TIMBERLAND BANCORP INC 10-Q

Item 1. Financial Statements (unaudited) TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, 2024 and September 30, 2023 (Dollars in thousands, except per share amounts) June 30, 2024 September 30, 2023 (Unaudited) * Assets Cash and cash equivalents: Cash and due from financial institutions $ 25,566 $ 25,390 Interest-bearing deposits in banks 133,347 103,331 Total cash and cash equivalents 158,913 128,721 Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value) 10,458 15,188 Investment securities held to maturity, at amortized cost (net of allowance for credit losses of $ 72 at June 30, 2024 and $ 0 at September 30, 2023), (estimated fair value of $ 166,761 and $ 253,766 ) 176,787 270,218 Investment securities available for sale, at fair value 74,515 41,771 Investments in equity securities, at fair value 836 811 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 1,795 400 Loans receivable, net of allowance for credit losses of $ 17,046 and $ 15,817 1,397,019 1,302,305 Premises and equipment, net 21,558 21,642 Accrued interest receivable 7,045 6,004 Bank owned life insurance (“BOLI”) 23,436 22,966 Goodwill 15,131 15,131 Core deposit intangible (“CDI”), net 508 677 Loan servicing rights, net 1,526 2,124 Operating lease right-of-use ("ROU") assets 1,550 1,772 Other assets 4,515 3,573 Total assets $ 1,900,629 $ 1,839,905 Liabilities and shareholders’ equity Liabilities Deposits: Non-interest-bearing demand $ 407,125 $ 455,864 Interest-bearing 1,221,419 1,105,071 Total deposits 1,628,544 1,560,935 FHLB borrowings 20,000 35,000 Operating lease liabilities 1,649 1,867 Other liabilities and accrued expenses 9,213 9,030 Total liabilities $ 1,659,406 $ 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) June 30, 2024 and September 30, 2023 (Dollars in thousands, except per share amounts) June 30, 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; 7,953,421 shares issued and outstanding - June 30, 2024 8,105,338 shares issued and outstanding - September 30, 2023 30,681 34,771 Retained earnings 211,087 199,386 Accumulated other comprehensive loss ( 545 ) ( 1,084 ) Total shareholders’ equity 241,223 233,073 Total liabilities and shareholders’ equity $ 1,900,629 $ 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 nine months ended June 30, 2024 and 2023 (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Interest and dividend income Loans receivable and loans held for sale $ 19,537 $ 16,215 $ 56,841 $ 45,622 Investment securities 2,335 2,384 6,892 7,058 Dividends from mutual funds, FHLB stock and other investments 94 70 266 185 Interest-bearing deposits in banks and CDs 2,173 1,220 5,791 5,524 Total interest and dividend income 24,139 19,889 69,790 58,389 Interest expense Deposits 7,938 3,123 21,383 6,729 FHLB borrowings 220 132 787 132 Total interest expense 8,158 3,255 22,170 6,861 Net interest income 15,981 16,634 47,620 51,528 Provision for (recapture of) credit losses Provision for credit losses - loans 264 610 810 1,610 Recapture of credit losses - investment securities ( 12 ) — ( 20 ) — Recapture of credit losses - unfunded commitments ( 8 ) — ( 130 ) — Total provision for credit loss - net 244 610 660 1,610 Net interest income after provision for (recapture of) credit losses 15,737 16,024 46,960 49,918 Non-interest income Net recoveries on investment securities 2 2 9 7 Gain on sale of investment securities available for sale, net — 95 — 95 Service charges on deposits 1,014 970 3,024 2,810 ATM and debit card interchange transaction fees 1,297 1,335 3,773 3,861 BOLI net earnings 158 157 470 470 Gain on sales of loans, net 68 80 188 147 Escrow fees 18 27 51 85 Other, net 234 209 689 741 Total non-interest income, net 2,791 2,875 8,204 8,216 See notes to unaudited consolidated financial statements 5 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (continued) For the three and nine months ended June 30, 2024 and 2023 (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Non-interest expense Salaries and employee benefits $ 5,928 $ 5,860 $ 17,863 $ 17,806 Premises and equipment 1,011 1,010 3,065 2,935 Gain on sales/dispositions of premises and equipment, net ( 3 ) ( 32 ) ( 3 ) ( 32 ) Advertising 211 179 556 551 OREO and other repossessed assets, net — — 1 1 ATM and debit card interchange transaction fees 580 491 1,796 1,463 Postage and courier 130 128 401 397 State and local taxes 335 297 979 894 Professional fees 335 577 908 1,479 Federal Deposit Insurance Corporation ("FDIC") insurance 208 191 624 517 Loan administration and foreclosure 156 126 395 385 Technology and communications 1,086 944 3,101 2,612 Deposit operations 450 430 1,094 1,022 Amortization of CDI 56 68 169 203 Other 586 658 1,735 2,173 Total non-interest expense, net 11,069 10,927 32,684 32,406 Income before income taxes 7,459 7,972 22,480 25,728 Provision for income taxes 1,535 1,666 4,552 5,252 Net income $ 5,924 $ 6,306 $ 17,928 $ 20,476 Net income per common share Basic $ 0.74 $ 0.77 $ 2.22 $ 2.50 Diluted $ 0.74 $ 0.77 $ 2.21 $ 2.47 Weighted average common shares outstanding Basic 8,004,552 8,156,831 8,067,068 8,203,255 Diluted 8,039,345 8,213,975 8,109,043 8,279,079 Dividends paid per common share $ 0.24 $ 0.23 $ 0.71 $ 0.78 See notes to unaudited consolidated financial statements 6 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three and nine months ended June 30, 2024 and 2023 (Dollars in thousands) (Unaudited) Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Comprehensive income Net income $ 5,924 $ 6,306 $ 17,928 $ 20,476 Other comprehensive income (loss) Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $ 53 , $( 66 ), $ 142 and $( 8 ), respectively 200 ( 249 ) 530 ( 29 ) 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 — — 9 2 Total other comprehensive income (loss), net of income taxes 200 ( 249 ) 539 ( 27 ) Total comprehensive income $ 6,124 $ 6,057 $ 18,467 $ 20,449 See notes to unaudited consolidated financial statements 7 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the three and nine months ended June 30, 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, March 31, 2023 8,203,174 $ 37,979 $ 190,177 $ ( 495 ) $ 227,661 Net income — — 6,306 — 6,306 Other comprehensive loss — — — ( 249 ) ( 249 ) Repurchase of common stock ( 110,000 ) ( 2,674 ) — — ( 2,674 ) Exercise of stock options 1,000 17 — — 17 Common stock dividends ($ 0.23 per common share) — — ( 1,877 ) — ( 1,877 ) Stock-based compensation expense — 79 — — 79 Balance, June 30, 2023 8,094,174 $ 35,401 $ 194,606 $ ( 744 ) $ 229,263 Balance, March 31, 2024 8,023,121 $ 32,338 $ 207,086 $ ( 745 ) $ 238,679 Net income — — 5,924 — 5,924 Other comprehensive income — — — 200 200 Repurchase of common stock ( 70,000 ) ( 1,767 ) — — ( 1,767 ) Exercise of stock options 300 5 — — 5 Common stock dividends ($ 0.24 per common share) — — ( 1,923 ) — ( 1,923 ) Stock-based compensation expense — 105 — — 105 Balance, June 30, 2024 7,953,421 $ 30,681 $ 211,087 $ ( 545 ) $ 241,223 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 — — 20,476 — 20,476 Other comprehensive loss — — — ( 27 ) ( 27 ) Repurchase of common stock ( 154,833 ) ( 4,119 ) — — ( 4,119 ) Exercise of stock options 27,055 534 — — 534 Common stock dividends ($ 0.78 per common share) — — ( 6,405 ) — ( 6,405 ) Stock-based compensation expense — 235 — — 235 Balance, June 30, 2023 8,094,174 $ 35,401 $ 194,606 $ ( 744 ) $ 229,263 Balance, September 30, 2023 8,105,338 $ 34,771 $ 199,386 $ ( 1,084 ) $ 233,073 Net income — — 17,928 — 17,928 Other comprehensive income — — — 539 539 Repurchase of common stock ( 182,117 ) ( 4,801 ) — — ( 4,801 ) Exercise of stock options 30,200 395 — — 395 Common stock dividends ($ 0.71 per common share) — — ( 5,739 ) — ( 5,739 ) Stock-based compensation expense — 316 — — 316 Adoption of ASU 2016-13 , net of tax — — ( 488 ) — ( 488 ) Balance, June 30, 2024 7,953,421 $ 30,681 $ 211,087 $ ( 545 ) $ 241,223 See notes to unaudited consolidated financial statements 8 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended June 30, 2024 and 2023 (Dollars in thousands) (Unaudited) Nine Months Ended June 30, 2024 2023 Cash flows from operating activities Net income $ 17,928 $ 20,476 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 660 1,610 Depreciation 1,088 1,022 Deferred income taxes/(benefits) — ( 77 ) Accretion of discount on purchased loans ( 29 ) ( 64 ) Amortization of CDI 169 203 Stock-based compensation expense 316 235 Gain on sale of investment securities available for sale, net — ( 95 ) Net recoveries on investment securities ( 9 ) ( 7 ) Change in fair value of investments in equity securities ( 25 ) ( 2 ) Accretion of discounts and premiums on securities ( 842 ) ( 922 ) Gain on sales of loans, net ( 188 ) ( 147 ) Gain on sales/disposition of premises and equipment, net ( 3 ) ( 32 ) Loans originated for sale ( 10,330 ) ( 6,062 ) Proceeds from sales of loans 9,123 6,957 Amortization of loan servicing rights 684 769 BOLI net earnings ( 470 ) ( 470 ) Increase in deferred loan origination fees 162 636 Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses ( 1,830 ) ( 800 ) Net cash provided by operating activities 16,404 23,230 Cash flows from investing activities Net decrease in CDs held for investment 4,730 5,963 Proceeds from sale of investment securities available for sale — 8,929 Purchase of investment securities held to maturity ( 1,919 ) ( 15,601 ) Purchase of investment securities available for sale ( 36,089 ) ( 16,994 ) Proceeds from maturities and prepayments of investment securities held to maturity 96,052 8,000 Proceeds from maturities and prepayments of investment securities available for sale 4,105 5,784 Purchase of FHLB stock — ( 608 ) Redemption of FHLB stock 1,565 — Increase in loans receivable, net ( 96,118 ) ( 130,403 ) Purchases of premises and equipment ( 1,010 ) ( 711 ) Proceeds from sales of premises and equipment 8 45 Net cash used in investing activities ( 28,676 ) ( 135,596 ) S ee notes to unaudited consolidated financial statements 9 TIMBERLAND BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) For the nine months ended June 30, 2024 and 2023 (Dollars in thousands) (Unaudited) Nine Months Ended June 30, 2024 2023 Cash flows from financing activities Net increase (decrease) in deposits $ 67,609 $ ( 79,446 ) Proceeds from (repayment of) FHLB borrowings ( 15,000 ) 15,000 Proceeds from exercise of stock options 395 534 Repurchase of common stock ( 4,801 ) ( 4,119 ) Payment of dividends ( 5,739 ) ( 6,405 ) Net cash provided by (used in) financing activities 42,464 ( 74,436 ) Net increase (decrease) in cash and cash equivalents 30,192 ( 186,802 ) Cash and cash equivalents Beginning of period 128,721 316,755 End of period $ 158,913 $ 129,953 Supplemental disclosure of cash flow information Income taxes paid $ 4,884 $ 6,268 Interest paid $ 21,854 $ 6,088 Supplemental disclosure of non-cash investing activities Other comprehensive income (loss) related to investment securities $ 539 $ ( 27 ) Operating lease liabilities arising from recording of ROU assets $ — $ 71 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 nine months ended June 30, 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 June 30, 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 June 30, 2024 and September 30, 2023 (dollars in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses ("ACL") June 30, 2024 Held to Maturity U.S. Treasury and U.S. government agency securities $ 92,233 $ — $ ( 6,349 ) $ 85,884 $ — Mortgage-backed securities ("MBS"): U.S. government agencies 50,727 2 ( 2,440 ) 48,289 — Private label residential 31,996 238 ( 1,438 ) 30,796 66 Municipal securities 1,337 — ( 10 ) 1,327 — Bank issued trust preferred securities 494 — ( 29 ) 465 6 Total held to maturity $ 176,787 $ 240 $ ( 10,266 ) $ 166,761 $ 72 11 June 30, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Available for Sale U.S. Treasury and U.S. government agency securities $ 8,924 $ — $ ( 14 ) $ 8,910 MBS: U.S. government agencies 66,280 137 ( 812 ) 65,605 Total $ 75,204 $ 137 $ ( 826 ) $ 74,515 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 12 Held to maturity and available for sale investment securities with unrealized losses were as follows as of June 30, 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 $ — $ — — $ 85,884 $ ( 6,349 ) 18 $ 85,884 $ ( 6,349 ) MBS: U.S. government agencies 10,633 ( 88 ) 8 37,477 ( 2,352 ) 49 48,110 ( 2,440 ) Private label residential — — — 26,476 ( 1,438 ) 25 26,476 ( 1,438 ) Municipal securities — — — 1,226 ( 10 ) 1 1,226 ( 10 ) Bank issued trust preferred securities — — — 465 ( 29 ) 1 465 ( 29 ) Total $ 10,633 $ ( 88 ) 8 $ 151,528 $ ( 10,178 ) 94 $ 162,161 $ ( 10,266 ) Available for sale U.S. Treasury and U.S. government agency securities $ 8,910 $ ( 14 ) 3 $ — $ 8,910 $ ( 14 ) MBS: U.S. government agencies 11,018 ( 33 ) 3 33,578 ( 779 ) 28 44,596 ( 812 ) Total $ 19,928 $ ( 47 ) 6 $ 33,578 $ ( 779 ) 28 $ 53,506 $ ( 826 ) 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 ) 13 During the nine months ended June 30, 2024, the Company recorded a $ 1,000 net realized losses on 14 held to maturity investment securities. During the nine months ended June 30, 2023, the Company recorded a $ 10,000 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 $ 212.16 million and $ 201.82 million at June 30, 2024 and September 30, 2023, respectively. The contractual maturities of debt securities at June 30, 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 $ 27,648 $ 27,156 $ 8,961 $ 8,946 Due after one year to five years 79,040 73,530 2,497 2,496 Due after five years to ten years 6,345 5,675 5,653 5,640 Due after ten years 63,754 60,400 58,093 57,433 Total $ 176,787 $ 166,761 $ 75,204 $ 74,515 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 ACL on any available for sale debt securities at June 30, 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 June 30, 2024, the ACL on the held to maturity securities portfolio totaled $ 72,000 . 14 The following tables set forth information for the three and nine months ended June 30, 2024 regarding activity in the ACL by portfolio segment (dollars in thousands): Three Months Ended June 30, 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 $ 77 $ — $ ( 11 ) $ 66 Bank issued trust preferred securities 8 — ( 2 ) 6 Total $ 85 $ — $ ( 13 ) (1) $ 72 (1) The total provision for (recapture of) credit losses does not match the three months ended income statement due to rounding. Nine Months Ended June 30, 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 ( 16 ) 66 Bank issued trust preferred securities — 10 ( 4 ) 6 Total $ — $ 92 $ ( 20 ) $ 72 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 $ 663,000 at June 30, 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 $ 72,000 of private label mortgage-backed held to maturity investment securities in non-accrual status at June 30, 2024. The Company monitors the credit quality of debt securities held to maturity using 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 June 30, 2024 by credit quality indicator: Credit Ratings As of June 30, 2024 AAA/AA/A BBB/BB/B Unrated Total Held to Maturity U.S. Treasury and U.S. government agency securities $ 92,233 $ — $ — $ 92,233 MBS: U.S. government agencies 50,727 — — 50,727 Private label residential 17,000 — 14,996 31,996 Municipal securities 1,237 — 100 1,337 Bank issued trust preferred securities — — 494 494 Total held to maturity $ 161,197 $ — $ 15,590 $ 176,787 15 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 nine months ended June 30, 2024 and 2023 (dollars in thousands): Nine Months Ended June 30, 2024 2023 Beginning balance of credit loss $ 816 $ 836 Subtractions: Net realized loss previously recorded as credit losses ( 1 ) ( 10 ) Recapture of prior credit loss ( 9 ) ( 7 ) Ending balance of credit loss $ 806 $ 819 (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 2024 goodwill impairment test during the quarter ended June 30, 2024. 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, 2024. 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 16 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 June 30, 2024, management believes that there have been no events or changes in the circumstances since May 31, 2024 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 June 30, 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 June 30, 2024, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment of CDI. 17 (4) LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable by portfolio segment consisted of the following at June 30, 2024 and September 30, 2023 (dollars in thousands): June 30, 2024 September 30, 2023 Amount Percent Amount Percent Mortgage loans: One- to four-family (1) $ 288,611 19.2 % $ 253,227 17.8 % Multi-family 177,950 11.8 127,176 8.9 Commercial 597,865 39.7 568,265 39.8 Construction - custom and owner/builder 128,222 8.5 129,699 9.1 Construction - speculative one- to four-family 11,441 0.8 17,099 1.2 Construction - commercial 32,130 2.1 51,064 3.6 Construction - multi-family 35,631 2.4 57,140 4.0 Construction - land development 19,104 1.3 18,841 1.3 Land 32,384 2.1 26,726 1.9 Total mortgage loans 1,323,338 87.9 1,249,237 87.6 Consumer loans: Home equity and second mortgage 43,679 2.9 38,281 2.7 Other 3,121 0.2 2,772 0.2 Total consumer loans 46,800 3.1 41,053 2.9 Commercial loans: Commercial business 136,213 9.0 135,802 9.5 U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans 314 — 466 — Total commercial loans 136,527 9.0 136,268 9.5 Total loans receivable 1,506,665 100.0 % 1,426,558 100.0 % Less: Undisbursed portion of construction loans in process ("LIP") 87,196 103,194 Deferred loan origination fees, net 5,404 5,242 ACL 17,046 15,817 Subtotal 109,646 124,253 Loans receivable, net $ 1,397,019 $ 1,302,305 _____________________________ (1) Does not include one- to four-family loans held for sale totaling $ 1.80 million and $ 400,000 at June 30, 2024 and September 30, 2023, respectively. Loans receivable at June 30, 2024 and September 30, 2023 are reported net of unamortized discounts totaling $ 163,000 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 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 June 30, 2024 there was one loan classified as doubtful which is supported by an SBA guarantee of the remaining balance. At 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 June 30, 2024 and September 30, 2023, there were no loans classified as loss. The following table sets forth the Company's loan portfolio at June 30, 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 $ 7,097 $ 54,350 $ 116,235 $ 49,399 $ 19,427 $ 40,249 $ — $ 286,757 Watch — 1,800 — — — — — 1,800 Substandard — — — — — 54 — 54 Total one- to four-family $ 7,097 $ 56,150 $ 116,235 $ 49,399 $ 19,427 $ 40,303 $ — $ 288,611 Multi-family Risk Rating Pass $ 13,134 $ 19,474 $ 39,836 $ 33,292 $ 27,002 $ 44,042 $ 1,170 $ 177,950 Total multi-family $ 13,134 $ 19,474 $ 39,836 $ 33,292 $ 27,002 $ 44,042 $ 1,170 $ 177,950 Commercial real estate Risk Rating Pass $ 21,105 $ 64,307 $ 128,334 $ 91,470 $ 57,322 $ 197,318 $ 12,637 $ 572,493 Watch — — — — 4,226 10,747 — 14,973 Special Mention — — — — — 4,401 — 4,401 Substandard — — — — — 5,998 — 5,998 Total commercial real estate $ 21,105 $ 64,307 $ 128,334 $ 91,470 $ 61,548 $ 218,464 $ 12,637 $ 597,865 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 $ 21,701 $ 42,271 $ 3,937 $ — $ — $ — $ — $ 67,909 Watch — — 2,870 2,726 432 436 — 6,464 Substandard — — — 152 — — — 152 Total construction $ 21,701 $ 42,271 $ 6,807 $ 2,878 $ 432 $ 436 $ — $ 74,525 Construction-speculative one-to four-family Risk Rating Pass $ 3,468 $ 2,747 $ — $ 518 $ — $ — $ — $ 6,733 Total construction $ 3,468 $ 2,747 $ — $ 518 $ — $ — $ — $ 6,733 Construction-commercial Risk Rating Pass $ 991 $ 16,914 $ 1,045 $ 1,293 $ — $ — $ — $ 20,243 Watch — 968 — — — — — 968 Total construction $ 991 $ 17,882 $ 1,045 $ 1,293 $ — $ — $ — $ 21,211 Construction-multi-family Risk Rating Pass $ 2,033 $ 18,249 $ — $ — $ — $ — $ — $ 20,282 Total construction $ 2,033 $ 18,249 $ — $ — $ — $ — $ — $ 20,282 Construction-land development Risk Rating Pass $ 1,903 $ 2,760 $ 11,918 $ — $ — $ — $ — $ 16,581 Total construction $ 1,903 $ 2,760 $ 11,918 $ — $ — $ — $ — $ 16,581 Land Risk Rating Pass $ 10,272 $ 5,740 $ 8,573 $ 4,085 $ 768 $ 2,045 $ 415 $ 31,898 Watch — — — — — 486 — 486 Total land $ 10,272 $ 5,740 $ 8,573 $ 4,085 $ 768 $ 2,531 $ 415 $ 32,384 Home equity Risk Rating Pass $ 3,434 $ 4,873 $ 2,017 $ 315 $ 674 $ 2,297 $ 29,338 $ 42,948 Watch — — — — 33 — — 33 Substandard — — — — — 83 615 698 Total home equity $ 3,434 $ 4,873 $ 2,017 $ 315 $ 707 $ 2,380 $ 29,953 $ 43,679 Other consumer Risk Rating Pass $ 1,657 $ 459 $ 247 $ 60 $ 14 $ 543 $ 84 $ 3,064 Watch — — — — — 57 — 57 Total other consumer $ 1,657 $ 459 $ 247 $ 60 $ 14 $ 600 $ 84 $ 3,121 Current period gross write-offs $ 5 $ 1 $ — $ — $ — $ — $ 2 $ 8 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 $ 12,815 $ 20,696 $ 37,436 $ 9,431 $ 8,637 $ 5,159 $ 39,404 $ 133,578 Watch — — 210 43 272 10 180 715 Substandard — 1,186 — — — 532 — 1,718 Doubtful — 202 — — — — — 202 Total commercial business $ 12,815 $ 22,084 $ 37,646 $ 9,474 $ 8,909 $ 5,701 $ 39,584 $ 136,213 Current period gross write-offs $ — $ 79 $ — $ — $ — $ — $ — $ 79 SBA PPP Risk Rating Pass $ — $ — $ — $ 267 $ 47 $ — $ — $ 314 Total SBA PPP $ — $ — $ — $ 267 $ 47 $ — $ — $ 314 Total loans receivable, gross (net of construction LIP) Risk Rating Pass $ 99,610 $ 252,840 $ 349,578 $ 190,130 $ 113,891 $ 291,653 $ 83,048 $ 1,380,750 Watch — 2,768 3,080 2,769 4,963 11,736 180 25,496 Special Mention — — — — — 4,401 — 4,401 Substandard — 1,186 — 152 — 6,667 615 8,620 Doubtful — 202 — — — — — 202 Total loans receivable $ 99,610 $ 256,996 $ 352,658 $ 193,051 $ 118,854 $ 314,457 $ 83,843 $ 1,419,469 Current period gross charge-off $ 5 $ 80 $ — $ — $ — $ — $ 2 $ 87 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 nine months ended June 30, 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 20 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. 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 nine months ended June 30, 2024 and 2023 regarding activity in the ACL by portfolio segment (dollars in thousands): Three Months Ended June 30, 2024 Beginning Allowance Provision for (Recapture of) Credit Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One- to four-family $ 2,185 $ 49 $ — $ 43 $ 2,277 Multi-family 1,358 84 — — 1,442 Commercial 6,954 241 — — 7,195 Construction – custom and owner/builder 1,215 76 — — 1,291 Construction – speculative one- to four-family 142 ( 47 ) — — 95 Construction – commercial 451 ( 58 ) — — 393 Construction – multi-family 478 ( 121 ) — — 357 Construction – land development 255 35 — — 290 Land 840 ( 12 ) — — 828 Consumer loans: Home equity and second mortgage 305 9 — — 314 Other 45 2 ( 2 ) — 45 Commercial business loans 2,590 6 ( 79 ) 2 2,519 Total $ 16,818 $ 264 $ ( 81 ) $ 45 $ 17,046 21 Nine Months Ended June 30, 2024 Beginning Allowance Impact of Adopting CECL (ASU 2016-13) Provision for (Recapture of) Credit Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One-to four-family $ 2,417 $ ( 408 ) $ 225 $ — $ 43 $ 2,277 Multi-family 1,156 ( 120 ) 406 — — 1,442 Commercial 7,209 ( 494 ) 480 — — 7,195 Construction – custom and owner/builder 750 542 ( 1 ) — — 1,291 Construction – speculative one- to four-family 148 ( 16 ) ( 37 ) — — 95 Construction – commercial 316 176 ( 99 ) — — 393 Construction – multi-family 602 204 ( 449 ) — — 357 Construction – land development 274 25 ( 9 ) — — 290 Land 406 318 104 — — 828 Consumer loans: Home equity and second mortgage 519 ( 243 ) 38 — — 314 Other 53 ( 7 ) 7 ( 8 ) — 45 Commercial business loans 1,967 484 145 ( 79 ) 2 2,519 Total $ 15,817 $ 461 $ 810 $ ( 87 ) $ 45 $ 17,046 Three Months Ended June 30, 2023 Beginning Allowance Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One- to four-family $ 2,052 $ 126 $ — $ — $ 2,178 Multi-family 938 74 — — 1,012 Commercial 6,904 125 — — 7,029 Construction – custom and owner/builder 726 73 — — 799 Construction – speculative one- to four-family 121 ( 11 ) — — 110 Construction – commercial 267 24 — — 291 Construction – multi-family 662 30 — — 692 Construction – land development 245 ( 12 ) — — 233 Land 363 26 — — 389 Consumer loans: Home equity and second mortgage 507 35 — — 542 Other 47 5 ( 1 ) — 51 Commercial business loans 1,866 115 — — 1,981 Total $ 14,698 $ 610 $ ( 1 ) $ — $ 15,307 22 Nine Months Ended June 30, 2023 Beginning Allowance Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One-to four-family $ 1,658 $ 520 $ — $ — $ 2,178 Multi-family 855 157 — — 1,012 Commercial 6,682 347 — — 7,029 Construction – custom and owner/builder 675 124 — — 799 Construction – speculative one- to four-family 130 ( 20 ) — — 110 Construction – commercial 343 ( 52 ) — — 291 Construction – multi-family 447 245 — — 692 Construction – land development 233 — — — 233 Land 397 ( 8 ) — — 389 Consumer loans: Home equity and second mortgage 440 102 — — 542 Other 42 11 ( 2 ) — 51 Commercial business loans 1,801 184 ( 5 ) 1 1,981 Total $ 13,703 $ 1,610 $ ( 7 ) $ 1 $ 15,307 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 June 30, 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 June 30, 2024 Mortgage loans: One- to four-family $ — $ — $ 135 $ — $ 135 $ 288,476 $ 288,611 Multi-family — — — — — 177,950 177,950 Commercial — — 1,310 — 1,310 596,555 597,865 Construction – custom and owner/builder — — 152 — 152 74,373 74,525 Construction – speculative one- to four-family — — — — — 6,733 6,733 Construction – commercial — — — — — 21,211 21,211 Construction – multi-family — — — — — 20,282 20,282 Construction – land development — — — — — 16,581 16,581 Land — — — — — 32,384 32,384 Consumer loans: Home equity and second mortgage — 2 615 — 617 43,062 43,679 Other — — — — — 3,121 3,121 Commercial business loans 50 62 1,908 — 2,020 134,193 136,213 SBA PPP loans — — — — — 314 314 Total $ 50 $ 64 $ 4,120 $ — $ 4,234 $ 1,415,235 $ 1,419,469 (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 June 30, 2024, the Company had $ 1.91 million of non-accrual loans with an ACL of $ 243,000 and $ 2.21 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 June 30, 2024 (in thousands): Recorded Investment Related ACL Mortgage loans: One- to four-family $ 135 $ — Commercial 1,310 — Construction - custom and owner/builder 152 — Consumer loans: Home equity and second mortgage 615 — Commercial business loans 1,908 243 Total $ 4,120 $ 243 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 June 30, 2023 and for three and nine 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 $ 373 $ 417 $ — $ 376 $ 381 $ 7 $ 21 $ 7 $ 21 Commercial 2,988 2,988 — 2,894 2,939 40 121 31 94 Land 150 150 — 305 371 2 4 1 3 Consumer loans: Home equity and second mortgage 390 390 — 488 444 3 9 2 7 Other — 48 — 1 2 — — — — Commercial business loans 44 44 — 46 51 — — — — Subtotal 3,945 4,037 — 4,110 4,188 52 155 41 125 With an allowance recorded: Commercial business loans 245 245 123 247 247 — — — — Subtotal 245 245 123 247 247 — — — — Total: Mortgage loans: One- to four-family 373 417 — 376 381 7 21 7 21 Commercial 2,988 2,988 — 2,894 2,939 40 121 31 94 Land 150 150 — 305 371 2 4 1 3 Consumer loans: Home equity and second mortgage 390 390 — 488 444 3 9 2 7 Other — 48 — 1 2 — — — — Commercial business loans 289 289 123 293 298 — — — — Total $ 4,190 $ 4,282 $ 123 $ 4,357 $ 4,435 $ 52 $ 155 $ 41 $ 125 _____________________________________________ (1) For the three months ended June 30, 2023. (2) For the nine months ended June 30, 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 nine months ended June 30, 2024 and 2023. At June 30, 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 nine months ended June 30, 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 other potential sources 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 June 30, 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 nine months ended June 30, 2024 and 2023 (dollars in thousands): Three Months Ended June 30, Nine Months Ended June 30, Lease cost: 2024 2023 2024 2023 Operating lease cost $ 98 $ 87 $ 283 $ 261 Short-term lease cost — — — — Total lease cost $ 98 $ 87 $ 283 $ 261 The following tables provide supplemental information related to operating leases at or for the three and nine months ended June 30, 2024 and 2023 (dollars in thousands): At or For the Three Months Ended June 30, 2024 At or For the Nine Months Ended June 30, 2024 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 83 $ 249 Weighted average remaining lease term-operating leases 6.1 years 6.1 years Weighted average discount rate-operating leases 2.34 % 2.34 % At or For the Three Months Ended June 30, 2023 At or For the Nine Months Ended June 30, 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 79 $ 234 Weighted average remaining lease term-operating leases 6.9 years 6.9 years Weighted average discount rate-operating leases 2.34 % 2.34 % 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 June 30, 2024 for future fiscal years are as follows (dollars in thousands): Remainder of 2024 $ 83 2025 336 2026 304 2027 232 2028 219 Thereafter 601 Total lease payments 1,775 Less imputed interest 126 Total $ 1,649 (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 nine months ended June 30, 2024 and 2023 is as follows (dollars in thousands, except per share amounts): Three Months Ended June 30, Nine Months Ended June 30, 2024 2023 2024 2023 Basic net income per common share computation Numerator – net income $ 5,924 $ 6,306 $ 17,928 $ 20,476 Denominator – weighted average common shares outstanding 8,004,552 8,156,831 8,067,068 8,203,255 Basic net income per common share $ 0.74 $ 0.77 $ 2.22 $ 2.50 Diluted net income per common share computation Numerator – net income $ 5,924 $ 6,306 $ 17,928 $ 20,476 Denominator – weighted average common shares outstanding 8,004,552 8,156,831 8,067,068 8,203,255 Effect of dilutive stock options (1) 34,793 57,144 41,975 75,824 Weighted average common shares outstanding - assuming dilution 8,039,345 8,213,975 8,109,043 8,279,079 Diluted net income per common share $ 0.74 $ 0.77 $ 2.21 $ 2.47 ____________________________________________ (1) For the three and nine months ended June 30, 2024, average options to purchase 240,820 and 233,081 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 nine months ended June 30, 2023, average options to purchase 256,503 30 and 203,823 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 nine months ended June 30, 2024 and 2023 are as follows (dollars in thousands): Three Months Ended June 30, 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 $ ( 745 ) $ — $ ( 745 ) Other comprehensive income 200 — 200 Balance of AOCI at the end of period $ ( 545 ) $ — $ ( 545 ) Nine Months Ended June 30, 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 530 9 539 Balance of AOCI at the end of period $ ( 545 ) $ — $ ( 545 ) Three Months Ended June 30, 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 $ ( 486 ) $ ( 9 ) $ ( 495 ) Other comprehensive loss ( 249 ) — ( 249 ) Balance of AOCI at the end of period $ ( 735 ) $ ( 9 ) $ ( 744 ) Nine Months Ended June 30, 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 (loss) ( 29 ) 2 ( 27 ) Balance of AOCI at the end of period $ ( 735 ) $ ( 9 ) $ ( 744 ) __________________________ (1) All amounts are net of income taxes. (8) STOCK COMPENSATION PLANS Under the Company's 2014 Equity Incentive Plan, the Company can 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 31 contractual term of ten years from the date of grant. At June 30, 2024, there were 15,576 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 June 30, 2024, there were 182,070 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 nine months ended June 30, 2024 and 2023 is summarized as follows: Nine Months Ended June 30, 2024 Nine Months Ended June 30, 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 ( 30,200 ) 13.07 ( 27,055 ) 19.77 Granted — — 1,000 33.40 Forfeited ( 16,560 ) 26.98 ( 7,800 ) 28.23 Options outstanding, end of period 322,390 $ 24.87 388,070 $ 23.47 The fair value of stock options is determined using the Black-Scholes valuation model. There were no stock options granted during the nine months ended June 30, 2024. The weighted average assumptions for options granted during the nine months ended June 30, 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 nine months ended June 30, 2024 and 2023 was $ 501,000 and $ 345,000 , respectively. At June 30, 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 June 30, 2024 was $ 221,000 . There were 300 options that vested during the nine months ended June 30, 2024 with a total fair value of $ 2,000 . At June 30, 2023, there were 186,910 unvested options with an aggregate grant date fair value of $ 1.05 million. There were 3,200 options that vested during the nine months ended June 30, 2023 with a total fair value of $ 17,000 . 32 Additional information regarding options outstanding at June 30, 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 1.0 26,250 $ 10.62 1.0 15.67 - 19.13 60,500 16.55 5.2 38,840 16.37 4.6 26.50 - 27.40 98,820 27.31 7.3 39,060 27.23 6.3 28.23 - 29.69 103,900 28.79 5.7 64,300 29.13 4.8 31.80 - 33.40 32,920 31.85 4.4 32,120 31.60 4.3 322,390 $ 24.87 5.6 200,570 $ 24.29 4.5 The aggregate intrinsic value of options outstanding at June 30, 2024 and 2023 was $ 1.07 million and $ 1.58 million , respectively. As of June 30, 2024, unrecognized compensation cost related to unvested stock options was $ 579,000 , which is expected to be recognized over a weighted average life of 1.81 years. At June 30, 2024, there were 26,150 unvested restricted stock awards. At June 30, 2023, there were no unvested restricted stock awards. There were no restricted stock awards granted during the nine months ended June 30, 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, June 30, 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 June 30, 2024, unrecognized compensation cost related to unvested restricted stock awards was $ 597,000 , which is expected to be recognized over a weighted average period of 1.98 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 June 30, 2024 and September 30, 2023. The Company's assets measured at estimated fair value on a recurring basis at June 30, 2024 and September 30, 2023 were as follows (dollars in thousands): June 30, 2024 Estimated Fair Value Level 1 Level 2 Level 3 Total Available for sale investment securities MBS: U.S. government agencies $ 8,910 $ 65,605 $ — $ 74,515 Investments in equity securities Mutual funds 836 — — 836 Total $ 9,746 $ 65,605 $ — $ 75,351 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 nine months ended June 30, 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 June 30, 2024 and September 30, 2023 (dollars in thousands): Estimated Fair Value Total Estimated June 30, 2024 Level 1 Level 2 Level 3 Fair Value Individually evaluated loans: Commercial business loans $ — $ — $ 1,168 $ 1,168 Total $ — $ — $ 1,168 $ 1,168 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 June 30, 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 June 30, 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 June 30, 2024 and September 30, 2023 (dollars in thousands): June 30, 2024 Fair Value Measurements Using: Recorded Amount Estimated Fair Value Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents $ 158,913 $ 158,913 $ 158,913 $ — $ — CDs held for investment 10,458 10,458 10,458 — — Investment securities 251,302 241,276 94,794 146,482 — Investments in equity securities 836 836 836 — — FHLB stock 2,037 2,037 2,037 — — Other investments 3,000 3,000 3,000 — — Loans held for sale 1,795 1,829 1,829 — — Loans receivable, net 1,397,019 1,344,541 — — 1,344,541 Accrued interest receivable 7,045 7,045 7,045 — — Financial liabilities Certificates of deposit 361,541 359,818 — — 359,818 FHLB borrowings 20,000 19,752 — — 19,752 Accrued interest payable 1,713 1,713 1,713 — — 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 Purchase Credit Impaired ("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 held to maturity 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 2 Investment Securities, Note 4 Loans Receivable and Allowance for Credit Losses 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. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The amendments in this ASU are intended to provide more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income tax paid information. The ASU requires disclosure in the rate reconciliation of specific categories as well as additional information for reconciling items that meet a quantitative threshold. The amendment requires on an annual basis a reconciliation broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity should apply the amendments in this ASU on a prospective basis. The Company expects this ASU to only impact its disclosure requirement and does not expect the adoption of this ASU to have a material impact on its business operations or the Company's consolidated financial statements. 37 (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 June 30, 2024, the Company recognized $ 1.01 million in service charges on deposits, $ 1.30 million in ATM and debit card interchange transaction fees, $ 18,000 in escrow fees, and $ 3,000 in fee income from non-deposit investment sales included in "Other" on the Consolidated Statement of Income, all considered within the scope of ASC 606. For the nine months ended June 30, 2024, the Company recognized $ 3.02 million in service charges on deposits, $ 3.77 million in ATM and debit card interchange transaction fees, $ 51,000 in escrow fees, and $ 6,000 in fee in come from non-deposit investment sales. For the three months ended June 30, 2023, the Company recognized $ 970,000 in service charges on deposits, $ 1.34 million in ATM and debit card interchange transaction fees, $ 27,000 in escrow fees, and $ 1,000 in fee income from non-deposit investment sales. For the nine months ended June 30, 2023, the Company recognized $ 2.81 million in service charges on deposits, $ 3.86 million in ATM and debit card interchange transaction fees, $ 85,000 in escrow fees, and $ 35,000 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 38 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 June 30, 2024 and 2023 are listed below (in thousands): June 30, 2024 June 30, 2023 Undisbursed portion of construction loans in process (see Note 4) $ 87,196 $ 104,774 Undisbursed lines of credit 118,050 139,400 Commitments to extend credit 14,278 29,881 $ 219,524 $ 274,055 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 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 $ 267,000 at June 30, 2024. The following table sets forth information for the three and nine months ended June 30, 2024 and 2023 regarding activity in the a ACL on unfunded loan commitments (dollars in thousands): ACL Three Months Ended June 30, 2024 Three Months Ended June 30, 2023 Beginning ACL $ 276 $ 320 Provision for (recapture of) credit losses ( 9 ) (1) 7 Ending ACL $ 267 $ 327 (1) The provision for (recapture of) credit losses does not match the three months ended income statement due to rounding. ACL Nine Months Ended June 30, 2024 Nine Months Ended June 30, 2023 Beginning ACL $ 332 $ 305 Impact of adopting CECL (ASU 2016-13) 65 — Provision for (recapture of) credit losses ( 130 ) 22 Ending ACL $ 267 $ 327 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. 39