What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-12-09 compared with 2021-12-08 · 245 added, 389 removed, 1766 unchanged (26% of the section changed)

3 unchanged sentences

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm 74

Report of Independent Registered Public Accounting Firm (Delap LLP, Lake Oswego, Oregon, PCAOB ID:

Consolidated Balance Sheets as of September 30, 2022 and 2021 70

9 unchanged sentences

Report of Independent Registered Public Accounting Firm

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

To the Board of Directors and Shareholders of

Timberland Bancorp, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Timberland Bancorp, Inc.

and Subsidiary (collectively, "the Company") as of September 30, 2021 and 2020, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2021, and the related notes (collectively referred to as "the financial statements").

and Subsidiary (collectively, "the Company") as of September 30, 2022 and 2021, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2022, and the related notes (collectively, "the financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America (U.S.).

15 unchanged sentences

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

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

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

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

1 unchanged sentence

Critical Audit Matter Description

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

the extent they are both probable and reasonable to estimate.

As described in Notes 1 and 4 to the financial statements, the Company's allowance for loan losses (ALL) is a valuation account that reflects the estimated loan losses based on known and inherent risks in the loan portfolio

to the extent that they are both probable and reasonable to estimate.

The ALL was approximately $13,703,000 as of September 30, 2022, which consists of specific and general components in the amounts of $127,000 and $13,576,000, respectively.

6 unchanged sentences

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

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

(ii) national and local economic trends and conditions;

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

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

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

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

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

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

(1) lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;

(2) national and local economic trends and conditions;

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

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

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

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

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

(8) changes in the value of underlying collateral, and (9) other external factors such as competition and legal and regulatory requirements.

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

20 unchanged sentences

Total cash and cash equivalents 316,755 580,196

Certificates of deposit (“CDs”) held for investment (at cost, which

approximates fair value) 28,482 65,545

Certificates of deposit (“CDs”) held for investment, at cost 22,894 28,482

Investment securities held to maturity, at amortized cost (estimated fair value $ 249,783 and $ 70,109 )

41 unchanged sentences

Retained earnings 180,535 164,167

Accumulated other comprehensive income 59 61

Accumulated other comprehensive income (loss) ( 717 ) 59

Total shareholders’ equity 218,569 206,899

21 unchanged sentences

Non-interest income

Recoveries on investment securities 20 120 71

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

Net recoveries on investment securities 22 20 120

Gain on sales of investment securities, net — — 47

Service charges on deposits 3,964 3,911 4,147

3 unchanged sentences

Escrow fees 211 290 273

Servicing income on loans sold 7 193 466

Valuation recovery (allowance) on loan servicing rights, net 119 110 ( 221 )

Fee income from non-deposit investment sales 23 22 46

Other, net 975 1,245 1,921

40 unchanged sentences

Other comprehensive income (loss)

Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $( 2 ), $( 1 ), and $ 23 , respectively

Unrealized holding loss on investment securities available for sale, net of income taxes of $( 209 ), $( 2 ), and $( 1 ), respectively

( 781 ) ( 12 ) ( 3 )

2 unchanged sentences

( 1 ) 2 ( 3 )

Amount reclassified to credit loss for previously recorded

market loss, net of income taxes of $ 0 , $ 0 , and $ 3 , respectively

Accretion of OTTI on investment securities held to maturity, net of income taxes of $ 2 , $ 2 , and $ 4 , respectively

Total other comprehensive income (loss), net of income taxes

( 776 ) ( 2 ) 11

Total comprehensive income $ 22,824 $ 27,581 $ 24,280

5 unchanged sentences

Years Ended September 30, 2022, 2021 and 2020

Common Stock Unearned

Shares Issued to

Employee Stock Ownership Plan ("ESOP") Accumulated

Common Stock Accumulated

Comprehensive

6 unchanged sentences

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

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

Exercise of stock options 37,975 391 — — 391

1 unchanged sentence

— — ( 7,083 ) — ( 7,083 )

Earned ESOP shares, net of income taxes — 308 133 — — 441

Earned Employee Stock Ownership Plan ("ESOP") shares, net of income taxes — 31 — — 31

Stock option compensation expense — 182 — — 182

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

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

Net income — — 27,583 — 27,583

Other comprehensive income — — — — 11 11

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

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

2 unchanged sentences

— — ( 8,589 ) — ( 8,589 )

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

Stock option compensation expense — 173 — — 173

36 unchanged sentences

Stock option compensation expense 246 173 182

Gain on sales of investment securities — — ( 47 )

Net recoveries on investment securities ( 22 ) ( 20 ) ( 120 )

11 unchanged sentences

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

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

Increase (decrease) in deferred loan origination fees ( 822 ) ( 1,293 ) 3,637

Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses ( 1,081 ) ( 411 ) ( 1,168 )

( 411 ) ( 1,168 ) ( 3,476 )

Net cash provided by operating activities 26,500 29,635 33,856

Cash flows from investing activities

Net decrease (increase) in CDs held for investment 37,063 12,801 ( 12,083 )

Net decrease in CDs held for investment 5,588 37,063 12,801

Purchase of investment securities held to maturity ( 208,778 ) ( 53,049 ) ( 10,255 )

5 unchanged sentences

20,448 13,162 5,802

Proceeds from sale of investment securities held to maturity — — 2,937

Proceeds from sales of investment securities available for sale — — 2,332

Purchase of FHLB stock ( 91 ) ( 181 ) ( 485 )

3 unchanged sentences

Proceeds from sales/dispositions of premises and equipment — — 307

Proceeds from death benefit on BOLI — — 3,078

Cash acquired, net of cash consideration paid in business combination — — 14,284

Escrow deposit for business combination — — 6,900

Net cash provided by (used in) investing activities ( 335,162 ) 37,445 ( 154,668 )

24 unchanged sentences

Supplemental disclosure of non-cash investing activities

Loans transferred to OREO and other repossessed assets $ — $ — $ 293

Other comprehensive income (loss) related to investment securities $ ( 776 ) $ ( 2 ) $ 11

13 unchanged sentences

All significant intercompany transactions and balances have been eliminated in consolidation.

On October 1, 2018, the Company completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington ("South Sound Acquisition").

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.

See Note 2 for additional information on the South Sound Acquisition.

Nature of Operations

14 unchanged sentences

Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the FRB and the correspondent banks.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

CDs Held for Investment

4 unchanged sentences

The Company generally limits its purchases of CDs to a maximum of $250,000 (the FDIC insurance coverage limit) with any single financial institution.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Investment Securities

22 unchanged sentences

The Company's determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value.

The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared with the capital stock amount and the length of time any decline has persisted;

(2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB;

(3) the impact of legislative and regulatory changes on

institutions and, accordingly, the customer base of the FHLB;

(3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB;

and (4) the liquidity position of the FHLB.

Based on its evaluation, the Company determined that there was no impairment of FHLB stock at September 30, 2022 and 2021.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Other Investments

3 unchanged sentences

An investor can have its investment in the fund redeemed for the balance of its capital account at any quarter-end with a 60 day notice to the fund.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Loans Held for Sale

30 unchanged sentences

Any subsequent deterioration in credit quality is recognized by recording an allowance for loan losses.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Troubled Debt Restructured Loans

5 unchanged sentences

a reduction in the accrued interest;

or re-amortizations, extensions, deferrals and renewals.

or re-amortizations,

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

extensions, deferrals and renewals.

TDRs are considered impaired and are individually evaluated for impairment.

4 unchanged sentences

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

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

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

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

13 unchanged sentences

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

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

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

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement.

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

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

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

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

Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties.

In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals.

Accordingly, the amounts of any such

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2022 and 2021

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

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

In addition, as certain of

these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals.

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

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

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

1 unchanged sentence

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

The allowance for loan losses is allocated to

certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio.

The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio.

While management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.

23 unchanged sentences

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

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

Income from BOLI is recognized when earned.

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2022 and 2021

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

Income from BOLI is recognized when earned.

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

24 unchanged sentences

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

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

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

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

1 unchanged sentence

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

CDI is evaluated for impairment whenever

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

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2022 and 2021

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

Loan Servicing Rights

4 unchanged sentences

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

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

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

3 unchanged sentences

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

Operating Leases

The Company has only identified leases classified as operating leases.

Operating leases are recorded as ROU assets and ROU liabilities within operating lease assets and operating lease liabilities, respectively, in the consolidated balance sheet.

ROU assets represent the Company's right to use an underlying asset for the lease term and ROU liabilities represent the Company's obligation to make lease payments arising from the lease.

Operating lease ROU assets and ROU liabilities are recognized at the lease agreement commencement date based on the present value of lease payments over the lease term.

The lease term incorporates options to extend the lease when it is reasonably certain that the Company will exercise that option.

As the Company's leases typically do not provide an implicit rate;

the Company uses its incremental borrowing rate based on the information available at the operating lease commencement date in determining the present value of lease payments.

The operating lease ROU assets is further reduced by any lease pre-payments made and lease incentives.

The leases may contain various provisions for increases in rental rates based either on changes in the published Consumer Price Index or a predetermined escalation schedule and such variable lease payments are recognized as lease expense as they are incurred.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company excludes operating leases with a term of twelve months or less from being capitalized as ROU assets and ROU liabilities.

Transfers of Financial Assets

7 unchanged sentences

Valuation allowances are established to reduce the net recorded amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

With respect to accounting for uncertainty in incomes taxes, a tax provision is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.

4 unchanged sentences

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

The Bank sponsors a leveraged ESOP;

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

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

As shares were released from collateral, compensation expense was recorded equal to the average market price of the shares for the period, and the shares became available for net income per common share calculations.

Dividends paid on unallocated shares reduced the Company’s cash contributions to the ESOP.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Costs for advertising and marketing are expensed as incurred.

7 unchanged sentences

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

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

Related Party Transactions

2 unchanged sentences

Recent Accounting Pronouncements

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

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

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

7 unchanged sentences

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

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

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

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

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

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

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other:

1 unchanged sentence

This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test.

In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.

Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

An entity should recognize an impairment charge for the amount by

which the carrying amount exceeds the reporting unit's fair value;

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

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

In computing the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2022 and 2021

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

procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.

Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

An entity would then recognize an impairment charge for the amount by

which the carrying amount exceeds the reporting unit's fair value;

however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.

Additionally, an entity would consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

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

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

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

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement .

This ASU modifies the disclosure requirements for fair value measurements.

The following disclosure requirements were removed from ASC Topic 820, Fair Value Measurement :

(1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;

(2) the policy for timing of transfers between levels;

and (3) the valuation process for Level 3 fair value measurements.

This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

This ASU adds the following disclosure requirements for Level 3 measurements:

(1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

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

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

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

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

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

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

The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU.

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

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

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

1 unchanged sentence

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

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

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

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

ASU 2019-12 was effective for fiscal years beginning after December 15, 2020,

including interim periods within those fiscal years.

The Company adopted ASU 2019-12 effective October 1, 2021, and it did not have a material impact on the Company's consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

4 unchanged sentences

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Note 2 - Business Combination

On October 1, 2018, the Company completed the South Sound Acquisition.

The primary reason for the acquisition was to expand the Company's presence along Washington State's economically important I-5 corridor.

Pursuant to the terms of the merger agreement, South Sound Bank shareholders received 0.746 of a share of the Company's common stock and $ 5.68825 in cash per share of South Sound Bank common stock.

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

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

The Company was considered the acquirer in this transaction.

Accordingly, the estimated fair values of the acquired assets, including the identifiable intangible assets, and the assumed liabilities in the South Sound Acquisition were measured and recorded as of October 1, 2018.

The excess of the total consideration paid over the fair value of the net assets acquired was allocated to goodwill.

The South Sound Acquisition resulted in $ 9,481,000 of goodwill.

The goodwill arising from this transaction consists largely of the synergies and expected economies of scale from combining the operations of the Company and South Sound Bank.

This goodwill is not deductible for tax purposes.

In most instances, determining the estimated fair values of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest.

Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as estimated credit losses, prepayments or early withdrawal, and other factors.

One of the most significant of those determinations relates to the valuation of acquired loans.

For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans.

In accordance with GAAP, there was no carry-over of South Sound Bank's previously established allowance for loan losses.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The following table summarizes the fair value of consideration paid, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction:

At October 1, 2018

Book Value Fair Value Adjustment Estimated Fair Value

(Dollars in thousands)

Total acquisition consideration $ 35,170

Recognized amounts of identifiable assets acquired and liabilities assumed

Identifiable assets acquired:

Cash and cash equivalents

$ 21,187 $ — 21,187

CDs held for investment

2,973 — 2,973

Investment securities held to maturity

19,891 ( 189 ) 19,702

Investment securities available for sale

5,022 — 5,022

Loans receivable

123,627 ( 2,083 ) 121,544

Premises and equipment

3,225 112 3,337

Accrued interest receivable

2,629 — 2,629

— 2,483 2,483

Loan servicing rights 285 ( 4 ) 281

1,087 ( 511 ) 576

180,710 ( 192 ) 180,518

Liabilities assumed:

151,378 160 151,538

Other liabilities and accrued expenses

3,291 — 3,291

Total liabilities assumed

154,669 160 154,829

Total identifiable net assets acquired

$ 26,041 $ ( 352 ) 25,689

Goodwill recognized

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

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

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

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

During the year ended September 30, 2020, the Company incurred acquisition-related expenses of $ 2,000 related to the South Sound Acquisition.

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

professional fees in the accompanying 2019 consolidated statement of income.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures.

The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) for creditors, require new disclosures for creditors for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty, and require public business entities to include current-period gross write-offs in the vintage disclosure tables.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The adoption of ASU 2022-02 is not expected to have a material impact on the Company's future consolidated financial statements.

Note 2 - Restricted Assets

Federal Reserve regulations require that the Bank maintain certain minimum reserve balances on hand or on deposit with the FRB, based on a percentage of transaction account deposits.

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

Currently, the FRB has not announced plans to re-impose a reserve requirement;

however, the FRB may adjust reserve requirement ratios at its sole discretion.

Notes to Consolidated Financial Statements

2 unchanged sentences

September 30, 2022 and 2021

Note 3 - Restricted Assets

Federal Reserve regulations require that the Bank maintain certain minimum reserve balances on hand or on deposit with the FRB, based on a percentage of transaction account deposits.

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

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

Note 3 - Investment Securities

8 unchanged sentences

Private label residential 49,335 245 ( 2,392 ) 47,188

Taxable municipal securities 2,102 — ( 67 ) 2,035

Bank issued trust preferred securities 500 — ( 31 ) 469

5 unchanged sentences

Held to Maturity

Treasury and U.S.

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

government agencies 25,913 936 ( 122 ) 26,727

20 unchanged sentences

35,447 ( 2,166 ) 27 8,708 ( 226 ) 6 44,155 ( 2,392 )

Taxable municipal securities 2,035 ( 67 ) 1 — — — 2,035 ( 67 )

Bank issued trust preferred securities 469 ( 31 ) 1 — — — 469 ( 31 )

$ 189,351 $ ( 10,937 ) 100 $ 47,652 $ ( 6,148 ) 20 $ 237,003 $ ( 17,085 )

8 unchanged sentences

Held to Maturity

Treasury and U.S.

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

government agencies

2 unchanged sentences

9,712 ( 23 ) 4 1 — 1 9,713 ( 23 )

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

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

32 unchanged sentences

Loss severity rate — % 11.27 % 2.87 %

The following table presents the OTTI recoveries for the years ended September 30, 2021, 2020 and 2019 (dollars in thousands):

2021 2020 2019

Maturity Held To

Maturity Held To Maturity

Total recoveries $ 20 $ 120 $ 71

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

Net recoveries recognized in earnings (2)

$ 20 $ 120 $ 59

________________________

(1) Represents OTTI related to all other factors.

(2) Represents OTTI related to credit losses.

Notes to Consolidated Financial Statements

5 unchanged sentences

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

Additional increases to the amount

related to credit loss for which OTTI

Additional increases to the amount related to credit losses for which OTTI

was previously recognized — 2 3

Subtractions:

Realized losses previously recorded

Net realized gain (losses) previously recorded

as credit losses

2 unchanged sentences

Balance, end of year $ 836 $ 853 $ 885

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

During the year ended September 30, 2022, the Company recorded a $ 1,000 net realized gain on sixteen held to maturity investment securities, all of which had been recognized previously as a credit loss.

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

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

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

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits and FHLB collateral totaled $ 133,824,000 and $ 97,602,000 at September 30, 2022 and 2021, respectively.

36 unchanged sentences

SBA Paycheck Protection Program ("PPP") 1,001 40,922

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

Total commercial loans 126,040 115,501

Total loans receivable

10 unchanged sentences

The real estate loan portfolio is primarily secured by one- to four-family properties, multi-family properties, land, and a variety of commercial real estate property types.

At September 30, 2021, there were no concentrations of real estate loans to a specific industry or secured by a specific collateral type that equaled or exceeded 20 % of the Company’s total loan portfolio, other than loans secured by one-to four-

family properties.

At September 30, 2022, there were no concentrations of real estate loans to a specific industry or secured by a specific collateral type that equaled or exceeded 20 % of the Company’s total loan portfolio, other than loans secured by one-to four-family properties.

The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions in the region and the impact of those changes on the real estate market.

77 unchanged sentences

Commercial Business Lending:

The Company originates commercial business loans which, excluding SBA PPP loans, are generally secured by business equipment, accounts receivable, inventory or other property.

The Company originates commercial business loans which, excluding SBA PPP loans, are generally secured by business equipment, accounts receivable, inventory and/or other property.

The Company also generally obtains personal guarantees from the business owners based on a review of personal financial statements.

1 unchanged sentence

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

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

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

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

10 unchanged sentences

PPP loans have:

(a) an interest rate of 1%, (b) a two-year loan term to maturity for loans approved by the SBA prior to June 5, 2020 (unless the borrower and the Company mutually agree to extend the term of the loan to five years) and a five-year maturity for loans approved thereafter;

and (c) principal and interest payments deferred for at least six months from the date of disbursement.

(1) an interest rate of 1%, (2) a two-year loan term to maturity for loans approved by the SBA prior to June 5, 2020 (unless the borrower and the Company mutually agree to extend the term of the loan to five years) and a five-year maturity for loans approved thereafter;

and (3) principal and interest payments deferred for at least six months from the date of disbursement.

All PPP loans needed to be issued by January 1, 2022.

Allowance for Loan Losses

289 unchanged sentences

With an allowance recorded:

Mortgage loans:

One- to four-family — — — 97 — —

Land 362 362 76 72 — —

Consumer loans:

Home equity and second mortgage — — — 145 — —

Commercial business loans 250 250 127 268 — —

36 unchanged sentences

Consumer loans:

Other — — — 7 — —

Commercial business loans 294 294 171 285 — —

28 unchanged sentences

Home equity and second mortgage 555 555 — 581 — —

Other 9 9 — 6 — —

Commercial business loans 182 182 — 176 — —

2 unchanged sentences

Mortgage loans:

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

Land — — — 110 — —

17 unchanged sentences

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

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

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

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

The majority of these borrowers had resumed making payments as of September 30, 2021, and only one loan with a balance of $ 323,000 remained on deferral status under COVID-19 loan modification forbearance agreements as of that date.

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

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

COVID-19 Loan Modifications

Mortgage loans Number Balance Percent

One- to four-family 1 $ 323 100.0 %

Total COVID-19 modifications 1 $ 323 100.0 %

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

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

Among other purposes, the CAA 2021, provided coronavirus emergency response and relief, including extending relief offered under the CARES Act related to restructured loans as a result of COVID-19.

The provisions ended on January 1, 2022.

In response to requests from borrowers and in accordance with the CARES Act and related regulatory guidance, the Company made payment deferral COVID-19 related modifications (typically 90-day payment deferrals with interest continuing to accrue or scheduled to be paid monthly) on a number of loans.

All of these borrowers had resumed making payments as of September 30, 2022.

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

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

2 unchanged sentences

One- to four-family 1 $ 323 100.0 %

Commercial 2 3,951 67.2

Construction 1 1,402 23.9

Total mortgage loans 4 5,820 99.1

Consumer loans

Home equity and second mortgage 1 50 0.9

Total consumer loans 1 50 0.9

Total COVID-19 modifications 1 $ 323 100.0 %

1 unchanged sentence

The Company had $ 2,553,000 in TDRs included in impaired loans at September 30, 2021 and had no commitments to lend additional funds on these loans.

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

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

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

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of September 30, 2022 and 2021 (dollars in thousands):

2 unchanged sentences

Commercial $ 2,330 $ — $ 2,330

Land — 119 119

Consumer loans:

1 unchanged sentence

$ 2,472 $ 143 $ 2,615

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Accruing Non-Accrual Total

Mortgage loans:

One- to four-family $ 483 $ — $ 483

Commercial $ 2,371 $ — $ 2,371

3 unchanged sentences

$ 2,371 $ 182 $ 2,553

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

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

There was one new TDR recognized during the year ended September 30, 2022.

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

The following table sets forth information with respect to the Company's TDRs, by portfolio segment, added during the year ended September 30, 2022:

5 unchanged sentences

Total 1 $ 136 $ 145 $ 142

(1) Modification resulted in an extension of maturity and deferral of accrued interest.

There were no TDRs for which there was a payment default within the first 12 months of modification during the years ended September 30, 2022, 2021 or 2020.

9 unchanged sentences

Premises and equipment, net $ 21,898 $ 22,367

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Note 6 – OREO and Other Repossessed Assets

3 unchanged sentences

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

Writedowns — — ( 173 ) —

Sales ( 157 ) ( 1 ) ( 893 ) ( 3 )

3 unchanged sentences

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

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

At September 30, 2022, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession, and there were no one- to four-family properties in the process of foreclosure.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Note 7 - Goodwill and CDI

There were no changes to the recorded amount of goodwill for both years ended September 30, 2022 and 2021.

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

The CDI amortization expense totaled $ 316,000 , $ 361,000 and $ 406,000 for the years ended September 30, 2022, 2021 and 2020, respectively.

1 unchanged sentence

Thereafter 45

Total $ 1,264

Note 8 - Loan Servicing Rights

1 unchanged sentence

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

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

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

The principal amount of loans serviced for Freddie Mac at September 30, 2022, 2021 and 2020 was $ 406,727,000 , $ 419,675,000 and $ 418,559,000 , respectively.

The guaranteed principal amount of SBA loans serviced for others at September 30, 2022, 2021 and 2020 was $ 3,560,000 , $ 6,761,000 and $ 8,022,000 , respectively.

7 unchanged sentences

At September 30, 2022, 2021 and 2020, the estimated fair value of Freddie Mac servicing rights totaled $ 5,547,000 , $ 3,656,000 and $ 3,120,000 , respectively.

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

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

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

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

The Freddie Mac servicing rights' fair values at September 30, 2022, 2021 and 2020 were estimated using discounted cash flow analyses with an average discount rates of 9.50 %, 9.00 % and 9.00 %, and average conditional prepayment rates of 6.31 %, 12.71 % and 14.42 %, respectively .

At September 30, 2022, there was no valuation allowance.

At September 30, 2021 and 2020, there was a valuation allowance of $ 119,000 and $ 211,000 , respectively.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

The following is an analysis of the changes in SBA loan servicing rights for the years ended September 30, 2022, 2021 and 2020 (dollars in thousands):

1 unchanged sentence

Balance, beginning of year $ 44 $ 115 $ 202

Additions due to South Sound Acquisition — — 285

Other additions — — 13

Amortization ( 41 ) ( 89 ) ( 90 )

Valuation allowance - South Sound Acquisition — — ( 4 )

Valuation recovery (allowance) — 18 ( 10 )

Balance, end of year $ 3 $ 44 $ 115

At September 30, 2022, SBA servicing rights were insignificant.

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

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

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

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

There was no valuation allowance on SBA servicing rights at September 30, 2022 and 2021.

Note 9 - Leases

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

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

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

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

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

At September 30, 2022, the Company has operating leases for two retail bank branch offices.

The Company's leases have remaining lease terms of four to nine years , both of which include options to extend the leases for up to five years .

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

The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the years ended September 30, 2022, 2021 and 2020 (dollars in thousands):

2022 2021 2020

Operating lease cost $ 371 $ 395 $ 377

1 unchanged sentence

Total lease cost $ 371 $ 395 $ 377

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

The following table provides supplemental information related to operating leases at or for the years ended September 30, 2022, 2021 and 2020 (dollars in thousands):

2022 2021 2020

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

Operating cash flows from operating leases $ 342 $ 327 $ 318

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

Weighted average remaining lease term-operating leases 7.67 yrs 8.44 yrs 9.24 yrs

Weighted average discount rate-operating leases 2.25 % 2.24 % 2.22 %

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

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

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

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

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

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Maturities of operating lease liabilities at September 30, 2022 for the five fiscal years ending subsequent to September 30, 2022 and thereafter, are as follows (dollars in thousands):

Thereafter 819

10 unchanged sentences

Total $ 1,632,176 $ 1,570,555

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Individual certificates of deposit in amounts of $250,000 or greater totaled $ 21,830,000 and $ 21,781,000 at September 30, 2022 and 2021, respectively.

2 unchanged sentences

2023 $ 76,311

Thereafter 70

Total $ 122,584

6 unchanged sentences

Total $ 2,657 $ 3,013 $ 4,635

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Note 11 – FHLB Borrowings and Other Borrowings

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

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

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

At September 30, 2022, the Bank had a borrowing capacity of $ 492,289,000 .

The Bank had no long-term or short-term FHLB borrowings outstanding at September 30, 2022.

The Bank had $ 5,000,000 in FHLB borrowings outstanding at September 30, 2021.

12 unchanged sentences

Total other liabilities and accrued expenses $ 7,697 $ 7,367

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Note 13 - Income Taxes

4 unchanged sentences

Provision for income taxes $ 5,962 $ 6,845 $ 6,038

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

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

At September 30, 2022 and 2021, the Company had income taxes payable of $ 332,000 and $ 42,000 , which is included in other liabilities and accrued expenses in the accompanying consolidated balance sheets.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

The components of the Company’s deferred tax assets and liabilities at September 30, 2022 and 2021 were as follows (dollars in thousands):

7 unchanged sentences

Operating lease liabilities 434 495

Net unrealized losses on investment securities and investments in equity securities 190 —

Total deferred tax assets 4,022 3,712

11 unchanged sentences

Net deferred tax liabilities $ ( 127 ) $ ( 510 )

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

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

No valuation allowance for deferred tax assets was recorded as of September 30, 2022 and 2021, as management believes that it is more likely than not that all of the deferred tax assets will be realized based on management's expectations of future taxable income.

The provision for income taxes for the years ended September 30, 2022, 2021 and 2020 differs from that computed at the federal statutory corporate tax rate as follows (dollars in thousands):

6 unchanged sentences

Provision for income taxes $ 5,962 $ 6,845 $ 6,038

No valuation allowance for deferred tax assets was recorded as of September 30, 2021 and 2020, as management believes that it is more likely than not that all of the deferred tax assets will be realized based on management's expectations of future taxable income.

Note 14 - Employee Stock Ownership and 401(k) Plan

1 unchanged sentence

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

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

may fund the ESOP with contributions of cash or stock, which are made at the discretion of the Board, and may fund the 401(k) Plan with contributions of cash.

Employee vesting occurs over six years .

1 unchanged sentence

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

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

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

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

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

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

As of September 30, 2022, an aggregate of 685,441 ESOP shares, which were previously released for allocation to participants, had been distributed to participants.

1 unchanged sentence

There was no compensation expense recognized for the ESOP for the years ended September 30, 2022, 2021 and 2020.

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

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

4 unchanged sentences

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

Under the Company's 2019 Equity Incentive Plan the

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

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

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

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

1 unchanged sentence

Generally, options and restricted stock vest in 20 % annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of the grant.

At September 30, 2021, there were 17,926 shares of common stock available which may be awarded as options or restricted stock pursuant to future grants under the 2014 Equity Incentive Plan.

At September 30, 2021, there were 231,000 shares of common stock available which may be awarded as options or restricted stock pursuant to future grants under the 2019 Equity Incentive Plan.

At September 30, 2022, there were 396 and 196,700 shares of common stock available which may be awarded as options or restricted stock pursuant to future grants under the 2014 and 2019 Equity Incentive Plans, respectively.

At both September 30, 2022 and 2021, there were no unvested restricted stock awards.

There were no restricted stock grants awarded during the years ended September 30, 2022, 2021 and 2020.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Stock option activity for the years ended September 30, 2022, 2021 and 2020 is summarized as follows:

24 unchanged sentences

There were 74,000 options granted during the year ended September 30, 2022 with an aggregate grant date fair value of $ 508,000 .

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The weighted average assumptions for options granted during the years ended September 30, 2022, 2021 and 2020 were as follows:

11 unchanged sentences

At September 30, 2021, there were 187,664 unvested options with an aggregate grant date fair value of $ 892,000 .

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Additional information regarding options outstanding at September 30, 2022 is as follows:

11 unchanged sentences

421,925 $ 23.30 6.8 230,015 $ 21.25 5.0

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

The aggregate intrinsic value of options outstanding at September 30, 2022, 2021 and 2020 was $ 2,130,000 , $ 3,119,000 , and $ 1,416,000 , respectively.

6 unchanged sentences

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

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

13 unchanged sentences

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

The Bank has an employee severance compensation plan which expires in 2027 and which provides severance pay benefits to eligible employees in the event of a change in control of Timberland Bancorp or the Bank (as defined in the plan).

2 unchanged sentences

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

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

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

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

7 unchanged sentences

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

In addition to the minimum regulatory capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

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

At September 30, 2022, the Bank's CET1 capital exceeded the required capital conservation buffer.

7 unchanged sentences

Risk-based Capital Ratios:

Common equity Tier 1 capital 188,512 20.6 41,257 4.5 59,593 6.5

CET1 202,438 18.0 50,551 4.5 73,018 6.5

Tier 1 capital 202,438 18.0 67,402 6.0 89,869 8.0

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

September 30, 2021

2 unchanged sentences

Risk-based Capital Ratios:

Common equity Tier 1 capital 168,937 19.7 38,504 4.5 55,618 6.5

CET1 188,512 20.6 41,257 4.5 59,593 6.5

Tier 1 capital 188,512 20.6 55,009 6.0 73,345 8.0

4 unchanged sentences

If Timberland Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at September 30, 2022, Timberland Bancorp would have exceeded all regulatory requirements.

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

The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp at September 30, 2022 and 2021 assuming that Timberland Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets (dollars in thousands):

Amount Ratio Amount Ratio

2 unchanged sentences

Risk-based Capital Ratios:

Common equity Tier 1 capital 191,973 20.9 172,000 20.1

CET1 204,659 18.2 191,973 20.9

Tier 1 capital 204,659 18.2 191,973 20.9

Total capital 218,667 19.5 203,475 22.2

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Note 18 - Condensed Financial Information - Parent Company Only

13 unchanged sentences

Total liabilities and shareholders’ equity $ 218,614 $ 206,979

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Condensed Statements of Income - Years Ended September 30, 2022, 2021 and 2020

3 unchanged sentences

Interest on deposits in banks $ 3 $ 5 $ 26

Interest on loan receivable from ESOP — — 9

Interest on investment securities 24 24 5

8 unchanged sentences

Net income $ 23,600 $ 27,583 $ 24,269

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Condensed Statements of Cash Flows - Years Ended September 30, 2022, 2021 and 2020

13 unchanged sentences

Purchase of investment securities held to maturity — — ( 500 )

Principal repayments on loan receivable from ESOP — — 285

Cash acquired, net of cash consideration paid in business combination — — 14,284

Net cash used in investing activities ( 202 ) ( 149 ) ( 687 )

8 unchanged sentences

End of year $ 1,710 $ 2,932 $ 2,633

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Note 19 - Net Income Per Common Share

11 unchanged sentences

Diluted net income per common share $ 2.82 $ 3.27 $ 2.88

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

______________

11 unchanged sentences

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

Other comprehensive income 85 31 116

Adoption of ASU 2016-01 $ 63 $ — $ 63

Other comprehensive income (loss) ( 3 ) 14 11

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

1 unchanged sentence

[1] All amounts are net of income taxes.

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

Note 21 - Fair Value Measurements

7 unchanged sentences

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

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

23 unchanged sentences

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

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

In some cases, adjustments are made to the appraised

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral.

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

8 unchanged sentences

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2022 (dollars in thousands):

2 unchanged sentences

Level 1 Level 2 Level 3

Mortgage loans:

Land $ — $ — $ 286

Commercial business loans

$ — $ — $ 123

Total impaired loans — — 123

Investment securities – held to maturity:

MBS - Private label residential — 10 —

OREO and other repossessed assets — — 157

Total $ — $ — $ 123

3 unchanged sentences

Impaired loans $ 123 Market approach Appraised value less estimated selling costs NA

OREO and other repossessed assets 157 Market approach Lower of appraised value or

listing price less estimated selling costs NA

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

3 unchanged sentences

Mortgage loans:

One- to four-family $ — $ — $ 481

Land $ — $ — $ 286

Commercial business loans — — 123

4 unchanged sentences

Total $ — $ 10 $ 566

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2021 (dollars in thousands):

3 unchanged sentences

listing price less estimated selling costs NA

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

GAAP requires disclosure of estimated fair values for financial instruments.

23 unchanged sentences

Accrued interest payable 108 108 108 — —

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

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

15 unchanged sentences

Accrued interest payable 137 134 134 — —

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

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

1 unchanged sentence

Management attempts to match maturities of assets and liabilities to the extent believed necessary to appropriately manage interest rate risk.

However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling

interest rate environment.

However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling interest rate environment.

Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment.

9 unchanged sentences

Net interest income 16,263 13,982 12,893 12,696

Provision for loan losses 270 — — —

Non-interest income 2,997 3,102 3,083 3,442

6 unchanged sentences

Diluted $ 0.85 $ 0.69 $ 0.63 $ 0.65

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

September 30,

5 unchanged sentences

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

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

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

8 unchanged sentences

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2021 and 2020

Note 23 - Revenue from Contracts with Customers

13 unchanged sentences

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

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

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

For the year ended September 30, 2022, the Company recognized $ 3,964,000 in service charges on deposits, $ 5,210,000 in ATM and debit card interchange transaction fees, $ 211,000 in escrow fees and $ 27,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

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

Notes to Consolidated Financial Statements

Timberland Bancorp, Inc.

and Subsidiary

September 30, 2022 and 2021

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

16 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data