TIMBERLAND BANCORP INC 10-Q

Item 1. Financial Statements (unaudited) TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, 2024 and September 30, 2023 (Dollars in thousands, except per share amounts) March 31, 2024 September 30, 2023 (Unaudited) * Assets Cash and cash equivalents: Cash and due from financial institutions $ 22,310 $ 25,390 Interest-bearing deposits in banks 158,039 103,331 Total cash and cash equivalents 180,349 128,721 Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value) 11,204 15,188 Investment securities held to maturity, at amortized cost (net of allowance for credit losses of $ 85 at March 31, 2024), (estimated fair value of $ 200,807 and $ 253,766 ) 211,818 270,218 Investment securities available for sale, at fair value 61,746 41,771 Investments in equity securities, at fair value 839 811 Federal Home Loan Bank of Des Moines (“FHLB”) stock, at cost 2,037 3,602 Other investments, at cost 3,000 3,000 Loans held for sale 1,311 400 Loans receivable, net of allowance for credit losses of $ 16,818 and $ 15,817 1,359,116 1,302,305 Premises and equipment, net 21,718 21,642 Accrued interest receivable 7,108 6,004 Bank owned life insurance (“BOLI”) 23,278 22,966 Goodwill 15,131 15,131 Core deposit intangible (“CDI”), net 564 677 Loan servicing rights, net 1,717 2,124 Operating lease right-of-use ("ROU") assets 1,624 1,772 Other assets 4,674 3,573 Total assets $ 1,907,234 $ 1,839,905 Liabilities and shareholders’ equity Liabilities Deposits: Non-interest-bearing demand $ 424,906 $ 455,864 Interest-bearing 1,213,648 1,105,071 Total deposits 1,638,554 1,560,935 FHLB borrowings 20,000 35,000 Operating lease liabilities 1,723 1,867 Other liabilities and accrued expenses 8,278 9,030 Total liabilities $ 1,668,555 $ 1,606,832 * 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, 2024 and September 30, 2023 (Dollars in thousands, except per share amounts) March 31, 2024 September 30, 2023 (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; 8,023,121 shares issued and outstanding - March 31, 2024 8,105,338 shares issued and outstanding - September 30, 2023 32,338 34,771 Retained earnings 207,086 199,386 Accumulated other comprehensive loss ( 745 ) ( 1,084 ) Total shareholders’ equity 238,679 233,073 Total liabilities and shareholders’ equity $ 1,907,234 $ 1,839,905 * 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, 2024 and 2023 (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Interest and dividend income Loans receivable and loans held for sale $ 18,909 $ 14,950 $ 37,304 $ 29,407 Investment securities 2,246 2,460 4,556 4,674 Dividends from mutual funds, FHLB stock and other investments 82 64 173 115 Interest-bearing deposits in banks and CDs 1,919 1,913 3,618 4,304 Total interest and dividend income 23,156 19,387 45,651 38,500 Interest expense Deposits 7,301 2,236 13,444 3,606 FHLB borrowings 220 — 568 — Total interest expense 7,521 2,236 14,012 3,606 Net interest income 15,635 17,151 31,639 34,894 Provision for (recapture of) credit losses Provision for credit losses - loans 166 475 545 1,000 Provision for (recapture of) credit losses - investment securities 3 — ( 7 ) — Recapture of credit losses - unfunded commitments ( 88 ) — ( 121 ) — Total provision for credit loss - net 81 475 417 1,000 Net interest income after provision for (recapture of) credit losses 15,554 16,676 31,222 33,894 Non-interest income Net recoveries on investment securities 2 2 7 5 Service charges on deposits 988 893 2,011 1,840 ATM and debit card interchange transaction fees 1,212 1,275 2,476 2,526 BOLI net earnings 156 157 312 313 Gain on sales of loans, net 41 46 120 67 Escrow fees 15 29 33 59 Other, net 201 234 454 531 Total non-interest income, net 2,615 2,636 5,413 5,341 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, 2024 and 2023 (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Non-interest expense Salaries and employee benefits $ 6,024 $ 6,046 $ 11,936 $ 11,946 Premises and equipment 1,081 1,001 2,054 1,925 Advertising 159 178 345 372 ATM and debit card interchange transaction fees 601 489 1,216 972 Postage and courier 145 147 271 268 State and local taxes 325 298 644 597 Professional fees 319 473 572 902 Federal Deposit Insurance Corporation ("FDIC") insurance 206 202 416 326 Loan administration and foreclosure 134 138 239 259 Technology and communications 1,040 880 2,014 1,668 Deposit operations 324 246 644 592 Amortization of CDI 57 67 113 135 Other 576 779 1,151 1,517 Total non-interest expense, net 10,991 10,944 21,615 21,479 Income before income taxes 7,178 8,368 15,020 17,756 Provision for income taxes 1,470 1,705 3,016 3,587 Net income $ 5,708 $ 6,663 $ 12,004 $ 14,169 Net income per common share Basic $ 0.71 $ 0.81 $ 1.48 $ 1.72 Diluted $ 0.70 $ 0.80 $ 1.47 $ 1.70 Weighted average common shares outstanding Basic 8,081,924 8,220,532 8,098,155 8,226,467 Diluted 8,121,109 8,304,370 8,143,701 8,311,630 Dividends paid per common share $ 0.24 $ 0.23 $ 0.47 $ 0.55 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, 2024 and 2023 (Dollars in thousands) (Unaudited) Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Comprehensive income Net income $ 5,708 $ 6,663 $ 12,004 $ 14,169 Other comprehensive income Unrealized holding gain on investment securities available for sale, net of income taxes of $ 22 , $ 64 , $ 88 and $ 58 , respectively 82 239 330 220 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 ,$ 0 , $ 2 , and $ 1 , respectively — 1 9 2 Total other comprehensive income, net of income taxes 82 240 339 222 Total comprehensive income $ 5,790 $ 6,903 $ 12,343 $ 14,391 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, 2024 and 2023 (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, 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 -based compensation expense — 78 — — 78 Balance, March 31, 2023 8,203,174 $ 37,979 $ 190,177 $ ( 495 ) $ 227,661 Balance, December 31, 2023 8,120,708 $ 34,869 $ 203,327 $ ( 827 ) $ 237,369 Net income — — 5,708 — 5,708 Other comprehensive income — — — 82 82 Repurchase of common stock ( 99,787 ) ( 2,672 ) — — ( 2,672 ) Exercise of stock options 2,200 35 — — 35 Common stock dividends ($ 0.24 per common share) — — ( 1,949 ) — ( 1,949 ) Stock-based compensation expense — 106 — — 106 Balance, March 31, 2024 8,023,121 $ 32,338 $ 207,086 $ ( 745 ) $ 238,679 Common Stock Accumulated Other Compre-hensive Income (Loss) Number of Shares Amount Retained Earnings Total 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-based compensation expense — 156 — — 156 Balance, March 31, 2023 8,203,174 $ 37,979 $ 190,177 $ ( 495 ) $ 227,661 Balance, September 30, 2023 8,105,338 $ 34,771 $ 199,386 $ ( 1,084 ) $ 233,073 Net income — — 12,004 — 12,004 Other comprehensive income — — — 339 339 Repurchase of common stock ( 112,117 ) ( 3,034 ) — — ( 3,034 ) Exercise of stock options 29,900 390 — — 390 Common stock dividends ($ 0.47 per common share) — — ( 3,816 ) — ( 3,816 ) Stock-based compensation expense — 211 — — 211 Adoption of ASU 2016-13 , net of tax — — ( 488 ) — ( 488 ) Balance, March 31, 2024 8,023,121 $ 32,338 $ 207,086 $ ( 745 ) $ 238,679 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, 2024 and 2023 (Dollars in thousands) (Unaudited) Six Months Ended March 31, 2024 2023 Cash flows from operating activities Net income $ 12,004 $ 14,169 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 417 1,000 Depreciation 720 672 Accretion of discount on purchased loans ( 20 ) ( 43 ) Amortization of CDI 113 135 Stock-based compensation expense 211 156 Net recoveries on investment securities ( 7 ) ( 5 ) Change in fair value of investments in equity securities ( 28 ) ( 15 ) Accretion of discounts and premiums on securities ( 574 ) ( 631 ) Gain on sales of loans, net ( 120 ) ( 67 ) Loans originated for sale ( 6,865 ) ( 2,931 ) Proceeds from sales of loans 6,074 3,546 Amortization of loan servicing rights 467 522 BOLI net earnings ( 312 ) ( 313 ) Increase (decrease) in deferred loan origination fees ( 63 ) 438 Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses ( 3,042 ) ( 1,269 ) Net cash provided by operating activities 8,975 15,364 Cash flows from investing activities Net decrease in CDs held for investment 3,984 2,726 Purchase of investment securities held to maturity ( 1,919 ) ( 15,602 ) Purchase of investment securities available for sale ( 22,207 ) ( 16,994 ) Proceeds from maturities and prepayments of investment securities held to maturity 60,810 4,865 Proceeds from maturities and prepayments of investment securities available for sale 2,667 3,921 Purchase of FHLB stock — ( 8 ) Redemption of FHLB stock 1,565 — Increase in loans receivable, net ( 57,610 ) ( 79,162 ) Purchases of premises and equipment ( 796 ) ( 518 ) Net cash used in investing activities ( 13,506 ) ( 100,772 ) 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, 2024 and 2023 (Dollars in thousands) (Unaudited) Six Months Ended March 31, 2024 2023 Cash flows from financing activities Net increase (decrease) in deposits $ 77,619 $ ( 83,409 ) Repayments of FHLB borrowings ( 15,000 ) — Proceeds from exercise of stock options 390 517 Repurchase of common stock ( 3,034 ) ( 1,445 ) Payment of dividends ( 3,816 ) ( 4,527 ) Net cash provided by (used in) financing activities 56,159 ( 88,864 ) Net increase (decrease) in cash and cash equivalents 51,628 ( 174,272 ) Cash and cash equivalents Beginning of period 128,721 316,755 End of period $ 180,349 $ 142,483 Supplemental disclosure of cash flow information Income taxes paid $ 3,388 $ 4,634 Interest paid $ 13,473 $ 3,214 Supplemental disclosure of non-cash investing activities Other comprehensive income related to investment securities $ 339 $ 222 Adjustment to retained earnings, net of deferred tax; - adoption of ASU 2016-13 $ ( 488 ) $ — 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, 2023 (“2023 Form 10-K”). The unaudited consolidated results of operations for the six months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2024. (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, 2024 presentation with no change to previously reported net income or total shareholders’ equity. (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, 2024 and September 30, 2023 (dollars in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses ("ACL") March 31, 2024 Held to Maturity U.S. Treasury and U.S. government agency securities $ 122,087 $ — $ ( 6,952 ) $ 115,135 $ — Mortgage-backed securities ("MBS"): U.S. government agencies 52,218 3 ( 2,676 ) 49,545 — Private label residential 35,153 328 ( 1,658 ) 33,823 77 Municipal securities 1,868 — ( 24 ) 1,844 — Bank issued trust preferred securities 492 — ( 32 ) 460 8 Total held to maturity $ 211,818 $ 331 $ ( 11,342 ) $ 200,807 $ 85 11 March 31, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Available for Sale MBS: U.S. government agencies $ 62,689 $ 34 $ ( 977 ) $ 61,746 Total $ 62,689 $ 34 $ ( 977 ) $ 61,746 September 30, 2023 Held to Maturity U.S. treasury and U.S. government agency securities $ 171,626 $ — $ ( 10,088 ) $ 161,538 MBS: U.S. government agencies 52,294 — ( 3,950 ) 48,344 Private label residential 44,011 295 ( 2,611 ) 41,695 Municipal securities 1,787 — ( 47 ) 1,740 Bank issued trust preferred securities 500 — ( 51 ) 449 Total $ 270,218 $ 295 $ ( 16,747 ) $ 253,766 Available for Sale MBS: U.S. government agencies $ 43,132 $ — $ ( 1,361 ) $ 41,771 $ 43,132 $ — $ ( 1,361 ) $ 41,771 Held to maturity and available for sale investment securities with unrealized losses were as follows as of March 31, 2024 (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 $ 9,609 $ ( 59 ) 1 $ 105,526 $ ( 6,893 ) 20 $ 115,135 $ ( 6,952 ) MBS: U.S. government agencies 15,686 ( 150 ) 3 33,660 ( 2,526 ) 55 49,346 ( 2,676 ) Private label residential — — — 30,398 ( 1,658 ) 29 30,398 ( 1,658 ) Municipal securities — — — 1,744 ( 24 ) 1 1,744 ( 24 ) Bank issued trust preferred securities — — — 460 ( 32 ) 1 460 ( 32 ) Total $ 25,295 $ ( 209 ) 4 $ 171,788 $ ( 11,133 ) 106 $ 197,083 $ ( 11,342 ) Available for sale MBS: U.S. government agencies $ 25,293 $ ( 166 ) 3 $ 27,561 $ ( 811 ) 31 $ 52,854 $ ( 977 ) Total $ 25,293 $ ( 166 ) 3 $ 27,561 $ ( 811 ) 31 $ 52,854 $ ( 977 ) 12 Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 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 $ 9,455 $ ( 129 ) 1 $ 152,082 $ ( 9,959 ) 26 $ 161,537 $ ( 10,088 ) MBS: U.S. government agencies 16,432 ( 549 ) 13 31,703 ( 3,401 ) 51 48,135 ( 3,950 ) Private label residential 1,288 ( 2 ) 1 38,205 ( 2,609 ) 32 39,493 ( 2,611 ) Municipal securities — — — 1,740 ( 47 ) 1 1,740 ( 47 ) Bank issued trust preferred securities — — — 449 ( 51 ) 1 449 ( 51 ) Total $ 27,175 $ ( 680 ) 15 $ 224,179 $ ( 16,067 ) 111 $ 251,354 $ ( 16,747 ) Available for sale MBS: U.S. government agencies $ 10,635 $ ( 308 ) 3 $ 30,809 $ ( 1,053 ) 27 $ 41,444 $ ( 1,361 ) Total $ 10,635 $ ( 308 ) 3 $ 30,809 $ ( 1,053 ) 27 $ 41,444 $ ( 1,361 ) During the six months ended March 31, 2024, the Company had no net realized losses on held to maturity investment securities. 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. 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 $ 230.46 million and $ 201.82 million at March 31, 2024 and September 30, 2023, respectively. The contractual maturities of debt securities at March 31, 2024 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 $ 56,678 $ 55,861 $ 9,044 $ 9,032 Due after one year to five years 79,591 73,827 2,530 2,523 Due after five years to ten years 8,862 8,056 5,658 5,658 Due after ten years 66,687 63,063 45,457 44,533 Total $ 211,818 $ 200,807 $ 62,689 $ 61,746 Credit Quality Indicators and Allowance for Credit Losses Available for Sale Investment Securities The Company assesses each available for sale investment security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis results from a credit loss or other factors. The Company did not record an 13 ACL on any available for sale debt securities at March 31, 2024 or upon adoption of ASU 2016-13 on October 1, 2023. As of both dates, the Company considered the unrealized losses across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value. The Company expects the fair value of these securities to recover as the securities approach their maturity dates or sooner if market yields for such securities decline. The Company does not believe that these securities are impaired because of their credit quality or related to any issuer or industry specific event. The Company has the ability and intent to hold the investments until the fair value recovers. Held to Maturity Investment Securities The Company measures expected credit losses on held to maturity investment securities, which are comprised of U.S. government agency and U.S. government mortgage-backed securities, private label mortgage-backed securities, municipal, and other bonds. The Company’s agency and mortgage-backed securities that are issued by U.S. government entities and agencies are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, no ACL has been established for these securities. The ACL on the private label mortgage-backed securities, municipal, and other bonds within the held to maturity securities portfolio is calculated using the probability of default/loss given default ("PD/LGD") method. The calculation is completed on a quarterly basis using the default studies provided by an industry leading source. At March 31, 2024, the ACL on the held to maturity securities portfolio totaled $ 85,000 . The following tables set forth information for the three and six months ended March 31, 2024 regarding activity in the ACL by portfolio segment (dollars in thousands): Three Months Ended March 31, 2024 Held to Maturity Beginning Allowance Impact of Adopting CECL (ASU 2016-13) Provision for (Recapture of) Credit Losses Ending Allowance MBS: Private label residential $ 73 $ — $ 4 $ 77 Bank issued trust preferred securities 9 — ( 1 ) 8 Total $ 82 $ — $ 3 $ 85 Six Months Ended March 31, 2024 Beginning Allowance Impact of Adopting CECL (ASU 2016-13) Provision for (Recapture of) Credit Losses Ending Allowance Held to Maturity MBS: Private label residential — 82 ( 5 ) 77 Bank issued trust preferred securities — 10 ( 2 ) 8 Total $ — $ 92 $ ( 7 ) $ 85 The ACL on held to maturity investment securities is included within investment securities held to maturity on the consolidated balance sheets. Changes in the ACL are recorded through the provision for (recapture of) credit losses on the consolidated income statement. Accrued interest receivable on held to maturity investment securities totaled $ 665,000 at March 31, 2024 and is included in accrued interest income receivable on the consolidated balance sheet. This amount is excluded from the estimate of expected credit losses. Held to maturity debt securities are typically classified as non-accrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held to maturity debt securities are placed on non-accrual status, unpaid interest credited to income is reversed. The Company had $ 79,000 of private label mortgage-backed held to maturity investment securities in non-accrual status at March 31, 2024. 14 The Company monitors the credit quality of debt securities held to maturity through the use of credit ratings from Moody's, S&P and Fitch. The Company monitors the credit ratings on a quarterly basis. The following table sets forth the Company's held to maturity investment securities at March 31, 2024 by credit quality indicator: Credit Ratings As of March 31, 2024 AAA/AA/A BBB/BB/B Unrated Total Held to Maturity U.S. Treasury and U.S. government agency securities $ 122,087 $ — $ — $ 122,087 MBS: U.S. government agencies 52,218 — — 52,218 Private label residential 17,946 — 17,207 35,153 Municipal securities 1,768 — 100 1,868 Bank issued trust preferred securities — — 492 492 Total held to maturity $ 194,019 $ — $ 17,799 $ 211,818 Prior to adopting ASU 2016-13, the Company bifurcated 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 was required in this analysis that included, but not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans. The amounts written off due to credit loss remain and continue to be recovered on a cash basis. The following table presents a roll forward of the credit loss component of held to maturity debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the six months ended March 31, 2024 and 2023 (dollars in thousands): Six Months Ended March 31, 2024 2023 Beginning balance of credit loss $ 816 $ 836 Subtractions: Net realized loss previously recorded as credit losses — ( 9 ) Recapture of prior credit loss ( 6 ) ( 5 ) Ending balance of credit loss $ 810 $ 822 (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 15 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 2023 goodwill impairment test during the quarter ended June 30, 2023 with the assistance of an independent third-party firm specializing in goodwill impairment valuations for financial institutions. 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, 2023. 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 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, 2024, management believes that there have been no events or changes in the circumstances since May 31, 2023 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, 2024 and September 30, 2023 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, 2024, 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 CREDIT LOSSES Loans receivable by portfolio segment consisted of the following at March 31, 2024 and September 30, 2023 (dollars in thousands): March 31, 2024 September 30, 2023 Amount Percent Amount Percent Mortgage loans: One- to four-family (1) $ 276,433 19.0 % $ 253,227 17.8 % Multi-family 167,275 11.5 127,176 8.9 Commercial 577,373 39.6 568,265 39.8 Construction - custom and owner/builder 122,988 8.4 129,699 9.1 Construction - speculative one- to four-family 16,407 1.1 17,099 1.2 Construction - commercial 32,318 2.2 51,064 3.6 Construction - multi-family 36,795 2.5 57,140 4.0 Construction - land development 16,051 1.1 18,841 1.3 Land 31,821 2.2 26,726 1.9 Total mortgage loans 1,277,461 87.6 1,249,237 87.6 Consumer loans: Home equity and second mortgage 42,357 2.9 38,281 2.7 Other 2,925 0.2 2,772 0.2 Total consumer loans 45,282 3.1 41,053 2.9 Commercial loans: Commercial business 135,505 9.3 135,802 9.5 U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans 367 — 466 — Total commercial loans 135,872 9.3 136,268 9.5 Total loans receivable 1,458,615 100.0 % 1,426,558 100.0 % Less: Undisbursed portion of construction loans in process ("LIP") 77,502 103,194 Deferred loan origination fees, net 5,179 5,242 ACL 16,818 15,817 Subtotal 99,499 124,253 Loans receivable, net $ 1,359,116 $ 1,302,305 _____________________________ (1) Does not include one- to four-family loans held for sale totaling $ 1.31 million and $ 400,000 at March 31, 2024 and September 30, 2023, respectively. Loans receivable at March 31, 2024 and September 30, 2023 are reported net of unamortized discounts totaling $ 172,000 and $ 192,000 , respectively. 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 17 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, 2024 and September 30, 2023, 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, 2024 and September 30, 2023, there were no loans classified as loss. The following table sets forth the Company's loan portfolio at March 31, 2024 by risk attribute and year of origination as well as current period gross charge-offs (dollars in thousands): Term Loans Amortized Cost Basis by Origination Fiscal Year Type 2024 2023 2022 2021 2020 Prior Revolving Loans Total Loans Receivable One-to four-family Risk Rating Pass $ 4,294 $ 41,193 $ 116,309 $ 50,922 $ 19,551 $ 41,984 $ — $ 274,253 Watch — 1,800 — — — — — 1,800 Substandard — — — — — 380 — 380 Total one- to four-family $ 4,294 $ 42,993 $ 116,309 $ 50,922 $ 19,551 $ 42,364 $ — $ 276,433 Multi-family Risk Rating Pass $ 12,637 $ 9,507 $ 39,951 $ 32,066 $ 27,241 $ 44,825 $ 1,048 $ 167,275 Total multi-family $ 12,637 $ 9,507 $ 39,951 $ 32,066 $ 27,241 $ 44,825 $ 1,048 $ 167,275 Commercial real estate Risk Rating Pass $ 9,027 $ 57,970 $ 124,208 $ 92,246 $ 58,905 $ 202,913 $ 8,097 $ 553,366 Watch — — — — 3,094 10,648 — 13,742 Special Mention — — — — — 4,401 — 4,401 Substandard — — — — — 5,864 — 5,864 Total commercial real estate $ 9,027 $ 57,970 $ 124,208 $ 92,246 $ 61,999 $ 223,826 $ 8,097 $ 577,373 18 Term Loans Amortized Cost Basis by Origination Fiscal Year Type 2024 2023 2022 2021 2020 Prior Revolving Loans Total Loans Receivable Construction-custom & owner/builder Risk Rating Pass $ 10,634 $ 46,881 $ 7,505 $ 1,110 $ — $ — $ — $ 66,130 Watch — — 1,100 2,621 462 436 — 4,619 Substandard — — — 152 — — — 152 Total construction $ 10,634 $ 46,881 $ 8,605 $ 3,883 $ 462 $ 436 $ — $ 70,901 Construction-speculative one-to four-family Risk Rating Pass $ 2,278 $ 7,319 $ — $ 518 $ — $ — $ — $ 10,115 Total construction $ 2,278 $ 7,319 $ — $ 518 $ — $ — $ — $ 10,115 Construction-commercial Risk Rating Pass $ — $ 16,445 $ 5,614 $ 1,293 $ — $ — $ — $ 23,352 Watch — 968 — — — — — 968 Total construction $ — $ 17,413 $ 5,614 $ 1,293 $ — $ — $ — $ 24,320 Construction-multi-family Risk Rating Pass $ 1,102 $ 24,660 $ — $ 1,363 $ — $ — $ — $ 27,125 Total construction $ 1,102 $ 24,660 $ — $ 1,363 $ — $ — $ — $ 27,125 Construction-land development Risk Rating Pass $ — $ 2,691 $ 11,905 $ — $ — $ — $ — $ 14,596 Total construction $ — $ 2,691 $ 11,905 $ — $ — $ — $ — $ 14,596 Land Risk Rating Pass $ 8,702 $ 6,501 $ 7,206 $ 4,501 $ 769 $ 2,185 $ 1,467 $ 31,331 Watch — — — — — 490 — 490 Total land $ 8,702 $ 6,501 $ 7,206 $ 4,501 $ 769 $ 2,675 $ 1,467 $ 31,821 Home equity Risk Rating Pass $ 2,676 $ 5,190 $ 2,053 $ 319 $ 684 $ 2,447 $ 28,705 $ 42,074 Watch — — — — 33 — — 33 Substandard — — — — — 250 — 250 Total home equity $ 2,676 $ 5,190 $ 2,053 $ 319 $ 717 $ 2,697 $ 28,705 $ 42,357 Other consumer Risk Rating Pass $ 1,212 $ 502 $ 252 $ 114 $ — $ 716 $ 70 $ 2,866 Watch — — — — — 59 — 59 Total other consumer $ 1,212 $ 502 $ 252 $ 114 $ — $ 775 $ 70 $ 2,925 Current period gross write-offs $ 3 $ 1 $ — $ — $ — $ — $ 2 $ 6 19 Term Loans Amortized Cost Basis by Origination Fiscal Year Type 2024 2023 2022 2021 2020 Prior Revolving Loans Total Loans Receivable Commercial business Risk Rating Pass $ 9,386 $ 21,420 $ 39,797 $ 10,838 $ 9,164 $ 5,473 $ 37,187 $ 133,265 Watch — — 162 50 — — 256 468 Substandard — 1,475 — — — 297 — 1,772 Total commercial business $ 9,386 $ 22,895 $ 39,959 $ 10,888 $ 9,164 $ 5,770 $ 37,443 $ 135,505 SBA PPP Risk Rating Pass $ — $ — $ — $ 309 $ 58 $ — $ — $ 367 Total SBA PPP $ — $ — $ — $ 309 $ 58 $ — $ — $ 367 Total loans receivable, gross (net of construction LIP) Risk Rating Pass $ 61,948 $ 240,279 $ 354,800 $ 195,599 $ 116,372 $ 300,543 $ 76,574 $ 1,346,115 Watch — 2,768 1,262 2,671 3,589 11,633 256 22,179 Special Mention — — — — — 4,401 — 4,401 Substandard — 1,475 — 152 — 6,791 — 8,418 Total loans receivable $ 61,948 $ 244,522 $ 356,062 $ 198,422 $ 119,961 $ 323,368 $ 76,830 $ 1,381,113 Current period gross charge-off $ 3 $ 1 $ — $ — $ — $ — $ 2 $ 6 Allowance for Credit Losses The Company adopted the new accounting standard for the ACL, commonly referred to as the current expected credit losses ("CECL") methodology, as of October 1, 2023. All disclosures as of and for the three and six months ended March 31, 2024 are presented in accordance with the new accounting standard. The comparative financial periods prior to the adoption of this new accounting standard are presented and disclosed under previously applicable GAAP's incurred loss methodology, which is not directly comparable to the new, CECL methodology. See also Note 10, Recent Accounting Pronouncements. As a result of implementing this new accounting standard, there was a one-time adjustment to the fiscal year 2024 opening allowance balance of $ 461,000 related to loans held for investment. The Company elected not to measure an ACL for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. For loans that do not share similar risk characteristics and cannot be evaluated on a collective basis, the Company will evaluate the loan individually. The Company estimates the expected credit losses over the loans' contractual terms, adjusted for expected prepayments. The ACL is calculated for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. Management has adopted the discounted cash flow ("DCF") methodology for all segments. The Company incorporates a reasonable and supportable forecast that utilizes current period national gross domestic product ("GDP") and national unemployment figures. Each of the loan segments are impacted by these factors. Prepayments are established for each segment based on historical averages for the segments, which management believes is an accurate presentation of future prepayment activity. Loans that are evaluated individually are not included in the collective analysis. The ACL on loans that are individually evaluated may be estimated based on their expected cash flows, or in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated selling costs. 20 When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the ACL. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; and/or the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement. Management's evaluation of the ACL is based on ongoing, quarterly assessments of the known and inherent risks in the loan portfolio. Loss factors are based on the Company's historical loss experience with additional consideration and adjustments made for changes in economic conditions, changes in the amount and composition of the loan portfolio, delinquency rates, changes in collateral values, seasoning of the loan portfolio, duration of the current business cycle, a detailed analysis of individually evaluated loans and other factors as deemed appropriate. Management also assesses the risk related to reasonable and supportable forecasts that are used. These factors are evaluated on a quarterly basis. Loss rates used by the Company are affected as changes in these factors increase or decrease from quarter to quarter. In addition, regulatory agencies, as integral part of their examination process, periodically review the Company's ACL and may require the Company to make additions to the ACL based on their judgment about information available to them at the time of their examinations. The following tables set forth information for the three and six months ended March 31, 2024 and 2023 regarding activity in the ACL by portfolio segment (dollars in thousands): Three Months Ended March 31, 2024 Beginning Allowance Provision for (Recapture of) Credit Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One- to four-family $ 2,096 $ 89 $ — $ — $ 2,185 Multi-family 1,200 158 — — 1,358 Commercial 6,822 132 — — 6,954 Construction – custom and owner/builder 1,234 ( 19 ) — — 1,215 Construction – speculative one- to four-family 132 10 — — 142 Construction – commercial 430 21 — — 451 Construction – multi-family 735 ( 257 ) — — 478 Construction – land development 298 ( 43 ) — — 255 Land 757 83 — — 840 Consumer loans: Home equity and second mortgage 286 19 — — 305 Other 46 3 ( 4 ) — 45 Commercial business loans 2,619 ( 30 ) — 1 2,590 Total $ 16,655 $ 166 $ ( 4 ) $ 1 $ 16,818 21 Six Months Ended March 31, 2024 Beginning Allowance Impact of Adopting CECL (ASU 2016-13) Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One-to four-family $ 2,417 $ ( 408 ) $ 176 $ — $ — $ 2,185 Multi-family 1,156 ( 120 ) 322 — — 1,358 Commercial 7,209 ( 494 ) 239 — — 6,954 Construction – custom and owner/builder 750 542 ( 77 ) — — 1,215 Construction – speculative one- to four-family 148 ( 16 ) 10 — — 142 Construction – commercial 316 176 ( 41 ) — — 451 Construction – multi-family 602 204 ( 328 ) — — 478 Construction – land development 274 25 ( 44 ) — — 255 Land 406 318 116 — — 840 Consumer loans: Home equity and second mortgage 519 ( 243 ) 29 — — 305 Other 53 ( 7 ) 5 ( 6 ) — 45 Commercial business loans 1,967 484 138 — 1 2,590 Total $ 15,817 $ 461 $ 545 $ ( 6 ) $ 1 $ 16,818 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 22 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 The following tables present information on the allowance for loan losses by portfolio segment at September 30, 2023 prior to the adoption of ASU 2016-13 (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 September 30, 2023 Mortgage loans: One- to four-family $ — $ 2,417 $ 2,417 $ 368 $ 252,859 $ 253,227 Multi-family — 1,156 1,156 — 127,176 127,176 Commercial — 7,209 7,209 2,973 565,292 568,265 Construction – custom and owner/builder — 750 750 — 73,239 73,239 Construction – speculative one- to four-family — 148 148 — 9,361 9,361 Construction – commercial — 316 316 — 26,030 26,030 Construction – multi-family — 602 602 — 45,890 45,890 Construction – land development — 274 274 — 16,129 16,129 Land — 406 406 — 26,726 26,726 Consumer loans: Home equity and second mortgage — 519 519 382 37,899 38,281 Other — 53 53 — 2,772 2,772 Commercial business loans 123 1,844 1,967 286 135,516 135,802 SBA PPP loans — — — — 466 466 Total $ 123 $ 15,694 $ 15,817 $ 4,009 $ 1,319,355 $ 1,323,364 23 Non-Accrual Loans When a loan is 90 days delinquent the accrual of interest is generally discontinued and the loan is placed on non-accrual. All interest accrued but not collected for loans placed on non-accrual is reversed out of interest income. Generally, payments received on non-accrual loans are applied to reduce the outstanding principal balance of the loan. At times interest may be accounted for on a cash basis, depending on the collateral value and the borrower's payment history. A loan is generally not removed from non-accrual until all delinquent principal, interest and late fees have been brought current and the borrower demonstrates repayment ability over a period of not less than six months and all taxes are current. The following tables present an analysis of loans by aging category and portfolio segment at March 31, 2024 and September 30, 2023 (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, 2024 Mortgage loans: One- to four-family $ — $ — $ 380 $ — $ 380 $ 276,053 $ 276,433 Multi-family — — — — — 167,275 167,275 Commercial — — 1,149 — 1,149 576,224 577,373 Construction – custom and owner/builder — — 152 — 152 70,749 70,901 Construction – speculative one- to four-family — — — — — 10,115 10,115 Construction – commercial — — — — — 24,320 24,320 Construction – multi-family — — — — — 27,125 27,125 Construction – land development — — — — — 14,596 14,596 Land — — — — — 31,821 31,821 Consumer loans: Home equity and second mortgage 340 — 165 — 505 41,852 42,357 Other — — — — — 2,925 2,925 Commercial business loans 256 — 1,759 — 2,015 133,490 135,505 SBA PPP loans — — — — — 367 367 Total $ 596 $ — $ 3,605 $ — $ 4,201 $ 1,376,912 $ 1,381,113 (1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual. 24 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 September 30, 2023 Mortgage loans: One- to four-family $ — $ — $ 368 $ — $ 368 $ 252,859 $ 253,227 Multi-family — — — — — 127,176 127,176 Commercial — — 683 — 683 567,582 568,265 Construction – custom and owner/builder 151 — — — 151 73,088 73,239 Construction – speculative one- to four-family — — — — — 9,361 9,361 Construction – commercial — — — — — 26,030 26,030 Construction – multi-family — — — — — 45,890 45,890 Construction – land development — — — — — 16,129 16,129 Land — — — — — 26,726 26,726 Consumer loans: Home equity and second mortgage — — 177 — 177 38,104 38,281 Other — — — — — 2,772 2,772 Commercial business loans — — 286 — 286 135,516 135,802 SBA PPP loans — — — — — 466 466 Total $ 151 $ — $ 1,514 $ — $ 1,665 $ 1,321,699 $ 1,323,364 (1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual. The following tables present an analysis of loans by credit quality indicator and portfolio segment at September 30, 2023 (dollars in thousands): Loan Grades September 30, 2023 Pass Watch Special Mention Substandard Total Mortgage loans: One- to four-family $ 252,859 $ — $ — $ 368 $ 253,227 Multi-family 127,176 — — — 127,176 Commercial 551,669 11,143 — 5,453 568,265 Construction – custom and owner/builder 68,181 5,058 — — 73,239 Construction – speculative one- to four-family 9,361 — — — 9,361 Construction – commercial 25,063 967 — — 26,030 Construction – multi-family 45,890 — — — 45,890 Construction – land development 16,129 — — — 16,129 Land 26,226 500 — — 26,726 Consumer loans: Home equity and second mortgage 37,982 34 — 265 38,281 Other 2,716 56 — — 2,772 Commercial business loans 135,502 — — 300 135,802 SBA PPP loans 466 — — — 466 Total $ 1,299,220 $ 17,758 $ — $ 6,386 $ 1,323,364 25 At March 31, 2024, the Company had $ 2.21 million of non-accrual loans with an ACL of $ 361,000 and $ 1.40 million of non-accrual loans with no ACL. The following table is a summary of the amortized cost of collateral dependent non-accrual loans as of March 31, 2024 (in thousands): Recorded Investment Related ACL Mortgage loans: One- to four-family $ 380 $ — Commercial 1,149 28 Construction - custom and owner/builder 152 — Consumer loans: Home equity and second mortgage 165 — Commercial business loans 1,759 333 Total $ 3,605 $ 361 Impaired Loans Prior to the adoption of CECL, a loan was considered impaired when it was probable that the Company would be unable to collect all amounts (principal and interest) when due according to the original 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 was identified as being impaired, the amount of the impairment was 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 was 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 credit 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. 26 The following table is a summary of information related to impaired loans by portfolio segment prior to the adoption of CECL as of September 30, 2023 and for the year then ended (dollars in thousands): Recorded Investment Unpaid Principal Balance (Loan Balance Plus Charge Off) Related Allowance Year to Date ("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 $ 368 $ 412 $ — $ 378 $ 29 $ 29 Commercial 2,973 2,973 — 2,987 167 129 Land — — — 297 5 4 Consumer loans: Home equity and second mortgage 382 382 — 390 12 10 Other — — — 1 — — Commercial business loans 41 90 — 49 — — Subtotal 3,764 3,857 — 4,102 213 172 With an allowance recorded: Mortgage loans: Commercial business loans 245 245 123 247 — — Subtotal 245 245 123 247 — — Total: Mortgage loans: One- to four-family 368 412 — 378 29 29 Commercial 2,973 2,973 — 2,987 167 129 Land — — — 297 5 4 Consumer loans: Home equity and second mortgage 382 382 — 390 12 10 Other — — — 1 — — Commercial business loans 286 335 123 296 — — Total $ 4,009 $ 4,102 $ 123 $ 4,349 $ 213 $ 172 ______________________________________________ (1) For the year ended September 30, 2023 . 27 The following table is a summary of information related to impaired loans by portfolio segment prior to the adoption of CECL as of March 31, 2023 and for 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. 28 Troubled debt restructurings ("TDRs") On October 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments - Credit Losses (ASU 2016-13). This ASU eliminated the accounting guidance for TDR loans for creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. No loans to borrowers experiencing financial difficulty were modified in the three and six months ended March 31, 2024 and 2023. At March 31, 2023, the Company had $ 2.60 million of TDRs, all of which were paying as agreed. There were no defaults in these loans during the six months ended March 31, 2024 and 2023. In accordance with the Company's policy guidelines, unsecured loans are generally charged-off when no payments have been received for three consecutive months unless an alternative action plan is in effect. The outstanding balance of a secured loan that is in excess of the net realizable value is generally charged-off if no payments are received for four or five consecutive months. However, charge-off's are postponed if alternative proposals to restructure, obtain additional guarantors, obtain additional assets as collateral or a potential sale of the underlying collateral would result in full repayment of the outstanding loan balance. Once any other potential source of repayment are exhausted, the impaired portion of the loan is charged-off. Regardless of whether a loan is unsecured or collateralized, once an amount is determined to be a confirmed loan loss it is promptly charged off. (5) LEASES At March 31, 2024, the Company has operating leases for two retail bank branch offices and an administrative office. The Company's leases have remaining lease terms of two to seven years , and include options to extend the leases from two 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 operating lease ROU assets and lease 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, 2024 and 2023 (dollars in thousands): Three Months Ended March 31, Six Months Ended March 31, Lease cost: 2024 2023 2024 2023 Operating lease cost $ 92 $ 85 $ 185 $ 174 Short-term lease cost — — — — Total lease cost $ 92 $ 85 $ 185 $ 174 The following tables provide supplemental information related to operating leases at or for the three and six months ended March 31, 2024 and 2023 (dollars in thousands): At or For the Three Months Ended March 31, 2024 At or For the Six Months Ended March 31, 2024 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 83 $ 166 Weighted average remaining lease term-operating leases 6.3 years 6.3 years Weighted average discount rate-operating leases 2.34 % 2.34 % 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 % 29 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, 2024 for future fiscal years are as follows (dollars in thousands): Remainder of 2024 $ 167 2025 336 2026 304 2027 232 2028 219 Thereafter 601 Total lease payments 1,859 Less imputed interest 136 Total $ 1,723 (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. Nonvested shares of restricted stock are included in the computation of basic earnings per share because the holder has voting rights and shares in non-forfeitable dividends during the vesting period. 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. Information regarding the calculation of basic and diluted net income per common share for the three and six months ended March 31, 2024 and 2023 is as follows (dollars in thousands, except per share amounts): Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2023 2023 Basic net income per common share computation Numerator – net income $ 5,708 $ 6,663 $ 12,004 $ 14,169 Denominator – weighted average common shares outstanding 8,081,924 8,220,532 8,098,155 8,226,467 Basic net income per common share $ 0.71 $ 0.81 $ 1.48 $ 1.72 Diluted net income per common share computation Numerator – net income $ 5,708 $ 6,663 $ 12,004 $ 14,169 Denominator – weighted average common shares outstanding 8,081,924 8,220,532 8,098,155 8,226,467 Effect of dilutive stock options (1) 39,185 83,838 45,546 85,163 Weighted average common shares outstanding - assuming dilution 8,121,109 8,304,370 8,143,701 8,311,630 Diluted net income per common share $ 0.70 $ 0.80 $ 1.47 $ 1.70 ____________________________________________ (1) For the three and six months ended March 31, 2024, average options to purchase 244,030 and 229,232 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, 2023, average options to purchase 176,867 30 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 be anti-dilutive. (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, 2024 and 2023 are as follows (dollars in thousands): Three Months Ended March 31, 2024 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 $ ( 827 ) $ — $ ( 827 ) Other comprehensive income 82 — 82 Balance of AOCI at the end of period $ ( 745 ) $ — $ ( 745 ) Six Months Ended March 31, 2024 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 $ ( 1,075 ) $ ( 9 ) $ ( 1,084 ) Other comprehensive income 330 9 339 Balance of AOCI at the end of period $ ( 745 ) $ — $ ( 745 ) 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 ) __________________________ (1) All amounts are net of income taxes. (8) STOCK COMPENSATION PLANS Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2019 Equity Incentive Plan, the 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, 2024, there were 9,356 shares of common stock available 31 which may be awarded as options or restricted stock pursuant to future grant under the 2014 Equity Incentive Plan. At March 31, 2024, there were 181,870 shares of common stock available which may be awarded as options or restricted stock pursuant to future grant under the 2019 Equity Incentive Plan. Stock option activity for the six months ended March 31, 2024 and 2023 is summarized as follows: Six Months Ended March 31, 2024 Six Months Ended March 31, 2023 Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Options outstanding, beginning of period 369,150 $ 24.00 421,925 $ 23.30 Exercised ( 29,900 ) 13.03 ( 26,055 ) 19.88 Granted — — 1,000 33.40 Forfeited ( 10,140 ) 25.71 ( 4,600 ) 27.38 Options outstanding, end of period 329,110 $ 24.95 392,270 $ 23.50 The fair value of stock options is determined using the Black-Scholes valuation model. There were no stock options granted during the six months ended March 31, 2024. 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, 2024 and 2023 was $ 499,000 and $ 337,000 , respectively. At March 31, 2024, there were 121,820 unvested options with an aggregate grant date fair value of $ 709,000 , all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at March 31, 2024 was $ 217,000 . There were 300 options that vested during the six months ended March 31, 2024 with a total fair value of $ 2,000 . At March 31, 2023, there were 189,910 unvested options with an aggregate grant date fair value of $ 1.07 million. There were 200 options that vested during the six months ended March 31, 2023 with a total fair value of $ 1,000 . 32 Additional information regarding options outstanding at March 31, 2024 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) 10.26 - 10.71 26,250 $ 10.62 1.3 26,250 $ 10.62 1.3 15.67 - 19.13 60,800 16.56 5.4 39,140 16.37 4.8 26.50 - 27.40 101,140 27.31 7.5 41,380 27.23 6.5 28.23 - 29.69 106,600 28.79 6.0 67,000 29.12 5.1 31.80 - 33.40 34,320 31.85 4.6 33,520 31.61 4.5 329,110 $ 24.95 5.8 207,290 $ 24.43 4.7 The aggregate intrinsic value of options outstanding at March 31, 2024 and 2023 was $ 1.06 million and $ 1.78 million , respectively. As of March 31, 2024, unrecognized compensation cost related to unvested stock options was $ 645,000 , which is expected to be recognized over a weighted average life of 1.90 years. At March 31, 2024, there were 26,150 unvested restricted stock awards. At March 31, 2023, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the six months ended March 31, 2024 and 2023. Time Based Number of Unvested Shares Weighted Average Grant Date Fair Value Outstanding, September 30, 2023 26,150 $ 27.37 Granted — — Forfeited — — Vested — — Outstanding, March 31, 2024 26,150 $ 27.37 The fair value of restricted stock awards is equal to the fair value of the Company's stock on the date of the grant. The related stock-based compensation expense is recorded over the requisite service period. At March 31, 2024, unrecognized compensation cost related to unvested restricted stock awards was $ 636,000 , which is expected to be recognized over a weighted average period of 2.23 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. 33 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). The Company had no liabilities measured at fair value on a recurring basis at March 31, 2024 and September 30, 2023. The Company's assets measured at estimated fair value on a recurring basis at March 31, 2024 and September 30, 2023 were as follows (dollars in thousands): March 31, 2024 Estimated Fair Value Level 1 Level 2 Level 3 Total Available for sale investment securities MBS: U.S. government agencies $ 8,863 $ 52,883 $ — $ 61,746 Investments in equity securities Mutual funds 839 — — 839 Total $ 9,702 $ 52,883 $ — $ 62,585 September 30, 2023 Estimated Fair Value Level 1 Level 2 Level 3 Total Available for sale investment securities MBS: U.S. government agencies $ — $ 41,771 $ — $ 41,771 Investments in equity securities Mutual funds 811 — — 811 Total $ 811 $ 41,771 $ — $ 42,582 There were no transfers among Level 1, Level 2 and Level 3 during the six months ended March 31, 2024 and the year ended September 30, 2023. 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: Individually Evaluated Collateral-Dependent Loans: Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are classified within level 3 of the fair value hierarchy. Impaired Loans : Prior to the adoption of CECL, 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. 34 The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at March 31, 2024 and September 30, 2023 (dollars in thousands): Estimated Fair Value Total Estimated March 31, 2024 Level 1 Level 2 Level 3 Fair Value Individually evaluated loans: Mortgage loans: Commercial $ — $ — $ 460 $ 460 Commercial business loans — — 1,387 1,387 Total $ — $ — $ 1,847 $ 1,847 Estimated Fair Value Total Estimated September 30, 2023 Level 1 Level 2 Level 3 Fair Value Impaired loans: Commercial business loans $ — $ — $ 122 $ 122 Total $ — $ — $ 122 $ 122 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, 2024 and September 30, 2023 (dollars in thousands): Valuation Technique(s) Unobservable Input(s) Range Individually evaluated and impaired loans Market approach Appraised value less estimated selling costs N/A 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, 2024 and September 30, 2023. 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. 35 The recorded amounts and estimated fair values of financial instruments were as follows as of March 31, 2024 and September 30, 2023 (dollars in thousands): March 31, 2024 Fair Value Measurements Using: Recorded Amount Estimated Fair Value Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents $ 180,349 $ 180,349 $ 180,349 $ — $ — CDs held for investment 11,204 11,204 11,204 — — Investment securities 273,564 262,544 123,997 138,547 — Investments in equity securities 839 839 839 — — FHLB stock 2,037 2,037 2,037 — — Other investments 3,000 3,000 3,000 — — Loans held for sale 1,311 1,329 1,329 — — Loans receivable, net 1,359,116 1,305,476 — — 1,305,476 Accrued interest receivable 7,108 7,108 7,108 — — Financial liabilities Certificates of deposit 353,948 352,354 — — 352,354 FHLB borrowings 20,000 19,767 — — 19,767 Accrued interest payable 1,936 1,936 1,936 — — September 30, 2023 Fair Value Measurements Using: Recorded Amount Estimated Fair Value Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents $ 128,721 $ 128,721 $ 128,721 $ — $ — CDs held for investment 15,188 15,188 15,188 — — Investment securities 311,989 295,538 161,538 134,000 — Investments in equity securities 811 811 811 — — FHLB stock 3,602 3,602 3,602 — — Other investments 3,000 3,000 3,000 — — Loans held for sale 400 407 407 — — Loans receivable, net 1,302,305 1,246,538 — — 1,246,538 Accrued interest receivable 6,004 6,004 6,004 — — Financial liabilities Certificates of deposit 300,100 297,542 — — 297,542 FHLB borrowings 35,000 34,747 — — 34,747 Accrued interest payable 1,397 1,397 1,397 — — 36 (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 required credit losses relating to available for sale debt securities to be recorded through an ACL rather than as a reduction of the carrying amount. ASU 2016-13 also changed the accounting for PCI debt securities and loans. ASU 2016-13 retained many of the current disclosure requirements in GAAP and expanded certain disclosure requirements. As a "smaller reporting company" filer with the U.S. Securities and Exchange Commission, ASU 2016-13 was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company experienced changes in the processes and procedures to calculate the ACL, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the accounting practices that were utilized with the incurred loss model. In addition, the prior policy for OTTI on investment securities available for sale was replaced with an allowance approach. On October 1, 2023, the Company adopted this ASU, which resulted in a net of tax charge of $ 488,000 to retained earnings, a $ 461,000 increase to the ACL on loans, a $ 92,000 increase to ACL on investment securities, and a $ 65,000 increase to ACL on unfunded commitments for the cumulative effect of adopting this guidance. For more information related to the implementation, see Note 4 Loans Receivable and Allowance for Credit Losses, Note 2 Investment Securities and Note 12 Commitments and Contingent Liabilities. 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 did not have a material impact on the Company's consolidated financial statements. In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASU 2016-13): Troubled Debt Restructurings and Vintage Disclosures. The amendments eliminate the accounting guidance for 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. This ASU is effective upon adoption of ASU 2016-13. On October 1, 2023, the Company adopted this ASU at the same time ASU 2016-13 was adopted. The Company had $ 1,000 in recoveries and $ 6,000 of write offs for the six months ended March 31, 2024. (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 within the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense. For the three months ended March 31, 2024, the Company recognized $ 988,000 in service charges on deposits, $ 1.21 million in ATM and debit card interchange transaction fees, $ 15,000 in escrow fees, and $ 2,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the six months ended March 31, 2024, the Company recognized $ 2.01 million in service changes on deposits, $ 2.48 million in ATM and debit card interchange transaction fees, $ 33,000 in escrow fees, and $ 3,000 in fee income from non-deposit investment sales. For the three months 37 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 changes 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. 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, 2024 and 2023 are listed below (in thousands): March 31, 2024 March 31, 2023 Undisbursed portion of construction loans in process (see Note 4) $ 77,502 99,253 Undisbursed lines of credit 135,883 138,711 Commitments to extend credit 19,106 41,218 $ 232,491 $ 279,182 The Company maintains a separate ACL related to unfunded loan commitments. The Company estimates expected losses on unfunded, off-balance sheet commitments over the contractual period in which the exposure to credit risk from a contractual 38 obligation to extend credit, unless the Company has determined that obligation is unconditionally cancellable. The methodology for calculating the ACL on unfunded loan commitments is similar to the methodology for calculating the ACL on loans but also includes an estimate of the future utilization of the commitment as determined by historical commitment utilization. Credit risk associated with the unfunded commitments are consistent with the loss ratio for each loan segment within the ACL for loans. The ACL on unfunded commitments is recognized in other liabilities and accrued expenses in the consolidated balance sheets and is adjusted as a provision (recapture of provision) for credit losses on the consolidated income statements. The ACL on unfunded loan commitments totaled $ 276,000 at March 31, 2024. The following table sets forth information for the three and six months ended March 31, 2024 and 2023 regarding activity in the a ACL on unfunded loan commitments (dollars in thousands): ACL Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Beginning ACL $ 364 $ 320 (Recapture of) provision for credit losses ( 88 ) — Ending ACL $ 276 $ 320 ACL Six Months Ended March 31, 2024 Six Months Ended March 31, 2023 Beginning ACL $ 332 $ 305 Impact of adopting CECL (ASU 2016-13) 65 — (Recapture of) provision for credit losses ( 121 ) 15 Ending ACL $ 276 $ 320 The Bank has an employee severance compensation plan which expires in 2027 that 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.