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What changed in TIMBERLAND BANCORP INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of TIMBERLAND BANCORP INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+510 added−518 removedSource: 10-K (2023-12-11) vs 10-K (2022-12-09)

Top changes in TIMBERLAND BANCORP INC's 2023 10-K

510 paragraphs added · 518 removed · 413 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

180 edited+44 added−31 removed210 unchanged
Biggest changeThe following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated: At September 30, 2022 2021 2020 Amount Percent of Loans in Category to Total Loans Amount Percent of Loans in Category to Total Loans Amount Percent of Loans in Category to Total Loans (Dollars in thousands) Mortgage loans: One- to four-family $ 1,658 14.05 % $ 1,154 11.08 % $ 1,163 10.46 % Multi-family 855 7.58 765 8.09 718 7.50 Commercial 6,682 42.81 6,813 43.49 7,144 39.99 Construction - custom and owner/builder 675 9.51 644 10.08 832 11.42 Construction - speculative one- to four-family 130 0.98 188 1.65 158 1.29 Construction - commercial 343 3.22 784 4.01 420 2.92 Construction - multi-family 447 5.14 436 4.81 238 3.04 Construction - land development 233 1.54 124 1.00 133 0.68 Land 397 2.14 470 1.84 572 2.25 Non-mortgage loans: Consumer loans 482 2.98 578 3.28 664 3.14 Commercial business loans 1,801 10.05 1,513 10.67 1,372 17.31 Total allowance for loan losses $ 13,703 100.00 % $ 13,469 100.00 % $ 13,414 100.00 % 20 Analysis of ALL The table below sets forth the ratio of net charge-offs during the period to average loans outstanding during the period: September 30, 2022 2021 2020 (Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loan (Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loan (Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loan (Dollars in thousands) Mortgage Loans: One- to four-family $ — $ 140,516 — % $ — $ 122,291 — % $ 2 $ 131,093 — Multi-family — 88,469 — — 90,569 — — 80,448 — Commercial — 513,152 — — 458,631 — 6 441,173 — Construction — 131,960 — — 121,441 — 5 121,458 — Land — 31,034 — 45 23,617 0.19 20 30,439 0.07 Total mortgage loans — 905,131 — 45 816,549 0.01 33 804,611 0.07 Consumer Loans: Home equity — 33,418 — — 32,988 — 15 37,247 0.04 Other (9) 2,369 (0.38) 3 2,848 0.11 (9) 3,746 (0.24) Total consumer loans (9) (9) 35,787 (0.38) 3 3,000 35,836 0.11 0.0011 6 40,993 (0.20) Commercial Loans: Commercial business (27) 114,717 (0.02) 7 174,357 — (15) 124,796 (0.01) Total $ (36) $ 1,055,635 — % $ 55 $ 1,026,742 0.01 % $ 24 $ 970,400 — % 21 Investment Activities The investment policies of the Bank are established and monitored by the Board of Directors.
Biggest changeCredit Ratios The following table sets forth the ratios between the ALL, non-accrual loans and total loans at the dates indicated: At September 30, 2023 2022 2021 (Dollars in thousands) ALL $ 15,817 $ 13,703 $ 13,469 Non-accrual loans $ 1,514 $ 2,059 $ 2,854 Loans receivable, net (1) $ 1,318,122 $ 1,146,129 $ 981,923 ALL to loans receivable, net 1.20 % 1.20 % 1.37 % Non-accrual loans to loans receivable, net 0.11 % 0.18 % 0.29 % ALL to non-accrual loans 1044.72 % 665.52 % 471.93 % ________________________________ (1) Loans receivable, net for this table includes the deductions for the undisbursed portion of construction loans in process and net deferred loan origination fees and does not include the deduction for the ALL. 19 The following table sets forth the ALL by loan category at the dates indicated: At September 30, 2023 2022 2021 Amount Percent of Loans in Category to Total Loans Amount Percent of Loans in Category to Total Loans Amount Percent of Loans in Category to Total Loans (Dollars in thousands) Mortgage loans: One- to four-family $ 2,417 17.75 % $ 1,658 14.05 % $ 1,154 11.08 % Multi-family 1,156 8.91 855 7.58 765 8.09 Commercial 7,209 39.84 6,682 42.81 6,813 43.49 Construction - custom and owner/builder 750 9.09 675 9.51 644 10.08 Construction - speculative one- to four-family 148 1.20 130 0.98 188 1.65 Construction - commercial 316 3.58 343 3.22 784 4.01 Construction - multi-family 602 4.01 447 5.14 436 4.81 Construction - land development 274 1.32 233 1.54 124 1.00 Land 406 1.87 397 2.14 470 1.84 Non-mortgage loans: Consumer loans 572 2.88 482 2.98 578 3.28 Commercial business loans 1,967 9.55 1,801 10.05 1,513 10.67 Total allowance for loan losses $ 15,817 100.00 % $ 13,703 100.00 % $ 13,469 100.00 % 20 Analysis of ALL The table below sets forth the ratio of net charge-offs during the period to average loans outstanding during the period: September 30, 2023 2022 2021 (Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loans (Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loans (Net Charge-offs) Recoveries Average Loans (Net Charge-Offs) Recoveries to Average Loans (Dollars in thousands) Mortgage Loans: One- to four-family $ — $ 215,854 — % $ — $ 140,516 — % $ — $ 122,291 — % Multi-family — 104,926 — — 88,469 — — 90,569 — Commercial — 547,924 — — 513,152 — — 458,631 — Construction — 151,149 — — 131,960 — — 121,441 — Land — 39,147 — — 31,034 — 45 23,617 0.19 Total mortgage loans — 1,059,000 — — 905,131 — 45 816,549 0.19 Consumer Loans: Home equity — 37,550 — — 33,418 — — 32,988 — Other (3) 2,434 (0.12) (9) 2,369 (0.38) 3 2,848 0.11 Total consumer loans (3) (3) 39,984 (0.12) (9) (9,000) 35,787 (0.38) -0.0038 3 35,836 0.11 Commercial Loans: Commercial business (15) 131,117 (0.01) (27) 114,717 (0.02) 7 174,357 — Total $ (18) $ 1,230,101 — % $ (36) $ 1,055,635 — % $ 55 $ 1,026,742 0.01 % 21 Investment Activities The investment policies of the Bank are established and monitored by the Board of Directors.
Borrowings through the FHLB and the Federal Reserve Bank of San Francisco ("FRB") may be used to compensate for reductions in the availability of funds from other sources. Deposit Accounts . Substantially all of the Bank's depositors are residents of Washington.
Borrowings through the FHLB and the Federal Reserve Bank of San Francisco ("FRB") may be used to compensate for reductions in the availability of funds from other sources. Deposit Accounts . Substantially all the Bank's depositors are residents of Washington.
Under state law, savings banks in Washington also generally have all of the powers that federal savings banks have under federal laws and regulations. The Bank is subject to periodic examination and reporting requirements by and of the Division and the FDIC. The following is a brief description of certain laws and regulations applicable to Timberland Bancorp and the Bank.
Under state law, savings banks in Washington also generally have all the powers that federal savings banks have under federal laws and regulations. The Bank is subject to periodic examination and reporting requirements by and of the Division and the FDIC. The following is a brief description of certain laws and regulations applicable to Timberland Bancorp and the Bank.
While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the 30 Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing.
While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various 30 regulations that implement some or all of the foregoing.
An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain requirements are met.
An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not 28 exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain requirements are met.
A bank that has experienced 28 rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: • Total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital; or • Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk: • Total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital; or • Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
Federal Reserve policy limits the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality and overall financial condition, and that it is inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.
Federal Reserve policy limits the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the 31 company's capital needs, asset quality and overall financial condition, and that it is inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.
In order to be considered well-capitalized under the prompt corrective action regulations, the Bank must maintain a CET1 risk-based ratio of 6.5%, a Tier 1 risk-based ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%, and the Bank must not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.
To be considered well-capitalized under the prompt corrective action regulations, the Bank must maintain a CET1 risk-based ratio of 6.5%, a Tier 1 risk-based ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%, and the Bank must not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level.
The Bank conducts operations from: • its main office in Hoquiam (Grays Harbor County); • five branch offices in Grays Harbor County (Ocean Shores, Montesano, Elma and two branches in Aberdeen); • five branch offices in Pierce County (Edgewood, Puyallup, Spanaway, Tacoma and Gig Harbor); • six branch offices in Thurston County (Tumwater, Yelm, two branches in Lacey and two branches in Olympia); • two branch offices in Kitsap County (Poulsbo and Silverdale); • a branch office in King County (Auburn); and 4 • three branch offices in Lewis County (Winlock, Toledo and Chehalis).
The Bank conducts operations from: • its main office in Hoquiam (Grays Harbor County); • five branch offices in Grays Harbor County (Ocean Shores, Montesano, Elma and two branches in Aberdeen); • five branch offices in Pierce County (Edgewood, Puyallup, Spanaway, Tacoma and Gig Harbor); • six branch offices in Thurston County (Tumwater, Yelm, two branches in Lacey and two branches in Olympia); • two branch offices in Kitsap County (Poulsbo and Silverdale); • a branch office in King County (Auburn); and • three branch offices in Lewis County (Winlock, Toledo and Chehalis).
However, the Bank usually obtains private mortgage insurance (“PMI”) on the portion of the principal amount that exceeds 80% of the appraised value of the security property. The maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied properties is generally 80% (90% for loans originated for sale in the secondary market to Freddie Mac or the FHLB).
However, the Bank usually obtains private mortgage insurance (“PMI”) on the portion of the principal amount that exceeds 80% of the appraised value of the security property. The maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied properties is generally 80% 8 (90% for loans originated for sale in the secondary market to Freddie Mac or the FHLB).
The Bank believes that its lengthy experience in providing residential construction loans has enabled it to establish processing and disbursement procedures to meet the needs of its borrowers while reducing many of the risks inherent with construction lending. The Bank also originates construction loans for commercial properties, multi-family properties, and land development projects.
The Bank believes that its lengthy experience in providing residential construction loans has enabled it to establish processing and disbursement procedures to 9 meet the needs of its borrowers while reducing many of the risks inherent with construction lending. The Bank also originates construction loans for commercial properties, multi-family properties, and land development projects.
If the estimate of value proves to be inaccurate, in the event of default and foreclosure, the Bank may be confronted with a property the value of which is insufficient to assure full 11 repayment. Land loans also pose additional risk because of the lack of income being produced by the property and potential illiquid nature of the collateral.
If the estimate of value proves to be inaccurate, in the event of default and foreclosure, the Bank may be confronted with a property the value of which is insufficient to assure full repayment. Land loans also pose additional risk because of the lack of income being produced by the property and potential illiquid nature of the collateral.
The Bank is a member of the FHLB, one of 11 regional Federal Home Loan Banks that administer the home financing credit function of savings institutions, each serving as a reserve or central bank for its members within its assigned region. The FHLB is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.
The Bank is a member of the FHLB, one of 11 regional Federal Home Loan Banks that administer the home financing credit function of savings institutions, each serving as a reserve or central bank for its 27 members within its assigned region. The FHLB is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.
The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties.
The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of properties.
Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk- 27 based capital measure, a leverage ratio capital measure and certain other factors.
Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors.
Interest received on loans secured by mortgages or deeds of trust on residential properties, certain residential mortgage-backed securities, and certain U.S. government and agency securities is not subject to this tax. Competition The Bank operates in an intensely competitive market for the attraction of deposits and in the origination of loans.
Interest received on loans secured by mortgages or deeds of trust on residential properties, certain residential mortgage-backed securities, and certain U.S. government and agency securities is not subject to this tax. 32 Competition The Bank operates in an intensely competitive market for the attraction of deposits and in the origination of loans.
In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer that consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital ratios in order to avoid limitations on paying dividends, repurchasing shares and paying certain discretionary bonuses.
In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer that consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital ratios to avoid limitations on paying dividends, repurchasing shares and paying certain discretionary bonuses.
SBA 7(a) loans are all adjustable rate loans based on the Prime Rate. Under the SBA 7(a) program, the Bank can sell in the secondary market the guaranteed portion of its SBA 7(a) loans and retain the related unguaranteed portion of these loans, as well as the servicing on such loans, for which it is paid a fee.
SBA 7(a) loans are all adjustable rate loans based on the Prime Rate. Under the SBA 7(a) program, the Bank can 12 sell in the secondary market the guaranteed portion of its SBA 7(a) loans and retain the related unguaranteed portion of these loans, as well as the servicing on such loans, for which it is paid a fee.
The FDIC, as required under the Federal Deposit Insurance Act, established a plan in September 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35 percent within eight years. This plan did not include an increase in the deposit insurance assessment rate.
The FDIC, as required under the Federal Deposit Insurance Act, established a plan in September 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35% within eight years. This plan did not include an increase in the deposit insurance assessment rate.
These allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities and the risks associated with particular problem assets. When the Bank classifies problem assets as loss, it charges off the balance of the asset against the allowance for loan losses.
These allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities and the risks associated with problem assets. When the Bank classifies problem assets as loss, it charges off the balance of the asset against the allowance for loan losses.
Any company that acquires control becomes subject to regulation as a bank holding 31 company. Depending on circumstances, a notice or application may be required to be filed with appropriate state banking regulators and may be subject to their approval or non-objection. Dividends.
Any company that acquires control becomes subject to regulation as a bank holding company. Depending on circumstances, a notice or application may be required to be filed with appropriate state banking regulators and may be subject to their approval or non-objection. Dividends.
Substandard loans are classified as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Assets classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.
Substandard loans are classified as those loans that are inadequately protected by the 17 current net worth and paying capacity of the obligor, or of the collateral pledged. Assets classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.
The increased assessment would improve the likelihood that the DIF reserve ratio would reach the required minimum by the statutory deadline, consistent with the FDIC’s Amended Restoration Plan. The FDIC also concurrently maintained the Designated Reserve Ratio (“DRR”) for the DIF at 2 percent for 2023.
The increased assessment would improve the likelihood that the DIF reserve ratio would reach the required minimum by the statutory deadline, consistent with the FDIC’s Amended Restoration Plan.The FDIC also concurrently maintained the Designated Reserve Ratio (“DRR”) for the DIF at 2% for 2023.
If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. 17 The categories of non-accrual loans and impaired loans overlap, although they are not identical.
If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The categories of non-accrual loans and impaired loans overlap, although they are not identical.
The Bank has historically attempted to minimize this risk by generally limiting the maximum loan-to-value ratio on land and land development loans to 75% of the estimated developed value of the secured property. Land Lending .
The Bank has historically attempted to minimize this risk by generally limiting the maximum loan-to-value ratio on land and land development loans to 75% of the estimated developed value of the secured property. 11 Land Lending .
If the borrower is other than an individual, the Bank also generally obtains personal guarantees from the principals (with ownership interests of 20% or more) based on a review of personal financial statements. At September 30, 2022, all multi-family loans were performing according to their repayment terms. See "Lending Activities - Non-performing Loans and Delinquencies." Commercial Real Estate Lending .
If the borrower is other than an individual, the Bank also generally obtains personal guarantees from the principals (with ownership interests of 20% or more) based on a review of personal financial statements. At September 30, 2023, all multi-family loans were performing according to their repayment terms. See "Lending Activities - Non-performing Loans and Delinquencies." Commercial Real Estate Lending .
Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements. At September 30, 2022, the Bank was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC.
Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements. At September 30, 2023, the Bank was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC.
The Bank requires that fire and extended coverage casualty insurance be maintained on the collateral for all of its real estate secured loans and flood insurance, if appropriate. The Bank’s lending policies generally limit the maximum loan-to-value ratio on mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or the purchase price.
The Bank requires that fire and extended coverage casualty insurance, and flood insurance if appropriate, be maintained on the collateral for all of its real estate secured loans. The Bank’s lending policies generally limit the maximum loan-to-value ratio on mortgage loans secured by owner-occupied properties to 85% of the lesser of the appraised value or the purchase price.
The following table sets forth certain information at September 30, 2022 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity but does not include potential prepayments. Loans having no stated maturity and overdrafts are reported as due in one year or less.
The following table sets forth certain information at September 30, 2023 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity but does not include potential prepayments. Loans having no stated maturity and overdrafts are reported as due in one year or less.
To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property. Federal Reserve System.
To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potentially hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property. Federal Reserve System.
The corporate dividends-received deduction is generally 50.0% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20.0% of the stock of a corporation distributing a dividend, then 65.0% of any dividends received may be deducted.
The corporate dividends-received deduction is generally 50.0% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20.0% and less than 80% of the stock of a corporation distributing a dividend, then 65.0% of any dividends received may be deducted.
Audits . The Company is no longer subject to U.S. federal tax examination by tax authorities for years ended on or before September 30, 2018. For additional information regarding our federal income taxes, see Note 13-Income Taxes of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
Audits . The Company is no longer subject to U.S. federal tax examination by tax authorities for years ended on or before September 30, 2019. For additional information regarding our federal income taxes, see "Note 13-Income Taxes" of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
At September 30, 2022, the Bank was in compliance with the reserve requirements in place at that time. Transactions with Affiliates. Timberland Bancorp, Inc. and the Bank are separate and distinct legal entities. The Bank is an affiliate of Timberland Bancorp, Inc. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates.
At September 30, 2023, the Bank was in compliance with the reserve requirements in place at that time. Transactions with Affiliates. Timberland Bancorp, Inc. and the Bank are separate and distinct legal entities. The Bank is an affiliate of Timberland Bancorp, Inc. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates.
These risks can be significantly impacted by supply and demand conditions. The Bank attempts to minimize these risks by generally limiting the maximum loan-to-value ratio on land loans to 75%. Consumer Lending. Consumer loans generally have shorter terms to maturity and may have higher interest rates than mortgage loans.
These risks can be significantly impacted by supply and demand conditions. The Bank attempts to minimize these risks by generally limiting the maximum loan-to-value ratio on land loans to 65%. Consumer Lending. Consumer loans generally have shorter terms to maturity and may have higher interest rates than mortgage loans.
The following table sets forth the maturities and weighted average yields of the debt securities in the Bank's portfolio at September 30, 2022. One Year or Less After One to Five Years After Five to Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Held to Maturity: U.S.
The following table sets forth the maturities and weighted average yields of the debt securities in the Bank's portfolio at September 30, 2023. One Year or Less After One to Five Years After Five to Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Held to Maturity: U.S.
The loans are primarily underwritten on the basis of the borrower's ability to service the loan from income. Under the SBA 7(a) program, the loans carry an SBA guaranty for up to 85% of the loan. Typical maturities for this type of loan vary but can be up to ten years.
The loans are primarily underwritten on the basis of the borrower's ability to service the loan from income. Under the SBA 7(a) program, the loans carry an SBA guaranty for up to 75% of the loan. Typical maturities for this type of loan vary but can be up to ten years.
Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements. The Bank has not elected to use the CBLR framework as of September 30, 2022.
Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements. The Bank has not elected to use the CBLR framework as of September 30, 2023.
These participation loans are underwritten in accordance with the Bank’s underwriting guidelines and are without recourse to the seller other than for fraud. During the years ended September 30, 2022 and 2020, the Bank did not purchase any loan participation interests.
These participation loans are underwritten in accordance with the Bank’s underwriting guidelines and are without recourse to the seller other than for fraud. During the years ended September 30, 2023 and 2022, the Bank did not purchase any loan participation interests.
The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity as of September 30, 2022. Jumbo certificates of deposit have principal balances of $250,000 or more, and the rates paid on these accounts are generally negotiable.
The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity as of September 30, 2023. Jumbo certificates of deposit have principal balances of $250,000 or more, and the rates paid on these accounts are generally negotiable.
Washington Taxation The Company and the Bank are subject to a business and occupation tax imposed under Washington law at the rate of 1.8% of gross receipts at September 30, 2022. In addition, various municipalities also assess business and occupation taxes at differing rates.
Washington Taxation The Company and the Bank are subject to a business and occupation tax imposed under Washington law at the rate of 1.8% of gross receipts at September 30, 2023. In addition, various municipalities also assess business and occupation taxes at differing rates.
In the case of a speculative or custom construction loan, the Bank reviews the experience and expertise of the builder.
In the case of a speculative or 10 custom construction loan, the Bank reviews the experience and expertise of the builder.
This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank.
This regulation and oversight are generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank.
Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments. In October 2022, the FDIC finalized a rule that will increase the initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023 (January 1, 2023 through March 31, 2023).
Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments. In October 2022, the FDIC finalized a rule that increased the initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023 (January 1, 2023 through March 31, 2023).
For additional information, see “Item 2. Properties.” Hoquiam, with a population of approximately 8,900, is located in Grays Harbor County which is situated along Washington State’s central Pacific coast. Hoquiam is located approximately 110 miles southwest of Seattle, Washington and 145 miles northwest of Portland, Oregon.
For additional information, see “Item 2. Properties.” 4 Hoquiam, with a population of approximately 8,800, is located in Grays Harbor County which is situated along Washington State’s central Pacific coast. Hoquiam is located approximately 110 miles southwest of Seattle, Washington and 145 miles northwest of Portland, Oregon.
The Bank increases its allowance for loan losses by charging provisions for loan losses against the Bank's operating income. The Board of Directors reviews the adequacy of the allowance for loan losses at least quarterly based on management's assessment of current economic conditions, past loss and collection experience, and risk characteristics of the loan portfolio.
The Bank increases its ALL by charging provisions for loan losses against the Bank's operating income. 18 The Board of Directors reviews the adequacy of the ALL at least quarterly based on management's assessment of current economic conditions, past loss and collection experience, and risk characteristics of the loan portfolio.
The Bank’s Commercial Loan Committee, which consists of the Bank’s Chief Executive Officer, President, Chief Credit Administrator, Executive Vice President of Lending, a commercial underwriter, and two Senior Vice Presidents of Commercial Lending, may approve commercial real estate loans and commercial business loans up to and including $3.00 million.
The Bank’s Commercial Loan Committee, which consists of the Bank’s Chief Executive Officer, Chief Credit Administrator, Executive Vice President of Lending, a commercial underwriter, and the Senior Vice President of Credit Administration, may approve commercial real estate loans and commercial business loans up to and including $3.00 million.
The loan-to-value ratio is typically 90% or less, when taking into account both the first and second mortgage loans. Second mortgage loans typically carry fixed interest rates with a fixed payment over a term between five and 15 years. Home equity lines of credit are generally made at interest rates tied to the Prime Rate.
The loan-to-value ratio is typically 90% or less, when considering both the first and second mortgage loans. Second mortgage loans typically carry fixed interest rates with a fixed payment over a term between five and 15 years. Home equity lines of credit are generally made at interest rates tied to the Prime Rate.
Grays Harbor County has a population of 77,000 according to the United States ("U.S.") Census Bureau 2022 estimates and a median family income of $79,600 according to 2022 estimates from the Department of Housing and Urban Development (“HUD”). The economic base in Grays Harbor County has been historically dependent on the timber and fishing industries.
Grays Harbor County has a population of 77,000 according to the United States ("U.S.") Census Bureau 2022 estimates and a median family income of $86,000 according to 2023 estimates from the Department of Housing and Urban Development (“HUD”). The economic base in Grays Harbor County has been historically dependent on the timber and fishing industries.
During the years ended September 30, 2022, 2021 and 2020, the Bank sold loan participation interests of $14.4 million, $10.0 million and $6.26 million, respectively. The following table shows total loans originated, purchased, sold and repaid during the years indicated.
During the years ended September 30, 2022 and 2021, the Bank sold loan participation interests of $14.4 million and $10.0 million , respectively. The following table shows total loans originated, purchased, sold and repaid during the years indicated.
The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 23 branches (including its main office in Hoquiam). The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”).
The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 23 branches (including its main office in Hoquiam). The Bank’s deposits are insured up to applicable legal limits by the FDIC.
Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm. Other Consumer Protection Laws and Regulations.
Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm.
The construction phase of these loans generally lasts up to 12 months with fixed interest rates typically ranging from 4.25% to 7.50% and with loan-to-value ratios of 80% (or up to 95% with PMI) of the appraised estimated value of the completed property.
The construction phase of these loans generally lasts up to 12 months with fixed interest rates typically ranging from 4.88% to 10.50% and with loan-to-value ratios of 80% (or up to 95% with PMI) of the appraised estimated value of the completed property.
The largest loan classified as 18 substandard at September 30, 2022 had a balance of $4.83 million and was secured by a commercial real estate property in King County. This loan was not on non-accrual status at September 30, 2022, as the loan was making payments in accordance with its repayment terms and was adequately collateralized.
The largest loan classified as substandard at September 30, 2023 had a balance of $4.73 million and was secured by a commercial real estate property in King County. This loan was not on non-accrual status at September 30, 2023, as the loan was making payments in accordance with its repayment terms and was adequately collateralized.
The Bank has five branches located in Pierce County, and these branches have historically been responsible for a substantial portion of the Bank’s construction lending activities. Thurston County has a population of 298,000 according to the U.S. Census Bureau 2022 estimates and a median family income of $103,500 according to 2022 HUD estimates.
The Bank has five branches located in Pierce County, and these branches have historically been responsible for a substantial portion of the Bank’s construction lending activities. Thurston County has a population of 299,000 according to the U.S. Census Bureau 2022 estimates and a median family income of $102,500 according to 2023 HUD estimates.
The Bank has six branches located in Thurston County. This county has historically had a stable economic base primarily attributable to the state government presence. Kitsap County has a population of 274,000 according to the U.S. Census Bureau 2022 estimates and a median family income of $102,500 according to 2022 HUD estimates.
The Bank has six branches located in Thurston County. This county has historically had a stable economic base primarily attributable to the state government presence. Kitsap County has a population of 278,000 according to the U.S. Census Bureau 2022 estimates and a median family income of $113,500 according to 2023 HUD estimates.
While the Bank believes that it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase significantly its allowance for loan losses.
While the Bank believes that it has established its existing ALL in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase significantly its ALL.
During the years ended September 30, 2022, 2021 and 2020, the Bank’s total gross loan originations were $572.46 million, $602.34 million and $597.19 million, respectively. Periodically, the Bank purchases loan participation interests in construction, commercial real estate and multi-family loans, secured by properties generally located in Washington State, from other banks.
During the years ended September 30, 2023, 2022 and 2021, the Bank’s total gross loan originations were $361.79 million, $572.46 million and $602.34 million, respectively. Periodically, the Bank purchases loan participation interests in construction, commercial real estate and multi-family loans, secured by properties generally located in Washington State, from other banks.
See "Item 1A. Risk Factors - We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that could increase our costs of operations." At September 30, 2022, the Bank had $21.83 million of jumbo certificates of deposit of $250,000 or more.
See "Item 1A. Risk Factors - We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that could increase our costs of operations." At September 30, 2023, the Bank had $91.71 million of jumbo certificates of deposit of $250,000 or more.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. As of September 30, 2022, the Bank’s aggregate recorded loan balances for construction, land development and land loans were 82.89% of regulatory capital.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. As of September 30, 2023, the Bank’s aggregate recorded loan balances for construction, land development and land loans were 84.08% of regulatory capital.
The Bank’s Chief Executive Officer, President, Chief Credit Administrator and Executive Vice President of Lending also have individual lending authority for loans up to and including $750,000. The Bank’s Board Loan Committee, which consists of two rotating non-employee Directors and the Bank’s Chief Executive Officer may approve loans up to and including $5.00 million.
The Bank’s Chief Executive Officer, Chief Credit Administrator and Executive Vice President of Lending also have individual lending authority for loans up to and including $750,000. The Bank’s Board Loan Committee, which consists of one permanent non-employee Director, one rotating non-employee Director and the Bank’s Chief Executive Officer may approve loans up to and including $5.00 million.
Although management believes that it uses the best information available to make its determinations, future adjustments to the allowance for loan losses may be necessary, and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.
Although management believes that it uses the best information available to make its determinations, future adjustments to the ALL may be necessary, and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.
In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate.
In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing ALL is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate.
The economy in Pierce County is diversified with the presence of military related government employment (Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace related employment. According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area increased to 4.3% at September 30, 2022 from 4.2% at September 30, 2021.
The economy in Pierce County is diversified with the presence of military related government employment (Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace related employment. According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area decreased to 3.9% at September 30, 2023 from 4.3% at September 30, 2022.
The Bank has two branches located in Kitsap County. The economic base of Kitsap County is largely supported by military related government employment through the U.S. Navy. According to the Washington State Employment Security Department, the unemployment rate for the Kitsap County area increased to 3.6% at September 30, 2022 from 3.4% at September 30, 2021.
The Bank has two branches located in Kitsap County. The economic base of Kitsap County is largely supported by military related government employment through the U.S. Navy. According to the Washington State Employment Security Department, the unemployment rate for the Kitsap County area decreased to 3.5% at September 30, 2023 from 3.6% at September 30, 2022.
The Bank also has checking accounts owned by businesses associated with the marijuana (or Initiative-502) industry in Washington State. It is generally permissible in Washington State to handle accounts associated with this industry in compliance with federal regulatory guidelines. At September 30, 2022, the Bank had $21.09 million, or 1.3% of total deposits, from businesses associated with the marijuana industry.
The Bank also has checking accounts owned by businesses associated with the marijuana (or Initiative-502) industry in Washington State. It is generally permissible in Washington State to handle accounts associated with this industry in compliance with federal regulatory guidelines. At September 30, 2023, the Bank had $19.51 million, or 1.3% of total deposits, from businesses associated with the marijuana industry.
In addition, at September 30, 2022 the Bank’s loans on commercial real estate, as defined by the FDIC, were 275.18% of regulatory capital. Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the activities and equity investments of FDIC-insured state-chartered banks to those that are permissible for national banks.
In addition, at September 30, 2023 the Bank’s loans on commercial real estate, as defined by the FDIC, were 289.24% of regulatory capital. Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the activities and equity investments of FDIC-insured state-chartered banks to those that are permissible for national banks.
Commercial real estate, construction, multi-family, and land loans typically have higher rates of return than one- to four-family loans; however, they also present a higher degree of risk. The Bank’s internal loan policy limits the maximum amount of loans to one borrower to 20% of its capital plus surplus.
Commercial real estate, construction, multi-family, and land loans typically have higher rates of return than one- to four-family loans; however, they also present a higher degree of risk. The Bank’s internal loan policy limits the maximum amount of loans to one borrower to 90% of its legal lending limit (which is 20% of its capital plus surplus).
King County is the most populous county in the state and has a population of 2.3 million according to the U.S. Census Bureau 2022 estimates. The Bank has one branch located in King County. The county’s median family income is $134,600 according to 2022 HUD estimates.
King County is the most populous county in the state and has a population of 2.3 million according to the U.S. Census Bureau 2022 estimates. The Bank has one branch located in King County. The county’s median family income is $146,500 according to 2023 HUD estimates.
The Bank also sells the guaranteed portion of some of its SBA 7(a) loans in the secondary market. Loans sold in the secondary market are generally sold on a servicing retained basis. At September 30, 2022, the Bank’s loan servicing portfolio, which is not included in the Company’s consolidated financial statements, totaled $410.29 million.
The Bank also sells the guaranteed portion of some of its SBA 7(a) loans in the secondary market. Loans sold in the secondary market are generally sold on a servicing retained basis. At September 30, 2023, the Bank’s loan servicing portfolio, which is not included in the Company’s consolidated financial statements, totaled $384.62 million.
Thurston County is home of Washington State’s capital (Olympia), and its economic base is largely driven by state government related employment. According to the Washington State Employment Security Department, the unemployment rate for the Thurston County area increased to 3.8% at September 30, 2022 from 3.5% at September 30, 2021.
Thurston County is home of Washington State’s capital (Olympia), and its economic base is largely driven by state government related employment. According to the Washington State Employment Security Department, the unemployment rate for the Thurston County area decreased to 3.4% at September 30, 2023 from 3.8% at September 30, 2022.
The Bank actively solicits deposit-related clients and competes for deposits by offering depositors a variety of savings accounts, checking accounts, cash management and other services. Subsidiary Activities The Bank has one wholly-owned subsidiary, Timberland Service Corp. (“Timberland Service”), whose primary function is to provide escrow services. Employees and Human Capital Resources Workforce.
The Bank actively solicits deposit-related clients and competes for deposits by offering depositors a variety of savings accounts, checking accounts, cash management and other services. Subsidiary Activities The Company has one wholly-owned subsidiary, the Bank. The Bank has one wholly-owned direct subsidiary, Timberland Service Corp. (“Timberland Service”), whose primary function is to provide escrow services.
Other industries that support the economic base are tourism, agriculture, shipping, transportation and technology. According to the Washington State Employment Security Department, the unemployment rate in Grays Harbor County increased to 5.8% at September 30, 2022 from 5.3% at September 30, 2021.
Other industries that support the economic base are tourism, agriculture, shipping, transportation and technology. According to the Washington State Employment Security Department, the unemployment rate in Grays Harbor County decreased to 4.8% at September 30, 2023 from 5.8% at September 30, 2022.
Risk Factors – Our investment securities portfolio may be negatively impacted by fluctuations in market value and interest rates and result in losses” and Note 3 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Deposit Activities and Other Sources of Funds General .
Risk Factors – Our investment securities portfolio may be negatively impacted by fluctuations in market value and interest rates and result in losses” and "Note 3-Investment Securities of the Notes to the Consolidated Financial Statements contained in Item 8 of this report". Deposit Activities and Other Sources of Funds General .
King County’s economic base is diversified with many industries including shipping, transportation, aerospace, computer technology and biotech. According to the Washington State Employment Security Department, the unemployment rate for the King County area decreased to 2.9% at September 30, 2022 from 4.3% at 5 September 30, 2021.
King County’s economic base is diversified with many industries including shipping, transportation, aerospace, computer technology and biotech. According to the Washington State Employment Security Department, the unemployment rate for the King County area increased to 3.6% at September 30, 2023 from 2.9% at September 30, 2022.
The Bank has six branches (including its home office) located in the county. Pierce County is the second most populous county in the state and has a population of 926,000 according to the U.S. Census Bureau 2022 estimates. The county’s median family income is $101,800 according to 2022 HUD estimates.
The Bank has six branches (including its home office) located in the county. Pierce County is the second most populous county in the state and has a population of 927,000 according to the U.S. Census Bureau 2022 estimates. The county’s median family income is $112,600 according to 2023 HUD estimates.
At September 30, 2022, the largest aggregate outstanding balance to one borrower for speculative one- to four-family construction loans to taled $4.04 million (including $642,000 of undisbursed loans in process) and was comprised of four loans that were performing according to their repayment terms. The Bank also provides construction financing for multi-family and commercial properties.
At September 30, 2023, the largest aggregate outstanding balance to one borrower for speculative one- to four-family construction loans to taled $3.12 million (including $796,000 of undisbursed loans in process) and was comprised of five loans that were performing according to their repayment terms. The Bank also provides construction financing for multi-family and commercial properties.
Speculative construction loans are generally originated for a term of 12 months, with current rates generally ranging from 5.50% to 7.50 %, an d with a loan-to-value ratio of no more than 80 % of the appraised value of the completed property.
Speculative construction loans are generally originated for a term of 12 months, with current rates generally ranging fr om 6.50% to 9.50%, an d with a loan-to-value ratio of no more than 80 % of the appraised value of the completed property.
At September 30, 2022, the Bank’s largest multi-family loan had an outstanding 8 principal balance o f $7.01 million and was secured by an apartment building located in Thurston County. At September 30, 2022, this loan was performing according to its repayment terms. The maximum loan-to-value ratio for multi-family loans is generally limited to not more than 80%.
At September 30, 2023, the Bank’s largest multi-family loan had an outstanding principal balance of $10.00 million and was secured by an apartment building located in Thurston County. At September 30, 2023, this loan was performing according to its repayment terms. The maximum loan-to-value ratio for multi-family loans is generally limited to not more than 80%.
The largest commercial business loan had an outstanding balance of $4.78 million at September 30, 2022 and was performing according to its repayment terms. At September 30, 2022, seven commercial business loans totaling $309,000 were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.” The Bank has increased commercial business loan originations made under the U.S.
The largest commercial business loan had an outstanding balance of $3.85 million at September 30, 2023 and was performing according to its repayment terms. At September 30, 2023, five commercial business loans totaling $286,000 were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.” The Bank has increased commercial business loan originations made under the U.S.
At September 30, 2022, the largest outstanding custom and owner/builder construction loan had an outstanding balance of $1.51 million (including $1.31 million of undisbursed loans in process) and was performing according to its repayment terms.
At September 30, 2023, the largest outstanding custom and owner/builder construction loan had an outstanding balance of $1.18 million (including $502,000 of undisbursed loans in process) and was performing according to its repayment terms.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeFurther, the FASB has adopted a new accounting standard that will be effective for our fiscal year beginning October 1, 2023. This standard, referred to as CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses.
Biggest changeFinally, beginning on October 1, 2023, the Company adopted the CECL standard to determine estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses at inception of the loan. The adoption of CECL will change the allowance calculation methodology from a historical incurred loss model to an expected future loss model.
Risks Related to Economic Conditions Our business may be adversely affected by downturns in the national economy and in the economies in our market areas. Substantially all of our loans are to businesses and individuals in the state of Washington.
Risks Related to Economic Conditions Our business may be adversely affected by downturns in the national economy and in the economies in our market areas. Substantially all our loans are to businesses and individuals in the state of Washington.
As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to a number of risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, results of operations, ability to execute our growth strategy, and ability to pay dividends.
As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any number of risks, which could have a material, adverse effect on our business, financial condition, liquidity, results of operations, ability to execute our growth strategy, and ability to pay dividends.
A secondary market for most types of commercial real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans.
A secondary market for most types of commercial real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all our interest in these loans.
As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operation and financial condition; • We expect that our net income will increase following an acquisition; however, we also expect our general and administrative expenses to increase, which could result to an increase in our efficiency ratio.
As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operation and financial condition; and • We expect that our net income will increase following an acquisition; however, we also expect our general and administrative expenses to increase, which could result to an increase in our efficiency ratio.
If our third-party providers encounter difficulties, including those resulting from breakdowns, or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted.
If our third-party providers encounter difficulties, including those resulting from breakdowns, or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or 44 higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted.
Any decline in available funding in amounts adequate to finance our activities or on terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which 45 could, in turn, have a material adverse effect on our business, financial condition and results of operations.
Any decline in available funding in amounts adequate to finance our activities or on terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.
For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to 38 repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property.
For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan, and such repayment and the costs associated with a foreclosure are justified by the value of the property.
If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected. Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability.
If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected. 41 Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability.
In a rising or higher interest rate environment, the demand for mortgage loans, particularly refinancing of existing mortgage loans, tends to fall and our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold. This would result in a decrease in mortgage revenues and a corresponding decrease in non-interest income.
In a rising or higher interest rate environment, the demand for mortgage loans, particularly refinancing of existing mortgage loans, tends to fall and 42 our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold. This would result in a decrease in mortgage revenues and a corresponding decrease in non-interest income.
Accordingly, charge-offs on commercial real 37 estate loans may be larger as a percentage of the total principal outstanding than those incurred with our residential or consumer loan portfolios. The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
Accordingly, charge-offs on commercial real estate loans may be larger as a percentage of the total principal outstanding than those incurred with our residential or consumer loan portfolios. The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
Business-How We Are Regulated." These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures.
Business - How We Are Regulated." These regulations, along with existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures.
Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may also require an increase in the allowance for loan losses.
In addition, deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside our control, may also require an increase in the allowance for loan losses.
Before making an investment decision, you should carefully consider the risks described below together with all of the other information included in this Form 10-K and our other filings with the SEC.
Before making an investment decision, you should carefully consider the risks described below together with all the other information included in this Form 10-K and our other filings with the SEC.
Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value.
Commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged against operating income, which we believe is appropriate to provide for probable losses in our loan portfolio.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged against operating income, that we believe is appropriate to provide for probable losses in our loan portfolio.
Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively 35 affect the borrower's ability to repay the loan and the value of the collateral securing the loan.
Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower's ability to repay the loan and the value of the collateral securing the loan.
Our non-performing assets adversely affect our net income in various ways: 39 • We do not record interest income on non-accrual loans or non-performing investment securities, except on a cash basis when the collectibility of the principal is not in doubt. • We must provide for probable loan losses through a current period charge to the provision for loan losses. • Non-interest expense increases when we must write down the value of properties in our OREO portfolio to reflect changing market values. • Non-interest income decreases when we must recognize other-than-temporary impairment on non-performing investment securities. • There are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance costs related to our OREO. • The resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activities.
Our non-performing assets adversely affect our net income in various ways: • We do not record interest income on non-accrual loans or non-performing investment securities, except on a cash basis when the collectibility of the principal is not in doubt. • We must provide for probable loan losses through a current period charge to the provision for loan losses. • Non-interest expense increases when we must write down the value of OREO properties, if any, to reflect changing market values. • Non-interest income decreases when we must recognize other-than-temporary impairment on non-performing investment securities. • There are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance costs related to OREO. • The resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activities.
Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions.
Increases in criminal activity levels and sophistication, advances in computer capabilities, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions.
In addition, legislation is currently pending in Congress that would allow banks and financial institutions to serve marijuana businesses in states where it is legal without any risk of federal prosecution. At September 30, 2022, approximately 1.3% of our total deposits and a portion of our service charges from deposits are from legal marijuana-related businesses.
In addition, legislation is currently pending in Congress that would allow banks and financial institutions to serve marijuana businesses in states where it is legal without any risk of federal prosecution. At September 30, 2023, approximately 1.3% of our total deposits and a portion of our service charges from deposits are from legal marijuana-related businesses.
Many of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because either we originated the loan with a relatively high combined loan-to-value ratio or because of the decline in home values in our market areas subsequent to when the loans were originated.
Many of our residential mortgage loans are secured by properties in which the borrowers have little or no equity because either we originated the loan with a relatively high combined loan-to-value ratio or because of the decline in home values in our market areas subsequent to when the loans were originated.
Item 1A. Risk Factors We assume and manage a certain degree of risk in order to conduct our business strategy.
Item 1A. Risk Factors We assume and manage a certain degree of risk in order to conduct our business.
Recessionary conditions or declines in the volume of single-family real estate and/or the sales prices as well as elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services.
Higher market interest rates, recessionary conditions or declines in the volume of single-family real estate and/or the sales prices as well as elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services.
Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operation. 43 Our security measures may not protect us from system failures or interruptions.
Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operation.
If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in our allowance for loan losses through the provision for losses on loans which is charged against income.
If our estimates are incorrect, the ALL may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in the ALL through the provision for losses on loans which is charged against income.
We have concluded that we have a concentration in commercial real estate lending because our balance in commercial real estate loans (including owner-occupied loans) at September 30, 2022 represents more than 300% of total capital.
We have concluded that we have a concentration in commercial real estate lending because our balance in commercial real estate loans (including owner-occupied loans) at September 30, 2023 represents more than 300% of total capital.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.
The determination of the appropriate level of the ALL inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.
Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington markets in which our loans and deposits are concentrated, negative operating results, or adverse regulatory action against us.
Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a downturn in the Washington markets in which our loans and deposits are concentrated, negative operating results, or adverse regulatory action against us.
If the integration process is not conducted successfully and with minimal adverse effect on the acquired business and its customers, we may not be able to realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business.
If the integration process is not conducted successfully and with minimal adverse effect on the acquired business and its customers, we may not be able to realize the anticipated economic benefits of the acquisition within the expected time frame, and we may lose customers or employees of the acquired business.
As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customers' information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation.
We are susceptible to fraudulent activity that may be committed against us or our customers which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customers' information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation.
As is the case with many financial institutions, our emphasis on increasing the development of core deposits, those deposits bearing no or a relatively low rate of interest with no stated maturity, has resulted in our having a significant amount of these deposits bearing a relatively low rate of interest and having a shorter duration than our assets.
As is the case with many financial institutions, our emphasis on increasing core deposits, those deposits bearing no or a relatively low rate of interest with no stated maturity, has resulted in our having a significant amount of these deposits which have a shorter duration than our assets.
The amount of this allowance is determined by our management through periodic comprehensive reviews and consideration of several factors, including, but not limited to: • an ongoing review of the quality, size and diversity of the loan portfolio; • evaluation of non-performing loans; • historical default and loss experience; • existing economic conditions and management's expectations of future events; • risk characteristics of the various classifications of loans; • the amount and quality of collateral, including guarantees, securing the loans; and • regulatory requirements and expectations.
The appropriate 39 level of the ALL is determined by management through periodic comprehensive reviews and consideration of several factors, including, but not limited to: • an ongoing review of the quality, size and diversity of the loan portfolio; • evaluation of non-performing loans; • historical default and loss experience; • existing economic conditions and management's expectations of future events; • risk characteristics of the various classifications of loans; • the amount and quality of collateral, including guarantees, securing the loans; and • regulatory requirements and expectations.
If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.
If additional borrowers become delinquent and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.
Further, a significant amount of our home equity lines of credit consist of second mortgage loans.
Further, a significant amount of our home equity lines of credit consists of second mortgage loans.
For these reasons, we may experience higher rates of delinquencies, default and losses on our residential loans. Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
For these reasons, we may experience higher rates of delinquencies, default and losses on our residential loans. Our allowance for loan losses may not be sufficient to absorb losses in our loan portfolio.
Any future changes in their program, our eligibility to participate in such program, the criteria for loans to be accepted or laws that significantly affect the activity of Freddie Mac could, in turn, materially adversely affect our results of operations if we could not find other purchasers.
Future changes in Freddie Mac's program, including our eligibility to participate, the criteria for loans to be accepted or laws that significantly affect the activity of Freddie Mac could materially adversely affect our results of operations if we could not find other purchasers.
At September 30, 2022, we had $76.31 million in certificates of deposit that mature within one year and $1.51 billion in non-interest bearing, NOW checking, savings and money market accounts. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment.
At September 30, 2023, we had $251.74 million in certificates of deposit that mature within one year and $1.26 billion in non-interest bearing, NOW checking, savings and money market accounts. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment.
We may experience decreases in the fair value of our loan servicing rights, which could reduce our earnings. Loan servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with servicing rights retained. At September 30, 2022, our loan servicing rights totaled $3.02 million.
We may experience decreases in the fair value of our loan servicing rights, which could reduce our earnings. 45 Loan servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with servicing rights retained. At September 30, 2023, our loan servicing rights totaled $2.12 million.
In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our Chief Executive Officer (who is retiring in January 2023) and certain other employees.
In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our Chief Executive Officer and certain other employees.
If the FOMC further increased the targeted federal funds rates, overall interest rates will likely continue to rise, which will positively impact our net interest income but may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S. economy.
If the FOMC further increases the targeted federal funds rate, overall interest rates will likely rise, which will negatively impact our net interest income and may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S. economy.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions. The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities.
Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. At September 30, 2022, we had $536.65 million of commercial real estate mortgage loans, representing 42.8% of our total loan portfolio.
Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. At September 30, 2023, we had $568.27 million of commercial real estate mortgage loans, representing 39.8% of our total loan portfolio.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Climate change and related legislative and regulatory initiatives may materially affect our business and results of operations.
Disruptions or failures in the physical infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition. 44 Risks Related to Accounting Matters We may experience future goodwill impairment, which could reduce our earnings.
Disruptions or failures in the physical infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.
Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.
Management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that the ALL may be sufficient to absorb losses.
As a result, these loans may experience a higher rate of default in a rising interest rate environment. Changes in interest rates also affect the value of our interest-earning assets and, in particular, our investment securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates.
As a result, these loans may experience a higher rate of default in a rising interest rate environment. Changes in interest rates also affect the value of our investment securities available for sale. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. At September 30, 2022, we had $126.04 million, or 10.1%, of total loans in commercial business loans.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. At September 30, 2023, we had $136.3 million, or 9.6%, of total loans in commercial business loans.
We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business.
While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business.
Any adverse change in this FinCEN guidance, any new regulations or legislation, any change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a negative impact on our non-interest income, as well as the cost of our operations, increasing our cost of regulatory compliance and of doing business and/or otherwise affect us, which may materially affect our profitability. 42 Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.
Any adverse change in this FinCEN guidance, any new regulations or legislation, any change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a negative impact on our non-interest income, as well as the cost of our operations, increasing our cost of regulatory compliance and of doing business and/or otherwise affect us, which may materially affect our profitability.
In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different from those of management.
Bank regulatory agencies also periodically review our ALL and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different from those of management. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to replenish the ALL.
Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans or other sources could have a substantial negative effect on our liquidity.
Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans or other sources could have a substantial negative effect on our liquidity.
General economic conditions, including inflation, unemployment and money supply fluctuations, also may adversely affect our profitability. Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade, and it is not known how changes in tariffs being imposed on international trade may also affect these businesses.
General economic conditions, including inflation, unemployment and money supply fluctuations, also may adversely affect our profitability. Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade. Changes in agreements or relationships between the United States and other countries may also affect these businesses.
Since March 2022, in response to inflation, the Federal Open 40 Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 300 basis, including 150 basis points during the third calendar quarter of 2022, to a range of 3.00% to 3.25% as of September 30, 2022.
Since March 2022, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, including 225 basis points during the 2023 fiscal year, to a range of 5.25% to 5.50% as of September 30, 2023.
We performed our test for goodwill impairment for fiscal year 2022, and the test concluded that recorded goodwill was not impaired. Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price.
Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price. Our evaluation of the fair value of goodwill involves a substantial amount of judgment.
While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers.
Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do.
The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.
The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.
In addition, our success has been and continues to be highly dependent upon the services of our directors, and we may not be able to identify and attract suitable candidates to replace such directors. We will be required to transition from the use of the LIBOR interest rate index in the future.
In addition, our success has been and continues to be highly dependent upon the services of our directors, and we may not be able to identify and attract suitable candidates to replace such directors. Item 1B. Unresolved Staff Comments Not applicable.
If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to replenish the allowance for loan losses. Any additional provisions will result in a decrease in net income and possibly capital, and may have a material adverse effect on our financial condition and results of operations.
Any additional provisions will result in a decrease in net income and possibly capital, and may have a material adverse effect on our financial condition and results of operations.
Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data.
Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. If we are able to raise capital, it may not be on terms that are acceptable to us.
There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets.
Although our business strategy emphasizes organic expansion, from time to time in the ordinary course of business, we engage in preliminary discussions with potential acquisition targets. There can be no assurance that we will successfully identify suitable acquisition candidates, complete acquisitions or successfully integrate acquired operations into our existing operations or expand into new markets.
Recently, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.
Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.
At September 30, 2022, $211.30 million, or 16.9%, of our total loan portfolio was secured by one- to four-family mortgage loans and home equity loans. This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict.
This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict.
If we are able to raise capital, it may not be on terms that are acceptable to us. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all.
Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.
A material increase in our non-performing construction or land loans could have a material adverse effect on our financial condition and results of operation. Our emphasis on commercial real estate lending may expose us to increased lending risks. Our current business strategy includes an emphasis on commercial real estate lending.
Although as of September 30, 2023, all construction and land loans were performing according to their terms, a significant rise in non-performing construction or land loans could materially impact our financial status and operations. Our emphasis on commercial real estate lending may expose us to increased lending risks. Our current business strategy includes an emphasis on commercial real estate lending.
Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations.
Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.
The Board of Directors oversees the risk management process, including the risk of cybersecurity, and engages with management on cybersecurity issues. Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
Risks Related to our Lending Activities Our real estate construction and land loans expose us to significant risks. We make real estate construction loans to individuals and builders, primarily for the construction of residential properties. We originate these loans whether or not the collateral property underlying the loan is under contract for sale.
Risks Related to our Lending Activities Our real estate construction and land loans expose us to significant risks. We specialize in real estate construction loans for individuals and builders, mainly focusing on residential property development. Our loans are initiated regardless of whether the property used as collateral is under a sales contract.
As part of our general growth strategy, on October 1, 2018, we completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets.
Risk Related to our Business Strategy We may be adversely affected by risks associated with completed and potential acquisitions. 40 As part of our general growth strategy, on October 1, 2018, we completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington.
We rely on other companies to provide key components of our business infrastructure. We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements.
Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements.
The spread of the coronavirus also caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. Given the ongoing dynamic nature of variants of COVID-19, it is difficult to predict the full impact of the COVID-19 pandemic outbreak on our business.
Given the ongoing dynamic nature of variants of COVID-19, it is difficult to predict the full impact of the COVID-19 pandemic outbreak on our business.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity” of this Form 10-K. Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high. 46 We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.
Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk management. We may incur losses on our securities portfolio as a result of changes in interest rates. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.
If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock.
In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others.
These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a compliance program to identify, measure, assess and report on our adherence to applicable laws, policies and procedures.
We also make land loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to use for recreational purposes. At September 30, 2022, land loans totaled $26.85 million, or 2.1% of our total loan portfolio.
We also offer land loans for land acquisition, which can be used for building or recreational purposes. As of September 30, 2023, land loans accounted for $26.73 million, or 1.9% of our total loan portfolio.
While the Company selects third-party vendors carefully, it does not control their actions.
In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While the Company selects third-party vendors carefully, it does not control their actions.
Significant charge-offs to our OREO may have an adverse effect on our financial condition and results of operations. Other Risks Related to Our Business Ineffective liquidity management could adversely affect our financial results and condition. Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands.
Ineffective liquidity management could adversely affect our financial results and condition. Liquidity is essential to our business. We rely on several sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio.
If our non-performing assets increase, our earnings will be adversely affected. At September 30, 2022, our non-performing assets (which consist of non-accruing loans, accruing loans 90 days or more past due, non-accrual investment securities, and OREO and other repossessed assets) were $2.17 million, or 0.12% of total assets.
At September 30, 2023, our non-performing assets (which consisted solely of non-accruing loans, non-accrual investment securities, and OREO) were $1.60 million, or 0.09% of total assets.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeAt September 30, 2022, the Bank operated 24 proprietary automated teller machines ("ATMs") that are part of a nationwide cash exchange network. Leases The Company adopted Accounting Standards Codification ("ASC") 842 ("ASC 842") on October 1, 2019 and began recording operating lease liabilities and operating lease right-of-use ("ROU") assets in the consolidated balance sheets.
Biggest changeThe lease terms for our leased branches are not individually material. In addition, the Bank operated 24 proprietary automated teller machines ("ATMs") that are part of a nationwide cash exchange network as of September 30, 2023.
Item 2. Properties At September 30, 2022, the Bank operated 23 full service facilities. The following table sets forth certain information regarding the Bank’s offices, all of which are owned, except for the Tacoma office and the Lacey office at 4530 Lacey Blvd SE, which are leased.
Item 2. Properties At September 30, 2023, the Company maintained its headquarters in Hoquiam, Washington, along with 23 full-service bank branches and four administrative offices with an aggregate net book value of $18.51 million. The Company's owns all properties except for one administrative office, the Tacoma branch and the Downtown Lacey branch, which are leased.
For additional information regarding operating lease liabilities and operating lease ROU assets, see Note 9 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. 48
In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are suitable for the Company's needs. For additional information see "Note 5 - Premises and Equipment and Note 9 - Leases of the Notes to Consolidated Financial Statements contained in Item 8 of this report".
Removed
Location Year Opened Approximate Square Footage Deposits at September 30, 2022 (In thousands) Main Office: 624 Simpson Avenue Hoquiam, Washington 98550 1966 7,700 $ 92,777 Branch Offices: 300 N.
Removed
Boone Street Aberdeen, Washington 98520 1974 3,400 53,780 . 201Main Street South Montesano, Washington 98563 2004 3,200 55,876 361 Damon Road Ocean Shores, Washington 98569 1977 2,100 52,177 2418 Meridian Avenue East Edgewood, Washington 98371 1980 2,400 79,351 202 Auburn Way South Auburn, Washington 98002 1994 4,200 43,449 12814 Meridian Avenue East (South Hill) Puyallup, Washington 98373 1996 4,200 55,608 (table continued on the following page) 47 1201 Marvin Road, N.E.
Removed
Lacey, Washington 98516 1997 4,400 40,265 101 Yelm Avenue W. Yelm, Washington 98597 1999 3,400 48,862 20464 Viking Way NW Poulsbo, Washington 98370 1999 1,800 37,427 2419 224 th Street E.
Removed
Spanaway, Washington 98387 1999 3,900 70,894 801 Trosper Road SW Tumwater, Washington 98512 2001 3,300 60,134 7805 South Hosmer Street Tacoma, Washington 98408 2001 5,000 139,732 2401 Bucklin Hill Road Silverdale, Washington 98383 2003 4,000 60,949 423 Washington Street SE Olympia, Washington 98501 2003 3,000 79,854 3105 Judson Street Gig Harbor, Washington 98335 2004 2,700 55,301 117 N.
Removed
Broadway Aberdeen, Washington 98520 2004 3,700 85,276 313 West Waldrip Street Elma, Washington 98541 2004 5,900 87,912 101 2 nd Street Toledo, Washington 98591 2004 1,800 58,921 209 NE 1 st Street Winlock, Washington 98586 2004 3,400 33,573 714 W.
Removed
Main Street Chehalis, Washington 98532 2009 4,600 63,164 2850 Harrison Ave NW Olympia, Washington 98502 2018 7,755 106,244 4530 Lacey Blvd SE Lacey, Washington 98503 2018 3,700 170,650 Loan Center/Data Center: 120 Lincoln Street Hoquiam, Washington 98550 2003 6,000 N/A Administrative Offices: 305 8th Street Hoquiam, Washington 98550 2004 4,100 N/A Management believes that all facilities are appropriately insured and are adequately equipped for carrying on the business of the Bank.
Removed
The Company has operating leases for two retail bank branch offices. The ROU assets totaled $2.89 million at October 1, 2019. The Company's leases have remaining lease terms of four to nine years, some of which include options to extend the leases for up to five years.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeThe Company is not currently a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company. Item 4. Mine Safety Disclosures Not applicable. PART II
Biggest changeThe Company is not currently a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company. 47 Item 4. Mine Safety Disclosures Not applicable. PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe following table sets forth the Company's repurchases of its outstanding Common Stock during the fourth quarter of the year ended September 30, 2022: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans Maximum Number of Shares that May Yet Be Purchased Under the Plans July 1, 2022 - July 31, 2022 — $ — — 263,491 August 1, 2022 - August 31, 2022 9,906 26.52 9,906 253,585 September 1, 2022 - September 30, 2022 24,540 27.26 24,540 229,045 Total 34,446 $ 27.04 34,446 229,045 49 Five-Year Stock Performance Graph The following graph compares the cumulative total shareholder return on our common stock with the cumulative total return on the Nasdaq Composite Index and with the S&P 600 Thrifts & Mortgage Finance Index, peer group indices.
Biggest changeStock Repurchases The following table sets forth the Company's repurchases of its outstanding Common Stock during the fourth quarter of the year ended September 30, 2023: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans Maximum Number of Shares that May Yet Be Purchased Under the Plans (1) July 1, 2023 - July 31, 2023 — $ — — 404,708 August 1, 2023 - August 31, 2023 — — — 404,708 September 1, 2023 - September 30, 2023 30,566 28.74 30,566 374,142 Total 30,566 $ 28.74 30,566 374,142 (1) On July 25, 2023, the Company announced a new stock repurchase program to purchase 404,708 shares of the Company's common stock.
Our cash dividend payout policy is reviewed regularly by management and the Board of Directors. Our Board of Directors has declared quarterly cash dividends on our common stock for 40 consecutive quarters.
Our cash dividend payout policy is reviewed regularly by management and the Board of Directors. Our Board of Directors has declared quarterly cash dividends on our common stock for 44 consecutive quarters.
Total return assumes the reinvestment of all dividends and that the value of the Company’s Common Stock and each index was $100 on September 30, 2017.
Total 48 return assumes the reinvestment of all dividends and that the value of the Company’s Common Stock and each index was $100 on September 30, 2018.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is traded on the Nasdaq Global Market under the symbol “TSBK.” As of December 2, 2022, there were 8,240,087 shares of common stock issued and approximately 414 shareholders of record.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is traded on the Nasdaq Global Market under the symbol “TSBK.” As of December 4, 2023, there were approximately 400 shareholders of record of the Company's common stock.
The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve. The Company has had various stock repurchase programs since January 1998.
The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve. Equity Compensation Plan Information.
Our future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by banking regulations. Stock Repurchases The Company is subject to certain restrictions on its ability to repurchase its common stock.
Our future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by banking regulations.
Year Ended Index 9/30/2017 9/30/2018 9/30/2019 9/30/2020 9/30/2021 9/30/2022 Timberland Bancorp, Inc. $ 100.00 $ 101.63 $ 91.99 $ 62.68 $ 104.51 $ 103.28 NASDAQ Composite Index 100.00 125.17 125.82 177.36 231.03 170.38 S&P 600 Thrifts & Mortgage Finance Index 100.00 110.53 115.59 82.82 145.98 121.26 * Source: S&P Global Market Intelligence For additional information, see Part III, Item 12 of this Form 10-K for information regarding the Company's Equity Compensation Plans, which is incorporated into this Item 5 by reference.
Year Ended Index 9/30/2018 9/30/2019 9/30/2020 9/30/2021 9/30/2022 9/30/2023 Timberland Bancorp, Inc. $ 100.00 $ 90.52 $ 61.68 $ 102.84 $ 101.63 $ 103.04 NASDAQ Composite Index 100.00 100.52 141.70 184.58 136.12 171.65 S&P 600 Thrifts & Mortgage Finance Index 100.00 93.33 64.16 122.19 110.84 90.46 * Source: S&P Global Market Intelligence For additional information, see Part III, Item 12 of this Form 10-K for information regarding the Company's Equity Compensation Plans, which is incorporated into this Item 5 by reference.
Cumulatively, since January 1998, the Company has repurchased 8,181,588 shares at an average price of $9.56 per share.
This marked the Company's 19th stock repurchase plan. Cumulatively, since January 1998, the Company has repurchased 8,366,987 shares of its common stock at an average price of $9.95 per share. The new stock repurchase program replaced the Company's existing repurchase plan which had 74,212 shares available to be repurchased prior to termination.
Removed
On February 24, 2021, the Company announced a plan to repurchase 415,970 shares of the Company's common stock. This marked the Company's 18th stock repurchase plan. As of September 30, 2022, the Company had repurchased 186,925 shares under this plan at an average price of $27.03 per share.
Added
The new repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions based upon market conditions and available liquidity.
Added
The Company is subject to certain restrictions on its ability to repurchase it common stock.
Added
The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is incorporated herein by reference.
Added
Five-Year Stock Performance Graph The following graph compares the cumulative total shareholder return on our common stock with the cumulative total return on the Nasdaq Composite Index and with the S&P 600 Thrifts & Mortgage Finance Index, peer group indices.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeManagement’s Discussion and Analysis of Financial Condition and Results of Operations 50 General 51 Overview 54 Operating Strategy 53 Selected Financial Data 53 Critical Accounting Policies and Estimates 54 Market Risk and Asset and Liability Management 57 Comparison of Financial Condition at September 30, 2022 and September 30, 2021 58 Comparison of Operating Results for the Years Ended September 30, 2022 and 2021 61 Average Balances, Interest and Average Yields/Cost 63 Rate/Volume Analysis 65 Liquidity and Capital Resources 65 New Accounting Pronouncements 67 Item 7A.
Biggest changeManagement’s Discussion and Analysis of Financial Condition and Results of Operations 49 General 50 Overview 50 Operating Strategy 51 Selected Financial Data 52 Critical Accounting Policies and Estimates 54 Market Risk and Asset and Liability Management 57 Comparison of Financial Condition at September 30, 2023 and September 30, 2022 58 Comparison of Operating Results for the Years Ended September 30, 2023 and 2022 61 Average Balances, Interest and Average Yields/Cost 63 Rate/Volume Analysis 65 Liquidity and Capital Resources 65 New Accounting Pronouncements 67 Item 7A.
Quantitative and Qualitative Disclosures About Market Risk 67 Item 8. Financial Statements and Supplementary Data 67 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 126 Item 9A. Controls and Procedures 126 Item 9B. Other Information 128 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 128 PART III. Item 10.
Quantitative and Qualitative Disclosures About Market Risk 67 Item 8. Financial Statements and Supplementary Data 67 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 124 Item 9A. Controls and Procedures 125 Item 9B. Other Information 125 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 125 PART III. Item 10.
Directors, Executive Officers and Corporate Governance 128 Item 11. Executive Compensation 128 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 128 Item 13. Certain Relationships and Related Transactions, and Director Independence 129 Item 14. Principal Accounting Fees and Services 129 PART IV. Item 15. Exhibits and Financial Statement Schedules 130
Directors, Executive Officers and Corporate Governance 125 Item 11. Executive Compensation 126 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 126 Item 13. Certain Relationships and Related Transactions, and Director Independence 127 Item 14. Principal Accountant Fees and Services 127 PART IV. Item 15. Exhibits and Financial Statement Schedules 128

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeAt September 30, 2022 2021 2020 2019 2 2018 (In thousands) SELECTED FINANCIAL CONDITION DATA: Total assets $ 1,860,508 $ 1,792,180 $ 1,565,978 $ 1,247,132 $ 1,018,290 Loans receivable, net 1,132,426 968,454 1,013,875 886,662 725,391 Investment securities held-to-maturity 266,608 69,102 27,890 31,102 12,810 Investment securities available-for-sale 41,415 63,176 57,907 22,532 1,154 FHLB stock 2,194 2,103 1,922 1,437 1,190 Other investments 3,000 3,000 3,000 3,000 3,000 Cash and due from financial institutions and interest-bearing deposits in banks 316,755 580,196 314,452 143,015 148,864 Certificate of deposits held for investments 22,894 28,482 65,545 78,346 63,290 BOLI 22,806 22,193 21,593 21,005 19,813 OREO and other repossessed assets — 157 1,050 1,683 1,913 Deposits 1,632,176 1,570,555 1,358,406 1,067,227 889,506 FHLB borrowings — 5,000 10,000 — — Shareholders' equity 218,569 206,899 187,630 171,067 124,657 Year Ended September 30, 2022 2021 2020 2019 2018 (In thousands, except per share data) SELECTED OPERATING DATA: Interest and dividend income $ 58,508 $ 54,962 $ 55,583 $ 55,725 $ 41,833 Interest expense 2,674 3,104 4,701 4,565 2,778 Net interest income 55,834 51,858 50,882 51,160 39,055 Provision for loan losses 270 — 3,700 — — Net interest income after provision for loan losses 55,564 51,858 47,182 51,160 39,055 Non-interest income 12,624 17,161 17,188 14,341 12,544 Non-interest expense 38,626 34,591 34,063 35,580 29,177 Income before income taxes 29,562 34,428 30,307 29,921 22,422 Provision for federal income taxes 5,962 6,845 6,038 5,901 5,701 Net income $ 23,600 $ 27,583 $ 24,269 $ 24,020 $ 16,721 Net income per common share: Basic $ 2.84 $ 3.31 $ 2.91 $ 2.89 $ 2.28 Diluted $ 2.82 $ 3.27 $ 2.88 $ 2.84 $ 2.22 Dividends per common share $ 0.87 $ 1.03 $ 0.85 $ 0.78 $ 0.60 Dividend payout ratio (1) 30.64 % 31.14 % 29.19 % 27.04 % 26.50 % ______________ (1) Cash dividends to common shareholders divided by net income to common shareholders. 53 At September 30, 2022 2021 2020 2019 2018 OTHER DATA: Number of real estate loans outstanding 2,332 2,290 2,508 2,766 2,550 Deposit accounts 56,380 58,454 58,566 59,547 55,441 Full-service offices 23 24 24 24 22 At or For the Year Ended September 30, 2022 2021 2020 2019 2018 KEY FINANCIAL RATIOS: Performance Ratios: Return on average assets (1) 1.27 % 1.64 % 1.75 % 1.96 % 1.70 % Return on average equity (2) 11.14 13.98 13.59 14.91 14.27 Interest rate spread (3) 3.07 3.13 3.70 4.31 4.10 Net interest margin (4) 3.16 3.25 3.90 4.50 4.23 Average interest-earning assets to average interest-bearing liabilities 160.67 162.08 155.98 148.15 144.17 Non-interest expense as a percent of average total assets 2.09 2.06 2.45 2.91 2.96 Efficiency ratio (5) 56.42 50.12 50.04 54.32 56.55 Asset Quality Ratios: Non-accrual and 90 days or more past due loans as a percent of total loans receivable, net 0.18 % 0.29 % 0.28 % 0.34 % 0.18 % Non-performing assets as a percent of total assets (6) 0.12 0.18 0.27 0.40 0.36 Allowance for loan losses as a percent of total loans receivable, net (7) 1.20 1.37 1.31 1.08 1.30 Allowance for loan losses as a percent of non-performing loans (8) 665.52 471.93 461.76 319.49 723.61 Net charge-offs (recoveries) to average outstanding loans 0.00 0.00 0.00 (0.02) 0.00 Capital Ratios: Total equity-to-assets ratio 11.75 % 11.54 % 11.98 % 13.71 % 12.24 % Average equity to average assets 11.43 11.74 12.85 13.17 11.90 __________________ (1) Net income divided by average total assets.
Biggest changeAt September 30, 2023 2022 2021 2020 2019 (In thousands) SELECTED FINANCIAL CONDITION DATA: Total assets $ 1,839,905 $ 1,860,508 $ 1,792,180 $ 1,565,978 $ 1,247,132 Loans receivable, net 1,302,305 1,132,426 968,454 1,013,875 886,662 Investment securities held-to-maturity 270,218 266,608 69,102 27,890 31,102 Investment securities available-for-sale 41,771 41,415 63,176 57,907 22,532 FHLB stock 3,602 2,194 2,103 1,922 1,437 Other investments 3,000 3,000 3,000 3,000 3,000 Cash and due from financial institutions and interest-bearing deposits in banks 128,721 316,755 580,196 314,452 143,015 Certificate of deposits held for investments 15,188 22,894 28,482 65,545 78,346 BOLI 22,966 22,806 22,193 21,593 21,005 OREO and other repossessed assets — — 157 1,050 1,683 Deposits 1,560,935 1,632,176 1,570,555 1,358,406 1,067,227 FHLB borrowings 35,000 — 5,000 10,000 — Shareholders' equity 233,073 218,569 206,899 187,630 171,067 Year Ended September 30, 2023 2022 2021 2020 2019 (In thousands, except per share data) SELECTED OPERATING DATA: Interest and dividend income $ 79,951 $ 58,508 $ 54,962 $ 55,583 $ 55,725 Interest expense 11,592 2,674 3,104 4,701 4,565 Net interest income 68,359 55,834 51,858 50,882 51,160 Provision for loan losses 2,132 270 — 3,700 — Net interest income after provision for loan losses 66,227 55,564 51,858 47,182 51,160 Non-interest income 11,140 12,624 17,161 17,188 14,341 Non-interest expense 43,373 38,626 34,591 34,063 35,580 Income before income taxes 33,994 29,562 34,428 30,307 29,921 Provision for federal income taxes 6,876 5,962 6,845 6,038 5,901 Net income $ 27,118 $ 23,600 $ 27,583 $ 24,269 $ 24,020 Net income per common share: Basic $ 3.32 $ 2.84 $ 3.31 $ 2.91 $ 2.89 Diluted $ 3.29 $ 2.82 $ 3.27 $ 2.88 $ 2.84 Dividends per common share $ 1.01 $ 0.87 $ 1.03 $ 0.85 $ 0.78 Dividend payout ratio (1) 30.48 % 30.64 % 31.14 % 29.19 % 27.04 % ______________ (1) Cash dividends to common shareholders divided by net income to common shareholders. 52 At September 30, 2023 2022 2021 2020 2019 OTHER DATA: Number of real estate loans outstanding 2,537 2,332 2,290 2,508 2,766 Deposit accounts 56,675 56,380 58,454 58,566 56,380 Full-service offices 23 23 24 24 24 At or For the Year Ended September 30, 2023 2022 2021 2020 2019 KEY FINANCIAL RATIOS: Performance Ratios: Return on average assets (1) 1.50 % 1.27 % 1.64 % 1.75 % 1.96 % Return on average equity (2) 12.01 11.14 13.98 13.59 14.91 Interest rate spread (3) 3.56 3.07 3.13 3.70 4.31 Net interest margin (4) 3.95 3.16 3.25 3.90 4.50 Average interest-earning assets to average interest-bearing liabilities 158.36 160.67 162.08 155.98 148.15 Non-interest expense as a percent of average total assets 2.39 2.09 2.06 2.45 2.91 Efficiency ratio (5) 54.56 56.42 50.12 50.04 54.32 Asset Quality Ratios: Non-accrual and 90 days or more past due loans as a percent of total loans receivable, net 0.12 % 0.18 % 0.29 % 0.28 % 0.34 % Non-performing assets as a percent of total assets (6) 0.09 0.12 0.18 0.27 0.40 Allowance for loan losses as a percent of total loans receivable, net (7) 1.20 1.20 1.37 1.31 1.08 Allowance for loan losses as a percent of non-performing loans (8) 1,044.72 665.52 471.93 461.76 319.49 Net charge-offs (recoveries) to average outstanding loans 0.00 0.00 0.00 0.00 (0.02) Capital Ratios: Total equity-to-assets ratio 12.67 % 11.75 % 11.54 % 11.98 % 13.71 % Average equity to average assets 12.46 11.43 11.74 12.85 13.17 __________________ (1) Net income divided by average total assets.
In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no 62 assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate.
In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate.
The level of general reserves is based on an analysis of potential exposures 55 existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the consolidated financial statements are prepared.
The level of general reserves is based on an analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the consolidated financial statements are prepared.
Under the acquisition method, the acquiring entity in a business combination recognizes all of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values.
Under the acquisition method, the acquiring entity in a business combination recognizes all the identifiable assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values.
Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset.
Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag changes in market rates. Additionally, certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset.
Loss factors are based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking organizations, which in our judgment affect the collectability of the loan portfolio as of the evaluation date.
Loss factors are based on our historical loss experience adjusted for significant environmental considerations, including the experience of other banking organizations, which in our judgment affect the collectability of the loan portfolio as of the 54 evaluation date.
Subject to market conditions, the Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit 65 withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible. Liquidity management is both a short and long-term responsibility of the Bank's management.
Subject to market conditions, the 64 Bank expects to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible. Liquidity management is both a short and long-term responsibility of the Bank's management.
Such yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented.
Yields and costs for the periods indicated are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented.
The information contained in this 50 section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K. Overview Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank.
The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K. Overview 49 Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank.
Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at both September 30, 2022 and 2021. This investment is utilized to help satisfy compliance with the Company's Community Reinvestment Act ("CRA") investment test requirements.
Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at both September 30, 2023 and 2022. This investment is utilized to help satisfy compliance with the Company's Community Reinvestment Act ("CRA") investment test requirements.
For the year ended September 30, 2022, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, escrow fees and other operating income.
For the year ended September 30, 2023, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the cash surrender value of BOLI, escrow fees and other operating income.
Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number and balances of loan and deposit accounts. 51 Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number and balances of loan and deposit accounts. 50 Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Goodwill: The recorded amount of goodwill remained unchanged at $15.13 million at both September 30, 2022 and September 30, 2021. The Company performed its annual review of goodwill during the quarter ended June 30, 2022 and determined that there was no impairment.
Goodwill: The recorded amount of goodwill remained unchanged at $15.13 million at both September 30, 2023 and September 30, 2022. The Company performed its annual review of goodwill during the quarter ended June 30, 2023 and determined that there was no impairment.
Sharp increases or decreases in interest rates may adversely affect the Bank's earnings. Management of the Bank monitors the Bank's interest rate sensitivity through the use of a model provided by NXTsoft Data Analytics, LLC (“NXTsoft”), a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry.
Sharp increases or decreases in interest rates may adversely affect the Bank's earnings. Management of the Bank monitors the Bank's interest rate sensitivity using a model provided by NXTsoft Data Analytics, LLC (“NXTsoft”), a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry.
(4) Net interest income divided by total average interest-earning assets. 64 Rate/Volume Analysis The following table sets forth the effects of changing rates and volumes on net interest income on the Company.
(4) Net interest income divided by total average interest-earning assets. 63 Rate/Volume Analysis The following table sets forth the effects of changing rates and volumes on net interest income on the Company.
Based upon the modeling described above, the Bank's asset and liability structure generally results in increases in net interest income and EVE in a rising interest rate scenario and decreases in net interest income and EVE in a declining interest rate scenario.
Based upon the modeling described above, the Bank's asset and liability structure generally results in a neutral net interest income and a EVE in a rising interest rate scenario and decreases in net interest income and EVE in a declining interest rate scenario.
The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the net discount declines. The remaining net discount on these acquired loans was $267,000 at September 30, 2022.
The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the net discount declines. The remaining net discount on these acquired loans was $192,000 at September 30, 2023.
Non-interest expense in certain periods are reduced by gains on the sale of premises and equipment and by gains on the sale of OREO.
Non-interest expense in certain periods is reduced by gains on the sale of premises and equipment and by gains on the sale of OREO.
Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any. Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any.
Non-interest income is also increased by a gain on sale and net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any. Non-interest income is also decreased by valuation allowances on loan servicing rights and increased by recoveries of valuation allowances on loan servicing rights, if any.
Among the material estimates required to establish the allowance for loan losses are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired loans; and determination of loss factors to be applied to the various elements of the portfolio.
Among the material estimates required to establish the allowance for loan losses are: overall economic conditions; value of collateral; strength of guarantors; loss exposure at default; the amount and timing of future cash flows on impaired loans; and determination of loss factors to be applied to the various elements of the portfolio. All these estimates are susceptible to significant change.
Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, amortization of CDI, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunications expenses, deposit operation expenses and other non-interest expenses.
Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, amortization of CDI, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, technology and communications expenses, deposit operation expenses and other non-interest expenses.
Financial Statements and Supplementary Data." Average Balances, Interest and Average Yields/Cost The earnings of the Company depend largely on the spread between the yield on interest-earning assets and the cost of interest-bearing liabilities, as well as the relative amount of the Company's interest-earning assets and interest- bearing liability portfolios. 63 The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs.
Average Balances, Interest and Average Yields/Cost The earnings of the Company depend largely on the spread between the yield on interest-earning assets and the cost of interest-bearing liabilities, as well as the relative amount of the Company's interest-earning assets and interest- bearing liability portfolios. 62 The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs.
Impaired loans are subject to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan. The aggregate principal impairment amount determined at September 30, 2022 was $127,000 compared to $247,000 at September 30, 2021.
Impaired loans are subject to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan. The aggregate principal impairment amount determined at September 30, 2023 was $123,000 compared to $127,000 at September 30, 2022.
All of these estimates are susceptible to significant change. We have established systematic methodologies for the determination of the adequacy of our allowance for loan losses. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans.
We have established systematic methodologies for the determination of the adequacy of our allowance for loan losses. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans.
The Company generally sells longer-term fixed-rate residential loans and the guaranteed portion of SBA commercial business loans for asset-liability management purposes and to generate non-interest income. The Company sold $73.50 million in loans during the year ended September 30, 2022 compared to $150.20 million for the year ended September 30, 2021.
The Company generally sells longer-term fixed-rate residential loans and the guaranteed portion of SBA commercial business loans for asset-liability management purposes and to generate non-interest income. The Company sold $11.54 million in loans during the year ended September 30, 2023 compared to $73.50 million for the year ended September 30, 2022.
Although the Company plans to continue to place emphasis on certain 52 lending products, such as commercial real estate loans, construction loans, and commercial business loans, the Company expects to continue to manage its credit exposures through the use of experienced bankers and an overall conservative approach to lending.
Although the Company plans to continue to place emphasis on certain lending products, such as commercial real estate loans, construction loans, and commercial business loans, the Company expects to continue to manage its credit exposures using experienced bankers and an overall conservative approach to lending.
Includes loans held for sale and interest earned on loans held for sale. Amortized net deferred loan fees, late fees, extension fees and prepayment penalties (year ended September 30, 2022 - $3,600; year ended September 30, 2021 - $6,859 and year ended September 30, 2020 - $3,196) are included with interest and dividends.
Includes loans held for sale and interest earned on loans held for sale. Amortized net deferred loan fees, late fees, extension fees and prepayment penalties (year ended September 30, 2023 - $1,373; year ended September 30, 2022 - $3,600 and year ended September 30, 2021 - $6,859) are included with interest and dividends.
In addition, shareholder’s equity was adversely impacted by unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in a $717,000 accumulated other comprehensive loss, net of tax at September 30, 2022. For additional information on shareholders' equity, see the Consolidated Statements of Shareholders' Equity contained in "Item 8.
In addition, shareholder’s equity was adversely impacted by unrealized losses on available for sale securities reflecting the increase in market interest rates during the year, resulting in a $1.08 million accumulated other comprehensive loss, net of tax at September 30, 2023. For additional information on shareholders' equity, see the Consolidated Statements of Shareholders' Equity contained in "Item 8.
The $1.00 million balance of SBA PPP loans was omitted from the Company's normal allowance for loan losses calculation at September 30, 2022, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.
The $466,000 balance of SBA PPP loans was omitted from the Company's allowance for loan losses calculation at September 30, 2023, as these loans are fully guaranteed by the SBA, and management expects that most PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven.
The Company recorded a provision for loan losses of $270,000 for the year ended September 30, 2022, primarily due to increased loan portfolio growth.
The Company recorded a provision for loan losses of $2.1 million for the year ended September 30, 2023, primarily due to increased loan portfolio growth. The Company recorded a provision for loan losses of $270,000 for the year ended September 30, 2022, primarily due to increased loan portfolio growth.
Investment securities purchased during the years ended September 30, 2022, 2021 and 2020 totaled $208.78 million, $71.75 million and $51.47 million, respectively. The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments.
Investment securities purchased during the years ended September 30, 2023, 2022 and 2021 totaled $32.60 million, $208.78 million and $71.75 million, respectively. The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments.
As of September 30, 2022, management believes that there had been no subsequent events or changes in circumstances that would indicate a potential impairment of goodwill. For additional information on goodwill, see Note 7 to the Consolidated Financial Statements contained in "Item 8.
As of September 30, 2023, management believes that there had been no subsequent events or changes in circumstances that would indicate a potential impairment of goodwill. For additional information on goodwill, see "Note 7-Goodwill and CDI" of the Consolidated Financial Statements contained in Item 8 of this report.
The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, 2022, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 32.1%.
The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, 2023, the Bank's regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 15.3%.
A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowing economic growth, and any governmental or societal responses to the COVID-19 pandemic, among other factors, could result in a material increase in the allowance for loan losses which would adversely affect the Company's financial condition and results of operations.
A further decline in national and local economic conditions, as a result of the effects of inflation, a potential recession or slowing economic growth, among other factors, could result in a material increase in the allowance for loan losses which would adversely affect the Company's financial condition and results of operations.
The accretion of the net fair value discount on acquired loans increased the average yield on loans by two basis points for the year ended September 30, 2022 and three basis points for the year ended September 30, 2021.
The accretion of the net fair value discount on acquired loans increased the average yield on loans by one basis point for the year ended September 30, 2023 and two basis points for the year ended September 30, 2022.
Accretion of the fair value discount on loans acquired in the South Sound Acquisition for the years ended September 30, 2022, 2021 and 2020 of $182, $340 and $597, respectively, is included with interest and dividends. (2) Average balances include loans and investment securities on non-accrual status. (3) Includes FHLB borrowings with original maturities of one year or greater.
Accretion of the fair value discount on loans for the years ended September 30, 2023, 2022 and 2021 of $75, $182 and $340 respectively, is included with interest and dividends. (2) Average balances include loans and investment securities on non-accrual status. (3) Includes FHLB borrowings with original maturities of one year or greater.
The Company had net charge-offs of $36,000 for the year ended September 30, 2022 and net recoveries of $55,000 for the year ended September 30, 2021. The net charge-offs (recoveries) to average outstanding loans ratio was 0.0% for the year ended September 30, 2022 and 2021.
The Company had net charge-offs of $18,000 for the year ended September 30, 2023 and net charge-offs of $36,000 for the year ended September 30, 2022. The net charge-offs (recoveries) to average outstanding loans was 0.0% for the year ended September 30, 2023 and 2022.
Business - Deposit Activities and Other Sources of Funds" and Note 10 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral.
Business - Deposit Activities and Other Sources of Funds" and N"ote 10-Deposits" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report. FHLB Borrowings: The Company has short- and long-term borrowing lines with the FHLB with total credit available on the lines equal to 45% of the Bank's total assets, limited by available collateral.
Based on the comprehensive methodology, management believes that the allowance for loan losses of $13.70 million at September 30, 2022 (1.20% of loans receivable and 665.52% of non-performing loans) was adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date.
Based on the comprehensive methodology, management believes that the allowance for loan losses of $15.82 million at September 30, 2023 (1.20% of loans receivable and 1044.72% of non-performing loans) was adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date.
During the year ended September 30, 2022, the accretion of the purchase accounting fair value discount on loans acquired in the South Sound Acquisition increased interest income on loans by $182,000 compared to $340,000 for the year ended September 30, 2021.
During the year ended September 30, 2023, the accretion of the purchase accounting fair value discount on loans acquired increased interest income on loans by $75,000 compared to $182,000 for the year ended September 30, 2022.
At September 30, 2022, the Bank maintained an unused credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which no balance was outstanding. The Bank had $492.29 million available for borrowings with the FHLB at September 30, 2022.
At September 30, 2023, the Bank maintained an unused credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral, under which $35.00 million of the$533.99 million available for borrowings with the FHLB was outstanding at September 30, 2023.
During the years ended September 30, 2022, 2021 and 2020, the Bank originated $572.46 million, $602.34 million and $597.19 million of loans, respectively. At September 30, 2022, the Bank had loan commitments totaling $143.49 million and undisbursed construction loans in process totaling $103.17 million.
During the years ended September 30, 2023, 2022 and 2021, the Bank originated $361.79 million, $572.46 million and $602.34 million of loans, respectively. At September 30, 2023, the Bank had loan commitments totaling $173.20 million and undisbursed construction loans in process totaling $103.19 million.
At September 30, 2022, the Company had total assets of $1.86 billion, net loans receivable of $1.13 billion, total deposits of $1.63 billion and total shareholders’ equity of $218.57 million. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.
At September 30, 2023, the Company had total assets of $1.84 billion, net loans receivable of $1.30 billion, total deposits of $1.56 billion and total shareholders’ equity of $233.07 million. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.
Financial Statements and Supplementary Data." Comparison of Operating Results for the Years Ended September 30, 2022 and 2021 Net income for the year ended September 30, 2022 decreased by $3.98 million, or 14.4%, to $23.60 million from $27.58 million for the year ended September 30, 2021.
Financial Statements and Supplementary Data". Comparison of Operating Results for the Years Ended September 30, 2023 and 2022 Net income for the year ended September 30, 2023 increased by $3.52 million, or 14.9%, to $27.12 million from $23.60 million for the year ended September 30, 2022.
During the years ended September 30, 2022, 2021 and 2020, the Bank sold $73.50 million, $150.20 million and $167.24 million, respectively, in loans and loan participation interests. During the years ended September 30, 2022, 2021 and 2020, the Bank received $324.23 million, $500.03 million and $287.04 million, respectively, in principal repayments.
During the years ended September 30, 2023, 2022 and 2021, the Bank sold $11.54 million, $73.50 million and $150.20 million, respectively, in loans and loan participation interests. During the years ended September 30, 2023, 2022 and 2021, the Bank received $177.31 million, $324.23 million and $500.03 million, respectively, in principal repayments.
The principal amount of loans serviced for Freddie Mac and the SBA decreased by $16.15 million to $410.29 million at September 30, 2022 from $426.44 million at September 30, 2021. For additional information on loan servicing rights, see Note 8 to the Consolidated Financial Statements contained in "Item 8.
The principal amount of loans serviced for Freddie Mac and the SBA decreased by $23.79 million to $386.50 million at September 30, 2023 from $410.29 million at September 30, 2022. For additional information on loan servicing rights, see "Note 8-Loan Servicing Rights" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Interest income on investment securities increased by $2.29 million, or 191.9%, to $3.49 million for the year ended September 30, 2022 from $1.20 million for the year ended September 30, 2021, primarily due to an increase in the average balance of held to maturity investment securities and an increase in the average yield on investment securities.
Interest income on investment securities increased by $5.90 million, or 169.0%, to $9.38 million for the year ended September 30, 2023 from $3.49 million for the year ended September 30, 2022, primarily due to an increase in the average balance of held to maturity investment securities and an increase in the average yield on investment securities.
The Company's effective income tax rate was 20.2% for the year ended September 30, 2022 and 19.9% for the 2021 fiscal year. For additional information on income taxes, see Note 13 of the Consolidated Financial Statements contained in "Item 8.
The Company's effective income tax rate was 20.2% for the years ended September 30, 2023 and 2022. For additional information on income taxes, see "Note 13-Income Taxes" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
Goodwill Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment.
There were no business combinations during the years ended September 30, 2022, 2021 and 2020, respectively. 55 Goodwill Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment.
Total deposits increased by $61.62 million, or 3.9%, to $1.63 billion at September 30, 2022 from $1.57 billion at September 30, 2021, primarily due to increases in NOW checking account balances, money market account balances, and savings account balances. These increases were partially offset by decreases in certificates of deposit account balances and non-interest bearing demand account balances.
Total deposits decreased by $71.24 million, or 4.4%, to $1.56 billion at September 30, 2023 from $1.63 billion at September 30, 2022, primarily due to decreases in non-interest bearing account balances, NOW checking account balances, money market account balances, and savings account balances. These decreases were partially offset by increases in certificates of deposit account balances.
We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions and accepting short payoffs on delinquent loans when such actions have been deemed appropriate.
We continue to seek to reduce the level of non-performing assets through collections, write-downs, modifications and sales of OREO. We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions and accepting short payoffs on delinquent 51 loans when such actions have been deemed appropriate.
A more detailed explanation of the changes in significant balance sheet categories follows: Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreased by $269.03 million, or 44.2%, to $339.65 million at September 30, 2022 from $608.68 million at September 30, 2021.
A more detailed explanation of the changes in significant balance sheet categories follows: Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreased by $194.74 million, or 57.6%, to $143.91 million at September 30, 2023 from $339.65 million at September 30, 2022.
The increase was primarily due to the purchase of additional held to maturity U.S. Treasury and U.S. government agency investment securities, U.S. government agency mortgage-backed investment securities and private label mortgage-backed investment securities, as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the year ended September 30, 2022.
The increase was primarily due to the purchase of $32.60 million additional investment securities, primarily consisting of U.S. Treasury and U.S. government agency investment securities and U.S. government agency mortgage-backed investment securities as the Company placed a portion of its excess overnight liquidity into higher-earning investment securities during the period.
Financial Statements and Supplementary Data." and the following: Provision and Allowance for Loan Losses The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
See "Note 1-Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in Item 8 of this report" for a summary of significant accounting policies and the effect on our financial statements and the following: Provision and Allowance for Loan Losses The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the fiscal year ending September 30, 2023 that would materially impact liquidity.
Based on current objectives, there are no projects scheduled for capital investments in premises and equipment during the fiscal year ending September 30, 2024 that would materially impact liquidity. For the fiscal year ending September 30, 2024, the Bank projects that fixed commitments will include $333,000 of operating lease payments.
Acquisition-related costs are expensed as incurred unless they are directly attributable to the issuance of the Company's common stock in a business 56 combination and the Company chooses to record these acquisition-related costs through stockholders' equity. There were no business combinations during the years ended September 30, 2022, 2021 and 2020, respectively.
Acquisition-related costs are expensed as incurred unless they are directly attributable to the issuance of the Company's common stock in a business combination and the Company chooses to record these acquisition-related costs through stockholders' equity.
Pursuant to this strategy, the Bank actively originates adjustable-rate loans for retention in its loan portfolio. Fixed-rate mortgage loans with maturities greater than seven years generally are originated for the immediate or future resale in the secondary mortgage market.
Management has sought to sustain the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Pursuant to this strategy, the Bank actively originates adjustable-rate loans for retention in its loan portfolio. Fixed-rate mortgage loans with maturities greater than seven years generally are originated for the immediate or future resale in the secondary mortgage market.
We continue to originate custom construction and owner/builder construction loans for sale into the secondary market upon the completion of construction. Maintaining strong asset quality. We believe that strong asset quality is a key to our long-term financial success. The percentage of non-performing loans to loans receivable, net was 0.18% and 0.29% at September 30, 2022 and 2021, respectively.
We continue to originate custom construction and owner/builder construction loans for sale into the secondary market upon the completion of construction. Maintaining strong asset quality. We believe that strong asset quality is a key to our long-term financial success. Non-performing assets have decreased to $1.60 million at September 30, 2023 from $2.17 million at September 30, 2022.
Loans Held for Sale: Loans held for sale decreased by $2.47 million, or 76.8%, to $748,000 at September 30, 2022 from $3.22 million at September 30, 2021, primarily due to the timing and volume of mortgage banking loan sales.
Loans Held for Sale: Loans held for sale decreased by $348,000, or 46.5%, to $400,000 at September 30, 2023 from $748,000 at September 30, 2022, primarily due to the timing and volume of mortgage banking loan sales.
Capital expenditures are incurred on an ongoing basis to expand and improve the Bank's product offerings, enhance and modernize technology infrastructure, and to introduce new technology-based products to compete effectively in the various markets.
Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Capital expenditures are incurred on an ongoing basis to expand and improve the Bank's product offerings, enhance and modernize technology infrastructure, and to introduce new technology-based products to compete effectively in the various markets.
The increase was primarily due to net income of $23.60 million for the year ended September 30, 2022, which was partially offset by the payment of $7.23 million in dividends to common shareholders and the repurchase of 170,237 shares of the Company's common stock for $4.58 million during the year ended September 30, 2022.
The increase was primarily due to net income of $27.12 million for the year ended September 30, 2023, which was partially offset by the payment of $8.27 million in dividends to common shareholders and the repurchase of 185,399 shares of the Company's common stock for $5.00 million during the year ended September 30, 2023.
Financial Statements and Supplementary Data." FHLB Stock : FHLB stock increased by $91,000 or 4.3%, to $2.19 million at September 30, 2022 from $2.10 million at September 30, 2021, due to purchases required by the FHLB as a result of the increase in total assets.
FHLB Stock : FHLB stock increased by $1.41 million, or 64.2%, to $3.60 million at September 30, 2023 from $2.19 million at September 30, 2022, due to purchases required by the FHLB as a result of the increase in total assets and borrowings.
The Bank’s liquidity has been positively impacted by increases in deposit levels. During the years ended September 30, 2022, 2021 and 2020, deposits increased by $61.62 million, $212.15 million and $290.18 million, respectively.
The Bank’s liquidity has been negatively impacted by decreases in deposit levels. During the year ended September 30, 2023, deposits decreased by $71.24 million. During the years ended September 30, 2022 and 2021, deposits increased by $61.62 million and $212.20 million, respectively.
Financial Statements and Supplementary Data." Bank Owned Life Insurance ("BOLI"): BOLI increased by $613,000, or 2.8%, to $22.81 million at September 30, 2022 from $22.19 million at September 30, 2021. The increase was due to net BOLI earnings, representing the increase in cash surrender value of the BOLI policies.
Bank Owned Life Insurance ("BOLI"): BOLI increased by $160,000, or 0.7%, to $22.97 million at September 30, 2023 from $22.81 million at September 30, 2022. The increase was due to net BOLI earnings, representing the increase in the cash surrender value of the BOLI policies and offset by a decrease in cash surrender value due to a death.
Year Ended September 30, 2022 2021 2020 Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/ Cost (Dollars in thousands) Interest-earning assets: Loans receivable (1)(2) $ 1,055,635 $ 51,324 4.86 % $ 1,026,742 $ 52,539 5.12 % $ 970,400 $ 51,341 5.29 % Investment securities (2) 224,850 3,488 1.55 103,328 1,195 1.16 72,652 1,579 2.17 Dividends from mutual funds, FHLB stock and other investments 6,021 120 1.99 5,989 111 1.85 5,760 128 2.22 Interest-bearing deposits in banks and CDs 482,162 3,576 0.74 459,145 1,117 0.24 254,558 2,535 1.00 Total interest-earning assets 1,768,668 58,508 3.31 1,595,204 54,962 3.45 1,303,370 55,583 4.26 Non-interest-earning assets 83,895 85,939 85,842 Total assets $ 1,852,563 $ 1,681,143 $ 1,389,212 Interest-bearing liabilities: NOW checking accounts $ 449,574 $ 650 0.14 % $ 402,430 $ 605 0.15 % $ 323,261 $ 882 0.27 % Money market accounts 244,498 766 0.31 186,489 560 0.30 148,506 735 0.49 Savings accounts 278,025 230 0.08 242,598 201 0.08 191,618 188 0.10 Certificates of deposit accounts 127,277 1,011 0.79 145,006 1,647 1.14 166,524 2,830 1.70 Short-term borrowings 3 — — — — — — — — Long-term borrowings (3) 1,427 17 1.19 7,686 91 1.18 5,685 66 1.16 Total interest-bearing liabilities 1,100,804 2,674 0.24 984,209 3,104 0.32 835,594 4,701 0.56 Non-interest-bearing deposits 529,702 488,833 364,971 Other liabilities 10,224 10,816 10,110 Total liabilities 1,640,730 1,483,858 1,210,675 Shareholders' equity 211,833 197,285 178,540 Total liabilities and shareholders' equity $ 1,852,563 $ 1,681,143 $ 1,389,215 Net interest income $ 55,834 $ 51,858 $ 50,882 Interest rate spread 3.07 % 3.13 % 3.70 % Net interest margin (4) 3.16 % 3.25 % 3.90 % Ratio of average interest-earning assets to average interest-bearing liabilities 160.67 % 162.08 % 155.98 % _______________________________________________ (1) Does not include interest on loans on non-accrual status.
Year Ended September 30, 2023 2022 2021 Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/ Cost (Dollars in thousands) Interest-earning assets: Loans receivable (1)(2) $ 1,230,101 $ 63,154 5.13 % $ 1,055,635 $ 51,324 4.86 % $ 1,026,742 $ 52,539 5.12 % Investment securities (2) 324,436 9,384 2.89 224,850 3,488 1.55 103,328 1,195 1.16 Dividends from mutual funds, FHLB stock and other investments 6,315 270 4.28 6,021 120 1.99 5,989 111 1.85 Interest-bearing deposits in banks and CDs 167,718 7,143 4.26 482,162 3,576 0.74 459,145 1,117 0.24 Total interest-earning assets 1,728,570 79,951 4.63 1,768,668 58,508 3.31 1,595,204 54,962 3.45 Non-interest-earning assets 84,205 83,895 85,939 Total assets $ 1,812,775 $ 1,852,563 $ 1,681,143 Interest-bearing liabilities: NOW checking accounts $ 407,679 $ 3,562 0.87 % $ 449,574 $ 650 0.14 % $ 402,430 $ 605 0.15 % Money market accounts 215,465 1,600 0.74 244,498 766 0.31 186,489 560 0.30 Savings accounts 261,006 415 0.16 278,025 230 0.08 242,598 201 0.08 Certificates of deposit accounts 200,476 5,725 2.86 127,277 1,011 0.79 145,006 1,647 1.14 Short-term borrowings 975 53 5.44 3 — — — — — Long-term borrowings (3) 5,973 237 3.97 1,427 17 1.19 7,686 91 1.18 Total interest-bearing liabilities 1,091,574 11,592 1.06 1,100,804 2,674 0.24 984,209 3,104 0.32 Non-interest-bearing deposits 484,795 529,702 488,833 Other liabilities 10,557 10,224 10,816 Total liabilities 1,586,926 1,640,730 1,483,858 Shareholders' equity 225,849 211,833 197,285 Total liabilities and shareholders' equity $ 1,812,775 $ 1,852,563 $ 1,681,143 Net interest income $ 68,359 $ 55,834 $ 51,858 Interest rate spread 3.56 % 3.07 % 3.13 % Net interest margin (4) 3.95 % 3.16 % 3.25 % Ratio of average interest-earning assets to average interest-bearing liabilities 158.36 % 160.67 % 162.08 % _______________________________________________ (1) Does not include interest on loans on non-accrual status.
In the event of a 100 basis point decrease in interest rates, the Bank would be expected to experience a 4.56% decrease in EVE and a 6.28% decrease in net interest income. In the event of a 100 basis point increase in interest rates, a 1.92% increase in EVE and a 3.19% increase in net interest income would be expected.
In the event of a 100 basis point decrease in interest rates, the Bank would be expected to experience a 2.67% decrease in EVE and a 3.03% decrease in net interest income. In the event of a 100 basis point increase in interest rates, a 0.25% increase in EVE and a 0.06% decrease in net interest income would be expected.
The increase was primarily due to timing differences in the normal course of business. Shareholders' Equity: Total shareholders' equity increased by $11.67 million, or 5.6%, to $218.57 million at September 30, 2022 from $206.90 million at September 30, 2021.
The increase was primarily due to timing differences in the normal course of business and an increase in accrued interest payable. Shareholders' Equity: Total shareholders' equity increased by $14.50 million, or 6.6%, to $233.07 million at September 30, 2023 from $218.57 million at September 30, 2022.
Net income per diluted common share decreased by $0.45, or 13.8%, to $2.82 for the year ended September 30, 2022 from $3.27 for the year ended September 30, 2021.
Net income per diluted common share increased by $0.47, or 16.7%, to $3.29 for the year ended September 30, 2023 from $2.82 for the year ended September 30, 2022.
For additional information on leases, see Note 9 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." Other Liabilities and Accrued Expenses: Other liabilities and accrued expenses increased by $330,000, or 4.48%, to $7.70 million at September 30, 2022 from $7.37 million at September 30, 2021.
For additional information on leases, see "Note 9-Leases" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report. 59 Other Liabilities and Accrued Expenses: Other liabilities and accrued expenses increased by $1.33 million or 17.3%, to $9.03 million at September 30, 2023 from $7.70 million at September 30, 2022.
Financial Statements and Supplementary Data." CDI: CDI decreased by $316,000, or 25.0% to $948,000 at September 30, 2022 from $1.26 million at September 30, 2021 due to scheduled amortization. For additional information on CDI, see Note 7 to the Consolidated Financial Statements contained in "Item 8.
CDI: CDI decreased by $271,000 or 28.6%, to $677,000 at September 30, 2023 from $948,000 at September 30, 2022 due to scheduled amortization. For additional information on CDI, see "Note 7-Goodwill and CDI" of the Consolidated Financial Statements contained in Item 8 of this report.
Since March 2022, in response to inflation, the FOMC of the Federal Reserve has increased the target range for the federal funds rate by 300 basis points, including 150 basis points during the third calendar calendar quarter of 2022, to a range of 3.00% to 3.25% as of September 30, 2022.
Since March 2022, in response to inflation, the FOMC increased the target range for the federal funds rate by 525 basis points, including 225 basis points during the 2023 fiscal year, to a range of 5.25% to 5.50% as of September 30, 2023.
Business - Regulation of the Bank - Capital Requirements.” New Accounting Pronouncements For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data".
New Accounting Pronouncements For a discussion of new accounting pronouncements and their impact on the Company, see "Note 1-Summary of Significant Accountion Policies" of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
The increase was primarily due to net income for the year ended September 30, 2022 of $23.60 million which was partially offset by $7.23 million in dividends paid to shareholders and the repurchase of 170,237 shares of common stock for $4.58 million.
The increase was primarily due to net income for the year ended September 30, 2023 of $27.12 million, partially offset by $8.27 million in dividends paid to shareholders and the repurchase of 185,399 shares of common stock for $5.00 million.
During the year ended September 30, 2022, a total of $629,000 in non-accrual interest, pre-payment penalties and late fees was collected compared to $942,000 for the year ended September 30, 2021. 61 Also impacting the average yield and average interest-earning asset balances during the years ended September 30, 2022 and 2021 were SBA PPP loans.
During the year ended September 30, 2023, a total of $398,000 in non-accrual interest, pre-payment penalties and late fees was collected compared to $629,000 for the year ended September 30, 2022.
Financial Statements and Supplementary Data." Loan Servicing Rights, Net: Loan servicing rights decreased by $459,000, or 13.2%, to $3.02 million at September 30, 2022 from $3.48 million at September 30, 2021, primarily due to the amortization of servicing rights, partially offset by additional capitalized Freddie Mac servicing rights for loans being sold with servicing retained, and a $119,000 valuation recovery reflecting decreased prepayment speeds due to rising market interest rates.
Loan Servicing Rights, Net: Loan servicing rights decreased by $899,000, or 29.7%, to $2.12 million at September 30, 2023 from $3.02 million at September 30, 2022, primarily due to the amortization of servicing rights and partially offset by additional capitalized Freddie Mac servicing rights for loans being sold with servicing retained.
The average cost of interest-bearing liabilities decreased to 0.24% for the year ended September 30, 2022 from 0.32% for the year ended September 30, 2021 as market interest rates for deposits decreased.
The increase in interest expense was primarily due to an increase in the average cost of interest-bearing liabilities, primarily deposits. The average cost of interest-bearing liabilities increased to 1.06% for the year ended September 30, 2023 from 0.24% for the year ended September 30, 2022 as market interest rates for deposits increased.
The level of delinquent loans (loans 30 or more days past due) decreased by $943,000, or 31.0%, to $2.10 million at September 30, 2022 from $3.04 million at September 30, 2021 and the level of loans graded substandard increased by $3.78 million, or 105.0%, to $7.39 million at September 30, 2022 from $3.60 million at September 30, 2021.
The level of delinquent loans (loans 30 or more days past due) decreased by $431,000, or 20.6%, to $1.67 million at September 30, 2023 from $2.10 million at September 30, 2022 and the level of loans graded substandard decreased by $1.00 million, or 13.6%, to $6.39 million at September 30, 2023 from $7.39 million at September 30, 2022.
Provision for Income Taxes: The provision for income taxes decreased by $883,000, or 12.9% to $5.96 million for the year ended September 30, 2022 from $6.85 million for the year ended September 30, 2021. The decrease in the provision for income taxes was primarily due to lower income before income taxes.
Provision for Income Taxes: The provision for income taxes increased by $914,000, or 15.3% to $6.88 million for the year ended September 30, 2023 from $5.96 million for the year ended September 30, 2022. The increase in the provision for income taxes was primarily due to higher income before income taxes.
The current quarterly common stock dividend rate is $0.22 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank, and returning a substantial portion of cash to shareholders.
The Company currently expects to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice.The current quarterly common stock dividend rate is $0.23 per share, as approved by the Board of Directors, which is a dividend rate per share that enables the Company to balance multiple objectives of managing and investing in the Bank and returning a substantial portion of cash to shareholders.
The increase in data processing and telecommunications expense was primarily due to the addition of several technology products and increased processing volumes. The increase in deposit operations expense was primarily due to increased fraud expense and unrecovered overdrafts. The efficiency ratio for the year ended September 30, 2022 was 56.42% compared to 50.12% for the year ended September 30, 2021.
The increase in deposit operations was primarily due to increased fraud expense and unrecovered overdrafts. The efficiency ratio for the year ended September 30, 2023 improved to 54.56% from 56.42% for the year ended September 30, 2022.

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