TIMBERLAND BANCORP INC 10-K

Item 8. Financial Statements and Supplementary Data TIMBERLAND BANCORP, INC. AND SUBSIDIARY Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (Delap LLP, Lake Oswego, Oregon, PCAOB ID: 116 ) 66 Consolidated Balance Sheets as of September 30, 2024 and 2023 68 Consolidated Statements of Income for the Years Ended September 30, 2024, 2023 and 2022 70 Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2024, 2023 and 2022 72 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2024, 2023 and 2022 73 Consolidated Statements of Cash Flows for the Years Ended September 30, 2024, 2023 and 2022 75 Notes to Consolidated Financial Statements 77 66 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Timberland Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Timberland Bancorp, Inc. and Subsidiary (collectively, "the Company") as of September 30, 2024 and 2023, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2024, and the related notes (collectively, "the financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2024, in conformity with accounting principles generally accepted in the United States of America (U.S.). Adoption of New Accounting Standard As described in Notes 1, 3, and 4 to the financial statements, the Company has changed its method of accounting for credit losses effective October 1, 2023 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , including all related amendments. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 67 Allowance for Credit Losses for Loans Critical Audit Matter Description As described in Notes 1 and 4 to the financial statements, the Company's allowance for credit losses for loans as of September 30, 2024, was $17.48 million on a total loan portfolio, net of deferred fees, of $1.44 billion. The allowance for credit losses for loans reflects an estimate of lifetime expected credit losses in the loan portfolio. The measurement of expected credit losses is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the Company's loan portfolio. We identified the Company’s estimate of the allowance for credit losses for loans as a critical audit matter. The principal considerations for our determination of the allowance for credit losses for loans as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors, model assumptions, forecasts and forecasting periods. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed. How the Critical Audit Matter Was Addressed in the Audit The primary audit procedures we performed to address this critical audit matter included the following, among others: • We obtained an understanding of the relevant controls related to management’s establishment of the qualitative factors, assessment, review and approval of the qualitative factors, and the data used in determining the qualitative factors. • We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current and forecasted economic conditions, and other risk factors used in development of the qualitative factors. • We tested the completeness and accuracy of the significant inputs into the model including the underlying data used to develop the qualitative factors and forecasts. • We validated the mathematical accuracy of the calculation. • We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, as well as other audit evidence gathered. • We performed analytical procedures to evaluate the directional consistency of changes that occurred in the allowance for credit losses for loans. /s/ Delap LLP We have served as the Company's auditors since 2010. Lake Oswego, Oregon December 11, 2024 68 Consolidated Balance Sheets (Dollars in Thousands, Except Per Share Amounts) Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 2024 2023 Assets Cash and cash equivalents: Cash and due from financial institutions $ 29,071 $ 25,390 Interest-bearing deposits in banks 135,657 103,331 Total cash and cash equivalents 164,728 128,721 Certificates of deposit (“CDs”) held for investment, at cost 10,209 15,188 Investment securities held to maturity, at amortized cost (net of allowance for credit losses of $ 60 at September 30, 2024 and $0 at September 30, 2023), (estimated fair value $ 166,007 and $ 253,766 ) 172,097 270,218 Investment securities available for sale, at fair value 72,257 41,771 Investments in equity securities, at fair value 866 811 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 — 400 Loans receivable, net of allowance for credit losses of $ 17,478 and $ 15,817 1,421,523 1,302,305 Premises and equipment, net 21,486 21,642 Accrued interest receivable 6,990 6,004 Bank owned life insurance (“BOLI”) 23,611 22,966 Goodwill 15,131 15,131 Core deposit intangible (“CDI”), net 451 677 Loan servicing rights, net 1,372 2,124 Operating lease right-of-use ("ROU") assets 1,475 1,772 Other assets 6,242 3,573 Total assets $ 1,923,475 $ 1,839,905 Liabilities and shareholders’ equity Liabilities Deposits: Non-interest-bearing demand $ 413,116 $ 455,864 Interest-bearing 1,234,552 1,105,071 Total deposits 1,647,668 1,560,935 Operating lease liabilities 1,575 1,867 FHLB borrowings 20,000 35,000 Other liabilities and accrued expenses 8,819 9,030 Total liabilities 1,678,062 1,606,832 Commitments and contingencies (See Note 16) See Notes to Consolidated Financial Statements 69 Consolidated Balance Sheets (continued) (Dollars in Thousands, Except Per Share Amounts) Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Shareholders’ equity 2024 2023 Preferred stock, $ 0.01 par value; 1,000,000 shares authorized; none issued $ — $ — Common stock, $ 0.01 par value; 50,000,000 shares authorized; 7,960,127 shares issued and outstanding - September 30, 2024 8,105,338 shares issued and outstanding - September 30, 2023 29,862 34,771 Retained earnings 215,531 199,386 Accumulated other comprehensive income (loss) 20 ( 1,084 ) Total shareholders’ equity 245,413 233,073 Total liabilities and shareholders’ equity $ 1,923,475 $ 1,839,905 See Notes to Consolidated Financial Statements 70 Consolidated Statements of Income (Dollars in Thousands, Except Per Share Amounts) Timberland Bancorp, Inc. and Subsidiary Years Ended September 30, 2024, 2023 and 2022 2024 2023 2022 Interest and dividend income Loans receivable and loans held for sale $ 77,430 $ 63,154 $ 51,324 Investment securities 9,129 9,384 3,488 Dividends from mutual funds, FHLB stock and other investments 361 270 120 Interest-bearing deposits in banks and CDs 7,905 7,143 3,576 Total interest and dividend income 94,825 79,951 58,508 Interest expense Deposits 29,659 11,302 2,657 FHLB borrowings 999 290 17 Total interest expense 30,658 11,592 2,674 Net interest income 64,167 68,359 55,834 Provision for (recapture of) credit losses Provision for credit losses - loans 1,254 2,132 270 Recapture of credit losses - investment securities ( 32 ) — — Recapture of credit losses - unfunded commitments ( 71 ) — — Total provision for credit losses - net 1,151 2,132 270 Net interest income after provision for (recapture of) credit losses 63,016 66,227 55,564 Non-interest income Net recoveries on investment securities 12 9 22 Gain on sales of investment securities, net — 95 — Service charges on deposits 4,062 3,824 3,964 ATM and debit card interchange transaction fees 5,066 5,194 5,210 BOLI net earnings 645 706 613 Gain on sales of loans, net 322 244 1,510 Escrow fees 71 109 211 Valuation recovery on loan servicing rights, net — — 119 Other, net 958 959 975 Total non-interest income, net 11,136 11,140 12,624 See Notes to Consolidated Financial Statements 71 Consolidated Statements of Income (continued) (Dollars in Thousands, Except Per Share Amounts) Timberland Bancorp, Inc. and Subsidiary Years Ended September 30, 2024, 2023 and 2022 2024 2023 2022 Non-interest expense Salaries and employee benefits $ 23,730 $ 23,562 $ 20,816 Premises and equipment 3,998 3,915 3,736 (Gain) loss on sales/dispositions of premises and equipment, net ( 2 ) ( 19 ) 13 Advertising 761 786 695 Other real estate owned ("OREO") and other repossessed assets, net 5 1 ( 17 ) ATM and debit card interchange transaction fees 2,384 1,987 1,943 Postage and courier 538 532 577 Amortization of CDI 226 271 316 State and local taxes 1,322 1,219 1,062 Professional fees 1,317 2,078 1,747 Federal Deposit Insurance Corporation ("FDIC") insurance 833 711 506 Loan administration and foreclosure 521 503 508 Technology and communications 4,264 3,545 2,719 Deposit operations 1,540 1,368 1,235 Other 2,309 2,914 2,770 Total non-interest expense, net 43,746 43,373 38,626 Income before income taxes 30,406 33,994 29,562 Provision for income taxes 6,123 6,876 5,962 Net income $ 24,283 $ 27,118 $ 23,600 Net income per common share Basic $ 3.02 $ 3.32 $ 2.84 Diluted $ 3.01 $ 3.29 $ 2.82 See Notes to Consolidated Financial Statements 72 Consolidated Statements of Comprehensive Income (Dollars in Thousands) Timberland Bancorp, Inc. and Subsidiary Years Ended September 30, 2024, 2023 and 2022 2024 2023 2022 Comprehensive income Net income $ 24,283 $ 27,118 $ 23,600 Other comprehensive income (loss) Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $ 291 , $( 98 ), and $( 209 ), respectively 1,095 ( 369 ) ( 781 ) Change in other than temporary impairment ("OTTI") on investment securities held to maturity, net of income taxes: Adjustments related to other factors for which OTTI was previously recognized, net of income taxes of $ 0 , $ 0 , and $ 0 , respectively — — ( 1 ) Accretion of OTTI on investment securities held to maturity, net of income taxes of $ 2 , $ 1 , and $ 2 , respectively 9 2 6 Total other comprehensive income (loss), net of income taxes 1,104 ( 367 ) ( 776 ) Total comprehensive income $ 25,387 $ 26,751 $ 22,824 See Notes to Consolidated Financial Statements 73 Consolidated Statements of Shareholders’ Equity (Dollars in Thousands, Except Per Share Amounts) Timberland Bancorp, Inc. and Subsidiary Years Ended September 30, 2024, 2023 and 2022 Common Stock Accumulated Other Comprehensive Income (Loss) Number of Shares Amount Retained Earnings Total Balance, September 30, 2021 8,355,469 $ 42,673 $ 164,167 $ 59 $ 206,899 Net income — — 23,600 — 23,600 Other comprehensive loss — — — ( 776 ) ( 776 ) Repurchase of common stock ( 170,237 ) ( 4,583 ) — — ( 4,583 ) Exercise of stock options 36,720 415 — — 415 Common stock dividends ($ 0.87 per common share) — — ( 7,232 ) — ( 7,232 ) Stock based compensation expense — 246 — — 246 Balance, September 30, 2022 8,221,952 38,751 180,535 ( 717 ) 218,569 Net income — — 27,118 — 27,118 Other comprehensive loss — — — ( 367 ) ( 367 ) Repurchase of common stock ( 185,399 ) ( 4,998 ) — — ( 4,998 ) Restricted stock grants 26,150 — — — — — Exercise of stock options 42,635 698 — — 698 Common stock dividends ($ 1.01 per common share) — — ( 8,267 ) — ( 8,267 ) Stock based compensation expense — 320 — — 320 Balance, September 30, 3023 8,105,338 $ 34,771 $ 199,386 $ ( 1,084 ) $ 233,073 74 Common Stock Accumulated Other Comprehensive Income (Loss) Number of Shares Amount Retained Earnings Total Balance, September 30, 2023 8,105,338 $ 34,771 $ 199,386 $ ( 1,084 ) $ 233,073 Net income — — 24,283 — 24,283 Other comprehensive income — — — 1,104 1,104 Repurchase of common stock, net of tax ( 218,976 ) ( 5,958 ) — — ( 5,958 ) Restricted stock grants, net 28,615 — — — — Exercise of stock options 45,150 659 — — 659 Common stock dividends ($ 0.95 per common share) — — ( 7,650 ) — ( 7,650 ) Stock based compensation expense — 390 — — 390 Adoption of ASU 2016-013, net of tax — — ( 488 ) — ( 488 ) Balance, September 30, 2024 7,960,127 $ 29,862 $ 215,531 $ 20 $ 245,413 See Notes to Consolidated Financial Statements 75 Consolidated Statements of Cash Flows (Dollars in Thousands) Timberland Bancorp, Inc. and Subsidiary Years Ended September 30, 2024, 2023 and 2022 2024 2023 2022 Cash flows from operating activities Net income $ 24,283 $ 27,118 $ 23,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,459 1,381 1,367 Deferred income taxes ( 383 ) ( 291 ) ( 177 ) Amortization of CDI 226 271 316 Accretion of discount on purchased loans ( 37 ) ( 75 ) ( 182 ) Stock option compensation expense 390 320 246 Gain on sales of investment securities, net — ( 95 ) — Net recoveries on investment securities ( 12 ) ( 9 ) ( 22 ) Change in fair value of investments in equity securities ( 55 ) 24 120 Gain on sales of OREO and other repossessed assets, net — — ( 2 ) Accretion of discounts and premiums on securities ( 1,051 ) ( 1,223 ) ( 39 ) Gain on sales of loans, net ( 322 ) ( 244 ) ( 1,510 ) (Gain) loss on sales/dispositions of premises and equipment, net ( 2 ) ( 19 ) 13 Provision for credit losses - net 1,151 2,132 270 Loans originated for sale ( 14,024 ) ( 10,946 ) ( 55,136 ) Proceeds from sales of loans 14,746 11,538 59,115 Amortization of loan servicing rights 894 1,012 1,156 Valuation adjustment on loan servicing rights, net — — ( 119 ) BOLI net earnings ( 645 ) ( 627 ) ( 613 ) BOLI death benefit in excess of cash surrender value — ( 79 ) — Increase (decrease) in deferred loan origination fees 182 921 ( 822 ) Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses ( 3,780 ) ( 112 ) ( 1,081 ) Net cash provided by operating activities 23,020 30,997 26,500 Cash flows from investing activities Net decrease in CDs held for investment 4,979 7,706 5,588 Purchase of investment securities held to maturity ( 1,919 ) ( 15,602 ) ( 208,778 ) Purchase of investment securities available for sale ( 43,032 ) ( 16,994 ) — Proceeds from maturities and prepayments of investment securities held to maturity 100,869 13,123 11,661 Proceeds from maturities and prepayments of investment securities available for sale 14,119 7,442 20,448 Proceeds from sales of investment securities available for sale — 8,927 — Purchase of FHLB stock — ( 1,408 ) ( 91 ) Proceeds from redemption of FHLB stock 1,565 — — Increase in loans receivable, net ( 121,077 ) ( 172,857 ) ( 163,238 ) Purchase of premises and equipment ( 1,309 ) ( 1,106 ) ( 911 ) Proceeds from sales of OREO and other repossessed assets — — 159 Proceeds from sales/dispositions of premises and equipment 8 — — Proceeds from death benefit on BOLI — 546 — Net cash used in investing activities ( 45,797 ) ( 170,223 ) ( 335,162 ) See Notes to Consolidated Financial Statements 76 Consolidated Statements of Cash Flows (continued) (Dollars in Thousands) Timberland Bancorp, Inc. and Subsidiary Years Ended September 30, 2024, 2023 and 2022 2024 2023 2022 Cash flows from financing activities Net increase (decrease) in deposits $ 86,733 $ ( 71,241 ) $ 61,621 Proceeds from (repayment of) FHLB borrowings ( 15,000 ) 35,000 ( 5,000 ) Proceeds from exercise of stock options 659 698 415 Repurchase of common stock, net of taxes ( 5,958 ) ( 4,998 ) ( 4,583 ) Payment of dividends ( 7,650 ) ( 8,267 ) ( 7,232 ) Net cash provided by (used in) financing activities 58,784 ( 48,808 ) 45,221 Net increase (decrease) in cash and cash equivalents 36,007 ( 188,034 ) ( 263,441 ) Cash and cash equivalents Beginning of year 128,721 316,755 580,196 End of year $ 164,728 $ 128,721 $ 316,755 Supplemental disclosure of cash flow information Income taxes paid $ 6,490 $ 6,989 $ 5,450 Interest paid $ 29,923 $ 10,303 $ 2,700 Supplemental disclosure of non-cash investing and financing activities Other comprehensive income (loss) related to investment securities $ 1,104 $ ( 367 ) $ ( 776 ) Operating lease liabilities arising from recording of ROU assets $ — $ 72 $ — Adjustment to retained earnings, net of deferred tax - adoption of ASU 2016-13 $ ( 488 ) $ — $ — See Notes to Consolidated Financial Statements 77 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 1 - Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Timberland Bancorp, Inc. (“Timberland Bancorp”), its wholly owned subsidiary, Timberland Bank (the “Bank”), and the Bank’s wholly owned subsidiary, Timberland Service Corp. (collectively, the "Company”). All significant intercompany transactions and balances have been eliminated in consolidation. Nature of Operations Timberland Bancorp is a bank holding company which operates primarily through its subsidiary, the Bank. The Bank was established in 1915 and, through its 23 branches located in Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties in Washington State, attracts deposits from the general public and uses those funds, along with other borrowings, primarily to provide residential real estate, construction, commercial real estate, commercial business and consumer loans to borrowers primarily in western Washington. Consolidated Financial Statement Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") (“GAAP”) and prevailing practices within the banking industry. The preparation of consolidated financial statements 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 periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for credit losses ("ACL"), the valuation of loan servicing rights, the valuation of assets acquired and liabilities assumed in acquisitions and the valuation of goodwill for potential impairment. Certain prior year amounts have been reclassified to conform to the 2024 fiscal year presentation with no change to previously reported net income or shareholders’ equity. Segment Reporting The Company has one reportable operating segment which is defined as community banking in western Washington under the operating name “Timberland Bank.” Cash and Cash Equivalents and Cash Flows The Company considers amounts included in the consolidated balance sheets’ captions “Cash and due from financial institutions” and “Interest-bearing deposits in banks,” all of which mature within ninety days, to be cash equivalents for purposes of reporting cash flows. Interest-bearing deposits in banks as of September 30, 2024 and 2023 included deposits with the Federal Reserve Bank of San Francisco ("FRB") of $ 134,234,000 and $ 84,500,000 , respectively. The Company also maintains balances in correspondent bank accounts which, at times, may exceed the FDIC insurance limit of $250,000 per correspondent bank. Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the FRB and the correspondent banks. CDs Held for Investment CDs held for investment include amounts invested with other FDIC-insured financial institutions for a stated interest rate and with a fixed maturity date. Such CDs generally have maturities of 12 to 60 months from the date of purchase by the Company. Early withdrawal penalties may apply; however, the Company intends to hold these CDs to maturity. The Company generally limits its purchases of CDs to a maximum of $250,000 (the FDIC insurance coverage limit) with any single financial institution. 78 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Investment Securities Investment securities are classified upon acquisition as held to maturity or available for sale. Investments securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Investment securities classified as available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of income tax effects. Premiums and discounts are amortized to interest income using the interest method over the contractual lives of the securities. Gains and losses on sales of investment securities are recognized on the trade date and determined using the specific identification method. The Company analyzes investment securities to determine whether there have been any events or economic circumstances to indicate that a security has incurred a credit-related loss. The Company considers many factors including recent events specific to the issuer or industry, and for securities, external credit ratings and recent downgrades. Credit component losses are reported in allowance for credit losses in the income statement when the present value of expected future cash flows is less than the amortized cost. Noncredit component losses are recorded in other comprehensive income (loss) when the Company (1) does not intend to sell the security or (2) is not more likely than not to have to sell the security prior to the security’s anticipated recovery. If the Company is likely to sell an investment security, any noncredit component losses are recognized and are reported in non-interest income. Investments in Equity Securities Investments in equity securities are stated at fair value. Changes in the fair value of investments in equity securities are recorded in other non-interest income. FHLB Stock The Bank, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.06 % of the Bank's total assets, with a maximum of $10.00 million and a minimum of $10,000, plus 4.50 % of any borrowings from the FHLB. No ready market exists for this stock, and it has no quoted market value. However, redemption of FHLB stock has historically been at par value. The Company's investment in FHLB stock is carried at cost, which approximates fair value. The Company evaluates its FHLB stock for impairment as needed. The Company's determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared with the capital stock amount and the length of time that any decline has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB; and (4) the liquidity position of the FHLB. Based on its evaluation, the Company determined that there was no impairment of FHLB stock at September 30, 2024 and 2023. Other Investments The Bank invests in the Solomon Hess SBA Loan Fund LLC - a private investment fund - to help satisfy compliance with the Bank's Community Reinvestment Act ("CRA") investment test requirements. Shares in this fund are not publicly traded and, therefore, have no readily determinable fair value. The Bank's investment in the fund is recorded at cost. An investor can have its investment in the fund redeemed for the balance of its capital account at any quarter-end with a 60 day notice to the fund. Loans Held for Sale Mortgage loans and commercial business loans originated and intended for sale in the secondary market are stated in the aggregate at the lower of cost or estimated fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains or losses on sales of loans are recognized at the time of sale. The gain or loss is the difference between the net sales proceeds and the recorded value of the loans, including any remaining unamortized deferred loan origination fees. 79 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Loans Receivable Loans are stated at the amount of unpaid principal, reduced by the undisbursed portion of construction loans in process, net deferred loan origination fees and the allowance for credit losses ("ACL"). Interest on loans is accrued daily based on the principal amount outstanding. Generally, the accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to make payments as they become due or when they are past due 90 days as to either principal or interest (based on contractual terms), unless the loan is well secured and in the process of collection. In determining whether a borrower may be able to make payments as they become due, management considers circumstances such as the financial strength of the borrower, the estimated collateral value, reasons for the delays in payments, payment record, the amounts past due and the number of days past due. All interest accrued but not collected for loans that are placed on non-accrual status or charged off is reversed against interest income. Subsequent collections on a cash basis are applied proportionately to past due principal and interest, unless collectability of principal is in doubt, in which case all payments are applied to principal. Loans are returned to accrual status when the loan is deemed current, and the collectability of principal and interest is no longer doubtful, or, in the case of one- to four-family loans, when the loan is less than 90 days delinquent. The categories of non-accrual loans and impaired loans overlap, although they are not identical. The Company charges fees for originating loans. These fees, net of certain loan origination costs, are deferred and amortized to income on the level-yield basis over the loan term. If the loan is repaid prior to maturity, the remaining unamortized deferred loan origination fee is recognized in income at the time of repayment. Acquired Loans Purchased loans, including loans acquired in business combinations, are recorded at their estimated fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an ACL is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired ("PCI") or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The excess of the cash flows expected to be collected over a PCI loan's carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the PCI loan using the effective yield method. The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents the Company's estimate of the credit losses expected to occur and would be considered in determining the estimated fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at the purchase date in excess of fair value are adjusted through a change to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording an ACL on loans. PCI loans were insignificant as of September 30, 2024 and 2023. For purchased non-credit-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. Any subsequent deterioration in credit quality is recognized by recording an ACL on loans. Allowance for Credit Losses ACL on Available for Sale Investment Securities - A vailable for sale investment securities in an unrealized loss position, are assessed to determine whether the Company intends to sell, or is more likely than not to be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. Investment securities available-for-sale that do not meet the aforementioned criteria, are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded, limited by the amount that the fair value is less than the amortized cost basis. 80 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Accrued interest receivable on investment securities available for sale is excluded from the estimate of expected credit losses. Changes in the ACL on investment securities available for sale are recorded as provision for (recapture of) credit losses on the consolidated income statements. Losses are charged against the ACL when it is believed the uncollectibility of an investment security available for sale is confirmed or when either of the criteria regarding intent or requirement to sell is met. ACL on Held to Maturity Investment Securities - The Company measures expected credit losses on investment securities held to maturity on a pooled, collective basis by major investment security type with similar risk characteristics. A historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the investment securities on those historical credit losses. Expected credit losses on investment securities in the held to maturity portfolio that do not share similar risk characteristics with any of the pools are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the investment securities. Accrued interest receivable on investment securities held to maturity is excluded from the estimate of expected credit losses. Changes in the ACL on investment securities held to maturity are recorded as provision for (recapture of) credit losses in the consolidated income statements. Losses are charged against the ACL when it is believed the uncollectibility of an investment security held to maturity is confirmed. ACL on Loans - 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 year ended September 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 4 - Loan Receivable and Allowance for Credit Losses. 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 elected to reverse interest income on loans 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 a 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 term, 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 those factors. Prepayment rates 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 evaluated individually may be estimated based on their expected cash flows, or in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated selling costs. 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 loss has been incurred: the loans 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 or inherent risks in the loan portfolio. Loss factors are based on the Company's historical loss experiences 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 81 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 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 an integral part of their examination process, periodically review the Company's ACL and may require the Company to make adjustments to the ACL based on their judgment about information available to them at the time of their examinations. The ACL on loans totaled $ 17,478,000 at September 30, 2024. ACL for Unfunded Loan Commitments - The Company maintains a separate ACL related to unfunded loan commitments. Management estimates the amount of expected losses related to unfunded, off-balance sheet commitments over the contractual period in which 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 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 for (recapture of) credit losses on the consolidated income statements. The ACL on unfunded loan commitments totaled $ 327,000 at September 30, 2024. Premises and Equipment Premises and equipment are recorded at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: buildings and improvements - five to forty years; and furniture and equipment - three to seven years. The cost of maintenance and repairs is charged to expense as incurred. Gains and losses on dispositions are reflected in current earnings. Impairment of Long-Lived Assets Long-lived assets, consisting of premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the recorded amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the recorded amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the recorded amount of the assets exceeds the discounted recovery amount or estimated fair value of the assets. No events or changes in circumstances have occurred during the years ended September 30, 2024 or 2023 that would cause management to re-evaluate the recoverability of the Company’s long-lived assets. OREO and Other Repossessed Assets OREO and other repossessed assets consist of properties or assets acquired through or in lieu of foreclosure, and are recorded initially at the estimated fair value of the properties less estimated costs of disposal, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. When the property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the ACL for OREO. The valuation of real estate 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 values of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. Costs relating to development and improvement of the properties or assets are capitalized, while costs relating to holding the properties or assets are expensed. BOLI BOLI policies are recorded at their cash surrender value less applicable cash surrender charges. Income from BOLI is recognized when earned. 82 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Goodwill 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 the 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 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 September 30, 2024, management believes that there were 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 decreases in the Company's stock price and market capitalization were deemed to be other than temporary, it may significantly affect the fair value of the Company's goodwill and may trigger impairment charges. Any impairment charge could have a material adverse effect on the Company's results of operation and financial condition. CDI 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. 83 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Loan Servicing Rights The Company holds rights to service (1) loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and (2) the guaranteed portion of U.S. Small Business Administration ("SBA") loans sold in the secondary market. Loan servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained. Loan servicing rights are amortized to servicing income on loans sold approximately in proportion to and over the period of estimated net servicing income. The value of loan servicing rights at the date of the sale of loans is estimated based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and expected prepayment rates on the underlying loans. The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated future cash flows from the loan servicing assets to those estimated at the time that the loan servicing assets were originated. Fair values are estimated using expected future discounted cash flows based on current market rates of interest. For purposes of measuring impairment, the loan servicing rights must be stratified by one or more predominant risk characteristics of the underlying loans. The Company stratifies its capitalized loan servicing rights based on product type and term of the underlying loans. The amount of impairment recognized is the amount, if any, by which the amortized cost of the loan servicing rights exceeds their fair value. Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that fair value is less than the recorded amount. Operating Leases The Company has only identified leases classified as operating leases. Operating leases are recorded as ROU assets and ROU liabilities within operating lease assets and operating lease liabilities, respectively, in the consolidated balance sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and ROU liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and ROU liabilities are recognized at the lease agreement commencement date based on the present value of lease payments over the lease term. The lease term incorporates options to extend the lease when it is reasonably certain that the Company will exercise that option. As the Company's leases typically do not provide an implicit rate; the Company uses the weighted average discount rate to estimate the present value of future lease payments in calculating the value of the ROU asset. The operating lease ROU assets is further reduced by any lease pre-payments made and lease incentives. The leases may contain various provisions for increases in rental rates based either on changes in the published Consumer Price Index or a predetermined escalation schedule and such variable lease payments are recognized as lease expense as they are incurred. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company excludes operating leases with a term of twelve months or less from being capitalized as ROU assets and ROU liabilities. Transfers of Financial Assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Income Taxes The Company files a consolidated federal and various state income tax returns. The Bank provides for income taxes separately and remits to (receives from) Timberland Bancorp amounts currently due (receivable). Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. These temporary differences will result in differences between income for tax purposes and income for financial reporting purposes in future years. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established to reduce the net recorded amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized. 84 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 With respect to accounting for uncertainty in incomes taxes, a tax provision is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized upon examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters as income tax expense. The Company is no longer subject to U.S. federal income tax examination by tax authorities for years ended on or before September 30, 2020. Advertising Costs for advertising and marketing are expensed as incurred. Stock-Based Compensation The Company measures compensation cost for all stock-based awards based on the grant-date fair value of the stock-based awards and recognizes compensation cost over the service period of stock-based awards. The fair value of stock options is determined using the Black-Scholes valuation model. Stock option forfeitures are accounted for as they occur. The fair value of restricted stock is determined based on the grant date fair value of the Company's common stock. 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. Related Party Transactions The previous Board Chair of the Bank and Timberland Bancorp passed away during the year ended September 30, 2023. He was a member of the law firm that provides general counsel to the Company. Legal and other fees paid to this law firm during the period he served on the Board for the years ended September 30, 2023 and 2022 totaled $ 24,000 and $ 48,000 , respectively. Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board ("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. 85 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 On October 1, 2023, the Company adopted this ASU. The following table sets forth information on the impact of adopting this ASU (dollars in thousands): September 30, 2023 October 1, 2023 October 1, 2023 As Previously Reported (Incurred Loss) Impact of ASU 2016-13 As Reported Under ASU 2016-13 Assets: ACL on investment securities $ — $ 92 $ 92 ACL on loans 15,817 461 16,278 Net deferred tax asset ( 26 ) 130 104 Liabilities: ACL on unfunded commitments 332 65 397 Total equity: $ 233,073 $ ( 488 ) $ 232,585 For more information related to the implementation, see Note 3 - Investment Securities, Note 4 - Loans Receivable and Allowance for Credit Losses and Note 16 - 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 was 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 trouble debt restructurings ("TDR") 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 was 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 requirements 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. In November 2024, the FASB issued ASU 2024-03, Income Statement (Topic 220): Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures. The amendments in this ASU require disclosure, in notes to the 86 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 financial statements, of specified information about certain costs and expenses. In conjunction with recent standards that enhanced the disaggregation of revenue and income tax information, the disaggregated expense information will enable investors to better understand the major components of an entity's income statement. The new standard is effective for annual periods beginning after December 15, 2026, with early adoption permitted. The Company expects this ASU to only impact its disclosure requirements and does not expect the adoption of the ASU to have a material impact on its business operations or the Company's consolidated financial statements. Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Company's financial position, results of operations or cash flows. Note 2 - Restricted Assets Federal Reserve regulations require that the Bank maintain certain minimum reserve balances on hand or on deposit with the FRB, based on a percentage of transaction account deposits. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratio to zero percent, effective March 26, 2020. Currently, the FRB has not announced plans to re-impose a reserve requirement; however, the FRB may adjust reserve requirement ratios at its sole discretion. 87 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 3 - Investment Securities Held to maturity and available for sale investment securities were as follows as of September 30, 2024 and 2023 (dollars in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value ACL September 30, 2024 Held to Maturity U.S. Treasury and U.S. government agency securities $ 92,312 $ 70 $ ( 4,197 ) $ 88,185 $ — Mortgage-backed securities ("MBS"): U.S. government agencies 49,481 174 ( 1,378 ) 48,277 — Private label residential 28,479 231 ( 980 ) 27,730 55 Municipal securities 1,330 8 — 1,338 — Bank issued trust preferred securities 495 — ( 18 ) 477 5 Total $ 172,097 $ 483 $ ( 6,573 ) $ 166,007 $ 60 Available for Sale U.S. government securities $ 3,934 $ 6 $ ( 1 ) $ 3,939 MBS: U.S. government agencies 68,297 545 ( 524 ) 68,318 Total $ 72,231 $ 551 $ ( 525 ) $ 72,257 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 Total $ 43,132 $ — $ ( 1,361 ) $ 41,771 88 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2024 (dollars in thousands): Less Than 12 Months 12 Months or Longer Total Estimated Fair Value Gross Unrealized Losses Qty Estimated Fair Value Gross Unrealized Losses Qty Estimated Fair Value Gross Unrealized Losses Held to Maturity U.S. Treasury and U.S. government agency securities $ — $ — — $ 78,363 $ ( 4,197 ) 17 $ 78,363 $ ( 4,197 ) MBS: U.S. government agencies 1 — 1 28,618 ( 1,378 ) 44 28,619 ( 1,378 ) Private label residential 804 ( 6 ) 1 20,447 ( 974 ) 19 21,251 ( 980 ) Bank issued trust preferred securities — — — 477 ( 18 ) 1 477 ( 18 ) Total $ 805 $ ( 6 ) 2 $ 127,905 $ ( 6,567 ) 81 $ 128,710 $ ( 6,573 ) Available for Sale U.S. government securities $ 1,962 $ ( 1 ) 1 $ — $ — — $ 1,962 $ ( 1 ) MBS: U.S. government agencies 11,368 ( 117 ) 4 25,751 ( 407 ) 23 37,119 ( 524 ) Total $ 13,330 $ ( 118 ) 5 $ 25,751 $ ( 407 ) 23 $ 39,081 $ ( 525 ) 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 Qty Estimated Fair Value Gross Unrealized Losses Qty 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 ) 89 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 During the year ended September 30, 2024, the Company recorded a $ 2,000 net realized loss on 14 held to maturity investment securities, all of which had been recognized previously as a credit loss. During the year ended September 30, 2023, the Company recorded a $ 11,000 net realized loss on 14 held to maturity investment securities, all of which had been recognized previously as a credit loss. During the year ended September 30, 2022, the Company recorded a $ 1,000 net realized gain on 16 held to maturity investment securities, all of which had been recognized previously as a credit loss. There were no realized gains or losses on available for sale securities for the year ended September 30, 2024. During the year ended September 30, 2023, the Company recorded a $ 95,000 realized gain on sale of two available for sale investment securities. There were no realized gains or losses on available for sale investment securities for the year ended September 30, 2022. The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits and FHLB collateral totaled $ 208,810,000 and $ 201,820,000 at September 30, 2024 and 2023, respectively. The contractual maturities of debt securities at September 30, 2024 are 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 $ 27,472 $ 27,262 $ 3,934 $ 3,939 Due after one year to five years 81,840 77,870 2,131 2,130 Due after five years to ten years 1,250 1,277 5,160 5,144 Due after ten years 61,535 59,598 61,006 61,044 Total $ 172,097 $ 166,007 $ 72,231 $ 72,257 Credit Quality Indicators and Allowance for Credit Losses Available for Sale Investment Securities The Company assesses each available for sale investment security that is 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 investment securities at September 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 schedule 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 September 30, 2024, the ACL on the held to maturity securities portfolio totaled $ 60,000 . 90 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table sets forth information for the year ended September 30, 2024 regarding activity in the ACL by portfolio segment (dollars in thousands): Year Ended September 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 $ — $ 82 $ ( 27 ) $ 55 Bank issued trust preferred securities — 10 ( 5 ) 5 Total $ — $ 92 $ ( 32 ) $ 60 The ACL on held to maturity 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 statements. Accrued interest receivable on held to maturity investment securities totaled $ 455,000 at September 30, 2024 and is included in accrued interest receivable on the consolidated balance sheet. This amount is excluded from the estimate of expected credit losses. Held to maturity investment securities are typically classified as non-accrual when the contractual payment of principal and 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 $ 51,000 of private label mortgage-backed held to maturity investment securities in non-accrual status at September 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 September 30, 2024 by credit quality indicator (dollars in thousands): Credit Ratings As of September 30, 2024 AAA/AA/A BBB/BB/B Unrated Total Held to Maturity U.S. Treasury and U.S. government agency securities $ 92,312 $ — $ — $ 92,312 MBS: U.S. government agencies 49,481 — — 49,481 Private label securities 16,277 — 12,202 28,479 Municipal securities 1,230 — 100 1,330 Bank issued trust preferred securities — — 495 495 Total held to maturity $ 159,300 $ — $ 12,797 $ 172,097 91 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 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 the 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 loan. The amounts written off due to credit loss remain and continue to be recovered on a cash basis. The following table represents a roll forward of the credit loss component of held to maturity investment securities that have been written down for OTTI with the credit loss component recognized in earning for the years ended September 30, 2024, 2023 and 2022 (dollars in thousands): 2024 2023 2022 Balance, beginning of year $ 816 $ 836 $ 853 Subtractions: Net realized gain (losses) previously recorded as credit losses ( 2 ) ( 11 ) 1 Recovery of prior credit loss ( 11 ) ( 9 ) ( 18 ) Balance, end of year $ 803 $ 816 $ 836 92 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 4 - Loans Receivable and Allowance for Credit Losses Loans receivable by portfolio segment consisted of the following at September 30, 2024 and 2023 (dollars in thousands): 2024 2023 Mortgage loans: One- to four-family $ 299,123 $ 253,227 Multi-family 177,350 127,176 Commercial 599,219 568,265 Construction – custom and owner/builder 132,101 129,699 Construction – speculative one- to four-family 11,495 17,099 Construction – commercial 29,463 51,064 Construction – multi-family 28,401 57,140 Construction – land development 17,741 18,841 Land 29,366 26,726 Total mortgage loans 1,324,259 1,249,237 Consumer loans: Home equity and second mortgage 47,913 38,281 Other 3,129 2,772 Total consumer loans 51,042 41,053 Commercial loans: Commercial business 138,743 135,802 SBA Paycheck Protection Program ("PPP") 260 466 Total commercial loans 139,003 136,268 Total loans receivable 1,514,304 1,426,558 Less: Undisbursed portion of construction loans in process 69,878 103,194 Deferred loan origination fees, net 5,425 5,242 Allowance for credit losses 17,478 15,817 92,781 124,253 Loans receivable, net $ 1,421,523 $ 1,302,305 Loans receivable at September 30, 2024 and 2023 are reported net of unamortized discounts totaling $ 155,000 and $ 192,000 , respectively. Significant Concentrations of Credit Risk Most of the Company’s lending activity is with customers located in the state of Washington and involves real estate. At September 30, 2024, the Company had $ 1,372,172,000 (including $ 69,878,000 of undisbursed construction loans in process) in loans secured by real estate, which represented 90.69 % of total loans receivable. The real estate loan portfolio is primarily secured by one- to four-family properties, multi-family properties, land, and a variety of commercial real estate property types. At September 30, 2024, there were no concentrations of real estate loans to a specific industry or secured by a specific collateral type that equaled or exceeded 20 % of the Company’s total loan portfolio, other than loans secured by one-to four-family properties. The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions in the region and the impact of those changes on the real estate market. The Company typically originates real estate loans with loan-to-value ratios of no greater than 85 %. Collateral and/or guarantees are required for all loans. 93 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Related Party Loans Certain related parties of the Company, principally Bank directors and officers, are loan customers of the Bank in the ordinary course of business. Such related party loans were performing according to their repayment terms at September 30, 2024 and 2023. Activity in related party loans during the years ended September 30, 2024, 2023 and 2022 was as follows (dollars in thousands): 2024 2023 2022 Balance, beginning of year $ 102 $ 50 $ 466 New loans or borrowings 623 61 40 Repayments and reclassifications ( 198 ) ( 9 ) ( 456 ) Balance, end of year $ 527 $ 102 $ 50 Loan Segment Risk Characteristics The Company believes that its loan classes are the same as its loan segments. One- To Four-Family Residential Lending: The Company originates both fixed-rate and adjustable-rate loans secured by one- to four-family residences. A portion of the fixed-rate one- to four-family loans are sold in the secondary market for asset/liability management purposes and to generate non-interest income. The Company’s lending policies generally limit the maximum loan-to-value on one- to four-family loans to 85 % of the lesser of the appraised value or the purchase price. However, the Company usually obtains private mortgage insurance on the portion of the principal amount that exceeds 80 % of the appraised value of the property. Multi-Family Lending : The Company originates loans secured by multi-family dwelling units (more than four units). Multi-family lending generally affords the Company an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by multi-family properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or economy. The Company attempts to minimize these risks by scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. Commercial Mortgage Lending : The Company originates commercial real estate loans secured by properties such as office buildings, retail/wholesale facilities, motels, restaurants, mini-storage facilities and other commercial properties. Commercial real estate lending generally affords the Company an opportunity to receive interest at higher rates than those available from one- to four-family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial properties are often dependent on the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or economy. The Company attempts to mitigate these risks by generally limiting the maximum loan-to-value ratio to 80 % and scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. Construction Lending : The Company currently originates the following types of construction loans: custom construction loans, owner/builder construction loans, speculative construction loans, commercial real estate construction loans, multi-family construction loans and land development loans. Construction lending affords the Company the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending. Construction lending, however, is generally considered to involve a higher degree of risk than one- to four family residential lending because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimated cost of construction proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to complete the project. If the estimate of value upon completion proves to be inaccurate, the Company may be confronted with a project whose value is insufficient to assure full repayment, and the Company may incur a loss. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to construct homes for which no purchaser has been 94 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 identified carry more risk, because the payoff for the loan depends on the builder’s ability to sell the property prior to the time that the construction loan is due. The Company attempts to mitigate these risks by adhering to its underwriting policies, disbursement procedures and monitoring practices. Construction Lending – Custom and Owner/Builder: Custom construction and owner/builder construction loans are originated to home owners and are typically refinanced into permanent loans at the completion of construction. Construction Lending – Speculative One- To Four-Family: Speculative one-to four-family construction loans are made to home builders and are termed “speculative,” because the home builder does not have, at the time of the loan origination, a signed contract with a home buyer who has a commitment for permanent financing with the Company or another lender for the finished home. The home buyer may be identified either during or after the construction period. Construction Lending – Commercial: Commercial construction loans are originated to construct properties such as office buildings, hotels, retail rental space and mini-storage facilities. Construction Lending – Multi-Family: Multi-family construction loans are originated to construct apartment buildings and condominium projects. Construction Lending – Land Development: Land development loans are originated to real estate developers for the purpose of developing residential subdivisions. The Company is currently originating land development loans on a limited basis. Land Lending : The Company originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to sell as improved lots. Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because these loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default or foreclosure, the Company may be confronted with a property value which is insufficient to assure full repayment. The Company attempts to minimize this risk by generally limiting the maximum loan-to-value ratio on land loans to 65 %. Consumer Lending – Home Equity and Second Mortgage: The Company originates home equity lines of credit and second mortgage loans. Home equity lines of credit and second mortgage loans have a greater credit risk than one- to four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Company. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the collateral and the credit-worthiness of the borrower. Consumer Lending – Other: The Company originates other consumer loans, which include automobile loans, boat loans, motorcycle loans, recreational vehicle loans, savings account loans and unsecured loans. Other consumer loans generally have shorter terms to maturity than mortgage loans. Other consumer loans generally involve a greater degree of risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the credit-worthiness of the borrower. Commercial Business Lending: The Company originates commercial business loans which, excluding SBA PPP loans, are generally secured by business equipment, accounts receivable, inventory and/or other property. The Company also generally obtains personal guarantees from the business owners based on a review of personal financial statements. Commercial business lending generally involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable and/or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment, because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use. Accordingly, the repayment of a commercial business loan depends primarily on the credit-worthiness of the borrower (and any guarantors), while the liquidation of collateral is a secondary and potentially insufficient source of repayment. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of the borrowers and the guarantors. 95 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 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 September 30, 2024, one loan was classified as doubtful. 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 an asset 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 September 30, 2024 and 2023, there were no loans classified as loss. 96 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table sets forth the Company's loan portfolio at September 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 $ 12,941 $ 66,671 $ 113,834 $ 48,120 $ 19,053 $ 36,659 $ — $ 297,278 Watch — 1,796 — — — — — 1,796 Substandard — — — — — 49 — 49 Total one- to four-family $ 12,941 $ 68,467 $ 113,834 $ 48,120 $ 19,053 $ 36,708 $ — $ 299,123 Multi-family Risk Rating Pass $ 13,136 $ 19,440 $ 39,673 $ 33,144 $ 27,029 $ 43,759 $ 1,169 $ 177,350 Total multi-family $ 13,136 $ 19,440 $ 39,673 $ 33,144 $ 27,029 $ 43,759 $ 1,169 $ 177,350 Commercial real estate Risk Rating Pass $ 23,758 $ 73,005 $ 126,939 $ 91,035 $ 55,498 $ 194,273 $ 8,799 $ 573,307 Watch — 944 — — 4,201 10,548 — 15,693 Special Mention — — — — — 4,401 — 4,401 Substandard — — — — — 5,818 — 5,818 Total commercial real estate $ 23,758 $ 73,949 $ 126,939 $ 91,035 $ 59,699 $ 215,040 $ 8,799 $ 599,219 Construction-custom & owner/builder Risk Rating Pass $ 38,303 $ 29,159 $ 778 $ — $ — $ — $ — $ 68,240 Watch 221 3,239 5,848 2,861 429 436 — 13,034 Total construction-customer & owner/builder $ 38,524 $ 32,398 $ 6,626 $ 2,861 $ 429 $ 436 $ — $ 81,274 Construction-speculative one-to four-family Risk Rating Pass $ 5,039 $ 2,412 $ — $ — $ — $ — $ — $ 7,451 Total construction-speculative one-to four-family $ 5,039 $ 2,412 $ — $ — $ — $ — $ — $ 7,451 Construction-commercial Risk Rating Pass $ 6,006 $ 16,349 $ 1,457 $ — $ — $ — $ — $ 23,812 Total construction-commercial $ 6,006 $ 16,349 $ 1,457 $ — $ — $ — $ — $ 23,812 97 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Term Loans Amortized Cost Basis by Origination Fiscal Year Type 2024 2023 2022 2021 2020 Prior Revolving Loans Total Loans Receivable Construction-multi-family Risk Rating Pass $ 588 $ 20,169 $ — $ — $ — $ — $ — $ 20,757 Total construction-multi-family $ 588 $ 20,169 $ — $ — $ — $ — $ — $ 20,757 Construction-land development Risk Rating Pass $ 1,673 $ 2,807 $ — $ — $ — $ — $ — $ 4,480 Watch $ — $ — $ 11,549 $ — $ — $ — $ — $ 11,549 Total construction-land development $ 1,673 $ 2,807 $ 11,549 $ — $ — $ — $ — $ 16,029 Land Risk Rating Pass $ 10,287 $ 4,828 $ 6,588 $ 4,004 $ 766 $ 1,954 $ 458 $ 28,885 Watch — — — — — 481 — 481 Total land $ 10,287 $ 4,828 $ 6,588 $ 4,004 $ 766 $ 2,435 $ 458 $ 29,366 Home equity Risk Rating Pass $ 5,820 $ 4,716 $ 1,990 $ 252 $ 573 $ 2,097 $ 31,766 $ 47,214 Substandard — — — — — 81 618 699 Total home equity $ 5,820 $ 4,716 $ 1,990 $ 252 $ 573 $ 2,178 $ 32,384 $ 47,913 Other consumer Risk Rating Pass $ 1,744 $ 441 $ 241 $ 57 $ 8 $ 501 $ 71 $ 3,063 Watch — — — — — 65 1 66 Total other consumer $ 1,744 $ 441 $ 241 $ 57 $ 8 $ 566 $ 72 $ 3,129 Current period gross write-offs $ 6 $ 1 $ — $ — $ — $ — $ 2 $ 9 Commercial business Risk Rating Pass $ 16,129 $ 19,910 $ 35,117 $ 8,588 $ 7,589 $ 4,775 $ 43,444 $ 135,552 Watch — — 202 36 696 6 180 1,120 Substandard — 1,352 — — — 517 — 1,869 Doubtful — 202 — — — — — 202 Total commercial business $ 16,129 $ 21,464 $ 35,319 $ 8,624 $ 8,285 $ 5,298 $ 43,624 $ 138,743 Current period gross write-offs $ — $ 79 $ — $ — $ — $ 13 $ — $ 92 SBA PPP Risk Rating Pass $ — $ — $ — $ 224 $ 36 $ — $ — $ 260 Total SBA PPP $ — $ — $ — $ 224 $ 36 $ — $ — $ 260 98 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Term Loans Amortized Cost Basis by Origination Fiscal Year Type 2024 2023 2022 2021 2020 Prior Revolving Loans Total Loans Receivable Total loans receivable, gross (net of construction LIP) Risk Rating Pass $ 135,424 $ 259,907 $ 326,617 $ 185,424 $ 110,552 $ 284,018 $ 85,707 $ 1,387,649 Watch 221 5,979 17,599 2,897 5,326 11,536 181 43,739 Special Mention — — — — — 4,401 — 4,401 Substandard — 1,352 — — — 6,465 618 8,435 Doubtful — 202 — — — — — 202 Total loans receivable $ 135,645 $ 267,440 $ 344,216 $ 188,321 $ 115,878 $ 306,420 $ 86,506 $ 1,444,426 Current period gross charge-off $ 6 $ 80 $ — $ — $ — $ 13 $ 2 $ 101 Allowance for Credit Losses During the year ended September 30, 2024, the ACL on loans increased $ 1,661,000 due primarily to a provision for credit losses on loans of $ 1,254,000 and a $ 461,000 upward adjustment related to the adoption of ASU 2016-13. The provision for credit losses on loans recognized during the year ended September 30, 2024 was primarily due to growth in balances of collectively evaluated loans. The following table sets forth information for the year ended September 30, 2024 regarding activity in the ACL by portfolio segment (dollars in thousands): 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 ) $ 580 $ — $ 43 $ 2,632 Multi-family 1,156 ( 120 ) 272 — — 1,308 Commercial 7,209 ( 494 ) 219 — — 6,934 Construction – custom and owner/builder 750 542 36 — — 1,328 Construction – speculative one- to four-family 148 ( 16 ) ( 4 ) — — 128 Construction – commercial 316 176 45 — — 537 Construction – multi-family 602 204 ( 350 ) — — 456 Construction – land development 274 25 36 — — 335 Land 406 318 69 — — 793 Consumer loans: Home equity and second mortgage 519 ( 243 ) 72 — — 348 Other 53 ( 7 ) 2 ( 9 ) — 39 Commercial business loans 1,967 484 277 ( 92 ) 4 2,640 Total $ 15,817 $ 461 $ 1,254 $ ( 101 ) $ 47 $ 17,478 99 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table sets forth information for the year ended September 30, 2023 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands): Beginning Allowance Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One- to four-family $ 1,658 $ 759 $ — $ — $ 2,417 Multi-family 855 301 — — 1,156 Commercial 6,682 527 — — 7,209 Construction – custom and owner/builder 675 75 — — 750 Construction – speculative one- to four-family 130 18 — — 148 Construction – commercial 343 ( 27 ) — — 316 Construction – multi-family 447 155 — — 602 Construction – land development 233 41 — — 274 Land 397 9 — — 406 Consumer loans: Home equity and second mortgage 440 79 — — 519 Other 42 14 ( 4 ) 1 53 Commercial business loans 1,801 181 ( 15 ) — 1,967 Total $ 13,703 $ 2,132 $ ( 19 ) $ 1 $ 15,817 The following table sets forth the information for the year ended September 30, 2022 regarding activity in the allowance for loan losses by portfolio (dollars in thousands): Beginning Allowance Provision for (Recapture of) Loan Losses Charge- offs Recoveries Ending Allowance Mortgage loans: One- to four-family $ 1,154 $ 504 $ — $ — $ 1,658 Multi-family 765 90 — — 855 Commercial 6,813 ( 131 ) — — 6,682 Construction – custom and owner/builder 644 31 — — 675 Construction – speculative one- to four-family 188 ( 58 ) — — 130 Construction – commercial 784 ( 441 ) — — 343 Construction – multi-family 436 11 — — 447 Construction – land development 124 109 — — 233 Land 470 ( 73 ) — — 397 Consumer loans: Home equity and second mortgage 528 ( 88 ) — — 440 Other 50 1 ( 10 ) 1 42 Commercial business loans 1,513 315 ( 49 ) 22 1,801 Total $ 13,469 $ 270 $ ( 59 ) $ 23 $ 13,703 100 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table presents information on loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, 2023 (dollars in thousands) prior to the adoption of ASU 2016-13: 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 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 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 returned to accrual status 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. 101 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table presents an analysis of loans by aging category and portfolio segment at September 30, 2024 (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 Mortgage loans: One- to four-family $ — $ — $ 49 $ — $ 49 $ 299,074 $ 299,123 Multi-family — — — — — 177,350 177,350 Commercial — — 1,158 — 1,158 598,061 599,219 Construction – custom and owner/ builder — — — — — 81,274 81,274 Construction – speculative one- to four-family — — — — — 7,451 7,451 Construction – commercial — — — — — 23,812 23,812 Construction – multi-family — — — — — 20,757 20,757 Construction – land development — — — — — 16,029 16,029 Land — — — — — 29,366 29,366 Consumer loans: Home equity and second mortgage — — 618 — 618 47,295 47,913 Other — 1 — — 1 3,128 3,129 Commercial business loans 424 169 2,060 — 2,653 136,090 138,743 SBA PPP loans — — — — — 260 260 Total $ 424 $ 170 $ 3,885 $ — $ 4,479 $ 1,439,947 $ 1,444,426 __________________ (1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual. 102 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table presents an analysis of loans by aging category and portfolio segment at 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 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. At September 30, 2024, the Company had $ 1,825,000 of non-accrual loans with an ACL of $ 506,000 and $ 2,060,000 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 September 30, 2024 (in thousands): Recorded Investment Related ACL Mortgage loans: One- to four- family $ 49 $ — Commercial 1,158 — Construction - custom and owner/builder — — Consumer loans: Home equity and second mortgage 618 — Commercial business loans 2,060 506 Total $ 3,885 $ 506 103 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table presents an analysis of loans by credit quality indicator and portfolio segment at September 30, 2023 (dollars in thousands): Loan Grades 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 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 contract 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 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 that the recorded investment of 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 the loan 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. 104 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2023 (dollars in thousands): September 30, 2023 For the Year Ended September 30, 2023 Recorded Investment Unpaid Principal Balance (Loan Balance Plus Charge Off) Related Allowance Average Recorded Investment Interest Income Recognized Cash Basis Interest Income Recognized 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: 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 $ 172 105 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2022 (dollars in thousands): September 30, 2022 For the Year Ended September 30, 2022 Recorded Investment Unpaid Principal Balance (Loan Balance Plus Charge Off) Related Allowance Average Recorded Investment Interest Income Recognized Cash Basis Interest Income Recognized With no related allowance recorded: Mortgage loans: One- to four-family $ 388 $ 432 $ — $ 470 $ 31 $ 31 Commercial 2,988 2,988 — 3,041 152 123 Land 450 450 — 492 — — Consumer loans: Home equity and second mortgage 394 394 — 436 6 5 Other 3 3 — 7 — — Commercial business loans 59 108 — 121 — — Subtotal 4,282 4,375 — 4,567 189 159 With an allowance recorded: Consumer loans: Home equity and second mortgage — — — 145 — — Commercial business loans 250 250 127 268 — — Subtotal 250 250 127 413 — — Total: Mortgage loans: One- to four-family 388 432 — 470 31 31 Commercial 2,988 2,988 — 3,041 152 123 Land 450 450 — 492 — — Consumer loans: Home equity and second mortgage 394 394 — 581 6 5 Other 3 3 — 7 — — Commercial business loans 309 358 127 389 — — Total $ 4,532 $ 4,625 $ 127 $ 4,980 $ 189 $ 159 106 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 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 years ended September 30, 2024 and 2023. At September 30, 2023, the Company had $ 2.50 million of TDRs, all of which were paying as agreed. There were no defaults in these loans during the years ended September 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-offs 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 loss it is charged off. Note 5 - Premises and Equipment Premises and equipment consisted of the following at September 30, 2024 and 2023 (dollars in thousands): 2024 2023 Land $ 5,404 $ 5,404 Buildings and improvements 25,592 25,178 Furniture and equipment 11,316 10,715 Property held for future expansion 116 116 Construction and purchases in progress 222 177 42,650 41,590 Less accumulated depreciation 21,164 19,948 Premises and equipment, net $ 21,486 $ 21,642 Note 6 – OREO and Other Repossessed Assets The following table presents the activity related to OREO and other repossessed assets for the years ended September 30, 2024 and 2023 (dollars in thousands): 2024 2023 Amount Number Amount Number Balance, beginning of year $ — 2 $ — 2 Sales — ( 1 ) — — Balance, end of year $ — 1 $ — 2 At September 30, 2024, OREO and other repossessed assets consisted of one OREO property in Washington with no book value. At September 30, 2023, OREO and other repossessed assets consisted of two OREO properties in Washington with no book value. During the year ended September 30, 2024, the Company transferred one OREO property with no value, to the business association that manages the surrounding properties. The Company did not record a net gain or loss on sale of OREO for the years ended September 30, 2024 and 2023. For the year ended September 30, 2022, the Company recorded net gains on sales of OREO and other repossessed assets of $ 2,000 . Gains and losses on sales of OREO and other repossessed assets are recorded in the OREO and other repossessed assets, net category in non-interest expense in the accompanying consolidated statements of income. At September 30, 2024, and 2023 there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession, and there were no one- to four-family properties in the process of foreclosure. 107 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 7 - Goodwill and CDI Goodwill There were no changes to the recorded amount of goodwill for both years ended September 30, 2024 and 2023. CDI The CDI amortization expense totaled $ 226,000 , $ 271,000 and $ 316,000 for the years ended September 30, 2024, 2023 and 2022, respectively. Amortization expense for the CDI for fiscal years ending subsequent to September 30, 2024 is estimated to be as follows (dollars in thousands): 2025 $ 181 2026 135 2027 90 2028 45 Total $ 451 Note 8 - Loan Servicing Rights The Company services one- to four-family mortgage loans for Freddie Mac and also provides servicing for secondary market purchasers of the guaranteed portion of SBA loans; such loans are not included in the accompanying consolidated balance sheets. The principal amount of loans serviced for Freddie Mac at September 30, 2024, 2023 and 2022 was $ 369,077,000 , $ 384,619,000 and $ 406,727,000 , respectively. The guaranteed principal amount of SBA loans serviced for others at September 30, 2024, 2023 and 2022 was $ 1,482,000 , $ 1,882,000 and $ 3,560,000 , respectively. The following is an analysis of the changes in Freddie Mac loan servicing rights for the years ended September 30, 2024, 2023 and 2022 (dollars in thousands): 2024 2023 2022 Balance, beginning of year $ 2,124 $ 3,020 $ 3,438 Additions 142 113 578 Amortization ( 894 ) ( 1,009 ) ( 1,115 ) Valuation recovery — — 119 Balance, end of year $ 1,372 $ 2,124 $ 3,020 At September 30, 2024, 2023 and 2022, the estimated fair value of Freddie Mac servicing rights totaled $ 4,655,000 , $ 5,469,000 and $ 5,547,000 , respectively. The Freddie Mac servicing rights' fair values at September 30, 2024, 2023 and 2022 were estimated using discounted cash flow analyses with average discount rates of 10.00 %, 9.50 % and 9.50 %, and average conditional prepayment rates of 7.03 %, 6.23 % and 6.31 %, respectively . At September 30, 2024, 2023 and 2022, there was no valuation allowance. At September 30, 2024 there were no SBA servicing rights and as of September 30, 2023, and 2022, the servicing rights were insignificant. There was no valuation allowance on SBA servicing rights at September 30, 2024, 2023 and 2022. 108 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 9 - Leases At September 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 , which include options to extend the leases for up to five years . Lease extensions are not certain, and the Company evaluates each lease based on the specific circumstances for the location to determine the probability of exercising the extensions in the calculation of ROU assets and 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 years ended September 30, 2024, 2023 and 2022 (dollars in thousands): Lease cost: 2024 2023 2022 Operating lease cost $ 380 $ 354 $ 371 Short-term lease cost — — — Total lease cost $ 380 $ 354 $ 371 The following table provides supplemental information related to operating leases at or for the years ended September 30, 2024, 2023 and 2022 (dollars in thousands): 2024 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 332 $ 316 $ 342 Weighted average remaining lease term-operating leases 5.94 yrs 6.69 yrs 7.67 yrs Weighted average discount rate-operating leases 2.34 % 2.33 % 2.25 % The Company's leases typically do not contain a discount rate implicit in the lease contracts. As an alternative, the weighted average discount rate is used to estimate the present value of future lease payments in calculating the value of the ROU asset. Maturities of operating lease liabilities at September 30, 2024 for the five fiscal years ending subsequent to September 30, 2024 and thereafter, are as follows (dollars in thousands): 2025 $ 336 2026 304 2027 232 2028 219 2029 218 Thereafter 383 Total lease payments 1,692 Less imputed interest 117 Total $ 1,575 109 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 10 - Deposits Deposits consisted of the following at September 30, 2024 and 2023 (dollars in thousands): 2024 2023 Non-interest-bearing demand $ 413,116 $ 455,864 NOW checking 333,329 386,730 Savings 205,993 228,366 Money market 326,922 189,875 Certificates of deposit 368,308 300,100 Total $ 1,647,668 $ 1,560,935 Individual certificates of deposit in amounts of $250,000 or greater totaled $ 113,579,000 and $ 91,714,000 at September 30, 2024 and 2023, respectively. The Company had brokered deposits totaling $ 48,759,000 and $ 38,165,000 at September 30, 2024 and 2023, respectively. The Company had reciprocal deposits totaling $ 93,464,000 and $ 70,764,000 at September 30, 2024 and 2023, respectively. Scheduled maturities of certificates of deposit for fiscal years ending subsequent to September 30, 2024 are as follows (dollars in thousands): 2025 $ 313,823 2026 24,644 2027 9,570 2028 8,217 2029 11,421 Thereafter 633 Total $ 368,308 Interest expense on deposits by account type was as follows for the years ended September 30, 2024, 2023 and 2022 (dollars in thousands): 2024 2023 2022 NOW checking $ 5,148 $ 3,561 $ 650 Savings 529 415 230 Money market 9,248 1,601 767 Certificates of deposit 14,734 5,725 1,010 Total $ 29,659 $ 11,302 $ 2,657 Note 11 – FHLB Borrowings and Other Borrowings The Bank has long- and short-term borrowing lines with the FHLB with total credit on the lines up to 45 % of the Bank’s total assets, limited by available collateral. At September 30, 2024, the Bank had a borrowing capacity of $ 626,041,000 prior to outstanding borrowings. The Bank had $ 20,000,000 long-term and no short-term FHLB borrowings outstanding at September 30, 2024. The long-term borrowings consisted of three borrowings, which mature at various dates during the 2026 fiscal year and bear interest rates ranging from 3.95% - 4.03%. The Bank had $ 15,000,000 long-term and $ 20,000,000 short-term FHLB borrowings outstanding at September 30, 2023. The long term borrowings consisted of two borrowings, with scheduled maturities in May 2026, and each bears interest at 3.95%. The short-term borrowings consisted of three borrowings, which matured at various dates during the 2024 fiscal year and bore interest at rates ranging from 5.52% to 5.57%. Under the Advances, Pledge and Security Agreement entered into with the FHLB ("FHLB Borrowing Agreement"), virtually all of the Bank’s assets, not otherwise encumbered, are pledged as collateral for borrowings under the FHLB Borrowing Agreement. The Bank also maintained two short-term borrowing lines with the FRB during the years ended September 30, 2024 and 2023, with total credit based on eligible collateral: Borrower-in-custody ("BIC") and Bank Term Funding Program ("BTFP"). At 110 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 September 30, 2024, the Bank had a borrowing capacity on the BIC line of $ 86,634,000 , with no outstanding borrowings at September 30, 2024 and 2023. At September 30, 2024, the Bank did not have a balance on the BTFP line, the borrowing program was discontinued by the FRB in March of 2024. At September 30, 2023, the Bank had a borrowing capacity on the BTFP line of $ 57,000,000 , with no outstanding borrowings at September 30, 2023. The Bank has a short-term $ 50,000,000 overnight borrowing line with Pacific Coast Bankers' Bank. The borrowing line may be reduced or withdrawn at any time. The Bank had no outstanding borrowings on this line at both September 30, 2024 and 2023. Note 12 - Other Liabilities and Accrued Expenses Other liabilities and accrued expenses were comprised of the following at September 30, 2024 and 2023 (dollars in thousands): 2024 2023 Accrued deferred compensation, profit sharing plans and bonuses payable $ 2,483 $ 2,641 Accrued interest payable on deposits 2,132 1,397 Accounts payable and accrued expenses - other 4,204 4,992 Total other liabilities and accrued expenses $ 8,819 $ 9,030 Note 13 - Income Taxes The components of the provision for income taxes for the years ended September 30, 2024, 2023 and 2022 were as follows (dollars in thousands): 2024 2023 2022 Current: Federal $ 6,506 $ 7,167 $ 6,139 Deferred ( 383 ) ( 291 ) ( 177 ) Provision for income taxes $ 6,123 $ 6,876 $ 5,962 At September 30, 2024 and 2023, the Company had income tax receivable of $ 80,000 and $ 107,000 , respectively, which is included in other assets in the accompanying consolidated balance sheets. The components of the Company’s deferred tax assets and liabilities at September 30, 2024 and 2023 were as follows (dollars in thousands): 2024 2023 Deferred Tax Assets Allowance for credit losses $ 3,739 $ 3,392 Allowance for OREO losses 5 5 OTTI credit impairment on investment securities 50 50 Accrued interest on loans 69 58 Deferred compensation and bonuses 163 217 Operating lease liabilities 331 392 Net unrealized losses on investment securities and investments in equity securities 5 288 Other 70 85 Total deferred tax assets 4,432 4,487 111 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 2024 2023 Deferred Tax Liabilities Goodwill 1,187 1,187 Loan servicing rights 288 446 Depreciation 815 906 Loan fees/costs 1,044 983 Prepaid expenses 159 172 Purchase accounting adjustment 110 159 Operating lease ROU assets 310 372 Other 27 — Total deferred tax liabilities 3,940 4,225 Net deferred tax assets $ 492 $ 262 Deferred tax assets are included in other assets, and deferred tax liabilities are included in other liabilities and accrued expenses in the accompanying consolidated balance sheets. No valuation allowance for deferred tax assets was recorded as of September 30, 2024 and 2023, as management believes that it is more likely than not that all of the deferred tax assets will be realized based on management's expectations of future taxable income. The provision for income taxes for the years ended September 30, 2024, 2023 and 2022 differs from that computed at the federal statutory corporate tax rate as follows (dollars in thousands): 2024 2023 2022 Expected federal income tax provision at statutory rate $ 6,385 $ 7,139 $ 6,208 BOLI income ( 135 ) ( 148 ) ( 129 ) Dividends on Employee Stock Ownership Plan ("ESOP") stock ( 58 ) ( 71 ) ( 70 ) Stock based compensation tax effect ( 37 ) ( 66 ) ( 34 ) Other, net ( 32 ) 22 ( 13 ) Provision for income taxes $ 6,123 $ 6,876 $ 5,962 Note 14 - Employee Stock Ownership and 401(k) Plan The Timberland Bank Employee Stock Ownership and 401(k) Plan (“KSOP”) is comprised of two components, the ESOP and the 401(k) Plan. The KSOP benefits employees with at least one year of service who are 18 years of age or older. The Bank may fund the ESOP with contributions of cash or stock, which are made at the discretion of the Board, and may fund the 401(k) Plan with contributions of cash. Employee vesting occurs over six years . ESOP In January 1998, the ESOP borrowed $ 7,930,000 from the Company to purchase 1,058,000 shares of common stock of the Company. The loan was repaid primarily from the Bank’s contributions to the ESOP and was fully repaid by March 31, 2019. As of September 30, 2024, an aggregate of 785,839 ESOP shares, which were previously released for allocation to participants, had been distributed to participants. Total shares held by the ESOP as of September 30, 2024, 2023 and 2022 were 272,161 , 317,094 and 372,559 , respectively. There was no compensation expense recognized for the ESOP for the years ended September 30, 2024, 2023 and 2022. 112 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 401(k) Plan Eligible employees may contribute a portion of their wages to the 401(k) Plan up to the maximum established under the Internal Revenue Code. Contributions by the Bank are at the discretion of the Board except for a safe harbor contribution of 3 % of eligible employees' wages, which is mandatory according to the plan document. Bank contributions totaled $ 1,084,000 , $ 1,039,000 and $ 942,000 for the years ended September 30, 2024, 2023 and 2022, respectively. Note 15 - Stock Compensation Plans The Company has two active stock compensation plans: the 2014 Equity Incentive Plan and the 2019 Equity Incentive Plan. Under the Company's 2014 Equity Incentive Plan, the Company may 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 may grant options and awards of restricted stock (with or without performance measures) for up to 350,000 shares of common stock, of which 300,000 shares are reserved to be awarded to employees and officers and 50,000 shares are reserved to be awarded to directors and directors emeriti. Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. 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 equal annual installments commencing on the first anniversary of the grant date. Stock options generally vest over a five year period from the date of the grant with a maximum contractual term of ten years from the date of the grant. Restricted stock grants generally vest over a three or five-year term from the date of grant. At September 30, 2024, there were 15,576 and 154,655 shares of common stock available for future grants under the 2014 and 2019 Equity Incentive Plans, respectively. Stock option activity for the years ended September 30, 2024, 2023 and 2022 is summarized as follows: Number of Shares Weighted Average Exercise Price Outstanding September 30, 2021 406,815 $ 21.62 Options granted 74,000 27.40 Options exercised ( 36,720 ) 11.31 Options forfeited ( 22,170 ) 26.01 Outstanding September 30, 2022 421,925 23.30 Options granted 1,000 33.40 Options exercised ( 42,635 ) 16.38 Options forfeited ( 11,140 ) 27.26 Outstanding September 30, 2023 369,150 24.00 Options granted — — Options exercised ( 45,150 ) 14.61 Options forfeited ( 17,760 ) 27.07 Outstanding September 30, 2024 306,240 $ 25.21 The aggregate intrinsic value of options exercised during the years ended September 30, 2024, 2023 and 2022 was $ 655,000 , $ 632,000 and $ 605,000 , respectively. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the weighted average assumptions noted in the following table. The risk-free interest rate is based on the rate of a U.S. Treasury security with a similar term as the expected life of the stock option at the particular grant date. The expected life is based on historical data, vesting terms and estimated exercise dates. The expected dividend yield is based on the most recent quarterly dividend on an annualized basis in effect at the time that the options were granted, adjusted, if appropriate, for management's expectations regarding future dividends. The expected volatility is based on historical volatility of the Company’s stock price. There were 74,000 options granted during the year ended September 30, 2022 with an aggregate grant date fair value of $ 508,000 . There were 1,000 options granted during the year ended September 30, 2023 with an aggregate grant date fair value of $ 9,000 . There were no options granted during the year ended September 30, 2024. 113 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The weighted average assumptions for options granted during the years ended September 30, 2023 and 2022 were as follows: 2023 2022 Expected volatility 33 % 33 % Expected life (in years) 5 5 Expected dividend yield 2.99 % 3.61 % Risk free interest rate 3.58 % 4.17 % Grant date fair value per share $ 8.65 $ 6.87 There were 43,690 options that vested during the year ended September 30, 2024 with a total fair value of $ 235,000 . There were 59,990 options that vested during the year ended September 30, 2023 with a total fair value of $ 316,000 . There were 52,960 options that vested during the year ended September 30, 2022 with a total fair value of $ 239,000 . At September 30, 2024, there were 77,230 unvested options with an aggregate grant date fair value of $ 468,000 , all of which the Company assumes will vest. The unvested options had an aggregate intrinsic value of $ 312,000 at September 30, 2024. At September 30, 2023, there were 130,120 unvested options with an aggregate grant date fair value of $ 756,000 . Additional information regarding options outstanding at September 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 20,750 $ 10.62 0.8 20,750 $ 10.62 0.8 15.67 - 19.13 55,450 16.60 5.1 44,520 16.53 4.8 26.50 - 27.40 97,220 27.32 7.0 57,320 27.26 6.4 28.23 - 29.69 99,900 28.78 5.5 74,300 28.97 5.0 31.80 - 33.40 32,920 31.85 4.1 32,120 31.60 4.0 306,240 $ 25.21 5.4 229,010 $ 24.86 4.8 The aggregate intrinsic value of options outstanding at September 30, 2024, 2023 and 2022 was $ 1,599,000 , $ 1,518,000 and $ 2,130,000 , respectively. As of September 30, 2024, unrecognized compensation cost related to non-vested stock options was $ 490,000 , which is expected to be recognized over a weighted average period of 1.76 years. Total stock option compensation expense for the years ended September 30, 2024 and 2023 was $ 233,000 and $ 320,000 , respectively. During the year ended September 30, 2024, the Company granted a total of 28,815 shares of restricted stock from the 2019 plan subject to time-based vesting. During the year ended September 30, 2023, the Company granted a total of 26,150 shares of restricted stock from the 2019 Plan subject to time-based vesting. As of and for the year ended September 30, 2022 , there were no unvested restricted stock awards outstanding or restricted stock grants awarded. 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 September 30, 2024, unrecognized compensation cost related to unvested restricted stock awards was $ 1,435,000 , which is expected to be recognized over a weighted average period of 2.53 years. Total compensation expense related to restricted stock awards for the year ended September 30, 2024 was $ 157,000 . 114 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table presents the activity related to restricted stock for the years ended September 30, 2024 and 2023: Time Based Number of Unvested Shares Weighted Average Grant Date Fair Value Outstanding, September 30, 2022 — $ — Granted 26,150 27.37 Forfeited — — Issued — — Outstanding, September 30, 2023 26,150 27.37 Granted 28,815 30.62 Forfeited ( 200 ) 27.37 Issued ( 5,750 ) 27.37 Outstanding, September 30, 2024 49,015 $ 29.28 Note 16 - Commitments and Contingencies 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 Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit - worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. However, such loan to value ratios will subsequently change, based on increases and decreases in the supporting collateral values. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, land and income-producing commercial properties. A summary of the Company’s commitments at September 30, 2024 and 2023 is as follows (dollars in thousands): 2024 2023 Undisbursed portion of construction loans in process (see Note 4) $ 69,878 $ 103,194 Undisbursed lines of credit 119,858 141,537 Commitments to extend credit 26,293 31,667 The Company maintains a separate ACL related to unfunded loan commitments. Management estimates the amount of expected losses related to unfunded, off-balance sheet commitments over the contractual period in which 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 utilization. Credit risk associated with the unfunded commitments is 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 for (recapture of) credit losses on the consolidated income statements. The ACL on unfunded loan commitments totaled $ 327,000 at September 30, 2024 Prior to the adoption of CECL the Company maintained a separate reserve for losses related to unfunded loan commitments. Management estimated the amount of probable losses related to unfunded loan commitments by applying the loss factors used in the allowance for loan loss methodology to an estimate of the expected amount and funded and applied this adjusted factor to the unused portion of loan commitments. The reserve for unfunded loan commitments totaled $ 332,000 at September 30, 115 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 2023. This amount was included in other liabilities and accrued expenses in the accompanying consolidated balance sheets. Increases (decreases) in the reserve for unfunded loan commitments were recorded in non-interest expense in the accompanying consolidated statements of income. The following table sets forth information for the years ended September 30, 2024 and 2023 regarding activity in the ACL (reserve for loss) on unfunded loan commitments (dollars in thousands): Year Ended September 30, 2024 Year Ended September 30, 2023 Beginning ACL $ 332 $ 305 Impact of adopting CECL (ASU 2016-13) 66 — (Recapture of) provision for credit losses ( 71 ) 27 Ending ACL $ 327 $ 332 The Bank has an employee severance compensation plan which expires in 2027 that provides severance pay benefits to eligible employees in the event of a change in control of Timberland Bancorp or the Bank (as defined in the plan). In general, all employees with two or more years of service are 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 employment agreements with the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Lending Officer, Chief Credit Officer and Chief Technology Officer which provide for a severance payment and other benefits if the officers are involuntarily terminated following a change in control of Timberland Bancorp or the Bank. The maximum value of the severance benefits under the employment agreements is 2.99 times the officer's average annual compensation during the five -year period prior to the effective date of the change in control. 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. Note 17 - Regulatory Matters The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The minimum requirements are a common equity Tier 1 ("CET1") capital ratio of 4.5 %, a Tier 1 capital ratio of 6.0 %, a total capital ratio of 8.0 % and a leverage ratio of 4.0 %. In addition to the minimum regulatory capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. At September 30, 2024, the Bank's CET1 capital exceeded the required capital conservation buffer. At September 30, 2024 and 2023, the Bank exceeded all regulatory capital requirements. The Bank was categorized as "well capitalized" at September 30, 2024 and 2023 under the regulations of the FDIC. The following tables compare the Bank’s actual capital amounts at September 30, 2024 and 2023 to its minimum regulatory capital requirements and "Well Capitalized" regulatory capital at those dates (dollars in thousands): 116 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Actual Regulatory Minimum To Be "Adequately Capitalized" Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions September 30, 2024 Amount Ratio Amount Ratio Amount Ratio Leverage Capital Ratio: Tier 1 capital $ 229,206 12.0 % $ 76,319 4.0 % $ 95,399 5.0 % Risk-based Capital Ratios: CET1 229,206 18.0 57,318 4.5 82,793 6.5 Tier 1 capital 229,206 18.0 76,424 6.0 101,899 8.0 Total capital 245,152 19.3 101,899 8.0 127,374 10.0 September 30, 2023 Leverage Capital Ratio: Tier 1 capital $ 218,749 12.0 % $ 72,983 4.0 % $ 91,229 5.0 % Risk-based Capital Ratios: CET1 218,749 18.0 54,549 4.5 78,792 6.5 Tier 1 capital 218,749 18.0 72,731 6.0 96,975 8.0 Total capital 233,914 19.3 96,975 8.0 121,219 10.0 Timberland Bancorp is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at September 30, 2024, Timberland Bancorp would have exceeded all regulatory requirements. The following table presents for informational purposes the regulatory capital ratios for Timberland Bancorp at September 30, 2024 and 2023 assuming that Timberland Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets (dollars in thousands): 2024 2023 Amount Ratio Amount Ratio Leverage Capital Ratio: Tier 1 capital $ 231,092 12.1 % $ 219,851 12.1 % Risk-based Capital Ratios: CET1 231,092 18.1 219,851 18.1 Tier 1 capital 231,092 18.1 219,851 18.1 Total capital 247,044 19.4 235,023 19.4 117 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 18 - Condensed Financial Information - Parent Company Only Condensed Balance Sheets - September 30, 2024 and 2023 (dollars in thousands) 2024 2023 Assets Cash and cash equivalents: Cash and due from financial institutions $ 1,430 $ 517 Total cash and cash equivalents 1,430 517 Investment securities held to maturity, at amortized cost (net of allowance for credit losses of $5 at September 30, 2024 and $0 at September 30, 2023) (estimated fair value of $477 and $449) 495 500 Investment in Bank 243,527 232,145 Other assets 94 51 Total assets $ 245,546 $ 233,213 Liabilities and shareholders’ equity Accrued expenses $ 133 $ 140 Shareholders’ equity 245,413 233,073 Total liabilities and shareholders’ equity $ 245,546 $ 233,213 Condensed Statements of Income - Years Ended September 30, 2024, 2023 and 2022 (dollars in thousands) 2024 2023 2022 Operating income Interest on deposits in banks $ — $ — $ 3 Interest on investment securities 24 24 24 Dividends from Bank 14,000 11,400 10,255 Total operating income 14,024 11,424 10,282 Operating expenses 328 351 303 Income before income taxes and equity in undistributed income of Bank 13,696 11,073 9,979 Benefit for income taxes ( 145 ) ( 148 ) ( 139 ) Income before undistributed income of Bank 13,841 11,221 10,118 Equity in undistributed income of Bank 10,442 15,897 13,482 Net income $ 24,283 $ 27,118 $ 23,600 118 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Condensed Statements of Cash Flows - Years Ended September 30, 2024, 2023 and 2022 (dollars in thousands) 2024 2023 2022 Cash flows from operating activities Net income $ 24,283 $ 27,118 $ 23,600 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of Bank ( 10,442 ) ( 15,897 ) ( 13,482 ) Stock option compensation expense 390 320 246 Other, net ( 50 ) 100 16 Net cash provided by operating activities 14,181 11,641 10,380 Cash flows from investing activities Investment in Bank ( 319 ) ( 267 ) ( 202 ) Net cash used in investing activities ( 319 ) ( 267 ) ( 202 ) Cash flows from financing activities Proceeds from exercise of stock options 659 698 415 Repurchase of common stock, net of tax ( 5,958 ) ( 4,998 ) ( 4,583 ) Payment of dividends ( 7,650 ) ( 8,267 ) ( 7,232 ) Net cash used in financing activities ( 12,949 ) ( 12,567 ) ( 11,400 ) Net increase (decrease) in cash and cash equivalents 913 ( 1,193 ) ( 1,222 ) Cash and cash equivalents Beginning of year 517 1,710 2,932 End of year $ 1,430 $ 517 $ 1,710 Note 19 - Net Income Per Common Share Information regarding the calculation of basic and diluted net income per common share for the years ended September 30, 2024, 2023 and 2022, is as follows (dollars in thousands, except per share amounts): 2024 2023 2022 Basic net income per common share computation Numerator - net income $ 24,283 $ 27,118 $ 23,600 Denominator - weighted average common shares outstanding 8,038,674 8,175,898 8,304,002 Basic net income per common share $ 3.02 $ 3.32 $ 2.84 Diluted net income per common share computation Numerator - net income $ 24,283 $ 27,118 $ 23,600 Denominator - weighted average common shares outstanding 8,038,674 8,175,898 8,304,002 Effect of dilutive stock options (1) 41,708 72,283 79,333 Weighted average common shares outstanding-assuming dilution 8,080,382 8,248,181 8,383,335 Diluted net income per common share $ 3.01 $ 3.29 $ 2.82 ______________ (1) For the years ended September 30, 2024, 2023 and 2022, average options to purchase 225,047 , 207,803 and 204,265 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. 119 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 20 - Accumulated Other Comprehensive Income (Loss) The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the years ended September 30, 2024, 2023 and 2022 are as follows (dollars in thousands): Changes in fair value of available for sale securities [1] Changes in OTTI on held to maturity securities [1] Total [1] 2024 Balance of AOCI at the beginning of period $ ( 1,075 ) $ ( 9 ) $ ( 1,084 ) Other comprehensive income 1,095 9 1,104 Balance of AOCI at the end of period $ 20 $ — $ 20 2023 Balance of AOCI at the beginning of period $ ( 706 ) $ ( 11 ) $ ( 717 ) Other comprehensive income (loss) ( 369 ) 2 ( 367 ) Balance of AOCI at the end of period $ ( 1,075 ) $ ( 9 ) $ ( 1,084 ) 2022 Balance of AOCI at the beginning of period $ 75 $ ( 16 ) $ 59 Other comprehensive income (loss) ( 781 ) 5 ( 776 ) Balance of AOCI at the end of period $ ( 706 ) $ ( 11 ) $ ( 717 ) ___________________ (1) All amounts are net of income taxes. Note 21 - 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 levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability based on the best information available in the circumstances. The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon quoted market prices (Level 1) and 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). 120 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The Company had no liabilities measured at fair value on a recurring basis at September 30, 2024 and 2023. The Company's assets measured at estimated fair value on a recurring basis at September 30, 2024 and 2023 are as follows (dollars in thousands): Estimated Fair Value September 30, 2024 Level 1 Level 2 Level 3 Total Available for sale investment securities MBS: U.S. government agencies $ 3,939 $ 68,318 $ — $ 72,257 Investments in equity securities Mutual funds 866 — — 866 Total $ 4,805 $ 68,318 $ — $ 73,123 September 30, 2023 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 years ended September 30, 2024 and 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 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. 121 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2024 and 2023 (dollars in thousands): Total Estimated Estimated Fair Value Measurements Using Fair Value Level 1 Level 2 Level 3 September 30, 2024 Individually evaluated collateral-dependent loans $ 1,315 $ — $ — $ 1,315 September 30, 2023 Impaired loans $ 122 $ — $ — $ 122 The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a non-recurring basis at September 30, 2024 and 2023: Valuation Technique Significant Unobservable Inputs Range Individually evaluated collateral-dependent loans (2024) and impaired loans (2023) Market approach Appraised value less selling costs N/A GAAP requires disclosure of estimated fair values for 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 which may have significant value. The Company does not believe that it would be practicable to estimate a fair value for these types of items as of September 30, 2024 and 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, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis. The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, 2024 (dollars in thousands): Fair Value Measurements Using: Recorded Amount Estimated Fair Value Level 1 Level 2 Level 3 Financial Assets Cash and cash equivalents $ 164,728 $ 164,728 $ 164,728 $ — $ — CDs held for investment 10,209 10,209 10,209 — — Investment securities 244,354 238,264 146,141 92,123 — Investments in equity securities 866 866 866 — — FHLB stock 2,037 2,037 2,037 — — Other investments 3,000 3,000 3,000 — — Loans receivable, net 1,421,523 1,387,642 — — 1,387,642 Accrued interest receivable 6,990 6,990 6,990 — — Financial Liabilities Certificates of deposit 368,308 368,312 — — 368,312 FHLB borrowings 20,000 20,035 — — 20,035 Accrued interest payable 2,132 2,132 2,132 — — 122 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, 2023 (dollars in thousands): 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 — — The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the estimated fair value of the Company’s financial instruments will change when interest rate levels change, and that change may either be favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to appropriately manage interest rate risk. However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling interest rate environment. Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors interest rates and maturities of assets and liabilities, and attempts to manage interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk. 123 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Note 22 - Selected Quarterly Financial Data (Unaudited) The following selected financial data is presented for the quarters ended (dollars in thousands, except per share amounts): September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 Interest and dividend income $ 25,035 $ 24,139 $ 23,156 $ 22,495 Interest expense ( 8,488 ) ( 8,158 ) ( 7,521 ) ( 6,491 ) Net interest income 16,547 15,981 15,635 16,004 Provision for credit losses, net ( 490 ) ( 244 ) ( 81 ) ( 336 ) Non-interest income 2,932 2,791 2,615 2,798 Non-interest expense ( 11,062 ) ( 11,069 ) ( 10,991 ) ( 10,624 ) Income before income taxes 7,927 7,459 7,178 7,842 Provision for income taxes 1,572 1,535 1,470 1,546 Net income $ 6,355 $ 5,924 $ 5,708 $ 6,296 Net income per common share Basic (1) $ 0.80 $ 0.74 $ 0.71 $ 0.78 Diluted (1) $ 0.79 $ 0.74 $ 0.70 $ 0.77 __________________________________________ (1) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding. September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 Interest and dividend income $ 21,562 $ 19,889 $ 19,387 $ 19,112 Interest expense ( 4,731 ) ( 3,255 ) ( 2,236 ) ( 1,369 ) Net interest income 16,831 16,634 17,151 17,743 Provision for loan losses ( 522 ) ( 610 ) ( 475 ) ( 525 ) Non-interest income 2,924 2,875 2,636 2,705 Non-interest expense ( 10,967 ) ( 10,927 ) ( 10,944 ) ( 10,535 ) Income before income taxes 8,266 7,972 8,368 9,388 Provision for income taxes 1,624 1,666 1,705 1,881 Net income $ 6,642 $ 6,306 $ 6,663 $ 7,507 Net income per common share Basic (1) $ 0.82 $ 0.77 $ 0.81 $ 0.91 Diluted (1) $ 0.81 $ 0.77 $ 0.80 $ 0.90 __________________________________________ (1) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding . Note 23 - Revenue from Contracts with Customers In accordance with ASU 2014-09, Revenue from Contracts with Customers ("ASC 606") , revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the Company satisfies a 124 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration that it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. 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/dispositions of premises and equipment, which are included in non-interest expense. For the year ended September 30, 2024, the Company recognized $ 4,062,000 in service charges on deposits, $ 5,066,000 in ATM and debit card interchange transaction fees, $ 71,000 in escrow fees and $ 12,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. For the year ended September 30, 2023, the Company recognized $ 3,824,000 in service charges on deposits, $ 5,194,000 in ATM and debit card interchange transaction fees, $ 109,000 in escrow fees and $ 36,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606. 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 that 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. Such 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 monthly 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. 125 Notes to Consolidated Financial Statements Timberland Bancorp, Inc. and Subsidiary September 30, 2024 and 2023 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.