TIMBERLAND BANCORP INC 10-K

Item 1. Business General Timberland Bancorp, Inc. (“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, 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. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank and its subsidiary, Timberland Service Corp. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 23 branches (including its main office in Hoquiam). The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank has been a member of the Federal Home Loan Bank System since 1937. The Bank is regulated by the Washington Department of Financial Institutions, Division of Banks (“Division” or “DFI”) and the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve System ("Federal Reserve"). 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. 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. Lending activities have been focused primarily on the origination of loans secured by real estate, including residential and commercial / multi-family construction loans, one- to four-family residential loans, multi-family loans, commercial real estate loans and land loans. The Bank originates adjustable-rate residential mortgage loans that do not qualify for sale in the secondary market. The Bank also originates commercial business loans and other consumer loans. The Company maintains a website at www.timberlandbank.com . The information contained on that website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. 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”). Market Area The Bank considers Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis counties, Washington as its primary market areas. The Bank conducts operations from: • its main office in Hoquiam (Grays Harbor County); • five branch offices in Grays Harbor County (Ocean Shores, Montesano, Elma and two branches in Aberdeen); • five branch offices in Pierce County (Edgewood, Puyallup, Spanaway, Tacoma and Gig Harbor); • 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); • a branch office in King County (Auburn); and 4 • three branch offices in Lewis County (Winlock, Toledo and Chehalis). For additional information, see “Item 2. Properties.” Hoquiam, with a population of approximately 8,900, is located in Grays Harbor County which is situated along Washington State’s central Pacific coast. Hoquiam is located approximately 110 miles southwest of Seattle, Washington and 145 miles northwest of Portland, Oregon. The Bank considers its primary market area to include six sub-markets: primarily rural Grays Harbor County with its historical dependence on the timber and fishing industries; Thurston and Kitsap counties with their dependence on state and federal government; Pierce and King counties with their broadly diversified economic bases; and Lewis County with its dependence on retail trade, manufacturing, industrial services and local government. Each of these markets presents operating risks to the Bank. The Bank’s expansion into Pierce, Thurston, Kitsap, King and Lewis counties represents the Bank’s strategy to expand and diversify its primary market area to become less reliant on the economy of Grays Harbor County. Grays Harbor County has a population of 77,000 according to the United States ("U.S.") Census Bureau 2022 estimates and a median family income of $79,600 according to 2022 estimates from the Department of Housing and Urban Development (“HUD”). The economic base in Grays Harbor County has been historically dependent on the timber and fishing industries. Other industries that support the economic base are tourism, agriculture, shipping, transportation and technology. According to the Washington State Employment Security Department, the unemployment rate in Grays Harbor County increased to 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. Pierce County is the second most populous county in the state and has a population of 926,000 according to the U.S. Census Bureau 2022 estimates. The county’s median family income is $101,800 according to 2022 HUD estimates. The economy in Pierce County is diversified with the presence of military related government employment (Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace related employment. According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area increased to 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. Thurston County has a population of 298,000 according to the U.S. Census Bureau 2022 estimates and a median family income of $103,500 according to 2022 HUD estimates. Thurston County is home of Washington State’s capital (Olympia), and its economic base is largely driven by state government related employment. According to the Washington State Employment Security Department, the unemployment rate for the Thurston County area increased to 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. Kitsap County has a population of 274,000 according to the U.S. Census Bureau 2022 estimates and a median family income of $102,500 according to 2022 HUD estimates. The Bank has two branches located in Kitsap County. The economic base of Kitsap County is largely supported by military related government employment through the U.S. Navy. 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. Census Bureau 2022 estimates. The Bank has one branch located in King County. The county’s median family income is $134,600 according to 2022 HUD estimates. 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 2.9% at September 30, 2022 from 4.3% at 5 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. Census Bureau 2022 estimates and a median family income of $79,600 according to 2022 HUD estimates. The economic base in Lewis County is supported by manufacturing, retail trade, local government and industrial services. According to the Washington State Employment Security Department, the unemployment rate in Lewis County increased to 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. Lending Activities General. 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 $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; however, they also present a higher degree of risk. The Bank’s internal loan policy limits the maximum amount of loans to one borrower to 20% of its capital plus surplus. According to the Washington Administrative Code, capital and surplus are defined as a bank's Tier 1 capital, Tier 2 capital and the balance of a bank's allowance for loan losses not included in the bank's Tier 2 capital as reported in the bank's call report. 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, 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). These loans were secured by multi-family, one- to four-family and commercial real estate properties located primarily in Thurston County and were performing according to their loan repayment terms at September 30, 2022. 6 Loan Portfolio Analysis. The following table sets forth the composition of the Bank’s loan portfolio by type of loan at the dates indicated. At September 30, 2022 2021 2020 Amount Percent Amount Percent Amount Percent (Dollars in thousands) Mortgage Loans: One- to four-family (1) $ 176,116 14.05 % $ 119,935 11.08 % $ 118,580 10.46 % Multi-family 95,025 7.58 87,563 8.09 85,053 7.50 Commercial 536,650 42.81 470,650 43.49 453,574 39.99 Construction - custom and owner/builder 119,240 9.51 109,152 10.08 129,572 11.42 Construction - speculative one- to four-family 12,254 0.98 17,813 1.65 14,592 1.29 Construction - commercial 40,364 3.22 43,365 4.01 33,144 2.92 Construction - multi-family 64,480 5.14 52,071 4.81 34,476 3.04 Construction - land development 19,280 1.54 10,804 1.00 7,712 0.68 Land 26,854 2.14 19,936 1.84 25,571 2.25 Total mortgage loans 1,090,263 86.97 931,289 86.05 902,274 79.55 Consumer Loans: Home equity and second mortgage 35,187 2.81 32,988 3.05 32,077 2.83 Other 2,128 0.17 2,512 0.23 3,572 0.31 Total consumer loans 37,315 2.98 35,500 3.28 35,649 3.14 Commercial Loans: Commercial business 125,039 9.97 74,579 6.89 69,540 6.13 U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") 1,001 0.08 40,922 3.78 126,820 11.18 Total commercial business and SBA PPP loans 126,040 10.05 115,501 10.67 196,360 17.31 Total loans receivable 1,253,618 100.00 % 1,082,290 100.00 % 1,134,283 100.00 % Less: Undisbursed portion of construction loans in process (103,168) (95,224) (100,558) Deferred loan origination fees, net (4,321) (5,143) (6,436) Allowance for loan losses (13,703) (13,469) (13,414) Total loans receivable, net $ 1,132,426 $ 968,454 $ 1,013,875 ___________ (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. Residential One- to Four-Family Lending . At September 30, 2022, $176.12 million, or 14.0%, of the Bank’s loan portfolio consisted of loans secured by one- to four-family residences. The Bank originates both fixed-rate loans and adjustable-rate loans. Generally, one- to four-family fixed-rate loans are originated to meet the requirements for sale in the secondary market to the Federal Home Loan Mortgage Corporation ("Freddie Mac") or the Federal Home Loan Bank of Des Moines ("FHLB"). From time to time, however, a portion of these fixed-rate loans may be retained in the loan portfolio to meet the Bank’s asset/liability management objectives. The Bank uses an automated underwriting program, which preliminarily qualifies a loan as conforming to Freddie Mac underwriting standards when the loan is originated. At September 30, 2022, $82.25 million, or 46.7%, of the Bank’s one- to four-family loan portfolio consisted of fixed-rate mortgage loans. 7 The Bank also offers adjustable-rate mortgage (“ARM”) loans. All of the Bank’s ARM loans are retained in its loan portfolio. The Bank offers several ARM products which adjust annually or every three to five years after an initial period ranging from one to five years and are typically subject to a limitation on the annual interest rate increase of 2% and an overall limitation of 6%. These ARM products generally are re-priced utilizing the weekly average yield on one-year U.S. Treasury securities adjusted to a constant maturity of one year plus a margin o f 2.75% to 4.00%. The Bank also offers ARM loans tied to the Wall Street Journal prime lending rate ("Prime Rate") index which typically do not have periodic or lifetime adjustment limits. Loans tied to the Prime Rate normally have margins ranging up to 3.0 % . ARM loans held in the Bank’s portfolio do not permit negative amortization of principal. Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment. At September 30, 2022, $93.87 million, or 53.3%, of the Bank’s one- to four- family loan portfolio consisted of ARM loans. A portion of the Bank’s ARM loans are “non-conforming,” because they do not satisfy acreage limits or various other requirements imposed by Freddie Mac. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Freddie Mac credit requirements because of personal and financial reasons (i.e., divorce, bankruptcy, length of time employed, etc.), and other aspects, which do not conform to Freddie Mac’s guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. These loans are known as non-conforming loans, and the Bank may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. The Bank believes that these loans satisfy a need in its local market area. As a result, subject to market conditions, the Bank intends to continue to originate these types of loans. The retention of ARM loans in the Bank’s loan portfolio helps reduce the Bank’s exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased interest to be paid by the customer as a result of increases in interest rates. It is possible that during periods of rising interest rates, the risk of default on ARM loans may increase as a result of repricing and the increased costs to the borrower. The Bank attempts to reduce the potential for delinquencies and defaults on ARM loans by qualifying the borrower based on the borrower’s ability to repay the ARM loan assuming a 2.0% increase in the initial interest rate. Another consideration is that although ARM loans allow the Bank to increase the sensitivity of its asset base due to changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, the Bank has no assurance that yield increases on ARM loans will be sufficient to offset increases in the Bank’s cost of funds. While fixed-rate, single-family residential mortgage loans are normally originated with 15 to 30 year terms to maturity, these loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all mortgage loans in the Bank’s loan portfolio contain due-on-sale clauses providing that the Bank may declare the unpaid amount due and payable upon the sale of the property securing the loan. Typically, the Bank enforces these due-on-sale clauses to the extent permitted by law and as business judgment dictates. Thus, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates received on outstanding loans. The Bank requires that fire and extended coverage casualty insurance be maintained on the collateral for all of its real estate secured loans and flood insurance, if appropriate. The Bank’s lending policies generally limit the maximum loan-to-value ratio on mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or the purchase price. 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). At September 30, 2022, two one- to four-family loans totaling $388,000 were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.” Multi-Family Lending. At September 30, 2022, $95.03 million, or 7.6%, of the Bank’s total loan portfolio was secured by multi-family dwelling units (more than four units) located primarily in the Bank’s primary market area. Multi-family loans are generally originated with variable rates of interest ranging from 1.00% to 3.50 % over the one-year constant maturity U.S. 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, 2022, the Bank’s largest multi-family loan had an outstanding 8 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. The maximum loan-to-value ratio for multi-family loans is generally limited to not more than 80%. The Bank generally requests its multi-family loan borrowers with loan balances in excess of $750,000 to submit financial statements and rent rolls annually on the properties securing such loans. The Bank also inspects such properties annually. The Bank generally imposes a minimum debt coverage ratio of 1.20 for loans secured by multi-family properties. Multi-family mortgage lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four- family residential lending. However, loans secured by multi-family properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, may involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. If the borrower is other than an individual, the Bank also generally obtains personal guarantees from the principals (with ownership interests of 20% or more) based on a review of personal financial statements. At September 30, 2022, all multi-family loans were performing according to their repayment terms. See "Lending Activities - Non-performing Loans and Delinquencies." Commercial Real Estate Lending . Commercial real estate loans totaled $536.65 million, or 42.8%, of the total loan portfolio at September 30, 2022. 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, 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.” The Bank typically requires appraisals of properties securing commercial real estate loans. For loans that are less than $250,000, the Bank may use an evaluation provided by a third-party vendor in lieu of an appraisal. Appraisals are performed by independent appraisers designated by the Bank. The Bank considers the quality and location of the real estate, the credit history of the borrower, the cash flow of the project and the quality of management involved with the property when making these loans. The Bank generally imposes a minimum debt coverage ratio of approximately 1.20 for loans secured by income producing commercial properties. Loan-to-value ratios on commercial real estate loans are generally limited to not more than 80%. If the borrower is other than an individual, the Bank also generally obtains personal guarantees from the principals (with ownership interests of 20% or more) based on a review of personal financial statements. Commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by generally limiting the maximum loan-to-value ratio to 80% and scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Bank also generally requests annual financial information and rent rolls on the subject property from the borrowers on loans over $750,000. Construction Lending. The Bank currently originates two types of residential construction loans: (i) custom construction and owner/builder construction loans and (ii) speculative construction loans. 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'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. At September 30, 2022, the Bank's construction loans totaled $255.62 million, or 20.4% of the Bank's total loan portfolio, including undisbursed loans in process of $103.17 million. All construction loans were performing according to their repayment terms at September 30, 2022. See "Lending Activities - Non-performing Loans and Delinquencies." 9 At September 30, 2022 and 2021, the composition of the Bank’s construction loan portfolio was as follows: At September 30, 2022 2021 Balance Percent of Total Balance Percent of Total (Dollars in thousands) Custom and owner/builder $ 119,240 46.65 % $ 109,152 46.80 % Speculative one- to four-family 12,254 4.79 17,813 7.64 Commercial real estate 40,364 15.79 43,365 18.60 Multi-family 64,480 25.23 52,071 22.33 Land development 19,280 7.54 10,804 4.63 Total $ 255,618 100.00 % $ 233,205 100.00 % Custom and owner/builder construction loans are originated to home owners and are typically converted to or refinanced into permanent loans at the completion of construction. The construction phase of these loans generally lasts up to 12 months with fixed interest rates typically ranging from 4.25% to 7.50% and with loan-to-value ratios of 80% (or up to 95% with PMI) of the appraised estimated value of the completed property. 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, 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. The home buyer may be identified either during or after the construction period, with the risk that the builder will have to debt service the speculative construction loan and pay real estate taxes and other carrying costs of the completed home for a significant time after the completion of construction until the home buyer is identified and a sale is consummated. Rather than originating lines of credit to home builders to construct several homes at once, the Bank generally originates and underwrites a separate loan for each home. 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, 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. At September 30, 2022, these loans amounted to $104.84 million, or 41.0%, of construction loan balances. These loans are typically secured by apartment buildings, condominiums, mini-storage facilities, office buildings, hotels and retail rental space predominantly located in the Bank’s primary market area. At September 30, 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. All construction loans must be approved by a member of one of the Bank’s Loan Committees or the Bank’s Board of Directors, or in the case of one- to four-family construction loans that meet Freddie Mac guidelines, by the Regional Manager of Community Lending, the Loan Department Supervisor or a Bank underwriter. See “Lending Activities - Loan Solicitation and Processing.” Prior to approval of any construction loan application, an independent fee appraiser inspects the site and prepares an appraisal on an "as completed" basis, and the Bank reviews the existing or proposed improvements, identifies the market for the proposed project and analyzes the pro-forma data and assumptions on the project. In the case of a speculative or custom construction loan, the Bank reviews the experience and expertise of the builder. 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. In the event of cost overruns, the Bank generally requires that the borrower increase the funds available for construction by paying the cost of such overruns directly or by depositing its own funds into a secured savings account, the proceeds of which are used to pay construction costs or to, the extent available, authorizes disbursements from a loan contingency line in the construction budget. 10 Loan disbursements during the construction period are made to the builder, materials supplier or subcontractor, based on a line item budget. Periodic on-site inspections are made by qualified independent inspectors to document the reasonableness of draw requests. For most builders, the Bank disburses loan funds by providing vouchers to borrowers, which when used by the borrower to purchase supplies are submitted by the supplier to the Bank for payment. The Bank originates construction loan applications primarily through customer referrals, contacts in the business community and, occasionally, real estate brokers seeking financing for their clients. Construction lending affords the Bank the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending. Construction lending, however, is generally considered to involve a higher degree of risk than single-family permanent mortgage lending, because funds are advanced upon the collateral for the project based on an estimate of the costs that will produce a future value at completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. With regard to loans originated to builders for speculative projects, changes in the demand, such as for new housing and higher than anticipated building costs, may cause actual results to vary significantly from those estimated. A downturn in the housing or the real estate market could increase loan delinquencies, defaults, and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some builders who have borrowed from us to fund construction projects on a speculative basis have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. In addition, during the term of many of our construction loans granted to builders who are building residential units for sale, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative construction loans, there is an added risk associated with identifying an end-purchaser for the finished project. The Bank historically originated loans to real estate developers with whom it had established relationships for the purpose of developing residential subdivisions (i.e . , installing roads, sewers, water and other utilities; generally with ten to 50 lots). Currently, the Bank is originating land development loans on a limited basis. Land development loans are secured by a lien on the property and typically are made for a period of two to five years with fixed or variable interest rates, with loan-to-value ratios generally not exceeding 75%. Land development loans are generally structured so that the Bank is repaid in full upon the sale by the borrower of approximately 80% of the subdivision lots. In addition, in the case of a corporate borrower, the Bank also generally obtains personal guarantees from corporate principals (with ownership interests in the borrowing entity of 20% or more) and reviews their personal financial statements. Land development loans secured by land under development involve greater risks than one- to four-family residential mortgage loans, because these loan funds are advanced upon the predicted future value of the developed property upon completion. If the estimate of the future value proves to be inaccurate, in the event of default and foreclosure, the Bank may be confronted with a property the value of which is insufficient to assure full repayment. The Bank has historically attempted to minimize this risk by generally limiting the maximum loan-to-value ratio on land and land development loans to 75% of the estimated developed value of the secured property. Land Lending . The Bank originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to use for recreational purposes. Land loans originated by the Bank generally have maturities of one to ten years. 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 11 repayment. Land loans also pose additional risk because of the lack of income being produced by the property and potential illiquid nature of the collateral. These risks can be significantly impacted by supply and demand conditions. The Bank attempts to minimize these risks by generally limiting the maximum loan-to-value ratio on land loans to 75%. Consumer Lending. Consumer loans generally have shorter terms to maturity and may have higher interest rates than mortgage loans. Consumer loans include home equity lines of credit, second mortgage loans, savings account loans, automobile loans, boat loans, motorcycle loans, recreational vehicle loans and unsecured loans. Consumer loans are made with both fixed and variable interest rates and with varying terms. Home equity lines of credit and second mortgage loans are made for purposes such as the improvement of residential properties, debt consolidation and education expenses, among others. The majority of these loans are made to existing customers and are secured by a first or second mortgage on residential property. The loan-to-value ratio is typically 90% or less, when taking into account both the first and second mortgage loans. Second mortgage loans typically carry fixed interest rates with a fixed payment over a term between five and 15 years. Home equity lines of credit are generally made at interest rates tied to the Prime Rate. 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 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. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. 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, 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 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. The Bank also generally obtains personal guarantees from the principals based on a review of personal financial statements. 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, 2022, seven commercial business loans totaling $309,000 were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.” The Bank has increased commercial business loan originations made under the U.S. Small Business Administration ("SBA") 7(a) program. Loans made by the Bank under the SBA 7(a) program generally are made to small businesses to provide working capital or to provide funding for the purchase of businesses, real estate, or equipment. These loans generally are secured by a combination of assets that may include equipment, receivables, inventory, business real property, and sometimes a lien on the personal residence of the borrower. The terms of these loans vary by purpose and type of underlying collateral. 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 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. 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. 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. 2021. The Bank is now working with its remaining PPP borrowers on the forgiveness phase of the program. The entire 12 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. 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 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, among other things. 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. Loan Maturity. The following table sets forth certain information at September 30, 2022 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity but does not include potential prepayments. Loans having no stated maturity and overdrafts are reported as due in one year or less. Within 1 Year After 1 Year Through 5 Years After 5 Years Through 15 Years After 15 Years Total (Dollars in thousands) Mortgage loans: One- to four-family $ 3,001 $ 13,747 $ 67,737 $ 91,631 $ 176,116 Multi-family 4,146 9,914 80,852 113 95,025 Commercial 24,954 88,651 420,468 2,577 536,650 Construction (1) 255,618 — — — 255,618 Land 9,914 13,339 3,542 59 26,854 Consumer loans: Home equity and second mortgage 3,462 11,177 18,937 1,611 35,187 Other 432 303 697 696 2,128 Commercial business 28,048 30,262 56,411 10,318 125,039 SBA PPP — 1,001 — — 1,001 Total $ 329,575 $ 168,394 $ 648,644 $ 107,005 1,253,618 Less: Undisbursed portion of construction loans in process Deferred loan origination fees, net (103,168) Allowance for loan losses (4,321) Total loans receivable, net (13,703) $ 1,132,426 _____________ (1) Includes $119.24 million of customer and owner/building construction/permanent loans, a portion of which may convert to permanent mortgage loans once construction is completed. 13 The following table sets forth the dollar amount of all loans due after one year from September 30, 2022, which have fixed interest rates and have floating or adjustable interest rates: Fixed Rates Floating or Adjustable Rates Total (Dollars in thousands) Mortgage loans: One- to four-family $ 79,473 $ 93,642 $ 173,115 Multi-family 35,214 55,665 90,879 Commercial 225,212 286,485 511,697 Land 14,988 1,952 16,940 Consumer loans: Home equity and second mortgage 4,497 27,228 31,725 Other 1,188 508 1,696 Commercial business 92,652 4,339 96,991 SBA PPP 1,001 — 1,001 Total $ 454,225 $ 469,819 $ 924,044 Scheduled contractual principal repayments of loans do not reflect the actual life of these assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan interest rates are substantially higher than interest rates on existing mortgage loans and, conversely, decrease when interest rates on existing mortgage loans are substantially higher than current mortgage loan interest rates. Loan Solicitation and Processing. Loan originations are obtained from a variety of sources, including walk-in customers and referrals from builders and realtors. Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicant’s employment, income and credit standing. An appraisal of the real estate offered as collateral generally is undertaken by a certified appraiser retained by the Bank. Loan applications are initiated by loan officers and are required to be approved by an authorized loan officer or Bank underwriter, one of the Bank’s Loan Committees or the Bank’s Board of Directors. The Bank’s Consumer Loan Committee consists of several underwriters, each of whom can approve one- to four-family mortgage loans and other consumer loans up to and including the current Freddie Mac single-family limit. 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 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 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. Loan Originations, Purchases and Sales . During the years ended September 30, 2022, 2021 and 2020, the Bank’s total gross loan originations were $572.46 million, $602.34 million and $597.19 million, respectively. Periodically, the Bank purchases loan participation interests in construction, commercial real estate and multi-family loans, secured by properties generally located in Washington State, from other banks. 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. 14 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 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. At September 30, 2022, the Bank’s loan servicing portfolio, which is not included in the Company’s consolidated financial statements, totaled $410.29 million. The Bank also periodically sells participation interests in construction loans, commercial real estate loans, multi-family and commercial business loans to other lenders. These sales are usually made to avoid concentrations in a particular loan type or concentrations to a particular borrower and to generate fee income. During the years ended September 30, 2022, 2021 and 2020, the Bank sold loan participation interests of $14.4 million, $10.0 million and $6.26 million, respectively. The following table shows total loans originated, purchased, sold and repaid during the years indicated. Year Ended September 30, 2022 2021 2020 Loans originated: (Dollars in thousands) Mortgage loans: One- to four-family $ 123,149 $ 174,379 $ 172,838 Multi-family 8,647 10,727 12,237 Commercial 127,951 110,063 74,927 Construction 204,911 169,284 158,366 Land 19,281 10,654 4,955 Consumer 27,350 25,674 19,259 Commercial business loans 61,174 36,672 27,071 SBA PPP loans — 64,891 127,535 Total loans originated 572,463 602,344 597,188 Loans and loan participations purchased: Mortgage loans: Commercial — 3,999 — Commercial business — 5,042 — Total loans purchased — 9,041 — Total loans originated, acquired and purchased 572,463 611,385 597,188 Loans sold: Loan participation interests sold (14,389) (10,000) (6,255) Whole loans sold (59,115) (140,202) (160,987) Total loans sold (73,504) (150,202) (167,242) Loan principal repayments (324,233) (500,032) (287,039) Other items, net (10,754) (6,572) (15,694) Net increase (decrease) in loans receivable $ 163,972 $ (45,421) $ 127,213 Loan Origination Fees . The Bank receives loan origination fees on many of its mortgage loans and commercial business loans. Loan fees are a percentage of the loan which are charged to the borrower for funding the loan. 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 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. Banks may not collect any fees from the SBA PPP loan applicants. Accounting principles generally accepted in the United States of America ("GAAP") require fees received and certain loan origination costs for originating loans to be deferred and amortized into interest income over the contractual life of the loan. 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 $4.32 million (including $42,000 for SBA PPP loans) at September 30, 2022. Non-performing Loans and Delinquencies. The Bank assesses late fees or penalty charges on delinquent loans of approximately 5% of the monthly loan payment amount. A majority of loan payments are due on the first day of the month; however, the borrower is given a 15-day grace period to make the loan payment. When a mortgage loan borrower fails to make 15 a required payment when due, the Bank institutes collection procedures. A notice is mailed to the borrower 16 days after the date the payment was due. Attempts to contact the borrower by telephone generally begin on or before the 30 th day of delinquency. If a satisfactory response is not obtained, continuous follow-up contacts are attempted until the loan has been brought current. Before the 90th day of delinquency, attempts are made to establish (i) the cause of the delinquency, (ii) whether the cause is temporary, (iii) the attitude of the borrower toward repaying the debt, and (iv) a mutually satisfactory arrangement for curing the default. If the borrower is chronically delinquent and all reasonable means of obtaining payment on time have been exhausted, foreclosure is initiated according to the terms of the security instrument and applicable law. Interest income on loans in foreclosure is reduced by the full amount of accrued and uncollected interest. When a consumer loan borrower or commercial business borrower fails to make a required payment on a loan by the payment due date, the Bank institutes similar collection procedures as for its mortgage loan borrowers. All loans becoming 90 days or more past due are placed on non-accrual status, with any accrued interest reversed against interest income, unless they are well secured and in the process of collection. 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. The following table sets forth information with respect to the Company's non-performing assets at the dates indicated: At September 30, 2022 2021 2020 Loans accounted for on a non-accrual basis: (Dollars in thousands) Mortgage loans: One- to four-family (1) $ 388 $ 407 $ 659 Commercial 657 773 858 Land 450 683 394 Consumer loans 255 533 564 Commercial business loans 309 458 430 Total 2,059 2,854 2,905 Accruing loans which are contractually past due 90 days or more — — — Total of non-accrual and 90 days or more past due loans 2,059 2,854 2,905 Non-accrual investment securities 106 159 209 Other real estate owned and other repossessed assets — 157 1,050 Total non-performing assets (2) $ 2,165 $ 3,170 $ 4,164 Troubled debt restructured loans on accrual status (3) $ 2,472 $ 2,371 $ 2,868 Non-accrual and 90 days or more past due loans as a percentage of loans receivable, net (4) 0.18 % 0.29 % 0.28 % Non-accrual and 90 days or more past due loans as a percentage of total assets 0.11 % 0.16 % 0.19 % Non-performing assets as a percentage of total assets 0.12 % 0.18 % 0.27 % Loans receivable, net (4) $ 1,146,129 $ 981,923 $ 1,027,289 Total assets $ 1,860,508 $ 1,792,180 $ 1,565,978 16 _______________ (1) Includes non-accrual one- to four-family properties in the process of foreclosure totaling $0, $150, $0, $150 and $0 as of September 30, 2022, 2021, 2020, 2019 and 2018, respectively. (2) Does not include troubled debt restructured loans on accrual status. (3) Does not include troubled debt restructured loans totaling $142, $182 $203, $366 and $323 recorded as non-accrual loans as of September 30, 2022, 2021, 2020, 2019 and 2018, respectively. (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 $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.” Other Real Estate Owned and Other Repossessed Assets. Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold. When property is acquired, it is recorded at the estimated fair market value less es timat ed costs to sell. Restructured Loans. Under GAAP, the Bank is required to account for certain loan modifications or restructurings as “troubled debt restructurings” or "troubled debt restructured loans." A troubled debt restructured loan ("TDR") is a loan for which the Company, for reasons related to a borrower's financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Examples of such concessions include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals. TDRs are considered impaired and are individually evaluated for impairment. TDRs are classified as either accrual or non-accrual. TDRs are classified as non-performing loans unless they have been performing in accordance with their modified terms for a period of at least six months. 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, 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. In accordance with GAAP, a loan is considered impaired when based on current information and events it is probable that a creditor 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 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 potential changes and any related adjustments are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses, and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. 17 The categories of non-accrual loans and impaired loans overlap, although they are not identical. The Bank considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status, such as the financial strength of the borrower, the collateral value, reasons for delay, payment record, the amount past due and the number of days past due. At September 30, 2022, the Bank had $4.53 million in impaired loans. For additional information on impaired loans, see Note 4 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Other Loans of Concern. Loans not reflected in the table above as non-performing, but where known information about possible credit problems of borrowers causes management to have doubts as to the ability of the borrower to comply with present repayment terms and that may result in disclosure of such loans as non-performing assets in the future, are commonly referred to as “other loans of concern” or “potential problem loans.” The amount included in potential problem loans results from an evaluation, on a loan-by-loan basis, of loans classified as “substandard” and “special mention,” as those terms are defined under “Asset Classification” below. The amount of potential problem loans (not included in the table above as non-performing) was $5.56 million at September 30, 2022. The vast majority of these loans are collateralized by real estate. See “Asset Classification” below for additional information regarding the Bank's problem loans. Asset Classification. Applicable regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard loans are classified as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Assets classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the Bank is not warranted. When the Bank classifies problem assets as either substandard or doubtful, it is required to establish allowances for loan losses in an amount deemed prudent by management. These allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities and the risks associated with particular problem assets. When the Bank classifies problem assets as loss, it charges off the balance of the asset against the allowance for loan losses. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated by the Bank as special mention. Special mention loans are defined as those credits deemed by management to have some potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan. Assets in this category are not adversely classified and currently do not expose the Bank to sufficient risk to warrant a substandard classification. The Bank’s determination of the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC and the Division which can require a different classification and the establishment of additional loss allowances. The aggregate amounts of the Bank’s classified and special mention loans (as determined by the Bank), and the allowance for loan losses at the dates indicated, were as follows: At September 30, 2022 2021 2020 (Dollars in thousands) Loss $ — $ — $ — Doubtful — — — Substandard (1)(2) 7,387 3,604 3,649 Special mention (1) 237 5,012 5,864 Total classified and special mention loans $ 7,624 $ 8,616 $ 9,513 Allowance for loan losses $ 13,703 $ 13,469 $ 13,414 _____________ (1) For further information concerning the change in classified assets, see “Non-performing Loans and Delinquencies" above. (2) Includes non-performing loans. 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 18 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 $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. The Bank has established a comprehensive methodology for the determination of provisions for loan losses that takes into consideration the need for an overall general valuation allowance. The Bank’s methodology for assessing the adequacy of its allowance for loan losses is based on its historic loss experience for various loan segments; adjusted for changes in economic conditions, delinquency rates and other factors. Using these loss estimate factors, management develops a range of probable loss for each loan category. Certain individual loans for which full collectibility may not be assured are evaluated individually with loss exposure based on estimated discounted cash flows or net realizable collateral values. 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 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. The Bank increases its allowance for loan losses by charging provisions for loan losses against the Bank's operating income. The Board of Directors reviews the adequacy of the allowance for loan losses at least quarterly based on management's assessment of current economic conditions, past loss and collection experience, and risk characteristics of the loan portfolio. 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 $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. Although management believes that it uses the best information available to make its determinations, future adjustments to the allowance for loan losses may be necessary, and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. While the Bank believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate. A further decline in national and local economic conditions, as a result of the 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. 19 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) 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 % ________________________________ (1) Loans receivable, net for this table includes the deductions for the undisbursed portion of construction loans in process and net deferred loan origination fees and does not include the deduction for the allowance for loan losses. The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated: At September 30, 2022 2021 2020 Amount Percent of Loans in Category to Total Loans Amount Percent of Loans in Category to Total Loans Amount Percent of Loans in Category to Total Loans (Dollars in thousands) Mortgage loans: One- to four-family $ 1,658 14.05 % $ 1,154 11.08 % $ 1,163 10.46 % Multi-family 855 7.58 765 8.09 718 7.50 Commercial 6,682 42.81 6,813 43.49 7,144 39.99 Construction - custom and owner/builder 675 9.51 644 10.08 832 11.42 Construction - speculative one- to four-family 130 0.98 188 1.65 158 1.29 Construction - commercial 343 3.22 784 4.01 420 2.92 Construction - multi-family 447 5.14 436 4.81 238 3.04 Construction - land development 233 1.54 124 1.00 133 0.68 Land 397 2.14 470 1.84 572 2.25 Non-mortgage loans: Consumer loans 482 2.98 578 3.28 664 3.14 Commercial business loans 1,801 10.05 1,513 10.67 1,372 17.31 Total allowance for loan losses $ 13,703 100.00 % $ 13,469 100.00 % $ 13,414 100.00 % 20 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 — % 21 Investment Activities The investment policies of the Bank are established and monitored by the Board of Directors. The policies are designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to compliment the Bank’s lending activities. These policies dictate the criteria for classifying investments in debt securities as either available for sale or held to maturity. The policies permit investment in various types of liquid assets permissible under applicable regulations, which include U.S. Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks, federal funds, mortgage-backed securities, municipal bonds and mutual funds. The Company's investment policy also permits investment in equity securities in certain financial service companies. 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, $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 $132.28 million at September 30, 2021, consisting of $28.76 million of U.S. government agency securities, $39.84 million of mortgage-backed securities held to maturity, $500,000 of bank issued trust preferred securities held to maturity and $63.18 million of mortgage-backed securities available for sale. The following table sets forth the maturities and weighted average yields of the debt securities in the Bank's portfolio at September 30, 2022. One Year or Less After One to Five Years After Five to Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Held to Maturity: U.S. Treasury and U.S. government agency securities $ — — % $ 141,921 1.75 % $ 28,755 1.30 % $ — — % Mortgage-backed securities 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 — — Available for Sale: Mortgage-backed securities — — 3,159 3.43 9,152 2.93 29,104 3.18 Total portfolio $ 3,027 5.38 % $ 165,760 2.13 % $ 47,922 2.05 % $ 91,314 3.37 % 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. Deposit Activities and Other Sources of Funds General . Deposits and loan repayments are the major sources of the Bank's funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. Borrowings through the FHLB and the Federal Reserve Bank of San Francisco ("FRB") may be used to compensate for reductions in the availability of funds from other sources. Deposit Accounts . Substantially all of the Bank's depositors are residents of Washington. 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, 22 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. The Bank also has checking accounts owned by businesses associated with the marijuana (or Initiative-502) industry in Washington State. It is generally permissible in Washington State to handle accounts associated with this industry in compliance with federal regulatory guidelines. At September 30, 2022, the Bank had $21.09 million, or 1.3% of total deposits, from businesses associated with the marijuana industry. See "Item 1A. Risk Factors - We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that could increase our costs of operations." At September 30, 2022, the Bank had $21.83 million of jumbo certificates of deposit of $250,000 or more. The Bank had $4.62 million in brokered reciprocal money market deposits at September 30, 2022. The Bank believes that its jumbo certificates of deposit, which represented 1.3% of total deposits at September 30, 2022, present similar interest rate risks as compared to its other deposits. The following table sets forth information concerning the Bank's deposits at September 30, 2022: Category Amount Percentage of Total Deposits (Dollars in thousands) Non-interest bearing demand $ 530,058 32.48 % Negotiable order of withdrawal (“NOW”) checking 447,779 27.43 Savings 283,219 17.35 Money market 248,536 15.23 Subtotal 1,509,592 92.49 Certificates of Deposit (1) Maturing within 1 year 76,311 4.68 Maturing after 1 year but within 2 years 22,714 1.39 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 Total deposits $ 1,632,176 100.00 % ______________________ (1) Based on remaining maturity of certificates. The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity as of September 30, 2022. Jumbo certificates of deposit have principal balances of $250,000 or more, and the rates paid on these accounts are generally negotiable. Maturity Period Amount (Dollars in thousands) Three months or less $ 2,007 Over three through six months 1,090 Over six through twelve months 7,753 Over twelve months 10,980 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). 23 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. The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated: At September 30, 2022 2021 2020 Amount Percent of Total Increase (Decrease) Amount Percent of Total Increase (Decrease) Amount Percent of Total (Dollars in thousands) Non-interest-bearing demand $ 530,058 32.48 % $ (5,154) $ 535,212 34.08 % $ 93,323 $ 441,889 32.53 % NOW checking 447,779 27.43 17,682 430,097 27.39 53,198 376,899 27.75 Savings 283,219 17.35 22,530 260,689 16.60 40,820 219,869 16.18 Money market 248,536 15.23 38,108 210,428 13.40 49,203 161,225 11.87 Certificates of deposit which mature: Within 1 year 76,311 4.68 (5,111) 81,422 5.18 (21,440) 102,862 7.57 After 1 year, but within 2 years 22,714 1.39 (3,727) 26,441 1.68 (2,914) 29,355 2.16 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 % Certificates of Deposit by Rates. The following table sets forth the certificates of deposit in the Bank classified by rates as of the dates indicated: At September 30, 2022 2021 2020 (Dollars in thousands) 0.00 - 1.99% $ 101,070 $ 108,191 $ 99,150 2.00 - 3.99% 21,254 25,678 59,114 4.00 - 5.99% 260 260 260 Total $ 122,584 $ 134,129 $ 158,524 Certificates of Deposit by Maturities. The following table sets forth the amount and maturities of certificates of deposit by rate at September 30, 2022: Amount Due Less Than One Year One to Two Years After Two to Five Years After Five Years Total (Dollars in thousands) 0.00 - 1.99% $ 71,796 $ 12,084 $ 17,120 $ 70 $ 101,070 2.00 - 3.99% 4,413 10,472 6,369 — 21,254 4.00 - 5.99% 102 158 — — 260 Total $ 76,311 $ 22,714 $ 23,489 $ 70 $ 122,584 24 Deposit Activities. The following table sets forth the deposit activities of the Bank for the years indicated: Year Ended September 30, 2022 2021 2020 (Dollars in thousands) Beginning balance $ 1,570,555 $ 1,358,406 $ 1,068,227 Net deposits before interest credited 58,965 209,136 285,544 Interest credited 2,656 3,013 4,635 Net increase in deposits 61,621 212,149 290,179 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. Item 8. Financial Statements and Supplementary Data" of this report on Form 10-K. Borrowings. Deposits and loan repayments are generally the primary source of funds for the Bank's lending and investment activities and for general business purposes. The Bank has the ability to use borrowings from the FHLB to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB functions as a central reserve bank providing credit for member financial institutions. As a member of the FHLB, the Bank is required to own capital stock in the FHLB and is authorized to apply for borrowings on the security of such stock and certain mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. government) provided certain creditworthiness standards have been met. Borrowings are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. 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, 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. At September 30, 2022, the Bank had no outstanding balance and $77.09 million in unused borrowing capacity on this borrowing line of credit. A short-term borrowing line of credit of $50.00 million is also maintained at Pacific Coast Bankers' Bank ("PCBB"). The Bank had no outstanding balance on this borrowing line of credit at September 30, 2022. 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. Item 8. Financial Statements and Supplemental Data" of this report on Form 10-K. Bank Owned Life Insurance The Bank has purchased life insurance policies covering certain officers. These policies are recorded at their cash surrender value, net of any cash surrender charges. Increases in cash surrender value, net of policy premiums, and proceeds from death benefits are recorded in non-interest income. At September 30, 2022, the cash surrender value of bank owned life insurance (“BOLI”) was $22.81 million. How We Are Regulated General. As a bank holding company, Timberland Bancorp is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve. Timberland Bancorp is also subject to the rules and regulations of the SEC under the federal securities laws. As a state-chartered savings bank, the Bank is subject to regulation and oversight by the Division and the applicable provisions of Washington law and regulations of the Division adopted thereunder. 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. 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 following is a brief description of certain laws and regulations applicable to Timberland Bancorp and the Bank. Descriptions of laws and regulations here and elsewhere in this report do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the U.S. Congress or the 25 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. Any such legislation or regulatory changes in the future could adversely affect the Company's and the Bank's operations and financial condition. We cannot predict whether any such changes may occur. The DFI and FDIC have extensive enforcement authority over all Washington state-chartered savings banks, including the Bank. The Federal Reserve has the same type of authority over Timberland Bancorp. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease-and-desist orders and removal orders and initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the regulators. Regulation of the Bank The Bank, as a state-chartered savings bank, is subject to regulation and oversight by the FDIC and the Division extending to all aspects of its operations. Insurance of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to $250,000 per separately insured deposit ownership right or category by the Deposit Insurance Fund (‘DIF”) of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base, which is their average consolidated total assets minus its Tier 1 capital. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments. 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. As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The FDIC also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC also has the authority to take enforcement actions against banks and savings associations. Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance. Capital Requirements. Federally insured financial institutions, such as the Bank, and their holding companies, are required to maintain a minimum level of regulatory capital. The Bank is subject to capital regulations adopted by the FDIC, which establish minimum required ratios for a common equity Tier 1 (“CET1”) capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the maintenance of the following minimum capital ratios: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies. However, the Federal Reserve has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve. The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), enacted in May 2018, required the federal banking agencies, including the FDIC, to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” or “CBLR” of between 8 to 10%. Institutions with capital meeting or exceeding the ratio and otherwise complying with the specified requirements (including off-balance sheet exposures of 25% or less of total assets and 26 trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The CBLR was established at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two-quarter grace period to again achieve compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements. The Bank has not elected to use the CBLR framework as of September 30, 2022. In order to be considered well-capitalized under the prompt corrective action regulations, the Bank must maintain a CET1 risk-based ratio of 6.5%, a Tier 1 risk-based ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%, and the Bank must not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level. In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer that consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital ratios in order to avoid limitations on paying dividends, repurchasing shares and paying certain discretionary bonuses. At September 30, 2022, the Bank met the requirements to be "well capitalized," and the Bank's CET1 capital exceeded the required conservation buffer. The following table compares the Bank's actual capital amounts at September 30, 2022 to its minimum regulatory capital requirements at that date (Dollars in thousands): Actual Regulatory Minimum To Be "Adequately Capitalized Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Leverage Capital Ratio: Tier 1 capital $ 202,438 10.9 % $ 74,039 4.0 % $ 92,549 5.0 % Risk-based Capital Ratios: CET1 capital 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 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 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. CECL covers a broader range of assets than the current method of recognizing credit losses and generally results in earlier recognition of credit losses. Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL. For a banking organization, implementation of CECL is generally likely to reduce retained earnings, and to affect other items, in a manner that reduces its regulatory capital. The federal banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC) have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital. Prompt Corrective Action. Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk- 27 based capital measure, a leverage ratio capital measure and certain other factors. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized. The final rule establishing an elective "community bank leverage ratio" regulatory capital framework provides that a qualifying institution whose capital exceeds the CBLR and opts to use the framework will be considered "well capitalized" for purposes of prompt corrective action. Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by an institution to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements. At September 30, 2022, the Bank was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC. For additional information regarding the Bank's minimum regulatory capital requirements, see "Capital Requirements" above and Note 17 of the Notes to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Federal Home Loan Bank System. The Bank is a member of the FHLB, one of 11 regional Federal Home Loan Banks that administer the home financing credit function of savings institutions, each serving as a reserve or central bank for its members within its assigned region. The FHLB is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All borrowings from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term borrowings are required to provide funds for residential home financing. See “Deposit Activities and Other Sources of Funds – Borrowings" above. As a member, the Bank is required to purchase and maintain stock in the FHLB based on the Bank's asset size and level of borrowings from the FHLB. At September 30, 2022, the Bank had $2.19 million in FHLB stock, which was in compliance with this requirement. The FHLB pays dividends quarterly, and the Bank received $65,000 in dividends during the year ended September 30, 2022. The Federal Home Loan Banks continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on borrowings targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a decrease in net income and possibly capital. Standards for Safety and Soundness. Each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. Management of the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a plan of compliance. 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 28 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; or • 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. Federal law generally limits the activities and equity investments of FDIC-insured state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain requirements are met. Under the laws of Washington State, Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the DFI in certain situations. In addition, Washington-chartered savings banks may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to Washington residents. Environmental Issues Associated With Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) is a federal statute that generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property. Federal Reserve System. The Federal Reserve requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the Federal Reserve reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At September 30, 2022, the Bank was in compliance with the reserve requirements in place at that time. Transactions with Affiliates. Timberland Bancorp, Inc. and the Bank are separate and distinct legal entities. The Bank is an affiliate of Timberland Bancorp, Inc. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates. Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act between a bank and an affiliate are limited to 10% of the bank's capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank's capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates. Community Reinvestment Act. Banks are also subject to the provisions of the Community Reinvestment Act of 1977 (“CRA”), which requires the appropriate federal bank regulatory agency to assess a bank’s performance under the CRA in meeting the credit needs of the community serviced by the bank, including low- and moderate-income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s performance must be 29 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. Dividends. Dividends from the Bank constitute the major source of funds available for dividends which may be paid to Company shareholders. 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. 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. Dividends payable by the Bank can be limited or prohibited if the Bank does not meet the capital conservation buffer requirement. The amount of dividends actually paid during any one period will be strongly affected by the Bank's management policy of maintaining a strong capital position. Federal law further provides that no insured depository institution may pay a cash dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice. Anti-Money Laundering and Customer Identification. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001. The USA PATRIOT Act and the Bank Secrecy Act requires financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts, and, effective in 2018, the beneficial owners of accounts. Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications. Privacy Standards 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 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 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 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 30 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. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights. Regulation of the Company General. The Company, as the sole shareholder of the Bank, is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the regulations promulgated thereunder. 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 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). In general, enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. BHCA. The Company is supervised by the Federal Reserve under the BHCA. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and may not conduct its operations in an unsafe or unsound manner. In addition, the Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company should serve as a source of strength to its subsidiary bank by having the ability to provide financial assistance to its subsidiary bank during periods of financial distress to the bank. A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary bank will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength provisions required by the Dodd-Frank Act. Timberland Bancorp, Inc. and any subsidiaries that it may control are considered “affiliates” within the meaning of the Federal Reserve Act, and transactions between the Bank and affiliates are subject to numerous restrictions. With some exceptions, Timberland Bancorp, Inc. and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by Timberland Bancorp, Inc. or by its affiliates. Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. The Federal Reserve must approve the acquisition (or acquisition of control) of a bank or other FDIC-insured depository institution by a bank holding company, and the appropriate federal banking regulator must approve a bank’s acquisition (or acquisition of control) of another bank or other FDIC-insured institution. Acquisition of Control of a Bank Holding Company. Under federal law, a notice or application must be submitted to the appropriate federal banking regulator if any person (including a company), or group acting in concert, seeks to acquire “control” of a bank holding company. An acquisition of control can occur upon the acquisition of 10% or more of the voting stock of a bank holding company or as otherwise defined by federal regulations. In considering such a notice or application, the Federal Reserve takes into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control becomes subject to regulation as a bank holding 31 company. Depending on circumstances, a notice or application may be required to be filed with appropriate state banking regulators and may be subject to their approval or non-objection. Dividends. Federal Reserve policy limits the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality and overall financial condition, and that it is inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Under Washington corporate law, the Company generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than its total liabilities. The capital conservation buffer requirement can also limit dividends. Stock Repurchases. Bank holding companies, except for certain “well-capitalized” and highly rated bank holding companies, are required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve. Capital Requirements. As discussed above, pursuant to the “Small Bank Holding Company” exception, effective August 30, 2018, bank holding companies with less than $3.00 billion in consolidated assets were generally no longer subject to the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to the Bank. At the time of this change, Timberland Bancorp, Inc. was considered “well capitalized” as defined for a bank holding company with a total risk-based capital ratio of 10.0% or more and a Tier 1 risk-based capital ratio of 8.0% or more, and was not subject to an individualized order, directive or agreement under which the Federal Reserve requires it to maintain a specific capital level. If the Company were subject to regulatory guidelines for bank holding companies with $3.00 billion or more in assets, at September 30, 2022, the Company would have exceeded all regulatory requirements. The following table presents for informational purposes the regulatory capital ratios for the Company as of September 30, 2022 (Dollars in thousands): Actual Amount Ratio Leverage Capital Ratio: Tier 1 capital $ 204,659 11.0 % Risk-based Capital Ratios: CET1 capital 204,659 18.2 Tier 1 capital 204,659 18.2 Total capital 218,667 19.5 For additional information, see Note 17 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K. Federal Securities Laws. Timberland Bancorp, Inc.’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Company is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. 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. 32 Taxation Federal Taxation General . The Company and the Bank report their operations on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. Dividends-Received Deduction . The Company may exclude from its income 100.0% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 50.0% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20.0% of the stock of a corporation distributing a dividend, then 65.0% of any dividends received may be deducted. Audits . The Company is no longer subject to U.S. 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. Competition 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 The Bank has one wholly-owned subsidiary, Timberland Service Corp. (“Timberland Service”), whose primary function is to provide escrow services. Employees and Human Capital Resources Workforce. As of September 30, 2022, the Company had 284 full-time employees and 11 part-time and on-call employees. The employees are not represented by a collective bargaining unit, and the Company believes that its relationship with its employees is good. 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. Our average tenure was 7.7 years as of September 30, 2022. Our workforce was 80% female and 20% male, and women held 81% of the Bank's management roles (including department supervisors and managers, as well as executive leadership). The average tenure of management was 13.4 years. 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. 33 Benefits. The Company provides competitive comprehensive benefits to its employees. The Company values the health and well-being of its employees and strives to provide programs to support this. Benefit programs available to eligible employees may include 401(k) savings plan, employee stock ownership plan, health and life insurance, employee assistance program, paid holidays, paid time off, and other leave as applicable. Response to COVID-19 pandemic. As an essential business, the Company responded quickly to implement procedures to assist employees in navigating the challenging impact from the pandemic, as well as protect the safety of both employees and customers. In response to Washington State's stay at home order, the Company moved eligible positions to remote work status. Safety measures were promptly implemented to protect employees working on site, which included installation of protective partitions and fully equipping locations with personal safety supplies. Employees who experienced a reduction in hours due to reduced branch operating hours continued to receive their full pay. Additional sick leave was authorized for employees impacted directly by the COVID-19 virus. As 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 help ensure that all employees and officers know the rules applicable to their jobs. Executive Officers of the Registrant The following table sets forth certain information with respect to the executive officers of the Company and the Bank: Executive Officers of the Company and Bank Age at September 30, 2022 Position Name Company Bank Michael R. Sand 68 Chief Executive Officer Chief Executive Officer Dean J. Brydon 55 President and Chief Financial Officer President and Chief Financial Officer Robert A. Drugge 71 Executive Vice President of Lending Executive Vice President of Lending Jonathan A. Fischer 48 Executive Vice President, Chief Operating Officer and Secretary Executive Vice President,Chief Operating Officer and Secretary Edward C. Foster 65 Executive Vice President and Chief Credit Administrator Executive Vice President and Chief Credit Administrator Marci A. Basich 53 Senior Vice President and Treasurer Senior Vice President and Treasurer Biographical Information. Michael R. 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. Mr. 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. Dean J. Brydon has been affiliated with the Bank since 1994 and has served as President of the Bank and the Company since January 24, 2022. Mr. 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. Mr. Brydon is a Certified Public Accountant. Robert A. Drugge has been affiliated with the Bank since April 2006 and has served as Executive Vice President of Lending since September 2006. Prior to joining Timberland, Mr. Drugge was employed at Bank of America as a senior officer and most recently served as Senior Vice President and Commercial Banking Manager. Mr. Drugge began his banking career at Seafirst in 1974, which was acquired by Bank America Corp. and became known as Bank of America. 34 Jonathan A. Fischer has been affiliated with the Bank since October 1997 and has served as Chief Operating Officer since August 23, 2012. Mr. Fischer has served as Secretary of the Bank and the Company since January 2022. Prior to that, Mr. Fischer had served as the Chief Risk Officer since October 2010. Mr. Fischer had also served as the Compliance Officer, Community Reinvestment Act Officer, and Privacy Officer since January 2000. Edward C. Foster has been affiliated with the Bank and has served as Chief Credit Administrator since February 2012. Prior to joining the Bank, Mr. Foster was employed by the FDIC, where he served as a Loan Review Specialist from January 2011 to February 2012. Mr. Foster owned a credit administration consulting business from February 2010 to January 2011. Prior to that, Mr. Foster served as the Chief Credit Officer for Carson River Community Bank from April 2008 through February 2010. Before joining Carson River Community Bank, Mr. Foster served as a Senior Regional Credit Officer for Omni National Bank from September 2006 through March 2008. Marci A. Basich has been affiliated with the Bank since 1999 and has served as Treasurer of the Company and the Bank since January 2002. Ms. Basich is a Certified Public Accountant.