

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Fiscal Year Ended September 30, ~~2015~~2018 OR

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-23333

TIMBERLAND BANCORP, INC.
(Exact name of registrant as specified in its charter)



Washington		91-1863696
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

624 Simpson Avenue, Hoquiam, Washington		98550
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:		(360) 533-4747

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.01 per share		The Nasdaq Stock Market LLC
(Title of Each Class)		(Name of Each Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act:		None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 ofor Section 15(d) of the Act. YES NO X

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files) YES X NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:



	Large accelerated filer [ ]	Accelerated filer [X]
	Non-accelerated filer [ ]	Smaller reporting company X [X]
	Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO X

As of November 30, ~~2015,~~2018, the registrant had ~~6,994,148~~8,310,703 shares of common stock issued and outstanding. The aggregate market value of the common stock held by nonaffiliates of the registrant, based on the closing sales price of the registrant’s common stock as quoted on the NASDAQ Global Market on March 31, ~~2015,~~2018, was ~~$71.0~~$224.7 million ~~(6,675,528~~(7,390,227 shares at ~~$10.64)~~$30.40). For purposes of this calculation, common stock held by officers and directors of the registrant was ~~excluded.~~included.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of Definitive Proxy Statement for the ~~2016~~2019 Annual Meeting of ~~Stockholders~~Shareholders (Part III).

TIMBERLAND BANCORP, INC.

~~2015~~2018 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



PART I.				Page
	Item 1.	Business
			General	3
			~~Corporate Overview~~	3 4
			Market Area	4
			Lending Activities	5 6
			Investment Activities	21 22
			Deposit Activities and Other Sources of Funds	2223
			Bank Owned Life Insurance	2526
			How We Are Regulated	2526
			Taxation	3233
			Competition	3334
			Subsidiary Activities	3334
			Personnel	3334
			Executive Officers of the Registrant	3334
	Item 1A.	Risk Factors		3435
	Item 1B.	Unresolved Staff Comments		4345
	Item 2.	Properties		4446
	Item 3.	Legal Proceedings		4547
	Item 4.	Mine Safety Disclosures		4547
PART II.
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		4648
	Item 6.	Selected Financial Data		4849
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		5152
			General	51 52
			~~Special Note Regarding Forward-Looking Statements~~ Overview	51 52
			Operating Strategy	53
			Critical Accounting Policies and Estimates	52
			~~New Accounting Pronouncements~~	53
			~~Operating Strategy~~	54
			Market Risk and Asset and Liability Management	55 54
			Comparison of Financial Condition at September 30, ~~2015~~2018 and September 30, ~~2014~~2017	56
			Comparison of Operating Results for Years Ended September 30, ~~2015~~2018 and ~~2014~~2017	58
			Comparison of Operating Results for Years Ended September 30, ~~2014~~2017 and ~~2013~~2016	60
			Average Balances, Interest and Average Yields/Cost	61
			Rate/Volume Analysis	63
			Liquidity and Capital Resources	63
			Effect of Inflation and Changing Prices	6465
			New Accounting Pronouncements	65
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		65
	Item 8.	Financial Statements and Supplementary Data		65
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		~~123~~119
	Item 9A.	Controls and Procedures		~~123~~119
	Item 9B.	Other Information		~~124~~121
PART III.
	Item 10.	Directors, Executive Officers and Corporate Governance		~~124~~121
	Item 11.	Executive Compensation		~~124~~121
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		~~122~~ 121
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		~~125~~122
	Item 14.	Principal Accounting Fees and Services		~~125~~122
PART IV.
	Item 15.	Exhibits and Financial Statement Schedules		~~126~~123
	Item 16.	Form 10-K Summary		123

As used throughout this report, the terms "we," "our," or "us," refer to Timberland Bancorp, Inc. and its consolidated subsidiary, unless the context otherwise requires.

Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel from our recent merger with South Sound Bank into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which may be greater than expected; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiary by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including as a result of Basel III; the impact of the Dodd Frank Wall Street Reform and Consumer Protection Act and implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on our consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks described elsewhere in this Form 10-K and the Company's other reports filed with or furnished to the Securities and Exchange Commission.

Any of the forward-looking statements that we make in this Form 10-K and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this annual report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal 2019 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's consolidated financial condition and results of operations as well as its stock price performance.

PART I

Item 1. Business

General

Timberland Bancorp, Inc. (“Timberland Bancorp" or the "Company”), a Washington corporation, was organized on September 8, 1997 for the purpose of becoming the holding company for Timberland ~~Savings~~ Bank ~~SSB~~ (the ~~“Bank”) upon the Bank’s conversion from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank (“Conversion”~~"Bank"). ~~The Conversion was completed on January 12, 1998 through the sale and issuance of 13,225,000 shares of common stock by the Company.~~ At September 30, ~~2015,~~2018, on a consolidated basis, the Company had total assets of ~~$815.8~~$1.02 billion, net loans receivable of $725.39 million, total deposits of ~~$678.9~~$889.51 million and total shareholders’ equity of ~~$89.2~~$124.66 million. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank and its subsidiary, Timberland Service Corporation.

The Bank ~~was established~~opened for business in 1915 ~~as “Southwest~~and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington ~~Savings~~with a full range of lending and ~~Loan Association.” In 1935, the Bank converted from a state-chartered mutual savings and loan association to a federally chartered mutual savings and loan association, and~~deposit services through its 22 branches (including its main office in 1972, changed its name to “Timberland Federal Savings and Loan Association.” In 1990, the Bank converted to a federally chartered mutual savings bank under the name “Timberland Savings Bank, FSB.” In 1991, the Bank converted to a Washington-chartered mutual savings bank and changed its name to “Timberland Savings Bank, SSB.” On December 29, 2000, the Bank changed its name to “Timberland Bank.”Hoquiam). The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank has been a member of the Federal Home Loan Bank System since 1937. The Bank is regulated by the Washington Department of Financial Institutions, Division of Banks (“Division” or “DFI”) and the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve ~~Board~~System ("Federal Reserve").

On May 23, 2018, the Company announced the signing of a definitive agreement and plan of merger with South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington. On October 1, 2018, the Company completed the acquisition of South Sound Bank (the "South Sound Merger") and South Sound Bank merged into the Bank and the Company. At September 30, 2018, South Sound Bank had $178.33 million in total assets, $121.35 million in net loans receivable and $151.43 million in total deposits. As a result of the South Sound Merger, South Sound Bank shareholders received 904,826 shares of Timberland Bancorp common stock and $6.90 million in cash for total consideration paid of $35.17 million. The financial condition data and operating results of the Company at and for the year ended September 30, 2018, do not include the acquired assets and assumed liabilities from South Sound Bank or the operating results produced by the acquired assets and assumed liabilities as the South Sound Merger did not close until October 1, 2018. For additional details see Note 21 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Timberland Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail customers while concentrating its lending activities on real estate mortgage ~~loans and commercial business~~ loans. Lending activities have ~~historically~~ been focused primarily on the origination of loans secured by real estate, including residential and commercial / multi-family construction ~~and land development,~~loans, one- to four-family residential loans, multi-family loans, commercial real estate loans and land loans. ~~During~~The Bank originates adjustable-rate residential mortgage loans that do not qualify for sale in the ~~past several years, the~~secondary market. The Bank ~~adjusted its lending strategy~~also originates commercial business loans and ~~began reducing its exposure to speculative construction and land development lending.~~other consumer loans.

The Company maintains a website at www.timberlandbank.com. The information contained on that website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own internet access charges, the Company makes available free of charge through that website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after these materials have been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

~~Corporate Overview~~

~~Preferred Stock Received in the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”).~~ On December 23, 2008, the Company received $16.64 million from the U.S. Treasury Department ("Treasury") as a part of the Treasury's CPP, which was established as part of the TARP. The Company sold 16,641 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("Series A Preferred Stock"), with a liquidation value of $1,000 per share and a related warrant to purchase 370,899 shares of the Company's common stock at an exercise price of $6.73 per share (subject to anti-dilution adjustments) at any time through December 23, 2018.

On November 13, 2012, the Company's outstanding 16,641 shares of Series A Preferred Stock were sold by the Treasury as part of its efforts to manage and recover its investments under the TARP. While the sale of these preferred shares to new owners did not result in any proceeds to the Company and did not change the Company's capital position or accounting for these shares, it did eliminate restrictions put in place by the Treasury on TARP recipients.

On June 12, 2013, the Treasury sold, to private investors, the warrant to purchase 370,899 shares of the Company's common stock. The sale of the warrant to new owners did not result in any proceeds to the Company and did not change the Company's capital position or accounting for the warrant.

During the year ended September 30, 2013, the Company purchased and retired 4,576 shares of its Series A Preferred Stock for $4.32 million; a $255,000 discount from the liquidation value. The discount from the liquidation value on the repurchased shares was recorded as an increase to retained earnings. On December 20, 2013, the Company redeemed the remaining 12,065 shares of its Series A Preferred Stock at the liquidation value of $12.07 million. The Series A Pref

~~erred Stock paid a 5.0% dividend through December 20, 2013, the date of its redemption.~~

Market Area

The Bank considers Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties, Washington as its primary market areas. 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);

five branch offices in Thurston County (Olympia, Yelm, Tumwater and two branches in Lacey);

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).

For additional information, see “Item 2. Properties.”

Hoquiam, with a population of approximately ~~8,400,~~8,500, 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 considers its primary market area to include six sub-markets: primarily rural Grays Harbor County with its historical dependence on the timber and fishing industries; Thurston and Kitsap counties with their dependence on state and federal government; Pierce and King counties with their broadly diversified economic bases; and Lewis County with its dependence on retail trade, manufacturing, industrial services and local government. Each of these markets presents operating risks to the Bank. The Bank’s expansion into Pierce, Thurston, Kitsap, King and Lewis counties represents the Bank’s strategy to expand and diversify its primary market area to become less reliant on the economy of Grays Harbor County.

Grays Harbor County has a population of ~~71,000~~73,000 according to the United States ("U.S.") Census Bureau ~~2014~~2017 estimates and a median family income of ~~$59,600~~$65,000 according to ~~2015~~2018 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. 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 ~~7.8%~~5.5% at September 30, ~~2015~~2018 from ~~8.8%~~6.1% at September 30, ~~2014.~~2017. The median price of a resale home in Grays Harbor County for the quarter ended ~~September~~June 30, ~~2015~~2018 increased ~~12.2%~~14.6% to ~~$143,700~~$188,800 from ~~$128,100~~$164,700 for the comparable prior year period. The number of home sales increased ~~10.0%~~12.3% for the quarter ended ~~September~~June 30, ~~2015~~2018 compared to the same quarter one year earlier. The Bank has six branches (including its home office) located ~~throughout~~in the county.

Pierce County is the second most populous county in the state and has a population of ~~832,000~~877,000 according to the U.S. Census Bureau ~~2014~~2017 estimates. The county’s median family income is ~~$71,000~~$74,600 according to ~~2015~~2018 HUD estimates. 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 ~~5.7%~~4.4% at September 30, ~~2015~~2018 from ~~6.0%~~4.8% at September 30, ~~2014.~~2017. The median price of a resale home in Pierce County for the quarter ended ~~September~~June 30, ~~2015~~2018 increased ~~8.1%~~12.9% to ~~$254,300~~$353,700 from ~~$235,200~~$313,200 for the comparable prior year period. The number of home sales increased ~~5.5%~~6.9% for the quarter ended ~~September~~June 30, ~~2015~~2018 compared to the same quarter one year earlier. 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 ~~266,000~~281,000 according to the U.S. Census Bureau ~~2014~~2017 estimates and a median family income of ~~$71,500~~$77,700 according to ~~2015~~2018 HUD estimates. 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 ~~remained level at 5.4%~~decreased to 4.1% at September 30, ~~2015 and~~2018 from 4.5% at September 30, ~~2014.~~2017. The median price of a resale home in Thurston County for the quarter ended ~~September~~June 30, ~~2015~~2018 increased ~~7.7%~~10.2% to ~~$257,100~~$319,300 from ~~$238,700~~$289,800 for the same quarter one year earlier. The number of home sales increased ~~2.0%~~8.2% for the quarter ended ~~September~~June 30, ~~2015~~2018 compared to the same ~~quarte~~

rquarter one year earlier. The Bank has five branches and acquired two additional branches in the South Sound Merger, 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 ~~254,000~~266,000 according to the U.S. Census Bureau ~~2014~~2017 estimates and a median family income of ~~$74,600~~$82,600 according to ~~2015~~2018 HUD estimates. 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 ~~5.0%~~4.1% at September 30, ~~2015~~2018 from ~~5.3%~~4.6% at September 30, ~~2014.~~2017. The median price of a resale home in Kitsap County for the quarter ended ~~September~~June 30, ~~2015~~2018 increased ~~7.4%~~9.4% to ~~$269,200~~$355,600 from ~~$250,700~~$325,000 for the same quarter one year earlier. The number of home sales increased ~~7.1%~~3.9% for the quarter ended ~~September~~June 30, ~~2015~~2018 compared to the same quarter one year earlier.

King County is the most populous county in the state and has a population of ~~2.1~~2.2 million according to the U.S. Census Bureau ~~2014~~2017 estimates. The Bank has one branch located in King County. The county’s median family income is ~~$89,600~~$103,400 according to ~~2015~~2018 HUD estimates. 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 3.4% at September 30, 2018 from 3.9% at September 30, ~~2015 from 4.8% at September 30, 2014.~~2017. The median price of a resale home in King County for the quarter ended ~~September~~June 30, ~~2015~~2018 increased ~~6.3%~~12.1% to ~~$491,000~~$729,800 from ~~$462,100~~$650,800 for the same quarter one year earlier. The number of home sales ~~increased 3.3%~~decreased 3.5% for the quarter ended ~~September~~June 30, ~~2015~~2018 compared to the same quarter one year earlier.

Lewis County has a population of ~~75,000~~78,000 according to the U.S. Census Bureau ~~2014~~2017 estimates and a median family income of ~~$59,600~~$65,000 according to ~~2015~~2018 HUD estimates. The economic base in Lewis County is supported by manufacturing, retail trade, local government and industrial services. According to the Washington State Employment Security Department, the unemployment rate in Lewis County decreased to ~~7.1%~~5.1% at September 30, ~~2015~~2018 from ~~8.3%~~5.7% at September 30, ~~2014.~~2017. The median price of a resale home in Lewis County for the quarter ended ~~September~~June 30, ~~2015~~2018 increased ~~0.5%~~17.8% to ~~$160,800~~$224,300 from ~~$160,000~~$190,400 for the same quarter one year earlier. The number of home sales increased ~~18.8%~~6.5% for the quarter ended ~~September~~June 30, ~~2015~~2018 compared to the same quarter one year earlier. The Bank currently has three branches located in Lewis County.

Lending Activities

General. Historically, the principal lending activity of the Bank has consisted of the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences, or by commercial real estate and loans for the construction of one- to four-family residences. ~~During the past several years, the Bank adjusted its lending strategy and began reducing its exposure to speculative construction and land development lending as well as land loans.~~ The Bank’s net loans receivable ~~including loans held for sale,~~ totaled ~~$607.3~~$725.39 million at September 30, ~~2015,~~2018, representing ~~74.4%~~71.2% of consolidated total assets, and at that date commercial real estate, construction ~~and land development loans~~ (including undisbursed loans in process), multi-family and land loans were ~~$428.3~~$620.95 million, or ~~63.6%~~75.7% of total loans. ~~Construction~~Commercial real estate, construction, multi-family, and land ~~development loans, land loans and commercial real estate~~ loans typically have higher rates of return than one- to four-family loans; however, they also present a higher degree of risk. ~~See “-Lending Activities - Commercial Real Estate Lending,” “- Lending Activities - Construction and Land Development Lending” and “- Lending Activities - Land Lending.”~~

The Bank’s internal loan policy limits the maximum amount of loans to one borrower to 20% of its capital plus surplus. According to the Washington Administrative Code, capital and surplus are defined as a bank's Tier 1 capital, Tier 2 capital and the balance of a bank's allowance for loan losses not included in the bank's Tier 2 capital as reported in the bank's call report. At September 30, ~~2015,~~2018, the maximum amount which the Bank could have lent to any one borrower and the borrower’s related entities was approximately ~~$18.5~~$25.40 million under this policy. At September 30, ~~2015,~~2018, the largest amount outstanding to any one borrower and the borrower’s related entities was ~~$17.2~~$18.30 million (including $3.65 million in undisbursed loans in process) which was secured by multi-family properties, commercial buildings, one- to four-family properties, land parcels, and construction projects located in ~~Pierce and Kitsap counties.~~Thurston County. These loans were all performing according to their loan ~~repaymen~~trepayment terms at September 30, ~~2015.~~2018. The next largest amount outstanding to any one borrower and the borrower’s related entities wa~~s $14.3~~was $16.21 million. These loans were secured by multi-family and commercial ~~buildings~~real estate properties located in ~~Pierce County~~King, Benton and Grant counties and were performing according to their loan repayment terms at September 30, ~~2015.~~2018.

Loan Portfolio Analysis. The following table sets forth the composition of the Bank’s loan portfolio by type of loan at the dates indicated.


	At September 30,																									At September 30,
	2015					2014					2013					2012					2011					2018					2017					2016					2015					2014
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in thousands)																									(Dollars in thousands)
Mortgage Loans:
One- to four-family(1)	$	119,715		17.79	%	$	98,534		16.22	%	$	104,298		18.00	%	$	106,979		18.82	%	$	114,680		20.47	%
One- to four-family (1)																										$	115,941		14.13	%	$	118,147		15.05	%	$	118,560		16.38	%	$	116,664		17.42	%	$	97,635		16.10	%
Multi-family	52,322			7.78		46,206			7.61		51,108			8.82		47,521			8.36		30,982			5.53		61,928			7.54		58,607			7.47		62,303			8.61		52,322			7.81		46,206			7.62
Commercial	291,216			43.28		294,354			48.47		291,297			50.27		256,254			45.08		246,037			43.92		345,113			42.05		328,927			41.91		312,525			43.18		291,216			43.47		294,354			48.54
Construction and land development	110,920			16.48		68,479			11.28		45,136			7.79		56,406			9.92		52,484			9.37
Construction - custom and owner/builder																										119,555			14.57		117,641			14.99		93,049			12.85		62,954			9.40		59,752			9.85
Construction - speculative one- to four-family																										15,433			1.88		9,918			1.26		8,106			1.12		6,668			1.00		2,577			0.42
Construction - commercial																										39,590			4.82		19,630			2.50		9,365			1.29		20,728			3.09		3,310			0.55
Construction - multi-family																										10,740			1.31		21,327			2.72		12,590			1.74		20,570			3.07		2,840			0.47
Construction - land development																										3,040			0.37		—			—		—			—		—			—		—			—
Land	26,140			3.88		29,589			4.87		31,144			5.37		39,655			6.98		49,236			8.79		25,546			3.11		23,910			3.05		21,627			2.99		26,140			3.90		29,589			4.88
Total mortgage loans	600,313			89.21		537,162			88.45		522,983			90.25		506,815			89.16		493,419			88.08		736,886			89.78		698,107			88.95		638,125			88.16		597,262			89.16		536,263			88.43

Consumer Loans:
Home equity and second mortgage	34,157			5.08		34,921			5.75		33,014			5.70		32,814			5.77		36,008			6.43		37,341			4.55		38,420			4.90		39,727			5.49		34,157			5.10		34,921			5.76
Other	4,669			0.69		4,699			0.77		5,981			1.03		6,183			1.10		8,240			1.47		3,515			0.43		3,823			0.49		4,139			0.57		4,669			0.70		4,699			0.77
Total consumer loans	38,826			5.77		39,620			6.52		38,995			6.73		38,997			6.87		44,248			7.90		40,856			4.98		42,243			5.39		43,866			6.06		38,826			5.80		39,620			6.53
Commercial business loans	33,763			5.02		30,559			5.03		17,499			3.02		22,588			3.97		22,510			4.02
Total loans	672,902			100.00	%	607,341			100.00	%	579,477			100.00	%	568,400			100.00	%	560,177			100.00	%
Commercial business loans (2)																										43,053			5.24		44,444			5.66		41,837			5.78		33,763			5.04		30,559			5.04
Total loans receivable																										820,795			100.00	%	784,794			100.00	%	723,828			100.00	%	669,851			100.00	%	606,442			100.00	%

Less:
Undisbursed portion of construction loans in process	(53,457		)			(29,416		)			(18,527		)			(16,325		)			(18,265		)			(83,237		)			(82,411		)			(48,627		)			(53,457		)			(29,416		)
Deferred loan origination fees	(2,193		)			(1,746		)			(1,710		)			(1,770		)			(1,942		)
Deferred loan origination fees, net																										(2,637		)			(2,466		)			(2,229		)			(2,193		)			(1,746		)
Allowance for loan losses	(9,924		)			(10,427		)			(11,136		)			(11,825		)			(11,946		)			(9,530		)			(9,553		)			(9,826		)			(9,924		)			(10,427		)
Total loans receivable, net	$	607,328				$	565,752				$	548,104				$	538,480				$	528,024				$	725,391				$	690,364				$	663,146				$	604,277				$	564,853

______________


(1)	~~Includes~~Does not include loans held-for-sale of ~~$3.1 million, $899,000, $1.9 million, $1.4 million~~$1,785, $3,515, $3,604, $3,051 and ~~$4.0 million~~$899 at September 30, 2018, 2017, 2016, 2015 ~~2014, 2013, 2012~~ and ~~2011,~~2014, respectively.

(2) Does not include loans held-for-sale of $84 at September 30, 2017.

Residential One- to Four-Family Lending. At September 30, ~~2015, $119.7~~2018, $115.94 million, or ~~17.8%~~14.1%, of the Bank’s loan portfolio consisted of loans secured by one- to four-family residences. The Bank originates both fixed-rate loans and adjustable-rate loans.

Generally, one- to four-family fixed-rate loans and five and seven year balloon reset loans (which are loans that are originated with a fixed interest rate for the initial five or seven years, and thereafter incur one interest rate change in which the new rate remains in effect for the remainder of the loan term) are originated to meet the requirements for sale in the secondary market to the Federal Home Loan Mortgage Corporation ("Freddie Mac") or the Federal Home Loan Bank of Des Moines ("FHLB"). From time to time, however, a portion of these fixed-rate ~~loans and five and seven year balloon reset~~ loans may be retained in the loan portfolio to meet the Bank’s asset/liability management objectives. The Bank uses an automated underwriting program, which preliminarily qualifies a loan as conforming to Freddie Mac underwriting standards when the loan is originated. At September 30, ~~2015, $37.3~~2018, $29.53 million, or ~~31.2%~~25.5%, ofof the Bank’s one- to four-family loan portfolio consisted of fixed-rate ~~and five and seven year balloon reset~~ mortgage loans.

The Bank also offers adjustable-rate mortgage (“ARM”) loans. All of the Bank’s ARM loans are retained in its loan portfolio. The Bank offers several ARM products which adjust annually or every three to five years after an initial period ranging from one to five years and are typically subject to a limitation on the annual interest rate increase of 2% and an overall limitation of 6%. These ARM products generally are ~~priced~~re-priced utilizing the weekly average yield on one year U.S. Treasury securities adjusted to a constant maturity of one year plus a margin ofo ~~2.88%~~f 2.75% to ~~4.00~~%4.00%. The Bank also offers ARM loans tied to ~~the~~The Wall Street Journal prime lending rate ~~or to the London Inter-Bank Offered Rate (“LIBOR”~~("Prime Rate") ~~indices~~index which typically do not have periodic or lifetime adjustment limits. Loans tied to ~~these indices~~the Prime Rate normally have margins ranging up to ~~3.5~~3.0%. ARM loans held in the Bank’s portfolio do not permit negative amortization of principal. Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment. At September 30, ~~2015, $82.4~~2018, $86.41 million, or ~~68.8%~~74.5%, of the Bank’s one- to four- family loan portfolio consisted of ARM loans.

A portion of the Bank’s ARM loans are “non-conforming”, because they do not satisfy acreage limits or various other requirements imposed by Freddie Mac. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Freddie Mac credit requirements because of personal and financial reasons (i.e., divorce, bankruptcy, length of time employed, etc.), and other aspects, which do not conform to Freddie Mac’s guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. These loans are known as non-conforming loans, and the Bank may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. The Bank believes that these loans satisfy a need in its local market area. As a result, subject to market conditions, the Bank intends to continue to originate these types of loans.

The retention of ARM loans in the Bank’s loan portfolio helps reduce the Bank’s exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased interest to be paid by the customer as a result of increases in interest rates. It is possible that during periods of rising interest rates the risk of default on ARM loans may increase as a result of repricing and the increased costs to the borrower. The Bank attempts to reduce the potential for delinquencies and defaults on ARM loans by qualifying the borrower based on the borrower’s ability to repay the ARM loan assuming ~~that~~a 2.0% increase in the ~~maximum~~initial interest ~~rate that could be charged during the loan term.~~rate. Another consideration is that although ARM loans allow the Bank to increase the sensitivity of its asset base due to changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, the Bank has no assurance that yield increases on ARM loans will be sufficient to offset increases in the Bank’s cost of funds.

While fixed-rate, single-family residential mortgage loans are normally originated with 15 to 30 year terms to maturity, these loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all mortgage loans in the Bank’s loan portfolio contain due-on-sale clauses providing that the Bank may declare the unpaid amount due and payable upon the sale of the property securing the loan. Typically, the Bank enforces these due-on-sale clauses to the extent permitted by law and as business judgment dictates. Thus, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates received on outstanding loans.

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. 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)~~Mac or the FHLB). At September 30, ~~2015, 17~~2018, five one- to four-family loans totaling ~~$2.4 million~~$545,000 were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.”

Multi-Family Lending. At September 30, ~~2015, the Bank had~~ 2018,~~$52.3~~ $61.93 million, or 7.5%, ~~, or~~ ~~7.8%~~, of the Bank’s total loan portfolio was secured by multi-family dwelling units (more than four units) located primarily in the Bank’s primary market area. Multi-family loans are generally originated with variable rates of interest ranging from 1.00% to ~~3.50%~~3.50% over the one-year constant maturity U.S. Treasury Bill Index, the Prime Rate or a matched term ~~FHLB advance,~~Federal Home Loan Bank borrowing, with principal and interest payments fully amortizing over terms of up to 30 years. At September 30, ~~2015,~~2018, the Bank’s largest multi-family loan had an outstanding principal balance ofo ~~$7.7~~ ~~million~~f $6.24 million and was secured by an apartment building located in Thurston County. At September 30, ~~2015,~~2018, 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 Bank generally requests its multi-family loan borrowers with loan balances in excess of $750,000 to submit financial statements and rent rolls annually on the properties securing such loans. The Bank also inspects such properties annually. The Bank generally imposes a minimum debt coverage ratio of ~~approximately~~ 1.20 for loans secured by multi-family properties.

Multi-family mortgage lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four- family residential lending. However, loans secured by multi-family properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, may involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. 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, ~~2015, one~~2018, all multi-family ~~loan with a balance of $760,000 was on non-accrual status.~~loans were performing according to their repayment terms. See "Lending Activities - Non-performing Loans and Delinquencies."

Commercial Real Estate Lending. Commercial real estate loans totaled ~~$291.2~~$345.11 million,, or ~~43.3%~~42.0%, of the total loan portfolio at September 30, ~~2015.~~2018. The Bank originates commercial real estate loans generally at variable interest rates with principal and interest payments fully amortizing over terms of up to 30 years. These loans are secured by properties, such as office buildings, retail/wholesale facilities, mini-storage facilities, motels, nursing homes, restaurants and convenience stores, generally located in the Bank’s primary market area. At September 30, ~~2015,~~2018, the largest commercial real estate loan was secured by an office building in ~~Grays Harbor~~Thurston County, had a balance of ~~$5.9~~ $7.90 million and was ~~performing~~performing according to its repayment terms. AtSeptember 30, ~~2015,~~ ~~three~~ 2018, no commercial real estate loans ~~totaling $1.0 million~~ were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.”

The Bank typically requires appraisals of properties securing commercial real estate loans. For loans that are less than $250,000, the Bank may use the tax assessed value and a property inspection in lieu of an appraisal. Appraisals are performed by independent appraisers designated by the Bank. The Bank considers the quality and location of the real estate, the credit history of the borrower, the cash flow of the project and the quality of management involved with the ~~property.~~property when making these loans. The Bank generally imposes a minimum debt coverage ratio of approximately 1.20 for ~~originated~~ loans secured by income producing commercial properties. Loan-to-value ratios on commercial real estate loans are generally limited to not more than 80%. 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.

Commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by generally limiting the maximum loan-to-value ratio to 80% and scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Bank also generally requests annual financial information and rent rolls on the subject property from the borrowers on loans over $750,000.

Construction ~~and Land Development~~ Lending. The Bank currently originates three types of residential construction loans: (i) custom construction loans, (ii) owner/builder construction loans and (iii) speculative construction ~~loans (on a limited basis).~~loans. The Bank believes that its ~~computer tracking system~~long tenure 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 ~~the~~multi-family properties, commercial properties, and land development ~~of multi-family and commercial properties.~~projects. The Bank's construction loans generally provide for the payment of interest only during the construction ~~phase. The $42.4 million or 62% increase in~~ phase, which is billed monthly, although during the term of some

construction loans ~~over~~no payment from the ~~past year reflects our decision~~borrower is required since the accumulated interest is added to ~~increase construction~~the principal of the loan ~~origination activity reflecting the improvement in real estate values and general economic conditions in our market areas.~~through an interest reserve. At September 30, ~~2015,~~2018, the Bank's construction ~~and land development~~ loans totaled ~~$110.9~~$188.36 million, or ~~16.5%~~22.9% of the Bank's total loan portfolio, ~~and consisted entirely~~including undisbursed loans in process of ~~construction loans.~~$83.24 million.

At September 30, ~~2015~~2018 and ~~2014,~~2017, the composition of the Bank’s construction loan portfolio was as follows:


	At September 30,								At September 30,
	2015				2014				2018				2017
	Outstanding Balance		Percent of Total		Outstanding Balance		Percent of Total		Outstanding Balance		Percent of Total		Outstanding Balance		Percent of Total
	(Dollars in thousands)								(Dollars in thousands)
Custom and owner/builder	$	62,954	56.76	%	$	59,752	87.26	%	$	119,555	63.47	%	$	117,641	69.81	%
Speculative one-to four-family	6,668		6.01		2,577		3.76		15,433		8.19		9,918		5.89
Commercial real estate	20,728		18.69		3,310		4.83		39,590		21.02		19,630		11.65
Multi-family (including condominium)	20,570		18.54		2,840		4.15
Multi-family									10,740		5.70		21,327		12.65
Land development									3,040		1.62		—		—
Total	$	110,920	100.00	%	$	68,479	100.00	%	$	188,358	100.00	%	$	168,516	100.00	%

Custom construction loans are made to home builders who, at the time of construction, have a signed contract with a home buyer who has a commitment to purchase the finished home. Custom construction loans are generally originated for a term of six to 12 months, with fixed interest rates typically ranging from ~~4.25%~~5.25% to 6.25% and with loan-to-value ratios of 80%80% or less of the appraised estimated value of the completed property or sales price, whichever is less. Custom and owner/builder construction loans are either originated with six to twelve month maturities or are structured to convert to permanent mortgage loans once construction is completed.

Owner/builder construction loans are originated to home owners rather than home builders and are typically converted to or refinanced into permanent loans at the completion of construction. The construction phase of an owner/builder construction loan generally lasts up to 12 months with fixed interest rates typically ranging from ~~4.25%~~4.50% to ~~6.25%~~6.75% and with loan-to-value ratios of 80% (or up to 95% with PMI) of the appraised estimated value of the completed property. At the completion of construction, the loan is converted to or refinanced into either a fixed-rate mortgage loan, which conforms to secondary market standards, or an ARM loan for retention in the Bank’s portfolio. At September 30, ~~2015,~~2018, custom and owner/builder construction loans totaled ~~$63.0~~$119.56 million,, or ~~56.8%~~ 63.5% of the total construction ~~and land development~~ loan portfolio. At September 30, ~~2015,~~2018, the largest outstanding custom and owner/builder construction loan had an outstanding balance of ~~$2.0~~$1.30 million (including ~~$776,000~~$664,000 of undisbursed loans in process) and was performing according to its repayment terms.

Speculative one-to four-family construction loans are made to home builders and are termed “speculative” because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either the Bank or another lender for the finished home. The home buyer may be identified either during or after the construction period, with the risk that the builder will have to debt service the speculative construction loan and ~~finance~~pay real estate taxes and other carrying costs of the completed home for a significant time after the completion of construction until the home buyer is identified and a sale is consummated. Rather than originating lines of credit to home builders to construct several homes at once, the Bank generally originates and underwrites a separate loan for each home. Speculative construction loans are generally originated for a term of 12 months, with current rates ~~averagin~~generally ranging from 6.00% to~~g 6.00%~~ 7.00%, and with a loan-to-value ratio of no more than ~~80%~~ 80% of the appraised ~~estimated~~ value of the completed property. ~~The Bank is currently originating speculative construction loans on a limited basis.~~ At September 30, ~~2015,~~2018, speculative one- to four-family construction loans totaled ~~$6.7~~$15.43 million, or ~~6.0%~~8.2% , of the total construction ~~and land development~~ loan portfolio. At September 30, ~~2015,~~2018, the largest aggregate outstanding balance to one borrower for speculative one- to four-family construction loans ~~totaled $671,000~~totaled $2.35 million (including ~~$223,000 o~~f$1.51 million of undisbursed loans in process) and was comprised of ~~two~~seven loans that were ~~performing~~performing according to their repayment terms.

The Bank also provides construction financing for multi-family and commercial properties. At September 30, ~~2015,~~2018, these loans amounted to ~~$41.3~~$50.33 million,, or ~~37.2%~~26.7%, of construction ~~and land development loans~~loan balances compared ~~to $6.2~~to $40.96 million, or ~~9.0%~~24.3%, of construction ~~and land development loans~~loan balances at September 30, ~~2014.~~2017. These loans are typically secured by ~~condominiums,~~ apartment buildings, condominiums, mini-storage facilities, office buildings, hotels and retail rental space predominantly located in the Bank’s primary market area. AtSeptember 30, ~~2015,~~2018, the largest outstanding multi-family construction loan was secured by an apartment building

project in ~~Pierce~~Thurston County and had a balance of ~~$6.8~~$6.70 million (including ~~$5.5~~$2.28 million of undisbursed construction loan proceeds) and was performing according to its repayment terms. At September 30, ~~2015,~~2018, the largest outstanding commercial real estate construction loan was secured by an assisted living facility project in King County and had a balance of ~~$6.0 million (including $2.8 million of undisbursed construction~~ $6.10 million. This loan ~~proceeds). This loan was secured by a mixed use building being constructed in Pierce County and~~ was performing according to its repayment ~~terms.~~terms at September 30, 2018.

All construction loans must be approved by a member of one of the Bank’s Loan Committees or the Bank’s Board of Directors, or in the case of one- to four-family construction loans that meet Freddie Mac guidelines, by the Regional Manager of Community Lending, the Loan Department Supervisor or a Bank underwriter. See “- Lending Activities - Loan Solicitation and Processing.” Prior to ~~preliminary~~ approval of any construction loan application, an independent fee appraiser inspects the site and prepares and appraisal on an "as completed" basis and the Bank reviews the existing or proposed improvements, identifies the market for the proposed project and analyzes the pro-forma data and assumptions on the project. In the case of a speculative or custom construction loan, the Bank reviews the experience and expertise of the builder. After this preliminary ~~approval has been given,~~review, the application is processed, which includes obtaining credit reports, financial statements and tax returns or verification of income on the borrowers and guarantors, an independent appraisal of the project, and any other expert reports necessary to evaluate the proposed project. In the event of cost overruns, the Bank generally requires that the borrower increase the funds available for construction by paying the cost of such overruns directly or by depositing its own funds into a secured savings account, the proceeds of which are used to pay construction ~~costs.~~costs, or to the extent available authorizes disbursements from a loan contingency line in the construction budget.

Loan disbursements during the construction period are made to the builder, materials supplier or subcontractor, based on a line item budget. Periodic on-site inspections are made by qualified independent inspectors to document the reasonableness of draw requests. For most builders, the Bank disburses loan funds by providing vouchers to borrowers, which when used by the borrower to purchase supplies are submitted by the supplier to the Bank for payment.

The Bank originates construction loan applications primarily through customer referrals, contacts in the business community and occasionally real estate brokers seeking financing for their clients.

Construction lending affords the Bank the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending. Construction lending, however, is generally considered to involve a higher degree of risk than single-family permanent mortgage lending because funds are advanced upon the collateral for the project based on an estimate of the costs that will produce a future value at completion. Because of the uncertainties inherent ~~difficulty~~ in estimating ~~both~~construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a ~~property’s~~project and the completed project loan-to-value ratio. With regard to loans originated to builders for speculative projects, changes in the demand, such as for new housing and higher than anticipated building costs, may cause actual results to vary significantly from those estimated. A downturn in the housing, or the real estate market, could increase loan delinquencies, defaults, and foreclosures, and significantly impair the value atof our collateral and our ability to sell the collateral upon foreclosure. Some builders who have borrowed from us to fund construction projects on a speculative basis have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.

In addition, during the term of many of our construction loans granted to builders who are building residential units for sale, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and the estimated cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, the borrower may be confronted with a project whose value is insufficient to assure full repayment and the Bank may incur a loss. ~~Projects~~Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may ~~also be jeopardized~~have a more pronounced effect on construction loans by ~~disagreements between borrowers and builders and by~~rapidly increasing the ~~failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry more risk because~~end-purchasers' borrowing costs, thereby reducing the ~~payoff~~overall demand for the ~~loan depends on the builder’s ability~~project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the ~~property prior~~process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Furthermore, in the ~~time that the construction loan is due. The Bank has sought to address these risks by adhering to strict underwriting policies, disbursement procedures, and monitoring practices. The Bank’s~~case of speculative construction loans, ~~are primarily secured by properties in its primary market area, and changes in~~there is an added risk associated with identifying an end-purchaser for the local and state economies and real estate markets have adversely affected the Bank’s construction loan portfolio. At September 30, 2015, all construction loans were performing according to their repayment terms. See "Lending Activities - Non-performing Loans and Delinquencies."finished project.

The Bank historically originated loans to real estate developers with whom it had established relationships for the purpose of developing residential subdivisions (i.e., installing roads, sewers, water and other utilities; generally with ten to 50 lots). ~~The Bank is not currently originating any new land development loans and at~~At September 30, ~~2015,~~2018, the Bank had no$3.00 million in land development loans outstanding. ~~Although~~Currently, the Bank is ~~not currently~~ originating land development loans ~~it may do so in the future. Historically land~~on a limited basis. Land development loans ~~were~~are secured by a lien on the property and typically ~~were~~are made for a period of two to five years with fixed or variable interest rates, ~~and were made~~ with loan-to-value ratios generally not exceeding 75%. Land development loans ~~were~~are generally structured so that the Bank ~~was~~is repaid in full upon the sale by the borrower of approximately 80% of the subdivision lots. In addition, in the case of a corporate borrower, the Bank also generally ~~obtained~~obtains personal guarantees from corporate principals (with ownership interests in the borrowing entity of 20% or more) and ~~reviewed~~reviews their personal financial statements.

Land development loans secured by land under development involve greater risks than one- to four-family residential

mortgage loans because these ~~loans~~loan funds are advanced upon the predicted future value of the developed property upon completion. If the estimate of the future 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. 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. At September 30, 2018 all construction loans were performing according to their repayment terms. See "Lending Activities - Non-performing Loans and Delinquencies."

Land Lending. The Bank ~~has historically originated~~originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to ~~sell as improved lots. Currently the Bank is originating~~ use for recreational purposes.~~land loans on a limited basis.~~ AtSeptember 30, ~~2015,~~2018, land loans totaled~~$26.1~~ $25.55 million, or 3.1%, ~~, or~~ ~~3.9%~~, of the Bank’s total loan ~~portfolio as compared to $29.6 million, or 4.9%, of the Bank’s total loan portfolio at September 30, 2014.~~portfolio. Land loans originated by the Bank generally have maturities of ~~five~~one to ten years. The largest land loan is secured by land in ~~Grays Harbor~~Thurston County, had an outstanding balance of ~~$2.6~~$1.50 million and was performing according to its repayment terms at September 30, ~~2015.~~2018. At September 30, ~~2015, six~~ 2018, two land loans totaling ~~$1.6~~ ~~million~~ $243,000 were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.”

Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because these loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default 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. These risks can be significantly impacted by supply and demand conditions. The Bank attempts to minimize ~~this risk~~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. Consumer loans include home equity lines of credit, second mortgage loans, savings account loans, automobile loans, boat loans, motorcycle loans, recreational vehicle loans and unsecured loans. Consumer loans are made with both fixed and variable interest rates and with varying terms. At September 30, ~~2015,~~2018, consumer loans amounted to ~~$38.8~~$40.86 million, or ~~5.8%~~5.0%, of the Bank's total loan portfolio.

At September 30, ~~2015,~~2018, the largest component of the consumer loan portfolio consisted of second mortgage loans and home equity lines of credit, which totaled ~~$34.2~~$37.34 million,, or ~~5.1%~~4.6%, of the Bank's total loan portfolio. Home equity lines of credit and second mortgage loans are made for purposes such as the improvement of residential properties, debt consolidation and education expenses, among others. The majority of these loans are made to existing customers and are secured by a first or second mortgage on residential property. The loan-to-value ratio is typically ~~80%~~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 or the 26 week Treasury Bill.~~Prime Rate. Second mortgage loans and home equity lines of credit have greater credit risk than one- to four-family residential mortgage loans in which the Bank is in the first lien position because they are generally secured by mortgages subordinated to the existing first mortgage on the property. For those second mortgage loans and home equity lines credit which the Bank does not hold the existing first mortgage on the property, ~~which may~~it is unlikely that the Bank will be successful in recovering all or ~~may not be held~~a portion of the loan balance in the event of default unless the Bank is prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the ~~Bank.~~value of the property.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. The Bank believes that these risks are not as prevalent in the case of the Bank’s consumer loan portfolio because a large percentage of the portfolio consists of second mortgage loans and home equity lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one- to four-family residential mortgage loans. At September 30, ~~2015,~~2018, five consumer loans totaling ~~$338,000~~$359,000 were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.”

Commercial Business Lending. Commercial business loans totaled ~~$33.8~~$43.05 million, or ~~5.0%~~5.2%, of the loan portfolio at September 30, ~~2015.~~2018. Commercial business loans are generally secured by business equipment, accounts receivable, inventory and/or other property and are made at variable rates of interest equal to a negotiated margin above the ~~prime rate.~~Prime Rate. The Bank also generally obtains personal guarantees from the principals based on a review of personal financial statements. The largest commercial business loan had an outstanding balance of ~~$1.9~~$1.86 million at September 30, ~~2015~~2018 and was performing according to its repayment

terms. At September 30, ~~2015, all~~2018, two commercial business loans totaling $170,000 were ~~performing according to their repayment terms.~~on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.”

The Bank has recently increased commercial business loan originations made under the U.S. Small Business Administration ("SBA") 7(a) program. Loans made by the Bank under the SBA 7(a) program generally are made to small businesses to provide working capital or to provide funding for the purchase of businesses, real estate, or equipment. These loans generally are secured by a combination of assets that may include equipment, receivables, inventory, business real property, and sometimes a lien on the personal residence of the borrower. The terms of these loans vary by purpose and type of underlying collateral. 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 a SBA guaranty for up to 85% of the loan. Typical maturities for this type of loan vary but can be up to ten years. 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. The loan servicing spread is generally a minimum of 1.00% on all SBA 7(a) loans. The Bank generally offers SBA 7(a) loans within a range of $50,000 to $1.00 million.

Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable and/or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial

business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

Loan Maturity. The following table sets forth certain information at September 30, ~~2015~~2018 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity but does not include scheduled payments or potential prepayments. Loans having no stated maturity and overdrafts are reported as due in one year or less.


	Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		After 10 Years		Total			Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		After 10 Years		Total
	(In thousands)													(Dollars in thousands)
Mortgage loans:
One- to four-family ~~(1)~~	$	3,209	$	1,799	$	1,926	$	28,178	$	84,603	$	119,715		$	325	$	1,119	$	2,317	$	38,822	$	73,358	$	115,941
Multi-family	3,277		3,881		12,833		28,788		3,543		52,322			—		979		7,953		52,497		499		61,928
Commercial	9,790		44,206		45,080		181,224		10,916		291,216			12,768		24,054		54,763		248,507		5,021		345,113
Construction and land development (2)	83,711		27,209		—		—		—		110,920
Construction (1)														188,358		—		—		—		—		188,358
Land	6,614		12,016		3,137		3,699		674		26,140			12,252		7,035		2,191		2,900		1,168		25,546
Consumer loans:
Home equity and second mortgage	4,249		4,400		2,440		13,413		9,655		34,157			3,930		5,505		5,147		14,766		7,993		37,341
Other	1,227		323		411		1,159		1,549		4,669			835		227		266		594		1,593		3,515
Commercial business loans	7,185		10,458		5,951		9,148		1,021		33,763			21,459		5,873		5,215		10,048		458		43,053
Total	$	119,262	$	104,292	$	71,778	$	265,609	$	111,961	672,902			$	239,927	$	44,792	$	77,852	$	368,134	$	90,090	820,795

Less:
Undisbursed portion of construction loans in process											(53,457		)											(83,237		)
Deferred loan origination fees											(2,193		)
Deferred loan origination fees, net																								(2,637		)
Allowance for loan losses											(9,924		)											(9,530		)
Total loans receivable, net											$	607,328												$	725,391

_____________


~~(1)~~	~~Includes $3.1 million of loans held-for-sale.~~


~~(2)~~	~~Includes construction/permanent loans that convert to permanent mortgage loans once construction is completed.~~

(1) Includes $119.56 million of construction/permanent loans, a portion of which may convert to permanent mortgage loans once construction is completed.

The following table sets forth the dollar amount of all loans due after one year from September 30, ~~2015,~~2018, which have fixed interest rates and have floating or adjustable interest ~~rates.~~

rates:


	Fixed Rates		Floating or Adjustable Rates		Total		Fixed Rates		Floating or Adjustable Rates		Total
	(In thousands)						(Dollars in thousands)
Mortgage loans:
One- to four-family ~~(1)~~	$	34,484	$	82,022	$	116,506	$	29,531	$	86,085	$	115,616
Multi-family	2,598		46,447		49,045		1,293		60,635		61,928
Commercial	55,504		225,922		281,426		35,467		296,878		332,345
Construction and land development	27,209		—		27,209
Land	9,083		10,443		19,526		5,761		7,533		13,294
Consumer loans:
Home equity and second mortgage	12,021		17,887		29,908		9,708		23,703		33,411
Other	3,125		317		3,442		1,752		928		2,680
Commercial business loans	16,170		10,408		26,578		11,463		10,131		21,594
Total	$	160,194	$	393,446	$	553,640	$	94,975	$	485,893	$	580,868

~~_____________~~


~~(1)~~	~~Includes $3.1 million of loans held-for-sale.~~

Scheduled contractual principal repayments of loans do not reflect the actual life of these assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan interest rates are substantially higher than interest rates on existing mortgage loans and, conversely, decrease when interest rates on existing mortgage loans are substantially higher than current mortgage loan interest rates.

Loan Solicitation and Processing. Loan originations are obtained from a variety of sources, including walk-in customers and referrals from builders and realtors. Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicant’s employment, income and credit standing. An appraisal of the real estate offered as collateral generally is undertaken by a certified appraiser retained by the Bank.

Loan applications are initiated by loan officers and are required to be approved by an authorized loan officer or Bank underwriter, one of the Bank’s Loan Committees or the Bank’s Board of Directors. The Bank’s Consumer Loan Committee consists of several underwriters, each of whom can approve one- to four-family mortgage loans and other consumer loans up to and including the current Freddie Mac single-family limit. Loan officers may also be granted individual approval authority for certain loans up to a maximum of $250,000. The approval authority for individual loan officers is granted on a case by case basis by the Bank's Chief Credit Administrator or President. All construction loans must be approved by a member of one of the Bank's Loan Committees or the Bank's Board of Directors, or in the case of one- to four- family construction loans that meet Freddie Mac guidelines, by the Regional Manager of Community Lending, the Loan Department Supervisor or a Bank underwriter, subject to their individual or Loan Committee loan limit. The Bank’s Commercial Loan Committee, which consists of the Bank’s President, Chief Credit Administrator, Executive Vice President of Lending and Regional Manager of Community Lending, may approve commercial real estate loans and commercial business loans up to and including ~~$1.5~~$1.50 million. The Bank’s 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 President, may approve loans up to and including ~~$3.0~~$3.00 million. Loans in excess of ~~$3.0~~$3.00 million, as well as loans of any amount granted to a single borrower whose aggregate loans exceed ~~$3.0~~$3.00 million, must be approved by the Bank’s Board of Directors.

Loan Originations, Purchases and Sales. During the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, the Bank’s total gross loan originations were ~~$265.5~~$329.59 million, ~~$185.8~~$340.61 million and ~~$217.8~~$267.35 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 ~~lenders.~~banks. 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, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, the Bank purchased loan participation interests of ~~$7.3~~$8.40 million, ~~$1.9~~$13.10 million and ~~$43,000,~~$898,000, respectively. ~~See “- Lending Activities - Construction and Land Development Lending” and “- Lending Activities - Multi-Family Lending.”~~

Consistent with its asset/liability management strategy, the Bank’s policy generally is to retain in its portfolio all ARM loans originated and to sell fixed rate one- to four-family mortgage loans in the secondary market to Freddie Mac; however, from time to time, a portion of fixed-rate loans may be retained in the Bank’s portfolio to meet its asset-liability objectives. The Bank also began selling the guaranteed portion of some of its SBA 7(a) loans in the secondary market during the year ended September

30, 2016. Loans sold in the secondary market are generally sold on a servicing retained basis. At September 30, ~~2015,~~2018, the Bank’s loan servicing portfolio, which is not included in the Company’s consolidated financial statements, totaled ~~$331.5~~$370.93 million.

The Bank also periodically sells participation interests in construction ~~and land development~~ loans, commercial real estate loans, multi-family and ~~land~~commercial business loans to other lenders. These sales are usually made to avoid concentrations in a particular loan type or concentrations to a particular ~~borrower.~~borrower and to generate fee income. During the ~~year~~years ended September 30, ~~2015,~~2018, 2017 and 2016, the Bank sold loan participation interests ~~to other lenders~~ of $3.6 million. During the year ended September 30, 2014, the Bank did not sell any loan participation interests. During the year ended September 30, 2013, the Bank sold loan participation interests to other lenders of $4.3 million.$253,000, $9.28 million, and $321,000, respectively.

The following table shows total loans originated, purchased, sold and repaid during the periods indicated.


	Year Ended September 30,									Year Ended September 30,
	2015			2014			2013			2018			2017			2016
Loans originated:	(In thousands)									(Dollars in thousands)
Mortgage loans:
One- to four-family	$	86,644		$	44,015		$	104,879		$	81,313		$	88,642		$	74,131
Multi-family	12,643			701			7,530			10,362			7,841			18,340
Commercial	35,921			45,215			50,314			68,443			58,777			43,942
Construction and land development	100,875			61,246			38,491
Construction										125,683			144,349			95,029
Land	6,570			4,174			1,853			16,300			14,056			4,515
Consumer	15,140			13,143			11,237			20,151			21,999			22,569
Commercial business loans	7,699			17,273			3,499			7,339			4,947			8,824
Total loans originated	265,492			185,767			217,803			329,591			340,611			267,350

Loans purchased:
Loans and loan participations purchased:
Mortgage loans:
One- to four-family	313			—			—
Commercial	—			1,911			—
Multi-family	—			—			43
Construction and land development	5,500			—			—
Construction										7,548			11,100			400
Commercial business	1,500			—			—			855			2,000			498
Total loans purchased	7,313			1,911			43			8,403			13,100			898
Total loans originated and purchased	272,805			187,678			217,846			337,994			353,711			268,248

Loans sold:
Partial loans sold	(3,600		)	—			(4,263		)
Loan participation interests sold										—			(9,284		)	(321		)
Whole loans sold	(53,948		)	(33,345		)	(89,352		)	(66,384		)	(72,158		)	(58,582		)
Total loans sold	(57,548		)	(33,345		)	(93,615		)	(66,384		)	(81,442		)	(58,903		)

Loan principal repayments	(149,696		)	(126,469		)	(113,154		)	(235,609		)	(211,303		)	(155,368		)
Other items, net	(23,985		)	(10,216		)	(1,453		)	(974		)	(33,748		)	4,892
Net increase in loans receivable	$	41,576		$	17,648		$	9,624		$	35,027		$	27,218		$	58,869

Loan Origination Fees. The Bank receives loan origination fees on many of its mortgage loans and commercial business loans. Loan fees are a percentage of the loan which are charged to the borrower for funding the loan. The amount of fees charged by the Bank is generally up to 2.0% of the loan amount. Accounting principles generally accepted in the United States of America ("GAAP") require fees received and certain loan origination costs for originating loans to be deferred and amortized into interest income over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid are recognized as income/expense at the time of prepayment. Unamortized net deferred loan origination fees totaled ~~$2.2~~$2.64 million at September 30, ~~2015.~~2018.

Non-performing Loans and Delinquencies. The Bank assesses late fees or penalty charges on delinquent loans of approximately 5% of the monthly loan payment amount. A majority of loan payments are due on the first day of the month; however, the borrower is given a 15 day grace period to make the loan payment. When a mortgage loan borrower fails to make a required payment when due, the Bank institutes collection procedures. A notice is mailed to the borrower 16 days after the date the payment is due. Attempts to contact the borrower by telephone generally begin on or before the 30^th day of delinquency. If a satisfactory response is not obtained, continuous follow-up contacts are attempted until the loan has been brought current. Before

the 90th day of delinquency, attempts are made to establish (i) the cause of the delinquency, (ii) whether the cause is temporary, (iii) the attitude of the borrower toward repaying the debt, and (iv) a mutually satisfactory arrangement for curing the default.

If the borrower is chronically delinquent and all reasonable means of obtaining payment on time have been exhausted, foreclosure is initiated according to the terms of the security instrument and applicable law. Interest income on loans in foreclosure is reduced by the full amount of accrued and uncollected interest.

When a consumer loan borrower or commercial business borrower fails to make a required payment on a loan by the payment due date, the Bank institutes similar collection procedures as for its mortgage loan borrowers. All loans becoming 90 days or more past due are placed on non-accrual status, with any accrued interest reversed against interest income, unless they are well secured and in the process of collection.

The Bank’s Board of Directors is ~~informed~~updated monthly as to the status of loans that are delinquent by more than 30 days and the status of all foreclosed and repossessed property owned by the Bank.

The following table sets forth information with respect to the Company's non-performing assets at the dates ~~indicated.~~indicated:


	At September 30,															At September 30,
	2015			2014			2013			2012			2011			2018			2017			2016			2015			2014
Loans accounted for on a non-accrual basis:	(Dollars in thousands)															(Dollars in thousands)
Mortgage loans:
One- to four-family(1)	$	2,368		$	4,376		$	6,985		$	3,382		$	2,150		$	545		$	874		$	914		$	2,368		$	4,376
Multi-family	760			—			—			1,449			—			—			—			—			760			—
Commercial	1,016			1,468			3,435			6,049			6,571			—			213			612			1,016			1,468
Construction and land development	—			—			659			1,570			3,522
Construction																—			—			367			—			—
Land	1,558			4,564			2,146			8,613			8,935			243			566			548			1,558			4,564
Consumer loans	338			501			385			268			367			359			258			432			338			501
Commercial business loans	—			—			—			—			44			170			—			—			—			—

Total	6,040			10,909			13,610			21,331			21,589			1,317			1,911			2,873			6,040			10,909

Accruing loans which are contractually past due 90 days or more	151			812			436			1,198			1,754			—			—			135			151			812

Total of non-accrual and 90 days past due loans	6,191			11,721			14,046			22,529			23,343			1,317			1,911			3,008			6,191			11,721

Non-accrual investment securities	932			1,101			2,187			2,442			2,796			406			533			734			932			1,101

Other real estate owned and other repossessed assets	7,854			9,092			11,720			13,302			10,811
Total non-performing assets (1)	$	14,977		$	21,914		$	27,953		$	38,273		$	36,950
Other real estate owned and other repossessed assets (2)																1,913			3,301			4,117			7,854			9,092
Total non-performing assets (3)																$	3,636		$	5,745		$	7,859		$	14,977		$	21,914

Troubled debt restructured loans on accrual status (2)	$	12,485		$	16,804		$	18,573		$	13,410		$	18,166
Troubled debt restructured loans on accrual status (4)																$	2,955		$	3,342		$	7,629		$	12,485		$	16,804

Non-accrual and 90 days or more past due loans as a percentage of loans receivable, net (3)	1.00		%	2.03		%	2.51		%	4.09		%	4.32		%
Non-accrual and 90 days or more past due loans as a percentage of loans receivable, net (5)																0.18		%	0.27		%	0.45		%	1.02		%	2.08		%

Non-accrual and 90 days or more past due loans as a percentage of total assets	0.76		%	1.57		%	1.88		%	3.06		%	3.16		%	0.13		%	0.20		%	0.34		%	0.76		%	1.57		%

Non-performing assets as a percentage of total assets	1.84		%	2.94		%	3.75		%	5.19		%	5.01		%	0.36		%	0.60		%	0.88		%	1.84		%	2.94		%

Loans receivable, net (3)	$	617,252		$	576,179		$	559,240		$	550,305		$	539,970
Loans receivable, net (5)																$	734,921		$	699,917		$	672,972		$	614,201		$	575,280
Total assets	$	815,815		$	745,565		$	745,648		$	736,954		$	738,224		$	1,018,290		$	952,024		$	891,388		$	815,815		$	745,565

_______________


~~(1)~~	~~Does not include troubled debt restructured loans on accrual status.~~


~~(2)~~	Does not include troubled debt restructured loans totaling $1.2 million, $2.3 million, $4.0 million, $10.1 million and $7.4 million reported as non-accrual loans at September 30, 2015, 2014, 2013, 2012 and 2011, respectively.


~~(3)~~	Loans receivable, net for this table includes loans held-for-sale and the deductions for the undisbursed portion of construction loans in process and deferred loan origination fees and does not include the deduction for the allowance for loan losses.

(1) Includes non-accrual one- to four-family properties in the process of foreclosure totaling $0, $100,

$138, $1,105 and $1,147 as of September 30, 2018, 2017, 2016, 2015 and 2014, respectively.

(2) Includes foreclosed residential real estate property totaling $0, $875, $1,071, $2,868, and $2,903

as of September 30, 2018, 2017, 2016, 2015 and 2014, respectively.

(3) Does not include troubled debt restructured loans on accrual status.

(4) Does not include troubled debt restructured loans totaling $323, $253, $531, $1,233 and $2,284

recorded as non-accrual loans as of September 30, 2018, 2017, 2016, 2015 and 2014, respectively.

(5) Loans receivable, net for this table includes the deductions for the undisbursed portion of construction loans in process

and deferred loan origination fees and does not include the deduction for the allowance for loan losses.

The Bank’s non-accrual loans decreased by ~~$4.9 million~~$594,000 to ~~$6.0~~$1.32 million at September 30, ~~2015~~2018 from ~~$10.9~~$1.91 million at September 30, ~~2014,~~2017, primarily as a result of a ~~$3.0 million~~$329,000 decrease in one-to four-family mortgage loans, a $323,000 decrease in land loans, a ~~$2.0~~ ~~million decrease in one- to four-family loans,~~ and a ~~$452,000~~ $213,000 decrease in commercial real estate loans, on non-accrual status. These decreases were partially offset by a ~~$760,000~~$170,000 increase in ~~multi-family~~commercial business loans ~~on non-accrual status, as~~and a ~~result of one loan secured by a multi-family property~~$101,000 increase in ~~Lewis County being placed~~consumer loans, on non-accrual status. A discussion of the Bank's largest non-performing loans is set forth below under “Asset Classification.”

Additional interest income which would have been recorded for the year ended September 30, ~~2015~~2018 had non-accruing loans been current in accordance with their original terms totaled $347,000~~3.1~~ ~~million.~~.

Other Real Estate Owned and Other Repossessed Assets. Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold. When property is acquired, it is recorded at the estimated fair market value less estimated costs to sell. At September 30, ~~2015,~~2018, the Bank had ~~$7.9~~$1.91 million of OREO and other repossessed assets consisting of 3412 individual properties, ~~and one mobile home,~~ a decrease of ~~$1.2~~$1.39 million from ~~$9.1~~$3.30 million at September 30, ~~2014~~2017. The OREO properties consisted of 2010 land parcels totaling ~~$3.4~~$1.47 million, ~~11 single family homes totaling $2.9 million, three~~and two commercial real estate properties totaling ~~$1.6 million, and one mobile home with a balance of $67,000.~~$448,000. The largest OREO property at September 30, ~~2015~~2018 was ~~a commercial building~~an undeveloped land parcel with a balance of ~~$1.1 million~~$874,000 located in ~~Grays Harbor~~Lewis County.

Restructured Loans. Under GAAP, the Bank is required to account for certain loan modifications or restructurings as “troubled debt restructurings” or "troubled debt restructured loans." ~~In general, the modification or restructuring of a debt constitutes a~~A troubled debt ~~restructuring if~~restructured loan ("TDR") is a loan for which the ~~Bank~~Company, for ~~economic or legal~~ reasons related to ~~the borrower’s~~a borrower's financial difficulties, grants a concession to the borrower that the ~~Bank~~Company would not otherwise consider. ~~Debt restructuring~~Examples of such concessions include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or ~~loan modifications~~re-amortizations, extensions, deferrals and renewals. TDRs are considered impaired and are individually evaluated for a borrower do not necessarily always constitute a troubled debt restructuring, however, and troubled debt restructurings do not necessarily result in non-accrual loans. Troubled debt restructured loansimpairment. TDRs are classified as either accrual or non-accrual. TDRs are classified as non-performing loans unless they have been performing in accordance with their modified terms for a period of at least six months. The Bank had ~~troubled debt restructured loans~~TDRs at September 30, ~~2015~~2018 and ~~2014~~2017 totaling ~~$13.7~~$3.28 million and ~~$19.1~~$3.60 million, respectively, of which ~~$1.2 million~~$323,000 and ~~$2.3 million,~~$253,000, respectively, were on non-accrual status. The allowance for loan losses allocated to ~~troubled debt restructured~~TDR loans at September 30, ~~2015~~2018 and ~~2014~~2017 was ~~$310,000~~$97,000 and ~~$973,000,~~$10,000, respectively.

Impaired Loans. AIn accordance with GAAP, a loan is considered impaired when based on current information and events it is probable ~~the Bank~~that a creditor will be unable to collect all ~~contractual principal~~amounts (principal and ~~interest payments~~interest) when due ~~in accordance with~~according to the ~~original or modified~~contractual terms of the loan agreement. ~~To determine specific valuation allowances,~~Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, ~~loans are~~the amount of the impairment is measured ~~based on~~by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral, ~~less~~reduced by estimated costs to sell (if applicable), or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated ~~cost~~fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to ~~sell if~~the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is ~~considered collateral dependent. Impaired~~recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans ~~not considered~~are applied to ~~be collateral dependent are measured based on~~reduce the ~~present value of expected future cash flows.~~principal balance.

The categories of non-accrual loans and impaired loans overlap, although they are not identical. The Bank considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be

placed on non-accrual status, such as the financial strength of the borrower, the collateral value, reasons for delay, payment record, the amount past due and the number of days past due. At September 30, ~~2015,~~2018, the Bank had ~~$24.4~~ m~~illion~~$4.27 million in impaired loans. For additional information on impaired loans, see Note 4 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Other Loans of Concern. Loans not reflected in the table above as non-performing, but where known information about possible credit problems of borrowers causes management to have doubts as to the ability of the borrower to comply with present repayment terms and that may result in disclosure of such loans as non-performing assets in the future, are commonly referred to as “other loans of concern” or “potential problem loans.” The amount included in potential problem loans results from an evaluation, on a loan-by-loan basis, of loans classified as “substandard” and “special mention,” as those terms are defined under “Asset Classification” below. The amount of potential problem loans (not included in the table above as non-performing) was ~~$23.5~~$5.0 million at September 30, ~~2015.~~2018. The vast majority of these loans are collateralized by real estate. See “Asset Classification” below for additional information regarding the Bank's problem loans.

Asset Classification. Applicable regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. 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. If the weakness or weaknesses are not corrected there is the distinct possibility that some loss will be sustained. Doubtful assets have the weaknesses of substandard assets with the additional ~~cha~~

~~racteristic~~characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the Bank is not warranted. When the Bank classifies problem assets as either substandard or doubtful, it is required to establish allowances for loan losses in an amount deemed prudent by management. 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. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated by the Bank as special mention. Special mention loans are defined as those credits deemed by management to have some potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan. Assets in this category are not adversely classified and currently do not expose the Bank to sufficient risk to warrant a substandard classification. The Bank’s determination of the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC and the Division which can require a different classification and the establishment of additional loss allowances.

The aggregate amounts of the Bank’s classified and special mention loans (as determined by the Bank), and of the Bank's allowances for loan losses at the dates indicated, were as follows:


	At September 30,						At September 30,
	2015		2014		2013		2018		2017		2016
	(In thousands)						(Dollars in thousands)
Loss	$	—	$	—	$	—	$	—	$	—	$	—
Doubtful	—		—		—		—		—		—
Substandard (1)(2)	12,717		18,056		27,978		3,182		3,253		5,036
Special mention (1)	17,016		27,106		22,916		3,123		7,783		15,065
Total classified and special mention loans	$	29,733	$	45,162	$	50,894	$	6,305	$	11,036	$	20,101

Allowance for loan losses	$	9,924	$	10,427	$	11,136	$	9,530	$	9,553	$	9,826

_____________


(1)	For further information concerning the change in classified assets, see “Non-performing Loans and Delinquencies" above.


(2)	Includes non-performing loans.

Loans classified as substandard decreased by ~~$5.4 million~~$71,000 to ~~$12.7~~ $3.18 million at September 30, ~~2015~~2018 from ~~$18.1~~$3.25 million at September 30, ~~2014.~~2017. At September 30, ~~2015,~~2018, 5328 loans were classified as ~~substandard compared to 51 loans at September 30, 2014.~~substandard. Of the ~~$12.7~~$3.18 million in loans classified as substandard at September 30, ~~2015, $6.0~~2018, $1.32 million were on non-accrual status. The largest loan classified as substandard at

September 30, ~~2015~~2018 had a balance of ~~$2.4 million~~$509,000 and was secured by a ~~self-storage facility~~single family home in ~~King~~Pierce County. This loan was performing according to its restructured payment terms at September 30, ~~2015.~~2018. The next largest loan classified as substandard at September 30, ~~2015~~2018 had a balance of ~~$1.0 million~~$386,000 and was secured by ~~land~~a commercial building in ~~Grays Harbor~~Pierce County. This loan was ~~on non-accrual status~~performing according to its payment terms at September 30, ~~2015.~~2018.

Loans classified as special mention decreased by ~~$10.1~~$4.66 million to ~~$17.0~~$3.12 million atSeptember 30, 2018 from $7.78 million at September 30, ~~2015 from $27.1 million at September 30, 2014,~~2017, primarily as a result of loans being upgraded to an improved risk grade category and loans being paid off during the year ended September 30, ~~2015. Ten individual~~2018. At September 30, 2018, nine loans ~~comprised $13.9 million, or 81.8%, of the $17.0 million in loans~~were classified as special mention. The largest loan classified as special mention at September 30, ~~2015. They include five commercial real estate loans totaling $7.0 million, four multi-family loans totaling $6.3 million~~2018 had a balance of $648,000 and was secured by land in Grays Harbor County. This loan was performing according to its payment terms at September 30, 2018. The next largest loan classified as special mention at September 30, 2018 had a balance of $581,000 and was secured by a one- to four-family property in Pierce County. This loan ~~with a balance of $626,000. All ten of these loans were current and paying in accordance with their required loan repayment~~was performing according to its payment terms at September 30, ~~2015.~~2018.

Allowance for Loan Losses. The allowance for loan losses is maintained to absorb ~~estimated~~probable losses inherent in the loan portfolio. The Bank has established a comprehensive methodology for the determination of provisions for loan losses that takes into consideration the need for an overall general valuation allowance. The Bank’s methodology for assessing the adequacy of its allowance for loan losses is based on its historic loss experience for various loan segments; adjusted for changes in economic conditions, delinquency rates and other factors. Using these loss estimate factors, management develops a range of probable loss for each loan category. Certain individual loans for which full collectibility may not be assured are evaluated individually with loss exposure based on estimated discounted cash flows or net realizable collateral values. The total estimated range of loss based on these two components of the analysis is compared to the loan loss allowance balance. Based on this review, management will adjust the allowance as necessary.

In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. 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.

At September 30, ~~2015,~~2018, the Bank’s allowance for loan losses totaled~~$9.9 million~~. $9.53 million. The Bank’s allowance for loan losses as a percentage of total loans receivable and non-performing loans wa~~s 1.61%~~was 1.30% and ~~160.30%~~723.61%, respectively, at September 30, ~~2015~~2018 and ~~1.81%~~1.36% and ~~88.96%~~499.90%, respectively, at September 30, ~~2014.~~2017. The decrease in the allowance for loan losses as a percentage of total loans receivable was primarily due to a decrease in non-performing loans and improvements in other underlying credit quality metrics in the loan portfolio.

Management believes that the amount maintained in the allowance for loan losses is adequate to absorb probable losses inherent in the portfolio. 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.

While the Bank believes 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. 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 as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Bank's financial condition and results of operations.

The following table sets forth an analysis of the Bank's allowance for loan losses for the periods ~~indicated.~~

indicated:


	Year Ended September 30,																Year Ended September 30,
	2015			2014				2013			2012			2011			2018			2017			2016			2015			2014
	(Dollars in thousands)																(Dollars in thousands)
Allowance at beginning of year	$	10,427		$	11,136			$	11,825		$	11,946		$	11,264		$	9,553		$	9,826		$	9,924		$	10,427		$	11,136
Provision for (recapture of) loan losses	(1,525		)	—				2,925			3,500			6,758
(Recapture of) provision for loan losses																	—			(1,250		)	—			(1,525		)	—

Recoveries:
Mortgage loans:
One- to four-family	264			194				95			74			151			—			21			56			264			194
Multi-family	3			—				—			14			41			—			—			—			3			—
Commercial	4			4				55			—			—			—			1,061			—			4			4
Construction	1,127			538				172			505			109
Construction - speculative one- to four-family																	13			6			2			2			—
Construction - multi-family																	—			—			181			1,125			251
Construction - land development																	—			—			—			—			287
Land	37			418				54			97			46			19			19			24			37			418
Consumer loans:
Home equity and second mortgage	2			7				5			14			42			—			—			—			2			7
Other	4			2				—			—			2			1			3			2			4			2
Commercial business loans	5			24				105			2			1			—			—			5			5			24
Total recoveries	1,446			1,187				486			706			392			33			1,110			270			1,446			1,187

Charge-offs:
Mortgage loans:
One- to four-family	(220		)	(1,106		)		(769		)	(276		)	(543		)	—			—			(72		)	(220		)	(1,106		)
Multi-family	—			—				—			(14		)	—			—			—			—			—			—
Commercial	—			(463		)		(667		)	(1,215		)	(47		)	(28		)	(13		)	(209		)	—			(463		)
Construction	—			—				(159		)	(885		)	(3,972		)
Land	(145		)	(260		)		(2,307		)	(1,251		)	(1,704		)	(22		)	(110		)	(61		)	(145		)	(260		)
Consumer loans:
Home equity and second mortgage	(50		)	(47		)		(184		)	(232		)	(150		)	—			—			(18		)	(50		)	(47		)
Other	(9		)	(6		)		(14		)	(24		)	(30		)	(6		)	(10		)	(8		)	(9		)	(6		)
Commercial business loans	—			(14		)		—			(430		)	(22		)	—			—			—			—			(14		)
Total charge-offs	(424		)	(1,896		)		(4,100		)	(4,327		)	(6,468		)	(56		)	(133		)	(368		)	(424		)	(1,896		)
Net recoveries (charge-offs)	1,022			(709		)		(3,614		)	(3,621		)	(6,076		)	(23		)	977			(98		)	1,022			(709		)

Allowance at end of year	$	9,924		$	10,427		—	$	11,136		$	11,825		$	11,946		$	9,530		$	9,553		$	9,826		$	9,924		$	10,427

Allowance for loan losses as a percentage of total loans receivable (net) outstanding at the end of the year (1)	1.61		%	1.81		%		1.99		%	2.15		%	2.21		%	1.30		%	1.36		%	1.46		%	1.62		%	1.81		%

Net recoveries (charge-offs) as a percentage of average loans outstanding during the year	0.17		%	(0.12		)%		(0.65		)%	(0.66		)%	(1.13		)%	—		%	0.14		%	(0.02		)%	0.17		%	(0.12		)%

Allowance for loan losses as a percentage of non-performing loans at the end of the year	160.30		%	88.96		%		79.28		%	52.48		%	51.18		%
Allowance for loan losses as a percentage of non-performing loans at end of year																	723.61		%	499.90		%	326.66		%	160.30		%	88.96		%

______________


(1)	Loans receivable, net for this table includes ~~loans held-for-sale and~~ 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 allowance for loan losses.

The following table sets forth the allocation of the allowance for loan losses by loan category at the dates ~~indicated.~~indicated:


	At September 30,																				At September 30,
	2015				2014				2013				2012				2011				2018				2017				2016				2015				2014
	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		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		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		Amount		Percent of Loans in Category to Total Loans
	(Dollars in thousands)																				(Dollars in thousands)
Mortgage loans:
One- to four-family	$	1,480	17.79	%	$	1,650	16.22	%	$	1,449	18.00	%	$	1,558	18.82	%	$	760	20.47	%	$	1,086	14.13	%	$	1,082	15.05	%	$	1,239	16.38	%	$	1,480	17.42	%	$	1,650	16.10	%
Multi-family	392		7.78		387		7.61		749		8.82		1,156		8.36		1,076		5.53		433		7.54		447		7.47		473		8.61		392		7.81		387		7.62
Commercial	4,065		43.28		4,836		48.47		5,275		50.27		4,247		45.08		4,035		43.92		4,248		42.05		4,184		41.91		4,384		43.18		4,065		43.47		4,836		48.54
Construction and land development	1,283		16.48		605		11.28		414		7.79		943		9.92		1,618		9.37
Construction - custom and owner/builder																					671		14.57		699		14.99		619		12.85		451		9.40		605		9.85
Construction - speculative one- to four-family																					178		1.88		128		1.26		130		1.12		123		1.00		—		0.42
Construction - commercial																					563		4.82		303		2.50		268		1.29		426		3.09		—		0.55
Construction - multi-family																					135		1.31		173		2.72		316		1.74		283		3.07		—		0.47
Construction - land development																					49		0.37		—		—		—		—		—		—		—		—
Land	1,021		3.88		1,434		4.87		1,940		5.37		2,392		6.98		2,795		8.79		844		3.11		918		3.05		820		2.99		1,021		3.90		1,434		4.88
Non-mortgage loans:
Consumer loans	1,260		5.77		1,055		6.52		982		6.73		1,013		6.87		875		7.90		766		4.98		1,104		5.39		1,095		6.06		1,260		5.80		1,055		6.53
Commercial business loans	423		5.02		460		5.03		327		3.02		516		3.97		787		4.02		557		5.24		515		5.66		482		5.78		423		5.04		460		5.04
Total allowance for loan losses	$	9,924	100.00	%	$	10,427	100.00	%	$	11,136	100.00	%	$	11,825	100.00	%	$	11,946	100.00	%	$	9,530	100.00	%	$	9,553	100.00	%	$	9,826	100.00	%	$	9,924	100.00	%	$	10,427	100.00	%

Investment Activities

The investment policies of the Bank are established and monitored by the Board of Directors. The policies are designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to compliment the Bank’s lending activities. These policies dictate the criteria for classifying securities as either ~~available-for-sale~~available for sale or ~~held-to-maturity.~~held to maturity. The policies permit investment in various types of liquid assets permissible under applicable regulations, which ~~includes~~include U.S. Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks, federal funds, mortgage-backed securities, municipal bonds and mutual funds. The Company's investment policy also permits investment in equity securities in certain financial service companies.

At September 30, ~~2015,~~2018, the Bank’s investment portfolio totaled ~~$9.3~~$13.96 million, consisting of ~~$6.0~~$10.97 million of U.S. Treasury and U.S. government agency securities ~~held-to-maturity, $1.9~~held to maturity, $1.85 million of mortgage-backed securities ~~held-to-maturity, $971,000~~held to maturity, $917,000 of mutual funds ~~available-for-sale~~available for sale and ~~$421,000~~$237,000 of mortgage-backed securities ~~available-for-sale.~~available for sale. The Bank does not maintain a trading account for any investments. This compares with a total investment portfolio of ~~$8.2~~$8.38 million at September 30, ~~2014,~~2017, consisting of ~~$3.0~~$6.01 million of U.S. Treasury and U.S. government agency securities ~~held-to~~held to maturity, ~~$2.3~~$1.13 million of mortgage-backed securities ~~held-to-maturity, $1.9 million~~held to maturity, $952,000 of mutual funds available for sale and $289,000 of mortgage-backed securities ~~available-for-sale and $958,000 of mutual funds available-for-sale.~~available for sale. The composition of the portfolios by type of security at the dates indicated is presented in the following ~~table.~~table:


	At September 30,												At September 30,
	2015				2014				2013				2018				2017				2016
	Recorded Amount		Percent of Total		Recorded Amount		Percent of Total		Recorded Amount		Percent of Total		Recorded Amount		Percent of Total		Recorded Amount		Percent of Total		Recorded Amount		Percent of Total
	(Dollars in thousands)												(Dollars in thousands)
Held-to-Maturity:
Held to Maturity:

U.S.Treasury and U.S. government agency securities	$	6,004	64.52	%	$	3,016	36.98	%	$	14	0.20	%	$	10,965	78.52	%	$	6,008	71.69	%	$	6,006	67.84	%
Mortgage-backed securities	1,909		20.52		2,282		27.98		2,723		39.82		1,845		13.21		1,131		13.50		1,505		17.00

Available-for-Sale:
Available for Sale:

Mortgage-backed securities	421		4.52		1,899		23.29		3,143		45.97		237		1.70		289		3.45		366		4.13
Mutual funds	971		10.44		958		11.75		958		14.01		917		6.57		952		11.36		976		11.03

Total portfolio	$	9,305	100.00	%	$	8,155	100.00	%	$	6,838	100.00	%	$	13,964	100.0	%	$	8,380	100.0	%	$	8,853	100.0	%

The following table sets forth the maturities and weighted average yields of the securities in the Bank's portfolio at September 30, ~~2015.~~2018. Mutual funds, which by their nature do not have maturities, are classified in the one year or less category.


	One Year or Less				After One to Five Years				After Five to Ten Years				After Ten Years				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		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(Dollars in thousands)																(Dollars in thousands)
Held-to-Maturity:
Held to Maturity:

U.S. Treasury and U.S. government agency securities	$	—	—	%	$	6,004	1.60	%	$	—	—	%	$	—	—	%	$	7,969	2.15	%	$	2,996	1.46	%	$	—	—	%	$	—	—	%
Mortgage-backed securities	—		—		2		4.73		22		2.71		1,885		5.82		—		—		969		2.33		67		3.72		809		9.42

Available-for-Sale:
Available for Sale:

Mortgage-backed securities	—		—		10		5.56		—		—		411		4.97		—		—		—		—		—		—		237		4.85
Mutual funds	971		2.40		—		—		—		—		—		—		917		2.20		—		—		—		—		—		—

Total portfolio	$	971	2.40	%	$	6,016	1.61	%	$	22	2.71	%	$	2,296	5.67	%	$	8,886	2.15	%	$	3,965	1.67	%	$	67	3.72	%	$	1,046	8.39	%

There were no securities which had an aggregate book value in excess of 10% of the Bank’s total equity at September 30, ~~2015.~~2018. At September 30, ~~2015,~~2018, the Bank had ~~$1.1 million~~$460,000 of private label mortgage-backed securities in the held to maturity investment securities portfolio of which ~~$932,000~~$406,000 were on non-accrual status. For additional information regarding investment securities, see “Item 1A. Risk Factors – ~~Other-than-temporary impairment charges in our~~Our investment securities portfolio ~~could~~may be negatively impacted by fluctuations in market value and interest rates and result in ~~additional~~ 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. Deposits and loan repayments are the major sources of the Bank's funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. Borrowings through the ~~FHLB~~Federal Home Loan Bank of Des Moines ("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. Deposits are attracted from within the Bank's market area through the offering of a broad selection of deposit instruments, including money market deposit accounts, checking accounts, regular savings accounts and certificates of deposit. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers current market interest rates, profitability to the Bank, matching deposit and loan products and its customer preferences and concerns. The Bank actively seeks consumer and commercial checking accounts through checking account acquisition marketing programs. The Bank also has checking accounts owned by businesses associated with the marijuana (or Initiative-502) industry in Washington State. It is permissible in Washington State to handle accounts associated with this industry in compliance with federal regulatory guidelines. At September 30, ~~2015,~~2018, the Bank had ~~47.4%~~$22.52 million, or 2.5% of total deposits, from businesses associated with the marijuana industry. See "Risk Factors- We operate in ~~non-interest bearing accounts~~a highly regulated environment and ~~NOW checking accounts.~~may be adversely affected by changes in federal and state laws and regulations that could increase our costs of operations."

At September 30, ~~2015,~~2018, the Bank had ~~$68.0~~$18.16 million of jumbo certificates of deposit of ~~$100,000~~$250,000 or more. The Bank had brokered certificates of deposit totaling ~~$3.2~~$3.20 million, brokered non-interest bearing demand accounts totaling $4.05 million, and ~~$8.5~~$9.96 million in brokered reciprocal money market deposits at September 30, ~~2015.~~2018. The Bank believes that its jumbo certificates of deposit, which represented ~~10.0%~~2.0% of total deposits at September 30, ~~2015,~~2018, present similar interest rate risks as compared to its other deposits.

The following table sets forth information concerning the Bank's deposits at September 30, ~~2015.~~2018:


Category	Weighted Average Interest Rate		Amount		Percentage of Total Deposits		Weighted Average Interest Rate		Amount		Percentage of Total Deposits
	(In thousands)						(Dollars in thousands)
Non-interest bearing	—	%	$	141,388	20.82	%
Non-interest bearing demand							—	%	$	233,258	26.22	%
Negotiable order of withdrawal (“NOW”) checking	0.27		180,628		26.61		0.21		225,290		25.33
Savings	0.05		110,315		16.25		0.06		151,404		17.02
Money market	0.29		92,476		13.62		0.52		137,746		15.49
Subtotal	0.21		524,807		77.30		0.17		747,698		84.06

Certificates of Deposit(1)
Certificates of Deposit (1)

Maturing within 1 year	0.56		93,882		13.83		1.03		76,157		8.56
Maturing after 1 year but within 2 years	0.93		33,416		4.92		1.43		32,004		3.60
Maturing after 2 years but within 5 years	1.23		26,275		3.87		1.81		33,647		3.78
Maturing after 5 years	1.92		532		0.08		—		—		—
Total certificates of deposit	0.77		154,105		22.70		1.31		141,808		15.94
Total deposits	0.30	%	$	678,912	100.00	%	0.35	%	$	889,506	100.00	%

______________________


(1)	Based on remaining maturity of certificates.

The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity as of September 30, ~~2015.~~2018. Jumbo certificates of deposit have principal balances of ~~$100,000~~$250,000 or more, and the rates paid on these accounts are generally negotiable.


Maturity Period	Amount		Amount
	(In thousands)
			(Dollars in thousands)
Three months or less	$	8,014	$	2,623
Over three through six months	14,379		4,910
Over six through twelve months	18,855		3,880
Over twelve months	26,785		6,751
Total	$	68,033	$	18,164

Deposit Flow. The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates ~~indicated.~~indicated:


	At September 30,																		At September 30,
	2015							2014							2013				2018							2017							2016
	Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total		Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total
	(Dollars in thousands)																		(Dollars in thousands)
Non-interest-bearing	$	141,388	20.82	%	$	34,971		$	106,417	17.30	%	$	18,760		$	87,657	14.41	%
Non-interest-bearing demand																			$	233,258	26.22	%	$	27,306		$	205,952	24.58	%	$	33,669		$	172,283	22.62	%
NOW checking	180,628		26.61		19,880			160,748		26.13		4,648			156,100		25.66		225,290		25.33		4,975			220,315		26.29		16,503			203,812		26.76
Savings	110,315		16.25		14,650			95,665		15.55		4,316			91,349		15.02		151,404		17.02		10,417			140,987		16.83		17,513			123,474		16.21
Money market	92,476		13.62		3,477			88,999		14.47		(10,007		)	99,006		16.28		137,746		15.49		6,744			131,002		15.64		17,011			113,991		14.97
Certificates of deposit which mature:
Within 1 year	93,882		13.83		(4,621		)	98,503		16.01		(12,977		)	111,480		18.33		76,157		8.56		717			75,440		9.00		(12,620		)	88,060		11.56
After 1 year, but within 2 years	33,416		4.92		670			32,746		5.32		2,796			29,950		4.92		32,004		3.60		4,234			27,770		3.31		1,222			26,548		3.49
After 2 years, but within 5 years	26,275		3.87		(4,306		)	30,581		4.97		(772		)	31,353		5.15		33,647		3.78		(2,640		)	36,287		4.33		2,934			33,353		4.38
Certificates maturing thereafter	532		0.08		(925		)	1,457		0.25		90			1,367		0.23		—		—		(145		)	145		0.02		132			13		—

Total	$	678,912	100.0	%	$	63,796		$	615,116	100.0	%	$	6,854		$	608,262	100.00	%	$	889,506	100.0	%	$	51,608		$	837,898	100.0	%	$	76,364		$	761,534	100.00	%

Certificates of Deposit by Rates. The following table sets forth the certificates of deposit in the Bank classified by rates as of the dates ~~indicated.~~indicated:


	At September 30,						At September 30,
	2015		2014		2013		2018		2017		2016
	(In thousands)						(Dollars in thousands)
0.00 - 1.99%	$	144,083	$	145,098	$	149,120	$	108,527	$	133,050	$	144,814
2.00 - 3.99%	9,762		16,776		24,759		33,016		6,332		2,900
4.00 - 5.99%	260		1,413		271		265		260		260
Total	$	154,105	$	163,287	$	174,150	$	141,808	$	139,642	$	147,974

Certificates of Deposit by Maturities. The following table sets forth the amount and maturities of certificates of deposit at September 30, ~~2015.~~2018:


	Amount Due										Amount Due
	Less Than One Year		One to Two Years		After Two to Five Years		After Five Years		Total		Less Than One Year		One to Two Years		After Two to Five Years		After Five Years		Total
	(In thousands)										(Dollars in thousands)
0.00 - 1.99%	$	85,489	$	33,103	$	25,192	$	299	$	144,083	$	66,174	$	21,320	$	21,033	$	—	$	108,527
2.00 - 3.99%	8,393		313		823		233		9,762		9,820		10,684		12,512		—		33,016
4.00 - 5.99%	—		—		260		—		260		163		—		102		—		265
Total	$	93,882	$	33,416	$	26,275	$	532	$	154,105	$	76,157	$	32,004	$	33,647	$	—	$	141,808

Deposit Activities. The following table sets forth the deposit activities of the Bank for the periods ~~indicated.~~indicated:


	Year Ended September 30,						Year Ended September 30,
	2015		2014		2013		2018		2017		2016
	(In thousands)						(Dollars in thousands)
Beginning balance	$	615,116	$	608,262	$	597,926	$	837,898	$	761,534	$	678,912
Net deposits before interest credited	61,792		4,788		7,768		48,830		74,146		80,581
Interest credited	2,004		2,066		2,568		2,778		2,218		2,041
Net increase in deposits	63,796		6,854		10,336		51,608		76,364		82,622
Ending balance	$	678,912	$	615,116	$	608,262	$	889,506	$	837,898	$	761,534

Borrowings. Deposits and loan repayments are generally the primary source of funds for the Bank's lending and investment activities and for general business purposes. The Bank has the ability to use ~~advances~~borrowings from the FHLB ~~of Des Moines (on May 31, 2015, the FHLB of Seattle merged into the FHLB of Des Moines)~~ to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB functions as a central reserve bank providing credit for member financial institutions. As a member of the FHLB, the Bank is required to own capital stock in the FHLB and is authorized to apply for ~~advances~~borrowings on the security of such stock and certain mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. government) provided certain creditworthiness standards have been met. ~~Advances~~Borrowings are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of ~~advances~~borrowings are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. At September 30, ~~2015,~~2018, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available ~~advances~~borrowings up to an aggregate amount to ~~35%~~45% of the Bank’s total assets, limited by available ~~collateral, under which $45.0 million in advances were outstanding.~~collateral. The Bank had no outstanding balance on this borrowing line at September 30, 2018. The Bank also has a Letter of Credit ("LOC") of up to ~~$15.0~~$23.00 million with the FHLB for the purpose of collateralizing Washington State public deposits. The LOC amount reduces the Bank's available FHLB ~~advances.~~borrowings. The Bank maintains a short-term borrowing line of credit with the FRB with total credit based on eligible collateral. At September 30, ~~2015,~~2018, the Bank had no outstanding balance and ~~$45.2~~$76.70 million in unused borrowing capacity on this borrowing line of credit. A short-term borrowing line of credit of ~~$10.0~~$10.00 million is also maintained at Pacific Coast Bankers' Bank ("PCBB"). The Bank had no outstanding balance on this borrowing line of credit at September 30, ~~2015.~~2018.

The following table sets forth certain information regarding borrowings, including repurchase agreements, by the Bank at the end of and during the periods indicated:


	At or For the Year Ended September 30,									At or For the Year Ended September 30,
	2015			2014			2013			2018			2017				2016
	(Dollars in thousands)									(Dollars in thousands)
Average total borrowings	$	45,000		$	45,000		$	45,352		$	—		$	17,096			$	44,959

Weighted average rate paid on total borrowings	4.19		%	4.16		%	4.13		%	—		%	5.73		%	(1)	4.52		%	(2)

Total borrowings outstanding at end of period	$	45,000		$	45,000		$	45,000		$	—		$	—			$	30,000

________________________

(1) Includes a prepayment penalty of $282. The weighted average rate without the prepayment penalty was 4.08%.

(2) Includes a prepayment penalty of $138. The weighted average rate without the prepayment penalty was 4.21%.

The ~~following table sets forth certain information regarding~~Bank did not have any short-term borrowings ~~consisting solely of repurchase agreements with customers by~~for the ~~Bank at the end of~~years ended September 30, 2018, 2017 and ~~during the periods indicated. Borrowings are considered short-term when the original maturity is less than one year.~~

At or For the
Year Ended September 30,
2015 2014 2013
(Dollars In thousands)
Maximum amount outstanding at any month end:
Repurchase agreements $ —
$ —
$ 787

Average outstanding during period:

Repurchase agreements $ —
$ —
$ 352
Total average outstanding during period $ —
$ —
$ 352

Weighted average rate paid during period:

Repurchase agreements — % — % 0.05 %
2016.

Bank Owned Life Insurance

The Bank has purchased life insurance policies covering certain officers. These policies are recorded at their cash surrender value, net of any cash surrender charges. Increases in cash surrender value, net of policy premiums, and proceeds from death benefits are recorded in non-interest income. At September 30, ~~2015,~~2018, the cash surrender value of bank owned life insurance (“BOLI”) was ~~$18.2~~$19.81 million.

How We Are Regulated

General. As a bank holding company, Timberland Bancorp is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve. Timberland Bancorp is also subject to the rules and regulations of the SEC under the federal securities laws. As a state-chartered savings bank, the Bank is subject to regulation and oversight by the Division and the applicable provisions of Washington law and regulations of the Division adopted thereunder. The Bank also is subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law, and requirements established by the Federal Reserve. State law and regulations govern the Bank's ability to take deposits and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers and to establish branch offices. 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. Descriptions of laws and regulations here and elsewhere in this report do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the U.S. Congress or the Washington State Legislature that may affect the operations of Timberland Bancorp and the Bank. In addition, the regulations governing the Company and the Bank may be amended from time to time by the FDIC, DFI, Federal Reserve and the Consumer Financial Protection Bureau ("CFPB"). Any such legislation or regulatory changes in the future could adversely affect the Company's and the Bank's operations and financial condition. We cannot predict whether any such changes may occur.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2010, imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions and their holding companies. Among other changes, the Dodd-Frank Act established the CFPB as an independent bureau of the Federal ~~Reserve Board.~~Reserve. The CFPB assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. The Bank is subject to consumer protection regulations issued by the CFPB, but as a smaller financial institution, the Bank is generally subject to supervision and enforcement by the FDIC and the DFI with respect to its compliance with consumer financial protection laws and CFPB regulations.

Many aspects of the Dodd-Frank Act are subject to rulemaking by the federal banking agencies, which has not been completed and in some instances will not take effect for some time, making it difficult to anticipate the overall financial impact of the Dodd-Frank Act on the Bank, Timberland Bancorp and the financial services industry more generally.

Regulation of the Bank

The Bank, as a state-chartered savings bank, is subject to regulation and oversight by the FDIC and the Division extending to all aspects of its operations.

Federal and State Enforcement Authority and Actions. As part of its supervisory authority over Washington-chartered savings banks, the Division may initiate enforcement proceedings to obtain a consent order to cease and desist against an institution believed to have engaged in unsafe and unsound practices or to have violated a law, regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to initiate enforcement actions against insured institutions for similar reasons and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Both of these agencies may utilize less formal supervisory tools to address their concerns about the condition, operations or compliance status of a savings bank.

Insurance of Accounts and Regulation by the FDIC. The deposit insurance fund ~~or the DIF~~(the "DIF") of the FDIC insures deposit accounts in the Bank up to $250,000 per separately insured ~~depositor.~~deposit ownership right or category. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The Bank's deposit insurance premiums for the year ended September 30, ~~2015~~2018 were ~~$593,000.~~$294,000.

Under the FDIC's ~~risk-based assessment~~ system for assessing insurance premiums, insured institutions that do not have assets of $10 billion are ~~assigned to one of four risk categories~~assessed based on ~~supervisory evaluations, regulatory capital levels~~CAMELS component ratings and certain ~~other risk factors. Rates are based on each institution's risk category and certain specified risk adjustments.~~financial ratios. For these institutions, total base assessment rates range from 3 to 30 basis points, subject to adjustment. Stronger institutions pay lower rates, while riskier institutions pay higher rates.

~~As required by the Dodd-Frank Act, the FDIC adopted new rules~~ Assessments are applied to ~~reform the deposit insurance assessment system, which redefined the~~an institution's assessment base, ~~used for calculating deposit insurance assessments effective April 1, 2011. Under the new rules, assessments are based on an institution's~~which is its average consolidated total assets minus average tangible ~~equity instead~~equity. The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating expenses and results of ~~total deposits and range from 2.5 to 45 basis points.~~operations of the Bank. Management cannot predict what assessment rates will be in the future.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against banks and savings associations. Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. These assessments, which may be revised based upon the level of DIF deposits, will continue until the bonds mature in ~~the years 2017 through~~ 2019. ~~This payment is established quarterly and averaged 6.00 basis points (annualized) of assessable assets for September 30, 2015.~~ The Financing Corporation was chartered in 1987 solely for the purpose of functioning as a vehicle for the recapitalization orof the deposit insurance system.

A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank.

Capital Requirements. Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital regulations adopted by the FDIC, which created a new required ratio for common equity Tier 1 ("CET1") capital, increased the minimum leverage and Tier 1 capital ratios, changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the required capital ratios, and changed what qualifies as capital for purposes of meeting the capital requirements. The Federal Reserve adopted parallel regulations for bank holding companies. These regulations implement the regulatory capital reforms required by the Dodd Frank Act and the "Basel III" requirements.

Under the capital regulations, the required minimum capital level ratios are (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6.0%; (iii) a total capital ratio of 8.0%; and (iv) a leverage ratio of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income ("AOCI") unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital. The leverage ratio is the ratio of Tier 1 capital to average consolidated assets as reported on Call Reports, minus certain items deducted from Tier 1 capital.

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. The capital conservation buffer requirement is subject to a phase-in period that began on January 1, 2016 with the requirement for a buffer of greater than 0.625% of risk-weighted assets. This capital conservation buffer increases each year until the capital conservation buffer requirement is fully implemented on January 1, 2019. At September 30, 2018 the conservation buffer was an amount greater than 1.875%.

In addition to the capital requirements, there have been a number of changes in what constitutes regulatory capital, subject to transition periods. These changes include the phasing-out of certain instruments of qualifying capital. The Bank did not have any of these instruments at September 30, 2018. Mortgage servicing rights and deferred tax assets over designated percentages of CET1 are deducted from capital, subject to a four-year transition period. CET1 capital consists of Tier 1 capital less all capital components that are not considered common equity. In addition, Tier 1 capital includes accumulated other comprehensive income (loss), which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a four-year transition period. Because of the Bank's asset size, it was not considered an advanced approaches banking organization and elected in the first quarter of calendar year 2015 to take the one-time option of deciding to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in its capital calculations.

The following table compares the Bank's actual capital amounts at September 30, 2018 to its minimum regulatory capital requirements at that date (Dollars in thousands):



	Actual				Regulatory Minimum To Be "Adequately Capitalized				Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	117,336	11.73	%	$	40,024	4.00	%	$	50,031	5.00	%

Risk-based Capital Ratios:
CET1 capital	117,336		16.74		31,539		4.50		45,557		6.50

Tier 1 capital	117,336		16.74		42,052		6.00		56,070		8.00

Total capital	126,109		17.99		56,070		8.00		70,087		10.00

The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution's capital level is or may become inadequate in light of particular risks or circumstances. Management of the Bank believes that, under the current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future.

For additional information regarding the Bank's regulatory capital requirements, see Note 15 of the Notes to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.

Prompt Corrective Action. 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. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized. Under these regulations, an institution is treated as well capitalized if it has (i) a total risk-based capital ratio of 10.0% or more, (ii) a CET1 risk-based capital ratio of 6.5% or more, (iii) a Tier 1 risk-based capital ratio of 8.0% or more, and (iv) a leverage ratio of 5.0% or more, and is not subject to any of certain specified requirements to meet and maintain a specific capital level for any capital measure.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by an institution to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. 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, ~~2015,~~2018, the Bank was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC. For additional information regarding the Bank's minimum regulatory capital requirements, see "Capital Requirements" ~~below~~above and Note 1615 of the Notes to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

~~Capital Requirements.~~ Timberland Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital adequacy requirements approved by the Federal Reserve and the FDIC that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act.

The Bank is now subject to new capital requirements adopted by the FDIC, which create a new required ratio for common equity Tier 1 ("CET1") capital, increases the leverage and Tier 1 capital ratios, changes the risk-weightings of certain assets for purposes of the risk-based capital ratios, creates an additional capital conservation buffer over the required capital ratios and changes what qualifies as capital for purposes of meeting those various capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. The Bank is required to maintain additional levels of Tier 1 common equity over the minimum risk-based capital levels before it may pay dividends, repurchase shares or pay discretionary bonuses.

In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional CET1 capital equal to 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.

The new minimum requirements are a ratio of CET1 capital to total risk-weighted assets (the "CET1 risk-based ratio") of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a leverage ratio of 4.0%. At September 30, 2015, the Bank exceeded all regulatory capital requirements and the Bank was categorized as "well capitalized" under the regulations of the FDIC.

In addition to the capital requirements, there are a number of changes in what constitutes regulatory capital, subject to transition periods. These changes include the phasing-out of certain instruments of qualifying capital. The Bank does not have any of these instruments. Mortgage servicing rights and deferred tax assets over designated percentages of CET1 will be deducted from capital, subject to a four-year transition period. CET1 will consist of Tier 1 capital less all capital components that are not considered common equity. In addition, Tier 1 capital will include accumulated other comprehensive income (loss), which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a four-year transition period. Because of the Bank's asset size, it was not considered an advanced approaches banking organization and elected in the first quarter of calendar year 2015 to take the one-time option of deciding to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in its capital calculations.

The new requirements also include changes in the risk-weighting of assets to better reflect credit risk and other risk exposure. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition development and construction loans and for non-residential mortgage loans that are 90 days or more past due or otherwise on non-accrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; and a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital.

Under the new standards, in order to be considered well-capitalized, the Bank must have a CET1 risk-based capital ratio of 6.5% (new), a Tier 1 risk-based capital ratio of 8.0% (increased from 6.0%), a total risk-based capital ratio of 10.0% (unchanged) and a Tier 1 leverage capital ratio of 5.0% (unchanged).

~~The following table compares the Bank's actual capital amounts at September 30, 2015 to its minimum regulatory capital requirements at that date (Dollars in thousands):~~

Actual Regulatory Minimum To Be "Adequately Capitalized To Be "Well Capitalized" Under Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Leverage Capital Ratio:
Tier 1 capital $ 82,297
10.29 % $ 32,006
4.00 % $ 40,008
5.00 %

Risk-based Capital Ratios:
Common equity tier 1 capital 82,297
13.43
27,568
4.50
$ 39,821
6.50

Tier 1 capital 82,297
13.43
36,758
6.00
$ 49,010
8.00

Total capital 89,986
14.69
49,010
8.00
$ 61,263
10.00

Federal Home Loan Bank System. The Bank is a member of the FHLB, ~~of Des Moines following the voluntary merger of the FHLB of Seattle with and into FHLB of Des Moines effective May 31, 2015. The FHLB of Des Moines is~~ one of 11 regional ~~FHLBs~~Federal Home Loan Banks that administer the home financing credit function of savings ~~institutions. Each FHLB serves~~institutions, each serving as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans ~~or advances~~ to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All ~~advances~~borrowings from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term ~~advances~~borrowings are required to provide funds for residential home financing. See “Deposit Activities and Other Sources of Funds – Borrowings" above.

As a member, the Bank is required to purchase and maintain stock in the FHLB based on the Bank's asset size and level of ~~Des Moines.~~borrowings from the FHLB. At September 30, ~~2015,~~2018, the Bank had ~~$2.7~~$1.19 million in FHLB stock, which was in compliance

with this requirement. ~~During the year ended September 30, 2015, the FHLB repurchased $2.5 million of its stock (FHLB of Seattle repurchased $111,000 and FHLB of Des Moines repurchased $2.4 million), at par, from the Bank.~~ The FHLB pays dividends quarterly, and the Bank received ~~$10,000~~$26,000 in dividends during the year ended September 30, ~~2015.~~2018.

The ~~FHLBs~~Federal Home Loan Banks continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on ~~advances~~borrowings targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a decrease in net income and possibly capital.

Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to: internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program also must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems. If the FDIC determines that the Bank fails to meet any standard prescribed by the guidelines, it may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard. FDIC regulations establish deadlines for the submission and review of such safety and soundness compliance ~~plans~~

.plans. Management of the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a plan of compliance.

Real Estate Lending Standards. FDIC regulations require the Bank to adopt and maintain written policies that establish appropriate limits and standards for real estate loans. These standards, which must be consistent with safe and sound banking practices, must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The Bank is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate for current market conditions. The Bank’s Board of Directors is required to review and approve the Bank’s standards at least annually. The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on loan-to-value ratios for different categories of real estate loans. Under the guidelines, the aggregate amount of all loans in excess of the supervisory loan-to-value ratios should not exceed 100% of total capital, and the total of all loans for commercial, agricultural, multi-family or other non-one- to four-family residential properties in excess of the supervisory loan-to-value ratio should not exceed 30% of total capital. Loans in excess of the supervisory loan-to-value ratio limitations must be identified in the Bank’s records and reported at least quarterly to the Bank’s Board of Directors. The Bank is in compliance with the record and reporting requirements. As of September 30, ~~2015,~~2018, the Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were ~~2.2%~~0.6% of total capital and the ~~Bank’s~~Bank's loans on commercial, agricultural, multi-family or other non-one- to four-family residential properties in excess of the supervisory loan-to-value ratios were ~~0.3%~~0.1% of total 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. 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.

~~Washington State has enacted a law regarding financial institution parity. Primarily,~~Under the law ~~affords Washington-chartered commercial banks the same powers as Washington-chartered savings banks. In order for a bank to exercise these powers, it must provide 30 days notice to the Director~~ of ~~Financial Institutions, and the Director must authorize the requested activity. In addition, the law provides that~~Washington State, Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the Director in certain situations. ~~Finally, the law provides additional flexibility for~~ In addition,Washington-chartered ~~commercial and~~ savings banks ~~with respect to interest rates on loans and other extensions of credit. Specifically, they~~ may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to Washington residents.

Environmental Issues Associated With Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) is a federal statute that generally imposes strict liability on all prior and present ~~"owners~~

"owners and operators" of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan.

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. The Federal Reserve ~~Board~~ requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal ("NOW") accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to reserve requirements, as are any non-personal time deposits at a savings bank. As of September 30, ~~2015,~~2018, the Bank’s deposit with the Federal Reserve and vault cash exceeded its Regulation D reserve requirements.

Affiliate Transactions. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies. Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are

limited to 10% of the bank subsidiary’s capital and surplus and, with respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions between a bank and its affiliates listed in Section 23B of the Federal Reserve Act ~~between a bank~~ and ~~its affiliates~~related regulations must be on terms as favorable to the bank as transactions with non-affiliates.

Community Reinvestment Act. Banks are also subject to the provisions of the Community Reinvestment Act of 1977 (“CRA”), which requires the appropriate federal bank regulatory agency to assess a bank’s performance under the CRA in meeting the credit needs of the community serviced by the bank, including ~~low~~low- and ~~moderate income~~moderate-income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s performance must be considered in connection with a bank’s application to, among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. The Bank received a “satisfactory” rating during its most recent examination.

Dividends. Dividends from the Bank constitute the major source of funds available for dividends which may be paid to Company shareholders. The amount of dividends payable by the Bank to the Company depends upon the Bank's earnings and capital position, and is limited by federal and state laws, regulations and policies. According to Washington law, the Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (i) the amount required for liquidation accounts or (ii) the net worth requirements, if any, imposed by the Director of the Division. In addition, dividends on the Bank's capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of the Bank, without the approval of the Director of the Division. Dividends payable by the Bank can be limited or prohibited if the Bank does not meet the capital conservation buffer requirement.

The amount of dividends actually paid during any one period will be strongly affected by the Bank's management policy of maintaining a strong capital position. Federal law further provides that no insured depository institution may pay a cash dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice.

Other Consumer Protection Laws and Regulations. The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. 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 regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the

Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.

Regulation of the Company

General. The Company, as the sole shareholder of the Bank, is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the regulations promulgated thereunder. This regulation and oversight is generally intended to ensure that ~~Timberland Bancorp~~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.

As a bank holding company, the Company is required to file quarterly reports with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.

BHCA. ~~Under the BHCA, the~~The Company is supervised by the Federal ~~Reserve. The~~Reserve under the BHCA. Federal Reserve ~~has a~~ policy requires that a bank holding company ~~is required to~~ serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an

unsafe or unsound manner. In addition, the Federal Reserve provides that bank holding companies should serve as a source of strength to its subsidiary banks by being prepared to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligation to serve as a source of strength to its subsidiary bank will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations or both. The Dodd-Frank Act essentially codified this policy.

Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities generally include, among others, operating a savings institution, mortgage company, finance company, escrow company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit related insurance; leasing property on a full payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. A bank holding company that meets certain supervisory and financial standards and elects to be designated as a financial holding company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in nature or incidental to financial activities.

Interstate Banking. The Federal Reserve may approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state except with respect to the acquisition of a bank that has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state. The Federal Reserve may not approve an application if the applicant controls or would control more than 10% of the insured deposits in the U.S. or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law.

The federal banking agencies are authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a law prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such

acquisitions. Interstate mergers and branch acquisitions ~~will~~are also begenerally subject to the nationwide and statewide insured deposit concentration amounts described above.

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 earning 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. Under Washington corporate law, the Company generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than its total liabilities. The capital conservation buffer requirement can also limit dividends.

Stock Repurchases. Bank holding companies, except for certain “well-capitalized” and highly rated bank holding companies, are required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. 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.

Capital Requirements. As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve under the BHCA and the regulations of the Federal Reserve. For a bank holding company with less than ~~$1.0~~$3.00 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve

expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If the Company were subject to regulatory guidelines for bank holding companies with ~~$1.0~~$3.00 billion or more in assets, at September 30, ~~2015,~~2018, the Company would have exceeded all regulatory requirements.

The following table presents the regulatory capital ratios for the Company as of September 30, ~~2015~~2018 (Dollars in thousands):


	Actual				Actual
	Amount		Ratio		Amount		Ratio

Leverage Capital Ratio:
Tier 1 capital	$	85,221	10.64	%	$	120,175	11.98	%

Risk-based Capital Ratios:
Common equity tier 1 capital	85,221		13.91
CET1 capital					120,175		17.13

Tier 1 capital	85,221		13.91		120,175		17.13

Total capital	92,911		15.16		128,955		18.39

For additional information see Note 1615 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank-Act ~~imposes~~imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions, and ~~implements~~mandated new capital regulations ~~that Timberland Bancorp has or will become subject to and that are~~ discussed above under “Regulation and Supervision of the Bank - Capital Requirements.” In addition, among other changes, the Dodd-Frank Act requires public companies, such as Timberland Bancorp, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a “say on pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer's annual total compensation to the median annual total compensation of all other employees. For certain of these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.

2018 Regulatory Reform. In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for community banks such as the Bank, and their holding companies.

The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent. Any qualifying depository institution or its holding company that exceeds the “community bank leverage ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules.

The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. A major effect of this change is to exclude such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how any new standards under the Act will ultimately be applied to us or what specific impact the Act and the yet-to-be-written implementing rules and regulations will have on community banks.

Taxation

Federal Taxation

General. The Company and the Bank report their operations on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company.

~~Corporate Alternative Minimum~~On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act amends the Internal Revenue Code ~~imposes~~to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35.0% to a flat 21.0%. The corporate federal income tax ~~on alternative minimum taxable~~rate reduction was effective January 1, 2018. Since the Company has a fiscal year end of September 30th, the reduced federal corporate income ~~(“AMTI”) at~~tax rate for fiscal year 2018 was the result of the application of a blended federal statutory tax rate of ~~20%. In addition, only 90%~~24.5%, which was based on the applicable tax rates before and after the Tax Act and corresponding number of ~~AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75%~~days in the fiscal year before and after enactment, and then a 21.0% federal corporate income tax rate for fiscal 2019 and thereafter. The Tax Act also required a revaluation of the ~~amount by which~~Company’s deferred tax assets and liabilities to account for the ~~Bank's adjusted current earnings exceeds its AMTI (determined without regard~~future impact of lower corporate income tax rates and other provisions of the legislation. As a result of the Company’s revaluation, the net deferred tax asset (“DTA”) was reduced through an increase to ~~this preference~~the provision for income taxes. The revaluation of our DTA balance resulted in a one-time increase for the fiscal year ended September 30, 2018 to federal income tax of $548,000. For additional details see Note 11 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and ~~prior to reduction for net operating losses).~~Supplementary Data."

Dividends-Received Deduction. The Company may exclude from its income ~~100%~~100.0% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally ~~70%~~70.0% 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%~~20.0% of the stock of a corporation distributing a dividend, then ~~80%~~80.0% 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, ~~2011.~~2014.

Washington Taxation

The Company and the Bank are subject to a business and occupation tax imposed under Washington law at the rate of ~~1.50%~~1.5% of gross receipts at September 30, ~~2015.~~2018. 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 (generally its primary source of lendable funds) and in the origination of loans. Historically, its most direct competition for deposits has come from commercial banks, thrift institutions and credit unions in its primary market area. In times of high interest rates, the Bank experiences additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The Bank's competition for loans comes principally from mortgage bankers, commercial banks, thrift institutions and ~~thrift institutions.~~credit unions. Such competition for deposits and the origination of loans may limit the Bank's future growth and earnings prospects.

Subsidiary Activities

The Bank has one wholly-owned subsidiary, Timberland Service Corporation (“Timberland Service”), whose primary function is to ~~act as the Bank's~~provide escrow ~~department.~~services.

Personnel

As of September 30, ~~2015,~~2018, the Bank had ~~226~~249 full-time employees and 2719 part-time and on-call employees. The employees are not represented by a collective bargaining unit, and the Bank believes its relationship with its employees is good.

Executive Officers of the Registrant

The following table sets forth certain information with respect to the executive officers of the Company and the ~~Bank.~~Bank:

Executive Officers of the Company and Bank



	Age at September 30, ~~2015~~2018	Position
Name	Age at September 30, ~~2015~~2018	Company	Bank
Michael R. Sand	6164	President and Chief Executive Officer	President and Chief Executive Officer

Dean J. Brydon	4851	Executive Vice President, Chief Financial Officer and Secretary	Executive Vice President, Chief Financial Officer and Secretary

Robert A. Drugge	6467	Executive Vice President of Lending	Executive Vice President of Lending

Jonathan A. Fischer	4144	Executive Vice President and Chief Operating Officer	Executive Vice President and Chief Operating Officer

Edward C. Foster	5861	Executive Vice President and Chief Credit Administrator	Executive Vice President and Chief Credit Administrator

Marci A. Basich	4649	Senior Vice President and Treasurer	Senior Vice President and Treasurer

Biographical Information.

Michael R. Sand has been affiliated with the Bank since 1977 and has served as President of the Bank and the Company since January 23, 2003. On September 30, 2003, he was appointed as Chief Executive Officer of the Bank and Company. Prior to appointment as President and Chief Executive Officer, Mr. Sand had served as Executive Vice President and Secretary of the Bank since 1993 and as Executive Vice President and Secretary of the Company since its formation in 1997.

Dean J. Brydon has been affiliated with the Bank since 1994 and has served as the Chief Financial Officer of the Company and the Bank since January 2000 and Secretary of the Company and Bank since January 2004. Mr. Brydon is a Certified Public Accountant.

Robert A. Drugge has been affiliated with the Bank since April 2006 and has served as Executive Vice President of Lending since September 2006. Prior to joining Timberland, Mr. Drugge was employed at Bank of America as a senior officer and most recently served as Senior Vice President and Commercial Banking Manager. Mr. Drugge began his banking career at Seafirst in 1974, which was acquired by Bank America Corp. and became known as Bank of America.

Jonathan A. Fischer has been affiliated with the Bank since October 1997 and has served as Chief Operating Officer since August 23, 2012. Prior to that, Mr. Fischer had served as the Chief Risk Officer since October 2010. Mr. Fischer had also served as the Compliance Officer, Community Reinvestment Act Officer, and Privacy Officer since January 2000.

Edward C. Foster has been affiliated with the Bank and has served as Chief Credit Administrator since February 2012. Prior to joining the Bank, Mr. Foster was employed by the FDIC, where he served as a Loan Review Specialist from January 2011 to February 2012. Mr. Foster owned a credit administration consulting business from February 2010 to January 2011. Prior to that, Mr. Foster served as the Chief Credit Officer for Carson River Community Bank from April 2008 through February 2010. Before joining Carson River Community Bank, Mr. Foster served as a Senior Regional Credit Officer for Omni National Bank from September 2006 through March 2008.

Marci A. Basich has been affiliated with the Bank since 1999 and has served as Treasurer of the Company and the Bank since January 2002. Ms. Basich is a Certified Public Accountant.

Item 1A. Risk Factors

We assume and manage a certain degree of risk in order to conduct our business strategy. In addition to the risk factors described below, other risks and uncertainties not specifically mentioned, or that are currently known to, or deemed to be immaterial by management, also may materially and adversely affect our financial position, results of operations and/or cash flows. 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. If any of the circumstances described in the following risk factors actually occur to a significant degree, the value of our common stock could decline, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.

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. A decline in the economies of our local market areas of Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis counties in which we operate, and which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations and prospects. Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade and it is not known how the recent changes in tariffs being imposed on international trade may also affect these businesses.

While real estate values and unemployment rates have recently improved, ~~a prolonged slow recovery or~~ a deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:

loan delinquencies, problem assets and foreclosures may increase;

we may increase our allowance for loan losses;

the sale of foreclosed assets may slow;

demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;

collateral for loans made may decline ~~further~~ in value, exposing us to increased risk loans, reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and

the amount of our low-cost or non-interest bearing deposits may decrease and the composition of our deposits may be adversely affected.

A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse. Many of the loans in our portfolio are

secured by real estate. 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. Real estate values are affected by various other factors, including changes in general or regional economic conditions, government rules or policies and natural disasters such as fires and earthquakes. If we are required to liquidate a significant

amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.

A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

Economic conditions have improved since the end of the economic recession; however, economic growth has been slow and uneven, unemployment remains relatively high, and concerns still exist over the federal deficit, government spending and global geopolitical risks which have all contributed to diminished expectations for the economy in our market areas. A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate value and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.

Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the overall economy, has among other things, kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. If the Federal Reserve increases the federal funds rate as expected in the near term, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Our real estate construction 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. At September 30, ~~2015,~~2018, construction ~~and land development~~ loans totaled ~~$110.9~~$188.36 million, or ~~16.5%~~22.9% of our total loan portfolio, of which ~~$90.2~~$145.73 million were for residential real estate projects, $39.59 million for commercial real estate projects and $3.04 million for land development projects. This compares to total construction ~~and land development~~ loans of ~~$68.5~~$168.52 million, or ~~11.3%~~21.5% of our total loan portfolio at September 30, ~~2014,~~2017, or an increase of ~~62.0%~~11.8% during the past year. Approximately ~~$63.0~~$119.56 million of our residential construction loans at September 30, ~~2015~~2018 were made to finance the construction of owner-occupied homes and are structured to be converted to permanent loans at the end of the construction phase. In general, construction lending involves additional risks because funds are advanced upon estimates of costs in relation to values associated with the completed project. Construction lending involves additional risks when compared with permanent residential lending because funds are advances upon the collateral for the project based on an estimate of costs that will produce a future value at completion. Because of the uncertainties inherent ~~difficulty~~ in estimating ~~a property's value both before and at completion of the project~~construction costs, as well as the ~~estimated cost~~market value of the ~~project. Construction~~complete project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Changes in demand for new housing and higher than anticipated building costs may ~~exceed original estimates as~~cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and may be concentrated with a ~~result~~small number of ~~increased materials, labor~~builders. A downturn in housing, or ~~other costs. Due to current uncertainties in~~ the ~~residential~~ real estate market, ~~property values~~could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of the builders we deal with have ~~become~~ more ~~difficult~~than one loan outstanding with us. Consequently, an adverse development with respect to ~~determine.~~one loan or one credit relationship can expose us to a significantly greater risk of loss. In addition during the term of some of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, ~~construction~~these loans often involve the disbursement of funds with repayment substantially dependent ~~in part,~~ on the success of the ultimate project and the ability of the borrower to sell or lease the property or ~~refinance the indebtedness,~~obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. ~~These~~If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are ~~also generally~~ more difficult and costly to monitor. ~~In addition,~~Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchaser's borrowing costs, thereby possibly reducing the homeowner's ability to finance the home upon completion or the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working our problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs. Furthermore, in the case of speculative construction loans, ~~to builders are often~~there is the added risk associated with ~~homes that are not pre-sold, and thus pose a greater potential risk than construction loans to individuals on their personal residences.~~identifying an end-purchaser for the finished project. At September 30, ~~2015, $6.7~~2018, $15.43 million of our construction portfolio was comprised of speculative one- to four-family construction loans. ~~No real estate~~Land development loans also pose additional risk because of the lack of income being produced by the property and potential illiquid nature of the collateral. These risks can be significantly impacted by supply and demand conditions. At September 30, 2018, all construction loans were ~~non-performing at September 30, 2015.~~performing in accordance to their terms. A material increase in our non-performing construction 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. This type of lending activity, while potentially more profitable than single-family residential lending, is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in these types of loans requires a more detailed analysis at the time of loan underwriting and on an ongoing basis. In our primary market of western Washington, a downturn in the real estate market could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Many of our commercial borrowers have more than one loan outstanding with us. 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, ~~2015,~~2018, we had ~~$291.2~~$345.11 million of commercial real estate mortgage loans, representing ~~43.3%~~42.0% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans, and repayment is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. For example, if the cash flow

from the borrower’s project is reduced as a result of leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired. Commercial real estate loans also expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment.

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. As a result of these characteristics, if we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. 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.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm non-residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). 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. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards because our balance in commercial real estate loans at September 30, ~~2015~~2018 represents more than 300% of total capital. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

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, ~~2015,~~2018, we had ~~$33.8~~$43.05 million, or ~~5.0%~~5.2%, of total loans in commercial business loans. Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. 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. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower.

Our business may be adversely affected by credit risk associated with residential property.

At September 30, ~~2015, $153.9~~2018, $153.28 million, or ~~22.9%~~18.7%, 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. 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. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations. Further, the Tax Act enacted in December 2017 could negatively impact our customers because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments, and could also negatively impact the housing market, which could adversely affect our business and loan growth. A decline in residential real estate values resulting from a downturn in the Washington housing market may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans.

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. Residential loans with combined higher loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale proceeds. Further, a significant amount of our home equity lines of credit consist of second mortgage loans. 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. 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.

Lending money is a substantial part of our business, and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

the cash flow of the borrower and/or the project being financed;

the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

the duration of the loan;

the credit history of a particular borrower; and

changes in economic and industry conditions.

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. 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;~~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 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. In determining the amount of the allowance for loan losses, we review our loans and the loss experience and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes. 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. 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. Further, the Financial Accounting Standards Board has adopted a new accounting standard that will be effective for our fiscal year beginning October 1, 2020. This standard, referred to as Current Expected Credit Loss ("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. This will change the current method of providing allowances for credit losses that are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.

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. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to replenish~~ the allowance for loan losses. 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 ~~their judgment about information available~~judgments different from those of management. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to ~~them at~~replenish the ~~time of their examinations.~~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.

If our non-performing assets increase, our earnings will be adversely affected.

At September 30, ~~2015~~2018 our non-performing assets (which consist of non-accruing loans, accruing loans 90 days or more past due, non-accrual investment securities, and ~~other real estate owned~~OREO and other repossessed assets) were ~~$15.0~~$3.64 million, or ~~1.84%~~0.36% of total assets. 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 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 activity.

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. In addition to the non-performing loans, there were ~~$12.5~~$2.96 million in loans classified as performing troubled debt restructurings at September 30, ~~2015.~~2018.

If Timberland Bank is unable to integrate South Sound Bank successfully, its business and earnings may be negatively affected.

The South Sound Merger involves the integration of companies that have previously operated independently. Successful integration of South Sound Bank's operations will depend primarily on the Bank's ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. No assurance can be given that the Bank will be able to integrate its post-merger operations without encountering difficulties including, without limitation, the loss of key employees and customers, the disruption of the ongoing business of the Bank or South Sound Bank or possible inconsistencies in standards, controls, procedures and policies. Anticipated economic benefits of the merger are projected to come from various areas that the Bank's management has identified through the due diligence and integration planning process. The elimination and consolidation of duplicate tasks are projected to result in annual cost savings. If the Bank has difficulties with the integration, it might not fully achieve the economic benefits it expects to result from the merger. In addition, the Bank may experience greater than expected costs or difficulties relating to the integration of the business of South Sound Bank, and/or may not realize expected cost savings from the merger within the expected time frame.

The required accounting treatment of loans we acquire through acquisitions including purchase credit impaired loans could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.

Under GAAP, we are required to record loans acquired through acquisitions, including purchase credit impaired loans, at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances on the acquisition date. Actual performance could differ from management’s initial estimates. If these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our net interest margins may initially increase due to the discount accretion. We expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and the discount

decreases, and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future periods.

If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation allowances, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property is taken in as OREO, and at certain other times during the asset's holding period. Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated estimated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s NBV over its fair value. If our valuation process is incorrect or if the property declines in value after foreclosure, the fair value of our OREO may not be sufficient to recover our NBV in such assets, resulting in the need for a valuation allowance.

In addition, bank regulators periodically review our OREO and may require us to recognize further valuation allowances. Significant charge-offs to our OREO may have a material adverse effect on our financial condition and results of operations.

Our investment securities portfolio may be negatively impacted by fluctuations in market value and interest rates and result in losses.

Our investment securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income (loss) and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for investment securities and limited investor demand. Our investment securities portfolio is evaluated for other-than-temporary-impairment ("OTTI"). If this evaluation shows impairment to the actual or projected cash flows associated with one or more investment securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale investment securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders' equity by the amount of change in the estimated fair value of the available-for-sale investment securities, net of income taxes. There can be no assurance that the declines in market value will not result in OTTI of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

During the year ended September 30, ~~2015, we recognized $13,000 of OTTI~~ ~~charges on private label mortgage backed securities we hold for investment. During the year ended September 30, 2014,~~2018, we recognized a ~~$59,000~~$68,000 recovery of OTTI charges on private label mortgage backed securities we hold for investment. During the year ended September 30, ~~2013,~~2017, we recognized a $33,000 recovery of OTTI charges on private label mortgage backed securities we hold for investment. During the year ended September 30, 2016, we recognized $168,000 of ~~$47,000 and recorded a credit loss through non-interest income.~~OTTI charges on private label mortgage backed securities we hold for investment. At September 30, ~~2015,~~2018, our remaining private label mortgage backed securities portfolio totaled ~~$1.1 million.~~$460,000 of which $406,000 was on non-accrual status.

The valuation of our investment securities also is influenced by additional external market and other factors, including implementation of Securities and Exchange Commission and Financial Accounting Standards Board guidance on fair value accounting, default rates on residential mortgage securities and rating agency actions. Accordingly, there can be no assurance that future declines in the market value of our private label mortgage backed securities or other investment securities will not result in additional OTTI of these assets and lead to accounting charges that could have ~~a material~~an adverse effect on our results of operations.

An increase in interest rates, change in the programs offered by Freddie Mac or our ability to qualify for their programs may reduce our mortgage revenues, which would negatively impact our non-interest income.

The sale of residential mortgage loans to Freddie Mac provides a significant portion of our non-interest income. 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. ~~Further,~~Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment, the demand for mortgage loans, particularly refinancing of existing mortgage loans, ~~tend~~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 addition, our results of operations are affected by the amount of non-interest expense associated with our loan sale activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In

~~Our real estate lending also exposes us~~addition, although we sell loans to Freddie Mac or into the ~~risk of environmental liabilities.~~

Insecondary market without recourse, we are required to give customary representations and warranties about the ~~course of our business,~~loans we ~~may foreclose~~sell. If we breach those representations and ~~take title to real estate, and~~warranties, we could be subject to environmental liabilities with respect to these properties. We may be held liable by a governmental entity or by third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to ~~investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as~~repurchase the ~~owner or former owner of a contaminated site,~~loans and we may ~~be subject to common law claims by third parties based~~incur a loss on ~~damages and costs resulting from environmental contamination emanating from~~ the ~~property. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.~~repurchase.

Fluctuating interest rates can adversely affect our profitability.

Our ~~profitability is~~earnings and cash flows are largely dependent upon our net interest income. 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. In an attempt to help the overall economy, the Federal Reserve Board kept interest rates low through its targeted Fed Funds rate for a number of years. The Federal Reserve Board has steadily increased the federal funds rate the last three years to a ~~large extent upon net~~range of 2.00% to 2.25% in September 2018 and indicated a likelihood for a further increases, subject to economic conditions. As the Federal Reserve Board increases the Fed Funds rate, overall interest ~~income,~~rates will likely rise, which ismay negatively impact both the ~~difference, or spread, between the interest earned on loans, securities~~housing markets by reducing refinancing activity and ~~other interest-earning assets~~new home purchases and the ~~interest paid~~U.S. economy. In addition, deflationary pressures, while possibly lowering our operational costs, could have a significant negative effect on ~~deposits, borrowings,~~our borrowers, especially our business borrowers, and ~~other interest-bearing liabilities. Because~~the values of ~~the differences in maturities and repricing characteristics of~~collateral securing loans which could negatively affect our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. financial performance.

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. ~~In a changing interest rate environment, we may not be able to manage this risk effectively.~~ Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also ~~can~~ affect: (1) our ability to originate and/or sell ~~loans;~~loans and obtain deposits; (2) the fair value of our ~~interest-earning~~financial assets and liabilities, which ~~would~~could negatively impact shareholders’ equity, and our ability to realize gains from the sale of such assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; (4) the ability of our borrowers to repay adjustable or variable rate loans; and (5) the average duration of our ~~mortgage-backed~~investment securities portfolio and ~~the~~other interest-earning assets. ~~Interest~~If the interest rates ~~are highly sensitive to many factors, including government monetary policies, domestic~~paid on deposits and ~~international economic and political conditions~~borrowings increase at a faster rate than the interest received on loans and other ~~factors beyond~~investments, our ~~control.~~net interest income, and therefore earnings, could be adversely affected. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.

~~A prolonged period of exceptionally low market~~Changes in interest rates such as we are currently experiencing, limits our ability to lower our interest expense, while the average yield on our loan portfolio may continue to decrease as our loans reprice or are originated at these low market rates, which could also have ~~an adverse effect~~a negative impact on our results of ~~operations.~~operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates (up or down) could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tends to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Changes in the slope of the "yield curve", or the spread between short-term and long-term interest rates, could also reduce our net interest margin. Normally the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely negatively impact our income.

A sustained increase in market interest rates could adversely affect our earnings. As a result of the ~~relatively~~exceptionally low interest rate environment, an increasing percentage of our deposits have been comprised of ~~short-term certificates of deposit and other~~ deposits ~~yielding~~bearing no or a relatively low rate of ~~interest.~~interest and having a shorter duration than our assets. At September 30, ~~2015,~~2018, we had ~~$93.9~~$76.16 million in certificates of deposit that mature within one year and ~~$524.8~~$747.70 million 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. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. In addition, a substantial amount of our residential mortgage loans and home equity lines of credit have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment.

~~Although management believes it has implemented effective asset~~Changes in interest rates also affect the value of our interest-earning assets and ~~liability management strategies to reduce~~in particular our investment securities portfolio. Generally, the ~~potential effects~~fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on investment securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of investment securities available for sale resulting from increases in interest rates could have an adverse effect on ~~our results of operations, any~~stockholders' equity.

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.~~sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk management.

~~Strong competition within our~~The financial services market ~~areas could hurt our profits~~is undergoing rapid technological changes, and ~~slow growth.~~if we are unable to stay current with those changes, we may not be able to effectively compete.

~~Although we consider ourselves competitive~~The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology to satisfy and grow customer demand for our products and services and to create additional efficiencies in our ~~market areas,~~operations. We expect that we ~~face intense competition in both making loans and attracting deposits. Price competition for loans and deposits might result~~will need to make substantial investments in our ~~earning less on our loans~~technology and ~~paying more on our deposits, which reduces net interest income.~~information systems to compete effectively and to stay current with technological changes. Some of ~~the institutions with which we compete~~our competitors have substantially greater resources ~~than we have~~to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may ~~offer~~put us at a competitive disadvantage. We may not be able to effectively implement new technology-driven products and services ~~that we do not provide. We expect competition~~or be successful in marketing these products and services to ~~increase in the future as~~our customers. As a result, ~~of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability will depend upon~~ our ~~continued~~ ability to effectively compete ~~successfully in~~to retain or acquire new business may be impaired, and our ~~market areas.~~business, financial condition or results of operations may be adversely affected.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and ~~advances~~at times, borrowings from the FHLB, borrowings from the FRB and other borrowings to fund our operations. At September 30, ~~2015,~~2018, we had ~~$45.0 million of~~no FHLB ~~advances~~borrowings outstanding and a letter of credit with an available balance of ~~$15.0~~$23.00 million and an additional ~~$255.4~~$356.19 million of available borrowing capacity through the FHLB and the FRB. Deposit flows and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived, and the competition for deposits and loans in the markets we serve. Further, changes to the FHLB's underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our ability to borrow, and could therefore have a significant adverse impact on our liquidity. Although we have historically been able to replace maturing deposits and ~~advances~~borrowings if desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB or FRB, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services ~~industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. Factors~~industry. Additional 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 where our deposits are concentrated or adverse regulatory action against us.

Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Although we consider our sources of funds adequate for our liquidity needs, we may seek additional debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on reasonable terms. If additional financing sources are unavailable, or are not available on reasonable terms, our financial condition, results of operations, growth and future prospects could be materially adversely affected. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our income may not increase proportionately to cover our costs.

We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that ~~are expected to~~could increase our costs of operations.

The ~~financial services~~banking industry is extensively regulated. ~~Timberland Bank is currently subject~~Federal banking regulations are designed primarily to extensive examination, supervision and comprehensive regulation by the DFI, our state regulator, and the FDIC, as insurer of our deposits. As a bank holding company, Timberland Bancorp is subject to examination, supervision and regulation by the Federal Reserve. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection ofprotect the deposit insurance ~~fund~~funds and consumers, ~~and~~ not to benefit ~~our~~a company's shareholders. These ~~regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to~~regulations may sometimes impose ~~restrictions~~significant limitations on our ~~operations,~~operations. The significant federal and state banking regulations that affect us are described in this report under the classification of our assets, and the determination of the level of our allowance for loan losses and level of deposit insurance premiums assessed. Additionally, actions by regulatory agencies or significant litigation against us could require us to devote significant time and resources to defending our business and may lead to penalties that materially affect us.heading "Item 1. 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. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Any new regulations or legislation, change in existing ~~regulations~~regulation or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a material impact on our operations,

increase our costs of regulatory compliance and of doing business and adversely affect our profitability. In this regard, the U.S. Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN"), published guidelines in 2014 for financial institutions servicing state legal marijuana businesses. These guidelines allow us to work with marijuana-related businesses that are operating in accordance with state laws and regulations, so long as we comply with required regulatory oversight of their accounts with us. At September 30, 2018, approximately 2.5% of our total deposits and a portion of our service charges from deposits are from legal marijuana-related businesses. 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, ~~and~~which may materially affect our profitability. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results or our operations as could our interpretations of those changes.

~~As discussed under “Business - Regulation~~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 ~~the~~acquisitions.

The USA PATRIOT and Bank - Financial Regulatory Reform” in Item I of this Form 10-K, the Dodd-Frank Act has significantly changed the bank regulatory structure and will affect the lending, deposit, investment, trading and operating activities ofSecrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and ~~their holding companies. The Dodd-Frank Act requires various federal agencies~~terrorist activities. If such activities are detected, financial institutions are obligated to ~~adopt~~file suspicious activity reports with FinCEN. These rules require financial institutions to establish procedures for identifying and ~~implement a broad range~~verifying the identity of customers seeking to open new ~~rules~~financial accounts. Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions. 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 ~~to prepare numerous studies~~procedures will be effective in preventing violations of these laws and reports for Congress. The federal agencies are given significant discretion in drafting and implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. It is difficult at this time to predict when or how any new standards will ultimately be applied to us or what specific impact the Dodd-Frank Act and the yet to be written rules and regulations for implementation will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our non-interest expense.regulations.

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.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At some point, we may need to raise additional capital to support our growth or replenish future losses. 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. Accordingly, we cannot make assurances that we will be able to raise additional ~~capital.~~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. ~~As a~~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 ~~may have~~are unable to raise additional capital ~~on terms that~~when required by our bank regulators, we may be ~~dilutive~~subject to ~~our shareholders.~~adverse regulatory action.

We may experience future goodwill impairment, which could reduce our earnings.

We performed our test for goodwill impairment for fiscal year ~~2015,~~2018, and the test concluded that recorded goodwill was not impaired. Our ~~assessment~~test of ~~the fair value of~~ goodwill for potential impairment is based on ~~an evaluation of~~a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market ~~capitalizations for similar~~conditions, cost or margin factors, financial ~~institutions, discounted cash flows from forecasted earnings, our current market capitalization,~~performance and ~~a valuation of our assets and liabilities.~~share price. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to write down our goodwill resulting in a charge against operations, which would adversely affect our results of operations, perhaps materially; however, it would have no impact on our liquidity, operations or regulatory capital. The acquisition of South Sound Bank on October 1, 2018, is expected to substantially increase our goodwill.

We may experience decreases in the fair value of our mortgage servicing rights, which could reduce our earnings.

Mortgage servicing rights (“MSRs”) are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with servicing rights retained. At September 30, ~~2015,~~2018, our MSRs totaled ~~$1.5~~$2.03 million. MSRs are amortized to servicing income on loans sold over the period of estimated net servicing income. The estimated fair value of MSRs at the date of the sale of loans is determined based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and prepayment rates on the underlying loans. On a quarterly basis, we evaluate the fair value of MSRs for impairment by comparing actual cash flows and estimated cash flows from the servicing assets to those estimated at the time servicing assets were originated. Our methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions, such as prepayment speeds. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the MSRs portfolio. For example, a decrease in mortgage interest rates typically increases the prepayment speeds of MSRs and therefore decreases the fair value of the MSRs. Future

decreases in mortgage interest rates could decrease the fair value of our MSRs below their recorded amount, which would decrease our earnings.

Our ~~assets as of September 30, 2015 include a deferred tax asset, and we~~framework for managing risks may not be ~~able~~effective in mitigating risk and loss to ~~realize the full amount of such asset.~~us.

We ~~recognize deferred tax assets~~have established processes and ~~liabilities based on differences between~~procedures intended to identify, measure, monitor, report, analyze and control the ~~financial statement recorded amounts~~types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and ~~the tax bases of assets~~compliance risk, and liabilities. At September 30, 2015, the net deferred tax asset was approximately $2.2 million. The net deferred tax asset results primarily from our provision for loan losses recorded for financial reporting purposes, which has been larger than net loan charge-offs deducted for tax reporting purposes.

reputational risk, among others. We ~~regularly review our net deferred tax assets for recoverability based~~also maintain a compliance program to identify, measure, assess, and report on our ~~expectations of~~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. As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, earnings and expected timing of reversals of temporary differences and record a valuation allowance if deemed necessary. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carry-back years, as well as future taxable income. We believe the recorded net deferred tax asset at September 30, 2015 is fully realizable; however, if we determinerisks that we ~~will be unable to realize all~~have not appropriately anticipated or ~~part of the net deferred tax asset,~~identified. If our risk management framework proves ineffective, we ~~would adjust the net deferred tax asset,~~could suffer unexpected losses which ~~would negatively impact~~could have a material adverse effect on our financial condition and results of operations.

~~The exercise of our outstanding warrant may be dilutive to holders of our common stock.~~

At September 30, 2015, we had an outstanding warrant to purchase up to 370,899 shares of our common stock at a price of $6.73 per share at any time through December 23, 2018. The ownership interest of existing holders of our common stock will be diluted to the extent the warrant is exercised. The shares of common stock underlying the warrant represent approximately 5.0% of the shares of our common stock outstanding as of September 30, 2015 (including the shares issuable upon exercise of the warrant in total shares outstanding).

~~Our exposure to operational risks may adversely affect us.~~

Similar to other financial institutions, we are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, the risk that sensitive customer or Company data is compromised, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors. Nationally, reported incidents of fraud and other financial crimes have increased. While we have policies and procedures designed to prevent such losses, there can be no assurances that such losses will not occur. If any of these risks occur, it could result in material adverse consequences for us.

We are subject to certain risks in connection with our use of technology.

Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.

Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. 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. Any compromise of our security ~~also~~ 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. ~~These~~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 ~~significant legal liability and significant~~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.~~business, financial condition and results of operation.

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. 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. 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 customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

~~The occurrence of any~~We cannot assure you that such breaches, failures or interruptions will not occur or, if the do occur, that they will be adequately addressed by us or the third parties on which we rely. We may ~~require us~~not be insured against all types of losses as a result of third-party failures and insurance coverage may be inadequate to cover all losses, resulting from breaches, systems failures or

other disruptions. If any of our third party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

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 loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

We are dependent on key personnel, and the loss of one or more of those key personnel may materially and adversely affect our prospects.

Competition for qualified employees and personnel in the banking industry is intense, and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Bank conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President, and certain other employees. 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.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

We rely on other companies to provide key components of our business infrastructure.

Third-party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third-parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third-party vendors could also entail significant delay and expense.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

At September 30, ~~2015,~~2018, the Bank operated 22 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 ~~the Gig Harbor office~~ and the Lacey office a

tat 1751 Circle Lane SE, which are leased.


Location	Year Opened	Approximate Square Footage	Deposits at September 30, 2015		Year Opened	Approximate Square Footage	Deposits at September 30, 2018
			(In thousands)				(In thousands)
Main Office:

624 Simpson Avenue Hoquiam, Washington 98550	1966	7,700	$	61,462	1966	7,700	$	64,563

Branch Offices:

300 N. Boone Street Aberdeen, Washington 98520	1974	3,400	32,833		1974	3,400	34,517

201 Main Street South Montesano, Washington 98563	2004	3,200	32,203		2004	3,200	41,372

361 Damon Road Ocean Shores, Washington 98569	1977	2,100	24,482		1977	2,100	34,524

2418 Meridian Avenue East Edgewood, Washington 98371	1980	2,400	42,118		1980	2,400	51,947

202 Auburn Way South Auburn, Washington 98002	1994	4,200	31,376		1994	4,200	35,969

12814 Meridian Avenue East (South Hill) Puyallup, Washington 98373	1996	4,200	37,320		1996	4,200	41,097

1201 Marvin Road, N.E. Lacey, Washington 98516	1997	4,400	20,406		1997	4,400	29,350

101 Yelm Avenue W. Yelm, Washington 98597	1999	3,400	21,542		1999	3,400	31,687

20464 Viking Way NW Poulsbo, Washington 98370	1999	1,800	16,261		1999	1,800	21,552

2419 224^th Street E. Spanaway, Washington 98387	1999	3,900	36,088		1999	3,900	42,840

801 Trosper Road SW Tumwater, Washington 98512	2001	3,300	29,120		2001	3,300	39,056
(table continued on the following page)


7805 South Hosmer Street Tacoma, Washington 98408	2001	5,000	$	40,711	2001	5,000	$	69,710

2401 Bucklin Hill Road Silverdale, Washington 98383	2003	4,000	39,695		2003	4,000	48,710

423 Washington Street SE Olympia, Washington 98501	2003	3,000	42,110		2003	3,000	59,200

3105 Judson Street Gig Harbor, Washington 98335	2004	2,700	27,801		2004	2,700	38,570

117 N. Broadway Aberdeen, Washington 98520	2004	3,700	25,207		2004	3,700	42,875

313 West Waldrip Street Elma, Washington 98541	2004	5,900	32,054		2004	5,900	36,501

1751 Circle Lane SE Lacey, Washington 98503	2004	900	14,617		2004	900	17,219

101 2nd Street Toledo, Washington 98591	2004	1,800	32,914		2004	1,800	41,376

209 NE 1st Street Winlock, Washington 98586	2004	3,400	16,438		2004	3,400	18,733

714 W. Main Street Chehalis, Washington 98532	2009	4,600	22,154		2009	4,600	48,138

Loan Center/Data Center:

120 Lincoln Street Hoquiam, Washington 98550	2003	6,000	N/A		2003	6,000	N/A

Administrative Offices:

305 8th Street Hoquiam, Washington 98550	2004	4,100	N/A		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.

At September 30, ~~2015,~~2018, the Bank operated 22 proprietary ~~ATMs~~automated teller machines ("ATMs") that are part of a nationwide cash exchange network.

Item 3. Legal Proceedings

Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company's business. The Company is not 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

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 November 30, ~~2015,~~2018, there were ~~6,994,148~~8,310,703 shares of common stock issued and approximately ~~476~~487 shareholders of record. The following table sets forth the high and low sales prices of, and dividends paid on, the Company's common stock for each quarter during the years ended September 30, 2015 and 2014. The high and low price information was provided by the Nasdaq Stock Market.

Fiscal 2015 High Low
Dividends per
Common Share
First Quarter $ 10.74
$ 10.39
$ 0.05
Second Quarter 11.57
10.25
0.06
Third Quarter 10.87
9.82
0.06
Fourth Quarter 11.20
9.91
0.07
Fiscal 2014 High Low Dividends per
Common Share
First Quarter $ 9.76
$ 8.28
$ 0.03
Second Quarter 11.59
9.61
0.04
Third Quarter 11.00
10.37
0.04
Fourth Quarter 10.98
10.27
0.05

~~Dividends~~

The timing and amount of cash dividends paid on our common stock depends on our earnings, capital requirements, financial condition and other relevant factors and is subject to the discretion of our board of directors. There can be no assurance that we will pay dividends on our common stock in the future.

Dividend payments by the Company are dependent primarily on dividends received by the Company from the Bank. Under federal regulations, the dollar amount of dividends the Bank may pay is dependent upon its capital position and recent net income. Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the FDIC regulations. However, an institution that has converted to a stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in connection with the mutual to stock conversion.

The DFI has the power to require any bank to suspend the payment of any and all dividends. In addition, under Washington law, no bank may declare or pay any dividend in an amount greater than its retained earnings without the prior approval of the DFI. Further, under Washington law, Timberland Bancorp is prohibited if, after making such dividend payment, it would be unable to pay its debts as they become due in the usual course of business, or if its total liabilities, plus the amount that would be needed, in the event Timberland Bancorp were to be dissolved at the time of the dividend payment, to satisfy preferential rights on dissolution of holders of preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is to be made, exceed our total assets.

In addition to the foregoing regulatory considerations, there are numerous governmental requirements and regulations that affect our business activities. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business and on our ability to pay dividends on our common stock.

Equity Compensation Plan Information

The following table summarizes share and exercise price information about the Company’s equity compensation ~~plan information presented under subparagraph (d) in Part III, Item 12.~~plans as of ~~this Form 10-K is incorporated herein by reference.~~September 30, 2018:



Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders:
2003 Stock Option Plan	121,850	$	8.39	0

Timberland Bancorp, Inc. 2014 Equity Incentive Plan:	258,970		19.63	71,416

Equity compensation plans not approved by security holders	—	—		—

Total	380,820	$	16.03	71,416

Stock Repurchases

The Company is subject to certain restrictions on its ability to repurchase its common stock. The Company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated net worth. 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. On July 28, 2015, the Company announced a plan to repurchase 352,681 shares of the Company's common stock. This marked the Company's 17th stock repurchase plan. As of September 30, ~~2015,~~2018, the Company ~~has~~had repurchased ~~64,788 of these~~130,788 shares under this plan at an average price of ~~$10.94~~$11.69 per share. Cumulatively, since January 1998 the Company has repurchased ~~7,848,722~~7,914,722 shares at an average price of ~~$8.99~~$9.02 per share.

The following table sets forth the Company's repurchases of its outstanding Common Stock during the fourth quarter of the year ended September 30, ~~2015.~~

2018:

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans

July 1, 2015 - July 31, 2015 —
$ —
—
352,681

August 1, 2015 - August 31, 2015 —
—
—
352,681

September 1, 2015 - September 30, 2015 64,788
10.94
64,788
287,893

Total 64,788
$ 10.94
64,788
287,893



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans

July 1, 2018 - July 31, 2018	—	$	—	—	221,893

August 1, 2018 - August 31, 2018	—	—		—	221,893

September 1, 2018 - September 30, 2018	—	—		—	221,893

Total	—	$	—	—	221,893

There were no shares repurchased during the year ended September 30, 2018 and 221,893 shares were available to be repurchased under the current repurchase program.

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 U.S. Companies Index and with the SNL $500 million to $1 Billion Asset Thrift Index, peer group indices. 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, ~~2010.~~2013.

Period Ended
Index 9/30/2010
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
Timberland Bancorp $ 100.00
$ 100.00
$ 148.52
$ 225.17
$ 267.81
$ 283.03
NASDAQ Composite 100.00
103.00
134.56
165.51
199.72
208.01
SNL $500M-$1B Thrift Index * 100.00
103.92
130.68
161.04
178.30
210.54



	Year Ended
Index	9/30/2013		9/30/2014		9/30/2015		9/30/2016		9/30/2017		9/30/2018
Timberland Bancorp	$	100.00	$	118.94	$	125.70	$	186.80	$	380.04	$	386.17
NASDAQ Composite	100.00		120.61		125.43		146.03		180.62		226.08
SNL $500M-$1B Thrift Index *	100.00		110.72		130.74		148.79		214.40		248.37

* Source: ~~SNL Financial LC, Charlottesville, VA~~S&P Global Market Intelligence

Item 6. Selected Financial Data

The following table sets forth certain information concerning the consolidated financial position and results of operations of the Company and its subsidiary at and for the dates indicated. The consolidated data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its subsidiary presented herein.


	At September 30,															At September 30,
	2015			2014			2013			2012			2011			2018			2017			2016			2015			2014
	(In thousands)															(Dollars in thousands)
SELECTED FINANCIAL CONDITION DATA:

Total assets	$	815,815		$	745,565		$	745,648		$	736,954		$	738,224		$	1,018,290		$	952,024		$	891,388		$	815,815		$	745,565
Loans receivable and loans held for sale, net	607,328			565,752			548,104			538,480			528,024
Loans receivable, net																725,391			690,364			663,146			604,277			564,853
Investment securities held to maturity	7,913			5,298			2,737			3,339			4,145			12,810			7,139			7,511			7,913			5,298
Investment securities available for sale	1,392			2,857			4,101			4,945			6,717			1,154			1,241			1,342			1,392			2,857
FHLB Stock	2,699			5,246			5,452			5,655			5,705
FHLB stock																1,190			1,107			2,204			2,699			5,246
Other investments																3,000			3,000			—			—			—
Cash and due from financial institutions and interest-bearing deposits in banks	92,289			72,354			94,496			96,668			112,065			148,864			148,188			108,941			92,289			72,354
Certificates of deposit held for investment	48,611			35,845			30,042			23,490			18,659			63,290			43,034			53,000			48,611			35,845
OREO and other repossessed assets, net	7,854			9,092			11,720			13,302			10,811			1,913			3,301			4,117			7,854			9,092
Deposits	678,912			615,116			608,262			597,926			592,678			889,506			837,898			761,534			678,912			615,116
FHLB advances	45,000			45,000			45,000			45,000			55,000
FHLB borrowings																—			—			30,000			45,000			45,000
Shareholders' equity	89,187			82,778			89,688			90,319			86,205			124,657			111,000			96,834			89,187			82,778

	Year Ended September 30,															Year Ended September 30,
	2015			2014			2013			2012			2011			2018			2017			2016			2015			2014
	(In thousands, except per share data)															(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:

Interest and dividend income	$	31,168		$	29,857		$	30,237		$	31,605		$	33,966		$	41,833		$	38,338		$	34,875		$	31,168		$	29,857
Interest expense	3,890			3,939			4,439			5,947			8,533			2,778			3,197			4,072			3,890			3,939
Net interest income	27,278			25,918			25,798			25,658			25,433			39,055			35,141			30,803			27,278			25,918
Provision for (recapture of) loan losses	(1,525		)	—			2,925			3,500			6,758
Net interest income after provision for (recapture of) loan losses	28,803			25,918			22,873			22,158			18,675
Recapture of loan losses																—			(1,250		)	—			(1,525		)	—
Net interest income after recapture of loan losses																39,055			36,391			30,803			28,803			25,918
Non-interest income	9,522			8,530			10,262			9,781			8,681			12,544			12,368			10,889			9,522			8,530
Non-interest expense	25,841			25,798			25,864			25,568			25,963			29,177			27,516			26,637			25,841			25,798
Income before federal income taxes	12,484			8,650			7,271			6,371			1,393
Provision for federal income taxes	4,192			2,800			2,514			1,781			304
Income before income taxes																22,422			21,243			15,055			12,484			8,650
Provision for income taxes																5,701			7,076			4,901			4,192			2,800
Net income	8,292			5,850			4,757			4,590			1,089			16,721			14,167			10,154			8,292			5,850
Preferred stock dividends	—			(136		)	(710		)	(832		)	(832		)	—			—			—			—			(136		)
Preferred stock discount accretion	—			(70		)	(283		)	(240		)	(225		)	—			—			—			—			(70		)
Discount on redemption of preferred stock	—			—			255			—			—
Net income to common shareholders	$	8,292		$	5,644		$	4,019		$	3,518		$	32		$	16,721		$	14,167		$	10,154		$	8,292		$	5,644

Net income per common share:
Basic	$	1.20		$	0.82		$	0.59		$	0.52		$	—		$	2.28		$	1.99		$	1.48		$	1.20		$	0.82
Diluted	$	1.17		$	0.80		$	0.58		$	0.52		$	—		$	2.22		$	1.92		$	1.43		$	1.17		$	0.80
Dividends per common share	$	0.24		$	0.16		$	—		$	—		$	—		$	0.60		$	0.50		$	0.37		$	0.24		$	0.16
Dividend payout ratio (1)	20.42		%	19.97		%	15.78		%	N/A			N/A			26.50		%	25.70		%	25.39		%	20.42		%	19.97		%

_______________


(1)	Cash dividends to common shareholders divided by net income to common shareholders.


	At September 30,					At September 30,
	2015	2014	2013	2012	2011	2018	2017	2016	2015	2014
OTHER DATA:

Number of real estate loans outstanding	2,545	2,525	2,524	2,513	2,604	2,550	2,593	2,615	2,545	2,525
Deposit accounts	52,343	52,656	54,809	55,848	56,152	55,441	54,707	53,611	52,343	52,656
Full-service offices	22	22	22	22	22	22	22	22	22	22


	At or For the Year Ended September 30,										At or For the Year Ended September 30,
	2015		2014		2013		2012		2011		2018		2017		2016		2015		2014
KEY FINANCIAL RATIOS:

Performance Ratios:
Return on average assets (1)	1.07	%	0.79	%	0.64	%	0.62	%	0.15	%	1.70	%	1.53	%	1.19	%	1.07	%	0.79	%
Return on average equity (2)	9.70		7.08		5.27		5.21		1.26		14.27		13.65		11.00		9.70		7.08
Interest rate spread (3)	3.66		3.71		3.69		3.65		3.58		4.10		3.93		3.72		3.66		3.71
Net interest margin (4)	3.80		3.84		3.82		3.81		3.78		4.23		4.07		3.88		3.80		3.84
Average interest-earning assets to average interest-bearing liabilities	126.41		122.04		119.93		117.42		115.24		144.17		137.75		131.69		126.41		122.04
Non-interest expense as a percent of average total assets	3.33		3.50		3.49		3.48		3.54		2.96		2.98		3.13		3.33		3.50

Efficiency ratio (5)	70.22		74.89		71.72		72.15		76.11		56.55		57.92		63.89		70.22		74.89

Asset Quality Ratios:
Non-accrual and 90 days or more past due loans as a percent of total loans receivable, net	1.00	%	2.03	%	2.51	%	4.09	%	4.32	%	0.18	%	0.28	%	0.45	%	1.02	%	2.08	%
Non-performing assets as a percent of total assets (6)	1.84		2.94		3.75		5.19		5.01		0.36		0.60		0.88		1.84		2.94
Allowance for loan losses as a percent of total loans receivable, net (7)	1.61		1.81		1.99		2.15		2.21		1.30		1.36		1.46		1.62		1.81
Allowance for loan losses as a percent of non-performing loans (8)	160.30		88.96		79.28		52.48		51.18		723.61		499.90		326.66		160.30		88.96
Net charge-offs (recoveries) to average outstanding loans	(0.17	)	0.12		0.65		0.66		1.13		—		(0.14	)	0.02		(0.17	)	0.12

Capital Ratios:
Total equity-to-assets ratio	10.93	%	11.10	%	12.03	%	12.26	%	11.68	%	12.24	%	11.66	%	10.86	%	10.93	%	11.10	%
Average equity to average assets	11.01		11.20		12.19		11.98		11.81		11.90		11.25		10.84		11.01		11.20

__________________


(1)	Net income divided by average total assets.


(2)	Net income divided by average total equity.


(3)	Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.


(4)	Net interest income before provision for (recapture of) loan losses as a percentage of average interest-earning assets.


(5)	Non-interest expenses divided by the sum of net interest income and non-interest income.


(6)	Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing, non-accrual investment securities, OREO and other repossessed assets.


(7)	Loans receivable ~~includes loans held for sale and~~ is before the allowance for loan losses.


(8)	Non-performing loans include non-accrual loans and loans past due 90 days or more and still accruing. ~~Troubled debt restructured loans~~TDRs that are on accrual status are not included.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the consolidated financial condition and results of operations of the Company. 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.

~~Special Note Regarding Forward-Looking Statements~~

~~Certain matters discussed~~Overview

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank. The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 22 branches (including its main office in Hoquiam). At September 30, 2018, the Company had total assets of $1.02 billion, net loans receivable of $725.39 million, total deposits of $889.51 million and total shareholders’ equity of $124.66 million. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this ~~Annual Report on Form 10-K may contain forward-looking statements within~~report relates primarily to the ~~meaning~~Bank’s operations.

On May 23, 2018, the Company announced the signing of a definitive agreement and plan of merger with South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington. On October 1, 2018, the ~~Private Securities Litigation Reform Act~~Company completed the acquisition of ~~1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact~~South Sound Bank (the "South Sound Merger") and ~~often include~~South Sound Bank merged into the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing loans in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates,Bank and the ~~relative differences between short~~Company. At September 30, 2018, South Sound Bank had $178.33 million in total assets, $121.35 million in net loans receivable and ~~long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations~~$151.43 million in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiary by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or our bank subsidiary which could require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including astotal deposits. As a result of ~~Basel III;~~ the ~~impact~~South Sound Merger, South Sound Bank shareholders received 904,826 shares of Timberland Bancorp common stock and $6.90 million in cash for total consideration paid of $35.17 million. The financial condition data and operating results of the ~~Dodd Frank Wall Street Reform~~Company at and ~~Consumer Protection Act~~for the year ended September 30, 2018, do not include the acquired assets and implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on our consolidated balance sheet; staffing fluctuations in response to product demandassumed liabilities from South Sound Bank or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adoptedoperating results produced by the ~~financial institution regulatory agencies or~~acquired assets and assumed liabilities as the ~~Financial Accounting Standards Board, including~~South Sound Merger did not close until October 1, 2018. For additional ~~guidance and interpretation on accounting issues and~~ details see Note 21 of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks described elsewhere in this Form 10-K and the Company's other reports filed with or furnishedNotes to ~~the SEC.~~

Any of the forward-looking statements that we make in this Form 10-K and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this annual report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal 2016 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's financial conditions and results of operations as well as its stock price performance.

~~Critical Accounting Policies and Estimates~~

The Company has established various accounting policies that govern the application of GAAP in the preparation of the Company's Consolidated Financial Statements. The Company has identified five policies, that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements. These policies relate to the methodology for the determination of the allowance for loan losses, the valuation of MSRs, the determination of other than temporary impairment ("OTTI") in the market value of investment securities, the determination of goodwill impairment and the determination of the recorded value of OREO. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management's Discussion and Analysis contained herein and in the notes to the Consolidated Financial Statements contained in ~~Item 8 of this Form 10-K. In particular, Note 1 to the Consolidated~~"Item 8. Financial Statements ~~“Summary~~and Supplementary Data."

The Bank is a community-oriented bank which has traditionally offered a variety of ~~Significant Accounting Policies,” generally describes~~savings products to its retail customers while concentrating its lending activities on real estate mortgage loans. Lending activities have been focused primarily on the ~~Company's accounting policies. Management believes~~origination of loans secured by real estate, including residential construction loans, one- to four-family residential loans, multi-family loans and commercial real estate loans. The Bank originates adjustable-rate residential mortgage loans that do not qualify for sale in the secondary market. The Bank also originates commercial business loans and other consumer loans.

The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) loan losses. Net interest income is the difference between interest income, which is the income that the ~~judgments, estimates~~Company earns on interest-earning assets, which are primarily loans and ~~assumptions used~~investments, and interest expense, the amount the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed). Net interest income is affected by changes in the ~~preparation~~volume and mix of interest-earning assets, interest earned on those assets, the volume and mix of interest-bearing liabilities and interest paid on those interest-bearing liabilities. Management attempts to match the re-pricing characteristics of the ~~Company's Consolidated Financial Statements are appropriate given~~interest-earning assets and interest-bearing liabilities to protect net interest income from changes in market interest rates and changes in the ~~factual circumstances at the time. However, given the sensitivity~~shape of the ~~Company's Consolidated Financial Statements to these critical policies, the use of other judgments, estimates and assumptions could result in material differences~~yield curve.

The provision for (recapture of) loan losses is dependent on changes in the ~~Company's results~~loan portfolio and management’s assessment of ~~operations or financial condition.~~

~~Allowance for Loan Losses.~~the collectability of the loan portfolio as well as prevailing economic and market conditions. The allowance for loan losses is maintained at a level sufficient to provide for probable loan losses based on evaluating known and inherent risks in the portfolio. The allowance is based upon management's comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes inreflects the amount and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectibility may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The appropriate allowance for loan loss level is estimated based upon factors and trends identified by management at the time the consolidated financial statements are prepared.

~~While~~that the Company believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Company’s loan portfolio, will not request the Company to significantly increase or decrease its allowance for loan losses. 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 as a result of the factors discussed elsewhere in this document. Although management believes the level of the allowance as of September 30, 2015 was adequate to ~~absorb~~cover probable credit losses inherent in its loan portfolio.

Net income is also affected by non-interest income and non-interest expenses. For the ~~loan portfolio, a decline in local economic conditions, results~~year ended September 30, 2018, non-interest income consisted primarily of ~~examinations by the Company’s or the Bank’s regulators or other factors, could result in a material~~service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, an increase in the ~~allowance for loan losses and may adversely affect the Company’s financial condition and results~~cash surrender value of ~~operations.~~

~~MSRs.~~ ~~MSRs are capitalized when acquired through the origination of loans that are subsequently sold with servicing rights retained and are amortized to~~BOLI, servicing income on loans sold ~~approximately~~and other operating income. 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 expenses consisted primarily of salaries and employee benefits, premises and equipment,

advertising, ATM and debit card interchange transaction fees, postage and courier expenses, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses and other non-interest expenses. Non-interest expenses in ~~proportion to and over the period of estimated net servicing income. The value of MSRs at the date of~~certain periods are reduced by gains on the sale of ~~loans is determined based~~premises and equipment and by gains on the ~~discounted present value~~sale of ~~expected future cash flows using key assumptions for servicing~~OREO. Non-interest income and ~~costs~~non-interest expenses are affected by the growth of the Company's operations and ~~prepayment rates on~~growth in the ~~underlying loans.~~number of loan and deposit accounts.

~~The estimated fair value is evaluated at least annually~~Results of operations may be affected significantly by ~~a third-party firm for impairment by comparing actual cash flows~~general and ~~estimated cash flows from the servicing assets to those estimated at the time the servicing assets were originated. The effect of~~local economic and competitive conditions, changes in market interest rates, ~~on estimated rates~~governmental policies and actions of loan prepayments represents the predominant risk characteristic underlying the MSRs’ portfolio. The Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions. For example, the determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ, and any difference may have a material effect on the fair value. Thus, any measurement of MSRs' fair value is limited by the conditions existing and assumptions as of the date made. Those assumptions may not be appropriate if they are applied at different times.regulatory authorities.

~~OTTI in the Estimated Fair Value of Investment Securities~~. Unrealized investment securities losses on available for sale and held to maturity securities are evaluated at least quarterly by a third-party firm to determine whether declines in value should be considered “other than temporary” and therefore be subject to immediate loss recognition through earnings for the portion related to credit losses. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the security is less than the recorded value primarily as a result of changes in interest rates, when there has not been significant deterioration in the financial condition of the issuer, and the Company has the intent and the ability to hold the security for a sufficient time to recover the recorded value. An unrealized loss in the value of an equity security is generally considered temporary when the fair value of the security is below the recorded value primarily as a result of current market conditions and not a result of deterioration in the financial condition of the underlying borrowers or the underlying collateral (in the case of mutual funds) and the Company has the intent and the ability to hold the security for a sufficient time to recover the recorded value. Other factors that may be considered in determining whether a decline in the value of either a debt or equity security is “other than temporary” include ratings by recognized rating agencies, capital strength and near-term prospects of the issuer, and recommendation of investment advisors or market analysts. Therefore, continued deterioration of current market conditions could result in additional impairment losses recognized within the Company’s investment portfolio.

~~Goodwill.~~ Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired and liabilities assumed. Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment. An annual test is performed during the third quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. If the estimated fair value of the Company's sole reporting unit exceeds the recorded value of the reporting unit, goodwill is not considered impaired.

The goodwill impairment tests involves a two-step process. Step one of the goodwill impairment test estimates the fair value of the reporting unit utilizing the allocation of corporate value approach, the income approach and the market approach in order to derive an enterprise value for the Company. If the results of the Company's step one test indicate that the reporting unit's estimated fair value is less than its recorded value, a step two analysis is performed. In the step two analysis, the estimated fair value of assets and liabilities is calculated in order to determine the implied fair value of the Company's goodwill. If the implied value of the goodwill exceeds the recorded value of goodwill, then goodwill is not considered to be impaired.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others; a significant decline in the expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Key assumptions used in the annual goodwill impairment test are highly judgmental and include: selection of comparable companies, amount of control premium, projected cash flows, discount rate applied to projected cash flows and method of estimating the fair value of loans. Any change in these indicators or key assumptions could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

During the quarter ended June 30, 2015, the Company engaged a third-party firm specializing in goodwill impairment valuations for financial institutions to help perform the annual test for goodwill impairment. The test concluded that recorded goodwill was not impaired. As of September 30, 2015, there have been no events or changes in the circumstances that would indicate a potential impairment. No assurance can be given, however, that the Company will not record an impairment loss on goodwill in the future.

~~OREO and Other Repossessed Assets.~~ OREO and other repossessed assets consist of properties or assets acquired through or in lieu of foreclosure and are recorded initially at the estimated fair value of the properties less estimated costs of disposal. Costs relating to development and improvement of the properties or assets are capitalized, while costs relating to holding the properties or assets are expensed. Valuations are periodically performed by management, and a charge to earnings is recorded if the recorded value of a property exceeds its estimated net realizable value.

~~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.”

Operating Strategy

The Company is a bank holding company which operates primarily through its subsidiary, the Bank. The Company's primary objective is to operate the Bank as a well capitalized, profitable, independent, community-oriented financial institution, serving customers in its primary market area of Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties. The Company's strategy is ~~a community-oriented bank which has traditionally offered a wide variety of savings~~to provide innovative products and superior service to small businesses, industry and geographic niches, and individuals located in its ~~retail customers while concentrating its lending activities on~~primary market area.

The Company's goal is to deliver returns to shareholders by increasing higher-yielding assets (in particular commercial real estate, loans. In spite of persistently weak economic conditions and exceptionally low interest rates which have created an unusually challenging banking environment for an extended period, the Company experienced marked improvement in profitability in fiscal years 2015 and 2014 as real estate values modestly improved along with general economic conditions resulting in materially lower loan charge-offs and write-downs of OREO as compared to prior periods. Although there continue to be indications that economic conditions in the U.S., including Washington State where we hold substantially all of our loans and conduct all of our operations, are improving from the recessionary downturn, the pace of recovery has been modest and uneven, and ongoing stress in the economy will likely continue to be challenging going forward. In response to the financial challenges in our market areas we have taken actions to manage our capital, reduce our exposure to speculative construction, and ~~land development loans~~commercial business loans), increasing core deposit balances, managing problem assets, efficiently managing expenses, and ~~land loans and maintain higher levels of~~exploring expansion opportunities. The Company seeks to achieve these results by focusing on balance sheet liquidity. We continue to originate residential fixed-rate mortgage loans primarily for sale in the secondary market. We also continue to manage the growth of our commercial and multi-family real estate loan portfolios in a disciplined fashion while continuing to dispose of other real estate owned properties and increase retail deposits.

We believe the resolution of problem financial institutions and continued bank consolidation in western Washington will provide opportunities for the Company to increase market share within the communities it serves. We are currently pursuing the following ~~strategies:~~

~~Improve asset quality.~~ We are focused on monitoring existing performing loans, resolving non-performing assets and selling foreclosed assets. We have sought to reduce the level of non-performing assets through collections, write-downs, modifications and sales of OREO. We have taken 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.objectives:

Expand our presence within our existing market areas by capturing opportunities resulting from changes in the competitive environment. We currently conduct our business primarily in western Washington. We have a community bank strategy that emphasizes responsive and personalized service to our customers. As a result of consolidation of banks in our market areas, we believe there is an opportunity for a community and customer focused bank to expand its customer base. By offering timely decision making, delivering appropriate banking products and services, and providing customer access to our senior managers we believe community banks, such as Timberland Bank, can distinguish themselves from larger banks operating in our market areas. We believe we have a significant opportunity to attract additional borrowers and depositors and expand our market presence and market share within our extensive branch footprint.

~~Continue generating revenues through mortgage banking operations.~~ The substantial majority of the fixed-rate residential mortgage loans we originate are sold into the secondary market with servicing retained. This strategy produces gains on the sale of such loans and reduces the interest rate and credit risk associated with fixed-rate residential lending. We continue to originate custom construction and owner builder loans for sale into the secondary market upon the completion of construction.

Portfolio diversification. In recent years, we have ~~strictly~~ limited the origination of speculative construction ~~land development~~loans and land loans in favor of loans that possess credit profiles representing less risk to the Bank. We continue originating owner/builder and custom construction loans, multi-family loans, commercial business loans and certain commercial real estate loans which offer higher risk adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than fixed rate one-to four-family loans. We anticipate capturing more of each customer's banking relationship by cross selling our loan and deposit products and offering additional services to our customers.

Increase core deposits and other retail deposit products. We focus on establishing a total banking relationship with our customers with the intent of internally funding our loan portfolio. We anticipate that the continued focus on customer relationships will increase our level of core ~~deposits and locally-based retail certificates of deposit.~~deposits. In addition to our retail branches, we maintain technology based products such as business cash management and a business remote deposit product that enables us to compete effectively with banks of all sizes.

Limit exposure to increasing interest rates. For many years, the majority of the loans the Bank has retained in its portfolio have generally possessed periodic interest rate adjustment features or have been relatively short term in nature. Loans originated for portfolio retention have generally included ARM loans, short term construction loans, and to a lesser extent commercial business loans with interest rates tied to a market index such as the ~~prime rate.~~Prime Rate. Longer term fixed-rate mortgage loans have generally been originated for sale into the secondary market.

Continue generating revenues through mortgage banking operations. The substantial majority of the fixed-rate residential mortgage loans we originate are sold into the secondary market with servicing retained. This strategy produces gains on the sale of such loans and reduces the interest rate and credit risk associated with fixed-rate residential lending. We continue to originate custom construction and owner builder 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 0.28% at September 30, 2018 and 2017, respectively. The Company's percentage of non-performing assets to total assets at September 30, 2018 was 0.36% compared to 0.60% at September 30, 2017. Non-performing assets have decreased to $3.64 million at September 30, 2018 from $21.91 million at

September 30, 2014. 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 loans when such actions have been deemed appropriate. We have also accepted short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure. 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 through the use of experienced bankers and an overall conservative approach to lending.

Critical Accounting Policies and Estimates

The Company has established various accounting policies that govern the application of GAAP in the preparation of the Company's Consolidated Financial Statements. The Company has identified five policies that as a result of judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements. These policies relate to the methodology for the determination of the allowance for loan losses, the valuation of MSRs, the determination of any OTTI in the fair value of investment securities, the valuation of goodwill for potential impairment and the valuation of OREO. These policies and the judgments, estimates and assumptions are described in greater detail in the notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K. In particular, Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies,” generally describes the Company's accounting policies. Management believes that the judgments, estimates and assumptions used in the preparation of the Company's Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the Company's Consolidated Financial Statements to these critical policies, the use of other judgments, estimates and assumptions could result in material differences in the Company's results of operations or financial condition.

Market Risk and Asset and Liability Management

General. Market risk is the risk of loss from adverse changes in market prices and rates. The Bank's market risk arises primarily from interest rate risk inherent in its lending, investment, deposit and borrowing activities. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. Management actively monitors and manages its interest rate risk exposure. Although the Bank manages other risks, such as credit quality and liquidity risk, in the normal course of business management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Bank's financial condition and results of operations. The Bank does not maintain a trading account for any class of financial instruments nor does it engage in hedging activities. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.

Qualitative Aspects of Market Risk. The Bank's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the difference between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Bank's interest-earning assets by retaining in its portfolio, short-term loans and loans with interest rates subject to periodic adjustments. The Bank relies on retail deposits as its primary source of funds. As part of its interest rate risk management strategy, the Bank promotes transaction accounts and certificates of deposit with terms of up to ~~six~~five years.

The Bank has adopted a strategy that is designed to substantially match the interest rate sensitivity of assets relative to its liabilities. The primary elements of this strategy involve originating ARM loans for its portfolio, maintaining residential construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to four-family residential mortgage loans, matching asset and liability maturities, investing in short-term securities, and originating fixed-rate loans for retention or sale in the secondary market while retaining the related MSRs.

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 FIMAC Solutions, LLC (“FIMAC”), a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry. Based on a rate shock analysis prepared by FIMAC based on data at September 30, ~~2015,~~2018, an immediate increase in interest rates of ~~200~~100 basis points would increase the Bank’s projected net interest income by approximately ~~6.5%~~4.2%, primarily because a larger portion of the Bank's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one year period. Conversely, an immediate decrease in interest rates of 100 basis points would decrease the Bank's projected net interest income by approximately 7.7%. See “Quantitative Aspects of Market Risk” below for additional information. 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. ~~At September 30, 2015, adjustable-rate mortgage loans constituted $382.8 million, or 63.0%, of the Bank's total mortgage loan portfolio due after one year.~~ Although the Bank

has sought to originate ARM loans, the ability to originate such loans depends to a great extent on market interest rates and borrowers' preferences. In lower interest rate environments, borrowers often prefer fixed-rate loans.

Consumer, commercial business and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans, and accordingly reduce the Bank’s exposure to fluctuations in interest rates. At September 30, ~~2015,~~2018, the consumer, commercial business and construction portfolios amounted to ~~$38.8~~$40.86 million, ~~$33.8~~$43.05 million and ~~$110.9~~$188.36 million, or ~~5.8%~~5.0%, ~~5.0%~~5.2% and ~~16.5%~~22.9% of total loans receivable, ~~(including loans held for sale),~~ respectively.

Quantitative Aspects of Market Risk. The model provided for the Bank by FIMAC estimates the changes in net portfolio value ("NPV") and net interest income in response to a range of assumed changes in market interest rates. The model first estimates the level of the Bank's NPV (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment. In general, market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates. The model then recalculates the Bank's NPV under different interest rate scenarios. The change in NPV under the different interest rate scenarios provides a measure of the Bank's exposure to interest rate risk. The following table is provided by FIMAC based on data at September 30, ~~2015.~~2018:


Hypothetical	Net Interest Income (1)(2)							Current Market Value							Net Interest Income (1)(2)							Current Market Value
Interest Rate	Estimated		$ Change			% Change		Estimated		$ Change			% Change		Estimated		$ Change			% Change		Estimated		$ Change			% Change
Scenario (3)	Value		from Base			from Base		Value		from Base			from Base		Value		from Base			from Base		Value		from Base			from Base
(Basis Points)	(Dollars in thousands)														(Dollars in thousands)
+400	$	30,429	$	3,221		11.84	%	$	185,917	$	23,640		14.57	%	$	48,333	$	6,934		16.75	%	$	249,797	$	39,044		18.53	%
+300	29,744		2,536			9.32		180,428		18,151			11.18		46,571		5,172			12.50		240,844		30,091			14.28
+200	28,965		1,757			6.45		174,493		12,216			7.53		44,871		3,472			8.39		231,756		21,003			9.97
+100	27,997		789			2.90		168,242		5,965			3.68		43,133		1,734			4.19		221,671		10,918			5.18
BASE	27,208		—			—		162,277		—			—		41,399		—			—		210,753		—			—
-100	26,266		(942		)	(3.46	)	151,440		(10,837		)	(6.68	)	38,231		(3,168		)	(7.65	)	192,932		(17,821		)	(8.46	)
-200															35,364		(6,035		)	(14.58	)	175,927		$	(34,826	)	(16.52	)
-300															33,884		(7,515		)	(18.15	)	158,959		$	(51,794	)	(24.58	)

___________


(1)	Does not include loan fees.


(2)	Includes BOLI income, which is included in non-interest income in the Consolidated Financial Statements.


(3)	No rates in the model are allowed to go below zero. Given the relatively low level of market interest rates, a calculation for a decrease of greater than ~~100~~300 basis points has not been prepared.

Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit decay, and should not be relied upon as indicative of actual results. Furthermore, the computations do not reflect any actions management may undertake in response to changes in interest rates.

In the event of a 100 basis point decrease in interest rates, the Bank would be expected to experience ~~a 6.7%~~an 8.5% decrease in NPV and a ~~3.5%~~7.7% decrease in net interest income. In the event of a ~~200~~100 basis point increase in interest rates, a ~~7.5%~~5.2% increase in NPV and a ~~6.5%~~4.2% increase in net interest income would be expected. Based upon the modeling described above, the Bank's asset and liability structure generally results in increases in net interest income and NPV in a rising interest rate scenario and decreases in net interest income and NPV in a declining interest ~~rate scenario and increases in net interest income and NPV in a rising~~ rate scenario.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. 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. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could possibly deviate significantly from those assumed in calculating the table.

Comparison of Financial Condition at September 30, ~~2015~~2018 and September 30, ~~2014~~2017

The Company's total assets increased by ~~$70.3~~$66.27 million, or ~~9.4%~~7.0%, to ~~$815.8~~$1.02 billion at September 30, 2018 from $952.02 million at September 30, ~~2015 from $745.6 million at September 30, 2014.~~2017. The increase in total assets was primarily attributable to increases in ~~nets~~net loans receivable, ~~cash and cash equivalents and~~ certificates of deposit ("CDs") held for investment and investments securities. Total assets at September 30, 2018 also included a $6.90 million escrow deposit related to the South Sound Merger, which ~~were partially offset~~was completed on October 1, 2018. The increase in total assets was funded primarily by ~~decreases~~an increase in ~~FHLB stock and OREO and other repossessed assets.~~total deposits.

Net loans receivable ~~including loans held for sale,~~ increased by ~~$41.5~~$35.03 million, or ~~7.3%~~5.1%, to ~~$607.3~~$725.39 million at September 30, ~~2015~~2018 from ~~$565.8~~$690.36 million at September 30, ~~2014,~~2017, primarily as a result of increases in construction and land development loans, one- to four-family loans, multi-family loans and commercial business loans. These increases in net loans receivable were partially offset by decreases in land loans and commercial real estate loans and net construction related loans.

~~The Company's total liabilities~~Total deposits increased by ~~$63.8~~$51.61 million, or ~~9.6%~~6.2%, to ~~$726.6~~$889.51 million at September 30, ~~2015~~2018 from ~~$662.8~~$837.90 million at September 30, ~~2014 due to an increase in total deposits. Total deposits increased by $63.8 million, or 10.4%, to $678.9 million at September 30, 2015 from $615.1 million at September 30, 2014,~~2017, primarily as a result of increases in non-interest bearing, savings, money market, and NOW checking ~~savings and money market~~ account balances. ~~These increases were partially offset by a decrease in CD account balances.~~

Shareholders' equity increased by ~~$6.4~~$13.66 million, or ~~7.7%~~12.3%, to ~~$89.2~~$124.66 million at September 30, ~~2015~~2018 from ~~$82.8~~$111.00 million at September 30, ~~2014.~~2017. The increase was primarily due to net income for the year ended September 30, ~~2015~~2018 of ~~$8.3~~$16.72 million which was partially offset by dividends paid to shareholders of $1.7 million and repurchases of common stock totaling $709,000. As of September 30, 2015, the Company exceeded all regulatory capital requirements required for bank holding company regulatory purposes. For additional details see Note 16 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" and "Item 1. Business - Regulation of the Company - Capital Requirements."

$4.43 million.

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 increased by ~~$32.7~~$20.93 million, or ~~30.2%~~10.9%, to ~~$140.9~~$212.15 million at September 30, ~~2015~~2018 from ~~$108.2~~$191.22 million at September 30, ~~2014.~~2017. The increase was ~~primarily~~ due to a ~~$19.9 million increase in total cash and cash equivalents and a $12.8~~$20.26 million increase in CDs held for investment. The Company continued to maintain high levels of liquidity primarily for asset-liability management purposes.

Investment Securities: Investment securities increased by ~~$1.1~~$5.58 million, or ~~13.4%~~66.6%, to ~~$9.3~~$13.96 million at September 30, ~~2015~~2018 from ~~$8.2~~$8.38 million at September 30, ~~2014.~~2017. The increase was primarily due to the purchase of ~~a $3.0~~$6.07 million in U.S. Treasury ~~security, which was partially offset by the sale of $1.2 million in U.S~~and U.S. government agency ~~MBS and scheduled amortization and prepayments. The sale of the investment~~ securities ~~resulted in a $45,000 gain~~ during the year ended September 30, ~~2015.~~2018, which was partially offset by scheduled amortization and prepayments. For additional details on ~~MBS and other investments,~~investment securities, see "Item 1. Business - Investment Activities" and Note 3 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and ~~Supplemental~~Supplementary Data."

FHLB Stock: FHLB stock ~~decreased~~increased by ~~$2.5 million,~~$83,000, or ~~48.6%~~7.5%, to ~~$2.7~~$1.19 million at September 30, ~~2015~~2018 from ~~$5.2~~$1.11 million at September 30, ~~2014,~~2017, due to required stock purchases by the FHLB. The required investment in FHLB stock increased primarily due to ~~stock redemptions by~~ the ~~FHLB. On May 31, 2015,~~increase in total assets.

Other Investments: Other investments remained unchanged at $3.00 million at September 30, 2018 from September 30, 2017. This investment in the ~~FHLB of Seattle merged into~~Solomon Hess SBA Loan Fund LLC is utilized to help satisfy compliance with the ~~FHLB of Des Moines, and excess stock was redeemed by the FHLB.~~Company's Community Reinvestment Act ("CRA") investment test requirements.

Loans ~~Receivable and Loans~~ Held for ~~Sale, Net of Allowance for Loan Losses:~~Sale: ~~Net loans receivable, including loans~~Loans held for sale ~~increased by $41.5 million, or 7.3%,~~decreased to ~~$607.3~~$1.79 million at September 30, ~~2015~~2018 from ~~$565.8~~$3.60 million at September 30, ~~2014.~~2017. The increase was primarily a result of a $42.4 million increase in construction and land development loans (comprised mostly of multi -family and commercial real estate construction loans), a $21.2 million increase in one- to four-family loans, a $6.1 million increase in multi-familyCompany sells longer-term fixed-rate residential loans and ~~a $3.2 million increase in~~the guaranteed portion of SBA commercial business loans. These increases to net loans receivable were partially offset by a $3.4 million decrease in land loans, a $3.1 million decrease in commercial real estate loans and a $794,000 decrease in consumer loans. In addition, there was a $24.0 million increase in the undisbursed portion of construction loans in process. The increase in construction loans, one- to four-family loans and multi-family loans was primarily due to increased demand for these types of loans in the Company's primary market areas. The increase in commercial business loans was primarily due to the Company's increased emphasis on originating commercial and industrial ("C&I") loans.

Loan originations increased by 35.2% to $265.5 million for the year ended September 30, 2015 from $185.8 million for the year ended September 30, 2014. The Company continues to sell longer-term fixed-rate residential loans for asset-liability management purposes and to generate non-interest income. The Company sold ~~$53.9~~$66.38 million in ~~fixed-rate one- to four-family mortgage~~ loans during the year ended September 30, ~~2015~~2018 compared to ~~$33.4~~$81.40 million for the year ended September 30, ~~2014.~~2017.

Loans Receivable, Net of Allowance for Loan Losses: Net loans receivable increased by $35.03 million, or 5.1%, to $725.39 million at September 30, 2018 from $690.36 million at September 30, 2017. The increase was primarily a result of a $19.96 million increase in commercial construction loans, a $16.19 million increase in commercial real estate loans, a $5.52 million increase in speculative one-to four-family construction loans, a $3.32 million increase in multi-family mortgage loans, a $3.04 million increase in land development loans and smaller increases in several other categories. These increases were partially offset by a $10.59 million decrease in multi-family construction loans, a $2.21 million decrease in one- to four-family loans and smaller increases in several other loan categories.

Loan originations decreased by $11.02 million, or 3.2%, to $329.59 million for the year ended September 30, 2018 from $340.61 million for the year ended September 30, 2017. The decrease in loan originations ~~and loans sold~~ was primarily due to ~~an increase of $42.2 million~~a decrease in construction loans originated ~~for sale~~ as ~~market demand for single family loan financing increased.~~compared to the prior fiscal year. For additional information on loans, see "Item 1. Business - Lending Activities" and Note 4 to the Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

Premises and Equipment: Premises and equipment ~~decreased~~increased by ~~$825,000,~~$535,000, or ~~4.7%~~2.9%, to ~~$16.9~~$18.95 million at September 30, ~~2015~~2018 from ~~$17.7~~$18.42 million at September 30, ~~2014.~~2017. The ~~decrease~~increase was primarily due to ~~normal depreciation and~~ the ~~sale~~purchase of ~~excess land adjacent to~~a building that will be used as the Company's ~~Lacey~~data center in the future and a remodel of the Bank's downtown Aberdeen branch ~~office, which was~~office. These additions were partially offset by ~~additions to premises and equipment from several remodeling projects at branch offices and capitalized technology related costs.~~normal depreciation. For additional information on premises and equipment, see "Item 2. Properties" and Note 65 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

OREO and Other Repossessed Assets: OREO and other repossessed assets decreased by ~~$1.2~~$1.39 million, or ~~13.6%~~42.0%, to ~~$7.9~~$1.91 million at September 30, ~~2015~~2018 from ~~$9.1~~$3.30 million at September 30, ~~2014.~~2017. The decrease was primarily due to the disposition of ~~$2.7~~$1.46 million in OREO properties and other repossessed assets and OREO valuation write-downs of ~~$644,000.~~$248,000. These decreases in OREO and other repossessed assets were partially offset by the addition of ~~$2.1 million~~$324,000 in OREO properties and other repossessed assets. At September 30, ~~2015,~~2018, the OREO balance was comprised of 3412 individual ~~properties and one other repossessed asset.~~properties. The properties consisted of 2010 land parcels totaling ~~$3.4~~$1.47 million, ~~11 single family homes totaling $2.9 million, three~~and two commercial real estate properties totaling ~~$1.6 million and one mobile home of $67,000.~~$448,000. The largest OREO ~~properties~~property at September 30, ~~2015 were a commercial building located in Grays Harbor County with a balance of $1.1 million and~~2018 was an undeveloped land parcel located in Lewis County with a balance of ~~$1.1 million.~~$874,000. For additional information on OREO and other repossessed assets, see "Item 1. Business - Lending Activities - Other Real Estate Owned and Other Repossessed Assets" and Note 76 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Bank Owned Life Insurance ("BOLI"): BOLI increased by ~~$538,000,~~$547,000, or ~~3.1%~~2.8%, to ~~$18.2~~$19.81 million at September 30, ~~2015~~2018 from ~~$17.6~~$19.27 million at September 30, ~~2014~~2017 due to net BOLI earnings, representing the increase in cash surrender value.

Goodwill: The recorded amount of goodwill of ~~$5.7~~$5.65 million at September 30, ~~2015~~2018 remained unchanged from September 30, ~~2014.~~2017. The Company performed its annual review of goodwill during the quarter ended June 30, ~~2015~~2018 and determined that there was no impairment. As of September 30, 2018, management believes that there had been no subsequent events or changes in circumstances that would indicate a potential impairment of goodwill. The South Sound Merger, which closed on October 1, 2018, is expected to substantially increase the recorded amount of goodwill. For additional information on goodwill, see Note 1 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and ~~Supplemental~~Supplementary Data."

MSRs: MSRs ~~decreased~~increased by ~~$206,000,~~$203,000, or ~~12.2%~~11.1%, to ~~$1.5~~$2.03 million at September 30, ~~2015~~2018 from ~~$1.7~~$1.83 million at September 30, ~~2014,~~2017, primarily due to ~~amortization of $841,000, which was partially offset by~~ the addition of ~~$635,000~~$694,000 in capitalized MSRs for new loans being ~~serviced.~~serviced, which was partially offset by amortization of $491,000. The principal amount of loans serviced for Freddie Mac and the SBA increased by ~~$3.9~~$12.81 million, or ~~1.2%~~3.6%, to ~~$331.5~~$371.68 million at September 30, ~~2015~~2018 from ~~$327.6~~$358.87 million at September 30, ~~2014.~~2017. For additional information on MSRs, see Note 57 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and ~~Supplemental~~Supplementary Data."

Deposits: Deposits increased by ~~$63.8~~$51.61 million, or ~~10.4%~~6.2%, to ~~$678.9~~$889.51 million at September 30, ~~2015~~2018 from ~~$615.1~~$837.90 million at September 30, ~~2014.~~2017. The increase was ~~primarily~~ a result of a ~~$35.0~~$27.31 million increase in ~~non-interest bearing~~non-interest-bearing demand account balances, a ~~$19.9~~$10.42 million increase in savings account balances, a $6.74 million increase in money market account balances, a $4.98 million increase in NOW checking account balances and a ~~$14.7~~$2.17 million increase ~~in savings account balances and a $3.5 million increase in money market accounts. These increases were partially offset by a $9.2 million decrease~~ in CD account balances. The increase in non-interest bearing demand account and NOW checking account balances was primarily due to increased commercial and consumer checking accounts as the Company continued to emphasize increasing its transaction accounts base. The Company also experienced deposit inflows due to a number of customers transferring funds from other financial institutions that were consolidated or closed branches during the year ended September 30, ~~2015. The decrease in CD account balances was primarily due to the Company opting not to match interest rates offered by competitors.~~2018. For additional information on deposits, see "Item 1. Business - Deposit Activities and Other Sources of Funds" and Note 8 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

FHLB ~~Advances:~~Borrowings: There were no FHLB ~~advances were $45.0 million~~borrowings at September 30, ~~2015~~2018 and at September 30, ~~2014.~~2017 as the Company repaid FHLB borrowings during the year ended September 30, 2017. For additional information on borrowings, see "Item 1,1. Business - Deposit Activities and Other Sources of Funds - Borrowings" and Note 9 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Shareholders' Equity: Total shareholders' equity increased by ~~$6.4~~$13.66 million, or ~~7.7%~~12.3%, to ~~$89.2~~$124.66 million at September 30, ~~2015~~2018 from ~~$82.8~~$111.00 million at September 30, ~~2014.~~2017. The increase was primarily due to net income of ~~$8.3~~$16.72 million for the year ended September 30, ~~2015,~~2018, which was partially offset by the payment of ~~$1.7~~$4.43 million in dividends to common ~~shareholders and the~~shareholders. The Company did not repurchase ~~of 64,788~~any shares of ~~the Company's~~its common stock ~~for $709,000.~~during the year ended September 30, 2018. For additional information on shareholders' equity, see the Consolidated Statements of Shareholders' Equity contained in "Item 8. Financial Statements and Supplementary Data."

Comparison of Operating Results for the Years Ended September 30, ~~2015~~2018 and ~~2014~~2017

Net income for the year ended September 30, ~~2015~~2018 increased by ~~$2.44~~$2.55 million, or ~~41.7%~~18.0%, to ~~$8.29~~$16.72 million from ~~$5.85~~$14.17 million for the year ended September 30, ~~2014. Net income to common shareholders increased $2.65 million, or 46.9%, to $8.29 million for the year ended September 30, 2015 from $5.64 million for the year ended September 30, 2014.~~2017. Net income per diluted common share increased ~~$0.37,~~by $0.30, or ~~46.3%~~15.6%, to ~~$1.17~~$2.22 for the year ended September 30, ~~2015~~2018 from ~~$0.80~~$1.92 for the year ended September 30, ~~2014.~~2017. The increase in net income was primarily due to ~~a recapture of loan losses,~~ increases in net interest income and ~~non-interest~~a decrease in the Company's effective income ~~which was~~tax rate. These increases to net income were partially offset by a decrease in the recapture for loan losses and an increase in ~~the provision for federal income taxes.~~

For the year ended September 30, 2014, net income to common shareholders was net of a dividend accrual and discount accretion related to the Series A Preferred Stock of $206,000, or approximately $0.03 per diluted common share. These preferred stock adjustments were not required in the year ended September 30, 2015 due to the redemption of the outstanding Series A Preferred Stock in December 2013.non-interest expense.

A more detailed explanation of the income statement categories is presented below.

Net Interest Income: Net interest income increased by ~~$1.36~~$3.91 million, or ~~5.2%~~11.1%, to ~~$27.28~~$39.06 million for the year ended September 30, ~~2015~~2018 from ~~$25.92~~$35.14 million for the year ended September 30, ~~2014.~~2017. The increase in net interest income was due to an increase in interest income and ~~to a much lesser extent,~~ a decrease in interest expense.

Total interest and dividend income increased by ~~$1.31~~$3.50 million, or ~~4.4%~~9.1%, to ~~$31.17~~$41.83 million for the year ended September 30, ~~2015~~2018 from ~~$29.86~~$38.34 million for the year ended September 30, ~~2014,~~2017, primarily due to a ~~$42.40~~$59.28 million increase in the average balance o

fof total ~~interest-bearing~~interest-earning assets to ~~$717.88~~$923.44 million from ~~$675.48~~$864.16 million ~~which was partially offset by a decrease~~and an increase in the average yield on ~~interest-bearing~~interest-earning assets to ~~4.34%~~4.53% from ~~4.42%~~4.44%. ~~Also contributing~~Interest income on loans receivable and loans held for sale increased by $1.91 million to ~~the increase in interest and dividend income was the collection of $284,000 of non-accrual interest during the year ended September 30, 2015.~~

~~Total interest expense decreased by $49,000 to $3.89 million, or 1.2%, for the year ended September 30, 2015 from $3.94~~$38.30 million for the year ended September 30, ~~2014,~~2018 from $36.39 million for the year ended September 30, 2017, primarily due to ~~a decrease~~an increase in the average ~~rate paid~~balance of loans receivable of $29.19 million during the year and to a lesser extent, an increase in the average yield on ~~interest-bearing liabilities~~loans receivable to ~~0.68%~~5.31% from ~~0.71%~~5.26%. Partially offsetting ~~the~~these increases was a $548,000 decrease in non-accrual interest ~~expense attributable~~and prepayment penalties collected during the year ended September 30, 2018. During the year ended September 30, 2018, a total of $502,000 in non-accrual interest and prepayment penalties was collected compared to a ~~reduction~~total of $1.05 million for the year ended September 30, 2017. Interest income on interest-bearing deposits in banks and CDs increased by $1.61 million to $3.20 million for the year ended September 30, 2018 from $1.59 million for the year ended September 30, 2017, primarily due to an increase in the average ~~rate, was~~yield to 1.70% from 0.99% and to a ~~$14.43~~lesser extent a $27.92 million increase in the average balance of interest-bearing ~~liabilities~~deposits in banks and CDs. The increase in average yield on interest-bearing deposits in banks and CDs was primarily due to ~~$567.89~~increases in the targeted federal funds rate by the Federal Reserve during the year.

Total interest expense decreased by $419,000, or 13.1%, to $2.78 million for the year ended September 30, ~~2015~~2018 from ~~$553.47~~$3.20 million for the year ended September 30, ~~2014.~~

2017, primarily due to a $979,000 decrease in interest expense on FHLB borrowings, which was partially offset by a $560,000 increase in interest expense on deposits. The ~~net interest margin decreased four basis points~~decrease in FHLB borrowing expense was primarily due to ~~3.80%~~a $17.10 million decrease in the average balance of borrowings for the year ended September 30, ~~2015 from 3.84%~~2018 as the Company repaid all FHLB borrowings during the year ended September 30, 2017. The increase in interest expense on deposits was primarily due an increase in the cost of money market accounts and certificates of deposit accounts and a $30.26 million increase in average interest-bearing deposits. The average cost of money market accounts and certificates of deposit accounts increased to 0.52% and 1.08%, respectively, for the year ended September 30, ~~2014, as the yield on interest-bearing assets decreased at a greater rate than the rate paid on interest-bearing liabilities decreased. The collection of non-accrual interest during~~2018 from 0.35% and 0.87%, respectively, for the year ended September 30, ~~2015 contributed an additional four~~2017, as market interest rates increased.

As a result of these changes, the net interest margin increased 16 basis points to 4.23% for the ~~net interest margin.~~year ended September 30, 2018 from 4.07% for the year ended September 30, 2017.

Provision for (Recapture of) Loan Losses: No provision for loan losses was made for the years ended September 30, 2018 and 2017 as the allowance for loan losses required by the Company's loan growth was offset by the decline in non-accrual loans, classified and special mention loans, and other improvements in credit quality metrics. There was a ~~$1.53 million~~ recapture of loan losses ~~for the year ended September 30, 2015 compared to no provision for or (recapture of) loan losses for the year ended September 30, 2014. There were net recoveries~~ of ~~$1.02~~$1.25 million for the year ended September 30, ~~2015 compared~~2017 mainly due to the Bank's recovery on previously charged-off commercial real estate loans and improvement in other underlying credit quality metrics in the loan portfolio. There were net charge-offs of ~~$709,000~~$23,000 for the year ended September 30, ~~2014.~~2018 compared to net recoveries of $977,000 for the year ended September 30, 2017. The net charge-offs (recoveries) to average outstanding loans ratio was ~~(0.17)~~0.00% for the year ended September 30, 2018 and (0.14)% for the year ended September 30, 2015 and 0.12% for the year ended September 30, 2014. The recapture of loan losses was primarily due to the level of net recoveries and improvements in other underlying credit quality metrics in the loan portfolio.2017. The level of delinquent loans (loans 30 or more days past due) ~~decreased~~increased by ~~$6.53 million,~~$143,000, or ~~47.7%~~5.9%, to ~~$7.17~~$2.56 million at September 30, ~~2015~~2018 from ~~$13.70~~$2.41 million at September 30, ~~2014~~2017 and the level of loans graded substandard decreased by ~~$5.34 million,~~$71,000, or ~~29.6%~~2.2%, to ~~$12.72~~$3.18 million at September 30, ~~2015~~2018 from ~~$18.06~~$3.25 million at September 30, ~~2014. Non-accrual~~2017. Special mention loans decreased ~~$4.87~~by $4.66 million, or ~~44.6%~~59.9%, to ~~$6.04~~$3.12 million at September 30, ~~2015~~2018 from ~~$10.91~~$7.78 million at September 30, ~~2014.~~2017. Non-accrual loans decreased by $594,000, or 31.1%, to $1.32 million at September 30, 2018 from $1.91 million at September 30, 2017.

The Company has established a comprehensive methodology for determining the ~~provision~~allowance for ~~(recapture of)~~ loan losses. On a quarterly basis the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio. These factors

include changes in the amount and composition of the loan portfolio, historic loss experience for various loan segments, changes in economic conditions, delinquency rates, a detailed analysis of impaired loans, and other factors to determine an appropriate level of allowance for loan losses. Impaired loans are subject to an impairment analysis to determine an appropriate reserve or write-down to be applied against each loan. The aggregate principal impairment amount determined at September 30, ~~2015~~2018 was ~~$1.01 million~~$97,000 compared to ~~$2.01 million~~$476,000 at September 30, ~~2014.~~2017.

Based on the comprehensive methodology, management believes the allowance for loan losses of ~~$9.92~~$9.53 million at September 30, ~~2015 (1.61%~~2018 (1.30% of loans receivable and ~~loans held for sale and 160.3%~~723.6% 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. While the Company believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to increase significantly its allowance for loan losses. 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. Any material increase in the allowance for loan losses would adversely affect the Company's financial condition and results of operations. For additional information, see "Item 1. Business - Lending Activities -- Allowance for Loan Losses."

Non-interest Income: Total non-interest income increased by ~~$992,000,~~$176,000, or ~~11.6%~~1.4%, to ~~$9.52~~$12.54 million for the year ended September 30, ~~2015~~2018 from ~~$8.53~~$12.37 million for the year ended September 30, ~~2014.~~2017. This increase was primarily due to ~~a $597,000 increase in gain on sales~~increases of ~~loans, a $238,000~~$227,000 increase in ATM and debit card interchange transaction fees, $63,000 in service charges on deposits, $63,000 in servicing income on loans sold and smaller increases in several other ~~categories, which was~~categories. These increases were partially offset by a ~~$123,000~~$264,000 decrease in ~~service charges~~gain on ~~deposits.~~sales of loans and smaller decreases in several other categories.

~~The increase in gain on sale of loans was primarily due to an increase in the dollar volume of fixed-rate one- to four-family loans sold during the year.~~ The increase in ATM and debit card interchange transaction fees was primarily ~~a result~~due to an increase in the volume of ~~increased~~ debit card ~~transaction levels and improved interchange fee income pricing from the Company's debit card provider.~~transactions. The ~~decrease~~increase in service charges on ~~deposit~~deposits was primarily due to ~~a decreased number~~an increase in the amount of service charges collected on checking ~~account overdrafts.~~accounts owned by businesses associated with the marijuana (or Initiative-502) industry in Washington State. It is permissible in Washington State to handle accounts associated with this industry in compliance with federal regulatory guidelines. The increase in servicing income on loans sold was primarily due to an increase in the dollar amount of loans serviced for Freddie Mac. The decrease in gain on sales of loans was primarily due to decreases in the dollar volume of fixed-rate one- to four-family loans and of the guaranteed portion of SBA loans sold during the year.

Non-interest Expense: Total non-interest expense increased by ~~$43,000,~~$1.66 million, or ~~0.2%~~6.0%, to ~~$25.84~~$29.18 million for the year ended September 30, ~~2015~~2018 from ~~$25.80~~$27.52 million for the year ended September 30, ~~2014. The~~2017. This increase was primarily ~~attributable~~due to ~~a $317,000~~an $832,000 increase in ~~data processing~~salaries and ~~telecommunications~~employee benefits expense, a ~~$178,000~~$503,000 increase in ~~premises and equipment~~professional fee expense and smaller increases ~~in several other expense categories. These increases were partially offset by an $187,000 decrease in loan ad~~

~~ministration~~ and ~~foreclosure expense, a $289,000 increase on the gain on sale / disposition of premises and equipment and smaller~~ decreases in several other ~~expense~~ categories.

The increase in ~~data processing~~salaries and ~~telecommunications~~employee benefits expense was primarily due to ~~upgrading data line capacity~~annual salary adjustments, the hiring of additional lending and ~~higher data processing~~operations personnel, and ~~internet banking costs based on usage and asset size.~~a $277,000 increase in ESOP compensation expense (as a result of the increase in the Company's average stock price during the year). The increase in ~~premises and equipment expense~~professional fees was primarily due to ~~increased depreciation expense from capitalized technology equipment implemented during~~$616,000 in acquisition related costs related to the ~~past two fiscal years, increased equipment maintenance expense and increased real estate taxes. The decrease in loan administration and foreclosure expense~~South Sound Merger, which closed on October 1, 2018. Partially offsetting these increases was ~~primarily due to~~ a ~~reduction in the number of loans in foreclosure. The increase in the gain on sale/disposition of premises and equipment was due primarily to a $299,000~~$113,000 gain on the sale of premises as the Company sold excess ~~land~~property adjacent to the ~~Company's Lacey branch.~~Edgewood Branch during the year. The efficiency ratio for the year ended September 30, 2018 improved to 56.55% from 57.92% for the year ended September 30, 2017 as the increases in net interest income and non-interest income outpaced the increase in non-interest expense.

Provision for ~~Federal~~ Income Taxes: The provision for ~~federal and state~~ income taxes ~~increased~~decreased by ~~$1.39~~$1.38 million, or ~~49.7%~~19.4% to ~~$4.19~~$5.70 million for the year ended September 30, ~~2015~~2018 from ~~$2.80~~$7.08 million for the year ended September 30, ~~2014,~~2017. The decrease in the provision for income taxes was primarily due to ~~increased~~a lower effective federal corporate income ~~before~~tax rate as a result of the Tax Cuts and Jobs Act ("Tax Act") that was enacted on December 22, 2017. The Tax Act (which decreased the federal corporate income ~~taxes.~~tax rate to 21.0% from 35.0% effective January 1, 2018), also required a revaluation of the Company's net deferred tax asset ("DTA") to account for the future impact of lower corporate income tax rates and other provisions of the legislation. The revaluation of the Company's ~~effective~~DTA balance resulted in a one-time increase to income tax expense of $548,000 during the quarter ended December 31, 2017. Since the Company is a September 30th fiscal-year end corporation, the reduction in the federal corporate income tax rate resulted in the use of a blended federal income tax rate ~~was 33.6%~~of 24.5% for the fiscal year ended September 30, 2018, and the Company will use the 21.0% federal corporate income tax rate thereafter. The impact of using the 24.5% blended federal income tax rate for the year ended September 30, ~~2015 compared to 32.4%~~2018 versus a 35.0% rate reduced the provision for income taxes by approximately $2.21 million, which was partially offset by the $548,000 one-time net DTA write-down. The Company's effective income tax rate was 25.4% for the year ended September 30, ~~2014.~~2018 compared to 33.3% for the year ended September 30, 2017. For additional information on ~~federal~~ income taxes, see Note 11 of the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Comparison of Operating Results for the Years Ended September 30, ~~2014~~2017 and ~~2013~~2016

Net income for the year ended September 30, ~~2014~~2017 increased ~~$1.09~~by $4.01 million, or ~~23.0%~~39.5%, to ~~$5.85~~$14.17 million from ~~$4.76~~$10.15 million for the year ended September 30, 2013. Net income to common shareholders after adjusting for preferred stock dividends, preferred stock discount accretion and discount on redemption of preferred stock increased $1.63 million, or 40.4%, to $5.64 million for the year ended September 30, 2014 from $4.02 million for the year ended September 30, 2013.2016. Net income per diluted common share increased ~~$0.22,~~by $0.49, or ~~37.9%~~34.3%, to ~~$0.80~~$1.92 for the year ended September 30, ~~2014~~2017 from ~~$0.58~~$1.43 for the year ended September 30, ~~2013.~~2016. The increase in net income was primarily due to ~~a decrease~~increases in net interest income, non-interest income, and the ~~provision for~~recapture of loan losses (which added approximately $0.11 to diluted earnings per share), which was partially offset by ~~a decrease~~an increase in non-interest ~~income~~expense and an increase in the provision for ~~federal~~ income taxes.

The decrease in the provision for loan losses was primarily a result of improved underlying credit quality metrics in the loan portfolio as the level of net charge-offs, delinquent loans and loans graded substandard decreased during the year ended September 30, 2014.

The decrease in non-interest income was primarily attributable to a decrease in gain on sale of loans and a decrease in the valuation recovery on MSRs. These decreases to non-interest income were partially offset by an increase in ATM and debit card interchange transaction fees.

A more detailed explanation of the income statement categories is presented below.

Net Interest Income: Net interest income increased by ~~$120,000,~~$4.34 million, or ~~0.5%~~14.1%, to ~~$25.92~~$35.14 million for the year ended September 30, ~~2014~~2017 from ~~$25.80~~$30.80 million for the year ended September 30, ~~2013.~~2016. The increase in net interest income was due to an increase in interest income and a decrease in interest ~~expense, which was partially offset by a decrease in interest income.~~expense.

Total interest and dividend income ~~decreased~~increased by ~~$380,000,~~$3.46 million, or ~~1.3%~~9.9%, to ~~$29.86~~$38.34 million for the year ended September 30, ~~2014~~2017 from ~~$30.24~~$34.88 million for the year ended September 30, ~~2013 as the yield on interest earning assets decreased~~2016, primarily due to ~~4.42% from 4.48%. The decrease~~a $69.44 million increase in the ~~weighted~~ average ~~yield on interest earning~~balance of total interest-earning assets ~~was primarily a result of a decrease in market interest rates. Partially offsetting the overall decrease in market interest rates was~~to $864.16 million from $794.72 million and an increase in the ~~percentage of loans comprising total interest-bearing assets. Average~~average yield on interest-earning assets to 4.44% from 4.39%. Interest income on loans receivable and loans held for sale increased ~~$10.44~~by $2.80 million, to ~~$567.25~~$36.39 million for the year ended September 30, ~~2014~~2017 from ~~$556.82~~$33.58 million for the year ended September 30, ~~2013.~~ 2016, primarily due to an increase in the average balance of net loans receivable and loans held for sale of $48.58 million during the year and an increase in the average yield on loans receivable and loans held for sale to 5.26% from 5.22%. Also contributing to the increase in interest and dividend income (and average yields) was a $255,000 increase in non-accrual interest and prepayment penalties collected during the year ended September 30, 2017. During the year ended September 30, 2017, a total of $1.05 million in non-accrual interest and prepayment penalties was collected compared to a total of $795,000 for the year ended September 30, 2016.

Total interest expense decreased by ~~$500,000~~$875,000 to ~~$3.94~~$3.20 million, or ~~11.3%~~21.5%, for the year ended September 30, ~~2014~~2017 from ~~$4.44~~$4.07 million for the year ended September 30, ~~2013 as the average rate paid~~2016, primarily due to a $1.05 million decrease in interest expense on ~~interest-bearing liabilities decreased to 0.71% for the year ended September 30, 2014 from 0.79% for the year ended September 30, 2013.~~FHLB borrowings, which was partially offset by a $177,000 increase in interest expense on deposits. The decrease in ~~funding costs~~FHLB borrowing expense was primarily due to a ~~result of CDs repricing at lower market interest rates and a $24.55~~$27.86 million decrease in the average balance of CDs. In addition, the composition of the deposit base changed as the percentage of non-interest bearing and lower costing transaction accounts increased. Average interest-bearing liabilities decreased $9.36 millionborrowings to ~~$553.47~~$17.10 million for the year ended September 30, ~~2014~~2017 from ~~$562.83~~$44.96 million for the year ended September 30, ~~2013.~~

~~The net interest margin increased two basis points to 3.84%~~2016 partially offset by prepayment penalties of $282,000 incurred for paying off the borrowings before their scheduled maturities. During the year ended September 30, ~~2014 from 3.82% for~~2017, the ~~year ended September 30, 2013 as funding costs decreased at~~Company repaid all FHLB borrowings. The increase in interest expense on deposits was primarily due to a ~~greater rate than the yield on~~$51.75 million increase in average interest-bearing ~~assets decreased.~~

~~Provision for Loan Losses:~~ ~~There was no provision for loan losses for the year ended September 30, 2014 as compared~~deposits to ~~$2.93~~$610.26 million for the year ended September 30, ~~2013. Net charge-offs decreased by $2.91 million, or 80.4%, to $709,000 for the year ended September 30, 2014~~2017 from ~~$3.61~~$558.52 million for the year ended September 30, ~~2013. The~~2016.

As a result of these changes, the net ~~charge-offs~~interest margin increased 19 basis points to ~~average outstanding loans ratio was 0.12%~~4.07% for the year ended September 30, ~~2014 and 0.65%~~2017 from 3.88% for the year ended September 30, ~~2013. The decrease in the~~2016.

Provision for (Recapture of) Loan Losses: No provision for loan losses was ~~primarily~~made for the years ended September 30, 2017 and 2016. There was a recapture of loan losses of $1.25 million for the year ended September 30, 2017 mainly due to the ~~decreased level of net charge-offs~~Bank's recovery on previously charged-off commercial real estate loans and ~~improvements~~improvement in other underlying credit quality metrics in the loan portfolio. There were net recoveries of $977,000 for the year ended September 30, 2017 compared to net charge-offs of $98,000 for the year ended September 30, 2016. The net charge-offs (recoveries) to average outstanding loans ratio was (0.14%) for the year ended September 30, 2017 and 0.02% for the year ended September 30, 2016. The level of delinquent loans (loans 30 or more days past due) decreased by ~~$4.37~~$1.06 million, or ~~24.2%~~30.5%, to ~~$13.70~~$2.41 million at September 30, ~~2014~~2017 from ~~$18.07~~$3.47 million at September 30, ~~2013,~~2016 and the level of loans graded substandard decreased by ~~$9.92~~$1.78 million, or ~~35.5%~~35.4%, to ~~$18.06~~$3.25 million at September 30, ~~2014~~2017 from ~~$27.98~~$5.04 million at September 30, ~~2013.~~2016. Non-accrual loans decreased ~~$2.70 million,~~by $962,000, or ~~19.8%~~33.5%, to ~~$10.91~~$1.91 million at September 30, ~~2014~~2017 from ~~$13.61~~$2.87 million at September 30, ~~2013.~~2016. The aggregate principal impairment amount determined at September 30, 2017 was $476,000 compared to $776,000 at September 30, 2016.

Based on the comprehensive methodology for determining the allowance for loan losses, management ~~deemed~~believes the allowance for loan losses of ~~$10.43~~$9.55 million at September 30, ~~2014 (1.81%~~2017 (1.36% of loans receivable and ~~loans held for sale and 89.0%~~499.9% 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.

Non-interest Income: Total non-interest income ~~decreased~~increased by ~~$1.73~~$1.48 million, or ~~16.9%~~13.6%, to ~~$8.53~~$12.37 million for the year ended September 30, ~~2014~~2017 from ~~$10.26~~$10.89 million for the year ended September 30, ~~2013.~~2016. This ~~decrease~~increase was primarily due to a

$549,000 increase in service charges on deposits, a ~~result of a $1.49 million decrease~~$376,000 increase in gain on sales of loans, ~~and no remaining valuation recovery on MSRs during the year ended September 30, 2014 compared to~~ a ~~$475,000 valuation recovery on MSRs for the year ended September 30, 2013. These decreases to non-interest income were partially offset by~~$201,000 change in net OTTI, a ~~$284,000~~$151,000 increase in ~~ATM~~servicing income on loans sold, and ~~debit card interchange transaction fees.~~smaller increases and decreases in several other categories.

The ~~decrease~~increase in service charges on deposits was primarily due to an increase in the amount of service charges collected on checking accounts owned by businesses associated with the marijuana (or Initiative-502) industry in Washington State. The increase in gain on sales of loans was primarily due to ~~a decrease~~increases in the dollar volume of fixed-rate one- to four-family loans and of the guaranteed portion of SBA loans sold during the year. The change in net OTTI was a result of $33,000 net recovery for the year ended September 30, ~~2014 as refinance activity decreased. The increase in ATM and debit card interchange transaction fees was primarily~~2017 compared to a ~~result~~net OTTI expense of ~~increased debit card transaction activity levels and a change in the fee structure as the Company changed its ATM and debit card processor during~~$168,000 for the year ended September 30, ~~2014.~~2016. The increase in servicing income on loans sold was primarily due to an increase in the dollar amount of loans serviced for Freddie Mac and a decrease in the amortization of MSRs.

Non-interest Expense: Total non-interest expense ~~decreased~~increased by ~~$66,000,~~$879,000, or ~~0.3%~~3.3%, to ~~$25.80~~$27.52 million for the year ended September 30, ~~2014~~2017 from ~~$25.86~~$26.64 million for the year ended September 30, ~~2013. The decrease~~2016. This increase was primarily ~~attributable~~due to a ~~$1.58 million~~$987,000 increase in salaries and employee benefits expense and smaller increases in several other categories. These increases were partially offset by a $640,000 decrease in OREO and other repossessed assets expense, ~~partially offset by a $689,000 increase~~and smaller decreases in salaries and employee benefits expense, a $239,000 increase in ATM and debit card interchange fee expense, and a $218,000 increase in data processing and telecommunications expense. Also impacting the comparison between years was a $424,000 decrease in gain on disposition of premises and equipment as the Company recorded a $431,000 gain on the sale of property during the year ended September 30, 2013, which reduced total non-interest expenses.several other categories.

~~The decrease in OREO related expenses was primarily a result of $1.46 million decrease in the level of valuation write-downs based on upon updated appraisals received on OREO properties.~~ The increase in salaries and employee benefits expense was primarily due to annual salary adjustments and the hiring of additional ~~loan officers, annual salary adjustments~~lending and ~~an increase~~operations personnel. The decrease in ~~health insurance costs. Also contributing~~OREO and other repossessed assets expense was primarily due to ~~the increase in salaries and employee benefits was~~ a decrease in ~~loan originations. Under GAAP,~~ the ~~portion~~level of a loan origination fee that is attributable to the estimated employee costs to generate the loan is recorded as a reduction of salaries and employee benefits expense. With the decrease in loan originations, the loan origination fees that reduced salaries and employee benefit expense decreased by $225,000 duringvaluation write-downs based on updated appraisals received on OREO properties. The efficiency ratio for the year ended September 30, ~~2014 compared~~2017 improved to 57.92% from 63.89% for the year ended September 30, ~~2013. The~~2016 as the increases in ~~ATM~~net interest income and ~~debit card interchange fee expense and data processing and telecommunications expense were primarily due to expenses associated with~~non-interest income outpaced the ~~Company's technology upgrades, which included outsourcing the core processing system and upgrading its electronic funds transfer platform.~~increase in non-interest expense.

Provision for ~~Federal~~ Income Taxes: The provision for ~~federal and state~~ income taxes increased by ~~$286,000,~~$2.18 million, or ~~11.4%~~44.4% to ~~$2.80~~$7.08 million for the year ended September 30, ~~2014~~2017 from ~~$2.51~~$4.90 million for the year ended September 30, ~~2013,~~2016, primarily due to increased income before income taxes. The Company's effective ~~federal~~ income tax rate was ~~32.4%~~33.3% for the year ended September 30, ~~2014~~2017 compared to ~~34.6%~~32.6% for the year ended September 30, 2013. The difference in the effective tax rate was primarily due to adjustments to the Company's deferred tax valuation allowance. During the year ended September 30, 2013, the provision for income taxes was increased by $236,000 due to the expiration of a capital loss carry-forward. For additional information on federal income taxes, see Note 11 of the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."2016.

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.

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. 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.


	Year Ended September 30,																		Year Ended September 30,
	2015						2014						2013						2018							2017						2016
	Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost		Average Balance			Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost
							(Dollars in thousands)																			(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)(2)	$	596,750	$	30,397	5.09	%	$	567,251	$	29,205	5.15	%	$	556,815	$	29,591	5.31	%	$	721,472		$	38,298	5.31	%	$	692,278	$	36,385	5.26	%	$	643,698	$	33,580	5.22	%
Investment securities (2)	6,964		249		3.58		6,782		259		3.82		6,595		281		4.26		8,807			217		2.46		7,651		279		3.65		8,123		287		3.52
FHLB stock and equity securities	5,396		31		0.57		6,332		27		0.44		6,561		29		0.44
Interest-bearing deposits	108,773		491		0.45		95,110		366		0.38		105,055		336		0.32
Dividends from mutual funds, FHLB stock and other investments																			5,078			120		2.36		4,066		88		2.16		3,723		106		2.85
Interest-bearing deposits in banks and CDs																			188,080		109	3,198		1.70		160,165		1,586		0.99		139,180		902		0.65
Total interest-earning assets	717,883		31,168		4.34		675,475		29,857		4.42		675,026		30,237		4.48		923,437			41,833		4.53		864,160		38,338		4.44		794,724		34,875		4.39
Non-interest-earning assets	58,270						62,432						65,803						60,728							58,834						56,969

Total assets	$	776,153					$	737,907					$	740,829					$	984,165						$	922,994					$	851,693

Interest-bearing liabilities:
Savings accounts	$	102,303	53		0.05		$	92,606	46		0.05		$	90,376	55		0.06		$	145,670		85		0.06		$	134,495	78		0.06		$	115,336	63		0.05
Money market accounts	94,881		274		0.29		94,894		246		0.26		86,558		246		0.28		139,138			722		0.52		125,296		434		0.35		105,836		327		0.31
NOW accounts	165,895		450		0.27		156,954		440		0.28		151,980		463		0.30		215,249			451		0.21		207,300		460		0.22		186,272		456		0.24
Certificates of deposit	159,815		1,227		0.77		164,014		1,334		0.81		188,564		1,804		0.96		140,464			1,520		1.08		143,171		1,246		0.87		151,072		1,195		0.79
Short-term borrowings (3)	—		—		—		—		—		—		352		—		0.05
Long-term borrowings (4)	45,000		1,886		4.19		45,000		1,873		4.16		45,000		1,871		4.16
Total interest bearing liabilities	567,894		3,890		0.68		553,468		3,939		0.71		562,830		4,439		0.79
Non-interest bearing liabilities	122,807						101,821						87,698
Long-term borrowings (3)																			—			—		—		17,096		979		5.73		44,959		2,031		4.52
Total interest-bearing liabilities																			640,521			2,778		0.43		627,358		3,197		0.51		603,475		4,072		0.67
Non-interest-bearing deposits																			221,953							187,368						152,085
Other liabilities																			4,549							4,450						3,809
Total liabilities	690,701						655,289						650,528						867,023							819,176						759,369

Shareholders' equity	85,452						82,618						90,301						117,142							103,818						92,324
Total liabilities and shareholders' equity	$	776,153					$	737,907					$	740,829					$	984,165						$	922,994					$	851,693

Net interest income			$	27,278					$	25,918					$	25,798						$	39,055					$	35,141					$	30,803
Interest rate spread					3.66	%					3.71	%					3.69	%						4.10	%					3.93	%					3.72	%
Net interest margin ~~(5)~~(4)					3.80	%					3.84	%					3.82	%						4.23	%					4.07	%					3.88	%
Ratio of average interest-earning assets to average interest-bearing liabilities					126.41	%					122.04	%					119.93	%						144.17	%					137.75	%					131.69	%

(1)

Does not include interest on loans on non-accrual status. Includes loans ~~originated~~held for sale and interest earned on loans held for sale. Amortized net deferred loan fees, late fees, extension fees and prepayment penalties ~~(2015~~(year ended September 30, 2018 - ~~$798; 2014~~$1,426; year ended September 30, 2017 - ~~$739;~~$1,328; and ~~2013~~year ended September 30, 2016 - ~~$522)~~$1,095) are included with interest and dividends.


(2)	Average balances ~~includes~~include loans and investment securities on non-accrual status.


(3)	Includes FHLB ~~advances with original maturities of less than one year and other short-term borrowings-repurchase agreements.~~


~~(4)~~	~~Includes FHLB advances~~borrowings with original maturities of one year or greater. Includes pre-payment penalties of $282 and $138 for the years ended September 30, 2017 and 2016.


~~(5)~~ (4)	Net interest income divided by total average interest earning assets.

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on net interest income on the Company. Information is provided with respect to the (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change (sum of the prior columns). Changes in both rate and volume have been allocated to rate and volume variances based on the absolute values of each.


	Year Ended September 30, 2015 Compared to Year Ended September 30, 2014 Increase (Decrease) Due to										Year Ended September 30, 2014 Compared to Year Ended September 30, 2013 Increase (Decrease) Due to									Year Ended September 30, 2018 Compared to Year Ended September 30, 2017 Increase (Decrease) Due to										Year Ended September 30, 2017 Compared to Year Ended September 30, 2016 Increase (Decrease) Due to
	Rate				Volume			Net Change			Rate			Volume			Net Change			Rate				Volume			Net Change			Rate			Volume			Net Change
								(In thousands)																			(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	73			$	1,119		$	1,192		$	(414	)	$	28		$	(386	)	$	366			$	1,547		$	1,913		$	253		$	2,552		$	2,805
Investment securities	(10		)		—			(10		)	(20		)	(2		)	(22		)	(100		)		38			(62		)	—			(8		)	(8		)
FHLB stock and equity securities	4				—			4			—			(2		)	(2		)
Interest-bearing deposits	68				57			125			31			(1		)	30
Dividends from mutual funds, FHLB stock and other investments																				8				24			32			(16		)	(2		)	(18		)
Interest-bearing deposits in banks and CDs																				1,296				316			1,612			533			151			684
Total net change in income on interest-earning assets	135				1,176			1,311			(403		)	23			(380		)	1,570				1,925			3,495			770			2,693			3,463

Interest-bearing liabilities:
Savings accounts	2				5			7			(8		)	(1		)	(9		)	—				7			7			4			11			15
Money market accounts	28				—			28			(6		)	6			—			236				52			288			43			64			107
NOW accounts	(1		)		11			10			(22		)	(1		)	(23		)	(27		)		18			(9		)	(10		)	14			4
Certificates of deposit	(74		)		(33		)	(107		)	(251		)	(219		)	(470		)	298				(24		)	274			54			(3		)	51
Long-term borrowings	13				—			13			—			2			2
FHLB borrowings																				—				(979		)	(979		)	(127		)	(925		)	(1,052		)
Total net change in expense on interest-bearing liabilities	(32		)		(17		)	(49		)	(287		)	(213		)	(500		)	507				(926		)	(419		)	(36		)	(839		)	(875		)
Net change in net interest income	$	167		—	$	1,193		$	1,360		$	(116	)	$	236		$	120		$	1,063		—	$	2,851		$	3,914		$	806		$	3,532		$	4,338

______________


(1)	Excludes interest on loans on non-accrual status. Includes loans ~~originated~~held for sale and interest earned on loans held for sale.

Liquidity and Capital Resources

The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing investment securities and FHLB ~~advances.~~borrowings. While the maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, ~~2015,~~2018, 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 ~~20.3%~~24.3%. At September 30, ~~2015,~~2018, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available ~~advances~~borrowings up to an aggregate amount equal to ~~35%~~45% of total assets, limited by available collateral. The Bank had ~~$210.2~~$279.49 million available for additional borrowings with the FHLB at September 30, ~~2015.~~2018. The Bank also has a LOC of up to ~~$15.0~~$23.00 million with the FHLB for the purpose of collateralizing Washington State public deposits, all of which was available to be drawn upon at September 30, ~~2015.~~2018. The LOC amount reduces the Bank's available borrowings under the FHLB

advance agreement. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral. At September 30, ~~2015,~~2018, the Bank had no outstanding balance on this borrowing line, under which ~~$45.2~~$76.70 million was available for future borrowings. The Bank also maintains a ~~$10.0~~$10.00 million overnight borrowing line with PCBB. At September 30, ~~2015,~~2018, the Bank did not have an outstanding balance on this borrowing line.

Liquidity management is both a short and long-term responsibility of the Bank's management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on ~~interest- bearing~~interest-bearing deposits. Excess liquidity is invested generally in interest-bearing overnight deposits, CDs held for investment and short-term government and agency obligations. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, the FRB and PCBB.

The Bank's primary investing activity is the origination of ~~mortgage~~ loans. During the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, the Bank originated ~~$242.7~~$329.59 million, ~~$155.4~~$340.61 million and ~~$203.1~~$267.35 million of ~~mortgage~~ loans, respectively. At September 30, ~~2015,~~2018, the Bank had loan commitments totaling ~~$53.7~~$67.19 million and undisbursed construction loans in process totaling ~~$53.5~~$83.24 million. The Bank anticipates that it will have sufficient funds available to meet current loan commitments. CDs that are scheduled to mature in less than one year from September 30, ~~2015~~2018 totaled ~~$93.9~~$76.16 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

The Bank’s liquidity is also affected by the volume of loans sold and loan principal payments. During the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, the Bank sold ~~$53.9~~$66.38 million, ~~$33.4~~$81.40 million and ~~$89.4~~$58.90 million in ~~fixed-rate, one- to four-family mortgage~~ loans and loan participation interests, respectively. During the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, the Bank received ~~$149.7~~$235.61 million, ~~$126.5~~$211.30 million and ~~$113.2~~$155.37 million in principal repayments, respectively.

The Bank’s liquidity has been impacted by increases in deposit levels. During the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, deposits increased by ~~$63.8~~$51.61 million, ~~$6.9~~$76.40 million and ~~$10.3~~$82.60 million, respectively.

Cash and cash equivalents, CDs held for investment and investment securities increased to ~~$150.2~~$226.12 million at September 30, ~~2015~~2018 from ~~$116.4~~$199.60 million at September 30, ~~2014.~~2017.

Timberland Bancorp is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. Sources of capital and liquidity for Timberland Bancorp include principal and interest payments on the loan receivable from the Employee Stock Ownership Plan ("ESOP"), distributions from the Bank and the issuance of debt or equity securities. At September 30, ~~2015,~~2018, Timberland Bancorp (on an unconsolidated basis) had liquid assets of ~~$1.2~~$2.89 million.

Bank holding companies and federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital. At September 30, ~~2015,~~2018, Timberland Bancorp and the Bank were in compliance with all applicable capital requirements. For additional details see Note 1615 to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” and “Item 1. Business - Regulation of the Bank - Capital Requirements.”

Contractual obligations. The following table presents, as of September 30, ~~2015,~~2018, the Company’s significant fixed and determinable contractual ~~obligations, within the categories described below, by payment date or contractual maturity. These contractual obligations, except for the~~ operating lease obligations ~~are included in the Consolidated Balance Sheet. The~~by payment ~~amounts represent those amounts contractually due~~date. There were no other fixed determinable contractual obligations outstanding at September 30, ~~2015.~~2018.


	Payments due by period										Payments due by period
	Less than 1 year		1 year through 3 years		After 3 years through 5 years		After 5 years		Total		Less than 1 year		1 year through 3 years		After 3 years through 5 years		After 5 years		Total
Contractual obligations	Less than 1 year		1 year through 3 years		After 3 years through 5 years		After 5 years		Total		Less than 1 year		1 year through 3 years		After 3 years through 5 years		After 5 years		Total
	(In thousands)										(Dollars in thousands)
Long-term debt obligations	$	—	$	45,000	$	—	$	—	$	45,000
Operating lease obligations	225		192		192		24		633		$	201	$	289	$	—	$	—	$	490
Total contractual obligations	$	225	$	45,192	$	192	$	24	$	45,633	$	201	$	289	$	—	$	—	$	490

Off-Balance Sheet Activities. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financial needs of its customers. For information regarding our commitments and off-balance sheet arrangements, see Note 14 of the Notes to Consolidated Financial Statements included in Item 8. "Financial Statements and Supplementary Data" of this Form 10-K.

A summary of the Company's commitments at September 30, 2018 and 2017 is as follows (in thousands):



	2018		2017
Undisbursed portion of construction loans in process	$	83,237	$	82,411
Undisbursed lines of credit	49,525		51,420
Commitments to extend credit	17,665		19,673
Total commitments	$	150,427	$	153,504

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operation of the Company is reflected in increased operating costs. Unlike most i

~~ndustrial~~industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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".

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information contained under “Item 7,7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk and Asset and Liability Management” of this Form 10-K is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

Index to Consolidated Financial Statements



	Page

Report of Independent Registered Public Accounting Firm	66
Consolidated Balance Sheets as of September 30, 2018 and 2017	68
Consolidated Statements of Income for the Years Ended
September 30, 2018, 2017 and 2016	70
Consolidated Statements of Comprehensive Income for the
Years Ended September 30, 2018, 2017 and 2016	72
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 2018, 2017 and 2016	73
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2018, 2017 and 2016	75
Notes to Consolidated Financial Statements	77

~~Management’s~~

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Timberland Bancorp, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Timberland Bancorp, Inc. and Subsidiary (collectively, "the Company") as of September 30, 2018 and 2017, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2018, and the related notes (collectively referred to as "the financial statements"). We have also audited the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America (U.S.). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

Basis for Opinion

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial ~~Reporting~~

~~The Company’s management~~Reporting. Our responsibility is ~~responsible for establishing~~to express an opinion on the Company's financial statements and ~~maintaining adequate~~an opinion on the Company's internal control over financial ~~reporting.~~reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of ~~consolidated~~ financial statements for external purposes in accordance with ~~GAAP. The Company's~~generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that ~~(i)~~(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and ~~disposition~~dispositions of the assets of the ~~Company; (ii)~~company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ~~consolidated~~ financial statements in accordance with ~~GAAP,~~generally accepted accounting principles, and that receipts and expenditures of the ~~Company~~company are being made only in accordance with authorizations of management and directors of the ~~Company;~~company; and ~~(iii)~~(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the ~~Company's~~company’s assets that could have a material effect on the ~~consolidated~~ financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. ~~All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls.~~ Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management conducted an evaluation of the effectiveness of internal control over financial reporting as of and for the year ended September 30, 2015 based on the framework in Internal Control -- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of and for the year ended September 30, 2015.

~~TIMBERLAND BANCORP, INC. AND SUBSIDIARY~~

~~Index to Consolidated Financial Statements~~



	~~Page~~

~~Report of Independent Registered Public Accounting Firm~~	67
~~Consolidated Balance Sheets as of September 30, 2015 and 2014~~	68
~~Consolidated Statements of Income For the Years Ended~~
~~September 30, 2015, 2014 and 2013~~	70
~~Consolidated Statements of Comprehensive Income For the~~
~~Years Ended September 30, 2015, 2014 and 2013~~	72
~~Consolidated Statements of Shareholders' Equity For the~~
~~Years Ended September 30, 2015, 2014 and 2013~~	73
~~Consolidated Statements of Cash Flows For the Years Ended~~
~~September 30, 2015, 2014 and 2013~~	75
~~Notes to Consolidated Financial Statements~~	77

~~Report of Independent Registered Public Accounting Firm~~

~~To the Board of Directors and~~

~~Shareholders of Timberland Bancorp, Inc.~~/s/ Delap LLP

We have ~~audited the accompanying consolidated balance sheets of Timberland Bancorp, Inc. and Subsidiary (collectively, "the Company")~~served as of September 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2015. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Timberland Bancorp, Inc. and Subsidiary as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2015, in conformity with accounting principles generally accepted in the United States of America.

~~/s/ Delap LLP~~auditor since 2010.

Lake Oswego, Oregon

December 7, ~~2015~~2018

Consolidated Balance Sheets

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017


	2015		2014		2018		2017
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	14,014	$	11,818	$	20,238	$	17,447
Interest-bearing deposits in banks	78,275		60,536		128,626		130,741
Total cash and cash equivalents	92,289		72,354		148,864		148,188

Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value)	48,611		35,845		63,290		43,034
Investment securities held to maturity, at amortized cost (estimated fair value of $8,894 and $6,274)	7,913		5,298
Investment securities available for sale	1,392		2,857
Federal Home Loan Bank (“FHLB”) stock	2,699		5,246

Loans receivable, net of allowance for loan losses of $9,924 and $10,427	604,277		564,853
Investment securities held to maturity, at amortized cost (estimated fair value $13,264 and $7,744)					12,810		7,139
Investment securities available for sale, at fair value					1,154		1,241
Federal Home Loan Bank of Des Moines (“FHLB”) stock					1,190		1,107
Other investments, at cost					3,000		3,000
Loans held for sale	3,051		899		1,785		3,599
Net loans receivable	607,328		565,752

Loans receivable, net of allowance for loans losses of $9,530 and $9,553					725,391		690,364
Premises and equipment, net	16,854		17,679		18,953		18,418
Other real estate owned (“OREO”) and other repossessed assets, net	7,854		9,092		1,913		3,301
Accrued interest receivable	2,170		1,910		2,877		2,520
Bank owned life insurance (“BOLI”)	18,170		17,632		19,813		19,266
Goodwill	5,650		5,650		5,650		5,650
Mortgage servicing rights (“MSRs”), net	1,478		1,684		2,028		1,825
Escrow deposit for business combination					6,900		—
Other assets	3,407		4,566		2,672		3,372
Total assets	$	815,815	$	745,565	$	1,018,290	$	952,024

Liabilities and shareholders’ equity
Liabilities
Deposits:
Non-interest-bearing demand	$	141,388	$	106,417	$	233,258	$	205,952
Interest-bearing	537,524		508,699		656,248		631,946
Total deposits	678,912		615,116		889,506		837,898

FHLB advances	45,000		45,000
Other liabilities and accrued expenses	2,716		2,671		4,127		3,126
Total liabilities	726,628		662,787		893,633		841,024

Commitments and contingencies (See Note 14)

See notes to consolidated financial statements

Consolidated Balance Sheets (continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017


Shareholders’ equity	2015			2014			2018			2017
Common stock, $0.01 par value; 50,000,000 shares authorized; 6,988,848 shares issued and outstanding - September 30, 2015 7,047,336 shares issued and outstanding - September 30, 2014	$	10,293		$	10,773
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued							$	—		$	—
Common stock, $0.01 par value; 50,000,000 shares authorized; 7,401,177 shares issued and outstanding - September 30, 2018 7,361,077 shares issued and outstanding - September 30, 2017							14,394			13,286
Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)	(926		)	(1,190		)	(133		)	(397		)
Retained earnings	80,133			73,534			110,525			98,235
Accumulated other comprehensive loss	(313		)	(339		)	(129		)	(124		)
Total shareholders’ equity	89,187			82,778			124,657			111,000
Total liabilities and shareholders’ equity	$	815,815		$	745,565		$	1,018,290		$	952,024

See notes to consolidated financial statements

Consolidated Statements of Income

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, ~~2015~~2018, ~~2014~~2017 and ~~2013~~2016


	2015			2014			2013			2018			2017			2016
Interest and dividend income
Loans receivable	$	30,397		$	29,205		$	29,591
Loans receivable and loans held for sale										$	38,298		$	36,385		$	33,580
Investment securities	249			259			281			217			279			287
Dividends from mutual funds and FHLB stock	31			27			29
Dividends from mutual funds, FHLB stock and other investments										120			88			106
Interest-bearing deposits in banks and CDs	491			366			336			3,198			1,586			902
Total interest and dividend income	31,168			29,857			30,237			41,833			38,338			34,875

Interest expense
Deposits	2,004			2,066			2,568			2,778			2,218			2,041
FHLB advances	1,886			1,873			1,871
FHLB borrowings										—			979			2,031
Total interest expense	3,890			3,939			4,439			2,778			3,197			4,072

Net interest income	27,278			25,918			25,798			39,055			35,141			30,803

Provision for (recapture of) loan losses	(1,525		)	—			2,925
Recapture of loan losses										—			(1,250		)	—

Net interest income after provision for (recapture of) loan losses	28,803			25,918			22,873
Net interest income after recapture of loan losses										39,055			36,391			30,803

Non-interest income
Recoveries (other than temporary impairment “OTTI”) on investment securities	—			7			(15		)	73			38			(29		)
Adjustment for portion of OTTI recorded as (transferred from) other comprehensive income (before income taxes)	(13		)	52			(32		)
Adjustment for portion of OTTI transferred from other comprehensive income (before income taxes)										(5		)	(5		)	(139		)
Net recoveries (OTTI) on investment securities	(13		)	59			(47		)	68			33			(168		)

Gain (loss) on sales of investment securities	45			(32		)	—
Service charges on deposits	3,615			3,738			3,663			4,581			4,518			3,969
ATM and debit card interchange transaction fees	2,664			2,426			2,142			3,570			3,343			3,261
BOLI net earnings	538			530			577			547			545			551
Gain on sales of loans, net	1,610			1,013			2,507			1,893			2,157			1,781
Escrow fees	206			158			184			211			242			214
Servicing income on loans sold										480			417			266
Fee income from non-deposit investment sales	41			68			82			109			63			111
Valuation recovery on MSRs, net	—			—			475
Other, net	816			570			679			1,085			1,050			904
Total non-interest income, net	9,522			8,530			10,262			12,544			12,368			10,889

See notes to consolidated financial statements

Consolidated Statements of Income (continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, ~~2015~~2018, ~~2014~~2017 and ~~2013~~2016


	2015			2014			2013			2018			2017		2016
Non-interest expense
Salaries and employee benefits	$	13,200		$	13,294		$	12,605		$	15,740		$	14,908	$	13,921
Premises and equipment	3,053			2,878			2,835			3,231			3,082		3,130
Gain on sales/dispositions of premises and equipment, net	(296		)	(7		)	(431		)
Loss (gain) on sales/dispositions of premises and equipment, net										(102		)	5		7
Advertising	779			742			742			782			698		753
OREO and other repossessed assets, net	918			1,010			2,587			140			22		662
ATM and debit card interchange transaction fees	1,221			1,096			857			1,296			1,405		1,377
Postage and courier	429			446			443			456			435		413
State and local taxes	561			479			576			687			609		572
Professional fees	829			792			856			1,390			887		657
Federal Deposit Insurance Corporation ("FDIC") insurance	593			636			685			294			362		448
Loan administration and foreclosure	269			456			430			336			205		321
Data processing and telecommunications	1,767			1,450			1,232			1,938			1,870		1,896
Deposit operations	812			759			607			1,192			1,074		912
Other	1,706			1,767			1,840			1,797			1,954		1,568
Total non-interest expense, net	25,841			25,798			25,864			29,177			27,516		26,637

Income before federal income taxes	12,484			8,650			7,271
Income before income taxes										22,422			21,243		15,055

Provision for federal income taxes	4,192			2,800			2,514
Provision for income taxes										5,701			7,076		4,901
Net income	8,292			5,850			4,757			$	16,721		$	14,167	$	10,154

Preferred stock dividends	—			(136		)	(710		)
Preferred stock discount accretion	—			(70		)	(283		)
Discount on redemption of preferred stock	—			—			255
Net income to common shareholders	$	8,292		$	5,644		$	4,019

Net income per common share
Basic	$	1.20		$	0.82		$	0.59		$	2.28		$	1.99	$	1.48
Diluted	$	1.17		$	0.80		$	0.58		$	2.22		$	1.92	$	1.43

See notes to consolidated financial statements

Consolidated Statements of Comprehensive Income

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, ~~2015~~2018, ~~2014~~2017 and ~~2013~~2016

2015
2014
2013
Comprehensive income
Net income $ 8,292
$ 5,850
$ 4,757
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes (34 ) (63 ) 23
Change in OTTI on investment securities held to maturity, net of income taxes:
Additional amount recognized related to credit loss for which OTTI was previously recognized 13
13
15
Amount reclassified to credit loss for previously recorded
market loss
9
21
6
Accretion of OTTI on investment securities held to maturity 38
52
57
Total other comprehensive income, net of income taxes $ 26
$ 23
$ 101
Total comprehensive income $ 8,318

$ 5,873

$ 4,858



	2018			2017			2016
Comprehensive income
Net income	$	16,721		$	14,167		$	10,154
Unrealized holding (loss) gain on investment securities available for sale, net of income taxes of ($8), ($12), and $0, respectively	(39		)	(23		)	1
Change in OTTI on investment securities held to maturity, net of income taxes:
Adjustments related to other factors for which OTTI was previously recognized, net of income taxes of ($2), $12, and $7, respectively	(7		)	22			12
Amount reclassified to credit loss for previously recorded market loss, net of income taxes of $1, $2, and $49, respectively	4			3			90
Accretion of OTTI on investment securities held to maturity, net of income taxes of $10, $26, and $18, respectively	37			49			35

Total other comprehensive income (loss), net of income taxes	(5		)	51			138

Total comprehensive income	$	16,716		$	14,218		$	10,292

See notes to consolidated financial statements

Consolidated Statements of Shareholders’ Equity

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, ~~2015~~2018, ~~2014~~2017 and ~~2013~~2016

Number of Shares Amount
Unearned
Shares Issued to
ESOP

Accumulated
Other
Comprehensive
Loss

Preferred
Stock

Common
Stock

Preferred
Stock

Common
Stock

Retained
Earnings
Total
September 30, 2012 16,641
7,045,036
$ 16,229
$ 10,484
$ (1,719 ) $ 65,788
$ (463 ) $ 90,319

Net income —
—
—
—
—
4,757
—
4,757
Accretion of preferred stock discount —
—
283
—
—
(283 ) —
—
Redemption of preferred stock (4,576 ) —
(4,576 ) —
—
255
—
(4,321 )
5% preferred stock dividend —
—
—
—
—
(885 ) —
(885 )
Common stock dividends ($0.09 per common share) —
1
—
—
—
—
(634 ) —
(634 )
Earned ESOP shares, net of income taxes —
—
—
6
265
—
—
271
MRDP (1) compensation expense, net of income taxes —
—
—
31
—
—
—
31
Stock option compensation expense —
—
—
49
—
—
—
49
Unrealized holding gain on investment securities available for sale, net of income taxes —
—
—
—
—
—
23
23
Change in OTTI on investment securities held to maturity, net of income taxes —
—
—
—
—
—
21
21
Accretion of OTTI on investment securities held to maturity, net of income taxes —
—
—
—
—
—
57
57

September 30, 2013 12,065
7,045,036
11,936
10,570
(1,454 ) 68,998
(362 ) 89,688

Net income —
—
—
—
—
5,850
—
5,850
Accretion of preferred stock discount —
—
70
—
—
(70 ) —
—
Redemption of preferred stock (12,065 )

—

(12,006 )
—

—

(59 )
—

(12,065 )
Exercise of stock options —
5,000
—
23
—
—
—
23
Forfeiture of MRDP shares —
(2,700 ) —
—
—
—
—
—
5% preferred stock dividend —
—
—
—
—
(58 ) —
(58 )
Common stock dividends ($0.16 per common share) —
—
—
—
—
(1,127 ) —
(1,127 )
Earned ESOP shares, net of income taxes —
—
—
64
264
—
—
328
MRDP compensation expense, net of income taxes —
—
—
4
—
—
—
4
Stock option compensation expense —
—
—
112
—
—
—
112
Unrealized holding loss on investment securities available for sale, net of income taxes —
—
—
—
—
—
(63 ) (63 )
Change in OTTI on investment securities held to maturity, net of income taxes —
—
—
—
—
—
34
34
Accretion of OTTI on investment securities held to maturity, net of income taxes —
—
—
—
—
—
52
52

September 30, 2014 —
7,047,336
—
10,773
(1,190 ) 73,534
(339 ) 82,778



	Common Stock					Unearned Shares Issued to ESOP						Accumulated Other Comprehensive Loss
	Number of Shares		Amount			Unearned Shares Issued to ESOP			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance, September 30, 2015	6,988,848		$	10,293		$	(926	)	$	80,133		$	(313	)	$	89,187

Net income	—		—			—			10,154			—			10,154
Other comprehensive income	—		—			—			—			138			138
Repurchase of common stock	(66,000	)	(820		)	—			—			—			(820		)
Exercise of stock options	21,020		159			—			—			—			159
Common stock dividends ($0.37 per common share)	—		—			—			(2,578		)	—			(2,578		)
Earned ESOP shares, net of income taxes	—		139			265			—			—			404
Stock option compensation expense	—		190			—			—			—			190

Balance, September 30, 2016	6,943,868		9,961			(661		)	87,709			(175		)	96,834

Net income	—		—			—			14,167			—			14,167
Other comprehensive income	—		—			—			—			51			51
Exercise of stock warrant	370,899		2,496			—			—			—			2,496
Exercise of stock options	46,310		332			—			—			—			332
Common stock dividends ($0.50 per common share)	—		—			—			(3,641		)	—			(3,641		)
Earned ESOP shares, net of income taxes	—		341			264			—			—			605
Stock option compensation expense	—		156			—			—			—			156

Balance, September 30, 2017	7,361,077		13,286			(397		)	98,235			(124		)	111,000

~~(1) 1998 Management Recognition and Development Plan (“MRDP”).~~

See notes to consolidated financial statements

Consolidated Statements of Shareholders’ Equity (continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, ~~2015~~2018, ~~2014~~2017 and ~~2013~~2016

Number of Shares Amount
Unearned
Shares Issued to
ESOP

Accumulated
Other
Comprehensive
Loss

Preferred
Stock

Common
Stock

Preferred
Stock

Common
Stock

Retained
Earnings
Total
September 30, 2014 —
7,047,336
$ —
$ 10,773
$ (1,190 ) $ 73,534
$ (339 ) $ 82,778

Net income —
—
—
—
—
8,292
—
8,292
Repurchase of common stock —
(64,788 ) —
(709 ) —
—
—
(709 )
Exercise of stock options —
6,300
—
30
—
—
—
30
Common stock dividends ($0.24 per common share) —
—
—
—
—
(1,693 ) —
(1,693 )
Earned ESOP shares, net of income taxes —
—
—
72
264
—
—
336
Stock option compensation expense —
—
—
127
—
—
—
127
Unrealized holding loss on investment securities available for sale, net of income taxes —
—
—
—
—
—
(34 ) (34 )
Change in OTTI on investment securities held to maturity, net of income taxes —
—
—
—
—
—
22
22
Accretion of OTTI on investment securities held to maturity, net of income taxes —
—
—
—
—
—
38
38

September 30, 2015 —
6,988,848
$ —
$ 10,293
$ (926 )
$ 80,133
$ (313 ) $ 89,187



	Common Stock			Unearned Shares Issued to ESOP						Accumulated Other Comprehensive Loss
	Number of Shares	Amount		Unearned Shares Issued to ESOP			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance, September 30, 2017	7,361,077	$	13,286	$	(397	)	$	98,235		$	(124	)	$	111,000

Net income	—	—		—			16,721			—			16,721
Other comprehensive loss	—	—		—			—			(5		)	(5		)
Exercise of stock options	40,100	318		—			—			—			318
Common stock dividends ($0.60 per common share)	—	—		—			(4,431		)	—			(4,431		)
Earned ESOP shares, net of income taxes	—	618		264			—			—			882
Stock option compensation expense	—	172		—			—			—			172

Balance, September 30, 2018	7,401,177	$	14,394	$	(133	)	$	110,525		$	(129	)	$	124,657

See notes to consolidated financial statements

Consolidated Statements of Cash Flows

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, ~~2015~~2018, ~~2014~~2017 and ~~2013~~2016


	2015			2014			2013			2018			2017			2016
Cash flows from operating activities
Net income	$	8,292		$	5,850		$	4,757		$	16,721		$	14,167		$	10,154
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,356			1,244			1,095			1,290			1,262			1,328
Deferred federal income taxes	196			451			777
Amortization of core deposit intangible ("CDI")	3			116			130
Deferred income taxes										797			385			283
Earned ESOP shares	264			264			265			882			605			404
MRDP compensation expense	—			2			39
Stock option compensation expense	125			104			49			172			156			190
Stock option tax effect less excess tax benefit	1			4			—
(Gain) loss on sales of investment securities	(45		)	32			—
Net OTTI (recoveries) on investment securities	13			(59		)	47
Net (recoveries) OTTI on investment securities										(68		)	(33		)	168
Gain on sales of OREO and other repossessed assets, net	(110		)	(169		)	(264		)	(229		)	(54		)	(47		)
Provision for OREO losses										248			42			435
Gain on sales of loans, net	(1,610		)	(1,013		)	(2,507		)	(1,893		)	(2,157		)	(1,781		)
Gain on sales/dispositions of premises and equipment, net	(296		)	(7		)	(431		)
Provision for (recapture of) loan losses	(1,525		)	—			2,925
Provision for OREO losses	644			605			2,064
(Gain) loss on sales/dispositions of premises and equipment, net										(102		)	5			7
Recapture of loan losses										—			(1,250		)	—
Loans originated for sale	(54,490		)	(31,320		)	(87,329		)	(62,677		)	(69,996		)	(57,354		)
Proceeds from sales of loans	53,948			33,345			89,352			66,384			72,158			58,582
Amortization of MSRs	841			969			948			491			487			555
Valuation recovery on MSRs, net	—			—			(475		)
BOLI net earnings	(538		)	(530		)	(577		)	(547		)	(545		)	(551		)
Increase (decrease) in deferred loan origination fees	447			36			(60		)
Increase in deferred loan origination fees										171			237			36
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	36			(1,301		)	767			(190		)	(1,610		)	(592		)
Net cash provided by operating activities	7,552			8,623			11,572			21,450			13,859			11,817

Cash flows from investing activities
Net increase in CDs held for investment	(12,766		)	(5,803		)	(6,552		)
Net (increase) decrease in CDs held for investment										(20,256		)	9,966			(4,389		)
Purchase of investment securities held to maturity	(2,988		)	(3,003		)	—			(6,073		)	—			—
Proceeds from maturities and prepayments of investment securities held to maturity	509			583			689			554			609			489
Proceeds from maturities and prepayments of investment securities available for sale	242			355			891			41			68			53
Proceeds from sales of investment securities available for sale	1,219			856			—
Purchase of FHLB stock										(83		)	(103		)	(105		)
Proceeds from redemption of FHLB stock	2,547			206			203			—			1,200			600
Purchase of other investments										—			(3,000		)	—
Increase in loans receivable, net	(40,019		)	(23,569		)	(15,819		)	(35,522		)	(26,956		)	(59,212		)
Additions to premises and equipment	(700		)	(1,189		)	(1,302		)	(2,186		)	(3,526		)	(640		)
Capitalized improvements to OREO										—			—			(142		)
Proceeds from sales of OREO and other repossessed assets	2,377			7,065			3,596			1,693			1,579			3,798
Proceeds from sales/dispositions of premises and equipment, net	465			37			760
Proceeds from sales/dispositions of premises and equipment										463			—			—
Escrow deposit for business combination										(6,900		)	—			—
Net cash used in investing activities	(49,114		)	(24,462		)	(17,534		)	(68,269		)	(20,163		)	(59,548		)

See notes to consolidated financial statements

Consolidated Statements of Cash Flows (continued)

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, ~~2015~~2018, ~~2014~~2017 and ~~2013~~2016


	2015			2014			2013			2018			2017			2016
Cash flows from financing activities
Net increase in deposits	$	63,796		$	6,854		$	10,336		$	51,608		$	76,364		$	82,622
Net decrease in repurchase agreements	—			—			(855		)
ESOP tax effect	72			64			6
MRDP compensation tax effect	—			2			(8		)
Stock option excess tax benefit	1			4			—
Repayment of FHLB borrowings										—			(30,000		)	(15,000		)
Proceeds from exercise of stock options	30			23			—			318			332			159
Repurchase of preferred stock	—			(12,065		)	(4,321		)
Proceeds from exercise of stock warrant										—			2,496			—
Repurchase of common stock	(709		)	—			—			—			—			(820		)
Payment of dividends	(1,693		)	(1,185		)	(1,368		)	(4,431		)	(3,641		)	(2,578		)
Net cash provided by (used in) financing activities	61,497			(6,303		)	3,790
Net cash provided by financing activities										47,495			45,551			64,383

Net increase (decrease) in cash and cash equivalents	19,935			(22,142		)	(2,172		)
Net increase in cash and cash equivalents										676			39,247			16,652

Cash and cash equivalents
Beginning of period	72,354			94,496			96,668			148,188			108,941			92,289
End of period	$	92,289		$	72,354		$	94,496		$	148,864		$	148,188		$	108,941


Supplemental disclosure of cash flow information
Income taxes paid	$	3,663		$	2,888		$	1,793		$	4,462		$	7,596		$	4,412
Interest paid	3,899			3,961			4,523			2,714			3,283			3,976

Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	$	2,123		$	6,155		$	6,375		$	324		$	751		$	307
Other comprehensive income related to investment securities	26			23			101
Loans originated to facilitate the sale of OREO	450			1,282			2,708
Other comprehensive (loss) income related to investment securities										(5		)	51			138

See notes to consolidated financial statements

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

Note 1 - Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Timberland Bancorp, Inc. (“Timberland Bancorp”); its wholly owned subsidiary, Timberland Bank (the “Bank”); and the Bank’s wholly owned subsidiary, Timberland Service Corp. (collectively, the "Company”). All significant intercompany transactions and balances have been eliminated in consolidation.

Nature of Operations

Timberland Bancorp is a bank holding company which operates primarily through its subsidiary, the Bank. The Bank was established in 1915 and, through its 22 branches located in Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties in Washington State, attracts deposits from the general public, and uses those funds, along with other borrowings, primarily to provide residential real estate, construction, commercial real estate, commercial business and consumer loans to borrowers primarily in western Washington.

Consolidated Financial Statement Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") (“GAAP”) and prevailing practices within the banking industry. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated balance sheets, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of any OTTI in the ~~estimated~~ fair value of investment securities, ~~the valuation of deferred tax assets,~~ the valuation of MSRs, the valuation of OREO and the valuation of goodwill for potential impairment.

Certain prior year amounts have been reclassified to conform to the ~~2015~~2018 fiscal year presentation with no change to previously reported net income or shareholders’ equity.

Segment Reporting

The Company has one reportable operating segment which is defined as community banking in western Washington under the operating name “Timberland Bank.”

~~Preferred Stock Sold in Troubled Asset Relief Program ("TARP") Capital Purchase Program ("CPP")~~

On December 23, 2008, the Company received $16.64 million from the U.S. Treasury Department ("Treasury") as a part of the Treasury's CPP, which was established as part of the TARP. The Company sold 16,641 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("Series A Preferred Stock"), with a liquidation value of $1,000 per share and a related warrant to purchase 370,899 shares of the Company's common stock at an exercise price of $6.73 per share (subject to anti-dilution adjustments) at any time through December 23, 2018.

The proceeds received in connection with the issuance of the Series A Preferred Stock were allocated between the preferred stock and warrant based on their relative fair values on the date of issuance. As a result, the preferred stock's initial recorded value was at a discount from the liquidation value or stated value. The discount from the liquidation value was accreted to the expected/actual redemption date and charged to retained earnings. This accretion was recorded using the level-yield method.

~~On November 13, 2012, the Company’s outstanding~~ ~~16,641~~ shares of Series A Preferred Stock were sold by the Treasury as part of its efforts to manage and recover its investments under the TARP. While the sale of the Series A Preferred Stock to new owners did not result in any proceeds to the Company and did not change the Company’s capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients.

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

On June 12, 2013, the Treasury sold the warrant to purchase up to 370,899 shares of the Company’s common stock to private investors. The sale of the warrant to new owners did not result in any proceeds to the Company and did not change the Company's capital position or accounting for the warrant.

During the year ended September 30, 2013, the Company purchased and retired 4,576 shares of its Series A Preferred Stock for $4.32 million; a $255,000 discount from its liquidation value. The discount from liquidation value on the repurchased shares was recorded as an increase to retained earnings. On December 20, 2013, the Company redeemed the remaining 12,065 shares of its Series A Preferred Stock at the liquidation value of $12.07 million. The Series A Preferred Stock paid a 5.0% dividend through December 20, 2013, the date of its redemption.

Cash and Cash Equivalents and Cash Flows

The Company considers amounts included in the consolidated balance sheets’ captions “Cash and due from financial institutions” and “Interest-bearing deposits in banks,” all of which mature within ninety days, to be cash equivalents for purposes of reporting cash flows. ~~Cash flows from loans, deposits, FHLB advances and repurchase agreements are reported net in the accompanying consolidated statements of cash flows.~~

Interest-bearing deposits in banks as of September 30, ~~2015~~2018 and ~~2014~~2017 included deposits with the Federal Reserve Bank of San Francisco ("FRB") of ~~$70,975,000~~$123,745,000 and ~~$55,445,000,~~$127,128,000, respectively. The Company also maintains balances in correspondent bank accounts which, at times, may exceed the FDIC insurance ~~limits~~limit of ~~$250,000.~~$250,000 per correspondent bank. Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the ~~Federal Reserve Bank of San Francisco ("FRB")~~FRB and the correspondent banks.

CDs Held for Investment

CDs held for investment include amounts invested with other FDIC-insured financial institutions for a stated interest rate and with a fixed maturity date. Such CDs generally have maturities of 12 to 24 months from the date of purchase by the Company. Early withdrawal penalties may apply; however, the Company intends to hold these CDs to maturity. The Company generally limits its purchases of CDs to a maximum of $250,000 (the FDIC insurance coverage limit) with any single financial institution.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

Investment Securities

Investment securities are classified upon acquisition as either held to maturity or available for sale. Investment securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and ~~reflected~~reported at amortized cost. Investment securities classified as available for sale are ~~reflected~~reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of income tax effects. Premiums and discounts are amortized to ~~earnings~~interest income using the interest method over the contractual lives of the securities. Gains and losses on sales of investment securities are recognized on the trade date and determined using the specific identification method.

In estimating whether there are any OTTI losses, management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates and (4) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Declines in the fair value of individual investment securities available for sale that are deemed to be other than temporary are ~~reflected~~recognized in earnings when identified. The fair value of the investment security then becomes the new cost basis. For individual investment securities that are held to maturity which the Company does not intend to sell, and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost basis, the other than temporary decline in the fair value of the investment security related to: (1) credit loss is recognized in earnings and (2) market or other factors is recognized in other comprehensive income (loss). Credit loss is recorded if the present value of expected future cash flows is less than the amortized cost. For individual investment securities which the Company intends to sell or more likely than not will not recover all of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the investment security’s cost basis and its fair value at the consolidated balance sheet date. For individual investment securities for which credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.

FHLB Stock

~~On May 31, 2015, the Federal Home Loan Bank of Seattle merged into the Federal Home Loan Bank of Des Moines ("FHLB").~~ The Bank, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.12% of the Bank's total assets plus 4%4.00% of ~~advances~~any borrowings from the FHLB. No ready market exists for this stock, and it has no quoted market value. However, redemption of FHLB stock has historically been at par value. The Company's investment in FHLB stock is carried at cost, which approximates fair value.

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

The Company evaluates its FHLB stock for impairment as needed. The Company's determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared with the capital stock amount and the length of time any decline has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB; and (4) the liquidity position of the FHLB. Based on its evaluation, the Company determined that there was no impairment of FHLB stock at September 30, ~~2015~~2018 and ~~2014.~~2017.

Other Investments

The Bank invests in the Solomon Hess SBA Loan Fund LLC - a private investment fund - to help satisfy compliance with the Bank's Community Reinvestment Act ("CRA") investment test requirements. Shares in this fund are not publicly traded and therefore have no readily determinable fair market value. The Bank's investment in the fund is recorded at cost. An investor can have its investment in the fund redeemed for the balance of its capital account at any quarter end with a 60 day notice to the fund.

Loans Held for Sale

Mortgage loans and commercial business loans originated and intended for sale in the secondary market are stated in the aggregate at the lower of cost or estimated fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains or losses on sales of loans are recognized at the time of sale. The gain or loss is the

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

difference between the net sales proceeds and the recorded value of the loans, including any remaining unamortized deferred loan origination fees.

Loans Receivable

Loans are stated at the amount of unpaid principal, reduced by the undisbursed portion of construction loans in process, net deferred loan origination fees and the allowance for loan losses.

~~Impaired Loans~~

A loan is generally considered impaired when it is probable that the Company will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement. When a loan is considered collateral dependent, impairment is measured using the estimated fair value of the underlying collateral, less any prior liens, and when applicable, less estimated selling costs. For impaired loans that are not collateral dependent, impairment is measured using the present value of expected future cash flows, discounted at the loan’s original effective interest rate.

~~The categories of non-accrual loans and impaired loans overlap, although they are not identical.~~

~~Troubled Debt Restructured Loans~~

A troubled debt restructured loan is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a significant concession to the borrower that the Company would not otherwise consider. Examples of such concessions include, but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals. Troubled debt restructured loans are considered impaired and are individually evaluated for impairment. Troubled debt restructured loans are classified as non-performing unless they have been performing in accordance with modified terms for a period of at least six months.

~~Allowance for Loan Losses~~

The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management's comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions, and a detailed analysis of individual loans for which full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component relates to loans that are deemed impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value less selling costs (if applicable), or observable market price of the impaired loan is lower than the recorded value of that loan. The general component covers non-classified loans and classified loans that are not evaluated individually for impairment and is based on historical loss experience adjusted for qualitative factors. The Company's historical loss experience is determined by evaluating the average net charge-offs over the most recent economic cycle, but not to exceed six years. Qualitative factors are determined by loan type and allow

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

management to adjust reserve levels to reflect the current general economic environment and portfolio performance trends including recent charge-off trends. Allowances are provided based on management’s continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, collateral values, geographic concentrations, seasoning of the loan portfolio, specific industry conditions, the duration of the current business cycle, and regulatory requirements and expectations. The appropriateness of the allowance for loan losses is estimated based upon these factors and trends identified by management at the time consolidated financial statements are prepared.

In accordance with GAAP, a loan is considered impaired when it is probable that a creditor will be unable to collect all amounts (principal and interest) due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral, reduced by estimated costs to sell (if applicable), or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

A provision for (recapture of) loan losses is charged (credited) to operations and is added to (deducted from) the allowance for loan losses based on a quarterly comprehensive analysis of the loan portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. While management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.

The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control. These factors may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. The Company has experienced a significant decline in valuations for some real estate collateral since October 2008. If real estate values decline further and as updated appraisals are received on collateral for impaired loans, the Company may need to increase the allowance for loan losses appropriately. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

~~Premises and Equipment~~

Premises and equipment are recorded at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: buildings and improvements - five to 40 years; furniture and equipment - three to seven years; and automobiles - five years. The cost of maintenance and repairs is charged to expense as incurred. Gains and losses on dispositions are reflected in earnings.

~~Impairment of Long-Lived Assets~~

Long-lived assets, consisting of premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the recorded amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the recorded amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the recorded amount of the assets exceeds the discounted recovery amount or estimated fair value of the assets. No events or changes in circumstances have occurred during the years ended September 30, 2015 or 2014 that would cause management to evaluate the recoverability of the Company’s long-lived assets.

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

~~OREO and Other Repossessed Assets~~

OREO and other repossessed assets consist of properties or assets acquired through or in lieu of foreclosure, and are recorded initially at the estimated fair value of the properties less estimated costs of disposal. When the property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the allowance for loan losses. Costs relating to development and improvement of the properties or assets are capitalized, while costs relating to holding the properties or assets are expensed. The valuation of real estate is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received.

~~Interest on Loans and Loan Fees~~

Interest on loans is accrued daily based on the principal amount outstanding. Generally, the accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to make payments as they become due or when they are past due 90 days as to either principal or interest (based on contractual terms), unless the loan is well secured and in the process of collection. In determining whether a borrower may be able to make payments as they become due, management considers circumstances such as the financial strength of the borrower, the estimated collateral value, reasons for the delays in payments, payment record, the amounts past due and the number of days past due. All interest accrued but not collected for loans that are placed on non-accrual status or charged off is reversed against interest income. Subsequent collections on a cash basis are applied proportionately to past due principal and interest, unless collectability of principal is in doubt, in which case all payments are applied to principal. Loans are returned to accrual status when the loan is deemed current, and the collectability of principal and interest is no longer doubtful, or, in the case of one- to four-family loans, when the loan is less than 90 days delinquent. The categories of non-accrual loans and impaired loans overlap, although they are not identical.

The Company charges fees for originating loans. These fees, net of certain loan origination costs, are deferred and amortized to income on the level-yield basis over the loan term. If the loan is repaid prior to maturity, the remaining unamortized deferred loan origination fee is recognized in income at the time of repayment.

Troubled Debt Restructured Loans

A troubled debt restructured loan ("TDR") is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Examples of such concessions include, but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals. TDRs are considered impaired and are individually evaluated for impairment. TDRs are classified as non-accrual (and considered to be non-performing) unless they have been performing in accordance with modified terms for a period of at least six months.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level sufficient to provide for probable losses inherent in the loan portfolio. The allowance is provided based upon management's comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions, and a detailed analysis of individual loans for which full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component relates to loans that are deemed impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value less selling costs (if applicable), or observable market price of the impaired loan is lower than the recorded value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. The Company's historical loss experience is determined by evaluating the average net charge-offs over the most recent economic cycle, but not to exceed six years. Qualitative factors are determined by loan type and allow management to adjust reserve levels to reflect the current general economic environment and portfolio performance trends including recent charge-off trends. Allowances are provided based on management’s continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, collateral values, geographic concentrations, seasoning of the loan portfolio, specific industry conditions, the duration of the current business cycle, and regulatory requirements and expectations. The appropriateness of the allowance for loan losses is estimated based upon these factors and trends identified by management at the time the consolidated financial statements are prepared.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control. These factors may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. If real estate values decline and as updated appraisals are received on collateral for impaired loans, the Company may need to increase the allowance for loan losses appropriately. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

Premises and Equipment

Premises and equipment are recorded at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: buildings and improvements - five to 40 years and furniture and equipment - three to seven years. The cost of maintenance and repairs is charged to expense as incurred. Gains and losses on dispositions are reflected in earnings.

Impairment of Long-Lived Assets

Long-lived assets, consisting of premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the recorded amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the recorded amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the recorded amount of the assets exceeds the discounted recovery amount or estimated fair value of the assets. No events or changes in circumstances have occurred during the years ended September 30, 2018 or 2017 that would cause management to evaluate the recoverability of the Company’s long-lived assets.

OREO and Other Repossessed Assets

OREO and other repossessed assets consist of properties or assets acquired through or in lieu of foreclosure, and are recorded initially at the estimated fair value of the properties less estimated costs of disposal, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. When the property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the allowance for loan losses. The valuation of real estate is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair values of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

changes and any related adjustments are generally recorded at the time such information is received. Costs relating to development and improvement of the properties or assets are capitalized, while costs relating to holding the properties or assets are expensed.

BOLI

BOLI policies are recorded at their cash surrender value less applicable cash surrender charges. Income from BOLI is recognized when earned.

Goodwill

Goodwill is initially recorded when the purchase price paid ~~for an acquisition~~in a business combination exceeds the estimated fair value of the net identified tangible and intangible assets ~~acquired.~~acquired and liabilities assumed. Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment. The Company performs an annual review during the third quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. For purposes of goodwill impairment testing, the services offered through the Bank and its subsidiary are managed as one strategic unit and represent the Company's only reporting unit.

The annual goodwill impairment test ~~involves~~begins with a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its carrying amount. If an entity concludes that it is not "more likely than not" that the fair value of a reporting unit is less than its carrying amount, it need not perform a two-step ~~process. Step one estimates~~impairment test. If the Company's qualitative assessment concluded that it is "more likely than not" that the fair value of its reporting unit is less than its carrying amount, it must perform the two-step impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the estimated fair value of the reporting ~~unit.~~unit with its carrying amount, or the book value, including goodwill. If the estimated fair value of the ~~Company's sole~~ reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the ~~Bank, under~~second step ~~one exceeds the recorded value~~ of the impairment test is unnecessary.

The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit ~~goodwill is not considered impaired, and no further analysis is necessary. If the estimated~~must determine fair value for all assets and liabilities, excluding goodwill. The net of the ~~Company's sole reporting unit is less than the recorded value, then a step two test, which calculates the~~assigned fair value of assets and liabilities is then compared to ~~calculate an implied value of goodwill, is performed.~~

~~The Company performed its fiscal year 2015 goodwill impairment test during~~ the quarter ended June 30, 2015 with the assistance of an independent third-party firm specializing in goodwill impairment valuations for financial institutions. The third-party analysis was conducted as of May 31, 2015 and the step one test concluded that the reporting unit's fair value was more than its recorded value, and, therefore, step two of the analysis was not necessary. Accordingly, the recorded value of goodwill as of May 31, 2015 was not impaired.

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

~~Step one of the goodwill impairment test estimated the fair~~book value of the reporting unit, ~~utilizing a discounted cash flow income approach analysis, a public company market approach analysis, a merger~~ and ~~acquisition market approach analysis and a trading price market approach analysis in order to derive an enterprise value for the Company.~~

The discounted cash flow income approach analysis uses a reporting unit's projection of estimated operating results and cash flows and discounts them using a rate that reflects current market conditions. The projection uses management's estimates of economic and market conditions over the projected period including growth rates in loans and deposits, estimates of future expected changes in net interest margins and cash expenditures. Key assumptions used by the Company in its discounted cash flow model (income approach) included an annual loan growth rate that ranged from 3.00% to 3.60%, an annual deposit growth rate that ranged from 2.20% to 3.20% and a return on assets that ranged from 0.80% to 1.00%. In addition to the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the approach were the discount rate of 12.2% and the residual capitalization rate of 9.2%. The discount rate used was the cost of equity capital. The cost of equity capital was based on the capital asset pricing model ("CAPM"), modified to account for a small stock premium. The small stock premium represents the additional return required by investors for small stocks based on the ~~2015 Valuation Handbook - Guide to Cost of Capital.~~ Beyond the approximate five-year forecast period, residual free cash flows were estimated to increase at a constant rate into perpetuity. These cash flows were converted to a residual value using an appropriate residual capitalization rate. The residual capitalization rate was equal to the discount rate minus the expected long-term growth rate of cash flows. Based on historical results, the economic climate, the outlook for the industry and management's expectations, a long-term growth rate of 3.0% was estimated.

The public company market approach analysis estimates the fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly traded companies with operating and investment characteristics similar to those of the Company. Key assumptions used by the Company included the selection of comparable public companies and performance ratios. In applying the public company analysis, the Company selected nine publicly traded institutions based on similar lines of business, markets, growth prospects, risks and firm size. The performance ratios included price to earnings (last twelve months), price to earnings (current year to date), price toany excess book value ~~price to tangible book value and price to deposits.~~

~~The merger and acquisition market approach analysis estimates~~becomes the fair value by using merger and acquisition transactions involving companies that are similar in nature to the Company. Key assumptions used by the Company included the selection of comparable merger and acquisition transactions and valuation ratios to be used. The analysis used banks located in Washington or Oregon that were acquired after January 1, 2013. The valuation ratios from these transactions for price to earnings and price to tangible book value were then used to derive an estimatedimplied fair value of goodwill. If the ~~Company.~~carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value.

~~The trading price~~Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market ~~approach analysis used the closing market price at May 29, 2015 of the Company's common stock, traded on the NASDAQ Global Market to determine the market value of total equity capital.~~

~~A key assumption used by the Company in the public company market approach analysis~~considerations, cost or margin factors, financial performance and the trading price market approach analysis was the application of a control premium. The Company's common stock is thinly traded, and therefore management believes the trading price reflects a discount for illiquidity. In addition, the tradingshare price of the Company's common ~~stock reflects a minority interest value. To determine~~stock. Based on this assessment, the ~~fair market value of a majority interest in~~Company determined that it is not "more likely than not" that the Company's ~~stock, premiums were calculated~~fair value is less than its carrying amount and ~~applied~~therefore goodwill was determined not to the indicated values. Therefore, a control premium was applied to the results of the discounted cash flow income approach analysis, the public company market approach analysis and the trading price market approach analysis because the initial value conclusion was based on minority interest transactions. Merger and acquisition studies were analyzed to conclude that the difference between the acquisition price and a company's stock price prior to acquisition indicates, in part, the price effect of a controlling interest. Based on the evaluation of merger and acquisition studies, a control premium of 25% was used.be impaired at May 31, 2018.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in ~~the~~ expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Key assumptions used in the annual goodwill impairment test are highly judgmental and include: selection of comparable companies, amount of control premium, projected cash flows and discount rate applied to projected cash flows. Any change in these indicators ~~or key assumptions~~ could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

As of September 30, ~~2015,~~2018, management believes that there ~~had~~have been no events or changes in the circumstances since May 31, ~~2015~~2018 that would indicate a potential impairment of goodwill. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future.

~~CDI~~

During the year ended September 30, 2005, the Company had recorded CDI of $2,201,000 in connection with the acquisition of certain branches and related deposits. The net remaining unamortized balance of the CDI was $3,000 at September 30, 2014, and was fully amortized during the year ended September 30, 2015. The CDI was amortized to non-interest expense using an accelerated method over a ten-year period.

MSRs

The Company holds rights to service (1) loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). and (2) the guaranteed portion of U.S. Small Business Administration ("SBA") loans sold in the secondary market. MSRs are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights ~~retained and~~retained. MSRs are amortized to servicing income on loans sold approximately in proportion to and

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

over the period of estimated net servicing income. The value of MSRs at the date of the sale of loans is estimated based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and expected prepayment rates on the underlying loans. The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated future cash flows from the servicing assets to those estimated at the time the servicing assets were originated. Fair values are estimated using expected future discounted cash flows based on current market rates of interest. For purposes of measuring impairment, the MSRs must be stratified by one or more predominant risk characteristics of the underlying loans. The Company stratifies its capitalized MSRs based on product type and term of the underlying loans. The amount of impairment recognized is the amount, if any, by which the amortized cost of the MSRs exceeds their fair value. Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that fair value is less than the recorded amount.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income Taxes

The Company files a consolidated federal and various state income tax ~~return.~~returns. The Bank provides for income taxes separately and remits to (receives from) Timberland Bancorp amounts currently due (receivable).

Deferred ~~federal~~ income taxes result from temporary differences between the tax basis of assets and liabilities, and their reported amounts in the consolidated financial statements. These temporary differences will result in differences between income for tax purposes and income for financial reporting purposes in future years. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established to reduce the net recorded amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized.

With respect to accounting for uncertainty in incomes taxes, a tax provision is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized upon examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters as income tax expense. The Company is no longer subject to U.S. federal income tax examination by tax authorities for years ended on or before September 30, ~~2011.~~2014.

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

ESOP

The Bank sponsors a leveraged ~~ESOP that is accounted for in accordance with GAAP. Accordingly, the~~ESOP. The debt of the ESOP is payable to Timberland Bancorp, is recorded as other borrowed funds of the Bank, and is eliminated in the consolidated financial statements. The shares of the Company's common stock pledged as collateral for the ESOP's debt are reported as unearned shares issued to the ESOP ~~in the consolidated financial statements. The debt of the ESOP is payable to Timberland Bancorp and is therefore eliminated~~ in the consolidated financial statements. As shares are released from collateral, compensation expense is recorded equal to the average market price of the shares for the period, and the shares become available for net income per common share calculations. Dividends paid on unallocated shares reduce the Company’s cash contributions to the ESOP.

Advertising

Costs for advertising and marketing are expensed as incurred.

Stock-Based Compensation

The Company measures compensation cost for all stock-based awards based on the grant-date fair value of the stock-based awards and recognizes compensation cost over the service period of stock-based awards.

The fair value of stock options is determined using the Black-Scholes valuation model. ~~The fair value of stock grants under the MRDP was equal~~Stock option forfeitures are accounted for as they occur.

Notes to ~~the fair value of the shares at the grant date.~~Consolidated Financial Statements_________________________________________________________________

~~The Company’s stock compensation plans are described more fully in Note 13.~~Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

Net Income Per Common Share

Basic net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted net income per common share is computed by dividing net income to common shareholders by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for ~~Timberland Bancorp's~~the Company's common stock during the period. The 5% dividend and related accretion for the amount of the Company's Series A Preferred Stock outstanding for the respective year was deducted from net income, and the discount on the redemption of Series A Preferred Stock was added to net income in computing net income to common shareholders. Common stock equivalents arise from the assumed conversion of outstanding stock options and ~~the~~ outstanding ~~warrant~~warrants to purchase common stock. Shares owned by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted net income per common share.

Related Party Transactions

The Chairman of the Board of the Bank and Timberland Bancorp is a member of the law firm that provides general counsel to the Company. Legal and other fees paid to this law firm for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 totaled ~~$164,000, $179,000~~$94,000, $99,000 and ~~$166,000,~~$127,000, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, ~~(Topic 606), with an effective date for annual reporting periods beginning after December 15, 2016.~~which created FASB Accounting Standards Codification ("ASC") Topic 606 ("ASC 606"). The core principle of ~~this ASU~~ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ~~In general,~~To achieve that core principle, an entity should apply the ~~new guidance requires companies~~following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to ~~use more judgment and make more estimates than under current guidance, including identifying~~the performance obligations in the contract and ~~estimating~~(5) recognize revenue when (or as) the ~~amount of variable consideration to include in the transaction price related to each separate~~entity satisfies a performance obligation. ~~In August 2015, the FASB issued ASU No. 2015-14,~~ ~~Revenue from Contracts with Customers (Topic 606), which deferred the~~ASC 606 is effective ~~date of ASU No. 2014-09 to annual periods~~for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASC 606 on October 1, 2018. The Company's primary source of revenue is interest income, which is recognized when earned and is excluded from the scope of ASC 606, and non-interest income. The adoption of ASC 606 will require additional disclosures regarding insignificant components of non-interest income, but will not have a material impact on the Company's future consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 generally requires equity investments - except those accounted for under the equity method of accounting or those that ~~reporting period.~~result in consolidation of the investee - to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU No. 2016-01 is intended to simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU No. 2016-01 also eliminates certain disclosures related to the fair value of financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU on October 1, 2018. The adoption of ASU No. ~~2014-09~~2016-01 is not expected to have a material impact on the Company's future consolidated financial statements.

83In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The principal change required by this ASU relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. This ASU also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

~~In August 2014,~~Improvements. This ASU amended the ~~FASB issued~~new leases standard to give entities another option for transition and to provide lessors with a practical expedient. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the ASC 606 if the associated non-lease components are the predominant components. The amendments have the same effective date as ASU No. ~~2014-14,~~ ~~Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure~~.2016-02. The ~~ASU addresses the classification of foreclosed loans that are either fully or partially guaranteed under government programs.~~amendments in ASU No. ~~2014-14 clarifies that upon foreclosure of fully or partially guaranteed loans which~~2016-02 are guaranteed under government programs and meet certain conditions, the creditor will be required to reclassify the previously existing mortgage loan to a separate other receivable from the guarantor, measured at the amount of the loan balance (principal and interest) that it expects to collect from the guarantor. ASU No. 2014-14 is effective for fiscal years, ~~and~~including interim periods within those fiscal years, beginning after December 15, ~~2014 for public organizations.~~2018. Early application of the amendments in this ASU is permitted. The effect of adoption of this ASU will depend on the nature and terms of the Company's leases at the time of adoption. Once adopted, the Company expects to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under non-cancelable operating lease agreements; however, based on current leases the adoption of ASU No. ~~2014-14~~2016-02 is not expected to have a material impact on the Company's future consolidated financial statements.

In ~~January 2015,~~June 2016, the FASB issued ASU No. ~~2015-01,~~2016-13, ~~Income Statement~~Financial Instruments - ~~Extraordinary and Unusual Items (Subtopic 225-20)~~Credit Losses. ~~The~~This ASU ~~eliminates~~replaces the ~~need~~existing incurred losses methodology with a current expected losses methodology with respect to ~~separately classify, present~~most financial assets measured at amortized cost and ~~disclose extraordinary events. The disclosure of events or transactions that are unusual or infrequent in nature will be included in~~certain other ~~guidance. The amendments in~~instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, this ASU ~~are~~requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU No. 2016-13 also changes the accounting for purchased credit-impaired debt securities and loans. ASU No. 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. ASU No. 2016-13 is effective for ~~annual periods, and~~fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU No. 2016-13 and expects to begin developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. At this time, the Company anticipates the allowance for loan losses will increase as a result of the implementation of this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU No. 2017-04, an entity should perform its annual, ~~periods,~~or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU No. 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, ~~2015.~~2019. Early application of this ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU No. ~~2015-01~~2017-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In ~~February 2015,~~March 2017, the FASB issued ASU No. ~~2015-02,~~2017-08, ~~Consolidation (Topic 810)~~Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): ~~Amendments~~Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium to the ~~Consolidation Analysis. The~~earliest call date. This ASU is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification ("Codification") and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest. ASU No. 2015-02 will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, ~~2015 for public companies. Early adoption is permitted, including adoption in an interim period.~~2018. The adoption of ASU No. ~~2015-02~~2017-08 is not expected to have a material impact on the Company's future consolidated financial statements.

In ~~June 2015,~~May 2017, the FASB issued ASU No. ~~2015-10,~~2017-09, ~~Technical Corrections and Improvements~~Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ~~. On November 10, 2010,~~This ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the ~~FASB added~~terms or conditions of a standing project that will facilitate the Codification updates for technical corrections, clarifications and improvements. These amendments are referred to as Technical Corrections and Improvements. Maintenance updates include non-substantive correctionsshare-based payment award. According to the ~~Codification, such as editorial corrections, various link-related changes~~ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and changes to source fragment information. This update contains amendments that will affect a wide variety of Topics in the Codification. The amendments in this ASU will apply to all reporting entities within the scopebalance sheet classification of the ~~affected accounting guidance and generally fall into one of four categories: amendments related to differences between original guidance and~~award are the ~~Codification, guidance clarification and reference corrections, simplification and minor improvements. In summary,~~same after the ~~amendments in this ASU represent changes to clarify the Codification, correct unintended application of guidance or make minor improvements~~modification as compared to the ~~Codification that are not expected~~original award prior to ~~have a significant effect on current accounting practice. Transaction guidance varies based on the amendments in this ASU. The amendments in this~~modification. ASU ~~that require transition guidance are~~No. 2017-09 is effective for fiscal years, ~~and~~including interim ~~reporting~~ periods within ~~these~~those fiscal years, beginning after December 15, ~~2015. Early~~2017, with early adoption ~~is permitted, including adoption in an interim period. All other amendments were effective upon the issuance of~~permitted. The Company

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

adopted this ~~ASU.~~ASU on October 1, 2018. The adoption of ASU ~~2015-10~~No. 2017-09 is not expected to have a material impact on the Company's future consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and was measured at the earlier of the commitment date or the date performance was completed. The amendments in this ASU require nonemployee share-based payment awards to be measured at the grant-date fair value of the equity instrument. ASU No. 2018-07 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entity's adoption of Topic 606. The adoption of ASU No. 2018-07 is not expected to have a material impact on the Company's future consolidated financial statements.

In ~~September 2015,~~August 2018, the FASB issued ASU No. ~~2015-16,~~2018-13, ~~Business Combinations~~Fair Value Measurement (Topic ~~805)~~820): ~~Simplifying~~Disclosure Framework - Changes to the ~~Accounting~~Disclosure Requirements for ~~Measurement-Period Adjustments.~~Fair Value Measurement. This ASU ~~requires~~modifies the disclosure requirements for fair value measurements. The following disclosure requirements were removed from ASC Topic 820, Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation process for Level 3 fair value measurements. This ASU clarifies that ~~an acquirer recognize adjustments to provisional amounts that are identified during~~ the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, ~~in which~~and (2) the ~~adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period's financial statements, the effect on earnings~~range and weighted average of ~~changes in depreciation, amortization, or other income effects, if any, as a result of the change~~significant unobservable inputs used to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in the current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.develop Level 3 fair value measurements. ASU No. ~~2015-16~~2018-13 is effective for fiscal years beginning after December 15, ~~2015,~~2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company's future consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for internal-use software costs. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ASU No. 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU No. ~~2015-16~~2018-15 is not expected to have a material impact on the Company's future consolidated financial statements.

Note 2 - Restricted Assets

Federal Reserve ~~Board~~ regulations require that the Bank maintain certain minimum reserve balances on hand or on deposit with the FRB, based on a percentage of transaction account deposits. The amounts of the reserve requirement balances as of September 30, ~~2015~~2018 and ~~2014~~2017 were ~~$1,026,000~~$1,609,000 and ~~$1,008,000,~~$1,658,000, respectively.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

Note 3 - Investment Securities

Held to maturity and available for sale investment securities were as follows as of September 30, ~~2015~~2018 and ~~2014~~2017 (dollars in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2015
September 30, 2018
Held to Maturity
Mortgage-backed securities ("MBS"):
U.S. government agencies	$	828	$	23	$	(1	)	$	850	$	1,385	$	8	$	(21	)	$	1,372
Private label residential	1,081		894		(12		)	1,963		460		552		(2		)	1,010
U.S. Treasury and U.S. government agency securities	6,004		77		—			6,081		10,965		—		(83		)	10,882
Total	$	7,913	$	994	$	(13	)	$	8,894	$	12,810	$	560	$	(106	)	$	13,264

Available for Sale
MBS:
U.S. government agencies	$	387	$	34	$	—		$	421
MBS: U.S. government agencies										$	231	$	7	$	(1	)	$	237
Mutual funds	1,000		—		(29		)	971		1,000		—		(83		)	917
Total	$	1,387	$	34	$	(29	)	$	1,392	$	1,231	$	7	$	(84	)	$	1,154

September 30, 2014
September 30, 2017
Held to Maturity
MBS:
U.S. government agencies	$	1,002	$	32	$	(2	)	$	1,032	$	532	$	11	$	(1	)	$	542
Private label residential	1,280		965		(7		)	2,238		599		596		(2		)	1,193
U.S. government agency securities	3,016		1		(13		)	3,004
U.S. Treasury and U.S. government agency securities										6,008		10		(9		)	6,009
Total	$	5,298	$	998	$	(22	)	$	6,274	$	7,139	$	617	$	(12	)	$	7,744

Available for Sale
MBS:
U.S. government agencies	$	1,801	$	100	$	(2	)	$	1,899
MBS: U.S. government agencies										$	271	$	18	$	—		$	289
Mutual funds	1,000		—		(42		)	958		1,000		—		(48		)	952
Total	$	2,801	$	100	$	(44	)	$	2,857	$	1,271	$	18	$	(48	)	$	1,241

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

~~Held to maturity and available for sale investment securities with unrealized losses were as follows as of~~ ~~September 30, 2015~~ ~~(dollars in thousands):~~

Less Than 12 Months 12 Months or Longer Total

Estimated
Fair
Value

Gross
Unrealized
Losses
Qty
Estimated
Fair
Value

Gross
Unrealized
Losses
Qty
Estimated
Fair
Value

Gross
Unrealized
Losses
Held to Maturity

MBS:

U.S. government agencies $ 49
$ —
4
$ 63
$ (1 ) 5
$ 112
$ (1 )
Private label residential 1
—
1
157
(12 ) 11
158
(12 )
Total
$ 50
$ —
5
$ 220
$ (13 ) 16
$ 270
$ (13 )

Available for Sale

MBS:

U.S. government agencies $ 1
$ —
1
$ 48
$ —
2
$ 49
$ —
Mutual funds —
—
—
971
(29 ) 1
971
(29 )
Total
$ 1
$ —
1
$ 1,019
$ (29 ) 3
$ 1,020
$ (29 )

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, ~~2014~~2018 (dollars in thousands):


	Less Than 12 Months						12 Months or Longer						Total					Less Than 12 Months						12 Months or Longer						Total
	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses
Held to Maturity
MBS:
U.S. government agencies	$	—	$	—		—	$	76	$	(2	)	8	$	76	$	(2	)	$	954	$	(20	)	2	$	64	$	(1	)	5	$	1,018	$	(21	)
Private label residential	9		—			1	188		(7		)	11	197		(7		)	—		—			—	50		(2		)	8	50		(2		)
U.S. government agency securities	2,989		(13		)	1	—		—			—	2,989		(13		)
U.S. Treasury and U.S. government agency securities																		7,946		(22		)	2	2,935		(61		)	1	10,881		(83		)
Total	$	2,998	$	(13	)	2	$	264	$	(9	)	19	$	3,262	$	(22	)	$	8,900	$	(42	)	4	$	3,049	$	(64	)	14	$	11,949	$	(106	)

Available for Sale
MBS:
U.S. government agencies	$	19	$	—		1	$	40	$	(2	)	1	$	59	$	(2	)	$	34	$	(1	)	1	$	—	$	—		—	$	34	$	(1	)
Mutual funds	—		—			—	958		(42		)	1	958		(42		)	—		—			—	917		(83		)	1	917		(83		)
Total	$	19	$	—		1	$	998	$	(44	)	2	$	1,017	$	(44	)	$	34	$	(1	)	1	$	917	$	(83	)	1	$	951	$	(84	)

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2017 (dollars in thousands):

~~Notes to Consolidated Financial Statements_________________________________________________________________~~



	Less Than 12 Months						12 Months or Longer						Total
	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses
Held to Maturity
MBS:
U.S. government agencies	$	—	$	—		—	$	114	$	(1	)	6	$	114	$	(1	)
Private label residential	—		—			—	85		(2		)	10	85		(2		)
U.S. Treasury and U.S. government agency securities	2,984		(9		)	1	—		—			—	2,984		(9		)
Total	$	2,984	$	(9	)	1	$	199	$	(3	)	16	$	3,183	$	(12	)

Available for Sale
Mutual funds	$	—	$	—		—	$	952	$	(48	)	1	$	952	$	(48	)
Total	$	—	$	—		—	$	952	$	(48	)	1	$	952	$	(48	)

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

The Company has evaluated the investment securities in the above tables and has determined that the decline in their value is temporary. The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities. The Company has the ability and the intent to hold the investments until the market value recovers. Furthermore, as of September 30, ~~2015,~~2018, management does not have the intent to sell any of the securities classified as available for sale where the estimated fair value is below the recorded value and believes that it is more likely than not that the Company will not have to sell such securities before a recovery of cost or(or recorded value if previously written ~~down.~~down).

~~In accordance with GAAP, the~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

The Company bifurcates OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss).

To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports. Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of September 30, ~~2015, 2014~~2018, 2017 and ~~2013:~~

2016:


	Range				Weighted		Range				Weighted
	Minimum		Maximum		Average		Minimum		Maximum		Average
September 30, 2015
September 30, 2018
Constant prepayment rate	6.00	%	15.00	%	11.49	%	6.00	%	15.00	%	12.91	%
Collateral default rate	0.16	%	14.65	%	6.08	%	—	%	10.42	%	5.03	%
Loss severity rate	3.92	%	65.00	%	39.83	%	—	%	75.00	%	37.25	%

September 30, 2014
September 30, 2017
Constant prepayment rate	6.00	%	15.00	%	10.59	%	6.00	%	15.00	%	10.40	%
Collateral default rate	0.01	%	22.34	%	7.41	%	0.03	%	10.75	%	4.84	%
Loss severity rate	0.16	%	75.17	%	45.81	%	1.00	%	62.00	%	41.75	%

September 30, 2013
September 30, 2016
Constant prepayment rate	6.00	%	15.00	%	12.33	%	6.00	%	15.00	%	11.29	%
Collateral default rate	0.73	%	22.53	%	7.84	%	0.07	%	14.45	%	5.47	%
Loss severity rate	20.48	%	75.02	%	52.69	%	1.00	%	73.00	%	42.26	%

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

The following table presents the OTTI ~~losses~~recoveries (losses) for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 (dollars in thousands):

2015 2014 2013

Held To
Maturity

Available
For Sale

Held To
Maturity

Available
For Sale
Held To Maturity Available For Sale
Total (OTTI) recoveries $ —
$ —
$ (83 ) $ 90
$ (13 ) $ (2 )
Adjustment for portion of OTTI recorded as (transferred from) other comprehensive income (before income taxes)(1) (13 ) —
52
—
(32 ) —
Net (OTTI) recoveries recognized in earnings (2) $ (13 ) $ —
$ (31 ) $ 90
$ (45 ) $ (2 )



	2018			2017			2016
	Held To Maturity			Held To Maturity			Held To Maturity
Total recoveries (OTTI)	$	73		$	38		$	(29	)
Adjustment for portion of OTTI transferred from other comprehensive income (before income taxes) (1)	(5		)	(5		)	(139		)
Net recoveries (OTTI) recognized in earnings (2)	$	68		$	33		$	(168	)

________________________


(1)	Represents OTTI related to all other factors.


(2)	Represents OTTI related to credit losses.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

The following table presents a roll forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 (dollars in thousands):


	2015			2014			2013			2018			2017			2016
Balance, beginning of year	$	1,654		$	2,084		$	2,703		$	1,301		$	1,505		$	1,576

Additions:
Credit losses for which OTTI was not previously recognized	—			2			7
Additional increases to the amount related to credit loss for which OTTI was previously recognized	13			33			45			14			18			170
Subtractions:
Realized losses previously recorded as credit losses	(91		)	(555		)	(671		)	(80		)	(171		)	(239		)
Recovery of prior credit loss	—			90			—			(82		)	(51		)	(2		)
Balance, end of year	$	1,576		$	1,654		$	2,084		$	1,153		$	1,301		$	1,505

~~During the year ended~~ ~~September 30, 2015, there were $45,000 in realized gains on sixteen available for sale investment securities. During the year ended~~ ~~September 30, 2014, there were $32,000 in realized losses on five available for sale investment securities.~~ During the year ended September 30, ~~2013, there were no realized gains or losses on available for sale investment securities. During the year ended~~ ~~September 30, 2015~~,2018, the Company recorded a ~~$91,000~~$80,000 net realized loss (as a result of investment securities being deemed worthless) on ~~fifteen~~sixteen held to maturity investment securities, all of which had been recognized previously as a credit loss. During the year ended September 30, ~~2014~~,2017, the Company recorded a ~~$465,000~~$171,000 net realized loss (as a result of investment securities being deemed worthless) on ~~fifteen~~twenty-two held to maturity ~~and~~ ~~six~~ ~~available for sale residential MBS,~~investment securities, all of which had been recognized previously as a credit loss. During the year ended September 30, ~~2013,~~2016, the Company recorded a ~~$671,000~~$239,000 net realized loss (as a result of investment securities being deemed worthless) on ~~eighteen~~twenty held to maturity ~~and five available for sale residential MBS~~investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of ~~residential MBS, treasury and agency~~investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits and FHLB collateral totaled $12,100,000 and ~~other non-profit organization deposits totaled $7,249,000 and~~ ~~$6,221,000~~$6,824,000 at September 30, ~~2015~~2018 and ~~2014~~,2017, respectively.

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

The contractual maturities of debt securities at September 30, ~~2015~~2018 are as follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.


	Held to Maturity				Available for Sale				Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year									$	7,969	$	7,946	$	—	$	—
Due after one year to five years	$	6,006	$	6,083	$	10	$	10	3,965		3,884		—		—
Due after five years to ten years	22		22		—		—		67		68		—		—
Due after ten years	1,885		2,789		377		411		809		1,366		231		237
Total	$	7,913	$	8,894	$	387	$	421	$	12,810	$	13,264	$	231	$	237

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

Note 4 - Loans Receivable and Allowance for Loan Losses

Loans receivable ~~and loans held for sale~~ by portfolio segment consisted of the following at September 30, ~~2015~~2018 and ~~2014~~2017 (dollars in thousands):


	2015		2014		2018		2017
Mortgage loans:
One- to four-family	$	116,664	$	97,635	$	115,941	$	118,147
Multi-family	52,322		46,206		61,928		58,607
Commercial	291,216		294,354		345,113		328,927
Construction – custom and owner/builder	62,954		59,752		119,555		117,641
Construction – speculative one- to four-family	6,668		2,577		15,433		9,918
Construction – commercial	20,728		3,310		39,590		19,630
Construction – multi-family	20,570		2,840		10,740		21,327
Construction – land development					3,040		—
Land	26,140		29,589		25,546		23,910
Total mortgage loans	597,262		536,263		736,886		698,107
Consumer loans:
Home equity and second mortgage	34,157		34,921		37,341		38,420
Other	4,669		4,699		3,515		3,823
Total consumer loans	38,826		39,620		40,856		42,243

Commercial business loans	33,763		30,559		43,053		44,444
Total loans receivable	669,851		606,442		820,795		784,794
Less:
Undisbursed portion of construction loans in process	53,457		29,416		83,237		82,411
Deferred loan origination fees	2,193		1,746
Deferred loan origination fees, net					2,637		2,466
Allowance for loan losses	9,924		10,427		9,530		9,553
	65,574		41,589		95,404		94,430
Loans receivable, net	604,277		564,853		$	725,391	$	690,364
Loans held for sale (one- to four-family)	3,051		899
Total loans receivable and loans held for sale, net	$	607,328	$	565,752

Significant Concentrations of Credit Risk

Most of the Company’s lending activity is with customers located in the state of Washington and involves real estate. At September 30, 2018, the Company had $774,227,000 (including $83,237,000 of undisbursed construction loans in process) in loans secured by real estate, which represented 94.3% of total loans receivable. The real estate loan portfolio is primarily secured by one- to four-family properties, multi-family properties, land, and a variety of commercial real estate property types. At September 30, 2018, there were no concentrations of real estate loans to a specific industry or secured by a specific collateral type that equaled or exceeded 20% of the Company’s total loan portfolio, other than loans secured by one-to four-

family properties. The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions in the region and the impact of those changes on the real estate market. The Company typically originates real estate loans with loan-to-value ratios of no greater than 90%. Collateral and/or guarantees are required for all loans.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

Certain related parties of the Company, principally Bank directors and officers, are loan customers of the Bank in the ordinary course of business. Such related party loans were performing according to their repayment terms at September 30, ~~2015~~2018 and

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

~~2014.~~ 2017. Activity in related party loans during the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 was as follows (dollars in thousands):


	2015			2014			2013			2018			2017			2016
Balance, beginning of year	$	927		$	1,095		$	1,113		$	741		$	230		$	630
New loans or advances	112			40			276
New loans or borrowings										368			592			66
Repayments and reclassifications	(409		)	(208		)	(294		)	(990		)	(81		)	(466		)
Balance, end of year	$	630		$	927		$	1,095		$	119		$	741		$	230

Loan Segment Risk Characteristics

The Company believes that its loan classes are the same as its loan segments.

One- To Four-Family Residential Lending: The Company originates both fixed-rate and adjustable-rate loans secured by one- to four-family residences. A portion of the fixed-rate one- to four-family loans are sold in the secondary market for asset/liability management purposes and to generate non-interest income. The Company’s lending policies generally limit the maximum loan-to-value on one- to four-family loans to 90% of the lesser of the appraised value or the purchase price. However, the Company usually obtains private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the property.

Multi-Family Lending: The Company originates loans secured by multi-family dwelling units (more than four units). Multi-family lending generally affords the Company an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by multi-family properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or economy. The Company attempts to minimize these risks by scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.

Commercial Mortgage Lending: The Company originates commercial real estate loans secured by properties such as office buildings, retail/wholesale facilities, motels, restaurants, mini-storage facilities and other commercial properties. Commercial real estate lending generally affords the Company an opportunity to receive interest at higher rates than those available from one- to four-family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial properties are often dependent on the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or economy. The Company attempts to mitigate these risks by generally limiting the maximum loan-to-value ratio to 80% and scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.

Construction Lending: The Company currently originates the following types of construction loans: custom construction loans, owner/builder construction loans, speculative construction loans, ~~(on a limited basis),~~ commercial real estate construction loans, ~~and~~ multi-family construction ~~loans. The Company is not currently originating~~loans and land development loans.

Construction lending affords the Company the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending. Construction lending, however, is generally considered to involve a higher degree of risk than ~~one-to~~one- to four family residential lending because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimated cost of construction proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to complete the project. If the estimate of value upon completion proves to be inaccurate, the Company may be confronted with a project whose value is insufficient to assure full repayment, and the Company may incur a loss. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to construct homes for which no purchaser has been identified carry more risk because the payoff for the loan depends on the builder’s ability to sell the property prior to the time

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

that the construction loan is due. The Company attempts to mitigate these risks by adhering to its underwriting policies, disbursement procedures and monitoring practices.

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

Construction Lending – Custom and Owner/Builder: Custom construction loans are made to home builders who, at the time of construction, have a signed contract with a home buyer who has a commitment to purchase the finished home. Owner/builder construction loans are originated to home owners rather than home builders and are typically refinanced into permanent loans at the completion of construction.

Construction Lending – Speculative One- To Four-Family: Speculative one-to four-family construction loans are made to home builders and are termed “speculative” because the home builder does not have, at the time of the loan origination, a signed contract with a home buyer who has a commitment for permanent financing with the Company or another lender for the finished home. The home buyer may be identified either during or after the construction period. ~~The Company is currently originating speculative one-to four-family construction loans on a limited basis.~~

Construction Lending – Commercial: Commercial construction loans are originated to construct properties such as office buildings, hotels, retail rental space and mini-storage facilities.

Construction Lending – Multi-Family: Multi-family construction loans are originated to construct apartment buildings and condominium projects.

Construction Lending –- Land Development: ~~The Company historically~~Land development loans are originated ~~loans~~ to real estate developers for the purpose of developing residential subdivisions. The Company is ~~not~~ currently originating ~~any~~ land development ~~loans.~~loans on a limited basis.

Land Lending: The Company ~~has historically originated~~originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to sell as improved lots. ~~Currently, the Company is originating new land loans on a limited basis.~~ Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because these loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default or foreclosure, the Company may be confronted with a property value which is insufficient to assure full repayment. The Company attempts to minimize this risk by generally limiting the maximum loan-to-value ratio on land loans to 75%.

Consumer Lending – Home Equity and Second ~~Mortgages:~~Mortgage: The Company originates home equity lines of credit and second mortgage loans. Home equity lines of credit and second mortgage loans have a greater credit risk than one- to four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Company. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the collateral and the credit-worthiness of the borrower.

Consumer Lending – Other: The Company originates other consumer loans, which include automobile loans, boat loans, motorcycle loans, recreational vehicle loans, savings account loans and unsecured loans. Other consumer loans generally have shorter terms to maturity than mortgage loans. Other consumer loans generally involve a greater degree of risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. ��In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the credit-worthiness of the borrower.

Commercial Business Lending: The Company originates commercial business loans which are generally secured by business equipment, accounts receivable, inventory or other property. The Company also generally obtains personal guarantees from the business owners based on a review of personal financial statements. Commercial business lending generally involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment, because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use. Accordingly, the repayment of a commercial business loan depends primarily on the credit-worthiness of the borrower (and any guarantors), while the liquidation of collateral is a secondary and potentially insufficient source of repayment. The Company attempts to mitigate

these risks by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of the borrowers and the guarantors.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

Allowance for Loan Losses

The following table sets forth information for the year ended September 30, ~~2015~~2018 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):


	Beginning Allowance		Provision for (Recapture of)			Charge- offs			Recoveries		Ending Allowance		Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,650	$	(214	)	$	(220	)	$	264	$	1,480
One- to four-family													$	1,082	$	4		$	—		$	—	$	1,086
Multi-family	387		2			—			3		392		447		(14		)	—			—		433
Commercial	4,836		(775		)	—			4		4,065		4,184		92			(28		)	—		4,248
Construction – custom and owner/builder	450		1			—			—		451		699		(28		)	—			—		671
Construction – speculative one- to four-family	52		69			—			2		123		128		37			—			13		178
Construction – commercial	78		348			—			—		426		303		260			—			—		563
Construction – multi-family	25		(867		)	—			1,125		283		173		(38		)	—			—		135
Construction – land development													—		49			—			—		49
Land	1,434		(305		)	(145		)	37		1,021		918		(71		)	(22		)	19		844
Consumer loans:
Home equity and second mortgage	879		242			(50		)	2		1,073		983		(334		)	—			—		649
Other	176		16			(9		)	4		187		121		1			(6		)	1		117
Commercial business loans	460		(42		)	—			5		423		515		42			—			—		557
Total	$	10,427	$	(1,525	)	$	(424	)	$	1,446	$	9,924	$	9,553	$	—		$	(56	)	$	33	$	9,530

The following table sets forth information for the year ended September 30, ~~2014~~2017 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):


	Beginning Allowance		Provision for (Recapture of)			Charge- offs			Recoveries		Ending Allowance		Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,449	$	1,113		$	(1,106	)	$	194	$	1,650
One- to four-family													$	1,239	$	(178	)	$	—		$	21	$	1,082
Multi-family	749		(362		)	—			—		387		473		(26		)	—			—		447
Commercial	5,275		20			(463		)	4		4,836		4,384		(1,248		)	(13		)	1,061		4,184
Construction – custom and owner/builder	262		188			—			—		450		619		80			—			—		699
Construction – speculative one- to four-family	96		(44		)	—			—		52		130		(8		)	—			6		128
Construction – commercial	56		22			—			—		78		268		35			—			—		303
Construction – multi-family	—		(226		)	—			251		25		316		(143		)	—			—		173
Construction – land development	—		(287		)	—			287		—
Land	1,940		(664		)	(260		)	418		1,434		820		189			(110		)	19		918
Consumer loans:
Home equity and second mortgage	782		137			(47		)	7		879		939		44			—			—		983
Other	200		(20		)	(6		)	2		176		156		(28		)	(10		)	3		121
Commercial business loans	327		123			(14		)	24		460		482		33			—			—		515
Total	$	11,136	$	—		$	(1,896	)	$	1,187	$	10,427	$	9,826	$	(1,250	)	$	(133	)	$	1,110	$	9,553

~~The following table sets forth information for the year ended September 30, 2013 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

The following table sets forth information for the year ended September 30, 2016 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):


	Beginning Allowance		Provision for (Recapture of)			Charge- offs			Recoveries		Ending Allowance		Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,558	$	565		$	(769	)	$	95	$	1,449
One- to four-family													$	1,480	$	(225	)	$	(72	)	$	56	$	1,239
Multi-family	1,156		(407		)	—			—		749		392		81			—			—		473
Commercial	4,247		1,640			(667		)	55		5,275		4,065		528			(209		)	—		4,384
Construction – custom and owner/builder	386		(124		)	(26		)	26		262		451		168			—			—		619
Construction – speculative one- to four-family	128		(32		)	—			—		96		123		5			—			2		130
Construction – commercial	429		(373		)	—			—		56		426		(158		)	—			—		268
Construction – multi-family	—		116			(116		)	—		—		283		(148		)	—			181		316
Construction – land development	—		(129		)	(17		)	146		—
Land	2,392		1,801			(2,307		)	54		1,940		1,021		(164		)	(61		)	24		820
Consumer loans:
Home equity and second mortgage	759		202			(184		)	5		782		1,073		(116		)	(18		)	—		939
Other	254		(40		)	(14		)	—		200		187		(25		)	(8		)	2		156
Commercial business loans	516		(294		)	—			105		327		423		54			—			5		482
Total	$	11,825	$	2,925		$	(4,100	)	$	486	$	11,136	$	9,924	$	—		$	(368	)	$	270	$	9,826

The following table presents information on ~~the~~ loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, ~~2015~~2018 (dollars in thousands):


	Allowance for Loan Losses						Recorded Investment in Loans						Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Mortgage loans:
One- to four-family	$	307	$	1,173	$	1,480	$	4,291	$	115,424	$	119,715	$	—	$	1,086	$	1,086	$	1,054	$	114,887	$	115,941
Multi-family	16		376		392		4,037		48,285		52,322		—		433		433		—		61,928		61,928
Commercial	265		3,800		4,065		12,852		278,364		291,216		—		4,248		4,248		2,446		342,667		345,113
Construction – custom and owner/ builder	—		451		451		—		36,192		36,192		—		671		671		—		67,024		67,024
Construction – speculative one- to four-family	—		123		123		—		3,781		3,781		—		178		178		—		7,107		7,107
Construction – commercial	—		426		426		—		12,200		12,200		—		563		563		—		23,440		23,440
Construction – multi-family	—		283		283		—		5,290		5,290		—		135		135		—		5,983		5,983
Construction – land development													—		49		49		—		1,567		1,567
Land	37		984		1,021		2,305		23,835		26,140		34		810		844		243		25,303		25,546
Consumer loans:
Home equity and second mortgage	362		711		1,073		910		33,247		34,157		—		649		649		359		36,982		37,341
Other	24		163		187		36		4,633		4,669		—		117		117		—		3,515		3,515
Commercial business loans	—		423		423		—		33,763		33,763		63		494		557		170		42,883		43,053
Total	$	1,011	$	8,913	$	9,924	$	24,431	$	595,014	$	619,445	$	97	$	9,433	$	9,530	$	4,272	$	733,286	$	737,558

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017


	Allowance for Loan Losses						Recorded Investment in Loans						Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Mortgage loans:
One- to four-family	$	709	$	941	$	1,650	$	7,011	$	91,523	$	98,534	$	—	$	1,082	$	1,082	$	1,443	$	116,704	$	118,147
Multi-family	39		348		387		3,317		42,889		46,206		—		447		447		—		58,607		58,607
Commercial	797		4,039		4,836		17,188		277,166		294,354		26		4,158		4,184		3,873		325,054		328,927
Construction – custom and owner/ builder	—		450		450		—		34,553		34,553		—		699		699		—		63,538		63,538
Construction – speculative one- to four-family	—		52		52		—		1,204		1,204		—		128		128		—		4,639		4,639
Construction – commercial	—		78		78		—		2,887		2,887		—		303		303		—		11,016		11,016
Construction – multi-family	—		25		25		—		419		419		—		173		173		—		6,912		6,912
Land	300		1,134		1,434		5,158		24,431		29,589		125		793		918		1,119		22,791		23,910
Consumer loans:
Home equity and second mortgage	162		717		879		797		34,124		34,921		325		658		983		557		37,863		38,420
Other	—		176		176		3		4,696		4,699		—		121		121		—		3,823		3,823
Commercial business loans	—		460		460		—		30,559		30,559		—		515		515		—		44,444		44,444
Total	$	2,007	$	8,420	$	10,427	$	33,474	$	544,451	$	577,925	$	476	$	9,077	$	9,553	$	6,992	$	695,391	$	702,383

The following table presents an ~~age~~ analysis ~~of past due status~~ of loans by aging category and portfolio segment at September 30, ~~2015~~2018 (dollars in thousands):


	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans		30-59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	—	$	425	$	2,368	$	—	$	2,793	$	116,922	$	119,715	$	557	$	—	$	545	$	—	$	1,102	$	114,839	$	115,941
Multi-family	—		—		760		—		760		51,562		52,322		—		—		—		—		—		61,928		61,928
Commercial	—		—		1,016		—		1,016		290,200		291,216		574		—		—		—		574		344,539		345,113
Construction – custom and owner/ builder	—		345		—		—		345		35,847		36,192		—		—		—		—		—		67,024		67,024
Construction – speculative one- to four-family	—		—		—		—		—		3,781		3,781		—		—		—		—		—		7,107		7,107
Construction – commercial	—		—		—		—		—		12,200		12,200		—		—		—		—		—		23,440		23,440
Construction – multi-family	—		—		—		—		—		5,290		5,290		—		—		—		—		—		5,983		5,983
Construction – land development															—		—		—		—		—		1,567		1,567
Land	15		32		1,558		—		1,605		24,535		26,140		40		—		243		—		283		25,263		25,546
Consumer loans:
Home equity and second mortgage	146		14		303		151		614		33,543		34,157		42		—		359		—		401		36,940		37,341
Other	—		—		35		—		35		4,634		4,669		10		16		—		—		26		3,489		3,515
Commercial business loans	—		—		—		—		—		33,763		33,763		—		—		170		—		170		42,883		43,053
Total	$	161	$	816	$	6,040	$	151	$	7,168	$	612,277	$	619,445	$	1,223	$	16	$	1,317	$	—	$	2,556	$	735,002	$	737,558

__________________


(1)	Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

The following table presents an ~~age~~ analysis ~~of past due status~~ of loans by aging category and portfolio segment at September 30, ~~2014~~2017 (dollars in thousands):


	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans		30-59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	—	$	577	$	4,376	$	—	$	4,953	$	93,581	$	98,534	$	193	$	—	$	874	$	—	$	1,067	$	117,080	$	118,147
Multi-family	—		—		—		—		—		46,206		46,206		—		—		—		—		—		58,607		58,607
Commercial	—		695		1,468		812		2,975		291,379		294,354		—		107		213		—		320		328,607		328,927
Construction – custom and owner/ builder	—		156		—		—		156		34,397		34,553		—		—		—		—		—		63,538		63,538
Construction – speculative one- to four-family	—		—		—		—		—		1,204		1,204		—		—		—		—		—		4,639		4,639
Construction – commercial	—		—		—		—		—		2,887		2,887		—		—		—		—		—		11,016		11,016
Construction – multi-family	—		—		—		—		—		419		419		—		—		—		—		—		6,912		6,912
Land	357		27		4,564		—		4,948		24,641		29,589		—		—		566		—		566		23,344		23,910
Consumer loans:
Home equity and second mortgage	62		44		498		—		604		34,317		34,921		56		—		258		—		314		38,106		38,420
Other	42		—		3		—		45		4,654		4,699		36		—		—		—		36		3,787		3,823
Commercial business loans	21		—		—		—		21		30,538		30,559		110		—		—		—		110		44,334		44,444
Total	$	482	$	1,499	$	10,909	$	812	$	13,702	$	564,223	$	577,925	$	395	$	107	$	1,911	$	—	$	2,413	$	699,970	$	702,383

___________________

(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

Credit Quality Indicators

The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential. The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral. The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:

Pass: Pass loans are defined as those loans that meet acceptable quality underwriting standards.

Watch: Watch loans are defined as those loans that still exhibit acceptable quality but have some concerns that justify greater attention. If these concerns are not corrected, a potential for further adverse categorization exists. These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.

Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan. ~~Assets in this category do not expose the Company to sufficient risk to warrant a substandard classification.~~

Substandard: Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

Loss: Loans in this classification are considered uncollectible and of such little value that continuance as an asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At September 30, ~~2015~~2018 and ~~2014,~~2017, there were no loans classified as loss.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

The following table ~~lists the loan credit risk grades utilized~~presents an analysis of loans by ~~the Company as~~ credit quality ~~indicators, by~~indicator and portfolio segment at September 30, ~~2015~~2018 (dollars in thousands).


	Loan Grades										Loan Grades
	Pass		Watch		Special Mention		Substandard		Total		Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	114,402	$	653	$	1,339	$	3,321	$	119,715	$	113,148	$	882	$	581	$	1,330	$	115,941
Multi-family	45,249		—		6,313		760		52,322		61,928		—		—		—		61,928
Commercial	270,685		8,040		6,803		5,688		291,216		334,908		8,375		988		842		345,113
Construction – custom and owner / builder	36,192		—		—		—		36,192		66,720		304		—		—		67,024
Construction – speculative one- to four-family	3,781		—		—		—		3,781		7,107		—		—		—		7,107
Construction – commercial	12,200		—		—		—		12,200		23,440		—		—		—		23,440
Construction – multi-family	5,290		—		—		—		5,290		5,983		—		—		—		5,983
Construction – land development											1,567		—		—		—		1,567
Land	20,964		1,105		2,078		1,993		26,140		22,810		988		1,505		243		25,546
Consumer loans:
Home equity and second mortgage	32,172		664		404		917		34,157		36,697		82		—		562		37,341
Other	4,631		—		—		38		4,669		3,480		—		—		35		3,515
Commercial business loans	33,635		49		79		—		33,763		42,812		22		49		170		43,053
Total	$	579,201	$	10,511	$	17,016	$	12,717	$	619,445	$	720,600	$	10,653	$	3,123	$	3,182	$	737,558


	Loan Grades										Loan Grades
	Pass		Watch		Special Mention		Substandard		Total		Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	90,340	$	1,749	$	1,045	$	5,400	$	98,534	$	115,481	$	422	$	644	$	1,600	$	118,147
Multi-family	37,336		1,697		6,410		763		46,206		56,857		—		1,750		—		58,607
Commercial	266,467		5,819		15,946		6,122		294,354		318,717		6,059		3,540		611		328,927
Construction – custom and owner / builder	34,553		—		—		—		34,553		63,210		328		—		—		63,538
Construction – speculative one- to four-family	1,204		—		—		—		1,204		4,639		—		—		—		4,639
Construction – commercial	2,887		—		—		—		2,887		11,016		—		—		—		11,016
Construction – multi-family	419		—		—		—		419		6,912		—		—		—		6,912
Land	21,084		114		3,586		4,805		29,589		20,528		1,022		1,794		566		23,910
Consumer loans:
Home equity and second mortgage	33,207		724		27		963		34,921		37,828		152		—		440		38,420
Other	4,657		39		—		3		4,699		3,787		—		—		36		3,823
Commercial business loans	30,355		112		92		—		30,559		43,416		973		55		—		44,444
Total	$	522,509	$	10,254	$	27,106	$	18,056	$	577,925	$	682,391	$	8,956	$	7,783	$	3,253	$	702,383

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, ~~2015~~2018 (dollars in thousands):


	September 30, 2015						For the Year Ended September 30, 2015						September 30, 2018						For the Year Ended September 30, 2018
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized		Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,321	$	1,546	$	—	$	1,919	$	25	$	25	$	1,054	$	1,200	$	—	$	1,422	$	80	$	69
Multi-family	760		791		—		570		3		3
Commercial	7,199		8,259		—		9,078		521		412		2,446		2,446		—		2,389		121		93
Construction – custom and owner / builder	—		—		—		118		—		—
Land													90		195		—		283		11		10
Consumer loans:
Home equity and second mortgage													359		359		—		210		3		3
Subtotal													3,949		4,200		—		4,304		215		175
With an allowance recorded:
Mortgage loans:
One- to four-family													—		—		—		9		—		—
Commercial													—		—		—		760		28		21
Land	1,614		2,150		—		1,028		25		20		153		153		34		383		9		8
Consumer loans:
Home equity and second mortgage	165		381		—		270		—		—		—		—		—		310		16		13
Commercial business loans	—		6		—		—		—		—		170		170		63		141		—		—
Subtotal	11,059		13,133		—		12,983		574		460		323		323		97		1,603		53		42
With an allowance recorded:
Total:
Mortgage loans:
One- to four-family	2,970		2,970		307		3,833		149		112		1,054		1,200		—		1,431		80		69
Multi-family	3,277		3,277		16		3,291		184		137
Commercial	5,653		5,653		265		3,475		202		152		2,446		2,446		—		3,149		149		114
Construction – custom and owner / builder	—		—		—		17		—		—
Land	691		691		37		3,298		32		27		243		348		34		666		20		18
Consumer loans:
Home equity and second mortgage	745		745		362		516		18		15		359		359		—		520		19		16
Other	36		36		24		28		—		—
Subtotal	13,372		13,372		1,011		14,458		585		443
Total:
Mortgage loans:
One- to four-family	4,291		4,516		307		5,752		174		137
Multi-family	4,037		4,068		16		3,861		187		140
Commercial	12,852		13,912		265		12,553		723		564
Construction – custom and owner / builder	—		—		—		135		—		—
Land	2,305		2,841		37		4,326		57		47
Consumer loans:
Home equity and second mortgage	910		1,126		362		786		18		15
Other	36		36		24		28		—		—
Commercial business loans	—		6		—		—		—		—		170		170		63		141		—		—
Total	$	24,431	$	26,505	$	1,011	$	27,441	$	1,159	$	903	$	4,272	$	4,523	$	97	$	5,907	$	268	$	217

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, ~~2014~~2017 (dollars in thousands):


	September 30, 2014						For the Year Ended September 30, 2014						September 30, 2017						For the Year Ended September 30, 2017
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized		Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	2,647	$	3,301	$	—	$	3,763	$	—	$	—	$	1,443	$	1,589	$	—	$	1,108	$	68	$	62
Multi-family	—		857		—		—		—		—
Commercial	11,057		14,184		—		7,859		414		325		1,967		1,967		—		3,901		188		143
Construction – multi-family	—		—		—		57		—		—
Construction – land development	—		—		—		141		—		—
Construction – custom and owner / builder													—		—		—		147		7		7
Land	1,079		1,674		—		1,044		12		10		297		410		—		512		8		6
Consumer loans:
Home equity and second mortgage	351		574		—		276		—		—		123		123		—		284		—		—
Other	3		3		—		7		—		—
Commercial business loans	—		10		—		22		—		—		—		—		—		11		—		—
Subtotal	15,137		20,603		—		13,169		426		335		3,830		4,089		—		5,963		271		218
With an allowance recorded:
Mortgage loans:
One- to four-family	4,364		4,364		709		4,140		146		110		—		—		—		721		50		38
Multi-family	3,317		3,317		39		4,157		220		165
Commercial	6,131		6,131		797		10,083		541		423		1,906		1,906		26		3,326		182		144
Construction – speculative one- to four-family	—		—		—		275		11		7
Land	4,079		4,079		300		3,780		18		16		822		881		125		666		35		29
Consumer loans:
Home equity and second mortgage	446		446		162		404		16		12		434		434		325		530		29		26
Other													—		—		—		17		—		—
Subtotal	18,337		18,337		2,007		22,839		952		733		3,162		3,221		476		5,260		296		237
Total:
Mortgage loans:
One- to four-family	7,011		7,665		709		7,903		146		110		1,443		1,589		—		1,829		118		100
Multi-family	3,317		4,174		39		4,157		220		165
Commercial	17,188		20,315		797		17,942		955		748		3,873		3,873		26		7,227		370		287
Construction – speculative one- to four-family	—		—		—		275		11		7
Construction – multi-family	—		—		—		57		—		—
Construction – land development	—		—		—		141		—		—
Construction – custom and owner / builder													—		—		—		147		7		7
Land	5,158		5,753		300		4,824		30		26		1,119		1,291		125		1,178		43		35
Consumer loans:
Home equity and second mortgage	797		1,020		162		680		16		12		557		557		325		814		29		26
Other	3		3		—		7		—		—		—		—		—		17		—		—
Commercial business loans	—		10		—		22		—		—		—		—		—		11		—		—
Total	$	33,474	$	38,940	$	2,007	$	36,008	$	1,378	$	1,068	$	6,992	$	7,310	$	476	$	11,223	$	567	$	455

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, ~~2013~~2016 (dollars in thousands):


	September 30, 2013						For the Year Ended September 30, 2013						September 30, 2016						For the Year Ended September 30, 2016
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized		Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	5,342	$	5,775	$	—	$	2,661	$	18	$	13	$	914	$	1,060	$	—	$	1,349	$	38	$	38
Multi-family	—		982		—		473		3		3		—		—		—		152		—		—
Commercial	4,879		8,005		—		8,781		322		267		7,566		8,685		—		7,784		421		330
Construction – custom and owner / builder	—		—		—		97		—		—		367		367		—		73		—		—
Construction – speculative one- to four-family	—		—		—		65		—		—
Construction – multi-family	143		608		—		293		—		—
Construction – land development	515		3,279		—		534		—		—
Land	1,188		2,133		—		3,519		9		8		693		1,101		—		839		16		12
Consumer loans:
Home equity and second mortgage	380		556		—		266		—		—		402		593		—		264		—		—
Other	6		6		—		8		—		—
Commercial business loans	—		33		—		—		—		—		—		—		—		15		—		—
Subtotal	12,453		21,377		—		16,697		352		291		9,942		11,806		—		10,476		475		380
With an allowance recorded:
Mortgage loans:
One- to four-family	3,642		3,726		600		4,397		91		68		1,350		1,350		70		1,921		118		89
Multi-family	5,184		5,184		334		5,960		301		230		—		—		—		655		—		—
Commercial	14,631		15,297		1,763		9,052		526		420		3,743		3,743		413		4,181		275		215
Construction – custom and owner / builder	—		—		—		60		—		—
Construction – speculative one- to four-family	687		687		88		695		29		16
Land	1,203		1,226		234		1,962		27		27		575		575		53		604		39		32
Consumer loans:
Home equity and second mortgage	299		299		57		352		16		12		597		597		227		709		44		40
Other													30		30		13		33		2		2
Subtotal	25,646		26,419		3,076		22,478		990		773		6,295		6,295		776		8,103		478		378
Total:
Mortgage loans:
One- to four-family	8,984		9,501		600		7,058		109		81		2,264		2,410		70		3,270		156		127
Multi-family	5,184		6,166		334		6,433		304		233		—		—		—		807		—		—
Commercial	19,510		23,302		1,763		17,833		848		687		11,309		12,428		413		11,965		696		545
Construction – custom and owner / builder	—		—		—		157		—		—		367		367		—		73		—		—
Construction – speculative one- to four-family	687		687		88		760		29		16
Construction – multi-family	143		608		—		293		—		—
Construction – land development	515		3,279		—		534		—		—
Land	2,391		3,359		234		5,481		36		35		1,268		1,676		53		1,443		55		44
Consumer loans:
Home equity and second mortgage	679		855		57		618		16		12		999		1,190		227		973		44		40
Other	6		6		—		8		—		—		30		30		13		33		2		2
Commercial business loans	—		33		—		—		—		—		—		—		—		15		—		—
Total	$	38,099	$	47,796	$	3,076	$	39,175	$	1,342	$	1,064	$	16,237	$	18,101	$	776	$	18,579	$	953	$	758

~~Troubled debt restructured loans are considered impaired loans~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and ~~are individually evaluated for impairment. Troubled debt restructured loans can be classified as either accrual or non-accrual.~~ Subsidiary

September 30, 2018 and 2017

The Company had ~~$13,718,000~~$3,278,000 in ~~troubled debt restructured loans~~TDRs included in impaired loans at September 30, ~~2015~~2018 and had no commitments to lend additional funds on these loans. The Company had $~~19,088,000~~3,595,000 in ~~troubled debt restructured loans~~TDRs included in impaired loans at September 30, ~~2014~~2017 and had no commitments to lend additional funds on these loans. The allowance for loan losses allocated to ~~troubled debt restructured loans~~TDRs at September 30, ~~2015~~2018 and ~~2014~~2017 was ~~$310,000~~$97,000 and ~~$994,000,~~$10,000, respectively.

The following tables set forth information with respect to the Company’s ~~troubled debt restructured loans~~TDRs by interest accrual status as of September 30, ~~2015~~2018 and ~~2014~~2017 (dollars in thousands):



	2018
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	509	$	—	$	509
Commercial	2,446		—		2,446
Land	—		153		153
Commercial business loans	—		170		170
Total	$	2,955	$	323	$	3,278


	2015						2017
	Accruing		Non- Accrual		Total		Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,929	$	826	$	2,755	$	569	$	—	$	569
Multi-family	3,277		—		3,277
Commercial	6,237		—		6,237		2,219		—		2,219
Land	747		255		1,002		554		253		807
Consumer loans:
Home equity and second mortgage	295		152		447
Total	$	12,485	$	1,233	$	13,718	$	3,342	$	253	$	3,595

2014
Accruing
Non-
Accrual
Total
Mortgage loans:
One- to four-family $ 2,634
$ 233
$ 2,867
Multi-family 3,317
—
3,317
Commercial 9,960
1,468
11,428
Land 594
431
1,025
Consumer loans:

Home equity and second mortgage 299
152
451
Total
$ 16,804
$ 2,284
$ 19,088

There were three new TDRs for the year ended September 30, 2018. There were no new TDRs during the years ended September 30, 2017 and 2016. The following ~~tables set~~table sets forth information with respect to the ~~Company’s loans,~~Company's TDRs, by portfolio segment, during the year ended September 30, 2018 (dollars in thousands):



2018	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
Land loans (1)	1	$	244	$	155	$	153
Commercial business loans (2)	2	183		183		170
Total	3	$	427	$	338	$	323

(1) Modification was a result of a reduction in principal balance.
(2) Modifications were a result of reduction in monthly payment amounts.

There were no TDRs for which ~~were modified in troubled debt restructurings~~there was a payment default within the first 12 months of modification during the years ended September 30, ~~2015, 2014 and 2013 (dollars in thousands):~~2018, 2017 or 2016.

2015
Number of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post- Modification
Outstanding
Recorded
Investment

End of
Period
Balance
One- to four-family (1) 1 $ 48
$ 48
$ 48
Total 1 $ 48
$ 48
$ 48

~~___________________________~~

~~(1) Modification was a result of a reduction in the stated interest rate.~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

2014
Number of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post- Modification
Outstanding
Recorded
Investment

End of
Period
Balance
One-to four-family (1) 1
$ 42
$ 42
$ 42
Land (1) 1
157
157
153
Total 2
$ 199
$ 199
$ 195


~~(1)~~	~~Modifications were a result of a reduction in the stated interest rate.~~

2013
Number of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post- Modification
Outstanding
Recorded
Investment

End of
Period
Balance
One-to four-family (1) 2 $ 353
$ 353
$ 350
Commercial (2) 2 2,327
2,327
2,318
Total 4 $ 2,680
$ 2,680
$ 2,668


~~(1)~~	~~Modifications were a result of a combination of changes (i.e., a reduction in the stated interest rate and an extension of the maturity at an interest rate below current market).~~


~~(2)~~	~~Modifications were a result of reductions in the stated interest rates.~~

~~No troubled debt restructured loans were recorded that subsequently defaulted during the years ended September 30, 2015, 2014 or 2013.~~

~~Note 5 - MSRs~~

Loans serviced for Freddie Mac are not included in the accompanying consolidated balance sheets. The principal amounts of those loans at September 30, 2015, 2014 and 2013 were $331,494,000, $327,594,000 and $325,726,000, respectively.

~~The following is an analysis of the changes in MSRs for the years ended September 30, 2015, 2014 and 2013 (dollars in thousands):~~

2015
2014
2013
Balance, beginning of year $ 1,684
$ 2,266
$ 2,011
Additions 635
387
728
Amortization (841 ) (969 ) (948 )
Recovery of valuation allowance —
—
475
Balance, end of year $ 1,478
$ 1,684
$ 2,266

At September 30, 2015, 2014 and 2013, the estimated fair value of MSRs totaled $3,095,000, $3,204,000 and $3,129,000, respectively. The MSRs' fair values for 2015, 2014 and 2013 were estimated using discounted cash flow analyses with average discount rates of 9.52%, 10.04% and 10.04%, respectively, and average prepayment speed factors of 174, 164 and

~~177, respectively. At September 30, 2015, 2014 and 2013 there were no valuation allowances on MSRs.~~

~~100~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

Note 65 - Premises and Equipment

Premises and equipment consisted of the following at September 30, ~~2015~~2018 and ~~2014~~2017 (dollars in thousands):


	2015		2014		2018		2017
Land	$	3,944	$	4,085	$	4,400	$	4,402
Buildings and improvements	17,664		17,546		20,636		20,167
Furniture and equipment	8,071		8,332		8,026		7,935
Property held for future expansion	110		110		129		129
Construction and purchases in progress	96		153		566		149
	29,885		30,226		33,757		32,782
Less accumulated depreciation	13,031		12,547		14,804		14,364
Premises and equipment, net	$	16,854	$	17,679	$	18,953	$	18,418

The Company leases certain premises under operating lease ~~agreeements.~~agreements. Certain leases contain renewal options from five to ten years and escalation clauses. Total rental expense was ~~$280,000, $267,000~~$206,000, $275,000 and ~~$250,000~~$287,000 for the years ended September 30, ~~2015, 2014,~~2018, 2017 and ~~2013,~~2016, respectively, which ~~was~~is included in premises and equipment expense in the accompanying consolidated statements of income.

Minimum net rental commitments under non-cancellable leases having an original or remaining term of more than one year for fiscal years ending subsequent to September 30, ~~2015~~2018 are as follows (dollars in thousands):

2016 $ 225
2017 96
2018 96
2019 96
2020 96
Thereafter 24
Total minimum payments required $ 633



2019	$	201
2020	165
2021	124
Total minimum payments required	$	490

~~Certain leases contain renewal options from five to ten years and escalation clauses based on increases in property taxes and other costs.~~

Note 76 – OREO and Other Repossessed Assets

The following table presents the activity related to OREO and other repossessed assets for the years ended September 30, ~~2015~~2018 and ~~2014~~2017 (dollars in thousands):


	2015					2014					2018					2017
	Amount			Number		Amount			Number		Amount			Number		Amount			Number
Balance, beginning of year	$	9,092		40		$	11,720		47		$	3,301		16		$	4,117		23
Additions to OREO and other repossessed assets	2,120			12		6,108			29		324			2		751			4
Capitalized improvements	3			—		47			—
Lower of cost or estimated fair value losses	(644		)	—		(605		)	—
Disposition of OREO and other repossessed assets	(2,717		)	(17	)	(8,178		)	(36	)
Writedowns											(248		)	—		(42		)	—
Sales of OREO and other repossessed assets											(1,464		)	(6	)	(1,525		)	(11	)
Balance, end of year	$	7,854		35		$	9,092		40		$	1,913		12		$	3,301		16

At September 30, ~~2015,~~2018, OREO and other repossessed assets consisted of 3412 OREO properties in Washington, with balances ranging from $13,000 to $874,000. At September 30, 2017, OREO and other repossessed assets consisted of 15 OREO properties and one other repossessed asset in Washington, with balances ranging from ~~$6,000~~$13,000 to ~~$1,091,000. At September 30, 2014, OREO consisted of 40 OREO properties in Washington, with balances ranging from $6,000 to $1,203,000.~~$948,000. The Company recorded net gains on sales of

~~101~~

OREO and other repossessed assets of ~~$110,000, $169,000,~~$229,000, $54,000, and ~~$264,000~~$47,000 for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, respectively. Gains and losses on sales of OREO and other repossessed assets are recorded in the OREO and other repossessed assets, net category in non-interest expense in the accompanying consolidated statements of income.

At September 30, 2018, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession and there were no one- to four-family properties in the process of foreclosure. At September 30, 2017, the recorded amount of foreclosed residential real estate properties held in OREO as a result of obtaining physical possession was $875,000 and the amount of one- to four-family properties in the process of foreclosure totaled $100,000.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

Note 7 - MSRs

The Company services loans for Freddie Mac and for secondary market purchasers of the guaranteed portion of SBA loans; such loans are not included in the accompanying consolidated balance sheets. The principal amount of loans serviced for Freddie Mac at September 30, 2018, 2017 and 2016 was $370,928,000, $358,173,000 and $340,308,000, respectively. The guaranteed principal amount of SBA loans serviced for others at September 30, 2018, 2017 and 2016 was $754,000, $697,000 and $319,000, respectively.

The following is an analysis of the changes in MSRs for the years ended September 30, 2018, 2017 and 2016 (dollars in thousands):



	2018			2017			2016
Balance, beginning of year	$	1,825		$	1,573		$	1,478
Additions	694			739			650
Amortization	(491		)	(487		)	(555		)
Balance, end of year	$	2,028		$	1,825		$	1,573

At September 30, 2018, 2017 and 2016, the estimated fair value of MSRs totaled $4,171,000, $3,556,000 and $2,865,000, respectively. The Freddie Mac MSRs' fair values at September 30, 2018, 2017 and 2016 were estimated using discounted cash flow analyses with average discount rates of 8.99%, 9.52% and 9.52%, respectively, and average prepayment speed factors of 132, 159 and 209, respectively. At September 30, 2018, 2017 and 2016, the SBA MSRs were insignificant. At September 30, 2018, 2017 and 2016, there were no valuation allowances on MSRs.

Note 8 - Deposits

Deposits consisted of the following at September 30, ~~2015~~2018 and ~~2014~~2017 (dollars in thousands):


	2015		2014		2018		2017
Non-interest-bearing demand	$	141,388	$	106,417	$	233,258	$	205,952
NOW checking	180,628		160,748		225,290		220,315
Savings	110,315		95,665		151,404		140,987
Money market	92,476		88,999		137,746		131,002
Certificates of deposit	154,105		163,287		141,808		139,642
Total	$	678,912	$	615,116	$	889,506	$	837,898

~~Certificates~~Individual certificates of deposit in amounts of ~~$100,000~~$250,000 or greater totaled ~~$68,033,000~~$18,164,000 and ~~$66,663,000~~$15,601,000 at September 30, ~~2015~~2018 and ~~2014,~~2017, respectively. The Company had brokered deposits totaling ~~$11,646,000~~$17,202,000 and ~~$3,192,000~~$15,642,000 at September 30, ~~2015~~2018 and ~~2014,~~2017, respectively.

Scheduled maturities of certificates of deposit for future years ending September 30 are as follows (dollars in thousands):

2016 $ 93,882
2017 33,416
2018 9,626
2019 8,003
2020 8,646
Thereafter 532
Total $ 154,105



2019	$	76,157
2020	32,004
2021	14,412
2022	11,991
2023	7,244
Total	$	141,808

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

Interest expense on deposits by account type was as follows for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 (dollars in thousands):


	2015		2014		2013		2018		2017		2016
NOW checking	$	450	$	440	$	463	$	451	$	460	$	456
Savings	53		46		55		85		78		64
Money market	274		246		246		722		434		327
Certificates of deposit	1,227		1,334		1,804		1,520		1,246		1,194
Total	$	2,004	$	2,066	$	2,568	$	2,778	$	2,218	$	2,041

Note 9 – FHLB ~~Advances~~Borrowings and Other Borrowings

The Bank has long- and short-term borrowing lines with the FHLB with total credit on the lines equal to ~~35%~~45% of the Bank’s total assets, limited by available collateral. ~~Borrowings are considered short-term when the original maturity is less than one year.~~ The Bank had ~~$45,000,000 of long-term~~no FHLB ~~advances~~borrowings outstanding at September 30, ~~2015~~2018 and ~~2014. The long-term borrowings at~~2017. During the year ended September 30, ~~2015 mature at various dates during~~2017, the ~~2017 fiscal year and bear interest at rates ranging from 3.69% to 4.34%.~~Company incurred a $282,000 prepayment penalty on two $15,000,000 FHLB borrowings that were repaid before their scheduled maturity dates. Under the Advances, ~~Security~~Pledge and ~~Deposit~~Security Agreement entered into with the FHLB ("FHLB ~~Advance~~Borrowing Agreement"), virtually all of the Bank’s assets, not otherwise encumbered, are pledged as collateral for ~~advances. A portion of the long-term advances have a putable feature and may be called by the FHLB earlier than the scheduled maturities.~~borrowings.

The Bank also has a letter of credit ("LOC") with the FHLB for the purpose of collateralizing Washington State public deposits. The LOC amount reduces the Bank's available borrowings under the FHLB ~~Advance~~Borrowing Agreement. The LOC had a limit of ~~$15,000,000~~$23,000,000 as of September 30, ~~2015,~~2018, all of which was available to draw upon.

~~102~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

The Bank also maintains a short-term borrowing line with the FRB with total credit based on eligible collateral. At September 30, ~~2015~~2018 the Bank had a borrowing capacity on this line of ~~$45,201,000.~~$76,703,000. The Bank had no outstanding ~~balance~~borrowings on this line at September 30, ~~2015~~2018 and ~~2014.~~2017.

The Bank has a short-term $10,000,000 overnight borrowing line with Pacific Coast Bankers' Bank. The borrowing line may be reduced or withdrawn at any time. ~~As of September 30, 2015 and 2014 the Bank did not have any outstanding advances on this borrowing line.~~

The Bank had no ~~short-term~~outstanding borrowings ~~outstanding during the years ended~~on this line at September 30, ~~2015, 2014~~2018 and ~~2013.~~2017.

Note 10 - Other Liabilities and Accrued Expenses

Other liabilities and accrued expenses were comprised of the following at September 30, ~~2015~~2018 and ~~2014~~2017 (dollars in thousands):


	2015		2014		2018		2017
Accrued deferred compensation and profit sharing plans payable	$	828	$	657
Accrued interest payable on deposits and advances	289		298
Accrued deferred compensation, profit sharing plans and bonuses payable					$	1,235	$	1,134
Accrued interest payable on deposits					225		161
Accounts payable and accrued expenses - other	1,599		1,716		2,667		1,831
Total other liabilities and accrued expenses	$	2,716	$	2,671	$	4,127	$	3,126

Note 11 - ~~Federal~~ Income Taxes

On December 22, 2017, the federal government enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revised the future ongoing federal corporate income tax by, among other things, decreasing the federal corporate income tax rate to 21.0% from 35.0% effective January 1, 2018. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a blended federal income tax rate of approximately 24.5% for the Company's fiscal year ended September 30, 2018, and 21.0% for subsequent fiscal years. In addition, the reduction of the corporate federal income tax rate required the Company to revalue its deferred tax assets and liabilities based on the lower federal income tax rate of 21.0%.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

As a result of the Tax Act, during the quarter ended December 31, 2017, the Company recorded a one-time income tax expense of $548,000 in conjunction with remeasuring its net deferred tax assets. The impact of using the 24.5% blended federal income tax rate for the year ended September 30, 2018 versus a 35.0% rate reduced the provision for income taxes by approximately $2.21 million, which was partially offset by the $548,000 one-time net deferred tax asset remeasurement.

The components of the provision for ~~federal~~ income taxes for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 were as follows (dollars in thousands):

2015
2014
2013
Current $ 3,996
$ 2,349
$ 1,737
Deferred 196
451
777
Provision $ 4,192
$ 2,800
$ 2,514



	2018		2017		2016
Current:
Federal	$	4,900	$	6,656	$	4,618
State	4		35		—
Deferred	797		385		283
Provision for income taxes	$	5,701	$	7,076	$	4,901

At September 30, ~~2015 and 2014,~~2018 the Company had income taxes payable of $151,000, which is included in other liabilities in the accompanying 2018 consolidated balance sheet. At September 30, 2017 the Company had income taxes receivable of ~~$92,000 and $461,000, respectively,~~$559,000, which ~~are~~is included in other assets in the accompanying 2017 consolidated balance ~~sheets.~~sheet.

The components of the Company’s deferred tax assets and liabilities at September 30, ~~2015~~2018 and ~~2014~~2017 were as follows (dollars in thousands):



	2018		2017
Deferred Tax Assets
Allowance for loan losses	$	2,021	$	3,380
Allowance for OREO losses	311		443
Unearned ESOP shares	32		148
Core deposit intangible	31		103
OTTI credit impairment on investment securities	104		173
Accrued interest on loans	10		29
Net unrealized losses on investment securities	42		66
Deferred compensation and bonuses	56		94
Reserve for loan commitments	43		75
Other	29		39
Total deferred tax assets	2,679		4,550

2015
2014
Deferred Tax Assets
Allowance for loan losses $ 3,483
$ 3,669
Allowance for OREO losses 564
628
Unearned ESOP shares 255
202
CDI 201
249
OTTI credit impairment 176
185
Accrued interest on loans 130
—
Net unrealized investment securities losses 114
128
Other 164
180
Total deferred tax assets $ 5,087
$ 5,241



Deferred Tax Liabilities
Goodwill	1,107		1,714
MSRs	426		639
Depreciation	283		480
Loan fees/costs	121		—
FHLB stock dividends	82		137
Prepaid expenses	74		140
Other	2		35
Total deferred tax liabilities	2,095		3,145

Net deferred tax assets	$	584	$	1,405

~~103~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

Deferred Tax Liabilities 2015
2014
Goodwill $ 1,417
$ 1,281
MSRs 505
572
Depreciation 464
141
FHLB stock dividends 447
773
Prepaid expenses 125
134
Other 8
9
Total deferred tax liabilities 2,966
2,910

Net deferred tax assets $ 2,121
$ 2,331

The provision for ~~federal~~ income taxes for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 differs from that computed at the federal statutory corporate tax rate as follows (dollars in thousands):

2015
2014
2013
Expected tax provision at statutory rate $ 4,268
$ 2,941
$ 2,472
BOLI income (184 ) (180 ) (196 )
Change in estimated utilization of net capital loss carry-forward —
—
281
Dividends on ESOP (58 ) (41 ) (24 )
Other - net 166
80
(19 )
Provision for federal income taxes
$ 4,192
$ 2,800
$ 2,514



	2018			2017			2016
Expected federal income tax provision at statutory rate	$	5,500		$	7,435		$	5,160
Net impact of the Tax Act	548			—			—
BOLI income	(134		)	(191		)	(189		)
Dividends on ESOP	(71		)	(102		)	(83		)
Stock options tax effect	(157		)	(188		)	—
Other, net	15			122			13
Provision for income taxes	$	5,701		$	7,076		$	4,901

During the year ended September 30, 2013, the Company utilized $183,000 of the capital loss carry-forward and wrote-off the remaining portion of the related deferred tax asset and valuation allowance due to the expiration of the capital loss carry-forward period. No valuation allowance for net deferred tax assets was recorded as of September 30, ~~2015~~2018 and ~~2014,~~2017, as management believes that it is more likely than not that all of the net deferred tax assets will be realized based on management's expectations of future taxable income and/or because they were supported by recoverable taxes paid in prior years.

Note 12 – Employee Stock Ownership and 401(k) Plan ~~(“KSOP”)~~

~~Effective October 3, 2007, the Bank established the~~The Timberland Bank Employee Stock Ownership and 401(k) Plan (“KSOP”) ~~by combining the existing Timberland Bank Employee Stock Ownership Plan (established in 1997) and the Timberland Bank 401(k) Plan (established in 1970). The KSOP~~ is comprised of two components, the ESOP and the 401(k) Plan. The KSOP benefits employees with at least one year of service who are 21 years of age or older. The Bank may fund the ESOP with contributions of cash or stock, and may fund the 401(k) Plan with contributions of cash. Employee vesting occurs over six years.

ESOP

In January 1998, the ESOP borrowed $7,930,000 from the Company to purchase 1,058,000 shares of common stock of the Company. The loan is being repaid primarily from the Bank’s contributions to the ESOP and is scheduled to be fully repaid by March 31, 2019. The interest rate on the loan is 8.5%. Interest expense on the ESOP debt was ~~$173,000, $206,000~~$53,000, $96,000 and

$~~237,000~~136,000 for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, respectively. The balance of the loan at September 30, ~~2015~~2018 was ~~$1,766,000.~~$285,000.

The amount of the Bank's annual contribution is discretionary, except that it must be sufficient to enable the ESOP to service its debt. All dividends received by the ESOP are used to pay debt service. Dividends of ~~$170,000, $120,000~~$291,000, $293,000 and ~~$72,000~~$243,000 were used to service the debt during the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, respectively. As the Plan makes each payment of principal and interest, an appropriate percentage of stock is released and allocated annually to eligible employee accounts, in accordance with applicable regulations. As of September 30, ~~2015, 379,819~~2018, an aggregate of 588,717 ESOP shares, which were previously released for allocation to participants, had been ~~distribut~~

~~104~~

~~Notes~~distributed to ~~Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

~~ed to~~ participants.

Shares held by the ESOP as of September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 were classified as follows:


	2015	2014	2013	2018	2017	2016
Unallocated shares	123,436	158,702	193,968	17,639	52,905	88,171
Shares released for allocation	554,745	564,111	592,468	451,644	489,665	535,927
Total ESOP shares	678,181	722,813	786,436	469,283	542,570	624,098

The approximate fair market value of the ESOP’s unallocated shares at September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 was ~~$1,344,000, $1,673,000~~$551,000, $1,658,000 and ~~$1,746,000,~~$1,389,000, respectively. Compensation expense recognized under the ESOP for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 was ~~$203,000, $242,000,~~$823,000, $495,000, and ~~$202,000,~~$233,000, respectively.

401(k) Plan

Eligible employees may contribute a portion of their wages to the 401(k) Plan up to the maximum established byunder the Internal Revenue ~~Service.~~Code. Contributions by the Bank are at the discretion of the Board except for a 3% safe harbor contribution of 3% of

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

eligible employees' wages, which is mandatory according to the plan document. Bank contributions totaled ~~$313,000, $302,000~~$379,000, $358,000 and ~~$289,000~~$333,000 for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, respectively.

Note 13 - Stock Compensation Plans

~~Stock Compensation Plans~~

Under the Company’s ~~prior stock compensation plans (1999 Stock Option Plan,~~ 2003 Stock Option Plan, ~~and the MRDP),~~ the Company was able to grant options ~~and awards for restricted stock~~ for up to ~~2,151,500~~300,000 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2014 Equity Incentive Plan, ~~which was approved by shareholders on January 27, 2015,~~ the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti. Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally, options and restricted stock vest in 20% annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of the grant. At September 30, ~~2015,~~2018, there were ~~224,366~~71,416 shares of common stock available which may be awarded as options or restricted stock ~~or options for common shares available for~~pursuant to future ~~grant~~grants under the 2014 Equity Incentive Plan.

At both September 30, ~~2015,~~2018 and 2017 there were no ~~options or awards for~~unvested restricted stock ~~available for future grant under~~awards. There were no restricted stock grants awarded during the ~~1999 Stock Option Plan, the 2003 Stock Option Plan, or the MRDP.~~years ended September 30, 2018, 2017 and 2016.

~~105~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

~~Stock Options~~

Stock option activity for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 is summarized as follows:


	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding September 30, 2012	195,626		$	7.97
Outstanding September 30, 2015					341,300		$	8.73
Options granted	29,000		6.00		55,750		15.67
Options exercised					(21,020	)	7.56
Options forfeited	(61,680	)	9.69		(2,900	)	9.96
Outstanding September 30, 2013	162,946		6.96
Outstanding September 30, 2016					373,130		9.82

Options granted	135,000		9.29		58,250		29.69
Options exercised	(5,000	)	4.66		(46,310	)	7.17
Options forfeited	(71,546	)	9.87		(4,950	)	6.28
Outstanding September 30, 2014	221,400		7.49
Outstanding September 30, 2017					380,120		13.23

Options granted	128,000		10.62		45,950		31.80
Options exercised	(6,300	)	4.84		(40,100	)	7.92
Options forfeited	(1,800	)	4.55		(5,150	)	13.39
Outstanding September 30, 2015	341,300		$	8.73
Outstanding September 30, 2018					380,820		$	16.03

The aggregate intrinsic value of options exercised during the years ended September 30, ~~2015~~2018 and ~~2014~~2017 was ~~$36,000~~$894,000 and ~~$25,000,~~$659,000, respectively.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the weighted average assumptions noted in the following table. The risk-free interest rate is based on the ~~U.S. Treasury~~ rate of a U.S. Treasury security with a similar term

as the expected life of the stock option at the particular grant date. The expected life is based on historical data, vesting terms and estimated exercise dates. The expected dividend yield is based on the most recent quarterly dividend on an annualized basis in effect at the time the options were granted, adjusted, if appropriate, for management's expectations regarding future dividends. At the time the options were granted for the year ended September 30, 2013, the Company was under regulatory restrictions prohibiting the payment of dividends. Since management did not know when the Company would be allowed to pay dividends, an expected dividend yield of 0% was used. The expected volatility is based on historical volatility of the Company’s stock price. There were ~~29,000~~55,750 options granted during the year ended September 30, ~~2013~~2016 with an aggregate grant date fair value of ~~$69,000.~~$81,000. There were ~~135,000~~58,250 options granted during the year ended September 30, ~~2014~~2017 with an aggregate grant date fair value of ~~$349,000.~~$224,000. There were ~~128,000~~45,950 options granted during the year ended September 30, ~~2015~~2018 with an aggregate grant date fair value of ~~$241,000.~~ $206,000.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

The weighted average assumptions for options granted during the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 were as follows:


	2015			2014			2013			2018			2017			2016
Expected volatility	28		%	39		%	45		%	17		%	16		%	16		%
Expected term (in years)	5			5			5
Expected life (in years)										5			5			5
Expected dividend yield	3.31		%	2.51		%	—		%	2.61		%	1.85		%	3.00		%
Risk free interest rate	1.43		%	1.41		%	0.76		%	2.97		%	1.89		%	1.12		%
Grant date fair value per share	$	1.88		$	2.59		$	2.37		$	4.48		$	3.84		$	1.46

There were ~~42,900~~76,450 options that vested during the year ended September 30, ~~2015~~2018 with a total fair value of ~~$100,000.~~$181,000. There were ~~43,800~~69,800 options that vested during the year ended September 30, ~~2014~~2017 with a total fair value of ~~$80,000.~~$145,000. There were ~~17,300~~65,100 options that vested during the year ended September 30, ~~2013~~2016 with a total fair value of ~~$32,000.~~$144,000.

At September 30, ~~2015~~2018 there were ~~262,700~~196,750 unvested options with an aggregate grant date fair value of ~~$574,000,~~$582,000, all of which the Company assumes will vest. The unvested options had an aggregate intrinsic value of ~~$390,000~~$2,098,000 at September 30, ~~2015.~~2018. At September 30, ~~2014~~2017 there were ~~177,600~~231,850 unvested options with an aggregate grant date fair value of ~~$434,000.~~$569,000.

~~106~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

Additional information regarding options outstanding at September 30, ~~2015~~2018 is as follows:


	Options Outstanding				Options Exercisable				Options Outstanding				Options Exercisable
Range of Exercise Prices ($)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$ 4.01 - 4.55	31,600	$	4.23	5.3	24,000	$	4.30	5.0	2,500	$	4.23	2.3	2,500	$	4.23	2.3
5.86 - 6.00	59,700	5.92		7.0	30,200	5.91		7.0	28,550	5.96		4.1	28,550	5.96		4.1
9.00	96,000	9.00		8.1	19,200	9.00		8.1	72,800	9.00		5.1	54,600	9.00		5.1
10.26 - 10.71	154,000	10.57		9.6	5,200	10.34		8.6	121,320	10.58		6.5	67,420	10.56		6.5
15.67									52,200	15.67		8.0	19,500	15.67		8.0
29.69									57,500	29.69		9.0	11,500	$	29.69	9.0
31.80									45,950	31.80		10.0	—	N/A		N/A
	341,300	$	8.73	8.3	78,600	$	6.47	6.8	380,820	$	16.03	7.0	184,070	$	11.04	5.9

The aggregate intrinsic value of options outstanding at September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 was ~~$738,000, $675,000,~~$5,813,000, $6,882,000, and ~~$443,000,~~$2,212,000, respectively.

~~Restricted Stock Grants~~

~~A summary~~As of ~~restricted stock grant shares vested for the years ended~~ September 30, ~~2014 and 2013 were as follows:~~

2014
2013
Shares vested 3,254
6,207
Aggregate vesting date fair value $ 30,000
$ 38,000

~~At both September 30, 2015 and 2014 there were no unvested restricted~~2018, unrecognized compensation cost related to non-vested stock ~~grant shares. There were no restricted stock grants awarded during the years ended September 30, 2015, 2014 and 2013.~~

~~Expense for Stock Compensation Plans~~

~~Compensation expense recorded in the consolidated financial statements for all stock-based plans~~options was ~~as follows for the years ended September 30, 2015, 2014 and 2013 (dollars in thousands):~~

2015
2014
2013
Stock options $ 127
$ 112
$ 49
Restricted stock grants —
2
39
Less: related tax benefit recognized (2 ) (10 ) (8 )
$ 125
$ 104
$ 80

~~The compensation expense~~$521,000, which is expected to be recognized ~~in the future years ending September 30 for stock options that had been awarded as~~over a weighted average period of ~~September 30, 2015 is as follows (in thousands):~~

2016 $ 151
2017 144
2018 113
2019 55
2020 33
$ 496

~~107~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~2.46 years.

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

Note 14 - Commitments and Contingencies

~~The~~In the normal course of business the Company is party to financial instruments with off-balance-sheet risk ~~in the normal course of business~~ to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk not recognized in the consolidated balance sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

~~A summary of the Company’s commitments at September 30, 2015 and 2014 is as follows (dollars in thousands):~~

2015
2014
Undisbursed portion of construction loans in process (see Note 4) $ 53,457
$ 29,416
Undisbursed lines of credit 41,494
30,678
Commitments to extend credit 12,196
18,119

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

evaluation of the party. However, such loan to value ratios will subsequently change, based on increases and decreases in the supporting collateral values. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, land and income-producing commercial properties.

A summary of the Company’s commitments at September 30, 2018 and 2017 is as follows (dollars in thousands):



	2018		2017
Undisbursed portion of construction loans in process (see Note 4)	$	83,237	$	82,411
Undisbursed lines of credit	49,525		51,420
Commitments to extend credit	17,665		19,673

The Company maintains a separate reserve for losses related to unfunded loan commitments. Management estimates the amount of probable losses related to unfunded loan commitments by applying the loss factors used in the allowance for loan loss methodology to an estimate of the expected amount of funding and applies this adjusted factor to the unused portion of unfunded loan commitments. The reserve for unfunded loan commitments totaled ~~$226,000~~$207,000 and ~~$192,000~~$214,000 at September 30, ~~2015~~2018 and ~~2014,~~2017, respectively. These amounts are included in other liabilities and accrued expenses in the accompanying consolidated balance sheets. Increases (decreases) in the reserve for unfunded loan commitments are recorded in non-interest expense in the accompanying consolidated statements of income.

The Bank has an employee severance compensation plan which expires in ~~2017~~2027 and which provides severance pay benefits to eligible employees in the event of a change in control of Timberland Bancorp or the Bank (as defined in the plan). In general, all employees with two or more years of service will be eligible to participate in the plan. Under the plan, in the event of a change in control of Timberland Bancorp or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control would be entitled to a payment based on years of service or officer rank with the Bank. The maximum payment for any eligible employee would be equal to 2418 months of the employee’s current compensation.

~~In March 2013, the Bank and the~~The Company ~~entered into~~has employment agreements with the Chief Executive Officer and the Chief Financial ~~Officer. The employment agreements~~Officer which provide for a severance payment and other benefits if the officers are involuntarily terminated following a change in control of the Company or the Bank. The maximum value of the severance benefits under the employment agreements is 2.99 times the officer's average annual compensation during the five-year period prior to the effective date of the change in control.

Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business. In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the consolidated financial position of the Company.

~~108~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

~~Note 15 - Significant Concentrations of Credit Risk~~

Most of the Company’s lending activity is with customers located in the state of Washington and involves real estate. At September 30, 2015, the Company had $634,470,000 (including $53,457,000 of undisbursed construction loans in process) in loans secured by real estate, which represents 94.3% of total loans and loans held for sale. The real estate loan portfolio is primarily secured by one- to four-family properties, multi-family properties, undeveloped land, and a variety of commercial real estate property types. At September 30, 2015, there were no concentrations of real estate loans to a specific industry or secured by a specific collateral type that equaled or exceeded 20% of the Company’s total loan portfolio, other than loans secured by one-to four-family properties. The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions in the region and the impact of those changes on the real estate market. The Company typically originates real estate loans with loan-to-value ratios of no greater than 90%. Collateral and/or guarantees are required for all loans. The Company also had $48,611,000 in CDs held for investment at September 30, 2015. The CDs are held with various FDIC insured institutions throughout the U.S., and each CD is below the FDIC insurance limit of $250,000.

Note 1615 - Regulatory Matters

The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital adequacy requirements. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. The new capital requirements adopted by the FDIC created a new required ratio for common equity Tier 1 ("CET1") capital, increased the leverage and Tier 1 capital ratios, changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the required capital ratios and changed what qualifies as capital for purpose of meeting these various capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. ~~The Bank is required to maintain additional levels of Tier 1 common equity over the minimum risk-based capital levels before it may pay dividends, repurchase shares or pay discretionary bonuses.~~

The ~~new~~ minimum requirements are a ~~ratio of CET1~~common equity Tier 1 ("CET1") capital ~~to total risk-weighted assets (the "CET1 risk-based ratio")~~ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a leverage ratio of 4.0%. In addition to the minimum ~~CET1, Tier 1 and total~~regulatory capital ratios, the Bank ~~will have to~~must maintain a capital conservation buffer consisting of additional CET1 capital ~~equal to 2.5% of risk-weighted assets~~ above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This ~~new~~ capital conservation buffer requirement ~~is to be~~was phased in beginning in January 2016 at 0.625% of risk-weighted assets and ~~increasing~~will increase each year ~~until~~to an amount equal to more than 2.5% of risk-weighted assets when fully implemented in January 2019. At September 30, 2018, the conservation buffer was an amount more than 1.875%.

In addition to the capital requirements, there are a number of changes in what constitutes regulatory capital, subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital. As of September 30, 2015, the Bank did not have any of these instruments. MSRs and deferred tax assets over designated percentages of CET1 capital will be deducted from capital, subject to a four-year transition period. CET1 capital will consist of Tier 1 capital less all capital components that are not considered common equity. In addition, Tier 1 capital will include accumulated other comprehensive income (loss), which includes all unrealized gains and losses on available for sale investment securities, subject to a four-year transition period. Because of the Bank's asset size, it was not considered an advanced approaches banking organization and elected in the first quarter of calendar year 2015 to take the one-time option of deciding to permanently opt-out of the inclusion of unrealized gains and losses on available for sale investment securities in its capital calculations.

The new requirements also include changes in the risk-weighting of assets to better reflect credit risk and other risk exposure. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days or more past due or otherwise on non-accrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one

~~109~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

~~year or less that is not unconditionally cancellable; and a 250% risk weight (up from 100%) for MSRs and deferred tax assets that are not deducted from capital.~~

At September 30, ~~2015~~2018 and ~~2014,~~2017 the Bank exceeded all regulatory capital requirements. The Bank was categorized as "well capitalized" at September 30, ~~2015~~2018 and ~~2014~~2017 under the regulations of the FDIC.

The following tables compare the Bank’s actual capital amounts at September 30, ~~2015~~2018 and ~~2014~~2017 to its minimum regulatory capital requirements and "Well Capitalized" regulatory capital at those dates (dollars in thousands):


September 30, 2015	Actual				Regulatory Minimum To Be "Adequately Capitalized"				To Be "Well Capitalized" Under Prompt Corrective Action Provisions
September 30, 2018													Actual				Regulatory Minimum To Be "Adequately Capitalized"				Regulatory MinimumTo Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	82,297	10.3	%	$	32,006	4.0	%	$	40,008	5.0	%	$	117,336	11.7	%	$	40,024	4.0	%	$	50,031	5.0	%

Risk-based Capital Ratios:
Common equity tier 1 capital	82,297		13.4		27,568		4.5		39,821		6.5
Common equity Tier 1 capital													117,336		16.7		31,539		4.5		45,557		6.5

Tier 1 capital	82,297		13.4		36,758		6.0		49,010		8.0		117,336		16.7		42,052		6.0		56,070		8.0

Total capital	89,986		14.7		49,010		8.0		61,263		10.0		126,109		18.0		56,070		8.0		70,087		10.0


September 30, 2014	Actual				Regulatory Minimum To Be "Adequately Capitalized"				To Be "Well Capitalized" Under Prompt Corrective Action Provisions
September 30, 2017													Actual				Regulatory Minimum To Be "Adequately Capitalized"				Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	75,734	10.2	%	$	29,629	4.0	%	$	37,036	5.0	%	$	104,102	11.2	%	$	37,116	4.0	%	$	46,395	5.0	%

Risk-based Capital Ratios:
Common equity Tier 1 capital													104,102		15.9		29,547		4.5		42,678		6.5

Tier 1 capital	75,734		13.2		22,939		4.0		34,409		6.0		104,102		15.9		39,395		6.0		52,527		8.0

Total capital	82,945		14.5		45,878		8.0		57,348		10.0		112,329		17.1		52,527		8.0		65,659		10.0

Timberland Bancorp is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than ~~$1.0~~$3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp were subject to regulatory guidelines for bank holding companies with ~~$1.0~~$3.0 billion or more in assets at September 30, ~~2015,~~2018, Timberland Bancorp would have exceeded all regulatory requirements.

The following table presents the regulatory capital ratios for Timberland Bancorp at September 30, 2018 and 2017 (dollars in thousands):



	2018				2017
	Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	120,175	12.0	%	$	107,145	11.5	%

Risk-based Capital Ratios:
Common equity Tier 1 capital	120,175		17.1		107,145		16.3

Tier 1 capital	120,175		17.1		107,145		16.3

Total capital	128,955		18.4		115,376		17.6

~~110~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~

~~The following table presents the regulatory capital ratios for Timberland Bancorp at September 30, 2015 and 2014 (dollars in thousands):~~

Actual
September 30, 2015 Amount Ratio

Leverage Capital Ratio:
Tier 1 capital $ 85,221
10.6 %

Risk-based Capital Ratios:
Common equity tier 1 capital 85,221
13.9

Tier 1 capital 85,221
13.9

Total capital 92,911
15.2

September 30, 2014

Leverage Capital Ratio:
Tier 1 capital $ 78,480
10.6 %

Risk-based Capital Ratios:
Tier 1 capital 78,480
13.7

Total capital 85,692
14.9

~~Restrictions on Retained Earnings~~

At the time of conversion of the Bank from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank, the Bank established a liquidation account in an amount equal to its retained earnings of $23,866,000 as of June 30, 1997, the date of the latest statement of financial condition used in the final conversion prospectus. The liquidation account is maintained for the benefit of eligible account holders who have maintained their deposit accounts in the Bank after conversion. The liquidation account reduces annually to the extent that eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases do not restore an eligible account holder’s interest in the liquidation account. At September 30, 2015 management estimates the amount of the liquidation account to be $429,000. In the event of a complete liquidation of the Bank (and only in such an event), eligible depositors who have continued to maintain accounts will be entitled to receive a distribution from the liquidation account before any distribution may be made with respect to common stock. The Bank may not declare or pay cash dividends if the effect thereof would reduce its regulatory capital below the amount required for the liquidation account.

2017

~~111~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

Note 1716 - Condensed Financial Information - Parent Company Only

Condensed Balance Sheets - September 30, ~~2015~~2018 and ~~2014~~2017

(dollars in thousands)


	2015		2014		2018		2017
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	439	$	55	$	306	$	485
Interest-bearing deposits in banks	811		440		2,588		1,797
Total cash and cash equivalents	1,250		495		2,894		2,282

Loan receivable from ESOP	1,766		2,183		285		821
Investment in Bank	86,263		80,031		121,818		107,957
Other assets	13		124		15		14
Total assets	$	89,292	$	82,833	$	125,012	$	111,074

Liabilities and shareholders’ equity
Accrued expenses	$	105	$	55	$	355	$	74
Shareholders’ equity	89,187		82,778		124,657		111,000
Total liabilities and shareholders’ equity	$	89,292	$	82,833	$	125,012	$	111,074

Condensed Statements of Income - Years Ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016

(dollars in thousands)


	2015			2014			2013			2018			2017			2016
Operating income
Interest on deposits in banks	$	—		$	—		$	1		$	37		$	27		$	3
Interest on loan receivable from ESOP	173			206			237			53			96			136
Dividends from Bank	2,698			13,190			3,300			4,429			1,390			3,039
Total operating income	2,871			13,396			3,538			4,519			1,513			3,178

Operating expenses	445			409			455			591			467			430

Income before income taxes and equity in undistributed income of Bank	2,426			12,987			3,083			3,928			1,046			2,748
Benefit for income taxes	(150		)	(110		)	(98		)	(198		)	(385		)	(183		)

Income before undistributed income of Bank	2,576			13,097			3,181			4,126			1,431			2,931

Equity in undistributed income of Bank (dividends in excess of income of Bank)	5,716			(7,247		)	1,576
Equity in undistributed income of Bank										12,595			12,736			7,223
Net income	8,292			5,850			4,757			$	16,721		$	14,167		$	10,154
Preferred stock dividends	—			(136		)	(710		)
Preferred stock accretion	—			(70		)	(283		)
Discount on redemption of preferred stock	—			—			255
Net income to common shareholders	$	8,292		$	5,644		$	4,019

~~112~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

Condensed Statements of Cash Flows - Years Ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016

(dollars in thousands)

2015
2014
2013
Cash flows from operating activities
Net income $ 8,292
$ 5,850
$ 4,757
  Adjustments to reconcile net income to
    net cash provided by operating activities:

   (Equity in undistributed income of Bank) dividends in excess
     of income of Bank
(5,716 ) 7,247
(1,576 )
Earned ESOP shares 264
264
265
MRDP compensation expense —
2
39
Stock option compensation expense 125
104
49
Stock option tax effect less excess tax benefit

1
4
—
Other, net 162
(247 ) (39 )
Net cash provided by operating activities 3,128
13,224
3,495

Cash flows from investing activities

Investment in Bank (491 ) (459 ) (344 )
Principal repayments on loan receivable from Bank 417
382
353
Net cash provided by (used in) investing activities (74 ) (77 ) 9

Cash flows from financing activities

ESOP tax effect 72
64
6
MRDP compensation tax effect —
2
(8 )
Stock option excess tax benefit 1
4
—
Proceeds from exercise of stock options 30
23
—
Repurchase of preferred stock —
(12,065 ) (4,321 )
Repurchase of common stock (709 ) —
—
Payment of dividends (1,693 ) (1,185 ) (1,368 )
Net cash used in financing activities (2,299 ) (13,157 ) (5,691 )

Net increase (decrease) in cash and cash equivalents 755
(10 ) (2,187 )

Cash and cash equivalents

Beginning of period 495
505
2,692
End of period $ 1,250
$ 495
$ 505

~~113~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~



	2018			2017			2016
Cash flows from operating activities
Net income	$	16,721		$	14,167		$	10,154
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of Bank	(12,595		)	(12,736		)	(7,223		)
Earned ESOP shares	882			605			404
Stock option compensation expense	172			156			190
Other, net	280			33			(65		)
Net cash provided by operating activities	5,460			2,225			3,460

Cash flows from investing activities
Investment in Bank	(1,271		)	(930		)	(616		)
Principal repayments on loan receivable from ESOP	536			493			452
Net cash used in investing activities	(735		)	(437		)	(164		)

Cash flows from financing activities
Proceeds from exercise of stock options	318			332			159
Proceeds from exercise of stock warrant	—			2,496			—
Repurchase of common stock	—			—			(820		)
Payment of dividends	(4,431		)	(3,641		)	(2,578		)
Net cash used in financing activities	(4,113		)	(813		)	(3,239		)

Net increase in cash and cash equivalents	612			975			57

Cash and cash equivalents
Beginning of period	2,282			1,307			1,250
End of period	$	2,894		$	2,282		$	1,307

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

Note 1817 - Net Income Per Common Share

Information regarding the calculation of basic and diluted net income per common share for the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013~~2016 is as follows (dollars in thousands, except per share amounts):

2015
2014
2013
Basic net income per common share computation
Numerator - net income $ 8,292
$ 5,850
$ 4,757
Preferred stock dividends —
(136 ) (710 )
Preferred stock discount accretion —
(70 ) (283 )
Discount on redemption of preferred stock —
—
255
Net income to common stockholders $ 8,292
$ 5,644
$ 4,019

  Denominator - weighted average common shares
    outstanding
6,897,270
6,856,730
6,817,918

Basic net income per common share $ 1.20
$ 0.82
$ 0.59

Diluted net income per common share computation

Numerator - net income $ 8,292
$ 5,850
$ 4,757
Preferred stock dividends —
(136 ) (710 )
Preferred stock discount accretion —
(70 ) (283 )
Discount on redemption of preferred stock —
—
255
Net income to common stockholders $ 8,292
$ 5,644
$ 4,019

  Denominator - weighted average common shares
    outstanding
6,897,270
6,856,730
6,817,918
Effect of dilutive stock options 36,863
36,614
16,555
Effect of dilutive stock warrant 134,955
126,332
52,522
  Weighted average common shares outstanding-
    assuming dilution
7,069,088
7,019,676
6,886,995

Diluted net income per common share $ 1.17
$ 0.80
$ 0.58



	2018		2017		2016
Basic net income per common share computation
Numerator - net income to common shareholders	$	16,721	$	14,167	$	10,154

Denominator - weighted average common shares outstanding	7,334,577		7,136,690		6,842,614

Basic net income per common share	$	2.28	$	1.99	$	1.48

Diluted net income per common share computation
Numerator - net income to common shareholders	$	16,721	$	14,167	$	10,154

Denominator - weighted average common shares outstanding	7,334,577		7,136,690		6,842,614
Effect of dilutive stock options (1)	191,767		163,773		78,910
Effect of dilutive stock warrant (2)	—		79,590		183,825
Weighted average common shares outstanding-assuming dilution	7,526,344		7,380,053		7,105,349

Diluted net income per common share	$	2.22	$	1.92	$	1.43

___________________

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

(1) For the years ended September 30, ~~2015, 2014~~2018, 2017 and ~~2013,~~2016, average options to purchase ~~155,152, 131,489~~29,581, 1,117 and ~~109,953~~42,801 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share because their effect would have been anti-dilutive.

(2) Represented a warrant to purchase 370,899 shares of the Company's common stock at an exercise price of $6.73 per share (subject to anti-dilution adjustments) at any time through December 23, 2018 (the "Warrant"). The Warrant was granted on December 23, 2008 to the U.S. Treasury Department ("Treasury") as part of the Company's participation in the Treasury's Troubled Asset Relief Program. On June 12, 2013, the Treasury sold the Warrant to private investors. On January 31, 2017, the Warrant was exercised and 370,899 shares of the Company's common stock were issued in exchange for $2,496,000.

Note 18 - Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the years ended September 30, 2018, 2017 and 2016 are as follows (dollars in thousands):



	Changes in fair value of available for sale securities ^[1]			Other-than-temporary impairment on held to maturity securities ^[1]			Total ^[1]
2018
Balance of AOCI at the beginning of period	$	(19	)	$	(105	)	$	(124	)
Net change	(39		)	34			(5		)
Balance of AOCI at the end of period	$	(58	)	$	(71	)	$	(129	)

2017
Balance of AOCI at the beginning of period	$	4		$	(179	)	$	(175	)
Net change	(23		)	74			51
Balance of AOCI at the end of period	$	(19	)	$	(105	)	$	(124	)

2016
Balance of AOCI at the beginning of period	$	3		$	(316	)	$	(313	)
Net change	1			137			138
Balance of AOCI at the end of period	$	4		$	(179	)	$	(175	)

___________________

^[1] All amounts are net of income taxes.

Note 19 - Fair Value Measurements

GAAP defines fair value and establishes a framework for measuring fair value. Fair value is the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The three levels for categorizing assets and liabilities under GAAP's fair value measurement requirements are as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions market participants would use in pricing an asset or liability based on the best information available in the circumstances.

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

The Company's assets measured at fair value on a recurring basis consist of investment securities available for sale. The estimated fair value of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair value of mutual funds are based upon quoted market prices (Level 1).

The Company had no liabilities measured at fair value on a recurring basis at September 30, 2018 and 2017. The Company's assets measured at estimated fair value on a recurring basis at September 30, 2018 and 2017 are as follows (dollars in thousands):



	Estimated Fair Value
September 30, 2018	Level 1		Level 2		Level 3		Total
Available for sale investment securities

MBS: U.S. government agencies	$	—	$	237	$	—	$	237
Mutual funds	917		—		—		917
Total	$	917	$	237	$	—	$	1,154



September 30, 2017
Available for sale investment securities

MBS: U.S. government agencies	$	—	$	289	$	—	$	289
Mutual funds	952		—		—		952
Total	$	952	$	289	$	—	$	1,241

There were no transfers among Level 1, Level 2 and Level 3 during the years ended September 30, 2018 and 2017.

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

The Company uses the following methods and significant assumptions to estimate fair value of such assets on a non-recurring basis:

Impaired Loans: The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Investment Securities Held to Maturity: The estimated fair value of investment securities held to maturity is based upon the assumptions market participants would use in pricing the investment security. Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

OREO and Other Repossessed Assets, net: OREO and other repossessed assets are recorded at estimated fair value less estimated costs to sell. Estimated fair value is generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale. Estimated costs to sell are based on standard market factors. The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2018 (dollars in thousands):



	Estimated Fair Value
Impaired loans:	Level 1		Level 2		Level 3
Mortgage loans:
Land	$	—	$	—	$	119
Commercial business loans	—		—		107
Total impaired loans	—		—		226

Investment securities – held to maturity:
MBS - Private label residential	—		3		—
OREO and other repossessed assets	—		—		1,913
Total	$	—	$	3	$	2,139

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2018 (dollars in thousands):



	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	226	Market approach	Appraised value less selling costs	NA

OREO and other repossessed assets	1,913		Market approach	Lower of appraised value or listing price less selling costs	NA

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2017 (dollars in thousands):



	Estimated Fair Value
Impaired loans:	Level 1		Level 2		Level 3
Mortgage loans:
Commercial	$	—	$	—	$	1,880
Land	—		—		697
Consumer loans:
Home equity and second mortgage	—		—		109
Total impaired loans	—		—		2,686

Investment securities – held to maturity:
MBS - Private label residential	—		125		—
OREO and other repossessed assets	—		—		3,301
Total	$	—	$	125	$	5,987



	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	2,686	Market approach	Appraised value less selling costs	NA

OREO and other repossessed assets	3,301		Market approach	Lower of appraised value or listing price less selling costs	NA

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

GAAP requires disclosure of estimated fair values for financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but which may have significant value. The Company does not believe that it would be practicable to estimate a representational fair value for these types of items as of September 30, ~~2015~~2018 and ~~2014.~~2017. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.

~~114~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

~~Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting~~

~~entity has the ability to access at the measurement date.~~

~~can be corroborated by observable market data.~~

~~Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the~~

~~assumptions market participants would use in pricing an asset or liability based on the best information~~

~~available in the circumstances.~~

The Company had no liabilities measured at fair value on a recurring basis at September 30, 2015 and 2014. The Company's assets measured at estimated fair value on a recurring basis at September 30, 2015 and 2014 are as follows (dollars in thousands):

Estimated Fair Value
September 30, 2015 Level 1 Level 2 Level 3 Total
Available for sale investment securities
MBS: U.S. government agencies $ —
$ 421
$ —
$ 421
Mutual funds 971
—
—
971
Total $ 971
$ 421
$ —
$ 1,392

September 30, 2014
Available for sale investment securities
MBS: U.S. government agencies $ —
$ 1,899
$ —
$ 1,899
Mutual funds 958
—
—
958
Total $ 958
$ 1,899
$ —
$ 2,857

~~There were no transfers among Level 1, Level 2 and Level 3 during the years ended September 30, 2015 and 2014.~~

~~The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis:~~

~~Impaired Loans~~: The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. The specific reserve for collateral dependent impaired loans was based on the estimated fair value of the collateral less estimated costs to sell, if applicable. In some cases, adjustments were made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

~~115~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

~~Investment Securities Held to Maturity:~~ The estimated fair value of investment securities held to maturity are based upon the assumptions market participants would use in pricing the investment security. Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

~~OREO and Other Repossessed Assets, net:~~ The Company’s OREO and other repossessed assets are initially recorded at estimated fair value less estimated costs to sell. This amount becomes the property’s new basis. Estimated fair value was generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale. Estimated costs to sell are based on standard market factors. The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2015, and the total losses resulting from these estimated fair value adjustments for the year ended September 30, 2015 (dollars in thousands):

Estimated Fair Value
Level 1 Level 2 Level 3 Total Losses
Impaired loans:
Mortgage loans:
One-to four-family $ —
$ —
$ 2,663
$ 220
Multi-family —
—
3,261
—
Commercial —
—
5,388
—
Land —
—
654
145
Consumer loans:

Home equity and second mortgage —
—
383
50
Other 12
9
Total impaired loans (1) —
—
12,361
424

Investment securities – held to maturity (2):

MBS - Private label residential —
31
—
13
OREO and other repossessed assets (3) —
—
7,854
644
Total $ —
$ 31
$ 20,215
$ 1,081

~~_______________________~~


~~(1)~~	~~The loss represents charge-offs on collateral dependent loans for estimated fair value adjustments based on the estimated fair value of the collateral net of estimated costs to sell, if applicable.~~


~~(2)~~	~~The loss represents OTTI credit-related charges on held to maturity MBS.~~


~~(3)~~	The loss represents adjustments resulting from management’s periodic reviews of the recorded value to determine whether the property continues to be recorded at the lower of its recorded book value or estimated fair value, net of estimated costs to sell.

~~116~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2014 and the total losses resulting from these estimated fair value adjustments for the year ended September 30, 2014 (dollars in thousands):

Estimated Fair Value
Level 1 Level 2 Level 3 Total Losses
Impaired loans:
Mortgage loans:
One-to four-family $ —
$ —
$ 3,655
$ 1,106
Multi-family —
—
3,278
—
Commercial —
—
5,334
463
Land —
—
3,779
260
Consumer loans:

Home equity and second mortgage —
—
284
47
Total impaired loans (1) —
—
16,330
1,876

Investment securities – held to maturity (2):

MBS - Private label residential —
40
—
31
OREO and other repossessed assets (3) —
—
9,092
605
Total $ —
$ 40
$ 25,422
$ 2,512

~~_______________________~~


~~(1)~~	~~The loss represents charge-offs on collateral dependent loans for estimated fair value adjustments based on the estimated fair value of the collateral, net of estimated cost to sell, if applicable.~~


~~(2)~~	~~The loss represents OTTI credit-related charges on held to maturity MBS.~~


~~(3)~~	The loss represents adjustments resulting from management’s periodic reviews of the recorded value to determine whether the property continues to be recorded at the lower of its recorded book value or estimated fair value, net of estimated costs to sell.

Estimated Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range

Impaired loans
$ 12,361
Market approach
Appraised value less selling
costs
NA

OREO and other repossessed assets 7,854
Market approach
Lower of appraised value or
listing price less selling costs
NA

Estimated Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range

Impaired loans
$ 16,330
Market approach
Appraised value less selling
costs
NA

OREO and other repossessed assets 9,092
Market approach
Lower of appraised value or
listing price less selling costs
NA

~~117~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

The following methods and assumptions were used by the Company in estimating fair value of its other financial instruments:

Cash and Cash ~~Equivalents:~~ ~~The estimated fair value of financial instruments that are short-term or re-price frequently~~Equivalents and ~~that have little or no risk are considered to have an estimated fair value equal to the recorded value.~~

CDs Held for Investment: The estimated fair value of financial instruments that are short-term or re-price frequently and that have little or no risk are considered to have an estimated fair value equal to the recorded value.

Investment Securities: See descriptions above.

FHLB Stock: No ready market exists for this stock, and it has no quoted market value. However, redemption of this stock has historically been at par value. ~~During the year ended September 30, 2015, 25,463 shares of FHLB stock were redeemed from the Company at par value.~~ Accordingly, par value is deemed to be a reasonable estimate of fair value.

Other Investments: The Bank invests in the Solomon Hess SBA Loan Fund LLC. Shares in the fund are not publicly traded and therefore have no readily determinable fair market value, therefore they are recorded on the balance sheet at cost. An investor can have its investment in the fund redeemed for the balance of its capital account at any quarter end with 60 days notice to the fund.

Loans Held for Sale: The estimated fair value is based on quoted market prices (for one- to four-family loans) and the guaranteed value of SBA loans (made to small businesses under SBA's 7(a) loan programs). Quoted market prices are obtained from Freddie Mac and the FHLB.

Loans Receivable, Net: The fair value of non-impaired loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. Prepayments are based on the historical experience of the Bank. Fair values for impaired loans are estimated using the methods described above.

~~Loans Held for Sale:~~ ~~The estimated fair value is based on quoted market prices obtained from Freddie Mac.~~

Accrued Interest: The recorded amount of accrued interest approximates the estimated fair value.

Deposits: The estimated fair value of deposits with no stated maturity date is deemed to be the amount payable on demand. The estimated fair value of fixed maturity certificates of deposit is computed by discounting future cash flows using the rates currently offered by the Bank for deposits of similar remaining maturities.

~~FHLB Advances:~~ The estimated fair value of FHLB advances is computed by discounting the future cash flows of the borrowings at a rate which approximates the current offering rate of the borrowings with a comparable remaining life.

Off-Balance-Sheet Instruments: Since the majority of the Company’s off-balance-sheet instruments consist of variable-rate commitments, the Company has determined that they do not have a distinguishable estimated fair value.

~~118~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, ~~2015~~2018 (dollars in thousands):


			Fair Value Measurements Using:													Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1			Level 2		Level 3		Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	92,289	$	92,289	$	92,289		$	—	$	—	$	148,864	$	148,864	$	148,864	$	—	$	—
CDs held for investment	48,611		48,611		48,611			—		—		63,290		63,290		63,290		—		—
Investment securities	9,305		10,286		3,996		6,676	6,290		—		13,964		14,418		8,812		5,606		—
FHLB stock	2,699		2,699		2,699			—		—		1,190		1,190		1,190		—		—
Other investments												3,000		3,000		3,000		—		—
Loans held for sale												1,785		1,814		1,814		—		—
Loans receivable, net	604,277		614,734		—			—		614,734		725,391		711,071		—		—		711,071
Loans held for sale	3,051		3,139		3,139			—		—
Accrued interest receivable	2,170		2,170		2,170			—		—		2,877		2,877		2,877		—		—

Financial Liabilities
Deposits:
Non-interest bearing demand	141,388		141,388		141,388			—		—
Non-interest-bearing demand												233,258		233,258		233,258		—		—
Interest-bearing	537,524		538,092		383,419			—		154,673		656,248		655,271		514,440		—		140,831
Total deposits	678,912		679,480		524,807			—		154,673		889,506		888,529		747,698		—		140,831
FHLB advances	45,000		46,742		—			46,742		—
Accrued interest payable	289		289		289			—		—		225		225		225		—		—

The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, ~~2014~~2017 (dollars in thousands):


			Fair Value Measurements Using:												Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3		Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	72,354	$	72,354	$	72,354	$	—	$	—	$	148,188	$	148,188	$	148,188	$	—	$	—
CDs held for investment	35,845		35,845		35,845		—		—		43,034		43,034		43,034		—		—
Invesment securities	8,155		9,131		958		8,173		—
Investment securities											8,380		8,985		3,954		5,031		—
FHLB stock	5,246		5,246		5,246		—		—		1,107		1,107		1,107		—		—
Other investments											3,000		3,000		3,000		—		—
Loans held for sale											3,599		3,619		3,619		—		—
Loans receivable, net	564,853		571,411		—		—		571,411		690,364		688,332		—		—		688,332
Loans held for sale	899		921		921		—		—
Accrued interest receivable	1,910		1,910		1,910		—		—		2,520		2,520		2,520		—		—

Financial Liabilities
Deposits:
Non-interest bearing demand	106,417		106,417		106,417		—		—
Non-interest-bearing demand											205,952		205,952		205,952		—		—
Interest-bearing	508,699		509,406		345,412		—		163,994		631,946		632,629		492,305		—		140,324
Total deposits	615,116		615,823		451,829		—		163,994		837,898		838,581		698,257		—		140,324
FHLB advances	45,000		47,279		—		47,279		—
Accrued interest payable	298		298		298		—		—		161		161		161		—		—

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the estimated fair value of the Company’s financial instruments will change when interest rate levels change, and that change may either be favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to appropriately manage interest rate risk. However, borrowers with fixed

~~119~~

~~Notes to Consolidated Financial Statements_________________________________________________________________~~

~~Timberland Bancorp, Inc. and Subsidiary~~

~~September 30, 2015 and 2014~~

interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2018 and 2017

interest rate environment. Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment. Management monitors interest rates and maturities of assets and liabilities, and attempts to manage interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 20 - Selected Quarterly Financial Data (Unaudited)

The following selected financial data is presented for the quarters ended (dollars in thousands, except per share amounts):


	September 30, 2015			June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017
Interest and dividend income	$	8,008		$	7,947		$	7,527		$	7,686		$	11,051		$	10,457		$	10,290		$	10,035
Interest expense	(984		)	(963		)	(960		)	(983		)	(781		)	(730		)	(666		)	(601		)
Net interest income	7,024			6,984			6,567			6,703			10,270			9,727			9,624			9,434

Recapture of loan losses (1)	(1,525		)	—			—			—
Non-interest income	2,662			2,523			2,214			2,123			3,180			3,145			3,082			3,137
Non-interest expense	(6,693		)	(6,220		)	(6,654		)	(6,274		)
Non-interest expense (1)													(7,658		)	(7,122		)	(7,221		)	(7,176		)

Income before federal income taxes	4,518			3,287			2,127			2,552
Income before income taxes													5,792			5,750			5,485			5,395

Provision for federal income taxes	1,563			1,128			676			825

Provision for income taxes													1,370			1,334			1,216			1,781
Net income	$	2,955		$	2,159		$	1,451		$	1,727		$	4,422		$	4,416		$	4,269		$	3,614

Net income per common share
Basic	$	0.43		$	0.31		$	0.21		$	0.25
Basic (2)													$	0.60		$	0.60		$	0.58		$	0.49
Diluted (2)	$	0.42		$	0.31		$	0.21		$	0.24		$	0.59		$	0.59		$	0.57		$	0.48

(1) During the ~~quarter~~quarters ended December 31, 2017, March 31, 2018, June 30, 2018 and September 30, ~~2015,~~2018 the Company incurred expenses related to the acquisition of South Sound Bank of $9, $80, $181, and $346, respectively.

(2) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.



	September 30, 2017			June 30, 2017			March 31, 2017			December 31, 2016
Interest and dividend income	$	9,711		$	10,165		$	9,299		$	9,163
Interest expense	(582		)	(918		)	(847		)	(850		)
Net interest income	9,129			9,247			8,452			8,313

Recapture of loan losses (1)	—			(1,000		)	(250		)	—
Non-interest income	3,145			3,156			2,851			3,216
Non-interest expense	(6,911		)	(6,938		)	(6,857		)	(6,810		)

Income before income taxes	5,363			6,465			4,696			4,719

Provision for income taxes	1,748			2,188			1,568			1,572
Net income	$	3,615		$	4,277		$	3,128		$	3,147

Net income per common share
Basic	$	0.50		$	0.59		$	0.44		$	0.46
Diluted (2)	$	0.48		$	0.58		$	0.42		$	0.43

(1) During the quarters ended March 31, 2017 and June 30, 2017 the Company recorded ~~a $1,525 recapture~~recaptures of loan losses of $250 and $1,000, respectively, primarily as a result of significant recoveries on loans which had previously been charged off in prior years and improvements in other credit quality metrics.

(2) The net income per common share amounts for the quarters ~~does~~do not add to the total for the fiscal year due to rounding.

~~120~~

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, ~~2015~~2018 and ~~2014~~2017

September 30,
2014
June 30,
2014
March 31,
2014
December 31,
2013
Interest and dividend income $ 7,567
$ 7,397
$ 7,412
$ 7,481
Interest expense (978 ) (964 ) (975 ) (1,022 )
Net interest income 6,589
6,433
6,437
6,459

Non-interest income 2,206
2,116
2,013
2,195
Non-interest expense (6,373 ) (6,430 ) (6,754 ) (6,241 )

Income before federal income taxes 2,422
2,119
1,696
2,413

Provision for federal income taxes 776
685
537
802

Net income 1,646
1,434
1,159
1,611

Preferred stock dividends —
—
—
(136 )
Preferred stock discount accretion —
—
—
(70 )

Net income to common shareholders $ 1,646
$ 1,434
$ 1,159
$ 1,405

Net income per common share
Basic $ 0.24
$ 0.21
$ 0.17
$ 0.20
Diluted (1) $ 0.23
$ 0.20
$ 0.16
$ 0.20
Note 21 - Subsequent Event - Business Combination

~~(1)~~

On October 1, 2018, the Company completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington ("South Sound Merger"). The ~~net income~~Company acquired 100% of the outstanding common stock of South Sound Bank, and South Sound Bank was merged into the Bank and the Company. Pursuant to the terms of the merger agreement, South Sound Bank shareholders received 0.746 of a share of the Company's common stock and $5.68825 in cash per share of South Sound Bank common ~~share amounts~~stock. The Company issued 904,826 shares of its common stock (valued at $28,267,000 based on the Company's closing stock price on September 30, 2018 of $31.24 per share) and paid $6,903,000 in cash in the transaction for total consideration paid of $35,170,000. At September 30, 2018, South Sound Bank had total assets of $178,333,000, a loan portfolio of $121,347,000, and deposits of $151,427,000 with two branches in Thurston County. The primary reason for the ~~quarters does not add~~acquisition was to expand the ~~total~~Company's presence along Washington State's economically important I-5 corridor.

The South Sound Merger constitutes a business acquisition as defined by GAAP, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and the liabilities assumed. Accordingly, the estimated fair values of the acquired assets, including the identifiable intangible assets, and the assumed liabilities in the acquisition will be measured and recorded as of the acquisition date.

Costs incurred by the Company for the ~~fiscal~~South Sound Merger totaled $616,000 during the year ~~due to rounding.~~ended September 30, 2018 and are included in professional fees in the accompanying consolidated statement of income. The operating results of the Company for the year ended September 30, 2018 do not include the operating results produced by the acquired assets and assumed liabilities from South Sound Bank as the South Sound Merger did not close until October 1, 2018. Preliminary fair values for assets acquired and liabilities assumed are not reported herein as the Company is still in the process of completing the initial accounting for the acquisition.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this annual report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of September 30, ~~2015~~2018 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Controls: There have been no changes in our internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, ~~2015,~~2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company continued, however, to implement suggestions from its internal auditor and independent auditor on ways to strengthen existing controls. The Company does not expect that its disclosure controls and procedures and internal controls over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been

~~121~~

detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

Management’s Report on Internal Control Over Financial Reporting

Management of Timberland Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) of the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Company designed and implemented a structured and comprehensive assessment process to evaluate its internal control over financial reporting across the enterprise. The assessment of the effectiveness of the Company's internal control over financial reporting was based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The Company's internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company's internal control over financial reporting was effective as of September 30, 2018.

The effectiveness of internal control over financial reporting as of September 30, 2018, has been audited by Delap LLP, the independent registered public accounting firm who also audited the Company's consolidated financial statements. Delap LLP's attestation report on the Company's internal control over financial reporting is included in ~~this Form 10-K under Part II, Item~~"Item 8. ~~“Financial~~Financial Statements and Supplementary Data.”"

The management of the Company has assessed the Company's compliance with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions during the fiscal year that ended on September 30, 2018. Management has concluded that the Company complied with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations.

Date: December 7, 2018



/s/ Michael R. Sand		/s/ Dean J. Brydon
Michael R. Sand		Dean J. Brydon
President and Chief Executive Officer		Chief Financial Officer

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is contained under the section captioned “Proposal I - Election of Directors” in the Company’s Definitive Proxy Statement for the ~~2015~~2018 Annual Meeting of Stockholders (“Proxy Statement”) and is incorporated herein by reference.

For information regarding the executive officers of the Company and the Bank, see “Item 1. Business - Executive Officers of the Registrant.”

Compliance with Section 16(a) of the Exchange Act

The information required by this item is contained under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” included in the Company’s Proxy Statement and is incorporated herein by reference.

Audit Committee Matters and Audit Committee Financial Expert

The Company has a separately designated standing Audit Committee, which as of September 30, 2018 was composed of Directors Stoney, Smith, Goldberg and ~~Goldberg.~~Davis. Each member of the Audit Committee is “independent” as defined in the Nasdaq Stock Market listing standards. The Company’s Board of Directors has designated Director Stoney as the Audit Committee financial expert, as defined in the SEC’s Regulation S-K. Directors Stoney, Smith, Goldberg and ~~Goldberg~~Davis are independent as that term is used in Item 7(c) of Schedule 14A promulgated under the Exchange Act.

Code of Ethics

The Board of Directors ratified its Code of Ethics for the Company’s officers (including its senior financial officers), directors and employees during the year ended September 30, ~~2015.~~2018. The Code of Ethics requires the Company’s officers, directors and employees to maintain the highest standards of professional conduct. The Company’s Code of Ethics was filed as an exhibit to its Annual Report on Form 10-K for the year ended September 30, 2003 and is available on our website at www.timberlandbank.com.

Nomination Procedures

There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’s Board of Directors.

Item 11. Executive Compensation

The information required by this item is contained under the sections captioned “Executive Compensation” and “Directors’ Compensation” included in the Company’s Proxy Statement and is incorporated herein by reference.

~~122~~

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a)Security Ownership of Certain Beneficial Owners.

The information required by this item is contained under the section captioned “Security Ownership of Certain Beneficial Owners and Management” included in the Company’s Proxy Statement and is incorporated herein by reference.

(b) Security Ownership of Management.

The information required by this item is contained under the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Proposal I - Election of Directors” included in the Company’s Proxy Statement and is incorporated herein by reference.

The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.

(d) Equity Compensation Plan Information. The following table summarizes share and exercise price information about the Company’s equity compensation plans as of September 30, 2015.

Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a) (b) (c)
Equity compensation plans
approved by security holders:

2003 Stock Option Plan 213,300
$ 7.60
—

Timberland Bancorp, Inc. 2014 Equity Incentive Plan 128,000
$ 10.62
224,366

Equity compensation plans
not approved by security holders
—
—
—

Total 341,300
$ 8.73
224,366

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is contained under the sections captioned “Meetings and Committees of the Board of Directors And Corporate Governance Matters - Corporate Governance - Related Party Transactions” and “Meetings and Committees of the Board of Directors and Corporate Governance Matters - Corporate Governance - Director Independence” included in the Company's Proxy Statement and are incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information required by this item is contained under the section captioned ~~“Independent~~“Proposal 4-Ratification of Selection of Independent Auditor” included in the Company’s Proxy Statement and is incorporated herein by reference.

~~123~~

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Exhibits



2.1		Agreement and Plan of Merger, dated as of May 22, 2018, by and between Timberland Bancorp, Timberland Bank and South Sound Bank (1)
3.1			Articles of Incorporation of the Registrant ~~(1)~~(2)
~~3.2~~	3.3		Amended and Restated Bylaws of the Registrant ~~(2)~~
~~3.3~~			~~Articles of Amendment to Articles of Incorporation of the Registrant~~ (3)
4.2			~~Warrant to purchase shares of the Company’s common stock dated December 23, 2008 (3)~~
~~4.3~~			Letter Agreement (including Securities Purchase Agreement – Standard Terms attached as Exhibit A) dated December 23, 2008 between the Company and the United States Department of the Treasury ~~(3)~~(4)
10.1			Employee Severance Compensation Plan, ~~(4)~~as revised (5)
10.2			Employee Stock Ownership Plan (5)
~~10.3~~	10.5		~~1999~~ 2003 Stock Option Plan (6)
~~10.4~~	10.6		~~2003 Stock Option Plan (7)~~
~~10.5~~			Form of Incentive Stock Option Agreement ~~(8)~~(7)
~~10.6~~	10.7		Form of Non-qualified Stock Option Agreement ~~(8)~~
~~10.7~~			~~Management Recognition and Development Plan (6)~~(7)
10.8			Form of Management Recognition and Development Award Agreement ~~(7)~~(7)
10.9			Employment Agreement with Michael R. Sand ~~(9)~~(8)
10.10			Employment Agreement with Dean J. Brydon ~~(9)~~(8)
10.11			Timberland Bancorp, Inc. 2014 Equity Incentive Plan ~~(10)~~(9)
14			Code of Ethics ~~(11)~~(10)
21			Subsidiaries of the Registrant*
23.1			Consent of Delap LLP*
31.1			Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act*
31.2			Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act*
32			Certification Pursuant to Section 906 of the Sarbanes-Oxley Act*
101			The following materials from Timberland Bancorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, ~~2015,~~2018, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements

____________


~~(1)~~	~~Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (333-35817) and incorporated by reference.~~


~~(2)~~	~~Incorporated by reference to the Registrant’s Current Report on Form 8-K filed October 29, 2015.~~


~~(3)~~	~~Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 23, 2008.~~


~~(4)~~	~~Incorporated by reference to the Registrant's Current Report on Form 8-K filed April 16, 2007.~~


~~(5)~~	~~Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.~~


~~(6)~~	~~Incorporated by reference to Exhibit 99 included in the Registrant’s Registration Statement on Form S-8 (333-32386)~~


~~(7)~~	~~Incorporated by reference to Exhibit 99.2 included in the Registrant’s Registration Statement on Form S-8 (333-1161163)~~


~~(8)~~	~~Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended September 30, 2005.~~


~~(9)~~	~~Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 29, 2013.~~


~~(10)~~	~~Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.~~


~~(11)~~	~~Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2003.~~

* Copies of these exhibits are available upon written request to Dean J. Brydon, Secretary, Timberland Bancorp, Inc.,

624 Simpson Avenue, Hoquiam, Washington 98550.

(1) Incorporated by reference to the Registrant's Current Report on Form 8-K filed May 23, 2018.

(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (333-35817) and incorporated by reference.

(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed October 1, 2018.

(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 23, 2008.

(5) Incorporated by reference to the Registrant's Current Report on Form 8-K filed April 16, 2007.

(6) Incorporated by reference to the Registrant's 2004 Annual Meeting Proxy Statement dated December 24, 2003.

(7) Incorporated by reference to Exhibit 99.2 included in the Registrant’s Registration Statement on Form S-8

(333-1161163).

(8) Incorporated by reference to the Registrant’s Current Report of Form 8-K filed on March 29, 2013.

(9) Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.

(10) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2003.

~~124~~

Item 16. Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	TIMBERLAND BANCORP, INC.

Date: December 7, ~~2015~~2018	By:	/s/Michael R. Sand
		Michael R. Sand
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



SIGNATURES	TITLE	DATE

/s/Michael R. Sand	President, Chief Executive Officer and	December 7, ~~2015~~2018
Michael R. Sand	Director
	(Principal Executive Officer)

/s/Jon C. Parker	Chairman of the Board	December 7, ~~2015~~2018
Jon C. Parker

/s/Dean J. Brydon	Chief Financial Officer	December 7, ~~2015~~2018
Dean J. Brydon	(Principal Financial and Accounting Officer)

/s/Andrea M. Clinton	Director	December 7, ~~2015~~2018
Andrea M. Clinton

/s/James A. Davis	Director	December 7, 2018
James A. Davis

/s/Larry D. Goldberg	Director	December 7, ~~2015~~2018
Larry D. Goldberg

~~/s/James C. Mason~~ /s/Kathy D. Leodler	Director	December 7, ~~2015~~2018
~~James C. Mason~~Kathy D. Leodler


/s/David A. Smith	Director	December 7, ~~2015~~2018
David A. Smith

/s/Michael J. Stoney	Director	December 7, ~~2015~~2018
Michael J. Stoney
		December 7, 2018
/s/Daniel D. Yerrington	Director
Daniel D. Yerrington

~~125~~

EXHIBIT INDEX



Exhibit No.		Description of Exhibit



21		Subsidiaries of the Registrant
23.1		Consent of Delap LLP
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101		The following materials from Timberland Bancorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, ~~2015,~~2018, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements

~~126~~125



Fiscal 2015	High		Low		Dividends per Common Share
First Quarter	$	10.74	$	10.39	$	0.05
Second Quarter	11.57		10.25		0.06
Third Quarter	10.87		9.82		0.06
Fourth Quarter	11.20		9.91		0.07
Fiscal 2014	High		Low		Dividends per Common Share
First Quarter	$	9.76	$	8.28	$	0.03
Second Quarter	11.59		9.61		0.04
Third Quarter	11.00		10.37		0.04
Fourth Quarter	10.98		10.27		0.05



	Period Ended
Index	9/30/2010		9/30/2011		9/30/2012		9/30/2013		9/30/2014		9/30/2015
Timberland Bancorp	$	100.00	$	100.00	$	148.52	$	225.17	$	267.81	$	283.03
NASDAQ Composite	100.00		103.00		134.56		165.51		199.72		208.01
SNL $500M-$1B Thrift Index *	100.00		103.92		130.68		161.04		178.30		210.54



	2014		2013
Shares vested	3,254		6,207
Aggregate vesting date fair value	$	30,000	$	38,000



	September 30, 2014			June 30, 2014			March 31, 2014			December 31, 2013
Interest and dividend income	$	7,567		$	7,397		$	7,412		$	7,481
Interest expense	(978		)	(964		)	(975		)	(1,022		)
Net interest income	6,589			6,433			6,437			6,459

Non-interest income	2,206			2,116			2,013			2,195
Non-interest expense	(6,373		)	(6,430		)	(6,754		)	(6,241		)

Income before federal income taxes	2,422			2,119			1,696			2,413

Provision for federal income taxes	776			685			537			802

Net income	1,646			1,434			1,159			1,611

Preferred stock dividends	—			—			—			(136		)
Preferred stock discount accretion	—			—			—			(70		)

Net income to common shareholders	$	1,646		$	1,434		$	1,159		$	1,405

Net income per common share
Basic	$	0.24		$	0.21		$	0.17		$	0.20
Diluted (1)	$	0.23		$	0.20		$	0.16		$	0.20

Year Opened

Approximate
Square Footage

Deposits at
September 30, ~~2015~~2018

(In thousands)