10-K

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, 2013                                                        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 of 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.      X   

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

Large accelerated filer	Accelerated filer
Non-accelerated filer	Smaller reporting company    X

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, 2013, the registrant had 7,047,636 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, 2013, was $57.8 million (7,045,036 shares at $8.21).  For purposes of this calculation, common stock held by officers and directors of the registrant and the Timberland Bank Employee Stock Ownership Plan and Trust are considered nonaffiliates.

DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Definitive Proxy Statement for the 2014 Annual Meeting of Stockholders (Part III).

TIMBERLAND BANCORP, INC.

2013 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I.				Page
	Item 1.	Business
			General	3
			Corporate Overview	3
			Market Area	4
			Lending Activities	5
			Investment Activities	23
			Deposit Activities and Other Sources of Funds	24
			Bank Owned Life Insurance	27
			How We Are Regulated	28
			Taxation	36
			Competition	36
			Subsidiary Activities	37
			Personnel	37
			Executive Officers of the Registrant	37
	Item 1A.	Risk Factors		38
	Item 1B.	Unresolved Staff Comments		48
	Item 2.	Properties		48
	Item 3.	Legal Proceedings		49
	Item 4.	Mine Safety Disclosures		49
PART II.
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		50
	Item 6.	Selected Financial Data		52
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		55
			General	55
			Special Note Regarding Forward-Looking Statements	55
			Critical Accounting Policies and Estimates	56
			New Accounting Pronouncements	57
			Operating Strategy	57
			Market Risk and Asset and Liability Management	58
			Comparison of Financial Condition at September 30, 2013 and September 30, 2012	60
			Comparison of Operating Results for Years Ended September 30, 2013 and 2012	62
			Comparison of Operating Results for Years Ended September 30, 2012 and 2011	64
			Average Balances, Interest and Average Yields/Cost	66
			Rate/Volume Analysis	68
			Liquidity and Capital Resources	68
			Effect of Inflation and Changing Prices	69
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		70
	Item 8.	Financial Statements and Supplementary Data		71
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		133
	Item 9A.	Controls and Procedures		133
	Item 9B.	Other Information		134
PART III.				134
	Item 10.	Directors, Executive Officers and Corporate Governance		134
	Item 11.	Executive Compensation		134
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		134
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		135
	Item 14.	Principal Accounting Fees and Services		135
PART IV.
	Item 15.	Exhibits and Financial Statement Schedules		136

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.

2

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 (“Bank”) upon the Bank’s conversion from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank (“Conversion”).  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, 2013, on a consolidated basis, the Company had total assets of $745.6 million, total deposits of $608.3 million and total shareholders’ equity of $89.7 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.

The Bank was established in 1915 as “Southwest Washington Savings 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 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.”  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 (“FHLB”) System since 1937.  The Bank is regulated by the Washington Department of Financial Institutions, Division of Banks (“Division” or “DFI”) and the FDIC.

The 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 construction loans and land development, one- to four-family residential loans, multi-family loans, commercial real estate loans and land loans.  During the past several years, the Bank adjusted its lending strategy and began reducing its exposure to speculative construction and land development lending.

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. The Series A Preferred Stock pays a 5.0% dividend through December 23, 2013, after which the rate increases to 9.0% until the preferred shares are redeemed by the Company.

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

3

shares was recorded as an increase to retained earnings and included in net income to common shareholders in the computation of net income per common share.

On November 19, 2013, the Company's Board of Directors approved the redemption of the remaining 12,065 shares of its Series A Preferred Stock, subject to obtaining regulatory approval. The Company has submitted an application to the Federal Reserve Bank of San Francisco ("FRB" or "Federal Reserve") for approval to redeem the Series A Preferred Stock.

Agreements with Banking Regulators.  In December 2009, the FDIC and the DFI determined that the Bank required supervisory attention and agreed to terms on a Memorandum of Understanding (the “Bank MOU”) with the Bank. The terms of the Bank MOU restricted the Bank from certain activities, and required that the Bank obtain the prior written approval, or non-objection, of the FDIC and/or the DFI to engage in certain activities. On December 12, 2012, the Bank was notified by the FDIC and the DFI that the Bank MOU had been rescinded.

In addition, on February 1, 2010, the FRB determined that the Company required additional supervisory attention and entered into a Memorandum of Understanding with the Company (the “Company MOU”).  Under the Company MOU, the Company was required to obtain prior written approval, or non-objection, from the FRB to declare or pay any dividends, or make any other capital distributions; issue any trust preferred securities; or purchase or redeem any of its stock. On January 15, 2013, the Company was notified by the FRB that the Company MOU had been rescinded.

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 9,000, 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 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 diversify its primary market area to become less reliant on the economy of Grays Harbor County.

Grays Harbor County has a population of 72,000 according to the U.S. Census Bureau 2012 estimates and a median family income of $55,400 according to 2013 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 11.0% at September 30, 2013 from 12.0% at September 30, 2012.  The median price of a resale home in Grays Harbor County for the quarter ended September 30, 2013 increased 1.3% to $126,900 from $125,300 for the comparable prior year period.  The number of home sales increased 47.0% for the quarter ended September 30, 2013 compared to the same quarter one year earlier.  The Bank has six branches

4

(including its home office) located throughout the county.  The downturn in Grays Harbor County’s economy and the decline in real estate values since 2008 have had a negative effect on the Bank’s profitability in this market area.

Pierce County is the second most populous county in the state and has a population of 812,000 according to the U.S. Census Bureau 2012 estimates.  The county’s median family income is $70,200 according to 2013 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 (Boeing).  According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area decreased to 7.7% at September 30, 2013 from 8.5% at September 30, 2012. The median price of a resale home in Pierce County for the quarter ended September 30, 2013 increased 11.6% to $228,300 from $204,600 for the comparable prior year period.  The number of home sales increased 36.1% for the quarter ended September 30, 2013 compared to the same quarter one year earlier.  The Bank has five branches in Pierce County and these branches have historically been responsible for a substantial portion of the Bank’s construction lending activities.  The downturn in Pierce County’s economy and the decline in real estate values since 2008 have had a negative effect on the Bank’s profitability in this market area.

Thurston County has a population of 258,000 according to the U.S. Census Bureau 2012 estimates and a median family income of $77,300 according to 2013 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 decreased to 6.7% at September 30, 2013 from 7.4% in 2012. The median price of a resale home in Thurston County for the quarter ended September 30, 2013 increased 4.8% to $228,300 from $217,800 for the same quarter one year earlier.  The number of home sales increased 19.4% for the quarter ended September 30, 2013 compared to the same quarter one year earlier.  The Bank has five branches in Thurston County.  This county has historically had a stable economic base primarily attributable to the state government presence; however the downturn in Thurston County’s economy and the decline in real estate values since 2008 have had a negative effect on the Bank’s profitability in this market area.

Kitsap County has a population of 255,000 according to the U.S. Census Bureau 2012 estimates and a median family income of $73,100 according to 2013 HUD estimates.  The Bank has two branches in Kitsap County.  The economic base of Kitsap County is largely supported by military related government employment through the United States Navy.   According to the Washington State Employment Security Department, the unemployment rate for the Kitsap County area decreased to 6.4% at September 30, 2013 from 7.1% at September 30, 2012.  The median price of a resale home in Kitsap County for the quarter ended September 30, 2013 decreased 0.6% to $248,200 from $249,800, for the same quarter one year earlier.  The number of home sales increased 30.9% for the quarter ended September 30, 2013 compared to the same quarter one year earlier.  The downturn in Kitsap County’s economy and the decline in real estate values since 2008 have had a negative effect on the Bank’s profitability in this market area.

King County is the most populous county in the state and has a population of 2.0 million according to the U.S. Census Bureau 2012 estimates.  The Bank has one branch in King County.  The county’s median family income is $86,700 according to 2013 HUD estimates.  King County’s economic base is diversified with many industries including shipping, transportation, aerospace (Boeing), computer technology and biotech industries.  According to the Washington State Employment Security Department, the unemployment rate for the King County area decreased to 5.6% at September 30, 2013 from 6.9% at September 30, 2012. The median price of a resale home in King County for the quarter ended September 30, 2013 increased 15.3% to $438,000 from $379,900, for the same quarter one year earlier.  The number of home sales increased 24.9% for the quarter ended September 30, 2013 compared to the same quarter one year earlier.  

Lewis County has a population of 76,000 according to the U.S. Census Bureau 2012 estimates and a median family income of $55,400 according to 2013 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 10.5% at September 30, 2013 from 11.8% at September 30, 2012. The median price of a resale home in Lewis County for the quarter ended September 30, 2013 increased 2.7% to 146,800 from $142,900, for the same quarter one year earlier.  The number of home sales increased 44.1% for the quarter ended September 30, 2013 compared to the same quarter one year earlier.  The Bank currently has three branches located in Lewis County.  The downturn in Lewis County’s economy and the decline in real estate values since 2008 have had a negative effect on the Bank’s profitability in this market area.

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-

5

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 $548.1 million at September 30, 2013, representing 73.5% of consolidated total assets, and at that date commercial real estate, construction and land development loans (including undisbursed loans in process), and land loans were $367.6 million, or 63.4%, of total loans.  Construction 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 25% of its Tier 1 capital.  At September 30, 2013, the maximum amount which the Bank could have lent to any one borrower and the borrower’s related entities was approximately $20.6million under this policy.  At September 30, 2013, the largest amount outstanding to any one borrower and the borrower’s related entities was $15.9million which was secured by commercial buildings located in Pierce and Kitsap counties.  These loans were all performing according to their loan repayment terms at September 30, 2013.  The next largest amount outstanding to any one borrower and the borrower’s related entities was $8.8 million.  These loans were secured by a multi-family building, a commercial building, several one- to four-family properties, and several land parcels.  All of the loans were secured by properties located in Grays Harbor County, except for a $1.7million multi-family loan secured by property located in Clark County and $289,000 secured by a single family property and a land parcel located in Clatsop County, Oregon.  These loans were performing according to their loan repayment terms at September 30, 2013.

6

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

	At September 30,
	2013					2012					2011					2010					2009
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in thousands)
Mortgage Loans:
One- to four-family(1)	$	104,298		18.00	%	$	106,979		18.82	%	$	114,680		20.47	%	$	121,014		21.65	%	$	110,556		18.58	%
Multi-family	51,108			8.82		47,521			8.36		30,982			5.53		32,267			5.77		25,638			4.31
Commercial	291,297			50.27		256,254			45.08		246,037			43.92		208,002			37.21		188,205			31.62
Construction and land development	45,136			7.79		56,406			9.92		52,484			9.37		69,271			12.39		139,728			23.48
Land	31,144			5.37		39,655			6.98		49,236			8.79		62,999			11.27		65,642			11.03
Total mortgage loans	522,983			90.25		506,815			89.16		493,419			88.08		493,553			88.29		529,769			89.02
Consumer Loans:
Home equity and second mortgage	33,014			5.70		32,814			5.77		36,008			6.43		38,418			6.87		41,746			7.01
Other	5,981			1.03		6,183			1.10		8,240			1.47		9,086			1.62		9,827			1.66
Total consumer loans	38,995			6.73		38,997			6.87		44,248			7.90		47,504			8.49		51,573			8.67
Commercial business loans	17,499			3.02		22,588			3.97		22,510			4.02		17,979			3.22		13,775			2.31
Total loans	579,477			100.00	%	568,400			100.00	%	560,177			100.00	%	559,036			100.00	%	595,117			100.00	%
Less:
Undisbursed portion of construction loans in process	(18,527		)			(16,325		)			(18,265		)			(17,952		)			(31,298		)
Deferred loan origination fees	(1,710		)			(1,770		)			(1,942		)			(2,229		)			(2,439		)
Allowance for loan losses	(11,136		)			(11,825		)			(11,946		)			(11,264		)			(14,172		)
Total loans receivable, net	$	548,104				$	538,480				$	528,024				$	527,591				$	547,208

______________

(1) Includes loans held-for-sale of $1.9 million, $1.4 million, $4.0 million, $3.0 million and $630,000 at September 30, 2013, 2012, 2011, 2010 and 2009, respectively.

7

Residential One- to Four-Family Lending.  At September 30, 2013, $104.3million, or 18.0%, 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").  From time to time, however, a portion of these fixed-rate loans, which include 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, 2013, $41.4 million, or 39.7%, of the Bank’s one- to four-family loan portfolio consisted of fixed-rate 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 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 utilizing the weekly average yield on one year U.S. Treasury securities adjusted to a constant maturity of one year plus a margin of 2.88% to 4.00%.  The Bank also offers ARM loans tied to the prime rate or to the London Inter-Bank Offered Rate (“LIBOR”) indices which typically do not have periodic, or lifetime adjustment limits.  Loans tied to these indices normally have margins ranging up to 3.5%.  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 atany time is largely determined by the demand for each in a competitive environment.  At September 30, 2013, $62.9million, or 60.3%, 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 the maximum interest rate that could be charged at the first adjustment period remains constant during the loan term.  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, 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.

8

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).  At September 30, 2013, 31 single family loans totaling $7.0 million were on non-accrual status.  See “- Lending Activities - Non-performing Loans and Delinquencies.”

Construction and Land Development Lending.  Prompted by unfavorable economic conditions in its primary market area in the 1980s, the Bank sought to establish a market niche and, as a result, began originating construction loans outside of Grays Harbor County.  In recent periods, construction lending activities have been primarily in the Pierce, King, Thurston, Grays Harbor, and Kitsap County markets although, as a result of the current economic environment, the Bank has sharply curtailed speculative 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).  The Bank believes that its computer tracking system 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 development of multi-family and commercial properties.  Our construction loans generally provide for the payment of interest only during the construction phase.

At September 30, 2013 and 2012, the composition of the Bank’s construction and land development loan portfolio was as follows:

	At September 30,
	2013				2012
	Outstanding Balance		Percent of Total		Outstanding Balance		Percent of Total
	(Dollars in thousands)
Custom and owner/builder	$	40,811	90.42	%	$	33,345	59.12	%
Speculative one-to four-family	1,428		3.16		1,880		3.33
Multi-family (including condominium)	143		0.32		345		0.61
Commercial real estate	2,239		4.96		20,247		35.90
Land development	515		1.14		589		1.04
Total	$	45,136	100.00	%	$	56,406	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 currently ranging from 5.75% to 7.88% and with loan-to-value ratios of 80% of the appraised estimated value of the completed property or sales price, whichever is less.

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 currently ranging from 5.75% to 7.88%, 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, 2013, custom and owner/builder construction loans totaled $40.8 million, or 90.4%, of the total construction and land development loan portfolio.  At September 30, 2013, the largest outstanding custom and owner/builder construction loan had an outstanding balance of $1.5million (including $658,000 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 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.  Historically, the Bank has originated loans to approximately 50 builders

9

located in the Bank’s primary market areas, each of which generally would have one to eight speculative loans outstanding from the Bank during a 12 month period.  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 averaging 6.50%, and with a loan-to-value ratio of no more than 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, 2013, speculative construction loans totaled $1.4 million, or 3.2%, of the total construction and land development loan portfolio.  At September 30, 2013, the Bank had two borrowers with an aggregate outstanding speculative loan balance of more than $500,000.  The largest aggregate outstanding balance to one borrower for speculative construction loans, totaled $687,000 and was comprised of a single loan that was performing according to its restructured terms.  

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.  At September 30, 2013, the Bank had three land development loans totaling $515,000, or 1.1% of construction and land development loans receivable, which were not performing according to their terms and were on non-accrual status.  Land development loans are secured by a lien on the property and typically were 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 are generally structured so that the Bank is repaid in full upon the sale by the borrower of approximately 80% of the subdivision lots.  A majority of the Bank’s land development loans are secured by property located in its primary market areas.  In addition, in the case of a corporate borrower, the Bank also generally obtains personal guarantees from corporate principals and 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 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 loans to 75% of the estimated developed value of the secured property.  The Bank is not currently originating any new land development loans.

The Bank also provides construction financing for  multi-family and commercial properties.  At September 30, 2013, these loans amounted to $2.4 million, or 5.3% of construction and land development loans.  These loans are secured by condominiums, apartment buildings, mini-storage facilities, office buildings, hotels and retail rental space predominantly located in the Bank’s primary market area.  At September 30, 2013, the largest outstanding multi-family construction loan was secured by an apartment building project in Pierce County and had a balance of $143,000 and was not performing according to its repayment terms.  At September 30, 2013, the largest outstanding commercial real estate construction loan had a balance of $719,000. This loan was secured by a mixed use building being constructed in Thurston County and was performing according to its repayment terms.

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 meeting Freddie Mac guidelines, by a qualified 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 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 preliminary approval has been given, the application is processed, which includes obtaining credit reports, financial statements and tax returns 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 depositing its own funds into a secured savings account, the proceeds of which are used to pay construction costs.

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 of the inherent difficulty in estimating

10

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 estimate of construction cost 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 may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors.  Loans to builders 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 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 construction loans are primarily secured by properties in its primary market area, and changes in the local and state economies and real estate markets have adversely affected the Bank’s construction loan portfolio.

Multi-Family Lending.  At September 30, 2013, the Bank had $51.1 million, or 8.8% of the Bank’s total loan portfolio, 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 2.00% to 3.50% over the one-year constant maturity U.S. Treasury Bill Index or a matched term FHLB advance, with principal and interest payments fully amortizing over terms of up to 30 years.  At September 30, 2013  the Bank’s largest multi-family loan had an outstanding principal balance of $7.3 million and was secured by an apartment building located in Thurston County. At September 30, 2013, 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 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 based on a review of personal financial statements.

Commercial Real Estate Lending.  Commercial real estate loans totaled $291.3 million, or 50.3% of the total loan portfolio at September 30, 2013.  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 restaurants, motels, mini-storage facilities, office buildings and retail/wholesale facilities, located in the Bank’s primary market area.  At September 30, 2013, the largest commercial real estate loan was secured by an office building in Grays Harbor Countyand had a balance of $6.4 million and was performing according to its terms.  At September 30, 2013, eight commercial real estate loans totaling $3.4 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, all of which are reviewed by management.  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.  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 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 requests annual financial information and rent rolls on the subject property from the borrowers on loans over $750,000.

11

Land Lending. The Bank has historically originated 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 originatingland loans on a limited basis and is attempting to decrease its land loan portfolio.  At September 30, 2013, land loans  totaled $31.1 million, or 5.4% of the Bank’s total loan portfolio as compared to $39.7 million, or 7.0% of the Bank’s total loan portfolio at September 30, 2012.  Land loans originated by the Bank generally have maturities of five to ten years.  The largest land loan had an outstanding balance of $3.7 million at September 30, 2013 and was performing according to its repayment terms.  At September 30, 2013, 17 land loans totaling $2.4 million were not performing according to their repayment terms.  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.  The Bank attempts to minimize this risk 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 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, 2013, consumer loans amounted to $39.0 million, or 6.7%, of the total loan portfolio.

At September 30, 2013, the largest component of the consumer loan portfolio consisted of second mortgage loans and home equity lines of credit, which totaled $33.0 million, or 5.7%of the 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% 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.  Second mortgage loans and home equity lines of credit have greater credit risk than one- to four-family residential mortgage loans because they are generally secured by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Bank.

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, 2013, five consumer loans totaling $536,000were delinquent in excess of 90 days.  See “- Lending Activities - Non-performing Loans and Delinquencies.”

Commercial Business Lending.  Commercial business loans totaled $17.5 million, or 3.0% of the loan portfolio at September 30, 2013.  Commercial business loans are generally secured by business equipment, accounts receivable, inventory or other property and are made at variable rates of interest equal to a negotiated margin above the 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 $1.9million at September 30, 2013 and was performing according to its repayment terms.  At September 30, 2013, all commercial business loans were performing according to their repayment terms.  See “- Lending Activities - Non-performing Loans and Delinquencies.”

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 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

12

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, 2013 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
			(In thousands)
Mortgage loans:
One- to four-family (1)	$	4,099	$	3,075	$	3,913	$	10,679	$	82,532	$	104,298
Multi-family	391		5,465		4,718		39,751		783		51,108
Commercial	14,600		20,262		60,952		182,000		13,483		291,297
Construction and land development (2)	45,136		—		—		—		—		45,136
Land	7,239		11,701		9,363		1,582		1,259		31,144
Consumer loans:
Home equity and second mortgage	4,059		4,255		4,349		9,909		10,442		33,014
Other	1,702		418		384		813		2,664		5,981
Commercial business loans	4,967		1,531		5,153		4,078		1,770		17,499
Total	$	82,193	$	46,707	$	88,832	$	248,812	$	112,933	579,477
Less:
Undisbursed portion of construction loans in process											(18,527		)
Deferred loan origination fees											(1,710		)
Allowance for loan losses											(11,136		)
Loans receivable, net											$	548,104

_____________

(1) Includes $1.9million of loans held-for-sale.

(2) Includes construction/permanent loans that 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, 2013, which have fixed interest rates and have floating or adjustable interest rates.

13

	Fixed Rates		Floating or Adjustable Rates		Total
	(In thousands)
Mortgage loans:
One- to four-family (1)	$	38,005	$	62,194	$	100,199
Multi-family	9,115		41,602		50,717
Commercial	55,313		221,384		276,697
Construction and land development	—		—		—
Land	14,016		9,889		23,905
Consumer loans:
Home equity and second mortgage	14,261		14,694		28,955
Other	3,595		684		4,279
Commercial business loans	4,917		7,615		12,532
Total	$	139,222	$	358,062	$	497,284

_____________

(1) Includes 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, however, 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 underwriter, one of the Bank’s Loan Committees or the Bank’s Board of Directors.  The Bank’s Consumer Loan Committee consists of three 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.  Certain consumer loans up to and including $25,000 may be approved by individual loan officers and the Bank’s Consumer Lending Department Manager may approve consumer loans up to and including $75,000.  The Bank’s Regional Manager of Commercial Lending has individual lending authority for loans up to and including $250,000, excluding speculative construction loans and unsecured loans.  The Bank’s Commercial Loan Committee, which consists of the Bank’s President, Chief Credit Administrator, Executive Vice President of Lending, Regional Manager of Community Lending, and Regional Manager of Commercial Lending, may approve commercial real estate loans and commercial business loans up to and including $1.5 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 million.  Loans in excess of $3.0 million, as well as loans of any amount granted to a single borrower whose aggregate loans exceed $3.0 million, must be approved by the Bank’s Board of Directors.

Loan Originations, Purchases and Sales.  During the years ended September 30, 2013, 2012 and 2011, the Bank’s total gross loan originations were $217.8 million, $228.3 million and $160.2 million, respectively.  Periodically, the Bank purchases participation interests in construction and land development loans, commercial real estate loans, and multi-family loans, secured by properties generally located in Washington State, from other lenders.  These purchases are underwritten to the Bank’s underwriting guidelines and are without recourse to the seller other than for fraud.  During the years ended September 30, 2013, 2012 and 2011, the Bank purchased loan participation interests of $43,000, $2.0 million and $187,000, 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.  Loans sold

14

in the secondary market are generally sold on a servicing retained basis.  At September 30, 2013, the Bank’s loan servicing portfolio, which is not included in the Company’s consolidated financial statements, totaled $325.7 million.

The Bank also periodically sells participation interests in construction and land development loans, commercial real estate loans, and land loans to other lenders.  These sales are usually made to avoid concentrations in a particular loan type or concentrations to a particular borrower.  During the years ended September 30, 2013 and 2012, the Bank sold loan participation interests to other lenders of $4.3 million and $3.6 million, respectively. The Bank did not sell any loan participation interests to other lenders during the year ended September 30, 2011.

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

	Year Ended September 30,
	2013			2012			2011
Loans originated:	(In thousands)
Mortgage loans:
One- to four-family	$	104,879		$	103,887		$	57,620
Multi-family	7,530			20,882			2,009
Commercial	50,314			48,450			38,262
Construction and land development	38,491			39,907			40,724
Land	1,853			1,858			3,793
Consumer	11,237			8,856			7,424
Commercial business loans	3,499			4,415			10,325
Total loans originated	217,803			228,255			160,157
Loans purchased:
Mortgage loans:
One- to four-family	—			—			187
Multi-family	43			56			—
Commercial business	—			1,955			—
Total loans purchased	43			2,011			187
Total loans originated and purchased	217,846			230,266			160,344
Loans sold:
Partial loans sold	(4,263		)	(3,600		)	—
Whole loans sold	(89,352		)	(97,357		)	(62,480		)
Total loans sold	(93,615		)	(100,957		)	(62,480		)
Loan principal repayments	(113,154		)	(121,086		)	(96,723		)
Other items, net	(1,453		)	2,233			(708		)
Net increase in loans receivable	$	9,624		$	10,456		$	433

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.  Current accounting principles generally accepted in the United States of America 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 at the time of prepayment.  Unamortized deferred loan origination fees totaled $1.7million at September 30, 2013.

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

15

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 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.

16

	At September 30,
	2013			2012			2011			2010			2009
Loans accounted for on a non-accrual basis:	(Dollars in thousands)
Mortgage loans:
One- to four-family	$	6,985		$	3,382		$	2,150		$	3,691		$	1,343
Multi-Family	—			1,449			—			—			—
Commercial	3,435			6,049			6,571			7,252			5,004
Construction and land development	659			1,570			3,522			7,609			17,594
Land	2,146			8,613			8,935			5,460			5,023
Consumer loans	385			268			367			806			258
Commercial business loans	—			—			44			46			65
Total	13,610			21,331			21,589			24,864			29,287
Accruing loans which are contractually past due 90 days or more	436			1,198			1,754			1,325			796
Total of non-accrual and 90 days past due loans	14,046			22,529			23,343			26,189			30,083
Non-accrual investment securities	2,187			2,442			2,796			3,390			477
Other real estate owned and other repossessed assets	11,720			13,302			10,811			11,519			8,185
Total non-performing assets (1)	$	27,953		$	38,273		$	36,950		$	41,098		$	38,745
Troubled debt restructured loans on accrual status (2)	$	18,573		$	13,410		$	18,166		$	8,995		$	—
Non-accrual and 90 days or more past due loans as a percentage of loans receivable, net	2.51		%	4.09		%	4.32		%	4.86		%	5.36		%
Non-accrual and 90 days or more past due loans as a percentage of total assets	1.88		%	3.06		%	3.16		%	3.53		%	4.28		%
Non-performing assets as a percentage of total assets	3.75		%	5.19		%	5.01		%	5.53		%	5.52		%
Loans receivable, net (3)	$	559,240		$	550,305		$	539,970		$	538,855		$	561,380
Total assets	$	745,648		$	736,954		$	738,224		$	742,687		$	701,676

_______________

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

(2) Does not include troubled debt restructured loans totaling $4.0 million, $10.1 million, $7.4 million, $7.4 million and $9.5 million reported as non-accrual loans at September 30, 2013, 2012, 2011, 2010 and 2009, respectively.

(3) Includes loans held-for-sale and is before the allowance for loan losses.

The Bank’s non-accrual loans decreased by $7.7 million to $13.6 million at September 30, 2013 from $21.3 million at September 30, 2012, primarily as a result of a $6.5 million decrease in land loans, a $2.6 million decrease in commercial real estate loans, a $1.4 million decrease in multi-family loans and a $911,000 decrease in construction and land development loans on non-accrual status.  These decreases were partially offset by a $3.6 million increase in one- to four-family loans and a $117,000 increase in consumer loans on non-accrual status. The largest non-performing loan was secured by a restaurant and motel located in Grays Harbor County which had a balance of $1.6 million at September 30, 2013.  A discussion of our 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, 2013 had non-accruing loans been current in accordance with their original terms totaled $4.0 million.

17

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, 2013, the Bank had $11.7million of OREO and other repossessed assets consisting of 47individual properties, a decrease of $1.6 million from $13.3 million at September 30, 2012.  The OREO properties consisted of 26 land parcels totaling $4.6 million, sixcommercial real estate properties totaling $3.2 million,threemulti-family properties totaling$2.1million and 12 single family homes totaling $1.8 million.  The largest OREO property was a multi-family property with a balance of $1.3 million located in Pierce County.

Restructured Loans.  Under accounting principles generally accepted in the United States of America, 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 troubled debt restructuring if the Bank for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that the Bank would not otherwise consider.  Debt restructuring or loan modifications for a borrower does not necessarily always constitute troubled debt restructuring, however, and troubled debt restructurings do not necessarily result in non-accrual loans.  Troubled debt restructured loans are classified as non-performing loans unless they have been performing in accordance with modified terms for a period of least six months. The Bank had troubled debt restructured loans at September 30, 2013 and 2012, totaling$22.6million and $23.5 million, of which $4.0million and $10.1 million respectively, were on non-accrual status, respectively. The allowance for loan losses allocated to troubled debt restructured loans at September 30, 2013 and 2012 was $2.4 million and $1.9 million, respectively.

Impaired Loans. A loan is considered impaired when it is probable the Bank will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement.  To determine specific valuation allowances, impaired loans are measured based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral dependent.  Impaired loans not considered to be collateral dependent are measured based on the present value of expected future cash flows.

The categories of non-accrual loans and impaired loans overlap, although they are not coextensive.  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, 2013, the Bank had $38.1 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 was $37.1 million at September 30, 2013. The vast majority of these loans are collateralized by real estate.  See “- Asset Classification” below for additional information regarding our 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 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.  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 the establishment of additional loss allowances.

18

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. Nine individual loans comprised $20.5 million, or 89.5%, of the $22.9 million in loans classified as special mention. They include four commercial real estate loans totaling $12.2 million and five multi-family loans totaling $8.3 million. All of these loans were current and paying in accordance with their required loan repayment terms at September 30, 2013, except one commercial real estate loan with a balance of $2.5 million that was 60 days past due.

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,
	2013		2012		2011
	(In thousands)
Loss	$	—	$	—	$	—
Doubtful	—		—		—
Substandard (1)(2)	27,978		33,082		56,980
Special mention (1)	22,916		32,944		27,419
Total classified and special    mention loans	$	50,894	$	66,026	$	84,399
Allowance for loan losses	$	11,136	$	11,825	$	11,946

_____________

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

(2) Includes non-performing loans.

Loans classified as substandard decreased $5.1 million to $28.0 million at September 30, 2013 from $33.1 million at September 30, 2012.  At September 30, 2013, 84 loans were classified as substandard compared to 89 loans at September 30, 2012. Of the $28.0 million in loans classified as substandard at September 30, 2013, $13.6 million were on non-accrual status and $151,000 were past due 90 days or more and still accruing.  Troubled debt restructured loans totaling $11.0 million were classified as substandard at September 30, 2013, with $4.0 million in troubled debt restructured loans on non-accrual status and $7.0 million in troubled debt restructured loans on accrual status.  The largest loan classified as substandard at September 30, 2013 had a balance of $2.6 million and was secured by a mini-storage facility in King County.  This loan was performing according to its restructured loan repayment terms at September 30, 2013.  The next largest loan classified as substandard at September 30, 2013 had a balance of $2.4 million and was secured by a commercial building with retail office space in Thurston County and was performing according to its loan repayment terms at September 30, 2013.

Allowance for Loan Losses.  The allowance for loan losses is maintained to absorb estimated losses 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 to maintain directional consistency with trends in the loan portfolio.

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 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.

19

At September 30, 2013, the Bank’s allowance for loan losses totaled $11.1 million.  The Bank’s allowance for loan losses as a percentage of total loans receivable and non-performing loans was 1.99% and 79.28%, respectively, at September 30, 2013 and 2.15% and 52.48%, respectively, at September 30, 2012.

Management believes that the amount maintained in the allowance is adequate to absorb probable losses 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 accounting principles generally accepted in the United States of America, 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.

20

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

	Year Ended September 30,
	2013			2012			2011			2010			2009
	(Dollars in thousands)
Allowance at beginning of year	$	11,825		$	11,946		$	11,264		$	14,172		$	8,050
Provision for loan losses	2,925			3,500			6,758			10,550			10,734
Allocated to loan commitments	—			—			—			—			(169		)
Recoveries:
Mortgage loans:
One- to four-family	95			74			151			—			—
Multi-family	—			14			41			—			—
Commercial	55			—			—			13			—
Construction	172			505			109			104			—
Land	54			97			46			153			83
Consumer loans:
Home equity and second mortgage	5			14			42			86			—
Other	—			—			2			6			5
Commercial business loans	105			2			1			—			—
Total recoveries	486			706			392			362			88
Charge-offs:
Mortgage loans:
One- to four-family	769			276			543			200			46
Multi-family	—			14			—			—			—
Construction	159			885			3,972			8,012			3,108
Commercial	667			1,215			47			1,888			235
Land	2,307			1,251			1,704			3,285			705
Consumer loans:
Home equity and second mortgage	184			232			150			399			162
Other	14			24			30			36			25
Commercial business loans	—			430			22			—			250
Total charge-offs	4,100			4,327			6,468			13,820			4,531
Net charge-offs	3,614			3,621			6,076			13,458			4,443
Allowance at end of year	$	11,136		$	11,825		$	11,946		$	11,264		$	14,172
Allowance for loan losses as a  percentage of total loans receivable (net) outstanding at the end of the year (1)	1.99		%	2.15		%	2.21		%	2.09		%	2.52		%
Net charge-offs as a percentage of average loans outstanding during the year	0.65		%	0.66		%	1.13		%	2.45		%	0.79		%
Allowance for loan losses as a percentage of non-performing loans at end of year	79.28		%	52.48		%	51.18		%	43.01		%	47.11		%

______________

(1) Total loans receivable (net) includes loans held for sale and is before the allowance for loan losses.

21

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

	At September 30,
	2013				2012				2011				2010				2009
	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)
Mortgage loans:
One- to four-family	$	1,449	18.00	%	$	1,558	18.82	%	$	760	20.47	%	$	530	21.65	%	$	616	18.58	%
Multi-family	749		8.82		1,156		8.36		1,076		5.53		392		5.77		431		4.31
Commercial	5,275		50.27		4,247		45.08		4,035		43.92		3,173		37.21		2,719		31.63
Construction and land development	414		7.79		943		9.92		1,618		9.37		1,626		12.39		5,132		23.48
Land	1,940		5.37		2,392		6.98		2,795		8.79		3,709		11.27		3,348		11.03
Non-mortgage loans:
Consumer loans	982		6.73		1,013		6.87		875		7.90		461		8.49		1,216		8.66
Commercial business loans	327		3.02		516		3.97		787		4.02		1,373		3.22		710		2.31
Total allowance for loan losses	$	11,136	100.00	%	$	11,825	100.00	%	$	11,946	100.00	%	$	11,264	100.00	%	$	14,172	100.00	%

22

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 or held-to-maturity.  The policies permit investment in various types of liquid assets permissible under applicable regulations, which includes U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks, banker’s acceptances, federal funds, mortgage-backed securities, and mutual funds.  The Company's investment policy also permits investment in equity securities in certain financial service companies.

At September 30, 2013, the Bank’s investment portfolio totaled $6.8 million, primarily consisting of  $3.1 million of mortgage-backed securities available-for-sale, $958,000 of mutual funds available-for-sale, and $2.7 million of mortgage-backed securities held-to-maturity.  The Bank does not maintain a trading account for any investments.  This compares with a total investment portfolio of $8.3 million at September 30, 2012, primarily consisting of $3.9 million of mortgage-backed securities available-for-sale, $1.0 million of mutual funds available-for-sale, and $3.3 million of mortgage-backed securities held-to-maturity.  The composition of the portfolios by type of security, at each respective date is presented in the following table.

	At September 30,
	2013				2012				2011
	Recorded Value		Percent of Total		Recorded Value		Percent of Total		Recorded Value		Percent of Total
	(Dollars in thousands)
Held-to-Maturity:
U.S. agency securities	$	14	0.20	%	$	27	0.33	%	$	27	0.25	%
Mortgage-backed securities	2,723		39.82		3,312		39.98		4,118		37.91
Available-for-Sale (at fair value):
Mortgage-backed securities	3,143		45.97		3,932		47.46		5,717		52.63
Mutual funds	958		14.01		1,013		12.23		1,000		9.21
Total portfolio	$	6,838	100.00	%	$	8,284	100.00	%	$	10,862	100.00	%

The following table sets forth the maturities and weighted average yields of the investment and mortgage-backed securities in the Bank's investment securities portfolio at September 30, 2013.  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
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(Dollars in thousands)
Held-to-Maturity:
U.S. agency securities	$	—	—	%	$	14	3.98	%	$	—	—	%	$	—	—	%
Mortgage-backed securities	—		—		8		4.65		22		1.71		2,693		4.69
Available-for-Sale:
Mortgage-backed securities	—		—		28		5.84		29		1.50		3,086		3.94
Mutual funds	958		2.52		—		—		—		—		—		—
Total portfolio	$	958	2.52	%	$	50	5.13	%	$	51	1.59	%	$	5,779	4.29	%

23

There were no securities which had an aggregate book value in excess of 10% of the Bank’s total equity at September 30, 2013.   At September 30, 2013, the Bank had $2.4 million of private label mortgage-backed securities of which $2.2 million were on non-accrual status.  For additional information regarding investment securities, see “Item 1A, Risk Factors – Other-than-temporary impairment charges in our investment securities portfolio could 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-Seattle and the 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.  At September 30, 2013, the Bank had 40.07% of total deposits in non-interest bearing accounts and NOW checking accounts.

At September 30, 2013 the Bank had $64.0 million of jumbo certificates of deposit of $100,000 or more.  The Bank also had brokered certificates of deposit totaling $1.2 million at September 30, 2013. The Bank believes that its jumbo certificates of deposit, which represented 10.5% of total deposits at September 30, 2013, 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, 2013.

Category	Weighted Average Interest Rate		Amount		Percentage of Total Deposits
	(In thousands)
Non-interest bearing	—	%	$	87,657	14.41	%
Negotiable order of withdrawal (“NOW”) checking	0.30		156,100		25.66
Savings	0.06		91,349		15.02
Money market	0.28		99,006		16.28
Subtotal	0.23		434,112		71.37
Certificates of Deposit(1)
Maturing within 1 year	0.59		111,480		18.33
Maturing after 1 year but within 2 years	1.12		29,950		4.92
Maturing after 2 years but within 5 years	1.57		31,353		5.15
Maturing after 5 years	1.31		1,367		0.23
Total certificates of deposit	0.86		174,150		28.63
Total deposits	0.44	%	$	608,262	100.00	%

______________________

(1)    Based on remaining maturity of certificates.

24

The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity as of September 30, 2013.  Jumbo certificates of deposit have principal balances of $100,000 or more and the rates paid on these accounts are generally negotiable.

Maturity Period	Amount
	(In thousands)
Three months or less	$	12,873
Over three through six months	8,211
Over six through twelve months	18,425
Over twelve months	24,449
Total	$	63,958

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.

	At September 30,
	2013							2012							2011
	Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total
	(Dollars in thousands)
Non-interest-bearing	$	87,657	14.41	%	$	12,361		$	75,296	12.60	%	$	10,802		$	64,494	10.88	%
NOW checking	156,100		25.66		5,961			150,139		25.11		(5,160		)	155,299		26.20
Savings	91,349		15.02		3,856			87,493		14.63		3,857			83,636		14.11
Money market	99,006		16.28		19,457			79,549		13.30		18,521			61,028		10.30
Certificates of deposit which mature:
Within 1 year	111,480		18.33		(20,175		)	131,655		22.02		(25,506		)	157,161		26.52
After 1 year, but within 2 years	29,950		4.92		(8,647		)	38,597		6.46		(1,196		)	39,793		6.71
After 2 years, but within 5 years	31,353		5.15		(3,704		)	35,057		5.86		4,416			30,641		5.17
Certificates maturing thereafter	1,367		0.23		1,227			140		0.02		(486		)	626		0.11
Total	$	608,262	100.0	%	$	10,336		$	597,926	100.0	%	$	5,248		$	592,678	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.

	At September 30,
	2013		2012		2011
	(In thousands)
0.00 - 1.99%	$	149,120	$	174,456	$	193,790
2.00 - 3.99%	24,759		30,552		33,345
4.00 - 5.99%	271		441		1,086
Total	$	174,150	$	205,449	$	228,221

25

Certificates of Deposit by Maturities.  The following table sets forth the amount and maturities of certificates of deposit at September 30, 2013.

	Amount Due
	Less Than One Year		One to Two Years		After Two to Five Years		After Five Years		Total
	(In thousands)
0.00 - 1.99%	$	104,751	$	21,228	$	21,774	$	1,367	$	149,120
2.00 - 3.99%	6,560		8,722		9,477		—		24,759
4.00 - 5.99%	169		—		102		—		271
Total	$	111,480	$	29,950	$	31,353	$	1,367	$	174,150

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

	Year Ended September 30,
	2013		2012		2011
	(In thousands)
Beginning balance	$	597,926	$	592,678	$	578,869
Net deposits before interest credited	7,768		1,297		7,673
Interest credited	2,568		3,951		6,136
Net increase in deposits	10,336		5,248		13,809
Ending balance	$	608,262	$	597,926	$	592,678

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 from the FHLB-Seattle to supplement its supply of lendable funds and to meet deposit withdrawal requirements.  The FHLB-Seattle functions as a central reserve bank providing credit for member financial institutions.  As a member of the FHLB-Seattle, the Bank is required to own capital stock in the FHLB-Seattle and is authorized to apply for advances on the security of such stock and certain mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States government) provided certain creditworthiness standards have been met.  Advances 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 are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit.  At September 30, 2013, the Bank maintained an uncommitted credit facility with the FHLB-Seattle that provided for immediately available advances up to an aggregate amount of 25% of the Bank’s total assets, limited by available collateral, under which $45.0 million was outstanding.  The Bank also maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.  At September 30, 2013, the Bank had no outstanding balance and $52.7 million in unused borrowing capacity on this borrowing line. A short-term borrowing line of $10.0 million is also maintained at Pacific Coast Bankers' Bank ("PCBB"); the Bank had no outstanding balance on this borrowing line at September 30, 2013.

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

26

	At or For the Year Ended September 30,
	2013			2012			2011
	(Dollars in thousands)
Average total borrowings	$	45,352		$	48,302		$	55,511
Weighted average rate paid on total borrowings	4.13		%	4.13		%	4.32		%
Total borrowings outstanding at end of period	$	45,000		$	45,855		$	55,729

The following table sets forth certain information regarding short-term borrowings including repurchase agreements with customers, by the Bank at the end of 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,
	2013			2012			2011
	(Dollars In thousands)
Maximum amount outstanding at any month end:
FHLB advances	$	—		$	—		$	—
Repurchase agreements	787			948			729
FRB borrowings	—			—			—
Average outstanding during period:
FHLB advances	$	—		$	—		$	—
Repurchase agreements	352			699			511
FRB borrowings	—			—			—
Total average outstanding during period	$	352		$	699		$	511
Weighted average rate paid during period:
FHLB advances	—		%	—		%	—		%
Repurchase agreements	0.05			0.05			0.05
Total weighted average rate paid during period	—			0.05			0.05
Outstanding at end of period:
FHLB advances	$	—		$	—		$	—
Repurchase agreements	—			855			729
FRB borrowings	—			—			—
Total outstanding at end of period	$	—		$	855		$	729
Weighted average rate at end of period:
FHLB advances	—		%	—		%	—		%
Repurchase agreements	—			0.05			0.05
Total weighted average rate at end of period	—			0.05			0.05

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, 2013, the cash surrender value of bank owned life insurance (“BOLI”) was $17.1 million.

27

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 United States Congress or the Washington State Legislature that may affect the operations of Timberland Bancorp and 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.

Financial Regulatory Reform. 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. The following summarizes significant aspects of the Dodd-Frank Act that may materially affect the operations of the Bank and Timberland Bancorp:

• Dodd-Frank Act established the CFPB and empowered it to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a smaller financial institution, it is generally subject to supervision and enforcement by the FDIC and the Division with respect to its compliance with consumer financial protection laws and CFPB regulations;

• Bank holding companies, like Timberland Bancorp, are required to serve as a source of strength for their depository institution subsidiaries;

• Require new capital rules and apply the same leverage and risk-based capital requirements that apply to insured depository institutions;

• Provide for new disclosure and other requirements relating to executive compensation and corporate governance;

• The prohibition on payment of interest on demand deposits was repealed;

• Deposit insurance is permanently increased to $250,000;

• The deposit insurance assessment base for FDIC insurance became the depository institution's average consolidated total assets less the average tangible equity during the assessment period; and

• The minimum reserve ratio of the FDIC's Deposit Insurance Fund ("DIF") increased to 1.35% of estimated annual insured deposits or the comparable percentage of the assessment  base; however, the FDIC is directed to "offset the effect" of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

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 cease-and-desist order 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 these agencies may utilize less formal supervisory tools to address their concerns about the condition, operations or compliance status of a savings bank.

In December 2009, the FDIC and the DFI determined that the Bank required supervisory attention and agreed to terms of the Bank MOU with the Bank. The terms of the Bank MOU restricted the Bank from certain activities, and required that the

28

Bank obtain the prior written approval, or non-objection, of the FDIC and/or the Division to engage in certain activities. On December 12, 2012, the Bank was notified by the FDIC and the Division that the Bank MOU had been terminated.

Insurance of Accounts and Regulation by the FDIC.  The deposit insurance fund, or the DIF of the FDIC insures deposit accounts in the Bank up to $250,000 per separately insured depositor.  As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. Our deposit insurance premiums for the year ended September 30, 2013, were $685,000.  

The Dodd-Frank Act requires that FDIC deposit insurance assessments be based on assets instead of deposits.  The FDIC has issued rules for this purpose, under which specify that the assessment base for a bank is equal to its total average consolidated assets less average tangible equity capital. The FDIC assessment rates range from approximately five basis points to 35 basis points, depending on applicable adjustments for unsecured debt issued by an institution and brokered deposits (and to further adjustment for institutions that hold unsecured debt of other FDIC-insured institutions), until such time as the FDIC's reserve ratio equals 1.15%. Once the FDIC's reserve ratio reaches 1.15% and the reserve ratio for the immediately prior assessment period is less than 2.0%, the applicable assessment rates may range from three basis points to 30 basis points (subject to adjustments as described above).  If the reserve ratio for the prior assessment period is equal to, or greater than 2.0% and less than 2.5%, the assessment rates may range from two basis points to 28 basis points and if the prior assessment period is greater than 2.5%, the assessment rates may range from one basis point to 25 basis points (in each case subject to adjustments as described above). No institution may pay a dividend if it is in default on its federal deposit insurance assessment.

The FDIC conducts examinations of and requires reporting by state non-member banks, such as the Bank. The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the deposit insurance fund.  The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the Bank's deposit insurance.

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.  The federal banking agencies have adopted regulations that implement this statutory framework.  Under these regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to adjusted total assets (leverage ratio) is 5% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level.  In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based capital ratio of not less than 4%, and a leverage ratio of not less than 4%. 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.

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, 2013, the Bank was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC.  For additional information on capital requirements, see Note 18 of the Notes to the Consolidated Financial Statements contained in “Item 8, Financial Statements and Supplemental Data” of this Form 10-K.

Current Capital Requirements for Timberland Bank.  Federally insured savings institutions, such as the Bank, are required to maintain a minimum level of regulatory capital.  On July 2, 2013, the Federal Reserve approved a final rule (“Final Rules”) to establish a new comprehensive regulatory capital framework for all U.S. financial institutions and their holding companies. On July 9, the Final Rule was approved as an interim final rule by the FDIC. The Final rule implements the “Basel

29

III” regulatory capital reforms and changes required by the Dodd-Frank Act, which is discussed below in the section entitled “-New Capital Rules.” The following is a discussion of the capital requirements the Bank was subject to as of September 30, 2013.

FDIC regulations recognize two types, or tiers, of capital: core (“Tier 1”) capital and supplementary (“Tier 2”) capital.  Tier 1 capital generally includes common shareholders' equity and noncumulative perpetual preferred stock, less most intangible assets.  Tier 2 capital, which is limited to 100% of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock (original maturity of at least five years but less than 20 years) that may be included in Tier 2 capital is limited to 50% of Tier 1 capital.

The FDIC currently measures an institution's capital using a leverage limit together with certain risk-based ratios.  The FDIC's minimum leverage capital requirement for a bank to be considered adequately capitalized specifies a minimum ratio of Tier 1 capital to average total assets of 4%.  At September 30, 2013, the Bank had a Tier 1 leverage capital ratio of 11.1%.  The FDIC retains the right to require a particular institution to maintain a higher capital level based on the its particular risk profile.

FDIC regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets.  Assets are placed in one of four categories and given a percentage weight based on the relative risk of that category.  In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the four categories.  Under the guidelines for a bank to be considered adequately capitalized, the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets (the Tier 1 risk based capital ratio) must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets must be at least 4%.  In evaluating the adequacy of a bank's capital, the FDIC may also consider other factors that may affect a bank's financial condition.  Such factors may include interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management's ability to monitor and control financial operating risks.  At September 30, 2013, the Bank's ratio of total capital to risk-weighted assets was 16.1% and the ratio of Tier 1 capital to risk-weighted assets was 14.8%.

The Division requires that net worth equal at least 5% of total assets.  At September 30, 2013, the Bank had a net worth of 10.9% of total assets.

The table below sets forth the Bank's capital position relative to its FDIC capital requirements at September 30, 2013.  The definitions of the terms used in the table are those provided in the capital regulations issued by the FDIC.

	At September 30, 2013
	Amount		Percent of Adjusted Total Assets (1)
	(Dollars in thousands)
Tier 1 (leverage) capital	$	82,265	11.1	%
Tier 1 (leverage) capital requirement (2)	29,662		4.0
Excess	$	52,603	7.1	%
Tier 1 risk adjusted capital	$	82,265	14.8	%
Tier 1 risk adjusted capital requirement	22,255		4.0
Excess	$	60,010	10.8	%
Total risk-based capital	$	89,273	16.1	%
Total risk-based capital requirement	44,509		8.0
Excess	$	44,764	8.1	%

______________

(1) For the Tier 1 (leverage) capital and Washington regulatory capital calculations, percent of total average assets of $741.6 million.  For the Tier 1 risk-based capital and total risk-based capital calculations, percent of total risk-weighted assets of $556.4 million.

(2) As a Washington-chartered savings bank, the Bank is subject to the capital requirements of the FDIC and the Division.  The FDIC requires state-chartered savings banks, including the Bank, to have a minimum leverage ratio of Tier 1 capital to total assets of at least 3%, provided, however, that all institutions, other than those (i) receiving the highest rating during the examination process and (ii) not anticipating any significant growth, are required to maintain a ratio of 1% to 2% above the stated minimum, with an absolute total capital to risk-weighted assets of at least 8%.  

30

New Capital Rules. The Final Rules approved by the Federal Reserve and subsequently approved as an interim final rule by the FDIC substantially amends the regulatory risk-based capital rules applicable to Timberland Bancorp and the Bank.

Effective in 2015 (with some changes generally transitioned into full effectiveness over two to four years), the Bank will be subject to new capital requirements adopted by the FDIC. These new requirements create a new required ratio for common equity Tier 1 (“CET1”) capital, increases the leverage and Tier 1 capital ratios, changes the risk-weights 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 these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

When these new requirements become effective in 2015, the Bank's leverage ratio of 4% of adjusted total assets and total capital ratio of 8% of risk-weighted assets will remain the same; however, the Tier 1 capital ratio requirement will increase from 4.0% to 6.5% of risk-weighted assets. In addition, the Bank will have to meet the new CET1 capital ratio of 4.5% of risk-weighted assets, with CET1 consisting of qualifying Tier 1 capital less all capital components that are not considered common equity.

For all of these capital requirements, there are a number of changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not have any of these instruments. Under the new requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital.

Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be deducted from capital, subject to a two-year transition period. 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 two-year transition period. Because of its asset size, the Bank has the one-time option of deciding in the first quarter of 2015 whether to permanently opt-out of the inclusion of accumulated other comprehensive income (loss) in its capital calculations. The Bank is considering whether to take advantage of this opt-out to reduce the impact of market volatility on its regulatory capital levels.

The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. 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 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 (currently set at 0%); a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk-weights (0% to 600%) for equity exposures.

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 be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% in January 2019.

The FDIC's prompt corrective action standards will change when these new capital ratios become effective. Under the new standards, in order to be considered well-capitalized, the Bank would be required to have a CET1 ratio of 6.5% (new), a Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged). The Bank has conducted a pro forma analysis of the application of the new capital requirements as of September 30, 2013. We have determined that the Bank meets all new requirements and would remain well-capitalized, even if these new requirements had been effect on that date. Timberland Bancorp has also conducted a pro forma analysis of the application of these new capital requirements as of September 30, 2013. We have determined that Timberland Bancorp meets all new requirements and would remain well-capitalized, even if these new requirements had been in effect on that date.

The application of these stringent capital requirements could, among other things, result in lower returns on invested capital, over time require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements.  Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying out dividends or repurchasing shares.  Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in

31

our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Any additional changes in our regulation and oversight, in the form of new laws, rules and regulations could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or prospects.

Federal Home Loan Bank System. The Bank is a member of the FHLB-Seattle, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions.  Each FHLB serves 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 from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB.  In addition, all long-term advances are required to provide funds for residential home financing.  See “Business – Deposit Activities and Other Sources of Funds – Borrowings.”

As a member, the Bank is required to purchase and maintain stock in the FHLB-Seattle.  At September 30, 2013, the Bank had $5.5 million in FHLB stock, which was in compliance with this requirement.  Subsequent to December 31, 2008, the FHLB-Seattle announced that it was below its regulatory risk-based capital requirement and was precluded from paying dividends or repurchasing capital stock. In September 2012, the FHLB-Seattle announced that it had been reclassified as adequately capitalized by its regulator, the Federal Housing Finance Agency. The FHLB-Seattle also announced that it had been granted authority to repurchase up to $25 million of excess capital stock per quarter, provided they receive a non-objection from the Federal Housing Finance Agency.  During the year ended September 30, 2013, the FHLB-Seattle repurchased $203,000 of its stock, at par, from the Bank.  The FHLB-Seattle resumed dividend payments in July 2013 and the Bank received $1,000 in dividends during the year ended September 30, 2013.

The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects.  These contributions have affected adversely 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, and 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.  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, 2013, the Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were 21% of total capital and

32

the 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 17% 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, 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-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 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 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, 2013, 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 listed in Section 23B of the Federal Reserve Act between a bank and its affiliates 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 and 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 the Company shareholders.  The amount of dividends payable by the Bank to the Company depends upon the Bank's earnings and

33

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.

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 and is registered as such 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, Inc. 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.

On February 1, 2010, the Federal Reserve determined that the Company required additional supervisory attention and entered into the Company MOU.  Under the Company MOU, the Company was required to obtain prior written approval, or non-objection, from the Federal Reserve to declare or pay any dividends, or make any other capital distributions; issue any trust preferred securities; or purchase or redeem any of its stock. On January 15, 2013, the Company was notified by the Federal Reserve that the Company MOU had been terminated.

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 will be 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 law and regulations and unsafe or unsound practices.

The Bank Holding Company Act.  Under the BHCA, the Company is supervised by the Federal Reserve.  The Federal Reserve has a policy 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 banks 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.

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

34

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.  The BHCA prohibits a bank holding company, with certain exceptions, from acquiring 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 in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.

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 United States 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 also be subject to the nationwide and statewide insured deposit concentration amounts described above.

Dividends.  The Federal Reserve has issued a policy statement on 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.

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.  The Federal Reserve has established capital adequacy guidelines for bank holding companies that generally parallel the capital requirements of the FDIC for the Bank.  The Federal Reserve regulations provide that capital standards will be applied on a consolidated basis in the case of a bank holding company with $500 million or more in total consolidated assets.

The Company’s total risk based capital must equal 8% of risk-weighted assets and one half of the 8%, or  4%, must consist of Tier 1 (core) capital and its Tier 1 (core) capital must equal 4% of total assets.  As of September 30, 2013, the Company’s total risk based capital was 16.6% of risk-weighted assets, its risk based capital of Tier 1 (core) capital was 15.3% of risk-weighted assets and its Tier 1 (core) capital was 11.5% of average assets.

35

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 new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions and implements new capital regulations that Timberland Bancorp will become subject to and that are discussed above under “- Regulation and Supervision of the Bank - New Capital Rules.” 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.

Sarbanes-Oxley Act of 2002.  As a public company, the Company is subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing.  The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002 in response to public concerns regarding corporate accountability in connection with several accounting scandals.  The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.  The SEC and Sarbanes-Oxley-related regulations and policies include very specific additional disclosure requirements and new corporate governance rules. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

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 Tax. The Internal Revenue Code imposes a tax on alternative minimum taxable income (“AMTI”) at a rate of 20%.  In addition, only 90% of AMTI can be offset by net operating loss carryovers.  AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses).

Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.  The corporate dividends-received deduction is generally 70% 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% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.

Audits.The Company is no longer subject to United States federal tax examination by tax authorities for years ended on or before September 30, 2009.

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% of gross receipts at September 30, 2013. Interest received on loans secured by mortgages or deeds of trust on residential properties, 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

36

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 and other thrift institutions.  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 escrow department and offer non-deposit investment services.

Personnel

As of September 30, 2013, the Bank had 243 full-time employees and 24 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.

Executive Officers of the Company and Bank

	Age at September 30, 2013	Position
Name		Company	Bank
Michael R. Sand	59	President and Chief Executive Officer	President and Chief Executive Officer
Dean J. Brydon	46	Executive Vice President, Chief Financial Officer and Secretary	Executive Vice President, Chief Financial Officer and Secretary
Robert A. Drugge	62	Executive Vice President	Executive Vice President of Lending
Jonathan A. Fischer	39	Executive Vice President and  Chief Operating Officer	Executive Vice President and   Chief Operating Officer
Edward C. Foster	56	Senior Vice President and   Chief Credit Administrator	Senior Vice President and   Chief Credit Administrator
Marci A. Basich	44	Senior Vice President and   Treasurer	Senior Vice President and Treasurer
Kathie M. Bailey	61	Senior Vice President	Senior Vice President and Chief   Operations Officer

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.

37

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 served as the Chief Risk Officer since October 2010.  Mr. Fischer 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.

Kathie M. Bailey has been affiliated with the Bank since 1984 and has served as Senior Vice President and Chief Operations Officer since 2003. Ms. Bailey will be retiring effective December 31, 2013.

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.  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.

The current weak economic conditions in the market areas we serve may continue to adversely impact our earnings and could increase the credit risk associated with our loan portfolio.

Substantially all of our loans are to businesses and individuals in the state of Washington. A continuing 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.  In particular, Washington has experienced substantial home price declines and increased foreclosures and has experienced above average unemployment rates.

Continued weakness or a further 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;

• 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 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 adverse effect on our results of operations.

The ongoing debate in Congress regarding the national debt ceiling and federal budget deficit and concerns over the United States' credit rating (which was downgraded by Standard & Poor's), the European sovereign debt crisis, the overall weakness in the economy, continued high unemployment in the United States, among other economic indicators, and the recent U.S. government shutdown, have contributed to increased volatility in the capital markets and diminished expectations for the economy.

A return of recessionary conditions and/or continued 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

38

operations, costs and profitability. Declines in real estate values and sales volumes and continued relatively 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 mortgage-backed securities. If the Federal Reserve increases the federal funds rate, 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 significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Strong competition within our market areas could hurt our profits and slow growth.

Although we consider ourselves competitive in our market areas, we face intense competition in both making loans and attracting deposits. Price competition for loans and deposits might result in our earning less on our loans and paying more on our deposits, which reduces net interest income. Some of the institutions with which we compete have substantially greater resources than we have and may offer services that we do not provide. We expect competition to increase in the future 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 compete successfully in our market areas.

Our real estate construction and land development 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, 2013, construction and land development loans totaled $45.1 million, or 7.8% of our total loan portfolio, of which $42.4 million were for residential real estate projects. Approximately $40.8 million of our residential construction loans 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.  Land development loans, which are loans made with land as security, totaled $515,000, or 0.1% of our total loan portfolio at September 30, 2013.  In general, construction and land development lending involves additional risks because of the inherent difficulty in estimating a property's value both before and at completion of the project as well as the estimated cost of the project.  Construction costs may exceed original estimates as a result of increased materials, labor or other costs.  In addition, because of current uncertainties in the residential real estate market, property values have become more difficult to determine.  Construction loans and land development loans often involve the disbursement of funds with repayment dependent, in part, on the success of the project and the ability of the borrower to sell or lease the property or refinance the indebtedness, rather than the ability of the borrower or guarantor to repay principal and interest.  These loans are also generally more difficult to monitor.  In addition, speculative construction loans to builders are often associated with homes that are not pre-sold, and thus pose a greater potential risk than construction loans to individuals on their personal residences. At September 30, 2013, $1.4 million of our construction portfolio was comprised of speculative one- to four-family construction loans.  Approximately $659,000, or 1.5%, of our total real estate construction and land development loans were non-performing at September 30, 2013.  A material increase in our non-performing construction and loan development 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 further 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, 2013, we had $291.3 million of commercial real estate mortgage loans, representing 50.3% 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

39

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 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, 2013 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, 2013, we had $17.5 million or 3.0% 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, 2013, $137.3 million, or 23.7% 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. The decline in residential real estate values as a result of the downturn in the Washington housing market has reduced the value of the real estate collateral securing these types of loans and increased the risk that we would incur losses 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.  Residential loans with combined higher loan-to-value ratios will be more sensitive to declining

40

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 net charge-offs have increased during the past five years compared to historical averages and we may be required to make further increases in our provision for loan losses and to charge-off additional loans in the future, which could adversely affect our results of operations.

For the fiscal years ended September 30, 2013, 2012, 2011, 2010 and 2009 we recorded net loan charge-offs of $3.6 million, $3.6 million, $6.1 million, $13.5 million and $4.4 million, respectively. During these last five fiscal years, we experienced higher loan delinquencies and credit losses than our historical averages. Our non-performing loans and assets have historically reflected unique operating difficulties for individual borrowers rather than weakness in the overall economy of the Pacific Northwest; however, more recently the deterioration in the general economy has become a significant contributing factor to the increased levels of delinquencies and non-performing loans.  Further, our portfolio is concentrated in construction and land development loans, land loans and commercial and commercial real estate loans, all of which have a higher risk of loss than residential mortgage loans.

The housing and real estate markets have recently modestly improved in several of our market areas, however, until general economic conditions improve further, we expect that we will continue to experience further delinquencies and credit losses.  As a result, we could be required to make further increases in our provision for loan losses to increase our allowance for loan losses.  Our allowance for loan losses was 1.99% of total loans held for investment and 79% of non-performing loans at September 30, 2013. Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations and our capital.

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 to expense, 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;

• risk characteristics of the various classifications of loans; and

• the amount and quality of collateral, including guarantees; securing the loans.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  Continuing 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 require an increase in 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 judgments different than those of management.  In addition, if charge-offs in future periods exceed the allowance for loan losses we will need additional

41

provisions to replenish the allowance for loan losses.  Any additional provisions will result in a decrease in net income and possibly capital, and may have a material adverse effect on our financial condition and results of operations.

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

At September 30, 2013 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 and other repossessed assets) were $28.0 million, or 3.75% 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.

We have classified an additional $18.6 million in loans as performing troubled debt restructurings at September 30, 2013.

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 assets 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.

Other-than-temporary impairment charges in our investment securities portfolio could result in additional losses.

During the year ended September 30, 2013, we recognized a $47,000 other than temporary impairment ("OTTI") charge on private label mortgage backed securities we hold for investment.  Management concluded that the decline of the estimated fair value below the cost of these securities was other than temporary and recorded a credit loss through non-interest income. At September 30, 2013 our remaining private label mortgage backed securities portfolio totaled $2.4 million.

We closely monitor our investment securities for changes in credit risk. The valuation of our investment securities also is influenced by 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, rating agency actions, and the prices at which observable market transactions occur. The current market environment limits our ability to mitigate our exposure to valuation changes in our investment securities by selling them. Accordingly, if market conditions deteriorate further and we determine our holdings of  private label mortgage backed securities or other investment securities are other than temporarily impaired, our results of operations could be adversely affected.

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.

42

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, in a rising or higher interest rate environment, the demand for mortgage loans, particularly refinancing of existing mortgage loans, tend 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.

Our real estate lending also exposes us to the risk of environmental liabilities.

In the course of our business, we may foreclose and take title to real estate, and 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 the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based 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.

Fluctuating interest rates can adversely affect our profitability.

Our profitability is dependent to a large extent upon net interest income, which is the difference, or spread, between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of 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.  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 interest rates also can affect: (1) our ability to originate and/or sell loans; (2) the fair value of our interest-earning assets, which would 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 securities portfolio and the interest-earning assets.  Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond our control.  If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.

As a result of the relatively low interest rate environment, an increasing percentage of our deposits have been comprised of short-term certificates of deposit and other deposits yielding no or a relatively low rate of interest. At September 30, 2013, we had $111.5 million in certificates of deposit that mature within one year and $434.1 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. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. 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 and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition 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.

Historically low interest rates may adversely affect our net interest income and profitability.

During the last four years it has been the policy of the Federal Reserve to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, yields on securities we have purchased, and market rates on the loans we have originated, have been at levels lower than were available prior to 2008. Consequently, the average yield on our interest-earning assets has decreased during the recent low interest rate environment.

43

However, our ability to lower our interest expense is limited at these interest rate levels, while the average yield on our interest-earning assets may continue to decrease. The Federal Reserve has indicated its intention to maintain low interest rates in the near future. Accordingly, our net interest income may decrease, which may have an adverse affect on our profitability. For information with respect to changes in interest rates, see “-Fluctuating interest rates can adversely affect our profitability.”

Increases in deposit insurance premiums and special FDIC assessments can adversely affect our earnings.

The Dodd-Frank Act established 1.35% as the minimum reserve ratio.  The FDIC has adopted a plan under which it will meet this ratio by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the minimum reserve ratio to 1.35% from the former minimum of 1.15%.  The FDIC has not announced how it will implement this offset.  In addition to the statutory minimum ratio, the FDIC must set a designated reserve ratio, or DRR, which may exceed the statutory minimum.  The FDIC has set 2.0% as the DRR.

As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance premiums are based on an institution's average consolidated total assets less average tangible equity capital instead of its deposits.  While our FDIC insurance premiums initially have been reduced by these regulations, it is possible that our future insurance premiums will increase under the final regulations.

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 from the FHLB of Seattle, borrowings from the Federal Reserve Bank of San Francisco and other borrowings to fund our operations. At September 30, 2013, we had $45.0 million of FHLB advances outstanding with an additional $190.8 million of available borrowing capacity through the FHLB and the FRB.  Although we have historically been able to replace maturing deposits and advances 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 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 increase our costs of operations.

The financial services industry is extensively regulated. Timberland Bank is currently subject 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 of the deposit insurance fund and consumers and not to benefit our shareholders. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on our operations, 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. 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. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

44

As discussed under “Business-Regulation of the 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 of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies 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 implementing rules and regulations 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.

The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.

As discussed under “Business-Regulation of the Bank-[New Capital Rules]” in Item I of this Form 10-K, effective January 1, 2015, Timberland Bancorp and Timberland Bank will be subject to new capital requirements under regulations adopted by the federal banking regulators to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. These new requirements establish the following minimum capital ratios: (1) a common equity Tier 1 (“CET1”) capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. In addition, there is a new requirement to maintain a capital conservation buffer, comprised of CET1 capital, in an amount greater than 2.5% of risk-weighted assets over the minimum capital required by each of the minimum risk-based capital ratios in order to avoid limitations on the organization’s ability to pay dividends, repurchase shares or pay discretionary bonuses. The capital conservation buffer requirement will be phased in, beginning January 1, 2016, requiring during 2016 a buffer amount greater than 0.625% in order to avoid these limitations, and increasing the amount each year until beginning January 1, 2019, the buffer amount must be greater than 2.5% in order to avoid the limitation.

The new regulations also change what qualifies as capital for purposes of meeting these various capital requirements, as well as the risk-weights of certain assets for purposes of the risk-based capital ratios. Under the new regulations, in order to be considered well-capitalized for prompt corrective action purposes, Timberland Bank will be required to maintain the following ratios: (1) a CET1 ratio of at least 6.5% of risk-weighted assets; (2) a Tier 1 capital ratio of at least 8.0% of risk-weighted assets; (3) a total capital ratio of at least 10.0% of risk-weighted assets; and (4) a leverage ratio of at least 5.0%.

We have conducted a pro forma analysis of these new requirements as of September 30, 2013. We have determined that if these requirements were in effect on that date, Timberland Bancorp and Timberland Bank would be considered well-capitalized.

The application of these more stringent capital requirements could, among other things, result in lower returns on invested capital, over time require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying out dividends or buying back shares. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Any additional changes in our regulation and oversight, in the form of new laws, rules and regulations could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or prospects.

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 continued growth.  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.  If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. As a result, we may have to raise additional capital on terms that may be dilutive to our shareholders. 

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

We performed our test for goodwill impairment for fiscal year 2013, and the test concluded that recorded goodwill was not impaired. Our assessment of the fair value of goodwill is based on an evaluation of market capitalizations for similar financial institutions, discounted cash flows from forecasted earnings, our current market capitalization, and a valuation of our assets and

45

liabilities. 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 to earnings, which would adversely affect our results of operations, perhaps materially; however, it would have no impact on our liquidity, operations or regulatory capital.

Our investment in Federal Home Loan Bank of Seattle stock may become impaired.

At September 30, 2013, we owned $5.5 million in FHLB stock. As a condition of membership at the FHLB, we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. Our FHLB stock has a par value of $100, is recorded at cost, and it is subject to recoverability testing per applicable accounting standards.  The FHLB announced that, as of December 31, 2008, it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (the "FHFA"), its primary regulator and that it would suspend future dividends and the repurchase and redemption of outstanding common stock. In September 2012, the FHLB announced that the FHFA reclassified the FHLB of Seattle to be adequately capitalized. The FHLB also announced that it had been granted authority to repurchase up to $25 million of excess capital stock per quarter, provided they receive a non-objection from the FHFA. As of September 30, 2013, the FHLB had repurchased $203,000 of its stock from the Bank at par value. The FHLB announced in July 2013 that, based on its second quarter 2013 financial results, their Board of Directors had declared a $0.025 per share cash dividend. This represented the first dividend in a number of years and represents a significant milestone in FHLB's return to normal operations. As a result, we have not recorded an impairment on our investment in FHLB stock. Deterioration in the FHLB's financial position may, however, result in future impairment in the value of those securities. We will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of our investments.

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, 2013 our MSRs totaled $2.3 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.  We recorded a $475,000 valuation recovery to our MSRs during the year ended September 30, 2013, which increased our earnings.  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, 2013 include a deferred tax asset and we may not be able to realize the full amount of such asset.

We recognize deferred tax assets and liabilities based on differences between the financial statement recorded amounts and the tax bases of assets and liabilities.  At September 30, 2013, the net deferred tax asset was approximately $2.8 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.

We regularly review our net deferred tax assets for recoverability based on our expectations of 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, 2013 is fully realizable; however, if we determine that we will be unable to realize all or part of the net deferred tax asset, we would adjust the net deferred tax asset, which would negatively impact our financial condition and results of operations.

The Series A Preferred Stock impacts net income to our common shareholders and net income per common share and the warrant we issued to Treasury may be dilutive to holders of our common stock.

On November 13, 2012, our outstanding shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, ("Series A Preferred Stock") with a redemption value of $1,000 per share, originally issued to the U.S. Treasury Department ("Treasury")

46

on December 23, 2008 as part of the CPP, 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 securities, 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 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 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.  The dividends declared or accrued on the Series A Preferred Stock reduce the net income to common shareholders and our net income per common share.  The Series A Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of the Company. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the warrant we issued in conjunction with the sale of the Series A Preferred Stock 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, 2013 (including the shares issuable upon exercise of the warrant in total shares outstanding).  

If we are unable to redeem our Series A Preferred Stock by December 2013, the cost of this capital to us will increase substantially.

If we are unable to redeem our Series A Preferred Stock prior to December 23, 2013, the cost of this capital to us will increase substantially on that date, from 5.0% per annum (approximately $603,000 annually) to 9.0% per annum (approximately $1.1 million annually).  Depending on our financial condition at the time, this increase in the annual dividend rate on the Series A Preferred Stock could have a material negative effect on our liquidity and ability to pay dividends to common shareholders.

Regulatory and contractual restrictions may limit or prevent us from paying dividends on our common stock.

Holders of our common stock are only entitled to receive such dividends as our Board may declare out of funds legally available for such payments.  As an entity separate and distinct from the Bank, the Company derives substantially all of its revenue in the form of dividends from the Bank.  Accordingly, the Company is and will be dependent upon dividends from the Bank to satisfy its cash needs and to pay dividends on its common stock. The inability to receive dividends from the Bank could have a material adverse effect on the Company's business, financial condition and results of operations. The Bank's ability to pay dividends is subject to its ability to earn net income and, to meet certain regulatory requirements. The lack of a cash dividend could adversely affect the market price of our common stock.

Changes in accounting standards may affect our performance.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations.  From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements.  These changes can be difficult to predict and can materially impact how we report and record our financial condition and results of operations.  In some cases, we could be required to apply a new or revised standard retroactively, resulting in a retrospective adjustment to prior financial statements.

We are subject to a variety of operational risks, including legal and compliance risk, fraud and theft risk and the risk of operational errors, which may adversely affect our business and results of operations.

We are from time to time subject to claims and proceedings related to our operations.  These claims and legal actions, which could include supervisory or enforcement actions by our regulators, or criminal proceedings, could involve large monetary claims, including civil money penalties or fines imposed by government authorities, and significant defense costs.  To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations.

Both internal and external fraud and theft are risks.  If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss.  Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or if such information were to be intercepted or otherwise inappropriately taken by third parties.

Operational errors include clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.  Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified.  Because of our large transaction volume and our necessary dependence upon automated systems to record and process these transactions there is a risk that technical flaws or tampering or manipulation of those automated systems arising from events wholly or partially beyond our control may

47

give rise to a disruption of service to customers and to financial loss or liability.  We are exposed to the risk that our business continuity and data security systems may prove to be inadequate.

The occurrence of any of these risks could result in a diminished ability to operate our business, additional costs to correct defects, potentially liability to clients, reputational damage and regulatory intervention, any of which could adversely affect our business, financial condition and results of operations.

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.

Item 1B.  Unresolved Staff Comments

Not applicable.

Item 2.  Properties

At September 30, 2013 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 at 1751 Circle Lane SE, which are leased.

Location	Year Opened	Approximate Square Footage	Deposits at September 30, 2013
			(In thousands)
Main Office:
624 Simpson Avenue Hoquiam, Washington 98550	1966	7,700	$	71,849
Branch Offices:
300 N. Boone Street Aberdeen, Washington 98520	1974	3,400	31,804
201Main Street South Montesano, Washington 98563	2004	3,200	29,928
361 Damon Road Ocean Shores, Washington 98569	1977	2,100	23,429
2418 Meridian Avenue East Edgewood, Washington 98371	1980	2,400	37,561
202 Auburn Way South Auburn, Washington 98002	1994	4,200	24,949
12814 Meridian Avenue East (South Hill) Puyallup, Washington 98373	1996	4,200	36,331
1201 Marvin Road, N.E. Lacey, Washington 98516	1997	4,400	20,365
101 Yelm Avenue W. Yelm, Washington 98597	1999	3,400	18,581

48

20464 Viking Way NW Poulsbo, Washington 98370	1999	1,800	13,870
2419 224th Street E. Spanaway, Washington 98387	1999	3,900	29,990
801 Trosper Road SW Tumwater, Washington 98512	2001	3,300	29,784
7805 South Hosmer Street Tacoma, Washington 98408	2001	5,000	30,661
2401 Bucklin Hill Road Silverdale, Washington 98383	2003	4,000	36,144
423 Washington Street SE Olympia, Washington 98501	2003	3,000	19,298
3105 Judson Street Gig Harbor, Washington 98335	2004	2,700	24,405
117 N. Broadway Aberdeen, Washington 98520	2004	3,700	22,640
313 West Waldrip Street Elma, Washington 98541	2004	5,900	23,456
1751 Circle Lane SE Lacey, Washington 98503	2004	900	13,417
101 2nd Street Toledo, Washington 98591	2004	1,800	31,124
209 NE 1st Street Winlock, Washington 98586	2004	3,400	18,191
714 W. Main Street Chehalis, Washington 98532	2009	4,600	20,485
Loan Center/Data Center:
120 Lincoln Street Hoquiam, Washington 98550	2003	6,000	N/A
Administrative Offices:
305 8th Street Hoquiam, Washington 98550	2004	4,100	N/A

Management believes that all facilities are appropriately insured and are adequately equipped for carrying on the business of the Bank.

At September 30, 2013 the Bank operated 23 proprietary ATMs that are part of a nationwide cash exchange network.

Item 3.  Legal Proceedings

Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank's business.  The Bank 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 Bank.

Item 4. Mine Safety Disclosures

Not applicable.

49

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, 2013, there were 7,047,636 shares of common stock issued and approximately 535 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, 2013 and 2012.  The high and low price information was provided by the Nasdaq Stock Market.

Fiscal 2013	High		Low		Dividends per Common Share
First Quarter	$	6.94	$	5.77	$	—
Second Quarter	8.90		6.66		0.03
Third Quarter	8.46		7.98		0.03
Fourth Quarter	9.24		8.25		0.03
Fiscal 2012	High		Low		Dividends per Common Share
First Quarter	$	4.60	$	3.25	$	—
Second Quarter	4.79		3.86		—
Third Quarter	5.31		4.55		—
Fourth Quarter	6.11		4.75		—

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. After consideration of these factors, we resumed our dividend payout in the second quarter of fiscal 2013. 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 equity compensation plan information presented under subparagraph (d) in Part III, Item 12. of this Form 10-K is incorporated herein by reference.

Stock Repurchases

50

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.  In addition, pursuant to the terms of the Series A Preferred Stock, the Company generally may not repurchase its common stock unless it is current on dividend payments on the Series A Preferred Stock. The Company did not repurchase any shares of its common stock during the year ended September 30, 2013 and there are no common stock repurchase plans currently authorized.

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, 2008.

	Period Ended
Index	9/30/2008	9/30/2009	9/30/2010	9/30/2011	9/30/2012	9/30/2013
Timberland Bancorp, Inc.	100.00	66.00	58.02	58.02	86.17	130.64
NASDAQ Composite	100.00	102.54	115.60	119.07	155.56	191.34
SNL $500M-$1B Thrift Index *	100.00	83.72	80.31	83.46	104.95	129.33

* Source: SNL Financial LC, Charlottesville, VA

51

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.

52

	At September 30,
	2013			2012			2011			2010			2009
	(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets	$	745,648		$	736,954		$	738,224		$	742,687		$	701,676
Loans receivable and loans held for sale, net	548,104			538,480			528,024			527,591			547,208
MBS and other investments held-to-maturity	2,737			3,339			4,145			5,066			7,087
MBS and other investments available-for-sale	4,101			4,945			6,717			11,119			13,471
FHLB Stock	5,452			5,655			5,705			5,705			5,705
Cash and due from financial institutions, interest-bearing deposits in banks and fed funds sold	94,496			96,668			112,065			111,786			66,462
Certificates of deposit held for investment	30,042			23,490			18,659			18,047			3,251
OREO and other repossessed assets	11,720			13,302			10,811			11,519			8,185
Deposits	608,262			597,926			592,678			578,869			505,661
FHLB advances	45,000			45,000			55,000			75,000			95,000
Federal Reserve Bank advances	—			—			—			—			10,000
Shareholders' equity	89,688			90,319			86,205			85,408			87,199
	Year Ended September 30,
	2013			2012			2011			2010			2009
	(In thousands, except per share data)
SELECTED OPERATING DATA:
Interest and dividend income	$	30,237		$	31,605		$	33,966		$	36,596		$	38,801
Interest expense	4,439			5,947			8,533			10,961			13,504
Net interest income	25,798			25,658			25,433			25,635			25,297
Provision for loan losses	2,925			3,500			6,758			10,550			10,734
Net interest income after provision for loan losses	22,873			22,158			18,675			15,085			14,563
Non-interest income	10,262			9,781			8,681			5,696			6,949
Non-interest expense	25,864			25,568			25,963			24,641			22,739
Income (loss) before income taxes	7,271			6,371			1,393			(3,860		)	(1,227		)
Provision (benefit) for federal income taxes	2,514			1,781			304			(1,569		)	(985		)
Net income (loss)	4,757			4,590			1,089			(2,291		)	(242		)
Preferred stock dividends	(710		)	(832		)	(832		)	(832		)	(643		)
Preferred stock accretion	(283		)	(240		)	(225		)	(210		)	(129		)
Discount on redemption of preferred stock	255			—			—			—			—
Net income (loss) to common shareholders	$	4,019		$	3,518		$	32		$	(3,333	)	$	(1,014	)
Net income (loss) per common share:
Basic	$	0.59		$	0.52		$	—		$	(0.50	)	$	(0.15	)
Diluted	$	0.58		$	0.52		$	—		$	(0.50	)	$	(0.15	)
Dividends per common share	$	0.09		$	—		$	—		$	0.04		$	0.39
Dividend payout ratio (1)	15.80		%	N/A			N/A			N/A			N/A

_______________

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

53

	At September 30,
	2013	2012	2011	2010	2009
OTHER DATA:
Number of real estate loans outstanding	2,712	2,704	2,796	2,919	3,062
Deposit accounts	54,809	55,848	56,152	55,598	53,941
Full-service offices	22	22	22	22	22

	At or For the Year Ended September 30,
	2013		2012		2011		2010		2009
KEY FINANCIAL RATIOS:
Performance Ratios:
Return (loss) on average assets (1)	0.64	%	0.62	%	0.15	%	(0.32	)%	(0.04	)%
Return (loss) on average equity (2)	5.27		5.21		1.26		(2.65	)	(0.28	)
Interest rate spread (3)	3.69		3.65		3.58		3.63		3.64
Net interest margin (4)	3.82		3.81		3.78		3.87		4.01
Average interest-earning assets to average interest-bearing liabilities	119.93		117.42		115.24		114.51		117.42
Non-interest expense as a percent of average total assets	3.49		3.48		3.54		3.43		3.35
Efficiency ratio (5)	71.72		72.15		76.11		78.65		70.52
Asset Quality Ratios:
Non-accrual and 90 days or more past due loans as a percent of total loans receivable, net	2.51	%	4.09	%	4.32	%	4.86	%	5.36	%
Non-performing assets as a percent of total assets (6)	3.75		5.19		5.01		5.53		5.52
Allowance for loan losses as a percent of total loans receivable, net (7)	1.99		2.15		2.21		2.09		2.59
Allowance for loan losses as a percent of non-performing loans (8)	79.28		52.48		51.18		43.01		47.11
Net charge-offs to average outstanding loans	0.65		0.66		1.13		2.45		0.79
Capital Ratios:
Total equity-to-assets ratio	12.03	%	12.26	%	11.68	%	11.50	%	12.43	%
Average equity to average assets	12.19		11.98		11.81		12.05		12.72

__________________

(1) Net income (loss) divided by average total assets.

(2) Net income (loss) 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 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 that are on accrual status are not included.

54

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 on this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact 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, 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, 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; 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 and preferred 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.

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 undertake no obligation to publicly update or revise any forward-looking statements included in this annual report 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. We caution readers not to place

55

undue reliance on any forward-looking statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for fiscal 2014 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 results of operations and stock price performance.

Critical Accounting Policies and Estimates

The Company has established various accounting policies that govern the application of accounting principles generally accepted in the United States of America (“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 mortgage servicing rights (“MSRs”), the determination of other than temporary impairments in the market value of investment securities, the determination of goodwill impairment and the determination of the recorded value of other real estate owned.  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 of the Notes to 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.

Allowance for Loan Losses. 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 in 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 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, 2013 was adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions, results of examinations by the Company’s or the Bank’s regulators or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations.

Mortgage Servicing Rights.  MSRs are capitalized when acquired through the origination of loans that are subsequently sold with servicing rights retained and are amortized to servicing income on loans sold in proportion to and over the period of estimated net servicing income.  The 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.

The estimated fair value is evaluated at least annually by a third party firm 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.  The effect of changes in market interest rates on estimated rates 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.

Other-Than-Temporary Impairment (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

56

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, 2013, 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, 2013, 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.

Other Real Estate Owned (“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 of the Notes 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 Bank is a community-oriented bank which has traditionally offered a wide variety of savings products to its retail customers while concentrating its lending activities on real estate loans. Weak economic conditions and ongoing stress on the housing and financial markets have prevailed since 2008 in portions of the United States, including Washington State where we hold substantially all

57

of our loans and conduct all of our operations. The majority of our loans are secured by collateral and made to borrowers located in Washington State. Western Washington, which includes our primary market areas, has experienced home price declines, increased foreclosures, and has experienced above average unemployment rates.  As a result, our credit losses since 2008 have been at significantly higher levels than our historical experience and our net interest income and other operating revenues and expenses have also been adversely affected.  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 and land loans and maintain higher levels of 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 properties. 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.

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 FDIC bank resolutions and anticipated 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 will 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 and land loans in favor of loans that possess credit profiles representing less risk to the Bank. We will 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. 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. 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. Longer term fixed-rate mortgage loans have generally been originated for sale into the secondary market.

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,

58

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 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, originating fixed-rate loans for retention or sale in the secondary market, and retaining the related mortgage servicing rights.

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 the financial services industry interest risk rate risk and balance sheet management services. Based on a rate shock analysis prepared by FIMAC based on data at September 30, 2013, an immediate increase in interest rates of 200 basis points would increase the Bank’s projected net interest income by approximately 5.3%, 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.  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, 2013, adjustable-rate mortgage loans constituted $358.1 million or 72.0%, 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 and land development 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, 2013, the consumer, commercial business and construction and land development portfolios amounted to $39.0million, $17.5 million and $45.1 million, or 6.7%, 3.0% and 7.8% 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, 2013.

59

Hypothetical	Net Interest Income (1)(2)							Current Market Value
Interest Rate	Estimated		$ Change			% Change		Estimated		$ Change			% Change
Scenario (3)	Value		from Base			from Base		Value		from Base			from Base
(Basis Points)	(Dollars in thousands)
+400	$	27,134	$	2,245		9.02	%	$	149,047	$	7,769		5.50	%
+300	26,688		1,799			7.23		147,048		5,770			4.08
+200	26,217		1,328			5.34		145,307		4,029			2.85
+100	25,519		630			2.53		143,222		1,944			1.38
BASE	24,889		—			—		141,278		—			—
-100	24,015		(874		)	(3.51	)	138,671		(2,607		)	(1.85	)
-200	23,360		(1,529		)	(6.14	)	138,663		(2,615		)	(1.85	)

___________

(1) Does not include loan fees.

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

(3) No rates in the model are allowed to go below zero.

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 1.9% decrease in NPV and a 3.5% decrease in net interest income.  In the event of a 200 basis point increase in interest rates, a 2.9% increase in NPV and a 5.3% increase in net interest income would be expected.  Based upon the modeling described above, the Bank's asset and liability structure generally results in 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 could possibly deviate significantly from those assumed in calculating the table.

Comparison of Financial Condition at September 30, 2013 and September 30, 2012

The Company's total assets increased by $8.7 million, or 1.2%, to $745.6 million at September 30, 2013 from $737.0 million at September 30, 2012.  The increase was primarily attributable to an increase in net loans receivable and an increase in certificates of deposit ("CDs") held for investment.  These increases were partially offset by decreases in OREO and other repossessed assets, the prepaid FDIC insurance assessment and other assets.

Net loans receivable increased by $9.6 million, or 1.8%, to $548.1 million at September 30, 2013 from $538.5 million at September 30, 2012, primarily a result of increases in commercial real estate, one-to four-family construction and multi-family loans balances.  These increases were partially offset by decreases to commercial real estate construction, land, commercial business and one-to four-family loan balances.

Total deposits increased by $10.3 million, or 1.7%, to $608.3 million at September 30, 2013 from $597.9 million at September 30, 2012, primarily as a result of increases in money market, non-interest bearing, N.O.W. checking and savings account balances.  These increases were partially offset by a decrease in CD account balances.

Shareholders' equity decreased by $631,000, or 0.7%, to $89.7 million at September 30, 2013 from $90.3 million at September 30, 2012.  The decrease was primarily due to the repurchase of 4,576 shares of Series A Preferred Stock and the payment of dividends on preferred and common stock. These decreases to shareholders' equity were partially offset by net income for the year ended September 30, 2013. As of September 30, 2013, the Company exceeded all regulatory capital requirements required for bank holding company regulatory purposes. For additional details see Note 18 of the Notes to Consolidated Financial Statements

60

contained in "Item 8. Financial Statements and Supplementary Data" and "Item 1. Business - Regulation of the Company - Capital Requirements."

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 $4.4 million, or 3.6%, to $124.5 million at September 30, 2013 from $120.2 million at September 30, 2012.  The increase was primarily due to a $6.6 million increase in CDs held for investment, which was partially offset by a $2.2 million decrease in total cash and cash equivalents.  The Company continued to maintain high levels of liquidity primarily for asset-liability management purposes.

Mortgage-backed Securities and Other Investments:  MBS and other investments decreased by $1.5 million, or 17.5%, to $6.8 million at September 30, 2013 from $8.3 million at September 30, 2012.  The decrease was primarily as a result of regular amortization and prepayments on MBS and $47,000 of OTTI charges recorded on private label residential MBS.  For additional details on MBS and other investments, see "Item 1, Business  -Investment Activities" and Note 3 of the Notes to the Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplemental Data."

Loans Receivable and Loans Held for Sale, Net of Allowance for Loan Losses:  Net loans receivable, including loans held for sale, increased by $9.6 million, or 1.8% to $548.1 million at September 30, 2013 from $538.5 million at September 30, 2012.  The increase was primarily a result of a $35.0 million increase in commercial real estate loan balances, a $7.5 million increase in custom and owner/builder residential construction loan balances, a $3.6 million increase in multi-family loan balances, a $484,000 increase in loans held for sale and a $689,000 decrease in the allowance for loan losses. These increases to net loans receivable were partially offset by an $18.0 million decrease in commercial construction loan balances, an $8.5 million decrease in land loan balances, a $5.1 million decrease in commercial business loan balances, a $3.2 million decrease in one- to four-family loan balances, a $452,000 decrease in speculative one-to four-family construction loan balances and a $2.2 million increase in the undisbursed portion of construction loans in process. The increase in commercial real estate loan balances and the decrease in commercial real estate construction loan balances were in part due to several commercial real estate construction projects completing the construction phase and converting to permanent financing during the year ended September 30, 2013.

Loan originations decreased by 4.6% to $217.8 million for the year ended September 30, 2013 from $228.3 million for the year ended September 30, 2012.  The decrease in loan originations was primarily due to a decrease in the level of multi-family loans and commercial business loans originated. The Company continued to sell longer-term fixed rate residential loans for asset-liability management purposes and to generate non-interest income.  The Company sold $89.4 million in fixed rate one- to four-family mortgage loans during the year ended September 30, 2013 compared to $97.4 million for the fiscal year ended September 30, 2012.  For additional information on loans, see "Item 1, Business   Lending Activities" and Note 4 of the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

Premises and Equipment:  Premises and equipment decreased by $122,000, or 0.7%, to $17.8 million at September 30, 2013 from $17.9 million at September 30, 2012.  The decrease was primarily due to the sale of a land parcel adjacent to a branch office and annual depreciation.  For additional information on premises and equipment, see "Item 2, Properties" and Note 6 of the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

Other Real Estate Owned:  OREO and other repossessed assets decreased by $1.6 million, or 11.9% to $11.7 million at September 30, 2013 from $13.3 million at September 30, 2012.  The decrease was primarily due to the disposition of $6.0 million in OREO properties and other repossessed assets and lower of cost or fair value losses of $2.1 million. These decreases in OREO were partially offset by the addition of $6.4 million in OREO properties and other repossessed assets and $146,000 in capitalized costs. At September 30, 2013, the OREO balance was comprised of 47 individual properties.  The properties consisted of 26 land parcels totaling $4.6 million, six commercial real estate properties totaling $3.2 million, three multi-family properties totaling $2.1 million and twelve single family homes totaling $1.8 million.  The largest OREO property was a multi-family property with a balance of $1.3 million.  For additional information on OREO and other repossessed assets, see "Item 1, Business Lending Activities  Nonperforming Assets" and Note 7 of the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

Bank Owned Life Insurance ("BOLI"):  BOLI increased $578,000, or 3.5%, to $17.1 million at September 30, 2013 from $16.5 million at September 30, 2012 due to net BOLI earnings.

Goodwill and Core Deposit Intangible ("CDI"):  The value of goodwill at $5.7 million at September 30, 2013 remained unchanged from September 30, 2012.  The amortized value of CDI decreased by $130,000 to $119,000 at September 30, 2013 from $249,000 at September 30, 2012 due to scheduled amortization.  The Company performed its annual review of goodwill

61

during the quarter ended June 30, 2013 and determined that there was no impairment.  For additional information on goodwill and CDI, see Note 1 and Note 8 of the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplemental Data."

Mortgage Servicing Rights ("MSRs"):  MSRs increased $255,000, or 12.7%, to $2.3 million at September 30, 2013 from $2.0 million at September 30, 2012, primarily due to the addition of $728,000 in capitalized MSRs for new loans being serviced and a $475,000 valuation reserve recovery on MSRs reflecting the recent increase in mortgage interest rates. This increase was partially offset by amortization of $948,000 on MSRs during the year ended September 30, 2013. The principal amount of loans serviced for Freddie Mac increased $20.9 million, or 6.8% to $325.7 million at September 30, 2013 from $304.9 million at September 30, 2012.  For additional information on MSRs, see Note 5 of the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplemental Data."

Prepaid FDIC Insurance Assessment:  There was no prepaid FDIC insurance assessment at September 30, 2013 compared to $1.2 million at September 30, 2012 as a portion of the prepaid amount was expensed and the FDIC returned the remaining prepaid amount.

Deposits: Deposits increased by $10.3 million, or 1.7%, to $608.3 million at September 30, 2013 from $597.9 million at September 30, 2012.  The increase was primarily a result of an $19.6 million increase in money market account balances, a $12.4 million increase in non-interest account balances, a $6.0 million increase in NOW checking account balances and a $3.9 million increase in savings account balances.  These increases were partially offset by a $31.3 million decrease in CD account balances.  The increase in money market account balances and the decrease in CD accounts were in part due to the low interest rate environment, as some depositors opted to place maturing CD funds into non-maturity accounts to retain flexibility if interest rates increased.  The Company also experienced deposit inflows due to a number of customers transferring funds from other financial institutions during the year ended September 30, 2013.  For additional information on deposits, see "Item 1, Business   Deposit Activities and Other Sources of Funds" and Note 9 of the Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

FHLB Advances: FHLB advances were $45.0 million at September 30, 2013 and at September 30, 2012. For additional information on borrowings, see "Item 1, Business   Deposit Activities and Other Sources of Funds   Borrowings" and Note 10 of the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

Shareholders' Equity:  Total shareholders' equity decreased by $631,000, or 0.7%, to $89.7 million at September 30, 2013 from $90.3 million at September 30, 2012.  The decrease was primarily due to the repurchase of 4,576 shares of Series A Preferred Stock for $4.3 million and the payment (and accrual) of $1.5 million in dividends to common and preferred shareholders. These decreases to shareholder's equity were partially offset by net income of $4.8 million for the year ended September 30, 2013. 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, 2013 and 2012

Net income for the year ended September 30, 2013 increased $167,000, or 3.6%, to $4.76 million from $4.59 million for the year ended September 30, 2012.  Net income to common shareholders after adjusting for preferred stock dividends, preferred stock discount accretion and discount on redemption of preferred stock increased $501,000, or 14.2%, to $4.02 million for the year ended September 30, 2013 from $3.52 million for the year ended September 30, 2012.  Net income per diluted common share increased $0.06, or 11.5%, to $0.58 for the year ended September 30, 2013 from $0.52 for the year ended September 30, 2012. The increase in net income was primarily due to a decrease in the provision for loan losses, an increase in non-interest income and an increase in net interest income. These increases to net income were partially offset by an increase in non-interest expense and an increase in the provision for 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 delinquent loans and loans graded substandard decreased during the year ended September 30, 2013.

The increase in non-interest income was primarily a result of an increase in the valuation recovery on MSRs and a reduction in net OTTI on MBS and other investments. These increases to non-interest income were partially offset by a decrease in service charges on deposits.

The increase in net interest income was primarily attributable to increases in the Company's average loans receivable and a decrease in the average balance of interest-bearing liabilities.

62

The increase in non-interest expense was primarily attributable to increases in OREO related expenses and salaries and employee benefits expense. These increases to non-interest expense were partially offset by the gain on disposition of premises and a decrease in loan administration and foreclosures expenses.

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

Net Interest Income:  Net interest income increased by $140,000, or 0.5%, to $25.80 million for the year ended September 30, 2013 from $25.66 million for the year ended September 30, 2012.  The increase in net interest income was primarily attributable to an increase in the Company's average loans receivable and a decrease in the average balance of interest-bearing liabilities.

Total interest and dividend income decreased by $1.37 million, or 4.3%, to $30.24 million for the year ended September 30, 2013 from $31.61 million for the year ended September 30, 2012 as the yield on interest earning assets decreased to 4.48% from 4.69%.  The decrease in the weighted average yield on interest earning assets was primarily a result of a decrease in overall market rates for loans.

Total interest expense decreased by $1.51 million to $4.44 million for the year ended September 30, 2013 from $5.95 million for the year ended September 30, 2012 as the average rate paid on interest-bearing liabilities decreased to 0.79% for the year ended September 30, 2013 from 1.04% for the year ended September 30, 2012.  The decrease in funding costs was primarily a result of a decrease in overall market rates, a change in the composition of deposit categories and a decrease in the average level of FHLB advances.

Average loans receivable increased $12.29 million to $556.82 million for the year ended September 30, 2013 from $544.52 million for the year ended September 30, 2012.  Average interest-bearing liabilities decreased $11.35 million to $562.83 million for the year ended September 30, 2013 from $574.18 million for the year ended September 30, 2012. The net interest margin increased one basis point to 3.82% for the year ended September 30, 2013 from 3.81% for the year ended September 30, 2012 as funding costs decreased at a greater rate than the yield on interest earning assets.

Provision for Loan Losses: The provision for loan losses decreased by $575,000, or 16.4%, to $2.93 million for the year ended September 30, 2013 from $3.50 million for the year ended September 30, 2012. Net charge-offs decreased by $7,000, or 0.2%, to $3.61 million for the year ended September 30, 2013 from $3.62  million for the year ended September 30, 2012.  The net charge-offs to average outstanding loans ratio was 0.65% for the year ended September 30, 2013 and 0.66% for the year ended September 30, 2012. The decrease in the provision for loan losses was primarily due to improved underlying credit quality metrics in the loan portfolio. The level of delinquent loans (loans 30 or more days past due) decreased by $12.17 million, or 40.2%, to $18.07 million at September 30, 2013 from $30.24 million at September 30, 2012 and the level of loans graded substandard decreased by $5.10 million, or 15.4%, to $27.98 million at September 30, 2013 from $33.08 million at September 30, 2012. Non-accruing loans decreased $7.72 million to $13.61 million at September 30, 2013 from $21.33 million at September 30, 2012.

The Company has established a comprehensive methodology for determining the provision for 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, 2013 was $3.08 million.

Based on the comprehensive methodology, management deemed the allowance for loan losses of $11.14 million at September 30, 2013 (1.99% of loans receivable and loans held for sale and 79.3% of non-performing loans) 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 $481,000, or 4.9%, to $10.26 million for the year ended September 30, 2013 from $9.78 million for the year ended September 30, 2012.  This increase was primarily a result of a $465,000

63

increase in the valuation recovery on MSRs and a $167,000 reduction in net OTTI on MBS and other investments.  These increases to non-interest income were partially offset by a $132,000 decrease in service charges on deposits.

The Company's valuation recovery on MSRs increased by $465,000 to $475,000 for the year ended September 30, 2013 from $10,000 for the year ended September 30, 2012.  The valuation of the MSRs was based on a third party valuation of the MSR asset.  At September 30, 2013, the MSR asset had no remaining valuation allowance available for future recovery. The decrease in net OTTI charges on MBS and other investments was primarily due to a reduction in the level of credit related impairment on private label MBS in the Company's investment portfolio during the year ended September 30, 2013. At September 30, 2013, the Company's remaining private label MBS had been reduced to $2.44 million from an original acquired balance of $15.30 million. The reduction in service charges on deposits was a result of fewer overdrafts on checking accounts. Although gain on sale of loans increased slightly to $2.51 million for the year ended September 30, 2013 as compared to $2.47 million for the year ended September 30, 2012, the recent increase in mortgage rates may, however, reduce future volumes of loans originated for sale as refinancing activity declines.

Non-interest Expense:   Total non-interest expense increased by $296,000, or 1.2%, to $25.86 million for the year ended September 30, 2013 from $25.57 million for the year ended September 30, 2012.  The increase was primarily attributable to a $605,000 increase in OREO and other repossessed assets expense, a $555,000 increase in salaries and employee benefits and smaller increases in several other expense categories. These increases to non-interest expense were partially offset by a $431,000 gain on the disposition of premises and equipment, a $386,000 decrease to loan administration and foreclosure expenses and smaller decreases in several other expense categories.

The increase in OREO related expenses was primarily a result of a $1.02 million increase in the level of valuation write-downs based on updated appraisals received on OREO properties. The increase in OREO expenses due to valuation write-downs was partially offset by net gains on sales of OREO and other repossessed assets that totaled $266,000 for the year ended September 30, 2013 compared to a net loss of $(373,000) for the year ended September 30, 2012. The increase in salaries and employee benefits expense was primarily due to annual salary adjustments and the hiring of additional lending department personnel. The gain on disposition of premises was a result of the sale of a land parcel adjacent to a branch office. The decrease in loan administration and foreclosure expense was primarily a result of decreased foreclosure related activity.

The Company's efficiency ratio improved to 71.72% for the year ended September 30, 2013 from 72.15% for the year ended September 30, 2012.

Provision for Federal Income Taxes: The provision for federal and state income taxes increased by $733,000, or 41.2% to $2.51 million for the year ended September 30, 2013 from $1.78 million for the year ended September 30, 2012, primarily due to increased income before income taxes and a deferred tax valuation allowance adjustment related to the expiration of a capital loss carry-forward.  The Company's effective federal and state income tax rate was 34.6% for the year ended September 30, 2013 compared to 28.0% for the year ended September 30, 2012.  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. During the year ended September 30, 2012, the provision for income taxes was reduced by $205,000 due to a deferred tax valuation recovery based on the expectation of certain tax planning strategies. For additional information on federal income taxes, see Note 13 of the Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

Comparison of Operating Results for the Years Ended September 30, 2012 and 2011

Net income was $4.59 million for the year ended September 30, 2012 compared to $1.10 million for the year ended September 30, 2011.  Net income to common shareholders after adjusting for preferred stock dividends and preferred stock discount accretion was $3.52 million for the year ended September 30, 2012 compared to $32,000 for the year ended September 30, 2011.  Net income per diluted common share was $0.52 for the year ended September 30, 2012 compared to $0.00 per diluted common share for the year ended September 30, 2011.  The increase in net income was primarily due to a decrease in the provision for loan losses, and an increase in non-interest income partially offset by an increase in the provision for income taxes. Also contributing to the improvement in net income were an increase in net interest income and a decrease in non-interest expense.

The decrease in the provision for loan losses was primarily a result of a decrease in the level of net charge-offs for the year ended September 30, 2012 compared to the prior year.

The increase in non-interest income was primarily a result of an increase in gain on sale of loans, an increase in ATM and debit card interchange transaction fees and a reduction in net OTTI on MBS and other investments. These increases to non-interest income were partially offset by a reduction in the valuation recovery on MSRs and a decrease in service charges on deposits.

64

The increase in net interest income was primarily attributable to an increase in the Company's net interest margin.

The decrease in non-interest expense was primarily attributable to decreases in salaries and employee benefits expense, FDIC insurance expense, other insurance expense and loan administration and foreclosure expense. These decreases to non-interest expense were partially offset by an increase in OREO related expenses.

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

Net Interest Income:  Net interest income increased by $225,000, or 0.9%, to $25.66 million for the year ended September 30, 2012 from $25.43 million for the year ended September 30, 2011. The increase in net interest income was primarily attributable to increases in the Company's average loan receivable and its net interest margin.

Total interest and dividend income decreased by $2.36 million, or 7.0%, to $31.61 million for the year ended September 30, 2012 from $33.97 million for the year ended September 30, 2011 as the yield on interest earning assets decreased to 4.69% from 5.04%.  The decrease in the weighted average yield on interest earning assets was primarily a result of a decrease in overall market rates.

Total interest expense decreased by $2.59 million to $5.95 million for the year ended September 30, 2012 from $8.53 million for the year ended September 30, 2011 as the average rate paid on interest-bearing liabilities decreased to 1.04% for the year ended September 30, 2012 from 1.46% for the year ended September 30, 2011.  The decrease in funding costs was primarily a result of a decrease in overall market rates, a change in the composition of deposit categories and a decrease in the average level of FHLB advances.

Average loans receivable increased $6.78 million to $544.52 million for the year ended September 30, 2012 as compared to $537.74 million for the year ended September 30, 2011. The net interest margin increased three basis points to 3.81% for the year ended September 30, 2012 from 3.78% for the year ended September 30, 2011 as funding costs decreased at a greater rate than the yield on interest earning assets.

Provision for Loan Losses: The provision for loan losses decreased by $3.26 million, or 48.2%, to $3.50 million for the year ended September 30, 2012 from $6.76 million for the year ended September 30, 2011.  Net charge-offs decreased by $2.46 million, or 40.4%,  to $3.62 million for the year ended September 30, 2012 from $6.08  million for the year ended September 30, 2011.  The net charge-offs to average outstanding loans ratio was 0.66% for the year ended September 30, 2012 and 1.13% for the year ended September 30, 2011.

Non-interest Income: Total non-interest income increased by $1.10 million, or 12.7%, to $9.78 million for the year ended September 30, 2012 from $8.68 million for the year ended September 30, 2011.  This increase was primarily a result of a $924,000 increase in gains on sale of loans, a $261,000 increase in ATM and debit card interchange transaction fees and a $233,000 reduction in net OTTI on MBS and other investments. These increases to non-interest income were partially offset by a $395,000 decrease in the valuation recovery on MSRs and a $112,000 decrease in service charges on deposits.

The increased income from loan sales was primarily a result of an increase in the amount of residential loans sold in the secondary market for the year ended September 30, 2012. The sale of one-to four-family mortgage loans increased to $97.4 million for the year ended September 30, 2012 from $62.5 million for the year ended September 30, 2011. The increased loan sales were primarily due to increased refinance activity that was attributable to decreased interest rates for fixed rate mortgage loans. The increased ATM and debit card interchange transaction fees were primarily due to several deposit promotions designed to increase ATM and debit card usage. The decrease in OTTI charges on MBS and other investments was primarily due to a reduction in the level of private label MRS in the Company's investment portfolio. At September 30, 2012 the Company's remaining private label MBS had be reduced to $2.78 million from an original acquired balance of $15.30 million.

The Company's valuation recovery on MSRs decreased by $395,000 to $10,000 for the year ended September 30, 2012 from $405,000 for the year ended September 30, 2011. The valuation of the MSRs was based on a third party valuation of the MSR asset. At September 30, 2012, the MSR asset had a remaining valuation allowance of $475,000 available for future recovery.

The reduction in service charges on deposits was a result of fewer overdrafts on checking accounts.

Non-interest Expense:   Total non-interest expense decreased by $395,000, or 1.5%, to $25.57 million for the year ended September 30, 2012 from $25.96 million for the year ended September 30, 2011. The decrease was primarily attributable to a $528,000 decrease in salaries and employee benefits, a $219,000 decrease in FDIC insurance expense, a $147,000 decrease in

65

other insurance expense and $143,000 decrease in loan administration and foreclosure expense. These decreased to non-interest expense were partially offset by a $608,000 increase in OREO and other repossessed assets expense.

The decrease in salaries and employee benefits expense was partially a result of an increased level of loan originations. Under GAAP, the portion of a loan origination fees that is attributable to the estimated employee costs to generate the loan is recorded as a reduction to salaries and employee benefit expense. With the increase in loan originations, the loan originations fees that reduced salaries and employee benefit expense increased by $480,000 during the year ended September 30, 2012 compared to the year ended September 30, 2011.

The decrease in FDIC insurance expense was primarily due to changes in the assessment calculation as a result of the implementation of the Dodd-Frank Act. The decrease in other insurance expenses was primarily a result of reduced insurance premiums. The decrease in loan administration and foreclosure expense was primarily a result of decreased foreclosure related expenses.

The increase in OREO related expenses and loan foreclosure related expenses were primarily a result of an increase in the number of OREO properties held and valuation write-downs based on updated appraisals received for several properties.

The Company's efficiency ratio improved to 72.15% for the year ended September 30, 2012 from 76.11% for the year ended September 30, 2011.

Provision for Federal Income Taxes: The provision for federal income taxes increased by $1.48 million, or 485.9%, to $1.78 million for the year ended September 30, 2012 from $304,000 for the year ended September 30, 2011, primarily due to increased income before taxes. The Company's effective federal and state income tax rate was 28.0% for the year ended September 30, 2012 compared to 21.8% for the year ended September 30, 2011. The difference in the effective tax rate was primarily due to a higher percentage of income subject to tax. Also impacting the effective tax rate were changes to the Company's deferred tax valuation allowance. During the year ended September 30, 2012, the provision for income taxes was reduced by approximately $205,000 due to a deferred tax valuation recovery based on the expected implementation of certain tax planning strategies. The deferred tax valuation allowance relates to a capital loss carry-forward on the sale of securities in fiscal 2008.

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.

66

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,
	2013						2012						2011
	Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost
							(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)(2)	$	556,815	$	29,591	5.31	%	$	544,524	$	30,831	5.66	%	$	537,740	$	32,976	6.13	%
Mortgage-backed securities and other investments	6,595		281		4.26		8,479		404		4.75		11,625		612		5.26
FHLB stock and equity securities	6,561		29		0.44		6,707		32		0.48		6,680		31		0.46
Interest-bearing deposits	105,055		336		0.32		114,514		338		0.30		117,491		347		0.29
Total interest-earning assets	675,026		30,237		4.48		674,224		31,605		4.69		673,536		33,966		5.04
Non-interest-earning assets	65,803						60,927						59,792
Total assets	$	740,829					$	735,151					$	733,328
Interest-bearing liabilities:
Savings accounts	90,376		55		0.06		$	87,020	245		0.28		$	73,696	459		0.62
Money market accounts	86,558		246		0.28		70,111		334		0.48		57,996		435		0.75
NOW accounts	151,980		463		0.30		152,983		651		0.43		157,095		1,415		0.90
Certificates of deposit	188,564		1,804		0.96		215,759		2,721		1.26		240,174		3,827		1.59
Short-term borrowings (3)	352		—		0.05		699		—		0.05		511		—		0.05
Long-term borrowings (4)	45,000		1,871		4.16		47,603		1,996		4.19		55,000		2,397		4.35
Total interest bearing liabilities	562,830		4,439		0.79		574,175		5,947		1.04		584,472		8,533		1.46
Non-interest bearing liabilities	87,698						72,888						62,225
Total liabilities	650,528						647,063						646,697
Shareholders' equity	90,301						88,088						86,631
Total liabilities and shareholders' equity	$	740,829					$	735,151					$	733,328
Net interest income			$	25,798					$	25,658					$	25,433
Interest rate spread.					3.69	%					3.65	%					3.58	%
Net interest margin (5)					3.82	%					3.81	%					3.78	%
Ratio of average interest-earning assets to average interest-bearing liabilities					119.93	%					117.42	%					115.24	%

_______________________________________________

(1) Does not include interest on loans on non-accrual status.  Includes loans originated for sale.  Amortized net deferred loan fees, late fees, extension fees and prepayment penalties (2013, $522; 2012, $802; and 2011, $835) included with interest and dividends.

(2) Average balance includes non-accrual loans.

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

(4) Includes FHLB advances with original maturities of one year or greater.

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

67

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), and (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, 2013 Compared to Year Ended September 30, 2012 Increase (Decrease) Due to										Year Ended September 30, 2012 Compared to Year Ended September 30, 2011 Increase (Decrease) Due to
	Rate				Volume			Net Change			Rate			Volume			Net Change
								(In thousands)
Interest-earning assets:
Loans receivable (1)	$	(1,925	)		$	685		$	(1,240	)	$	(2,555	)	$	411		$	(2,144	)
Mortgage-backed securities and other investments	(39		)		(84		)	(123		)	(55		)	(154		)	(209		)
FHLB stock and equity securities	(3		)		—			(3		)	1			—			1
Interest-bearing deposits	27				(29		)	(2		)	—			(9		)	(9		)
Total net change in income on interest-earning assets	(1,940		)		572			(1,368		)	(2,609		)	248			(2,361		)
Interest-bearing liabilities:
Savings accounts	(199		)		9			(190		)	(286		)	72			(214		)
Money market accounts	(155		)		67			(88		)	(180		)	79			(101		)
NOW accounts	(184		)		(4		)	(188		)	(728		)	(36		)	(764		)
Certificates of deposit	(602		)		(315		)	(917		)	(744		)	(362		)	(1,106		)
Long-term borrowings	(17		)		(108		)	(125		)	(88		)	(313		)	(401		)
Total net change in expense on interest-bearing liabilities	(1,157		)		(351		)	(1,508		)	(2,026		)	(559		)	(2,586		)
Net change in net interest income	$	(783	)	—	$	923		$	140		$	(583	)	$	808		$	225

______________

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

Liquidity and Capital Resources

The Bank's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, the sale of loans, maturing securities and FHLB advances.  While the maturity and 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, 2013, 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 19.17%.  At September 30, 2013, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available advances up to an aggregate amount equal to 25% of total assets, limited by available collateral, under which $45.0 million was outstanding.  The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.  At September 30, 2013 the Bank had no outstanding balance on this borrowing line. The Bank also maintains a $10.0 million overnight borrowing line with PCBB. At September 30, 2013, the Bank did not have an outstanding balance on this borrowing line.

68

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 deposits.  Excess liquidity is invested generally in interest-bearing overnight deposits and other 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 and collateral for repurchase agreements.

The Bank's primary investing activity is the origination of mortgage loans.  During the years ended September 30, 2013, 2012 and 2011, the Bank originated $203.1 million, $215.0 million and $142.4 million of mortgage loans, respectively.  At September 30, 2013, the Bank had loan commitments totaling $41.6 million and undisbursed loans in process totaling $18.5 million.  The Bank anticipates that it will have sufficient funds available to meet current loan commitments.  Certificates of deposit that are scheduled to mature in less than one year from September 30, 2013 totaled $111.5 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, 2013, 2012 and 2011, the Bank sold $89.4 million, $97.4 million and $62.5 million in fixed rate, one- to four-family mortgage loans, respectively.  During the years ended September 30, 2013, 2012 and 2011, the Bank received $113.2 million, $121.1 million and $96.7 million in principal repayments, respectively.

The Bank’s liquidity has been impacted by increases in deposit levels.  During the years ended September 30, 2013, 2012 and 2011, deposits increased by $10.3 million, $5.2 million and $13.8 million, respectively.

Cash and cash equivalents, certificate of deposits held for investment and mortgage-backed securities and other investments increased to $131.4 million at September 30, 2013 from $128.4 million at September 30, 2012.

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, although there are regulatory restrictions on the ability of the Bank to pay dividends. At September 30, 2013, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $505,000.

Bank holding companies and federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital.  At September 30, 2013, Timberland Bancorp and the Bank were in compliance with all applicable capital requirements.  For additional details see Note 18 of the Notes to 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, 2013, 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 payment amounts represent those amounts contractually due at September 30, 2013.

	Payments due by period
	Less than 1 year		1 year through 3 years		After 3 years through  5 years		After 5 years		Total
Contractual obligations
	(In thousands)
Short-term debt obligations	$	—	$	—	$	—	$	—	$	—
Long-term debt obligations	—		—		45,000		—		45,000
Operating lease obligations	183		384		148		166		881
Total contractual obligations	$	183	$	384	$	45,148	$	166	$	45,881

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America 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

69

costs.  Unlike most 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.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The information contained under “Item 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.

70

Item 8.  Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.  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 accounting principles generally accepted in the United States of America.  The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, 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 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 based on the framework in Internal Control -- Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission as of September 30, 2013.  Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of September 30, 2013.

71

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	73
Consolidated Balance Sheets as of September 30, 2013 and 2012	74
Consolidated Statements of Income For the Years Ended
September 30, 2013, 2012 and 2011	76
Consolidated Statements of Comprehensive Income For the
Years Ended September 30, 2013, 2012 and 2011	78
Consolidated Statements of Shareholders' Equity For the
Years Ended September 30, 2013, 2012 and 2011	79
Consolidated Statements of Cash Flows For the Years Ended
September 30, 2013, 2012 and 2011	81
Notes to Consolidated Financial Statements	83

72

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Shareholders of Timberland Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Timberland Bancorp, Inc. and Subsidiary (collectively, “the Company”) as of September 30, 2013 and 2012, 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, 2013. 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, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ Delap LLP

Lake Oswego, Oregon

December 11, 2013

73

Consolidated Balance Sheets

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

September 30, 2013 and 2012

	2013		2012
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	12,879	$	11,008
Interest-bearing deposits in banks	81,617		85,660
Total cash and cash equivalents	94,496		96,668
Certificates of deposit (“CDs”) held for investment (at cost, which      approximates fair value)	30,042		23,490
Mortgage-backed securities (“MBS”) and other investments - held to      maturity, at amortized cost (estimated fair value of $3,533 and $3,632)	2,737		3,339
MBS and other investments - available for sale	4,101		4,945
Federal Home Loan Bank of Seattle (“FHLB”) stock	5,452		5,655
Loans receivable, net of allowance for loan losses of $11,136 and $11,825	546,193		537,053
Loans held for sale	1,911		1,427
Net loans receivable	548,104		538,480
Premises and equipment, net	17,764		17,886
Other real estate owned (“OREO”) and other repossessed assets, net	11,720		13,302
Accrued interest receivable	1,972		2,183
Bank owned life insurance (“BOLI”)	17,102		16,524
Goodwill	5,650		5,650
Core deposit intangible (“CDI”)	119		249
Mortgage servicing rights (“MSRs”), net	2,266		2,011
Prepaid Federal Deposit Insurance Corporation (“FDIC”) insurance assessment	—		1,186
Other assets	4,123		5,386
Total assets	$	745,648	$	736,954
Liabilities and shareholders’ equity
Liabilities:
Deposits:
Non-interest-bearing demand	$	87,657	$	75,296
Interest-bearing	520,605		522,630
Total deposits	608,262		597,926
FHLB advances	45,000		45,000
Repurchase agreements	—		855
Other liabilities and accrued expenses	2,698		2,854
Total liabilities	655,960		646,635
Commitments and contingencies (See Note 16)

See notes to consolidated financial statements

74

Consolidated Balance Sheets (Continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

September 30, 2013 and 2012

Shareholders’ equity	2013			2012
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $0.01 par value; 1,000,000 shares authorized; redeemable at $1,000 per share:    12,065 shares issued and outstanding - September 30, 2013    16,641 shares issued and outstanding - September 30, 2012	$	11,936		$	16,229
Common stock, $0.01 par value; 50,000,000 shares authorized;    7,045,036 shares issued and outstanding	10,570			10,484
Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)	(1,454		)	(1,719		)
Retained earnings	68,998			65,788
Accumulated other comprehensive loss	(362		)	(463		)
Total shareholders’ equity	89,688			90,319
Total liabilities and shareholders’ equity	$	745,648		$	736,954

See notes to consolidated financial statements

75

Consolidated Statements of Income

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2013, 2012, and 2011

	2013			2012			2011
Interest and dividend income
Loans receivable	$	29,591		$	30,831		$	32,976
MBS and other investments	281			404			612
Dividends from mutual funds and FHLB stock	29			32			31
Interest-bearing deposits in banks	336			338			347
Total interest and dividend income	30,237			31,605			33,966
Interest expense
Deposits	2,568			3,951			6,136
FHLB advances	1,871			1,996			2,397
Total interest expense	4,439			5,947			8,533
Net interest income	25,798			25,658			25,433
Provision for loan losses	2,925			3,500			6,758
Net interest income after provision for loan losses	22,873			22,158			18,675
Non-interest income
Other than temporary impairment (“OTTI”) on MBS and other investments	(15		)	(206		)	(236		)
Adjustment for portion recognized in other comprehensive loss (before taxes)	(32		)	(8		)	(211		)
Net OTTI on MBS and other investments	(47		)	(214		)	(447		)
Realized losses on MBS and other investments	—			—			(2		)
Gain on sales of MBS and other investments	—			22			79
Service charges on deposits	3,663			3,795			3,907
ATM and debit card interchange transaction fees	2,142			2,172			1,911
BOLI net earnings	577			607			517
Gain on sales of loans, net	2,507			2,472			1,548
Escrow fees	184			118			73
Fee income from non-deposit investment sales	82			71			92
Valuation recovery on MSRs, net	475			10			405
Other	679			728			598
Total non-interest income, net	10,262			9,781			8,681

See notes to consolidated financial statements

76

Consolidated Statements of Income (continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2013, 2012, and 2011

	2013			2012			2011
Non-interest expense
Salaries and employee benefits	$	12,605		$	12,050		$	12,578
Premises and equipment	2,835			2,676			2,632
(Gain) loss on disposition of premises and equipment, net	(431		)	—			16
Advertising	742			726			800
OREO and other repossessed assets, net	2,587			1,982			1,374
ATM	857			794			802
Postage and courier	443			501			540
Amortization of CDI	130			148			167
State and local taxes	576			608			622
Professional fees	856			822			753
FDIC insurance	685			942			1,161
Other insurance	174			212			359
Loan administration and foreclosure	430			816			959
Data processing and telecommunications	1,232			1,265			1,172
Deposit operations	607			776			675
Other	1,536			1,250			1,353
Total non-interest expense	25,864			25,568			25,963
Income before income taxes	7,271			6,371			1,393
Provision for federal income taxes	2,514			1,781			304
Net income	4,757			4,590			1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Preferred stock discount accretion	(283		)	(240		)	(225		)
Discount on redemption of preferred stock	255			—			—
Net income to common shareholders	$	4,019		$	3,518		$	32
Net income per common share
Basic	$	0.59		$	0.52		$	—
Diluted	$	0.58		$	0.52		$	—

See notes to consolidated financial statements

77

Consolidated Statements of Comprehensive Income

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2013, 2012, and 2011

	2013		2012			2011
Comprehensive income:
Net income	$	4,757	$	4,590		$	1,089
Unrealized holding gain on securities available for sale, net of tax	23		14			14
Change in OTTI on securities held to maturity, net of tax:
Additions	—		(27		)	(65		)
Additional amount recognized related to credit loss for which OTTI was previously recognized	15		8			16
Amount reclassified to credit loss for previously recorded market loss	6		24			188
Accretion of OTTI securities held to maturity, net of tax	57		46			43
Total comprehensive income	$	4,858	$	4,655		$	1,285

See notes to consolidated financial statements

78

Consolidated Statements of Shareholders’ Equity

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2013, 2012 and 2011

	Number of Shares		Amount					Unearned  Shares Issued to ESOP						Accumulated Other Compre- hensive Loss
	Preferred Stock	Common Stock	Preferred Stock		Common Stock						Retained Earnings						Total
September 30, 2010	16,641	7,045,036	$	15,764	$	10,377		$	(2,247	)	$	62,238		$	(724	)	$	85,408
Net income	—	—	—		—			—			1,089			—			1,089
Accretion of preferred stock discount	—	—	225		—			—			(225		)	—			—
5% preferred stock dividend	—	—	—		—			—			(832		)	—			(832		)
Earned ESOP shares, net of tax	—	—	—		(61		)	264			—			—			203
MRDP (1) compensation expense, net of tax	—	—	—		134			—			—			—			134
Stock option compensation expense	—	—	—		7			—			—			—			7
Unrealized holding gain on securities available for sale, net of tax	—	—	—		—			—			—			14			14
Change in OTTI on securities held to maturity, net of tax	—	—	—		—			—			—			139			139
Accretion of OTTI on securities held to maturity, net of tax	—	—	—		—			—			—			43			43
September 30, 2011	16,641	7,045,036	15,989		10,457			(1,983		)	62,270			(528		)	86,205
Net income	—	—	—		—			—			4,590			—			4,590
Accretion of preferred stock discount	—	—	240		—			—			(240		)	—			—
5% preferred stock dividend	—	—	—		—			—			(832		)	—			(832		)
Earned ESOP shares, net of tax	—	—	—		(65		)	264			—			—			199
MRDP compensation expense, net of tax	—	—	—		77			—			—			—			77
Stock option compensation expense	—	—	—		15			—			—			—			15
Unrealized holding gain on securities available for sale, net of tax	—	—	—		—			—			—			14			14
Change in OTTI on securities held to maturity, net of tax	—	—	—		—			—			—			5			5
Accretion of OTTI on securities held to maturity, net of tax	—	—	—		—			—			—			46			46
September 30, 2012	16,641	7,045,036	16,229		10,484			(1,719		)	65,788			(463		)	90,319

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

See notes to consolidated financial statements

79

Consolidated Statements of Shareholders’ Equity (continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2013, 2012 and 2011

	Number of Shares			Amount					Unearned  Shares Issued to ESOP						Accumulated Other Compre- hensive 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 dividends	—		—	—			—		—			(885		)	—			(885		)
Common stock dividends ($0.09 per common share)	—		—	—			—		—			(634		)	—			(634		)
Earned ESOP shares, net of tax	—		—	—			6		265			—			—			271
MRDP  compensation expense, net of tax	—		—	—			31		—			—			—			31
Stock option compensation expense	—		—	—			49		—			—			—			49
Unrealized holding gain on securities available for sale, net of tax	—		—	—			—		—			—			23			23
Change in OTTI on securities held to maturity, net of tax	—		—	—			—		—			—			21			21
Accretion of OTTI on securities held to maturity, net of tax	—		—	—			—		—			—			57			57
September 30, 2013	12,065		7,045,036	$	11,936		$	10,570	$	(1,454	)	$	68,998		$	(362	)	$	89,688

See notes to consolidated financial statements

80

Consolidated Statements of Cash Flows

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2013, 2012, and 2011

	2013			2012			2011
Cash flows from operating activities
Net income	$	4,757		$	4,590		$	1,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,095			940			992
Deferred federal income taxes	777			154			156
Amortization of CDI	130			148			167
Earned ESOP shares	265			264			264
MRDP compensation expense	39			105			171
Stock option compensation expense	49			15			7
Gains on sale of MBS and other investments	—			(22		)	(79		)
Net OTTI on MBS and other investments	47			214			447
Realized losses on MBS and other investments	—			—			2
(Gain) loss on sale of OREO and other repossessed assets, net	(264		)	373			(548		)
Gains on sale of loans, net	(2,507		)	(2,472		)	(1,548		)
(Gain) loss on disposition of premises and equipment, net	(431		)	—			16
Provision for loan losses	2,925			3,500			6,758
Provision for OREO losses	2,064			1,048			1,402
Loans originated for sale	(87,329		)	(93,073		)	(63,945		)
Amortization of MSRs	948			805			681
Proceeds from sales of loans	89,352			97,357			63,738
Recovery of MSRs valuation allowance	(475		)	(10		)	(405		)
BOLI net earnings	(577		)	(607		)	(517		)
Decrease in deferred loan origination fees	(60		)	(180		)	(287		)
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	767			2,239			2,138
Net cash provided by operating activities	11,572			15,388			10,699
Cash flows from investing activities
Net increase in CDs held for investment	(6,552		)	(4,831		)	(612		)
Activity in MBS and other investments held to maturity: Maturities and prepayments	689			751			850
Activity in MBS and other investments available for sale: Maturities and prepayments	891			1,042			2,243
Proceeds from sales	—			743			2,272
Redemption of FHLB stock	203			50			—
Increase in loans receivable, net	(15,819		)	(22,860		)	(10,157		)
Additions to premises and equipment	(1,302		)	(1,436		)	(1,015		)
Proceeds from sales of OREO and other repossessed assets	3,596			2,555			4,181
Proceeds from disposition of premises and equipment, net	760			—			—
Purchase of BOLI	—			—			(2,000		)
Net cash used in investing activities	(17,534		)	(23,986		)	(4,238		)

See notes to consolidated financial statements

81

Consolidated Statements of Cash Flows (continued)

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2013, 2012, and 2011

	2013			2012			2011
Cash flows from financing activities
Net increase in deposits	$	10,336		$	5,248		$	13,809
Repayment of FHLB advances	—			(10,000		)	(20,000		)
Net increase (decrease) in repurchase agreements	(855		)	126			107
ESOP tax effect	6			(65		)	(61		)
MRDP compensation tax effect	(8		)	(28		)	(37		)
Repurchase of preferred stock	(4,321		)	—			—
Payment of dividends	(1,368		)	(2,080		)	—
Net cash provided by (used in) financing activities	3,790			(6,799		)	(6,182		)
Net increase (decrease) in cash and cash equivalents	(2,172		)	(15,397		)	279
Cash and cash equivalents
Beginning of period	96,668			112,065			111,786
End of period	$	94,496		$	96,668		$	112,065
Supplemental disclosure of cash flow information
Income taxes paid	$	1,793		$	2,343		$	2,097
Interest paid	4,523			6,089			8,725
Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	$	6,375		$	9,443		$	5,782
Loans originated to facilitate the sale of OREO	2,708			3,095			1,538

See notes to consolidated financial statements

82

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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 (“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 sheet, 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 OTTI in the estimated fair value of mortgage-backed securities, the valuation of MSRs, the valuation of OREO and the determination of goodwill impairment.

Certain prior year amounts have been reclassified to conform to the fiscal 2013 presentation with no change to net income or shareholders’ equity previously reported.

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 Series A Preferred Stock pays a 5.0% dividend through December 23, 2013, after which the rate increases to 9.0% until the preferred stock is redeemed by the Company.

The proceeds received in connection with the issuance of the Series A Preferred Stock were allocated between the preferred stock and detachable 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 is accreted to the expected redemption date and charged to retained earnings. This accretion is 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 Treasury's efforts to manage and recover its investments under the TARP. While the sale of this 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.  

83

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

On June 12, 2013, the Treasury sold, to private investors, the warrant to purchase up to 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 discount from liquidation value of $255,000. The discount from liquidation value on the repurchased shares was recorded as an increase to retained earnings.

On November 19, 2013, the Board of Directors (the "Board") of the Company approved the redemption of the remaining 12,065 shares of Series A Preferred Stock, subject to obtaining regulatory approval. The Company has submitted an application to the Federal Reserve Bank of San Francisco ("FRB") for approval to redeem the Series A Preferred Stock.

MBS and Other Investments

MBS and other investments are classified upon acquisition as either held to maturity or available for sale.  Securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reflected at amortized cost.  Securities classified as available for sale are reflected at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax effects.  Premiums and discounts are amortized to earnings using the interest method over the contractual life of the securities.  Gains and losses on sales of 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 securities available for sale that are deemed to be other than temporary are reflected in earnings when identified.  The fair value of the security then becomes the new cost basis.  For individual securities 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 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 cash flows is less than the amortized cost.  For individual 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 security’s cost basis and its fair value at the consolidated balance sheet date.  For individual 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

The Company, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of its outstanding home loans or 5% of advances from the FHLB.  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. Accordingly, $100 per share par value is deemed to be a reasonable estimate of fair value.

The Company evaluated its investment in the FHLB stock for OTTI, consistent with its accounting policy.  Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB, the actions being taken by the FHLB to address its regulatory situation and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the Company does not believe that its investment in the FHLB is impaired.  Further, during the year ended September 30, 2012, the Federal Housing Finance Agency (“Finance Agency”) upgraded the FHLB’s capital classification to “adequately capitalized” and granted the FHLB authority to repurchase up to $25 million of excess capital stock per quarter at par value, provided they receive a non-objection for each quarter’s repurchase from the Finance Agency.  The FHLB announced in July 2013 that, based on its second quarter 2013 financial results, their board of directors had declared a $0.025 per share cash dividend. This represented the first dividend in a number

84

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

of years. Even though the Company did not determine its investment in the FHLB stock was impaired at September 30, 2013, future deterioration of the FHLB’s financial condition may result in future impairment losses.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are stated in the aggregate at the lower of cost or estimated fair value.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.  Gains or losses on sales of loans are recognized at the time of sale.  The gain or loss is the difference between the net sales proceeds and the recorded value of the loans, including any remaining unamortized deferred loan origination fees.

Loans Receivable

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

Non-Performing Loans

Loans on non-accrual status and loans past due 90 days or more and still accruing interest are considered to be non-performing loans.

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.

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, 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-amortizing, 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.

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 coextensive.  The Company 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.

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 (or 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

85

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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 augment 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.  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 the Financial Accounting Standards Board (“FASB”) guidance for receivables, 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 homogenous 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), 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 loan losses is charged against operations and is added to 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 continue to 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.

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 meet payments as they become due or when they are past due 90 days as to either principal or interest (based on contractual terms), unless they are well secured and in the process of collection.  In determining whether a borrower may be able to meet 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.

86

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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.

MSRs

The Company holds rights to service loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). MSRs are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained and are amortized to servicing income on loans sold in proportion to and 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 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 servicing assets were originated.  Fair values are estimated using discounted cash flows based on current market rates of interest.  For purposes of measuring impairment, the rights 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.

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 exceeds the estimated fair value of the net identified tangible and intangible assets acquired.  Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment.  An annual review 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 and no additional analysis is necessary.

The Company performed its fiscal year 2013 goodwill impairment test during the quarter ended June 30, 2013 with the assistance of a third-party firm specializing in goodwill impairment valuations for financial institutions. The third-party analysis was conducted as of May 31, 2013 and concluded that the fair value of goodwill was $45.0 million, which exceeded the recorded value of $5.7 million by 689%.

The goodwill impairment test involved a two-step process. Step one of the goodwill impairment test estimated 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.

The allocation of corporate value approach applies the aggregate market value of the Company and divides it among the reporting units. The Company has a single reporting unit. The aggregate market value was based on the Company's common stock market price on May 31, 2013, adjusted for a control premium and the value of preferred stock (at its liquidation value). A key assumption in this approach is the control premium applied to the aggregate market value. A control premium is utilized to adjust the value of a company to its value from the perspective of a controlling interest which is generally higher than the value determined using a widely quoted market price per share. The Company used an expected control premium of 30%, which was based on comparable transaction history.

The income approach uses a reporting unit's projection of estimated operating results and cash flows that are discounted 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 revenue growth rate that approximated 3.0% and a return on assets that ranged from 0.54% to 1.01% (average of 0.73%). In addition to the above projections of estimated operating results, key assumptions used to determine the

87

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

fair value estimate under the income approach were the discount rate of 15.0% utilized for the Company's cash flow estimate and a terminal value of 1.25 times the ending book value of the reporting unit. The Company used a build-up approach in

developing the discount rate including an assessment of the risk free interest rate, the rate of return expected from publicly traded stocks based on an analysis of historical data, the industry the Company operates in and the size of the Company.

The market approach estimates the fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples were derived from comparable publicly traded companies with operating and investment characteristics similar to those of the reporting unit. In applying the market approach method, the Company selected six publicly traded institutions based on a variety of financial metrics (e.g., tangible equity, return on assets, return on equity, net interest margin, non-performing assets, net charge-offs and reserves for loan losses) and other relevant factors (e.g., geographical location, lines of business, risk profile, availability of financial information, etc.).

The Company calculated a fair value of its reporting unit of $89 million using the corporate value approach, $82 million using the income approach and $96 million using the market approach. The concluded fair value based on the three methods under the step one test was $87 million, with the most weighting given to the income approach. The results of the Company's step one test indicated that the reporting unit's fair value was less than its recorded value and therefore the Company performed a step two analysis.

The Company then calculated the implied fair value of its reporting unit under step two of the goodwill impairment test. Under this approach, the Company calculated the fair value for the assets and liabilities of the reporting unit. The calculated implied fair value of the Company's goodwill exceeded the recorded value by $39.3 million.

Under the step two process significant adjustments were made to determine the estimated fair value of the Company's loans receivable compared to its recorded value. The Company utilized a discounted cash flow approach and a comparable sales transaction approach to determine the fair value of its loans receivable.

The discounted cash flow approach was utilized to value performing loans with credit quality grades of pass. A key assumption in the discounted cash flow approach was determining an appropriate discount rate. In determining the discount rate for pass loans, the Company started with its contractual cash flows and its current lending rate for comparable loans and adjusted these for credit factors, estimated prepayments and liquidity premiums. Based on an analysis of these factors, performing loans with credit quality grades of pass were discounted by 5%.

The comparable sales transaction approach using comparable loan sales was utilized for performing loans with credit quality grades of watch, special mention or substandard and for non-performing loans. In the comparable sales transaction approach a weighted average discount rate was used that approximated the discount for similar loan sales by the FDIC. A key assumption used by the Company in the comparable sales transaction approach was determining the appropriate discount rate to apply to each loan category. Performing loans with credit quality grades of watch, special mention or substandard were discounted by 25% and non-performing loans were discounted by 50%. These weighted average discount rates approximated the discount for similar loan sales by the FDIC. Increases in the pricing for future reported loan sale transactions could have a significant impact on the implied fair value of goodwill under the step two process.

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 prices 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.

As of September 30, 2013, management believes that there have been no events or changes in the circumstances 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.

88

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

CDI

The CDI is amortized to non-interest expense using an accelerated method over a ten-year period.

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, 2013 or 2012 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.  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 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.

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 income tax return.  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 (loss) for tax purposes and income (loss) 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 (benefit) 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

89

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on 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 United States federal income tax examination by tax authorities for years ended on or before September 30, 2009.

ESOP

The Bank sponsors a leveraged ESOP that is accounted for in accordance with GAAP.  Accordingly, the debt of the ESOP is recorded as other borrowed funds of the Bank, and the shares pledged as collateral are reported as unearned shares issued to the ESOP on the consolidated balance sheets.  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.

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 purpose 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, 2013 and 2012 included deposits with the FRB of $72,955,000 and $75,325,000, respectively.  The Company also maintains balances in correspondent bank accounts which, at times, may exceed FDIC insurance limits of $250,000.  Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the FRB and the correspondent banks.

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 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 is equal to the fair value of the shares at the grant date.

The Company’s stock compensation plans are described more fully in Note 15.

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 the Company’s common stock during the period.  The 5% dividend and related accretion for the amount of the Company's Series A Perferred Stock outstanding for the respective year is deducted from net income, and the discount on the redemption of Series A Preferred Stock is added to net income in computing net income to common shareholders. Common stock equivalents arise from assumed conversion of outstanding stock options and the outstanding warrant 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 net income per common share.

90

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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 fees paid to this law firm for the years ended September 30, 2013, 2012 and 2011 totaled $166,000, $203,000 and $176,000, respectively.

Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standard Update ("ASU") No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance requires an entity to provide information about the amount reclassified out of accumulated other comprehensive income by component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The guidance was effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exits. The guidance clarifies when it is appropriate for an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. Early adoption is permitted. The guidance should be applied prospectively to all unrecognized tax benefits that exist at the effective date, however, retrospective application is also permitted. Adoption of ASU 2013-11 is not expected to have a significant impact on the Company's 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, 2013 and 2012 were approximately $840,000 and $874,000, respectively.

91

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Note 3 - Mortgage-Backed Securities and Other Investments

Mortgage-backed securities and other investments were as follows as of September 30, 2013 and 2012 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2013
Held to Maturity
MBS:
U.S. government agencies	$	1,202	$	31	$	(2	)	$	1,231
Private label residential	1,521		781		(15		)	2,287
U.S. agency securities	14		1		—			15
Total	$	2,737	$	813	$	(17	)	$	3,533
Available for Sale
MBS:
U.S. government agencies	$	2,144	$	87	$	(2	)	$	2,229
Private label residential	804		120		(10		)	914
Mutual funds	1,000		—		(42		)	958
Total	$	3,948	$	207	$	(54	)	$	4,101
September 30, 2012
Held to Maturity
MBS:
U.S. government agencies	$	1,493	$	44	$	(3	)	$	1,534
Private label residential	1,819		309		(60		)	2,068
U.S. agency securities	27		3		—			30
Total	$	3,339	$	356	$	(63	)	$	3,632
Available for Sale
MBS:
U.S. government agencies	$	2,828	$	147	$	—		$	2,975
Private label residential	1,001		65		(109		)	957
Mutual funds	1,000		13		—			1,013
Total	$	4,829	$	225	$	(109	)	$	4,945

92

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time these unrealized losses existed as of September 30, 2013 (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	$	3	$	—		6	$	88	$	(2	)	4	$	91	$	(2	)
Private label residential	80		(4		)	4	239		(11		)	14	319		(15		)
Total	$	83	$	(4	)	10	$	327	$	(13	)	18	$	410	$	(17	)
Available for Sale
MBS:
U.S. government agencies	$	96	$	(2	)	3	$	—	$	—		1	$	96	$	(2	)
Private label residential	—		—			—	108		(10		)	2	108		(10		)
Mutual Funds	958		(42		)	1	—		—			—	958		(42		)
Total	$	1,054	$	(44	)	4	$	108	$	(10	)	3	$	1,162	$	(54	)

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time the unrealized losses existed as of September 30, 2012 (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	$	7	$	—		1	$	100	$	(3	)	4	$	107	$	(3	)
Private label residential	17		(1		)	1	423		(59		)	28	440		(60		)
Total	$	24	$	(1	)	2	$	523	$	(62	)	32	$	547	$	(63	)
Available for Sale
MBS:
Private label residential	—		—			—	651		(109		)	4	651		(109		)
Total	$	—	$	—		—	$	651	$	(109	)	4	$	651	$	(109	)

The Company has evaluated these securities and has determined that the decline in their value is temporary.  The unrealized losses are primarily due to unusually large spreads in the market for private label mortgage-related products.  The fair value of the mortgage-backed securities is expected to recover as the securities approach their maturity date and/or as the pricing spreads

93

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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, 2013, 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 recorded value if previously written down).

During the year ended September 30, 2013, the Company recorded net OTTI charges through earnings on residential MBS of $47,000.  For the year ended September 30, 2012, the Company recorded net OTTI charges through earnings on residential MBS of $214,000. In accordance with GAAP, the Company bifurcates OTTI into (i) amounts related to credit losses which are recognized through earnings and (ii) 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, 2013, 2012 and 2011:

	Range				Weighted
	Minimum		Maximum		Average
September 30, 2013
Constant prepayment rate	6.00	%	15.00	%	12.33	%
Collateral default rate	0.73	%	22.53	%	7.84	%
Loss severity rate	20.48	%	75.02	%	52.69	%
September 30, 2012
Constant prepayment rate	6.00	%	15.00	%	8.77	%
Collateral default rate	0.06	%	28.40	%	8.74	%
Loss severity rate	0.52	%	76.03	%	48.28	%
September 30, 2011
Constant prepayment rate	6.00	%	15.00	%	10.71	%
Collateral default rate	0.43	%	24.23	%	8.03	%
Loss severity rate	11.93	%	64.54	%	39.22	%

94

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table presents the OTTI losses for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013						2012						2011
	Held To Maturity			Available For Sale			Held To Maturity			Available For Sale			Held To Maturity			Available For Sale
Total OTTI losses	$	(13	)	$	(2	)	$	(156	)	$	(50	)	$	(210	)	$	(26	)
Portion of OTTI losses recognized in other comprehensive loss (before taxes) (1)	(32		)	—			(8		)	—			(211		)	—
Net OTTI recognized in earnings (2)	$	(45	)	$	(2	)	$	(164	)	$	(50	)	$	(421	)	$	(26	)

________________________

(1) Represents OTTI related to all other factors.

(2) Represents OTTI related to credit losses.

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, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Balance, beginning of year	$	2,703		$	3,361		$	4,725
Additions:
Credit losses for which OTTI was           not previously recognized	7			81			53
Additional increases to the amount           related to credit loss for which OTTI           was previously recognized	45			133			398
Subtractions:
Realized losses previously recorded           as credit losses	(671		)	(872		)	(1,811		)
Recovery of prior credit loss	—			—			(4		)
Balance, end of year	$	2,084		$	2,703		$	3,361

During the year ended September 30, 2013 there were no realized gains on sale of securities.  During the year ended September 30, 2012 there was a realized gain on one available for sale security in the amount of $22,000. During the year ended September 30, 2011, there was a realized gain on two available for sale securities in the amount of $79,000. During the year ended September 30, 2013, the Company recorded a $671,000 realized loss (as a result of securities being deemed worthless) on eighteen held to maturity and five available for sale residential MBS, all of which had been recognized previously as a credit loss. During the year ended September 30, 2012, the Company recorded a $872,000 realized loss (as a result of securities being deemed worthless) on twenty-five held to maturity and five available for sale residential MBS, all of which had been recognized previously as a credit loss.  During the year ended September 30, 2011, the Company recorded a $1,813,000 realized loss (as a result of securities being deemed worthless) on twenty-eight held to maturity and one available for sale residential MBS of which $1,811,000 had been recognized previously as a credit loss.

The recorded amount of residential mortgage-backed and agency securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral, retail repurchase agreements and other non-profit organization deposits totaled $4,537,000 and $5,699,000 at September 30, 2013 and 2012, respectively.

95

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The contractual maturities of debt securities at September 30, 2013, are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.

	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due after one year to five years	$	22	$	23	$	28	$	28
Due after five to ten years	22		22		28		29
Due after ten years	2,693		3,488		2,892		3,086
Total	$	2,737	$	3,533	$	2,948	$	3,143

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, 2013 and 2012 (dollars in thousands):

	2013		2012
Mortgage loans:
One- to four-family	$	102,387	$	105,552
Multi-family	51,108		47,521
Commercial	291,297		256,254
Construction – custom and owner/builder	40,811		33,345
Construction – speculative one- to four-family	1,428		1,880
Construction – commercial	2,239		20,247
Construction – multi-family	143		345
Construction – land development	515		589
Land	31,144		39,655
Total mortgage loans	521,072		505,388
Consumer loans:
Home equity and second mortgage	33,014		32,814
Other	5,981		6,183
Total consumer loans	38,995		38,997
Commercial business loans	17,499		22,588
Total loans receivable	577,566		566,973
Less:
Undisbursed portion of construction loans in process	18,527		16,325
Deferred loan origination fees	1,710		1,770
Allowance for loan losses	11,136		11,825
	31,373		29,920
Loans receivable, net	546,193		537,053
Loans held for sale (one- to four-family)	1,911		1,427
Total loans receivable and loans held for sale, net	$	548,104	$	538,480

96

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Certain related parties of the Company, principally Bank directors and officers, are loan customers of the Bank in the ordinary course of business.  Their loans were performing according to their repayment terms at September 30, 2013 and 2012.  Activity in related party loans during the years ended September 30, 2013 and 2012 was as follows (dollars in thousands):

	2013			2012
Balance, beginning of year	$	1,113		$	2,498
New loans or advances	276			175
Repayments and reclassifications	(294		)	(1,560		)
Balance, end of year	$	1,095		$	1,113

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 the 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 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 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 very limited basis), commercial real estate construction loans, and multi-family construction loans.  The Company is not currently originating land development loans.

Construction lending affords the Company the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending.  Construction lending, however, is generally considered to involve a higher degree of risk than one-to four family residential lending because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project.  The nature of these loans is such that they are generally more difficult to evaluate and monitor.  If the estimated cost of construction proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to complete the project.  If the estimate of value upon completion proves to be inaccurate, the Company may be confronted with a project whose value is insufficient to assure full repayment, and it 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 that the

97

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

construction loan is due.  The Company attempts to mitigate these risks by adhering to its underwriting policies, disbursement procedures, and monitoring practices.

Construction Lending – Custom and Owner/Builder:  Custom construction 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 very 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 originated loans to real estate developers for the purpose of developing residential subdivisions.  The Company is not currently originating any land development loans.

Land Lending: The Company has historically originated 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 very 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:   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 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 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 principals 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

98

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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.

Allowance for Loan Losses

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):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,558	$	565		$	769	$	95	$	1,449
Multi-family	1,156		(407		)	—		—		749
Commercial	4,247		1,640			667		55		5,275
Construction – custom and owner/builder	386		(124		)	26		26		262
Construction – speculative one- to four-family	128		(32		)	—		—		96
Construction – commercial	429		(373		)	—		—		56
Construction – multi-family	—		116			116		—		—
Construction – land development	—		(129		)	17		146		—
Land	2,392		1,801			2,307		54		1,940
Consumer loans:
Home equity and second mortgage	759		202			184		5		782
Other	254		(40		)	14		—		200
Commercial business loans	516		(294		)	—		105		327
Total	$	11,825	$	2,925		$	4,100	$	486	$	11,136

The following table sets forth information for the year ended September 30, 2012 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	760	$	1,000		$	276	$	74	$	1,558
Multi-family	1,076		80			14		14		1,156
Commercial	4,035		1,427			1,215		—		4,247
Construction – custom and owner/builder	222		164			—		—		386
Construction – speculative one- to four-family	169		(42		)	—		1		128
Construction – commercial	794		257			622		—		429
Construction – multi-family	354		(780		)	24		450		—
Construction – land development	79		106			239		54		—
Land	2,795		751			1,251		97		2,392
Consumer loans:
Home equity and second mortgage	460		517			232		14		759
Other	415		(137		)	24		—		254
Commercial business loans	787		157			430		2		516
Total	$	11,946	$	3,500		$	4,327	$	706	$	11,825

99

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table sets forth information for the year ended September 30, 2011 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	530	$	622		$	543	$	151	$	760
Multi-family	393		642			—		41		1,076
Commercial	3,173		804			47		105		4,035
Construction – custom and owner/builder	481		(211		)	48		—		222
Construction – speculative one- to four-family	414		(142		)	103		—		169
Construction – commercial	245		1,993			1,444		—		794
Construction – multi-family	245		1,328			1,219		—		354
Construction – land development	240		993			1,158		4		79
Land	3,709		744			1,704		46		2,795
Consumer loans:
Home equity and second mortgage	922		(354		)	150		42		460
Other	451		(8		)	30		2		415
Commercial business loans	461		347			22		1		787
Total	$	11,264	$	6,758		$	6,468	$	392	$	11,946

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, 2013 (dollars in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Mortgage loans:
One- to four-family	$	600	$	849	$	1,449	$	8,984	$	95,314	$	104,298
Multi-family	334		415		749		5,184		45,924		51,108
Commercial	1,763		3,512		5,275		19,510		271,787		291,297
Construction – custom and owner/ builder	—		262		262		—		22,788		22,788
Construction – speculative one- to four family	88		8		96		687		236		923
Construction – commercial	—		56		56		—		2,239		2,239
Construction –  multi-family	—		—		—		143		1		144
Construction – land development	—		—		—		515		—		515
Land	234		1,706		1,940		2,391		28,753		31,144
Consumer loans:
Home equity and second mortgage	57		725		782		679		32,335		33,014
Other	—		200		200		6		5,975		5,981
Commercial business loans	—		327		327		—		17,499		17,499
Total	$	3,076	$	8,060	$	11,136	$	38,099	$	522,851	$	560,950

100

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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, 2012 (dollars in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Mortgage loans:
One- to four-family	$	678	$	880	$	1,558	$	5,282	$	101,697	$	106,979
Multi-family	711		445		1,156		6,879		40,642		47,521
Commercial	667		3,580		4,247		17,192		239,062		256,254
Construction – custom and owner/ builder	15		371		386		309		20,159		20,468
Construction – speculative one- to four family	109		19		128		1,027		495		1,522
Construction – commercial	—		429		429		—		17,157		17,157
Construction –  multi-family	—		—		—		345		—		345
Construction – land development	—		—		—		589		—		589
Land	686		1,706		2,392		8,613		31,042		39,655
Consumer loans:
Home equity and second mortgage	36		723		759		562		32,252		32,814
Other	—		254		254		7		6,176		6,183
Commercial business loans	—		516		516		—		22,588		22,588
Total	$	2,902	$	8,923	$	11,825	$	40,805	$	511,270	$	552,075

The following table presents an age analysis of past due status of loans by portfolio segment at September 30, 2013 (dollars in thousands):

	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	14	$	1,218	$	6,985	$	—	$	8,217	$	96,081	$	104,298
Multi-family	—		—		—		—		—		51,108		51,108
Commercial	—		2,537		3,435		—		5,972		285,325		291,297
Construction – custom and owner/ builder	—		—		—		—		—		22,788		22,788
Construction – speculative one- to four family	—		—		—		—		—		923		923
Construction – commercial	—		—		—		—		—		2,239		2,239
Construction –  multi-family	—		—		144		—		144		—		144
Construction – land development	—		—		515		—		515		—		515
Land	—		—		2,146		284		2,430		28,714		31,144
Consumer loans:
Home equity and second mortgage	101		20		380		152		653		32,361		33,014
Other	1		39		5		—		45		5,936		5,981
Commercial business loans	83		15		—		—		98		17,401		17,499
Total	$	199	$	3,829	$	13,610	$	436	$	18,074	$	542,876	$	560,950

__________________

(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

101

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table presents an age analysis of past due status of loans by portfolio segment at September 30, 2012 (dollars in thousands):

	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	1,987	$	—	$	3,382	$	142	$	5,511	$	101,468	$	106,979
Multi-family	3,402		—		1,449		—		4,851		42,670		47,521
Commercial	1,071		—		6,049		6		7,126		249,128		256,254
Construction – custom and owner/ builder	—		—		309		—		309		20,159		20,468
Construction – speculative one- to four family	—		—		327		700		1,027		495		1,522
Construction – commercial	—		—		—		—		—		17,157		17,157
Construction –  multi-family	—		—		345		—		345		—		345
Construction – land development	—		—		589		—		589		—		589
Land	943		—		8,613		200		9,756		29,899		39,655
Consumer loans:
Home equity and second mortgage	277		14		261		150		702		32,112		32,814
Other	4		—		7		—		11		6,172		6,183
Commercial business loans	—		15		—		—		15		22,573		22,588
Total	$	7,684	$	29	$	21,331	$	1,198	$	30,242	$	521,833	$	552,075

___________________

(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 or 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

102

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

practical or desirable to defer writing off this basically worthless loan even though partial recovery may be realized in the future.

The following table lists the loan credit risk grades by portfolio segment utilized by the Company that serve as credit quality indicators at September 30, 2013 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	91,291	$	4,032	$	769	$	8,206	$	104,298
Multi-family	41,863		132		8,337		776		51,108
Commercial	262,502		3,309		12,522		12,964		291,297
Construction – custom and owner / builder	22,788		—		—		—		22,788
Construction – speculative one- to four-family	236		687		—		—		923
Construction – commercial	2,239		—		—		—		2,239
Construction – multi-family	—		—		—		144		144
Construction – land development	—		—		—		515		515
Land	20,627		5,101		1,129		4,287		31,144
Consumer loans:
Home equity and second mortgage	31,096		782		55		1,081		33,014
Other	5,937		39		—		5		5,981
Commercial business loans	17,029		366		104		—		17,499
Total	$	495,608	$	14,448	$	22,916	$	27,978	$	560,950

The following table lists the loan credit risk grades by portfolio segment utilized by the Company that serve as credit quality indicators at September 30, 2012 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	93,668	$	4,000	$	4,343	$	4,968	$	106,979
Multi-family	35,703		107		10,220		1,491		47,521
Commercial	228,036		1,722		11,515		14,981		256,254
Construction – custom and owner / builder	17,621		—		2,538		309		20,468
Construction – speculative one- to four-family	304		191		700		327		1,522
Construction – commercial	17,157		—		—		—		17,157
Construction – multi-family	—		—		—		345		345
Construction – land development	—		—		—		589		589
Land	22,700		5,788		2,554		8,613		39,655
Consumer loans:
Home equity and second mortgage	29,777		1,488		788		761		32,814
Other	6,136		40		—		7		6,183
Commercial business loans	20,777		834		286		691		22,588
Total	$	471,879	$	14,170	$	32,944	$	33,082	$	552,075

103

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Impaired Loans

A loan is 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.  Impaired loans are measured based on the estimated fair value of the collateral less estimated cost to sell (if applicable) if the loan is considered collateral dependent.  Impaired loans that are not considered to be collateral dependent are measured based on the present value of expected future cash flows.

The categories of non-accrual loans and impaired loans overlap, although they are not coextensive.  The Company 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 estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due.

104

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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 (dollars in thousands):

	September 30, 2013						For the Year Ended September 30, 2013
	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
Multi-family	—		982		—		473		3		3
Commercial	4,879		8,005		—		8,781		322		267
Construction – custom and owner / builder	—		—		—		97		—		—
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
Consumer loans:
Home equity and second mortgage	380		556		—		266		—		—
Other	6		6		—		8		—		—
Commercial business loans	—		33		—		—		—		—
Subtotal	12,453		21,377		—		16,697		352		291
With an allowance recorded:
Mortgage loans:
One- to four-family	3,642		3,726		600		4,397		91		68
Multi-family	5,184		5,184		334		5,960		301		230
Commercial	14,631		15,297		1,763		9,052		526		420
Construction – custom and owner / builder	—		—		—		60		—		—
Construction – speculative one- to four-family	687		687		88		695		29		16
Construction – multi-family	—		—		—		—		—		—
Construction - land development	—		—		—		—		—		—
Land	1,203		1,226		234		1,962		27		27
Consumer loans:
Home equity and second mortgage	299		299		57		352		16		12
Commercial business loans	—		—		—		—		—		—
Subtotal	25,646		26,419		3,076		22,478		990		773
Total
Mortgage loans:
One- to four-family	8,984		9,501		600		7,058		109		81
Multi-family	5,184		6,166		334		6,433		304		233
Commercial	19,510		23,302		1,763		17,833		848		687
Construction – custom and owner / builder	—		—		—		157		—		—
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
Consumer loans:
Home equity and second mortgage	679		855		57		618		16		12
Other	6		6		—		8		—		—
Commercial business loans	—		33		—		—		—		—
Total	$	38,099	$	47,796	$	3,076	$	39,175	$	1,342	$	1,064

105

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2012 (dollars in thousands):

	September 30, 2012						For the Year Ended September 30, 2012
	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	$	1,510	$	1,605	$	—	$	1,838	$	20	$	16
Multi-family	—		982		—		—		1		1
Commercial	7,596		8,664		—		14,491		543		348
Construction – custom and owner / builder	208		208		—		209		—		—
Construction – speculative one- to four-family	327		327		—		65		—		—
Construction – commercial	—		2,066				—		14		14
Construction – multi-family	345		810		—		338		—		—
Construction – land development	589		3,497		—		1,089		14		14
Land	5,989		8,247		—		6,279		28		16
Consumer loans:					—
Home equity and second mortgage	261		383		—		482		—		—
Other	7		7		—		5		—		—
Commercial business loans	—		166		—		32		2		2
Subtotal	16,832		26,962		—		24,828		622		411
With an allowance recorded:
Mortgage loans:
One- to four-family	3,772		3,772		678		2,520		81		62
Multi-family	6,879		6,879		711		6,618		294		189
Commercial	9,596		9,596		667		5,043		60		39
Construction – custom and owner / builder	101		101		15		106		—		—
Construction – speculative one- to four-family	700		700		109		700		29		20
Construction – commercial	—		—		—		3,248		230		146
Construction – multi-family	—		—		—		74		—		—
Land	2,624		2,811		686		3,307		37		36
Consumer loans:
Home equity and second mortgage	301		301		36		515		31		23
Commercial business loans	—		—		—		55		—		—
Subtotal	23,973		24,160		2,902		22,186		762		515
Total
Mortgage loans:
One- to four-family	5,282		5,377		678		4,358		101		78
Multi-family	6,879		7,861		711		6,618		295		190
Commercial	17,192		18,260		667		19,534		603		387
Construction – custom and owner / builder	309		309		15		315		—		—
Construction – speculative one- to four-family	1,027		1,027		109		765		29		20
Construction – commercial	—		2,066		—		3,248		244		160
Construction – multi-family	345		810		—		412		—		—
Construction – land development	589		3,497		—		1,089		14		14
Land	8,613		11,058		686		9,586		65		52
Consumer loans:
Home equity and second mortgage	562		684		36		997		31		23
Other	7		7		—		5		—		—
Commercial business loans	—		166		—		87		2		2
Total	$	40,805	$	51,122	$	2,902	$	47,014	$	1,384	$	926

106

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2011 (dollars in thousands):

	September 30, 2011						For the Year Ended September 30, 2011
	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	$	2,092	$	2,387	$	—	$	2,908	$	30	$	22
Multi-family	—		982		—		681		—		—
Commercial	18,137		19,279		—		14,623		1,060		573
Construction – custom and owner / builder	209		209		—		303		7		1
Construction – speculative one- to four-family	—		—		—		502		7		7
Construction – multi-family	632		1,135		—		1,287		4		4
Construction – land development	1,882		7,179		—		2,920		5		—
Land	8,198		11,533		—		7,883		69		42
Consumer loans:
Home equity and second mortgage	669		719		—		430		26		16
Other	—		—		—		13		—		—
Commercial business loans	44		65		—		44		2		2
Subtotal	31,863		43,488		—		31,594		1,210		667
With an allowance recorded:
Mortgage loans:
One- to four-family	1,609		1,609		45		768		47		38
Multi-family	5,482		5,482		632		4,798		298		222
Commercial	1,185		1,185		255		1,409		50		118
Construction – custom and owner / builder	111		111		11		45		2		2
Construction – speculative one- to four-family	700		700		37		1,042		50		37
Construction - commercial	5,435		6,879		738		3,537		273		123
Construction – multi-family	—		—		—		65		—		—
Land	1,799		1,821		560		2,946		114		83
Consumer loans:
Home equity and second mortgage	345		345		10		425		10		9
Commercial business loans	1		1		1		1		—		—
Subtotal	16,667		18,133		2,289		15,036		844		632
Total
Mortgage loans:
One- to four-family	3,701		3,996		45		3,676		77		60
Multi-family	5,482		6,464		632		5,479		298		222
Commercial	19,322		20,464		255		16,032		1,110		691
Construction – custom and owner / builder	320		320		11		348		9		3
Construction – speculative one- to four-family	700		700		37		1,544		57		44
Construction - commercial	5,435		6,879		738		3,537		273		123
Construction – multi-family	632		1,135		—		1,352		4		4
Construction – land development	1,882		7,179		—		2,920		5		—
Land	9,997		13,354		560		10,829		183		125
Consumer loans:
Home equity and second mortgage	1,014		1,064		10		855		36		25
Other	1		1		—		14		—		—
Commercial business loans	44		65		1		44		2		2
Total	$	48,530	$	61,621	$	2,289	$	46,630	$	2,054	$	1,299

107

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Troubled debt restructured loans are loans for which the Company, for economic or legal reasons related to the borrower’s financial condition, has granted a significant concession to the borrower that it would otherwise not consider.  The loan terms which have been modified or restructured due to a borrower’s financial difficulty, 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; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizing, extensions, deferrals and renewals.  Troubled debt restructured loans are considered impaired loans and are individually evaluated for impairment.  Troubled debt restructured loans can be classified as either accrual or non-accrual. The Company had $22.6 million in troubled debt restructured loans included in impaired loans at September 30, 2013 and had $1,000 in commitments to lend additional funds on these loans.  The Company had $23.5 million in troubled debt restructured loans included in impaired loans at September 30, 2012 and had $1,000 in commitments to lend additional funds on these loans. The allowance for loan losses allocated to troubled debt restructured loans at September 30, 2013 and 2012 was $2,371,000 and $1,894,000, respectively.

The following table sets forth information with respect to the Company’s troubled debt restructured loans by interest accrual status as of September 30, 2013 and 2012 (dollars in thousands):

	2013
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,999	$	198	$	2,197
Multi-family	5,184		—		5,184
Commercial	10,160		1,574		11,734
Construction – speculative one- to four-family	687		—		687
Construction – land development	—		515		515
Land	244		1,564		1,808
Consumer loans:
Home equity and second mortgage	299		180		479
Total	$	18,573	$	4,031	$	22,604

	2012
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,900	$	—	$	1,900
Multi-family	5,430		—		5,430
Commercial	5,079		4,862		9,941
Construction – speculative one- to four-family	700		—		700
Construction – land development	—		526		526
Land	—		4,445		4,445
Consumer loans:
Home equity and second mortgage	301		261		562
Total	$	13,410	$	10,094	$	23,504

108

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table sets forth information with respect to the Company’s troubled debt restructured loans by portfolio segment that occurred during the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

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 a reduction in the stated interest rate.

2012	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
One-to four-family (1)	1	$	373	$	373	$	372
Commercial (1)	1	2,718		2,718		2,657
Land (2)	1	249		249		233
Total	3	$	3,340	$	3,340	$	3,262

_______________________________

(1) Modifications were a result of a combination of changes (i.e. a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(2)     Modification was a result of a reduction in the stated interest rate.

2011	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
One-to four-family (1)	4	$	1,543	$	1,543	$	1,543
Commercial (2)	2	3,394		3,717		3,145
Construction - commercial (3)	2	6,800		5,451		5,435
Land (4)	2	535		535		526
Home equity (3)	2	303		303		303
Total	12	$	12,575	$	11,549	$	10,952

(1) $1.01 million was a result of a reduction in stated interest rate and $538,000 was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(2) $925,000 was a result of a reduction in stated interest rate and $2.79 million was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

109

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

(3) Modifications were a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(4) $147,000 was a result of modifying the maturity date, timing of payments or frequency of payments and $388,000 was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

One commercial real estate troubled debt restructured loan with a balance of $919,000 and one land troubled debt restructured loan with a balance of $147,000 were modified during the year ended September 30, 2011 and subsequently defaulted.  No troubled debt restructured loans were recorded that subsequently defaulted during the years ended September 30, 2013 and 2012.

Note 5 - Mortgage Servicing Rights

Loans serviced for Freddie Mac are not included in the accompanying consolidated balance sheets.  The principal amounts of those loans at September 30, 2013, 2012 and 2011 were $325,726,000, $304,872,000 and $298,924,000, respectively.

The following is an analysis of the changes in MSRs for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Balance, beginning of year	$	2,011		$	2,108		$	1,929
Additions	728			698			455
Amortization	(948		)	(805		)	(681		)
Valuation allowance	—			(216		)	(434		)
Recovery of valuation allowance	475			226			839
Balance, end of year	$	2,266		$	2,011		$	2,108

At September 30, 2013, 2012 and 2011, the estimated fair value of MSRs totaled $3,129,000, $2,011,000 and $2,108,000, respectively.  The MSRs' fair values for 2013, 2012 and 2011 were estimated using discounted cash flow analyses with average discount rates of 10.04%, 10.07% and 10.11%, respectively, and average prepayment speed factors of 177, 330 and

324, respectively.  At September 30, 2013 there was no valuation allowance on MSR's. At September 30, 2012 and 2011, there were valuation allowances on MSR's of $475,000 and $485,000, respectively.

Note 6 - Premises and Equipment

Premises and equipment consisted of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Land	$	4,112	$	4,293
Buildings and improvements	17,344		17,188
Furniture and equipment	7,527		7,189
Property held for future expansion	110		110
Construction and purchases in progress	370		72
	29,463		28,852
Less accumulated depreciation	11,699		10,966
Premises and equipment, net	$	17,764	$	17,886

110

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The Company leases certain premises under operating leases.  Rental expense of leased premises was $250,000, $248,000 and $232,000 for the years ended September 30, 2013, 2012, and 2011, respectively, which was 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, 2013 are as follows (dollars in thousands):

2014	$	183
2015	256
2016	128
2017	74
2018	74
Thereafter	166
Total minimum payments required	$	881

Certain leases contain renewal options from five to ten years and escalation clauses based on increases in property taxes and other costs.

Note 7 – OREO and Other Repossessed Assets

The following table presents the activity related to OREO and other repossessed assets for the years ended September 30, 2013 and 2012 (dollars in thousands):

	2013 Amount			Number		2012 Amount			Number
Balance, beginning of year	$	13,302		56		$	10,811		50
Additions to OREO and other repossessed assets	6,375			25		9,443			44
Capitalized improvements	146			—		119			—
Lower of cost or estimated fair value losses	(2,064		)	—		(1,048		)	—
Disposition of OREO and other repossessed assets	(6,039		)	(34	)	(6,023		)	(38	)
Balance, end of year	$	11,720		47		$	13,302		56

At September 30, 2013, OREO and other repossessed assets consisted of 47 properties in Washington, with balances ranging from $4,000 to $1,301,000.  At September 30, 2012, OREO consisted of 56 properties in Washington, with balances ranging from $4,000 to $2,805,000.  The Company recorded net gains on sale of OREO and other repossessed assets of $264,000 for the year ended September 30, 2013. The Company recorded net losses on sales of OREO and other repossessed assets for the year ended September 30, 2012 of $(373,000) and net gains on sales of OREO and other repossessed asset of $548,000 for the year ended September 30, 2011. Gains and losses on sales of OREO and other repossessed assets are included/netted in the OREO and other repossessed assets, net category in non-interest expense in the accompanying consolidated statements of income.

Note 8 - CDI

During the year ended September 30, 2005, the Company recorded a CDI of $2,201,000 in connection with the October 2004 acquisition of seven branches and related deposits.  Net unamortized CDI totaled $119,000 and $249,000 at September 30, 2013

and 2012, respectively.  Amortization expense related to the CDI for the years ended September 30, 2013, 2012 and 2011 was $130,000, $148,000 and $167,000, respectively.

111

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Amortization expense for the CDI for future years ending September 30 is estimated to be as follows (dollars in thousands):

2014	$	116
2015	3
Total	$	119

Note 9 - Deposits

Deposits consisted of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Non-interest-bearing demand	$	87,657	$	75,296
NOW checking	156,100		150,139
Savings	91,349		87,493
Money market accounts	99,006		79,549
Certificates of deposit	174,150		205,449
Total	$	608,262	$	597,926

Certificates of deposit of $100,000 or greater totaled $63,958,000 and $77,540,000 at September 30, 2013 and 2012, respectively. The Company had brokered deposits totaling $1,191,000 at September 30, 2013. There were no brokered deposits at September 30, 2012.

Scheduled maturities of certificates of deposit for future years ending September 30 are as follows (dollars in thousands):

2014	$	111,480
2015	29,950
2016	12,788
2017	12,030
2018	6,535
Thereafter	1,367
Total	$	174,150

Interest expense on deposits by account type was as follows for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013		2012		2011
NOW checking	$	463	$	651	$	1,415
Savings	55		245		459
Money market accounts	246		334		435
Certificates of deposit	1,804		2,721		3,827
Total	$	2,568	$	3,951	$	6,136

112

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Note 10 – FHLB Advances and Other Borrowings

The Bank has long- and short-term borrowing lines with the FHLB with total credit on the lines equal to 25% 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 FHLB advances outstanding at September 30, 2013 and 2012.  The long-term borrowings at September 30, 2013 mature at various dates during the 2017 fiscal year and bear interest at rates ranging from 3.69% to 4.34%.  Under the Advances, Security and Deposit Agreement entered into with the FHLB, 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.

The Bank also maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.  At September 30, 2013 the Bank had a borrowing capacity on this line of $52,702,000 with no balance outstanding.  The Bank had no outstanding balance on this line at September 30, 2012.

The Bank has a short-term $10,000,000 overnight borrowing line with Pacific Coast Banker's Bank. The borrowing line may be reduced or withdrawn at any time. As of September 30, 2013 and 2012 the Bank did not have any outstanding advances on this borrowing line.

There were no short-term borrowings during the years ended September 30, 2013, 2012 and 2011.

Note 11 - Repurchase Agreements

The Bank had no overnight repurchase agreements with customers at September 30, 2013. Repurchase agreements with customers at September 30, 2012 totaled $855,000.

Information concerning repurchase agreements as of and for the years ended September 30, 2013 and 2012 is summarized as follows (dollars in thousands):

	2013			2012
Average daily balance during the period	$	352		$	699
Average daily interest rate during the period	0.05		%	0.05		%
Maximum month-end balance during the period	$	787		$	948
Weighted average rate at end of the period	—		%	0.05		%
Securities underlying the agreements at end of the period:
Recorded value	$	—		$	813
Estimated fair value	—			838

The securities underlying the agreements at September 30, 2012 were under the Company's control in safekeeping at third-party financial institutions.

Note 12 - Other Liabilities and Accrued Expenses

Other liabilities and accrued expenses were comprised of the following at September 30, 2013 and 2012 (dollars in thousands):

113

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

	2013		2012
Accrued deferred compensation and profit sharing plans payable	$	660	$	566
Accrued interest payable on deposits, advances and      repurchase agreements	320		404
Accounts payable and accrued expenses - other	1,718		1,884
Total other liabilities and accrued expenses	$	2,698	$	2,854

Note 13 - Federal Income Taxes

The components of the provision for federal income taxes for the years ended September 30, 2013, 2012 and 2011 were as follows (dollars in thousands):

	2013		2012		2011
Current	$	1,737	$	1,627	$	148
Deferred	777		154		156
Provision	$	2,514	$	1,781	$	304

At September 30, 2013 and 2012, the Company had income taxes receivable of $80,000 and $708,000, respectively, which are included in other assets in the accompanying consolidated balance sheets.

The components of the Company’s deferred tax assets and liabilities at September 30, 2013 and 2012 were as follows (dollars in thousands):

	2013		2012
Deferred Tax Assets
Accrued interest on loans	$	83	$	278
Unearned ESOP shares	282		301
Allowance for loan losses	4,018		4,293
Allowance for OREO losses	794		516
CDI	259		264
Unearned MRDP shares	8		25
Net unrealized securities losses	139		192
Capital loss carry-forward	—		677
OTTI credit impairment	198		194
Other	166		156
Total deferred tax assets	5,947		6,896

114

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

	2013		2012
Deferred Tax Liabilities
FHLB stock dividends	$	840	$	874
Depreciation	147		294
Goodwill	1,153		1,024
MSR's	770		683
Prepaid expenses	233		172
Other	11		13
Total deferred tax liabilities	3,154		3,060
Valuation allowance for capital loss on sale of securities	—		(213		)
Net deferred tax assets	$	2,793	$	3,623

The provision for federal income taxes for the years ended September 30, 2013, 2012 and 2011 differs from that computed at the statutory corporate tax rate as follows (dollars in thousands):

	2013			2012			2011
Expected tax provision at statutory rate	$	2,472		$	2,166		$	474
BOLI income	(196		)	(206		)	(175		)
Change in estimated utilization of net capital loss carry-forward	281			(208		)	—
Dividends on ESOP	(24		)	—			—
Other - net	(19		)	29			5
Provision forfederal income taxes	$	2,514		$	1,781		$	304

During the year ended September 30, 2012, the Company adjusted its valuation allowance for deferred taxes to reflect anticipated tax strategies to utilize a capital loss carry-forward related to a previous redemption in kind of investment securities. 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.

Note 14 – Employee Stock Ownership and 401(k) Plan (“KSOP”)

Effective October 3, 2007, the Bank established 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) Profit Sharing 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.  It may be funded by Bank contributions in cash or stock for the ESOP and in cash only for the 401(k) profit sharing.  Employee vesting occurs over six years.

ESOP

The amount of the 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 $72,000 were used to service the debt during the year ended September 30, 2013. There were no dividends used to service debt for the years ended September 30, 2012 and 2011.  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, 2013, 271,564 ESOP shares had been distributed to participants.

115

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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 $237,000, $266,000 and

$291,000 for the years ended September 30, 2013, 2012 and 2011, respectively. The balance of the loan at September 30, 2013 was $2,566,000.

Shares held by the ESOP as of September 30, 2013, 2012 and 2011 were classified as follows:

	2013	2012	2011
Unallocated shares	193,968	229,234	264,500
Shares released for allocation	592,468	597,641	585,468
Total ESOP shares	786,436	826,875	849,968

The approximate fair market value of the ESOP’s unallocated shares at September 30, 2013, 2012 and 2011, was $1,746,000, $1,375,000 and $1,069,000, respectively.  Compensation expense recognized under the ESOP for the years ended September 30, 2013, 2012 and 2011 was $202,000, $165,000, and $172,000.

401(k)

Eligible employees may contribute up to the maximum established by the Internal Revenue Service.  Contributions by the Bank are at the discretion of the Board except for a 3% safe harbor contribution which is mandatory according to the plan document.  Bank contributions totaled $289,000, $283,000 and $290,000 for the years ended September 30, 2013, 2012 and 2011, respectively.

Note 15 - Stock Compensation Plans

Stock Option Plans

Under the Company’s stock option plans (1999 Stock Option Plan and 2003 Stock Option Plan), the Company was able to grant options for up to 1,622,500 shares of common stock to employees, officers and directors.  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 stock on the date of grant.  Generally, options vest in 20% annual installments on each of the five anniversaries from the date of the grant.  At September 30, 2013, options for 157,338 shares were available for future grant under the 2003 Stock Option Plan and no shares were available for future grant under the 1999 Stock Option Plan.

In October 2013, the Board approved grants to employees and directors of options to purchase 106,000 shares of common stock.

116

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Stock option activity for the years ended September 30, 2013, 2012 and 2011 is summarized as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding September 30, 2010	194,864		$	8.71
Options forfeited	(57,138	)	7.42
Outstanding September 30, 2011	137,726		9.25
Options granted	76,000		5.04
Options forfeited	(18,100	)	5.44
Outstanding September 30, 2012	195,626		7.97
Options granted	29,000		6.00
Options forfeited	(61,680	)	9.69
Outstanding September 30, 2013	162,946		$	6.96

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 similar term

as 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 years ended September 30, 2013 and 2012, 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 no options granted during the year ended September 30, 2011.  There were 76,000 options granted during the year ended September 30, 2012 with an aggregate grant date fair value of $150,000. There were 29,000  options granted during the year ended September 30, 2013 with an aggregate grant date fair value of $69,000. The weighted average assumptions for options granted during the years ended September 30, 2013 and 2012 were as follows:

	2013			2012
Expected volatility	45		%	45		%
Expected term (in years)	5			5
Expected dividend yield	—		%	—		%
Risk free interest rate	0.76		%	0.76		%
Grant date fair value per share	$	2.37		$	1.97

There were 17,300 options that vested during the year ended September 30, 2013 with a total fair value of $32,000.There were 5,000 options that vested during the year ended September 30, 2012 with a total fair value of $6,000. There were 5,200 options that vested during the year ended September 30, 2011 with a total fair value of $7,000.

At September 30, 2013 there were 91,000 unvested options with an aggregate grant date fair value of $189,000, all of which the Company assumes will vest.  The unvested options had an aggregate intrinsic value of $330,000 at September 30, 2013.  At September 30, 2012 there were 79,300 unvested options with an aggregate grant date fair value of $152,000.

There were no options exercised during the years ended September 30, 2013, 2012 or 2011.

117

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Additional information regarding options outstanding at September 30, 2013, is as follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices ($)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$ 4.01 - 4.55	46,900	$	4.25	7.2	18,900	$	4.40	6.7
5.86 - 6.00	71,500	5.92		9.0	8,500	5.86		9.0
11.46 - 11.63	44,546	11.50		0.3	44,546	11.50		0.3
	162,946	$	6.96	6.1	71,946	$	8.97	2.9

The aggregate intrinsic value of options outstanding at September 30, 2013 was $443,000. The aggregate intrinsic value of options outstanding at September 30, 2012 was $88,000. There was no aggregate intrinsic value of options outstanding at September 30, 2011, as the exercise price of all options outstanding was greater than the stock’s current market value.

Stock Grant Plan

The Company adopted the MRDP in 1998 for the benefit of employees, officers and directors of the Company.  The objective of the MRDP is to retain personnel of experience and ability in key positions by providing them with a proprietary interest in the Company.

The MRDP allowed for the issuance to participants of up to 529,000 shares of the Company’s common stock.  Awards under the MRDP were made in the form of restricted shares of common stock that are subject to restrictions on the transfer of ownership and are subject to a five-year vesting period.  Compensation expense in the amount of the fair value of the common stock at the date of the grant to the plan participants is recognized over a five-year vesting period, with 20% vesting on each of the five anniversaries from the date of the grant.  At September 30, 2013, there were no shares available for future awards under the MRDP.  There were no MRDP shares granted during the years ended September 30, 2013, 2012 or 2011.

A summary of MRDP shares vested for the years ended September 30, 2013, 2012 and 2011 were as follows:

	2013		2012		2011
Shares vested	6,207		10,831		13,435
Aggregate vesting date fair value	$	38,000	$	46,000	$	61,000

A summary of unvested MRDP shares as of September 30, 2013 and changes during the year ended September 30, 2013, were as follows:

	Shares	Weighted Average Grant Date Fair Value
Unvested shares, beginning of period	9,461	$	9.00
Shares vested	6,207	10.04
Unvested shares, end of period	3,254	$	7.01

At September 30, 2013, there were 3,254 unvested MRDP shares with an aggregate grant date fair value of $23,000.

118

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Expense for Stock Compensation Plans

Compensation expense recorded in the consolidated financial statements for all stock-based plans were as follows for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Stock options	$	49		$	15		$	7
MRDP stock grants	39			105			171
Less: related tax benefit recognized	(8		)	(28		)	(37		)
	$	80		$	92		$	141

The compensation expense to be recognized in the future for stock-based awards that had been awarded as of September 30, 2013 but not vested for the years ending September 30, is as follows (in thousands):

	Stock Options		Stock Grants (MRDP)		Total Awards
2014	$	51	$	2	$	53
2015	44		—		44
2016	44		—		44
2017	35		—		35
2018	1		—		1
	$	175	$	2	$	177

Note 16 - Commitments and Contingencies

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, 2013 and 2012 is as follows (dollars in thousands):

	2013		2012
Undisbursed portion of construction loans in process (see Note 4)	$	18,527	$	16,325
Undisbursed lines of credit	25,187		21,671
Commitments to extend credit	16,399		10,113

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’s credit-worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party.  However, such loan to value ratios will subsequently change, based on increases and decreases in the supporting collateral values.  Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, land, and income-producing commercial properties.

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

119

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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 $165,000 and $148,000 at September 30, 2013 and 2012, 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, 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 24 months of the employee’s current compensation.

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.

Note 17 - 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, 2013, the Company had $555,997,000(including $18,527,000 of undisbursed construction loan proceeds) in loans secured by real estate, which represents 95.9% 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, 2013, 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 collectibility 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 $30,042,000 in CDs held for investment at September 30, 2013.  The CDs are held with FDIC insured institutions, and each CD is below the FDIC insurance limit of $250,000 with the exception of one CD held with FHLB Seattle totaling $2.5 million.

Note 18 - Regulatory Matters

Timberland Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.  Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital classifications of Timberland Bancorp and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital.  Under current FDIC regulations, insured state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage capital to total assets of at least 4.0%, (ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at least 8.0%.

In December 2009, the FDIC and the Washington State Department of Financial Institutions, Division of Banks (“Division”) determined that the Bank required supervisory attention and agreed to terms on a Memorandum of Understanding with the Bank (the “Bank MOU”).  Under the Bank MOU, the Bank was required among other things, to maintain Tier 1 Capital of not less than 10.0% of the Bank’s adjusted total assets and maintain capital ratios above the “well capitalized” thresholds as defined under FDIC Rules and Regulations; obtain the prior consent from the FDIC and the Division prior to the Bank declaring a dividend to its holding company; and not engage in any transactions that would materially change the Bank’s balance sheet

120

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

composition, including growth in total assets of five percent or more or significant changes in funding sources without the prior non-objection of the FDIC. On December 12, 2012, the Bank was notified by the FDIC and the Division that the Bank MOU had been rescinded.

In addition, in February 2010, the FRB determined that Timberland Bancorp required additional supervisory attention and entered into a Memorandum of Understanding with Timberland Bancorp (the “Company MOU”).  Under the Company MOU, Timberland Bancorp was required, among other things, to obtain prior written approval or non-objection from the FRB to declare or pay any dividends, or make any other capital distributions; issue any trust preferred securities; or purchase or redeem any of its stock. On January 15, 2013, the FRB notified Timberland Bancorp that the Company MOU had been rescinded.

The following table compares Timberland Bancorp’s (consolidated) and the Bank’s actual capital amounts at September 30, 2013 and 2012 to their minimum regulatory capital requirements at that date (dollars in thousands):

	Actual				Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2013
Tier 1 leverage capital:
Timberland Bancorp	$	85,158	11.5	%	$	29,677	4.0	%	N/A		N/A
Timberland Bank	82,265		11.1		29,662		4.0		$	37,078	5.0	%
Tier 1 risk adjusted capital:
Timberland Bancorp	85,158		15.3		22,259		4.0		N/A		N/A
Timberland Bank	82,265		14.8		22,255		4.0		33,382		6.0
Total risk based capital:
Timberland Bancorp	92,168		16.6		44,518		8.0		N/A		N/A
Timberland Bank	89,273		16.1		44,509		8.0		55,636		10.0
September 30, 2012
Tier 1 leverage capital:
Timberland Bancorp	$	85,455	11.7	%	$	29,313	4.0	%	N/A		N/A
Timberland Bank	79,911		10.9		73,013		10.0	(1)	$	73,013	10.0	%
Tier 1 risk adjusted capital:
Timberland Bancorp	85,455		15.5		22,042		4.0		N/A		N/A
Timberland Bank	79,911		14.5		33,036		6.0	(1)	33,036		6.0
Total risk based capital:
Timberland Bancorp	92,406		16.8		44,084		8.0		N/A		N/A
Timberland Bank	86,856		15.8		55,059		10.0	(1)	55,059		10.0

______________________________

(1) Reflects the higher Tier 1 leverage capital ratio that the Bank was required to comply with under terms of the Bank MOU that was in effect at September 30, 2012.  Also reflects that the Bank was required to maintain Tier 1 risk adjusted capital ratio and Total risk-based capital ratio at or above the “well capitalized” thresholds under the terms of the Bank MOU.

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

121

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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, 2013 management estimates the value 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.

Note 19 - Condensed Financial Information - Parent Company Only

Condensed Balance Sheets - September 30, 2013 and 2012

(dollars in thousands)

	2013		2012
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	126	$	509
Interest-bearing deposits in banks	379		2,183
Total cash and cash equivalents	505		2,692
Loan receivable from ESOP	2,565		2,918
Investment in Bank	86,795		84,775
Other assets	40		26
Total assets	$	89,905	$	90,411
Liabilities and shareholders’ equity
Accrued expenses	$	217	$	92
Shareholders’ equity	89,688		90,319
Total liabilities and shareholders’ equity	$	89,905	$	90,411

122

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Condensed Statements of Income - Years Ended September 30, 2013, 2012 and 2011

(dollars in thousands)

	2013			2012			2011
Operating income
Interest on deposits in banks	$	1		$	1		$	1
Interest on loan receivable from ESOP	237			266			291
Total operating income	238			267			292
Operating expenses	455			556			541
Loss before income taxes and equity in undistributed     income of Bank	(217		)	(289		)	(249		)
Benefit for income taxes	(98		)	(98		)	(85		)
Loss before equity in undistributed income of Bank	(119		)	(191		)	(164		)
Equity in undistributed income of Bank	4,876			4,781			1,253
Net income	4,757			4,590			1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Preferred stock accretion	(283		)	(240		)	(225		)
Discount on redemption of preferred stock	255			—			—
Net income to common shareholders	$	4,019		$	3,518		$	32

123

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Condensed Statements of Cash Flows - Years Ended September 30, 2013, 2012 and 2011

(dollars in thousands)

	2013			2012			2011
Cash flows from operating activities
Net income	$	4,757		$	4,590		$	1,089
Adjustments to reconcile net income to     net cash provided by operating activities:
Equity in undistributed income of        Bank	(4,876		)	(4,781		)	(1,253		)
ESOP shares earned	265			264			264
MRDP compensation expense	39			105			171
Stock option compensation expense	49			15			7
Other, net	(39		)	406			(160		)
Net cash provided by operating activities	195			599			118
Cash flows from investing activities
Investment in Bank	2,956			(243		)	(288		)
Principal repayments on loan receivable from Bank	353			322			298
Net cash provided by investing activities	3,309			79			10
Cash flows from financing activities
Repurchase of preferred stock	(4,321		)	—			—
Payment of dividends	(1,368		)	(2,080		)	—
ESOP tax effect	6			(65		)	(61		)
MRDP compensation tax effect	(8		)	(28		)	(37		)
Net cash used in financing activities	(5,691		)	(2,173		)	(98		)
Net increase (decrease) in cash and cash equivalents	(2,187		)	(1,495		)	30
Cash and cash equivalents
Beginning of year	2,692			4,187			4,157
End of year	$	505		$	2,692		$	4,187

124

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

Note 20 - 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 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 is deducted from net income, and the discount on the redemption of Series A Preferred Stock is added to net income in computing net income to common shareholders. Common stock equivalents arise from assumed conversion of outstanding stock options and outstanding warrants to purchase common stock.  In accordance with FASB guidance for stock compensation, shares owned by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing net income per common share.  Information regarding the calculation of basic and diluted net income per common share for the years ended September 30, 2013, 2012 and 2011 is as follows (dollars in thousands, except per share amounts):

	2013			2012			2011
Basic net income per common share computation
Numerator - net income	$	4,757		$	4,590		$	1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Discount on redemption of preferred stock	255			—			—
Preferred stock discount accretion	(283		)	(240		)	(225		)
Net income to common stockholders	$	4,019		$	3,518		$	32
Denominator - weighted average common shares     outstanding	6,817,918			6,780,612			6,745,347
Basic net income per common share	$	0.59		$	0.52		$	—
Diluted net income per common share computation
Numerator - net income	$	4,757		$	4,590		$	1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Discount on redemption of preferred stock	255			—			—
Preferred stock discount accretion	(283		)	(240		)	(225		)
Net income to common stockholders	$	4,019		$	3,518		$	32
Denominator - weighted average common shares     outstanding	6,817,918			6,780,612			6,745,347
Effect of dilutive stock options	16,555			—			177
Effect of dilutive stock warrant	52,522			—			—
Weighted average common shares outstanding-     assuming dilution	6,886,995			6,780,612			6,745,524
Diluted net income per common share	$	0.58		$	0.52		$	—

For the years ended September 30, 2013, 2012 and 2011, average options to purchase 109,953, 162,517 and 163,714 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.

125

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

For the years ended September 30, 2012 and 2011, a warrant to purchase a weighted average of 370,899 shares was outstanding but not included in the computation of diluted net income per common share because the warrant’s exercise price was greater than the average market price of the common shares and, therefore, its effect would have been anti-dilutive.

Note 21 - Fair Value Measurement

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, 2013 and 2012.  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.

Accounting guidance regarding fair value measurements defines fair value and establishes a framework for measuring fair value in accordance with GAAP.  Fair value is the exchange 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 following definitions describe the levels of inputs that may be used to measure fair value:

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 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.

The Company used the following methods and significant assumptions to estimate fair value on a recurring basis:

MBS and Other Investments Available for Sale

The estimated fair value of MBS and other investments are based upon the assumptions market participants would use in pricing the security.  Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2).

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a recurring basis at September 30, 2013 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for Sale Securities
MBS:
U.S. government agencies	$	—	$	2,229	$	—	$	2,229
Private label residential	—		914		—		914
Mutual funds	958		—		—		958
Total	$	958	$	3,143	$	—	$	4,101

There were no transfers among Level 1, Level 2 and Level 3 during the year ended September 30, 2013.

126

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a recurring basis at September 30, 2012 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for Sale Securities
MBS:
U.S. government agencies	$	—	$	2,975	$	—	$	2,975
Private label residential	—		957		—		957
Mutual funds	1,013		—		—		1,013
Total	$	1,013	$	3,932	$	—	$	4,945

There were no transfers among Level 1, Level 2 and Level 3 during the year ended September 30, 2012.

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis:

Impaired Loans: A loan is considered to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  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.  The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis.  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.

MBS and Other Investments Held to Maturity: The estimated fair value of MBS and other investments held to maturity are based upon the assumptions market participants would use in pricing the 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).

MSRs: The fair value of the MSRs was determined using a third-party model, which incorporates the expected life of the underlying loans, estimated cost to service the loans, servicing fees received and other factors.  The estimated fair value is calculated by stratifying the MSRs based on the predominant risk characteristics that include the underlying loan’s interest rate, cash flows of the loan, origination date and term (Level 3).

127

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2013, and the total losses resulting from these estimated fair value adjustments for the year ended September 30, 2013 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total Losses
Impaired loans:
Mortgage Loans;
One-to four-family	$	—	$	—	$	3,042	$	769
Multi-family	—		—		4,850		—
Commercial	—		—		12,868		667
Construction – speculative one-to four-family	—		—		599		—
Land	—		—		969		2,307
Consumer loans:
Home equity and second mortgage	—		—		242		184
Total impaired loans (1)	—		—		22,570		3,927
MBS – held to maturity (2):
Private label residential	—		83		—		45
OREO and other repossessed assets (3)	—		—		11,720		2,064
Total	$	—	$	83	$	34,290	$	6,036

_______________________

(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.

128

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a non-recurring basis at September 30, 2012 and the total losses resulting from these estimated fair value adjustments for the year ended September 30, 2012 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total Losses
Impaired loans:
Mortgage Loans;
One-to four-family	$	—	$	—	$	3,094	$	276
Multi-family	—		—		6,168		14
Commercial	—		—		8,929		1,215
Construction – custom and owner / builder	—		—		86		—
Construction – speculative one-to four-family	—		—		591		—
Land	—		—		1,938		1,251
Consumer loans:
Home equity and second mortgage	—		—		265		232
Total impaired loans (1)	—		—		21,071		2,988
MBS – held to maturity (2):
Private label residential	—		231		—		164
OREO and other repossessed assets (3)	—		—		13,302		947
MSRs (4)	—		—		2,011		—
Total	$	—	$	231	$	36,384	$	4,099

_______________________

(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.

(4) The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights exceed their estimated fair value.  Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that estimated fair value is less than the recorded amount.

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, 2013 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	22,570	Market approach	Appraised value less selling costs	NA
OREO and other repossessed assets	$	11,720	Market approach	Lower of appraised value or listing price less selling costs	NA

129

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

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 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.

MBS and other investments:  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, 2013, 2,028 shares of FHLB stock was redeemed from the Company at par value. Accordingly, par value is deemed to be a reasonable estimate of fair value.

Loans Receivable, Net:  At September 30, 2013 the fair value of loans was estimated using a discounted cash flow analysis and comparable market statistics. A discounted cash flow analysis was used to estimate the fair value of loans graded pass. The fair value of loans graded watch, special mention and substandard was estimated using comparable market statistics that approximated sales of similarly rated loans. At September 30, 2012, the fair value of loans was estimated using comparable market statistics that approximated sales of similar types of loans.

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 included at 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.

Repurchase Agreements:  The recorded value of repurchase agreements approximates the estimated fair value due to the short-term nature of the borrowings.

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.

130

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The estimated fair values of financial instruments were as follows as of September 30, 2013 (dollars in thousands):

			Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1			Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	94,496	$	94,496	$	94,496		$	—	$	—
CDs held for investment	30,042		30,042		30,042			—		—
MBS and other investments	6,838		7,634		973		6,676	6,661		—
FHLB stock	5,452		5,452		5,452			—		—
Loans receivable, net	546,193		514,616		—			—		514,616
Loans held for sale	1,911		1,973		1,973			—		—
Accrued interest receivable	1,972		1,972		1,972			—		—
Financial Liabilities
Deposits:
Non-interest bearing demand	$	87,657	$	87,657	$	87,657		$	—	$	—
Interest-bearing	520,605		522,021		346,455			—		175,566
Total deposits	608,262		609,678		434,112			—		175,566
FHLB advances	45,000		48,445		—			48,445		—
Accrued interest payable	320		320		320			—		—

The estimated fair values of financial instruments were as follows as of September 30, 2012 (dollars in thousands):

			Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1			Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	96,668	$	96,668	$	96,668		$	—	$	—
CDs held for investment	23,490		23,490		23,490			—		—
MBS and other investments	8,284		8,577		1,043		6,676	7,534		—
FHLB stock	5,655		5,655		5,655			—		—
Loans receivable, net	537,053		502,147		—			—		502,147
Loans held for sale	1,427		1,504		1,504			—		—
Accrued interest receivable	2,183		2,183		2,183			—		—
Financial Liabilities
Deposits:
Non-interest bearing demand	$	75,296	$	75,296	$	75,296		$	—	$	—
Interest-bearing	522,630		524,823		317,181			—		207,642
Total deposits	597,926		600,119		392,477			—		207,642
FHLB advances	45,000		51,115		—			51,115		—
Repurchase agreements	855		855		855			—		—
Accrued interest payable	404		404		404			—		—

131

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.  As a result, the estimated fair value of the Company’s financial instruments will change when interest rate levels change, and that change may either be favorable or unfavorable to the Company.  Management attempts to match maturities of assets and liabilities to the extent believed necessary to appropriately manage interest rate risk.  However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling interest rate environment.  Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment.  Management monitors interest rates and maturities of assets and liabilities, and attempts to manage interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 22 - Selected Quarterly Financial Data (Unaudited)

The following selected financial data are presented for the quarters ended (dollars in thousands, except per share amounts):

	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012
Interest and dividend income	$	7,521		$	7,575		$	7,552		$	7,589
Interest expense	(1,052		)	(1,076		)	(1,111		)	(1,200		)
Net interest income	6,469			6,499			6,441			6,389
Provision for loan losses	(165		)	(1,385		)	(1,175		)	(200		)
Non-interest income	2,397			2,372			2,778			2,715
Non-interest expense	(7,066		)	(6,237		)	(6,184		)	(6,377		)
Income before income taxes	1,635			1,249			1,860			2,527
Provision for federal income taxes	740			373			582			819
Net income	895			876			1,278			1,708
Preferred stock dividends	(151		)	(151		)	(207		)	(201		)
Preferred stock discount accretion	(47		)	(47		)	(126		)	(63		)
Discount on redemption of preferred stock	—			—			255			—
Net income to common shareholders	$	697		$	678		$	1,200		$	1,444
Net income per common share
Basic	$	0.10		$	0.10		$	0.18		$	0.21
Diluted	0.10			0.10			0.17			0.21

132

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc and Subsidiary

September 30, 2013 and 2012

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011
Interest and dividend income	$	7,750		$	8,019		$	7,804		$	8,032
Interest expense	(1,294		)	(1,391		)	(1,531		)	(1,731		)
Net interest income	6,456			6,628			6,273			6,301
Provision for loan losses	(900		)	(900		)	(1,050		)	(650		)
Non-interest income	2,503			2,341			2,493			2,444
Non-interest expense	(6,678		)	(6,097		)	(6,572		)	(6,221		)
Income before income taxes	1,381			1,972			1,144			1,874
Provision for federal income taxes	230			624			336			591
Net income	1,151			1,348			808			1,283
Preferred stock dividends	(208		)	(208		)	(208		)	(208		)
Preferred stock discount accretion	(61		)	(61		)	(59		)	(59		)
Net income to common shareholders	$	882		$	1,079		$	541		$	1,016
Net income per common share
Basic	$	0.13		$	0.16		$	0.08		$	0.15
Diluted	0.13			0.16			0.08			0.15

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, 2013 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 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, 2013, 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 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

133

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 is included in this Form 10-K under Part II, Item 8, “Financial Statements and Supplementary Data.”

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 2013 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.”

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, composed of Directors Robbel, Smith, Goldberg and Stoney.  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 Directors Robbel and Stoney as the Audit Committee financial experts, as defined in the SEC’s Regulation S-K.  Directors Robbel, Smith,  Goldberg and Stoney 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, 2013.  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.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a)Security Ownership of Certain Beneficial Owners.

134

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.

(a)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 is incorporated herein by reference.

(c)           Changes In Control.

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, 2013.

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:
1999 Stock Option Plan	32,414	$	11.46	—
2003 Stock Option Plan	130,532	5.81		157,338
Equity compensation plans  not approved by security holders	—	—		—
Total	162,946			157,338

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 Auditor” included in the Company’s Proxy Statement and is incorporated herein by reference.

135

PART IV

Item 15.  Exhibits, Financial Statement Schedules

(a)      Exhibits

3.1	Articles of Incorporation of the Registrant (1)
3.2	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)
10.1	Employee Severance Compensation Plan (4)
10.2	Employee Stock Ownership Plan (5)
10.3	1999 Stock Option Plan (6)
10.4	2003 Stock Option Plan (7)
10.5	Form of Incentive Stock Option Agreement (8)
10.6	Form of Non-qualified Stock Option Agreement (8)
10.7	Management Recognition and Development Plan (6)
10.8	Form of Management Recognition and Development Award Agreement (7)
10.9	Employment Agreement with Michael R. Sand (9)
10.10	Employment Agreement with Dean J. Brydon (9)
14	Code of Ethics (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
99.1	Certification of the Principal Executive Officer Pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008 for the Fiscal Year Ended September 30, 2013
99.2	Certification of the Chief Financial Officer Pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008 for the Fiscal Year Ended September 30, 2013
101	The following materials from Timberland Bancorp, Inc.’s  Annual Report on Form 10-K for the year ended September 30, 2013, 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 (11)

____________

(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 April 29, 2010.

(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) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2003.

(11) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

136

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 11, 2013	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 11, 2013
Michael R. Sand	Director
	(Principal Executive Officer)
/s/Jon C. Parker	Chairman of the Board	December 11, 2013
Jon C. Parker
/s/Dean J. Brydon	Chief Financial Officer	December 11, 2013
Dean J. Brydon	(Principal Financial and Accounting Officer)
/s/Andrea M. Clinton	Director	December 11, 2013
Andrea M. Clinton
/s/Larry D. Goldberg	Director	December 11, 2013
Larry D. Goldberg
/s/James C. Mason	Director	December 11, 2013
James C. Mason
/s/Ronald A. Robbel	Director	December 11, 2013
Ronald A. Robbel
/s/David A. Smith	Director	December 11, 2013
David A. Smith
/s/Michael J. Stoney	Director	December 11, 2013
Michael J. Stoney

137

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
99.1	Certification of the Principal Executive Officer Pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008 for the Fiscal Year Ended September 30, 2013
99.2	Certification of the Chief Financial Officer Pursuant to Section 111(b) of Emergency Economic Stabilization Act of 2008 for the Fiscal Year Ended September 30, 20132
101	The following materials from Timberland Bancorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2013, 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 *

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

138

EX-21

Exhibit 21

Subsidiaries of the Registrant

Parent
Timberland Bancorp, Inc.
	Percentage	Jurisdiction or
Subsidiaries	of Ownership	State of Incorporation
Timberland Bank	100%	Washington
Timberland Service Corporation (1)	100%	Washington

(1)    This corporation is a wholly-owned subsidiary of Timberland Bank.

EX-23.1

Exhibit 23.1

Consent of Independent Registered

Public Accounting Firm

We consent to the incorporation by reference in Registration Statements No. 333-32386 and No. 333-116163 on Form S-8 of Timberland Bancorp, Inc. of our report dated December 11, 2013, with respect to the consolidated financial statements of Timberland Bancorp, Inc. and Subsidiary (collectively, “Timberland”) included in Timberland’s Annual Report (Form 10-K) for the year ended September 30, 2013.

/s/ Delap LLP

Lake Oswego, Oregon

December 11, 2013

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act

I, Michael R. Sand, certify that:

1. I have reviewed this Form 10-K of Timberland Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: December 11, 2013

/s/ Michael R. Sand                                        

Michael R. Sand

Chief Executive Officer 

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act

I, Dean J. Brydon, certify that:

1. I have reviewed this Form 10-K of Timberland Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: December 11, 2013

/s/ Dean J. Brydon                                 

Dean J. Brydon 

Chief Financial Officer 

EX-32

EXHIBIT 32

Certification Pursuant to Section 906 of the Sarbanes Oxley Act

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

OF TIMBERLAND BANCORP, INC.

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

           Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), each of the undersigned hereby certifies in his capacity as an officer of Timberland Bancorp, Inc. (the “Company”) and in connection with this Annual Report on Form 10-K (“Report”), that:

• the Report fully complies with the requirements of Sections 13(a)  and 15(d) of the Securities Exchange Act of 1934, as amended, and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in the Report.

/s/ Michael R. Sand	/s/ Dean J. Brydon
Michael R. Sand	Dean J. Brydon
Chief Executive Officer	Chief Financial Officer

Date: December 11, 2013

EX-99.1

Exhibit 99.1

TIMBERLAND BANCORP, INC.

Certification of Principal Executive Officer Pursuant to 31 CFR § 30.15

I, Michael R. Sand, the President and Chief Executive Officer of Timberland Bancorp, Inc. (the “Company”), certify, based on my knowledge, that:

(i) The compensation committee of the Company has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to the Company;

(ii) The compensation committee of the Company, has identified and limited during any part of the most recently completed fiscal year that was a TARP period the features in the SEO compensation plans that could lead SEOS to take unnecessary and excessive risks that could threaten the value of the Company and identified any features in the employee compensation plans that pose risks to the Company and limited those features to ensure that the Company is not unnecessarily exposed to risks;

(iii) The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified the features in the plan that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee and has limited any such features that would encourage the manipulation of reported earnings of the Company;

(iv) The compensation committee of the Company will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The compensation committee of the Company will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in:

(A)SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of the Company;

(B) Employee compensation plans that unnecessarily expose the Company to risks; and

(C)Employee compensation plans that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee;

(vi) The Company has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) The Company has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO and any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(viii) The Company has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

(ix) The Company and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period, and that any expenses requiring approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility, were properly approved;

(x) The Company will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

(xi) The Company will disclose the amount, nature, and justification for the offering during any part of the most recently completed fiscal year that was a TARP period of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in paragraph (viii);

(xii) The Company will disclose whether the Company, the board of directors of the Company, or the compensation committee has engaged during any part of the most recently completed fiscal year that was a TARP period, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) The Company has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(xiv) The Company has substantially complied with all other requirements related to employee compensation that are provided in the agreement between the Company and Treasury, including any amendments;

(xv) The Company has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year ended September 30, 2013, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title and employer of each SEO and most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date:	December 11, 2013	By:	/s/Michael R. Sand
			Michael R. Sand
			President and Chief Executive Officer

EX-99.2

Exhibit 99.2

TIMBERLAND BANCORP, INC.

Certification of Principal Financial Officer Pursuant to 31 CFR § 30.15

I, Dean J. Brydon, the Executive Vice President, Chief Financial Officer and Secretary of Timberland Bancorp, Inc. (the “Company”) certify, based on my knowledge, that:

(i) The compensation committee of the Company has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to the Company;

(ii) The compensation committee of the Company, has identified and limited during any part of the most recently completed fiscal year that was a TARP period the features in the SEO compensation plans that could lead SEOS to take unnecessary and excessive risks that could threaten the value of the Company and identified any features in the employee compensation plans that pose risks to the Company and limited those features to ensure that the Company is not unnecessarily exposed to risks;

(iii) The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified the features in the plan that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee and has limited any such features that would encourage the manipulation of reported earnings of the Company;

(iv) The compensation committee of the Company will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The compensation committee of the Company will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in:

(A)SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of the Company;

(B) Employee compensation plans that unnecessarily expose the Company to risks; and

(C)Employee compensation plans that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee;

(vi) The Company has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) The Company has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO and any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(viii) The Company has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

(ix) The Company and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period, and that any expenses requiring approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility, were properly approved;

(x) The Company will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

(xi) The Company will disclose the amount, nature, and justification for the offering during any part of the most recently completed fiscal year that was a TARP period of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in paragraph (viii);

(xii) The Company will disclose whether the Company, the board of directors of the Company, or the compensation committee has engaged during any part of the most recently completed fiscal year that was a TARP period, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) The Company has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(xiv) The Company has substantially complied with all other requirements related to employee compensation that are provided in the agreement between the Company and Treasury, including any amendments;

(xv) The Company has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year ended September 30, 2013, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title and employer of each SEO and most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date:	December 11, 2013	By:	/s/Dean J. Brydon
			Dean J. Brydon
			Executive Vice President,
			Chief Financial Officer and Secretary

XML

Condensed Financial Information - Parent Company Only: Condensed Statements of Operations, Parent Company (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Operating income
Interest on deposits in banks									$ 336	$ 338	$ 347
Operating expenses									607	776	675
Loss before income taxes and equity in undistributed income of Bank									7,271	6,371	1,393
Benefit for income taxes	(740)	(373)	(582)	(819)	(230)	(624)	(336)	(591)	(2,514)	(1,781)	(304)
Net income	895	876	1,278	1,708	1,151	1,348	808	1,283	4,757	4,590	1,089
Preferred stock dividends	(151)	(151)	(207)	(201)	(208)	(208)	(208)	(208)	(710)	(832)	(832)
Preferred stock accretion	(47)	(47)	(126)	(63)	(61)	(61)	(59)	(59)	(283)	(240)	(225)
Discount on redemption of preferred stock	0	0	255	0					255	0	0
Net income to common shareholders	697	678	1,200	1,444	882	1,079	541	1,016	4,019	3,518	32
Parent Company
Operating income
Interest on deposits in banks									1	1	1
Interest on loan receivable from ESOP									237	266	291
Total operating income									238	267	292
Operating expenses									455	556	541
Loss before income taxes and equity in undistributed income of Bank									(217)	(289)	(249)
Benefit for income taxes									98	98	85
Loss before equity in undistributed income of Bank									(119)	(191)	(164)
Equity in undistributed income of Bank									4,876	4,781	1,253
Net income									4,757	4,590	1,089
Preferred stock dividends									(710)	(832)	(832)
Preferred stock accretion									(283)	(240)	(225)
Discount on redemption of preferred stock									255	0	0
Net income to common shareholders									$ 4,019	$ 3,518	$ 32

XML

CDI (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2005 branch
Finite-Lived Intangible Assets [Line Items]
Number of branches	22
Amortization of CDI	$ 130	$ 148	$ 167
Core deposits
Finite-Lived Intangible Assets [Line Items]
CDI acquired, gross				2,201
Number of branches				7
Unamortized CDI, net	119	249
Amortization of CDI	$ 130	$ 148	$ 167

XML

Loans Receivable And Allowance For Loan Losses: Schedule of Troubled debt restructured loans (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	$ 22,604	$ 23,504
Accruing
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	18,573	13,410
Non-Accrual
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	4,031	10,094
Mortgage loans, one-to-four family
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	2,197	1,900
Mortgage loans, one-to-four family | Accruing
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	1,999	1,900
Mortgage loans, one-to-four family | Non-Accrual
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	198	0
Mortgage loans, multi-family
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	5,184	5,430
Mortgage loans, multi-family | Accruing
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	5,184	5,430
Mortgage loans, multi-family | Non-Accrual
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	0	0
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	687	700
Mortgage loans, construction - speculative one-to-four family | Accruing
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	687	700
Mortgage loans, construction - speculative one-to-four family | Non-Accrual
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	0	0
Mortgage loans, commercial
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	11,734	9,941
Mortgage loans, commercial | Accruing
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	10,160	5,079
Mortgage loans, commercial | Non-Accrual
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	1,574	4,862
Mortgage loans, construction - land development
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	515	526
Mortgage loans, construction - land development | Accruing
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	0	0
Mortgage loans, construction - land development | Non-Accrual
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	515	526
Mortgage loans, land
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	1,808	4,445
Mortgage loans, land | Accruing
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	244	0
Mortgage loans, land | Non-Accrual
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	1,564	4,445
Consumer loans, home equity and second mortgage
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	479	562
Consumer loans, home equity and second mortgage | Accruing
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	299	301
Consumer loans, home equity and second mortgage | Non-Accrual
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loan	$ 180	$ 261

XML

Mortgage Servicing Rights: Summary of Loans serviced for Freddie Mac (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Transfers and Servicing [Abstract]
Loans serviced for Freddie Mac, Principal amount	$ 325,726	$ 304,872	$ 298,924

XML

Stock Compensation Plans: Summary of MRDP Shares Unvested (Details) (MRDP, Stock Grants, USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
MRDP | Stock Grants
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Unvested shares, beginning of period	9,461
Shares vested	6,207	10,831	13,435
Unvested shares, end of period	3,254	9,461
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Roll Forward]
Unvested shares, beginning of period, Weighted Average Grant Date Fair Value	$ 9.00
Shares vested, Weighted Average Grant Date Fair Value	$ 10.04
Unvested shares, end of period, Weighted Average Grant Date Fair Value	$ 7.01	$ 9.00

XML

FHLB Advances and Other Borrowings (Details) (USD $)	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
FHLB borrowings, ratio of maximum borrowing capacity to total assets	25.00%
Short-term borrowings	$ 0	$ 0	$ 0
Pacific Coast Banker's Bank
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Short-term overnight borrowings, maximum borrowing capacity	10,000,000
Overnight line of credit, amount outstanding	0	0
Federal Home Loan Bank Advances
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Short-term FHLB borrowings, maximum borrowing capacity	52,702,000
Short-term FHLB advances	0	0
Federal Home Loan Bank Advances
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Long-term FHLB advances	$ 45,000,000	$ 45,000,000
Long-term FHLB borrowings, minimum interest rate	3.69%
Long-term FHLB borrowings, maximum interest rate	4.34%

XML

Federal Income Taxes: Schedule of Effective Income Tax Rate Reconciliation (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Income Tax Disclosure [Abstract]
Expected tax provision at statutory rate	$ 2,472	$ 2,166	$ 474
BOLI income	(196)	(206)	(175)
Change in estimated utilization of net capital loss carry-forward	281	(208)	0
Dividends on ESOP	(24)	0	0
Other - net	(19)	29	5
Provision for federal income taxes	$ 2,514	$ 1,781	$ 304

XML

CDI

12 Months Ended

Sep. 30, 2013

Finite-Lived Intangible Assets, Net [Abstract]

CDI

CDI

During the year ended September 30, 2005, the Company recorded a CDI of $2,201,000 in connection with the October 2004 acquisition of seven branches and related deposits.  Net unamortized CDI totaled $119,000 and $249,000 at September 30, 2013

and 2012, respectively.  Amortization expense related to the CDI for the years ended September 30, 2013, 2012 and 2011 was $130,000, $148,000 and $167,000, respectively.

Amortization expense for the CDI for future years ending September 30 is estimated to be as follows (dollars in thousands):

2014	$	116
2015	3
Total	$	119

XML

Summary Of Significant Accounting Policies Summary of Significant Accounting Policies: FHLB Stock (Details) (USD $) In Millions, except Per Share data, unless otherwise specified	12 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2013 Minimum
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
FHLB, investment in capital stock, home loans (percent)			1.00%
FHLB, investment in capital stock, advances (percent)			5.00%
Par value of FHLB stock		$ 100
FHLB, authorization to repurchase investment stock, maximum per quarter	$ 25

XML

Timberland Bancorp, Inc. and Subsidiary Condensed Consolidated Statements of Income (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Interest and dividend income
Loans receivable	$ 29,591	$ 30,831	$ 32,976
MBS and other investments	281	404	612
Dividends from mutual funds and FHLB stock	29	32	31
Interest-bearing deposits in banks	336	338	347
Total interest and dividend income	30,237	31,605	33,966
Interest expense
Deposits	2,568	3,951	6,136
FHLB advances	1,871	1,996	2,397
Total interest expense	4,439	5,947	8,533
Net interest income	25,798	25,658	25,433
Provision for loan losses	2,925	3,500	6,758
Net interest income after provision for loan losses	22,873	22,158	18,675
Non-interest income
Other than temporary impairment (“OTTI”) on MBS and other investments	(15)	(206)	(236)
Adjustment for portion recognized in other comprehensive loss (before taxes)	(32)	(8)	(211)
Net OTTI on MBS and other investments	(47)	(214)	(447)
Realized losses on MBS and other investments	0	0	(2)
Gain on sales of MBS and other investments	0	22	79
Service charges on deposits	3,663	3,795	3,907
ATM and debit card interchange transaction fees	2,142	2,172	1,911
BOLI net earnings	577	607	517
Gain on sales of loans, net	2,507	2,472	1,548
Escrow fees	184	118	73
Fee income from non-deposit investment sales	82	71	92
Valuation recovery on MSRs, net	475	10	405
Other	679	728	598
Total non-interest income, net	10,262	9,781	8,681
Non-interest expense
Salaries and employee benefits	12,605	12,050	12,578
Premises and equipment	2,835	2,676	2,632
(Gain) loss on disposition of premises and equipment, net	(431)	0	16
Advertising	742	726	800
OREO and other repossessed assets, net	2,587	1,982	1,374
ATM	857	794	802
Postage and courier	443	501	540
Amortization of CDI	130	148	167
State and local taxes	576	608	622
Professional fees	856	822	753
FDIC insurance	685	942	1,161
Other insurance	174	212	359
Loan administration and foreclosure	430	816	959
Data processing and telecommunications	1,232	1,265	1,172
Deposit operations	607	776	675
Other	1,536	1,250	1,353
Total non-interest expense	25,864	25,568	25,963
Income before income taxes	7,271	6,371	1,393
Provision for federal income taxes	2,514	1,781	304
Net income	4,757	4,590	1,089
Preferred stock dividends	(710)	(832)	(832)
Preferred stock discount accretion	(283)	(240)	(225)
Repurchase of preferred stock at a discount	255	0	0
Net income to common shareholders	$ 4,019	$ 3,518	$ 32
Net income per common share
Basic (in dollars per share)	$ 0.59	$ 0.52	$ 0.00
Diluted (in dollars per share)	$ 0.58	$ 0.52	$ 0.00

XML

Summary Of Significant Accounting Policies

12 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

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 (“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 sheet, 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 OTTI in the estimated fair value of mortgage-backed securities, the valuation of MSRs, the valuation of OREO and the determination of goodwill impairment.

Certain prior year amounts have been reclassified to conform to the fiscal 2013 presentation with no change to net income or shareholders’ equity previously reported.

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 Series A Preferred Stock pays a 5.0% dividend through December 23, 2013, after which the rate increases to 9.0% until the preferred stock is redeemed by the Company.

The proceeds received in connection with the issuance of the Series A Preferred Stock were allocated between the preferred stock and detachable 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 is accreted to the expected redemption date and charged to retained earnings. This accretion is 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 Treasury's efforts to manage and recover its investments under the TARP. While the sale of this 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.  

On June 12, 2013, the Treasury sold, to private investors, the warrant to purchase up to 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 discount from liquidation value of $255,000. The discount from liquidation value on the repurchased shares was recorded as an increase to retained earnings.

On November 19, 2013, the Board of Directors (the "Board") of the Company approved the redemption of the remaining 12,065 shares of Series A Preferred Stock, subject to obtaining regulatory approval. The Company has submitted an application to the Federal Reserve Bank of San Francisco ("FRB") for approval to redeem the Series A Preferred Stock.

MBS and Other Investments

MBS and other investments are classified upon acquisition as either held to maturity or available for sale.  Securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reflected at amortized cost.  Securities classified as available for sale are reflected at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax effects.  Premiums and discounts are amortized to earnings using the interest method over the contractual life of the securities.  Gains and losses on sales of 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 securities available for sale that are deemed to be other than temporary are reflected in earnings when identified.  The fair value of the security then becomes the new cost basis.  For individual securities 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 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 cash flows is less than the amortized cost.  For individual 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 security’s cost basis and its fair value at the consolidated balance sheet date.  For individual 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

The Company, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of its outstanding home loans or 5% of advances from the FHLB.  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. Accordingly, $100 per share par value is deemed to be a reasonable estimate of fair value.

The Company evaluated its investment in the FHLB stock for OTTI, consistent with its accounting policy.  Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB, the actions being taken by the FHLB to address its regulatory situation and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the Company does not believe that its investment in the FHLB is impaired.  Further, during the year ended September 30, 2012, the Federal Housing Finance Agency (“Finance Agency”) upgraded the FHLB’s capital classification to “adequately capitalized” and granted the FHLB authority to repurchase up to $25 million of excess capital stock per quarter at par value, provided they receive a non-objection for each quarter’s repurchase from the Finance Agency.  The FHLB announced in July 2013 that, based on its second quarter 2013 financial results, their board of directors had declared a $0.025 per share cash dividend. This represented the first dividend in a number of years. Even though the Company did not determine its investment in the FHLB stock was impaired at September 30, 2013, future deterioration of the FHLB’s financial condition may result in future impairment losses.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are stated in the aggregate at the lower of cost or estimated fair value.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.  Gains or losses on sales of loans are recognized at the time of sale.  The gain or loss is the difference between the net sales proceeds and the recorded value of the loans, including any remaining unamortized deferred loan origination fees.

Loans Receivable

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

Non-Performing Loans

Loans on non-accrual status and loans past due 90 days or more and still accruing interest are considered to be non-performing loans.

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.

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, 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-amortizing, 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.

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 coextensive.  The Company 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.

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 (or 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 management to augment 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.  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 the Financial Accounting Standards Board (“FASB”) guidance for receivables, 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 homogenous 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), 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 loan losses is charged against operations and is added to 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 continue to 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.

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 meet payments as they become due or when they are past due 90 days as to either principal or interest (based on contractual terms), unless they are well secured and in the process of collection.  In determining whether a borrower may be able to meet 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 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.

MSRs

The Company holds rights to service loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). MSRs are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained and are amortized to servicing income on loans sold in proportion to and 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 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 servicing assets were originated.  Fair values are estimated using discounted cash flows based on current market rates of interest.  For purposes of measuring impairment, the rights 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.

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 exceeds the estimated fair value of the net identified tangible and intangible assets acquired.  Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment.  An annual review 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 and no additional analysis is necessary.

The Company performed its fiscal year 2013 goodwill impairment test during the quarter ended June 30, 2013 with the assistance of a third-party firm specializing in goodwill impairment valuations for financial institutions. The third-party analysis was conducted as of May 31, 2013 and concluded that the fair value of goodwill was $45.0 million, which exceeded the recorded value of $5.7 million by 689%.

The goodwill impairment test involved a two-step process. Step one of the goodwill impairment test estimated 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.

The allocation of corporate value approach applies the aggregate market value of the Company and divides it among the reporting units. The Company has a single reporting unit. The aggregate market value was based on the Company's common stock market price on May 31, 2013, adjusted for a control premium and the value of preferred stock (at its liquidation value). A key assumption in this approach is the control premium applied to the aggregate market value. A control premium is utilized to adjust the value of a company to its value from the perspective of a controlling interest which is generally higher than the value determined using a widely quoted market price per share. The Company used an expected control premium of 30%, which was based on comparable transaction history.

The income approach uses a reporting unit's projection of estimated operating results and cash flows that are discounted 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 revenue growth rate that approximated 3.0% and a return on assets that ranged from 0.54% to 1.01% (average of 0.73%). In addition to the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the income approach were the discount rate of 15.0% utilized for the Company's cash flow estimate and a terminal value of 1.25 times the ending book value of the reporting unit. The Company used a build-up approach in

developing the discount rate including an assessment of the risk free interest rate, the rate of return expected from publicly traded stocks based on an analysis of historical data, the industry the Company operates in and the size of the Company.

The market approach estimates the fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples were derived from comparable publicly traded companies with operating and investment characteristics similar to those of the reporting unit. In applying the market approach method, the Company selected six publicly traded institutions based on a variety of financial metrics (e.g., tangible equity, return on assets, return on equity, net interest margin, non-performing assets, net charge-offs and reserves for loan losses) and other relevant factors (e.g., geographical location, lines of business, risk profile, availability of financial information, etc.).

The Company calculated a fair value of its reporting unit of $89 million using the corporate value approach, $82 million using the income approach and $96 million using the market approach. The concluded fair value based on the three methods under the step one test was $87 million, with the most weighting given to the income approach. The results of the Company's step one test indicated that the reporting unit's fair value was less than its recorded value and therefore the Company performed a step two analysis.

The Company then calculated the implied fair value of its reporting unit under step two of the goodwill impairment test. Under this approach, the Company calculated the fair value for the assets and liabilities of the reporting unit. The calculated implied fair value of the Company's goodwill exceeded the recorded value by $39.3 million.

Under the step two process significant adjustments were made to determine the estimated fair value of the Company's loans receivable compared to its recorded value. The Company utilized a discounted cash flow approach and a comparable sales transaction approach to determine the fair value of its loans receivable.

The discounted cash flow approach was utilized to value performing loans with credit quality grades of pass. A key assumption in the discounted cash flow approach was determining an appropriate discount rate. In determining the discount rate for pass loans, the Company started with its contractual cash flows and its current lending rate for comparable loans and adjusted these for credit factors, estimated prepayments and liquidity premiums. Based on an analysis of these factors, performing loans with credit quality grades of pass were discounted by 5%.

The comparable sales transaction approach using comparable loan sales was utilized for performing loans with credit quality grades of watch, special mention or substandard and for non-performing loans. In the comparable sales transaction approach a weighted average discount rate was used that approximated the discount for similar loan sales by the FDIC. A key assumption used by the Company in the comparable sales transaction approach was determining the appropriate discount rate to apply to each loan category. Performing loans with credit quality grades of watch, special mention or substandard were discounted by 25% and non-performing loans were discounted by 50%. These weighted average discount rates approximated the discount for similar loan sales by the FDIC. Increases in the pricing for future reported loan sale transactions could have a significant impact on the implied fair value of goodwill under the step two process.

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 prices 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.

As of September 30, 2013, management believes that there have been no events or changes in the circumstances 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

The CDI is amortized to non-interest expense using an accelerated method over a ten-year period.

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, 2013 or 2012 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.  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 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.

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 income tax return.  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 (loss) for tax purposes and income (loss) 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 (benefit) 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 on 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 United States federal income tax examination by tax authorities for years ended on or before September 30, 2009.

ESOP

The Bank sponsors a leveraged ESOP that is accounted for in accordance with GAAP.  Accordingly, the debt of the ESOP is recorded as other borrowed funds of the Bank, and the shares pledged as collateral are reported as unearned shares issued to the ESOP on the consolidated balance sheets.  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.

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 purpose 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, 2013 and 2012 included deposits with the FRB of $72,955,000 and $75,325,000, respectively.  The Company also maintains balances in correspondent bank accounts which, at times, may exceed FDIC insurance limits of $250,000.  Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the FRB and the correspondent banks.

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 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 is equal to the fair value of the shares at the grant date.

The Company’s stock compensation plans are described more fully in Note 15.

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 the Company’s common stock during the period.  The 5% dividend and related accretion for the amount of the Company's Series A Perferred Stock outstanding for the respective year is deducted from net income, and the discount on the redemption of Series A Preferred Stock is added to net income in computing net income to common shareholders. Common stock equivalents arise from assumed conversion of outstanding stock options and the outstanding warrant 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 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 fees paid to this law firm for the years ended September 30, 2013, 2012 and 2011 totaled $166,000, $203,000 and $176,000, respectively.

Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standard Update ("ASU") No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance requires an entity to provide information about the amount reclassified out of accumulated other comprehensive income by component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The guidance was effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exits. The guidance clarifies when it is appropriate for an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. Early adoption is permitted. The guidance should be applied prospectively to all unrecognized tax benefits that exist at the effective date, however, retrospective application is also permitted. Adoption of ASU 2013-11 is not expected to have a significant impact on the Company's consolidated financial statements.

XML

Net Income Per Common Share (Details)	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Stock Options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	109,953	162,517	163,714
Warrant
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount		370,899
Preferred Stock
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Preferred stock, dividend rate (percent)	5.00%	5.00%	5.00%

XML

Stock Compensation Plans

12 Months Ended

Sep. 30, 2013

Share-based Compensation [Abstract]

Stock Compensation Plans

Stock Compensation Plans

Stock Option Plans

Under the Company’s stock option plans (1999 Stock Option Plan and 2003 Stock Option Plan), the Company was able to grant options for up to 1,622,500 shares of common stock to employees, officers and directors.  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 stock on the date of grant.  Generally, options vest in 20% annual installments on each of the five anniversaries from the date of the grant.  At September 30, 2013, options for 157,338 shares were available for future grant under the 2003 Stock Option Plan and no shares were available for future grant under the 1999 Stock Option Plan.

In October 2013, the Board approved grants to employees and directors of options to purchase 106,000 shares of common stock.

Stock option activity for the years ended September 30, 2013, 2012 and 2011 is summarized as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding September 30, 2010	194,864		$	8.71
Options forfeited	(57,138	)	7.42
Outstanding September 30, 2011	137,726		9.25
Options granted	76,000		5.04
Options forfeited	(18,100	)	5.44
Outstanding September 30, 2012	195,626		7.97
Options granted	29,000		6.00
Options forfeited	(61,680	)	9.69
Outstanding September 30, 2013	162,946		$	6.96

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 similar term

as 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 years ended September 30, 2013 and 2012, 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 no options granted during the year ended September 30, 2011.  There were 76,000 options granted during the year ended September 30, 2012 with an aggregate grant date fair value of $150,000. There were 29,000  options granted during the year ended September 30, 2013 with an aggregate grant date fair value of $69,000. The weighted average assumptions for options granted during the years ended September 30, 2013 and 2012 were as follows:

	2013			2012
Expected volatility	45		%	45		%
Expected term (in years)	5			5
Expected dividend yield	—		%	—		%
Risk free interest rate	0.76		%	0.76		%
Grant date fair value per share	$	2.37		$	1.97

There were 17,300 options that vested during the year ended September 30, 2013 with a total fair value of $32,000.There were 5,000 options that vested during the year ended September 30, 2012 with a total fair value of $6,000. There were 5,200 options that vested during the year ended September 30, 2011 with a total fair value of $7,000.

At September 30, 2013 there were 91,000 unvested options with an aggregate grant date fair value of $189,000, all of which the Company assumes will vest.  The unvested options had an aggregate intrinsic value of $330,000 at September 30, 2013.  At September 30, 2012 there were 79,300 unvested options with an aggregate grant date fair value of $152,000.

There were no options exercised during the years ended September 30, 2013, 2012 or 2011.

Additional information regarding options outstanding at September 30, 2013, is as follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices ($)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$ 4.01 - 4.55	46,900	$	4.25	7.2	18,900	$	4.40	6.7
5.86 - 6.00	71,500	5.92		9.0	8,500	5.86		9.0
11.46 - 11.63	44,546	11.50		0.3	44,546	11.50		0.3
	162,946	$	6.96	6.1	71,946	$	8.97	2.9

The aggregate intrinsic value of options outstanding at September 30, 2013 was $443,000. The aggregate intrinsic value of options outstanding at September 30, 2012 was $88,000. There was no aggregate intrinsic value of options outstanding at September 30, 2011, as the exercise price of all options outstanding was greater than the stock’s current market value.

Stock Grant Plan

The Company adopted the MRDP in 1998 for the benefit of employees, officers and directors of the Company.  The objective of the MRDP is to retain personnel of experience and ability in key positions by providing them with a proprietary interest in the Company.

The MRDP allowed for the issuance to participants of up to 529,000 shares of the Company’s common stock.  Awards under the MRDP were made in the form of restricted shares of common stock that are subject to restrictions on the transfer of ownership and are subject to a five-year vesting period.  Compensation expense in the amount of the fair value of the common stock at the date of the grant to the plan participants is recognized over a five-year vesting period, with 20% vesting on each of the five anniversaries from the date of the grant.  At September 30, 2013, there were no shares available for future awards under the MRDP.  There were no MRDP shares granted during the years ended September 30, 2013, 2012 or 2011.

A summary of MRDP shares vested for the years ended September 30, 2013, 2012 and 2011 were as follows:

	2013		2012		2011
Shares vested	6,207		10,831		13,435
Aggregate vesting date fair value	$	38,000	$	46,000	$	61,000

A summary of unvested MRDP shares as of September 30, 2013 and changes during the year ended September 30, 2013, were as follows:

	Shares	Weighted Average Grant Date Fair Value
Unvested shares, beginning of period	9,461	$	9.00
Shares vested	6,207	10.04
Unvested shares, end of period	3,254	$	7.01

At September 30, 2013, there were 3,254 unvested MRDP shares with an aggregate grant date fair value of $23,000.

Expense for Stock Compensation Plans

Compensation expense recorded in the consolidated financial statements for all stock-based plans were as follows for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Stock options	$	49		$	15		$	7
MRDP stock grants	39			105			171
Less: related tax benefit recognized	(8		)	(28		)	(37		)
	$	80		$	92		$	141

The compensation expense to be recognized in the future for stock-based awards that had been awarded as of September 30, 2013 but not vested for the years ending September 30, is as follows (in thousands):

	Stock Options		Stock Grants (MRDP)		Total Awards
2014	$	51	$	2	$	53
2015	44		—		44
2016	44		—		44
2017	35		—		35
2018	1		—		1
	$	175	$	2	$	177

XML

Significant Concentrations of Credit Risk (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013 certificate_of_deposit
Concentration Risk [Line Items]
Loans secured by real estate	$ 555,997
Undisbursed construction loan proceeds	18,527
Loans secured by real estate, percentage of total portfolio	95.90%
Concentration of credit risk, real estate loans by industry, benchmark percentage	20.00%
Ratio of loans to appraisal or purchase price	90.00%
CDs held for investment	30,042
Number of Certificates of Deposit	1
FHLB Seattle
Concentration Risk [Line Items]
CDs held for investment	$ 2,500

XML

Loans Receivable And Allowance For Loan Losses: Schedule of Loans receivable and Loans held for sale (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	$ 577,566	$ 566,973
Undisbursed portion of construction loans in process	(18,527)	(16,325)
Deferred loan origination fees	(1,710)	(1,770)
Allowance for loan losses	(11,136)	(11,825)
Less: Loans in process, Deferred fees and Allowance for loan losses	31,373	29,920
Total loans receivable, net	546,193	537,053
Loans held for sale (one- to four-family)	1,911	1,427
Total loans receivable and loans held for sale, net	548,104	538,480
Total mortgage loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	521,072	505,388
Mortgage loans, one-to-four family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	102,387	105,552
Mortgage loans, multi-family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	51,108	47,521
Mortgage loans, commercial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	291,297	256,254
Mortgage loans, construction - custom and owner/builder
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	40,811	33,345
Mortgage loans, construction - speculative one-to-four family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	1,428	1,880
Construction - commercial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	2,239	20,247
Mortgage loans, construction - multi-family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	143	345
Mortgage loans, construction - land development
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	515	589
Mortgage loans, land
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	31,144	39,655
Total consumer loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Consumer loans	38,995	38,997
Consumer loans, home equity and second mortgage
Accounts, Notes, Loans and Financing Receivable [Line Items]
Consumer loans	33,014	32,814
Consumer loans, other
Accounts, Notes, Loans and Financing Receivable [Line Items]
Consumer loans	5,981	6,183
Commercial business loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Commercial business loans	$ 17,499	$ 22,588

XML

Summary Of Significant Accounting Policies Summary of Significant Accounting Policies: Cash (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Restricted Cash and Cash Equivalents Items [Line Items]
Interest-bearing deposits in Federal Reserve Bank	$ 81,617	$ 85,660
Preferred Stock
Restricted Cash and Cash Equivalents Items [Line Items]
Preferred stock, dividend rate (percent)	5.00%	5.00%	5.00%
Interest-bearing deposits
Restricted Cash and Cash Equivalents Items [Line Items]
Interest-bearing deposits in Federal Reserve Bank	$ 72,955	$ 75,325

XML

Deposits

12 Months Ended

Sep. 30, 2013

Deposits [Abstract]

Deposits

Deposits

Deposits consisted of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Non-interest-bearing demand	$	87,657	$	75,296
NOW checking	156,100		150,139
Savings	91,349		87,493
Money market accounts	99,006		79,549
Certificates of deposit	174,150		205,449
Total	$	608,262	$	597,926

Certificates of deposit of $100,000 or greater totaled $63,958,000 and $77,540,000 at September 30, 2013 and 2012, respectively. The Company had brokered deposits totaling $1,191,000 at September 30, 2013. There were no brokered deposits at September 30, 2012.

Scheduled maturities of certificates of deposit for future years ending September 30 are as follows (dollars in thousands):

2014	$	111,480
2015	29,950
2016	12,788
2017	12,030
2018	6,535
Thereafter	1,367
Total	$	174,150

Interest expense on deposits by account type was as follows for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013		2012		2011
NOW checking	$	463	$	651	$	1,415
Savings	55		245		459
Money market accounts	246		334		435
Certificates of deposit	1,804		2,721		3,827
Total	$	2,568	$	3,951	$	6,136

XML

CDI: Amortization expense for the CDI for future years (Details) (Core deposits, USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Core deposits
Finite-Lived Intangible Assets [Line Items]
2014	$ 116
2015	3
Total	$ 119	$ 249

XML

Net Income Per Common Share (Tables)

12 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Schedule of Calculation of Numerator and Denominator in Earnings Per Share

Information regarding the calculation of basic and diluted net income per common share for the years ended September 30, 2013, 2012 and 2011 is as follows (dollars in thousands, except per share amounts):

	2013			2012			2011
Basic net income per common share computation
Numerator - net income	$	4,757		$	4,590		$	1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Discount on redemption of preferred stock	255			—			—
Preferred stock discount accretion	(283		)	(240		)	(225		)
Net income to common stockholders	$	4,019		$	3,518		$	32
Denominator - weighted average common shares     outstanding	6,817,918			6,780,612			6,745,347
Basic net income per common share	$	0.59		$	0.52		$	—
Diluted net income per common share computation
Numerator - net income	$	4,757		$	4,590		$	1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Discount on redemption of preferred stock	255			—			—
Preferred stock discount accretion	(283		)	(240		)	(225		)
Net income to common stockholders	$	4,019		$	3,518		$	32
Denominator - weighted average common shares     outstanding	6,817,918			6,780,612			6,745,347
Effect of dilutive stock options	16,555			—			177
Effect of dilutive stock warrant	52,522			—			—
Weighted average common shares outstanding-     assuming dilution	6,886,995			6,780,612			6,745,524
Diluted net income per common share	$	0.58		$	0.52		$	—

XML

Mortgage Servicing Rights (Details) (USD $)	12 Months Ended
	Sep. 30, 2013 prepayment_speed_factor	Sep. 30, 2012 prepayment_speed_factor	Sep. 30, 2011 prepayment_speed_factor
Transfers and Servicing [Abstract]
Mortgate Servicing Rights (MSR), Fair Value	$ 3,129,000	$ 2,011,000	$ 2,108,000
Mortgate Servicing Rights (MSR), Average Discount Rate for estimating Fair Value	10.04%	10.07%	10.11%
Mortgate Servicing Rights (MSR), Average Prepayment Speed Factor for estimating Fair Value	177	330	324
MSRs valuation allowances	$ 0	$ 475,000	$ 485,000

XML

Summary Of Significant Accounting Policies Summary of Significant Accounting Policies: Related Party Transactions (Details) (Chairman of the Board, USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Chairman of the Board
Related Party Transaction [Line Items]
Related party transaction, legal fees	$ 166	$ 203	$ 176

XML

CDI (Tables)

12 Months Ended

Sep. 30, 2013

Finite-Lived Intangible Assets, Net [Abstract]

CDI, Future Amortization Expense

Amortization expense for the CDI for future years ending September 30 is estimated to be as follows (dollars in thousands):

2014	$	116
2015	3
Total	$	119

XML

Regulatory Matters

12 Months Ended

Sep. 30, 2013

Regulatory Capital Requirements [Abstract]

Regulatory Matters

Regulatory Matters

Timberland Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.  Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital classifications of Timberland Bancorp and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital.  Under current FDIC regulations, insured state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage capital to total assets of at least 4.0%, (ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at least 8.0%.

In December 2009, the FDIC and the Washington State Department of Financial Institutions, Division of Banks (“Division”) determined that the Bank required supervisory attention and agreed to terms on a Memorandum of Understanding with the Bank (the “Bank MOU”).  Under the Bank MOU, the Bank was required among other things, to maintain Tier 1 Capital of not less than 10.0% of the Bank’s adjusted total assets and maintain capital ratios above the “well capitalized” thresholds as defined under FDIC Rules and Regulations; obtain the prior consent from the FDIC and the Division prior to the Bank declaring a dividend to its holding company; and not engage in any transactions that would materially change the Bank’s balance sheet composition, including growth in total assets of five percent or more or significant changes in funding sources without the prior non-objection of the FDIC. On December 12, 2012, the Bank was notified by the FDIC and the Division that the Bank MOU had been rescinded.

In addition, in February 2010, the FRB determined that Timberland Bancorp required additional supervisory attention and entered into a Memorandum of Understanding with Timberland Bancorp (the “Company MOU”).  Under the Company MOU, Timberland Bancorp was required, among other things, to obtain prior written approval or non-objection from the FRB to declare or pay any dividends, or make any other capital distributions; issue any trust preferred securities; or purchase or redeem any of its stock. On January 15, 2013, the FRB notified Timberland Bancorp that the Company MOU had been rescinded.

The following table compares Timberland Bancorp’s (consolidated) and the Bank’s actual capital amounts at September 30, 2013 and 2012 to their minimum regulatory capital requirements at that date (dollars in thousands):

	Actual				Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2013
Tier 1 leverage capital:
Timberland Bancorp	$	85,158	11.5	%	$	29,677	4.0	%	N/A		N/A
Timberland Bank	82,265		11.1		29,662		4.0		$	37,078	5.0	%
Tier 1 risk adjusted capital:
Timberland Bancorp	85,158		15.3		22,259		4.0		N/A		N/A
Timberland Bank	82,265		14.8		22,255		4.0		33,382		6.0
Total risk based capital:
Timberland Bancorp	92,168		16.6		44,518		8.0		N/A		N/A
Timberland Bank	89,273		16.1		44,509		8.0		55,636		10.0
September 30, 2012
Tier 1 leverage capital:
Timberland Bancorp	$	85,455	11.7	%	$	29,313	4.0	%	N/A		N/A
Timberland Bank	79,911		10.9		73,013		10.0	(1)	$	73,013	10.0	%
Tier 1 risk adjusted capital:
Timberland Bancorp	85,455		15.5		22,042		4.0		N/A		N/A
Timberland Bank	79,911		14.5		33,036		6.0	(1)	33,036		6.0
Total risk based capital:
Timberland Bancorp	92,406		16.8		44,084		8.0		N/A		N/A
Timberland Bank	86,856		15.8		55,059		10.0	(1)	55,059		10.0

______________________________

(1) Reflects the higher Tier 1 leverage capital ratio that the Bank was required to comply with under terms of the Bank MOU that was in effect at September 30, 2012.  Also reflects that the Bank was required to maintain Tier 1 risk adjusted capital ratio and Total risk-based capital ratio at or above the “well capitalized” thresholds under the terms of the Bank MOU.

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, 2013 management estimates the value 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.

XML

Significant Concentrations of Credit Risk

12 Months Ended

Sep. 30, 2013

Risks and Uncertainties [Abstract]

Significant Concentrations of Credit Risk

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, 2013, the Company had $555,997,000(including $18,527,000 of undisbursed construction loan proceeds) in loans secured by real estate, which represents 95.9% 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, 2013, 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 collectibility 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 $30,042,000 in CDs held for investment at September 30, 2013.  The CDs are held with FDIC insured institutions, and each CD is below the FDIC insurance limit of $250,000 with the exception of one CD held with FHLB Seattle totaling $2.5 million.

XML

Federal Income Taxes: Schedule of Deferred Tax Assets and Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Deferred Tax Assets
Accrued interest on loans	$ 83	$ 278
Unearned ESOP shares	282	301
Allowance for loan losses	4,018	4,293
Allowance for OREO losses	794	516
CDI	259	264
Unearned MRDP shares	8	25
Net unrealized securities losses	139	192
Capital loss carry-forward	0	677
OTTI credit impairment	198	194
Other	166	156
Total deferred tax assets	5,947	6,896
Deferred Tax Liabilities
FHLB stock dividends	840	874
Depreciation	147	294
Goodwill	1,153	1,024
MSR's	770	683
Prepaid expenses	233	172
Other	11	13
Total deferred tax liabilities	3,154	3,060
Valuation allowance for capital loss on sale of securities	0	(213)
Net deferred tax assets	$ 2,793	$ 3,623

XML

Regulatory Matters (Tables)

12 Months Ended

Sep. 30, 2013

Regulatory Capital Requirements [Abstract]

Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations

The following table compares Timberland Bancorp’s (consolidated) and the Bank’s actual capital amounts at September 30, 2013 and 2012 to their minimum regulatory capital requirements at that date (dollars in thousands):

	Actual				Capital Adequacy Purposes				To be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2013
Tier 1 leverage capital:
Timberland Bancorp	$	85,158	11.5	%	$	29,677	4.0	%	N/A		N/A
Timberland Bank	82,265		11.1		29,662		4.0		$	37,078	5.0	%
Tier 1 risk adjusted capital:
Timberland Bancorp	85,158		15.3		22,259		4.0		N/A		N/A
Timberland Bank	82,265		14.8		22,255		4.0		33,382		6.0
Total risk based capital:
Timberland Bancorp	92,168		16.6		44,518		8.0		N/A		N/A
Timberland Bank	89,273		16.1		44,509		8.0		55,636		10.0
September 30, 2012
Tier 1 leverage capital:
Timberland Bancorp	$	85,455	11.7	%	$	29,313	4.0	%	N/A		N/A
Timberland Bank	79,911		10.9		73,013		10.0	(1)	$	73,013	10.0	%
Tier 1 risk adjusted capital:
Timberland Bancorp	85,455		15.5		22,042		4.0		N/A		N/A
Timberland Bank	79,911		14.5		33,036		6.0	(1)	33,036		6.0
Total risk based capital:
Timberland Bancorp	92,406		16.8		44,084		8.0		N/A		N/A
Timberland Bank	86,856		15.8		55,059		10.0	(1)	55,059		10.0

______________________________

(1) Reflects the higher Tier 1 leverage capital ratio that the Bank was required to comply with under terms of the Bank MOU that was in effect at September 30, 2012.  Also reflects that the Bank was required to maintain Tier 1 risk adjusted capital ratio and Total risk-based capital ratio at or above the “well capitalized” thresholds under the terms of the Bank MOU.

XML

Loans Receivable And Allowance For Loan Losses (Tables)

12 Months Ended

Sep. 30, 2013

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Schedule of Loans receivable and Loans held for sale

Loans receivable and loans held for sale by portfolio segment consisted of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Mortgage loans:
One- to four-family	$	102,387	$	105,552
Multi-family	51,108		47,521
Commercial	291,297		256,254
Construction – custom and owner/builder	40,811		33,345
Construction – speculative one- to four-family	1,428		1,880
Construction – commercial	2,239		20,247
Construction – multi-family	143		345
Construction – land development	515		589
Land	31,144		39,655
Total mortgage loans	521,072		505,388
Consumer loans:
Home equity and second mortgage	33,014		32,814
Other	5,981		6,183
Total consumer loans	38,995		38,997
Commercial business loans	17,499		22,588
Total loans receivable	577,566		566,973
Less:
Undisbursed portion of construction loans in process	18,527		16,325
Deferred loan origination fees	1,710		1,770
Allowance for loan losses	11,136		11,825
	31,373		29,920
Loans receivable, net	546,193		537,053
Loans held for sale (one- to four-family)	1,911		1,427
Total loans receivable and loans held for sale, net	$	548,104	$	538,480

Schedule of Activity in Related Party Loans

Activity in related party loans during the years ended September 30, 2013 and 2012 was as follows (dollars in thousands):

	2013			2012
Balance, beginning of year	$	1,113		$	2,498
New loans or advances	276			175
Repayments and reclassifications	(294		)	(1,560		)
Balance, end of year	$	1,095		$	1,113

Schedule of Allowance for Loan Losses

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):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,558	$	565		$	769	$	95	$	1,449
Multi-family	1,156		(407		)	—		—		749
Commercial	4,247		1,640			667		55		5,275
Construction – custom and owner/builder	386		(124		)	26		26		262
Construction – speculative one- to four-family	128		(32		)	—		—		96
Construction – commercial	429		(373		)	—		—		56
Construction – multi-family	—		116			116		—		—
Construction – land development	—		(129		)	17		146		—
Land	2,392		1,801			2,307		54		1,940
Consumer loans:
Home equity and second mortgage	759		202			184		5		782
Other	254		(40		)	14		—		200
Commercial business loans	516		(294		)	—		105		327
Total	$	11,825	$	2,925		$	4,100	$	486	$	11,136

The following table sets forth information for the year ended September 30, 2012 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	760	$	1,000		$	276	$	74	$	1,558
Multi-family	1,076		80			14		14		1,156
Commercial	4,035		1,427			1,215		—		4,247
Construction – custom and owner/builder	222		164			—		—		386
Construction – speculative one- to four-family	169		(42		)	—		1		128
Construction – commercial	794		257			622		—		429
Construction – multi-family	354		(780		)	24		450		—
Construction – land development	79		106			239		54		—
Land	2,795		751			1,251		97		2,392
Consumer loans:
Home equity and second mortgage	460		517			232		14		759
Other	415		(137		)	24		—		254
Commercial business loans	787		157			430		2		516
Total	$	11,946	$	3,500		$	4,327	$	706	$	11,825

Summary Analysis of Activity in the Allowance for Loan Losses

The following table sets forth information for the year ended September 30, 2011 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	530	$	622		$	543	$	151	$	760
Multi-family	393		642			—		41		1,076
Commercial	3,173		804			47		105		4,035
Construction – custom and owner/builder	481		(211		)	48		—		222
Construction – speculative one- to four-family	414		(142		)	103		—		169
Construction – commercial	245		1,993			1,444		—		794
Construction – multi-family	245		1,328			1,219		—		354
Construction – land development	240		993			1,158		4		79
Land	3,709		744			1,704		46		2,795
Consumer loans:
Home equity and second mortgage	922		(354		)	150		42		460
Other	451		(8		)	30		2		415
Commercial business loans	461		347			22		1		787
Total	$	11,264	$	6,758		$	6,468	$	392	$	11,946

Schedule of Loans Evaluated Individually for Impairment and Collectively Evaluated for Impairment in the Allowance for Loan Losses

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, 2013 (dollars in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Mortgage loans:
One- to four-family	$	600	$	849	$	1,449	$	8,984	$	95,314	$	104,298
Multi-family	334		415		749		5,184		45,924		51,108
Commercial	1,763		3,512		5,275		19,510		271,787		291,297
Construction – custom and owner/ builder	—		262		262		—		22,788		22,788
Construction – speculative one- to four family	88		8		96		687		236		923
Construction – commercial	—		56		56		—		2,239		2,239
Construction –  multi-family	—		—		—		143		1		144
Construction – land development	—		—		—		515		—		515
Land	234		1,706		1,940		2,391		28,753		31,144
Consumer loans:
Home equity and second mortgage	57		725		782		679		32,335		33,014
Other	—		200		200		6		5,975		5,981
Commercial business loans	—		327		327		—		17,499		17,499
Total	$	3,076	$	8,060	$	11,136	$	38,099	$	522,851	$	560,950

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, 2012 (dollars in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Mortgage loans:
One- to four-family	$	678	$	880	$	1,558	$	5,282	$	101,697	$	106,979
Multi-family	711		445		1,156		6,879		40,642		47,521
Commercial	667		3,580		4,247		17,192		239,062		256,254
Construction – custom and owner/ builder	15		371		386		309		20,159		20,468
Construction – speculative one- to four family	109		19		128		1,027		495		1,522
Construction – commercial	—		429		429		—		17,157		17,157
Construction –  multi-family	—		—		—		345		—		345
Construction – land development	—		—		—		589		—		589
Land	686		1,706		2,392		8,613		31,042		39,655
Consumer loans:
Home equity and second mortgage	36		723		759		562		32,252		32,814
Other	—		254		254		7		6,176		6,183
Commercial business loans	—		516		516		—		22,588		22,588
Total	$	2,902	$	8,923	$	11,825	$	40,805	$	511,270	$	552,075

Past Due Status of Loans Receivable

The following table presents an age analysis of past due status of loans by portfolio segment at September 30, 2013 (dollars in thousands):

	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	14	$	1,218	$	6,985	$	—	$	8,217	$	96,081	$	104,298
Multi-family	—		—		—		—		—		51,108		51,108
Commercial	—		2,537		3,435		—		5,972		285,325		291,297
Construction – custom and owner/ builder	—		—		—		—		—		22,788		22,788
Construction – speculative one- to four family	—		—		—		—		—		923		923
Construction – commercial	—		—		—		—		—		2,239		2,239
Construction –  multi-family	—		—		144		—		144		—		144
Construction – land development	—		—		515		—		515		—		515
Land	—		—		2,146		284		2,430		28,714		31,144
Consumer loans:
Home equity and second mortgage	101		20		380		152		653		32,361		33,014
Other	1		39		5		—		45		5,936		5,981
Commercial business loans	83		15		—		—		98		17,401		17,499
Total	$	199	$	3,829	$	13,610	$	436	$	18,074	$	542,876	$	560,950

__________________

(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

The following table presents an age analysis of past due status of loans by portfolio segment at September 30, 2012 (dollars in thousands):

	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	1,987	$	—	$	3,382	$	142	$	5,511	$	101,468	$	106,979
Multi-family	3,402		—		1,449		—		4,851		42,670		47,521
Commercial	1,071		—		6,049		6		7,126		249,128		256,254
Construction – custom and owner/ builder	—		—		309		—		309		20,159		20,468
Construction – speculative one- to four family	—		—		327		700		1,027		495		1,522
Construction – commercial	—		—		—		—		—		17,157		17,157
Construction –  multi-family	—		—		345		—		345		—		345
Construction – land development	—		—		589		—		589		—		589
Land	943		—		8,613		200		9,756		29,899		39,655
Consumer loans:
Home equity and second mortgage	277		14		261		150		702		32,112		32,814
Other	4		—		7		—		11		6,172		6,183
Commercial business loans	—		15		—		—		15		22,573		22,588
Total	$	7,684	$	29	$	21,331	$	1,198	$	30,242	$	521,833	$	552,075

___________________

(1)     Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

Financing Receivable Credit Quality Indicators

The following table lists the loan credit risk grades by portfolio segment utilized by the Company that serve as credit quality indicators at September 30, 2013 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	91,291	$	4,032	$	769	$	8,206	$	104,298
Multi-family	41,863		132		8,337		776		51,108
Commercial	262,502		3,309		12,522		12,964		291,297
Construction – custom and owner / builder	22,788		—		—		—		22,788
Construction – speculative one- to four-family	236		687		—		—		923
Construction – commercial	2,239		—		—		—		2,239
Construction – multi-family	—		—		—		144		144
Construction – land development	—		—		—		515		515
Land	20,627		5,101		1,129		4,287		31,144
Consumer loans:
Home equity and second mortgage	31,096		782		55		1,081		33,014
Other	5,937		39		—		5		5,981
Commercial business loans	17,029		366		104		—		17,499
Total	$	495,608	$	14,448	$	22,916	$	27,978	$	560,950

The following table lists the loan credit risk grades by portfolio segment utilized by the Company that serve as credit quality indicators at September 30, 2012 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	93,668	$	4,000	$	4,343	$	4,968	$	106,979
Multi-family	35,703		107		10,220		1,491		47,521
Commercial	228,036		1,722		11,515		14,981		256,254
Construction – custom and owner / builder	17,621		—		2,538		309		20,468
Construction – speculative one- to four-family	304		191		700		327		1,522
Construction – commercial	17,157		—		—		—		17,157
Construction – multi-family	—		—		—		345		345
Construction – land development	—		—		—		589		589
Land	22,700		5,788		2,554		8,613		39,655
Consumer loans:
Home equity and second mortgage	29,777		1,488		788		761		32,814
Other	6,136		40		—		7		6,183
Commercial business loans	20,777		834		286		691		22,588
Total	$	471,879	$	14,170	$	32,944	$	33,082	$	552,075

Impaired Financing Receivables

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 (dollars in thousands):

	September 30, 2013						For the Year Ended September 30, 2013
	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
Multi-family	—		982		—		473		3		3
Commercial	4,879		8,005		—		8,781		322		267
Construction – custom and owner / builder	—		—		—		97		—		—
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
Consumer loans:
Home equity and second mortgage	380		556		—		266		—		—
Other	6		6		—		8		—		—
Commercial business loans	—		33		—		—		—		—
Subtotal	12,453		21,377		—		16,697		352		291
With an allowance recorded:
Mortgage loans:
One- to four-family	3,642		3,726		600		4,397		91		68
Multi-family	5,184		5,184		334		5,960		301		230
Commercial	14,631		15,297		1,763		9,052		526		420
Construction – custom and owner / builder	—		—		—		60		—		—
Construction – speculative one- to four-family	687		687		88		695		29		16
Construction – multi-family	—		—		—		—		—		—
Construction - land development	—		—		—		—		—		—
Land	1,203		1,226		234		1,962		27		27
Consumer loans:
Home equity and second mortgage	299		299		57		352		16		12
Commercial business loans	—		—		—		—		—		—
Subtotal	25,646		26,419		3,076		22,478		990		773
Total
Mortgage loans:
One- to four-family	8,984		9,501		600		7,058		109		81
Multi-family	5,184		6,166		334		6,433		304		233
Commercial	19,510		23,302		1,763		17,833		848		687
Construction – custom and owner / builder	—		—		—		157		—		—
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
Consumer loans:
Home equity and second mortgage	679		855		57		618		16		12
Other	6		6		—		8		—		—
Commercial business loans	—		33		—		—		—		—
Total	$	38,099	$	47,796	$	3,076	$	39,175	$	1,342	$	1,064

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2012 (dollars in thousands):

	September 30, 2012						For the Year Ended September 30, 2012
	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	$	1,510	$	1,605	$	—	$	1,838	$	20	$	16
Multi-family	—		982		—		—		1		1
Commercial	7,596		8,664		—		14,491		543		348
Construction – custom and owner / builder	208		208		—		209		—		—
Construction – speculative one- to four-family	327		327		—		65		—		—
Construction – commercial	—		2,066				—		14		14
Construction – multi-family	345		810		—		338		—		—
Construction – land development	589		3,497		—		1,089		14		14
Land	5,989		8,247		—		6,279		28		16
Consumer loans:					—
Home equity and second mortgage	261		383		—		482		—		—
Other	7		7		—		5		—		—
Commercial business loans	—		166		—		32		2		2
Subtotal	16,832		26,962		—		24,828		622		411
With an allowance recorded:
Mortgage loans:
One- to four-family	3,772		3,772		678		2,520		81		62
Multi-family	6,879		6,879		711		6,618		294		189
Commercial	9,596		9,596		667		5,043		60		39
Construction – custom and owner / builder	101		101		15		106		—		—
Construction – speculative one- to four-family	700		700		109		700		29		20
Construction – commercial	—		—		—		3,248		230		146
Construction – multi-family	—		—		—		74		—		—
Land	2,624		2,811		686		3,307		37		36
Consumer loans:
Home equity and second mortgage	301		301		36		515		31		23
Commercial business loans	—		—		—		55		—		—
Subtotal	23,973		24,160		2,902		22,186		762		515
Total
Mortgage loans:
One- to four-family	5,282		5,377		678		4,358		101		78
Multi-family	6,879		7,861		711		6,618		295		190
Commercial	17,192		18,260		667		19,534		603		387
Construction – custom and owner / builder	309		309		15		315		—		—
Construction – speculative one- to four-family	1,027		1,027		109		765		29		20
Construction – commercial	—		2,066		—		3,248		244		160
Construction – multi-family	345		810		—		412		—		—
Construction – land development	589		3,497		—		1,089		14		14
Land	8,613		11,058		686		9,586		65		52
Consumer loans:
Home equity and second mortgage	562		684		36		997		31		23
Other	7		7		—		5		—		—
Commercial business loans	—		166		—		87		2		2
Total	$	40,805	$	51,122	$	2,902	$	47,014	$	1,384	$	926

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2011 (dollars in thousands):

	September 30, 2011						For the Year Ended September 30, 2011
	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	$	2,092	$	2,387	$	—	$	2,908	$	30	$	22
Multi-family	—		982		—		681		—		—
Commercial	18,137		19,279		—		14,623		1,060		573
Construction – custom and owner / builder	209		209		—		303		7		1
Construction – speculative one- to four-family	—		—		—		502		7		7
Construction – multi-family	632		1,135		—		1,287		4		4
Construction – land development	1,882		7,179		—		2,920		5		—
Land	8,198		11,533		—		7,883		69		42
Consumer loans:
Home equity and second mortgage	669		719		—		430		26		16
Other	—		—		—		13		—		—
Commercial business loans	44		65		—		44		2		2
Subtotal	31,863		43,488		—		31,594		1,210		667
With an allowance recorded:
Mortgage loans:
One- to four-family	1,609		1,609		45		768		47		38
Multi-family	5,482		5,482		632		4,798		298		222
Commercial	1,185		1,185		255		1,409		50		118
Construction – custom and owner / builder	111		111		11		45		2		2
Construction – speculative one- to four-family	700		700		37		1,042		50		37
Construction - commercial	5,435		6,879		738		3,537		273		123
Construction – multi-family	—		—		—		65		—		—
Land	1,799		1,821		560		2,946		114		83
Consumer loans:
Home equity and second mortgage	345		345		10		425		10		9
Commercial business loans	1		1		1		1		—		—
Subtotal	16,667		18,133		2,289		15,036		844		632
Total
Mortgage loans:
One- to four-family	3,701		3,996		45		3,676		77		60
Multi-family	5,482		6,464		632		5,479		298		222
Commercial	19,322		20,464		255		16,032		1,110		691
Construction – custom and owner / builder	320		320		11		348		9		3
Construction – speculative one- to four-family	700		700		37		1,544		57		44
Construction - commercial	5,435		6,879		738		3,537		273		123
Construction – multi-family	632		1,135		—		1,352		4		4
Construction – land development	1,882		7,179		—		2,920		5		—
Land	9,997		13,354		560		10,829		183		125
Consumer loans:
Home equity and second mortgage	1,014		1,064		10		855		36		25
Other	1		1		—		14		—		—
Commercial business loans	44		65		1		44		2		2
Total	$	48,530	$	61,621	$	2,289	$	46,630	$	2,054	$	1,299

Schedule 1 of Troubled debt restructured loans

The following table sets forth information with respect to the Company’s troubled debt restructured loans by interest accrual status as of September 30, 2013 and 2012 (dollars in thousands):

	2013
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,999	$	198	$	2,197
Multi-family	5,184		—		5,184
Commercial	10,160		1,574		11,734
Construction – speculative one- to four-family	687		—		687
Construction – land development	—		515		515
Land	244		1,564		1,808
Consumer loans:
Home equity and second mortgage	299		180		479
Total	$	18,573	$	4,031	$	22,604

	2012
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,900	$	—	$	1,900
Multi-family	5,430		—		5,430
Commercial	5,079		4,862		9,941
Construction – speculative one- to four-family	700		—		700
Construction – land development	—		526		526
Land	—		4,445		4,445
Consumer loans:
Home equity and second mortgage	301		261		562
Total	$	13,410	$	10,094	$	23,504

Schedule 2 of Troubled debt restructured loans

The following table sets forth information with respect to the Company’s troubled debt restructured loans by portfolio segment that occurred during the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

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 a reduction in the stated interest rate.

2012	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
One-to four-family (1)	1	$	373	$	373	$	372
Commercial (1)	1	2,718		2,718		2,657
Land (2)	1	249		249		233
Total	3	$	3,340	$	3,340	$	3,262

_______________________________

(1) Modifications were a result of a combination of changes (i.e. a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(2)     Modification was a result of a reduction in the stated interest rate.

2011	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
One-to four-family (1)	4	$	1,543	$	1,543	$	1,543
Commercial (2)	2	3,394		3,717		3,145
Construction - commercial (3)	2	6,800		5,451		5,435
Land (4)	2	535		535		526
Home equity (3)	2	303		303		303
Total	12	$	12,575	$	11,549	$	10,952

(1) $1.01 million was a result of a reduction in stated interest rate and $538,000 was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(2) $925,000 was a result of a reduction in stated interest rate and $2.79 million was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(3) Modifications were a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(4) $147,000 was a result of modifying the maturity date, timing of payments or frequency of payments and $388,000 was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

XML

Repurchase Agreements: Schedule of Repurchase Agreements (Tables)

12 Months Ended

Sep. 30, 2013

Disclosure of Repurchase Agreements [Abstract]

Schedule of Repurchase Agreements

Information concerning repurchase agreements as of and for the years ended September 30, 2013 and 2012 is summarized as follows (dollars in thousands):

	2013			2012
Average daily balance during the period	$	352		$	699
Average daily interest rate during the period	0.05		%	0.05		%
Maximum month-end balance during the period	$	787		$	948
Weighted average rate at end of the period	—		%	0.05		%
Securities underlying the agreements at end of the period:
Recorded value	$	—		$	813
Estimated fair value	—			838

XML

Fair Value Measurement (Tables)

12 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value, Assets Measured on Recurring Basis

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a recurring basis at September 30, 2013 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for Sale Securities
MBS:
U.S. government agencies	$	—	$	2,229	$	—	$	2,229
Private label residential	—		914		—		914
Mutual funds	958		—		—		958
Total	$	958	$	3,143	$	—	$	4,101

There were no transfers among Level 1, Level 2 and Level 3 during the year ended September 30, 2013.

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a recurring basis at September 30, 2012 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for Sale Securities
MBS:
U.S. government agencies	$	—	$	2,975	$	—	$	2,975
Private label residential	—		957		—		957
Mutual funds	1,013		—		—		1,013
Total	$	1,013	$	3,932	$	—	$	4,945

Balances of Assets Measured at Estimated Fair Value, Nonrecurring Basis

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2013, and the total losses resulting from these estimated fair value adjustments for the year ended September 30, 2013 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total Losses
Impaired loans:
Mortgage Loans;
One-to four-family	$	—	$	—	$	3,042	$	769
Multi-family	—		—		4,850		—
Commercial	—		—		12,868		667
Construction – speculative one-to four-family	—		—		599		—
Land	—		—		969		2,307
Consumer loans:
Home equity and second mortgage	—		—		242		184
Total impaired loans (1)	—		—		22,570		3,927
MBS – held to maturity (2):
Private label residential	—		83		—		45
OREO and other repossessed assets (3)	—		—		11,720		2,064
Total	$	—	$	83	$	34,290	$	6,036

_______________________

(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.

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a non-recurring basis at September 30, 2012 and the total losses resulting from these estimated fair value adjustments for the year ended September 30, 2012 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total Losses
Impaired loans:
Mortgage Loans;
One-to four-family	$	—	$	—	$	3,094	$	276
Multi-family	—		—		6,168		14
Commercial	—		—		8,929		1,215
Construction – custom and owner / builder	—		—		86		—
Construction – speculative one-to four-family	—		—		591		—
Land	—		—		1,938		1,251
Consumer loans:
Home equity and second mortgage	—		—		265		232
Total impaired loans (1)	—		—		21,071		2,988
MBS – held to maturity (2):
Private label residential	—		231		—		164
OREO and other repossessed assets (3)	—		—		13,302		947
MSRs (4)	—		—		2,011		—
Total	$	—	$	231	$	36,384	$	4,099

_______________________

(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.

(4) The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights exceed their estimated fair value.  Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that estimated fair value is less than the recorded amount.

Level 3 Fair Value Measurements, Nonrecurring Basis

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, 2013 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	22,570	Market approach	Appraised value less selling costs	NA
OREO and other repossessed assets	$	11,720	Market approach	Lower of appraised value or listing price less selling costs	NA

Balances of Assets and Liabilities Measured at Estimated Fair Value, Recurring Basis

he estimated fair values of financial instruments were as follows as of September 30, 2013 (dollars in thousands):

			Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1			Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	94,496	$	94,496	$	94,496		$	—	$	—
CDs held for investment	30,042		30,042		30,042			—		—
MBS and other investments	6,838		7,634		973		6,676	6,661		—
FHLB stock	5,452		5,452		5,452			—		—
Loans receivable, net	546,193		514,616		—			—		514,616
Loans held for sale	1,911		1,973		1,973			—		—
Accrued interest receivable	1,972		1,972		1,972			—		—
Financial Liabilities
Deposits:
Non-interest bearing demand	$	87,657	$	87,657	$	87,657		$	—	$	—
Interest-bearing	520,605		522,021		346,455			—		175,566
Total deposits	608,262		609,678		434,112			—		175,566
FHLB advances	45,000		48,445		—			48,445		—
Accrued interest payable	320		320		320			—		—

The estimated fair values of financial instruments were as follows as of September 30, 2012 (dollars in thousands):

			Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1			Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	96,668	$	96,668	$	96,668		$	—	$	—
CDs held for investment	23,490		23,490		23,490			—		—
MBS and other investments	8,284		8,577		1,043		6,676	7,534		—
FHLB stock	5,655		5,655		5,655			—		—
Loans receivable, net	537,053		502,147		—			—		502,147
Loans held for sale	1,427		1,504		1,504			—		—
Accrued interest receivable	2,183		2,183		2,183			—		—
Financial Liabilities
Deposits:
Non-interest bearing demand	$	75,296	$	75,296	$	75,296		$	—	$	—
Interest-bearing	522,630		524,823		317,181			—		207,642
Total deposits	597,926		600,119		392,477			—		207,642
FHLB advances	45,000		51,115		—			51,115		—
Repurchase agreements	855		855		855			—		—
Accrued interest payable	404		404		404			—		—

XML

Selected Quarterly Financial Data (unaudited)

12 Months Ended

Sep. 30, 2013

Quarterly Financial Information Disclosure [Abstract]

Selected Quarterly Financial Data (unaudited)

Selected Quarterly Financial Data (Unaudited)

The following selected financial data are presented for the quarters ended (dollars in thousands, except per share amounts):

	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012
Interest and dividend income	$	7,521		$	7,575		$	7,552		$	7,589
Interest expense	(1,052		)	(1,076		)	(1,111		)	(1,200		)
Net interest income	6,469			6,499			6,441			6,389
Provision for loan losses	(165		)	(1,385		)	(1,175		)	(200		)
Non-interest income	2,397			2,372			2,778			2,715
Non-interest expense	(7,066		)	(6,237		)	(6,184		)	(6,377		)
Income before income taxes	1,635			1,249			1,860			2,527
Provision for federal income taxes	740			373			582			819
Net income	895			876			1,278			1,708
Preferred stock dividends	(151		)	(151		)	(207		)	(201		)
Preferred stock discount accretion	(47		)	(47		)	(126		)	(63		)
Discount on redemption of preferred stock	—			—			255			—
Net income to common shareholders	$	697		$	678		$	1,200		$	1,444
Net income per common share
Basic	$	0.10		$	0.10		$	0.18		$	0.21
Diluted	0.10			0.10			0.17			0.21

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011
Interest and dividend income	$	7,750		$	8,019		$	7,804		$	8,032
Interest expense	(1,294		)	(1,391		)	(1,531		)	(1,731		)
Net interest income	6,456			6,628			6,273			6,301
Provision for loan losses	(900		)	(900		)	(1,050		)	(650		)
Non-interest income	2,503			2,341			2,493			2,444
Non-interest expense	(6,678		)	(6,097		)	(6,572		)	(6,221		)
Income before income taxes	1,381			1,972			1,144			1,874
Provision for federal income taxes	230			624			336			591
Net income	1,151			1,348			808			1,283
Preferred stock dividends	(208		)	(208		)	(208		)	(208		)
Preferred stock discount accretion	(61		)	(61		)	(59		)	(59		)
Net income to common shareholders	$	882		$	1,079		$	541		$	1,016
Net income per common share
Basic	$	0.13		$	0.16		$	0.08		$	0.15
Diluted	0.13			0.16			0.08			0.15

XML

Commitments and Contingencies: Supply Commitment (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Commitments and Contingencies Disclosure [Abstract]
Undisbursed portion of construction loans in process	$ 18,527	$ 16,325
Undisbursed lines of credit	25,187	21,671
Commitments to extend credit	$ 16,399	$ 10,113

XML

MBS And Other Investments: Other than Temporary Impairment, Credit Losses Recognized in Earnings (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Roll Forward]
Beginning balance of credit loss	$ 2,703	$ 3,361	$ 4,725
Additions, Credit losses for which OTTI was not previously recognized	7	81	53
Additions, Additional increases to the amount related to credit loss for which OTTI was previously recognized	45	133	398
Subtractions, Realized losses previously recorded as credit losses	(671)	(872)	(1,811)
Other than Temporary Impairment, Credit Losses Recognized in Earnings, Reductions, Cash Flows	0	0	(4)
Ending balance of credit loss	$ 2,084	$ 2,703	$ 3,361

XML

Stock Compensation Plans: Schedule of Expenses for Stock Compensation Plans (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 80	$ 92	$ 141
Related tax benefit recognized	(8)	(28)	(37)
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	49	15	7
Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 39	$ 105	$ 171

XML

Loans Receivable And Allowance For Loan Losses: Past Due Status of Loans (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	$ 199	$ 7,684
Loans receivable, 60-89 Days Past Due	3,829	29
Loans receivable, Non-Accrual	13,610	21,331
Loans receivable, Past Due 90 Days or More and Still Accruing	436	1,198
Loans receivable, Total Past Due	18,074	30,242
Loans receivable, Current	542,876	521,833
Loans receivable	560,950	552,075
Mortgage loans, one-to-four family
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	14	1,987
Loans receivable, 60-89 Days Past Due	1,218	0
Loans receivable, Non-Accrual	6,985	3,382
Loans receivable, Past Due 90 Days or More and Still Accruing	0	142
Loans receivable, Total Past Due	8,217	5,511
Loans receivable, Current	96,081	101,468
Loans receivable	104,298	106,979
Mortgage loans, multi-family
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	0	3,402
Loans receivable, 60-89 Days Past Due	0	0
Loans receivable, Non-Accrual	0	1,449
Loans receivable, Past Due 90 Days or More and Still Accruing	0	0
Loans receivable, Total Past Due	0	4,851
Loans receivable, Current	51,108	42,670
Loans receivable	51,108	47,521
Mortgage loans, commercial
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	0	1,071
Loans receivable, 60-89 Days Past Due	2,537	0
Loans receivable, Non-Accrual	3,435	6,049
Loans receivable, Past Due 90 Days or More and Still Accruing	0	6
Loans receivable, Total Past Due	5,972	7,126
Loans receivable, Current	285,325	249,128
Loans receivable	291,297	256,254
Mortgage loans, construction - custom and owner/builder
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	0	0
Loans receivable, 60-89 Days Past Due	0	0
Loans receivable, Non-Accrual	0	309
Loans receivable, Past Due 90 Days or More and Still Accruing	0	0
Loans receivable, Total Past Due	0	309
Loans receivable, Current	22,788	20,159
Loans receivable	22,788	20,468
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	0	0
Loans receivable, 60-89 Days Past Due	0	0
Loans receivable, Non-Accrual	0	327
Loans receivable, Past Due 90 Days or More and Still Accruing	0	700
Loans receivable, Total Past Due	0	1,027
Loans receivable, Current	923	495
Loans receivable	923	1,522
Construction - commercial
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	0	0
Loans receivable, 60-89 Days Past Due	0	0
Loans receivable, Non-Accrual	0	0
Loans receivable, Past Due 90 Days or More and Still Accruing	0	0
Loans receivable, Total Past Due	0	0
Loans receivable, Current	2,239	17,157
Loans receivable	2,239	17,157
Mortgage loans, construction - multi-family
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	0	0
Loans receivable, 60-89 Days Past Due	0	0
Loans receivable, Non-Accrual	144	345
Loans receivable, Past Due 90 Days or More and Still Accruing	0	0
Loans receivable, Total Past Due	144	345
Loans receivable, Current	0	0
Loans receivable	144	345
Mortgage loans, construction - land development
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	0	0
Loans receivable, 60-89 Days Past Due	0	0
Loans receivable, Non-Accrual	515	589
Loans receivable, Past Due 90 Days or More and Still Accruing	0	0
Loans receivable, Total Past Due	515	589
Loans receivable, Current	0	0
Loans receivable	515	589
Mortgage loans, land
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	0	943
Loans receivable, 60-89 Days Past Due	0	0
Loans receivable, Non-Accrual	2,146	8,613
Loans receivable, Past Due 90 Days or More and Still Accruing	284	200
Loans receivable, Total Past Due	2,430	9,756
Loans receivable, Current	28,714	29,899
Loans receivable	31,144	39,655
Consumer loans, home equity and second mortgage
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	101	277
Loans receivable, 60-89 Days Past Due	20	14
Loans receivable, Non-Accrual	380	261
Loans receivable, Past Due 90 Days or More and Still Accruing	152	150
Loans receivable, Total Past Due	653	702
Loans receivable, Current	32,361	32,112
Loans receivable	33,014	32,814
Consumer loans, other
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	1	4
Loans receivable, 60-89 Days Past Due	39	0
Loans receivable, Non-Accrual	5	7
Loans receivable, Past Due 90 Days or More and Still Accruing	0	0
Loans receivable, Total Past Due	45	11
Loans receivable, Current	5,936	6,172
Loans receivable	5,981	6,183
Commercial business loans
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans receivable, 30-59 Days Past Due	83	0
Loans receivable, 60-89 Days Past Due	15	15
Loans receivable, Non-Accrual	0	0
Loans receivable, Past Due 90 Days or More and Still Accruing	0	0
Loans receivable, Total Past Due	98	15
Loans receivable, Current	17,401	22,573
Loans receivable	$ 17,499	$ 22,588

XML

Fair Value Measurement: Estimated Fair Values of Financial Instruments (Details) (USD $)	Sep. 30, 2013	Sep. 30, 2012
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Repurchase agreements	$ 0	$ 838,000
Recorded Amount
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	94,496,000	96,668,000
CDs held for investment	30,042,000	23,490,000
MBS and other investments	6,838,000	8,284,000
FHLB stock	5,452,000	5,655,000
Loans receivable, net	546,193,000	537,053,000
Loans held for sale	1,911,000	1,427,000
Accrued interest receivable	1,972,000	2,183,000
Non-interest bearing demand	87,657,000	75,296,000
Interest-bearing	520,605,000	522,630,000
Total deposits	608,262,000	597,926,000
FHLB advances	45,000,000	45,000,000
Repurchase agreements		855,000
Accrued interest payable	320,000	404,000
Fair Value
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	94,496,000	96,668,000
CDs held for investment	30,042,000	23,490,000
MBS and other investments	7,634,000	8,577,000
FHLB stock	5,452,000	5,655,000
Loans receivable, net	514,616,000	502,147,000
Loans held for sale	1,973,000	1,504,000
Accrued interest receivable	1,972,000	2,183,000
Non-interest bearing demand	87,657,000	75,296,000
Interest-bearing	522,021,000	524,823,000
Total deposits	609,678,000	600,119,000
FHLB advances	48,445,000	51,115,000
Repurchase agreements		855,000
Accrued interest payable	320,000	404,000
Fair Value | Fair Value, Inputs, Level 1
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	94,496,000	96,668,000
CDs held for investment	30,042,000	23,490,000
MBS and other investments	973,000	1,043,000
FHLB stock	5,452,000	5,655,000
Loans receivable, net	0	0
Loans held for sale	1,973,000	1,504,000
Accrued interest receivable	1,972,000	2,183,000
Non-interest bearing demand	87,657,000	75,296,000
Interest-bearing	346,455,000	317,181,000
Total deposits	434,112,000	392,477,000
FHLB advances	0	0
Repurchase agreements		855,000
Accrued interest payable	320,000	404,000
Fair Value | Fair Value, Inputs, Level 2
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	0	0
CDs held for investment	0	0
MBS and other investments	6,661,000	7,534,000
FHLB stock	0	0
Loans receivable, net	0	0
Loans held for sale	0	0
Accrued interest receivable	0	0
Non-interest bearing demand	0	0
Interest-bearing	0	0
Total deposits	0	0
FHLB advances	48,445,000	51,115,000
Repurchase agreements		0
Accrued interest payable	0	0
Fair Value | Fair Value, Inputs, Level 3
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	0	0
CDs held for investment	0	0
MBS and other investments	0	0
FHLB stock	0	0
Loans receivable, net	514,616,000	502,147,000
Loans held for sale	0	0
Accrued interest receivable	0	0
Non-interest bearing demand	0	0
Interest-bearing	175,566,000	207,642,000
Total deposits	175,566,000	207,642,000
FHLB advances	0	0
Repurchase agreements		0
Accrued interest payable	$ 0	$ 0

XML

MBS And Other Investments: Schedule of Other than Temporary Impairments (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013		Sep. 30, 2012		Sep. 30, 2011
Held to Maturity
Net OTTI recognized in earnings	$ (57)		$ (46)		$ (43)
Held-to-maturity Securities
Held to Maturity
Total OTTI	(13)		(156)		(210)
Portion of OTTI recognized in other comprehensive (income) loss (before income taxes)	(32)	[1]	(8)	[1]	(211)	[1]
Net OTTI recognized in earnings	(45)	[2]	(164)	[2]	(421)	[2]
Available-for-sale Securities
Available for Sale
Total OTTI	(2)		(50)		(26)
Portion of OTTI recognized in other comprehensive (income) loss (before income taxes)	0	[1]	0	[1]	0	[1]
Net OTTI recognized in earnings	$ (2)	[2]	$ (50)	[2]	$ (26)	[2]

[1] Represents OTTI related to all other factors.

[2] Represents OTTI related to credit losses.

XML

Employee Stock Ownership and 401(k) Plan ("KSOP") (Tables)

12 Months Ended

Sep. 30, 2013

Compensation and Retirement Disclosure [Abstract]

Schedule of Shares Held by the ESOP

Shares held by the ESOP as of September 30, 2013, 2012 and 2011 were classified as follows:

	2013	2012	2011
Unallocated shares	193,968	229,234	264,500
Shares released for allocation	592,468	597,641	585,468
Total ESOP shares	786,436	826,875	849,968

XML

Loans Receivable And Allowance For Loan Losses: Loan Segment Risk Narrative (Details)	12 Months Ended
	Sep. 30, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Ratio of loans to appraisal or purchase price	90.00%
Mortgage loans, one-to-four family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Ratio of loans to appraisal or purchase price	90.00%
Ratio of loans to appraised value, private mortgage insurance requirement, percentage limit	80.00%
Mortgage loans, commercial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Ratio of loans to appraisal or purchase price	80.00%
Mortgage loans, land
Accounts, Notes, Loans and Financing Receivable [Line Items]
Ratio of loans to appraisal or purchase price	75.00%

XML

Repurchase Agreements (Details) (USD $)	Sep. 30, 2013	Sep. 30, 2012
Repurchase Agreement Counterparty [Line Items]
Repurchase agreements	$ 0	$ 813,000
Overnight
Repurchase Agreement Counterparty [Line Items]
Repurchase agreements	$ 0	$ 855,000

XML

Repurchase Agreements: Schedule of Repurchase Agreements (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Disclosure of Repurchase Agreements [Abstract]
Average daily balance during the period	$ 352	$ 699
Average daily interest rate during the period	0.05%	0.05%
Maximum month-end balance during the period	787	948
Weighted average rate at end of the period	0.00%	0.05%
Securities underlying the agreements at end of the period:
Recorded value	0	813
Estimated fair value	$ 0	$ 838

XML

Regulatory Matters: Restrictions on Retained Earnings (Details) (USD $) In Thousands, unless otherwise specified				1 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Jun. 30, 1997	Dec. 31, 2009 FDIC, Memorandum of Understanding
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Tier 1 Capital, minimum percentage				10.00%
Growth in total assets, maximum percentage				5.00%
Retained earnings	$ 68,998	$ 65,788	$ 23,866
Liquidation Account, Amount	$ 429

XML

Federal Income Taxes: Schedule of Components of Income Tax Expense (Benefit) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Income Tax Disclosure [Abstract]
Current	$ 1,737	$ 1,627	$ 148
Deferred	777	154	156
Provision	$ 2,514	$ 1,781	$ 304

XML

Commitments and Contingencies

12 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

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, 2013 and 2012 is as follows (dollars in thousands):

	2013		2012
Undisbursed portion of construction loans in process (see Note 4)	$	18,527	$	16,325
Undisbursed lines of credit	25,187		21,671
Commitments to extend credit	16,399		10,113

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’s credit-worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party.  However, such loan to value ratios will subsequently change, based on increases and decreases in the supporting collateral values.  Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, land, and income-producing commercial properties.

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 $165,000 and $148,000 at September 30, 2013 and 2012, 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, 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 24 months of the employee’s current compensation.

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.

XML

Timberland Bancorp, Inc. and Subsidiary Condensed Consolidated Statements of Shareholders' Equity (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	Total		MRDP Stock		Stock Options	Preferred Stock	Common Stock		Common Stock MRDP Stock		Common Stock Stock Options	Unearned Shares Issued to ESOP	Retained Earnings	Accumulated Other Comprehensive Loss
Balance at beginning of period - amount at Sep. 30, 2010	$ 85,408					$ 15,764	$ 10,377					$ (2,247)	$ 62,238	$ (724)
Balance at beginning of period - shares at Sep. 30, 2010						16,641	7,045,036
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	1,089												1,089
Preferred stock accretion	(225)					225							(225)
5% preferred stock dividends	(832)												(832)
Earned ESOP shares, net of tax	203						(61)					264
Stock option/MRDP compensation expense			134	[1]	7				134	[1]	7
Unrealized holding gain on securities available for sale, net of tax	14													14
Change in OTTI on securities held to maturity, net of tax	139													139
Accretion of OTTI on securities held to maturity, net of tax	43													43
Balance at end of period - amount at Sep. 30, 2011	86,205					15,989	10,457					(1,983)	62,270	(528)
Balance at end of period - shares at Sep. 30, 2011						16,641	7,045,036
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	4,590												4,590
Preferred stock accretion	(240)					240							(240)
5% preferred stock dividends	(832)												(832)
Earned ESOP shares, net of tax	199						(65)					264
Stock option/MRDP compensation expense	92	[1]	77	[1]	15		92	[1]	77	[1]	15
Unrealized holding gain on securities available for sale, net of tax	14													14
Change in OTTI on securities held to maturity, net of tax	5													5
Accretion of OTTI on securities held to maturity, net of tax	46													46
Balance at end of period - amount at Sep. 30, 2012	90,319					16,229	10,484					(1,719)	65,788	(463)
Balance at end of period - shares at Sep. 30, 2012						16,641	7,045,036
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	4,757												4,757
Preferred stock accretion	(283)					283							(283)
Redemption of preferred stock - shares						(4,576)
Redemption of preferred stock - amount	(4,321)					(4,576)							255
5% preferred stock dividends	(885)												(885)
Common stock dividends ($0.09 per common share)	(634)												(634)
Earned ESOP shares, net of tax	271						6					265
Stock option/MRDP compensation expense	0	[1]	31	[1]	49		0	[1]	31	[1]	49
Unrealized holding gain on securities available for sale, net of tax	23													23
Change in OTTI on securities held to maturity, net of tax	21													21
Accretion of OTTI on securities held to maturity, net of tax	57													57
Balance at end of period - amount at Sep. 30, 2013	$ 89,688					$ 11,936	$ 10,570					$ (1,454)	$ 68,998	$ (362)
Balance at end of period - shares at Sep. 30, 2013						12,065	7,045,036

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

XML

Stock Compensation Plans: Summary of MRDP Shares Vested (Details) (MRDP, Stock Grants, USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
MRDP | Stock Grants
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares vested	6,207	10,831	13,435
Aggregate vesting date fair value	$ 38,000	$ 46,000	$ 61,000

XML

Timberland Bancorp, Inc. and Subsidiary Condensed Consolidated Statements of Shareholders' Equity Timberland Bancorp, Inc. and Subsidiary Condensed Consolidated Statements of Shareholders' Equity (Phantom) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013		Sep. 30, 2012
Stock option/MRDP compensation expense	$ 0	[1]	$ 92	[1]
Common Stock
Stock option/MRDP compensation expense	$ 0	[1]	$ 92	[1]

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

XML

Net Income Per Common Share: Schedule of Earnings per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Earnings Per Share, Basic [Abstract]
Numerator – net income	$ 895	$ 876	$ 1,278	$ 1,708	$ 1,151	$ 1,348	$ 808	$ 1,283	$ 4,757	$ 4,590	$ 1,089
Preferred stock dividends	(151)	(151)	(207)	(201)	(208)	(208)	(208)	(208)	(710)	(832)	(832)
Repurchase of preferred stock at a discount	0	0	255	0					255	0	0
Preferred stock discount accretion	(47)	(47)	(126)	(63)	(61)	(61)	(59)	(59)	(283)	(240)	(225)
Net income to common shareholders	$ 697	$ 678	$ 1,200	$ 1,444	$ 882	$ 1,079	$ 541	$ 1,016	$ 4,019	$ 3,518	$ 32
Denominator – weighted average common shares outstanding									6,817,918	6,780,612	6,745,347
Basic net income per common share (in dollars per share)	$ 0.10	$ 0.10	$ 0.18	$ 0.21	$ 0.13	$ 0.16	$ 0.08	$ 0.15	$ 0.59	$ 0.52	$ 0.00
Diluted net income per common share computation
Effect of dilutive stock options									16,555	0	177
Effect of dilutive stock warrant									52,522	0	0
Weighted average common shares outstanding- assuming dilution									6,886,995	6,780,612	6,745,524
Diluted net income per common share (in dollars per share)	$ 0.10	$ 0.10	$ 0.17	$ 0.21	$ 0.13	$ 0.16	$ 0.08	$ 0.15	$ 0.58	$ 0.52	$ 0.00

XML

MBS And Other Investments

12 Months Ended

Sep. 30, 2013

Investments [Abstract]

MBS And Other Investments

Mortgage-Backed Securities and Other Investments

Mortgage-backed securities and other investments were as follows as of September 30, 2013 and 2012 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2013
Held to Maturity
MBS:
U.S. government agencies	$	1,202	$	31	$	(2	)	$	1,231
Private label residential	1,521		781		(15		)	2,287
U.S. agency securities	14		1		—			15
Total	$	2,737	$	813	$	(17	)	$	3,533
Available for Sale
MBS:
U.S. government agencies	$	2,144	$	87	$	(2	)	$	2,229
Private label residential	804		120		(10		)	914
Mutual funds	1,000		—		(42		)	958
Total	$	3,948	$	207	$	(54	)	$	4,101
September 30, 2012
Held to Maturity
MBS:
U.S. government agencies	$	1,493	$	44	$	(3	)	$	1,534
Private label residential	1,819		309		(60		)	2,068
U.S. agency securities	27		3		—			30
Total	$	3,339	$	356	$	(63	)	$	3,632
Available for Sale
MBS:
U.S. government agencies	$	2,828	$	147	$	—		$	2,975
Private label residential	1,001		65		(109		)	957
Mutual funds	1,000		13		—			1,013
Total	$	4,829	$	225	$	(109	)	$	4,945

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time these unrealized losses existed as of September 30, 2013 (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	$	3	$	—		6	$	88	$	(2	)	4	$	91	$	(2	)
Private label residential	80		(4		)	4	239		(11		)	14	319		(15		)
Total	$	83	$	(4	)	10	$	327	$	(13	)	18	$	410	$	(17	)
Available for Sale
MBS:
U.S. government agencies	$	96	$	(2	)	3	$	—	$	—		1	$	96	$	(2	)
Private label residential	—		—			—	108		(10		)	2	108		(10		)
Mutual Funds	958		(42		)	1	—		—			—	958		(42		)
Total	$	1,054	$	(44	)	4	$	108	$	(10	)	3	$	1,162	$	(54	)

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time the unrealized losses existed as of September 30, 2012 (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	$	7	$	—		1	$	100	$	(3	)	4	$	107	$	(3	)
Private label residential	17		(1		)	1	423		(59		)	28	440		(60		)
Total	$	24	$	(1	)	2	$	523	$	(62	)	32	$	547	$	(63	)
Available for Sale
MBS:
Private label residential	—		—			—	651		(109		)	4	651		(109		)
Total	$	—	$	—		—	$	651	$	(109	)	4	$	651	$	(109	)

The Company has evaluated these securities and has determined that the decline in their value is temporary.  The unrealized losses are primarily due to unusually large spreads in the market for private label mortgage-related products.  The fair value of the mortgage-backed securities is expected to recover as the securities approach their maturity date 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, 2013, 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 recorded value if previously written down).

During the year ended September 30, 2013, the Company recorded net OTTI charges through earnings on residential MBS of $47,000.  For the year ended September 30, 2012, the Company recorded net OTTI charges through earnings on residential MBS of $214,000. In accordance with GAAP, the Company bifurcates OTTI into (i) amounts related to credit losses which are recognized through earnings and (ii) 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, 2013, 2012 and 2011:

	Range				Weighted
	Minimum		Maximum		Average
September 30, 2013
Constant prepayment rate	6.00	%	15.00	%	12.33	%
Collateral default rate	0.73	%	22.53	%	7.84	%
Loss severity rate	20.48	%	75.02	%	52.69	%
September 30, 2012
Constant prepayment rate	6.00	%	15.00	%	8.77	%
Collateral default rate	0.06	%	28.40	%	8.74	%
Loss severity rate	0.52	%	76.03	%	48.28	%
September 30, 2011
Constant prepayment rate	6.00	%	15.00	%	10.71	%
Collateral default rate	0.43	%	24.23	%	8.03	%
Loss severity rate	11.93	%	64.54	%	39.22	%

The following table presents the OTTI losses for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013						2012						2011
	Held To Maturity			Available For Sale			Held To Maturity			Available For Sale			Held To Maturity			Available For Sale
Total OTTI losses	$	(13	)	$	(2	)	$	(156	)	$	(50	)	$	(210	)	$	(26	)
Portion of OTTI losses recognized in other comprehensive loss (before taxes) (1)	(32		)	—			(8		)	—			(211		)	—
Net OTTI recognized in earnings (2)	$	(45	)	$	(2	)	$	(164	)	$	(50	)	$	(421	)	$	(26	)

________________________

(1) Represents OTTI related to all other factors.

(2) Represents OTTI related to credit losses.

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, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Balance, beginning of year	$	2,703		$	3,361		$	4,725
Additions:
Credit losses for which OTTI was           not previously recognized	7			81			53
Additional increases to the amount           related to credit loss for which OTTI           was previously recognized	45			133			398
Subtractions:
Realized losses previously recorded           as credit losses	(671		)	(872		)	(1,811		)
Recovery of prior credit loss	—			—			(4		)
Balance, end of year	$	2,084		$	2,703		$	3,361

During the year ended September 30, 2013 there were no realized gains on sale of securities.  During the year ended September 30, 2012 there was a realized gain on one available for sale security in the amount of $22,000. During the year ended September 30, 2011, there was a realized gain on two available for sale securities in the amount of $79,000. During the year ended September 30, 2013, the Company recorded a $671,000 realized loss (as a result of securities being deemed worthless) on eighteen held to maturity and five available for sale residential MBS, all of which had been recognized previously as a credit loss. During the year ended September 30, 2012, the Company recorded a $872,000 realized loss (as a result of securities being deemed worthless) on twenty-five held to maturity and five available for sale residential MBS, all of which had been recognized previously as a credit loss.  During the year ended September 30, 2011, the Company recorded a $1,813,000 realized loss (as a result of securities being deemed worthless) on twenty-eight held to maturity and one available for sale residential MBS of which $1,811,000 had been recognized previously as a credit loss.

The recorded amount of residential mortgage-backed and agency securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral, retail repurchase agreements and other non-profit organization deposits totaled $4,537,000 and $5,699,000 at September 30, 2013 and 2012, respectively.

The contractual maturities of debt securities at September 30, 2013, are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.

	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due after one year to five years	$	22	$	23	$	28	$	28
Due after five to ten years	22		22		28		29
Due after ten years	2,693		3,488		2,892		3,086
Total	$	2,737	$	3,533	$	2,948	$	3,143

XML

Loans Receivable And Allowance For Loan Losses: Financing Receivable Credit Quality Indicators (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	$ 560,950	$ 552,075
Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	495,608	471,879
Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	14,448	14,170
Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	22,916	32,944
Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	27,978	33,082
Mortgage loans, one-to-four family
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	104,298	106,979
Mortgage loans, one-to-four family | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	91,291	93,668
Mortgage loans, one-to-four family | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	4,032	4,000
Mortgage loans, one-to-four family | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	769	4,343
Mortgage loans, one-to-four family | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	8,206	4,968
Mortgage loans, multi-family
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	51,108	47,521
Mortgage loans, multi-family | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	41,863	35,703
Mortgage loans, multi-family | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	132	107
Mortgage loans, multi-family | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	8,337	10,220
Mortgage loans, multi-family | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	776	1,491
Mortgage loans, commercial
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	291,297	256,254
Mortgage loans, commercial | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	262,502	228,036
Mortgage loans, commercial | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	3,309	1,722
Mortgage loans, commercial | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	12,522	11,515
Mortgage loans, commercial | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	12,964	14,981
Mortgage loans, construction - custom and owner/builder
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	22,788	20,468
Mortgage loans, construction - custom and owner/builder | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	22,788	17,621
Mortgage loans, construction - custom and owner/builder | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Mortgage loans, construction - custom and owner/builder | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	2,538
Mortgage loans, construction - custom and owner/builder | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	309
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	923	1,522
Mortgage loans, construction - speculative one-to-four family | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	236	304
Mortgage loans, construction - speculative one-to-four family | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	687	191
Mortgage loans, construction - speculative one-to-four family | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	700
Mortgage loans, construction - speculative one-to-four family | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	327
Construction - commercial
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	2,239	17,157
Construction - commercial | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	2,239	17,157
Construction - commercial | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Construction - commercial | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Construction - commercial | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Mortgage loans, construction - multi-family
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	144	345
Mortgage loans, construction - multi-family | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Mortgage loans, construction - multi-family | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Mortgage loans, construction - multi-family | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Mortgage loans, construction - multi-family | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	144	345
Mortgage loans, construction - land development
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	515	589
Mortgage loans, construction - land development | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Mortgage loans, construction - land development | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Mortgage loans, construction - land development | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Mortgage loans, construction - land development | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	515	589
Mortgage loans, land
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	31,144	39,655
Mortgage loans, land | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	20,627	22,700
Mortgage loans, land | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	5,101	5,788
Mortgage loans, land | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	1,129	2,554
Mortgage loans, land | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	4,287	8,613
Consumer loans, home equity and second mortgage
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	33,014	32,814
Consumer loans, home equity and second mortgage | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	31,096	29,777
Consumer loans, home equity and second mortgage | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	782	1,488
Consumer loans, home equity and second mortgage | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	55	788
Consumer loans, home equity and second mortgage | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	1,081	761
Consumer loans, other
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	5,981	6,183
Consumer loans, other | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	5,937	6,136
Consumer loans, other | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	39	40
Consumer loans, other | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	0	0
Consumer loans, other | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	5	7
Commercial business loans
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	17,499	22,588
Commercial business loans | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	17,029	20,777
Commercial business loans | Watch
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	366	834
Commercial business loans | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	104	286
Commercial business loans | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans receivable	$ 0	$ 691

XML

Timberland Bancorp, Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities
Net income	$ 4,757	$ 4,590	$ 1,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,095	940	992
Deferred federal income taxes	777	154	156
Amortization of CDI	130	148	167
Earned ESOP shares	265	264	264
MRDP compensation expense	39	105	171
Stock option compensation expense	49	15	7
Gains on sale of MBS and other investments	0	(22)	(79)
Net OTTI on MBS and other investments	47	214	447
Realized losses on MBS and other investments	0	0	2
(Gain) loss on sale of OREO and other repossessed assets, net	(264)	373	(548)
Gains on sale of loans, net	(2,507)	(2,472)	(1,548)
(Gain) loss on disposition of premises and equipment, net	(431)	0	16
Provision for loan losses	2,925	3,500	6,758
Provision for OREO losses	2,064	1,048	1,402
Loans originated for sale	(87,329)	(93,073)	(63,945)
Amortization of MSRs	948	805	681
Proceeds from sales of loans	89,352	97,357	63,738
Recovery of MSRs valuation allowance	(475)	(10)	(405)
BOLI net earnings	(577)	(607)	(517)
Decrease in deferred loan origination fees	(60)	(180)	(287)
Decrease in deferred loan origination fees	767	2,239	2,138
Net cash provided by operating activities	11,572	15,388	10,699
Cash flows from investing activities
Net increase in CDs held for investment	(6,552)	(4,831)	(612)
Activity in MBS and other investments held to maturity: Maturities and prepayments	689	751	850
Activity in MBS and other investments available for sale: Maturities and prepayments	891	1,042	2,243
Proceeds from sales	0	743	2,272
Redemption of FHLB stock	203	50	0
Increase in loans receivable, net	(15,819)	(22,860)	(10,157)
Additions to premises and equipment	(1,302)	(1,436)	(1,015)
Proceeds from sales of OREO and other repossessed assets	3,596	2,555	4,181
Proceeds from disposition of premises and equipment, net	760	0	0
Purchase of BOLI	0	0	(2,000)
Net cash used in investing activities	(17,534)	(23,986)	(4,238)
Cash flows from financing activities
Net increase in deposits	10,336	5,248	13,809
Repayment of FHLB advances	0	(10,000)	(20,000)
Net increase (decrease) in repurchase agreements	(855)	126	107
ESOP tax effect	6	(65)	(61)
MRDP compensation tax effect	(8)	(28)	(37)
Repurchase of preferred stock	(4,321)	0	0
Payment of dividends	(1,368)	(2,080)	0
Net cash provided by (used in) financing activities	3,790	(6,799)	(6,182)
Net increase (decrease) in cash and cash equivalents	(2,172)	(15,397)	279
Beginning of year	96,668	112,065	111,786
End of year	94,496	96,668	112,065
Supplemental disclosure of cash flow information
Income taxes paid	1,793	2,343	2,097
Interest paid	4,523	6,089	8,725
Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	6,375	9,443	5,782
Loans originated to facilitate the sale of OREO	$ 2,708	$ 3,095	$ 1,538

XML

Other Liabilities and Accrued Expenses: Schedule of Other Liabilities and Accrued Expenses (Tables)

12 Months Ended

Sep. 30, 2013

Payables and Accruals [Abstract]

Schedule of Other Liabilities and Accrued Expenses

Other liabilities and accrued expenses were comprised of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Accrued deferred compensation and profit sharing plans payable	$	660	$	566
Accrued interest payable on deposits, advances and      repurchase agreements	320		404
Accounts payable and accrued expenses - other	1,718		1,884
Total other liabilities and accrued expenses	$	2,698	$	2,854

XML

Condensed Financial Information - Parent Company Only

12 Months Ended

Sep. 30, 2013

Condensed Financial Information of Parent Company Only Disclosure [Abstract]

Condensed Financial Information - Parent Company Only

Condensed Financial Information - Parent Company Only

Condensed Balance Sheets - September 30, 2013 and 2012

(dollars in thousands)

	2013		2012
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	126	$	509
Interest-bearing deposits in banks	379		2,183
Total cash and cash equivalents	505		2,692
Loan receivable from ESOP	2,565		2,918
Investment in Bank	86,795		84,775
Other assets	40		26
Total assets	$	89,905	$	90,411
Liabilities and shareholders’ equity
Accrued expenses	$	217	$	92
Shareholders’ equity	89,688		90,319
Total liabilities and shareholders’ equity	$	89,905	$	90,411

Condensed Statements of Income - Years Ended September 30, 2013, 2012 and 2011

(dollars in thousands)

	2013			2012			2011
Operating income
Interest on deposits in banks	$	1		$	1		$	1
Interest on loan receivable from ESOP	237			266			291
Total operating income	238			267			292
Operating expenses	455			556			541
Loss before income taxes and equity in undistributed     income of Bank	(217		)	(289		)	(249		)
Benefit for income taxes	(98		)	(98		)	(85		)
Loss before equity in undistributed income of Bank	(119		)	(191		)	(164		)
Equity in undistributed income of Bank	4,876			4,781			1,253
Net income	4,757			4,590			1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Preferred stock accretion	(283		)	(240		)	(225		)
Discount on redemption of preferred stock	255			—			—
Net income to common shareholders	$	4,019		$	3,518		$	32

Condensed Statements of Cash Flows - Years Ended September 30, 2013, 2012 and 2011

(dollars in thousands)

	2013			2012			2011
Cash flows from operating activities
Net income	$	4,757		$	4,590		$	1,089
Adjustments to reconcile net income to     net cash provided by operating activities:
Equity in undistributed income of        Bank	(4,876		)	(4,781		)	(1,253		)
ESOP shares earned	265			264			264
MRDP compensation expense	39			105			171
Stock option compensation expense	49			15			7
Other, net	(39		)	406			(160		)
Net cash provided by operating activities	195			599			118
Cash flows from investing activities
Investment in Bank	2,956			(243		)	(288		)
Principal repayments on loan receivable from Bank	353			322			298
Net cash provided by investing activities	3,309			79			10
Cash flows from financing activities
Repurchase of preferred stock	(4,321		)	—			—
Payment of dividends	(1,368		)	(2,080		)	—
ESOP tax effect	6			(65		)	(61		)
MRDP compensation tax effect	(8		)	(28		)	(37		)
Net cash used in financing activities	(5,691		)	(2,173		)	(98		)
Net increase (decrease) in cash and cash equivalents	(2,187		)	(1,495		)	30
Cash and cash equivalents
Beginning of year	2,692			4,187			4,157
End of year	$	505		$	2,692		$	4,187

XML

Summary Of Significant Accounting Policies: Basis of Presentation (Policies)

12 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Principles of Consolidation

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

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

Consolidated Financial Statement Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the banking industry.

Use of Estimates

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 sheet, 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 OTTI in the estimated fair value of mortgage-backed securities, the valuation of MSRs, the valuation of OREO and the determination of goodwill impairment.

Reclassification Policy

Certain prior year amounts have been reclassified to conform to the fiscal 2013 presentation with no change to net income or shareholders’ equity previously reported.

Operating Segment Policy

Segment Reporting

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

U.S. Treasury Department's Capital Purchase Program

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 Series A Preferred Stock pays a 5.0% dividend through December 23, 2013, after which the rate increases to 9.0% until the preferred stock is redeemed by the Company.

The proceeds received in connection with the issuance of the Series A Preferred Stock were allocated between the preferred stock and detachable 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 is accreted to the expected redemption date and charged to retained earnings. This accretion is 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 Treasury's efforts to manage and recover its investments under the TARP. While the sale of this 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.  

On June 12, 2013, the Treasury sold, to private investors, the warrant to purchase up to 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 discount from liquidation value of $255,000. The discount from liquidation value on the repurchased shares was recorded as an increase to retained earnings.

On November 19, 2013, the Board of Directors (the "Board") of the Company approved the redemption of the remaining 12,065 shares of Series A Preferred Stock, subject to obtaining regulatory approval. The Company has submitted an application to the Federal Reserve Bank of San Francisco ("FRB") for approval to redeem the Series A Preferred Stock.

MBS and Other Investments

MBS and Other Investments

MBS and other investments are classified upon acquisition as either held to maturity or available for sale.  Securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reflected at amortized cost.  Securities classified as available for sale are reflected at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax effects.  Premiums and discounts are amortized to earnings using the interest method over the contractual life of the securities.  Gains and losses on sales of 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 securities available for sale that are deemed to be other than temporary are reflected in earnings when identified.  The fair value of the security then becomes the new cost basis.  For individual securities 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 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 cash flows is less than the amortized cost.  For individual 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 security’s cost basis and its fair value at the consolidated balance sheet date.  For individual 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

FHLB Stock

The Company, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of its outstanding home loans or 5% of advances from the FHLB.  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. Accordingly, $100 per share par value is deemed to be a reasonable estimate of fair value.

The Company evaluated its investment in the FHLB stock for OTTI, consistent with its accounting policy.  Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB, the actions being taken by the FHLB to address its regulatory situation and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the Company does not believe that its investment in the FHLB is impaired.  Further, during the year ended September 30, 2012, the Federal Housing Finance Agency (“Finance Agency”) upgraded the FHLB’s capital classification to “adequately capitalized” and granted the FHLB authority to repurchase up to $25 million of excess capital stock per quarter at par value, provided they receive a non-objection for each quarter’s repurchase from the Finance Agency.  The FHLB announced in July 2013 that, based on its second quarter 2013 financial results, their board of directors had declared a $0.025 per share cash dividend. This represented the first dividend in a number of years. Even though the Company did not determine its investment in the FHLB stock was impaired at September 30, 2013, future deterioration of the FHLB’s financial condition may result in future impairment losses.

Loans Held For Sale

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are stated in the aggregate at the lower of cost or estimated fair value.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.  Gains or losses on sales of loans are recognized at the time of sale.  The gain or loss is the difference between the net sales proceeds and the recorded value of the loans, including any remaining unamortized deferred loan origination fees.

Loans Receivable

Loans Receivable

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

Troubled Debt Restructured Loans

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.

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, 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-amortizing, extensions, deferrals and renewals.  Troubled debt restructured loans are considered impaired and are individually evaluated for impairment.

Impaired Loans

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 coextensive.  The Company 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.

Allowance for Loan Losses

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 (or 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 management to augment 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.  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 the Financial Accounting Standards Board (“FASB”) guidance for receivables, 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 homogenous 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), 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 loan losses is charged against operations and is added to 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 continue to 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.

Interest on Loans and Loan Fees

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 meet payments as they become due or when they are past due 90 days as to either principal or interest (based on contractual terms), unless they are well secured and in the process of collection.  In determining whether a borrower may be able to meet 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 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.

MSRs

MSRs

The Company holds rights to service loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). MSRs are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained and are amortized to servicing income on loans sold in proportion to and 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 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 servicing assets were originated.  Fair values are estimated using discounted cash flows based on current market rates of interest.  For purposes of measuring impairment, the rights 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.

BOLI

BOLI

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

Goodwill

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.  Goodwill is presumed to have an indefinite useful life and is analyzed annually for impairment.  An annual review 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 and no additional analysis is necessary.

The Company performed its fiscal year 2013 goodwill impairment test during the quarter ended June 30, 2013 with the assistance of a third-party firm specializing in goodwill impairment valuations for financial institutions. The third-party analysis was conducted as of May 31, 2013 and concluded that the fair value of goodwill was $45.0 million, which exceeded the recorded value of $5.7 million by 689%.

The goodwill impairment test involved a two-step process. Step one of the goodwill impairment test estimated 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.

The allocation of corporate value approach applies the aggregate market value of the Company and divides it among the reporting units. The Company has a single reporting unit. The aggregate market value was based on the Company's common stock market price on May 31, 2013, adjusted for a control premium and the value of preferred stock (at its liquidation value). A key assumption in this approach is the control premium applied to the aggregate market value. A control premium is utilized to adjust the value of a company to its value from the perspective of a controlling interest which is generally higher than the value determined using a widely quoted market price per share. The Company used an expected control premium of 30%, which was based on comparable transaction history.

The income approach uses a reporting unit's projection of estimated operating results and cash flows that are discounted 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 revenue growth rate that approximated 3.0% and a return on assets that ranged from 0.54% to 1.01% (average of 0.73%). In addition to the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the income approach were the discount rate of 15.0% utilized for the Company's cash flow estimate and a terminal value of 1.25 times the ending book value of the reporting unit. The Company used a build-up approach in

developing the discount rate including an assessment of the risk free interest rate, the rate of return expected from publicly traded stocks based on an analysis of historical data, the industry the Company operates in and the size of the Company.

The market approach estimates the fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples were derived from comparable publicly traded companies with operating and investment characteristics similar to those of the reporting unit. In applying the market approach method, the Company selected six publicly traded institutions based on a variety of financial metrics (e.g., tangible equity, return on assets, return on equity, net interest margin, non-performing assets, net charge-offs and reserves for loan losses) and other relevant factors (e.g., geographical location, lines of business, risk profile, availability of financial information, etc.).

CDI

CDI

The CDI is amortized to non-interest expense using an accelerated method over a ten-year period.

Premises and Equipment

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

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, 2013 or 2012 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

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.  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.

Transfers of Financial Assets

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

Income Taxes

The Company files a consolidated federal income tax return.  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 (loss) for tax purposes and income (loss) 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 (benefit) 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 on 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 United States federal income tax examination by tax authorities for years ended on or before September 30, 2009.

ESOP

ESOP

The Bank sponsors a leveraged ESOP that is accounted for in accordance with GAAP.  Accordingly, the debt of the ESOP is recorded as other borrowed funds of the Bank, and the shares pledged as collateral are reported as unearned shares issued to the ESOP on the consolidated balance sheets.  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.

Cash and Cash Equivalents and Cash Flows

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 purpose 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, 2013 and 2012 included deposits with the FRB of $72,955,000 and $75,325,000, respectively.  The Company also maintains balances in correspondent bank accounts which, at times, may exceed FDIC insurance limits of $250,000.  Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the FRB and the correspondent banks.

Advertising

Advertising

Costs for advertising and marketing are expensed as incurred.

Stock-based Compensation

Stock-Based Compensation

The Company measures compensation cost for all stock-based awards based on the grant-date fair value 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 is equal to the fair value of the shares at the grant date.

Net Income (Loss) Per Common Share

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 the Company’s common stock during the period.  The 5% dividend and related accretion for the amount of the Company's Series A Perferred Stock outstanding for the respective year is deducted from net income, and the discount on the redemption of Series A Preferred Stock is added to net income in computing net income to common shareholders. Common stock equivalents arise from assumed conversion of outstanding stock options and the outstanding warrant 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 net income per common share.

Related Party Transactions

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 fees paid to this law firm for the years ended September 30, 2013, 2012 and 2011 totaled $166,000, $203,000 and $176,000, respectively.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standard Update ("ASU") No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance requires an entity to provide information about the amount reclassified out of accumulated other comprehensive income by component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The guidance was effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Company's consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exits. The guidance clarifies when it is appropriate for an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. Early adoption is permitted. The guidance should be applied prospectively to all unrecognized tax benefits that exist at the effective date, however, retrospective application is also permitted. Adoption of ASU 2013-11 is not expected to have a significant impact on the Company's consolidated financial statements.

XML

Loans Receivable And Allowance For Loan Losses: Schedule of loans evaluated individually for impairment and collectively evaluated for impairment in the allowance for loan losses (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2010
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	$ 3,076	$ 2,902
Allowance for Loan Losses, Collectively Evaluated for Impairment	8,060	8,923
Allowance for Loan Losses, Total	11,136	11,825	11,946	11,264
Recorded Investment in Loans, Individually Evaluated for Impairment	38,099	40,805
Recorded Investment in Loans, Collectively Evaluated for Impairment	522,851	511,270
Loans receivable	560,950	552,075
Mortgage loans, one-to-four family
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	600	678
Allowance for Loan Losses, Collectively Evaluated for Impairment	849	880
Allowance for Loan Losses, Total	1,449	1,558	760	530
Recorded Investment in Loans, Individually Evaluated for Impairment	8,984	5,282
Recorded Investment in Loans, Collectively Evaluated for Impairment	95,314	101,697
Loans receivable	104,298	106,979
Mortgage loans, multi-family
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	334	711
Allowance for Loan Losses, Collectively Evaluated for Impairment	415	445
Allowance for Loan Losses, Total	749	1,156	1,076	393
Recorded Investment in Loans, Individually Evaluated for Impairment	5,184	6,879
Recorded Investment in Loans, Collectively Evaluated for Impairment	45,924	40,642
Loans receivable	51,108	47,521
Mortgage loans, commercial
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	1,763	667
Allowance for Loan Losses, Collectively Evaluated for Impairment	3,512	3,580
Allowance for Loan Losses, Total	5,275	4,247	4,035	3,173
Recorded Investment in Loans, Individually Evaluated for Impairment	19,510	17,192
Recorded Investment in Loans, Collectively Evaluated for Impairment	271,787	239,062
Loans receivable	291,297	256,254
Mortgage loans, construction - custom and owner/builder
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	15
Allowance for Loan Losses, Collectively Evaluated for Impairment	262	371
Allowance for Loan Losses, Total	262	386	222	481
Recorded Investment in Loans, Individually Evaluated for Impairment	0	309
Recorded Investment in Loans, Collectively Evaluated for Impairment	22,788	20,159
Loans receivable	22,788	20,468
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	88	109
Allowance for Loan Losses, Collectively Evaluated for Impairment	8	19
Allowance for Loan Losses, Total	96	128	169	414
Recorded Investment in Loans, Individually Evaluated for Impairment	687	1,027
Recorded Investment in Loans, Collectively Evaluated for Impairment	236	495
Loans receivable	923	1,522
Construction - commercial
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	56	429
Allowance for Loan Losses, Total	56	429	794	245
Recorded Investment in Loans, Individually Evaluated for Impairment	0	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	2,239	17,157
Loans receivable	2,239	17,157
Mortgage loans, construction - multi-family
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	0	0
Allowance for Loan Losses, Total	0	0	354	245
Recorded Investment in Loans, Individually Evaluated for Impairment	143	345
Recorded Investment in Loans, Collectively Evaluated for Impairment	1	0
Loans receivable	144	345
Mortgage loans, construction - land development
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	0	0
Allowance for Loan Losses, Total	0	0	79	240
Recorded Investment in Loans, Individually Evaluated for Impairment	515	589
Recorded Investment in Loans, Collectively Evaluated for Impairment	0	0
Loans receivable	515	589
Mortgage loans, land
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	234	686
Allowance for Loan Losses, Collectively Evaluated for Impairment	1,706	1,706
Allowance for Loan Losses, Total	1,940	2,392	2,795	3,709
Recorded Investment in Loans, Individually Evaluated for Impairment	2,391	8,613
Recorded Investment in Loans, Collectively Evaluated for Impairment	28,753	31,042
Loans receivable	31,144	39,655
Consumer loans, home equity and second mortgage
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	57	36
Allowance for Loan Losses, Collectively Evaluated for Impairment	725	723
Allowance for Loan Losses, Total	782	759	460	922
Recorded Investment in Loans, Individually Evaluated for Impairment	679	562
Recorded Investment in Loans, Collectively Evaluated for Impairment	32,335	32,252
Loans receivable	33,014	32,814
Consumer loans, other
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	200	254
Allowance for Loan Losses, Total	200	254	415	451
Recorded Investment in Loans, Individually Evaluated for Impairment	6	7
Recorded Investment in Loans, Collectively Evaluated for Impairment	5,975	6,176
Loans receivable	5,981	6,183
Commercial business loans
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	327	516
Allowance for Loan Losses, Total	327	516	787	461
Recorded Investment in Loans, Individually Evaluated for Impairment	0	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	17,499	22,588
Loans receivable	$ 17,499	$ 22,588

XML

Employee Stock Ownership and 401(k) Plan ("KSOP"): Schedule of Shares held by the ESOP (Details) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Compensation and Retirement Disclosure [Abstract]
Unallocated shares	193,968	229,234	264,500
Shares released for allocation	592,468	597,641	585,468
Total ESOP shares	786,436	826,875	849,968

XML

Fair Value Measurement: Balances of Assets and Liabilities Measured on Nonrecurring Basis (Details) (Nonrecurring, USD $)	Sep. 30, 2013	Sep. 30, 2012
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	$ 6,036,000	$ 4,099,000
Mortgage loans, one-to-four family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	769,000	276,000
Mortgage loans, multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	14,000
Mortgage loans, commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	667,000	1,215,000
Mortgage loans, construction - custom and owner/builder
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring		0
Mortgage loans, construction - speculative one-to-four family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Mortgage loans, land
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	2,307,000	1,251,000
Consumer loans, home equity and second mortgage
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	184,000	232,000
Total impaired loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	3,927,000	2,988,000
Private label residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	45,000	164,000
OREO and other repossessed items
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	2,064,000	947,000
MSRs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring		0
Fair Value, Inputs, Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | Mortgage loans, one-to-four family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | Mortgage loans, multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | Mortgage loans, commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | Mortgage loans, construction - custom and owner/builder
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring		0
Fair Value, Inputs, Level 1 | Mortgage loans, construction - speculative one-to-four family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | Mortgage loans, land
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | Consumer loans, home equity and second mortgage
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | Total impaired loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | Private label residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | OREO and other repossessed items
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 1 | MSRs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring		0
Fair Value, Inputs, Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	83,000	231,000
Fair Value, Inputs, Level 2 | Mortgage loans, one-to-four family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 2 | Mortgage loans, multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 2 | Mortgage loans, commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 2 | Mortgage loans, construction - custom and owner/builder
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring		0
Fair Value, Inputs, Level 2 | Mortgage loans, construction - speculative one-to-four family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 2 | Mortgage loans, land
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 2 | Consumer loans, home equity and second mortgage
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 2 | Total impaired loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 2 | Private label residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	83,000	231,000
Fair Value, Inputs, Level 2 | OREO and other repossessed items
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 2 | MSRs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring		0
Fair Value, Inputs, Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	34,290,000	36,384,000
Fair Value, Inputs, Level 3 | Mortgage loans, one-to-four family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	3,042,000	3,094,000
Fair Value, Inputs, Level 3 | Mortgage loans, multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	4,850,000	6,168,000
Fair Value, Inputs, Level 3 | Mortgage loans, commercial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	12,868,000	8,929,000
Fair Value, Inputs, Level 3 | Mortgage loans, construction - custom and owner/builder
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring		86,000
Fair Value, Inputs, Level 3 | Mortgage loans, construction - speculative one-to-four family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	599,000	591,000
Fair Value, Inputs, Level 3 | Mortgage loans, land
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	969,000	1,938,000
Fair Value, Inputs, Level 3 | Consumer loans, home equity and second mortgage
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	242,000	265,000
Fair Value, Inputs, Level 3 | Total impaired loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	22,570,000	21,071,000
Fair Value, Inputs, Level 3 | Private label residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	0	0
Fair Value, Inputs, Level 3 | OREO and other repossessed items
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	11,720,000	13,302,000
Fair Value, Inputs, Level 3 | MSRs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring		$ 2,011,000

XML

OREO and Other Repossessed Assets (Tables)

12 Months Ended

Sep. 30, 2013

Other Real Estate, Foreclosed Assets, and Repossessed Assets [Abstract]

Schedule of OREO and Other Repossesssed Assets

The following table presents the activity related to OREO and other repossessed assets for the years ended September 30, 2013 and 2012 (dollars in thousands):

	2013 Amount			Number		2012 Amount			Number
Balance, beginning of year	$	13,302		56		$	10,811		50
Additions to OREO and other repossessed assets	6,375			25		9,443			44
Capitalized improvements	146			—		119			—
Lower of cost or estimated fair value losses	(2,064		)	—		(1,048		)	—
Disposition of OREO and other repossessed assets	(6,039		)	(34	)	(6,023		)	(38	)
Balance, end of year	$	11,720		47		$	13,302		56

XML

Loans Receivable And Allowance For Loan Losses: Schedule of Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	$ 11,825	$ 11,946	$ 11,264
Provision/(Credit)	2,925	3,500	6,758
Charge-offs	4,100	4,327	6,468
Recoveries	486	706	392
Allowance for loan losses, Ending Allowance	11,136	11,825	11,946
Mortgage loans, one-to-four family
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	1,558	760	530
Provision/(Credit)	565	1,000	622
Charge-offs	769	276	543
Recoveries	95	74	151
Allowance for loan losses, Ending Allowance	1,449	1,558	760
Mortgage loans, multi-family
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	1,156	1,076	393
Provision/(Credit)	(407)	80	642
Charge-offs	0	14	0
Recoveries	0	14	41
Allowance for loan losses, Ending Allowance	749	1,156	1,076
Mortgage loans, commercial
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	4,247	4,035	3,173
Provision/(Credit)	1,640	1,427	804
Charge-offs	667	1,215	47
Recoveries	55	0	105
Allowance for loan losses, Ending Allowance	5,275	4,247	4,035
Mortgage loans, construction - custom and owner/builder
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	386	222	481
Provision/(Credit)	(124)	164	(211)
Charge-offs	26	0	48
Recoveries	26	0	0
Allowance for loan losses, Ending Allowance	262	386	222
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	128	169	414
Provision/(Credit)	(32)	(42)	(142)
Charge-offs	0	0	103
Recoveries	0	1	0
Allowance for loan losses, Ending Allowance	96	128	169
Construction - commercial
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	429	794	245
Provision/(Credit)	(373)	257	1,993
Charge-offs	0	622	1,444
Recoveries	0	0	0
Allowance for loan losses, Ending Allowance	56	429	794
Mortgage loans, construction - multi-family
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	0	354	245
Provision/(Credit)	116	(780)	1,328
Charge-offs	116	24	1,219
Recoveries	0	450	0
Allowance for loan losses, Ending Allowance	0	0	354
Mortgage loans, construction - land development
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	0	79	240
Provision/(Credit)	(129)	106	993
Charge-offs	17	239	1,158
Recoveries	146	54	4
Allowance for loan losses, Ending Allowance	0	0	79
Mortgage loans, land
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	2,392	2,795	3,709
Provision/(Credit)	1,801	751	744
Charge-offs	2,307	1,251	1,704
Recoveries	54	97	46
Allowance for loan losses, Ending Allowance	1,940	2,392	2,795
Consumer loans, home equity and second mortgage
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	759	460	922
Provision/(Credit)	202	517	(354)
Charge-offs	184	232	150
Recoveries	5	14	42
Allowance for loan losses, Ending Allowance	782	759	460
Consumer loans, other
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	254	415	451
Provision/(Credit)	(40)	(137)	(8)
Charge-offs	14	24	30
Recoveries	0	0	2
Allowance for loan losses, Ending Allowance	200	254	415
Commercial business loans
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Allowance for loan losses, Beginning Allowance	516	787	461
Provision/(Credit)	(294)	157	347
Charge-offs	0	430	22
Recoveries	105	2	1
Allowance for loan losses, Ending Allowance	$ 327	$ 516	$ 787

XML

Other Liabilities and Accrued Expenses: Schedule of Other Liabilities and Accrued Expenses (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Payables and Accruals [Abstract]
Accrued deferred compensation and profit sharing plans payable	$ 660	$ 566
Accrued interest payable on deposits, advances and repurchase agreements	320	404
Accounts payable and accrued expenses - other	1,718	1,884
Total other liabilities and accrued expenses	$ 2,698	$ 2,854

XML

Summary Of Significant Accounting Policies Summary of Significant Accounting Policies: Premises and Equipment (Details)	12 Months Ended
	Sep. 30, 2013
Buildings and improvements | Minimum
Property, Plant and Equipment [Line Items]
Estimated useful life	5 years
Buildings and improvements | Maximum
Property, Plant and Equipment [Line Items]
Estimated useful life	40 years
Furniture and equipment | Minimum
Property, Plant and Equipment [Line Items]
Estimated useful life	3 years
Furniture and equipment | Maximum
Property, Plant and Equipment [Line Items]
Estimated useful life	7 years
Automobiles
Property, Plant and Equipment [Line Items]
Estimated useful life	5 years

XML

Selected Quarterly Financial Data (unaudited): Selected financial data (Tables)

12 Months Ended

Sep. 30, 2013

Quarterly Financial Information Disclosure [Abstract]

Schedule of Quarterly Financial Data

The following selected financial data are presented for the quarters ended (dollars in thousands, except per share amounts):

	September 30, 2013			June 30, 2013			March 31, 2013			December 31, 2012
Interest and dividend income	$	7,521		$	7,575		$	7,552		$	7,589
Interest expense	(1,052		)	(1,076		)	(1,111		)	(1,200		)
Net interest income	6,469			6,499			6,441			6,389
Provision for loan losses	(165		)	(1,385		)	(1,175		)	(200		)
Non-interest income	2,397			2,372			2,778			2,715
Non-interest expense	(7,066		)	(6,237		)	(6,184		)	(6,377		)
Income before income taxes	1,635			1,249			1,860			2,527
Provision for federal income taxes	740			373			582			819
Net income	895			876			1,278			1,708
Preferred stock dividends	(151		)	(151		)	(207		)	(201		)
Preferred stock discount accretion	(47		)	(47		)	(126		)	(63		)
Discount on redemption of preferred stock	—			—			255			—
Net income to common shareholders	$	697		$	678		$	1,200		$	1,444
Net income per common share
Basic	$	0.10		$	0.10		$	0.18		$	0.21
Diluted	0.10			0.10			0.17			0.21

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011
Interest and dividend income	$	7,750		$	8,019		$	7,804		$	8,032
Interest expense	(1,294		)	(1,391		)	(1,531		)	(1,731		)
Net interest income	6,456			6,628			6,273			6,301
Provision for loan losses	(900		)	(900		)	(1,050		)	(650		)
Non-interest income	2,503			2,341			2,493			2,444
Non-interest expense	(6,678		)	(6,097		)	(6,572		)	(6,221		)
Income before income taxes	1,381			1,972			1,144			1,874
Provision for federal income taxes	230			624			336			591
Net income	1,151			1,348			808			1,283
Preferred stock dividends	(208		)	(208		)	(208		)	(208		)
Preferred stock discount accretion	(61		)	(61		)	(59		)	(59		)
Net income to common shareholders	$	882		$	1,079		$	541		$	1,016
Net income per common share
Basic	$	0.13		$	0.16		$	0.08		$	0.15
Diluted	0.13			0.16			0.08			0.15

XML

Commitments and Contingencies (Tables)

12 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Supply Commitment

A summary of the Company’s commitments at September 30, 2013 and 2012 is as follows (dollars in thousands):

	2013		2012
Undisbursed portion of construction loans in process (see Note 4)	$	18,527	$	16,325
Undisbursed lines of credit	25,187		21,671
Commitments to extend credit	16,399		10,113

XML

Timberland Bancorp, Inc. and Subsidiary Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Statement of Financial Position [Abstract]
Mortgage-backed securities and other investments held to maturity-fair value	$ 3,533	$ 3,632
Preferred stock par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock shares authorized	1,000,000	1,000,000
Preferred stock shares issued	12,065	16,641
Preferred stock shares outstanding	12,065	16,641
Preferred stock per share liquidation value (in dollars per share)	$ 1,000	$ 1,000
Common stock par value (in dollars per share)	$ 0.01	$ 0.01
Common stock shares authorized	50,000,000	50,000,000
Common stock shares issued	7,045,036	7,045,036
Common stock shares outstanding	7,045,036	7,045,036

XML

Mortgage Servicing Rights

12 Months Ended

Sep. 30, 2013

Transfers and Servicing [Abstract]

Mortgage Servicing Rights

Mortgage Servicing Rights

Loans serviced for Freddie Mac are not included in the accompanying consolidated balance sheets.  The principal amounts of those loans at September 30, 2013, 2012 and 2011 were $325,726,000, $304,872,000 and $298,924,000, respectively.

The following is an analysis of the changes in MSRs for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Balance, beginning of year	$	2,011		$	2,108		$	1,929
Additions	728			698			455
Amortization	(948		)	(805		)	(681		)
Valuation allowance	—			(216		)	(434		)
Recovery of valuation allowance	475			226			839
Balance, end of year	$	2,266		$	2,011		$	2,108

At September 30, 2013, 2012 and 2011, the estimated fair value of MSRs totaled $3,129,000, $2,011,000 and $2,108,000, respectively.  The MSRs' fair values for 2013, 2012 and 2011 were estimated using discounted cash flow analyses with average discount rates of 10.04%, 10.07% and 10.11%, respectively, and average prepayment speed factors of 177, 330 and

324, respectively.  At September 30, 2013 there was no valuation allowance on MSR's. At September 30, 2012 and 2011, there were valuation allowances on MSR's of $475,000 and $485,000, respectively.

XML

Timberland Bancorp, Inc. and Subsidiary Condensed Consolidated Statements of Comprehensive Income (Unaudited) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Comprehensive income:
Net income	$ 4,757	$ 4,590	$ 1,089
Unrealized holding gain on securities available for sale, net of tax	23	14	14
Change in OTTI on securities held to maturity, net of tax:
Additions	0	(27)	(65)
Additional amount recognized related to credit loss for which OTTI was previously recognized	15	8	16
Amount reclassified to credit loss for previously recorded market loss	6	24	188
Accretion of OTTI securities held to maturity, net of tax	57	46	43
Total comprehensive income	$ 4,858	$ 4,655	$ 1,285

XML

Restricted Assets (Details) (Federal Reserve Bank, USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Federal Reserve Bank
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted assets	$ 840	$ 874

XML

Timberland Bancorp, Inc. and Subsidiary Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Cash and cash equivalents:
Cash and due from financial institutions	$ 12,879	$ 11,008
Interest-bearing deposits in banks	81,617	85,660
Total cash and cash equivalents	94,496	96,668
Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value)	30,042	23,490
Mortgage-backed securities (“MBS”) and other investments - held to maturity, at amortized cost (estimated fair value of $3,533 and $3,632)	2,737	3,339
MBS and other investments - available for sale	4,101	4,945
Federal Home Loan Bank of Seattle (“FHLB”) stock	5,452	5,655
Loans receivable, net of allowance for loan losses of $11,136 and $11,825	546,193	537,053
Loans held for sale	1,911	1,427
Net loans receivable	548,104	538,480
Premises and equipment, net	17,764	17,886
Other real estate owned (“OREO”) and other repossessed assets, net	11,720	13,302
Accrued interest receivable	1,972	2,183
Bank owned life insurance (“BOLI”)	17,102	16,524
Goodwill	5,650	5,650
Core deposit intangible (“CDI”)	119	249
Mortgage servicing rights (“MSRs”), net	2,266	2,011
Prepaid Federal Deposit Insurance Corporation (“FDIC”) insurance assessment	0	1,186
Other assets	4,123	5,386
Total assets	745,648	736,954
Deposits:
Non-interest-bearing demand	87,657	75,296
Interest-bearing	520,605	522,630
Total deposits	608,262	597,926
FHLB advances	45,000	45,000
Repurchase agreements	0	855
Other liabilities and accrued expenses	2,698	2,854
Total liabilities	655,960	646,635
Shareholders’ equity
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $0.01 par value; 1,000,000 shares authorized; redeemable at $1,000 per share: 12,065 shares issued and outstanding - September 30, 2013 16,641 shares issued and outstanding - September 30, 2012	11,936	16,229
Common stock, $0.01 par value; 50,000,000 shares authorized; 7,045,036 shares issued and outstanding	10,570	10,484
Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)	(1,454)	(1,719)
Retained earnings	68,998	65,788
Accumulated other comprehensive loss	(362)	(463)
Total shareholders’ equity	89,688	90,319
Total liabilities and shareholders’ equity	$ 745,648	$ 736,954

XML

Summary Of Significant Accounting Policies Summary of Significant Accounting Policies: Operations (Details)	12 Months Ended
	Sep. 30, 2013 branch
Accounting Policies [Abstract]
Number of branches	22

XML

Mortgage Servicing Rights: Analysis of the changes in MSRs (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Transfers and Servicing [Abstract]
Mortgage Servicing Rights (MSR), Starting Balance	$ 2,011	$ 2,108	$ 1,929
Mortgage Servicing Rights (MSR), Additions	728	698	455
Mortgage Servicing Rights (MSR), Amortization	(948)	(805)	(681)
Mortgage Servicing Rights (MSR), Valuation Allowance	0	(216)	(434)
Mortgage Servicing Rights (MSR), Recovery of Valuation Allowance	475	226	839
Mortgage Servicing Rights (MSR), Ending Balance	$ 2,266	$ 2,011	$ 2,108

XML

Fair Value Measurement: Level 3 Fair Value Measurements, Nonrecurring (Details) (USD $)	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2013 Nonrecurring	Sep. 30, 2012 Nonrecurring	Sep. 30, 2013 Nonrecurring Impaired loans	Sep. 30, 2012 Nonrecurring Impaired loans	Sep. 30, 2013 Nonrecurring Fair Value, Inputs, Level 3	Sep. 30, 2012 Nonrecurring Fair Value, Inputs, Level 3	Sep. 30, 2013 Nonrecurring Fair Value, Inputs, Level 3 Impaired loans	Sep. 30, 2012 Nonrecurring Fair Value, Inputs, Level 3 Impaired loans	Sep. 30, 2013 Nonrecurring Fair Value, Inputs, Level 3 Impaired loans Market approach	Sep. 30, 2013 Nonrecurring Fair Value, Inputs, Level 3 Other real estate owned Market approach
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, estimated fair value, nonrecurring		$ 6,036,000	$ 4,099,000	$ 3,927,000	$ 2,988,000	$ 34,290,000	$ 36,384,000	$ 22,570,000	$ 21,071,000	$ 22,570,000	$ 11,720,000
FHLB stock, shares redeemed during period	2,028

XML

Loans Receivable And Allowance For Loan Losses Loans Receivable And Allowance For Loan Losses: Summary of TDR Loans (Details) (USD $)	Sep. 30, 2013 contract	Sep. 30, 2012 contract	Sep. 30, 2011 Mortgage loans, commercial contract	Sep. 30, 2011 Mortgage loans, land contract	Sep. 30, 2013 Troubled debt restructured loans	Sep. 30, 2012 Troubled debt restructured loans
Financing Receivable, Modifications [Line Items]
TDR loans included in impaired loans	$ 22,600,000	$ 23,500,000
TDR loans, commitment to lend additional funds	1,000	1,000
Financing receivable modifications, subsequent default, number of contracts	0	0	1	1
Financing receivable modifications, subsequent default, recorded investment	0	0	919,000	147,000
Allowance for loan losses	$ 11,136,000	$ 11,825,000			$ 2,371,000	$ 1,894,000

XML

Net Income Per Common Share

12 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Net Income Per Common Share

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 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 is deducted from net income, and the discount on the redemption of Series A Preferred Stock is added to net income in computing net income to common shareholders. Common stock equivalents arise from assumed conversion of outstanding stock options and outstanding warrants to purchase common stock.  In accordance with FASB guidance for stock compensation, shares owned by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing net income per common share.  Information regarding the calculation of basic and diluted net income per common share for the years ended September 30, 2013, 2012 and 2011 is as follows (dollars in thousands, except per share amounts):

	2013			2012			2011
Basic net income per common share computation
Numerator - net income	$	4,757		$	4,590		$	1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Discount on redemption of preferred stock	255			—			—
Preferred stock discount accretion	(283		)	(240		)	(225		)
Net income to common stockholders	$	4,019		$	3,518		$	32
Denominator - weighted average common shares     outstanding	6,817,918			6,780,612			6,745,347
Basic net income per common share	$	0.59		$	0.52		$	—
Diluted net income per common share computation
Numerator - net income	$	4,757		$	4,590		$	1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Discount on redemption of preferred stock	255			—			—
Preferred stock discount accretion	(283		)	(240		)	(225		)
Net income to common stockholders	$	4,019		$	3,518		$	32
Denominator - weighted average common shares     outstanding	6,817,918			6,780,612			6,745,347
Effect of dilutive stock options	16,555			—			177
Effect of dilutive stock warrant	52,522			—			—
Weighted average common shares outstanding-     assuming dilution	6,886,995			6,780,612			6,745,524
Diluted net income per common share	$	0.58		$	0.52		$	—

For the years ended September 30, 2013, 2012 and 2011, average options to purchase 109,953, 162,517 and 163,714 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share because their effect would have been anti-dilutive.

For the years ended September 30, 2012 and 2011, a warrant to purchase a weighted average of 370,899 shares was outstanding but not included in the computation of diluted net income per common share because the warrant’s exercise price was greater than the average market price of the common shares and, therefore, its effect would have been anti-dilutive.

XML

Employee Stock Ownership and 401(k) Plan ("KSOP")

12 Months Ended

Sep. 30, 2013

Compensation and Retirement Disclosure [Abstract]

Employee Stock Ownership and 401(k) Plan (KSOP)

Employee Stock Ownership and 401(k) Plan (“KSOP”)

Effective October 3, 2007, the Bank established 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) Profit Sharing 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.  It may be funded by Bank contributions in cash or stock for the ESOP and in cash only for the 401(k) profit sharing.  Employee vesting occurs over six years.

ESOP

The amount of the 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 $72,000 were used to service the debt during the year ended September 30, 2013. There were no dividends used to service debt for the years ended September 30, 2012 and 2011.  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, 2013, 271,564 ESOP shares had been distributed to participants.

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 $237,000, $266,000 and

$291,000 for the years ended September 30, 2013, 2012 and 2011, respectively. The balance of the loan at September 30, 2013 was $2,566,000.

Shares held by the ESOP as of September 30, 2013, 2012 and 2011 were classified as follows:

	2013	2012	2011
Unallocated shares	193,968	229,234	264,500
Shares released for allocation	592,468	597,641	585,468
Total ESOP shares	786,436	826,875	849,968

The approximate fair market value of the ESOP’s unallocated shares at September 30, 2013, 2012 and 2011, was $1,746,000, $1,375,000 and $1,069,000, respectively.  Compensation expense recognized under the ESOP for the years ended September 30, 2013, 2012 and 2011 was $202,000, $165,000, and $172,000.

401(k)

Eligible employees may contribute up to the maximum established by the Internal Revenue Service.  Contributions by the Bank are at the discretion of the Board except for a 3% safe harbor contribution which is mandatory according to the plan document.  Bank contributions totaled $289,000, $283,000 and $290,000 for the years ended September 30, 2013, 2012 and 2011, respectively.

XML

Stock Compensation Plans: Stock Option Activity (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Shares:
Options outstanding, beginning of period	195,626	137,726	194,864
Granted	29,000	76,000
Forfeited	(61,680)	(18,100)	(57,138)
Options outstanding, end of period	162,946	195,626	137,726
Weighted Average Exercise Price (in dollars per share):
Options outstanding, beginning of period	$ 7.97	$ 9.25	$ 8.71
Granted	$ 6.00	$ 5.04
Forfeited	$ 9.69	$ 5.44	$ 7.42
Options outstanding, end of period	$ 6.96	$ 7.97	$ 9.25

XML

Stock Compensation Plans (Tables)

12 Months Ended

Sep. 30, 2013

Share-based Compensation [Abstract]

Schedule of Stock Option Activity

tock option activity for the years ended September 30, 2013, 2012 and 2011 is summarized as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding September 30, 2010	194,864		$	8.71
Options forfeited	(57,138	)	7.42
Outstanding September 30, 2011	137,726		9.25
Options granted	76,000		5.04
Options forfeited	(18,100	)	5.44
Outstanding September 30, 2012	195,626		7.97
Options granted	29,000		6.00
Options forfeited	(61,680	)	9.69
Outstanding September 30, 2013	162,946		$	6.96

Schedule of Fair Value Assumptions

The weighted average assumptions for options granted during the years ended September 30, 2013 and 2012 were as follows:

	2013			2012
Expected volatility	45		%	45		%
Expected term (in years)	5			5
Expected dividend yield	—		%	—		%
Risk free interest rate	0.76		%	0.76		%
Grant date fair value per share	$	2.37		$	1.97

Schedule of Stock Option Plans, by Exercise Price Range

Additional information regarding options outstanding at September 30, 2013, is as follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices ($)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Number	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
$ 4.01 - 4.55	46,900	$	4.25	7.2	18,900	$	4.40	6.7
5.86 - 6.00	71,500	5.92		9.0	8,500	5.86		9.0
11.46 - 11.63	44,546	11.50		0.3	44,546	11.50		0.3
	162,946	$	6.96	6.1	71,946	$	8.97	2.9

Summary of MRDP Shares Vested

A summary of MRDP shares vested for the years ended September 30, 2013, 2012 and 2011 were as follows:

	2013		2012		2011
Shares vested	6,207		10,831		13,435
Aggregate vesting date fair value	$	38,000	$	46,000	$	61,000

Summary of MRDP Shares Unvested

A summary of unvested MRDP shares as of September 30, 2013 and changes during the year ended September 30, 2013, were as follows:

	Shares	Weighted Average Grant Date Fair Value
Unvested shares, beginning of period	9,461	$	9.00
Shares vested	6,207	10.04
Unvested shares, end of period	3,254	$	7.01

Schedule of Compensation Expense by Plan

Compensation expense recorded in the consolidated financial statements for all stock-based plans were as follows for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Stock options	$	49		$	15		$	7
MRDP stock grants	39			105			171
Less: related tax benefit recognized	(8		)	(28		)	(37		)
	$	80		$	92		$	141

Schedule of Compensation Expense to be Recognized in Future Periods

The compensation expense to be recognized in the future for stock-based awards that had been awarded as of September 30, 2013 but not vested for the years ending September 30, is as follows (in thousands):

	Stock Options		Stock Grants (MRDP)		Total Awards
2014	$	51	$	2	$	53
2015	44		—		44
2016	44		—		44
2017	35		—		35
2018	1		—		1
	$	175	$	2	$	177

XML

Loans Receivable And Allowance For Loan Losses: Schedule of Troubled Debt Restructurings by Portfolio Segment (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013 contract	Sep. 30, 2012 contract	Sep. 30, 2011 contract
Financing Receivable, Modifications [Line Items]
Troubled debt restructurings, End of Period Balance	$ 22,604	$ 23,504
One-to-four family | TDR, reduction in stated interest rate
Financing Receivable, Modifications [Line Items]
Post- Modification Outstanding Recorded Investment		1,010
One-to-four family | TDR, combination of changes
Financing Receivable, Modifications [Line Items]
Post- Modification Outstanding Recorded Investment		538
Commercial | TDR, reduction in stated interest rate
Financing Receivable, Modifications [Line Items]
Post- Modification Outstanding Recorded Investment		925
Commercial | TDR, combination of changes
Financing Receivable, Modifications [Line Items]
Post- Modification Outstanding Recorded Investment		2,790
Land | TDR, combination of changes
Financing Receivable, Modifications [Line Items]
Post- Modification Outstanding Recorded Investment		388
Land | TDR, modifying maturity date, timing or frequency of payments
Financing Receivable, Modifications [Line Items]
Post- Modification Outstanding Recorded Investment		147
Portfolio Segment [Member]
Financing Receivable, Modifications [Line Items]
Number of Contracts	4,000	3,000	12,000
Pre- Modification Outstanding Recorded Investment	2,680	3,340	12,575
Post- Modification Outstanding Recorded Investment	2,680	3,340	11,549
Troubled debt restructurings, End of Period Balance	2,668	3,262	10,952
Portfolio Segment [Member] | One-to-four family
Financing Receivable, Modifications [Line Items]
Number of Contracts	2,000	1,000	4,000
Pre- Modification Outstanding Recorded Investment	353	373	1,543
Post- Modification Outstanding Recorded Investment	353	373	1,543
Troubled debt restructurings, End of Period Balance	350	372	1,543
Portfolio Segment [Member] | Commercial
Financing Receivable, Modifications [Line Items]
Number of Contracts	2,000	1,000	2,000
Pre- Modification Outstanding Recorded Investment	2,327	2,718	3,394
Post- Modification Outstanding Recorded Investment	2,327	2,718	3,717
Troubled debt restructurings, End of Period Balance	2,318	2,657	3,145
Portfolio Segment [Member] | Construction - commercial
Financing Receivable, Modifications [Line Items]
Number of Contracts			2,000
Pre- Modification Outstanding Recorded Investment			6,800
Post- Modification Outstanding Recorded Investment			5,451
Troubled debt restructurings, End of Period Balance			5,435
Portfolio Segment [Member] | Land
Financing Receivable, Modifications [Line Items]
Number of Contracts		1,000	2,000
Pre- Modification Outstanding Recorded Investment		249	535
Post- Modification Outstanding Recorded Investment		249	535
Troubled debt restructurings, End of Period Balance		233	526
Portfolio Segment [Member] | Home equity
Financing Receivable, Modifications [Line Items]
Number of Contracts			2,000
Pre- Modification Outstanding Recorded Investment			303
Post- Modification Outstanding Recorded Investment			303
Troubled debt restructurings, End of Period Balance			$ 303

XML

Condensed Financial Information - Parent Company Only: Condensed Statements of Cash Flows, Parent Company (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities
Net income	$ 4,757	$ 4,590	$ 1,089
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP shares earned	(271)	(199)	(203)
MRDP compensation expense	39	105	171
Stock option compensation expense	49	15	7
Net cash provided by operating activities	11,572	15,388	10,699
Cash flows from investing activities
Net cash provided by investing activities	(17,534)	(23,986)	(4,238)
Cash flows from financing activities
Repurchase of preferred stock	(4,321)	0	0
Payment of dividends	(1,368)	(2,080)	0
ESOP tax effect	6	(65)	(61)
MRDP compensation tax effect	(8)	(28)	(37)
Net cash used in financing activities	3,790	(6,799)	(6,182)
Net increase (decrease) in cash and cash equivalents	(2,172)	(15,397)	279
Cash and cash equivalents:
Beginning of year	96,668	112,065	111,786
End of year	94,496	96,668	112,065
Parent Company
Cash flows from operating activities
Net income	4,757	4,590	1,089
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of Bank	(4,876)	(4,781)	(1,253)
ESOP shares earned	265	264	264
MRDP compensation expense	39	105	171
Stock option compensation expense	49	15	7
Other, net	(39)	406	(160)
Net cash provided by operating activities	195	599	118
Cash flows from investing activities
Investment in Bank	2,956	(243)	(288)
Principal repayments on loan receivable from Bank	353	322	298
Net cash provided by investing activities	3,309	79	10
Cash flows from financing activities
Repurchase of preferred stock	(4,321)	0	0
Payment of dividends	(1,368)	(2,080)	0
ESOP tax effect	6	(65)	(61)
MRDP compensation tax effect	(8)	(28)	(37)
Net cash used in financing activities	(5,691)	(2,173)	(98)
Net increase (decrease) in cash and cash equivalents	(2,187)	(1,495)	30
Cash and cash equivalents:
Beginning of year	2,692	4,187	4,157
End of year	$ 505	$ 2,692	$ 4,187

XML

Summary Of Significant Accounting Policies Summary of Significant Accounting Policies: Goodwill (Details) (USD $)	12 Months Ended
	Sep. 30, 2013	May 31, 2013	Sep. 30, 2012
Goodwill [Line Items]
Goodwill impairment test, calculation of fair value		$ 45,000,000
Goodwill	5,650,000	5,700,000	5,650,000
Goodwill, percentage by which fair value exceeds carrying value		689.00%
Expected control premium		30.00%
Annual growth rate		3.00%
Discount rate		15.00%
Terminal value		125.00%
Fair value of reporting unit		87,000,000
Goodwill, amount fair value exceeds carrying value		39,300,000
Estimated useful life, CDI	10 years
Corporate value approach
Goodwill [Line Items]
Fair value of reporting unit		89,000,000
Income approach
Goodwill [Line Items]
Fair value of reporting unit		82,000,000
Market approach
Goodwill [Line Items]
Fair value of reporting unit		$ 96,000,000
Discounted cash flow approach | Pass
Goodwill [Line Items]
Discount rate		5.00%
Discounted cash flow approach | Watch, Special Mention, or Substandard
Goodwill [Line Items]
Discount rate		25.00%
Discounted cash flow approach | Nonperforming
Goodwill [Line Items]
Discount rate		50.00%
Minimum
Goodwill [Line Items]
Return on assets		0.54%
Maximum
Goodwill [Line Items]
Return on assets		1.01%
Average
Goodwill [Line Items]
Return on assets		0.73%

XML

MBS And Other Investments: Narrative-Realized Gains (Losses) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		12 Months Ended
	Sep. 30, 2013 security	Sep. 30, 2012	Sep. 30, 2013 security	Sep. 30, 2012 security	Sep. 30, 2011 security
Schedule of Available-for-sale Securities [Line Items]
Gain on sale of securities		$ 22	$ 0		$ 79
Loss on sale of securities	671		872	1,813
Held-to-maturity securities, realized loss, number of securities	18		25	28
Available-for-sale securities, realized loss, number of securities	5		5	1	2
Security owned and pledged as collateral	4,537	5,699	4,537	5,699
Previously Recognized as a Credit Loss
Schedule of Available-for-sale Securities [Line Items]
Loss on sale of securities				$ 1,811

XML

Deposits (Tables)

12 Months Ended

Sep. 30, 2013

Deposits [Abstract]

Schedule of Deposits

Deposits consisted of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Non-interest-bearing demand	$	87,657	$	75,296
NOW checking	156,100		150,139
Savings	91,349		87,493
Money market accounts	99,006		79,549
Certificates of deposit	174,150		205,449
Total	$	608,262	$	597,926

Scheduled maturities of certificates of deposit for future years

Scheduled maturities of certificates of deposit for future years ending September 30 are as follows (dollars in thousands):

2014	$	111,480
2015	29,950
2016	12,788
2017	12,030
2018	6,535
Thereafter	1,367
Total	$	174,150

Schedule of Interest Expense on Deposits

Interest expense on deposits by account type was as follows for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013		2012		2011
NOW checking	$	463	$	651	$	1,415
Savings	55		245		459
Money market accounts	246		334		435
Certificates of deposit	1,804		2,721		3,827
Total	$	2,568	$	3,951	$	6,136

XML

Mortgage Servicing Rights (Tables)

12 Months Ended

Sep. 30, 2013

Transfers and Servicing [Abstract]

Analysis of the changes in MSRs

ollowing is an analysis of the changes in MSRs for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Balance, beginning of year	$	2,011		$	2,108		$	1,929
Additions	728			698			455
Amortization	(948		)	(805		)	(681		)
Valuation allowance	—			(216		)	(434		)
Recovery of valuation allowance	475			226			839
Balance, end of year	$	2,266		$	2,011		$	2,108

XML

Premises and Equipment (Tables)

12 Months Ended

Sep. 30, 2013

Property, Plant and Equipment [Abstract]

Schedule of Premises and Equipment

Premises and equipment consisted of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Land	$	4,112	$	4,293
Buildings and improvements	17,344		17,188
Furniture and equipment	7,527		7,189
Property held for future expansion	110		110
Construction and purchases in progress	370		72
	29,463		28,852
Less accumulated depreciation	11,699		10,966
Premises and equipment, net	$	17,764	$	17,886

Minimum net rental commitments under non-cancellable leases

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, 2013 are as follows (dollars in thousands):

2014	$	183
2015	256
2016	128
2017	74
2018	74
Thereafter	166
Total minimum payments required	$	881

XML

Loans Receivable And Allowance For Loan Losses

12 Months Ended

Sep. 30, 2013

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Loans Receivable And Allowance For Loan Losses

Loans Receivable and Allowance for Loan Losses

Loans receivable and loans held for sale by portfolio segment consisted of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Mortgage loans:
One- to four-family	$	102,387	$	105,552
Multi-family	51,108		47,521
Commercial	291,297		256,254
Construction – custom and owner/builder	40,811		33,345
Construction – speculative one- to four-family	1,428		1,880
Construction – commercial	2,239		20,247
Construction – multi-family	143		345
Construction – land development	515		589
Land	31,144		39,655
Total mortgage loans	521,072		505,388
Consumer loans:
Home equity and second mortgage	33,014		32,814
Other	5,981		6,183
Total consumer loans	38,995		38,997
Commercial business loans	17,499		22,588
Total loans receivable	577,566		566,973
Less:
Undisbursed portion of construction loans in process	18,527		16,325
Deferred loan origination fees	1,710		1,770
Allowance for loan losses	11,136		11,825
	31,373		29,920
Loans receivable, net	546,193		537,053
Loans held for sale (one- to four-family)	1,911		1,427
Total loans receivable and loans held for sale, net	$	548,104	$	538,480

Certain related parties of the Company, principally Bank directors and officers, are loan customers of the Bank in the ordinary course of business.  Their loans were performing according to their repayment terms at September 30, 2013 and 2012.  Activity in related party loans during the years ended September 30, 2013 and 2012 was as follows (dollars in thousands):

	2013			2012
Balance, beginning of year	$	1,113		$	2,498
New loans or advances	276			175
Repayments and reclassifications	(294		)	(1,560		)
Balance, end of year	$	1,095		$	1,113

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 the 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 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 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 very limited basis), commercial real estate construction loans, and multi-family construction loans.  The Company is not currently originating land development loans.

Construction lending affords the Company the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending.  Construction lending, however, is generally considered to involve a higher degree of risk than one-to four family residential lending because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project.  The nature of these loans is such that they are generally more difficult to evaluate and monitor.  If the estimated cost of construction proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to complete the project.  If the estimate of value upon completion proves to be inaccurate, the Company may be confronted with a project whose value is insufficient to assure full repayment, and it 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 that the

construction loan is due.  The Company attempts to mitigate these risks by adhering to its underwriting policies, disbursement procedures, and monitoring practices.

Construction Lending – Custom and Owner/Builder:  Custom construction 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 very 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 originated loans to real estate developers for the purpose of developing residential subdivisions.  The Company is not currently originating any land development loans.

Land Lending: The Company has historically originated 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 very 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:   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 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 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 principals 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.

Allowance for Loan Losses

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):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,558	$	565		$	769	$	95	$	1,449
Multi-family	1,156		(407		)	—		—		749
Commercial	4,247		1,640			667		55		5,275
Construction – custom and owner/builder	386		(124		)	26		26		262
Construction – speculative one- to four-family	128		(32		)	—		—		96
Construction – commercial	429		(373		)	—		—		56
Construction – multi-family	—		116			116		—		—
Construction – land development	—		(129		)	17		146		—
Land	2,392		1,801			2,307		54		1,940
Consumer loans:
Home equity and second mortgage	759		202			184		5		782
Other	254		(40		)	14		—		200
Commercial business loans	516		(294		)	—		105		327
Total	$	11,825	$	2,925		$	4,100	$	486	$	11,136

The following table sets forth information for the year ended September 30, 2012 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	760	$	1,000		$	276	$	74	$	1,558
Multi-family	1,076		80			14		14		1,156
Commercial	4,035		1,427			1,215		—		4,247
Construction – custom and owner/builder	222		164			—		—		386
Construction – speculative one- to four-family	169		(42		)	—		1		128
Construction – commercial	794		257			622		—		429
Construction – multi-family	354		(780		)	24		450		—
Construction – land development	79		106			239		54		—
Land	2,795		751			1,251		97		2,392
Consumer loans:
Home equity and second mortgage	460		517			232		14		759
Other	415		(137		)	24		—		254
Commercial business loans	787		157			430		2		516
Total	$	11,946	$	3,500		$	4,327	$	706	$	11,825

The following table sets forth information for the year ended September 30, 2011 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	530	$	622		$	543	$	151	$	760
Multi-family	393		642			—		41		1,076
Commercial	3,173		804			47		105		4,035
Construction – custom and owner/builder	481		(211		)	48		—		222
Construction – speculative one- to four-family	414		(142		)	103		—		169
Construction – commercial	245		1,993			1,444		—		794
Construction – multi-family	245		1,328			1,219		—		354
Construction – land development	240		993			1,158		4		79
Land	3,709		744			1,704		46		2,795
Consumer loans:
Home equity and second mortgage	922		(354		)	150		42		460
Other	451		(8		)	30		2		415
Commercial business loans	461		347			22		1		787
Total	$	11,264	$	6,758		$	6,468	$	392	$	11,946

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, 2013 (dollars in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Mortgage loans:
One- to four-family	$	600	$	849	$	1,449	$	8,984	$	95,314	$	104,298
Multi-family	334		415		749		5,184		45,924		51,108
Commercial	1,763		3,512		5,275		19,510		271,787		291,297
Construction – custom and owner/ builder	—		262		262		—		22,788		22,788
Construction – speculative one- to four family	88		8		96		687		236		923
Construction – commercial	—		56		56		—		2,239		2,239
Construction –  multi-family	—		—		—		143		1		144
Construction – land development	—		—		—		515		—		515
Land	234		1,706		1,940		2,391		28,753		31,144
Consumer loans:
Home equity and second mortgage	57		725		782		679		32,335		33,014
Other	—		200		200		6		5,975		5,981
Commercial business loans	—		327		327		—		17,499		17,499
Total	$	3,076	$	8,060	$	11,136	$	38,099	$	522,851	$	560,950

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, 2012 (dollars in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Mortgage loans:
One- to four-family	$	678	$	880	$	1,558	$	5,282	$	101,697	$	106,979
Multi-family	711		445		1,156		6,879		40,642		47,521
Commercial	667		3,580		4,247		17,192		239,062		256,254
Construction – custom and owner/ builder	15		371		386		309		20,159		20,468
Construction – speculative one- to four family	109		19		128		1,027		495		1,522
Construction – commercial	—		429		429		—		17,157		17,157
Construction –  multi-family	—		—		—		345		—		345
Construction – land development	—		—		—		589		—		589
Land	686		1,706		2,392		8,613		31,042		39,655
Consumer loans:
Home equity and second mortgage	36		723		759		562		32,252		32,814
Other	—		254		254		7		6,176		6,183
Commercial business loans	—		516		516		—		22,588		22,588
Total	$	2,902	$	8,923	$	11,825	$	40,805	$	511,270	$	552,075

The following table presents an age analysis of past due status of loans by portfolio segment at September 30, 2013 (dollars in thousands):

	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	14	$	1,218	$	6,985	$	—	$	8,217	$	96,081	$	104,298
Multi-family	—		—		—		—		—		51,108		51,108
Commercial	—		2,537		3,435		—		5,972		285,325		291,297
Construction – custom and owner/ builder	—		—		—		—		—		22,788		22,788
Construction – speculative one- to four family	—		—		—		—		—		923		923
Construction – commercial	—		—		—		—		—		2,239		2,239
Construction –  multi-family	—		—		144		—		144		—		144
Construction – land development	—		—		515		—		515		—		515
Land	—		—		2,146		284		2,430		28,714		31,144
Consumer loans:
Home equity and second mortgage	101		20		380		152		653		32,361		33,014
Other	1		39		5		—		45		5,936		5,981
Commercial business loans	83		15		—		—		98		17,401		17,499
Total	$	199	$	3,829	$	13,610	$	436	$	18,074	$	542,876	$	560,950

__________________

(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

The following table presents an age analysis of past due status of loans by portfolio segment at September 30, 2012 (dollars in thousands):

	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	1,987	$	—	$	3,382	$	142	$	5,511	$	101,468	$	106,979
Multi-family	3,402		—		1,449		—		4,851		42,670		47,521
Commercial	1,071		—		6,049		6		7,126		249,128		256,254
Construction – custom and owner/ builder	—		—		309		—		309		20,159		20,468
Construction – speculative one- to four family	—		—		327		700		1,027		495		1,522
Construction – commercial	—		—		—		—		—		17,157		17,157
Construction –  multi-family	—		—		345		—		345		—		345
Construction – land development	—		—		589		—		589		—		589
Land	943		—		8,613		200		9,756		29,899		39,655
Consumer loans:
Home equity and second mortgage	277		14		261		150		702		32,112		32,814
Other	4		—		7		—		11		6,172		6,183
Commercial business loans	—		15		—		—		15		22,573		22,588
Total	$	7,684	$	29	$	21,331	$	1,198	$	30,242	$	521,833	$	552,075

___________________

(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 or 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

practical or desirable to defer writing off this basically worthless loan even though partial recovery may be realized in the future.

The following table lists the loan credit risk grades by portfolio segment utilized by the Company that serve as credit quality indicators at September 30, 2013 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	91,291	$	4,032	$	769	$	8,206	$	104,298
Multi-family	41,863		132		8,337		776		51,108
Commercial	262,502		3,309		12,522		12,964		291,297
Construction – custom and owner / builder	22,788		—		—		—		22,788
Construction – speculative one- to four-family	236		687		—		—		923
Construction – commercial	2,239		—		—		—		2,239
Construction – multi-family	—		—		—		144		144
Construction – land development	—		—		—		515		515
Land	20,627		5,101		1,129		4,287		31,144
Consumer loans:
Home equity and second mortgage	31,096		782		55		1,081		33,014
Other	5,937		39		—		5		5,981
Commercial business loans	17,029		366		104		—		17,499
Total	$	495,608	$	14,448	$	22,916	$	27,978	$	560,950

The following table lists the loan credit risk grades by portfolio segment utilized by the Company that serve as credit quality indicators at September 30, 2012 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	93,668	$	4,000	$	4,343	$	4,968	$	106,979
Multi-family	35,703		107		10,220		1,491		47,521
Commercial	228,036		1,722		11,515		14,981		256,254
Construction – custom and owner / builder	17,621		—		2,538		309		20,468
Construction – speculative one- to four-family	304		191		700		327		1,522
Construction – commercial	17,157		—		—		—		17,157
Construction – multi-family	—		—		—		345		345
Construction – land development	—		—		—		589		589
Land	22,700		5,788		2,554		8,613		39,655
Consumer loans:
Home equity and second mortgage	29,777		1,488		788		761		32,814
Other	6,136		40		—		7		6,183
Commercial business loans	20,777		834		286		691		22,588
Total	$	471,879	$	14,170	$	32,944	$	33,082	$	552,075

Impaired Loans

A loan is 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.  Impaired loans are measured based on the estimated fair value of the collateral less estimated cost to sell (if applicable) if the loan is considered collateral dependent.  Impaired loans that are not considered to be collateral dependent are measured based on the present value of expected future cash flows.

The categories of non-accrual loans and impaired loans overlap, although they are not coextensive.  The Company 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 estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due.

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 (dollars in thousands):

	September 30, 2013						For the Year Ended September 30, 2013
	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
Multi-family	—		982		—		473		3		3
Commercial	4,879		8,005		—		8,781		322		267
Construction – custom and owner / builder	—		—		—		97		—		—
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
Consumer loans:
Home equity and second mortgage	380		556		—		266		—		—
Other	6		6		—		8		—		—
Commercial business loans	—		33		—		—		—		—
Subtotal	12,453		21,377		—		16,697		352		291
With an allowance recorded:
Mortgage loans:
One- to four-family	3,642		3,726		600		4,397		91		68
Multi-family	5,184		5,184		334		5,960		301		230
Commercial	14,631		15,297		1,763		9,052		526		420
Construction – custom and owner / builder	—		—		—		60		—		—
Construction – speculative one- to four-family	687		687		88		695		29		16
Construction – multi-family	—		—		—		—		—		—
Construction - land development	—		—		—		—		—		—
Land	1,203		1,226		234		1,962		27		27
Consumer loans:
Home equity and second mortgage	299		299		57		352		16		12
Commercial business loans	—		—		—		—		—		—
Subtotal	25,646		26,419		3,076		22,478		990		773
Total
Mortgage loans:
One- to four-family	8,984		9,501		600		7,058		109		81
Multi-family	5,184		6,166		334		6,433		304		233
Commercial	19,510		23,302		1,763		17,833		848		687
Construction – custom and owner / builder	—		—		—		157		—		—
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
Consumer loans:
Home equity and second mortgage	679		855		57		618		16		12
Other	6		6		—		8		—		—
Commercial business loans	—		33		—		—		—		—
Total	$	38,099	$	47,796	$	3,076	$	39,175	$	1,342	$	1,064

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2012 (dollars in thousands):

	September 30, 2012						For the Year Ended September 30, 2012
	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	$	1,510	$	1,605	$	—	$	1,838	$	20	$	16
Multi-family	—		982		—		—		1		1
Commercial	7,596		8,664		—		14,491		543		348
Construction – custom and owner / builder	208		208		—		209		—		—
Construction – speculative one- to four-family	327		327		—		65		—		—
Construction – commercial	—		2,066				—		14		14
Construction – multi-family	345		810		—		338		—		—
Construction – land development	589		3,497		—		1,089		14		14
Land	5,989		8,247		—		6,279		28		16
Consumer loans:					—
Home equity and second mortgage	261		383		—		482		—		—
Other	7		7		—		5		—		—
Commercial business loans	—		166		—		32		2		2
Subtotal	16,832		26,962		—		24,828		622		411
With an allowance recorded:
Mortgage loans:
One- to four-family	3,772		3,772		678		2,520		81		62
Multi-family	6,879		6,879		711		6,618		294		189
Commercial	9,596		9,596		667		5,043		60		39
Construction – custom and owner / builder	101		101		15		106		—		—
Construction – speculative one- to four-family	700		700		109		700		29		20
Construction – commercial	—		—		—		3,248		230		146
Construction – multi-family	—		—		—		74		—		—
Land	2,624		2,811		686		3,307		37		36
Consumer loans:
Home equity and second mortgage	301		301		36		515		31		23
Commercial business loans	—		—		—		55		—		—
Subtotal	23,973		24,160		2,902		22,186		762		515
Total
Mortgage loans:
One- to four-family	5,282		5,377		678		4,358		101		78
Multi-family	6,879		7,861		711		6,618		295		190
Commercial	17,192		18,260		667		19,534		603		387
Construction – custom and owner / builder	309		309		15		315		—		—
Construction – speculative one- to four-family	1,027		1,027		109		765		29		20
Construction – commercial	—		2,066		—		3,248		244		160
Construction – multi-family	345		810		—		412		—		—
Construction – land development	589		3,497		—		1,089		14		14
Land	8,613		11,058		686		9,586		65		52
Consumer loans:
Home equity and second mortgage	562		684		36		997		31		23
Other	7		7		—		5		—		—
Commercial business loans	—		166		—		87		2		2
Total	$	40,805	$	51,122	$	2,902	$	47,014	$	1,384	$	926

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2011 (dollars in thousands):

	September 30, 2011						For the Year Ended September 30, 2011
	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	$	2,092	$	2,387	$	—	$	2,908	$	30	$	22
Multi-family	—		982		—		681		—		—
Commercial	18,137		19,279		—		14,623		1,060		573
Construction – custom and owner / builder	209		209		—		303		7		1
Construction – speculative one- to four-family	—		—		—		502		7		7
Construction – multi-family	632		1,135		—		1,287		4		4
Construction – land development	1,882		7,179		—		2,920		5		—
Land	8,198		11,533		—		7,883		69		42
Consumer loans:
Home equity and second mortgage	669		719		—		430		26		16
Other	—		—		—		13		—		—
Commercial business loans	44		65		—		44		2		2
Subtotal	31,863		43,488		—		31,594		1,210		667
With an allowance recorded:
Mortgage loans:
One- to four-family	1,609		1,609		45		768		47		38
Multi-family	5,482		5,482		632		4,798		298		222
Commercial	1,185		1,185		255		1,409		50		118
Construction – custom and owner / builder	111		111		11		45		2		2
Construction – speculative one- to four-family	700		700		37		1,042		50		37
Construction - commercial	5,435		6,879		738		3,537		273		123
Construction – multi-family	—		—		—		65		—		—
Land	1,799		1,821		560		2,946		114		83
Consumer loans:
Home equity and second mortgage	345		345		10		425		10		9
Commercial business loans	1		1		1		1		—		—
Subtotal	16,667		18,133		2,289		15,036		844		632
Total
Mortgage loans:
One- to four-family	3,701		3,996		45		3,676		77		60
Multi-family	5,482		6,464		632		5,479		298		222
Commercial	19,322		20,464		255		16,032		1,110		691
Construction – custom and owner / builder	320		320		11		348		9		3
Construction – speculative one- to four-family	700		700		37		1,544		57		44
Construction - commercial	5,435		6,879		738		3,537		273		123
Construction – multi-family	632		1,135		—		1,352		4		4
Construction – land development	1,882		7,179		—		2,920		5		—
Land	9,997		13,354		560		10,829		183		125
Consumer loans:
Home equity and second mortgage	1,014		1,064		10		855		36		25
Other	1		1		—		14		—		—
Commercial business loans	44		65		1		44		2		2
Total	$	48,530	$	61,621	$	2,289	$	46,630	$	2,054	$	1,299

Troubled debt restructured loans are loans for which the Company, for economic or legal reasons related to the borrower’s financial condition, has granted a significant concession to the borrower that it would otherwise not consider.  The loan terms which have been modified or restructured due to a borrower’s financial difficulty, 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; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizing, extensions, deferrals and renewals.  Troubled debt restructured loans are considered impaired loans and are individually evaluated for impairment.  Troubled debt restructured loans can be classified as either accrual or non-accrual. The Company had $22.6 million in troubled debt restructured loans included in impaired loans at September 30, 2013 and had $1,000 in commitments to lend additional funds on these loans.  The Company had $23.5 million in troubled debt restructured loans included in impaired loans at September 30, 2012 and had $1,000 in commitments to lend additional funds on these loans. The allowance for loan losses allocated to troubled debt restructured loans at September 30, 2013 and 2012 was $2,371,000 and $1,894,000, respectively.

The following table sets forth information with respect to the Company’s troubled debt restructured loans by interest accrual status as of September 30, 2013 and 2012 (dollars in thousands):

	2013
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,999	$	198	$	2,197
Multi-family	5,184		—		5,184
Commercial	10,160		1,574		11,734
Construction – speculative one- to four-family	687		—		687
Construction – land development	—		515		515
Land	244		1,564		1,808
Consumer loans:
Home equity and second mortgage	299		180		479
Total	$	18,573	$	4,031	$	22,604

	2012
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,900	$	—	$	1,900
Multi-family	5,430		—		5,430
Commercial	5,079		4,862		9,941
Construction – speculative one- to four-family	700		—		700
Construction – land development	—		526		526
Land	—		4,445		4,445
Consumer loans:
Home equity and second mortgage	301		261		562
Total	$	13,410	$	10,094	$	23,504

The following table sets forth information with respect to the Company’s troubled debt restructured loans by portfolio segment that occurred during the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

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 a reduction in the stated interest rate.

2012	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
One-to four-family (1)	1	$	373	$	373	$	372
Commercial (1)	1	2,718		2,718		2,657
Land (2)	1	249		249		233
Total	3	$	3,340	$	3,340	$	3,262

_______________________________

(1) Modifications were a result of a combination of changes (i.e. a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(2)     Modification was a result of a reduction in the stated interest rate.

2011	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
One-to four-family (1)	4	$	1,543	$	1,543	$	1,543
Commercial (2)	2	3,394		3,717		3,145
Construction - commercial (3)	2	6,800		5,451		5,435
Land (4)	2	535		535		526
Home equity (3)	2	303		303		303
Total	12	$	12,575	$	11,549	$	10,952

(1) $1.01 million was a result of a reduction in stated interest rate and $538,000 was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(2) $925,000 was a result of a reduction in stated interest rate and $2.79 million was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(3) Modifications were a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

(4) $147,000 was a result of modifying the maturity date, timing of payments or frequency of payments and $388,000 was a result of a combination of changes (i.e., a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals).

One commercial real estate troubled debt restructured loan with a balance of $919,000 and one land troubled debt restructured loan with a balance of $147,000 were modified during the year ended September 30, 2011 and subsequently defaulted.  No troubled debt restructured loans were recorded that subsequently defaulted during the years ended September 30, 2013 and 2012.

XML

MBS And Other Investments: Schedule of significant inputs utilized to measure management's estimate of the credit loss component on OTTI securities (Details)	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Minimum
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
OTTI significant inputs - Constant prepayment rate	6.00%	6.00%	6.00%
OTTI significant inputs - Collateral default rate	0.73%	0.06%	0.43%
OTTI significant inputs - Loss severity rate	20.48%	0.52%	11.93%
Maximum
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
OTTI significant inputs - Constant prepayment rate	15.00%	15.00%	15.00%
OTTI significant inputs - Collateral default rate	22.53%	28.40%	24.23%
OTTI significant inputs - Loss severity rate	75.02%	76.03%	64.54%
Weighted Average
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
OTTI significant inputs - Constant prepayment rate	12.33%	8.77%	10.71%
OTTI significant inputs - Collateral default rate	7.84%	8.74%	8.03%
OTTI significant inputs - Loss severity rate	52.69%	48.28%	39.22%

XML

Deposits (Details) (USD $)	Sep. 30, 2013	Sep. 30, 2012
Deposits [Abstract]
Time Deposits, $100,000 or More	$ 63,958,000	$ 77,540,000
Brokered deposits	$ 1,191,000	$ 0

XML

Fair Value Measurement

12 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurement

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, 2013 and 2012.  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.

Accounting guidance regarding fair value measurements defines fair value and establishes a framework for measuring fair value in accordance with GAAP.  Fair value is the exchange 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 following definitions describe the levels of inputs that may be used to measure fair value:

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 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.

The Company used the following methods and significant assumptions to estimate fair value on a recurring basis:

MBS and Other Investments Available for Sale

The estimated fair value of MBS and other investments are based upon the assumptions market participants would use in pricing the security.  Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2).

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a recurring basis at September 30, 2013 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for Sale Securities
MBS:
U.S. government agencies	$	—	$	2,229	$	—	$	2,229
Private label residential	—		914		—		914
Mutual funds	958		—		—		958
Total	$	958	$	3,143	$	—	$	4,101

There were no transfers among Level 1, Level 2 and Level 3 during the year ended September 30, 2013.

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a recurring basis at September 30, 2012 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for Sale Securities
MBS:
U.S. government agencies	$	—	$	2,975	$	—	$	2,975
Private label residential	—		957		—		957
Mutual funds	1,013		—		—		1,013
Total	$	1,013	$	3,932	$	—	$	4,945

There were no transfers among Level 1, Level 2 and Level 3 during the year ended September 30, 2012.

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

The Company uses the following methods and significant assumptions to estimate fair value on a non-recurring basis:

Impaired Loans: A loan is considered to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  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.  The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis.  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.

MBS and Other Investments Held to Maturity: The estimated fair value of MBS and other investments held to maturity are based upon the assumptions market participants would use in pricing the 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).

MSRs: The fair value of the MSRs was determined using a third-party model, which incorporates the expected life of the underlying loans, estimated cost to service the loans, servicing fees received and other factors.  The estimated fair value is calculated by stratifying the MSRs based on the predominant risk characteristics that include the underlying loan’s interest rate, cash flows of the loan, origination date and term (Level 3).

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2013, and the total losses resulting from these estimated fair value adjustments for the year ended September 30, 2013 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total Losses
Impaired loans:
Mortgage Loans;
One-to four-family	$	—	$	—	$	3,042	$	769
Multi-family	—		—		4,850		—
Commercial	—		—		12,868		667
Construction – speculative one-to four-family	—		—		599		—
Land	—		—		969		2,307
Consumer loans:
Home equity and second mortgage	—		—		242		184
Total impaired loans (1)	—		—		22,570		3,927
MBS – held to maturity (2):
Private label residential	—		83		—		45
OREO and other repossessed assets (3)	—		—		11,720		2,064
Total	$	—	$	83	$	34,290	$	6,036

_______________________

(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.

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a non-recurring basis at September 30, 2012 and the total losses resulting from these estimated fair value adjustments for the year ended September 30, 2012 (dollars in thousands):

	Estimated Fair Value
	Level 1		Level 2		Level 3		Total Losses
Impaired loans:
Mortgage Loans;
One-to four-family	$	—	$	—	$	3,094	$	276
Multi-family	—		—		6,168		14
Commercial	—		—		8,929		1,215
Construction – custom and owner / builder	—		—		86		—
Construction – speculative one-to four-family	—		—		591		—
Land	—		—		1,938		1,251
Consumer loans:
Home equity and second mortgage	—		—		265		232
Total impaired loans (1)	—		—		21,071		2,988
MBS – held to maturity (2):
Private label residential	—		231		—		164
OREO and other repossessed assets (3)	—		—		13,302		947
MSRs (4)	—		—		2,011		—
Total	$	—	$	231	$	36,384	$	4,099

_______________________

(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.

(4) The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights exceed their estimated fair value.  Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that estimated fair value is less than the recorded amount.

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, 2013 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	22,570	Market approach	Appraised value less selling costs	NA
OREO and other repossessed assets	$	11,720	Market approach	Lower of appraised value or listing price less selling costs	NA

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 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.

MBS and other investments:  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, 2013, 2,028 shares of FHLB stock was redeemed from the Company at par value. Accordingly, par value is deemed to be a reasonable estimate of fair value.

Loans Receivable, Net:  At September 30, 2013 the fair value of loans was estimated using a discounted cash flow analysis and comparable market statistics. A discounted cash flow analysis was used to estimate the fair value of loans graded pass. The fair value of loans graded watch, special mention and substandard was estimated using comparable market statistics that approximated sales of similarly rated loans. At September 30, 2012, the fair value of loans was estimated using comparable market statistics that approximated sales of similar types of loans.

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 included at 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.

Repurchase Agreements:  The recorded value of repurchase agreements approximates the estimated fair value due to the short-term nature of the borrowings.

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.

The estimated fair values of financial instruments were as follows as of September 30, 2013 (dollars in thousands):

			Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1			Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	94,496	$	94,496	$	94,496		$	—	$	—
CDs held for investment	30,042		30,042		30,042			—		—
MBS and other investments	6,838		7,634		973		6,676	6,661		—
FHLB stock	5,452		5,452		5,452			—		—
Loans receivable, net	546,193		514,616		—			—		514,616
Loans held for sale	1,911		1,973		1,973			—		—
Accrued interest receivable	1,972		1,972		1,972			—		—
Financial Liabilities
Deposits:
Non-interest bearing demand	$	87,657	$	87,657	$	87,657		$	—	$	—
Interest-bearing	520,605		522,021		346,455			—		175,566
Total deposits	608,262		609,678		434,112			—		175,566
FHLB advances	45,000		48,445		—			48,445		—
Accrued interest payable	320		320		320			—		—

The estimated fair values of financial instruments were as follows as of September 30, 2012 (dollars in thousands):

			Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1			Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	96,668	$	96,668	$	96,668		$	—	$	—
CDs held for investment	23,490		23,490		23,490			—		—
MBS and other investments	8,284		8,577		1,043		6,676	7,534		—
FHLB stock	5,655		5,655		5,655			—		—
Loans receivable, net	537,053		502,147		—			—		502,147
Loans held for sale	1,427		1,504		1,504			—		—
Accrued interest receivable	2,183		2,183		2,183			—		—
Financial Liabilities
Deposits:
Non-interest bearing demand	$	75,296	$	75,296	$	75,296		$	—	$	—
Interest-bearing	522,630		524,823		317,181			—		207,642
Total deposits	597,926		600,119		392,477			—		207,642
FHLB advances	45,000		51,115		—			51,115		—
Repurchase agreements	855		855		855			—		—
Accrued interest payable	404		404		404			—		—

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.  As a result, the estimated fair value of the Company’s financial instruments will change when interest rate levels change, and that change may either be favorable or unfavorable to the Company.  Management attempts to match maturities of assets and liabilities to the extent believed necessary to appropriately manage interest rate risk.  However, borrowers with fixed interest rate obligations are less likely to prepay in a rising interest rate environment and more likely to prepay in a falling interest rate environment.  Conversely, depositors who are receiving fixed interest rates are more likely to withdraw funds before maturity in a rising interest rate environment and less likely to do so in a falling interest rate environment.  Management monitors interest rates and maturities of assets and liabilities, and attempts to manage interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

XML

Federal Income Taxes (Tables)

12 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense (Benefit)

The components of the provision for federal income taxes for the years ended September 30, 2013, 2012 and 2011 were as follows (dollars in thousands):

	2013		2012		2011
Current	$	1,737	$	1,627	$	148
Deferred	777		154		156
Provision	$	2,514	$	1,781	$	304

Schedule of Deferred Tax Assets and Liabilities

The components of the Company’s deferred tax assets and liabilities at September 30, 2013 and 2012 were as follows (dollars in thousands):

	2013		2012
Deferred Tax Assets
Accrued interest on loans	$	83	$	278
Unearned ESOP shares	282		301
Allowance for loan losses	4,018		4,293
Allowance for OREO losses	794		516
CDI	259		264
Unearned MRDP shares	8		25
Net unrealized securities losses	139		192
Capital loss carry-forward	—		677
OTTI credit impairment	198		194
Other	166		156
Total deferred tax assets	5,947		6,896

	2013		2012
Deferred Tax Liabilities
FHLB stock dividends	$	840	$	874
Depreciation	147		294
Goodwill	1,153		1,024
MSR's	770		683
Prepaid expenses	233		172
Other	11		13
Total deferred tax liabilities	3,154		3,060
Valuation allowance for capital loss on sale of securities	—		(213		)
Net deferred tax assets	$	2,793	$	3,623

Schedule of Effective Income Tax Rate Reconciliation

The provision for federal income taxes for the years ended September 30, 2013, 2012 and 2011 differs from that computed at the statutory corporate tax rate as follows (dollars in thousands):

	2013			2012			2011
Expected tax provision at statutory rate	$	2,472		$	2,166		$	474
BOLI income	(196		)	(206		)	(175		)
Change in estimated utilization of net capital loss carry-forward	281			(208		)	—
Dividends on ESOP	(24		)	—			—
Other - net	(19		)	29			5
Provision forfederal income taxes	$	2,514		$	1,781		$	304

During the year ended September 30, 2012, the Company adjusted its valuation allowance for deferred taxes to reflect anticipated tax strategies to utilize a capital loss carry-forward related to a previous redemption in kind of investment securities. 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.

XML

Stock Compensation Plans (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 1998
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted during period	29,000,000	76,000,000
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized	1,622,500
Award vesting percentage	20.00%
Award vesting period	5 years
Number of shares available for grant (shares)	157,338
Stock options granted during period	29,000	76,000	0
Stock options, aggregate grant date fair value	$ 69	$ 150
Stock options vested during period	17,300	5,000	5,200
Stock options vested during period, aggregate grant date fair value	32	6	7
Number of unvested stock options	91,000	79,300
Unvested stock awards, aggregate grant date fair value	189	152
Unvested stock options, aggregate intrinsic value	330
Stock options exercised during period	0	0	0
Stock options, outstanding, aggregate intrinsic value	443	88
Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized				529,000
Award vesting percentage	20.00%
Award vesting period	5 years
Number of shares available for grant (shares)	0
Unvested stock awards, aggregate grant date fair value	$ 23
Stock awards, granted during period	0	0	0
Number of unvested stock awards (shares)	3,254,000	9,461,000

XML

OREO and Other Repossessed Assets

12 Months Ended

Sep. 30, 2013

Other Real Estate, Foreclosed Assets, and Repossessed Assets [Abstract]

OREO and Other Repossessed Assets

OREO and Other Repossessed Assets

The following table presents the activity related to OREO and other repossessed assets for the years ended September 30, 2013 and 2012 (dollars in thousands):

	2013 Amount			Number		2012 Amount			Number
Balance, beginning of year	$	13,302		56		$	10,811		50
Additions to OREO and other repossessed assets	6,375			25		9,443			44
Capitalized improvements	146			—		119			—
Lower of cost or estimated fair value losses	(2,064		)	—		(1,048		)	—
Disposition of OREO and other repossessed assets	(6,039		)	(34	)	(6,023		)	(38	)
Balance, end of year	$	11,720		47		$	13,302		56

At September 30, 2013, OREO and other repossessed assets consisted of 47 properties in Washington, with balances ranging from $4,000 to $1,301,000.  At September 30, 2012, OREO consisted of 56 properties in Washington, with balances ranging from $4,000 to $2,805,000.  The Company recorded net gains on sale of OREO and other repossessed assets of $264,000 for the year ended September 30, 2013. The Company recorded net losses on sales of OREO and other repossessed assets for the year ended September 30, 2012 of $(373,000) and net gains on sales of OREO and other repossessed asset of $548,000 for the year ended September 30, 2011. Gains and losses on sales of OREO and other repossessed assets are included/netted in the OREO and other repossessed assets, net category in non-interest expense in the accompanying consolidated statements of income.

XML

Deposits: Schedule of Interest Expense on Deposits (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Deposits [Abstract]
NOW checking	$ 463	$ 651	$ 1,415
Savings	55	245	459
Money market accounts	246	334	435
Certificates of deposit	1,804	2,721	3,827
Total	$ 2,568	$ 3,951	$ 6,136

XML

Regulatory Matters: Schedule of Compliance with Regulatory Capital Requirements for Mortgage Companies (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Timberland Bancorp
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Tier 1 leverage capital, Actual Amount	$ 85,158	$ 85,455
Tier 1 leverage capital, Actual Ratio	11.50%	11.70%
Tier 1 leverage capital, Capital Adequacy Purposes Amount	29,677	29,313
Tier 1 leverage capital, Capital Adequacy Purposes Ratio	4.00%	4.00%
Tier 1 risk adjusted capital, Actual Amount	85,158	85,455
Tier 1 risk adjusted capital, Actual Ratio	15.30%	15.50%
Tier 1 risk adjusted capital, Capital Adequacy Purposes Amount	22,259	22,042
Tier 1 risk adjusted capital, Capital Adequacy Purposes Ratio	4.00%	4.00%
Tier 1 risk based capital, Actual Amount	92,168	92,406
Tier 1 risk based capital, Actual Ratio	16.60%	16.80%
Total risk based capital, Capital Adequacy Purposes Amount	44,518	44,084
Total risk based capital, Capital Adequacy Purposes Ratio	8.00%	8.00%
Timberland Bank
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Tier 1 leverage capital, Actual Amount	82,265	79,911
Tier 1 leverage capital, Actual Ratio	11.10%	10.90%
Tier 1 leverage capital, Capital Adequacy Purposes Amount	29,662	73,013
Tier 1 leverage capital, Capital Adequacy Purposes Ratio	4.00%	10.00%
Tier 1 leverage capital, To be Well Capitalized Under Prompt Corrective Action Provisions Amount	37,078	73,013
Tier 1 leverage capital, To be Well Capitalized Under Prompt Corrective Action Provisions Ratio	5.00%	10.00%
Tier 1 risk adjusted capital, Actual Amount	82,265	79,911
Tier 1 risk adjusted capital, Actual Ratio	14.80%	14.50%
Tier 1 risk adjusted capital, Capital Adequacy Purposes Amount	22,255	33,036
Tier 1 risk adjusted capital, Capital Adequacy Purposes Ratio	4.00%	6.00%
Tier 1 risk adjusted capital, To be Well Capitalized Under Prompt Corrective Action Provisions Amount	33,382	33,036
Tier 1 risk adjusted capital, To be Well Capitalized Under Prompt Corrective Action Provisions Ratio	6.00%	6.00%
Tier 1 risk based capital, Actual Amount	89,273	86,856
Tier 1 risk based capital, Actual Ratio	16.10%	15.80%
Total risk based capital, Capital Adequacy Purposes Amount	44,509	55,059
Total risk based capital, Capital Adequacy Purposes Ratio	8.00%	10.00%
Total risk based capital, To be Well Capitalized Under Prompt Corrective Action Provisions Amount	$ 55,636	$ 55,059
Total risk based capital, To be Well Capitalized Under Prompt Corrective Action Provisions Ratio	10.00%	10.00%

XML

Loans Receivable And Allowance For Loan Losses: Impaired Financing Receivables (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Recorded Investment
With no related allowance recorded	$ 12,453	$ 16,832	$ 31,863
With an allowance recorded	25,646	23,973	16,667
Total	38,099	40,805	48,530
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	21,377	26,962	43,488
With an allowance recorded	26,419	24,160	18,133
Total	47,796	51,122	61,621
Related Allowance	(3,076)	(2,902)	(2,289)
YTD Average Recorded Investment
With no related allowance recorded	16,697	24,828	31,594
With an allowance recorded	22,478	22,186	15,036
Total	39,175	47,014	46,630
YTD Interest Income Recognized
With no related allowance recorded	352	622	1,210
With an allowance recorded	990	762	844
Total	1,342	1,384	2,054
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	291	411	667
With an allowance recorded	773	515	632
Total	1,064	926	1,299
Mortgage loans, one-to-four family
Recorded Investment
With no related allowance recorded	5,342	1,510	2,092
With an allowance recorded	3,642	3,772	1,609
Total	8,984	5,282	3,701
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	5,775	1,605	2,387
With an allowance recorded	3,726	3,772	1,609
Total	9,501	5,377	3,996
Related Allowance	(600)	(678)	(45)
YTD Average Recorded Investment
With no related allowance recorded	2,661	1,838	2,908
With an allowance recorded	4,397	2,520	768
Total	7,058	4,358	3,676
YTD Interest Income Recognized
With no related allowance recorded	18	20	30
With an allowance recorded	91	81	47
Total	109	101	77
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	13	16	22
With an allowance recorded	68	62	38
Total	81	78	60
Mortgage loans, multi-family
Recorded Investment
With no related allowance recorded	0	0	0
With an allowance recorded	5,184	6,879	5,482
Total	5,184	6,879	5,482
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	982	982	982
With an allowance recorded	5,184	6,879	5,482
Total	6,166	7,861	6,464
Related Allowance	(334)	(711)	(632)
YTD Average Recorded Investment
With no related allowance recorded	473	0	681
With an allowance recorded	5,960	6,618	4,798
Total	6,433	6,618	5,479
YTD Interest Income Recognized
With no related allowance recorded	3	1	0
With an allowance recorded	301	294	298
Total	304	295	298
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	3	1	0
With an allowance recorded	230	189	222
Total	233	190	222
Mortgage loans, commercial
Recorded Investment
With no related allowance recorded	4,879	7,596	18,137
With an allowance recorded	14,631	9,596	1,185
Total	19,510	17,192	19,322
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	8,005	8,664	19,279
With an allowance recorded	15,297	9,596	1,185
Total	23,302	18,260	20,464
Related Allowance	(1,763)	(667)	(255)
YTD Average Recorded Investment
With no related allowance recorded	8,781	14,491	14,623
With an allowance recorded	9,052	5,043	1,409
Total	17,833	19,534	16,032
YTD Interest Income Recognized
With no related allowance recorded	322	543	1,060
With an allowance recorded	526	60	50
Total	848	603	1,110
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	267	348	573
With an allowance recorded	420	39	118
Total	687	387	691
Mortgage loans, construction - custom and owner/builder
Recorded Investment
With no related allowance recorded	0	208	209
With an allowance recorded	0	101	111
Total	0	309	320
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	0	208	209
With an allowance recorded	0	101	111
Total	0	309	320
Related Allowance	0	(15)	(11)
YTD Average Recorded Investment
With no related allowance recorded	97	209	303
With an allowance recorded	60	106	45
Total	157	315	348
YTD Interest Income Recognized
With no related allowance recorded	0	0	7
With an allowance recorded	0	0	2
Total	0	0	9
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	0	0	1
With an allowance recorded	0	0	2
Total	0	0	3
Mortgage loans, construction - speculative one-to-four family
Recorded Investment
With no related allowance recorded	0	327	0
With an allowance recorded	687	700	700
Total	687	1,027	700
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	0	327	0
With an allowance recorded	687	700	700
Total	687	1,027	700
Related Allowance	(88)	(109)	(37)
YTD Average Recorded Investment
With no related allowance recorded	65	65	502
With an allowance recorded	695	700	1,042
Total	760	765	1,544
YTD Interest Income Recognized
With no related allowance recorded	0	0	7
With an allowance recorded	29	29	50
Total	29	29	57
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	0	0	7
With an allowance recorded	16	20	37
Total	16	20	44
Construction - commercial
Recorded Investment
With no related allowance recorded		0
With an allowance recorded		0	5,435
Total		0	5,435
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded		2,066
With an allowance recorded		0	6,879
Total		2,066	6,879
Related Allowance		0	(738)
YTD Average Recorded Investment
With no related allowance recorded		0
With an allowance recorded		3,248	3,537
Total		3,248	3,537
YTD Interest Income Recognized
With no related allowance recorded		14
With an allowance recorded		230	273
Total		244	273
YTD Cash Basis Interest Income Recognized
With no related allowance recorded		14
With an allowance recorded		146	123
Total		160	123
Mortgage loans, construction - multi-family
Recorded Investment
With no related allowance recorded	143	345	632
With an allowance recorded	0	0	0
Total	143	345	632
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	608	810	1,135
With an allowance recorded	0	0	0
Total	608	810	1,135
Related Allowance	0	0	0
YTD Average Recorded Investment
With no related allowance recorded	293	338	1,287
With an allowance recorded	0	74	65
Total	293	412	1,352
YTD Interest Income Recognized
With no related allowance recorded	0	0	4
With an allowance recorded	0	0	0
Total	0	0	4
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	0	0	4
With an allowance recorded	0	0	0
Total	0	0	4
Mortgage loans, construction - land development
Recorded Investment
With no related allowance recorded	515	589	1,882
With an allowance recorded	0
Total	515	589	1,882
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	3,279	3,497	7,179
With an allowance recorded	0
Total	3,279	3,497	7,179
Related Allowance	0	0	0
YTD Average Recorded Investment
With no related allowance recorded	534	1,089	2,920
With an allowance recorded	0
Total	534	1,089	2,920
YTD Interest Income Recognized
With no related allowance recorded	0	14	5
With an allowance recorded	0
Total	0	14	5
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	0	14	0
With an allowance recorded	0
Total	0	14	0
Mortgage loans, land
Recorded Investment
With no related allowance recorded	1,188	5,989	8,198
With an allowance recorded	1,203	2,624	1,799
Total	2,391	8,613	9,997
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	2,133	8,247	11,533
With an allowance recorded	1,226	2,811	1,821
Total	3,359	11,058	13,354
Related Allowance	(234)	(686)	(560)
YTD Average Recorded Investment
With no related allowance recorded	3,519	6,279	7,883
With an allowance recorded	1,962	3,307	2,946
Total	5,481	9,586	10,829
YTD Interest Income Recognized
With no related allowance recorded	9	28	69
With an allowance recorded	27	37	114
Total	36	65	183
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	8	16	42
With an allowance recorded	27	36	83
Total	35	52	125
Consumer loans, home equity and second mortgage
Recorded Investment
With no related allowance recorded	380	261	669
With an allowance recorded	299	301	345
Total	679	562	1,014
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	556	383	719
With an allowance recorded	299	301	345
Total	855	684	1,064
Related Allowance	(57)	(36)	(10)
YTD Average Recorded Investment
With no related allowance recorded	266	482	430
With an allowance recorded	352	515	425
Total	618	997	855
YTD Interest Income Recognized
With no related allowance recorded	0	0	26
With an allowance recorded	16	31	10
Total	16	31	36
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	0	0	16
With an allowance recorded	12	23	9
Total	12	23	25
Consumer loans, other
Recorded Investment
With no related allowance recorded	6	7	0
Total	6	7	1
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	6	7	0
Total	6	7	1
Related Allowance	0	0	0
YTD Average Recorded Investment
With no related allowance recorded	8	5	13
Total	8	5	14
YTD Interest Income Recognized
With no related allowance recorded	0	0	0
Total	0	0	0
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	0	0	0
Total	0	0	0
Commercial business loans
Recorded Investment
With no related allowance recorded	0	0	44
With an allowance recorded	0	0	1
Total	0	0	44
Unpaid Principal Balance (Loan Balance Plus Charge Off)
With no related allowance recorded	33	166	65
With an allowance recorded	0	0	1
Total	33	166	65
Related Allowance	0	0	(1)
YTD Average Recorded Investment
With no related allowance recorded	0	32	44
With an allowance recorded	0	55	1
Total	0	87	44
YTD Interest Income Recognized
With no related allowance recorded	0	2	2
With an allowance recorded	0	0	0
Total	0	2	2
YTD Cash Basis Interest Income Recognized
With no related allowance recorded	0	2	2
With an allowance recorded	0	0	0
Total	$ 0	$ 2	$ 2

XML

Restricted Assets

12 Months Ended

Sep. 30, 2013

Cash and Cash Equivalents [Abstract]

Restricted Assets

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, 2013 and 2012 were approximately $840,000 and $874,000, respectively.

XML

Timberland Bancorp, inc. and Subsidiary Condensed Consolidated Statements of Shareholders' Equity (Parentheticals) (USD $)	12 Months Ended
	Sep. 30, 2013
Preferred Stock
Preferred stock, dividend rate (percent)	5.00%
Common Stock
Common stock dividends (in dollars per share)	$ 0.09

XML

Deposits: Scheduled maturities of certificates of deposit for future years (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013
Deposits [Abstract]
2014	$ 111,480
2015	29,950
2016	12,788
2017	12,030
2018	6,535
Thereafter	1,367
Total	$ 174,150

XML

Summary Of Significant Accounting Policies Summary of Significant Accounting Policies: TARP and CPP (Details) (USD $)			0 Months Ended	12 Months Ended		0 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 23, 2008 Fixed Rate Cumulative Perpetual Preferred Stock, Series A	Sep. 30, 2013 Fixed Rate Cumulative Perpetual Preferred Stock, Series A	Nov. 13, 2012 Fixed Rate Cumulative Perpetual Preferred Stock, Series A	Nov. 19, 2013 Fixed Rate Cumulative Perpetual Preferred Stock, Series A Subsequent Event	Dec. 23, 2008 Fixed Rate Cumulative Perpetual Preferred Stock, Series A Dividend rate, term 1	Dec. 23, 2008 Fixed Rate Cumulative Perpetual Preferred Stock, Series A Dividend rate, term 2	Jun. 12, 2013 Common Stock	Dec. 23, 2008 Common Stock
Class of Stock [Line Items]
Proceeds from preferred stock sold under Capital Purchase Program under TARP			$ 16,640,000
Preferred stock sold under Capital Purchase program under TARP			16,641
Preferred stock per share liquidation value (in dollars per share)	$ 1,000	$ 1,000	$ 1,000
Warrant issued to purchase common stock (in shares)									370,899	370,899
Exercise price of warrant (in dollars per share)										6.73
Preferred stock, dividend rate (percent)							5.00%	9.00%
Preferred stock outstanding under Capital Purchase program under TARP	12,065	16,641			16,641
Preferred shares repurchased and retired (in shares)				4,576		12,065
Preferred shares repurchased and retired, amount				4,320,000
Preferred shares repurchased and retired, discount from par value				$ 255,000

XML

Selected Quarterly Financial Data (unaudited): Selected financial data (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Quarterly Financial Information Disclosure [Abstract]
Interest and dividend income	$ 7,521	$ 7,575	$ 7,552	$ 7,589	$ 7,750	$ 8,019	$ 7,804	$ 8,032
Interest expense	(1,052)	(1,076)	(1,111)	(1,200)	(1,294)	(1,391)	(1,531)	(1,731)	(4,439)	(5,947)	(8,533)
Net interest income	6,469	6,499	6,441	6,389	6,456	6,628	6,273	6,301	25,798	25,658	25,433
Provision for loan losses	(165)	(1,385)	(1,175)	(200)	(900)	(900)	(1,050)	(650)	(2,925)	(3,500)	(6,758)
Non-interest income	2,397	2,372	2,778	2,715	2,503	2,341	2,493	2,444	10,262	9,781	8,681
Non-interest expense	(7,066)	(6,237)	(6,184)	(6,377)	(6,678)	(6,097)	(6,572)	(6,221)	(25,864)	(25,568)	(25,963)
Income before income taxes	1,635	1,249	1,860	2,527	1,381	1,972	1,144	1,874
Provision for federal income taxes	740	373	582	819	230	624	336	591	2,514	1,781	304
Net income	895	876	1,278	1,708	1,151	1,348	808	1,283	4,757	4,590	1,089
Preferred stock dividends	(151)	(151)	(207)	(201)	(208)	(208)	(208)	(208)	(710)	(832)	(832)
Preferred stock accretion	(47)	(47)	(126)	(63)	(61)	(61)	(59)	(59)	(283)	(240)	(225)
Repurchase of preferred stock at a discount	0	0	255	0					255	0	0
Net income to common shareholders	$ 697	$ 678	$ 1,200	$ 1,444	$ 882	$ 1,079	$ 541	$ 1,016	$ 4,019	$ 3,518	$ 32
Net income per common share
Basic (in dollars per share)	$ 0.10	$ 0.10	$ 0.18	$ 0.21	$ 0.13	$ 0.16	$ 0.08	$ 0.15	$ 0.59	$ 0.52	$ 0.00
Diluted (in dollars per share)	$ 0.10	$ 0.10	$ 0.17	$ 0.21	$ 0.13	$ 0.16	$ 0.08	$ 0.15	$ 0.58	$ 0.52	$ 0.00

XML

Condensed Financial Information - Parent Company Only (Tables)

12 Months Ended

Sep. 30, 2013

Condensed Financial Information of Parent Company Only Disclosure [Abstract]

Condensed Balance Sheets, Parent Company

Condensed Balance Sheets - September 30, 2013 and 2012

(dollars in thousands)

	2013		2012
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	126	$	509
Interest-bearing deposits in banks	379		2,183
Total cash and cash equivalents	505		2,692
Loan receivable from ESOP	2,565		2,918
Investment in Bank	86,795		84,775
Other assets	40		26
Total assets	$	89,905	$	90,411
Liabilities and shareholders’ equity
Accrued expenses	$	217	$	92
Shareholders’ equity	89,688		90,319
Total liabilities and shareholders’ equity	$	89,905	$	90,411

Condensed Statements of Operations, Parent Company

	2013			2012			2011
Operating income
Interest on deposits in banks	$	1		$	1		$	1
Interest on loan receivable from ESOP	237			266			291
Total operating income	238			267			292
Operating expenses	455			556			541
Loss before income taxes and equity in undistributed     income of Bank	(217		)	(289		)	(249		)
Benefit for income taxes	(98		)	(98		)	(85		)
Loss before equity in undistributed income of Bank	(119		)	(191		)	(164		)
Equity in undistributed income of Bank	4,876			4,781			1,253
Net income	4,757			4,590			1,089
Preferred stock dividends	(710		)	(832		)	(832		)
Preferred stock accretion	(283		)	(240		)	(225		)
Discount on redemption of preferred stock	255			—			—
Net income to common shareholders	$	4,019		$	3,518		$	32

Condensed Statements of Cash Flows, Parent Company

Condensed Statements of Cash Flows - Years Ended September 30, 2013, 2012 and 2011

(dollars in thousands)

	2013			2012			2011
Cash flows from operating activities
Net income	$	4,757		$	4,590		$	1,089
Adjustments to reconcile net income to     net cash provided by operating activities:
Equity in undistributed income of        Bank	(4,876		)	(4,781		)	(1,253		)
ESOP shares earned	265			264			264
MRDP compensation expense	39			105			171
Stock option compensation expense	49			15			7
Other, net	(39		)	406			(160		)
Net cash provided by operating activities	195			599			118
Cash flows from investing activities
Investment in Bank	2,956			(243		)	(288		)
Principal repayments on loan receivable from Bank	353			322			298
Net cash provided by investing activities	3,309			79			10
Cash flows from financing activities
Repurchase of preferred stock	(4,321		)	—			—
Payment of dividends	(1,368		)	(2,080		)	—
ESOP tax effect	6			(65		)	(61		)
MRDP compensation tax effect	(8		)	(28		)	(37		)
Net cash used in financing activities	(5,691		)	(2,173		)	(98		)
Net increase (decrease) in cash and cash equivalents	(2,187		)	(1,495		)	30
Cash and cash equivalents
Beginning of year	2,692			4,187			4,157
End of year	$	505		$	2,692		$	4,187

XML

Stock Compensation Plans: Fair Value Assumptions (Details) (Stock Options, USD $)	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected Volatility	45.00%	45.00%
Expected term (in years)	5 years	5 years
Expected dividend yield	0.00%	0.00%
Risk free interest rate	0.76%	0.76%
Grant date fair value per share (in dollars per share)	$ 2.37	$ 1.97

XML

Premises and Equipment: Rent Expense (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011
Property, Plant and Equipment [Abstract]
Operating Leases, Rent Expense	$ 250	$ 248	$ 232

XML

Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Commitments and Contingencies Disclosure [Abstract]
Reserve for unfunded loan commitments	$ 165	$ 148
Employee severance compensation plan, employee minimum service requirement	2 years
Employee severance compensation plan, eligible payment, maximum compensation term	24 months

XML

MBS And Other Investments (Tables)

12 Months Ended

Sep. 30, 2013

Investments [Abstract]

Marketable Securities

Mortgage-backed securities and other investments were as follows as of September 30, 2013 and 2012 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2013
Held to Maturity
MBS:
U.S. government agencies	$	1,202	$	31	$	(2	)	$	1,231
Private label residential	1,521		781		(15		)	2,287
U.S. agency securities	14		1		—			15
Total	$	2,737	$	813	$	(17	)	$	3,533
Available for Sale
MBS:
U.S. government agencies	$	2,144	$	87	$	(2	)	$	2,229
Private label residential	804		120		(10		)	914
Mutual funds	1,000		—		(42		)	958
Total	$	3,948	$	207	$	(54	)	$	4,101
September 30, 2012
Held to Maturity
MBS:
U.S. government agencies	$	1,493	$	44	$	(3	)	$	1,534
Private label residential	1,819		309		(60		)	2,068
U.S. agency securities	27		3		—			30
Total	$	3,339	$	356	$	(63	)	$	3,632
Available for Sale
MBS:
U.S. government agencies	$	2,828	$	147	$	—		$	2,975
Private label residential	1,001		65		(109		)	957
Mutual funds	1,000		13		—			1,013
Total	$	4,829	$	225	$	(109	)	$	4,945

Unrealized Gain (Loss) on Investments

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time these unrealized losses existed as of September 30, 2013 (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	$	3	$	—		6	$	88	$	(2	)	4	$	91	$	(2	)
Private label residential	80		(4		)	4	239		(11		)	14	319		(15		)
Total	$	83	$	(4	)	10	$	327	$	(13	)	18	$	410	$	(17	)
Available for Sale
MBS:
U.S. government agencies	$	96	$	(2	)	3	$	—	$	—		1	$	96	$	(2	)
Private label residential	—		—			—	108		(10		)	2	108		(10		)
Mutual Funds	958		(42		)	1	—		—			—	958		(42		)
Total	$	1,054	$	(44	)	4	$	108	$	(10	)	3	$	1,162	$	(54	)

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time the unrealized losses existed as of September 30, 2012 (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	$	7	$	—		1	$	100	$	(3	)	4	$	107	$	(3	)
Private label residential	17		(1		)	1	423		(59		)	28	440		(60		)
Total	$	24	$	(1	)	2	$	523	$	(62	)	32	$	547	$	(63	)
Available for Sale
MBS:
Private label residential	—		—			—	651		(109		)	4	651		(109		)
Total	$	—	$	—		—	$	651	$	(109	)	4	$	651	$	(109	)

Schedule of Significant Inputs Utilized to Measure Estimate of Credit Loss Component on OTTI Securities

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, 2013, 2012 and 2011:

	Range				Weighted
	Minimum		Maximum		Average
September 30, 2013
Constant prepayment rate	6.00	%	15.00	%	12.33	%
Collateral default rate	0.73	%	22.53	%	7.84	%
Loss severity rate	20.48	%	75.02	%	52.69	%
September 30, 2012
Constant prepayment rate	6.00	%	15.00	%	8.77	%
Collateral default rate	0.06	%	28.40	%	8.74	%
Loss severity rate	0.52	%	76.03	%	48.28	%
September 30, 2011
Constant prepayment rate	6.00	%	15.00	%	10.71	%
Collateral default rate	0.43	%	24.23	%	8.03	%
Loss severity rate	11.93	%	64.54	%	39.22	%

Schedule of Other than Temporary Impairments

The following table presents the OTTI losses for the years ended September 30, 2013, 2012 and 2011 (dollars in thousands):

	2013						2012						2011
	Held To Maturity			Available For Sale			Held To Maturity			Available For Sale			Held To Maturity			Available For Sale
Total OTTI losses	$	(13	)	$	(2	)	$	(156	)	$	(50	)	$	(210	)	$	(26	)
Portion of OTTI losses recognized in other comprehensive loss (before taxes) (1)	(32		)	—			(8		)	—			(211		)	—
Net OTTI recognized in earnings (2)	$	(45	)	$	(2	)	$	(164	)	$	(50	)	$	(421	)	$	(26	)

________________________

(1) Represents OTTI related to all other factors.

(2) Represents OTTI related to credit losses.

Other than Temporary Impairment, Credit Losses Recognized in Earnings

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, 2013, 2012 and 2011 (dollars in thousands):

	2013			2012			2011
Balance, beginning of year	$	2,703		$	3,361		$	4,725
Additions:
Credit losses for which OTTI was           not previously recognized	7			81			53
Additional increases to the amount           related to credit loss for which OTTI           was previously recognized	45			133			398
Subtractions:
Realized losses previously recorded           as credit losses	(671		)	(872		)	(1,811		)
Recovery of prior credit loss	—			—			(4		)
Balance, end of year	$	2,084		$	2,703		$	3,361

Schedule of Contractual Maturities of Debt Securities

The contractual maturities of debt securities at September 30, 2013, are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.

	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due after one year to five years	$	22	$	23	$	28	$	28
Due after five to ten years	22		22		28		29
Due after ten years	2,693		3,488		2,892		3,086
Total	$	2,737	$	3,533	$	2,948	$	3,143

XML

Employee Stock Ownership and 401(k) Plan ("KSOP") (Details) (USD $)	1 Months Ended	12 Months Ended			72 Months Ended
	Jan. 31, 2008	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2013	Jan. 31, 1998
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
ESOP shares earned		$ (271,000)	$ (199,000)	$ (203,000)
KSOP
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Number of components in KSOP		2
Required service period		1 year
Employee minimum age requirement		21 years
Award vesting period		6 years
ESOP
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Dividends used for debt service		72,000	0	0
ESOP, shares distributed to participants					271,564
ESOP, loan borrowed from employer						7,930,000
ESOP, shares purchased for plan	1,058,000
ESOP, interest rate on employer loan		8.50%
ESOP, interest expense on employer loan		237,000	266,000	291,000
ESOP, amount outstanding on employer loan		2,566,000			2,566,000
ESOP, fair value of unallocated shares		1,746,000	1,375,000	1,069,000	1,746,000
ESOP shares earned		202,000	165,000	172,000
401(k)
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
401(k), employer safe harbor contribution (percent)		3.00%
401(k), employer contributions		$ 289,000	$ 283,000	$ 290,000

XML

Federal Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Income Tax Disclosure [Abstract]
Income Taxes Receivable	$ 80	$ 708
Capital loss carry-forward utilized during period	$ 183

XML

Premises and Equipment: Property, Plant and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	$ 29,463	$ 28,852
Less accumulated depreciation	11,699	10,966
Premises and equipment, net	17,764	17,886
Land
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	4,112	4,293
Buildings and improvements
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	17,344	17,188
Furniture and equipment
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	7,527	7,189
Property held for future expansion
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	110	110
Construction and purchases in progress
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	$ 370	$ 72

XML

Deposits: Schedule of Deposits (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012
Deposits [Abstract]
Non-interest-bearing demand	$ 87,657	$ 75,296
NOW checking	156,100	150,139
Savings	91,349	87,493
Money market accounts	99,006	79,549
Certificates of deposit	174,150	205,449
Total deposits	$ 608,262	$ 597,926

XML

MBS And Other Investments: Schedule of Contractual maturities of debt securities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013
Held-to-maturity Securities, Amortized Cost:
Due after one year to five years	$ 22
Due after five to ten years	22
Due after ten years	2,693
Total	2,737
Held-to-maturity Securities, Estimated Fair Value:
Due after one year to five years	23
Due after five to ten years	22
Due after ten years	3,488
Total	3,533
Available-for-sale Securities, Amortized Cost:
Due after one year to five years	28
Due after five to ten years	28
Due after ten years	2,892
Total	2,948
Available-for-sale Securities, Estimated Fair Value:
Due after one year to five years	28
Due after five to ten years	29
Due after ten years	3,086
Total	$ 3,143

XML

Condensed Financial Information - Parent Company Only: Condensed Balance Sheets, Parent Company (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2010
Cash and cash equivalents:
Cash and due from financial institutions	$ 12,879	$ 11,008
Interest-bearing deposits in banks	81,617	85,660
Total cash and cash equivalents	94,496	96,668	112,065	111,786
Other assets	4,123	5,386
Total assets	745,648	736,954
Liabilities and shareholders’ equity
Shareholders’ equity	89,688	90,319	86,205	85,408
Total liabilities and shareholders’ equity	745,648	736,954
Parent Company
Cash and cash equivalents:
Cash and due from financial institutions	126	509
Interest-bearing deposits in banks	379	2,183
Total cash and cash equivalents	505	2,692	4,187	4,157
Loan receivable from ESOP	2,565	2,918
Investment in Bank	86,795	84,775
Other assets	40	26
Total assets	89,905	90,411
Liabilities and shareholders’ equity
Accrued expenses	217	92
Shareholders’ equity	89,688	90,319
Total liabilities and shareholders’ equity	$ 89,905	$ 90,411

XML

MBS And Other Investments: Marketable Securities (Details) (USD $)	Sep. 30, 2013	Sep. 30, 2012
Held to Maturity
Amortized Cost	$ 2,737,000	$ 3,339,000
Gross Unrealized Gains	813,000	356,000
Gross Unrealized Losses	(17,000)	(63,000)
Estimated Fair Value	3,533,000	3,632,000
Available for Sale
Amortized Cost	3,948,000	4,829,000
Gross Unrealized Gains	207,000	225,000
Gross Unrealized Losses	(54,000)	(109,000)
Estimated Fair Value	4,101,000	4,945,000
Mortgage-backed Securities, U.S. government agencies
Held to Maturity
Amortized Cost	1,202,000	1,493,000
Gross Unrealized Gains	31,000	44,000
Gross Unrealized Losses	(2,000)	(3,000)
Estimated Fair Value	1,231,000	1,534,000
Available for Sale
Amortized Cost	2,144,000	2,828,000
Gross Unrealized Gains	87,000	147,000
Gross Unrealized Losses	(2,000)	0
Estimated Fair Value	2,229,000	2,975,000
Mortgage-backed Securities, Private label residential
Held to Maturity
Amortized Cost	1,521,000	1,819,000
Gross Unrealized Gains	781,000	309,000
Gross Unrealized Losses	(15,000)	(60,000)
Estimated Fair Value	2,287,000	2,068,000
Available for Sale
Amortized Cost	804,000	1,001,000
Gross Unrealized Gains	120,000	65,000
Gross Unrealized Losses	(10,000)	(109,000)
Estimated Fair Value	914,000	957,000
U.S. agency securities
Held to Maturity
Amortized Cost	14,000	27,000
Gross Unrealized Gains	1,000	3,000
Gross Unrealized Losses	0	0
Estimated Fair Value	15,000	30,000
Mutual funds
Available for Sale
Amortized Cost	1,000,000	1,000,000
Gross Unrealized Gains	0	13,000
Gross Unrealized Losses	(42,000)	0
Estimated Fair Value	$ 958,000	$ 1,013,000

XML

Premises and Equipment: Minimum net rental commitments under non-cancellable leases (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
2014	$ 183
2015	256
2016	128
2017	74
2018	74
Thereafter	166
Total minimum payments required	$ 881
Minimum
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
Operating lease renewal options, term	5 years
Maximum
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
Operating lease renewal options, term	10 years

XML

FHLB Advances and Other Borrowings

12 Months Ended

Sep. 30, 2013

Advances from Federal Home Loan Banks [Abstract]

FHLB Advances and Other Borrowings

FHLB Advances and Other Borrowings

The Bank has long- and short-term borrowing lines with the FHLB with total credit on the lines equal to 25% 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 FHLB advances outstanding at September 30, 2013 and 2012.  The long-term borrowings at September 30, 2013 mature at various dates during the 2017 fiscal year and bear interest at rates ranging from 3.69% to 4.34%.  Under the Advances, Security and Deposit Agreement entered into with the FHLB, 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.

The Bank also maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.  At September 30, 2013 the Bank had a borrowing capacity on this line of $52,702,000 with no balance outstanding.  The Bank had no outstanding balance on this line at September 30, 2012.

The Bank has a short-term $10,000,000 overnight borrowing line with Pacific Coast Banker's Bank. The borrowing line may be reduced or withdrawn at any time. As of September 30, 2013 and 2012 the Bank did not have any outstanding advances on this borrowing line.

There were no short-term borrowings during the years ended September 30, 2013, 2012 and 2011.

XML

Premises and Equipment

12 Months Ended

Sep. 30, 2013

Property, Plant and Equipment [Abstract]

Premises and Equipment

Premises and Equipment

Premises and equipment consisted of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Land	$	4,112	$	4,293
Buildings and improvements	17,344		17,188
Furniture and equipment	7,527		7,189
Property held for future expansion	110		110
Construction and purchases in progress	370		72
	29,463		28,852
Less accumulated depreciation	11,699		10,966
Premises and equipment, net	$	17,764	$	17,886

The Company leases certain premises under operating leases.  Rental expense of leased premises was $250,000, $248,000 and $232,000 for the years ended September 30, 2013, 2012, and 2011, respectively, which was 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, 2013 are as follows (dollars in thousands):

2014	$	183
2015	256
2016	128
2017	74
2018	74
Thereafter	166
Total minimum payments required	$	881

Certain leases contain renewal options from five to ten years and escalation clauses based on increases in property taxes and other costs.

XML

Fair Value Measurement: Balances of Assets and Liabilities Measured on Recurring Basis (Details) (USD $)	Sep. 30, 2013	Sep. 30, 2012
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	$ 4,101,000	$ 4,945,000
Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	2,229,000	2,975,000
Mutual funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	958,000	1,013,000
Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	4,101,000	4,945,000
Recurring | Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	2,229,000	2,975,000
Recurring | Private label residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	914,000	957,000
Recurring | Mutual funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	958,000	1,013,000
Recurring | Fair Value, Inputs, Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	958,000	1,013,000
Recurring | Fair Value, Inputs, Level 1 | Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	0	0
Recurring | Fair Value, Inputs, Level 1 | Private label residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	0	0
Recurring | Fair Value, Inputs, Level 1 | Mutual funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	958,000	1,013,000
Recurring | Fair Value, Inputs, Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	3,143,000	3,932,000
Recurring | Fair Value, Inputs, Level 2 | Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	2,229,000	2,975,000
Recurring | Fair Value, Inputs, Level 2 | Private label residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	914,000	957,000
Recurring | Fair Value, Inputs, Level 2 | Mutual funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	0	0
Recurring | Fair Value, Inputs, Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	0	0
Recurring | Fair Value, Inputs, Level 3 | Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	0	0
Recurring | Fair Value, Inputs, Level 3 | Private label residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	0	0
Recurring | Fair Value, Inputs, Level 3 | Mutual funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for Sale Securities	$ 0	$ 0

XML

Loans Receivable And Allowance For Loan Losses: Schedule of Activity in Related Party Loans (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Receivables [Abstract]
Balance, beginning of year	$ 1,113	$ 2,498
New loans or advances	276	175
Repayments and reclassifications	(294)	(1,560)
Balance, end of year	$ 1,095	$ 1,113

XML

Federal Income Taxes

12 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Federal Income Taxes

Federal Income Taxes

The components of the provision for federal income taxes for the years ended September 30, 2013, 2012 and 2011 were as follows (dollars in thousands):

	2013		2012		2011
Current	$	1,737	$	1,627	$	148
Deferred	777		154		156
Provision	$	2,514	$	1,781	$	304

At September 30, 2013 and 2012, the Company had income taxes receivable of $80,000 and $708,000, respectively, which are included in other assets in the accompanying consolidated balance sheets.

The components of the Company’s deferred tax assets and liabilities at September 30, 2013 and 2012 were as follows (dollars in thousands):

	2013		2012
Deferred Tax Assets
Accrued interest on loans	$	83	$	278
Unearned ESOP shares	282		301
Allowance for loan losses	4,018		4,293
Allowance for OREO losses	794		516
CDI	259		264
Unearned MRDP shares	8		25
Net unrealized securities losses	139		192
Capital loss carry-forward	—		677
OTTI credit impairment	198		194
Other	166		156
Total deferred tax assets	5,947		6,896

	2013		2012
Deferred Tax Liabilities
FHLB stock dividends	$	840	$	874
Depreciation	147		294
Goodwill	1,153		1,024
MSR's	770		683
Prepaid expenses	233		172
Other	11		13
Total deferred tax liabilities	3,154		3,060
Valuation allowance for capital loss on sale of securities	—		(213		)
Net deferred tax assets	$	2,793	$	3,623

The provision for federal income taxes for the years ended September 30, 2013, 2012 and 2011 differs from that computed at the statutory corporate tax rate as follows (dollars in thousands):

	2013			2012			2011
Expected tax provision at statutory rate	$	2,472		$	2,166		$	474
BOLI income	(196		)	(206		)	(175		)
Change in estimated utilization of net capital loss carry-forward	281			(208		)	—
Dividends on ESOP	(24		)	—			—
Other - net	(19		)	29			5
Provision forfederal income taxes	$	2,514		$	1,781		$	304

During the year ended September 30, 2012, the Company adjusted its valuation allowance for deferred taxes to reflect anticipated tax strategies to utilize a capital loss carry-forward related to a previous redemption in kind of investment securities. 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.

XML

Repurchase Agreements

12 Months Ended

Sep. 30, 2013

Disclosure of Repurchase Agreements [Abstract]

Repurchase Agreements

Repurchase Agreements

The Bank had no overnight repurchase agreements with customers at September 30, 2013. Repurchase agreements with customers at September 30, 2012 totaled $855,000.

Information concerning repurchase agreements as of and for the years ended September 30, 2013 and 2012 is summarized as follows (dollars in thousands):

	2013			2012
Average daily balance during the period	$	352		$	699
Average daily interest rate during the period	0.05		%	0.05		%
Maximum month-end balance during the period	$	787		$	948
Weighted average rate at end of the period	—		%	0.05		%
Securities underlying the agreements at end of the period:
Recorded value	$	—		$	813
Estimated fair value	—			838

The securities underlying the agreements at September 30, 2012 were under the Company's control in safekeeping at third-party financial institutions.

XML

Stock Compensation Plans: Stock Options by Exercise Price (Details) (Stock Options, USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Sep. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number	162,946
Options Outstanding, Weighted Average Exercise Price	$ 6.96
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	6 years 1 month 6 days
Options Exercisable, Number	71,946
Options Exercisable, Weighted Average Exercise Price	$ 8.97
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	2 years 10 months 24 days
$4.01 - $4.55
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number	46,900
Options Outstanding, Weighted Average Exercise Price	$ 4.25
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	7 years 2 months 12 days
Options Exercisable, Number	18,900
Options Exercisable, Weighted Average Exercise Price	$ 4.40
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	6 years 8 months 12 days
$5.86 - $6.00
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number	71,500
Options Outstanding, Weighted Average Exercise Price	$ 5.92
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	9 years
Options Exercisable, Number	8,500
Options Exercisable, Weighted Average Exercise Price	$ 5.86
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	9 years
$11.46 - $11.63
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number	44,546
Options Outstanding, Weighted Average Exercise Price	$ 11.50
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	3 months 18 days
Options Exercisable, Number	44,546
Options Exercisable, Weighted Average Exercise Price	$ 11.50
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	3 months 18 days

XML

Document and Entity Information (USD $) In Millions, except Share data, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Nov. 30, 2013	Mar. 31, 2013
Document and Entity Information
Entity Registrant Name	TIMBERLAND BANCORP INC,
Entity Central Index Key	0001046050
Current Fiscal Year End Date	--09-30
Entity Filer Category	Smaller Reporting Company
Document Type	10-K
Document Period End Date	Sep. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	FY
Amendment Flag	false
Entity Common Stock, Shares Outstanding		7,047,636
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 57.8

XML

OREO and Other Repossessed Assets: Other Real Estate, Roll Forward (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013 property	Sep. 30, 2012 property
OREO and Other Repossessed Assets
OREO and Other Repossessed Assets, Amount, Starting Balance	$ 13,302	$ 10,811
Additions to OREO and other repossessed assets, Amount	6,375	9,443
Capitalized improvements	146	119
Lower of cost or fair value losses	(2,064)	(1,048)
Disposition of OREO and other repossessed assets, Amount	(6,039)	(6,023)
OREO and Other Repossessed Assets, Amount, Ending Balance	$ 11,720	$ 13,302
OREO and Other Repossessed Assets, Number, Starting	56,000	50,000
Additions to OREO and other repossessed assets, Number	25,000	44,000
Disposition of OREO and other repossessed assets, Number	(34,000)	(38,000)
OREO and Other Repossessed Assets, Number, Ending	47,000	56,000

XML

Other Liabilities and Accrued Expenses

12 Months Ended

Sep. 30, 2013

Payables and Accruals [Abstract]

Other Liabilities and Accrued Expenses

Other Liabilities and Accrued Expenses

Other liabilities and accrued expenses were comprised of the following at September 30, 2013 and 2012 (dollars in thousands):

	2013		2012
Accrued deferred compensation and profit sharing plans payable	$	660	$	566
Accrued interest payable on deposits, advances and      repurchase agreements	320		404
Accounts payable and accrued expenses - other	1,718		1,884
Total other liabilities and accrued expenses	$	2,698	$	2,854

XML

MBS And Other Investments: Narrative-OTTI charges recorded through earnings (Details) (Mortgage-backed Securities, Private label residential, USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Mortgage-backed Securities, Private label residential
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
OTTI charges recognized in earnings	$ 47	$ 214

XML

Stock Compensation Plans: Schedule of Unrecognized Compensation Expense for Stock Compensation Plans (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Total Awards	$ 177
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Options	175
Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Grants (MRDP)	2
2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Total Awards	53
2014 | Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Options	51
2014 | Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Grants (MRDP)	2
2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Total Awards	44
2015 | Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Options	44
2015 | Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Grants (MRDP)	0
2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Total Awards	44
2016 | Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Options	44
2016 | Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Grants (MRDP)	0
2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Total Awards	35
2017 | Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Options	35
2017 | Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Grants (MRDP)	0
2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Total Awards	1
2018 | Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Options	1
2018 | Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Grants (MRDP)	$ 0

XML

MBS And Other Investments: Unrealized Gain (Loss) on Investments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013 security	Sep. 30, 2012 security
Held-to-maturity Securities, Fair Value:
Less Than 12 Months	$ 83	$ 24
Held-to-maturity Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	327	523
Total	410	547
Held-to-maturity Securities, Gross Unrealized Losses
Less Than 12 Months	(4)	(1)
12 Months or Longer	(13)	(62)
Total	(17)	(63)
Held-to-maturity, Qty, Less Than 12 Months	10	2
Held-to-maturity, Qty, 12 Months or Longer	18	32
Available-for-sale Securities, Fair Value:
Less Than 12 Months	1,054	0
Available-for-sale Securities, 12 Months or Longer, Estimated Fair Value	108	651
Total	1,162	651
Available-for-sale Securities, Gross Unrealized Losses:
Less Than 12 Months	(44)	0
12 Months or Longer	(10)	(109)
Total	(54)	(109)
Available-for-sale, Qty, Less than 12 Months	4	0
Available-for-sale, Qty, 12 Months or Longer	3	4
Mortgage-backed Securities, U.S. government agencies
Held-to-maturity Securities, Fair Value:
Less Than 12 Months	3	7
Held-to-maturity Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	88	100
Total	91	107
Held-to-maturity Securities, Gross Unrealized Losses
Less Than 12 Months	0	0
12 Months or Longer	(2)	(3)
Total	(2)	(3)
Held-to-maturity, Qty, Less Than 12 Months	6	1
Held-to-maturity, Qty, 12 Months or Longer	4	4
Available-for-sale Securities, Fair Value:
Less Than 12 Months	96
Available-for-sale Securities, 12 Months or Longer, Estimated Fair Value	0
Total	96
Available-for-sale Securities, Gross Unrealized Losses:
Less Than 12 Months	(2)
12 Months or Longer	0
Total	(2)
Available-for-sale, Qty, Less than 12 Months	3
Available-for-sale, Qty, 12 Months or Longer	1
Mortgage-backed Securities, Private label residential
Held-to-maturity Securities, Fair Value:
Less Than 12 Months	80	17
Held-to-maturity Securities, Continuous Unrealized Loss Position, Twelve Months or Longer, Fair Value	239	423
Total	319	440
Held-to-maturity Securities, Gross Unrealized Losses
Less Than 12 Months	(4)	(1)
12 Months or Longer	(11)	(59)
Total	(15)	(60)
Held-to-maturity, Qty, Less Than 12 Months	4	1
Held-to-maturity, Qty, 12 Months or Longer	14	28
Available-for-sale Securities, Fair Value:
Less Than 12 Months	0	0
Available-for-sale Securities, 12 Months or Longer, Estimated Fair Value	108	651
Total	108	651
Available-for-sale Securities, Gross Unrealized Losses:
Less Than 12 Months	0	0
12 Months or Longer	(10)	(109)
Total	(10)	(109)
Available-for-sale, Qty, Less than 12 Months	0	0
Available-for-sale, Qty, 12 Months or Longer	2	4
Mutual funds
Available-for-sale Securities, Fair Value:
Less Than 12 Months	958
Available-for-sale Securities, 12 Months or Longer, Estimated Fair Value	0
Total	958
Available-for-sale Securities, Gross Unrealized Losses:
Less Than 12 Months	(42)
12 Months or Longer	0
Total	$ (42)
Available-for-sale, Qty, Less than 12 Months	1
Available-for-sale, Qty, 12 Months or Longer	0

XML

OREO and Other Repossessed Assets (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Sep. 30, 2013 property	Sep. 30, 2012 property	Sep. 30, 2011 property
Real Estate Properties [Line Items]
OREO and Other Repossessed Assets, Number	47,000	56,000	50,000
Other real estate owned (“OREO”) and other repossessed assets, net	$ 11,720	$ 13,302	$ 10,811
Gains (losses) on sale of OREO and other repossessed assets, net	264	(373)	548
Minimum
Real Estate Properties [Line Items]
Other real estate owned (“OREO”) and other repossessed assets, net	4	4
Maximum
Real Estate Properties [Line Items]
Other real estate owned (“OREO”) and other repossessed assets, net	$ 1,301	$ 2,805
Washington
Real Estate Properties [Line Items]
OREO and Other Repossessed Assets, Number	47	56