA servicing rights were insignificant.

Note 10 - Leases

The Company adopted ASC 842 on October 1, 2019 and began recording operating lease liabilities and operating lease ROU assets on the consolidated balance sheets.

The Company adopted ASC 842 on October 1, 2019 and began recording operating lease liabilities and operating lease ROU assets in the consolidated balance sheets.

The Company has operating leases for three retail bank branch offices.

The ROU assets totaled $ 2.89 million at October 1, 2019.

The Company's leases have remaining lease terms of 22 months to eleven years , some of which include options to extend the leases for up to five years .

The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the year ended September 30, 2020 (dollars in thousands):

The Company's leases have remaining lease terms of ten months to ten years , some of which include options to extend the leases for up to five years .

Lease extensions are not certain and the Company evaluates each lease based on the specific circumstances for the location to determine the probability of exercising the extensions in the calculation of ROU.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the years ended September 30, 2021 and 2020 (dollars in thousands):

Operating lease cost $ 395 $ 377

Short-term lease cost — —

Total lease cost $ 395 $ 377

The following table provides supplemental information to operating leases at or for the year ended September 30, 2020 (dollars in thousands):

Lease expense was $322,000 for the year ended September 30, 2019.

The following table provides supplemental information related to operating leases at or for the years ended September 30, 2021 and 2020 (dollars in thousands):

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 327 $ 318

Weighted average remaining lease term-operating leases 9.24 years

Weighted average remaining lease term-operating leases 8.44 years 9.24 years

Weighted average discount rate-operating leases 2.24 % 2.22 %

The Company's leases typically do not contain a discount rate implicit in the lease contract.

As an alternative, the weighted average discount rate used to value the future value of lease payments due in calculating the value of the ROU asset and lease

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

Maturities of operating lease liabilities at September 30, 2020 for future years are as follows (dollars in thousands):

2021 $ 327,000

As an alternative, the weighted average discount rate used to estimate the present value of future lease payments in calculating the value of the ROU asset.

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

Maturities of operating lease liabilities at September 30, 2021 for fiscal years ended subsequent to September 30, 2021 are as follows (dollars in thousands):

Thereafter 1,038

2 unchanged sentences

Total $ 2,359

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Note 11 - Deposits

6 unchanged sentences

Total $ 1,570,555 $ 1,358,406

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Individual certificates of deposit in amounts of $250,000 or greater totaled $ 21,781,000 and $ 28,945,000 at September 30, 2021 and 2020, respectively.

12 unchanged sentences

The Bank has long- and short-term borrowing lines with the FHLB with total credit on the lines equal to 45 % of the Bank’s total assets, limited by available collateral.

The Bank had $ 10,000,000 of long-term FHLB borrowings outstanding at September 30, 2020.

These borrowings consisted of two $ 5,000,000 borrowings, with scheduled maturities in March 2025 and March 2027, and which bear interest at 1.19 % and 1.11 %, respectively.

The Bank had no FHLB borrowings outstanding at September 30, 2019.

Under the Advances, Pledge and Security Agreement entered into with the FHLB ("FHLB Borrowing Agreement"), virtually all of the Bank’s assets, not otherwise encumbered, are pledged as collateral for borrowings.

The Bank had a single $ 5,000,000 long-term FHLB borrowing outstanding at September 30, 2021, with scheduled maturity in March 2025, and which bears interest at 1.19 %.

The Bank had $ 10,000,000 in FHLB borrowings outstanding at September 30, 2020.

The Bank also maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.

4 unchanged sentences

The Bank had no outstanding borrowings on this line at both September 30, 2021 and 2020.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Note 13 - Other Liabilities and Accrued Expenses

4 unchanged sentences

Total other liabilities and accrued expenses $ 7,367 $ 7,312

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Note 14 - Income Taxes

On December 22, 2017, the federal government enacted the Tax Cuts and Jobs Act (the "Tax Act").

The Tax Act significantly revised the future ongoing federal corporate income tax by, among other things, decreasing the federal corporate income tax rate to 21.0% from 35.0% effective January 1, 2018.

As the Company has a September 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a blended federal income tax rate of approximately 24.5 % for the Company's fiscal year ended September 30, 2018, and 21.0% for subsequent fiscal years.

In addition, the reduction of the corporate federal income tax rate required the Company to revalue its deferred tax assets and liabilities based on the lower federal income tax rate of 21.0%.

As a result of the Tax Act, during the year ended September 30, 2018, the Company recorded a one-time income tax expense of $ 548,000 in conjunction with remeasuring its net deferred tax assets.

The impact of using the 24.5 % blended federal income tax rate for the year ended September 30, 2018 versus a 35.0% rate reduced the provision for income taxes by approximately $ 2.21 million, which was partially offset by the $ 548,000 one-time net deferred tax asset remeasurement.

The components of the provision for income taxes for the years ended September 30, 2021, 2020 and 2019 were as follows (dollars in thousands):

3 unchanged sentences

Provision for income taxes $ 6,845 $ 6,038 $ 5,901

At September 30, 2020, the Company had income taxes receivable of $ 781,000 , which is included in other assets in the accompanying 2020 consolidated balance sheet.

At September 30, 2021, the Company had income taxes payable of $ 42,000 , which is included in other liabilities in the accompanying 2021 consolidated balance sheet.

At September 30, 2020, the Company had income taxes receivable of $ 781,000 , which is included in other assets in the accompanying 2020 consolidated balance sheet.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

The components of the Company’s deferred tax assets and liabilities at September 30, 2021 and 2020 were as follows (dollars in thousands):

6 unchanged sentences

Reserve for loan commitments 76 81

Lease liability 552 —

Operating lease liabilities 495 552

Total deferred tax assets 3,712 3,757

1 unchanged sentence

Goodwill 1,187 1,187

Servicing rights 650 506

Loan servicing rights 731 650

Depreciation 787 778

4 unchanged sentences

Net unrealized gains on investment securities and investments in equity securities 20 23

Right of use asset 543 —

Operating lease ROU assets 480 543

Total deferred tax liabilities 4,222 3,995

Net deferred tax assets (liabilities) $ ( 238 ) $ ( 137 )

Deferred tax liabilities are included in other liabilities on the consolidated balance sheet.

Net deferred tax liabilities $ ( 510 ) $ ( 238 )

Deferred tax liabilities are included in other liabilities in the accompanying consolidated balance sheets.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The provision for income taxes for the years ended September 30, 2021, 2020 and 2019 differs from that computed at the federal statutory corporate tax rate as follows (dollars in thousands):

1 unchanged sentence

Expected federal income tax provision at statutory rate $ 7,230 $ 6,365 $ 6,283

Net impact of the Tax Act — — 548

BOLI income ( 125 ) ( 124 ) ( 345 )

7 unchanged sentences

The KSOP benefits employees with at least one year of service who are 18 years of age or older.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

may fund the ESOP with contributions of cash or stock, and may fund the 401(k) Plan with contributions of cash.

The Bank may fund the ESOP with contributions of cash or stock, and may fund the 401(k) Plan with contributions of cash.

Employee vesting occurs over six years .

1 unchanged sentence

The loan was repaid primarily from the Bank’s contributions to the ESOP and was fully repaid by March 31, 2019.

The interest rate on the loan was 8.5 %.

Interest expense on the ESOP debt was $ 9,000 and $ 53,000 for the years ended September 30, 2019 and 2018, respectively.

The amount of the Bank's annual contribution was discretionary, except that it must have been sufficient to enable the ESOP to service its debt.

The amount of the Bank's annual contribution is discretionary, except that it must have been sufficient to enable the ESOP to service its debt.

All dividends received by the ESOP were used to pay debt service through March 31, 2019.

The dividends received after March 31, 2019 have been paid directly to participants.

Dividends of $ 176,000 and $ 291,000 were used to service the debt during the years ended September 30, 2019 and 2018, respectively.

Dividends of $ 176,000 were used to service the debt during the year ended September 30, 2019.

As the Plan made each payment of principal and interest, an appropriate percentage of stock was released and allocated annually to eligible employee accounts, in accordance with applicable regulations.

As of September 30, 2021, an aggregate of 660,374 ESOP shares, which were previously released for allocation to participants, had been distributed to participants.

Shares held by the ESOP as of September 30, 2020, 2019 and 2018 were classified as follows:

2020 2019 2018

Unallocated shares — — 17,639

Shares released for allocation 415,698 425,281 451,644

Total ESOP shares 415,698 425,281 469,283

The approximate fair market value of the ESOP’s unallocated shares at September 30, 2018 was $ 551,000 .

There was no compensation expense recognized for the ESOP for the year ended September 30, 2020.

Compensation expense recognized for the ESOP for the years ended September 30, 2019 and 2018 was $ 318,000 , and $ 823,000 , respectively.

Total shares held by the ESOP as of September 30, 2021, 2020 and 2019 were 397,626 , 415,698 and 425,281 , respectively.

There was no compensation expense recognized for the ESOP for the years ended September 30, 2021 and 2020.

Compensation expense recognized for the ESOP for the year ended September 30, 2019 was $ 318,000 .

Eligible employees may contribute a portion of their wages to the 401(k) Plan up to the maximum established under the Internal Revenue Code.

4 unchanged sentences

Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti.

Under the Company's 2019 Equity Incentive Plan, which was approved by shareholders on January 28, 2020, the Company is able to grant options and awards or restricted stock (with or without performance measures) for up to 350,000 shares of common stock, of which 300,000 share are reserved to be awarded to employees and officers and 50,000 shares are reserved to be awarded to directors and directors emeriti.

Under the Company's 2019 Equity Incentive Plan the

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 350,000 shares of common stock, of which 300,000 shares are reserved to be awarded to employees and officers and 50,000 shares are reserved to be awarded to directors and directors emeriti.

Shares issued may be purchased in the open market or may be issued from authorized and unissued shares.

5 unchanged sentences

There were no restricted stock grants awarded during the years ended September 30, 2021, 2020 and 2019.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Stock option activity for the years ended September 30, 2021, 2020 and 2019 is summarized as follows:

19 unchanged sentences

The expected life is based on historical data, vesting terms and estimated exercise dates.

The expected dividend yield is based on the most recent quarterly dividend on an annualized basis in effect at the time the options were granted, adjusted, if appropriate, for management's expectations regarding future dividends.

The expected dividend yield is based on the most recent quarterly dividend on an annualized basis in effect at the time that the options were granted, adjusted, if appropriate, for management's expectations regarding future dividends.

The expected volatility is based on historical volatility of the Company’s stock price.

2 unchanged sentences

There were 81,000 options granted during the year ended September 30, 2021 with an aggregate grant date fair value of $ 502,000 .

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The weighted average assumptions for options granted during the years ended September 30, 2021, 2020 and 2019 were as follows:

11 unchanged sentences

At September 30, 2020, there were 159,192 unvested options with an aggregate grant date fair value of $ 571,000 .

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Additional information regarding options outstanding at September 30, 2021 is as follows:

12 unchanged sentences

406,815 $ 21.62 6.9 219,151 $ 18.63 5.1

395,349 $ 18.45 6.6 236,157 $ 15.31 5.1

The aggregate intrinsic value of options outstanding at September 30, 2021, 2020 and 2019 was $ 3,119,000 , $ 1,416,000 , and $ 3,854,000 , respectively.

6 unchanged sentences

The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

11 unchanged sentences

The reserve for unfunded loan commitments totaled $ 365,000 and $ 384,000 at September 30, 2021 and 2020, respectively.

These amounts are included in other liabilities and accrued expenses in the accompanying

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

consolidated balance sheets.

These amounts are included in other liabilities and accrued expenses in the accompanying consolidated balance sheets.

Increases (decreases) in the reserve for unfunded loan commitments are recorded in non-interest expense in the accompanying consolidated statements of income.

3 unchanged sentences

The maximum payment for any eligible employee would be equal to 18 months of the employee’s current compensation.

The Company has employment agreements with the Chief Executive Officer and the Chief Financial Officer which provide for a severance payment and other benefits if the officers are involuntarily terminated following a change in control of the Company or the Bank.

Timberland Bancorp has employment agreements with the Chief Executive Officer and the Chief Financial Officer which provide for a severance payment and other benefits if the officers are involuntarily terminated following a change in control of Timberland Bancorp or the Bank.

The maximum value of the severance benefits under the employment agreements is 2.99 times the officer's average annual compensation during the five -year period prior to the effective date of the change in control.

Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business.

In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the consolidated financial position of the Company.

In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the future consolidated financial position of the Company.

Note 18 - Regulatory Matters

4 unchanged sentences

The minimum requirements are a common equity Tier 1 ("CET1") capital ratio of 4.5 %, a Tier 1 capital ratio of 6.0 %, a total capital ratio of 8.0 % and a leverage ratio of 4.0 %.

In addition to the minimum regulatory capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

discretionary bonuses based on percentages of retained income that could be utilized for such actions.

At September 30, 2021, the Bank's CET1 capital exceeded the required capital conservation buffer.

2 unchanged sentences

The following tables compare the Bank’s actual capital amounts at September 30, 2021 and 2020 to its minimum regulatory capital requirements and "Well Capitalized" regulatory capital at those dates (dollars in thousands):

September 30, 2020 Actual Regulatory Minimum To Be "Adequately Capitalized" Regulatory MinimumTo Be "Well Capitalized" Under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

Actual Regulatory Minimum To Be "Adequately Capitalized" Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions

September 30, 2021 Amount Ratio Amount Ratio Amount Ratio

Leverage Capital Ratio:

4 unchanged sentences

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

September 30, 2019 Actual Regulatory Minimum To Be "Adequately Capitalized" Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

September 30, 2020

Leverage Capital Ratio:

8 unchanged sentences

If Timberland Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at September 30, 2021, Timberland Bancorp would have exceeded all regulatory requirements.

The following table presents the regulatory capital ratios for Timberland Bancorp at September 30, 2020 and 2019 assuming Timberland Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets (dollars in thousands):

The following table presents the regulatory capital ratios for Timberland Bancorp at September 30, 2021 and 2020 assuming that Timberland Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets (dollars in thousands):

Amount Ratio Amount Ratio

5 unchanged sentences

Total capital 203,475 22.2 182,805 21.3

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Note 19 - Condensed Financial Information - Parent Company Only

5 unchanged sentences

Total cash and cash equivalents

Investment securities held to maturity, at amortized cost (estimated fair value $499)

Investment securities held to maturity, at amortized cost (estimated fair value $ 505 and $ 499 )

Investment in Bank 203,440 184,567

5 unchanged sentences

Total liabilities and shareholders’ equity $ 206,979 $ 187,723

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Condensed Statements of Income - Years Ended September 30, 2021, 2020 and 2019

14 unchanged sentences

Net income $ 27,583 $ 24,269 $ 24,020

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Condensed Statements of Cash Flows - Years Ended September 30, 2021, 2020 and 2019

25 unchanged sentences

End of year $ 2,932 $ 2,633 $ 2,891

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Note 20 - Net Income Per Common Share

11 unchanged sentences

Diluted net income per common share $ 3.27 $ 2.88 $ 2.84

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

___________________

8 unchanged sentences

Balance of AOCI at the beginning of period $ 90 $ ( 40 ) $ 50

Other comprehensive income 85 31 116

Adoption of ASU 2016-01 $ 63 $ — $ 63

Other comprehensive income (loss) ( 3 ) 14 11

Balance of AOCI at the end of period $ 87 $ ( 26 ) $ 61

Balance of AOCI at the beginning of period $ ( 58 ) $ ( 71 ) $ ( 129 )

Other comprehensive income (loss) ( 39 ) 34 ( 5 )

Other comprehensive income 85 31 116

Adoption of ASU 2016-01 $ 63 $ — $ 63

Balance of AOCI at the end of period $ 90 $ ( 40 ) $ 50

1 unchanged sentence

[1] All amounts are net of income taxes.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Note 22 - Fair Value Measurements

1 unchanged sentence

GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels.

GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three levels.

Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels.

2 unchanged sentences

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

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

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities.

23 unchanged sentences

The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable.

In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

changes in the market and in the collateral.

In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral.

Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

8 unchanged sentences

The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

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

3 unchanged sentences

Mortgage loans:

One- to four-family $ — $ — $ 481

Land $ — $ — $ 286

Commercial business loans

10 unchanged sentences

listing price less estimated selling costs NA

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2020 (dollars in thousands):

3 unchanged sentences

Mortgage loans:

Land $ — $ — $ 114

Consumer loans:

One- to four-family $ — $ — $ 481

Commercial business loans — — 210

9 unchanged sentences

listing price less estimated selling costs NA

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

GAAP requires disclosure of estimated fair values for financial instruments.

5 unchanged sentences

Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.

Additionally, in accordance with ASU 2016-01, which the Company adopted on October 1, 2018 on a prospective basis, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Additionally, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

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

22 unchanged sentences

Investment securities 85,797 87,734 — 87,235 499

Investment in equity securities 958 958 958 — —

Investments in equity securities 977 977 977 — —

FHLB stock 1,922 1,922 1,922 — —

7 unchanged sentences

Accrued interest payable 274 274 274 — —

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.

5 unchanged sentences

Management monitors interest rates and maturities of assets and liabilities, and attempts to manage interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2020 and 2019

Note 23 - Selected Quarterly Financial Data (Unaudited)

7 unchanged sentences

Net interest income 13,110 13,157 12,567 13,024

Provision for loan losses 500 1,000 2,000 200

Non-interest income 3,450 4,266 4,886 4,559

6 unchanged sentences

Diluted $ 0.71 $ 0.83 $ 0.86 $ 0.87

__________________________________________

(1) During the quarters ended December 31, 2019, March 31, 2020, June 30, 2020 and September 30, 2020, the Company incurred expenses related to the acquisition of South Sound Bank of $ 0 , $ 2 , $ 0 , and $ 0 , respectively.

(2) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.

September 30,

5 unchanged sentences

Net interest income 12,520 12,480 12,880 13,002

Provision for loan losses 500 1,000 2,000 200

Non-interest income 4,715 4,855 3,680 3,938

7 unchanged sentences

__________________________________________

(1) During the quarters ended December 31, 2018, March 31, 2019, June 30, 2019, and September 30, 2019, the Company incurred expenses related to the acquisition of South Sound Bank of $ 64 , $ 55 , $ 328 , and $ 15 , respectively.

(1) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.

4 unchanged sentences

Note 24 - Revenue from Contracts with Customers

In accordance with ASC 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

In accordance with ASU 2014-09, Revenue from Contracts with Customers ("ASC 606") , revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services.

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:

(i) identify the contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

(1) identify the contract(s) with a customer;

(2) identify the performance obligations in the contract;

(3) determine the transaction price;

(4) allocate the transaction price to the performance obligations in the contract;

and (5) recognize revenue when (or as) the Company satisfies a performance obligation.

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration that it is entitled to in exchange for the goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct.

1 unchanged sentence

ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope.

The majority of the Company's revenues are composed of interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, BOLI net earnings, servicing income on loans sold and other loan fee income, which are not in the scope of ASC 606.

Revenue reported as service charges on deposits, ATM and debit card interchange transaction fees, merchant services fees, non-deposit investment fees and escrow fees are within the scope of ASC 606.

All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income with the exception of gains on sale of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense.

For the year ended September 30, 2020, the Company recognized $ 4,147,000 in services charges on deposits, $ 4,378,000 in ATM and debit card interchange fees, $ 273,000 in escrow fees and $ 22,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of OREO and gains on sales/dispositions of premises and equipment, which are included in non-interest expense.

For the year ended September 30, 2021, the Company recognized $ 3,911,000 in service charges on deposits, $ 5,084,000 in ATM and debit card interchange fees, $ 290,000 in escrow fees and $ 23,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

For the year ended September 30, 2020, the Company recognized $ 4,147,000 in service charges on deposits, $ 4,378,000 in ATM and debit card interchange fees, $ 273,000 in escrow fees and $ 22,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

Descriptions of the Company's revenue-generating activities that are within the scope of ASC 606 are as follows:

3 unchanged sentences

Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.

Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed as the contract duration does not extend beyond the service performed.

Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time that the transaction is executed, as the contract duration does not extend beyond the service performed.

• ATM and Debit Card Interchange Transaction Fees:

3 unchanged sentences

The Company earns fees from real estate escrow contracts with customers.

The Company receives and disburses money and/or property per the customer's contract.

Fees are recognized when the escrow contract closes.

The Company receives and disburses money and/or property according to the customer's contract.

Such fees are recognized when the escrow contract closes.

• Fee income from Non-Deposit Investment Sales:

3 unchanged sentences

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 8. Financial Statements and Supplementary Data