TIMBERLAND BANCORP INC 10-Q

Item 1. Financial Statements (unaudited) TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, 2023 and September 30, 2022 (Dollars in thousands, except per share amounts) March 31, 2023 September 30, 2022 (Unaudited) * Assets Cash and cash equivalents: Cash and due from financial institutions $ 26,015 $ 24,808 Interest-bearing deposits in banks 116,468 291,947 Total cash and cash equivalents 142,483 316,755 Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value) 20,168 22,894 Investment securities held to maturity, at amortized cost (estimated fair value of $ 265,092 and $ 249,783 ) 277,911 266,608 Investment securities available for sale, at fair value 54,838 41,415 Investments in equity securities, at fair value 850 835 Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost 2,202 2,194 Other investments, at cost 3,000 3,000 Loans held for sale 200 748 Loans receivable, net of allowance for loan losses of $ 14,698 and $ 13,703 1,210,193 1,132,426 Premises and equipment, net 21,744 21,898 Accrued interest receivable 5,295 4,483 Bank owned life insurance (“BOLI”) 23,119 22,806 Goodwill 15,131 15,131 Core deposit intangible (“CDI”), net 813 948 Loan servicing rights, net 2,535 3,023 Operating lease right-of-use ("ROU") assets 1,844 1,980 Other assets 4,292 3,364 Total assets $ 1,786,618 $ 1,860,508 Liabilities and shareholders’ equity Liabilities Deposits: Non-interest-bearing demand $ 479,283 $ 530,058 Interest-bearing 1,069,484 1,102,118 Total deposits 1,548,767 1,632,176 Operating lease liabilities 1,935 2,066 Other liabilities and accrued expenses 8,255 7,697 Total liabilities $ 1,558,957 $ 1,641,939 * Derived from audited consolidated financial statements. See notes to unaudited consolidated financial statements 3 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (continued) March 31, 2023 and September 30, 2022 (Dollars in thousands, except per share amounts) March 31, 2023 September 30, 2022 (Unaudited) * Commitments and contingent liabilities (see Note 12) Shareholders’ equity Preferred stock, $ 0.01 par value; 1,000,000 shares authorized; none issued $ — $ — Common stock, $ 0.01 par value; 50,000,000 shares authorized; 8,203,174 shares issued and outstanding - March 31, 2023 8,221,952 shares issued and outstanding - September 30, 2022 37,979 38,751 Retained earnings 190,177 180,535 Accumulated other comprehensive loss ( 495 ) ( 717 ) Total shareholders’ equity 227,661 218,569 Total liabilities and shareholders’ equity $ 1,786,618 $ 1,860,508 * Derived from audited consolidated financial statements. See notes to unaudited consolidated financial statements 4 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the three and six months ended March 31, 2023 and 2022 (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended March 31, Six Months Ended March 31, 2023 2022 2023 2022 Interest and dividend income Loans receivable and loans held for sale $ 14,950 $ 12,620 $ 29,407 $ 25,242 Investment securities 2,460 590 4,674 996 Dividends from mutual funds, FHLB stock and other investments 64 27 115 54 Interest-bearing deposits in banks and CDs 1,913 283 4,304 571 Total interest and dividend income 19,387 13,520 38,500 26,863 Interest expense Deposits 2,236 625 3,606 1,257 FHLB borrowings — 2 — 17 Total interest expense 2,236 627 3,606 1,274 Net interest income 17,151 12,893 34,894 25,589 Provision for loan losses 475 — 1,000 — Net interest income after provision for loan losses 16,676 12,893 33,894 25,589 Non-interest income Net recoveries on investment securities 2 3 5 11 Service charges on deposits 893 1,014 1,840 1,927 ATM and debit card interchange transaction fees 1,275 1,247 2,526 2,523 BOLI net earnings 157 152 313 305 Gain on sales of loans, net 46 416 67 1,079 Escrow fees 29 44 59 123 Valuation recovery on loan servicing rights, net — — — 119 Other, net 234 207 531 438 Total non-interest income, net 2,636 3,083 5,341 6,525 See notes to unaudited consolidated financial statements 5 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (continued) For the three and six months ended March 31, 2023 and 2022 (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended March 31, Six Months Ended March 31, 2023 2022 2023 2022 Non-interest expense Salaries and employee benefits $ 6,046 $ 5,192 $ 11,946 $ 10,363 Premises and equipment 1,001 988 1,925 1,916 Advertising 178 161 372 327 OREO and other repossessed assets, net — 2 — ( 16 ) ATM and debit card interchange transaction fees 489 450 972 914 Postage and courier 147 164 268 300 State and local taxes 298 235 597 489 Professional fees 473 322 902 593 Federal Deposit Insurance Corporation ("FDIC") insurance 202 126 326 254 Loan administration and foreclosure 138 96 259 200 Data processing and telecommunications 880 669 1,668 1,282 Deposit operations 246 262 592 561 Amortization of CDI 67 79 135 158 Other 779 587 1,517 1,256 Total non-interest expense, net 10,944 9,333 21,479 18,597 Income before income taxes 8,368 6,643 17,756 13,517 Provision for income taxes 1,705 1,316 3,587 2,705 Net income $ 6,663 $ 5,327 $ 14,169 $ 10,812 Net income per common share Basic $ 0.81 $ 0.64 $ 1.72 $ 1.30 Diluted $ 0.80 $ 0.63 $ 1.70 $ 1.28 Weighted average common shares outstanding Basic 8,220,532 8,337,407 8,226,467 8,346,839 Diluted 8,304,370 8,421,875 8,311,630 8,435,536 Dividends paid per common share $ 0.23 $ 0.22 $ 0.55 $ 0.43 See notes to unaudited consolidated financial statements 6 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three and six months ended March 31, 2023 and 2022 (Dollars in thousands) (Unaudited) Three Months Ended March 31, Six Months Ended March 31, 2023 2022 2023 2022 Comprehensive income Net income $ 6,663 $ 5,327 $ 14,169 $ 10,812 Other comprehensive income (loss) Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $ 64 , $( 40 ), $ 58 and $( 45 ), respectively 239 ( 152 ) 220 ( 170 ) Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes: Accretion of OTTI on investment securities held to maturity, net of income taxes of $ 0 , $ 1 , $ 1 and $ 1 , respectively 1 3 2 4 Total other comprehensive income (loss), net of income taxes 240 ( 149 ) 222 ( 166 ) Total comprehensive income $ 6,903 $ 5,178 $ 14,391 $ 10,646 See notes to unaudited consolidated financial statements 7 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the three and six months ended March 31, 2023 and 2022 (Dollars in thousands, except per share amounts) (Unaudited) Number of Shares Amount Accumulated Other Compre-hensive Income (Loss) Common Stock Common Stock Retained Earnings Total Balance, December 31, 2021 8,348,821 $ 42,436 $ 167,897 $ 42 210,375 Net income — — 5,327 — 5,327 Other comprehensive loss — — — ( 149 ) ( 149 ) Repurchase of common stock ( 61,565 ) ( 1,716 ) — — ( 1,716 ) Exercise of stock options 18,570 202 — — 202 Common stock dividends ($ 0.22 per common share) — — ( 1,836 ) — ( 1,836 ) Stock option compensation expense — 66 — — 66 Balance, March 31, 2022 8,305,826 $ 40,988 $ 171,388 $ ( 107 ) $ 212,269 Balance, December 31, 2022 8,231,197 $ 38,878 $ 185,406 $ ( 735 ) $ 223,549 Net income — — 6,663 — 6,663 Other comprehensive income — — — 240 240 Repurchase of common stock ( 34,263 ) ( 1,098 ) — — ( 1,098 ) Exercise of stock options 6,240 121 — — 121 Common stock dividends ($ 0.23 per common share) — — ( 1,892 ) — ( 1,892 ) Stock option compensation expense — 78 — — 78 Balance, March 31, 2023 8,203,174 $ 37,979 $ 190,177 $ ( 495 ) $ 227,661 Common Stock Accumulated Other Compre-hensive Income (Loss) Number of Shares Amount Retained Earnings Total Balance, September 30, 2021 8,355,469 $ 42,673 $ 164,167 $ 59 $ 206,899 Net income — — 10,812 — 10,812 Other comprehensive loss — — — ( 166 ) ( 166 ) Repurchase of common stock ( 77,113 ) ( 2,149 ) — — ( 2,149 ) Exercise of stock options 27,470 332 — — 332 Common stock dividends ($ 0.43 per common share) — — ( 3,591 ) — ( 3,591 ) Stock option compensation expense — 132 — — 132 Balance, March 31, 2022 8,305,826 $ 40,988 $ 171,388 $ ( 107 ) $ 212,269 Balance, September 30, 2022 8,221,952 $ 38,751 $ 180,535 $ ( 717 ) $ 218,569 Net income — — 14,169 — 14,169 Other comprehensive income — — — 222 222 Repurchase of common stock ( 44,833 ) ( 1,445 ) — — ( 1,445 ) Exercise of stock options 26,055 517 — — 517 Common stock dividends ($ 0.55 per common share) — — ( 4,527 ) — ( 4,527 ) Stock option compensation expense — 156 — — 156 Balance, March 31, 2023 8,203,174 $ 37,979 $ 190,177 $ ( 495 ) $ 227,661 See notes to unaudited consolidated financial statements 8 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended March 31, 2023 and 2022 (Dollars in thousands) (Unaudited) Six Months Ended March 31, 2023 2022 Cash flows from operating activities Net income $ 14,169 $ 10,812 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,000 — Depreciation 672 708 Deferred income taxes — 266 Accretion of discount on purchased loans ( 43 ) ( 91 ) Amortization of CDI 135 158 Stock option compensation expense 156 132 Net recoveries on investment securities ( 5 ) ( 11 ) Change in fair value of investments in equity securities ( 15 ) 53 Amortization (accretion) of discounts and premiums on securities ( 631 ) 176 Gain on sales of loans, net ( 67 ) ( 1,079 ) Loans originated for sale ( 2,931 ) ( 37,915 ) Proceeds from sales of loans 3,546 39,439 Amortization of loan servicing rights 522 600 Valuation recovery on loan servicing rights, net — ( 119 ) BOLI net earnings ( 313 ) ( 305 ) Increase (decrease) in deferred loan origination fees 438 ( 1,342 ) Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses ( 1,269 ) ( 2,071 ) Net cash provided by operating activities 15,364 9,411 Cash flows from investing activities Net (increase) decrease in CDs held for investment 2,726 ( 137 ) Purchase of investment securities held to maturity ( 15,602 ) ( 126,272 ) Purchase of investment securities available for sale ( 16,994 ) — Proceeds from maturities and prepayments of investment securities held to maturity 4,865 5,992 Proceeds from maturities and prepayments of investment securities available for sale 3,921 12,152 Purchase of FHLB stock ( 8 ) ( 91 ) Increase in loans receivable, net ( 79,162 ) ( 64,193 ) Purchases of premises and equipment ( 518 ) ( 219 ) Net cash used in investing activities ( 100,772 ) ( 172,768 ) S ee notes to unaudited consolidated financial statements 9 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) For the six months ended March 31, 2023 and 2022 (Dollars in thousands) (Unaudited) Six Months Ended March 31, 2023 2022 Cash flows from financing activities Net increase (decrease) in deposits $ ( 83,409 ) $ 85,871 Repayments of FHLB borrowings — ( 5,000 ) Proceeds from exercise of stock options 517 332 Repurchase of common stock ( 1,445 ) ( 2,149 ) Payment of dividends ( 4,527 ) ( 3,591 ) Net cash provided by (used in) financing activities ( 88,864 ) 75,463 Net decrease in cash and cash equivalents ( 174,272 ) ( 87,894 ) Cash and cash equivalents Beginning of period 316,755 580,196 End of period $ 142,483 $ 492,302 Supplemental disclosure of cash flow information Income taxes paid $ 4,634 $ 2,188 Interest paid $ 3,214 $ 1,305 Supplemental disclosure of non-cash investing activities Other comprehensive income (loss) related to investment securities $ 222 $ ( 166 ) See notes to unaudited consolidated financial statements 10 Timberland Bancorp, Inc. and Subsidiary Notes to Unaudited Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation: The accompanying unaudited consolidated financial statements of Timberland Bancorp, Inc. and its wholly-owned subsidiary, Timberland Bank (the "Bank") (collectively, "the Company") were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2022 (“2022 Form 10-K”). The unaudited consolidated results of operations for the six months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2023. (b) Principles of Consolidation: The unaudited consolidated financial statements include the accounts of the Company and the Bank’s wholly-owned subsidiary, Timberland Service Corporation. All significant inter-company transactions and balances have been eliminated in consolidation. (c) Operating Segment: The Company has one reportable operating segment which is defined as community banking in western Washington under the operating name, "Timberland Bank." (d) The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated balance sheets, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. (e) Certain prior period amounts have been reclassified to conform to the March 31, 2023 presentation with no change to previously reported net income or total shareholders’ equity. 11 (2) INVESTMENT SECURITIES Held to maturity and available for sale investment securities have been classified according to management’s intent and were as follows as of March 31, 2023 and September 30, 2022 (dollars in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value March 31, 2023 Held to maturity U.S. Treasury and U.S. government agency securities $ 171,148 $ 118 $ ( 9,244 ) $ 162,022 Mortgage-backed securities ("MBS"): U.S. government agencies 54,522 234 ( 2,008 ) 52,748 Private label residential 49,660 260 ( 2,103 ) 47,817 Taxable municipal securities 2,081 — ( 48 ) 2,033 Bank issued trust preferred securities 500 — ( 28 ) 472 Total $ 277,911 $ 612 $ ( 13,431 ) $ 265,092 Available for sale MBS: U.S. government agencies $ 55,454 $ 397 $ ( 1,013 ) $ 54,838 Total $ 55,454 $ 397 $ ( 1,013 ) $ 54,838 September 30, 2022 Held to maturity U.S. Treasury and U.S. government agency securities $ 170,676 $ 11 $ ( 12,109 ) $ 158,578 MBS: U.S. government agencies 43,995 4 ( 2,486 ) 41,513 Private label residential 49,335 245 ( 2,392 ) 47,188 Taxable municipal securities 2,102 — ( 67 ) 2,035 Bank issued trust preferred securities 500 — ( 31 ) 469 Total $ 266,608 $ 260 $ ( 17,085 ) $ 249,783 Available for sale MBS: U.S. government agencies $ 42,309 $ — $ ( 894 ) $ 41,415 Total $ 42,309 $ — $ ( 894 ) $ 41,415 12 Held to maturity and available for sale investment securities with unrealized losses were as follows as of March 31, 2023 (dollars in thousands): Less Than 12 Months 12 Months or Longer Total Estimated Fair Value Gross Unrealized Losses Quantity Estimated Fair Value Gross Unrealized Losses Quantity Estimated Fair Value Gross Unrealized Losses Held to maturity U.S. Treasury and U.S. government agency securities $ 9,507 $ ( 127 ) 1 $ 142,892 $ ( 9,117 ) 25 $ 152,399 $ ( 9,244 ) MBS: U.S. government agencies 22,367 ( 490 ) 24 12,627 ( 1,518 ) 28 34,994 ( 2,008 ) Private label residential 21,709 ( 686 ) 15 22,643 ( 1,417 ) 19 44,352 ( 2,103 ) Taxable municipal securities 2,034 ( 48 ) 1 — — — 2,034 ( 48 ) Bank issued trust preferred securities — — — 472 ( 28 ) 1 472 ( 28 ) Total $ 55,617 $ ( 1,351 ) 41 $ 178,634 $ ( 12,080 ) 73 $ 234,251 $ ( 13,431 ) Available for sale MBS: U.S. government agencies $ 12,440 $ ( 252 ) 9 $ 21,152 $ ( 761 ) 18 $ 33,592 $ ( 1,013 ) Total $ 12,440 $ ( 252 ) 9 $ 21,152 $ ( 761 ) 18 $ 33,592 $ ( 1,013 ) Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2022 (dollars in thousands): Less Than 12 Months 12 Months or Longer Total Estimated Fair Value Gross Unrealized Losses Quantity Estimated Fair Value Gross Unrealized Losses Quantity Estimated Fair Value Gross Unrealized Losses Held to maturity U.S. Treasury and U.S. government agency securities $ 115,504 $ ( 7,224 ) 17 $ 33,638 $ ( 4,885 ) 9 $ 149,142 $ ( 12,109 ) MBS: U.S. government agencies 35,896 ( 1,449 ) 54 5,306 ( 1,037 ) 5 41,202 ( 2,486 ) Private label residential 35,447 ( 2,166 ) 27 8,708 ( 226 ) 6 44,155 ( 2,392 ) Taxable municipal securities 2,035 ( 67 ) 1 — — — 2,035 ( 67 ) Bank issued trust preferred securities 469 ( 31 ) 1 — — — 469 ( 31 ) Total $ 189,351 $ ( 10,937 ) 100 $ 47,652 $ ( 6,148 ) 20 $ 237,003 $ ( 17,085 ) Available for sale MBS: U.S. government agencies $ 25,170 $ ( 292 ) 16 $ 15,705 $ ( 602 ) 13 $ 40,875 $ ( 894 ) Total $ 25,170 $ ( 292 ) 16 $ 15,705 $ ( 602 ) 13 $ 40,875 $ ( 894 ) 13 The Company has evaluated the investment securities in the above tables and has determined that the declines in their fair value are temporary. The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities. The Company has the ability and the intent to hold the investments until the fair value recovers. Further, as of March 31, 2023, management does not have the intent to sell any of the securities classified as available for sale for which the estimated fair value is below the recorded value and believes that it is more likely than not that the Company will not have to sell such securities before a recovery of cost (or recorded value if previously written down). The Company bifurcates OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports. Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans. The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of March 31, 2023 and 2022: Range Weighted Minimum Maximum Average March 31, 2023 Constant prepayment rate 6.00 % 15.00 % 7.38 % Collateral default rate — % 19.63 % 10.56 % Loss severity rate — % 3.17 % 1.04 % March 31, 2022 Constant prepayment rate 6.00 % 15.00 % 8.37 % Collateral default rate 0.53 % 21.55 % 10.53 % Loss severity rate — % 8.53 % 3.72 % The following table presents a roll forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the six months ended March 31, 2023 and 2022 (dollars in thousands): Six Months Ended March 31, 2023 2022 Beginning balance of credit loss $ 836 $ 853 Additions (subtractions): Net realized gain (loss) previously recorded as credit losses ( 9 ) 1 Recovery of prior credit loss ( 5 ) ( 8 ) Ending balance of credit loss $ 822 $ 846 14 During the six months ended March 31, 2023, the Company recorded a $ 9,000 net realized loss on 14 held to maturity investment securities all of which had been recognized previously as credit loss. During the six months ended March 31, 2022, the Company recorded a $ 1,000 net realized gain on 14 held to maturity investment securities all of which had been recognized previously as credit loss. The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral and other non-profit organization deposits totaled $ 215.33 million and $ 133.82 million at March 31, 2023 and September 30, 2022, respectively. The contractual maturities of debt securities at March 31, 2023 were as follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions. Held to Maturity Available for Sale Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due within one year $ 54,872 $ 53,419 $ — $ — Due after one year to five years 123,311 117,192 3,200 3,180 Due after five years to ten years 25,082 22,814 7,653 7,624 Due after ten years 74,646 71,667 44,601 44,034 Total $ 277,911 $ 265,092 $ 55,454 $ 54,838 (3) GOODWILL AND CDI Goodwill is initially recorded when the purchase price paid in a business combination exceeds the estimated fair value of the net identified tangible and intangible assets acquired and liabilities assumed. Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment. The Company performs an annual review during the third quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. For purposes of goodwill impairment testing, the services offered through the Bank and its subsidiary are managed as one strategic unit and represent the Company's only reporting unit. The annual goodwill impairment test begins with a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its carrying amount. If an entity concludes that it is not "more likely than not" that the fair value of a reporting unit is less than its carrying amount, it need not perform a two-step impairment test. If the Company's qualitative assessment concluded that it is "more likely than not" that the fair value of its reporting unit is less than its carrying amount, it must perform the two-step impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the estimated fair value of the reporting unit with its carrying amount, or the book value, including goodwill. If the estimated fair value of the reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the second step of the impairment test is unnecessary. The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit must determine fair value for all assets and liabilities, excluding goodwill. The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill. If the carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value. Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. The Company performed its fiscal year 2022 goodwill impairment test during the quarter ended June 30, 2022. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount, and, therefore, goodwill was determined not to be impaired at May 31, 2022. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the 15 Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year. As of March 31, 2023, management believes that there have been no events or changes in the circumstances since May 31, 2022 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future. If adverse economic conditions or any decreases in the Company's stock price and market capitalization were deemed other than temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on the Company's results of operations and financial condition. The recorded amount of goodwill at March 31, 2023 and September 30, 2022 remained unchanged at $ 15.13 million. CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of a business combination compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. As of March 31, 2023, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI. 16 (4) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans receivable by portfolio segment consisted of the following at March 31, 2023 and September 30, 2022 (dollars in thousands): March 31, 2023 September 30, 2022 Amount Percent Amount Percent Mortgage loans: One- to four-family (1) $ 216,639 16.3 % $ 176,116 14.1 % Multi-family 103,870 7.8 95,025 7.6 Commercial 547,876 41.2 536,650 42.8 Construction - custom and owner/builder 124,071 9.4 119,240 9.5 Construction - speculative one- to four-family 11,343 0.9 12,254 1.0 Construction - commercial 31,458 2.4 40,364 3.2 Construction - multi-family 83,051 6.2 64,480 5.1 Construction - land development 17,018 1.3 19,280 1.5 Land 24,520 1.8 26,854 2.1 Total mortgage loans 1,159,846 87.3 1,090,263 86.9 Consumer loans: Home equity and second mortgage 36,896 2.8 35,187 2.8 Other 2,283 0.2 2,128 0.2 Total consumer loans 39,179 3.0 37,315 3.0 Commercial loans: Commercial business 129,306 9.7 125,039 10.0 U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans 572 — 1,001 0.1 Total commercial loans 129,878 9.7 126,040 10.1 Total loans receivable 1,328,903 100.0 % 1,253,618 100.0 % Less: Undisbursed portion of construction loans in process 99,253 103,168 Deferred loan origination fees, net 4,759 4,321 Allowance for loan losses 14,698 13,703 Subtotal 118,710 121,192 Loans receivable, net $ 1,210,193 $ 1,132,426 _____________________________ (1) Does not include one- to four-family loans held for sale totaling $ 200 and $ 748 at March 31, 2023 and September 30, 2022, respectively. Loans receivable at March 31, 2023 and September 30, 2022 are reported net of unamortized discounts totaling $ 225,000 and $ 267,000 , respectively. 17 Allowance for Loan Losses The following tables set forth information for the three and six months ended March 31, 2023 and 2022 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands): Three Months Ended March 31, 2023 Beginning Allowance Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One- to four-family $ 1,888 $ 164 $ — $ — $ 2,052 Multi-family 871 67 — — 938 Commercial 6,794 110 — — 6,904 Construction – custom and owner/builder 673 53 — — 726 Construction – speculative one- to four-family 125 ( 4 ) — — 121 Construction – commercial 323 ( 56 ) — — 267 Construction – multi-family 577 85 — — 662 Construction – land development 222 23 — — 245 Land 383 ( 20 ) — — 363 Consumer loans: Home equity and second mortgage 493 14 — — 507 Other 47 1 ( 1 ) — 47 Commercial business loans 1,833 38 ( 5 ) — 1,866 Total $ 14,229 $ 475 $ ( 6 ) $ — $ 14,698 Six Months Ended March 31, 2023 Beginning Allowance Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One-to four-family $ 1,658 $ 394 $ — $ — $ 2,052 Multi-family 855 83 — — 938 Commercial 6,682 222 — — 6,904 Construction – custom and owner/builder 675 51 — — 726 Construction – speculative one- to four-family 130 ( 9 ) — — 121 Construction – commercial 343 ( 76 ) — — 267 Construction – multi-family 447 215 — — 662 Construction – land development 233 12 — — 245 Land 397 ( 34 ) — — 363 Consumer loans: Home equity and second mortgage 440 67 — — 507 Other 42 6 ( 1 ) — 47 Commercial business loans 1,801 69 ( 5 ) 1 1,866 Total $ 13,703 $ 1,000 $ ( 6 ) $ 1 $ 14,698 18 Three Months Ended March 31, 2022 Beginning Allowance Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One- to four-family $ 1,237 $ 10 $ — $ — $ 1,247 Multi-family 748 ( 13 ) — — 735 Commercial 6,807 124 — — 6,931 Construction – custom and owner/builder 671 15 — — 686 Construction – speculative one- to four-family 153 ( 27 ) — — 126 Construction – commercial 593 ( 130 ) — — 463 Construction – multi-family 460 ( 24 ) — — 436 Construction – land development 157 ( 31 ) — — 126 Land 435 ( 58 ) — — 377 Consumer loans: Home equity and second mortgage 532 ( 63 ) — — 469 Other 48 ( 4 ) ( 1 ) 1 44 Commercial business loans 1,627 201 ( 49 ) 14 1,793 Total $ 13,468 $ — $ ( 50 ) $ 15 $ 13,433 Six Months Ended March 31, 2022 Beginning Allowance Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One-to four-family $ 1,154 $ 93 $ — $ — $ 1,247 Multi-family 765 ( 30 ) — — 735 Commercial 6,813 118 — — 6,931 Construction – custom and owner/builder 644 42 — — 686 Construction – speculative one- to four-family 188 ( 62 ) — — 126 Construction – commercial 784 ( 321 ) — — 463 Construction – multi-family 436 — — — 436 Construction – land development 124 2 — — 126 Land 470 ( 93 ) — — 377 Consumer loans: Home equity and second mortgage 528 ( 59 ) — — 469 Other 50 ( 5 ) ( 2 ) 1 44 Commercial business loans 1,513 315 ( 49 ) 14 1,793 Total $ 13,469 $ — $ ( 51 ) $ 15 $ 13,433 19 The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at March 31, 2023 and September 30, 2022 (dollars in thousands): Allowance for Loan Losses Recorded Investment in Loans Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Total March 31, 2023 Mortgage loans: One- to four-family $ — $ 2,052 $ 2,052 $ 378 $ 216,261 $ 216,639 Multi-family — 938 938 — 103,870 103,870 Commercial — 6,904 6,904 3,006 544,870 547,876 Construction – custom and owner/builder — 726 726 — 71,750 71,750 Construction – speculative one- to four-family — 121 121 — 7,785 7,785 Construction – commercial — 267 267 — 23,145 23,145 Construction – multi-family — 662 662 — 50,758 50,758 Construction – land development — 245 245 — 14,250 14,250 Land — 363 363 459 24,061 24,520 Consumer loans: Home equity and second mortgage — 507 507 381 36,515 36,896 Other — 47 47 1 2,282 2,283 Commercial business loans 123 1,743 1,866 293 129,013 129,306 SBA PPP loans — — — — 572 572 Total $ 123 $ 14,575 $ 14,698 $ 4,518 $ 1,225,132 $ 1,229,650 September 30, 2022 Mortgage loans: One- to four-family $ — $ 1,658 $ 1,658 $ 388 $ 175,728 $ 176,116 Multi-family — 855 855 — 95,025 95,025 Commercial — 6,682 6,682 2,988 533,662 536,650 Construction – custom and owner/builder — 675 675 — 67,091 67,091 Construction – speculative one- to four-family — 130 130 — 8,364 8,364 Construction – commercial — 343 343 — 29,059 29,059 Construction – multi-family — 447 447 — 34,354 34,354 Construction – land development — 233 233 — 13,582 13,582 Land — 397 397 450 26,404 26,854 Consumer loans: Home equity and second mortgage — 440 440 394 34,793 35,187 Other — 42 42 3 2,125 2,128 Commercial business loans 127 1,674 1,801 309 124,730 125,039 SBA PPP loans — — — — 1,001 1,001 Total $ 127 $ 13,576 $ 13,703 $ 4,532 $ 1,145,918 $ 1,150,450 20 The following tables present an analysis of loans by aging category and portfolio segment at March 31, 2023 and September 30, 2022 (dollars in thousands): 30–59 Days Past Due 60-89 Days Past Due Non- Accrual (1) Past Due 90 Days or More and Still Accruing Total Past Due Current Total Loans March 31, 2023 Mortgage loans: One- to four-family $ — $ — $ 378 $ — $ 378 $ 216,261 $ 216,639 Multi-family — — — — — 103,870 103,870 Commercial — — 694 — 694 547,182 547,876 Construction – custom and owner/builder — — — — — 71,750 71,750 Construction – speculative one- to four-family — — — — — 7,785 7,785 Construction – commercial — — — — — 23,145 23,145 Construction – multi-family — — — — — 50,758 50,758 Construction – land development — — — — — 14,250 14,250 Land — — 362 — 362 24,158 24,520 Consumer loans: Home equity and second mortgage 28 — 241 — 269 36,627 36,896 Other — — 1 — 1 2,282 2,283 Commercial business loans 194 — 293 — 487 128,819 129,306 SBA PPP loans — — — — — 572 572 Total $ 222 $ — $ 1,969 $ — $ 2,191 $ 1,227,459 $ 1,229,650 September 30, 2022 Mortgage loans: One- to four-family $ — $ — $ 388 $ — $ 388 $ 175,728 $ 176,116 Multi-family — — — — — 95,025 95,025 Commercial — — 657 — 657 535,993 536,650 Construction – custom and owner/builder — — — — — 67,091 67,091 Construction – speculative one- to four-family — — — — — 8,364 8,364 Construction – commercial — — — — — 29,059 29,059 Construction – multi-family — — — — — 34,354 34,354 Construction – land development — — — — — 13,582 13,582 Land — — 450 — 450 26,404 26,854 Consumer loans: Home equity and second mortgage 37 — 252 — 289 34,898 35,187 Other — — 3 — 3 2,125 2,128 Commercial business loans — — 309 — 309 124,730 125,039 SBA PPP loans — — — — — 1,001 1,001 Total $ 37 $ — $ 2,059 $ — $ 2,096 $ 1,148,354 $ 1,150,450 ______________________ (1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual. 21 Credit Quality Indicators The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential. The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral. The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio: Pass: Pass loans are defined as those loans that meet acceptable quality underwriting standards. Watch: Watch loans are defined as those loans that still exhibit acceptable quality, but have some concerns that justify greater attention. If these concerns are not corrected, a potential for further adverse categorization exists. These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment. Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan. Substandard: Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Loans 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: Loans in this classification have the weaknesses of substandard loans with the additional characteristic that the weaknesses make the collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. At March 31, 2023 and September 30, 2022, there were no loans classified as doubtful. Loss: Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At March 31, 2023 and September 30, 2022, there were no loans classified as loss. 22 The following tables present an analysis of loans by credit quality indicator and portfolio segment at March 31, 2023 and September 30, 2022 (dollars in thousands): Loan Grades March 31, 2023 Pass Watch Special Mention Substandard Total Mortgage loans: One- to four-family $ 216,226 $ 33 $ — $ 380 $ 216,639 Multi-family 103,870 — — — 103,870 Commercial 534,258 8,103 — 5,515 547,876 Construction – custom and owner/builder 68,505 3,245 — — 71,750 Construction – speculative one- to four-family 7,785 — — — 7,785 Construction – commercial 23,145 — — — 23,145 Construction – multi-family 50,758 — — — 50,758 Construction – land development 14,231 — — 19 14,250 Land 23,551 510 — 459 24,520 Consumer loans: Home equity and second mortgage 36,416 34 — 446 36,896 Other 2,255 27 — 1 2,283 Commercial business loans 128,997 — — 309 129,306 SBA PPP loans 540 32 — — 572 Total $ 1,210,537 $ 11,984 $ — $ 7,129 $ 1,229,650 September 30, 2022 Mortgage loans: One- to four-family $ 175,687 $ 38 $ — $ 391 $ 176,116 Multi-family 95,025 — — — 95,025 Commercial 522,741 7,940 237 5,732 536,650 Construction – custom and owner/builder 65,249 1,842 — — 67,091 Construction – speculative one- to four-family 8,364 — — — 8,364 Construction – commercial 29,059 — — — 29,059 Construction – multi-family 34,354 — — — 34,354 Construction – land development 13,557 — — 25 13,582 Land 25,882 522 — 450 26,854 Consumer loans: Home equity and second mortgage 34,709 19 — 459 35,187 Other 2,063 62 — 3 2,128 Commercial business loans 124,712 — — 327 125,039 SBA PPP loans 1,001 — — — 1,001 Total $ 1,132,403 $ 10,423 $ 237 $ 7,387 $ 1,150,450 Impaired Loans A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current 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 that such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses, and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The categories of non-accrual loans and impaired loans overlap, although they are not identical. 23 The following table is a summary of information related to impaired loans by portfolio segment as of March 31, 2023 and for the three and six months then ended (dollars in thousands): Recorded Investment Unpaid Principal Balance (Loan Balance Plus Charge Off) Related Allowance Quarter to Date ("QTD") Average Recorded Investment (1) Year to Date ("YTD") Average Recorded Investment (2) QTD Interest Income Recognized (1) YTD Interest Income Recognized (2) QTD Cash Basis Interest Income Recognized (1) YTD Cash Basis Interest Income Recognized (2) With no related allowance recorded: Mortgage loans: One- to four-family $ 378 $ 421 $ — $ 381 $ 386 $ 7 $ 14 $ 7 $ 14 Commercial 3,006 3,006 — 2,890 2,984 40 81 30 63 Land 459 459 — 442 438 2 2 2 2 Consumer loans: Home equity and second mortgage 381 381 — 496 400 3 6 3 5 Other 1 1 — 2 3 — — — — Commercial business loans 48 97 — 52 57 — — — — Subtotal 4,273 4,365 — 4,263 4,268 52 103 42 84 With an allowance recorded: Commercial business loans 245 245 123 247 249 — — — — Subtotal 245 245 123 247 249 — — — — Total: Mortgage loans: One- to four-family 378 421 — 381 386 7 14 7 14 Commercial 3,006 3,006 — 2,890 2,984 40 81 30 63 Land 459 459 — 442 438 2 2 2 2 Consumer loans: Home equity and second mortgage 381 381 — 496 400 3 6 3 5 Other 1 1 — 2 3 — — — — Commercial business loans 293 342 123 299 306 — — — — Total $ 4,518 $ 4,610 $ 123 $ 4,510 $ 4,517 $ 52 $ 103 $ 42 $ 84 ______________________________________________ (1) For the three months ended March 31, 2023 . (2) For the six months ended March 31, 2023. 24 The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2022 (dollars in thousands): Recorded Investment Unpaid Principal Balance (Loan Balance Plus Charge Off) Related Allowance YTD Average Recorded Investment (1) YTD Interest Income Recognized (1) YTD Cash Basis Interest Income Recognized (1) With no related allowance recorded: Mortgage loans: One- to four-family $ 388 $ 432 $ — $ 470 $ 31 $ 31 Commercial 2,988 2,988 — 3,041 152 123 Land 450 450 — 492 — — Consumer loans: Home equity and second mortgage 394 394 — 436 6 5 Other 3 3 — 7 — — Commercial business loans 59 108 — 121 — — Subtotal 4,282 4,375 — 4,567 189 159 With an allowance recorded: Consumer loans: Home equity and second mortgage — — — 145 — — Commercial business loans 250 250 127 268 — — Subtotal 250 250 127 413 — — Total Mortgage loans: One- to four-family 388 432 — 470 31 31 Commercial 2,988 2,988 — 3,041 152 123 Land 450 450 — 492 — — Consumer loans: Home equity and second mortgage 394 394 — 581 6 5 Other 3 3 — 7 — — Commercial business loans 309 358 127 389 — — Total $ 4,532 $ 4,625 $ 127 $ 4,980 $ 189 $ 159 _____________________________________________ (1) For the year ended September 30, 2022. 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 non-accrual (and considered to be non-performing) unless they have been performing in accordance with modified terms for a period of at least six months. The Company had $ 2.60 million and $ 2.62 million in TDRs included in impaired loans at March 31, 2023 and September 30, 2022, respectively, and had no commitments at these dates to lend additional funds on these loans. There was no allowance for loan losses allocated to TDRs at March 31, 2023 and September 30, 2022. There were no TDRs for which there was a payment default within the first 12 months of the modification during the six months ended March 31, 2023. 25 The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of March 31, 2023 and September 30, 2022 (dollars in thousands): March 31, 2023 Accruing Non- Accrual Total Mortgage loans: Commercial $ 2,312 $ — $ 2,312 Land 97 — 97 Consumer loans: Home equity and second mortgage 141 50 191 Total $ 2,550 $ 50 $ 2,600 September 30, 2022 Accruing Non- Accrual Total Mortgage loans: Commercial $ 2,330 $ — $ 2,330 Land — 88 88 Consumer loans: Home equity and second mortgage 142 55 197 Total $ 2,472 $ 143 $ 2,615 There were no new TDRs recognized during the six months ended March 31, 2023. There was one new TDR recognized during the year ended September 30, 2022. The following table sets forth information with respect to the Company's TDR, by portfolio segment, during the year ended September 30, 2022: September 30, 2022 Number of Contracts Pre-Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment End of Period Balance Home equity and second mortgage loan (1) 1 $ 136 $ 145 $ 142 Total 1 $ 136 $ 145 $ 142 (1) Modification was a result of an increase in principal balance and a reduction in interest rate and monthly payment. (5) LEASES At March 31, 2023, the Company has operating leases for two retail bank branch offices. The Company's leases have remaining lease terms of four to nine years , both of which include options to extend the leases for up to five years . Lease extensions are not certain, and the Company evaluates each lease based on the specific circumstances for the location to determine the probability of exercising the extensions in the calculation of ROU assets and liabilities. The components of lease cost (included in the premises and equipment expense category in the consolidated statements of income) are as follows for the three and six months ended March 31, 2023 and 2022 (dollars in thousands): Three Months Ended March 31, Six Months Ended March 31, Lease cost: 2023 2022 2023 2022 Operating lease cost $ 85 $ 94 $ 174 $ 188 Short-term lease cost — — — — Total lease cost $ 85 $ 94 $ 174 $ 188 26 The following tables provide supplemental information related to operating leases at or for the three and six months ended March 31, 2023 and 2022 (dollars in thousands): At or For the Three Months Ended March 31, 2023 At or For the Six Months Ended March 31, 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 78 $ 155 Weighted average remaining lease term-operating leases 7.2 years 7.2 years Weighted average discount rate-operating leases 2.25 % 2.25 % At or For the Three Months Ended March 31, 2022 At or For the Six Months Ended March 31, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 87 $ 174 Weighted average remaining lease term-operating leases 8.1 years 8.1 years Weighted average discount rate-operating leases 2.24 % 2.24 % The Company's leases typically do not contain a discount rate implicit in the lease contracts. As an alternative, the weighted average discount rate used to estimate the present value of future lease payments in calculating the value of the ROU asset and lease liability was determined by utilizing the FHLB fixed-rate credit advance borrowing rate for the term correlating to the remaining term of each lease. Maturities of operating lease liabilities at March 31, 2023 for future fiscal years are as follows (dollars in thousands): Remainder of 2023 $ 155 2024 313 2025 317 2026 284 2027 219 Thereafter 820 Total lease payments 2,108 Less imputed interest 173 Total $ 1,935 (6) NET INCOME PER COMMON SHARE Basic net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding during the period without considering any dilutive items. Diluted net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period. Common stock equivalents arise from the assumed conversion of outstanding stock options to purchase common stock. 27 Information regarding the calculation of basic and diluted net income per common share for the three and six months ended March 31, 2023 and 2022 is as follows (dollars in thousands, except per share amounts): Three Months Ended March 31, Six Months Ended March 31, 2023 2022 2023 2022 Basic net income per common share computation Numerator – net income $ 6,663 $ 5,327 $ 14,169 $ 10,812 Denominator – weighted average common shares outstanding 8,220,532 8,337,407 8,226,467 8,346,839 Basic net income per common share $ 0.81 $ 0.64 $ 1.72 $ 1.30 Diluted net income per common share computation Numerator – net income $ 6,663 $ 5,327 $ 14,169 $ 10,812 Denominator – weighted average common shares outstanding 8,220,532 8,337,407 8,226,467 8,346,839 Effect of dilutive stock options (1) 83,838 84,468 85,163 88,697 Weighted average common shares outstanding - assuming dilution 8,304,370 8,421,875 8,311,630 8,435,536 Diluted net income per common share $ 0.80 $ 0.63 $ 1.70 $ 1.28 ____________________________________________ (1) For the three and six months ended March 31, 2023, average options to purchase 176,867 and 177,484 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share, because their effect would have been anti-dilutive. For the three and six months ended March 31, 2022, average options to purchase 204,398 and 207,256 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share, because their effect would have been anti-dilutive. 28 (7) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the three and six months ended March 31, 2023 and 2022 are as follows (dollars in thousands): Three Months Ended March 31, 2023 Changes in fair value of available for sale securities (1) Changes in OTTI on held to maturity securities (1) Total (1) Balance of AOCI at the beginning of period $ ( 725 ) $ ( 10 ) $ ( 735 ) Other comprehensive income 239 1 240 Balance of AOCI at the end of period $ ( 486 ) $ ( 9 ) $ ( 495 ) Six Months Ended March 31, 2023 Changes in fair value of available for sale securities (1) Changes in OTTI on held to maturity securities (1) Total (1) Balance of AOCI at the beginning of period $ ( 706 ) $ ( 11 ) $ ( 717 ) Other comprehensive income 220 2 222 Balance of AOCI at the end of period $ ( 486 ) $ ( 9 ) $ ( 495 ) Three Months Ended March 31, 2022 Changes in fair value of available for sale securities (1) Changes in OTTI on held to maturity securities (1) Total (1) Balance of AOCI at the beginning of period $ 57 $ ( 15 ) $ 42 Other comprehensive income (loss) ( 152 ) 3 ( 149 ) Balance of AOCI at the end of period $ ( 95 ) $ ( 12 ) $ ( 107 ) Six Months Ended March 31, 2022 Changes in fair value of available for sale securities (1) Changes in OTTI on held to maturity securities (1) Total (1) Balance of AOCI at the beginning of period $ 75 $ ( 16 ) $ 59 Other comprehensive income (loss) ( 170 ) 4 ( 166 ) Balance of AOCI at the end of period $ ( 95 ) $ ( 12 ) $ ( 107 ) __________________________ (1) All amounts are net of income taxes. (8) STOCK COMPENSATION PLANS Under the Company’s 2003 Stock Option Plan, the Company was able to grant options for up to 300,000 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of 29 common stock to employees, officers, directors and directors emeriti. Under the Company's 2019 Equity Incentive Plan, the Company is able to grant options and awards or restricted stock (with or without performance measures) for up to 350,000 shares of common stock, of which 300,000 shares are reserved to be awarded to employees, including officers, and 50,000 shares are reserved to be awarded to directors and directors emeriti. Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally, options and restricted stock vest in 20 % annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of grant. At March 31, 2023, there were 1,796 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2014 Equity Incentive Plan. At March 31, 2023, there were 198,900 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2019 Equity Incentive Plan. At both March 31, 2023 and 2022, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the six months ended March 31, 2023 and 2022. Stock option activity for the six months ended March 31, 2023 and 2022 is summarized as follows: Six Months Ended March 31, 2023 Six Months Ended March 31, 2022 Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Options outstanding, beginning of period 421,925 $ 23.30 406,815 $ 21.62 Exercised ( 26,055 ) 19.88 ( 27,470 ) 12.09 Granted 1,000 33.40 1,000 27.25 Forfeited ( 4,600 ) 27.38 ( 17,170 ) 25.91 Options outstanding, end of period 392,270 $ 23.50 363,175 $ 22.15 The fair value of stock options is determined using the Black-Scholes valuation model. The weighted average assumptions for options granted during the six months ended March 31, 2023 were as follows: Expected volatility 33 % Expected life (in years) 5 Expected dividend yield 2.99 % Risk free interest rate 3.58 % Grant date fair value per share $ 8.65 The aggregate intrinsic value of options exercised during the six months ended March 31, 2023 and 2022 was $ 337,000 and $ 443,000 , respectively. At March 31, 2023, there were 189,910 unvested options with an aggregate grant date fair value of $ 1.07 million, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at March 31, 2023 was $ 371,000 . There were 200 options vested during the six months ended March 31, 2023 with a total fair value of $ 1,000 . At March 31, 2022, there were 178,670 unvested options with an aggregate grant date fair value of $ 847,000 . There were 400 options that vested during the six months ended March 31, 2022 with a total fair value of $ 2,000 . 30 Additional information regarding options outstanding at March 31, 2023 is as follows: Options Outstanding Options Exercisable Range of Exercise Prices ($) Number Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Number Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) 9.00 14,000 $ 9.00 0.6 14,000 $ 9.00 0.6 10.26 - 10.71 45,000 10.55 1.9 45,000 10.55 1.9 15.67 - 19.13 75,500 16.54 6.3 38,810 16.19 5.2 26.50 - 27.40 108,820 27.31 8.5 20,740 27.14 6.5 28.23 - 29.69 113,150 28.78 7.0 55,950 29.35 5.4 31.80 - 33.40 35,800 31.84 5.6 27,860 31.80 5.5 392,270 $ 23.50 6.3 202,360 $ 21.35 4.4 The aggregate intrinsic value of options outstanding at March 31, 2023 and 2022 was $ 1.78 million and $ 2.17 million , respectively. As of March 31, 2023, unrecognized compensation cost related to unvested stock options was $ 972,000 , which is expected to be recognized over a weighted average life of 5.00 years. (9) FAIR VALUE MEASUREMENTS Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability based on the best information available in the circumstances. The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1). 31 The Company had no liabilities measured at fair value on a recurring basis at March 31, 2023 and September 30, 2022. The Company's assets measured at estimated fair value on a recurring basis at March 31, 2023 and September 30, 2022 were as follows (dollars in thousands): March 31, 2023 Estimated Fair Value Level 1 Level 2 Level 3 Total Available for sale investment securities MBS: U.S. government agencies $ — $ 54,838 $ — $ 54,838 Investments in equity securities Mutual funds 850 — — 850 Total $ 850 $ 54,838 $ — $ 55,688 September 30, 2022 Estimated Fair Value Level 1 Level 2 Level 3 Total Available for sale investment securities MBS: U.S. government agencies $ — $ 41,415 $ — $ 41,415 Investments in equity securities Mutual funds 835 — — 835 Total $ 835 $ 41,415 $ — $ 42,250 There were no transfers among Level 1, Level 2 and Level 3 during the six months ended March 31, 2023 and the year ended September 30, 2022. The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis: Impaired Loans : The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of the comparable collateral included in the appraisal and known changes in the market and in the underlying collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. 32 The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at March 31, 2023 (dollars in thousands): Estimated Fair Value Level 1 Level 2 Level 3 Impaired loans: Commercial business loans $ — $ — $ 126 Total $ — $ — $ 126 The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of March 31, 2023 (dollars in thousands): Estimated Fair Value Valuation Technique(s) Unobservable Input(s) Impaired loans $ 126 Market approach Appraised value less estimated selling costs The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2022 (dollars in thousands): Estimated Fair Value Level 1 Level 2 Level 3 Impaired loans: Commercial business loans $ — $ — $ 123 Total $ — $ — $ 123 The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2022 (dollars in thousands): Estimated Fair Value Valuation Technique(s) Unobservable Input(s) Impaired loans $ 123 Market approach Appraised value less estimated selling costs GAAP requires disclosure of estimated fair values for certain financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but for which may have significant value. The Company does not believe that it would be practicable to estimate a representative fair value for these types of items as of March 31, 2023 and September 30, 2022. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with GAAP, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis. 33 The recorded amounts and estimated fair values of financial instruments were as follows as of March 31, 2023 and September 30, 2022 (dollars in thousands): March 31, 2023 Fair Value Measurements Using: Recorded Amount Estimated Fair Value Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents $ 142,483 $ 142,483 $ 142,483 $ — $ — CDs held for investment 20,168 20,168 20,168 — — Investment securities 332,749 319,930 162,022 157,908 — Investments in equity securities 850 850 850 — — FHLB stock 2,202 2,202 2,202 — — Other investments 3,000 3,000 3,000 — — Loans held for sale 200 204 204 — — Loans receivable, net 1,210,193 1,171,041 — — 1,171,041 Accrued interest receivable 5,295 5,295 5,295 — — Financial liabilities Certificates of deposit 186,109 183,424 — — 183,424 Accrued interest payable 500 500 500 — — September 30, 2022 Fair Value Measurements Using: Recorded Amount Estimated Fair Value Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents $ 316,755 $ 316,755 $ 316,755 $ — $ — CDs held for investment 22,894 22,519 22,519 — — Investment securities 308,023 291,198 158,578 132,620 — Investments in equity securities 835 835 835 — — FHLB stock 2,194 2,194 2,194 — — Other investments 3,000 3,000 3,000 — — Loans held for sale 748 758 758 — — Loans receivable, net 1,132,426 1,124,579 — — 1,124,579 Accrued interest receivable 4,483 4,483 4,483 — — Financial liabilities Certificates of deposit 122,584 120,807 — — 120,807 Accrued interest payable 108 108 108 — — (10) RECENT ACCOUNTING PRONOUNCEMENTS In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments , as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11. ASU 2016-13 replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changes the accounting for PCI debt securities and loans. ASU 34 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. As a "smaller reporting company" filer with the U.S. Securities and Exchange Commission, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for OTTI on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to help ensure that it is fully compliant with ASU 2016-13 at the adoption date. At this time, the Company anticipates that the allowance for loan losses will increase as a result of the implementation of ASU 2016-13; however, until its evaluation is complete, the magnitude of this increase will be unknown. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity would then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity would consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's future consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2024. The Company has not adopted ASU 2020-04 as of March 31, 2023. The adoption of ASU 2020-04 is not expected to have a material impact on the Company's future consolidated financial statements. In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) for creditors, require new disclosures for creditors for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty, and require public business entities to include current-period gross write-offs in the vintage disclosure tables. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU 2022-02 is not expected to have a material impact on the Company's future consolidated financial statements. (11) REVENUE FROM CONTRACTS WITH CUSTOMERS ASU 2014-09 Revenue from Contracts with Customers (" ASC 606") applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of the Company's revenues are composed of interest income, deferred loan fee accretion, premium/discount accretion, gains on sales of loans and investments, BOLI net earnings, servicing income on loans sold and other loan fee income, which are not within the scope of ASC 606. Revenue reported as service charges on deposits, ATM and debit card interchange transaction fees, merchant services fees, non-deposit investment fees and escrow fees are within the scope of ASC 606. All of the Company's revenue from contracts with customers withi n the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense. For the three months ended March 31, 2023, the Company recognized $ 893,000 in service charges on deposits, $ 1.28 million in ATM and debit card interchange transaction fees, $ 29,000 in escrow fees, and $ 4,000 in fee income from non-deposit investment sales. For the six months ended March 31, 2023, the Company recognized $ 1.84 million in service charges on deposits, $ 2.53 million in ATM and debit card interchange transaction fees, $ 59,000 in escrow fees and $ 34,000 in fee income from non-deposit investment sales. For the three months ended March 31, 2022, the Company recognized 35 $ 1.01 million in service charges on deposits, $ 1.25 million in ATM and debit card interchange transaction fees, $ 44,000 in escrow fees, and $ 8,000 in fee income from non-deposit investment sales. For the six months ended March 31, 2022, the Company recognized $ 1.93 million in service charges on deposits, $ 2.52 million in ATM and debit card interchanges transaction fees, $ 123,000 in escrow fees, and $ 10,000 in fee income from non-deposit investment sales. If a contract is determined to be within the scope of ASC 606, the Company recognizes revenue when it satisfies its performance obligation. Descriptions of the Company's revenue-generating activities that are within the scope of ASC 606 are as follows: • Service Charges on Deposits: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed, as the contract duration does not extend beyond the service performed. • ATM and Debit Card Interchange Transaction Fees: The Company earns fees from cardholder transactions conducted through third-party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis. • Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property according to the customer's contract. Fees are recognized when the escrow contract closes. • Fee Income from Non-deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer. (12) COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk not recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit - worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. However, such loan to value ratios will subsequently change, based on increases and decreases in the supporting collateral values. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, land and income-producing commercial properties. A summary of the Company's commitments at March 31, 2023 and 2022 are listed below (in thousands): March 31, 2023 March 31, 2022 Undisbursed portion of construction loans in process (see Note 4) $ 99,253 $ 100,719 Undisbursed lines of credit 138,711 120,918 Commitments to extend credit 41,218 34,962 $ 279,182 $ 256,599 The Company maintains a separate reserve for losses related to unfunded loan commitments. Management estimates the amount of probable losses related to unfunded loan commitments by applying the loss factors used in the allowance for loan loss methodology to an estimate of the expected amount of funding and applies this adjusted factor to the unused portion of 36 unfunded loan commitments. The reserve for unfunded loan commitments totaled $ 320,000 and $ 345,000 at March 31, 2023 and 2022, respectively. These amounts are included in other liabilities and accrued expenses in the accompanying consolidated balance sheets. Increases (decreases) in the reserve for unfunded loan commitments are recorded in non-interest expense in the accompanying consolidated statements of income. The Bank has an employee severance compensation plan which expires in 2027 and provides for severance pay benefits to eligible employees in the event of a change in control of Timberland Bancorp or the Bank (as defined in the plan). In general, all employees with two or more years of service will be eligible to participate in the plan. Under the plan, in the event of a change in control of Timberland Bancorp or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control would be entitled to a payment based on years of service or officer rank with the Bank. The maximum payment for any eligible employee would be equal to 18 months of the employee’s current compensation. Timberland Bancorp has entered into employment contracts with certain key employees, which provide for contingent payment subject to future events. Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the future consolidated financial position of the Company.