What changed in this filing

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Item 1. Business

2022-12-09 compared with 2021-12-08 · 222 added, 268 removed, 954 unchanged (34% of the section changed)

1 unchanged sentence

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

At September 30, 2021, on a consolidated basis, the Company had total assets of $1.79 billion, net loans receivable of $968.45 million, total deposits of $1.57 billion and total shareholders’ equity of $206.90 million.

At September 30, 2022, on a consolidated basis, the Company had total assets of $1.86 billion, net loans receivable of $1.13 billion, total deposits of $1.63 billion and total shareholders’ equity of $218.57 million.

The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.

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The Company acquired 100% of the outstanding common stock of South Sound Bank, and South Sound Bank was merged into the Bank.

The results of operations of the acquired assets and assumed liabilities have been included in the Company's consolidated financial statements as of and for the period since the acquisition date.

For additional details, see Note 2 of the Notes to Consolidated Financial Statements contained in "Item 8.

Financial Statements and Supplementary Data."

Timberland Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail customers while concentrating its lending activities on real estate mortgage loans.

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Other than an investor’s own internet access charges, the Company makes available free of charge through that website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after these materials have been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

The Bank considers Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties, Washington as its primary market areas.

The Bank considers Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis counties, Washington as its primary market areas.

The Bank conducts operations from:

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• five branch offices in Pierce County (Edgewood, Puyallup, Spanaway, Tacoma and Gig Harbor);

• seven branch offices in Thurston County (Tumwater, Yelm, three branches in Lacey and two branches in Olympia);

• six branch offices in Thurston County (Tumwater, Yelm, two branches in Lacey and two branches in Olympia);

• two branch offices in Kitsap County (Poulsbo and Silverdale);

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

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

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

The number of home sales increased 11.2% for the quarter ended June 30, 2021 compared to the same quarter one year earlier.

According to the Washington State Employment Security Department, the unemployment rate in Grays Harbor County increased to 5.8% at September 30, 2022 from 5.3% at September 30, 2021.

The median price of a resale home in Grays Harbor County for the quarter ended September 30, 2022 increased 9.2% to $357,200 from $327,100 for the comparable prior year period.

The number of home sales increased 1.3% for the quarter ended September 30, 2022 compared to the same quarter one year earlier.

The Bank has six branches (including its home office) located in the county.

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

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

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

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

According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area increased to 4.3% at September 30, 2022 from 4.2% at September 30, 2021.

The median price of a resale home in Pierce County for the quarter ended September 30, 2022 increased 7.2% to $554,900 from $517,500 for the comparable prior year period.

The number of home sales decreased 5.7% for the quarter ended September 30, 2022 compared to the same quarter one year earlier.

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

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

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

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

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

The Bank has seven branches located in Thurston County.

According to the Washington State Employment Security Department, the unemployment rate for the Thurston County area increased to 3.8% at September 30, 2022 from 3.5% at September 30, 2021.

The median price of a resale home in Thurston County for the quarter ended September 30, 2022 increased 4.3% to $493,000 from $472,600 for the same quarter one year earlier.

The number of home sales decreased 0.5% for the quarter ended September 30, 2022 compared to the same quarter one year earlier.

The Bank has six branches located in Thurston County.

This county has historically had a stable economic base primarily attributable to the state government presence.

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

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

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

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

According to the Washington State Employment Security Department, the unemployment rate for the Kitsap County area increased to 3.6% at September 30, 2022 from 3.4% at September 30, 2021.

The median price of a resale home in Kitsap County for the quarter ended September 30, 2022 increased 5.6% to $541,600 from $512,700 for the same quarter one year earlier.

The number of home sales was unchanged for the quarter ended September 30, 2022 compared to the same quarter one year earlier.

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

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

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

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

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

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

According to the Washington State Employment Security Department, the unemployment rate for the King County area decreased to 2.9% at September 30, 2022 from 4.3% at

September 30, 2021.

The median price of a resale home in King County for the quarter ended September 30, 2022 increased 4.3% to $893,800 from $856,700 for the same quarter one year earlier.

The number of home sales decreased 11.6% for the quarter ended September 30, 2022 compared to the same quarter one year earlier.

Lewis County has a population of 84,000 according to the U.S.

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

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

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

The number of home sales increased 16.9% for the quarter ended June 30, 2021 compared to the same quarter one year earlier.

According to the Washington State Employment Security Department, the unemployment rate in Lewis County increased to 4.7% at September 30, 2022 from 4.3% at September 30, 2021.

The median price of a resale home in Lewis County for the quarter ended September 30, 2022 increased 3.8% to $396,500 from $381,900 for the same quarter one year earlier.

The number of home sales decreased 4.4% for the quarter ended September 30, 2022 compared to the same quarter one year earlier.

The Bank has three branches located in Lewis County.

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

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

The Bank’s net loans receivable totaled $1.13 billion at September 30, 2022, representing 60.9% of consolidated total assets, and at that date, commercial real estate, construction (including undisbursed loans in process), multi-family and land loans were $914.15 million, or 72.9% of total loans.

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

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At September 30, 2022, the maximum amount which the Bank could have lent to any one borrower and the borrower’s related entities was approximately $43.29 million under this policy.

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

At September 30, 2022, the largest amount outstanding to any one borrower and the borrower’s related entities was $39.79 million (including $4.18 million in available lines of credit), which was secured by various commercial real estate and residential properties and other business assets located primarily in King and Pierce counties, and these borrowings were performing according to their repayment terms at September 30, 2022.

The next largest amount outstanding to any one borrower and the borrower’s related entities was $34.62 million (including $10.93 million of undisbursed construction loan proceeds).

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2022 2021 2020

Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

Amount Percent Amount Percent Amount Percent

(Dollars in thousands)

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Commercial business 125,039 9.97 74,579 6.89 69,540 6.13

74,579 6.89 69,540 6.13 64,764 6.53 43,053 5.24 44,444 5.66

Small Business Administration ("SBA") Paycheck Protection Program ("PPP") 1,001 0.08 40,922 3.78 126,820 11.18

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(1) Does not include loans held for sale of $748, $3,217, $4,509, $6,071 and $1,785 at September 30, 2022, 2021, 2020, 2019 and 2018, respectively.

(2) Does not include loans held for sale of $84 at September 30, 2017.

Residential One- to Four-Family Lending .

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However, the Bank usually obtains private mortgage insurance (“PMI”) on the portion of the principal amount that exceeds 80% of the appraised value of the security property.

The maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied properties is generally

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

The maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied properties is generally 80% (90% for loans originated for sale in the secondary market to Freddie Mac or the FHLB).

At September 30, 2022, two one- to four-family loans totaling $388,000 were on non-accrual status.

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

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

At September 30, 2022, the Bank’s largest multi-family loan had an outstanding

principal balance o f $7.01 million and was secured by an apartment building located in Thurston County.

At September 30, 2022, this loan was performing according to its repayment terms.

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

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

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

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

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

At September 30, 2022, the largest commercial real estate loan was secured by a medical office building in Thurston County, had a balance of $7.91 million and was perf orming according to its repayment terms.

At September 30, 2022, three commercial real estate loans totaling $657,00 0 were on non-accrual status.

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

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The Bank believes that its lengthy experience in providing residential construction loans has enabled it to establish processing and disbursement procedures to meet the needs of its borrowers while reducing many of the risks inherent with construction lending.

The Bank also originates

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

The Bank also originates construction loans for commercial properties, multi-family properties, and land development projects.

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

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

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

At September 30, 2022, the largest outstanding custom and owner/builder construction loan had an outstanding balance of $1.51 million (including $1.31 million of undisbursed loans in process) and was performing according to its repayment terms.

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

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Speculative construction loans are generally originated for a term of 12 months, with current rates generally ranging from 5.50% to 7.50 %, an d with a loan-to-value ratio of no more than 80 % of the appraised value of the completed property.

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

At September 30, 2022, the largest aggregate outstanding balance to one borrower for speculative one- to four-family construction loans to taled $4.04 million (including $642,000 of undisbursed loans in process) and was comprised of four loans that were performing according to their repayment terms.

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

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

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

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

At September 30, 2022, the largest outstanding multi-family construction loan was for $10.00 million (including $3.50 million of undisbursed loans in process) secured by an apartment building project in Thurston County.

At September 30, 2022, the largest outstanding commercial real estate construction loan was secured by a mini-storage facility in Grays Harbor, Washington and had a balance of $7.21 million (including $348,000 of undisbursed loans in process).

This loan was performing according to its repayment terms at September 30, 2022.

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

In the case of a speculative or

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

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

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

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

The largest land loan is secured by land in Clark County, had an outstanding balance of $1.62 million and was performing according to its repayment terms at September 30, 2021 .

At September 30, 2021, three land loans totaling $683,000 were on non-accrual status.

The largest land loan is secured by land in Pierce County, had an outstanding balance of $1.72 million and was performing according to its repayment terms at September 30, 2022 .

At September 30, 2022, two land loans totaling $450,000 were on non-accrual status.

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

Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because these loans are more difficult to evaluate.

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

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

Land loans also pose additional risk because of the lack of income being produced by the property and potential illiquid nature of the collateral.

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Second mortgage loans and home equity lines of credit have greater credit risk than one- to four-family residential mortgage loans in which the Bank is in the first lien position, because they are generally secured by mortgages subordinated to the existing first mortgage on the property.

For those second mortgage loans and home equity lines credit which the Bank does not hold the existing first mortgage on the property, it is unlikely that the Bank will be successful in recovering all or a portion of the loan balance in the event of default unless the Bank is prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property.

For those second mortgage loans and home equity lines credit on which the Bank does not hold the existing first mortgage on the property, it is unlikely that the Bank will be successful in recovering all or a portion of the loan balance in the event of default unless the Bank is prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles.

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The Bank believes that these risks are not as prevalent in the case of the Bank’s consumer loan portfolio, because a large percentage of the portfolio consists of second mortgage loans and home equity lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one- to four-family residential mortgage loans.

At September 30, 2021, seven consumer loans totaling $533,000 were on non-accrual status.

At September 30, 2022, three consumer loans totaling $255,000 were on non-accrual status.

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

Commercial Business Lending .

Commercial business loans (excluding SBA PPP loans) totaled $74.58 million, or 6.9%, of the loan portfolio at September 30, 2021.

Commercial business loans totaled $126.04 million, or 10.1%, of the loan portfolio at September 30, 2022.

Commercial business loans are generally secured by business equipment, accounts receivable, inventory and/or other property and are made at variable rates of interest equal to a negotiated margin above the Prime Rate.

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The largest commercial business loan had an outstanding balance of $4.78 million at September 30, 2022 and was performing according to its repayment terms.

At September 30, 2021, six commercial business loans totaling $458,000 were on non-accrual status.

At September 30, 2022, seven commercial business loans totaling $309,000 were on non-accrual status.

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

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The loans are primarily underwritten on the basis of the borrower's ability to service the loan from income.

Under the SBA 7(a) program, the loans carry a SBA guaranty for up to 85% of the loan.

Under the SBA 7(a) program, the loans carry an SBA guaranty for up to 85% of the loan.

Typical maturities for this type of loan vary but can be up to ten years.

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

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

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

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

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

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

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

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

Unless prior arrangements are made, and the Company consents, loans falling more than four weeks delinquent are eligible for purchase in accordance with a Marketing and Servicing Agreement in existence since March 6, 2014.

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

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

Commercial business loans also include loans originated under the PPP, a specialized low-interest (1%) forgivable loan program funded by the U.S.

Treasury Department and administered by the SBA.

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

The program was instituted in response to the COVID-19 pandemic and ended May 31.

The Bank is now working with its remaining PPP borrowers on the forgiveness phase of the program.

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

SBA PPP loans totaled $1.00 million at September 30, 2022.

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

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

SBA PPP Lending .

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

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

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

PPP loans have:

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

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

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

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

Loan Maturity.

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15 Years After

10 Years After

15 Years Total

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Loan officers may also be granted individual approval authority for certain loans up to a maximum of $250,000.

The approval authority for individual loan officers is granted on a case by case basis by the Bank's Chief Credit Administrator or President.

The approval authority for individual loan officers is granted on a case by case basis by the Bank's Chief Credit Administrator or Chief Executive Officer.

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

The Bank’s Commercial Loan Committee, which consists of the Bank’s President, Chief Credit Administrator, Executive Vice President of Lending, a commercial underwriter, and two Senior Vice Presidents of Commercial Lending, may approve commercial real estate loans and commercial business loans up to and including $3.00 million.

The Bank’s President, Chief Credit Administrator and Executive Vice President of Lending also have individual lending authority for loans up to and including $750,000.

The Bank’s Board Loan Committee, which consists of two rotating non-employee Directors and the Bank’s President, may approve loans up to and including $5.00 million.

The Bank’s Commercial Loan Committee, which consists of the Bank’s Chief Executive Officer, President, Chief Credit Administrator, Executive Vice President of Lending, a commercial underwriter, and two Senior Vice Presidents of Commercial Lending, may approve commercial real estate loans and commercial business loans up to and including $3.00 million.

The Bank’s Chief Executive Officer, President, Chief Credit Administrator and Executive Vice President of Lending also have individual lending authority for loans up to and including $750,000.

The Bank’s Board Loan Committee, which consists of two rotating non-employee Directors and the Bank’s Chief Executive Officer may approve loans up to and including $5.00 million.

Loans in excess of $5.00 million, as well as loans of any amount granted to a single borrower whose aggregate loans exceed $5.00 million, must be approved by the Bank’s Board of Directors.

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

During the years ended September 30, 2022 and 2020, the Bank did not purchase any loan participation interests.

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

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

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

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

however, from time to time, a portion of fixed-rate loans may be retained in the Bank’s portfolio to meet its asset-liability objectives.

The Bank also began selling the guaranteed portion of some of its SBA 7(a) loans in the secondary market during the year ended September 30, 2016.

The Bank also sells the guaranteed portion of some of its SBA 7(a) loans in the secondary market.

Loans sold in the secondary market are generally sold on a servicing retained basis.

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Total loans originated 572,463 602,344 597,188

Loans acquired in the South Sound Acquisition (net of fair value discount)

Mortgage loans:

One- to four-family — — 10,190

Multi-family — — 7,807

Commercial — — 64,967

Construction — — 11,730

Consumer — — 3,918

Commercial business loans — — 22,932

Total loans acquired — — 121,544

Loans and loan participations purchased:

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Commercial — 3,999 —

Construction — — 5,717

Commercial business — 5,042 —

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

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

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

The Bank began processing loan forgiveness applications and receiving SBA PPP forgiveness payments during the three months ended December 31, 2020.

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Net deferred fees or costs associated with loans that are prepaid are recognized as income/expense at the time of prepayment.

Unamortized net deferred loan origination fees totaled $5.14 million (including $1.83 million for SBA PPP loans) at September 30, 2021.

Unamortized net deferred loan origination fees totaled $4.32 million (including $42,000 for SBA PPP loans) at September 30, 2022.

Non-performing Loans and Delinquencies.

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

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

When a mortgage loan borrower fails to make

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

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

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The Bank’s Board of Directors is updated monthly as to the status of loans that are delinquent by more than 30 days and the status of all foreclosed and repossessed property owned by the Bank.

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

Loans subject to payment forbearance under the Bank's COVID-19 loan modification program are not reported as delinquent during the forbearance time period.

For additional information, see "COVID-19 Loan Modifications" below.

The following table sets forth information with respect to the Company's non-performing assets at the dates indicated:

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Non-accrual and 90 days or more past due loans as a percentage of loans receivable, net (4) 0.18 % 0.29 % 0.28 %

0.29 % 0.28 % 0.34 % 0.18 % 0.27 %

Non-accrual and 90 days or more past due loans as a percentage of total assets

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$0, $150 and $0 as of September 30, 2022, 2021, 2020, 2019 and 2018, respectively.

(2) Includes foreclosed residential real estate property totaling $0, $0, $0, $0 and $875

as of September 30, 2021, 2020, 2019, 2018 and 2017, respectively.

(2) Does not include troubled debt restructured loans on accrual status.

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

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

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

The Bank’s non-accrual loans de creased b y $795,000 to $2.06 million at September 30, 2022 from $2.85 million at September 30, 2021, as a result of a $278,000 decrease in consumer loans, a $233,000 decrease in land loans, a $149,000 decrease in commercial business loans, a $116,000 decrease in commercial mortgage loans and a $19,000 decrease in one- to four-family mortgage loans on non-accrual status.

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

Additional interest income which would have been recorded for the year ended September 30, 2021 had non-accruing loans been current in accordance with their original terms totaled $375,000.

Other Real Estate Owned and Other Repossessed Assets.

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The Bank had TDRs at September 30, 2022 and 2021 totaling $2.61 million and $2.55 million, respectively, of which $143,000 and $182,000, respectively, were on non-accrual status.

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

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

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

The Company has followed the CARES Act and interagency guidance from the federal banking agencies when determining if a borrower's modification is subject to TDR classification.

See "COVID-19 Loan Modifications" below.

None of the allowance for loan losses was allocated to TDRs at September 30, 2022 or 2021.

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

The Company followed the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and interagency guidance from the federal banking agencies when determining if a borrower's modification is subject to TDR classification.

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of (i) December 30, 2020 or (ii) 60 days after the President declared a termination of the COVID-19 national emergency were not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019.

The Consolidated Appropriations Act, 2021 ("CAA 2021") extended the period to suspend the requirements under TDR accounting guidance to January 1, 2022.

Modifications included payment deferrals, fee waivers, extensions of repayment term, or other delays in payment.

As of September 30, 2022, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the COVID pandemic have resumed contractual payments.

At September 30, 2021, one customer with an outstanding balance of $323,000 was deferring loan payments.

Impaired Loans.

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See “Asset Classification” below for additional information regarding the Bank's problem loans.

COVID-19 Loan Modifications .

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 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.

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

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

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

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

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

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

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

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

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

Asset Classification.

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Special mention (1) 237 5,012 5,864

Total classified and special

mention loans

$ 8,616 $ 9,513 $ 7,867

Total classified and special mention loans $ 7,624 $ 8,616 $ 9,513

Allowance for loan losses $ 13,703 $ 13,469 $ 13,414

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(2) Includes non-performing loans.

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

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

Loans classified as substandard increased by $3.78 million to $7.39 million at September 30, 2022 from $3.60 million at September 30, 2021.

At September 30, 2022, 31 loans were classified as substandard.

Of the $7.39 million in loans classified as substandard at September 30, 2022, $2.06 million were on non-accrual status.

The largest loan classified as substandard at September 30, 2021 had a balance of $494,000 and was secured by a commercial real estate property in Grays Harbor County and equipment.

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

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

The largest loan classified as

substandard at September 30, 2022 had a balance of $4.83 million and was secured by a commercial real estate property in King County.

This loan was not on non-accrual status at September 30, 2022, as the loan was making payments in accordance with its repayment terms and was adequately collateralized.

The next largest loan classified as substandard at September 30, 2022 had a balance of $488,000 and was secured by a commercial real estate property in Grays Harbor County.

This loan was on non-accrual status at September 30, 2022.

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

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

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

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

Allowance for Loan Losses.

Loans classified as special mention decreased by $4.78 million to $237,000 at September 30, 2022 from $5.01 million at September 30, 2021.

At September 30, 2 022, two loans were classified as special mention.

The largest credit relationship classified as special mention at September 30, 2022 had a balance of $210,000 and was secured by a commercial real estate property in Grays Harbor County.

This loan was performing according to its repayment terms at September 30, 2022.

Allowance for Loan Losses ("ALL").

The allowance for loan losses is maintained to absorb probable losses inherent in the loan portfolio.

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

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

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

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

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

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

When determining the appropriate loss factors in fiscal 2022, management also took into consideration inflation, a potential recession and slowing economic growth, and any governmental or societal responses to the COVID-19 pandemic on such factors as the national and state unemployment rates and related trends, consumer spending levels and trends, and industries significantly impacted by the COVID-19 pandemic.

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

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The Bank’s allowance for loan losses as a percentage of total loans receivable and non-performing loans was 1.20% and 665.52%, respectively, at September 30, 2022 and 1.37% and 471.93%, respectively, at September 30, 2021.

The $40.92 million balance of SBA PPP loans was omitted from the allowance for loan loss calculation at September 30, 2021 as these loans are fully guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.

In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loan's contractual amount, of which a portion reflects a discount for possible credit losses.

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

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

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

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

The $1.00 million balance of SBA PPP loans was omitted from the allowance for loan loss calculation at September 30, 2022, as these loans are fully guaranteed by the SBA.

Based on its comprehensive analysis, management believes that the amount maintained in the allowance for loan losses is adequate to absorb probable losses inherent in the portfolio.

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

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

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

Year Ended September 30,

A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowing economic growth, and any governmental or societal responses to the COVID-19 pandemic, among other factors could result in a material increase in the allowance for loan losses which may adversely affect the Company's financial condition and results of operations.

Credit Ratios

The following table sets forth the ratios between the ALL, non-accrual loans and total loans at the dates indicated:

At September 30,

2022 2021 2020

(Dollars in thousands)

Allowance at beginning of year $ 13,414 $ 9,690 $ 9,530 $ 9,553 $ 9,826

Provision for (recapture of) loan losses — 3,700 — — (1,250)

Mortgage loans:

One- to four-family — 2 104 — 21

Commercial — 6 166 — 1,061

Construction - custom and owner/builder — 5 2 — —

Construction - speculative one- to four-family — — — 13 6

Construction - multi-family — — — — —

Land 45 20 18 19 19

Consumer loans:

Home equity and second mortgage — 15 — — —

Other 4 3 6 1 3

Commercial business loans 9 — 25 — —

Total recoveries 58 51 321 33 1,110

Charge-offs :

Mortgage loans:

Commercial — — — (28) (13)

Land — — (49) (22) (110)

Consumer loans:

Home equity and second mortgage — — (5) — —

Other (1) (12) (5) (6) (10)

Commercial business loans (2) (15) (102) — —

Total charge-offs (3) (27) (161) (56) (133)

Net recoveries (charge-offs) 55 24 160 (23) 977

Allowance at end of year $ 13,469 $ 13,414 $ 9,690 $ 9,530 $ 9,553

Allowance for loan losses as a percentage of total loans receivable (net) outstanding at the end of the year (1)

1.37 % 1.31 % 1.08 % 1.30 % 1.36 %

Net recoveries (charge-offs) as a percentage of average loans outstanding during the year

0.01 % 0.00 % 0.02 % 0.00 % 0.14 %

Allowance for loan losses as a percentage of non-performing loans at end of year

471.93 % 461.76 % 319.49 % 723.61 % 499.90 %

ALL $ 13,703 $ 13,469 $ 13,414

Non-accrual loans $ 2,059 $ 2,854 $ 2,905

Loans receivable, net (1) $ 1,146,129 $ 981,923 $ 1,027,289

ALL to loans receivable, net 1.20 % 1.37 % 1.31 %

Non-accrual loans to loans receivable, net 0.18 % 0.29 % 0.28 %

ALL to non-accrual loans 665.52 % 471.93 % 461.76 %

________________________________

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Loans Amount Percent

(Dollars in thousands)

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$ 13,703 100.00 % $ 13,469 100.00 % $ 13,414 100.00 %

Analysis of ALL

The table below sets forth the ratio of net charge-offs during the period to average loans outstanding during the period:

September 30,

2022 2021 2020

(Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loan (Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loan (Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loan

(Dollars in thousands)

Mortgage Loans:

One- to four-family $ — $ 140,516 — % $ — $ 122,291 — % $ 2 $ 131,093 —

Multi-family — 88,469 — — 90,569 — — 80,448 —

Commercial — 513,152 — — 458,631 — 6 441,173 —

Construction — 131,960 — — 121,441 — 5 121,458 —

Land — 31,034 — 45 23,617 0.19 20 30,439 0.07

Total mortgage loans — 905,131 — 45 816,549 0.01 33 804,611 0.07

Consumer Loans:

Home equity — 33,418 — — 32,988 — 15 37,247 0.04

Other (9) 2,369 (0.38) 3 2,848 0.11 (9) 3,746 (0.24)

Total consumer loans (9) (9) 35,787 (0.38) 3 3,000 35,836 0.11 0.0011 6 40,993 (0.20)

Commercial Loans:

Commercial business (27) 114,717 (0.02) 7 174,357 — (15) 124,796 (0.01)

Total $ (36) $ 1,055,635 — % $ 55 $ 1,026,742 0.01 % $ 24 $ 970,400 — %

Investment Activities

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At September 30, 2022, the Bank’s investment portfolio was comprised of investments in debt securities that totaled $308.02 million, consisting of $170.68 million of U.S.

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

government agency securities, $93.33 million of mortgage-backed securities held to maturity, $2.10 million of taxable municipal securities held to maturity, $500,000 of bank issued trust preferred securities held to maturity and $41.42 million of mortgage-backed securities available for sale.

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

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

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

At September 30,

2021 2020 2019

Amount Percent of

Total Recorded

Amount Percent of

Total Recorded

Amount Percent of

(Dollars in thousands)

Held to Maturity:

U.S.Treasury and U.S.

government agency securities

$ 28,760 21.74 % $ — — % $ 2,999 5.59 %

Mortgage-backed securities 39,842 30.12 27,390 31.93 28,103 52.40

Bank issued trust preferred securities 500 0.38 500 0.58 — —

Available for Sale:

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

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

This compares with a total investment portfolio of $132.28 million at September 30, 2021, consisting of $28.76 million of U.S.

The following table sets forth the maturities and weighted average yields of the debt securities in the Bank's portfolio at September 30, 2022.

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3,027 5.38 18,578 4.64 9,515 3.35 62,210 3.46

Taxable municipal securities — — 2,102 3.44 — — — —

Bank issued trust preferred securities — — — — 500 4.75 — —

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Total portfolio $ 3,027 5.38 % $ 165,760 2.13 % $ 47,922 2.05 % $ 91,314 3.37 %

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

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

For additional information

regarding investment securities, see “Item 1A.

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

Risk Factors – Our investment securities portfolio may be negatively impacted by fluctuations in market value and interest rates and result in losses” and Note 3 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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Deposits are attracted from within the Bank's market area through the offering of a broad selection of deposit instruments, including money market deposit accounts, checking accounts, regular savings accounts and certificates of deposit.

Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.

In determining the terms of its deposit accounts, the Bank considers current market interest rates, profitability to the Bank, matching deposit and loan products and its customer preferences and concerns.

Deposit account terms vary, according to the

minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.

In determining the terms of its deposit accounts, the Bank considers current market interest rates, profitability to the Bank,

matching deposit and loan products and its customer preferences and concerns.

The Bank actively seeks consumer and commercial checking accounts through checking account acquisition marketing programs.

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The following table sets forth information concerning the Bank's deposits at September 30, 2022:

Category Amount Percentage

Category Amount Percentage of Total Deposits

(Dollars in thousands)

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Maturing after 2 years but within 5 years 23,489 1.44

Maturing after 5 years 70 —

Total certificates of deposit 122,584 7.51

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Total $ 21,830

As of September 30, 2022 and 2021, approximately $122.69 million and $134.25 million, respectively, of our deposit portfolio were uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used for Timberland Bank’s regulatory reporting requirements.

The following table sets forth the portion of our time deposits that are in excess of the FDIC insurance limit, by remaining time until maturity, as of September 30, 2022 (dollars in thousands).

Maturity Period Amount

(Dollars in thousands)

Three months or less $ 257

Over three through six months 90

Over six through twelve months 4,253

Over twelve months 6,779

Total $ 11,379

Deposit Flow.

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After 2 years, but within 5 years 23,489 1.44 (2,777) 26,266 1.67 (41) 26,307 1.94

Certificates maturing thereafter 70 — 70 — — — — —

Total $ 1,632,176 100.00 % $ 61,621 $ 1,570,555 100.00 % $ 212,149 $ 1,358,406 100.00 %

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Beginning balance $ 1,570,555 $ 1,358,406 $ 1,068,227

Deposits acquired in South Sound Acquisition — — 151,538

Net deposits before interest credited 58,965 209,136 285,544

2 unchanged sentences

Ending balance $ 1,632,176 $ 1,570,555 $ 1,358,406

For additional information regarding our deposits, see “Note 10—Deposits” of the Notes to Consolidated Financial Statements contained in "Part II.

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

Deposits and loan repayments are generally the primary source of funds for the Bank's lending and investment activities and for general business purposes.

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Depending on the program, limitations on the amount of borrowings are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit.

At September 30, 2021, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount to 45% of the Bank’s total assets, limited by available collateral, under which $5.0 million in borrowings were outstanding.

At September 30, 2022, the Bank maintained an unused credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount to 45% of the Bank’s total assets, limited by available collateral, under which no borrowings were outstanding.

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

2 unchanged sentences

The Bank had no outstanding balance on this borrowing line of credit at September 30, 2022.

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

At or For the

Year Ended September 30,

2021 2020 2019

(Dollars in thousands)

Average total borrowings $ 7,685 $ 5,685 $ —

Weighted average rate paid on total borrowings 1.18 % 1.16 % — %

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

The Bank did not have any short-term borrowings for the years ended September 30, 2022, 2021 and 2020.

For additional information regarding our borrowings, see "Note 11-FHLB Borrowings and Other Borrowings" in the Notes to Consolidated Financial Statements in "Part II.

Financial Statements and Supplemental Data" of this report on Form 10-K.

Bank Owned Life Insurance

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The Bank also is subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law, and requirements established by the Federal Reserve.

State law and regulations govern the Bank's ability to take deposits

and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers and to establish branch offices.

State law and regulations govern the Bank's ability to take deposits and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers and to establish branch offices.

Under state law, savings banks in Washington also generally have all of the powers that federal savings banks have under federal laws and regulations.

The Bank is subject to periodic examination and reporting requirements by and of the Division and the FDIC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") established the Consumer Financial Protection Bureau ("CFPB") as an independent bureau of the Federal Reserve with responsibility for the implementation of federal financial consumer protection and fair lending laws and regulations.

The Bank is subject to consumer protection regulations issued by the CFPB, but as a smaller financial institution, is generally subject to supervision and enforcement by the FDIC and DFI with respect to its compliance with federal and state consumer financial protection laws and regulations.

The following is a brief description of certain laws and regulations applicable to Timberland Bancorp and the Bank.

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Legislation is introduced from time to time in the U.S.

Congress or the Washington State Legislature that may affect the operations of Timberland Bancorp and the Bank.

Congress or the

Washington State Legislature that may affect the operations of Timberland Bancorp and the Bank.

In addition, the regulations governing the Company and the Bank may be amended from time to time by the FDIC, DFI, Federal Reserve and the CFPB.

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

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

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

In October 2022, the FDIC finalized a rule that will increase the initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023 (January 1, 2023 through March 31, 2023).

The FDIC, as required under the Federal Deposit Insurance Act, established a plan in September 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35 percent within eight years.

This plan did not include an increase in the deposit insurance assessment rate.

Based on the FDIC’s recent projections, however, the FDIC determined that the DIF reserve ratio is at risk of not reaching the statutory minimum by the statutory deadline of September 30, 2028 without increasing the deposit insurance assessment rates.

The increased assessment would improve the likelihood that the DIF reserve ratio would reach the required minimum by the statutory deadline, consistent with the FDIC’s Amended Restoration Plan.

The FDIC also concurrently maintained the Designated Reserve Ratio (“DRR”) for the DIF at 2 percent for 2023.

The new assessment rate schedules will remain in effect unless and until the reserve ratio meets or exceeds 2 percent in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2 percent DRR.

Progressively lower assessment rate schedules will take effect when the reserve ratio reaches 2 percent, and again when it reaches 2.5 percent.

The revised assessment rate schedule will remain in effect unless and until the reserve ratio meets or exceeds 2 percent, absent further action by the FDIC.

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

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

Institutions with capital meeting or exceeding the ratio and

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

Institutions with capital meeting or exceeding the ratio and otherwise complying with the specified requirements (including off-balance sheet exposures of 25% or less of total assets and

trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements.

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

15 unchanged sentences

Total capital 216,446 19.3 89,869 8.0 112,336 10.0

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

For additional information regarding the Bank's regulatory capital requirements, see Note 17-Regulatory Matters of the Notes to the Consolidated Financial Statements contained in "Item 8.

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

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

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

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

44 unchanged sentences

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

Real Estate Lending Standards.

FDIC regulations require the Bank to adopt and maintain written policies that establish appropriate limits and standards for real estate loans.

These standards, which must be consistent with safe and sound banking practices, must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements.

The Bank is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate for current market conditions.

The Bank’s Board of Directors is required to review and approve the Bank’s standards at least annually.

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

Under the guidelines, the aggregate amount of all

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

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

The Bank is in compliance with the record and reporting requirements.

As of September 30, 2021, the Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were 0.2% of total capital, and the Bank's loans on commercial, agricultural, multi-family or other non-one- to four-family residential properties in excess of the supervisory loan-to-value ratios were 0.1% of total capital.

Commercial Real Estate Lending Concentrations.

The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending.

The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution).

The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations.

The guidance directs the FDIC and other federal bank regulatory agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk.

A bank that has experienced

rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:

• Total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital;

• Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.

The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy.

As of September 30, 2022, the Bank’s aggregate recorded loan balances for construction, land development and land loans were 82.89% of regulatory capital.

In addition, at September 30, 2022 the Bank’s loans on commercial real estate, as defined by the FDIC, were 275.18% of regulatory capital.

Activities and Investments of Insured State-Chartered Financial Institutions.

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The regulatory agency’s assessment of the bank’s record is made available to the public.

Further, a bank’s performance must be considered in connection with a bank’s application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution.

Further, a bank’s performance must be

considered in connection with a bank’s application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution.

The Bank received a “satisfactory” rating during its most recent examination.

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

According to Washington law,

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

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

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

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

Privacy Standards.

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

Privacy Standards and Cybersecurity.

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers.

Federal banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors.

These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services.

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

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

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

In addition, on November 18, 2021, the federal banking agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents.

Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred.

Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector.

Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours.

Compliance with the new rule was required by May 1, 2022.

Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm.

Other Consumer Protection Laws and Regulations.

The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers.

While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing.

While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the

Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing.

These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services.

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This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank.

As a bank holding company, the Company is required to file quarterly reports with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular examinations by the Federal Reserve.

As a bank holding company, the Company is required to file semi-annual reports with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular examinations by the Federal Reserve.

The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries).

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

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

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

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

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

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

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

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

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

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If the Company were subject to regulatory guidelines for bank holding companies with $3.00 billion or more in assets, at September 30, 2022, the Company would have exceeded all regulatory requirements.

The following table presents the regulatory capital ratios for the Company as of September 30, 2021 (Dollars in thousands):

The following table presents for informational purposes the regulatory capital ratios for the Company as of September 30, 2022 (Dollars in thousands):

Leverage Capital Ratio:

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

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

as a registered company under the Exchange Act.

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

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

COVID-19 Legislation.

In response to the COVID-19 pandemic, Congress and the federal banking agencies, though legislation, rule making, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide national emergency economic relief measures including, among others, the CARES Act and CAA 2021.

As the on-going COVID-19 pandemic evolves, federal and state regulatory authorities continue to issue additional guidance with respect to COVID-19.

In addition, it is possible that Congress will enact additional COVID-19 response legislation in response to new COVID-19 variants.

We will continue to assess the impact of the CARES Act, CAA, 2021 and other statues, regulations and supervisory guidance related to the COVID-19 pandemic.

Federal Taxation

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federal tax examination by tax authorities for years ended on or before September 30, 2018.

For additional information regarding our federal income taxes, see Note 13-Income Taxes of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

Washington Taxation

The Company and the Bank are subject to a business and occupation tax imposed under Washington law at the rate of 1.8% of gross receipts at September 30, 2022.

In addition, various municipalities also assess business and occupation taxes at differing rates.

Interest received on loans secured by mortgages or deeds of trust on residential properties, certain residential mortgage-backed securities, and certain U.S.

government and agency securities is not subject to this tax.

The Bank operates in an intensely competitive market for the attraction of deposits (generally its primary source of lendable funds) and in the origination of loans.

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

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

government securities.

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

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

The Bank operates in an intensely competitive market for the attraction of deposits and in the origination of loans.

The Bank competes for loans and deposits with other commercial banks, thrift institutions, credit unions, mortgage bankers, and other providers of financial services, including finance companies, online-only banks, mutual funds, insurance companies, and more recently with financial technology companies that rely on technology to provide financial services.

Many of our competitors have substantially greater resources than we do.

Particularly in times of high or rising interest rates, the Bank also faces significant competition for investor's funds from short-term money market securities and other corporate and government securities.

The Bank competes for loans principally through the range and quality of services we provide, interest rates and loan fees, and robust delivery channels for our products and services.

The Bank actively solicits deposit-related clients and competes for deposits by offering depositors a variety of savings accounts, checking accounts, cash management and other services.

Subsidiary Activities

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

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

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

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

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The ethnicity of our workforce was 79% White, 8% Hispanic or Latinx, 4% two or more races, 4% Asian, 2% Native Hawaiian or Pacific Islander, 2% African American or Black and 1% American Indian or Alaska Native.

The Company's board of directors is comprised of the Company's Chief Executive Officer and seven non-employee directors, including four identified as female and one identified as a member of a minority community.

The Company provides competitive comprehensive benefits to its employees.

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

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

As of September 30, 2022, all banking branches are open with normal hours and substantially all employees have returned to their routine working environments.

The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines to support our employees and prioritize employee safety.

Training and education.

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

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

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

Executive Officers of the Registrant

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Name Company Bank

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

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

Sand 68 Chief Executive Officer Chief Executive Officer

Brydon 55 President and Chief Financial Officer President and Chief Financial Officer

Drugge 71 Executive Vice President of Lending Executive Vice President of Lending

Fischer 47 Executive Vice President and Chief Operating Officer

Executive Vice President and Chief Operating Officer

Fischer 48 Executive Vice President, Chief Operating Officer and Secretary Executive Vice President,Chief Operating Officer and Secretary

Foster 65 Executive Vice President and Chief Credit Administrator

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Biographical Information.

Sand has been affiliated with the Bank since 1977 and has served as President of the Bank and the Company since January 23, 2003.

On September 30, 2003, he was appointed as Chief Executive Officer of the Bank and Company.

Sand has been affiliated with the Bank since 1977 and has served as Chief Executive Officer of the Bank and the Company since September 30, 2003.

Sand had served as President of the Bank and the Company from January 23, 2003 through January 24, 2022.

Prior to appointment as President and Chief Executive Officer, Mr.

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

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

Brydon has been affiliated with the Bank since 1994 and has served as President of the Bank and the Company since January 24, 2022.

Brydon has served as the Chief Financial Officer of the Company and the Bank since January 2000.

Previously Mr.

Brydon had served as Secretary of the Company and the Bank from January 2004 to January 2022.

Brydon is a Certified Public Accountant.

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Fischer has been affiliated with the Bank since October 1997 and has served as Chief Operating Officer since August 23, 2012.

Fischer has served as Secretary of the Bank and the Company since January 2022.

Prior to that, Mr.

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

What changed 10-K

Item 1. Business