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, 2019                                                    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:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $.01 par value	TSBK	The NASDAQ Stock Market LLC

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 or Section 15(d) of the     Act.   YES   NO    X    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files)   YES   X    NO 

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

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

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

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

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

As of November 30, 2019, the registrant had 8,345,069 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, 2019, was $233.3 million (8,336,419 shares at $27.98).  For purposes of this calculation, common stock held by officers and directors of the registrant was included.

DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders (Part III).

1

TIMBERLAND BANCORP, INC.

2019 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I.				Page
	Item 1.	Business
			General	4
			Market Area	4
			Lending Activities	6
			Investment Activities	22
			Deposit Activities and Other Sources of Funds	23
			Bank Owned Life Insurance	25
			How We Are Regulated	26
			Taxation	33
			Competition	33
			Subsidiary Activities	34
			Personnel	34
			Executive Officers of the Registrant	34
	Item 1A.	Risk Factors		35
	Item 1B.	Unresolved Staff Comments		46
	Item 2.	Properties		47
	Item 3.	Legal Proceedings		48
	Item 4.	Mine Safety Disclosures		48
PART II.
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		49
	Item 6.	Selected Financial Data		51
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		53
			General	53
			Overview	53
			Operating Strategy	54
			Critical Accounting Policies and Estimates	55
			Market Risk and Asset and Liability Management	55
			Comparison of Financial Condition at September 30, 2019 and September 30, 2018	56
			Comparison of Operating Results for Years Ended September 30, 2019 and 2018	59
			Average Balances, Interest and Average Yields/Cost	61
			Rate/Volume Analysis	63
			Liquidity and Capital Resources	63
			Effect of Inflation and Changing Prices	65
			New Accounting Pronouncements	65
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		65
	Item 8.	Financial Statements and Supplementary Data		65
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		121
	Item 9A.	Controls and Procedures		121
	Item 9B.	Other Information		124
PART III.
	Item 10.	Directors, Executive Officers and Corporate Governance		124
	Item 11.	Executive Compensation		124
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		124
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		125
	Item 14.	Principal Accounting Fees and Services		125
PART IV.
	Item 15.	Exhibits and Financial Statement Schedules		126
	Item 16.	Form 10-K Summary		126

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

Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: 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; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future 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 control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on our consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks described elsewhere in this Form 10-K and the Company's other reports filed with or furnished to the Securities and Exchange Commission.

Any of the forward-looking statements that we make in this Form 10-K and in the other public statements we make are based upon management's beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to publicly update or revise any forward-looking statements included in this annual report to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur and we caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal 2020 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's consolidated financial condition and results of operations as well as its stock price performance.

3

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 Bank (the "Bank").  At September 30, 2019, on a consolidated basis, the Company had total assets of $1.25 billion, net loans receivable of $886.66 million, total deposits of $1.07 billion and total shareholders’ equity of $171.07 million.  The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank.  Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Bank and its subsidiary, Timberland Service Corporation.

The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 24 branches (including its main office in Hoquiam). The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”).  The Bank has been a member of the Federal Home Loan Bank System since 1937.  The Bank is regulated by the Washington Department of Financial Institutions, Division of Banks (“Division” or “DFI”) and the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve System ("Federal Reserve").

On October 1, 2018, the Company completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington ("South Sound Acquisition"). The Company acquired 100% of the outstanding common stock of South Sound Bank, and South Sound Bank was merged into the Bank. The results of operations of the acquired assets and assumed liabilities have been included in the Company's consolidated financial statements as of and for the period since the acquisition date. For additional details see Note 2 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

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

The 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”).

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);

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

• two branch offices in Kitsap County (Poulsbo and Silverdale);

• a branch office in King County (Auburn); and

• three branch offices in Lewis County (Winlock, Toledo and Chehalis).

4

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

Hoquiam, with a population of approximately 8,600, is located in Grays Harbor County which is situated along Washington State’s central Pacific coast.  Hoquiam is located approximately 110 miles southwest of Seattle, Washington and 145 miles northwest of Portland, Oregon.

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

Grays Harbor County has a population of 74,000 according to the United States ("U.S.") Census Bureau 2018 estimates and a median family income of $63,500 according to 2019 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 increased to 6.7% at September 30, 2019 from 5.5% at September 30, 2018.  The median price of a resale home in Grays Harbor County for the quarter ended June 30, 2019 increased 12.0% to $211,400 from $188,800 for the comparable prior year period.  The number of home sales decreased 0.5% for the quarter ended June 30, 2019 compared to the same quarter one year earlier.  The Bank has six branches (including its home office) located in the county.  

Pierce County is the second most populous county in the state and has a population of 891,000 according to the U.S. Census Bureau 2018 estimates.  The county’s median family income is $80,200 according to 2019 HUD estimates.  The economy in Pierce County is diversified with the presence of military related government employment (Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace related employment.  According to the Washington State Employment Security Department, the unemployment rate for the Pierce County area increased to 5.0% at September 30, 2019 from 4.4% at September 30, 2018. The median price of a resale home in Pierce County for the quarter ended June 30, 2019 increased 5.3% to $372,300 from $353,700 for the comparable prior year period.  The number of home sales decreased 6.3% for the quarter ended June 30, 2019 compared to the same quarter one year earlier.  The Bank has five branches located in Pierce County, and these branches have historically been responsible for a substantial portion of the Bank’s construction lending activities. 

Thurston County has a population of 286,000 according to the U.S. Census Bureau 2018 estimates and a median family income of $83,700 according to 2019 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 increased to 4.8% at September 30, 2019 from 4.1% at September 30, 2018. The median price of a resale home in Thurston County for the quarter ended June 30, 2019 increased 6.7% to $340,700 from $319,300 for the same quarter one year earlier.  The number of home sales decreased 4.2% for the quarter ended June 30, 2019 compared to the same quarter one year earlier.  The Bank has seven branches located in Thurston County.  This county has historically had a stable economic base primarily attributable to the state government presence.

Kitsap County has a population of 270,000 according to the U.S. Census Bureau 2018 estimates and a median family income of $85,500 according to 2019 HUD estimates.  The Bank has two branches located in Kitsap County.  The economic base of Kitsap County is largely supported by military related government employment through the U.S. Navy.  According to the Washington State Employment Security Department, the unemployment rate for the Kitsap County area increased to 4.5% at September 30, 2019 from 4.1% at September 30, 2018.  The median price of a resale home in Kitsap County for the quarter ended June 30, 2019 increased 7.1% to $380,800 from $355,600 for the same quarter one year earlier.  The number of home sales decreased 7.7% for the quarter ended June 30, 2019 compared to the same quarter one year earlier.  

King County is the most populous county in the state and has a population of 2.2 million according to the U.S. Census Bureau 2018 estimates.  The Bank has one branch located in King County.  The county’s median family income is $108,600 according to 2019 HUD estimates.  King County’s economic base is diversified with many industries including shipping, transportation, aerospace, computer technology and biotech.  According to the Washington State Employment Security Department, the unemployment rate for the King County area decreased to 3.0% at September 30, 2019 from 3.4% at September 30, 2018. The median price of a resale home in King County for the quarter ended June 30, 2019 decreased 3.9% to $701,200 from $729,800 for the same quarter one year earlier.  The number of home sales decreased 6.8% for the quarter ended June 30, 2019 compared to the same quarter one year earlier.  

5

Lewis County has a population of 80,000 according to the U.S. Census Bureau 2018 estimates and a median family income of $63,500 according to 2019 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 increased to 5.9% at September 30, 2019 from 5.1% at September 30, 2018. The median price of a resale home in Lewis County for the quarter ended June 30, 2019 increased 15.2% to $258,300 from $224,300 for the same quarter one year earlier.  The number of home sales decreased 3.1% for the quarter ended June 30, 2019 compared to the same quarter one year earlier.  The Bank currently has three branches located in Lewis County.  

Lending Activities

General.  Historically, the principal lending activity of the Bank has consisted of the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences, or by commercial real estate and loans for the construction of one- to four-family residences.  The Bank’s net loans receivable totaled $886.66 million at September 30, 2019, representing 71.1% of consolidated total assets, and at that date commercial real estate, construction (including undisbursed loans in process), multi-family and land loans were $749.45 million, or 75.6% of total loans.  Commercial real estate, construction, multi-family, and land loans typically have higher rates of return than one- to four-family loans; however, they also present a higher degree of risk.  

The Bank’s internal loan policy limits the maximum amount of loans to one borrower to 20% of its capital plus surplus. According to the Washington Administrative Code, capital and surplus are defined as a bank's Tier 1 capital, Tier 2 capital and the balance of a bank's allowance for loan losses not included in the bank's Tier 2 capital as reported in the bank's call report. At September 30, 2019, the maximum amount which the Bank could have lent to any one borrower and the borrower’s related entities was approximately $32.48 million under this policy.  At September 30, 2019, the largest amount outstanding to any one borrower and the borrower’s related entities was $18.30 million, which was secured by multi-family and commercial real estate properties located in King and Benton counties and were performing according to their loan repayment terms at September 30, 2019.  The next largest amount outstanding to any one borrower and the borrower’s related entities was $16.40 million.  These loans were secured by commercial real estate properties and other business assets located in King County and were performing according to their loan repayment terms at September 30, 2019.

6

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

	At September 30,
	2019					2018					2017					2016					2015
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in thousands)
Mortgage Loans:
One- to four-family (1)	$	132,661		13.38	%	$	115,941		14.13	%	$	118,147		15.05	%	$	118,560		16.38	%	$	116,664		17.42	%
Multi-family	76,036			7.67		61,928			7.54		58,607			7.47		62,303			8.61		52,322			7.81
Commercial	419,117			42.28		345,113			42.05		328,927			41.91		312,525			43.18		291,216			43.47
Construction - custom and owner/builder	128,848			13.00		119,555			14.57		117,641			14.99		93,049			12.85		62,954			9.40
Construction - speculative one- to four-family	16,445			1.66		15,433			1.88		9,918			1.26		8,106			1.12		6,668			1.00
Construction - commercial	39,566			3.99		39,590			4.82		19,630			2.50		9,365			1.29		20,728			3.09
Construction - multi-family	36,263			3.66		10,740			1.31		21,327			2.72		12,590			1.74		20,570			3.07
Construction - land development	2,404			0.24		3,040			0.37		—			—		—			—		—			—
Land	30,770			3.10		25,546			3.11		23,910			3.05		21,627			2.99		26,140			3.90
Total mortgage loans	882,110			88.98		736,886			89.78		698,107			88.95		638,125			88.16		597,262			89.16
Consumer Loans:
Home equity and second mortgage	40,190			4.05		37,341			4.55		38,420			4.90		39,727			5.49		34,157			5.10
Other	4,312			0.44		3,515			0.43		3,823			0.49		4,139			0.57		4,669			0.70
Total consumer loans	44,502			4.49		40,856			4.98		42,243			5.39		43,866			6.06		38,826			5.80
Commercial business loans (2)	64,764			6.53		43,053			5.24		44,444			5.66		41,837			5.78		33,763			5.04
Total loans receivable	991,376			100.00	%	820,795			100.00	%	784,794			100.00	%	723,828			100.00	%	669,851			100.00	%
Less:
Undisbursed portion of construction loans in process	(92,226		)			(83,237		)			(82,411		)			(48,627		)			(53,457		)
Deferred loan origination fees, net	(2,798		)			(2,637		)			(2,466		)			(2,229		)			(2,193		)
Allowance for loan losses	(9,690		)			(9,530		)			(9,553		)			(9,826		)			(9,924		)
Total loans receivable, net	$	886,662				$	725,391				$	690,364				$	663,146				$	604,277

______________

(1) Does not include loans held-for-sale of $6,071, $1,785, $3,515, $3,604 and $3,051 at September 30, 2019, 2018, 2017, 2016 and 2015, respectively.

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

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Residential One- to Four-Family Lending.  At September 30, 2019, $132.66 million, or 13.4%, 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 are originated to meet the requirements for sale in the secondary market to the Federal Home Loan Mortgage Corporation ("Freddie Mac") or the Federal Home Loan Bank of Des Moines ("FHLB").  From time to time, however, a portion of these fixed-rate loans 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, 2019, $37.95 million, or 28.6%, 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 or every three to five years after an initial period ranging from one to five years and are typically subject to a limitation on the annual interest rate increase of 2% and an overall limitation of 6%.  These ARM products generally are re-priced utilizing the weekly average yield on one year U.S. Treasury securities adjusted to a constant maturity of one year plus a margin of 2.75% to 4.00%.  The Bank also offers ARM loans tied to The Wall Street Journal prime lending rate ("Prime Rate") index which typically do not have periodic or lifetime adjustment limits.  Loans tied to the Prime Rate normally have margins ranging up to 3.0%.  ARM loans held in the Bank’s portfolio do not permit negative amortization of principal.  Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan.  The relative amount of fixed-rate mortgage loans and ARM loans that can be originated atany time is largely determined by the demand for each in a competitive environment.  At September 30, 2019, $94.71 million, or 71.4%, 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 a 2.0% increase in the initial interest rate.  Another consideration is that although ARM loans allow the Bank to increase the sensitivity of its asset base due to changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits.  Because of these considerations, the Bank has no assurance that yield increases on ARM loans will be sufficient to offset increases in the Bank’s cost of funds.

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

The Bank requires that fire and extended coverage casualty insurance be maintained on the collateral for all of its real estate secured loans and flood insurance, if appropriate.

The Bank’s lending policies generally limit the maximum loan-to-value ratio on mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or the purchase price.  However, the Bank usually obtains private mortgage insurance (“PMI”) on the portion of the principal amount that exceeds 80% of the appraised value of the security property. The maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied properties is generally 80% (90% for loans

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originated for sale in the secondary market to Freddie Mac or the FHLB).  At September 30, 2019, three one- to four-family loans totaling $699,000 were on non-accrual status.  See “Lending Activities - Non-performing Loans and Delinquencies.”

Multi-Family Lending.  AtSeptember 30, 2019,$76.04 million, or 7.7%,of the Bank’s total loan portfolio was secured by multi-family dwelling units (more than four units) located primarily in the Bank’s primary market area.  Multi-family loans are generally originated with variable rates of interest ranging from1.00% to 3.50% over the one-year constant maturity U.S. Treasury Bill Index, the Prime Rate or a matched term FHLB borrowing, with principal and interest payments fully amortizing over terms of up to 30 years.  AtSeptember 30, 2019, the Bank’s largest multi-family loan had an outstanding principal balance of $5.29 million and was secured by an apartment building located in Clark County. At September 30, 2019, this loan was performing according to its repayment terms.  

The maximum loan-to-value ratio for multi-family loans is generally limited to not more than 80%.  The Bank generally requests its multi-family loan borrowers with loan balances in excess of $750,000 to submit financial statements and rent rolls annually on the properties securing such loans.  The Bank also inspects such properties annually.  The Bank generally imposes a minimum debt coverage ratio of 1.20 for loans secured by multi-family properties.

Multi-family mortgage lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four- family residential lending.  However, loans secured by multi-family properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, may involve a greater degree of risk than one- to four-family residential mortgage loans.  Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.  The Bank seeks to minimize these risks by scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.  If the borrower is other than an individual, the Bank also generally obtains personal guarantees from the principals (with ownership interests of 20% or more) based on a review of personal financial statements. At September 30, 2019, all multi-family loans were performing according to their repayment terms. See "Lending Activities - Non-performing Loans and Delinquencies."

Commercial Real Estate Lending.  Commercial real estate loans totaled $419.12 million, or 42.3%, of the total loan portfolio atSeptember 30, 2019.  The Bank originates commercial real estate loans generally at variable interest rates with principal and interest payments fully amortizing over terms of up to 30 years.  These loans are secured by properties, such as office buildings, retail/wholesale facilities, mini-storage facilities, motels, nursing homes, restaurants and convenience stores, generally located in the Bank’s primary market area.  AtSeptember 30, 2019,the largest commercial real estate loan was secured by a medical building in Pierce County, had a balance of $7.93 million and was performing according to its repayment terms.  AtSeptember 30, 2019, two commercial real estate loans totaling $779,000were 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 an evaluation provided by a third party vendor in lieu of an appraisal.  Appraisals are performed by independent appraisers designated by the Bank.  The Bank considers the quality and location of the real estate, the credit history of the borrower, the cash flow of the project and the quality of management involved with the property when making these loans.  The Bank generally imposes a minimum debt coverage ratio of approximately 1.20 for loans secured by income producing commercial properties.  Loan-to-value ratios on commercial real estate loans are generally limited to not more than 80%.  If the borrower is other than an individual, the Bank also generally obtains personal guarantees from the principals (with ownership interests of 20% or more) based on a review of personal financial statements.

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

Construction Lending.      The Bank currently originates two types of residential construction loans:  (i) custom construction and owner/builder construction loans and (ii) speculative construction loans.  The Bank believes that its lengthy experience in providing residential construction loans has enabled it to establish processing and disbursement procedures to meet the needs of its borrowers while reducing many of the risks inherent with construction lending.  The Bank also originates construction loans for multi-family properties, commercial properties, and land development projects.  The Bank's construction

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loans generally provide for the payment of interest only during the construction phase, which is billed monthly, although during the term of some construction loans no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. At September 30, 2019, the Bank's construction loans totaled $223.53 million, or 22.5% of the Bank's total loan portfolio, including undisbursed loans in process of $92.23 million. All construction loans were performing according to their repayment terms at September 30, 2019. See "Lending Activities - Non-performing Loans and Delinquencies."

At September 30, 2019 and 2018, the composition of the Bank’s construction loan portfolio was as follows:

	At September 30,
	2019				2018
	Outstanding Balance		Percent of Total		Outstanding Balance		Percent of Total
	(Dollars in thousands)
Custom and owner/builder	$	128,848	57.64	%	$	119,555	63.47	%
Speculative one- to four-family	16,445		7.36		15,433		8.19
Commercial real estate	39,566		17.70		39,590		21.02
Multi-family	36,263		16.22		10,740		5.70
Land development	2,404		1.08		3,040		1.62
Total	$	223,526	100.00	%	$	188,358	100.00	%

Custom and owner/builder construction loans are originated to home owners and are typically converted to or refinanced into permanent loans at the completion of construction.  The construction phase of these loans generally lasts up to 12 months with fixed interest rates typically ranging from 4.50% to 6.50% 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, 2019, custom and owner/builder construction loans totaled $128.85 million, or 57.6% of the total construction loan portfolio.  At September 30, 2019, the largest outstanding custom and owner/builder construction loan had an outstanding balance of $1.76 million (including $788,000 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 pay real estate taxes and other carrying costs of the completed home for a significant time after the completion of construction until the home buyer is identified and a sale is consummated.  Rather than originating lines of credit to home builders to construct several homes at once, the Bank generally originates and underwrites a separate loan for each home.  Speculative construction loans are generally originated for a term of 12 months, with current rates generally ranging from 5.00% to 7.00%, and with a loan-to-value ratio of no more than80% of the appraised value of the completed property.  AtSeptember 30, 2019, speculative one- to four-family construction loans totaled$16.45 million, or 7.4%of the total construction loan portfolio.  At September 30, 2019, the largest aggregate outstanding balance to one borrower for speculative one- to four-family construction loans totaled $2.60 million (including $1.48 million of undisbursed loans in process) and was comprised of eleven loans that were performing according to their repayment terms.  

The Bank also provides construction financing for multi-family and commercial properties.  At September 30, 2019, these loans amounted to $75.83 million, or 33.9%,of construction loan balances compared to $50.33 million,or 26.7%, of construction loan balances at September 30, 2018.  These loans are typically secured by apartment buildings, condominiums, mini-storage facilities, office buildings, hotels and retail rental space predominantly located in the Bank’s primary market area.  AtSeptember 30, 2019, thelargest outstanding multi-family construction loan was secured by an apartment building project in Thurston County and had a balance of $11.0 million (including $10.8 million of undisbursed construction loan proceeds) and was performing according to its repayment terms.  AtSeptember 30, 2019, the largest outstanding commercial real estate construction loan wassecured by an assisted living facility project in King County and had a balance of $6.10 million. This loan was performing according to its repayment terms at September 30, 2019.

All construction loans must be approved by a member of one of the Bank’s Loan Committees or the Bank’s Board of Directors, or in the case of one- to four-family construction loans that meet Freddie Mac guidelines, by the Regional Manager of Community Lending, the Loan Department Supervisor or a Bank underwriter. See “- Lending Activities - Loan Solicitation and

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Processing.”  Prior to approval of any construction loan application, an independent fee appraiser inspects the site and prepares an appraisal on an "as completed" basis and the Bank reviews the existing or proposed improvements, identifies the market for the proposed project and analyzes the pro-forma data and assumptions on the project.  In the case of a speculative or custom construction loan, the Bank reviews the experience and expertise of the builder.  After this preliminary review, the application is processed, which includes obtaining credit reports, financial statements and tax returns or verification of income on the borrowers and guarantors, an independent appraisal of the project, and any other expert reports necessary to evaluate the proposed project.  In the event of cost overruns, the Bank generally requires that the borrower increase the funds available for construction by paying the cost of such overruns directly or by depositing its own funds into a secured savings account, the proceeds of which are used to pay construction costs, or to the extent available authorizes disbursements from a loan contingency line in the construction budget.

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

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

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

In addition, during the term of many of our construction loans granted to builders who are building residential units for sale, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative construction loans, there is an added risk associated with identifying an end-purchaser for the finished project.

The Bank historically originated loans to real estate developers with whom it had established relationships for the purpose of developing residential subdivisions (i.e., installing roads, sewers, water and other utilities; generally with ten to 50 lots). At September 30, 2019, land development loans totaled $2.40 million, or 1.1% of the total construction loan portfolio. Currently, the Bank is originating land development loans on a limited basis.  Land development loans are secured by a lien on the property and typically are made for a period of two to five years with fixed or variable interest rates, 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.  In addition, in the case of a corporate borrower, the Bank also generally obtains personal guarantees from corporate principals (with ownership interests in the borrowing entity of 20% or more) 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 loan funds are advanced upon the predicted future value of the developed property upon completion.  If the estimate of the future value proves to be inaccurate, in the event of default and foreclosure the Bank may be confronted with a property the value of which is insufficient to assure full repayment.  The Bank has historically attempted to

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minimize this risk by generally limiting the maximum loan-to-value ratio on land and land development loans to 75% of the estimated developed value of the secured property.  

Land Lending. The Bank originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to use for recreational purposes.  AtSeptember 30, 2019, land loans totaled$30.77 million, or 3.1%,of the Bank’s total loan portfolio.  Land loans originated by the Bank generally have maturities of one to ten years.  The largest land loan is secured by land in Thurston County, had an outstanding balance of $2.02 million and was performing according to its repayment terms at September 30, 2019.  AtSeptember 30, 2019, three land loans totaling $204,000 were on non-accrual status.  See “Lending Activities - Non-performing Loans and Delinquencies.”

Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because these loans are more difficult to evaluate.  If the estimate of value proves to be inaccurate, in the event of default and foreclosure the Bank may be confronted with a property the value of which is insufficient to assure full repayment. Land loans also pose additional risk because of the lack of income being produced by the property and potential illiquid nature of the collateral. These risks can be significantly impacted by supply and demand conditions.  The Bank attempts to minimize these risks by generally limiting the maximum loan-to-value ratio on land loans to 75%.

Consumer Lending.  Consumer loans generally have shorter terms to maturity and may have higher interest rates than mortgage loans.  Consumer loans include home equity lines of credit, second mortgage loans, savings account loans, automobile loans, boat loans, motorcycle loans, recreational vehicle loans and unsecured loans.  Consumer loans are made with both fixed and variable interest rates and with varying terms.  At September 30, 2019, consumer loans amounted to $44.50 million, or 4.5%, of the Bank's total loan portfolio.

At September 30, 2019, the largest component of the consumer loan portfolio consisted of second mortgage loans and home equity lines of credit, which totaled $40.19 million, or 4.1%,of the Bank's total loan portfolio.  Home equity lines of credit and second mortgage loans are made for purposes such as the improvement of residential properties, debt consolidation and education expenses, among others.  The majority of these loans are made to existing customers and are secured by a first or second mortgage on residential property.  The loan-to-value ratio is typically 90% or less, when taking into account both the first and second mortgage loans.  Second mortgage loans typically carry fixed interest rates with a fixed payment over a term between five and 15 years.  Home equity lines of credit are generally made at interest rates tied to the Prime Rate.  Second mortgage loans and home equity lines of credit have greater credit risk than one- to four-family residential mortgage loans in which the Bank is in the first lien position because they are generally secured by mortgages subordinated to the existing first mortgage on the property. For those second mortgage loans and home equity lines credit which the Bank does not hold the existing first mortgage on the property, it is unlikely that the Bank will be successful in recovering all or a portion of the loan balance in the event of default unless the Bank is prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.  The Bank believes that these risks are not as prevalent in the case of the Bank’s consumer loan portfolio because a large percentage of the portfolio consists of second mortgage loans and home equity lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one- to four-family residential mortgage loans.  At September 30, 2019, eight consumer loans totaling $626,000 were on non-accrual status. See “Lending Activities - Non-performing Loans and Delinquencies.”

Commercial Business Lending.  Commercial business loans totaled $64.76 million, or 6.5%, of the loan portfolio at September 30, 2019.  Commercial business loans are generally secured by business equipment, accounts receivable, inventory and/or other property and are made at variable rates of interest equal to a negotiated margin above the Prime Rate.  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 $1.85 million at September 30, 2019 and was performing according to its repayment terms.  At September 30, 2019, ten commercial business loans totaling $725,000 were on non-accrual status.  See “Lending Activities - Non-performing Loans and Delinquencies.”

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The Bank has increased commercial business loan originations made under the U.S. Small Business Administration ("SBA") 7(a) program. Loans made by the Bank under the SBA 7(a) program generally are made to small businesses to provide working capital or to provide funding for the purchase of businesses, real estate, or equipment. These loans generally are secured by a combination of assets that may include equipment, receivables, inventory, business real property, and sometimes a lien on the personal residence of the borrower. The terms of these loans vary by purpose and type of underlying collateral. The loans are primarily underwritten on the basis of the borrower's ability to service the loan from income. Under the SBA 7(a) program the loans carry a SBA guaranty for up to 85% of the loan. Typical maturities for this type of loan vary but can be up to ten years. SBA 7(a) loans are all adjustable rate loans based on the Prime Rate. Under the SBA 7(a) program, the Bank can sell in the secondary market the guaranteed portion of its SBA 7(a) loans and retain the related unguaranteed portion of these loans, as well as the servicing on such loans, for which it is paid a fee. The loan servicing spread is generally a minimum of 1.00% on all SBA 7(a) loans. The Bank generally offers SBA 7(a) loans within a range of $50,000 to $1.50 million.

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

Loan Maturity.  The following table sets forth certain information at September 30, 2019 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
	(Dollars in thousands)
Mortgage loans:
One- to four-family	$	1,161	$	1,978	$	4,488	$	49,452	$	75,582	$	132,661
Multi-family	799		3,672		8,604		62,140		821		76,036
Commercial	14,573		29,954		61,206		302,260		11,124		419,117
Construction (1)	223,526		—		—		—		—		223,526
Land	15,923		7,805		3,642		2,014		1,386		30,770
Consumer loans:
Home equity and second mortgage	3,679		5,675		5,026		15,015		10,795		40,190
Other	1,652		249		235		533		1,643		4,312
Commercial business loans	29,533		6,681		9,065		15,238		4,247		64,764
Total	$	290,846	$	56,014	$	92,266	$	446,652	$	105,598	991,376
Less:
Undisbursed portion of construction loans in process											(92,226		)
Deferred loan origination fees, net											(2,798		)
Allowance for loan losses											(9,690		)
Total loans receivable, net											$	886,662

_____________

(1)    Includes $128.85 million of construction/permanent loans, a portion of which may convert to permanent mortgage loans once construction is completed.

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The following table sets forth the dollar amount of all loans due after one year from September 30, 2019, which have fixed interest rates and have floating or adjustable interest rates:

	Fixed Rates		Floating or Adjustable Rates		Total
	(Dollars in thousands)
Mortgage loans:
One- to four-family	$	37,952	$	93,548	$	131,500
Multi-family	2,222		73,015		75,237
Commercial	83,840		320,704		404,544
Land	9,726		5,121		14,847
Consumer loans:
Home equity and second mortgage	10,459		26,052		36,511
Other	1,610		1,050		2,660
Commercial business loans	12,905		22,326		35,231
Total	$	158,714	$	541,816	$	700,530

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

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

Loan applications are initiated by loan officers and are required to be approved by an authorized loan officer or Bank underwriter, one of the Bank’s Loan Committees or the Bank’s Board of Directors.  The Bank’s Consumer Loan Committee consists of several underwriters, each of whom can approve one- to four-family mortgage loans and other consumer loans up to and including the current Freddie Mac single-family limit. Loan officers may also be granted individual approval authority for certain loans up to a maximum of $250,000. The approval authority for individual loan officers is granted on a case by case basis by the Bank's Chief Credit Administrator or President.  All construction loans must be approved by a member of one of the Bank's Loan Committees or the Bank's Board of Directors, or in the case of one- to four- family construction loans that meet Freddie Mac guidelines, by the Regional Manager of Community Lending, the Loan Department Supervisor or a Bank underwriter, subject to their individual or Loan Committee loan limit. The Bank’s Commercial Loan Committee, which consists of the Bank’s President, Chief Credit Administrator, Executive Vice President of Lending and two Senior Vice Presidents of Commercial Lending, may approve commercial real estate loans and commercial business loans up to and including $3.00 million. The Bank’s 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 $5.00 million.  Loans in excess of $5.00 million, as well as loans of any amount granted to a single borrower whose aggregate loans exceed $5.00 million, must be approved by the Bank’s Board of Directors.

Loan Originations, Purchases and Sales.  During the years ended September 30, 2019, 2018 and 2017, the Bank’s total gross loan originations were $356.04 million, $329.59 million and $340.61 million, respectively.  Periodically, the Bank purchases loan participation interests in construction, commercial real estate and multi-family loans, secured by properties generally located in Washington State, from other banks.  These participation loans are underwritten in accordance with the Bank’s underwriting guidelines and are without recourse to the seller other than for fraud.  During the years ended September 30, 2019, 2018 and 2017, the Bank purchased loan participation interests of $8.66 million, $8.40 million and $13.10 million, respectively. 

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

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30, 2016.  Loans sold in the secondary market are generally sold on a servicing retained basis.  At September 30, 2019, the Bank’s loan servicing portfolio, which is not included in the Company’s consolidated financial statements, totaled $399.12 million.

The Bank also periodically sells participation interests in construction loans, commercial real estate loans, multi-family and commercial business loans to other lenders.  These sales are usually made to avoid concentrations in a particular loan type or concentrations to a particular borrower and to generate fee income.  During the years ended September 30, 2019, 2018 and 2017, the Bank sold loan participation interests of $5.43 million, $253,000, and $9.28 million, respectively.

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

	Year Ended September 30,
	2019			2018			2017
Loans originated:	(Dollars in thousands)
Mortgage loans:
One- to four-family	$	91,669		$	81,313		$	88,642
Multi-family	12,503			10,362			7,841
Commercial	48,040			68,443			58,777
Construction	160,693			125,683			144,349
Land	9,540			16,300			14,056
Consumer	20,999			20,151			21,999
Commercial business loans	12,591			7,339			4,947
Total loans originated	356,035			329,591			340,611
Loans acquired in the South Sound Acquisition (net of fair value discount)
Mortgage loans:
One- to four-family	10,190			—			—
Multi-family	7,807			—			—
Commercial	64,967			—			—
Construction	11,730			—			—
Consumer	3,918			—			—
Commercial business loans	22,932			—			—
Total loans acquired	121,544			—			—
Loans and loan participations purchased:
Mortgage loans:
Commercial	2,946			—			—
Construction	5,717			7,548			11,100
Commercial business	—			855			2,000
Total loans purchased	8,663			8,403			13,100
Total loans originated, acquired and purchased	486,242			337,994			353,711
Loans sold:
Loan participation interests sold	(5,431		)	(253		)	(9,284		)
Whole loans sold	(67,600		)	(66,131		)	(72,158		)
Total loans sold	(73,031		)	(66,384		)	(81,442		)
Loan principal repayments	(241,656		)	(235,609		)	(211,303		)
Other items, net	(10,284		)	(974		)	(33,748		)
Net increase in loans receivable	$	161,271		$	35,027		$	27,218

Loan Origination Fees.  The Bank receives loan origination fees on many of its mortgage loans and commercial business loans.  Loan fees are a percentage of the loan which are charged to the borrower for funding the loan.  The amount of fees charged by the Bank is generally up to 2.0% of the loan amount.  Accounting principles generally accepted in the United States of America ("GAAP") require fees received and certain loan origination costs for originating loans to be deferred and amortized into interest income over the contractual life of the loan.  Net deferred fees or costs associated with loans that are prepaid are recognized as income/expense at the time of prepayment.  Unamortized net deferred loan origination fees totaled $2.80 million at September 30, 2019.

15

Non-performing Loans and Delinquencies.  The Bank assesses late fees or penalty charges on delinquent loans of approximately 5% of the monthly loan payment amount.  A majority of loan payments are due on the first day of the month; however, the borrower is given a 15 day grace period to make the loan payment.  When a mortgage loan borrower fails to make a required payment when due, the Bank institutes collection procedures. A notice is mailed to the borrower 16 days after the date the payment is due.  Attempts to contact the borrower by telephone generally begin on or before the 30^th day of delinquency.  If a satisfactory response is not obtained, continuous follow-up contacts are attempted until the loan has been brought current.  Before the 90th day of delinquency, attempts are made to establish (i) the cause of the delinquency, (ii) whether the cause is temporary, (iii) the attitude of the borrower toward repaying the debt, and (iv) a mutually satisfactory arrangement for curing the default.

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

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

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

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

	At September 30,
	2019			2018			2017			2016			2015
Loans accounted for on a non-accrual basis:	(Dollars in thousands)
Mortgage loans:
One- to four-family (1)	$	699		$	545		$	874		$	914		$	2,368
Multi-family	—			—			—			—			760
Commercial	779			—			213			612			1,016
Construction	—			—			—			367			—
Land	204			243			566			548			1,558
Consumer loans	626			359			258			432			338
Commercial business loans	725			170			—			—			—
Total	3,033			1,317			1,911			2,873			6,040
Accruing loans which are contractually past due 90 days or more	—			—			—			135			151
Total of non-accrual and 90 days past due loans	3,033			1,317			1,911			3,008			6,191
Non-accrual investment securities	294			406			533			734			932
Other real estate owned and other repossessed assets (2)	1,683			1,913			3,301			4,117			7,854
Total non-performing assets (3)	$	5,010		$	3,636		$	5,745		$	7,859		$	14,977
Troubled debt restructured loans on accrual status (4)	$	2,903		$	2,955		$	3,342		$	7,629		$	12,485
Non-accrual and 90 days or more past due loans as a percentage of loans receivable, net (5)	0.34		%	0.18		%	0.27		%	0.45		%	1.02		%
Non-accrual and 90 days or more past due loans as a percentage of total assets	0.24		%	0.13		%	0.20		%	0.34		%	0.76		%
Non-performing assets as a percentage of total assets	0.40		%	0.36		%	0.60		%	0.88		%	1.84		%
Loans receivable, net (5)	$	896,352		$	734,921		$	699,917		$	672,972		$	614,201
Total assets	$	1,247,132		$	1,018,290		$	952,024		$	891,388		$	815,815

16

_______________

(1)    Includes non-accrual one- to four-family properties in the process of foreclosure totaling $150, $0,

$100, $138 and $1,105 as of September 30, 2019, 2018, 2017, 2016 and 2015, respectively.

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

as of September 30, 2019, 2018, 2017, 2016 and 2015, respectively.

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

(4)    Does not include troubled debt restructured loans totaling $366, $323, $253, $531 and $1,233

recorded as non-accrual loans as of September 30, 2019, 2018, 2017, 2016 and 2015, respectively.

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

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

The Bank’s non-accrual loans increased by $1.71 million to $3.03 million at September 30, 2019 from $1.32 million at September 30, 2018, primarily as a result of a $779,000 increase in commercial real estate loans, a $555,000 increase in commercial business loans, a $267,000 increase in consumer loans, and a $154,000 increase in one- to four-family mortgage loans, on non-accrual status. These increases were partially offset by a $39,000 decrease in land loans on non-accrual status.  A discussion of the Bank's largest non-performing loans is set forth below under “Asset Classification.”

Additional interest income which would have been recorded for the year ended September 30, 2019 had non-accruing loans been current in accordance with their original terms totaled $362,000.

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, 2019, the Bank had $1.68 million of OREO and other repossessed assets consisting of12individual properties, a decrease of $230,000 from $1.91 million at September 30, 2018.  The OREO properties consisted of 11 land parcels totaling $1.66 million, and one commercial real estate property with a book value of $25,000.  The largest OREO property at September 30, 2019 was an undeveloped land parcel with a balance of $874,000 located in Lewis County.

Restructured Loans.  Under GAAP, the Bank is required to account for certain loan modifications or restructurings as “troubled debt restructurings” or "troubled debt restructured loans."  A troubled debt restructured loan ("TDR") is a loan for which the Company, for reasons related to a borrower's financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Examples of such concessions include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals. TDRs are considered impaired and are individually evaluated for impairment. TDRs are classified as either accrual or non-accrual. TDRs are classified as non-performing loans unless they have been performing in accordance with their modified terms for a period of at least six months. The Bank had TDRs at September 30, 2019 and 2018 totaling $3.27 million and $3.28 million, respectively, of which $366,000 and $323,000, respectively, were on non-accrual status. The allowance for loan losses allocated to TDR loans at September 30, 2019 and 2018 was $56,000 and $97,000, respectively.

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

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

17

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, 2019, the Bank had $5.94 million in impaired loans.  For additional information on impaired loans, see Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Other Loans of Concern.  Loans not reflected in the table above as non-performing, but where known information about possible credit problems of borrowers causes management to have doubts as to the ability of the borrower to comply with present repayment terms and that may result in disclosure of such loans as non-performing assets in the future, are commonly referred to as “other loans of concern” or “potential problem loans.”  The amount included in potential problem loans results from an evaluation, on a loan-by-loan basis, of loans classified as “substandard” and “special mention,” as those terms are defined under “Asset Classification” below.  The amount of potential problem loans (not included in the table above as non-performing) was $4.83 million at September 30, 2019. The vast majority of these loans are collateralized by real estate.  See “Asset Classification” below for additional information regarding the Bank's problem loans.

Asset Classification.  Applicable regulations require that each insured institution review and classify its assets on a regular basis.  In addition, in connection with examinations of insured institutions, regulatory examiners have authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets:  substandard, doubtful and loss.  Substandard loans are classified as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged.  Assets classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.  If the weakness or weaknesses are not corrected there is the distinct possibility that some loss will be sustained.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the Bank is not warranted.  When the Bank classifies problem assets as either substandard or doubtful, it is required to establish allowances for loan losses in an amount deemed prudent by management.  These allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities and the risks associated with particular problem assets.  When the Bank classifies problem assets as loss, it charges off the balance of the asset against the allowance for loan losses.  Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated by the Bank as special mention.  Special mention loans are defined as those credits deemed by management to have some potential weakness that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan.  Assets in this category are not adversely classified and currently do not expose the Bank to sufficient risk to warrant a substandard classification. The Bank’s determination of the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC and the Division which can require a different classification and the establishment of additional loss allowances.

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

	At September 30,
	2019		2018		2017
	(Dollars in thousands)
Loss	$	—	$	—	$	—
Doubtful	—		—		—
Substandard (1)(2)	5,320		3,182		3,253
Special mention (1)	2,547		3,123		7,783
Total classified and special    mention loans	$	7,867	$	6,305	$	11,036
Allowance for loan losses	$	9,690	$	9,530	$	9,553

_____________

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

(2) Includes non-performing loans.

Loans classified as substandard increased by $2.14 million to $5.32 millionatSeptember 30, 2019from$3.18 millionatSeptember 30, 2018.  AtSeptember 30, 2019, 44 loans were classified as substandard.Of the $5.32 million in loans classified as substandard at September 30, 2019, $3.03 million were on non-accrual status.  The largest loan classified as substandard at

18

September 30, 2019 had a balance of $524,000 and was secured by a single family home in Pierce County. This loan was performing according to its payment terms at September 30, 2019.  The next largest loan classified as substandard at September 30, 2019 had a balance of $493,000 and was secured by a single family home in Pierce County. This loan was performing according to its payment terms at September 30, 2019.

Loans classified as special mention decreased by$576,000 to $2.55 millionatSeptember 30, 2019from$3.12 millionatSeptember 30, 2018, primarily as a result of loans being upgraded to an improved risk grade category and loans being paid off during the year endedSeptember 30, 2019. At September 30, 2019, ten loans were classified as special mention. The largest loan classified as special mention at September 30, 2019 had a balance of $623,000 and was secured by land in Grays Harbor County. This loan was performing according to its payment terms at September 30, 2019. The next largest loan classified as special mention at September 30, 2019 had a balance of $561,000 and was secured by a one- to four-family property in Pierce County. This loan was performing according to its payment terms at September 30, 2019.

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

In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan.  The Bank increases its allowance for loan losses by charging provisions for loan losses against the Bank's operating income.

The Board of Directors reviews the adequacy of the allowance for loan losses at least quarterly based on management's assessment of current economic conditions, past loss and collection experience, and risk characteristics of the loan portfolio.

At September 30, 2019, the Bank’s allowance for loan losses totaled$9.69 million.  The Bank’s allowance for loan losses as a percentage of total loans receivable and non-performing loans was 1.08% and 319.49%, respectively, at September 30, 2019 and 1.30% and 723.61%, respectively, at September 30, 2018. The decrease in the allowance for loan losses as a percentage of total loans receivable was primarily due to loans acquired in the South Sound Acquisition and improvements in several underlying credit quality metrics in the loan portfolio. In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loan's contractual amount, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loans losses is recorded for acquired loans at the acquisition date. The discount recorded on acquired loans is not reflected in the allowance for loan losses or the related allowance coverage ratios, however we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the South Sound Acquisition. The remaining fair value discount on loans acquired in the South Sound Acquisition was $1.39 million at September 30, 2019.

Management believes that the amount maintained in the allowance for loan losses is adequate to absorb probable losses inherent in the portfolio. Although management believes that it uses the best information available to make its determinations, future adjustments to the allowance for loan losses may be necessary, and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

While the Bank believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase significantly its allowance for loan losses.  In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.  Any material increase in the allowance for loan losses may adversely affect the Bank's financial condition and results of operations.

19

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

	Year Ended September 30,
	2019			2018			2017			2016			2015
	(Dollars in thousands)
Allowance at beginning of year	$	9,530		$	9,553		$	9,826		$	9,924		$	10,427
Recapture of loan losses	—			—			(1,250		)	—			(1,525		)
Recoveries:
Mortgage loans:
One- to four-family	104			—			21			56			264
Multi-family	—			—			—			—			3
Commercial	166			—			1,061			—			4
Construction - custom and owner/builder	2			—			—			—			—
Construction - speculative one- to four-family	—			13			6			2			2
Construction - multi-family	—			—			—			181			1,125
Construction - land development	—			—			—			—			—
Land	18			19			19			24			37
Consumer loans:
Home equity and second mortgage	—			—			—			—			2
Other	6			1			3			2			4
Commercial business loans	25			—			—			5			5
Total recoveries	321			33			1,110			270			1,446
Charge-offs:
Mortgage loans:
One- to four-family	—			—			—			(72		)	(220		)
Commercial	—			(28		)	(13		)	(209		)	—
Land	(49		)	(22		)	(110		)	(61		)	(145		)
Consumer loans:
Home equity and second mortgage	(5		)	—			—			(18		)	(50		)
Other	(5		)	(6		)	(10		)	(8		)	(9		)
Commercial business loans	(102		)	—			—			—			—
Total charge-offs	(161		)	(56		)	(133		)	(368		)	(424		)
Net recoveries (charge-offs)	160			(23		)	977			(98		)	1,022
Allowance at end of year	$	9,690		$	9,530		$	9,553		$	9,826		$	9,924
Allowance for loan losses as a percentage of total loans receivable (net) outstanding at the end of the year (1)	1.08		%	1.30		%	1.36		%	1.46		%	1.62		%
Net recoveries (charge-offs) as a percentage of average loans outstanding during the year	0.02		%	—		%	0.14		%	(0.02		)%	0.17		%
Allowance for loan losses as a percentage of non-performing loans at end of year	319.49		%	723.61		%	499.90		%	326.66		%	160.30		%

______________

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

20

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

	At September 30,
	2019				2018				2017				2016				2015
	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	$	1,167	13.38	%	$	1,086	14.13	%	$	1,082	15.05	%	$	1,239	16.38	%	$	1,480	17.42	%
Multi-family	481		7.67		433		7.54		447		7.47		473		8.61		392		7.81
Commercial	4,154		42.28		4,248		42.05		4,184		41.91		4,384		43.18		4,065		43.47
Construction - custom and owner/builder	755		13.00		671		14.57		699		14.99		619		12.85		451		9.40
Construction - speculative one- to four-family	212		1.66		178		1.88		128		1.26		130		1.12		123		1.00
Construction - commercial	338		3.99		563		4.82		303		2.50		268		1.29		426		3.09
Construction - multi-family	375		3.66		135		1.31		173		2.72		316		1.74		283		3.07
Construction - land development	67		0.24		49		0.37		—		—		—		—		—		—
Land	697		3.10		844		3.11		918		3.05		820		2.99		1,021		3.90
Non-mortgage loans:
Consumer loans	722		4.49		766		4.98		1,104		5.39		1,095		6.06		1,260		5.80
Commercial business loans	722		6.53		557		5.24		515		5.66		482		5.78		423		5.04
Total allowance for loan losses	$	9,690	100.00	%	$	9,530	100.00	%	$	9,553	100.00	%	$	9,826	100.00	%	$	9,924	100.00	%

21

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 investments in debt 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 include U.S. Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks, federal funds, mortgage-backed securities, municipal bonds and mutual funds.  The Company's investment policy also permits investment in equity securities in certain financial service companies.

Investments in equity securities are stated at fair value. Prior to October 1, 2018, changes in the fair value of investments in equity securities were excluded from earnings and reported in other comprehensive income (loss), net of income tax effects. On October 1, 2018, the Company adopted ASU 2016-01 and reclassified its mutual funds as investments in equity securities. Beginning October 1, 2018, changes in the fair value of investments in equity securities are recorded in other non-interest income.

At September 30, 2019, the Bank’s portfolio of investments in debt securities totaled $53.63 million, consisting of $3.00 million of U.S. Treasury and U.S. government agency securities held to maturity, $28.10 million of mortgage-backed securities held to maturity, and $22.53 million of mortgage-backed securities available for sale.  The Bank does not maintain a trading account for any investments.  This compares with a total investment portfolio of $13.96 million at September 30, 2018, consisting of $10.97 million of U.S. Treasury and U.S. government agency securities held to maturity, $1.85 million of mortgage-backed securities held to maturity, $917,000 of mutual funds available for sale and $237,000 of mortgage-backed securities available for sale.  The composition of the portfolios by type of security at the dates indicated is presented in the following table:

	At September 30,
	2019				2018				2017
	Recorded Amount		Percent of Total		Recorded Amount		Percent of Total		Recorded Amount		Percent of Total
	(Dollars in thousands)
Held to Maturity:
U.S.Treasury and U.S. government agency securities	$	2,999	5.59	%	$	10,965	78.52	%	$	6,008	71.69	%
Mortgage-backed securities	28,103		52.40		1,845		13.21		1,131		13.50
Available for Sale:
Mortgage-backed securities	22,532		42.01		237		1.70		289		3.45
Mutual funds	—		—		917		6.57		952		11.36
Total portfolio	$	53,634	100.0	%	$	13,964	100.0	%	$	8,380	100.0	%

The following table sets forth the maturities and weighted average yields of the debt securities in the Bank's portfolio at September 30, 2019.  

	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. Treasury and U.S. government agency securities	$	2,999	1.46	%	$	—	—	%	$	—	—	%	$	—	—	%
Mortgage-backed securities	26		3.38		495		3.13		5,893		3.23		21,689		3.75
Available for Sale:
Mortgage-backed securities	—		—		145		4.59		130		2.90		22,257		2.53
Total portfolio	$	3,025	1.48	%	$	640	3.46	%	$	6,023	3.22	%	$	43,946	2.53	%

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There were no securities which had an aggregate book value in excess of 10% of the Bank’s total equity at September 30, 2019.  At September 30, 2019, the Bank had $317,000 of private label mortgage-backed securities in the held to maturity investment securities portfolio of which $294,000 were on non-accrual status.  For additional information regarding investment securities, see “Item 1A. Risk Factors – Our investment securities portfolio may be negatively impacted by fluctuations in market value and interest rates and result in losses” and Note 4 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 and the Federal Reserve Bank of San Francisco ("FRB") may be used to compensate for reductions in the availability of funds from other sources.

Deposit Accounts.  Substantially all of the Bank's depositors are residents of Washington.  Deposits are attracted from within the Bank's market area through the offering of a broad selection of deposit instruments, including money market deposit accounts, checking accounts, regular savings accounts and certificates of deposit.  Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.  In determining the terms of its deposit accounts, the Bank considers current market interest rates, profitability to the Bank, matching deposit and loan products and its customer preferences and concerns.  The Bank actively seeks consumer and commercial checking accounts through checking account acquisition marketing programs. The Bank also has checking accounts owned by businesses associated with the marijuana (or Initiative-502) industry in Washington State. It is generally permissible in Washington State to handle accounts associated with this industry in compliance with federal regulatory guidelines.  At September 30, 2019, the Bank had $31.43 million, or 2.9% of total deposits, from businesses associated with the marijuana industry. See "Risk Factors- We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that could increase our costs of operations."

At September 30, 2019, the Bank had $29.21 million of jumbo certificates of deposit of $250,000 or more.  The Bank had brokered certificates of deposit totaling $3.20 million, brokered non-interest bearing demand accounts totaling $7.74 million, and $8.39 million in brokered reciprocal money market deposits at September 30, 2019. The Bank believes that its jumbo certificates of deposit, which represented 2.7% of total deposits at September 30, 2019, 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, 2019:

Category		Amount		Percentage of Total Deposits
	(Dollars in thousands)
Non-interest bearing demand		$	296,472	27.75	%
Negotiable order of withdrawal (“NOW”) checking		297,055		27.81
Savings		164,506		15.40
Money market		144,539		13.53
Subtotal		902,572		84.49
Certificates of Deposit (1)
Maturing within 1 year		92,266		8.64
Maturing after 1 year but within 2 years		38,724		3.63
Maturing after 2 years but within 5 years		34,665		3.24
Maturing after 5 years		—		—
Total certificates of deposit		165,655		15.51
Total deposits		$	1,068,227	100.00	%

______________________

(1)    Based on remaining maturity of certificates.

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The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity as of September 30, 2019.  Jumbo certificates of deposit have principal balances of $250,000 or more, and the rates paid on these accounts are generally negotiable.

Maturity Period	Amount
	(Dollars in thousands)
Three months or less	$	5,912
Over three through six months	5,754
Over six through twelve months	6,133
Over twelve months	11,412
Total	$	29,211

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,
	2019						2018							2017
	Amount		Percent of Total		Increase (Decrease)		Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total
	(Dollars in thousands)
Non-interest-bearing demand	$	296,472	27.75	%	$	63,214	$	233,258	26.22	%	$	27,306		$	205,952	24.58	%
NOW checking	297,055		27.81		71,765		225,290		25.33		4,975			220,315		26.29
Savings	164,506		15.40		13,102		151,404		17.02		10,417			140,987		16.83
Money market	144,539		13.53		6,793		137,746		15.49		6,744			131,002		15.64
Certificates of deposit which mature:
Within 1 year	92,266		8.64		16,109		76,157		8.56		717			75,440		9.00
After 1 year, but within 2 years	38,724		3.63		6,720		32,004		3.60		4,234			27,770		3.31
After 2 years, but within 5 years	34,665		3.24		1,018		33,647		3.78		(2,640		)	36,287		4.33
Certificates maturing thereafter	—		—		—		—		—		(145		)	145		0.02
Total	$	1,068,227	100.0	%	$	178,721	$	889,506	100.0	%	$	51,608		$	837,898	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,
	2019		2018		2017
	(Dollars in thousands)
0.00 - 1.99%	$	82,953	$	108,527	$	133,050
2.00 - 3.99%	78,274		33,016		6,332
4.00 - 5.99%	4,428		265		260
Total	$	165,655	$	141,808	$	139,642

Certificates of Deposit by Maturities.  The following table sets forth the amount and maturities of certificates of deposit at September 30, 2019:

	Amount Due
	Less Than One Year		One to Two Years		After Two to Five Years		After Five Years		Total
	(Dollars in thousands)
0.00 - 1.99%	$	55,732	$	14,454	$	12,767	$	—	$	82,953
2.00 - 3.99%	36,325		23,252		18,697		—		78,274
4.00 - 5.99%	209		1,018		3,201		—		4,428
Total	$	92,266	$	38,724	$	34,665	$	—	$	165,655

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

	Year Ended September 30,
	2019		2018		2017
	(Dollars in thousands)
Beginning balance	$	889,506	$	837,898	$	761,534
Deposits acquired in South Sound Acquisition	151,538		—		—
Net deposits before interest credited	22,618		48,830		74,146
Interest credited	4,565		2,778		2,218
Net increase in deposits	178,721		51,608		76,364
Ending balance	$	1,068,227	$	889,506	$	837,898

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 borrowings from the FHLB to supplement its supply of lendable funds and to meet deposit withdrawal requirements.  The FHLB functions as a central reserve bank providing credit for member financial institutions.  As a member of the FHLB, the Bank is required to own capital stock in the FHLB and is authorized to apply for borrowings on the security of such stock and certain mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. government) provided certain creditworthiness standards have been met.  Borrowings are made pursuant to several different credit programs.  Each credit program has its own interest rate and range of maturities.  Depending on the program, limitations on the amount of borrowings are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. At September 30, 2019, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount to 45% of the Bank’s total assets, limited by available collateral. The Bank had no outstanding balance on this borrowing line at September 30, 2019. The Bank also has a Letter of Credit ("LOC") of up to $23.00 million with the FHLB for the purpose of collateralizing Washington State public deposits. all of which was available to be drawn upon at September 30, 2019. The LOC amount reduces the Bank's available FHLB borrowings. The Bank maintains a short-term borrowing line of credit with the FRB with total credit based on eligible collateral.  At September 30, 2019, the Bank had no outstanding balance and $84.36 million in unused borrowing capacity on this borrowing line of credit. A short-term borrowing line of credit of $10.00 million is also maintained at Pacific Coast Bankers' Bank ("PCBB"). The Bank had no outstanding balance on this borrowing line of credit at September 30, 2019.

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

	At or For the Year Ended September 30,
	2019			2018			2017
	(Dollars in thousands)
Average total borrowings	$	—		$	—		$	17,096
Weighted average rate paid on total borrowings	—		%	—		%	5.73		%	(1)
Total borrowings outstanding at end of period	$	—		$	—		$	—

________________________

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

The Bank did not have any short-term borrowings for the years ended September 30, 2019, 2018 and 2017.

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, 2019, the cash surrender value of bank owned life insurance (“BOLI”) was $21.01 million.

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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 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") established the Consumer Financial Protection Bureau ("CFPB") as an independent bureau of the Federal Reserve with responsibility for the implementation of federal financial consumer protection and fair lending laws and regulations. The Bank is subject to consumer protection regulations issued by the CFPB, but as a smaller financial institution, is generally subject to supervision and enforcement by the FDIC and DFI with respect to its compliance with federal and state consumer financial protection laws and regulations.

The following is a brief description of certain laws and regulations applicable to Timberland Bancorp and the Bank. Descriptions of laws and regulations here and elsewhere in this report do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the U.S. Congress or the Washington State Legislature that may affect the operations of Timberland Bancorp and the Bank. In addition, the regulations governing the Company and the Bank may be amended from time to time by the FDIC, DFI, Federal Reserve and the CFPB. Any such legislation or regulatory changes in the future could adversely affect the Company's and the Bank's operations and financial condition. We cannot predict whether any such changes may occur.

Regulation of the Bank

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

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

Insurance of Accounts and Regulation by the FDIC.  The deposit insurance fund (the "DIF") of the FDIC insures deposit accounts in the Bank up to $250,000 per separately insured deposit ownership right or category.  As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The Bank's deposit insurance premiums for the year ended September 30, 2019 were $187,000.  

Under the FDIC's system for assessing insurance premiums, insured institutions that do not have assets of $10 billion are assessed based on CAMELS component ratings and certain financial ratios. For these institutions, total base assessment rates range from 3 to 30 basis points, subject to adjustment. Stronger institutions pay lower rates, while riskier institutions pay higher rates. Assessments are applied to an institution's assessment base, which is its average consolidated total assets minus average tangible equity. The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the future.

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

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

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

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

In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer that consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital ratios in order to avoid limitations on paying dividends, repurchasing shares and paying certain discretionary bonuses. At September 30, 2019 the conservation buffer was an amount greater than 2.5%.

In addition to the capital requirements, there have been a number of changes in what constitutes regulatory capital, subject to transition periods. These changes include the phasing-out of certain instruments of qualifying capital. The Bank did not have any of these instruments at September 30, 2019. Servicing rights and deferred tax assets over designated percentages of CET1 are deducted from capital, subject to a four-year transition period. CET1 capital consists of Tier 1 capital less all capital components that are not considered common equity. In addition, Tier 1 capital includes accumulated other comprehensive income (loss), which includes all unrealized gains and losses on available for sale debt securities, subject to a four-year transition period. Because of the Bank's asset size, it was not considered an advanced approaches banking organization and elected in the first quarter of calendar year 2015 to take the one-time option of deciding to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt securities in its capital calculations.

The following table compares the Bank's actual capital amounts at September 30, 2019 to its minimum regulatory capital requirements at that date (Dollars in thousands):

	Actual				Regulatory Minimum To Be "Adequately Capitalized				Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	152,926	12.47	%	$	49,044	4.00	%	$	61,305	5.00	%
Risk-based Capital Ratios:
CET1 capital	152,926		18.10		38,019		4.50		54,916		6.50
Tier 1 capital	152,926		18.10		50,692		6.00		67,589		8.00
Total capital	162,857		19.28		67,589		8.00		84,487		10.00

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

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For additional information regarding the Bank's regulatory capital requirements, see Note 17 of the Notes to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.

In September 2019, the FDIC and other federal banking agencies adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio ("CBLR") for institutions that have total consolidated assets of $10 billion or less and meet other qualifying criteria. The CBLR provides a simple measure of capital adequacy for qualifying institutions. Qualifying institutions that elect to use the CBLR framework and that maintain a leverage capital ratio of greater than 9% will be considered to have satisfied the general applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. Management is still reviewing the CBLR framework.

Prompt Corrective Action.  Federal statutes establish a supervisory framework based on five capital categories:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.  An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors.  An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized. Under these regulations, an institution is treated as well capitalized if it has (i) a total risk-based capital ratio of 10.0% or more, (ii) a CET1 risk-based capital ratio of 6.5% or more, (iii) a Tier 1 risk-based capital ratio of 8.0% or more, and (iv) a leverage ratio of 5.0% or more, and is not subject to any of certain specified requirements to meet and maintain a specific capital level for any capital measure.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized.  Failure by an institution to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator.  Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.  Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.

At September 30, 2019, the Bank was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC.  For additional information regarding the Bank's minimum regulatory capital requirements, see "Capital Requirements" above and Note 17 of the Notes to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Federal Home Loan Bank System. The Bank is a member of the FHLB, one of 11 regional Federal Home Loan Banks that administer the home financing credit function of savings institutions, each serving as a reserve or central bank for its members within its assigned region.  The FHLB is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.  It makes loans 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 borrowings from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB.  In addition, all long-term borrowings are required to provide funds for residential home financing.  See “Deposit Activities and Other Sources of Funds – Borrowings" above.

As a member, the Bank is required to purchase and maintain stock in the FHLB based on the Bank's asset size and level of borrowings from the FHLB.  At September 30, 2019, the Bank had $1.44 million in FHLB stock, which was in compliance with this requirement.  The FHLB pays dividends quarterly, and the Bank received $51,000 in dividends during the year ended September 30, 2019.

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

Standards for Safety and Soundness.  The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to: internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits.  The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities.  The information security program also must be

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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, 2019, the Bank’s aggregate loans in excess of the supervisory loan-to-value ratios were 0.3% of total capital and 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 0.1% of total capital.

Activities and Investments of Insured State-Chartered Financial Institutions.  Federal law generally limits the activities and equity investments of FDIC-insured state-chartered banks to those that are permissible for national banks.  An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain requirements are met.

Under the law of Washington State, Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the Director in certain situations.  In addition,Washington-chartered savings banks 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 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, 2019, the Bank’s deposit with the Federal Reserve and vault cash exceeded its Regulation D reserve requirements.

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Affiliate Transactions.  Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies.  Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of the bank subsidiary’s capital and surplus and, with respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus.  Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts.  Federal law also requires that covered transactions and certain other transactions between a bank and its affiliates listed in Section 23B of the Federal Reserve Act and related regulations must be on terms as favorable to the bank as transactions with non-affiliates.

Community Reinvestment Act. Banks are also subject to the provisions of the Community Reinvestment Act of 1977 (“CRA”), which requires the appropriate federal bank regulatory agency to assess a bank’s performance under the CRA in meeting the credit needs of the community serviced by the bank, including low- 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 Company shareholders.  The amount of dividends payable by the Bank to the Company depends upon the Bank's earnings and capital position, and is limited by federal and state laws, regulations and policies. According to Washington law, the Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (i) the amount required for liquidation accounts or (ii) the net worth requirements, if any, imposed by the Director of the Division. In addition, dividends on the Bank's capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of the Bank, without the approval of the Director of the Division. Dividends payable by the Bank can be limited or prohibited if the Bank does not meet the capital conservation buffer requirement.

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

Other Consumer Protection Laws and Regulations.  The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers.  While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing.  These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services.  Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.

Regulation of the Company

           General.  The Company, as the sole shareholder of the Bank, is a bank holding company registered with the Federal Reserve.  Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the regulations promulgated thereunder.  This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank.

As a bank holding company, the Company is required to file quarterly reports with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular examinations by the Federal Reserve.  The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank

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subsidiaries).  In general, enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.

BHCA.  The Company is supervised by the Federal Reserve under the BHCA.  Federal Reserve policy requires that a bank holding company serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.  In addition, the Federal Reserve provides that bank holding companies should serve as a source of strength to its subsidiary banks by being prepared to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks.  A bank holding company's failure to meet its obligation to serve as a source of strength to its subsidiary bank will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's regulations or both. The Dodd-Frank Act essentially codified this policy.

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

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

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

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

Dividends.  Federal Reserve policy limits the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company's capital needs, asset quality and overall financial condition, and that it is inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.  Under Washington corporate law, the Company generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than its total liabilities. The capital conservation buffer requirement can also limit dividends.

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

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would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.  

Capital Requirements.  As a bank holding company registered with the Federal Reserve, the Company is subject to the capital adequacy requirements of the Federal Reserve under the BHCA and the regulations of the Federal Reserve. For a bank holding company with less than $3.00 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If the Company were subject to regulatory guidelines for bank holding companies with $3.00 billion or more in assets, at September 30, 2019, the Company would have exceeded all regulatory requirements.

The following table presents the regulatory capital ratios for the Company as of September 30, 2019 (Dollars in thousands):

	Actual
	Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	155,468	12.65	%
Risk-based Capital Ratios:
CET1 capital	155,468		18.40
Tier 1 capital	155,468		18.40
Total capital	165,399		19.57

For additional information see Note 17 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K.

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

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

The 2018 Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single CBLR of between 8 and 10 percent, as described above. Any qualifying depository institution or its holding company that exceeds the CBLR will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules.

The 2018 Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company

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may have from $1 billion to $3 billion. A major effect of this change is to exclude such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the 2018 Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how any new standards under the 2018 Act will ultimately be applied to us or what specific impact the 2018 Act and the yet-to-be-written implementing rules and regulations will have on community banks.

Taxation

Federal Taxation

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

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35.0% to a flat 21.0%. The corporate federal income tax rate reduction was effective January 1, 2018. Since the Company has a fiscal year end of September 30, the reduced federal corporate income tax rate for fiscal year 2018 was the result of the application of a blended federal statutory tax rate of 24.5%, which was based on the applicable tax rates before and after the Tax Act and corresponding number of days in the fiscal year before and after enactment, and then a 21.0% federal corporate income tax rate for fiscal 2019 and thereafter. The Tax Act also required a revaluation of the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate income tax rates and other provisions of the legislation. As a result of the Company’s revaluation, the net deferred tax asset (“DTA”) was reduced through an increase to the provision for income taxes. The revaluation of our DTA balance resulted in a one-time increase for the fiscal year ended September 30, 2018 to federal income tax of $548,000. For additional details see Note 13 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Dividends-Received Deduction. The Company may exclude from its income 100.0% of dividends received from the Bank as a member of the same affiliated group of corporations.  The corporate dividends-received deduction is generally 70.0% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank owns more than 20.0% of the stock of a corporation distributing a dividend, then 80.0% of any dividends received may be deducted.

Audits.The Company is no longer subject to U.S. federal tax examination by tax authorities for years ended on or before September 30, 2015.

Washington Taxation

The Company and the Bank are subject to a business and occupation tax imposed under Washington law at the rate of 1.5% of gross receipts at September 30, 2019. This business and occupation tax rate is scheduled to increase to 1.8% of gross receipts starting on January 1, 2020. Interest received on loans secured by mortgages or deeds of trust on residential properties, certain residential mortgage-backed securities, and certain U.S. government and agency securities is not subject to this tax.

Competition

The Bank operates in an intensely competitive market for the attraction of deposits (generally its primary source of lendable funds) and in the origination of loans.  Historically, its most direct competition for deposits has come from commercial banks, thrift institutions and credit unions in its primary market area.  In times of high interest rates, the Bank experiences additional significant competition for investors' funds from short-term money market securities and other corporate and government securities.  The Bank's competition for loans comes principally from mortgage bankers, commercial banks, thrift institutions and credit unions.  Such competition for deposits and the origination of loans may limit the Bank's future growth and earnings prospects.

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Subsidiary Activities

The Bank has one wholly-owned subsidiary, Timberland Service Corporation (“Timberland Service”), whose primary function is to provide escrow services.

Personnel

As of September 30, 2019, the Bank had 286 full-time employees and 12 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, 2019	Position
Name		Company	Bank
Michael R. Sand	65	President and Chief Executive Officer	President and Chief Executive Officer
Dean J. Brydon	52	Executive Vice President, Chief Financial Officer and Secretary	Executive Vice President, Chief Financial Officer and Secretary
Robert A. Drugge	68	Executive Vice President of Lending	Executive Vice President of Lending
Jonathan A. Fischer	45	Executive Vice President and  Chief Operating Officer	Executive Vice President and   Chief Operating Officer
Edward C. Foster	62	Executive Vice President and   Chief Credit Administrator	Executive Vice President and   Chief Credit Administrator
Marci A. Basich	50	Senior Vice President and   Treasurer	Senior Vice President and Treasurer

Biographical Information.

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

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

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

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

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

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joining Carson River Community Bank, Mr. Foster served as a Senior Regional Credit Officer for Omni National Bank from September 2006 through March 2008.

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

Item 1A.  Risk Factors

We assume and manage a certain degree of risk in order to conduct our business strategy.  In addition to the risk factors described below, other risks and uncertainties not specifically mentioned, or that are currently known to, or deemed to be immaterial by management, also may materially and adversely affect our financial position, results of operations and/or cash flows.  Before making an investment decision, you should carefully consider the risks described below together with all of the other information included in this Form 10-K and our other filings with the SEC.  If any of the circumstances described in the following risk factors actually occur to a significant degree, the value of our common stock could decline, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.

Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.

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

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

• loan delinquencies, problem assets and foreclosures may increase;

• we may increase our allowance for loan losses;

• the sale of foreclosed assets may slow;

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

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

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

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

A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse. Many of the loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower's ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, government rules or policies and natural disasters such as fires and earthquakes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.

Our real estate construction and land loans expose us to significant risks.

We make real estate construction loans to individuals and builders, primarily for the construction of residential properties. We originate these loans whether or not the collateral property underlying the loan is under contract for sale. At September 30, 2019, construction loans totaled $223.53 million, or 22.5% of our total loan portfolio, of which $181.56 million were for residential real estate projects, $39.57 million for commercial real estate projects and $2.40 million for land development projects. This compares to total construction loans of $188.36 million, or 22.9% of our total loan portfolio at September 30, 2018, or an increase of 18.7% during the past year. Approximately $128.85 million of our residential construction loans at September 30, 2019 were made to finance the construction of owner-occupied homes and are structured to be converted to permanent loans at the end of the construction phase.  In general, construction lending involves additional risks because funds are advanced upon estimates of costs in relation to values associated with the completed project. Construction lending involves additional risks when compared

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with permanent residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the complete project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Changes in demand for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and may be concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of the builders we deal with have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. In addition during the term of some of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchaser's borrowing costs, thereby possibly reducing the homeowner's ability to finance the home upon completion or the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working our problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project. At September 30, 2019, $16.45 million of our construction portfolio was comprised of speculative one- to four-family construction loans. We also make land loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to use for recreational purposes. At September 30, 2019, land loans totaled $30.77 million, or 3.1% of our total loan portfolio. Loans on land under development or held for future construction as well as land loans made to individuals for the future construction of a residence also pose additional risk because the length of time from financing to completion of a development project is significantly longer than for a traditional construction loan, which makes them more susceptible to declines in real estate values, declines in overall economic conditions which may delay the development of the land and changes in the political landscape that could affect the permitted and intended use of the land being financed, and the potential illiquid nature of the collateral. In addition, during this long period of time from financing to completion, the collateral often does not generate any cash flow to support the debt service. At September 30, 2019, all construction loans were performing in accordance to their terms and $204,000 of land loans were non-performing.  A material increase in our non-performing construction or land loans could have a material adverse effect on our financial condition and results of operation.

Our emphasis on commercial real estate lending may expose us to increased lending risks.

Our current business strategy includes an emphasis on commercial real estate lending. This type of lending activity, while potentially more profitable than single-family residential lending, is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in these types of loans requires a more detailed analysis at the time of loan underwriting and on an ongoing basis. In our primary market of western Washington, a downturn in the real estate market could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.

At September 30, 2019, we had $419.12 million of commercial real estate mortgage loans, representing 42.3% 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 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.

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A secondary market for most types of commercial real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans.  As a result of these characteristics, if we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on commercial real estate loans may be larger as a percentage of the total principal outstanding than those incurred with our residential or consumer loan portfolios.

The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm non-residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution).  The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations.  The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards because our balance in commercial real estate loans at September 30, 2019 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, 2019, we had $64.76 million, or 6.5%, 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, 2019, $172.85 million, or 17.4%, of our total loan portfolio was secured by one- to four-family mortgage loans and home equity loans.  This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Recessionary conditions or declines in the volume of single-family real estate and/or the sales prices as well as elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations. Further, the Tax Act enacted in December 2017 could negatively impact our customers because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments, and could also negatively impact the housing market, which could adversely affect our business and loan growth. A decline in residential real estate values resulting from a downturn in the Washington housing market may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans.

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Many of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because either we originated the loan with a relatively high combined loan-to-value ratio or because of the decline in home values in our market areas subsequent to when the loans were originated.  Residential loans with combined higher loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale proceeds.  Further, a significant amount of our home equity lines of credit consist of second mortgage loans. For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property.  For these reasons, we may experience higher rates of delinquencies, default and losses on our residential loans.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

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

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

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

• the duration of the loan;

• the credit history of a particular borrower; and

• changes in economic and industry conditions.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged against operating income, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management through periodic comprehensive reviews and consideration of several factors, including, but not limited to:

• an ongoing review of the quality, size and diversity of the loan portfolio;

• evaluation of non-performing loans;

• historical default and loss experience;

• existing economic conditions and management's expectations of future events;

• risk characteristics of the various classifications of loans;

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

• regulatory requirements and expectations.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and the loss experience and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in our allowance for loan losses through the provision for losses on loans which is charged against income. Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. Further, the Financial Accounting Standards Board has adopted a new accounting standard that will be effective for our fiscal year beginning October 1, 2023. This standard, referred to as Current Expected Credit Loss ("CECL") will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for credit losses that are probable. We anticipate that our allowance for loan losses will increase as a result of the implementation of CECL, however, until our evaluation is complete, the magnitude of the increase will be unknown.

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may also require an increase in the allowance for loan losses.  In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different from those of management. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to replenish

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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, 2019 our non-performing assets (which consist of non-accruing loans, accruing loans 90 days or more past due, non-accrual investment securities, and OREO and other repossessed assets) were $5.01 million, or 0.40% of total assets. Our non-performing assets adversely affect our net income in various ways:

• We do not record interest income on non-accrual loans or non-performing investment securities, except on a cash basis when the collectibility of the principal is not in doubt.

• We must provide for probable loan losses through a current period charge to the provision for loan losses.

• Non-interest expense increases when we must write down the value of properties in our OREO portfolio to reflect changing market values.

• Non-interest income decreases when we must recognize other-than-temporary impairment on non-performing investment securities.

• There are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance costs related to our OREO.

• The resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.

If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations. In addition to the non-performing loans, there were $2.90 million in loans classified as performing troubled debt restructurings at September 30, 2019.

We may be adversely affected by risks associated with completed and potential acquisitions.

As part of our general growth strategy, on October 1, 2018 we completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets. There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets. The consummation of any future acquisitions may dilute shareholder value or may have an adverse effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by our existing operations, or otherwise perform as expected. Further, transaction-related expenses may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on the value of our common stock. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:

• We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;

• Higher than expected deposit attrition;

• The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal adverse effect on the acquired business and its customers, we may not be able to realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful;

• To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operation and financial condition;

• We expect our net income will increase following an acquisition; however, we also expect our general and administrative expenses to increase, which could result to an increase in our efficiency ratio. Ultimately, we would expect our efficiency ratio to improve; however, if we are not successful in our integration process, this may not occur, and our acquisition or branching activities may not be accretive to earnings in the short or long-term.

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

Under GAAP, we are required to record loans acquired through acquisitions, including purchase credit impaired loans, at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances on the acquisition date. Actual performance could differ from management’s initial estimates. If these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our net interest margins may initially increase due to the discount accretion. We expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and the discount decreases, and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest margins and lower interest income in future periods.

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

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

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

Uncertainty relating to the London Interbank Offered Rate ("LIBOR") calculation process and potential phasing out of LIBOR may adversely affect our results of operations.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally. The Federal Reserve Board, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing the U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities ("SOFR"). SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Whether or not SOFR attains traction as a LIBOR replacement tool remains in question, although some transactions using SOFR have been completed in 2019, and the future of LIBOR remains uncertain as this time. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and securities in our portfolio. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may experience significant expenses in effecting the transition, and may be subject to disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations.

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

Our investment securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income (loss) and/or earnings. Fluctuations in market value may be caused by changes in market interest

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

During the year ended September 30, 2019, we recognized a $59,000 recovery of OTTI charges on private label mortgage backed securities we hold for investment. During the year ended September 30, 2018, we recognized a $68,000 recovery of OTTI charges on private label mortgage backed securities we hold for investment. During the year ended September 30, 2017, we recognized a $33,000 recovery of OTTI charges on private label mortgage backed securities we hold for investment. At September 30, 2019, our remaining private label mortgage backed securities portfolio totaled $317,000 of which $294,000 was on non-accrual status.

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

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

The sale of residential mortgage loans to Freddie Mac provides a significant portion of our non-interest income. Any future changes in their program, our eligibility to participate in such program, the criteria for loans to be accepted or laws that significantly affect the activity of Freddie Mac could, in turn, materially adversely affect our results of operations if we could not find other purchasers. Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment, the demand for mortgage loans, particularly refinancing of existing mortgage loans, tends to fall and our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold. This would result in a decrease in mortgage revenues and a corresponding decrease in non-interest income. In addition, our results of operations are affected by the amount of non-interest expense associated with our loan sale activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell loans to Freddie Mac or into the secondary market without recourse, we are required to give customary representations and warranties about the loans we sell. If we breach those representations and warranties, we may be required to repurchase the loans and we may incur a loss on the repurchase.

Fluctuating interest rates can adversely affect our profitability

Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. In an attempt to help the overall economy, the Federal Reserve Board kept interest rates low through its targeted Fed Funds rate for a number of years, however, the Federal Reserve Board had steadily increased the federal funds target rate in 2018 and 2017. Beginning in August 2019 the Federal Reserve Board has reduced the federal funds target rate 25 basis points three times to a current range of 1.50% to 1.75% in response to some recent weaknesses in economic data and indicated possible further decreases subject to economic conditions. If the Federal Reserve Board increases the Fed Funds rate, overall interest rates will likely rise, which may negatively impact both the housing markets by reducing refinancing activity and new home purchases and the U.S. economy. In addition, deflationary pressures, while possibly lowering our operational costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans which could negatively affect our financial performance.

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect: (1) our ability to originate and/or sell loans and obtain deposits; (2) the fair value of our financial assets and liabilities, which could negatively impact shareholders’ equity, and our ability to realize gains from the sale of such assets; (3) our ability to obtain and retain deposits

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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 investment securities portfolio and other interest-earning assets.  If the interest rates paid on deposits and borrowings increase at a faster rate than the interest received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments decline more rapidly than the interest rates paid on deposits and other borrowings. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.

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

A sustained increase or decrease in market interest rates could adversely affect our earnings. As a result of the exceptionally low interest rate environment, an increasing percentage of our deposits have been comprised of deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets. At September 30, 2019, we had $92.27 million in certificates of deposit that mature within one year and $902.57 million in non-interest bearing, NOW checking, savings and money market accounts. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. In addition, a substantial amount of our residential mortgage loans and home equity lines of credit have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment.

Changes in interest rates also affect the value of our interest-earning assets and in particular our investment securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on investment securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of investment securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders' equity.

Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk management.

The financial services market is undergoing rapid technological changes, and if we are unable to stay current with those changes, we may not be able to effectively compete.

The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success will depend, in part, on our ability to keep pace with the technological changes and to use technology to satisfy and grow customer demand for our products and services and to create additional efficiencies in our operations. We expect that we will need to make substantial investments in our technology and information systems to compete effectively and to stay current with technological changes. Some of our competitors have substantially greater resources to invest in technological improvements and will be able to invest more heavily in developing and adopting new technologies, which may put us at a competitive disadvantage. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations may be adversely affected.

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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 at times, borrowings from the FHLB, borrowings from the FRB and other borrowings to fund our operations. At September 30, 2019, we had no FHLB borrowings outstanding and a letter of credit with an available balance of $23.00 million and an additional $380.03 million of available borrowing capacity through the FHLB and the FRB. Deposit flows and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived, and the competition for deposits and loans in the markets we serve. Further, changes to the FHLB's underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our ability to borrow, and could therefore have a significant adverse impact on our liquidity.  Although we have historically been able to replace maturing deposits and borrowings if desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB or FRB, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry. Additional factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington markets where our deposits are concentrated or adverse regulatory action against us.

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

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

The banking industry is extensively regulated. Federal banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company's shareholders. These regulations may sometimes impose significant limitations on our operations. Certain significant federal and state banking regulations that affect us are described in this report under the heading "Item 1. Business-How We Are Regulated". These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Any new regulations or legislation, change in existing regulation or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business and adversely affect our profitability. In this regard, the U.S. Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN"), published guidelines in 2014 for financial institutions servicing marijuana businesses that are legal under state law. These guidelines allow us to work with marijuana-related businesses that are operating in accordance with state laws and regulations, so long as we comply with required regulatory oversight of their accounts with us. In addition, a marijuana financial services bill is currently pending in Congress that would allow banks and financial institutions to serve marijuana businesses in states where it is legal without any risk of federal prosecution. At September 30, 2019, approximately 2.9% of our total deposits and a portion of our service charges from deposits are from legal marijuana-related businesses. Any adverse change in this FinCEN guidance, any new regulations or legislation, any change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a negative impact on our non-interest income, as well as the cost of our operations, increasing our cost of regulatory compliance and of doing business and/or otherwise affect us, which may materially affect our profitability.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with FinCEN. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions. Recently several banking institutions

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have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.  At some point, we may need to raise additional capital to support our growth or replenish future losses.  Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance.  If we are able to raise capital it may not be on terms that are acceptable to us.  Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all.  If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action. 

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

We performed our test for goodwill impairment for fiscal year 2019, and the test concluded that recorded goodwill was not impaired. Our test of goodwill for potential impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market conditions, cost or margin factors, financial performance and share price. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to exist, we would be required to write down our goodwill resulting in a charge against operations, which would adversely affect our results of operations, perhaps materially; however, it would have no impact on our liquidity, operations or regulatory capital. The acquisition of South Sound Bank on October 1, 2018 substantially increased our goodwill.

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

Servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with servicing rights retained.  At September 30, 2019, our servicing rights totaled $2.41 million.  Servicing rights are amortized to servicing income on loans sold over the period of estimated net servicing income.  The estimated fair value of servicing rights 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 servicing rights 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 servicing rights 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 servicing rights portfolio.  For example, a decrease in interest rates typically increases the prepayment speeds of servicing rights and therefore decreases the fair value of the servicing rights.  Future decreases in interest rates could decrease the fair value of our servicing rights below their recorded amount, which would decrease our earnings.

Our framework for managing risks may not be effective in mitigating risk and loss to us.

We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. As with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses which could have a material adverse effect on our financial condition and results of operations.

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

Our security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general

44

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

Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operation.

Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While the Company selects third-party vendors carefully, it does not control their actions. If our third-party providers encounter difficulties, including those resulting from breakdowns, or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third-party failures and insurance coverage may be inadequate to cover all losses, resulting from breaches, systems failures or other disruptions. If any of our third party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

The board of directors oversees the risk management process, including the risk of cybersecurity, and engages with management on cybersecurity issues.

Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customers' information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent

45

fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

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

Competition for qualified employees and personnel in the banking industry is intense, and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Bank conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel.  In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President, and certain other employees.  In addition, our success has been and continues to be highly dependent upon the services of our directors, and we may not be able to identify and attract suitable candidates to replace such directors.

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

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

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

We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by a third party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors' performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

Item 1B.  Unresolved Staff Comments

Not applicable.

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Item 2.  Properties

At September 30, 2019, the Bank operated 24 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 Lacey office at 1751 Circle Lane SE and the Lacey office at 4530 Lacey Blvd SE, which are leased.

Location	Year Opened	Approximate Square Footage	Deposits at September 30, 2019
			(In thousands)
Main Office:
624 Simpson Avenue Hoquiam, Washington 98550	1966	7,700	$	68,981
Branch Offices:
300 N. Boone Street Aberdeen, Washington 98520	1974	3,400	36,425
201 Main Street South Montesano, Washington 98563	2004	3,200	41,519
361 Damon Road Ocean Shores, Washington 98569	1977	2,100	36,050
2418 Meridian Avenue East Edgewood, Washington 98371	1980	2,400	52,130
202 Auburn Way South Auburn, Washington 98002	1994	4,200	31,617
12814 Meridian Avenue East (South Hill) Puyallup, Washington 98373	1996	4,200	43,118
1201 Marvin Road, N.E. Lacey, Washington 98516	1997	4,400	29,725
101 Yelm Avenue W. Yelm, Washington 98597	1999	3,400	35,025
20464 Viking Way NW Poulsbo, Washington 98370	1999	1,800	23,196
2419 224th Street E. Spanaway, Washington 98387	1999	3,900	44,448
801 Trosper Road SW Tumwater, Washington 98512	2001	3,300	41,343
7805 South Hosmer Street Tacoma, Washington 98408	2001	5,000	74,996
2401 Bucklin Hill Road Silverdale, Washington 98383	2003	4,000	45,390
423 Washington Street SE Olympia, Washington 98501	2003	3,000	51,655
3105 Judson Street Gig Harbor, Washington 98335	2004	2,700	36,844
117 N. Broadway Aberdeen, Washington 98520	2004	3,700	49,546
313 West Waldrip Street Elma, Washington 98541	2004	5,900	34,540
(table continued on the following page)

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Location	Year Opened	Approximate Square Footage	Deposits at September 30, 2019
			(In thousands)

1751 Circle Lane SE Lacey, Washington 98503	2004	900	18,486
101 2nd Street Toledo, Washington 98591	2004	1,800	41,056
209 NE 1st Street Winlock, Washington 98586	2004	3,400	22,795
714 W. Main Street Chehalis, Washington 98532	2009	4,600	56,692
2850 Harrison Ave NW Olympia, Washington 98502	2018	7,800	65,489
4530 Lacey Blvd SE Lacey, Washington 98503	2018	3,700	87,161
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, 2019, the Bank operated 25 proprietary automated teller machines ("ATMs") that are part of a nationwide cash exchange network.

Item 3.  Legal Proceedings

Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company's business.  The Company is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company.

Item 4. Mine Safety Disclosures

Not applicable.

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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, 2019, there were 8,345,069 shares of common stock issued and approximately 488 shareholders of record.  

Stock Repurchases

The Company is subject to certain restrictions on its ability to repurchase its common stock. The Company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.  

The Company has had various stock repurchase programs since January 1998. On July 28, 2015, the Company announced a plan to repurchase 352,681 shares of the Company's common stock. This marked the Company's 17th stock repurchase plan. As of September 30, 2019, the Company had repurchased 151,228 shares under this plan at an average price of $13.41 per share. Cumulatively, since January 1998 the Company has repurchased 7,935,162 shares at an average price of $9.06 per share.

The following table sets forth the Company's repurchases of its outstanding Common Stock during the fourth quarter of the year ended September 30, 2019:

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans
July 1, 2019 - July 31, 2019	—	$	—	—	219,062
August 1, 2019 - August 31, 2019	17,609	24.33		17,609	201,453
September 1, 2019 - September 30, 2019	—	—		—	201,453
Total	17,609	$	24.33	17,609	201,453

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, 2014.

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	Year Ended
Index	9/30/2014		9/30/2015		9/30/2016		9/30/2017		9/30/2018		9/30/2019
Timberland Bancorp	$	100.00	$	105.65	$	157.02	$	319.48	$	324.68	$	293.90
NASDAQ Composite	100.00		104.00		121.08		149.75		187.44		188.43
SNL $500M-$1B Thrift Index *	100.00		118.08		134.39		193.64		224.33		203.84

* Source: S&P Global Market Intelligence

For additional information, see Part III, Item 12 of this Form 10-K for information regarding the Company's Equity Compensation Plans, which is incorporated into this Item 5 by reference.

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Item 6.  Selected Financial Data

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

	At September 30,
	2019			2018			2017			2016			2015
	(Dollars in thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets	$	1,247,132		$	1,018,290		$	952,024		$	891,388		$	815,815
Loans receivable, net	886,662			725,391			690,364			663,146			604,277
Investment securities held to maturity	31,102			12,810			7,139			7,511			7,913
Investment securities available for sale	22,532			1,154			1,241			1,342			1,392
FHLB stock	1,437			1,190			1,107			2,204			2,699
Other investments	3,000			3,000			3,000			—			—
Cash and due from financial institutions and interest-bearing deposits in banks	143,015			148,864			148,188			108,941			92,289
Certificates of deposit held for investment	78,346			63,290			43,034			53,000			48,611
OREO and other repossessed assets, net	1,683			1,913			3,301			4,117			7,854
Deposits	1,068,227			889,506			837,898			761,534			678,912
FHLB borrowings	—			—			—			30,000			45,000
Shareholders' equity	171,067			124,657			111,000			96,834			89,187
	Year Ended September 30,
	2019			2018			2017			2016			2015
	(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest and dividend income	$	55,725		$	41,833		$	38,338		$	34,875		$	31,168
Interest expense	4,565			2,778			3,197			4,072			3,890
Net interest income	51,160			39,055			35,141			30,803			27,278
Recapture of loan losses	—			—			(1,250		)	—			(1,525		)
Net interest income after recapture of loan losses	51,160			39,055			36,391			30,803			28,803
Non-interest income	14,341			12,544			12,368			10,889			9,522
Non-interest expense	35,580			29,177			27,516			26,637			25,841
Income before income taxes	29,921			22,422			21,243			15,055			12,484
Provision for income taxes	5,901			5,701			7,076			4,901			4,192
Net income	$	24,020		$	16,721		$	14,167		$	10,154		$	8,292
Net income per common share:
Basic	$	2.89		$	2.28		$	1.99		$	1.48		$	1.20
Diluted	$	2.84		$	2.22		$	1.92		$	1.43		$	1.17
Dividends per common share	$	0.78		$	0.60		$	0.50		$	0.37		$	0.24
Dividend payout ratio (1)	27.04		%	26.50		%	25.70		%	25.39		%	20.42		%

_______________

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

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	At September 30,
	2019	2018	2017	2016	2015
OTHER DATA:
Number of real estate loans outstanding	2,766	2,550	2,593	2,615	2,545
Deposit accounts	59,547	55,441	54,707	53,611	52,343
Full-service offices	24	22	22	22	22

	At or For the Year Ended September 30,
	2019		2018		2017		2016		2015
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (1)	1.96	%	1.70	%	1.53	%	1.19	%	1.07	%
Return on average equity (2)	14.91		14.27		13.65		11.00		9.70
Interest rate spread (3)	4.31		4.10		3.93		3.72		3.66
Net interest margin (4)	4.50		4.23		4.07		3.88		3.80
Average interest-earning assets to average interest-bearing liabilities	148.15		144.17		137.75		131.69		126.41
Non-interest expense as a percent of average total assets	2.91		2.96		2.98		3.13		3.33
Efficiency ratio (5)	54.32		56.55		57.92		63.89		70.22
Asset Quality Ratios:
Non-accrual and 90 days or more past due loans as a percent of total loans receivable, net	0.34	%	0.18	%	0.28	%	0.45	%	1.02	%
Non-performing assets as a percent of total assets (6)	0.40		0.36		0.60		0.88		1.84
Allowance for loan losses as a percent of total loans receivable, net (7)	1.08		1.30		1.36		1.46		1.62
Allowance for loan losses as a percent of non-performing loans (8)	319.49		723.61		499.90		326.66		160.30
Net charge-offs (recoveries) to average outstanding loans	(0.02	)	—		(0.14	)	0.02		(0.17	)
Capital Ratios:
Total equity-to-assets ratio	13.71	%	12.24	%	11.66	%	10.86	%	10.93	%
Average equity to average assets	13.17		11.90		11.25		10.84		11.01

__________________

(1) Net income divided by average total assets.

(2) Net income divided by average total equity.

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

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

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

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

(7) Loans receivable 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.  TDRs that are on accrual status are not included.

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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.

Overview

Timberland Bancorp, Inc., a Washington corporation, is the holding company for Timberland Bank.  The Bank opened for business in 1915 and serves consumers and businesses across Grays Harbor, Thurston, Pierce, King, Kitsap and Lewis counties, Washington with a full range of lending and deposit services through its 24 branches (including its main office in Hoquiam).  At September 30, 2019, the Company had total assets of $1.25 billion, net loans receivable of $886.66 million, total deposits of $1.07 billion and total shareholders’ equity of $171.07 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 relates primarily to the Bank’s operations.

On October 1, 2018, the Company completed the South Sound Acquisition. The operating results for the year ended September 30, 2019 include the operating results produced by the net assets acquired in the South Sound Acquisition. For additional information on the South Sound Acquisition, see Note 2 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

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

The profitability of the Company’s operations depends primarily on its net interest income after provision for (recapture of) loan losses.  Net interest income is the difference between interest income, which is the income that the Company earns on interest-earning assets, which are primarily loans and investments, and interest expense, the amount the Company pays on its interest-bearing liabilities, which are primarily deposits and borrowings (as needed).  Net interest income is affected by changes in the volume and mix of interest-earning assets, the interest earned on those assets, the volume and mix of interest-bearing liabilities and the interest paid on those interest-bearing liabilities. Management attempts to maintain a net interest margin placing it within the top quartile of its Washington State peers.

The provision for (recapture of) loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions.  The allowance for loan losses reflects the amount that the Company believes is adequate to cover probable credit losses inherent in its loan portfolio.

Net income is also affected by non-interest income and non-interest expense.  For the year ended September 30, 2019, non-interest income consisted primarily of service charges on deposit accounts, gain on sales of loans, ATM and debit card interchange transaction fees, a BOLI death benefit claim, an increase in the cash surrender value of BOLI, servicing income on loans sold and other operating income.  Non-interest income is also increased by net recoveries on investment securities and reduced by net OTTI losses on investment securities, if any.  Non-interest expense consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM and debit card interchange transaction fees, postage and courier expenses, amortization of CDI, state and local taxes, professional fees, FDIC insurance premiums, loan administration and foreclosure expenses, data processing and telecommunication expenses, deposit operation expenses and other non-interest expenses. Non-interest expense in certain periods are reduced by gains on the sale of premises and equipment and by gains on the sale of OREO.  Non-interest income and non-interest expense are affected by the growth of the Company's operations and growth in the number and balances of loan and deposit accounts.

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Results of operations may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Operating Strategy

The Company is a bank holding company which operates primarily through its subsidiary, the Bank. The Company's primary objective is to operate the Bank as a well capitalized, profitable, independent, community-oriented financial institution, serving customers in its primary market area of Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties. The Company's strategy is to provide products and superior service to small businesses and individuals located in its primary market area.

The Company's goal is to deliver returns to shareholders by focusing on the origination of higher-yielding assets (in particular commercial real estate, construction, and commercial business loans), increasing core deposit balances, managing problem assets, efficiently managing expenses, and seeking expansion opportunities. The Company seeks to achieve these results by focusing on the following objectives:

Expand our presence within our existing market areas by capturing opportunities resulting from changes in the competitive environment. We currently conduct our business primarily in western Washington. We have a community bank strategy that emphasizes responsive and personalized service to our customers. As a result of the 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.

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

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

Managing exposure to fluctuating 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, although from time to time the Bank may retain a portion of its fixed-rate mortgage loan originations and extend the initial fixed rate period of its hybrid ARM commercial real estate loans for asset/liability purposes.

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

Maintaining strong asset quality. We believe that strong asset quality is a key to our long-term financial success. The percentage of non-performing loans to loans receivable, net was 0.34% and 0.18% at September 30, 2019 and 2018, respectively. The Company's percentage of non-performing assets to total assets at September 30, 2019 was 0.40% compared to 0.36% at September 30, 2018. Non-performing assets have decreased to $5.01 million at September 30, 2019 from $21.91 million at September 30, 2014. We continue to seek to reduce the level of non-performing assets through collections, write-downs, modifications and sales of OREO. We also take proactive steps to resolve our non-performing loans, including negotiating payment plans, forbearances, loan modifications and loan extensions and accepting short payoffs on delinquent loans when such actions

54

have been deemed appropriate. We have also accepted short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure. Although the Company plans to continue to place emphasis on certain lending products, such as commercial real estate loans, construction loans, and commercial business loans, the Company expects to continue to manage its credit exposures through the use of experienced bankers and an overall conservative approach to lending.

Critical Accounting Policies and Estimates

The Company has established various accounting policies that govern the application of GAAP in the preparation of the Company's Consolidated Financial Statements. The Company has identified six 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 determination of any OTTI in the fair value of investment securities, the valuation of servicing rights, the valuation of OREO, the valuation of assets acquired and liabilities assumed in the South Sound Acquisition and the valuation of goodwill for potential impairment. These policies and the judgments, estimates and assumptions are described in greater detail in the notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K. In particular, Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies,” generally describes the Company's accounting policies. Management believes that the judgments, estimates and assumptions used in the preparation of the Company's Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the Company's Consolidated Financial Statements to these critical policies, the use of other judgments, estimates and assumptions could result in material differences in the Company's results of operations or financial condition.

Market Risk and Asset and Liability Management

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

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

The Bank has adopted a strategy that is designed to substantially match the interest rate sensitivity of assets relative to its liabilities.  The primary elements of this strategy involve originating ARM loans for its portfolio, maintaining residential construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to four-family residential mortgage loans, matching asset and liability maturities, investing in short-term securities, and originating fixed-rate loans for retention or sale in the secondary market while retaining the related 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 NXTsoft Data Analytics, LLC (“NXTsoft”), a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry. Based on a rate shock analysis prepared by NXTsoft based on data at September 30, 2019, an immediate increase in interest rates of 100 basis points would increase the Bank’s projected net interest income by approximately 4.1%, primarily because a larger portion of the Bank's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one year period.  Conversely, an immediate decrease in interest rates of 100 basis points would decrease the Bank's projected net interest income by approximately 6.9%. 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.  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.

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Consumer, commercial business and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans, and accordingly reduce the Bank’s exposure to fluctuations in interest rates. At September 30, 2019, the consumer, commercial business and construction loan portfolios amounted to $44.50 million, $64.76 million and $223.53 million, or 4.5%, 6.5% and 22.5% of total loans receivable, respectively.

Quantitative Aspects of Market Risk.  The model provided for the Bank by NXTsoft 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 NXTsoft based on data at September 30, 2019:

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	$	56,253	$	8,022		16.63	%	$	298,884	$	49,110		19.66	%
+300	54,204		5,973			12.38		287,693		37,919			15.18
+200	52,218		3,987			8.27		276,148		26,374			10.56
+100	50,201		1,970			4.08		263,419		13,645			5.46
BASE	48,231		—			—		249,774		—			—
-100	44,887		(3,344		)	(6.93	)	228,935		(20,839		)	(8.34	)
-200	42,354		(5,877		)	(12.19	)	209,148		(40,626		)	(16.26	)
-300	42,014		(6,217		)	(12.89	)	231,509		(18,265		)	(7.31	)

___________

(1) Does not include loan fees.

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

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

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 an 8.3% decrease in NPV and a 6.9% decrease in net interest income.  In the event of a 100 basis point increase in interest rates, a 5.5% increase in NPV and a 4.1% increase in net interest income would be expected.  Based upon the modeling described above, the Bank's asset and liability structure generally results in increases in net interest income and NPV in a rising interest rate scenario and decreases in net interest income and NPV in a declining interest rate scenario.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.  Additionally, certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset.  Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could possibly deviate significantly from those assumed in calculating the table.

Comparison of Financial Condition at September 30, 2019 and September 30, 2018

The Company's total assets increased by $228.84 million, or 22.5%, to $1.25 billion at September 30, 2019 from $1.02 billion at September 30, 2018.  The increase in total assets was primarily due to the South Sound Acquisition, which resulted in

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a $183.10 million increase in total assets (including goodwill and net of cash consideration paid) at the acquisition date (October 1, 2018) and to a lesser extent, organic growth.

Net loans receivable increased by $161.27 million, or 22.2%, to $886.66 million at September 30, 2019 from $725.39 million at September 30, 2018, primarily due to loans acquired in the South Sound Acquisition ($121.54 million at the acquisition date) and, to a lesser extent, organic loan growth.

Total deposits increased by $178.72 million, or 20.1%, to $1.07 billion at September 30, 2019 from $889.51 million at September 30, 2018, primarily due to deposits acquired in the South Sound Acquisition ($151.54 million at the acquisition date) and, to a lesser extent, organic deposit growth.

Shareholders' equity increased by $46.41 million, or 37.2%, to $171.07 million at September 30, 2019 from $124.66 million at September 30, 2018.  The increase was primarily due to $28.27 million in common stock issued in the South Sound Acquisition and net income for the year ended September 30, 2019 of $24.02 million which was partially offset by dividends paid to shareholders of $6.50 million.

A more detailed explanation of the changes in significant balance sheet categories follows:

Cash and Cash Equivalents: Cash and cash equivalents decreased by $5.85 million, or 3.9%, to $143.02 million at September 30, 2019 from $148.86 million at September 30, 2018.  The decrease was primarily a result of the Company investing a portion of its overnight liquidity into CDs held for investment and investment securities.

CDs Held for Investment: CDs held for investment increased by $15.06 million, or 23.8%, to $78.35 million at September 30, 2019 from $63.29 million. The level of CDs held for investment increased as a portion of the Company's overnight liquidity was invested in CDs earning higher interest.

Investment Securities and Investments in Equity Securities:  Investment securities and investments in equity securities increased by $40.63 million, or 290.9%, to $54.59 million at September 30, 2019 from $13.96 million at September 30, 2018.  The increase was primarily due to investment securities that were acquired in the South Sound Acquisition ($24.72 million at the acquisition date) and the purchase of additional investment securities during the year ended September 30, 2019. Partially offsetting these increases was the sale of several investment securities acquired in the South Sound Acquisition along with maturities, prepayments and scheduled amortization of other investment securities. For additional details on investment securities, see "Item 1. Business - Investment Activities" and Note 4 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

FHLB Stock: FHLB stock increased by $247,000, or 20.8%, to $1.44 million at September 30, 2019 from $1.11 million at September 30, 2018, due to FHLB stock acquired in the South Sound Acquisition and purchases required by the FHLB due to the increase in total assets.

Other Investments: Other investments consist solely of the Company's investment in the Solomon Hess SBA Loan Fund LLC, which was unchanged at both September 30, 2019 and September 30, 2018. This investment is utilized to help satisfy compliance with the Company's Community Reinvestment Act ("CRA") investment test requirements.

Loans Held for Sale: Loans held for sale increased to $6.07 million, or 240.1%, at September 30, 2019 from $1.79 million at September 30, 2018, primarily due to the timing and volume of mortgage banking loan sales. The Company sells longer-term fixed-rate residential loans and the guaranteed portion of SBA commercial business loans for asset-liability management purposes and to generate non-interest income.  The Company sold $73.03 million in loans during the year ended September 30, 2019 compared to $66.38 million for the year ended September 30, 2018.

Loans Receivable, Net of Allowance for Loan Losses:  Net loans receivable increased by $161.27 million, or 22.2%, to $886.66 million at September 30, 2019 from $725.39 million at September 30, 2018. The increase was primarily due to loans acquired in the South Sound Acquisition ($121.54 million at the acquisition date) and, to a lesser extent, organic loan growth. The increase consisted of a $74.00 million increase in commercial real estate loans, a $35.17 million increase in construction loans, a $21.71 million increase in commercial business loans, a $16.72 million increase in one- to four-family loans, a $14.11 million increase in multi-family loans and smaller increases in several other categories. These increases were partially offset by a $9.00 million increase in the undisbursed portion of construction loans in process.

Loan originations increased by $26.44 million, or 8.0%, to $356.04 million for the year ended September 30, 2019 from $329.59 million for the year ended September 30, 2018.  The increase in loan originations was primarily due to an increase in

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construction loans originated as compared to the prior fiscal year. For additional information on loans, see "Item 1. Business - Lending Activities" and Note 5 to the Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

Premises and Equipment:  Premises and equipment increased by $3.88 million, or 20.5%, to $22.83 million at September 30, 2019 from $18.95 million at September 30, 2018.  The increase was primarily due to premises and equipment acquired in the South Sound Acquisition ($3.34 million at the acquisition date) and a branch remodeling project, which was partially offset by normal depreciation.  For additional information on premises and equipment, see "Item 2. Properties" and Note 6 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

OREO and Other Repossessed Assets:  OREO and other repossessed assets decreased by $230,000, or 12.0%, to $1.68 million at September 30, 2019 from $1.91 million at September 30, 2018.  The decrease was primarily due to the sales of $524,000 in OREO properties and other repossessed assets and OREO valuation write-downs of $24,000. These decreases in OREO and other repossessed assets were partially offset by the addition of $318,000 in OREO properties and other repossessed assets. At September 30, 2019, the OREO balance was comprised of 12 individual properties.  The properties consisted of 11 land parcels totaling $1.66 million, and one commercial real estate properties totaling $25,000.  The largest OREO property at September 30, 2019 was an undeveloped land parcel located in Lewis County with a balance of $874,000.  For additional information on OREO and other repossessed assets, see "Item 1. Business - Lending Activities - Other Real Estate Owned and Other Repossessed Assets" and Note 7 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Bank Owned Life Insurance ("BOLI"):  BOLI increased by $1.19 million, or 6.0%, to $21.01 million at September 30, 2019 from $19.81 million at September 30, 2018. The increase was primarily due to BOLI acquired in the South Sound Acquisition ($2.63 million at the acquisition date) and normal increases in the cash surrender value of BOLI policies. These increases were partially offset by a death benefit claim during the year which reduced the BOLI cash surrender value by $2.05 million.

Goodwill:  The recorded amount of goodwill increased by $9.48 million, or 167.8%, to $15.13 million at September 30, 2019 from $5.65 million at September 30, 2018, due to the goodwill recorded in the South Sound Acquisition.   The Company performed its annual review of goodwill during the quarter ended June 30, 2019 and determined that there was no impairment.  As of September 30, 2019, management believes that there had been no subsequent events or changes in circumstances that would indicate a potential impairment of goodwill. For additional information on goodwill, see Note 8 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

CDI: CDI increased to $2.03 million at September 30, 2019 due to $2.48 million of CDI recorded in the South Sound Acquisition, net of $452,000 in amortization for the year. For additional information on CDI, see Note 8 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Servicing Rights:  Servicing rights increased by $380,000, or 18.7%, to $2.41 million at September 30, 2019 from $2.03 million at September 30, 2018, primarily due to SBA servicing rights acquired in the South Sound Acquisition ($281,000 at the acquisition date) and additional capitalized Freddie Mac servicing rights for new loans being serviced, which was partially offset by amortization. The principal amount of loans serviced for Freddie Mac and the SBA increased by $27.44 million, or 7.4%, to $399.12 million at September 30, 2019 from $371.68 million at September 30, 2018.  For additional information on servicing rights, see Note 9 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Other Assets: Other assets increased by $2.65 million, or 99.2%, to $5.32 million at September 30, 2019 from $2.67 million at September 30, 2018. The increase was primarily due to a $1.21 million income tax receivable at September 30, 2019 and other assets acquired in the South Sound Acquisition.

Deposits: Deposits increased by $178.72 million, or 20.1%, to $1.07 billion at September 30, 2019 from $889.51 million at September 30, 2018.  The increase in total deposits was primarily due to deposits acquired in the South Sound Acquisition ($151.54 million at the acquisition date) and, to a lesser extent, organic deposit growth. The increase in total deposits consisted of a $71.77 million increase in NOW checking account balances, a $63.21 million increase in non-interest-bearing demand account balances, a $23.85 million increase in CD account balances, a $13.10 million increase in savings account balances and a $6.79 million increase in money market account balances.  The organic increase in deposits was primarily due to increased commercial and consumer checking accounts as the Company continued to emphasize increasing its transaction accounts base. The Company also experienced deposit inflows due to a number of customers transferring funds from other financial institutions that consolidated or closed branches during the year ended September 30, 2019.  For additional information on deposits, see "Item 1. Business - Deposit Activities and Other Sources of Funds" and Note 10 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

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Other Liabilities and Accrued Expenses: Other liabilities and accrued expenses increased by $3.71 million, or 89.9%, to $7.84 million at September 30, 2019 from $4.13 million at September 30, 2018. The increase was primarily due to liabilities assumed in the South Sound Acquisition.

Shareholders' Equity:  Total shareholders' equity increased by $46.41 million, or 37.2%, to $171.07 million at September 30, 2019 from $124.66 million at September 30, 2018.  The increase was primarily due to $28.27 million in common stock issued in the South Sound Acquisition and net income of $24.02 million for the year ended September 30, 2019, partially offset by the payment of $6.50 million in dividends to common shareholders and the repurchase of 20,440 shares of the Company's common stock for $499,000 during the year ended September 30, 2019. 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, 2019 and 2018

Net income for the year ended September 30, 2019increased by $7.30 million, or 43.7%, to $24.02 million from $16.72 million for the year ended September 30, 2018.  Net income per diluted common share increased by $0.62, or 27.9%, to $2.84 for the year ended September 30, 2019 from $2.22 for the year ended September 30, 2018. The increase in net income was primarily due to increases in net interest income and non-interest income and a decrease in the Company's effective income tax rate. These increases to net income were partially offset by an increase in non-interest expense. The increases in net interest income and non-interest expense were primarily the result of the South Sound Acquisition. The increase in non-interest income was primarily due to an increase in BOLI net earnings as a result of a death benefit claim.

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

Net Interest Income:  Net interest income increased by $12.11 million, or 31.0%, to $51.16 million for the year ended September 30, 2019 from $39.06 million for the year ended September 30, 2018.  The increase in net interest income was due to an increase in interest income which was partially offset by an increase in interest expense.

Total interest and dividend income increased by $13.89 million, or 33.2%, to $55.73 million for the year ended September 30, 2019 from $41.83 million for the year ended September 30, 2018, primarily due to increases in both the average balance and the average yield on interest-earning assets. Average interest-earning assets increased by $213.42 million to $1.14 billion for the year ended September 30, 2019 from $923.44 million for the year ended September 30, 2018, primarily due to interest-earning assets acquired in the South Sound Acquisition. The yield on average interest-earning assets increased to 4.90% for the year ended September 30, 2019 from 4.53% for the year ended September 30, 2018.

Interest income on loans receivable and loans held for sale increased by $10.83 million, or 28.3%, to $49.13 million for the year ended September 30, 2019 from $38.30 million for the year ended September 30, 2018, primarily due to an increase in the average balance of loans receivable of $157.51 million during the year and to a lesser extent, an increase in the average yield on loans receivable to 5.59% from 5.31%. During the year ended September 30, 2019, the accretion of the purchase accounting fair value discount on loans acquired in the South Sound Acquisition increased interest income on loans by $645,000. The accretion of the net fair value discount on acquired loans increased the average yield on loans by seven basis points during the year ended September 30, 2019. The incremental accretion and the impact on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the net discount declines. The remaining net discount on these acquired loans was $1.39 million at September 30, 2019. Partially offsetting these increases was a $130,000 decrease in non-accrual interest and prepayment penalties collected during the year ended September 30, 2019. During the year ended September 30, 2019, a total of $372,000 in non-accrual interest and prepayment penalties was collected compared to a total of $502,000 for the year ended September 30, 2018. Interest income on investment securities increased by $1.05 million, or 482.5%, to $1.26 million for the year ended September 30, 2019 from $217,000 for the year ended September 30, 2018 primarily due to increases in both the average balance of investment securities (in large part due to the South Sound Acquisition) and in the average yield on investment securities. Interest income on interest-bearing deposits in banks and CDs increased by $1.97 million, or 61.7%, to $5.17 million for the year ended September 30, 2019 from $3.20 million for the year ended September 30, 2018, primarily due to an increase in the average yield to 2.41% from 1.70% and, to a lesser extent, a $26.40 million increase in the average balance of interest-bearing deposits in banks and CDs. The increase in average yield on interest-earning assets was primarily due to increases in average short-term interest rates as the Federal Reserve continued to increase the targeted Fed Funds rate 25 basis points in each quarter of 2018, before beginning to reduce interest rates in August 2019.

Total interest expense increased by $1.79 million, or 64.3%, to $4.57 million for the year ended September 30, 2019 from $2.78 million for the year ended September 30, 2018. The increase in interest expense was due to increases in the average cost and, to a lesser extent, the average balance of interest-bearing deposits. The average cost of interest-bearing deposits increased

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to 0.59% for the year ended September 30, 2019 from 0.43% for the year ended September 30, 2018 as market interest rates for deposits increased. Average interest-bearing deposits increased by $126.87 million, or 19.8%, to $767.39 million for the year ended September 30, 2019 from $640.52 million for the year ended September 30, 2018, primarily due to the interest-bearing deposits acquired in the South Sound Acquisition and, to a lesser extent, organic deposit growth.

As a result of these changes, the net interest margin increased 27 basis points to 4.50% for the year ended September 30, 2019 from 4.23% for the year ended September 30, 2018.

Provision for (Recapture of) Loan Losses: There was no provision for (recapture of) loan losses for both the years ended September 30, 2019 and 2018. There were net recoveries of $160,000 for the year ended September 30, 2019 compared to net charge-offs of $23,000 for the year ended September 30, 2018.  The net charge-offs (recoveries) to average outstanding loans ratio was (0.02%) for the year ended September 30, 2019 and 0.00% for the year ended September 30, 2018. The level of delinquent loans (loans 30 or more days past due) increased by $1.37 million, or 53.6%, to $3.93 million at September 30, 2019 from $2.56 million at September 30, 2018 and the level of loans graded substandard increased by $2.14 million, or 67.2%, to $5.32 million at September 30, 2019 from $3.18 million at September 30, 2018. Special mention loans decreased by $576,000, or 21.5%, to $2.55 million at September 30, 2019 from $3.12 million at September 30, 2018. Non-accrual loans increased by $1.72 million, or 130.3%, to $3.03 million at September 30, 2019 from $1.32 million at September 30, 2018.

The Company has established a comprehensive methodology for determining the allowance 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 amount to be allocated to each loan.  The aggregate principal impairment amount determined at September 30, 2019 was $172,000 compared to $97,000 at September 30, 2018.

In accordance with GAAP, loans acquired in the South Sound Acquisition were recorded at their estimated fair value, which resulted in a net discount to the loans' contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. The remaining fair value discount on loans acquired in the South Sound Acquisition was $1.39 million at September 30, 2019. The Company believes this should be considered by investors when comparing the Company's allowance for loan losses to total loans in periods prior to the South Sound Acquisition.

Based on the comprehensive methodology, management believes the allowance for loan losses of $9.69 million at September 30, 2019 (1.08% of loans receivable and 319.5% of non-performing loans) was adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at that date.  While the Company believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that bank regulators, in reviewing the Company's loan portfolio, will not request the Company to increase significantly its allowance for loan losses.  In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate.  Any material increase in the allowance for loan losses would adversely affect the Company's financial condition and results of operations.  For additional information, see "Item 1. Business - Lending Activities -- Allowance for Loan Losses."

Non-interest Income: Total non-interest income increased by $1.80 million, or 14.3%, to $14.34 million for the year ended September 30, 2019 from $12.54 million for the year ended September 30, 2018.  This increase was primarily due to increases of $1.09 million in BOLI net earnings, $466,000 in ATM and debit card interchange transaction fees, $323,000 in service charges on deposits and smaller increases in several other categories. These increases were partially offset by a $139,000 decrease in gain on sales of loans and smaller decreases in several other categories. The increase in BOLI net earnings was primarily the result of a $1.03 million BOLI death benefit claim. The increase in ATM and debit card interchange transaction fees was primarily due to an increase in the dollar volume of debit card transactions, which was in part a result of the transaction accounts acquired in the South Sound Acquisition. The increase in service charges on deposits was primarily due to fee income from the deposit accounts acquired in the South Sound Acquisition. The decrease in gain on sales of loans was primarily due to a lower average loan sale margin on loans sold during the year.

Non-interest Expense:  Total non-interest expense increased by $6.40 million, or 21.9%, to $35.58 million for the year ended September 30, 2019 from $29.18 million for the year ended September 30, 2018.  This increase was primarily due to increases of $2.81 million in salaries and employee benefits expense, $1.77 million in data processing and telecommunication expense, $600,000 in premises and equipment expense, $452,000 in CDI amortization and smaller increases and decreases in

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several other categories. During the year ended September 30, 2019, the Company incurred acquisition-related expenses of $462,000 related to the South Sound Acquisition, of which $317,000 is included in data processing and telecommunications expenses and $145,000 is included in professional fees. During the year ended September 30, 2018, the Company incurred acquisition-related expenses of $616,000 related to the South Sound Acquisition, which are all included in professional fees.

The increase in salaries and employee benefits expense was primarily due to the additional employees added as a result of the South Sound Acquisition and annual salary adjustments. The increase in data processing and telecommunication expense was primarily a result of expenses associated with the core operating system conversion to Jack Henry Silverlake platform and the conversion of the branches acquired in the South Sound Acquisition to the Silverlake platform. The increase in premises and equipment expense was primarily a result of the additional branch facilities acquired in the South Sound Acquisition and an increase in building maintenance expenses. The efficiency ratio for the year ended September 30, 2019 improved to 54.32% from 56.55% for the year ended September 30, 2018 as the increases in net interest income and non-interest income outpaced the increase in non-interest expense.

Provision for Income Taxes: The provision for income taxes increased by $200,000, or 3.5% to $5.90 million for the year ended September 30, 2019 from $5.70 million for the year ended September 30, 2018. The increase in the provision for income taxes was primarily due to increased income before income taxes, which was partially offset by a lower effective income tax rate. The Company's effective income tax rate was 19.7% for the year ended September 30, 2019 compared to 25.4% for the year ended September 30, 2018. The change in effective income tax rates was primarily a result of the Tax Act enacted in December 2017 which decreased the federal corporate income tax rate to 21.0% from 35.0% effective January 1, 2018, and also required a revaluation of the Company's net deferred tax asset ("DTA") to account for the future impact of lower corporate income tax rates and other provisions of the legislation. Since the Company is a September 30th fiscal-year end corporation, the reduction in the federal corporate income tax rate resulted in the use of a blended federal income tax rate of 24.5% for the fiscal year ended September 30, 2018, and a 21.0% federal corporate income tax rate thereafter. The revaluation of the Company's DTA resulted in a one-time increase to income tax expense of $548,000 during the year ended September 30, 2018. Also contributing to the lower effective income tax rate for the year ended September 30, 2019 was a higher percentage of tax-exempt income, primarily due to the BOLI death benefit claim. For additional information on income taxes, see Note 13 of the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Average Balances, Interest and Average Yields/Cost

The earnings of the Company depend largely on the spread between the yield on interest-earning assets and the cost of interest-bearing liabilities, as well as the relative amount of the Company's interest-earning assets and interest- bearing liability portfolios.

61

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,
	2019						2018						2017
	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)	$	878,984	$	49,127	5.59	%	$	721,472	$	38,298	5.31	%	$	692,278	$	36,385	5.26	%
Investment securities (2)	38,070		1,264		3.32		8,807		217		2.46		7,651		279		3.65
Dividends from mutual funds, FHLB stock and other investments	5,324		162		3.04		5,078		120		2.36		4,066		88		2.16
Interest-bearing deposits in banks and CDs	214,481		5,172		2.41		188,080		3,198		1.70		160,165		1,586		0.99
Total interest-earning assets	1,136,859		55,725		4.90		923,437		41,833		4.53		864,160		38,338		4.44
Non-interest-earning assets	86,494						60,728						58,834
Total assets	$	1,223,353					$	984,165					$	922,994
Interest-bearing liabilities:
Savings accounts	$	162,266	106		0.07		$	145,670	85		0.06		$	134,495	78		0.06
Money market accounts	154,375		1,119		0.72		139,138		722		0.52		125,296		434		0.35
NOW checking accounts	291,348		840		0.29		215,249		451		0.21		207,300		460		0.22
Certificates of deposit accounts	159,397		2,500		1.57		140,464		1,520		1.08		143,171		1,246		0.87
Long-term borrowings (3)	—		—		—		—		—		—		17,096		979		5.73
Total interest-bearing liabilities	767,386		4,565		0.59		640,521		2,778		0.43		627,358		3,197		0.51
Non-interest-bearing deposits	290,653						221,953						187,368
Other liabilities	4,229						4,549						4,450
Total liabilities	1,062,268						867,023						819,176
Shareholders' equity	161,085						117,142						103,818
Total liabilities and shareholders' equity	$	1,223,353					$	984,165					$	922,994
Net interest income			$	51,160					$	39,055					$	35,141
Interest rate spread					4.31	%					4.10	%					3.93	%
Net interest margin (4)					4.50	%					4.23	%					4.07	%
Ratio of average interest-earning assets to average interest-bearing liabilities					148.15	%					144.17	%					137.75	%

_______________________________________________

(1) Does not include interest on loans on non-accrual status.  Includes loans held for sale and interest earned on loans held for sale.  Amortized net deferred loan fees, late fees, extension fees and prepayment penalties (year ended September 30, 2019 - $1,743; year ended September 30, 2018 - $1,426; and year ended September 30, 2017 - $1,328) are included with interest and dividends. Accretion of the fair value discount on loans acquired in the South Sound Acquisition for the year ended September 30, 2019 of $645 is included with interest and dividends.

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

(3) Includes FHLB borrowings with original maturities of one year or greater. Includes pre-payment penalties of $282 for the year ended September 30, 2017.

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

62

Rate/Volume Analysis

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

	Year Ended September 30, 2019 Compared to Year Ended September 30, 2018 Increase (Decrease) Due to						Year Ended September 30, 2018 Compared to Year Ended September 30, 2017 Increase (Decrease) Due to
	Rate		Volume		Net Change		Rate			Volume			Net Change
					(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	2,112	$	8,717	$	10,829	$	366		$	1,547		$	1,913
Investment securities	99		948		1,047		(100		)	38			(62		)
Dividends from mutual funds, FHLB stock and other investments	36		6		42		8			24			32
Interest-bearing deposits in banks and CDs	1,478		496		1,974		1,296			316			1,612
Total net change in income on interest-earning assets	3,725		10,167		13,892		1,570			1,925			3,495
Interest-bearing liabilities:
Savings accounts	11		10		21		—			7			7
Money market accounts	311		86		397		236			52			288
NOW checking accounts	201		188		389		(27		)	18			(9		)
Certificates of deposit accounts	754		226		980		298			(24		)	274
FHLB borrowings	—		—		—		—			(979		)	(979		)
Total net change in expense on interest-bearing liabilities	1,277		510		1,787		507			(926		)	(419		)
Net change in net interest income	$	2,448	$	9,657	$	12,105	$	1,063		$	2,851		$	3,914

______________

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

Liquidity and Capital Resources

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

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments and to take advantage of investment opportunities.  The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs.  At September 30, 2019, 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 23.2%.  At September 30, 2019, the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available borrowings up to an aggregate amount equal to 45% of total assets, limited by available collateral. The Bank had $295.67 million available for additional borrowings with the FHLB at September 30, 2019. The Bank also has a LOC of up to $23.00 million with the FHLB for the purpose of collateralizing Washington State public deposits, all of which was available to be drawn upon at September 30, 2019. The LOC amount reduces the Bank's available borrowings under the FHLB

63

advance agreement. The Bank maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.  At September 30, 2019, the Bank had no outstanding balance on this borrowing line, under which $84.36 million was available for future borrowings. The Bank also maintains a $10.00 million overnight borrowing line with PCBB. At September 30, 2019, the Bank did not have an outstanding balance on this borrowing line.

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

The Bank's primary investing activity is the origination of loans.  During the years ended September 30, 2019, 2018 and 2017, the Bank originated $356.04 million, $329.59 million and $340.61 million of loans, respectively.  At September 30, 2019, the Bank had loan commitments totaling $96.76 million and undisbursed construction loans in process totaling $92.23 million.  The Bank anticipates that it will have sufficient funds available to meet current loan commitments.  CDs that are scheduled to mature in less than one year from September 30, 2019 totaled $92.27 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, 2019, 2018 and 2017, the Bank sold $73.03 million, $66.38 million and $81.40 million in loans and loan participation interests, respectively.  During the years ended September 30, 2019, 2018 and 2017, the Bank received $241.66 million, $235.61 million and $211.30 million in principal repayments, respectively.

The Bank’s liquidity has been impacted by increases in deposit levels.  During the years ended September 30, 2019, 2018 and 2017, deposits increased by $178.72 million, $51.61 million and $76.40 million, respectively.

Cash and cash equivalents, CDs held for investment and investment securities increased to $275.00 million at September 30, 2019 from $226.12 million at September 30, 2018.

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 distributions from the Bank and the issuance of debt or equity securities. At September 30, 2019, Timberland Bancorp (on an unconsolidated basis) had liquid assets of $2.89 million.

Bank holding companies and federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital.  At September 30, 2019, Timberland Bancorp and the Bank were in compliance with all applicable capital requirements.  For additional details see Note 17 to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” and “Item 1. Business - Regulation of the Bank - Capital Requirements.”

Contractual obligations.  The following table presents, as of September 30, 2019, the Company’s significant fixed and determinable contractual operating lease obligations by payment date. There were no other fixed determinable contractual obligations outstanding at September 30, 2019.

	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
	(Dollars in thousands)
Operating lease obligations	$	315	$	264	$	—	$	—	$	579
Total contractual obligations	$	315	$	264	$	—	$	—	$	579

Off-Balance Sheet Activities. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financial needs of its customers. For information regarding our commitments and off-balance sheet arrangements, see Note 16 of the Notes to Consolidated Financial Statements included in Item 8. "Financial Statements and Supplementary Data" of this Form 10-K.

64

A summary of the Company's commitments at September 30, 2019 and 2018 is as follows (in thousands):

	2019		2018
Undisbursed portion of construction loans in process	$	92,226	$	83,237
Undisbursed lines of credit	80,184		49,525
Commitments to extend credit	16,578		17,665
Total commitments	$	188,988	$	150,427

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation.  The primary impact of inflation on the operation of the Company is reflected in increased operating costs.  Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

New Accounting Pronouncements

For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data".

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

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

Item 8.  Financial Statements and Supplementary Data

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	66
Consolidated Balance Sheets as of September 30, 2019 and 2018	68
Consolidated Statements of Income for the Years Ended
September 30, 2019, 2018 and 2017	70
Consolidated Statements of Comprehensive Income for the
Years Ended September 30, 2019, 2018 and 2017	72
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 2019, 2018 and 2017	73
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2019, 2018 and 2017	75
Notes to Consolidated Financial Statements	77

65

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Timberland Bancorp, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Timberland Bancorp, Inc. and Subsidiary (collectively, "the Company") as of September 30, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as "the financial statements"). We have also audited the Company's internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America (U.S.). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

Basis for Opinion

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

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

66

Definition and Limitations of Internal Control over Financial Reporting

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

/s/ Delap LLP

We have served as the Company's auditor since 2010.

Lake Oswego, Oregon

December 9, 2019

67

Consolidated Balance Sheets

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

	2019		2018
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	25,179	$	20,238
Interest-bearing deposits in banks	117,836		128,626
Total cash and cash equivalents	143,015		148,864
Certificates of deposit (“CDs”) held for investment (at cost, which      approximates fair value)	78,346		63,290
Investment securities held to maturity, at amortized cost (estimated fair value $32,580 and $13,264)	31,102		12,810
Investment securities available for sale, at fair value	22,532		1,154
Investments in equity securities, at fair value	958		—
Federal Home Loan Bank of Des Moines (“FHLB”) stock	1,437		1,190
Other investments, at cost	3,000		3,000
Loans held for sale	6,071		1,785
Loans receivable, net of allowance for loans losses of $9,690 and $9,530	886,662		725,391
Premises and equipment, net	22,830		18,953
Other real estate owned (“OREO”) and other repossessed assets, net	1,683		1,913
Accrued interest receivable	3,598		2,877
Bank owned life insurance (“BOLI”)	21,005		19,813
Goodwill	15,131		5,650
Core deposit intangible (“CDI”), net	2,031		—
Servicing rights, net	2,408		2,028
Escrow deposit for business combination	—		6,900
Other assets	5,323		2,672
Total assets	$	1,247,132	$	1,018,290
Liabilities and shareholders’ equity
Liabilities
Deposits:
Non-interest-bearing demand	$	296,472	$	233,258
Interest-bearing	771,755		656,248
Total deposits	1,068,227		889,506
Other liabilities and accrued expenses	7,838		4,127
Total liabilities	1,076,065		893,633
Commitments and contingencies (See Note 16)

See notes to consolidated financial statements

68

Consolidated Balance Sheets (continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Shareholders’ equity	2019		2018
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued	$	—	$	—
Common stock, $0.01 par value; 50,000,000 shares authorized;   8,329,419 shares issued and outstanding - September 30, 2019   7,401,177 shares issued and outstanding - September 30, 2018	43,030		14,394
Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)	—		(133		)
Retained earnings	127,987		110,525
Accumulated other comprehensive income (loss)	50		(129		)
Total shareholders’ equity	171,067		124,657
Total liabilities and shareholders’ equity	$	1,247,132	$	1,018,290

See notes to consolidated financial statements

69

Consolidated Statements of Income

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2019, 2018 and 2017

	2019			2018			2017
Interest and dividend income
Loans receivable and loans held for sale	$	49,127		$	38,298		$	36,385
Investment securities	1,264			217			279
Dividends from mutual funds, FHLB stock and other investments	162			120			88
Interest-bearing deposits in banks and CDs	5,172			3,198			1,586
Total interest and dividend income	55,725			41,833			38,338
Interest expense
Deposits	4,565			2,778			2,218
FHLB borrowings	—			—			979
Total interest expense	4,565			2,778			3,197
Net interest income	51,160			39,055			35,141
Recapture of loan losses	—			—			(1,250		)
Net interest income after recapture of loan losses	51,160			39,055			36,391
Non-interest income
Recoveries on investment securities	71			73			38
Adjustment for portion of other than temporary impairment ("OTTI") transferred from other comprehensive income (loss) (before income taxes)	(12		)	(5		)	(5		)
Net recoveries on investment securities	59			68			33
Gain on sales of investment securities, net	47			—			—
Service charges on deposits	4,904			4,581			4,518
ATM and debit card interchange transaction fees	4,036			3,570			3,343
BOLI net earnings	1,641			547			545
Gain on sales of loans, net	1,754			1,893			2,157
Escrow fees	197			211			242
Servicing income on loans sold	462			480			417
Fee income from non-deposit investment sales	46			109			63
Other, net	1,195			1,085			1,050
Total non-interest income, net	14,341			12,544			12,368

See notes to consolidated financial statements

70

Consolidated Statements of Income (continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2019, 2018 and 2017

	2019		2018			2017
Non-interest expense
Salaries and employee benefits	$	18,545	$	15,740		$	14,908
Premises and equipment	3,831		3,231			3,082
Loss (gain) on sales/dispositions of premises and equipment, net	7		(102		)	5
Advertising	696		782			698
OREO and other repossessed assets, net	221		140			22
ATM and debit card interchange transaction fees	1,583		1,296			1,405
Postage and courier	514		456			435
Amortization of CDI	452		—			—
State and local taxes	873		687			609
Professional fees	1,019		1,390			887
Federal Deposit Insurance Corporation ("FDIC") insurance	187		294			362
Loan administration and foreclosure	382		336			205
Data processing and telecommunications	3,707		1,938			1,870
Deposit operations	1,358		1,192			1,074
Other	2,205		1,797			1,954
Total non-interest expense, net	35,580		29,177			27,516
Income before income taxes	29,921		22,422			21,243
Provision for income taxes	5,901		5,701			7,076
Net income	$	24,020	$	16,721		$	14,167
Net income per common share
Basic	$	2.89	$	2.28		$	1.99
Diluted	$	2.84	$	2.22		$	1.92

See notes to consolidated financial statements

71

Consolidated Statements of Comprehensive Income

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2019, 2018 and 2017

	2019			2018			2017
Comprehensive income
Net income	$	24,020		$	16,721		$	14,167
Other comprehensive income (loss)
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $23, ($8), and ($12), respectively	85			(39		)	(23		)
Change in OTTI on investment securities held to maturity, net of income taxes:
Adjustments related to other factors for which OTTI was previously recognized, net of income taxes of ($1), ($2), and $12, respectively	(3		)	(7		)	22
Amount reclassified to credit loss for previously recorded market loss, net of income taxes of $3, $1, and $2, respectively	9			4			3
Accretion of OTTI on investment securities held to maturity, net of income taxes of $6, $10, and $26, respectively	25			37			49
Total other comprehensive income (loss), net of income taxes	116			(5		)	51
Total comprehensive income	$	24,136		$	16,716		$	14,218

See notes to consolidated financial statements

72

Consolidated Statements of Shareholders’ Equity

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2019, 2018 and 2017

	Common Stock			Unearned  Shares Issued to ESOP						Accumulated Other Comprehensive Loss
	Number of Shares	Amount					Retained Earnings						Total
Balance, September 30, 2016	6,943,868	$	9,961	$	(661	)	$	87,709		$	(175	)	$	96,834
Net income	—	—		—			14,167			—			14,167
Other comprehensive income	—	—		—			—			51			51
Exercise of stock warrant	370,899	2,496		—			—			—			2,496
Exercise of stock options	46,310	332		—			—			—			332
Common stock dividends ($0.50 per common share)	—	—		—			(3,641		)	—			(3,641		)
Earned ESOP shares, net of income taxes	—	341		264			—			—			605
Stock option compensation expense	—	156		—			—			—			156
Balance, September 30, 2017	7,361,077	13,286		(397		)	98,235			(124		)	111,000
Net income	—	—		—			16,721			—			16,721
Other comprehensive loss	—	—		—			—			(5		)	(5		)
Exercise of stock options	40,100	318		—			—			—			318
Common stock dividends ($0.60 per common share)	—	—		—			(4,431		)	—			(4,431		)
Earned ESOP shares, net of income taxes	—	618		264			—			—			882
Stock option compensation expense	—	172		—			—			—			172
Balance, September 30, 2018	7,401,177	14,394		(133		)	110,525			(129		)	124,657

See notes to consolidated financial statements

73

Consolidated Statements of Shareholders’ Equity (continued)

(Dollars in Thousands, Except Per Share Amounts)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2019, 2018 and 2017

	Common Stock					Unearned  Shares Issued to ESOP						Accumulated Other Comprehensive Income (Loss)
	Number of Shares		Amount						Retained Earnings						Total
Balance, September 30, 2018	7,401,177		$	14,394		$	(133	)	$	110,525		$	(129	)	$	124,657
Net income	—		—			—			24,020			—			24,020
Other comprehensive income	—		—			—			—			116			116
Repurchase of common stock	(20,440	)	(499		)	—			—			—			(499		)
Common stock issued for business combination	904,826		28,267			—			—			—			28,267
Exercise of stock options	43,856		401			—			—			—			401
Common stock dividends ($0.78 per common share)	—		—			—			(6,495		)	—			(6,495		)
Earned ESOP shares, net of income taxes	—		308			133			—			—			441
Stock option compensation expense	—		159			—			—			—			159
Adoption of Accounting Standards Update ("ASU") 2016-01	—		—			—			(63		)	63			—
Balance, September 30, 2019	8,329,419		$	43,030		$	—		$	127,987		$	50		$	171,067

See notes to consolidated financial statements

74

Consolidated Statements of Cash Flows

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2019, 2018 and 2017

	2019			2018			2017
Cash flows from operating activities
Net income	$	24,020		$	16,721		$	14,167
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,604			1,290			1,262
Deferred income taxes	703			797			385
Amortization of CDI	452			—			—
Earned ESOP shares	441			882			605
Accretion of discount on purchased loans	(645		)	—			—
Stock option compensation expense	159			172			156
Gain on sales of investment securities	(47		)	—			—
Net recoveries on investment securities	(59		)	(68		)	(33		)
Change in fair value of investments in equity securities	(41		)	—			—
Gain on sales of OREO and other repossessed assets, net	(89		)	(229		)	(54		)
Provision for OREO losses	24			248			42
Gain on sales of loans, net	(1,754		)	(1,893		)	(2,157		)
(Gain) loss on sales/dispositions of premises and equipment, net	7			(102		)	5
Recapture of loan losses	—			—			(1,250		)
Loans originated for sale	(70,489		)	(62,677		)	(69,996		)
Proceeds from sales of loans	67,957			66,384			72,158
Amortization of servicing rights	646			491			487
Valuation adjustment on servicing rights, net	4			—			—
BOLI net earnings	(613		)	(547		)	(545		)
BOLI death benefit in excess of cash surrender value	(1,028		)	—			—
Increase in deferred loan origination fees	161			171			237
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	(3,305		)	(190		)	(1,610		)
Net cash provided by operating activities	18,108			21,450			13,859
Cash flows from investing activities
Net (increase) decrease in CDs held for investment	(12,083		)	(20,256		)	9,966
Purchase of investment securities held to maturity	(13,166		)	(6,073		)	—
Purchase of investment securities available for sale	(20,909		)	—			—
Proceeds from maturities and prepayments of investment securities held to maturity	11,784			554			609
Proceeds from maturities and prepayments of investment securities available for sale	1,412			41			68
Proceeds from sale of investment securities held to maturity	2,937			—			—
Proceeds from sales of investment securities available for sale	2,332			—			—
Purchase of FHLB stock	(42		)	(83		)	(103		)
Proceeds from redemption of FHLB stock	—			—			1,200
Purchase of other investments	—			—			(3,000		)
Increase in loans receivable, net	(39,536		)	(35,522		)	(26,956		)
Additions to premises and equipment	(2,151		)	(2,186		)	(3,526		)
Proceeds from sales of OREO and other repossessed assets	613			1,693			1,579
Proceeds from sales/dispositions of premises and equipment	—			463			—
Proceeds from death benefit on BOLI	3,078			—			—
Cash acquired, net of cash consideration paid in business combination	14,284			—			—
Escrow deposit for business combination	6,900			(6,900		)	—
Net cash used in investing activities	(44,547		)	(68,269		)	(20,163		)

See notes to consolidated financial statements

75

Consolidated Statements of Cash Flows (continued)

(Dollars in Thousands)

Timberland Bancorp, Inc. and Subsidiary

Years Ended September 30, 2019, 2018 and 2017

	2019			2018			2017
Cash flows from financing activities
Net increase in deposits	$	27,183		$	51,608		$	76,364
Repayment of FHLB borrowings	—			—			(30,000		)
Proceeds from exercise of stock options	401			318			332
Proceeds from exercise of stock warrant	—			—			2,496
Repurchase of common stock	(499		)	—			—
Payment of dividends	(6,495		)	(4,431		)	(3,641		)
Net cash provided by financing activities	20,590			47,495			45,551
Net increase (decrease) in cash and cash equivalents	(5,849		)	676			39,247
Cash and cash equivalents
Beginning of period	148,864			148,188			108,941
End of period	$	143,015		$	148,864		$	148,188
Supplemental disclosure of cash flow information
Income taxes paid	$	6,593		$	4,462		$	7,596
Interest paid	4,457			2,714			3,283
Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	$	293		$	324		$	751
Other comprehensive income (loss) related to investment securities	116			(5		)	51

See notes to consolidated financial statements

76

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

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.

On October 1, 2018, the Company completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington ("South Sound Acquisition"). The Company acquired 100% of the outstanding common stock of South Sound Bank, and South Sound Bank was merged into the Bank. The results of operations of the acquired assets and assumed liabilities have been included in the Company's consolidated financial statements as of and for the period since the acquisition date. See Note 2 for additional information on the South Sound Acquisition.

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 24 branches located in Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties in Washington State, attracts deposits from the general public, and uses those funds, along with other borrowings, primarily to provide residential real estate, construction, commercial real estate, commercial business and consumer loans to borrowers primarily in western Washington.

Consolidated Financial Statement Presentation

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

Certain prior year amounts have been reclassified to conform to the 2019 fiscal year presentation with no change to previously reported net income or shareholders’ equity.

Segment Reporting

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

Cash and Cash Equivalents and Cash Flows

The Company considers amounts included in the consolidated balance sheets’ captions “Cash and due from financial institutions” and “Interest-bearing deposits in banks,” all of which mature within ninety days, to be cash equivalents for purposes of reporting cash flows. 

Interest-bearing deposits in banks as of September 30, 2019 and 2018 included deposits with the Federal Reserve Bank of San Francisco ("FRB") of $102,189,000 and $123,745,000, respectively.  The Company also maintains balances in correspondent bank accounts which, at times, may exceed the FDIC insurance limit of $250,000 per correspondent bank.  Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the FRB and the correspondent banks.

77

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

CDs Held for Investment

CDs held for investment include amounts invested with other FDIC-insured financial institutions for a stated interest rate and with a fixed maturity date. Such CDs generally have maturities of 12 to 60 months from the date of purchase by the Company. Early withdrawal penalties may apply; however, the Company intends to hold these CDs to maturity. The Company generally limits its purchases of CDs to a maximum of $250,000 (the FDIC insurance coverage limit) with any single financial institution.

Investment Securities

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

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 debt securities available for sale that are deemed to be other than temporary are recognized in earnings when identified.  The fair value of the debt security then becomes the new cost basis.  For individual debt securities that are held to maturity which the Company does not intend to sell, and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost basis, the other than temporary decline in the fair value of the debt security related to: (1) credit loss is recognized in earnings and (2) market or other factors is recognized in other comprehensive income (loss).  Credit loss is recorded if the present value of expected future cash flows is less than the amortized cost.  For individual debt 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 debt security’s cost basis and its fair value at the consolidated balance sheet date.  For individual debt 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.

Investments in Equity Securities

Investments in equity securities are stated at fair value. Prior to October 1, 2018, changes in the fair value of investments in equity securities were excluded from earnings and reported in other comprehensive income (loss), net of income tax effects. On October 1, 2018, the Company adopted ASU 2016-01 and reclassified its mutual funds as investments in equity securities. Beginning October 1, 2018, changes in the fair value of investments in equity securities are recorded in other non-interest income.

FHLB Stock

The Bank, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.12% of the Bank's total assets plus 4.00% of any borrowings from the FHLB.  No ready market exists for this stock, and it has no quoted market value. However, redemption of FHLB stock has historically been at par value. The Company's investment in FHLB stock is carried at cost, which approximates fair value.

The Company evaluates its FHLB stock for impairment as needed. The Company's determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared with the capital stock amount and the length of time any decline has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (3) the impact of legislative and regulatory changes on

78

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

institutions and, accordingly, the customer base of the FHLB; and (4) the liquidity position of the FHLB. Based on its evaluation, the Company determined that there was no impairment of FHLB stock at September 30, 2019 and 2018.

Other Investments

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

Loans Held for Sale

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

Loans Receivable

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

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

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

Acquired Loans

Purchased loans, including loans acquired in business combinations, are recorded at their estimated fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired ("PCI") or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The excess of the cash flows expected to be collected over a PCI loan's carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the PCI loan using the effective yield method. The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents the Company's estimate of the credit losses expected to occur and would be considered in determining the estimated fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at the purchase date in excess of fair value are adjusted through a change to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording an allowance for loan losses. PCI loans were insignificant as of September 30, 2019, and the Company had no PCI loans as of September 30, 2018.

79

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

For purchased non-credit-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. Any subsequent deterioration in credit quality is recognized by recording an allowance for loan losses.

Troubled Debt Restructured Loans

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

Allowance for Loan Losses

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

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

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

80

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

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

Premises and Equipment

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

Impairment of Long-Lived Assets

Long-lived assets, consisting of premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the recorded amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the recorded amount of an asset to undiscounted future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the recorded amount of the assets exceeds the discounted recovery amount or estimated fair value of the assets.  No events or changes in circumstances have occurred during the years ended September 30, 2019 or 2018 that would cause management to evaluate the recoverability of the Company’s long-lived assets.

OREO and Other Repossessed Assets

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

BOLI

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

Goodwill

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

The annual goodwill impairment test begins with a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its carrying amount. If an entity concludes that it is not "more likely than not" that the fair value of a reporting unit is less than its carrying amount, it need not perform a two-step impairment test. If the Company's qualitative assessment concluded that it is "more likely than not" that the fair value of its reporting unit is less than its carrying

81

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

amount, it must perform the two-step impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. The first step of the goodwill impairment test compares the estimated fair value of the reporting unit with its carrying amount, or the book value, including goodwill. If the estimated fair value of the reporting unit equals or exceeds its book value, goodwill is considered not impaired, and the second step of the impairment test is unnecessary.

The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit must determine fair value for all assets and liabilities, excluding goodwill. The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill. If the carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value.

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount and therefore goodwill was determined not to be impaired at May 31, 2019.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

As of September 30, 2019, management believes that there were no events or changes in the circumstances since May 31, 2019 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

CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of a business combination compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.

Servicing Rights

The Company holds rights to service (1) loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and (2) the guaranteed portion of U.S. Small Business Administration ("SBA") loans sold in the secondary market. Servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained. Servicing rights are amortized to servicing income on loans sold approximately in proportion to and over the period of estimated net servicing income.  The value of servicing rights at the date of the sale of loans is estimated based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and expected prepayment rates on the underlying loans.  The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated future cash flows from the servicing assets to those estimated at the time the servicing assets were originated.  Fair values are estimated using expected future discounted cash flows based on current market rates of interest.  For purposes of measuring impairment, the servicing rights must be stratified by one or more predominant risk characteristics of the underlying loans.  The Company stratifies its capitalized servicing rights based on product type and term of the underlying loans.  The amount of impairment recognized is the amount, if any, by which the amortized cost of the servicing rights exceeds their fair value.  Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that fair value is less than the recorded amount.

82

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Transfers of Financial Assets

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

Income Taxes

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

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

With respect to accounting for uncertainty in incomes taxes, a tax provision is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized upon examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The Company recognizes interest and/or penalties related to income tax matters as income tax expense. The Company is no longer subject to U.S. federal income tax examination by tax authorities for years ended on or before September 30, 2015.

ESOP

The Bank sponsors a leveraged ESOP; however, all ESOP debt was fully repaid during the year ended September 30, 2019. The debt of the ESOP was payable to Timberland Bancorp, was recorded as other borrowed funds of the Bank, and was eliminated in the consolidated financial statements. The shares of the Company's common stock pledged as collateral for the ESOP's debt were reported as unearned shares issued to the ESOP in the consolidated financial statements. As shares were released from collateral, compensation expense was recorded equal to the average market price of the shares for the period, and the shares became available for net income per common share calculations.  Dividends paid on unallocated shares reduced the Company’s cash contributions to the ESOP.

Advertising

Costs for advertising and marketing are expensed as incurred.

Stock-Based Compensation

The Company measures compensation cost for all stock-based awards based on the grant-date fair value of the stock-based awards and recognizes compensation cost over the service period of stock-based awards. The fair value of stock options is determined using the Black-Scholes valuation model.  Stock option forfeitures are accounted for as they occur.

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. Common stock equivalents arise from the assumed conversion of outstanding stock options and outstanding warrants to purchase common stock.  Shares owned

83

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted net income per common share.

Related Party Transactions

The Chairman of the Board of the Bank and Timberland Bancorp is a member of the law firm that provides general counsel to the Company.  Legal and other fees paid to this law firm for the years ended September 30, 2019, 2018 and 2017 totaled $69,000, $94,000 and $99,000, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers, which created FASB Accounting Standards Codification ("ASC") Topic 606 ("ASC 606"). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASC 606 on October 1, 2018 using the modified retrospective approach. Therefore, the comparative information has not been adjusted and continues to be reported under the superseded ASC 605. There was no cumulative effect adjustment as of October 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the year ended September 30, 2019; however, additional disclosures were incorporated in the footnotes upon adoption. The majority of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606. The Company elected to apply the practical expedient pursuant to ASC 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less. See Note 23 for additional information.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 generally requires equity investments - except those accounted for under the equity method of accounting or those that result in consolidation of the investee - to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 is intended to simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU 2016-01 also eliminates certain disclosures related to the fair value of financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 on October 1, 2018. As required by ASU 2016-01, on October 1, 2018 the Company recorded a one-time cumulative effect adjustment of $63,000 representing net unrealized losses on equity securities (mutual funds) between accumulated other comprehensive loss and retained earnings on the accompanying consolidated balance sheet. Additionally, the fair values of financial instruments for disclosure purposes were computed using an exit price notion and deposits with no stated maturity are no longer included in the fair value disclosures in Note 21.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which created FASB ASC Topic 842 ("ASC 842") and is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The principal change required by ASC 842 relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASC 842 also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. ASC 842 also provides an optional transition

84

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

method for adoption, under which an entity initially applies ASC 842 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts ASC 842 will continue to be in accordance with current GAAP. ASC 842 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of ASC 842 is permitted. The Company adopted the provisions of ASC 842 effective October 1, 2019 utilizing the optional transition method and will not restate comparative periods. The Company also elected the package of practical expedients permitted under ASC 842's transition guidance, which allows the Company to carryforward its historical lease classifications and its assessment as to whether a contract is or contains a lease. The Company also elected to not recognize lease assets and lease liabilities for leases with an initial term of 12 months or less. The Company expects the adoption of ASC 842 will result in an increase in other assets and an increase in other liabilities of approximately $2.9 million. The Company does not expect the adoption of ASC 842 to have a material impact on its future consolidated statements of income.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05. This ASU replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, this ASU requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changes the accounting for purchased credit-impaired debt securities and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. At this time, the Company anticipates the allowance for loan losses will increase as a result of the implementation of this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application of this ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU 2017-08 is not expected to have a material impact on the Company's future consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to the ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award are the same after the modification as compared to the original award prior to modification. ASU 2017-09 was effective for fiscal years, including

85

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU on October 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company's consolidated financial statements.

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements. The following disclosure requirements were removed from ASC Topic 820, Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation process for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's future consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for internal-use software costs. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-15 is not expected to have a material impact on the Company's future consolidated financial statements.

Note 2 - Business Combination

On October 1, 2018, the Company completed the South Sound Acquisition. The primary reason for the acquisition was to expand the Company's presence along Washington State's economically important I-5 corridor.

Pursuant to the terms of the merger agreement, South Sound Bank shareholders received 0.746 of a share of the Company's common stock and $5.68825 in cash per share of South Sound Bank common stock. The Company issued 904,826 shares of its common stock (valued at $28,267,000 based on the Company's closing stock price on September 30, 2018 of $31.24 per share) and paid $6,903,000 in cash in the transaction for total consideration paid of $35,170,000.

The South Sound Acquisition constitutes a business combination as defined by GAAP, which establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed. The Company was considered the acquirer in this transaction. Accordingly, the estimated fair values of the acquired assets, including the identifiable intangible assets, and the assumed liabilities in the South Sound Acquisition were measured and recorded as of October 1, 2018. The excess of the total consideration paid over the fair

86

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

value of the net assets acquired was allocated to goodwill. The South Sound Acquisition resulted in $9,481,000 of goodwill. The goodwill arising from this transaction consists largely of the synergies and expected economies of scale from combining the operations of the Company and South Sound Bank. This goodwill is not deductible for tax purposes.

In most instances, determining the estimated fair values of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest. Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as estimated credit losses, prepayments or early withdrawal, and other factors. One of the most significant of those determinations relates to the valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. In accordance with GAAP, there was no carry-over of South Sound Bank's previously established allowance for loan losses.

The following table summarizes the fair value of consideration paid, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction:

	At October 1, 2018
	Book Value		Fair Value Adjustment			Estimated Fair Value
	(Dollars in thousands)
Total acquisition consideration						$	35,170
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired:
Cash and cash equivalents	$	21,187	$	—		21,187
CDs held for investment	2,973		—			2,973
FHLB stock	205		—			205
Investment securities held to maturity	19,891		(189		)	19,702
Investment securities available for sale	5,022		—			5,022
Loans receivable	123,627		(2,083		)	121,544
Premises and equipment	3,225		112			3,337
OREO	25		—			25
Accrued interest receivable	554		—			554
BOLI	2,629		—			2,629
CDI	—		2,483			2,483
Servicing rights	285		(4		)	281
Other assets	1,087		(511		)	576
Total assets	180,710		(192		)	180,518
Liabilities assumed:
Deposits	151,378		160			151,538
Other liabilities and accrued expenses	3,291		—			3,291
Total liabilities assumed	154,669		160			154,829
Total identifiable net assets acquired	$	26,041	$	(352	)	25,689
Goodwill recognized						$	9,481

The acquired loan portfolio was valued using Level 3 inputs (see Note 21) and included the use of present value techniques, including cash flow estimates and incorporated assumptions that the Company believes marketplace participants would use in estimating fair values.

87

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The operating results of the Company for the year ended September 30, 2019 include the operating results produced by the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date. The Company determined that the disclosure requirements related to the amounts of revenues and earnings from the net assets acquired in the South Sound

Acquisition since the October 1, 2018 acquisition date is impracticable. The financial activity and operating results of the net assets acquired in the South Sound Acquisition were commingled with the Company's financial activity and operating results as of the acquisition date.

For illustrative purposes only, the following table presents certain unaudited pro forma information for the years ended September 30, 2019 and 2018. This unaudited estimated pro forma information was calculated as if South Sound Bank had been acquired as of the beginning of the fiscal year ended September 30, 2018. The unaudited estimated pro forma information combines the historical results of South Sound Bank with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the transaction occurred at the beginning of the fiscal year ended September 30, 2018. The unaudited pro forma information does not consider any changes to the provision for loan losses resulting from recording loans at fair value. Additionally, the Company expects to achieve further operating cost savings and other business synergies, including revenue growth as a result of the acquisition, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.

	Pro Forma for the Year Ended September 30,
	2019		2018
	(Dollars in thousands, except per share amounts)
Total revenues (net interest income plus non-interest income)	$	65,501	$	59,184
Net income	24,385		18,825
Basic net income per common share	2.93		2.28
Diluted net income per common share	2.88		2.23

During the year ended September 30, 2019, the Company incurred acquisition-related expenses of $462,000 related to the South Sound Acquisition, of which $317,000 is included in data processing and telecommunications and $145,000 is included in professional fees in the accompanying consolidated statements of income. During the year ended September 30, 2018, the Company incurred acquisition-related expenses of $616,000 related to the South Sound Acquisition, which are all included in professional fees in the accompanying consolidated statement of income. South Sound Bank incurred acquisition-related expenses of $1,598,000 for the fiscal year ended September 30, 2018 related to the South Sound Acquisition. The acquisition-related expenses incurred by the Company and South Sound Bank are not included in the unaudited pro forma information presented for the years ended September 30, 2019 and 2018.

Note 3 - Restricted Assets

Federal Reserve regulations require that the Bank maintain certain minimum reserve balances on hand or on deposit with the FRB, based on a percentage of transaction account deposits.  The amounts of the reserve requirement balances as of September 30, 2019 and 2018 were $1,898,000 and $1,609,000, respectively.

88

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Note 4 - Investment Securities

Held to maturity and available for sale investment securities were as follows as of September 30, 2019 and 2018 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2019
Held to Maturity
Mortgage-backed securities ("MBS"):
U.S. government agencies	$	27,786	$	999	$	(2	)	$	28,783
Private label residential	317		490		(1		)	806
U.S. Treasury and U.S. government agency securities	2,999		—		(8		)	2,991
Total	$	31,102	$	1,489	$	(11	)	$	32,580
Available for Sale
MBS: U.S. government agencies	$	22,418	$	114	$	—		$	22,532
Total	$	22,418	$	114	$	—		$	22,532
September 30, 2018
Held to Maturity
MBS:
U.S. government agencies	$	1,385	$	8	$	(21	)	$	1,372
Private label residential	460		552		(2		)	1,010
U.S. Treasury and U.S. government agency securities	10,965		—		(83		)	10,882
Total	$	12,810	$	560	$	(106	)	$	13,264
Available for Sale
MBS: U.S. government agencies	$	231	$	7	$	(1	)	$	237
Mutual funds	1,000		—		(83		)	917
Total	$	1,231	$	7	$	(84	)	$	1,154

Held to maturity investment securities with unrealized losses were as follows as of September 30, 2019 (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	$	291	$	(1	)	2	$	76	$	(1	)	6	$	367	$	(2	)
Private label residential	—		—			—	23		(1		)	5	23		(1		)
U.S. Treasury and U.S. government agency securities	—		—			—	2,991		(8		)	1	2,991		(8		)
Total	$	291	$	(1	)	2	$	3,090	$	(10	)	12	$	3,381	$	(11	)

89

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2018 (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	$	954	$	(20	)	2	$	64	$	(1	)	5	$	1,018	$	(21	)
Private label residential	—		—			—	50		(2		)	8	50		(2		)
U.S. Treasury and U.S. government agency securities	7,946		(22		)	2	2,935		(61		)	1	10,881		(83		)
Total	$	8,900	$	(42	)	4	$	3,049	$	(64	)	14	$	11,949	$	(106	)
Available for Sale
MBS: U.S. government agencies	$	34	$	(1	)	1	$	—	$	—		—	$	34	$	(1	)
Mutual Funds	—		—			—	917		(83		)	1	917		(83		)
Total	$	34	$	(1	)	1	$	917	$	(83	)	1	$	951	$	(84	)

The Company has evaluated the investment securities in the above tables and has determined that the decline in their fair value is temporary.  The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities.  The Company has the ability and the intent to hold the investments until the fair value of these securities recovers.  

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

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

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of September 30, 2019, 2018 and 2017:

	Range				Weighted
	Minimum		Maximum		Average
September 30, 2019
Constant prepayment rate	6.00	%	15.00	%	10.67	%
Collateral default rate	3.00	%	19.70	%	10.40	%
Loss severity rate	—	%	10.59	%	4.07	%
September 30, 2018
Constant prepayment rate	6.00	%	15.00	%	12.91	%
Collateral default rate	—	%	10.42	%	5.03	%
Loss severity rate	—	%	75.00	%	37.25	%
September 30, 2017
Constant prepayment rate	6.00	%	15.00	%	10.40	%
Collateral default rate	0.03	%	10.75	%	4.84	%
Loss severity rate	1.00	%	62.00	%	41.75	%

90

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The following table presents the OTTI recoveries for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
	Held To Maturity			Held To Maturity			Held To Maturity
Total recoveries	$	71		$	73		$	38
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)	(12		)	(5		)	(5		)
Net recoveries recognized in earnings (2)	$	59		$	68		$	33

________________________

(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, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	1,153		$	1,301		$	1,505
Additions:
Additional increases to the amount           related to credit loss for which OTTI           was previously recognized	13			14			18
Subtractions:
Realized losses previously recorded           as credit losses	(23		)	(80		)	(171		)
Recovery of prior credit loss	(72		)	(82		)	(51		)
Balance, end of year	$	1,071		$	1,153		$	1,301

During the year ended September 30, 2019, the Company recorded a $23,000 net realized loss (as a result of investment securities being deemed worthless) on seventeen held to maturity investment securities, all of which had been recognized previously as a credit loss. During the year ended September 30, 2018, the Company recorded an $80,000 net realized loss (as a result of investment securities being deemed worthless) on sixteen held to maturity investment securities, all of which had been recognized previously as a credit loss.  During the year ended September 30, 2017, the Company recorded a $171,000 net realized loss (as a result of investment securities being deemed worthless) on twenty-two held to maturity investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits and FHLB collateral totaled $18,587,000 and $12,100,000 at September 30, 2019 and 2018, respectively.

The contractual maturities of debt securities at September 30, 2019 are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.

91

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	3,025	$	3,017	$	—	$	—
Due after one year to five years	495		498		145		145
Due after five years to ten years	5,893		6,272		129		130
Due after ten years	21,689		22,793		22,144		22,257
Total	$	31,102	$	32,580	$	22,418	$	22,532

Note 5 - Loans Receivable and Allowance for Loan Losses

Loans receivable by portfolio segment consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Mortgage loans:
One- to four-family	$	132,661	$	115,941
Multi-family	76,036		61,928
Commercial	419,117		345,113
Construction – custom and owner/builder	128,848		119,555
Construction – speculative one- to four-family	16,445		15,433
Construction – commercial	39,566		39,590
Construction – multi-family	36,263		10,740
Construction – land development	2,404		3,040
Land	30,770		25,546
Total mortgage loans	882,110		736,886
Consumer loans:
Home equity and second mortgage	40,190		37,341
Other	4,312		3,515
Total consumer loans	44,502		40,856
Commercial business loans	64,764		43,053
Total loans receivable	991,376		820,795
Less:
Undisbursed portion of construction loans in process	92,226		83,237
Deferred loan origination fees, net	2,798		2,637
Allowance for loan losses	9,690		9,530
	104,714		95,404
Loans receivable, net	$	886,662	$	725,391

Loans receivable at September 30, 2019 are reported net of unamortized discounts totaling $1,386,000. There were no unamortized discounts on loans receivable at September 30, 2018.

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, 2019, the Company had $922,300,000 (including $92,226,000 of undisbursed construction loans in process) in loans secured by real estate, which represented 93.0% of total loans receivable.  The real estate loan portfolio is primarily secured by one- to four-family properties, multi-family properties, land, and a variety of commercial real estate property

92

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

types.  At September 30, 2019, there were no concentrations of real estate loans to a specific industry or secured by a specific collateral type that equaled or exceeded 20% of the Company’s total loan portfolio, other than loans secured by one-to four-

family properties.  The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions in the region and the impact of those changes on the real estate market.  The Company typically originates real estate loans with loan-to-value ratios of no greater than 90%.  Collateral and/or guarantees are required for all loans.

Related Party Loans

Certain related parties of the Company, principally Bank directors and officers, are loan customers of the Bank in the ordinary course of business.  Such related party loans were performing according to their repayment terms at September 30, 2019 and 2018.  Activity in related party loans during the years ended September 30, 2019, 2018 and 2017 was as follows (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	119		$	741		$	230
New loans or borrowings	1			368			592
Repayments and reclassifications	(26		)	(990		)	(81		)
Balance, end of year	$	94		$	119		$	741

Loan Segment Risk Characteristics

The Company believes that its loan classes are the same as its loan segments.

One- To Four-Family Residential Lending:  The Company originates both fixed-rate and adjustable-rate loans secured by one- to four-family residences.  A portion of the fixed-rate one- to four-family loans are sold in the secondary market for asset/liability management purposes and to generate non-interest income.  The Company’s lending policies generally limit the maximum loan-to-value on one- to four-family loans to 90% of the lesser of the appraised value or the purchase price.  However, the Company usually obtains private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the property.

Multi-Family Lending: The Company originates loans secured by multi-family dwelling units (more than four units).  Multi-family lending generally affords the Company an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending.  However, loans secured by multi-family properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans.  Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or economy.  The Company attempts to minimize these risks by scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.

Commercial Mortgage Lending: The Company originates commercial real estate loans secured by properties such as office buildings, retail/wholesale facilities, motels, restaurants, mini-storage facilities and other commercial properties.  Commercial real estate lending generally affords the Company an opportunity to receive interest at higher rates than those available from one- to four-family residential lending.  However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial properties are often dependent on the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or economy.  The Company attempts to mitigate these risks by generally limiting the maximum loan-to-value ratio to 80% and scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.

Construction Lending:  The Company currently originates the following types of construction loans: custom construction loans, owner/builder construction loans, speculative construction loans, commercial real estate construction loans, multi-family construction loans and land development loans. 

Construction lending affords the Company the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending.  Construction lending, however, is generally considered to

93

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

involve a higher degree of risk than one- to four family residential lending because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project.  The nature of these loans is such that they are generally more difficult to evaluate and monitor.  If the estimated cost of construction proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to complete the project.  If the estimate of value upon completion proves to be inaccurate, the Company may be confronted with a project whose value is insufficient to assure full repayment, and the Company may incur a loss.  Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors.  Loans to construct homes for which no purchaser has been identified carry more risk because the payoff for the loan depends on the builder’s ability to sell the property prior to the time that the construction loan is due.  The Company attempts to mitigate these risks by adhering to its underwriting policies, disbursement procedures and monitoring practices.

Construction Lending – Custom and Owner/Builder:  Custom construction and owner/builder construction loans are originated to home owners and are typically refinanced into permanent loans at the completion of construction.

Construction Lending – Speculative One- To Four-Family: Speculative one-to four-family construction loans are made to home builders and are termed “speculative” because the home builder does not have, at the time of the loan origination, a signed contract with a home buyer who has a commitment for permanent financing with the Company or another lender for the finished home.  The home buyer may be identified either during or after the construction period. 

Construction Lending – Commercial:  Commercial construction loans are originated to construct properties such as office buildings, hotels, retail rental space and mini-storage facilities.

Construction Lending – Multi-Family:  Multi-family construction loans are originated to construct apartment buildings and condominium projects.

Construction Lending - Land Development: Land development loans are originated to real estate developers for the purpose of developing residential subdivisions. The Company is currently originating land development loans on a limited basis.

Land Lending: The Company originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to sell as improved lots.  Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because these loans are more difficult to evaluate.  If the estimate of value proves to be inaccurate, in the event of default or foreclosure, the Company may be confronted with a property value which is insufficient to assure full repayment.  The Company attempts to minimize this risk by generally limiting the maximum loan-to-value ratio on land loans to 75%.

Consumer Lending – Home Equity and Second Mortgage:   The Company originates home equity lines of credit and second mortgage loans.  Home equity lines of credit and second mortgage loans have a greater credit risk than one- to four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Company.  The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the collateral and the credit-worthiness of the borrower.

Consumer Lending – Other: The Company originates other consumer loans, which include automobile loans, boat loans, motorcycle loans, recreational vehicle loans, savings account loans and unsecured loans.  Other consumer loans generally have shorter terms to maturity than mortgage loans.  Other consumer loans generally involve a greater degree of risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the credit-worthiness of the borrower.

Commercial Business Lending:  The Company originates commercial business loans which are generally secured by business equipment, accounts receivable, inventory or other property.  The Company also generally obtains personal guarantees from the business owners based on a review of personal financial statements.  Commercial business lending generally involves risks that are different from those associated with residential and commercial real estate lending.  Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default.  Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment, because accounts

94

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

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, 2019 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,086	$	(23	)	$	—		$	104	$	1,167
Multi-family	433		48			—			—		481
Commercial	4,248		(260		)	—			166		4,154
Construction – custom and owner/builder	671		82			—			2		755
Construction – speculative one- to four-family	178		34			—			—		212
Construction – commercial	563		(225		)	—			—		338
Construction – multi-family	135		240			—			—		375
Construction – land development	49		18			—			—		67
Land	844		(116		)	(49		)	18		697
Consumer loans:
Home equity and second mortgage	649		(21		)	(5		)	—		623
Other	117		(19		)	(5		)	6		99
Commercial business loans	557		242			(102		)	25		722
Total	$	9,530	$	—		$	(161	)	$	321	$	9,690

The following table sets forth information for the year ended September 30, 2018 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,082	$	4		$	—		$	—	$	1,086
Multi-family	447		(14		)	—			—		433
Commercial	4,184		92			(28		)	—		4,248
Construction – custom and owner/builder	699		(28		)	—			—		671
Construction – speculative one- to four-family	128		37			—			13		178
Construction – commercial	303		260			—			—		563
Construction – multi-family	173		(38		)	—			—		135
Construction – land development	—		49			—			—		49
Land	918		(71		)	(22		)	19		844
Consumer loans:
Home equity and second mortgage	983		(334		)	—			—		649
Other	121		1			(6		)	1		117
Commercial business loans	515		42			—			—		557
Total	$	9,553	$	—		$	(56	)	$	33	$	9,530

95

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The following table sets forth information for the year ended September 30, 2017 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,239	$	(178	)	$	—		$	21	$	1,082
Multi-family	473		(26		)	—			—		447
Commercial	4,384		(1,248		)	(13		)	1,061		4,184
Construction – custom and owner/builder	619		80			—			—		699
Construction – speculative one- to four-family	130		(8		)	—			6		128
Construction – commercial	268		35			—			—		303
Construction – multi-family	316		(143		)	—			—		173
Land	820		189			(110		)	19		918
Consumer loans:
Home equity and second mortgage	939		44			—			—		983
Other	156		(28		)	(10		)	3		121
Commercial business loans	482		33			—			—		515
Total	$	9,826	$	(1,250	)	$	(133	)	$	1,110	$	9,553

The following table presents information on loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, 2019 (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	$	—	$	1,167	$	1,167	$	1,192	$	131,469	$	132,661
Multi-family	—		481		481		—		76,036		76,036
Commercial	—		4,154		4,154		3,190		415,927		419,117
Construction – custom and owner/ builder	—		755		755		—		75,411		75,411
Construction – speculative one- to four-family	—		212		212		—		10,779		10,779
Construction – commercial	—		338		338		—		24,051		24,051
Construction – multi-family	—		375		375		—		19,256		19,256
Construction – land development	—		67		67		—		1,803		1,803
Land	27		670		697		204		30,566		30,770
Consumer loans:
Home equity and second mortgage	—		623		623		603		39,587		40,190
Other	17		82		99		23		4,289		4,312
Commercial business loans	128		594		722		725		64,039		64,764
Total	$	172	$	9,518	$	9,690	$	5,937	$	893,213	$	899,150

96

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The following table presents information on loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, 2018 (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	$	—	$	1,086	$	1,086	$	1,054	$	114,887	$	115,941
Multi-family	—		433		433		—		61,928		61,928
Commercial	—		4,248		4,248		2,446		342,667		345,113
Construction – custom and owner/ builder	—		671		671		—		67,024		67,024
Construction – speculative one- to four-family	—		178		178		—		7,107		7,107
Construction – commercial	—		563		563		—		23,440		23,440
Construction – multi-family	—		135		135		—		5,983		5,983
Construction – land development	—		49		49		—		1,567		1,567
Land	34		810		844		243		25,303		25,546
Consumer loans:
Home equity and second mortgage	—		649		649		359		36,982		37,341
Other	—		117		117		—		3,515		3,515
Commercial business loans	63		494		557		170		42,883		43,053
Total	$	97	$	9,433	$	9,530	$	4,272	$	733,286	$	737,558

The following table presents an analysis of loans by aging category and portfolio segment at September 30, 2019 (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	$	—	$	286	$	699	$	—	$	985	$	131,676	$	132,661
Multi-family	—		—		—		—		—		76,036		76,036
Commercial	94		218		779		—		1,091		418,026		419,117
Construction – custom and owner/ builder	—		—		—		—		—		75,411		75,411
Construction – speculative one- to four-family	—		—		—		—		—		10,779		10,779
Construction – commercial	—		—		—		—		—		24,051		24,051
Construction – multi-family	—		—		—		—		—		19,256		19,256
Construction – land development	—		—		—		—		—		1,803		1,803
Land	5		193		204		—		402		30,368		30,770
Consumer loans:
Home equity and second mortgage	94		—		603		—		697		39,493		40,190
Other	—		—		23		—		23		4,289		4,312
Commercial business loans	—		2		725		—		727		64,037		64,764
Total	$	193	$	699	$	3,033	$	—	$	3,925	$	895,225	$	899,150

__________________

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

97

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The following table presents an analysis of loans by aging category and portfolio segment at September 30, 2018 (dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	557	$	—	$	545	$	—	$	1,102	$	114,839	$	115,941
Multi-family	—		—		—		—		—		61,928		61,928
Commercial	574		—		—		—		574		344,539		345,113
Construction – custom and owner/ builder	—		—		—		—		—		67,024		67,024
Construction – speculative one- to four-family	—		—		—		—		—		7,107		7,107
Construction – commercial	—		—		—		—		—		23,440		23,440
Construction – multi-family	—		—		—		—		—		5,983		5,983
Construction – land development	—		—		—		—		—		1,567		1,567
Land	40		—		243		—		283		25,263		25,546
Consumer loans:
Home equity and second mortgage	42		—		359		—		401		36,940		37,341
Other	10		16		—		—		26		3,489		3,515
Commercial business loans	—		—		170		—		170		42,883		43,053
Total	$	1,223	$	16	$	1,317	$	—	$	2,556	$	735,002	$	737,558

___________________

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

Credit Quality Indicators

The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential.  The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral.  The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:

Pass:  Pass loans are defined as those loans that meet acceptable quality underwriting standards.

Watch:  Watch loans are defined as those loans that still exhibit acceptable quality but have some concerns that justify greater attention.  If these concerns are not corrected, a potential for further adverse categorization exists.  These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.

Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan.  

Substandard:  Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.  If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

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

98

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At September 30, 2019 and 2018, there were no loans classified as loss.

The following table presents an analysis of loans by credit quality indicator and portfolio segment at September 30, 2019 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	129,748	$	296	$	562	$	2,055	$	132,661
Multi-family	76,036		—		—		—		76,036
Commercial	405,165		11,944		683		1,325		419,117
Construction – custom and owner / builder	75,178		233		—		—		75,411
Construction – speculative one- to four-family	10,779		—		—		—		10,779
Construction – commercial	24,051		—		—		—		24,051
Construction – multi-family	19,256		—		—		—		19,256
Construction – land development	1,659		—		—		144		1,803
Land	28,390		952		1,217		211		30,770
Consumer loans:
Home equity and second mortgage	39,364		41		—		785		40,190
Other	4,257		33		—		22		4,312
Commercial business loans	63,669		232		85		778		64,764
Total	$	877,552	$	13,731	$	2,547	$	5,320	$	899,150

The following table presents an analysis of loans by credit quality indicator and portfolio segment at September 30, 2018 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	113,148	$	882	$	581	$	1,330	$	115,941
Multi-family	61,928		—		—		—		61,928
Commercial	334,908		8,375		988		842		345,113
Construction – custom and owner / builder	66,720		304		—		—		67,024
Construction – speculative one- to four-family	7,107		—		—		—		7,107
Construction – commercial	23,440		—		—		—		23,440
Construction – multi-family	5,983		—		—		—		5,983
Construction – land development	1,567		—		—		—		1,567
Land	22,810		988		1,505		243		25,546
Consumer loans:
Home equity and second mortgage	36,697		82		—		562		37,341
Other	3,480		—		—		35		3,515
Commercial business loans	42,812		22		49		170		43,053
Total	$	720,600	$	10,653	$	3,123	$	3,182	$	737,558

99

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2019 (dollars in thousands):

	September 30, 2019						For the Year Ended September 30, 2019
	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	$	1,192	$	1,236	$	—	$	1,110	$	71	$	62
Commercial	3,190		3,190		—		2,920		227		192
Land	63		126		—		100		3		3
Consumer loans:
Home equity and second mortgage	603		603		—		459		—		—
Commercial business loans	189		291		—		142		30		30
Subtotal	5,237		5,446		—		4,731		331		287
With an allowance recorded:
Mortgage loans:
Land	141		141		27		246		—		—
Consumer loans:
Other	23		23		17		10		—		—
Commercial business loans	536		536		128		350		30		30
Subtotal	700		700		172		606		30		30
Total:
Mortgage loans:
One- to four-family	1,192		1,236		—		1,110		71		62
Commercial	3,190		3,190		—		2,920		227		192
Land	204		267		27		346		3		3
Consumer loans:
Home equity and second mortgage	603		603		—		459		—		—
Other	23		23		17		10		—		—
Commercial business loans	725		827		128		492		60		60
Total	$	5,937	$	6,146	$	172	$	5,337	$	361	$	317

100

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2018 (dollars in thousands):

	September 30, 2018						For the Year Ended September 30, 2018
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,054	$	1,200	$	—	$	1,422	$	80	$	69
Commercial	2,446		2,446		—		2,389		121		93
Land	90		195		—		283		11		10
Consumer loans:
Home equity and second mortgage	359		359		—		210		3		3
Subtotal	3,949		4,200		—		4,304		215		175
With an allowance recorded:
Mortgage loans:
One- to four-family	—		—		—		9		—		—
Commercial	—		—		—		760		28		21
Land	153		153		34		383		9		8
Consumer loans:
Home equity and second mortgage	—		—		—		310		16		13
Commercial business loans	170		170		63		141		—		—
Subtotal	323		323		97		1,603		53		42
Total:
Mortgage loans:
One- to four-family	1,054		1,200		—		1,431		80		69
Commercial	2,446		2,446		—		3,149		149		114
Land	243		348		34		666		20		18
Consumer loans:
Home equity and second mortgage	359		359		—		520		19		16
Commercial business loans	170		170		63		141		—		—
Total	$	4,272	$	4,523	$	97	$	5,907	$	268	$	217

101

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2017 (dollars in thousands):

	September 30, 2017						For the Year Ended September 30, 2017
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,443	$	1,589	$	—	$	1,108	$	68	$	62
Commercial	1,967		1,967		—		3,901		188		143
Construction – custom and owner / builder	—		—		—		147		7		7
Land	297		410		—		512		8		6
Consumer loans:
Home equity and second mortgage	123		123		—		284		—		—
Commercial business loans	—		—		—		11		—		—
Subtotal	3,830		4,089		—		5,963		271		218
With an allowance recorded:
Mortgage loans:
One- to four-family	—		—		—		721		50		38
Commercial	1,906		1,906		26		3,326		182		144
Land	822		881		125		666		35		29
Consumer loans:
Home equity and second mortgage	434		434		325		530		29		26
Other	—		—		—		17		—		—
Subtotal	3,162		3,221		476		5,260		296		237
Total:
Mortgage loans:
One- to four-family	1,443		1,589		—		1,829		118		100
Commercial	3,873		3,873		26		7,227		370		287
Construction – custom and owner / builder	—		—		—		147		7		7
Land	1,119		1,291		125		1,178		43		35
Consumer loans:
Home equity and second mortgage	557		557		325		814		29		26
Other	—		—		—		17		—		—
Commercial business loans	—		—		—		11		—		—
Total	$	6,992	$	7,310	$	476	$	11,223	$	567	$	455

102

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The Company had $3,269,000 in TDRs included in impaired loans at September 30, 2019 and had no commitments to lend additional funds on these loans.  The Company had $3,278,000 in TDRs included in impaired loans at September 30, 2018 and had no commitments to lend additional funds on these loans. The allowance for loan losses allocated to TDRs at September 30, 2019 and 2018 was $56,000 and $97,000, respectively.

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of September 30, 2019 and 2018 (dollars in thousands):

	2019
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	493	$	141	$	634
Commercial	2,410		—		2,410
Consumer loans:
Home equity and second mortgage	—		82		82
Commercial business loans	—		143		143
Total	$	2,903	$	366	$	3,269

	2018
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	509	$	—	$	509
Commercial	2,446		—		2,446
Land	—		153		153
Commercial business loans	—		170		170
Total	$	2,955	$	323	$	3,278

There was one new TDR during the year ended September 30, 2019. There were three new TDRs during the year ended September 30, 2018. There were no new TDRs during the year ended September 30, 2017. The following table sets forth information with respect to the Company's TDRs, by portfolio segment, during the years ended September 30, 2019 and 2018 (dollars in thousands):

2019	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
Home equity and second mortgage loan (1)	1	$	85	$	85	$	82
Total	1	$	85	$	85	$	82
2018
Land loans (2)	1	$	244	$	155	$	153
Commercial business loans (1)	2	183		183		170
Total	3	$	427	$	338	$	323
(1) Modifications were a result of reduction in interest rates or monthly payment amounts.
(2) Modification was a result of a reduction in principal balance.

There were no TDRs for which there was a payment default within the first 12 months of modification during the years ended September 30, 2019, 2018 or 2017.

103

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Note 6 - Premises and Equipment

Premises and equipment consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Land	$	5,404	$	4,400
Buildings and improvements	23,847		20,636
Furniture and equipment	9,012		8,026
Property held for future expansion	334		129
Construction and purchases in progress	338		566
	38,935		33,757
Less accumulated depreciation	16,105		14,804
Premises and equipment, net	$	22,830	$	18,953

The Company leases certain premises under operating lease agreements.  Certain leases contain renewal options from five to ten years and escalation clauses. Total rental expense was $332,000, $206,000 and $275,000 for the years ended September 30, 2019, 2018 and 2017, respectively, which is included in premises and equipment expense in the accompanying consolidated statements of income.

Minimum net rental commitments under non-cancellable leases having an original or remaining term of more than one year for fiscal years ending subsequent to September 30, 2019 are as follows (dollars in thousands):

2020	$	315
2021	229
2022	35
Total minimum payments required	$	579

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, 2019 and 2018 (dollars in thousands):

	2019					2018
	Amount			Number		Amount			Number
Balance, beginning of year	$	1,913		12		$	3,301		16
Addition due to South Sound Acquisition	25			1		—			—
Other additions	293			2		324			2
Writedowns	(24		)	—		(248		)	—
Sales	(524		)	(3	)	(1,464		)	(6	)
Balance, end of year	$	1,683		12		$	1,913		12

At both September 30, 2019 and 2018, OREO and other repossessed assets consisted of 12 OREO properties in Washington, with balances ranging from $13,000 to $874,000.   The Company recorded net gains on sales of OREO and other repossessed assets of $89,000, $229,000, and $54,000 for the years ended September 30, 2019, 2018 and 2017, respectively. Gains and losses on sales of OREO and other repossessed assets are recorded in the OREO and other repossessed assets, net category in non-interest expense in the accompanying consolidated statements of income.

At September 30, 2019, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession and the amount of one- to four-family properties in the process of foreclosure totaled $150,000. At September 30, 2018, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession and there were no one- to four-family properties in the process of foreclosure.

104

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Note 8 - Goodwill and CDI

Goodwill

The following table presents the change in the recorded amount of goodwill for the year ended September 30, 2019 (dollars in thousands). There were no changes to the recorded amount of goodwill for the years ended September 30, 2018 and 2017.

Balance, beginning of year	$	5,650
Addition as a result of the South Sound Acquisition (see Note 2)	9,481
Balance, end of year	$	15,131

CDI

During the year ended September 30, 2019, the Company recorded a CDI of $2,483,000 in connection with the South Sound Acquisition. The net unamortized CDI totaled $2,031,000 at September 30, 2019. The CDI amortization expense totaled $452,000 for the year ended September 30, 2019.

Amortization expense for the CDI for fiscal years ending subsequent to September 30, 2019 is estimated to be as follows (dollars in thousands):

2020	$	406
2021	361
2022	316
2023	271
2024	226
Thereafter	451
Total	$	2,031

Note 9 - Servicing Rights

The Company services one- to four-family mortgage loans for Freddie Mac and also provides servicing for secondary market purchasers of the guaranteed portion of SBA loans; such loans are not included in the accompanying consolidated balance sheets.  The principal amount of loans serviced for Freddie Mac at September 30, 2019, 2018 and 2017 was $386,357,000, $370,928,000 and $358,173,000, respectively.  The guaranteed principal amount of SBA loans serviced for others at September 30, 2019, 2018 and 2017 was $12,765,000, $754,000 and $697,000, respectively.

The following is an analysis of the changes in Freddie Mac servicing rights for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	2,022		$	1,823		$	1,570
Additions	747			687			739
Amortization	(563		)	(488		)	(486		)
Balance, end of year	$	2,206		$	2,022		$	1,823

At September 30, 2019, 2018 and 2017, the estimated fair value of Freddie Mac servicing rights totaled $3,694,000, $4,171,000 and $3,556,000, respectively.  The Freddie Mac servicing rights' fair values at September 30, 2019, 2018 and 2017 were estimated using discounted cash flow analyses with average discount rates of 9.00%, 8.99% and 9.52%, respectively, and average conditional prepayment rates of 11.31%, 8.10% and 9.90%, respectively. At September 30, 2019, 2018 and 2017, there were no valuation allowances on the Freddie Mac servicing rights.

105

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The following is an analysis of the changes in SBA servicing rights for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	6		$	2		$	3
Additions due to South Sound Acquisition	281			—			—
Other additions	2			7			—
Amortization	(83		)	(3		)	(1		)
Valuation allowance	(4		)	—			—
Balance, end of year	$	202		$	6		$	2

At September 30, 2019, the estimated fair value of SBA servicing rights totaled $202,000.  The SBA servicing rights' fair values at September 30, 2019 were estimated using discounted cash flow analyses with average discount rates of 15.00% and average conditional prepayment rates of 16.13%. At September 30, 2019 there was a $4,000 valuation allowance on SBA servicing rights. At September 30, 2018 and 2017 the SBA servicing rights were insignificant.

Note 10 - Deposits

Deposits consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Non-interest-bearing demand	$	296,472	$	233,258
NOW checking	297,055		225,290
Savings	164,506		151,404
Money market	144,539		137,746
Certificates of deposit	165,655		141,808
Total	$	1,068,227	$	889,506

Individual certificates of deposit in amounts of $250,000 or greater totaled $29,211,000 and $18,164,000 at September 30, 2019 and 2018, respectively. The Company had brokered deposits totaling $19,327,000 and $17,202,000 at September 30, 2019 and 2018, respectively.

Scheduled maturities of certificates of deposit for fiscal years ending subsequent to September 30, 2019 are as follows (dollars in thousands):

2020	$	92,266
2021	38,724
2022	17,746
2023	8,113
2024	8,806
Total	$	165,655

Interest expense on deposits by account type was as follows for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019		2018		2017
NOW checking	$	840	$	451	$	460
Savings	106		85		78
Money market	1,119		722		434
Certificates of deposit	2,500		1,520		1,246
Total	$	4,565	$	2,778	$	2,218

106

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Note 11 – FHLB Borrowings and Other Borrowings

The Bank has long- and short-term borrowing lines with the FHLB with total credit on the lines equal to 45% of the Bank’s total assets, limited by available collateral.  The Bank had no FHLB borrowings outstanding at both September 30, 2019 and 2018.  Under the Advances, Pledge and Security Agreement entered into with the FHLB ("FHLB Borrowing Agreement"), virtually all of the Bank’s assets, not otherwise encumbered, are pledged as collateral for borrowings.

The Bank also has a letter of credit ("LOC") with the FHLB for the purpose of collateralizing Washington State public deposits. The LOC amount reduces the Bank's available borrowings under the FHLB Borrowing Agreement. The LOC had a limit of $23,000,000 as of September 30, 2019, all of which was available to draw upon.

The Bank also maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.  At September 30, 2019 the Bank had a borrowing capacity on this line of $84,356,000. The Bank had no outstanding borrowings on this line at both September 30, 2019 and 2018.

The Bank has a short-term $10,000,000 overnight borrowing line with Pacific Coast Bankers' Bank. The borrowing line may be reduced or withdrawn at any time. The Bank had no outstanding borrowings on this line at both September 30, 2019 and 2018.

Note 12 - Other Liabilities and Accrued Expenses

Other liabilities and accrued expenses were comprised of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Accrued deferred compensation, profit sharing plans and bonuses payable	$	3,131	$	1,235
Accrued interest payable on deposits	333		225
Accounts payable and accrued expenses - other	4,374		2,667
Total other liabilities and accrued expenses	$	7,838	$	4,127

Note 13 - Income Taxes

On December 22, 2017, the federal government enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revised the future ongoing federal corporate income tax by, among other things, decreasing the federal corporate income tax rate to 21.0% from 35.0% effective January 1, 2018. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a blended federal income tax rate of approximately 24.5% for the Company's fiscal year ended September 30, 2018, and 21.0% for subsequent fiscal years. In addition, the reduction of the corporate federal income tax rate required the Company to revalue its deferred tax assets and liabilities based on the lower federal income tax rate of 21.0%.

As a result of the Tax Act, during the year ended September 30, 2018, the Company recorded a one-time income tax expense of $548,000 in conjunction with remeasuring its net deferred tax assets. The impact of using the 24.5% blended federal income tax rate for the year ended September 30, 2018 versus a 35.0% rate reduced the provision for income taxes by approximately $2.21 million, which was partially offset by the $548,000 one-time net deferred tax asset remeasurement.

The components of the provision for income taxes for the years ended September 30, 2019, 2018 and 2017 were as follows (dollars in thousands):

	2019		2018		2017
Current:
Federal	$	5,198	$	4,900	$	6,656
State	—		4		35
Deferred	703		797		385
Provision for income taxes	$	5,901	$	5,701	$	7,076

107

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

At September 30, 2019 the Company had income taxes receivable of $1,210,000, which is included in other assets in the accompanying 2019 consolidated balance sheet. At September 30, 2018 the Company had income taxes payable of $151,000, which is included in other liabilities in the accompanying 2018 consolidated balance sheet.

The components of the Company’s deferred tax assets and liabilities at September 30, 2019 and 2018 were as follows (dollars in thousands):

	2019		2018
Deferred Tax Assets
Allowance for loan losses	$	1,550	$	2,021
Allowance for OREO losses	218		311
Unearned ESOP shares	—		32
Core deposit intangible	—		31
OTTI credit impairment on investment securities	97		104
Accrued interest on loans	76		10
Net unrealized losses on investment securities	—		42
Deferred compensation and bonuses	520		56
Reserve for loan commitments	51		43
Other	82		29
Total deferred tax assets	2,594		2,679

Deferred Tax Liabilities
Goodwill	1,187			1,107
Servicing rights	506			426
Depreciation	494			283
Loan fees/costs	267			121
FHLB stock dividends	82			82
Prepaid expenses	70			74
Purchase accounting adjustment	110			—
Net unrealized gains on investment securities and investments in equity securities	15			—
Other	—			2
Total deferred tax liabilities	2,731			2,095
Net deferred tax assets (liabilities)	$	(137	)	$	584

The provision for income taxes for the years ended September 30, 2019, 2018 and 2017 differs from that computed at the federal statutory corporate tax rate as follows (dollars in thousands):

	2019			2018			2017
Expected federal income tax provision at statutory rate	$	6,283		$	5,500		$	7,435
Net impact of the Tax Act	—			548			—
BOLI income	(345		)	(134		)	(191		)
Dividends on ESOP	(73		)	(71		)	(102		)
Stock options tax effect	(87		)	(157		)	(188		)
Other, net	123			15			122
Provision for income taxes	$	5,901		$	5,701		$	7,076

No valuation allowance for deferred tax assets was recorded as of September 30, 2019 and 2018, as management believes that it is more likely than not that all of the deferred tax assets will be realized based on management's expectations of future taxable income.

108

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Note 14 - Employee Stock Ownership and 401(k) Plan

The Timberland Bank Employee Stock Ownership and 401(k) Plan (“KSOP”) is comprised of two components, the ESOP and the 401(k) Plan.  The KSOP benefits employees with at least one year of service who are 18 years of age or older.  The Bank may fund the ESOP with contributions of cash or stock, and may fund the 401(k) Plan with contributions of cash.  Employee vesting occurs over six years.

ESOP

In January 1998, the ESOP borrowed $7,930,000 from the Company to purchase 1,058,000 shares of common stock of the Company.  The loan was repaid primarily from the Bank’s contributions to the ESOP and was fully repaid by March 31, 2019. The interest rate on the loan was 8.5%. Interest expense on the ESOP debt was $9,000, $53,000 and $96,000 for the years ended September 30, 2019, 2018 and 2017, respectively.

The amount of the Bank's annual contribution is discretionary, except that it must be sufficient to enable the ESOP to service its debt.  All dividends received by the ESOP were used to pay debt service through March 31, 2019. The dividends received after March 31, 2019 have been paid directly to participants. Dividends of $176,000, $291,000 and $293,000 were used to service the debt during the years ended September 30, 2019, 2018 and 2017, respectively.  As the Plan made each payment of principal and interest, an appropriate percentage of stock was released and allocated annually to eligible employee accounts, in accordance with applicable regulations.As of September 30, 2019, an aggregate of 632,719 ESOP shares, which were previously released for allocation to participants, had been distributed to participants.

Shares held by the ESOP as of September 30, 2019, 2018 and 2017 were classified as follows:

	2019	2018	2017
Unallocated shares	—	17,639	52,905
Shares released for allocation	425,281	451,644	489,665
Total ESOP shares	425,281	469,283	542,570

The approximate fair market value of the ESOP’s unallocated shares at September 30, 2018 and 2017 was $551,000 and $1,658,000, respectively.  Compensation expense recognized under the ESOP for the years ended September 30, 2019, 2018 and 2017 was $318,000, $823,000, and $495,000, respectively.

401(k) Plan

Eligible employees may contribute a portion of their wages to the 401(k) Plan up to the maximum established under the Internal Revenue Code.  Contributions by the Bank are at the discretion of the Board except for a safe harbor contribution of 3% of eligible employees' wages, which is mandatory according to the plan document.  Bank contributions totaled $743,000, $379,000 and $358,000 for the years ended September 30, 2019, 2018 and 2017, respectively.

Note 15 - Stock Compensation Plans

Under the Company’s 2003 Stock Option Plan, the Company was able to grant options for up to 300,000 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti.  Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant.  Generally, options and restricted stock vest in 20% annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of the grant.  At September 30, 2019, there were 30,076 shares of common stock available which may be awarded as options or restricted stock pursuant to future grants under the 2014 Equity Incentive Plan.

At both September 30, 2019 and 2018, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the years ended September 30, 2019, 2018 and 2017.

109

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Stock option activity for the years ended September 30, 2019, 2018 and 2017 is summarized as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding September 30, 2016	373,130		$	9.82
Options granted	58,250		29.69
Options exercised	(46,310	)	7.17
Options forfeited	(4,950	)	6.28
Outstanding September 30, 2017	380,120		13.23
Options granted	45,950		31.80
Options exercised	(40,100	)	7.92
Options forfeited	(5,150	)	13.39
Outstanding September 30, 2018	380,820		16.03
Options granted	46,840		27.14
Options exercised	(43,856	)	9.14
Options forfeited	(5,500	)	19.89
Outstanding September 30, 2019	378,304		$	18.15

The aggregate intrinsic value of options exercised during the years ended September 30, 2019 and 2018 was $864,000 and $894,000, respectively.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the weighted average assumptions noted in the following table.  The risk-free interest rate is based on the rate of a U.S. Treasury security with a similar term as the expected life of the stock option at the particular grant date.  The expected life is based on historical data, vesting terms and estimated exercise dates. The expected dividend yield is based on the most recent quarterly dividend on an annualized basis in effect at the time the options were granted, adjusted, if appropriate, for management's expectations regarding future dividends.  The expected volatility is based on historical volatility of the Company’s stock price.  There were 58,250 options granted during the year ended September 30, 2017 with an aggregate grant date fair value of $224,000. There were 45,950 options granted during the year ended September 30, 2018 with an aggregate grant date fair value of $206,000. There were 46,840 options granted during the year ended September 30, 2019 with an aggregate grant date fair value of $240,000.

The weighted average assumptions for options granted during the years ended September 30, 2019, 2018 and 2017 were as follows:

	2019			2018			2017
Expected volatility	29		%	17		%	16		%
Expected life (in years)	5			5			5
Expected dividend yield	3.28		%	2.61		%	1.85		%
Risk free interest rate	1.53		%	2.97		%	1.89		%
Grant date fair value per share	$	5.12		$	4.48		$	3.84

There were 77,540 options that vested during the year ended September 30, 2019 with a total fair value of $203,000. There were 76,450 options that vested during the year ended September 30, 2018 with a total fair value of $181,000. There were 69,800 options that vested during the year ended September 30, 2017 with a total fair value of $145,000.

At September 30, 2019, there were 160,750 unvested options with an aggregate grant date fair value of $605,000, all of which the Company assumes will vest.  The unvested options had an aggregate intrinsic value of $658,000 at September 30, 2019.  At September 30, 2018, there were 196,750 unvested options with an aggregate grant date fair value of $582,000.

110

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Additional information regarding options outstanding at September 30, 2019 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	2,500	$	4.33	0.9	2,500	$	4.33	0.9
5.86 - 6.00	19,100	5.97		3.1	19,100	5.97		3.1
9.00	49,975	9.00		4.1	49,975	9.00		4.1
10.26 - 10.71	110,839	10.58		5.5	87,589	10.57		5.5
15.67	48,000	15.67		7.0	27,000	15.67		7.0
27.14	46,840	27.14		10.0	—	N/A		N/A
29.69	55,600	29.69		8.0	22,300	29.69		8.0
31.80	45,450	31.80		9.0	9,090	31.80		9.0
	378,304	$	18.15	6.7	217,554	$	13.21	5.5

The aggregate intrinsic value of options outstanding at September 30, 2019, 2018 and 2017 was $3,854,000, $5,813,000, and $6,882,000, respectively.

As of September 30, 2019, unrecognized compensation cost related to non-vested stock options was $604,000, which is expected to be recognized over a weighted average period of 2.45 years.

Note 16 - Commitments and Contingencies

In the normal course of business the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  These instruments involve, to varying degrees, elements of credit risk not recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

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

A summary of the Company’s commitments at September 30, 2019 and 2018 is as follows (dollars in thousands):

	2019		2018
Undisbursed portion of construction loans in process (see Note 5)	$	92,226	$	83,237
Undisbursed lines of credit	80,184		49,525
Commitments to extend credit	16,578		17,665

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 $241,000 and $207,000 at September 30, 2019 and 2018, respectively.  These amounts are included in other liabilities and accrued expenses in the accompanying

111

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

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 2027 and which provides severance pay benefits to eligible employees in the event of a change in control of Timberland Bancorp or the Bank (as defined in the plan).  In general, all employees with two or more years of service will be eligible to participate in the plan.  Under the plan, in the event of a change in control of Timberland Bancorp or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control would be entitled to a payment based on years of service or officer rank with the Bank.  The maximum payment for any eligible employee would be equal to 18 months of the employee’s current compensation.

The Company has employment agreements with the Chief Executive Officer and the Chief Financial Officer which provide for a severance payment and other benefits if the officers are involuntarily terminated following a change in control of the Company or the Bank. The maximum value of the severance benefits under the employment agreements is 2.99 times the officer's average annual compensation during the five-year period prior to the effective date of the change in control.

Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business.  In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the consolidated financial position of the Company.

Note 17 - Regulatory Matters

The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.

The minimum requirements are a common equity Tier 1 ("CET1") capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a leverage ratio of 4.0%. In addition to the minimum regulatory capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. At September 30, 2019, the Bank's CET1 capital exceeded the required capital conservation buffer.

At September 30, 2019 and 2018 the Bank exceeded all regulatory capital requirements. The Bank was categorized as "well capitalized" at September 30, 2019 and 2018 under the regulations of the FDIC. The following tables compare the Bank’s actual capital amounts at September 30, 2019 and 2018 to its minimum regulatory capital requirements and "Well Capitalized" regulatory capital at those dates (dollars in thousands):

September 30, 2019	Actual				Regulatory Minimum To Be "Adequately Capitalized"				Regulatory MinimumTo Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	152,926	12.5	%	$	49,044	4.0	%	$	61,305	5.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	152,926		18.1		38,019		4.5		54,916		6.5
Tier 1 capital	152,926		18.1		50,692		6.0		67,589		8.0
Total capital	162,857		19.3		67,589		8.0		84,487		10.0

112

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

September 30, 2018	Actual				Regulatory Minimum To Be "Adequately Capitalized"				Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	117,336	11.7	%	$	40,024	4.0	%	$	50,031	5.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	117,336		16.7		31,539		4.5		45,557		6.5
Tier 1 capital	117,336		16.7		42,052		6.0		56,070		8.0
Total capital	126,109		18.0		56,070		8.0		70,087		10.0

Timberland Bancorp is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at September 30, 2019, Timberland Bancorp would have exceeded all regulatory requirements.

The following table presents the regulatory capital ratios for Timberland Bancorp at September 30, 2019 and 2018 assuming Timberland Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets (dollars in thousands):

	2019				2018
	Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	155,468	12.7	%	$	120,175	12.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	155,468		18.4		120,175		17.1
Tier 1 capital	155,468		18.4		120,175		17.1
Total capital	165,399		19.6		128,955		18.4

Note 18 - Condensed Financial Information - Parent Company Only

Condensed Balance Sheets - September 30, 2019 and 2018

(dollars in thousands)

	2019		2018
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	336	$	306
Interest-bearing deposits in banks	2,555		2,588
Total cash and cash equivalents	2,891		2,894
Loan receivable from ESOP	—		285
Investment in Bank	168,525		121,818
Other assets	15		15
Total assets	$	171,431	$	125,012
Liabilities and shareholders’ equity
Accrued expenses	$	364	$	355
Shareholders’ equity	171,067		124,657
Total liabilities and shareholders’ equity	$	171,431	$	125,012

113

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Condensed Statements of Income - Years Ended September 30, 2019, 2018 and 2017

(dollars in thousands)

	2019			2018			2017
Operating income
Interest on deposits in banks	$	67		$	37		$	27
Interest on loan receivable from ESOP	9			53			96
Dividends from Bank	6,607			4,429			1,390
Total operating income	6,683			4,519			1,513
Operating expenses	525			591			467
Income before income taxes and equity in undistributed     income of Bank	6,158			3,928			1,046
Benefit for income taxes	(169		)	(198		)	(385		)
Income before undistributed income of Bank	6,327			4,126			1,431
Equity in undistributed income of Bank	17,693			12,595			12,736
Net income	$	24,020		$	16,721		$	14,167

Condensed Statements of Cash Flows - Years Ended September 30, 2019, 2018 and 2017

(dollars in thousands)

	2019			2018			2017
Cash flows from operating activities
Net income	$	24,020		$	16,721		$	14,167
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of Bank	(17,693		)	(12,595		)	(12,736		)
Earned ESOP shares	441			882			605
Stock option compensation expense	159			172			156
Other, net	9			280			33
Net cash provided by operating activities	6,936			5,460			2,225
Cash flows from investing activities
Investment in Bank	(14,915		)	(1,271		)	(930		)
Principal repayments on loan receivable from ESOP	285			536			493
Cash acquired, net of cash consideration paid in business combination	14,284			—			—
Net cash used in investing activities	(346		)	(735		)	(437		)
Cash flows from financing activities
Proceeds from exercise of stock options	401			318			332
Proceeds from exercise of stock warrant	—			—			2,496
Repurchase of common stock	(499		)	—			—
Payment of dividends	(6,495		)	(4,431		)	(3,641		)
Net cash used in financing activities	(6,593		)	(4,113		)	(813		)
Net (decrease) increase in cash and cash equivalents	(3		)	612			975
Cash and cash equivalents
Beginning of period	2,894			2,282			1,307
End of period	$	2,891		$	2,894		$	2,282

114

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Note 19 - Net Income Per Common Share

Information regarding the calculation of basic and diluted net income per common share for the years ended September 30, 2019, 2018 and 2017 is as follows (dollars in thousands, except per share amounts):

	2019		2018		2017
Basic net income per common share computation
Numerator - net income to common shareholders	$	24,020	$	16,721	$	14,167
Denominator - weighted average common shares outstanding	8,318,928		7,334,577		7,136,690
Basic net income per common share	$	2.89	$	2.28	$	1.99
Diluted net income per common share computation
Numerator - net income to common shareholders	$	24,020	$	16,721	$	14,167
Denominator - weighted average common shares outstanding	8,318,928		7,334,577		7,136,690
Effect of dilutive stock options (1)	149,298		191,767		163,773
Effect of dilutive stock warrant (2)	—		—		79,590
Weighted average common shares outstanding-assuming dilution	8,468,226		7,526,344		7,380,053
Diluted net income per common share	$	2.84	$	2.22	$	1.92

___________________

(1) For the years ended September 30, 2019, 2018 and 2017, average options to purchase 102,920, 29,581 and 1,117 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share because their effect would have been anti-dilutive.

(2) Represented a warrant to purchase 370,899 shares of the Company's common stock at an exercise price of $6.73 per share (subject to anti-dilution adjustments) at any time through December 23, 2018 (the "Warrant"). The Warrant was granted on December 23, 2008 to the U.S. Treasury Department ("Treasury") as part of the Company's participation in the Treasury's Troubled Asset Relief Program. On June 12, 2013, the Treasury sold the Warrant to private investors. On January 31, 2017, the Warrant was exercised and 370,899 shares of the Company's common stock were issued in exchange for $2,496,000.

Note 20 - Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the years ended September 30, 2019, 2018 and 2017 are as follows (dollars in thousands):

	Changes in fair value of available for sale securities [1]			Changes in OTTI on held to maturity securities [1]			Total [1]
2019
Balance of AOCI at the beginning of period	$	(58	)	$	(71	)	$	(129	)
Other comprehensive income	85			31			116
Adoption of ASU 2016-01	63			—			63
Balance of AOCI at the end of period	$	90		$	(40	)	$	50

115

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

2018
Balance of AOCI at the beginning of period	$	(19	)	$	(105	)	$	(124	)
Other comprehensive loss	(39		)	34			(5		)
Balance of AOCI at the end of period	$	(58	)	$	(71	)	$	(129	)
2017
Balance of AOCI at the beginning of period	$	4		$	(179	)	$	(175	)
Other comprehensive income	(23		)	74			51
Balance of AOCI at the end of period	$	(19	)	$	(105	)	$	(124	)

___________________

^[1] All amounts are net of income taxes.

Note 21 - Fair Value Measurements

Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.

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's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1).

The Company had no liabilities measured at fair value on a recurring basis at September 30, 2019 and 2018. The Company's assets measured at estimated fair value on a recurring basis at September 30, 2019 and 2018 are as follows (dollars in thousands):

	Estimated Fair Value
September 30, 2019	Level 1		Level 2		Level 3		Total
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	22,532	$	—	$	22,532
Investments in equity securities
Mutual funds	958		—		—		958
Total	$	958	$	22,532	$	—	$	23,490

116

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

September 30, 2018
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	237	$	—	$	237
Mutual funds	917		—		—		917
Total	$	917	$	237	$	—	$	1,154

There were no transfers among Level 1, Level 2 and Level 3 during the years ended September 30, 2019 and 2018.

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

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

Impaired Loans: The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable.  In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Investment Securities Held to Maturity: The estimated fair value of investment securities held to maturity is based upon the assumptions market participants would use in pricing the investment security.  Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

OREO and Other Repossessed Assets, net:  OREO and other repossessed assets are recorded at estimated fair value less estimated costs to sell.  Estimated fair value is generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale.  Estimated costs to sell are based on standard market factors.  The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2019 (dollars in thousands):

	Estimated Fair Value
Impaired loans:	Level 1		Level 2		Level 3
Mortgage loans:
Land	$	—	$	—	$	114
Consumer loans:
Other					6
Commercial business loans	—		—		408
Total impaired loans	—		—		528
Investment securities – held to maturity:
MBS - Private label residential	—		2		—
OREO and other repossessed assets	—		—		1,683
Total	$	—	$	2	$	2,211

117

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

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, 2019 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	528	Market approach	Appraised value less estimated selling costs	NA
OREO and other repossessed assets	1,683		Market approach	Lower of appraised value or listing price less estimated selling costs	NA

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2018 (dollars in thousands):

	Estimated Fair Value
Impaired loans:	Level 1		Level 2		Level 3
Mortgage loans:
Land	$	—	$	—	$	119
Commercial business loans	—		—		107
Total impaired loans	—		—		226
Investment securities – held to maturity:
MBS - Private label residential	—		3		—
OREO and other repossessed assets	—		—		1,913
Total	$	—	$	3	$	2,139

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2018 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	226	Market approach	Appraised value less estimated selling costs	NA
OREO and other repossessed assets	1,913		Market approach	Lower of appraised value or listing price less estimated selling costs	NA

GAAP requires disclosure of estimated fair values for financial instruments.  Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time.  Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change.  In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed.  The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but which may have significant value.  The Company does not believe that it would be practicable to estimate a fair value for these types of items as of September 30, 2019 and 2018.  Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with ASU 2016-01, which the Company adopted on October 1, 2018 on a prospective basis, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

118

Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, 2019 (dollars in thousands):

					Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	143,015	$	143,015	$	143,015	$	—	$	—
CDs held for investment	78,346		78,346		78,346		—		—
Investment securities	53,634		55,112		3,949		51,163		—
Investments in equity securities	958		958		958		—		—
FHLB stock	1,437		1,437		1,437		—		—
Other investments	3,000		3,000		3,000		—		—
Loans held for sale	6,071		6,260		6,260		—		—
Loans receivable, net	886,662		892,495		—		—		892,495
Accrued interest receivable	3,598		3,598		3,598		—		—
Financial Liabilities
Certificates of deposit	165,655		166,852		—		—		166,852
Accrued interest payable	333		333		333		—		—

The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, 2018 (dollars in thousands):

					Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	148,864	$	148,864	$	148,864	$	—	$	—
CDs held for investment	63,290		63,290		63,290		—		—
Investment securities	13,964		14,418		8,812		5,606		—
FHLB stock	1,190		1,190		1,190		—		—
Other investments	3,000		3,000		3,000		—		—
Loans held for sale	1,785		1,814		1,814		—		—
Loans receivable, net	725,391		711,071		—		—		711,071
Accrued interest receivable	2,877		2,877		2,877		—		—
Financial Liabilities
Certificates of deposit	141,808		140,831		—		—		140,831
Accrued interest payable	225		225		225		—		—

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.

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Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Note 22 - Selected Quarterly Financial Data (Unaudited)

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

	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018
Interest and dividend income	$	14,384		$	14,185		$	13,841		$	13,315
Interest expense	(1,233		)	(1,248		)	(1,113		)	(971		)
Net interest income	13,151			12,937			12,728			12,344
Non-interest income	3,597			3,538			3,940			3,266
Non-interest expense (1)	(8,774		)	(8,967		)	(9,277		)	(8,562		)
Income before income taxes	7,974			7,508			7,391			7,048
Provision for income taxes	1,639			1,552			1,277			1,433
Net income	$	6,335		$	5,956		$	6,114		$	5,615
Net income per common share
Basic	$	0.76		$	0.71		$	0.74		$	0.68
Diluted (2)	$	0.75		$	0.70		$	0.72		$	0.66

__________________________________________

(1) During the quarters ended December 31, 2018, March 31, 2019, June 30, 2019 and September 30, 2019 the Company incurred expenses related to the acquisition of South Sound Bank of $64, $55, $328, and $15, respectively.

(2) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.

	September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017
Interest and dividend income	$	11,051		$	10,457		$	10,290		$	10,035
Interest expense	(781		)	(730		)	(666		)	(601		)
Net interest income	10,270			9,727			9,624			9,434
Non-interest income	3,180			3,145			3,082			3,137
Non-interest expense (1)	(7,658		)	(7,122		)	(7,221		)	(7,176		)
Income before income taxes	5,792			5,750			5,485			5,395
Provision for income taxes	1,370			1,334			1,216			1,781
Net income	$	4,422		$	4,416		$	4,269		$	3,614
Net income per common share
Basic (2)	$	0.60		$	0.60		$	0.58		$	0.49
Diluted (2)	$	0.59		$	0.59		$	0.57		$	0.48

__________________________________________

(1) During the quarters ended December 31, 2017, March 31, 2018, June 30, 2018, and September 30, 2018 the Company incurred expenses related to the acquisition of South Sound Bank of $9, $80, $181, and $346, respectively.

(2) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.

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Notes to Consolidated Financial Statements_________________________________________________________________

Timberland Bancorp, Inc. and Subsidiary

September 30, 2019 and 2018

Note 23 - Revenue from Contracts with Customers

In accordance with ASC 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income with the exception of gains on sale of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense and were not significant for the year ended September 30, 2019. For the year ended September 30, 2019, the Company recognized $4,904,000 in services charges on deposits, $4,036,000 in ATM and debit card interchange fees, $197,000 in escrow fees and $46,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

Descriptions of the Company's revenue-generating activities that are within the scope of ASC 606 are as follows:

• Service Charges on Deposits: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Transaction based-fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed as the contract duration does not extend beyond the service performed.

• ATM and Debit Card Interchange Transaction Fees: The Company earns fees from cardholder transactions conducted through third party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis.

• Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property per the customer's contract. Fees are recognized when the escrow contract closes.

• Fee income from Non-Deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer.

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, 2019 the Company’s disclosure controls and procedures

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were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b)           Changes in Internal Controls:  There have been no changes in our internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2019, 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 acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

Management’s Report on Internal Control Over Financial Reporting

Management of Timberland Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) of the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Company designed and implemented a structured and comprehensive assessment process to evaluate its internal control over financial reporting across the enterprise. The assessment of the effectiveness of the Company's internal control over financial reporting was based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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

A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company's internal control over financial reporting was effective as of September 30, 2019.

The effectiveness of internal control over financial reporting as of September 30, 2019, has been audited by Delap LLP, the independent registered public accounting firm who also audited the Company's consolidated financial statements. Delap LLP's attestation report on the Company's internal control over financial reporting is included in "Item 8. Financial Statements and Supplementary Data."

122

The management of the Company has assessed the Company's compliance with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations pertaining to dividend restrictions during the fiscal year that ended on September 30, 2019. Management has concluded that the Company complied with the Federal laws and regulations pertaining to insider loans and the Federal and, if applicable, State laws and regulations.

Date: December 9, 2019    

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

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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 2019 Annual Meeting of Stockholders (“Proxy Statement”) and is incorporated herein by reference.

For information regarding the executive officers of the Company and the Bank, see “Item 1.  Business - Executive Officers of the Registrant.”

Compliance with Section 16(a) of the Exchange Act

The information required by this item is contained under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” included  in the Company’s Proxy Statement and is incorporated herein by reference.

Audit Committee Matters and Audit Committee Financial Expert

The Company has a separately designated standing Audit Committee, which as of September 30, 2019 was composed of Directors Stoney, Smith, Goldberg and Davis. Each member of the Audit Committee is “independent” as defined in the Nasdaq Stock Market listing standards.  The Company’s Board of Directors has designated Director Stoney as the Audit Committee financial expert, as defined in the SEC’s Regulation S-K.  Directors Stoney, Smith, Goldberg and Davis are independent as that term is used in Item 7(c) of Schedule 14A promulgated under the Exchange Act.

Code of Ethics

The Board of Directors ratified its Code of Ethics for the Company’s officers (including its senior financial officers), directors and employees during the year ended September 30, 2019.  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.

The information required by this item is contained under the section captioned “Security Ownership of Certain Beneficial Owners and Management” included in the Company’s Proxy Statement and is incorporated herein by reference.

(b)    Security Ownership of Management.

The information required by this item is contained under the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Proposal I - Election of Directors” included in the Company’s Proxy Statement and is incorporated herein by reference.

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(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.

Equity Compensation Plan Information

The following table summarizes share and exercise price information about the Company’s equity compensation plans as of September 30, 2019:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans  approved by security holders:
2003 Stock Option Plan	87,575	$	8.45	—
Timberland Bancorp, Inc. 2014  Equity Incentive Plan:	290,729		21.07	30,076
Equity compensation plans  not approved by security holders	—	—		—
Total	378,304	$	18.15	30,076

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 “Proposal 4-Ratification of Selection of Independent Auditor” included in the Company’s Proxy Statement and is incorporated herein by reference.

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PART IV

Item 15.  Exhibits and Financial Statement Schedules

(a)      Exhibits

2.1	Agreement and Plan of Merger, dated as of May 22, 2018, by and between Timberland Bancorp, Timberland Bank and South Sound Bank (1)
3.1	Articles of Incorporation of the Registrant (2)
3.3	Amended and Restated Bylaws of the Registrant (3)
4.1	Form of Certificate of Timberland Bancorp, Inc. Common Stock (4)
4.2	Description of Capital Stock of Timberland Bancorp, Inc.
10.1	Employee Severance Compensation Plan, as revised (5)
10.2	Employee Stock Ownership Plan (5)
10.3	2003 Stock Option Plan (6)
10.4	Form of Incentive Stock Option Agreement (7)
10.5	Form of Non-qualified Stock Option Agreement (7)
10.6	Form of Management Recognition and Development Award Agreement (7)
10.7	Employment Agreement with Michael R. Sand (8)
10.8	Employment Agreement with Dean J. Brydon (8)
10.9	Timberland Bancorp, Inc. 2014 Equity Incentive Plan (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
101	The following materials from Timberland Bancorp, Inc.’s  Annual Report on Form 10-K for the year ended September 30, 2019, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements

____________

(1) Incorporated by reference to the Registrant's Current Report on Form 8-K filed May 23, 2018.

(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (333-35817) and incorporated by reference.

(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed October 1, 2018.

(4) Filed as an exhibit to the Registrant's Statement on Form S-1 (333-35817) and incorporated by reference.

(5) Incorporated by reference to the Registrant's Current Report on Form 8-K filed April 16, 2007.

(6) Incorporated by reference to the Registrant's 2004 Annual Meeting Proxy Statement dated December 24, 2003.

(7) Incorporated by reference to Exhibit 99.2 included in the Registrant’s Registration Statement on Form S-8 (333-1161163).

(8) Incorporated by reference to the Registrant’s Current Report of Form 8-K filed on March 29, 2013.

(9) Attached as Appendix A to the Registrant's Annual Meeting Proxy Statement filed on December 19, 2014.

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

Item 16. Form 10-K Summary

None.

126

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 9, 2019	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 9, 2019
Michael R. Sand	Director
	(Principal Executive Officer)
/s/Jon C. Parker	Chairman of the Board	December 9, 2019
Jon C. Parker
/s/Dean J. Brydon	Chief Financial Officer	December 9, 2019
Dean J. Brydon	(Principal Financial and Accounting Officer)
/s/Andrea M. Clinton	Director	December 9, 2019
Andrea M. Clinton
/s/James A. Davis	Director	December 9, 2019
James A. Davis
/s/Larry D. Goldberg	Director	December 9, 2019
Larry D. Goldberg
/s/Kathy D. Leodler	Director	December 9, 2019
Kathy D. Leodler
/s/David A. Smith	Director	December 9, 2019
David A. Smith
/s/Michael J. Stoney	Director	December 9, 2019
Michael J. Stoney
/s/Daniel D. Yerrington	Director	December 9, 2019
Daniel D. Yerrington

127

EXHIBIT INDEX

Exhibit No. Description of Exhibit 

4.2	Description of Capital Stock of Timberland Bancorp, Inc.
21	Subsidiaries of the Registrant
23.1	Consent of Delap LLP
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from Timberland Bancorp, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2019, 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

128

EX-4.2

Exhibit 4.2

Description of Timberland Bancorp’s Capital Stock

The following briefly summarizes the material terms of Timberland Bancorp’s (“Timberland”) capital stock. In connection with this summary, we urge you to read Timberland’s articles of incorporation and bylaws in their entirety, copies of which have been filed as exhibits to Timberland Bancorp’s Annual Report on Form 10-K.

General

Timberland’s authorized capital stock currently consists of:

• 50,000,000 common shares, $0.01 par value per share; and

• 1,000,000 preferred shares, $0.01 par value per share.

Common Shares

Each Timberland common share has the same relative rights and is identical in all respects with each other Timberland common share. Timberland common shares represent non-withdrawable capital, are not of an insurable type and are not insured by the FDIC or any other government agency.

Subject to any prior rights of the holders of any preferred shares or other shares of Timberland then outstanding, holders of Timberland common shares are entitled to receive such dividends as are declared by the board of directors of Timberland out of funds legally available for dividends.

Except with respect to greater than 10% shareholders, full voting rights are vested in the holders of Timberland common shares and each share is entitled to one vote. See “Comparison of Shareholder Rights-Restrictions on Voting Rights.” Subject to any prior rights of the holders of any Timberland preferred shares then outstanding, in the event of a liquidation, dissolution or winding up of Timberland, holders of Timberland common shares will be entitled to receive, pro rata, any assets distributable to shareholders in respect of shares held by them. Holders of Timberland common shares will not have any preemptive rights to subscribe for any additional securities which may be issued by Timberland, nor will they have cumulative voting rights.

Preferred Shares

Timberland may issue preferred shares in one or more series at such time or times and for such consideration as the board of directors of Timberland may determine, generally without shareholder approval. The board of directors of Timberland is expressly authorized at any time, and from time to time, to issue Timberland preferred shares, with such voting and other powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions, as are stated and expressed in the board resolution providing for the issuance. The board of directors of Timberland is authorized to designate the series and the number of shares comprising such series, the dividend rate on the shares of such series, the redemption rights, if any, any purchase, retirement or sinking fund provisions, any conversion rights and any special voting rights. The ability of Timberland’s board of directors to approve the issuance of preferred or other shares without shareholder approval could make an acquisition by an unwanted suitor of a controlling interest in Timberland more difficult, time-consuming or costly, or otherwise discourage an attempt to acquire control of Timberland.

Preferred shares redeemed or acquired by Timberland may return to the status of authorized but unissued shares, without designation as to series, and may be reissued by Timberland upon approval of its board of directors.

Other Anti-Takeover Provisions

In addition to the ability to issue common and preferred shares without shareholder approval, Timberland’s charter and bylaws contain a number of provisions which may have the effect of delaying, deferring or preventing a change in control of Timberland.

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, No. 333-116163, and No. 333-202341 on Form S-8 of Timberland Bancorp, Inc. of our report dated December 9, 2019, with respect to the consolidated financial statements of Timberland Bancorp, Inc. and Subsidiary (collectively, "Timberland"), and the effectiveness of Timberland's internal control over financial reporting, included in Timberland's Annual Report (Form 10-K) for the year ended September 30, 2019.

/s/ Delap LLP

Lake Oswego, Oregon

December 9, 2019

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 9, 2019

/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 9, 2019

/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 9, 2019

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Comprehensive income
Net income	$ 24,020	$ 16,721	$ 14,167
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent [Abstract]
Unrealized holding gain (loss) on investment securities available for sale, net of income taxes of $23, ($8), and ($12), respectively	85	(39)	(23)
Change in OTTI on investment securities held to maturity, net of income taxes:
Adjustments related to other factors for which OTTI was previously recognized, net of income taxes of ($1), ($2), and $12, respectively	(3)	(7)	22
Amount reclassified to credit loss for previously recorded market loss, net of income taxes of $3, $1, and $2, respectively	9	4	3
Accretion of OTTI on investment securities held to maturity, net of income taxes of $6, $10, and $26, respectively	25	37	49
Total other comprehensive income (loss), net of income taxes	116	(5)	51
Total comprehensive income	$ 24,136	$ 16,716	$ 14,218

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Commitments and Contingencies: Supply Commitment (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Commitments and Contingencies Disclosure [Abstract]
Undisbursed portion of construction loans in process	$ 92,226	$ 83,237
Undisbursed lines of credit	80,184	49,525
Commitments to extend credit	$ 16,578	$ 17,665

XML

Document and Entity Information - USD ($) $ in Millions	12 Months Ended
	Sep. 30, 2019	Nov. 30, 2019	Mar. 31, 2019
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	Accelerated Filer
Document Type	10-K
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	FY
Amendment Flag	false
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		8,345,069
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 233.3

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Summary of Significant Accounting Policies: Cash (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Restricted Cash and Cash Equivalents Items [Line Items]
Interest-bearing deposits in Federal Reserve Bank	$ 117,836	$ 128,626
Minimum
Restricted Cash and Cash Equivalents Items [Line Items]
Maturity of CDs held for investment	12 months
Maximum
Restricted Cash and Cash Equivalents Items [Line Items]
Maturity of CDs held for investment	60 months
Interest-bearing deposits
Restricted Cash and Cash Equivalents Items [Line Items]
Interest-bearing deposits in Federal Reserve Bank	$ 102,189	$ 123,745

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Statement of Cash Flows [Abstract]
Cash acquired, net of cash consideration paid in business combination	$ 14,284	$ 0	$ 0
Cash flows from operating activities
Net income	24,020	16,721	14,167
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,604	1,290	1,262
Deferred income taxes	703	797	385
Amortization of CDI	452	0	0
Earned ESOP shares	441	882	605
Accretion of discount on purchased loans	(645)	0	0
Stock option compensation expense	159	172	156
Gain on sales of investment securities	(47)	0	0
Net recoveries on investment securities	(59)	(68)	(33)
Change in fair value of investments in equity securities	(41)	0	0
Gain on sales of OREO and other repossessed assets, net	(89)	(229)	(54)
Provision for OREO losses	24	248	42
Gain on sales of loans, net	(1,754)	(1,893)	(2,157)
(Gain) loss on sales/dispositions of premises and equipment, net	7	(102)	5
Recapture of loan losses	0	0	(1,250)
Loans originated for sale	(70,489)	(62,677)	(69,996)
Proceeds from sales of loans	67,957	66,384	72,158
Amortization of servicing rights	646	491	487
Valuation adjustment on servicing rights, net	4	0	0
BOLI net earnings	(613)	(547)	(545)
BOLI death benefit in excess of cash surrender value	(1,028)	0	0
Increase in deferred loan origination fees	161	171	237
Net change in accrued interest receivable and other assets, and other liabilities and accrued expenses	(3,305)	(190)	(1,610)
Net cash provided by operating activities	18,108	21,450	13,859
Cash flows from investing activities
Net (increase) decrease in CDs held for investment	(12,083)	(20,256)	9,966
Purchase of investment securities held to maturity	(13,166)	(6,073)	0
Purchase of investment securities available for sale	(20,909)	0	0
Proceeds from maturities and prepayments of investment securities held to maturity	11,784	554	609
Proceeds from maturities and prepayments of investment securities available for sale	1,412	41	68
Proceeds from sale of investment securities held to maturity	2,937	0	0
Proceeds from sales of investment securities available for sale	2,332	0	0
Purchase of FHLB stock	(42)	(83)	(103)
Proceeds from redemption of FHLB stock	0	0	1,200
Purchase of other investments	0	0	(3,000)
Increase in loans receivable, net	(39,536)	(35,522)	(26,956)
Additions to premises and equipment	(2,151)	(2,186)	(3,526)
Proceeds from sales of OREO and other repossessed assets	613	1,693	1,579
Proceeds from sales/dispositions of premises and equipment	0	463	0
Proceeds from death benefit on BOLI	3,078	0	0
Escrow deposit for business combination	6,900	(6,900)	0
Net cash used in investing activities	(44,547)	(68,269)	(20,163)
Cash flows from financing activities
Net increase in deposits	27,183	51,608	76,364
Repayment of FHLB borrowings	0	0	(30,000)
Proceeds from exercise of stock options	401	318	332
Proceeds from exercise of stock warrant	0	0	2,496
Repurchase of common stock	(499)	0	0
Payment of dividends	(6,495)	(4,431)	(3,641)
Net cash provided by financing activities	20,590	47,495	45,551
Net increase (decrease) in cash and cash equivalents	(5,849)	676	39,247
Beginning of period	148,864	148,188	108,941
End of period	143,015	148,864	148,188
Supplemental disclosure of cash flow information
Income taxes paid	6,593	4,462	7,596
Interest paid	4,457	2,714	3,283
Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	293	324	751
Other comprehensive income	$ 116	$ (5)	$ 51

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Federal Income Taxes: Schedule of Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Deferred Tax Assets
Allowance for loan losses	$ 1,550	$ 2,021
Allowance for OREO losses	218	311
Unearned ESOP shares	0	32
Core deposit intangible	0	31
OTTI credit impairment on investment securities	97	104
Accrued interest on loans	76	10
Net unrealized losses on investment securities	0	42
Deferred compensation and bonuses	520	56
Reserve for loan commitments	51	43
Other	82	29
Total deferred tax assets	2,594	2,679
Deferred Tax Liabilities
Goodwill	1,187	1,107
Servicing rights	506	426
Depreciation	494	283
Loan fees/costs	267	121
FHLB stock dividends	82	82
Prepaid expenses	70	74
Purchase accounting adjustment	110	0
Net unrealized gains on investment securities and investments in equity securities	15	0
Other	0	2
Total deferred tax liabilities	2,731	2,095
Net deferred tax assets (liabilities)	$ (137)	$ 584

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Stock Compensation Plans: Narrative (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017	Jan. 27, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate intrinsic value of options exercised	$ 864	$ 894
Share-based compensation, nonvested awards, future recognition of compensation cost, Stock Options	$ 604
Unrecognized compensation cost, weighted average period for recognition (in years)	2 years 5 months 12 days
2014 Equity Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized				352,366
Number of shares available for grant (in shares)	30,076
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized	300,000
Award vesting percentage (as a percent)	20.00%
Award vesting period (in years)	5 years
Expiration period (in years)	10 years
Stock options granted during period (in shares)	46,840	45,950	58,250
Stock options, aggregate grant date fair value	$ 240	$ 206	$ 224
Stock options vested during period (in shares)	77,540	76,450	69,800
Stock options vested during period, aggregate grant date fair value	$ 203	$ 181	$ 145
Number of unvested stock options (in shares)	160,750	196,750
Unvested stock awards, aggregate grant date fair value	$ 605	$ 582
Unvested stock options, aggregate intrinsic value	658
Stock options, outstanding, aggregate intrinsic value	$ 3,854	$ 5,813	$ 6,882
MRDP Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting percentage (as a percent)	20.00%
Award vesting period (in years)	5 years
Expiration period (in years)	10 years
Number of unvested stock awards (in shares)	0	0
Stock Grants | MRDP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock awards, granted during period (in shares)	0	0	0

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Selected Quarterly Financial Data (Unaudited): Selected financial data (Tables)

12 Months Ended

Sep. 30, 2019

Quarterly Financial Information Disclosure [Abstract]

Schedule of Quarterly Financial Data

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

	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018
Interest and dividend income	$	14,384		$	14,185		$	13,841		$	13,315
Interest expense	(1,233		)	(1,248		)	(1,113		)	(971		)
Net interest income	13,151			12,937			12,728			12,344
Non-interest income	3,597			3,538			3,940			3,266
Non-interest expense (1)	(8,774		)	(8,967		)	(9,277		)	(8,562		)
Income before income taxes	7,974			7,508			7,391			7,048
Provision for income taxes	1,639			1,552			1,277			1,433
Net income	$	6,335		$	5,956		$	6,114		$	5,615
Net income per common share
Basic	$	0.76		$	0.71		$	0.74		$	0.68
Diluted (2)	$	0.75		$	0.70		$	0.72		$	0.66

__________________________________________

(1) During the quarters ended December 31, 2018, March 31, 2019, June 30, 2019 and September 30, 2019 the Company incurred expenses related to the acquisition of South Sound Bank of $64, $55, $328, and $15, respectively.

(2) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.

	September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017
Interest and dividend income	$	11,051		$	10,457		$	10,290		$	10,035
Interest expense	(781		)	(730		)	(666		)	(601		)
Net interest income	10,270			9,727			9,624			9,434
Non-interest income	3,180			3,145			3,082			3,137
Non-interest expense (1)	(7,658		)	(7,122		)	(7,221		)	(7,176		)
Income before income taxes	5,792			5,750			5,485			5,395
Provision for income taxes	1,370			1,334			1,216			1,781
Net income	$	4,422		$	4,416		$	4,269		$	3,614
Net income per common share
Basic (2)	$	0.60		$	0.60		$	0.58		$	0.49
Diluted (2)	$	0.59		$	0.59		$	0.57		$	0.48

__________________________________________

(1) During the quarters ended December 31, 2017, March 31, 2018, June 30, 2018, and September 30, 2018 the Company incurred expenses related to the acquisition of South Sound Bank of $9, $80, $181, and $346, respectively.

(2) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.

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Servicing Rights - Analysis of the changes in MSRs (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Freddie Mac
Servicing Asset at Fair Value, Amount [Roll Forward]
Balance, beginning of year	$ 2,022	$ 1,823	$ 1,570
Additions	747	687	739
Amortization	(563)	(488)	(486)
Balance, end of year	2,206	2,022	1,823
SBA
Servicing Asset at Fair Value, Amount [Roll Forward]
Balance, beginning of year	6	2	3
Additions due to South Sound Acquisition	281	0	0
Other additions	2	7	0
Amortization	(83)	(3)	(1)
Valuation allowance	(4)	0	0
Balance, end of year	$ 202	$ 6	$ 2

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Loans Receivable and Allowance for Loan Losses: Summary of TDR Loans (Details) - USD ($)	Sep. 30, 2019	Sep. 30, 2018
Financing Receivable, Troubled Debt Restructuring [Line Items]
TDR loans included in impaired loans	$ 3,269,000	$ 3,278,000
TDR Loans, commitment to lend additional funds	0	0
Allowance for loan losses	9,690,000	9,530,000
Troubled Debt Restructured Loans
Financing Receivable, Troubled Debt Restructuring [Line Items]
Allowance for loan losses	$ 56,000	$ 97,000

XML

Premises and Equipment: Property, Plant and Equipment (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	$ 38,935	$ 33,757
Less accumulated depreciation	16,105	14,804
Premises and equipment, net	22,830	18,953
Land
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	5,404	4,400
Buildings and improvements
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	23,847	20,636
Furniture and equipment
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	9,012	8,026
Property held for future expansion
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	334	129
Construction and purchases in progress
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	$ 338	$ 566

XML

Loans Receivable and Allowance for Loan Losses: Significant Concentrations of Credit Risk (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Receivables [Abstract]
Loans secured by real estate	$ 922,300
Undisbursed portion of construction loans in process	$ 92,226	$ 83,237
Loans secured by real estate, percentage of total portfolio (as a percent)	93.00%
Concentration of credit risk, real estate loans by industry, benchmark percentage (as a percent)	20.00%
Ratio of loans to appraisal or purchase price (as a percent)	90.00%

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Selected Quarterly Financial Dara (Unaudited): Selected financial data (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017
South Sound Bank
Business Acquisition [Line Items]
Business combination, acquisition related costs	$ 15	$ 328	$ 55	$ 64	$ 0	$ 0	$ 0	$ 0

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	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2016
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	$ 172	$ 97
Allowance for Loan Losses, Collectively Evaluated for Impairment	9,518	9,433
Allowance for Loan Losses, Total	9,690	9,530	$ 9,553	$ 9,826
Recorded Investment in Loans, Individually Evaluated for Impairment	5,937	4,272
Recorded Investment in Loans, Collectively Evaluated for Impairment	893,213	733,286
Loans receivable	899,150	737,558
Mortgage loans, one-to-four family
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	1,167	1,086
Allowance for Loan Losses, Total	1,167	1,086	1,082	1,239
Recorded Investment in Loans, Individually Evaluated for Impairment	1,192	1,054
Recorded Investment in Loans, Collectively Evaluated for Impairment	131,469	114,887
Loans receivable	132,661	115,941
Mortgage loans, multi-family
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	481	433
Allowance for Loan Losses, Total	481	433	447	473
Recorded Investment in Loans, Individually Evaluated for Impairment	0	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	76,036	61,928
Loans receivable	76,036	61,928
Mortgage loans, commercial
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	4,154	4,248
Allowance for Loan Losses, Total	4,154	4,248	4,184	4,384
Recorded Investment in Loans, Individually Evaluated for Impairment	3,190	2,446
Recorded Investment in Loans, Collectively Evaluated for Impairment	415,927	342,667
Loans receivable	419,117	345,113
Mortgage loans, construction - custom and owner/builder
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	755	671
Allowance for Loan Losses, Total	755	671	699	619
Recorded Investment in Loans, Individually Evaluated for Impairment	0	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	75,411	67,024
Loans receivable	75,411	67,024
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	212	178
Allowance for Loan Losses, Total	212	178	128	130
Recorded Investment in Loans, Individually Evaluated for Impairment	0	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	10,779	7,107
Loans receivable	10,779	7,107
Mortgage loans, construction - commercial
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	338	563
Allowance for Loan Losses, Total	338	563	303	268
Recorded Investment in Loans, Individually Evaluated for Impairment	0	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	24,051	23,440
Loans receivable	24,051	23,440
Mortgage loans, construction - multi-family
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	375	135
Allowance for Loan Losses, Total	375	135	173	316
Recorded Investment in Loans, Individually Evaluated for Impairment	0	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	19,256	5,983
Loans receivable	19,256	5,983
Mortgage loans - construction - land development
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	67	49
Allowance for Loan Losses, Total	67	49	0
Recorded Investment in Loans, Individually Evaluated for Impairment	0	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	1,803	1,567
Loans receivable	1,803	1,567
Mortgage loans, land
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	27	34
Allowance for Loan Losses, Collectively Evaluated for Impairment	670	810
Allowance for Loan Losses, Total	697	844	918	820
Recorded Investment in Loans, Individually Evaluated for Impairment	204	243
Recorded Investment in Loans, Collectively Evaluated for Impairment	30,566	25,303
Loans receivable	30,770	25,546
Consumer loans, home equity and second mortgage
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	0	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	623	649
Allowance for Loan Losses, Total	623	649	983	939
Recorded Investment in Loans, Individually Evaluated for Impairment	603	359
Recorded Investment in Loans, Collectively Evaluated for Impairment	39,587	36,982
Loans receivable	40,190	37,341
Consumer loans, other
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	17	0
Allowance for Loan Losses, Collectively Evaluated for Impairment	82	117
Allowance for Loan Losses, Total	99	117	121	156
Recorded Investment in Loans, Individually Evaluated for Impairment	23	0
Recorded Investment in Loans, Collectively Evaluated for Impairment	4,289	3,515
Loans receivable	4,312	3,515
Commercial business loans
Financing Receivable, Allowance for Credit Loss [Line Items]
Allowance for Loan Losses, Individually Evaluated for Impairment	128	63
Allowance for Loan Losses, Collectively Evaluated for Impairment	594	494
Allowance for Loan Losses, Total	722	557	$ 515	$ 482
Recorded Investment in Loans, Individually Evaluated for Impairment	725	170
Recorded Investment in Loans, Collectively Evaluated for Impairment	64,039	42,883
Loans receivable	$ 64,764	$ 43,053

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OREO and Other Repossessed Assets: Narrative (Details) $ in Thousands	12 Months Ended
	Sep. 30, 2019 USD ($) property	Sep. 30, 2018 USD ($) property	Sep. 30, 2017 USD ($)
Real Estate Properties [Line Items]
Other real estate owned (“OREO”) and other repossessed assets, net	$ 1,683	$ 1,913	$ 3,301
(Gain) loss on sales of OREO and other repossessed assets, net	89	$ 229	$ 54
Recorded amount of foreclosed residential real estate properties held in OREO	$ 150
Washington
Real Estate Properties [Line Items]
OREO, number of repossessed assets | property	12
Number of other repossessed assets | property	0	0
Washington | Minimum
Real Estate Properties [Line Items]
Other real estate owned (“OREO”) and other repossessed assets, net	$ 13
Washington | Maximum
Real Estate Properties [Line Items]
Other real estate owned (“OREO”) and other repossessed assets, net	$ 874

XML

Loans Receivable and Allowance for Loan Losses

12 Months Ended

Sep. 30, 2019

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 by portfolio segment consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Mortgage loans:
One- to four-family	$	132,661	$	115,941
Multi-family	76,036		61,928
Commercial	419,117		345,113
Construction – custom and owner/builder	128,848		119,555
Construction – speculative one- to four-family	16,445		15,433
Construction – commercial	39,566		39,590
Construction – multi-family	36,263		10,740
Construction – land development	2,404		3,040
Land	30,770		25,546
Total mortgage loans	882,110		736,886
Consumer loans:
Home equity and second mortgage	40,190		37,341
Other	4,312		3,515
Total consumer loans	44,502		40,856
Commercial business loans	64,764		43,053
Total loans receivable	991,376		820,795
Less:
Undisbursed portion of construction loans in process	92,226		83,237
Deferred loan origination fees, net	2,798		2,637
Allowance for loan losses	9,690		9,530
	104,714		95,404
Loans receivable, net	$	886,662	$	725,391

Loans receivable at September 30, 2019 are reported net of unamortized discounts totaling $1,386,000. There were no unamortized discounts on loans receivable at September 30, 2018.

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, 2019, the Company had $922,300,000 (including $92,226,000 of undisbursed construction loans in process) in loans secured by real estate, which represented 93.0% of total loans receivable.  The real estate loan portfolio is primarily secured by one- to four-family properties, multi-family properties, land, and a variety of commercial real estate property types.  At September 30, 2019, there were no concentrations of real estate loans to a specific industry or secured by a specific collateral type that equaled or exceeded 20% of the Company’s total loan portfolio, other than loans secured by one-to four-

family properties.  The ultimate collectability of a substantial portion of the loan portfolio is susceptible to changes in economic and market conditions in the region and the impact of those changes on the real estate market.  The Company typically originates real estate loans with loan-to-value ratios of no greater than 90%.  Collateral and/or guarantees are required for all loans.

Related Party Loans

Certain related parties of the Company, principally Bank directors and officers, are loan customers of the Bank in the ordinary course of business.  Such related party loans were performing according to their repayment terms at September 30, 2019 and 2018.  Activity in related party loans during the years ended September 30, 2019, 2018 and 2017 was as follows (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	119		$	741		$	230
New loans or borrowings	1			368			592
Repayments and reclassifications	(26		)	(990		)	(81		)
Balance, end of year	$	94		$	119		$	741

Loan Segment Risk Characteristics

The Company believes that its loan classes are the same as its loan segments.

One- To Four-Family Residential Lending:  The Company originates both fixed-rate and adjustable-rate loans secured by one- to four-family residences.  A portion of the fixed-rate one- to four-family loans are sold in the secondary market for asset/liability management purposes and to generate non-interest income.  The Company’s lending policies generally limit the maximum loan-to-value on one- to four-family loans to 90% of the lesser of the appraised value or the purchase price.  However, the Company usually obtains private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the property.

Multi-Family Lending: The Company originates loans secured by multi-family dwelling units (more than four units).  Multi-family lending generally affords the Company an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending.  However, loans secured by multi-family properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans.  Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or economy.  The Company attempts to minimize these risks by scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.

Commercial Mortgage Lending: The Company originates commercial real estate loans secured by properties such as office buildings, retail/wholesale facilities, motels, restaurants, mini-storage facilities and other commercial properties.  Commercial real estate lending generally affords the Company an opportunity to receive interest at higher rates than those available from one- to four-family residential lending.  However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial properties are often dependent on the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or economy.  The Company attempts to mitigate these risks by generally limiting the maximum loan-to-value ratio to 80% and scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.

Construction Lending:  The Company currently originates the following types of construction loans: custom construction loans, owner/builder construction loans, speculative construction loans, commercial real estate construction loans, multi-family construction loans and land development loans. 

Construction lending affords the Company the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending.  Construction lending, however, is generally considered to involve a higher degree of risk than one- to four family residential lending because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project.  The nature of these loans is such that they are generally more difficult to evaluate and monitor.  If the estimated cost of construction proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to complete the project.  If the estimate of value upon completion proves to be inaccurate, the Company may be confronted with a project whose value is insufficient to assure full repayment, and the Company may incur a loss.  Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors.  Loans to construct homes for which no purchaser has been identified carry more risk because the payoff for the loan depends on the builder’s ability to sell the property prior to the time that the construction loan is due.  The Company attempts to mitigate these risks by adhering to its underwriting policies, disbursement procedures and monitoring practices.

Construction Lending – Custom and Owner/Builder:  Custom construction and owner/builder construction loans are originated to home owners and are typically refinanced into permanent loans at the completion of construction.

Construction Lending – Speculative One- To Four-Family: Speculative one-to four-family construction loans are made to home builders and are termed “speculative” because the home builder does not have, at the time of the loan origination, a signed contract with a home buyer who has a commitment for permanent financing with the Company or another lender for the finished home.  The home buyer may be identified either during or after the construction period. 

Construction Lending – Commercial:  Commercial construction loans are originated to construct properties such as office buildings, hotels, retail rental space and mini-storage facilities.

Construction Lending – Multi-Family:  Multi-family construction loans are originated to construct apartment buildings and condominium projects.

Construction Lending - Land Development: Land development loans are originated to real estate developers for the purpose of developing residential subdivisions. The Company is currently originating land development loans on a limited basis.

Land Lending: The Company originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to sell as improved lots.  Loans secured by undeveloped land or improved lots involve greater risks than one- to four-family residential mortgage loans because these loans are more difficult to evaluate.  If the estimate of value proves to be inaccurate, in the event of default or foreclosure, the Company may be confronted with a property value which is insufficient to assure full repayment.  The Company attempts to minimize this risk by generally limiting the maximum loan-to-value ratio on land loans to 75%.

Consumer Lending – Home Equity and Second Mortgage:   The Company originates home equity lines of credit and second mortgage loans.  Home equity lines of credit and second mortgage loans have a greater credit risk than one- to four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Company.  The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the collateral and the credit-worthiness of the borrower.

Consumer Lending – Other: The Company originates other consumer loans, which include automobile loans, boat loans, motorcycle loans, recreational vehicle loans, savings account loans and unsecured loans.  Other consumer loans generally have shorter terms to maturity than mortgage loans.  Other consumer loans generally involve a greater degree of risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the credit-worthiness of the borrower.

Commercial Business Lending:  The Company originates commercial business loans which are generally secured by business equipment, accounts receivable, inventory or other property.  The Company also generally obtains personal guarantees from the business owners based on a review of personal financial statements.  Commercial business lending generally involves risks that are different from those associated with residential and commercial real estate lending.  Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values, and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default.  Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment, because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use.  Accordingly, the repayment of a commercial business loan depends primarily on the credit-worthiness of the borrower (and any guarantors), while the liquidation of collateral is a secondary and potentially insufficient source of repayment.  The Company attempts to mitigate

these risks by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of the borrowers and the guarantors.

Allowance for Loan Losses

The following table sets forth information for the year ended September 30, 2019 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,086	$	(23	)	$	—		$	104	$	1,167
Multi-family	433		48			—			—		481
Commercial	4,248		(260		)	—			166		4,154
Construction – custom and owner/builder	671		82			—			2		755
Construction – speculative one- to four-family	178		34			—			—		212
Construction – commercial	563		(225		)	—			—		338
Construction – multi-family	135		240			—			—		375
Construction – land development	49		18			—			—		67
Land	844		(116		)	(49		)	18		697
Consumer loans:
Home equity and second mortgage	649		(21		)	(5		)	—		623
Other	117		(19		)	(5		)	6		99
Commercial business loans	557		242			(102		)	25		722
Total	$	9,530	$	—		$	(161	)	$	321	$	9,690

The following table sets forth information for the year ended September 30, 2018 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,082	$	4		$	—		$	—	$	1,086
Multi-family	447		(14		)	—			—		433
Commercial	4,184		92			(28		)	—		4,248
Construction – custom and owner/builder	699		(28		)	—			—		671
Construction – speculative one- to four-family	128		37			—			13		178
Construction – commercial	303		260			—			—		563
Construction – multi-family	173		(38		)	—			—		135
Construction – land development	—		49			—			—		49
Land	918		(71		)	(22		)	19		844
Consumer loans:
Home equity and second mortgage	983		(334		)	—			—		649
Other	121		1			(6		)	1		117
Commercial business loans	515		42			—			—		557
Total	$	9,553	$	—		$	(56	)	$	33	$	9,530

The following table sets forth information for the year ended September 30, 2017 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,239	$	(178	)	$	—		$	21	$	1,082
Multi-family	473		(26		)	—			—		447
Commercial	4,384		(1,248		)	(13		)	1,061		4,184
Construction – custom and owner/builder	619		80			—			—		699
Construction – speculative one- to four-family	130		(8		)	—			6		128
Construction – commercial	268		35			—			—		303
Construction – multi-family	316		(143		)	—			—		173
Land	820		189			(110		)	19		918
Consumer loans:
Home equity and second mortgage	939		44			—			—		983
Other	156		(28		)	(10		)	3		121
Commercial business loans	482		33			—			—		515
Total	$	9,826	$	(1,250	)	$	(133	)	$	1,110	$	9,553

The following table presents information on loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, 2019 (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	$	—	$	1,167	$	1,167	$	1,192	$	131,469	$	132,661
Multi-family	—		481		481		—		76,036		76,036
Commercial	—		4,154		4,154		3,190		415,927		419,117
Construction – custom and owner/ builder	—		755		755		—		75,411		75,411
Construction – speculative one- to four-family	—		212		212		—		10,779		10,779
Construction – commercial	—		338		338		—		24,051		24,051
Construction – multi-family	—		375		375		—		19,256		19,256
Construction – land development	—		67		67		—		1,803		1,803
Land	27		670		697		204		30,566		30,770
Consumer loans:
Home equity and second mortgage	—		623		623		603		39,587		40,190
Other	17		82		99		23		4,289		4,312
Commercial business loans	128		594		722		725		64,039		64,764
Total	$	172	$	9,518	$	9,690	$	5,937	$	893,213	$	899,150

The following table presents information on loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, 2018 (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	$	—	$	1,086	$	1,086	$	1,054	$	114,887	$	115,941
Multi-family	—		433		433		—		61,928		61,928
Commercial	—		4,248		4,248		2,446		342,667		345,113
Construction – custom and owner/ builder	—		671		671		—		67,024		67,024
Construction – speculative one- to four-family	—		178		178		—		7,107		7,107
Construction – commercial	—		563		563		—		23,440		23,440
Construction – multi-family	—		135		135		—		5,983		5,983
Construction – land development	—		49		49		—		1,567		1,567
Land	34		810		844		243		25,303		25,546
Consumer loans:
Home equity and second mortgage	—		649		649		359		36,982		37,341
Other	—		117		117		—		3,515		3,515
Commercial business loans	63		494		557		170		42,883		43,053
Total	$	97	$	9,433	$	9,530	$	4,272	$	733,286	$	737,558

The following table presents an analysis of loans by aging category and portfolio segment at September 30, 2019 (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	$	—	$	286	$	699	$	—	$	985	$	131,676	$	132,661
Multi-family	—		—		—		—		—		76,036		76,036
Commercial	94		218		779		—		1,091		418,026		419,117
Construction – custom and owner/ builder	—		—		—		—		—		75,411		75,411
Construction – speculative one- to four-family	—		—		—		—		—		10,779		10,779
Construction – commercial	—		—		—		—		—		24,051		24,051
Construction – multi-family	—		—		—		—		—		19,256		19,256
Construction – land development	—		—		—		—		—		1,803		1,803
Land	5		193		204		—		402		30,368		30,770
Consumer loans:
Home equity and second mortgage	94		—		603		—		697		39,493		40,190
Other	—		—		23		—		23		4,289		4,312
Commercial business loans	—		2		725		—		727		64,037		64,764
Total	$	193	$	699	$	3,033	$	—	$	3,925	$	895,225	$	899,150

__________________

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

The following table presents an analysis of loans by aging category and portfolio segment at September 30, 2018 (dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	557	$	—	$	545	$	—	$	1,102	$	114,839	$	115,941
Multi-family	—		—		—		—		—		61,928		61,928
Commercial	574		—		—		—		574		344,539		345,113
Construction – custom and owner/ builder	—		—		—		—		—		67,024		67,024
Construction – speculative one- to four-family	—		—		—		—		—		7,107		7,107
Construction – commercial	—		—		—		—		—		23,440		23,440
Construction – multi-family	—		—		—		—		—		5,983		5,983
Construction – land development	—		—		—		—		—		1,567		1,567
Land	40		—		243		—		283		25,263		25,546
Consumer loans:
Home equity and second mortgage	42		—		359		—		401		36,940		37,341
Other	10		16		—		—		26		3,489		3,515
Commercial business loans	—		—		170		—		170		42,883		43,053
Total	$	1,223	$	16	$	1,317	$	—	$	2,556	$	735,002	$	737,558

___________________

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

Credit Quality Indicators

The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential.  The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral.  The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:

Pass:  Pass loans are defined as those loans that meet acceptable quality underwriting standards.

Watch:  Watch loans are defined as those loans that still exhibit acceptable quality but have some concerns that justify greater attention.  If these concerns are not corrected, a potential for further adverse categorization exists.  These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.

Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan.  

Substandard:  Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.  If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

Loss:  Loans in this classification are considered uncollectible and of such little value that continuance as an asset is not warranted.  This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At September 30, 2019 and 2018, there were no loans classified as loss.

The following table presents an analysis of loans by credit quality indicator and portfolio segment at September 30, 2019 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	129,748	$	296	$	562	$	2,055	$	132,661
Multi-family	76,036		—		—		—		76,036
Commercial	405,165		11,944		683		1,325		419,117
Construction – custom and owner / builder	75,178		233		—		—		75,411
Construction – speculative one- to four-family	10,779		—		—		—		10,779
Construction – commercial	24,051		—		—		—		24,051
Construction – multi-family	19,256		—		—		—		19,256
Construction – land development	1,659		—		—		144		1,803
Land	28,390		952		1,217		211		30,770
Consumer loans:
Home equity and second mortgage	39,364		41		—		785		40,190
Other	4,257		33		—		22		4,312
Commercial business loans	63,669		232		85		778		64,764
Total	$	877,552	$	13,731	$	2,547	$	5,320	$	899,150

The following table presents an analysis of loans by credit quality indicator and portfolio segment at September 30, 2018 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	113,148	$	882	$	581	$	1,330	$	115,941
Multi-family	61,928		—		—		—		61,928
Commercial	334,908		8,375		988		842		345,113
Construction – custom and owner / builder	66,720		304		—		—		67,024
Construction – speculative one- to four-family	7,107		—		—		—		7,107
Construction – commercial	23,440		—		—		—		23,440
Construction – multi-family	5,983		—		—		—		5,983
Construction – land development	1,567		—		—		—		1,567
Land	22,810		988		1,505		243		25,546
Consumer loans:
Home equity and second mortgage	36,697		82		—		562		37,341
Other	3,480		—		—		35		3,515
Commercial business loans	42,812		22		49		170		43,053
Total	$	720,600	$	10,653	$	3,123	$	3,182	$	737,558

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2019 (dollars in thousands):

	September 30, 2019						For the Year Ended September 30, 2019
	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	$	1,192	$	1,236	$	—	$	1,110	$	71	$	62
Commercial	3,190		3,190		—		2,920		227		192
Land	63		126		—		100		3		3
Consumer loans:
Home equity and second mortgage	603		603		—		459		—		—
Commercial business loans	189		291		—		142		30		30
Subtotal	5,237		5,446		—		4,731		331		287
With an allowance recorded:
Mortgage loans:
Land	141		141		27		246		—		—
Consumer loans:
Other	23		23		17		10		—		—
Commercial business loans	536		536		128		350		30		30
Subtotal	700		700		172		606		30		30
Total:
Mortgage loans:
One- to four-family	1,192		1,236		—		1,110		71		62
Commercial	3,190		3,190		—		2,920		227		192
Land	204		267		27		346		3		3
Consumer loans:
Home equity and second mortgage	603		603		—		459		—		—
Other	23		23		17		10		—		—
Commercial business loans	725		827		128		492		60		60
Total	$	5,937	$	6,146	$	172	$	5,337	$	361	$	317

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2018 (dollars in thousands):

	September 30, 2018						For the Year Ended September 30, 2018
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,054	$	1,200	$	—	$	1,422	$	80	$	69
Commercial	2,446		2,446		—		2,389		121		93
Land	90		195		—		283		11		10
Consumer loans:
Home equity and second mortgage	359		359		—		210		3		3
Subtotal	3,949		4,200		—		4,304		215		175
With an allowance recorded:
Mortgage loans:
One- to four-family	—		—		—		9		—		—
Commercial	—		—		—		760		28		21
Land	153		153		34		383		9		8
Consumer loans:
Home equity and second mortgage	—		—		—		310		16		13
Commercial business loans	170		170		63		141		—		—
Subtotal	323		323		97		1,603		53		42
Total:
Mortgage loans:
One- to four-family	1,054		1,200		—		1,431		80		69
Commercial	2,446		2,446		—		3,149		149		114
Land	243		348		34		666		20		18
Consumer loans:
Home equity and second mortgage	359		359		—		520		19		16
Commercial business loans	170		170		63		141		—		—
Total	$	4,272	$	4,523	$	97	$	5,907	$	268	$	217

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2017 (dollars in thousands):

	September 30, 2017						For the Year Ended September 30, 2017
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,443	$	1,589	$	—	$	1,108	$	68	$	62
Commercial	1,967		1,967		—		3,901		188		143
Construction – custom and owner / builder	—		—		—		147		7		7
Land	297		410		—		512		8		6
Consumer loans:
Home equity and second mortgage	123		123		—		284		—		—
Commercial business loans	—		—		—		11		—		—
Subtotal	3,830		4,089		—		5,963		271		218
With an allowance recorded:
Mortgage loans:
One- to four-family	—		—		—		721		50		38
Commercial	1,906		1,906		26		3,326		182		144
Land	822		881		125		666		35		29
Consumer loans:
Home equity and second mortgage	434		434		325		530		29		26
Other	—		—		—		17		—		—
Subtotal	3,162		3,221		476		5,260		296		237
Total:
Mortgage loans:
One- to four-family	1,443		1,589		—		1,829		118		100
Commercial	3,873		3,873		26		7,227		370		287
Construction – custom and owner / builder	—		—		—		147		7		7
Land	1,119		1,291		125		1,178		43		35
Consumer loans:
Home equity and second mortgage	557		557		325		814		29		26
Other	—		—		—		17		—		—
Commercial business loans	—		—		—		11		—		—
Total	$	6,992	$	7,310	$	476	$	11,223	$	567	$	455

The Company had $3,269,000 in TDRs included in impaired loans at September 30, 2019 and had no commitments to lend additional funds on these loans.  The Company had $3,278,000 in TDRs included in impaired loans at September 30, 2018 and had no commitments to lend additional funds on these loans. The allowance for loan losses allocated to TDRs at September 30, 2019 and 2018 was $56,000 and $97,000, respectively.

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of September 30, 2019 and 2018 (dollars in thousands):

	2019
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	493	$	141	$	634
Commercial	2,410		—		2,410
Consumer loans:
Home equity and second mortgage	—		82		82
Commercial business loans	—		143		143
Total	$	2,903	$	366	$	3,269

	2018
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	509	$	—	$	509
Commercial	2,446		—		2,446
Land	—		153		153
Commercial business loans	—		170		170
Total	$	2,955	$	323	$	3,278

There was one new TDR during the year ended September 30, 2019. There were three new TDRs during the year ended September 30, 2018. There were no new TDRs during the year ended September 30, 2017. The following table sets forth information with respect to the Company's TDRs, by portfolio segment, during the years ended September 30, 2019 and 2018 (dollars in thousands):

2019	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
Home equity and second mortgage loan (1)	1	$	85	$	85	$	82
Total	1	$	85	$	85	$	82
2018
Land loans (2)	1	$	244	$	155	$	153
Commercial business loans (1)	2	183		183		170
Total	3	$	427	$	338	$	323
(1) Modifications were a result of reduction in interest rates or monthly payment amounts.
(2) Modification was a result of a reduction in principal balance.

There were no TDRs for which there was a payment default within the first 12 months of modification during the years ended September 30, 2019, 2018 or 2017.

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Business Combinations

12 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Business Combinations

Business Combination

On October 1, 2018, the Company completed the South Sound Acquisition. The primary reason for the acquisition was to expand the Company's presence along Washington State's economically important I-5 corridor.

Pursuant to the terms of the merger agreement, South Sound Bank shareholders received 0.746 of a share of the Company's common stock and $5.68825 in cash per share of South Sound Bank common stock. The Company issued 904,826 shares of its common stock (valued at $28,267,000 based on the Company's closing stock price on September 30, 2018 of $31.24 per share) and paid $6,903,000 in cash in the transaction for total consideration paid of $35,170,000.

The South Sound Acquisition constitutes a business combination as defined by GAAP, which establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed. The Company was considered the acquirer in this transaction. Accordingly, the estimated fair values of the acquired assets, including the identifiable intangible assets, and the assumed liabilities in the South Sound Acquisition were measured and recorded as of October 1, 2018. The excess of the total consideration paid over the fair value of the net assets acquired was allocated to goodwill. The South Sound Acquisition resulted in $9,481,000 of goodwill. The goodwill arising from this transaction consists largely of the synergies and expected economies of scale from combining the operations of the Company and South Sound Bank. This goodwill is not deductible for tax purposes.

In most instances, determining the estimated fair values of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest. Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as estimated credit losses, prepayments or early withdrawal, and other factors. One of the most significant of those determinations relates to the valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. In accordance with GAAP, there was no carry-over of South Sound Bank's previously established allowance for loan losses.

The following table summarizes the fair value of consideration paid, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction:

	At October 1, 2018
	Book Value		Fair Value Adjustment			Estimated Fair Value
	(Dollars in thousands)
Total acquisition consideration						$	35,170
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired:
Cash and cash equivalents	$	21,187	$	—		21,187
CDs held for investment	2,973		—			2,973
FHLB stock	205		—			205
Investment securities held to maturity	19,891		(189		)	19,702
Investment securities available for sale	5,022		—			5,022
Loans receivable	123,627		(2,083		)	121,544
Premises and equipment	3,225		112			3,337
OREO	25		—			25
Accrued interest receivable	554		—			554
BOLI	2,629		—			2,629
CDI	—		2,483			2,483
Servicing rights	285		(4		)	281
Other assets	1,087		(511		)	576
Total assets	180,710		(192		)	180,518
Liabilities assumed:
Deposits	151,378		160			151,538
Other liabilities and accrued expenses	3,291		—			3,291
Total liabilities assumed	154,669		160			154,829
Total identifiable net assets acquired	$	26,041	$	(352	)	25,689
Goodwill recognized						$	9,481

The acquired loan portfolio was valued using Level 3 inputs (see Note 21) and included the use of present value techniques, including cash flow estimates and incorporated assumptions that the Company believes marketplace participants would use in estimating fair values.

The operating results of the Company for the year ended September 30, 2019 include the operating results produced by the net assets acquired in the South Sound Acquisition since the October 1, 2018 acquisition date. The Company determined that the disclosure requirements related to the amounts of revenues and earnings from the net assets acquired in the South Sound

Acquisition since the October 1, 2018 acquisition date is impracticable. The financial activity and operating results of the net assets acquired in the South Sound Acquisition were commingled with the Company's financial activity and operating results as of the acquisition date.

For illustrative purposes only, the following table presents certain unaudited pro forma information for the years ended September 30, 2019 and 2018. This unaudited estimated pro forma information was calculated as if South Sound Bank had been acquired as of the beginning of the fiscal year ended September 30, 2018. The unaudited estimated pro forma information combines the historical results of South Sound Bank with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the transaction occurred at the beginning of the fiscal year ended September 30, 2018. The unaudited pro forma information does not consider any changes to the provision for loan losses resulting from recording loans at fair value. Additionally, the Company expects to achieve further operating cost savings and other business synergies, including revenue growth as a result of the acquisition, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.

	Pro Forma for the Year Ended September 30,
	2019		2018
	(Dollars in thousands, except per share amounts)
Total revenues (net interest income plus non-interest income)	$	65,501	$	59,184
Net income	24,385		18,825
Basic net income per common share	2.93		2.28
Diluted net income per common share	2.88		2.23

During the year ended September 30, 2019, the Company incurred acquisition-related expenses of $462,000 related to the South Sound Acquisition, of which $317,000 is included in data processing and telecommunications and $145,000 is included in professional fees in the accompanying consolidated statements of income. During the year ended September 30, 2018, the Company incurred acquisition-related expenses of $616,000 related to the South Sound Acquisition, which are all included in professional fees in the accompanying consolidated statement of income. South Sound Bank incurred acquisition-related expenses of $1,598,000 for the fiscal year ended September 30, 2018 related to the South Sound Acquisition. The acquisition-related expenses incurred by the Company and South Sound Bank are not included in the unaudited pro forma information presented for the years ended September 30, 2019 and 2018.

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Servicing Rights

12 Months Ended

Sep. 30, 2019

Transfers and Servicing [Abstract]

Servicing Rights

The Company services one- to four-family mortgage loans for Freddie Mac and also provides servicing for secondary market purchasers of the guaranteed portion of SBA loans; such loans are not included in the accompanying consolidated balance sheets.  The principal amount of loans serviced for Freddie Mac at September 30, 2019, 2018 and 2017 was $386,357,000, $370,928,000 and $358,173,000, respectively.  The guaranteed principal amount of SBA loans serviced for others at September 30, 2019, 2018 and 2017 was $12,765,000, $754,000 and $697,000, respectively.

The following is an analysis of the changes in Freddie Mac servicing rights for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	2,022		$	1,823		$	1,570
Additions	747			687			739
Amortization	(563		)	(488		)	(486		)
Balance, end of year	$	2,206		$	2,022		$	1,823

At September 30, 2019, 2018 and 2017, the estimated fair value of Freddie Mac servicing rights totaled $3,694,000, $4,171,000 and $3,556,000, respectively.  The Freddie Mac servicing rights' fair values at September 30, 2019, 2018 and 2017 were estimated using discounted cash flow analyses with average discount rates of 9.00%, 8.99% and 9.52%, respectively, and average conditional prepayment rates of 11.31%, 8.10% and 9.90%, respectively. At September 30, 2019, 2018 and 2017, there were no valuation allowances on the Freddie Mac servicing rights.

The following is an analysis of the changes in SBA servicing rights for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	6		$	2		$	3
Additions due to South Sound Acquisition	281			—			—
Other additions	2			7			—
Amortization	(83		)	(3		)	(1		)
Valuation allowance	(4		)	—			—
Balance, end of year	$	202		$	6		$	2

At September 30, 2019, the estimated fair value of SBA servicing rights totaled $202,000.  The SBA servicing rights' fair values at September 30, 2019 were estimated using discounted cash flow analyses with average discount rates of 15.00% and average conditional prepayment rates of 16.13%. At September 30, 2019 there was a $4,000 valuation allowance on SBA servicing rights. At September 30, 2018 and 2017 the SBA servicing rights were insignificant.

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Summary of Significant Accounting Policies: Basis of Presentation (Policies)

12 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

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 24 branches located in Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties in Washington State, attracts deposits from the general public, and uses those funds, along with other borrowings, primarily to provide residential real estate, construction, commercial real estate, commercial business and consumer loans to borrowers primarily in western Washington.

Consolidated Financial Statement Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S.") (“GAAP”) and prevailing practices within the banking industry. 

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 sheets, and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of any OTTI in the fair value of investment securities, the valuation of servicing rights, the valuation of OREO, the valuation of assets acquired and liabilities assumed in the South Sound Acquisition and the valuation of goodwill for potential impairment.

Reclassification Policy

Certain prior year amounts have been reclassified to conform to the 2019 fiscal year presentation with no change to previously reported net income or shareholders’ equity.

Segment Reporting

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

Cash and Cash Equivalents and Cash Flows

The Company considers amounts included in the consolidated balance sheets’ captions “Cash and due from financial institutions” and “Interest-bearing deposits in banks,” all of which mature within ninety days, to be cash equivalents for purposes of reporting cash flows. 

CDs Held for Investment

CDs held for investment include amounts invested with other FDIC-insured financial institutions for a stated interest rate and with a fixed maturity date. Such CDs generally have maturities of 12 to 60 months from the date of purchase by the Company. Early withdrawal penalties may apply; however, the Company intends to hold these CDs to maturity. The Company generally limits its purchases of CDs to a maximum of $250,000 (the FDIC insurance coverage limit) with any single financial institution.

Investment Securities

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

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 debt securities available for sale that are deemed to be other than temporary are recognized in earnings when identified.  The fair value of the debt security then becomes the new cost basis.  For individual debt securities that are held to maturity which the Company does not intend to sell, and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost basis, the other than temporary decline in the fair value of the debt security related to: (1) credit loss is recognized in earnings and (2) market or other factors is recognized in other comprehensive income (loss).  Credit loss is recorded if the present value of expected future cash flows is less than the amortized cost.  For individual debt 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 debt security’s cost basis and its fair value at the consolidated balance sheet date.  For individual debt 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 Bank, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.12% of the Bank's total assets plus 4.00% of any borrowings from the FHLB.  No ready market exists for this stock, and it has no quoted market value. However, redemption of FHLB stock has historically been at par value. The Company's investment in FHLB stock is carried at cost, which approximates fair value.

The Company evaluates its FHLB stock for impairment as needed. The Company's determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared with the capital stock amount and the length of time any decline has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB; and (4) the liquidity position of the FHLB. Based on its evaluation, the Company determined that there was no impairment of FHLB stock at September 30, 2019 and 2018.

Loans Held for Sale

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

Loans Receivable

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

Interest on Loans, Non-accrual Loans and Loan Fees

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

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

Troubled Debt Restructured Loans

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

Allowance for Loan Losses

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

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

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

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

Premises and Equipment

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

Impairment of Long-Lived Assets

Long-lived assets, consisting of premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the recorded amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the recorded amount of an asset to undiscounted future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the recorded amount of the assets exceeds the discounted recovery amount or estimated fair value of the assets.  No events or changes in circumstances have occurred during the years ended September 30, 2019 or 2018 that would cause management to evaluate the recoverability of the Company’s long-lived assets.

OREO and Other Repossessed Assets

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

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

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

The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit must determine fair value for all assets and liabilities, excluding goodwill. The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill. If the carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value.

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount and therefore goodwill was determined not to be impaired at May 31, 2019.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

As of September 30, 2019, management believes that there were no events or changes in the circumstances since May 31, 2019 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.

MSRs

The Company holds rights to service (1) loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and (2) the guaranteed portion of U.S. Small Business Administration ("SBA") loans sold in the secondary market. Servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained. Servicing rights are amortized to servicing income on loans sold approximately in proportion to and over the period of estimated net servicing income.  The value of servicing rights at the date of the sale of loans is estimated based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and expected prepayment rates on the underlying loans.  The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated future cash flows from the servicing assets to those estimated at the time the servicing assets were originated.  Fair values are estimated using expected future discounted cash flows based on current market rates of interest.  For purposes of measuring impairment, the servicing rights must be stratified by one or more predominant risk characteristics of the underlying loans.  The Company stratifies its capitalized servicing rights based on product type and term of the underlying loans.  The amount of impairment recognized is the amount, if any, by which the amortized cost of the servicing rights exceeds their fair value.  Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that fair value is less than the recorded amount.

Transfers of Financial Assets

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

Income Taxes

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

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

With respect to accounting for uncertainty in incomes taxes, a tax provision is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized upon examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The Company recognizes interest and/or penalties related to income tax matters as income tax expense. The Company is no longer subject to U.S. federal income tax examination by tax authorities for years ended on or before September 30, 2015.

ESOP

The Bank sponsors a leveraged ESOP; however, all ESOP debt was fully repaid during the year ended September 30, 2019. The debt of the ESOP was payable to Timberland Bancorp, was recorded as other borrowed funds of the Bank, and was eliminated in the consolidated financial statements. The shares of the Company's common stock pledged as collateral for the ESOP's debt were reported as unearned shares issued to the ESOP in the consolidated financial statements. As shares were released from collateral, compensation expense was recorded equal to the average market price of the shares for the period, and the shares became available for net income per common share calculations.  Dividends paid on unallocated shares reduced the Company’s cash contributions to the ESOP.

Advertising

Costs for advertising and marketing are expensed as incurred.

Stock-based Compensation

The Company measures compensation cost for all stock-based awards based on the grant-date fair value of the stock-based awards and recognizes compensation cost over the service period of stock-based awards. The fair value of stock options is determined using the Black-Scholes valuation model.  Stock option forfeitures are accounted for as they occur.

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. Common stock equivalents arise from the assumed conversion of outstanding stock options and outstanding warrants to purchase common stock.  Shares owned by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted net income per common share.

Related Party Transactions

The Chairman of the Board of the Bank and Timberland Bancorp is a member of the law firm that provides general counsel to the Company. 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers, which created FASB Accounting Standards Codification ("ASC") Topic 606 ("ASC 606"). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASC 606 on October 1, 2018 using the modified retrospective approach. Therefore, the comparative information has not been adjusted and continues to be reported under the superseded ASC 605. There was no cumulative effect adjustment as of October 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the year ended September 30, 2019; however, additional disclosures were incorporated in the footnotes upon adoption. The majority of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606. The Company elected to apply the practical expedient pursuant to ASC 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less. See Note 23 for additional information.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 generally requires equity investments - except those accounted for under the equity method of accounting or those that result in consolidation of the investee - to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 is intended to simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU 2016-01 also eliminates certain disclosures related to the fair value of financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 on October 1, 2018. As required by ASU 2016-01, on October 1, 2018 the Company recorded a one-time cumulative effect adjustment of $63,000 representing net unrealized losses on equity securities (mutual funds) between accumulated other comprehensive loss and retained earnings on the accompanying consolidated balance sheet. Additionally, the fair values of financial instruments for disclosure purposes were computed using an exit price notion and deposits with no stated maturity are no longer included in the fair value disclosures in Note 21.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which created FASB ASC Topic 842 ("ASC 842") and is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The principal change required by ASC 842 relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASC 842 also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. ASC 842 also provides an optional transition method for adoption, under which an entity initially applies ASC 842 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts ASC 842 will continue to be in accordance with current GAAP. ASC 842 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of ASC 842 is permitted. The Company adopted the provisions of ASC 842 effective October 1, 2019 utilizing the optional transition method and will not restate comparative periods. The Company also elected the package of practical expedients permitted under ASC 842's transition guidance, which allows the Company to carryforward its historical lease classifications and its assessment as to whether a contract is or contains a lease. The Company also elected to not recognize lease assets and lease liabilities for leases with an initial term of 12 months or less. The Company expects the adoption of ASC 842 will result in an increase in other assets and an increase in other liabilities of approximately $2.9 million. The Company does not expect the adoption of ASC 842 to have a material impact on its future consolidated statements of income.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05. This ASU replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, this ASU requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changes the accounting for purchased credit-impaired debt securities and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. At this time, the Company anticipates the allowance for loan losses will increase as a result of the implementation of this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application of this ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU 2017-08 is not expected to have a material impact on the Company's future consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to the ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award are the same after the modification as compared to the original award prior to modification. ASU 2017-09 was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU on October 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company's consolidated financial statements.

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements. The following disclosure requirements were removed from ASC Topic 820, Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation process for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's future consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for internal-use software costs. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-15 is not expected to have a material impact on the Company's future consolidated financial statements.

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Premises and Equipment (Tables)

12 Months Ended

Sep. 30, 2019

Property, Plant and Equipment [Abstract]

Schedule of Premises and Equipment

Premises and equipment consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Land	$	5,404	$	4,400
Buildings and improvements	23,847		20,636
Furniture and equipment	9,012		8,026
Property held for future expansion	334		129
Construction and purchases in progress	338		566
	38,935		33,757
Less accumulated depreciation	16,105		14,804
Premises and equipment, net	$	22,830	$	18,953

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, 2019 are as follows (dollars in thousands):

2020	$	315
2021	229
2022	35
Total minimum payments required	$	579

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Regulatory Matters

12 Months Ended

Sep. 30, 2019

Broker-Dealer, Net Capital Requirement, SEC Regulation [Abstract]

Regulatory Matters

Regulatory Matters

The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.

The minimum requirements are a common equity Tier 1 ("CET1") capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a leverage ratio of 4.0%. In addition to the minimum regulatory capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. At September 30, 2019, the Bank's CET1 capital exceeded the required capital conservation buffer.

At September 30, 2019 and 2018 the Bank exceeded all regulatory capital requirements. The Bank was categorized as "well capitalized" at September 30, 2019 and 2018 under the regulations of the FDIC. The following tables compare the Bank’s actual capital amounts at September 30, 2019 and 2018 to its minimum regulatory capital requirements and "Well Capitalized" regulatory capital at those dates (dollars in thousands):

September 30, 2019	Actual				Regulatory Minimum To Be "Adequately Capitalized"				Regulatory MinimumTo Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	152,926	12.5	%	$	49,044	4.0	%	$	61,305	5.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	152,926		18.1		38,019		4.5		54,916		6.5
Tier 1 capital	152,926		18.1		50,692		6.0		67,589		8.0
Total capital	162,857		19.3		67,589		8.0		84,487		10.0

September 30, 2018	Actual				Regulatory Minimum To Be "Adequately Capitalized"				Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	117,336	11.7	%	$	40,024	4.0	%	$	50,031	5.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	117,336		16.7		31,539		4.5		45,557		6.5
Tier 1 capital	117,336		16.7		42,052		6.0		56,070		8.0
Total capital	126,109		18.0		56,070		8.0		70,087		10.0

Timberland Bancorp is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis, and the Federal Reserve expects the holding company's subsidiary bank to be well capitalized under the prompt corrective action regulations. If Timberland Bancorp were subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets at September 30, 2019, Timberland Bancorp would have exceeded all regulatory requirements.

The following table presents the regulatory capital ratios for Timberland Bancorp at September 30, 2019 and 2018 assuming Timberland Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets (dollars in thousands):

	2019				2018
	Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	155,468	12.7	%	$	120,175	12.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	155,468		18.4		120,175		17.1
Tier 1 capital	155,468		18.4		120,175		17.1
Total capital	165,399		19.6		128,955		18.4

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Income Taxes

12 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

On December 22, 2017, the federal government enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revised the future ongoing federal corporate income tax by, among other things, decreasing the federal corporate income tax rate to 21.0% from 35.0% effective January 1, 2018. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a blended federal income tax rate of approximately 24.5% for the Company's fiscal year ended September 30, 2018, and 21.0% for subsequent fiscal years. In addition, the reduction of the corporate federal income tax rate required the Company to revalue its deferred tax assets and liabilities based on the lower federal income tax rate of 21.0%.

As a result of the Tax Act, during the year ended September 30, 2018, the Company recorded a one-time income tax expense of $548,000 in conjunction with remeasuring its net deferred tax assets. The impact of using the 24.5% blended federal income tax rate for the year ended September 30, 2018 versus a 35.0% rate reduced the provision for income taxes by approximately $2.21 million, which was partially offset by the $548,000 one-time net deferred tax asset remeasurement.

The components of the provision for income taxes for the years ended September 30, 2019, 2018 and 2017 were as follows (dollars in thousands):

	2019		2018		2017
Current:
Federal	$	5,198	$	4,900	$	6,656
State	—		4		35
Deferred	703		797		385
Provision for income taxes	$	5,901	$	5,701	$	7,076

At September 30, 2019 the Company had income taxes receivable of $1,210,000, which is included in other assets in the accompanying 2019 consolidated balance sheet. At September 30, 2018 the Company had income taxes payable of $151,000, which is included in other liabilities in the accompanying 2018 consolidated balance sheet.

The components of the Company’s deferred tax assets and liabilities at September 30, 2019 and 2018 were as follows (dollars in thousands):

	2019		2018
Deferred Tax Assets
Allowance for loan losses	$	1,550	$	2,021
Allowance for OREO losses	218		311
Unearned ESOP shares	—		32
Core deposit intangible	—		31
OTTI credit impairment on investment securities	97		104
Accrued interest on loans	76		10
Net unrealized losses on investment securities	—		42
Deferred compensation and bonuses	520		56
Reserve for loan commitments	51		43
Other	82		29
Total deferred tax assets	2,594		2,679

Deferred Tax Liabilities
Goodwill	1,187			1,107
Servicing rights	506			426
Depreciation	494			283
Loan fees/costs	267			121
FHLB stock dividends	82			82
Prepaid expenses	70			74
Purchase accounting adjustment	110			—
Net unrealized gains on investment securities and investments in equity securities	15			—
Other	—			2
Total deferred tax liabilities	2,731			2,095
Net deferred tax assets (liabilities)	$	(137	)	$	584

The provision for income taxes for the years ended September 30, 2019, 2018 and 2017 differs from that computed at the federal statutory corporate tax rate as follows (dollars in thousands):

	2019			2018			2017
Expected federal income tax provision at statutory rate	$	6,283		$	5,500		$	7,435
Net impact of the Tax Act	—			548			—
BOLI income	(345		)	(134		)	(191		)
Dividends on ESOP	(73		)	(71		)	(102		)
Stock options tax effect	(87		)	(157		)	(188		)
Other, net	123			15			122
Provision for income taxes	$	5,901		$	5,701		$	7,076

No valuation allowance for deferred tax assets was recorded as of September 30, 2019 and 2018, as management believes that it is more likely than not that all of the deferred tax assets will be realized based on management's expectations of future taxable income.

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Net Income Per Common Share: Schedule of Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Earnings Per Share, Basic [Abstract]
Net income to common shareholders									$ 24,020	$ 16,721	$ 14,167
Denominator – weighted average common shares outstanding (shares)									8,318,928	7,334,577	7,136,690
Basic net income per common share (in dollars per share)	$ 0.76	$ 0.71	$ 0.74	$ 0.68	$ 0.60	$ 0.60	$ 0.58	$ 0.49	$ 2.89	$ 2.28	$ 1.99
Diluted net income per common share computation
Effect of dilutive stock options (shares)									149,298	191,767	163,773
Effect of dilutive stock warrant (shares)									0	0	79,590
Weighted average common shares outstanding-assuming dilution (shares)									8,468,226	7,526,344	7,380,053
Diluted net income per common share (in dollars per share)	$ 0.75	$ 0.70	$ 0.72	$ 0.66	$ 0.59	$ 0.59	$ 0.57	$ 0.48	$ 2.84	$ 2.22	$ 1.92

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Federal Income Taxes (Tables)

12 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense (Benefit)

The components of the provision for income taxes for the years ended September 30, 2019, 2018 and 2017 were as follows (dollars in thousands):

	2019		2018		2017
Current:
Federal	$	5,198	$	4,900	$	6,656
State	—		4		35
Deferred	703		797		385
Provision for income taxes	$	5,901	$	5,701	$	7,076

Schedule of Deferred Tax Assets and Liabilities

The components of the Company’s deferred tax assets and liabilities at September 30, 2019 and 2018 were as follows (dollars in thousands):

	2019		2018
Deferred Tax Assets
Allowance for loan losses	$	1,550	$	2,021
Allowance for OREO losses	218		311
Unearned ESOP shares	—		32
Core deposit intangible	—		31
OTTI credit impairment on investment securities	97		104
Accrued interest on loans	76		10
Net unrealized losses on investment securities	—		42
Deferred compensation and bonuses	520		56
Reserve for loan commitments	51		43
Other	82		29
Total deferred tax assets	2,594		2,679

Deferred Tax Liabilities
Goodwill	1,187			1,107
Servicing rights	506			426
Depreciation	494			283
Loan fees/costs	267			121
FHLB stock dividends	82			82
Prepaid expenses	70			74
Purchase accounting adjustment	110			—
Net unrealized gains on investment securities and investments in equity securities	15			—
Other	—			2
Total deferred tax liabilities	2,731			2,095
Net deferred tax assets (liabilities)	$	(137	)	$	584

Schedule of Effective Income Tax Rate Reconciliation

The provision for income taxes for the years ended September 30, 2019, 2018 and 2017 differs from that computed at the federal statutory corporate tax rate as follows (dollars in thousands):

	2019			2018			2017
Expected federal income tax provision at statutory rate	$	6,283		$	5,500		$	7,435
Net impact of the Tax Act	—			548			—
BOLI income	(345		)	(134		)	(191		)
Dividends on ESOP	(73		)	(71		)	(102		)
Stock options tax effect	(87		)	(157		)	(188		)
Other, net	123			15			122
Provision for income taxes	$	5,901		$	5,701		$	7,076

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Regulatory Matters (Tables)

12 Months Ended

Sep. 30, 2019

Broker-Dealer, Net Capital Requirement, SEC Regulation [Abstract]

Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations

The following table presents the regulatory capital ratios for Timberland Bancorp at September 30, 2019 and 2018 assuming Timberland Bancorp was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets (dollars in thousands):

	2019				2018
	Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	155,468	12.7	%	$	120,175	12.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	155,468		18.4		120,175		17.1
Tier 1 capital	155,468		18.4		120,175		17.1
Total capital	165,399		19.6		128,955		18.4

The following tables compare the Bank’s actual capital amounts at September 30, 2019 and 2018 to its minimum regulatory capital requirements and "Well Capitalized" regulatory capital at those dates (dollars in thousands):

September 30, 2019	Actual				Regulatory Minimum To Be "Adequately Capitalized"				Regulatory MinimumTo Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	152,926	12.5	%	$	49,044	4.0	%	$	61,305	5.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	152,926		18.1		38,019		4.5		54,916		6.5
Tier 1 capital	152,926		18.1		50,692		6.0		67,589		8.0
Total capital	162,857		19.3		67,589		8.0		84,487		10.0

September 30, 2018	Actual				Regulatory Minimum To Be "Adequately Capitalized"				Regulatory Minimum To Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Leverage Capital Ratio:
Tier 1 capital	$	117,336	11.7	%	$	40,024	4.0	%	$	50,031	5.0	%
Risk-based Capital Ratios:
Common equity Tier 1 capital	117,336		16.7		31,539		4.5		45,557		6.5
Tier 1 capital	117,336		16.7		42,052		6.0		56,070		8.0
Total capital	126,109		18.0		56,070		8.0		70,087		10.0

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Regulatory Matters: Narrative (Details) - Timberland Bank	Sep. 30, 2019	Sep. 30, 2018
Compliance with Regulatory Capital Requirements for Mortgage Companies [Line Items]
Tier 1 Risk-based Capital Ratio, Regulatory Minimum To Be Adequately Capitalized, Ratio	4.50%	4.50%
Tier 1 Risk-based Capital, Regulatory Minimum To Be Adequately Capitalized, Ratio	6.00%	6.00%
Total Capital, Regulatory Minimum To Be Adequately Capitalized, Ratio	8.00%	8.00%
Tier 1 Leverage Capital, Regulatory Minimum To Be Adequately Capitalized, Ratio	4.00%	4.00%

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Fair Value Measurements: Balances of Assets and Liabilities Measured on Nonrecurring Basis (Details) - Nonrecurring - USD ($)	Sep. 30, 2019	Sep. 30, 2018
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, 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 | Other
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring
Fair Value, Inputs, Level 1 | Commercial business 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 | 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 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	2,000	3,000
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 | Other
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring
Fair Value, Inputs, Level 2 | Commercial business 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 | 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	2,000	3,000
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 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	2,211,000	2,139,000
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	114,000	119,000
Fair Value, Inputs, Level 3 | Other
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	6,000
Fair Value, Inputs, Level 3 | Commercial business loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, estimated fair value, nonrecurring	408,000	107,000
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	528,000	226,000
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	$ 1,683,000	$ 1,913,000

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Deposits: Scheduled maturities of certificates of deposit for future years (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Deposits [Abstract]
2019	$ 92,266
2020	38,724
2021	17,746
2022	8,113
2023	8,806
Total	$ 165,655

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Investment Securities: Unrealized Gain (Loss) on Investments (Details) $ in Thousands	Sep. 30, 2019 USD ($) security	Sep. 30, 2018 USD ($) security
Held-to-maturity Securities, Fair Value:
Estimated Fair Value - Less Than 12 Months	$ 291	$ 8,900
Estimated Fair Value - 12 Months or Longer	3,090	3,049
Total Estimated Fair Value	3,381	11,949
Held-to-maturity Securities, Gross Unrealized Losses
Gross Unrealized Losses - Less Than 12 Months	(1)	(42)
Gross Unrealized Losses - 12 Months or Longer	(10)	(64)
Total Gross Unrealized Losses	$ (11)	$ (106)
Held-to-maturity, Qty, Less Than 12 Months | security	2	4
Held-to-maturity, Qty, 12 Months or Longer | security	12	14
Estimated Fair Value - Less Than 12 Months		$ 34
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss		(1)
Estimated Fair Value - 12 Months or Longer		917
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss		(83)
Total Estimated Fair Value		951
Available-for-sale Securities, Continuous Unrealized Loss Position, Accumulated Loss		$ (84)
Available-for-sale Securities, Gross Unrealized Losses:
Available-for-sale, Qty, Less than 12 Months | security		1
Available-for-sale, Qty, 12 Months or Longer | security		1
Mortgage-backed Securities, U.S. government agencies
Held-to-maturity Securities, Fair Value:
Estimated Fair Value - Less Than 12 Months	$ 291	$ 954
Estimated Fair Value - 12 Months or Longer	76	64
Total Estimated Fair Value	367	1,018
Held-to-maturity Securities, Gross Unrealized Losses
Gross Unrealized Losses - Less Than 12 Months	(1)	(20)
Gross Unrealized Losses - 12 Months or Longer	(1)	(1)
Total Gross Unrealized Losses	$ (2)	$ (21)
Held-to-maturity, Qty, Less Than 12 Months | security	2	2
Held-to-maturity, Qty, 12 Months or Longer | security	6	5
Estimated Fair Value - Less Than 12 Months		$ 34
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss		(1)
Estimated Fair Value - 12 Months or Longer		0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss		0
Total Estimated Fair Value		34
Available-for-sale Securities, Continuous Unrealized Loss Position, Accumulated Loss		$ (1)
Available-for-sale Securities, Gross Unrealized Losses:
Available-for-sale, Qty, Less than 12 Months | security		1
Available-for-sale, Qty, 12 Months or Longer | security		0
Mortgage-backed Securities, Private label residential
Held-to-maturity Securities, Fair Value:
Estimated Fair Value - Less Than 12 Months	$ 0	$ 0
Estimated Fair Value - 12 Months or Longer	23	50
Total Estimated Fair Value	23	50
Held-to-maturity Securities, Gross Unrealized Losses
Gross Unrealized Losses - Less Than 12 Months	0	0
Gross Unrealized Losses - 12 Months or Longer	(1)	(2)
Total Gross Unrealized Losses	$ (1)	$ (2)
Held-to-maturity, Qty, Less Than 12 Months | security	0	0
Held-to-maturity, Qty, 12 Months or Longer | security	5	8
US Government Agencies Debt Securities
Held-to-maturity Securities, Fair Value:
Estimated Fair Value - Less Than 12 Months	$ 0	$ 7,946
Estimated Fair Value - 12 Months or Longer	2,991	2,935
Total Estimated Fair Value	2,991	10,881
Held-to-maturity Securities, Gross Unrealized Losses
Gross Unrealized Losses - Less Than 12 Months	0	(22)
Gross Unrealized Losses - 12 Months or Longer	(8)	(61)
Total Gross Unrealized Losses	$ (8)	$ (83)
Held-to-maturity, Qty, Less Than 12 Months | security	0	2
Held-to-maturity, Qty, 12 Months or Longer | security	1	1
Mutual funds
Held-to-maturity Securities, Gross Unrealized Losses
Estimated Fair Value - Less Than 12 Months		$ 0
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss		0
Estimated Fair Value - 12 Months or Longer		917
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss		(83)
Total Estimated Fair Value		917
Available-for-sale Securities, Continuous Unrealized Loss Position, Accumulated Loss		$ (83)
Available-for-sale Securities, Gross Unrealized Losses:
Available-for-sale, Qty, Less than 12 Months | security		0
Available-for-sale, Qty, 12 Months or Longer | security		1

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Summary of Significant Accounting Policies: Related Party Transactions (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Chairman of the Board
Related Party Transaction [Line Items]
Related party transaction, legal fees	$ 69	$ 94	$ 99

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Goodwill and CDI - Amortization Expense (Details) - Core Deposits $ in Thousands	Sep. 30, 2019 USD ($)
Acquired Finite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Assets, Amortization Expense, Next Twelve Months	$ 406
Finite-Lived Intangible Assets, Amortization Expense, Year Two	361
Finite-Lived Intangible Assets, Amortization Expense, Year Three	316
Finite-Lived Intangible Assets, Amortization Expense, Year Four	271
Finite-Lived Intangible Assets, Amortization Expense, Year Five	226
Finite-Lived Intangible Assets, Amortization Expense, after Year Five	451
Finite-Lived Intangible Assets, Net	$ 2,031

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Investment Securities: Narrative-Realized Gains (Losses) (Details) $ in Thousands	12 Months Ended
	Sep. 30, 2019 USD ($) security	Sep. 30, 2018 USD ($) security	Sep. 30, 2017 USD ($) security
Investments [Abstract]
Loss on sale of securities	$ 23	$ 80	$ 171
Held-to-maturity securities, realized loss, number of securities | security	17	16	22
Security owned and pledged as collateral	$ 18,587	$ 12,100

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Federal Income Taxes: Schedule of Components of Income Tax Expense (Benefit) (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Income Tax Disclosure [Abstract]
Federal									$ 5,198	$ 4,900	$ 6,656
State									0	4	35
Deferred									703	797	385
Provision for income taxes	$ 1,639	$ 1,552	$ 1,277	$ 1,433	$ 1,370	$ 1,334	$ 1,216	$ 1,781	$ 5,901	$ 5,701	$ 7,076

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Condensed Financial Information - Parent Company Only

12 Months Ended

Sep. 30, 2019

Condensed Financial Information Disclosure [Abstract]

Condensed Financial Information - Parent Company Only

Condensed Financial Information - Parent Company Only

Condensed Balance Sheets - September 30, 2019 and 2018

(dollars in thousands)

	2019		2018
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	336	$	306
Interest-bearing deposits in banks	2,555		2,588
Total cash and cash equivalents	2,891		2,894
Loan receivable from ESOP	—		285
Investment in Bank	168,525		121,818
Other assets	15		15
Total assets	$	171,431	$	125,012
Liabilities and shareholders’ equity
Accrued expenses	$	364	$	355
Shareholders’ equity	171,067		124,657
Total liabilities and shareholders’ equity	$	171,431	$	125,012

Condensed Statements of Income - Years Ended September 30, 2019, 2018 and 2017

(dollars in thousands)

	2019			2018			2017
Operating income
Interest on deposits in banks	$	67		$	37		$	27
Interest on loan receivable from ESOP	9			53			96
Dividends from Bank	6,607			4,429			1,390
Total operating income	6,683			4,519			1,513
Operating expenses	525			591			467
Income before income taxes and equity in undistributed     income of Bank	6,158			3,928			1,046
Benefit for income taxes	(169		)	(198		)	(385		)
Income before undistributed income of Bank	6,327			4,126			1,431
Equity in undistributed income of Bank	17,693			12,595			12,736
Net income	$	24,020		$	16,721		$	14,167

Condensed Statements of Cash Flows - Years Ended September 30, 2019, 2018 and 2017

(dollars in thousands)

	2019			2018			2017
Cash flows from operating activities
Net income	$	24,020		$	16,721		$	14,167
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of Bank	(17,693		)	(12,595		)	(12,736		)
Earned ESOP shares	441			882			605
Stock option compensation expense	159			172			156
Other, net	9			280			33
Net cash provided by operating activities	6,936			5,460			2,225
Cash flows from investing activities
Investment in Bank	(14,915		)	(1,271		)	(930		)
Principal repayments on loan receivable from ESOP	285			536			493
Cash acquired, net of cash consideration paid in business combination	14,284			—			—
Net cash used in investing activities	(346		)	(735		)	(437		)
Cash flows from financing activities
Proceeds from exercise of stock options	401			318			332
Proceeds from exercise of stock warrant	—			—			2,496
Repurchase of common stock	(499		)	—			—
Payment of dividends	(6,495		)	(4,431		)	(3,641		)
Net cash used in financing activities	(6,593		)	(4,113		)	(813		)
Net (decrease) increase in cash and cash equivalents	(3		)	612			975
Cash and cash equivalents
Beginning of period	2,894			2,282			1,307
End of period	$	2,891		$	2,894		$	2,282

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Employee Stock Ownership and 401(k) Plan

12 Months Ended

Sep. 30, 2019

Retirement Benefits [Abstract]

Employee Stock Ownership and 401(k) Plan

Employee Stock Ownership and 401(k) Plan

The Timberland Bank Employee Stock Ownership and 401(k) Plan (“KSOP”) is comprised of two components, the ESOP and the 401(k) Plan.  The KSOP benefits employees with at least one year of service who are 18 years of age or older.  The Bank may fund the ESOP with contributions of cash or stock, and may fund the 401(k) Plan with contributions of cash.  Employee vesting occurs over six years.

ESOP

In January 1998, the ESOP borrowed $7,930,000 from the Company to purchase 1,058,000 shares of common stock of the Company.  The loan was repaid primarily from the Bank’s contributions to the ESOP and was fully repaid by March 31, 2019. The interest rate on the loan was 8.5%. Interest expense on the ESOP debt was $9,000, $53,000 and $96,000 for the years ended September 30, 2019, 2018 and 2017, respectively.

The amount of the Bank's annual contribution is discretionary, except that it must be sufficient to enable the ESOP to service its debt.  All dividends received by the ESOP were used to pay debt service through March 31, 2019. The dividends received after March 31, 2019 have been paid directly to participants. Dividends of $176,000, $291,000 and $293,000 were used to service the debt during the years ended September 30, 2019, 2018 and 2017, respectively.  As the Plan made each payment of principal and interest, an appropriate percentage of stock was released and allocated annually to eligible employee accounts, in accordance with applicable regulations.As of September 30, 2019, an aggregate of 632,719 ESOP shares, which were previously released for allocation to participants, had been distributed to participants.

Shares held by the ESOP as of September 30, 2019, 2018 and 2017 were classified as follows:

	2019	2018	2017
Unallocated shares	—	17,639	52,905
Shares released for allocation	425,281	451,644	489,665
Total ESOP shares	425,281	469,283	542,570

The approximate fair market value of the ESOP’s unallocated shares at September 30, 2018 and 2017 was $551,000 and $1,658,000, respectively.  Compensation expense recognized under the ESOP for the years ended September 30, 2019, 2018 and 2017 was $318,000, $823,000, and $495,000, respectively.

401(k) Plan

Eligible employees may contribute a portion of their wages to the 401(k) Plan up to the maximum established under the Internal Revenue Code.  Contributions by the Bank are at the discretion of the Board except for a safe harbor contribution of 3% of eligible employees' wages, which is mandatory according to the plan document.  Bank contributions totaled $743,000, $379,000 and $358,000 for the years ended September 30, 2019, 2018 and 2017, respectively.

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Fair Value Measurements: Balances of Assets and Liabilities Measured on a Recurring Balance (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities		$ 1,154
Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	$ 22,532	237
Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	23,490	1,154
Recurring | Fair Value, Inputs, Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	958	917
Recurring | Fair Value, Inputs, Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	22,532	237
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 | Mortgage-backed Securities, U.S. government agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	22,532	237
Recurring | Mortgage-backed Securities, U.S. government agencies | Fair Value, Inputs, Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	0	0
Recurring | Mortgage-backed Securities, U.S. government agencies | Fair Value, Inputs, Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	22,532	237
Recurring | Mortgage-backed Securities, U.S. government agencies | 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 | Mutual funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	958	917
Recurring | Mutual funds | Fair Value, Inputs, Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	958	917
Recurring | Mutual funds | Fair Value, Inputs, Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	0	0
Recurring | Mutual funds | Fair Value, Inputs, Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	$ 0	$ 0

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Other Liabilities and Accrued Expenses: Schedule of Other Liabilities and Accrued Expenses (Tables)

12 Months Ended

Sep. 30, 2019

Payables and Accruals [Abstract]

Schedule of Other Liabilities and Accrued Expenses

Other liabilities and accrued expenses were comprised of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Accrued deferred compensation, profit sharing plans and bonuses payable	$	3,131	$	1,235
Accrued interest payable on deposits	333		225
Accounts payable and accrued expenses - other	4,374		2,667
Total other liabilities and accrued expenses	$	7,838	$	4,127

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Condensed Financial Information - Parent Company Only: Condensed Statements of Cash Flows, Parent Company (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities
Net income	$ 6,335	$ 5,956	$ 6,114	$ 5,615	$ 4,422	$ 4,416	$ 4,269	$ 3,614	$ 24,020	$ 16,721	$ 14,167
Adjustments to reconcile net income to net cash provided by operating activities:
Stock option compensation expense									159	172	156
Net cash provided by operating activities									18,108	21,450	13,859
Cash flows from investing activities
Cash acquired, net of cash consideration paid in business combination									14,284	0	0
Net cash used in investing activities									(44,547)	(68,269)	(20,163)
Cash flows from financing activities
Proceeds from exercise of stock warrant									0	0	2,496
Repurchase of common stock									(499)	0	0
Payment of dividends									(6,495)	(4,431)	(3,641)
Net cash provided by financing activities									20,590	47,495	45,551
Net increase (decrease) in cash and cash equivalents									(5,849)	676	39,247
Cash and cash equivalents:
Beginning of period				148,864				148,188	148,864	148,188	108,941
End of period	143,015				148,864				143,015	148,864	148,188
Parent Company
Cash flows from operating activities
Net income									24,020	16,721	14,167
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of Bank									(17,693)	(12,595)	(12,736)
Earned ESOP shares									441	882	605
Stock option compensation expense									159	172	156
Other, net									9	280	33
Net cash provided by operating activities									6,936	5,460	2,225
Cash flows from investing activities
Investment in Bank									(14,915)	(1,271)	(930)
Principal repayments on loan receivable from ESOP									285	536	493
Net cash used in investing activities									(346)	(735)	(437)
Cash flows from financing activities
Proceeds from exercise of stock options									401	318	332
Proceeds from exercise of stock warrant									0	0	2,496
Repurchase of common stock									(499)	0	0
Payment of dividends									(6,495)	(4,431)	(3,641)
Net cash provided by financing activities									(6,593)	(4,113)	(813)
Net increase (decrease) in cash and cash equivalents									(3)	612	975
Cash and cash equivalents:
Beginning of period				$ 2,894				$ 2,282	2,894	2,282	1,307
End of period	$ 2,891				$ 2,894				$ 2,891	$ 2,894	$ 2,282

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Regulatory Matters: Schedule of Compliance with Regulatory Capital Requirements for Mortgage Companies (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Timberland Bank
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Tier 1 Leverage Capital, Actual Amount	$ 152,926	$ 117,336
Tier 1 Leverage Capital, Actual Ratio	12.50%	11.70%
Tier 1 Leverage Capital, Regulatory Minimum To Be Adequately Capitalized, Amount	$ 49,044	$ 40,024
Tier 1 Leverage Capital, Regulatory Minimum To Be Adequately Capitalized, Ratio	4.00%	4.00%
Tier 1 Leverage Capital, To Be Well Capitalized Under Prompt Corrective Action Provisions, Amount	$ 61,305	$ 50,031
Tier 1 Leverage Capital, To Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio	5.00%	5.00%
Tier 1 Risk-based Capital Ratio, Common Equity, Actual Amount	$ 152,926	$ 117,336
Tier 1 Risk-based Capital Ratio, Common Equity, Actual Ratio	18.10%	16.70%
Tier 1 Risk-based Capital Ratio, Regulatory Minimum To Be Adequately Capitalized, Amount	$ 38,019	$ 31,539
Tier 1 Risk-based Capital Ratio, Regulatory Minimum To Be Adequately Capitalized, Ratio	4.50%	4.50%
Tier 1 Risk-based Capital Ratio, Regulatory Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions, Amount	$ 54,916	$ 45,557
Tier 1 Risk-based Capital Ratio, Regulatory Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio	6.50%	6.50%
Tier 1 Risk-based Capital, Actual Amount	$ 152,926	$ 117,336
Tier 1 Risk-based Capital, Actual Ratio	18.10%	16.70%
Tier 1 Risk-based Capital, Regulatory Minimum To Be Adequately Capitalized, Amount	$ 50,692	$ 42,052
Tier 1 Risk-based Capital, Regulatory Minimum To Be Adequately Capitalized, Ratio	6.00%	6.00%
Tier 1 Risk-based Capital, Regulatory Minimum To Be Well Capitalized, Amount	$ 67,589	$ 56,070
Tier 1 Risk-based Capital, Regulatory Minimum To Be Well Capitalized, Ratio	8.00%	8.00%
Total Capital, Actual Amount	$ 162,857	$ 126,109
Total Capital, Actual Ratio	19.30%	18.00%
Total Capital, Regulatory Minimum To Be Adequately Capitalized, Amount	$ 67,589	$ 56,070
Total Capital, Regulatory Minimum To Be Adequately Capitalized, Ratio	8.00%	8.00%
Total Capital, Regulatory Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions, Amount	$ 84,487	$ 70,087
Total Capital, Regulatory Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio	10.00%	10.00%
Timberland Bancorp
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Tier 1 Leverage Capital, Actual Amount	$ 155,468	$ 120,175
Tier 1 Leverage Capital, Actual Ratio	12.70%	12.00%
Tier 1 Risk-based Capital Ratio, Common Equity, Actual Amount	$ 155,468	$ 120,175
Tier 1 Risk-based Capital Ratio, Common Equity, Actual Ratio	18.40%	17.10%
Tier 1 Risk-based Capital, Actual Amount	$ 155,468	$ 120,175
Tier 1 Risk-based Capital, Actual Ratio	18.40%	17.10%
Total Capital, Actual Amount	$ 165,399	$ 128,955
Total Capital, Actual Ratio	19.60%	18.40%

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Commitments and Contingencies (Tables)

12 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Supply Commitment

A summary of the Company’s commitments at September 30, 2019 and 2018 is as follows (dollars in thousands):

	2019		2018
Undisbursed portion of construction loans in process (see Note 5)	$	92,226	$	83,237
Undisbursed lines of credit	80,184		49,525
Commitments to extend credit	16,578		17,665

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Investment Securities: Schedule of Contractual maturities of debt securities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Held-to-maturity Securities, Amortized Cost:
Due within one year	$ 3,025
Due after one year to five years	495
Due after five years to ten years	5,893
Due after ten years	21,689
Total	31,102	$ 12,810
Held-to-maturity Securities, Estimated Fair Value:
Due within one year	3,017
Due after one year to five years	498
Due after five years to ten years	6,272
Due after ten years	22,793
Total	32,580	$ 13,264
Available-for-sale Securities, Amortized Cost:
Due within one year	0
Due after one year to five years	145
Due after five years to ten years	129
Due after ten years	22,144
Total	22,418
Available-for-sale Securities, Estimated Fair Value:
Due within one year	0
Due after one year to five years	145
Due after five years to ten years	130
Due after ten years	22,257
Total	$ 22,532

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Federal Income Taxes: Narrative (Details) - USD ($)	3 Months Ended								12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Income Tax Contingency [Line Items]
Effective tax rate									24.50%
Change in tax rate, income tax expense (benefit)									$ 2,210,000
Provision for income taxes	$ 1,639,000	$ 1,552,000	$ 1,277,000	$ 1,433,000	$ 1,370,000	$ 1,334,000	$ 1,216,000	$ 1,781,000	5,901,000	$ 5,701,000	$ 7,076,000
Income taxes receivable	1,210,000				151,000				1,210,000	151,000
Deferred tax assets, valuation allowance	$ 0				$ 0				$ 0	$ 0
Deferred Tax Asset
Income Tax Contingency [Line Items]
Provision for income taxes				$ 548,000

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Deposits: Schedule of Interest Expense on Deposits (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Deposits [Abstract]
NOW checking	$ 840	$ 451	$ 460
Savings	106	85	78
Money market	1,119	722	434
Certificates of deposit	2,500	1,520	1,246
Total	$ 4,565	$ 2,778	$ 2,218

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Investment Securities: Schedule of significant inputs utilized to measure management's estimate of the credit loss component on OTTI securities (Details)	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
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	3.00%	0.00%	0.03%
OTTI significant inputs - Loss severity rate	0.00%	0.00%	1.00%
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	19.70%	10.42%	10.75%
OTTI significant inputs - Loss severity rate	10.59%	75.00%	62.00%
Weighted Average
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
OTTI significant inputs - Constant prepayment rate	10.67%	12.91%	10.40%
OTTI significant inputs - Collateral default rate	10.40%	5.03%	4.84%
OTTI significant inputs - Loss severity rate	4.07%	37.25%	41.75%

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Summary of Significant Accounting Policies: Change in Accounting Principles (Details) - USD ($) $ in Thousands	Oct. 01, 2019	Sep. 30, 2019	Oct. 01, 2018	Sep. 30, 2018
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Cumulative effect adjustment			$ 0
Other assets		$ 5,323		$ 2,672
ASU 2016-01
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Cumulative effect adjustment			$ 63
Forecast | ASU 2016-02
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Other assets	$ 2,900
Other liabilities	$ 2,900

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Servicing Rights - Summary of Fair Values (Details) - USD ($)	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Servicing Assets at Fair Value [Line Items]
MSRs valuation allowances		$ 0	$ 0
SBA
Servicing Assets at Fair Value [Line Items]
Mortgage servicing rights (MSR), fair value	$ 202,000
Mortgage servicing rights (MSR), average discount rates for estimating fair value	15.00%
Mortgage servicing rights (MSR), average conditional prepayment rates for estimating fair value	0.1613
MSRs valuation allowances	$ 4,000
Freddie Mac
Servicing Assets at Fair Value [Line Items]
Mortgage servicing rights (MSR), fair value	$ 3,694,000	$ 4,171,000	$ 3,556,000
Mortgage servicing rights (MSR), average discount rates for estimating fair value	9.00%	8.99%	9.52%
Mortgage servicing rights (MSR), average conditional prepayment rates for estimating fair value	0.1131	0.0810	0.0990

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Federal Income Taxes: Schedule of Effective Income Tax Rate Reconciliation (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Income Tax Disclosure [Abstract]
Expected federal income tax provision at statutory rate									$ 6,283	$ 5,500	$ 7,435
Net impact of the Tax Act									0	548	0
BOLI income									(345)	(134)	(191)
Dividends on ESOP									(73)	(71)	(102)
Stock options tax effect									(87)	(157)	(188)
Other, net									123	15	122
Provision for income taxes	$ 1,639	$ 1,552	$ 1,277	$ 1,433	$ 1,370	$ 1,334	$ 1,216	$ 1,781	$ 5,901	$ 5,701	$ 7,076

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Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Common Stock
Common stock dividends (in dollars per share)	$ 0.78	$ 0.60	$ 0.50

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Business Combinations - Pro Forma Information (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Business Acquisition [Line Items]
Net income	$ 6,335	$ 5,956	$ 6,114	$ 5,615	$ 4,422	$ 4,416	$ 4,269	$ 3,614	$ 24,020	$ 16,721	$ 14,167
Basic (in dollars per share)	$ 0.76	$ 0.71	$ 0.74	$ 0.68	$ 0.60	$ 0.60	$ 0.58	$ 0.49	$ 2.89	$ 2.28	$ 1.99
Diluted (in dollars per share)	$ 0.75	$ 0.70	$ 0.72	$ 0.66	$ 0.59	$ 0.59	$ 0.57	$ 0.48	$ 2.84	$ 2.22	$ 1.92
Pro Forma | South Sound Merger
Business Acquisition [Line Items]
Total revenues (net interest income plus non-interest income)									$ 65,501	$ 59,184
Net income									$ 24,385	$ 18,825
Basic (in dollars per share)									$ 2,930.00	$ 2,280.00
Diluted (in dollars per share)									$ 2,880.00	$ 2,230.00

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Business Combinations - Narrative (Details) - USD ($) $ / shares in Units, $ in Thousands		12 Months Ended
	Oct. 01, 2018	Sep. 30, 2019	Sep. 30, 2018
Business Acquisition [Line Items]
Goodwill acquired		$ 9,481
South Sound Merger
Business Acquisition [Line Items]
Shares issued (shares)	904,826
Issued, value assigned	$ 28,267
Business combination, share price (dollars per share)	$ 31.24
Cash paid	$ 6,903
Total merger consideration	35,170
Goodwill acquired	$ 9,481
Acquisition related costs		462	$ 616
Timberland Bank | South Sound Merger
Business Acquisition [Line Items]
Shares issued (in dollars per share)	$ 0.746
South Sound Bank
Business Acquisition [Line Items]
Acquisition related costs			$ 1,598
South Sound Bank | South Sound Merger
Business Acquisition [Line Items]
Shares issued (in dollars per share)	$ 5.68825
Data processing and telecommunications | South Sound Merger
Business Acquisition [Line Items]
Acquisition related costs		317
Professional fees | South Sound Bank | South Sound Merger
Business Acquisition [Line Items]
Acquisition related costs		$ 145

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Stock Compensation Plans: Stock Option Activity (Details) - $ / shares	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Number of Shares
Options outstanding, beginning of period (in shares)	380,820	380,120	373,130
Options granted (in shares)	46,840	45,950	58,250
Options exercised (in shares)	(43,856)	(40,100)	(46,310)
Options forfeited (in shares)	(5,500)	(5,150)	(4,950)
Options outstanding, end of period (in shares)	378,304	380,820	380,120
Weighted Average Exercise Price
Options outstanding, beginning of period (in dollars per share)	$ 16.03	$ 13.23	$ 9.82
Options granted (in dollars per share)	27.14	31.80	29.69
Options exercised (in dollars per share)	9.14	7.92	7.17
Options forfeited (in dollars per share)	19.89	13.39	6.28
Options outstanding, end of period (in dollars per share)	$ 18.15	$ 16.03	$ 13.23

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Consolidated Statements of Income - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Interest and dividend income
Loans receivable and loans held for sale	$ 49,127	$ 38,298	$ 36,385
Investment securities	1,264	217	279
Dividends from mutual funds, FHLB stock and other investments	162	120	88
Interest-bearing deposits in banks and CDs	5,172	3,198	1,586
Total interest and dividend income	55,725	41,833	38,338
Interest expense
Deposits	4,565	2,778	2,218
FHLB borrowings	0	0	979
Total interest expense	4,565	2,778	3,197
Net interest income	51,160	39,055	35,141
Recapture of loan losses	0	0	(1,250)
Net interest income after recapture of loan losses	51,160	39,055	36,391
Non-interest income
Recoveries on investment securities	71	73	38
Adjustment for portion of other than temporary impairment (OTTI) transferred from other comprehensive income (loss) (before income taxes)	(12)	(5)	(5)
Net recoveries on investment securities	59	68	33
Gain on sales of investment securities, net	47	0	0
BOLI net earnings	1,641	547	545
Gain on sales of loans, net	1,754	1,893	2,157
Other, net	1,195	1,085	1,050
Total non-interest income, net	14,341	12,544	12,368
Non-interest expense
Salaries and employee benefits	18,545	15,740	14,908
Premises and equipment	3,831	3,231	3,082
Loss (gain) on sales/dispositions of premises and equipment, net	7	(102)	5
Advertising	696	782	698
OREO and other repossessed assets, net	221	140	22
ATM and debit card interchange transaction fees	1,583	1,296	1,405
Postage and courier	514	456	435
Amortization of CDI	452	0	0
State and local taxes	873	687	609
Professional fees	1,019	1,390	887
Federal Deposit Insurance Corporation (FDIC) insurance	187	294	362
Loan administration and foreclosure	382	336	205
Data processing and telecommunications	3,707	1,938	1,870
Deposit operations	1,358	1,192	1,074
Other	2,205	1,797	1,954
Total non-interest expense, net	35,580	29,177	27,516
Income before income taxes	29,921	22,422	21,243
Provision for income taxes	5,901	5,701	7,076
Net income	$ 24,020	$ 16,721	$ 14,167
Net income per common share
Basic (in dollars per share)	$ 2.89	$ 2.28	$ 1.99
Diluted (in dollars per share)	$ 2.84	$ 2.22	$ 1.92
Service charges on deposits
Non-interest income
Service charges on deposits	$ 4,904	$ 4,581	$ 4,518
ATM and debit card interchange transaction fees
Non-interest income
Service charges on deposits	4,036	3,570	3,343
Escrow fees
Non-interest income
Service charges on deposits	197	211	242
Servicing income on loans sold
Non-interest income
Service charges on deposits	462	480	417
Fee income from non-deposit investment sales
Non-interest income
Service charges on deposits	$ 46	$ 109	$ 63

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Commitments and Contingencies (Details) $ in Thousands	12 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)
Commitments and Contingencies Disclosure [Abstract]
Reserve for unfunded loan commitments	$ 241	$ 207
Employee severance compensation plan, employee minimum service requirement (in years)	2 years
Employee severance compensation plan, period following effective date of a change in company control (in months)	12 months
Employee severance compensation plan, eligible payment, maximum compensation term (in months)	18 months
Employee severance compensation plan, annual compensation multiplier	2.99
Employee severance compensation plan, period following effective date of change in control for eligible severance benefits (in years)	5 years

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Loans Receivable and Allowance for Loan Losses: Schedule of Troubled Debt Restructured Loans (Details)	12 Months Ended
	Sep. 30, 2019 USD ($) contract	Sep. 30, 2018 USD ($) contract	Sep. 30, 2017 USD ($) contract
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	$ 3,269,000	$ 3,278,000
Troubled debt restructured loan, subsequent default, number of contracts | contract	0	0	0
Troubled debt restructured loan, subsequent default, recorded investment	$ 0	$ 0	$ 0
Portfolio Segment
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	$ 82,000
Number of Contracts | contract	1
Pre-Modification Outstanding Recorded Investment	$ 85,000
Post- Modification Outstanding Recorded Investment	85,000
Mortgage loans, land
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan		153,000
Mortgage loans, land | Portfolio Segment
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	$ 82,000	$ 323,000
Number of Contracts | contract	1	3
Pre-Modification Outstanding Recorded Investment	$ 85,000	$ 427,000
Post- Modification Outstanding Recorded Investment	85,000	338,000
Commercial business loans
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	143,000	170,000
Mortgage loans, one-to-four family
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	634,000	509,000
Mortgage loans, one-to-four family | Portfolio Segment
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan		$ 153,000
Number of Contracts | contract		1
Pre-Modification Outstanding Recorded Investment		$ 244,000
Post- Modification Outstanding Recorded Investment		155,000
Mortgage loans, commercial
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	2,410,000	2,446,000
Mortgage loans, commercial | Portfolio Segment
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan		$ 170,000
Number of Contracts | contract		2
Pre-Modification Outstanding Recorded Investment		$ 183,000
Post- Modification Outstanding Recorded Investment		183,000
Consumer loans, home equity and second mortgage
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	82,000
Accruing
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	2,903,000	2,955,000
Accruing | Mortgage loans, land
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan		0
Accruing | Commercial business loans
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	0	0
Accruing | Mortgage loans, one-to-four family
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	493,000	509,000
Accruing | Mortgage loans, commercial
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	2,410,000	2,446,000
Accruing | Consumer loans, home equity and second mortgage
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	0
Non- Accrual
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	366,000	323,000
Non- Accrual | Mortgage loans, land
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan		153,000
Non- Accrual | Commercial business loans
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	143,000	170,000
Non- Accrual | Mortgage loans, one-to-four family
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	141,000	0
Non- Accrual | Mortgage loans, commercial
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	0	$ 0
Non- Accrual | Consumer loans, home equity and second mortgage
Financing Receivable, Troubled Debt Restructuring [Line Items]
Troubled debt restructured loan	$ 82,000

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Loans Receivable and Allowance for Loan Losses: Schedule of Loans receivable and Loans held for sale (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	$ 991,376	$ 820,795
Undisbursed portion of construction loans in process	92,226	83,237
Deferred loan origination fees	2,798	2,637
Allowance for loan losses	9,690	9,530
Less: Loans in process, Deferred fees and Allowance for loan losses	104,714	95,404
Total loans receivable, net	886,662	725,391
Unamortized discounts, loans receivable	1,386
Total mortgage loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	882,110	736,886
Mortgage loans, one-to-four family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	132,661	115,941
Mortgage loans, multi-family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	76,036	61,928
Mortgage loans, commercial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	419,117	345,113
Mortgage loans, construction - custom and owner/builder
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	128,848	119,555
Mortgage loans, construction - speculative one-to-four family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	16,445	15,433
Mortgage loans, construction - commercial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	39,566	39,590
Mortgage loans, construction - multi-family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	36,263	10,740
Mortgage loans - construction - land development
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	2,404	3,040
Mortgage loans, land
Accounts, Notes, Loans and Financing Receivable [Line Items]
Mortgage loans	30,770	25,546
Total consumer loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Consumer loans	44,502	40,856
Consumer loans, home equity and second mortgage
Accounts, Notes, Loans and Financing Receivable [Line Items]
Consumer loans	40,190	37,341
Consumer loans, other
Accounts, Notes, Loans and Financing Receivable [Line Items]
Consumer loans	4,312	3,515
Commercial business loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Commercial business loans	$ 64,764	$ 43,053

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Loans Receivable and Allowance for Loan Losses: Schedule of Allowance for Loan Losses (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	$ 9,530	$ 9,553	$ 9,826
Provision for (Recapture of) Loan Losses	0	0	(1,250)
Charge-offs	(161)	(56)	(133)
Recoveries	321	33	1,110
Allowance for loan losses, Ending Allowance	9,690	9,530	9,553
Mortgage loans, one-to-four family
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	1,086	1,082	1,239
Provision for (Recapture of) Loan Losses	(23)	4	(178)
Charge-offs	0	0	0
Recoveries	104	0	21
Allowance for loan losses, Ending Allowance	1,167	1,086	1,082
Mortgage loans, multi-family
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	433	447	473
Provision for (Recapture of) Loan Losses	48	(14)	(26)
Charge-offs	0	0	0
Recoveries	0	0	0
Allowance for loan losses, Ending Allowance	481	433	447
Mortgage loans, commercial
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	4,248	4,184	4,384
Provision for (Recapture of) Loan Losses	(260)	92	(1,248)
Charge-offs	0	(28)	(13)
Recoveries	166	0	1,061
Allowance for loan losses, Ending Allowance	4,154	4,248	4,184
Mortgage loans, construction - custom and owner/builder
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	671	699	619
Provision for (Recapture of) Loan Losses	82	(28)	80
Charge-offs	0	0	0
Recoveries	2	0	0
Allowance for loan losses, Ending Allowance	755	671	699
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	178	128	130
Provision for (Recapture of) Loan Losses	34	37	(8)
Charge-offs	0	0	0
Recoveries	0	13	6
Allowance for loan losses, Ending Allowance	212	178	128
Mortgage loans, construction - commercial
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	563	303	268
Provision for (Recapture of) Loan Losses	(225)	260	35
Charge-offs	0	0	0
Recoveries	0	0	0
Allowance for loan losses, Ending Allowance	338	563	303
Mortgage loans, construction - multi-family
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	135	173	316
Provision for (Recapture of) Loan Losses	240	(38)	(143)
Charge-offs	0	0	0
Recoveries	0	0	0
Allowance for loan losses, Ending Allowance	375	135	173
Mortgage loans - construction - land development
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	49	0
Provision for (Recapture of) Loan Losses	18	49
Charge-offs	0	0
Recoveries	0	0
Allowance for loan losses, Ending Allowance	67	49	0
Mortgage loans, land
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	844	918	820
Provision for (Recapture of) Loan Losses	(116)	(71)	189
Charge-offs	(49)	(22)	(110)
Recoveries	18	19	19
Allowance for loan losses, Ending Allowance	697	844	918
Consumer loans, home equity and second mortgage
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	649	983	939
Provision for (Recapture of) Loan Losses	(21)	(334)	44
Charge-offs	(5)	0	0
Recoveries	0	0	0
Allowance for loan losses, Ending Allowance	623	649	983
Consumer loans, other
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	117	121	156
Provision for (Recapture of) Loan Losses	(19)	1	(28)
Charge-offs	(5)	(6)	(10)
Recoveries	6	1	3
Allowance for loan losses, Ending Allowance	99	117	121
Commercial business loans
Financing Receivable, Allowance for Credit Loss [Roll Forward]
Allowance for loan losses, Beginning Allowance	557	515	482
Provision for (Recapture of) Loan Losses	242	42	33
Charge-offs	(102)	0	0
Recoveries	25	0	0
Allowance for loan losses, Ending Allowance	$ 722	$ 557	$ 515

XML

Selected Quarterly Financial Data (Unaudited): Selected financial data (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Quarterly Financial Information Disclosure [Abstract]
Interest and dividend income	$ 14,384	$ 14,185	$ 13,841	$ 13,315	$ 11,051	$ 10,457	$ 10,290	$ 10,035
Interest expense	(1,233)	(1,248)	(1,113)	(971)	(781)	(730)	(666)	(601)	$ (4,565)	$ (2,778)	$ (3,197)
Net interest income	13,151	12,937	12,728	12,344	10,270	9,727	9,624	9,434	51,160	39,055	35,141
Non-interest income	3,597	3,538	3,940	3,266	3,180	3,145	3,082	3,137	14,341	12,544	12,368
Non-interest expense	(8,774)	(8,967)	(9,277)	(8,562)	(7,658)	(7,122)	(7,221)	(7,176)	(35,580)	(29,177)	(27,516)
Income before income taxes	7,974	7,508	7,391	7,048	5,792	5,750	5,485	5,395
Provision for income taxes	1,639	1,552	1,277	1,433	1,370	1,334	1,216	1,781	5,901	5,701	7,076
Net income	$ 6,335	$ 5,956	$ 6,114	$ 5,615	$ 4,422	$ 4,416	$ 4,269	$ 3,614	$ 24,020	$ 16,721	$ 14,167
Net income per common share
Basic (in dollars per share)	$ 0.76	$ 0.71	$ 0.74	$ 0.68	$ 0.60	$ 0.60	$ 0.58	$ 0.49	$ 2.89	$ 2.28	$ 1.99
Diluted (in dollars per share)	$ 0.75	$ 0.70	$ 0.72	$ 0.66	$ 0.59	$ 0.59	$ 0.57	$ 0.48	$ 2.84	$ 2.22	$ 1.92

XML

OREO and Other Repossessed Assets: Other Real Estate, Roll Forward (Details) $ in Thousands	12 Months Ended
	Sep. 30, 2019 USD ($) property	Sep. 30, 2018 USD ($) property
OREO and Other Repossessed Assets
OREO and Other Repossessed Assets, Amount, Starting Balance | $	$ 1,913	$ 3,301
Additions to OREO and other repossessed assets, amount | $	293	324
Writedowns, amount | $	(24)	(248)
Sales of OREO and other repossessed assets, amount | $	(524)	(1,464)
OREO and Other Repossessed Assets, Amount, Ending Balance | $	$ 1,683	$ 1,913
Other Real Estate, Number Of Contracts [Roll Forward]
OREO and Other Repossessed Assets, Number, Starting Balance | property	12	16
Additions to OREO and other repossessed assets, number | property	2	2
Writedowns, number | property	0	0
Sales of OREO and other repossessed assets, number | property	(3)	(6)
OREO and Other Repossessed Assets, Number, Ending Balance | property	12	12
South Sound Bank
OREO and Other Repossessed Assets
Additions to OREO and other repossessed assets, amount | $	$ 25	$ 0
Other Real Estate, Number Of Contracts [Roll Forward]
Additions to OREO and other repossessed assets, number | property	1	0

XML

Goodwill and CDI - CDI (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Finite-Lived Intangible Assets [Line Items]
Amortization of CDI	$ 452	$ 0	$ 0
Core Deposits
Finite-Lived Intangible Assets [Line Items]
Addition as a result of the South Sound Merger (see Note 2)	2,483
Net unamortized CDI	2,031
Amortization of CDI	$ 452

XML

Loans Receivable and Allowance for Loan Losses: Impaired Financing Receivables (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	$ 5,237	$ 3,949	$ 3,830
Impaired Financing Receivable, with Related Allowance, Recorded Investment	700	323	3,162
Impaired Financing Receivable, Recorded Investment	5,937	4,272	6,992
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	5,446	4,200	4,089
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	700	323	3,221
Impaired Financing Receivable, Unpaid Principal Balance (Loan Balance Plus Charge Off)	6,146	4,523	7,310
Impaired Financing Receivable, Related Allowance	172	97	476
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	4,731	4,304	5,963
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	606	1,603	5,260
Impaired Financing Receivable, Average Recorded Investment	5,337	5,907	11,223
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income Recognized	331	215	271
Impaired Financing Receivable, with Related Allowance, Interest Income Recognized	30	53	296
Impaired Financing Receivable, Interest Income Recognized	361	268	567
Impaired Financing Receivable, Interest Income, Cash Basis Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Cash Basis Interest Income Recognized	287	175	218
Impaired Financing Receivable, with Related Allowance, Cash Basis Interest Income Recognized	30	42	237
Impaired Financing Receivable, Cash Basis Interest Income Recognized	317	217	455
Mortgage loans, one-to-four family
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	1,192	1,054	1,443
Impaired Financing Receivable, with Related Allowance, Recorded Investment		0	0
Impaired Financing Receivable, Recorded Investment	1,192	1,054	1,443
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	1,236	1,200	1,589
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)		0	0
Impaired Financing Receivable, Unpaid Principal Balance (Loan Balance Plus Charge Off)	1,236	1,200	1,589
Impaired Financing Receivable, Related Allowance	0	0	0
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	1,110	1,422	1,108
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment		9	721
Impaired Financing Receivable, Average Recorded Investment	1,110	1,431	1,829
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income Recognized	71	80	68
Impaired Financing Receivable, with Related Allowance, Interest Income Recognized		0	50
Impaired Financing Receivable, Interest Income Recognized	71	80	118
Impaired Financing Receivable, Interest Income, Cash Basis Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Cash Basis Interest Income Recognized	62	69	62
Impaired Financing Receivable, with Related Allowance, Cash Basis Interest Income Recognized		0	38
Impaired Financing Receivable, Cash Basis Interest Income Recognized	62	69	100
Mortgage loans, commercial
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	3,190	2,446	1,967
Impaired Financing Receivable, with Related Allowance, Recorded Investment		0	1,906
Impaired Financing Receivable, Recorded Investment	3,190	2,446	3,873
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	3,190	2,446	1,967
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)		0	1,906
Impaired Financing Receivable, Unpaid Principal Balance (Loan Balance Plus Charge Off)	3,190	2,446	3,873
Impaired Financing Receivable, Related Allowance	0	0	26
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	2,920	2,389	3,901
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment		760	3,326
Impaired Financing Receivable, Average Recorded Investment	2,920	3,149	7,227
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income Recognized	227	121	188
Impaired Financing Receivable, with Related Allowance, Interest Income Recognized		28	182
Impaired Financing Receivable, Interest Income Recognized	227	149	370
Impaired Financing Receivable, Interest Income, Cash Basis Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Cash Basis Interest Income Recognized	192	93	143
Impaired Financing Receivable, with Related Allowance, Cash Basis Interest Income Recognized		21	144
Impaired Financing Receivable, Cash Basis Interest Income Recognized	192	114	287
Mortgage loans, construction - custom and owner/builder
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment			0
Impaired Financing Receivable, Recorded Investment			0
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)			0
Impaired Financing Receivable, Unpaid Principal Balance (Loan Balance Plus Charge Off)			0
Impaired Financing Receivable, Related Allowance			0
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment			147
Impaired Financing Receivable, Average Recorded Investment			147
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income Recognized			7
Impaired Financing Receivable, Interest Income Recognized			7
Impaired Financing Receivable, Interest Income, Cash Basis Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Cash Basis Interest Income Recognized			7
Impaired Financing Receivable, Cash Basis Interest Income Recognized			7
Mortgage loans, land
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	63	90	297
Impaired Financing Receivable, with Related Allowance, Recorded Investment	141	153	822
Impaired Financing Receivable, Recorded Investment	204	243	1,119
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	126	195	410
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	141	153	881
Impaired Financing Receivable, Unpaid Principal Balance (Loan Balance Plus Charge Off)	267	348	1,291
Impaired Financing Receivable, Related Allowance	27	34	125
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	100	283	512
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	246	383	666
Impaired Financing Receivable, Average Recorded Investment	346	666	1,178
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income Recognized	3	11	8
Impaired Financing Receivable, with Related Allowance, Interest Income Recognized	0	9	35
Impaired Financing Receivable, Interest Income Recognized	3	20	43
Impaired Financing Receivable, Interest Income, Cash Basis Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Cash Basis Interest Income Recognized	3	10	6
Impaired Financing Receivable, with Related Allowance, Cash Basis Interest Income Recognized	0	8	29
Impaired Financing Receivable, Cash Basis Interest Income Recognized	3	18	35
Consumer loans, home equity and second mortgage
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	603	359	123
Impaired Financing Receivable, with Related Allowance, Recorded Investment		0	434
Impaired Financing Receivable, Recorded Investment	603	359	557
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	603	359	123
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)		0	434
Impaired Financing Receivable, Unpaid Principal Balance (Loan Balance Plus Charge Off)	603	359	557
Impaired Financing Receivable, Related Allowance	0	0	325
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	459	210	284
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment		310	530
Impaired Financing Receivable, Average Recorded Investment	459	520	814
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income Recognized	0	3	0
Impaired Financing Receivable, with Related Allowance, Interest Income Recognized		16	29
Impaired Financing Receivable, Interest Income Recognized	0	19	29
Impaired Financing Receivable, Interest Income, Cash Basis Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Cash Basis Interest Income Recognized	0	3	0
Impaired Financing Receivable, with Related Allowance, Cash Basis Interest Income Recognized		13	26
Impaired Financing Receivable, Cash Basis Interest Income Recognized	0	16	26
Other
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with Related Allowance, Recorded Investment	23		0
Impaired Financing Receivable, Recorded Investment	23		0
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	23		0
Impaired Financing Receivable, Unpaid Principal Balance (Loan Balance Plus Charge Off)	23		0
Impaired Financing Receivable, Related Allowance	17		0
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	10		17
Impaired Financing Receivable, Average Recorded Investment	10		17
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with Related Allowance, Interest Income Recognized	0		0
Impaired Financing Receivable, Interest Income Recognized	0		0
Impaired Financing Receivable, Interest Income, Cash Basis Method [Abstract]
Impaired Financing Receivable, with Related Allowance, Cash Basis Interest Income Recognized	0		0
Impaired Financing Receivable, Cash Basis Interest Income Recognized	0		0
Commercial business loans
Impaired Financing Receivable, Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	189		0
Impaired Financing Receivable, with Related Allowance, Recorded Investment	536	170
Impaired Financing Receivable, Recorded Investment	725	170	0
Impaired Financing Receivable, Unpaid Principal Balance [Abstract]
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	291		0
Impaired Financing Receivable, with Related Allowance, Unpaid Principal Balance (Loan Balance Plus Charge Off)	536	170
Impaired Financing Receivable, Unpaid Principal Balance (Loan Balance Plus Charge Off)	827	170	0
Impaired Financing Receivable, Related Allowance	128	63	0
Impaired Financing Receivable, Average Recorded Investment [Abstract]
Impaired Financing Receivable, with No Related Allowance, Average Recorded Investment	142		11
Impaired Financing Receivable, with Related Allowance, Average Recorded Investment	350	141
Impaired Financing Receivable, Average Recorded Investment	492	141	11
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Interest Income Recognized	30		0
Impaired Financing Receivable, with Related Allowance, Interest Income Recognized	30	0
Impaired Financing Receivable, Interest Income Recognized	60	0	0
Impaired Financing Receivable, Interest Income, Cash Basis Method [Abstract]
Impaired Financing Receivable, with No Related Allowance, Cash Basis Interest Income Recognized	30		0
Impaired Financing Receivable, with Related Allowance, Cash Basis Interest Income Recognized	30	0
Impaired Financing Receivable, Cash Basis Interest Income Recognized	$ 60	$ 0	$ 0

XML

Deposits

12 Months Ended

Sep. 30, 2019

Deposits [Abstract]

Deposits

Deposits

Deposits consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Non-interest-bearing demand	$	296,472	$	233,258
NOW checking	297,055		225,290
Savings	164,506		151,404
Money market	144,539		137,746
Certificates of deposit	165,655		141,808
Total	$	1,068,227	$	889,506

Individual certificates of deposit in amounts of $250,000 or greater totaled $29,211,000 and $18,164,000 at September 30, 2019 and 2018, respectively. The Company had brokered deposits totaling $19,327,000 and $17,202,000 at September 30, 2019 and 2018, respectively.

Scheduled maturities of certificates of deposit for fiscal years ending subsequent to September 30, 2019 are as follows (dollars in thousands):

2020	$	92,266
2021	38,724
2022	17,746
2023	8,113
2024	8,806
Total	$	165,655

Interest expense on deposits by account type was as follows for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019		2018		2017
NOW checking	$	840	$	451	$	460
Savings	106		85		78
Money market	1,119		722		434
Certificates of deposit	2,500		1,520		1,246
Total	$	4,565	$	2,778	$	2,218

XML

Premises and Equipment

12 Months Ended

Sep. 30, 2019

Property, Plant and Equipment [Abstract]

Premises and Equipment

Premises and Equipment

Premises and equipment consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Land	$	5,404	$	4,400
Buildings and improvements	23,847		20,636
Furniture and equipment	9,012		8,026
Property held for future expansion	334		129
Construction and purchases in progress	338		566
	38,935		33,757
Less accumulated depreciation	16,105		14,804
Premises and equipment, net	$	22,830	$	18,953

The Company leases certain premises under operating lease agreements.  Certain leases contain renewal options from five to ten years and escalation clauses. Total rental expense was $332,000, $206,000 and $275,000 for the years ended September 30, 2019, 2018 and 2017, respectively, which is included in premises and equipment expense in the accompanying consolidated statements of income.

Minimum net rental commitments under non-cancellable leases having an original or remaining term of more than one year for fiscal years ending subsequent to September 30, 2019 are as follows (dollars in thousands):

2020	$	315
2021	229
2022	35
Total minimum payments required	$	579

XML

Label	Element	Value
AOCI Attributable to Parent [Member]
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	$ 63,000
Retained Earnings [Member]
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	$ (63,000)

XML

Summary of Significant Accounting Policies

12 Months Ended

Sep. 30, 2019

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.

On October 1, 2018, the Company completed the acquisition of South Sound Bank, a Washington-state chartered bank, headquartered in Olympia, Washington ("South Sound Acquisition"). The Company acquired 100% of the outstanding common stock of South Sound Bank, and South Sound Bank was merged into the Bank. The results of operations of the acquired assets and assumed liabilities have been included in the Company's consolidated financial statements as of and for the period since the acquisition date. See Note 2 for additional information on the South Sound Acquisition.

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 24 branches located in Grays Harbor, Pierce, Thurston, Kitsap, King and Lewis counties in Washington State, attracts deposits from the general public, and uses those funds, along with other borrowings, primarily to provide residential real estate, construction, commercial real estate, commercial business and consumer loans to borrowers primarily in western Washington.

Consolidated Financial Statement Presentation

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

Certain prior year amounts have been reclassified to conform to the 2019 fiscal year presentation with no change to previously reported net income or shareholders’ equity.

Segment Reporting

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

Cash and Cash Equivalents and Cash Flows

The Company considers amounts included in the consolidated balance sheets’ captions “Cash and due from financial institutions” and “Interest-bearing deposits in banks,” all of which mature within ninety days, to be cash equivalents for purposes of reporting cash flows. 

Interest-bearing deposits in banks as of September 30, 2019 and 2018 included deposits with the Federal Reserve Bank of San Francisco ("FRB") of $102,189,000 and $123,745,000, respectively.  The Company also maintains balances in correspondent bank accounts which, at times, may exceed the FDIC insurance limit of $250,000 per correspondent bank.  Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the FRB and the correspondent banks.

CDs Held for Investment

CDs held for investment include amounts invested with other FDIC-insured financial institutions for a stated interest rate and with a fixed maturity date. Such CDs generally have maturities of 12 to 60 months from the date of purchase by the Company. Early withdrawal penalties may apply; however, the Company intends to hold these CDs to maturity. The Company generally limits its purchases of CDs to a maximum of $250,000 (the FDIC insurance coverage limit) with any single financial institution.

Investment Securities

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

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 debt securities available for sale that are deemed to be other than temporary are recognized in earnings when identified.  The fair value of the debt security then becomes the new cost basis.  For individual debt securities that are held to maturity which the Company does not intend to sell, and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost basis, the other than temporary decline in the fair value of the debt security related to: (1) credit loss is recognized in earnings and (2) market or other factors is recognized in other comprehensive income (loss).  Credit loss is recorded if the present value of expected future cash flows is less than the amortized cost.  For individual debt 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 debt security’s cost basis and its fair value at the consolidated balance sheet date.  For individual debt 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.

Investments in Equity Securities

Investments in equity securities are stated at fair value. Prior to October 1, 2018, changes in the fair value of investments in equity securities were excluded from earnings and reported in other comprehensive income (loss), net of income tax effects. On October 1, 2018, the Company adopted ASU 2016-01 and reclassified its mutual funds as investments in equity securities. Beginning October 1, 2018, changes in the fair value of investments in equity securities are recorded in other non-interest income.

FHLB Stock

The Bank, as a member of the FHLB, is required to maintain an investment in capital stock of the FHLB in an amount equal to 0.12% of the Bank's total assets plus 4.00% of any borrowings from the FHLB.  No ready market exists for this stock, and it has no quoted market value. However, redemption of FHLB stock has historically been at par value. The Company's investment in FHLB stock is carried at cost, which approximates fair value.

The Company evaluates its FHLB stock for impairment as needed. The Company's determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared with the capital stock amount and the length of time any decline has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB; and (4) the liquidity position of the FHLB. Based on its evaluation, the Company determined that there was no impairment of FHLB stock at September 30, 2019 and 2018.

Other Investments

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

Loans Held for Sale

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

Loans Receivable

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

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

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

Acquired Loans

Purchased loans, including loans acquired in business combinations, are recorded at their estimated fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-impaired ("PCI") or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The excess of the cash flows expected to be collected over a PCI loan's carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the PCI loan using the effective yield method. The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents the Company's estimate of the credit losses expected to occur and would be considered in determining the estimated fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at the purchase date in excess of fair value are adjusted through a change to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording an allowance for loan losses. PCI loans were insignificant as of September 30, 2019, and the Company had no PCI loans as of September 30, 2018.

For purchased non-credit-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loans. Any subsequent deterioration in credit quality is recognized by recording an allowance for loan losses.

Troubled Debt Restructured Loans

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

Allowance for Loan Losses

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

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

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

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

Premises and Equipment

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

Impairment of Long-Lived Assets

Long-lived assets, consisting of premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the recorded amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the recorded amount of an asset to undiscounted future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the recorded amount of the assets exceeds the discounted recovery amount or estimated fair value of the assets.  No events or changes in circumstances have occurred during the years ended September 30, 2019 or 2018 that would cause management to evaluate the recoverability of the Company’s long-lived assets.

OREO and Other Repossessed Assets

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

BOLI

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

Goodwill

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

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

The second step, if necessary, measures the amount of goodwill impairment loss to be recognized. The reporting unit must determine fair value for all assets and liabilities, excluding goodwill. The net of the assigned fair value of assets and liabilities is then compared to the book value of the reporting unit, and any excess book value becomes the implied fair value of goodwill. If the carrying amount of the goodwill exceeds the newly calculated implied fair value of goodwill, an impairment loss is recognized in the amount required to write-down the goodwill to the implied fair value.

Management's qualitative assessment takes into consideration macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price of the Company's common stock. Based on this assessment, the Company determined that it is not "more likely than not" that the Company's fair value is less than its carrying amount and therefore goodwill was determined not to be impaired at May 31, 2019.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Any change in these indicators could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

As of September 30, 2019, management believes that there were no events or changes in the circumstances since May 31, 2019 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

CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of a business combination compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years. CDI is evaluated for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.

Servicing Rights

The Company holds rights to service (1) loans that it has originated and sold to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and (2) the guaranteed portion of U.S. Small Business Administration ("SBA") loans sold in the secondary market. Servicing rights are capitalized at estimated fair value when acquired through the origination of loans that are subsequently sold with the servicing rights retained. Servicing rights are amortized to servicing income on loans sold approximately in proportion to and over the period of estimated net servicing income.  The value of servicing rights at the date of the sale of loans is estimated based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and expected prepayment rates on the underlying loans.  The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated future cash flows from the servicing assets to those estimated at the time the servicing assets were originated.  Fair values are estimated using expected future discounted cash flows based on current market rates of interest.  For purposes of measuring impairment, the servicing rights must be stratified by one or more predominant risk characteristics of the underlying loans.  The Company stratifies its capitalized servicing rights based on product type and term of the underlying loans.  The amount of impairment recognized is the amount, if any, by which the amortized cost of the servicing rights exceeds their fair value.  Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that fair value is less than the recorded amount.

Transfers of Financial Assets

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

Income Taxes

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

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

With respect to accounting for uncertainty in incomes taxes, a tax provision is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized upon examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The Company recognizes interest and/or penalties related to income tax matters as income tax expense. The Company is no longer subject to U.S. federal income tax examination by tax authorities for years ended on or before September 30, 2015.

ESOP

The Bank sponsors a leveraged ESOP; however, all ESOP debt was fully repaid during the year ended September 30, 2019. The debt of the ESOP was payable to Timberland Bancorp, was recorded as other borrowed funds of the Bank, and was eliminated in the consolidated financial statements. The shares of the Company's common stock pledged as collateral for the ESOP's debt were reported as unearned shares issued to the ESOP in the consolidated financial statements. As shares were released from collateral, compensation expense was recorded equal to the average market price of the shares for the period, and the shares became available for net income per common share calculations.  Dividends paid on unallocated shares reduced the Company’s cash contributions to the ESOP.

Advertising

Costs for advertising and marketing are expensed as incurred.

Stock-Based Compensation

The Company measures compensation cost for all stock-based awards based on the grant-date fair value of the stock-based awards and recognizes compensation cost over the service period of stock-based awards. The fair value of stock options is determined using the Black-Scholes valuation model.  Stock option forfeitures are accounted for as they occur.

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. Common stock equivalents arise from the assumed conversion of outstanding stock options and outstanding warrants to purchase common stock.  Shares owned by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted net income per common share.

Related Party Transactions

The Chairman of the Board of the Bank and Timberland Bancorp is a member of the law firm that provides general counsel to the Company.  Legal and other fees paid to this law firm for the years ended September 30, 2019, 2018 and 2017 totaled $69,000, $94,000 and $99,000, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers, which created FASB Accounting Standards Codification ("ASC") Topic 606 ("ASC 606"). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASC 606 on October 1, 2018 using the modified retrospective approach. Therefore, the comparative information has not been adjusted and continues to be reported under the superseded ASC 605. There was no cumulative effect adjustment as of October 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the year ended September 30, 2019; however, additional disclosures were incorporated in the footnotes upon adoption. The majority of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606. The Company elected to apply the practical expedient pursuant to ASC 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less. See Note 23 for additional information.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 generally requires equity investments - except those accounted for under the equity method of accounting or those that result in consolidation of the investee - to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 is intended to simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU 2016-01 also eliminates certain disclosures related to the fair value of financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 on October 1, 2018. As required by ASU 2016-01, on October 1, 2018 the Company recorded a one-time cumulative effect adjustment of $63,000 representing net unrealized losses on equity securities (mutual funds) between accumulated other comprehensive loss and retained earnings on the accompanying consolidated balance sheet. Additionally, the fair values of financial instruments for disclosure purposes were computed using an exit price notion and deposits with no stated maturity are no longer included in the fair value disclosures in Note 21.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which created FASB ASC Topic 842 ("ASC 842") and is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The principal change required by ASC 842 relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASC 842 also changes disclosure requirements related to leasing activities and requires certain qualitative disclosures along with specific quantitative disclosures. ASC 842 also provides an optional transition method for adoption, under which an entity initially applies ASC 842 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts ASC 842 will continue to be in accordance with current GAAP. ASC 842 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of ASC 842 is permitted. The Company adopted the provisions of ASC 842 effective October 1, 2019 utilizing the optional transition method and will not restate comparative periods. The Company also elected the package of practical expedients permitted under ASC 842's transition guidance, which allows the Company to carryforward its historical lease classifications and its assessment as to whether a contract is or contains a lease. The Company also elected to not recognize lease assets and lease liabilities for leases with an initial term of 12 months or less. The Company expects the adoption of ASC 842 will result in an increase in other assets and an increase in other liabilities of approximately $2.9 million. The Company does not expect the adoption of ASC 842 to have a material impact on its future consolidated statements of income.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05. This ASU replaces the existing incurred losses methodology with a current expected losses methodology with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, this ASU requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of the carrying amount. ASU 2016-13 also changes the accounting for purchased credit-impaired debt securities and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current policy for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. At this time, the Company anticipates the allowance for loan losses will increase as a result of the implementation of this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value of its assets and liabilities (including unrecognized assets and liabilities) at the impairment testing date following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application of this ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's future consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU 2017-08 is not expected to have a material impact on the Company's future consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to the ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award are the same after the modification as compared to the original award prior to modification. ASU 2017-09 was effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU on October 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company's consolidated financial statements.

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements. The following disclosure requirements were removed from ASC Topic 820, Fair Value Measurement: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation process for Level 3 fair value measurements. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. This ASU adds the following disclosure requirements for Level 3 measurements: (1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any removed or modified disclosures. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's future consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for internal-use software costs. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-15 is not expected to have a material impact on the Company's future consolidated financial statements.

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Revenue from Contracts with Customers Revenue from Contracts with Customers

12 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

Revenue from Contract with Customer

Revenue from Contracts with Customers

In accordance with ASC 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income with the exception of gains on sale of OREO and gains on sales/disposition of premises and equipment, which are included in non-interest expense and were not significant for the year ended September 30, 2019. For the year ended September 30, 2019, the Company recognized $4,904,000 in services charges on deposits, $4,036,000 in ATM and debit card interchange fees, $197,000 in escrow fees and $46,000 in fee income from non-deposit investment sales, all considered within the scope of ASC 606.

Descriptions of the Company's revenue-generating activities that are within the scope of ASC 606 are as follows:

• Service Charges on Deposits: The Company earns fees from its deposit customers from a variety of deposit products and services. Non-transaction based fees such as account maintenance fees and monthly statement fees are considered to be provided to the customer under a day-to-day contract with ongoing renewals. Revenue for these non-transaction fees are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Transaction based-fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed as the contract duration does not extend beyond the service performed.

• ATM and Debit Card Interchange Transaction Fees: The Company earns fees from cardholder transactions conducted through third party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs, but may settle on a daily or monthly basis.

• Escrow Fees: The Company earns fees from real estate escrow contracts with customers. The Company receives and disburses money and/or property per the customer's contract. Fees are recognized when the escrow contract closes.

• Fee income from Non-Deposit Investment Sales: The Company earns fees from contracts with customers for investment activities. Revenues are generally recognized on a monthly basis and are generally based on a percentage of the customer's assets under management or based on investment solutions that are implemented for the customer.

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Loans Receivable and Allowance for Loan Losses (Tables)

12 Months Ended

Sep. 30, 2019

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

Schedule of Loans Receivable and Loans Held for Sale

Loans receivable by portfolio segment consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Mortgage loans:
One- to four-family	$	132,661	$	115,941
Multi-family	76,036		61,928
Commercial	419,117		345,113
Construction – custom and owner/builder	128,848		119,555
Construction – speculative one- to four-family	16,445		15,433
Construction – commercial	39,566		39,590
Construction – multi-family	36,263		10,740
Construction – land development	2,404		3,040
Land	30,770		25,546
Total mortgage loans	882,110		736,886
Consumer loans:
Home equity and second mortgage	40,190		37,341
Other	4,312		3,515
Total consumer loans	44,502		40,856
Commercial business loans	64,764		43,053
Total loans receivable	991,376		820,795
Less:
Undisbursed portion of construction loans in process	92,226		83,237
Deferred loan origination fees, net	2,798		2,637
Allowance for loan losses	9,690		9,530
	104,714		95,404
Loans receivable, net	$	886,662	$	725,391

Schedule of Activity in Related Party Loans

Activity in related party loans during the years ended September 30, 2019, 2018 and 2017 was as follows (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	119		$	741		$	230
New loans or borrowings	1			368			592
Repayments and reclassifications	(26		)	(990		)	(81		)
Balance, end of year	$	94		$	119		$	741

Schedule of Allowance for Loan Losses

The following table sets forth information for the year ended September 30, 2019 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,086	$	(23	)	$	—		$	104	$	1,167
Multi-family	433		48			—			—		481
Commercial	4,248		(260		)	—			166		4,154
Construction – custom and owner/builder	671		82			—			2		755
Construction – speculative one- to four-family	178		34			—			—		212
Construction – commercial	563		(225		)	—			—		338
Construction – multi-family	135		240			—			—		375
Construction – land development	49		18			—			—		67
Land	844		(116		)	(49		)	18		697
Consumer loans:
Home equity and second mortgage	649		(21		)	(5		)	—		623
Other	117		(19		)	(5		)	6		99
Commercial business loans	557		242			(102		)	25		722
Total	$	9,530	$	—		$	(161	)	$	321	$	9,690

The following table sets forth information for the year ended September 30, 2018 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,082	$	4		$	—		$	—	$	1,086
Multi-family	447		(14		)	—			—		433
Commercial	4,184		92			(28		)	—		4,248
Construction – custom and owner/builder	699		(28		)	—			—		671
Construction – speculative one- to four-family	128		37			—			13		178
Construction – commercial	303		260			—			—		563
Construction – multi-family	173		(38		)	—			—		135
Construction – land development	—		49			—			—		49
Land	918		(71		)	(22		)	19		844
Consumer loans:
Home equity and second mortgage	983		(334		)	—			—		649
Other	121		1			(6		)	1		117
Commercial business loans	515		42			—			—		557
Total	$	9,553	$	—		$	(56	)	$	33	$	9,530

The following table sets forth information for the year ended September 30, 2017 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):

	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,239	$	(178	)	$	—		$	21	$	1,082
Multi-family	473		(26		)	—			—		447
Commercial	4,384		(1,248		)	(13		)	1,061		4,184
Construction – custom and owner/builder	619		80			—			—		699
Construction – speculative one- to four-family	130		(8		)	—			6		128
Construction – commercial	268		35			—			—		303
Construction – multi-family	316		(143		)	—			—		173
Land	820		189			(110		)	19		918
Consumer loans:
Home equity and second mortgage	939		44			—			—		983
Other	156		(28		)	(10		)	3		121
Commercial business loans	482		33			—			—		515
Total	$	9,826	$	(1,250	)	$	(133	)	$	1,110	$	9,553

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

The following table presents information on loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, 2019 (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	$	—	$	1,167	$	1,167	$	1,192	$	131,469	$	132,661
Multi-family	—		481		481		—		76,036		76,036
Commercial	—		4,154		4,154		3,190		415,927		419,117
Construction – custom and owner/ builder	—		755		755		—		75,411		75,411
Construction – speculative one- to four-family	—		212		212		—		10,779		10,779
Construction – commercial	—		338		338		—		24,051		24,051
Construction – multi-family	—		375		375		—		19,256		19,256
Construction – land development	—		67		67		—		1,803		1,803
Land	27		670		697		204		30,566		30,770
Consumer loans:
Home equity and second mortgage	—		623		623		603		39,587		40,190
Other	17		82		99		23		4,289		4,312
Commercial business loans	128		594		722		725		64,039		64,764
Total	$	172	$	9,518	$	9,690	$	5,937	$	893,213	$	899,150

The following table presents information on loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at September 30, 2018 (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	$	—	$	1,086	$	1,086	$	1,054	$	114,887	$	115,941
Multi-family	—		433		433		—		61,928		61,928
Commercial	—		4,248		4,248		2,446		342,667		345,113
Construction – custom and owner/ builder	—		671		671		—		67,024		67,024
Construction – speculative one- to four-family	—		178		178		—		7,107		7,107
Construction – commercial	—		563		563		—		23,440		23,440
Construction – multi-family	—		135		135		—		5,983		5,983
Construction – land development	—		49		49		—		1,567		1,567
Land	34		810		844		243		25,303		25,546
Consumer loans:
Home equity and second mortgage	—		649		649		359		36,982		37,341
Other	—		117		117		—		3,515		3,515
Commercial business loans	63		494		557		170		42,883		43,053
Total	$	97	$	9,433	$	9,530	$	4,272	$	733,286	$	737,558

Past Due Status of Loans Receivable

The following table presents an analysis of loans by aging category and portfolio segment at September 30, 2019 (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	$	—	$	286	$	699	$	—	$	985	$	131,676	$	132,661
Multi-family	—		—		—		—		—		76,036		76,036
Commercial	94		218		779		—		1,091		418,026		419,117
Construction – custom and owner/ builder	—		—		—		—		—		75,411		75,411
Construction – speculative one- to four-family	—		—		—		—		—		10,779		10,779
Construction – commercial	—		—		—		—		—		24,051		24,051
Construction – multi-family	—		—		—		—		—		19,256		19,256
Construction – land development	—		—		—		—		—		1,803		1,803
Land	5		193		204		—		402		30,368		30,770
Consumer loans:
Home equity and second mortgage	94		—		603		—		697		39,493		40,190
Other	—		—		23		—		23		4,289		4,312
Commercial business loans	—		2		725		—		727		64,037		64,764
Total	$	193	$	699	$	3,033	$	—	$	3,925	$	895,225	$	899,150

__________________

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

The following table presents an analysis of loans by aging category and portfolio segment at September 30, 2018 (dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Non- Accrual(1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
Mortgage loans:
One- to four-family	$	557	$	—	$	545	$	—	$	1,102	$	114,839	$	115,941
Multi-family	—		—		—		—		—		61,928		61,928
Commercial	574		—		—		—		574		344,539		345,113
Construction – custom and owner/ builder	—		—		—		—		—		67,024		67,024
Construction – speculative one- to four-family	—		—		—		—		—		7,107		7,107
Construction – commercial	—		—		—		—		—		23,440		23,440
Construction – multi-family	—		—		—		—		—		5,983		5,983
Construction – land development	—		—		—		—		—		1,567		1,567
Land	40		—		243		—		283		25,263		25,546
Consumer loans:
Home equity and second mortgage	42		—		359		—		401		36,940		37,341
Other	10		16		—		—		26		3,489		3,515
Commercial business loans	—		—		170		—		170		42,883		43,053
Total	$	1,223	$	16	$	1,317	$	—	$	2,556	$	735,002	$	737,558

___________________

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

Financing Receivable Credit Quality Indicators

The following table presents an analysis of loans by credit quality indicator and portfolio segment at September 30, 2019 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	129,748	$	296	$	562	$	2,055	$	132,661
Multi-family	76,036		—		—		—		76,036
Commercial	405,165		11,944		683		1,325		419,117
Construction – custom and owner / builder	75,178		233		—		—		75,411
Construction – speculative one- to four-family	10,779		—		—		—		10,779
Construction – commercial	24,051		—		—		—		24,051
Construction – multi-family	19,256		—		—		—		19,256
Construction – land development	1,659		—		—		144		1,803
Land	28,390		952		1,217		211		30,770
Consumer loans:
Home equity and second mortgage	39,364		41		—		785		40,190
Other	4,257		33		—		22		4,312
Commercial business loans	63,669		232		85		778		64,764
Total	$	877,552	$	13,731	$	2,547	$	5,320	$	899,150

The following table presents an analysis of loans by credit quality indicator and portfolio segment at September 30, 2018 (dollars in thousands):

	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	113,148	$	882	$	581	$	1,330	$	115,941
Multi-family	61,928		—		—		—		61,928
Commercial	334,908		8,375		988		842		345,113
Construction – custom and owner / builder	66,720		304		—		—		67,024
Construction – speculative one- to four-family	7,107		—		—		—		7,107
Construction – commercial	23,440		—		—		—		23,440
Construction – multi-family	5,983		—		—		—		5,983
Construction – land development	1,567		—		—		—		1,567
Land	22,810		988		1,505		243		25,546
Consumer loans:
Home equity and second mortgage	36,697		82		—		562		37,341
Other	3,480		—		—		35		3,515
Commercial business loans	42,812		22		49		170		43,053
Total	$	720,600	$	10,653	$	3,123	$	3,182	$	737,558

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, 2019 (dollars in thousands):

	September 30, 2019						For the Year Ended September 30, 2019
	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	$	1,192	$	1,236	$	—	$	1,110	$	71	$	62
Commercial	3,190		3,190		—		2,920		227		192
Land	63		126		—		100		3		3
Consumer loans:
Home equity and second mortgage	603		603		—		459		—		—
Commercial business loans	189		291		—		142		30		30
Subtotal	5,237		5,446		—		4,731		331		287
With an allowance recorded:
Mortgage loans:
Land	141		141		27		246		—		—
Consumer loans:
Other	23		23		17		10		—		—
Commercial business loans	536		536		128		350		30		30
Subtotal	700		700		172		606		30		30
Total:
Mortgage loans:
One- to four-family	1,192		1,236		—		1,110		71		62
Commercial	3,190		3,190		—		2,920		227		192
Land	204		267		27		346		3		3
Consumer loans:
Home equity and second mortgage	603		603		—		459		—		—
Other	23		23		17		10		—		—
Commercial business loans	725		827		128		492		60		60
Total	$	5,937	$	6,146	$	172	$	5,337	$	361	$	317

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2018 (dollars in thousands):

	September 30, 2018						For the Year Ended September 30, 2018
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,054	$	1,200	$	—	$	1,422	$	80	$	69
Commercial	2,446		2,446		—		2,389		121		93
Land	90		195		—		283		11		10
Consumer loans:
Home equity and second mortgage	359		359		—		210		3		3
Subtotal	3,949		4,200		—		4,304		215		175
With an allowance recorded:
Mortgage loans:
One- to four-family	—		—		—		9		—		—
Commercial	—		—		—		760		28		21
Land	153		153		34		383		9		8
Consumer loans:
Home equity and second mortgage	—		—		—		310		16		13
Commercial business loans	170		170		63		141		—		—
Subtotal	323		323		97		1,603		53		42
Total:
Mortgage loans:
One- to four-family	1,054		1,200		—		1,431		80		69
Commercial	2,446		2,446		—		3,149		149		114
Land	243		348		34		666		20		18
Consumer loans:
Home equity and second mortgage	359		359		—		520		19		16
Commercial business loans	170		170		63		141		—		—
Total	$	4,272	$	4,523	$	97	$	5,907	$	268	$	217

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2017 (dollars in thousands):

	September 30, 2017						For the Year Ended September 30, 2017
	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,443	$	1,589	$	—	$	1,108	$	68	$	62
Commercial	1,967		1,967		—		3,901		188		143
Construction – custom and owner / builder	—		—		—		147		7		7
Land	297		410		—		512		8		6
Consumer loans:
Home equity and second mortgage	123		123		—		284		—		—
Commercial business loans	—		—		—		11		—		—
Subtotal	3,830		4,089		—		5,963		271		218
With an allowance recorded:
Mortgage loans:
One- to four-family	—		—		—		721		50		38
Commercial	1,906		1,906		26		3,326		182		144
Land	822		881		125		666		35		29
Consumer loans:
Home equity and second mortgage	434		434		325		530		29		26
Other	—		—		—		17		—		—
Subtotal	3,162		3,221		476		5,260		296		237
Total:
Mortgage loans:
One- to four-family	1,443		1,589		—		1,829		118		100
Commercial	3,873		3,873		26		7,227		370		287
Construction – custom and owner / builder	—		—		—		147		7		7
Land	1,119		1,291		125		1,178		43		35
Consumer loans:
Home equity and second mortgage	557		557		325		814		29		26
Other	—		—		—		17		—		—
Commercial business loans	—		—		—		11		—		—
Total	$	6,992	$	7,310	$	476	$	11,223	$	567	$	455

Schedule of Troubled Debt Restructuring Loans by Interest Accrual Status

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of September 30, 2019 and 2018 (dollars in thousands):

	2019
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	493	$	141	$	634
Commercial	2,410		—		2,410
Consumer loans:
Home equity and second mortgage	—		82		82
Commercial business loans	—		143		143
Total	$	2,903	$	366	$	3,269

	2018
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	509	$	—	$	509
Commercial	2,446		—		2,446
Land	—		153		153
Commercial business loans	—		170		170
Total	$	2,955	$	323	$	3,278

Troubled Debt Restructurings on Financing Receivables

2019	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
Home equity and second mortgage loan (1)	1	$	85	$	85	$	82
Total	1	$	85	$	85	$	82
2018
Land loans (2)	1	$	244	$	155	$	153
Commercial business loans (1)	2	183		183		170
Total	3	$	427	$	338	$	323
(1) Modifications were a result of reduction in interest rates or monthly payment amounts.
(2) Modification was a result of a reduction in principal balance.

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Commitments and Contingencies

12 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

In the normal course of business the Company is party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  These instruments involve, to varying degrees, elements of credit risk not recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

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

A summary of the Company’s commitments at September 30, 2019 and 2018 is as follows (dollars in thousands):

	2019		2018
Undisbursed portion of construction loans in process (see Note 5)	$	92,226	$	83,237
Undisbursed lines of credit	80,184		49,525
Commitments to extend credit	16,578		17,665

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 $241,000 and $207,000 at September 30, 2019 and 2018, 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 2027 and which provides severance pay benefits to eligible employees in the event of a change in control of Timberland Bancorp or the Bank (as defined in the plan).  In general, all employees with two or more years of service will be eligible to participate in the plan.  Under the plan, in the event of a change in control of Timberland Bancorp or the Bank, eligible employees who are terminated or who terminate employment (but only upon the occurrence of events specified in the plan) within 12 months of the effective date of a change in control would be entitled to a payment based on years of service or officer rank with the Bank.  The maximum payment for any eligible employee would be equal to 18 months of the employee’s current compensation.

The Company has employment agreements with the Chief Executive Officer and the Chief Financial Officer which provide for a severance payment and other benefits if the officers are involuntarily terminated following a change in control of the Company or the Bank. The maximum value of the severance benefits under the employment agreements is 2.99 times the officer's average annual compensation during the five-year period prior to the effective date of the change in control.

Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business.  In the opinion of management, liabilities arising from these claims, if any, will not have a material effect on the consolidated financial position of the Company.

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Other Liabilities and Accrued Expenses

12 Months Ended

Sep. 30, 2019

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, 2019 and 2018 (dollars in thousands):

	2019		2018
Accrued deferred compensation, profit sharing plans and bonuses payable	$	3,131	$	1,235
Accrued interest payable on deposits	333		225
Accounts payable and accrued expenses - other	4,374		2,667
Total other liabilities and accrued expenses	$	7,838	$	4,127

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Accumulated Other Comprehensive Income (Loss)

12 Months Ended

Sep. 30, 2019

Equity [Abstract]

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the years ended September 30, 2019, 2018 and 2017 are as follows (dollars in thousands):

	Changes in fair value of available for sale securities [1]			Changes in OTTI on held to maturity securities [1]			Total [1]
2019
Balance of AOCI at the beginning of period	$	(58	)	$	(71	)	$	(129	)
Other comprehensive income	85			31			116
Adoption of ASU 2016-01	63			—			63
Balance of AOCI at the end of period	$	90		$	(40	)	$	50

2018
Balance of AOCI at the beginning of period	$	(19	)	$	(105	)	$	(124	)
Other comprehensive loss	(39		)	34			(5		)
Balance of AOCI at the end of period	$	(58	)	$	(71	)	$	(129	)
2017
Balance of AOCI at the beginning of period	$	4		$	(179	)	$	(175	)
Other comprehensive income	(23		)	74			51
Balance of AOCI at the end of period	$	(19	)	$	(105	)	$	(124	)

___________________

^[1] All amounts are net of income taxes.

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Other Liabilities and Accrued Expenses: Schedule of Other Liabilities and Accrued Expenses (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Payables and Accruals [Abstract]
Accrued deferred compensation, profit sharing plans and bonuses payable	$ 3,131	$ 1,235
Accrued interest payable on deposits	333	225
Accounts payable and accrued expenses - other	4,374	2,667
Total other liabilities and accrued expenses	$ 7,838	$ 4,127

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Investment Securities: Other than Temporary Impairment, Credit Losses Recognized in Earnings (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Roll Forward]
Balance, beginning of year	$ 1,153	$ 1,301	$ 1,505
Additional increases to the amount related to credit loss for which OTTI was previously recognized	13	14	18
Realized losses previously recorded as credit losses	(23)	(80)	(171)
Recovery of prior credit loss	(72)	(82)	(51)
Balance, end of year	$ 1,071	$ 1,153	$ 1,301

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Investment Securities: Marketable Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Held to Maturity
Amortized Cost	$ 31,102	$ 12,810
Gross Unrealized Gains	1,489	560
Gross Unrealized Losses	(11)	(106)
Estimated Fair Value	32,580	13,264
Available for Sale
Amortized Cost		1,231
Gross Unrealized Gains		7
Gross Unrealized Losses		(84)
Estimated Fair Value		1,154
Mortgage-backed Securities, U.S. government agencies
Held to Maturity
Amortized Cost	27,786	1,385
Gross Unrealized Gains	999	8
Gross Unrealized Losses	(2)	(21)
Estimated Fair Value	28,783	1,372
Available for Sale
Amortized Cost	22,418	231
Gross Unrealized Gains	114	7
Gross Unrealized Losses	0	(1)
Estimated Fair Value	22,532	237
Mutual funds
Available for Sale
Amortized Cost		1,000
Gross Unrealized Gains		0
Gross Unrealized Losses		(83)
Estimated Fair Value		917
Mortgage-backed Securities, Private label residential
Held to Maturity
Amortized Cost	317	460
Gross Unrealized Gains	490	552
Gross Unrealized Losses	(1)	(2)
Estimated Fair Value	806	1,010
U.S. agency securities
Held to Maturity
Amortized Cost	2,999	10,965
Gross Unrealized Gains	0	0
Gross Unrealized Losses	(8)	(83)
Estimated Fair Value	$ 2,991	$ 10,882

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Deposits: Narrative (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Deposits [Abstract]
Time Deposits, $250,000 Or More	$ 29,211	$ 18,164
Brokered deposits	$ 19,327	$ 17,202

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Condensed Financial Information - Parent Company Only (Tables)

12 Months Ended

Sep. 30, 2019

Condensed Financial Information Disclosure [Abstract]

Condensed Balance Sheets, Parent Company

Condensed Balance Sheets - September 30, 2019 and 2018

(dollars in thousands)

	2019		2018
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	336	$	306
Interest-bearing deposits in banks	2,555		2,588
Total cash and cash equivalents	2,891		2,894
Loan receivable from ESOP	—		285
Investment in Bank	168,525		121,818
Other assets	15		15
Total assets	$	171,431	$	125,012
Liabilities and shareholders’ equity
Accrued expenses	$	364	$	355
Shareholders’ equity	171,067		124,657
Total liabilities and shareholders’ equity	$	171,431	$	125,012

Condensed Statements of Operations, Parent Company

Condensed Statements of Income - Years Ended September 30, 2019, 2018 and 2017

(dollars in thousands)

	2019			2018			2017
Operating income
Interest on deposits in banks	$	67		$	37		$	27
Interest on loan receivable from ESOP	9			53			96
Dividends from Bank	6,607			4,429			1,390
Total operating income	6,683			4,519			1,513
Operating expenses	525			591			467
Income before income taxes and equity in undistributed     income of Bank	6,158			3,928			1,046
Benefit for income taxes	(169		)	(198		)	(385		)
Income before undistributed income of Bank	6,327			4,126			1,431
Equity in undistributed income of Bank	17,693			12,595			12,736
Net income	$	24,020		$	16,721		$	14,167

Condensed Statements of Cash Flows, Parent Company

Condensed Statements of Cash Flows - Years Ended September 30, 2019, 2018 and 2017

(dollars in thousands)

	2019			2018			2017
Cash flows from operating activities
Net income	$	24,020		$	16,721		$	14,167
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of Bank	(17,693		)	(12,595		)	(12,736		)
Earned ESOP shares	441			882			605
Stock option compensation expense	159			172			156
Other, net	9			280			33
Net cash provided by operating activities	6,936			5,460			2,225
Cash flows from investing activities
Investment in Bank	(14,915		)	(1,271		)	(930		)
Principal repayments on loan receivable from ESOP	285			536			493
Cash acquired, net of cash consideration paid in business combination	14,284			—			—
Net cash used in investing activities	(346		)	(735		)	(437		)
Cash flows from financing activities
Proceeds from exercise of stock options	401			318			332
Proceeds from exercise of stock warrant	—			—			2,496
Repurchase of common stock	(499		)	—			—
Payment of dividends	(6,495		)	(4,431		)	(3,641		)
Net cash used in financing activities	(6,593		)	(4,113		)	(813		)
Net (decrease) increase in cash and cash equivalents	(3		)	612			975
Cash and cash equivalents
Beginning of period	2,894			2,282			1,307
End of period	$	2,891		$	2,894		$	2,282

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Net Income Per Common Share: Narrative (Details) - USD ($) $ / shares in Units, $ in Thousands		12 Months Ended
	Jan. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Number of securities called by warrants (shares)	370,899
Proceeds from warrants exercised	$ 2,496
Stock Options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share (shares)		102,920	29,581	1,117
Warrant
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share (shares)		370,899
Common Stock
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Exercise price (in dollars per share)		$ 6.73

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Servicing Rights (Tables)

12 Months Ended

Sep. 30, 2019

Transfers and Servicing [Abstract]

Analysis of the changes in MSRs

The following is an analysis of the changes in SBA servicing rights for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	6		$	2		$	3
Additions due to South Sound Acquisition	281			—			—
Other additions	2			7			—
Amortization	(83		)	(3		)	(1		)
Valuation allowance	(4		)	—			—
Balance, end of year	$	202		$	6		$	2

The following is an analysis of the changes in Freddie Mac servicing rights for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	2,022		$	1,823		$	1,570
Additions	747			687			739
Amortization	(563		)	(488		)	(486		)
Balance, end of year	$	2,206		$	2,022		$	1,823

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Employee Stock Ownership and 401(k) Plan (Tables)

12 Months Ended

Sep. 30, 2019

Retirement Benefits [Abstract]

Schedule of Shares Held by the ESOP

Shares held by the ESOP as of September 30, 2019, 2018 and 2017 were classified as follows:

	2019	2018	2017
Unallocated shares	—	17,639	52,905
Shares released for allocation	425,281	451,644	489,665
Total ESOP shares	425,281	469,283	542,570

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Condensed Financial Information - Parent Company Only: Condensed Balance Sheets, Parent Company (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2016
Cash and cash equivalents:
Cash and due from financial institutions	$ 25,179	$ 20,238
Interest-bearing deposits in banks	117,836	128,626
Total cash and cash equivalents	143,015	148,864	$ 148,188	$ 108,941
Other assets	5,323	2,672
Total assets	1,247,132	1,018,290
Liabilities and shareholders’ equity
Shareholders’ equity	171,067	124,657	111,000	96,834
Total liabilities and shareholders’ equity	1,247,132	1,018,290
Parent Company
Cash and cash equivalents:
Cash and due from financial institutions	336	306
Interest-bearing deposits in banks	2,555	2,588
Total cash and cash equivalents	2,891	2,894	$ 2,282	$ 1,307
Loan receivable from ESOP	0	285
Investment in Bank	168,525	121,818
Other assets	15	15
Total assets	171,431	125,012
Liabilities and shareholders’ equity
Accrued expenses	364	355
Shareholders’ equity	171,067	124,657
Total liabilities and shareholders’ equity	$ 171,431	$ 125,012

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Premises and Equipment: Rent Expense (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Property, Plant and Equipment [Line Items]
Operating leases, rent expense	$ 332	$ 206	$ 275
Minimum
Property, Plant and Equipment [Line Items]
Operating leases, renewal term	5 years
Maximum
Property, Plant and Equipment [Line Items]
Operating leases, renewal term	10 years

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Loans Receivable and Allowance for Loan Losses: Schedule of Activity in Related Party Loans (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Loans and Leases Receivable, Related Parties [Roll Forward]
Balance, beginning of year	$ 119	$ 741	$ 230
New loans or borrowings	1	368	592
Repayments and reclassifications	(26)	(990)	(81)
Balance, end of year	$ 94	$ 119	$ 741

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Revenue from Contracts with Customers (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Service charges on deposits
Revenue from External Customer [Line Items]
Service charges on deposits	$ 4,904	$ 4,581	$ 4,518
ATM and debit card interchange transaction fees
Revenue from External Customer [Line Items]
Service charges on deposits	4,036	3,570	3,343
Escrow fees
Revenue from External Customer [Line Items]
Service charges on deposits	197	211	242
Fee income from non-deposit investment sales
Revenue from External Customer [Line Items]
Service charges on deposits	$ 46	$ 109	$ 63

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Fair Value Measurements: Level 3 Fair Value Measurements, Nonrecurring (Details) - Nonrecurring - Fair Value, Inputs, Level 3 - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Fair Value Inputs, Assets, Quantitative Information [Line Items] (Deprecated 2018-01-31)
Assets, estimated fair value, nonrecurring	$ 2,211	$ 2,139
Total impaired loans
Fair Value Inputs, Assets, Quantitative Information [Line Items] (Deprecated 2018-01-31)
Assets, estimated fair value, nonrecurring	528	226
OREO and other repossessed assets
Fair Value Inputs, Assets, Quantitative Information [Line Items] (Deprecated 2018-01-31)
Assets, estimated fair value, nonrecurring	1,683	1,913
Market approach | Total impaired loans
Fair Value Inputs, Assets, Quantitative Information [Line Items] (Deprecated 2018-01-31)
Assets, estimated fair value, nonrecurring	528	226
Market approach | OREO and other repossessed assets
Fair Value Inputs, Assets, Quantitative Information [Line Items] (Deprecated 2018-01-31)
Assets, estimated fair value, nonrecurring	$ 1,683	$ 1,913

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Loans Receivable and Allowance for Loan Losses: Past Due Status of Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2019		Sep. 30, 2018
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	$ 3,925		$ 2,556
Loans receivable, Non-Accrual	3,033	[1]	1,317	[2]
Loans receivable, Current	895,225		735,002
Loans receivable	899,150		737,558
30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	193		1,223
60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	699		16
Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, one-to-four family
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	985		1,102
Loans receivable, Non-Accrual	699	[1]	545	[2]
Loans receivable, Current	131,676		114,839
Loans receivable	132,661		115,941
Mortgage loans, one-to-four family | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		557
Mortgage loans, one-to-four family | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	286		0
Mortgage loans, one-to-four family | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, multi-family
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Loans receivable, Non-Accrual	0	[1]	0	[2]
Loans receivable, Current	76,036		61,928
Loans receivable	76,036		61,928
Mortgage loans, multi-family | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, multi-family | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, multi-family | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, commercial
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	1,091		574
Loans receivable, Non-Accrual	779	[1]	0	[2]
Loans receivable, Current	418,026		344,539
Loans receivable	419,117		345,113
Mortgage loans, commercial | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	94		574
Mortgage loans, commercial | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	218		0
Mortgage loans, commercial | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - custom and owner/builder
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Loans receivable, Non-Accrual	0	[1]	0	[2]
Loans receivable, Current	75,411		67,024
Loans receivable	75,411		67,024
Mortgage loans, construction - custom and owner/builder | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - custom and owner/builder | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - custom and owner/builder | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Loans receivable, Non-Accrual	0	[1]	0	[2]
Loans receivable, Current	10,779		7,107
Loans receivable	10,779		7,107
Mortgage loans, construction - speculative one-to-four family | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - speculative one-to-four family | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - speculative one-to-four family | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - commercial
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Loans receivable, Non-Accrual	0	[1]	0	[2]
Loans receivable, Current	24,051		23,440
Loans receivable	24,051		23,440
Mortgage loans, construction - commercial | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - commercial | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - commercial | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - multi-family
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Loans receivable, Non-Accrual	0	[1]	0	[2]
Loans receivable, Current	19,256		5,983
Loans receivable	19,256		5,983
Mortgage loans, construction - multi-family | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - multi-family | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, construction - multi-family | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans - construction - land development
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Loans receivable, Non-Accrual	0	[1]	0	[2]
Loans receivable, Current	1,803		1,567
Loans receivable	1,803		1,567
Mortgage loans - construction - land development | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans - construction - land development | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans - construction - land development | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Mortgage loans, land
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	402		283
Loans receivable, Non-Accrual	204	[1]	243	[2]
Loans receivable, Current	30,368		25,263
Loans receivable	30,770		25,546
Mortgage loans, land | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	5		40
Mortgage loans, land | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	193		0
Mortgage loans, land | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Consumer loans, home equity and second mortgage
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	697		401
Loans receivable, Non-Accrual	603	[1]	359	[2]
Loans receivable, Current	39,493		36,940
Loans receivable	40,190		37,341
Consumer loans, home equity and second mortgage | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	94		42
Consumer loans, home equity and second mortgage | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Consumer loans, home equity and second mortgage | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Consumer loans, other
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	23		26
Loans receivable, Non-Accrual	23	[1]	0	[2]
Loans receivable, Current	4,289		3,489
Loans receivable	4,312		3,515
Consumer loans, other | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		10
Consumer loans, other | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		16
Consumer loans, other | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Commercial business loans
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	727		170
Loans receivable, Non-Accrual	725	[1]	170	[2]
Loans receivable, Current	64,037		42,883
Loans receivable	64,764		43,053
Commercial business loans | 30-59 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	0		0
Commercial business loans | 60-89 Days Past Due
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	2		0
Commercial business loans | Past Due 90 Days or More and Still Accruing
Financing Receivable, Past Due [Line Items]
Loans receivable, Total Past Due	$ 0		$ 0

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

[2] Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

XML

Goodwill and CDI - Goodwill (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Goodwill [Roll Forward]
Balance at the beginning of the period	$ 15,131	$ 5,650
Addition as a result of the South Sound Merger (see Note 2)	9,481
Balance at the end of the period	$ 15,131

XML

Business Combinations - Assets Acquired and Liabilities Assumed (Details) - USD ($) $ in Thousands		12 Months Ended
	Oct. 01, 2018	Sep. 30, 2019
Business Acquisition [Line Items]
Addition as a result of the South Sound Merger (see Note 2)		$ 9,481
South Sound Merger
Business Acquisition [Line Items]
Total merger consideration	$ 35,170
Addition as a result of the South Sound Merger (see Note 2)	9,481
Book Value | South Sound Merger
Business Acquisition [Line Items]
Cash and cash equivalents	21,187
CDs held for investment	2,973
FHLB stock	205
Investment securities held to maturity	19,891
Investment securities available for sale	5,022
Loans receivable	123,627
Premises and equipment	3,225
OREO	25
Accrued interest receivable	554
BOLI	2,629
CDI	0
MSRs	285
Other assets	1,087
Total assets	180,710
Deposits	151,378
Other liabilities and accrued expenses	3,291
Total liabilities assumed	154,669
Total identifiable net assets acquired	26,041
Fair Value Adjustment | South Sound Merger
Business Acquisition [Line Items]
Cash and cash equivalents	0
CDs held for investment	0
FHLB stock	0
Investment securities held to maturity	(189)
Investment securities available for sale	0
Loans receivable	(2,083)
Premises and equipment	112
OREO	0
Accrued interest receivable	0
BOLI	0
CDI	2,483
MSRs	(4)
Other assets	(511)
Total assets	(192)
Deposits	160
Other liabilities and accrued expenses	0
Total liabilities assumed	160
Total identifiable net assets acquired	(352)
Estimated Fair Value | South Sound Merger
Business Acquisition [Line Items]
Total merger consideration	35,170
Cash and cash equivalents	21,187
CDs held for investment	2,973
FHLB stock	205
Investment securities held to maturity	19,702
Investment securities available for sale	5,022
Loans receivable	121,544
Premises and equipment	3,337
OREO	25
Accrued interest receivable	554
BOLI	2,629
CDI	2,483
MSRs	281
Other assets	576
Total assets	180,518
Deposits	151,538
Other liabilities and accrued expenses	3,291
Total liabilities assumed	154,829
Total identifiable net assets acquired	25,689
Addition as a result of the South Sound Merger (see Note 2)	$ 9,481

XML

Employee Stock Ownership and 401(k) Plan: Schedule of Shares held by the ESOP (Details) - shares shares in Thousands	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Retirement Benefits [Abstract]
Unallocated shares (shares)	0	17,639	52,905
Shares released for allocation (shares)	425,281	451,644	489,665
Total ESOP shares (shares)	425,281	469,283	542,570

XML

Stock Compensation Plans: Stock Options by Exercise Price (Details) - Stock Options	12 Months Ended
	Sep. 30, 2019 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	378,304
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 18.15
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	6 years 8 months 3 days
Options Exercisable, Number (in shares) | shares	217,554.000
Options Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 13.21
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	5 years 5 months 27 days
$ 4.01 - 4.55
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	2,500
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 4.33
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	11 months
Options Exercisable, Number (in shares) | shares	2,500
Options Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 4.33
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	11 months
Exercise price range, lower range limit (in dollars per share)	$ 4.01
Exercise price range, upper range limit (in dollars per share)	$ 4.55
5.86 - 6.00
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	19,100
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 5.97
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	3 years 24 days
Options Exercisable, Number (in shares) | shares	19,100
Options Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 5.97
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	3 years 24 days
Exercise price range, lower range limit (in dollars per share)	$ 5.86
Exercise price range, upper range limit (in dollars per share)	$ 6.00
9.00
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	49,975
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 9.00
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	4 years 30 days
Options Exercisable, Number (in shares) | shares	49,975
Options Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 9.00
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	4 years 30 days
Exercise price range, lower range limit (in dollars per share)	$ 9
10.26 - 10.71
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	110,839
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 10.58
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	5 years 6 months 18 days
Options Exercisable, Number (in shares) | shares	87,589
Options Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 10.57
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	5 years 5 months 27 days
Exercise price range, lower range limit (in dollars per share)	$ 10.26
Exercise price range, upper range limit (in dollars per share)	$ 10.26
15.67
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	48,000
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 15.67
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	7 years
Options Exercisable, Number (in shares) | shares	27,000
Options Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 15.67
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	7 years
Exercise price range, lower range limit (in dollars per share)	$ 15.67
27.14
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	46,840
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 27.14
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	10 years
Options Exercisable, Number (in shares) | shares	0
Exercise price range, lower range limit (in dollars per share)	$ 27.14
29.69
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	55,600
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 29.69
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	8 years
Options Exercisable, Number (in shares) | shares	22,300
Options Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 29.69
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	8 years
Exercise price range, lower range limit (in dollars per share)	$ 29.69
31.80
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options Outstanding, Number (in shares) | shares	45,450
Options Outstanding, Weighted Average Exercise Price (in dollars per share)	$ 31.80
Options Outstanding, Weighted Average Remaining Contractual Life (Years)	9 years
Options Exercisable, Number (in shares) | shares	9,090
Options Exercisable, Weighted Average Exercise Price (in dollars per share)	$ 31.80
Options Exercisable, Weighted Average Remaining Contractual Life (Years)	9 years
Exercise price range, lower range limit (in dollars per share)	$ 31.8

XML

Fair Value Measurements (Tables)

12 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value, Assets Measured on Recurring Basis

The Company's assets measured at estimated fair value on a recurring basis at September 30, 2019 and 2018 are as follows (dollars in thousands):

	Estimated Fair Value
September 30, 2019	Level 1		Level 2		Level 3		Total
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	22,532	$	—	$	22,532
Investments in equity securities
Mutual funds	958		—		—		958
Total	$	958	$	22,532	$	—	$	23,490

September 30, 2018
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	237	$	—	$	237
Mutual funds	917		—		—		917
Total	$	917	$	237	$	—	$	1,154

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, 2019 (dollars in thousands):

	Estimated Fair Value
Impaired loans:	Level 1		Level 2		Level 3
Mortgage loans:
Land	$	—	$	—	$	114
Consumer loans:
Other					6
Commercial business loans	—		—		408
Total impaired loans	—		—		528
Investment securities – held to maturity:
MBS - Private label residential	—		2		—
OREO and other repossessed assets	—		—		1,683
Total	$	—	$	2	$	2,211

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2018 (dollars in thousands):

	Estimated Fair Value
Impaired loans:	Level 1		Level 2		Level 3
Mortgage loans:
Land	$	—	$	—	$	119
Commercial business loans	—		—		107
Total impaired loans	—		—		226
Investment securities – held to maturity:
MBS - Private label residential	—		3		—
OREO and other repossessed assets	—		—		1,913
Total	$	—	$	3	$	2,139

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, 2019 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	528	Market approach	Appraised value less estimated selling costs	NA
OREO and other repossessed assets	1,683		Market approach	Lower of appraised value or listing price less estimated selling costs	NA

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2018 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	226	Market approach	Appraised value less estimated selling costs	NA
OREO and other repossessed assets	1,913		Market approach	Lower of appraised value or listing price less estimated selling costs	NA

Balances of Assets and Liabilities Measured at Estimated Fair Value, Recurring Basis

The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, 2019 (dollars in thousands):

					Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	143,015	$	143,015	$	143,015	$	—	$	—
CDs held for investment	78,346		78,346		78,346		—		—
Investment securities	53,634		55,112		3,949		51,163		—
Investments in equity securities	958		958		958		—		—
FHLB stock	1,437		1,437		1,437		—		—
Other investments	3,000		3,000		3,000		—		—
Loans held for sale	6,071		6,260		6,260		—		—
Loans receivable, net	886,662		892,495		—		—		892,495
Accrued interest receivable	3,598		3,598		3,598		—		—
Financial Liabilities
Certificates of deposit	165,655		166,852		—		—		166,852
Accrued interest payable	333		333		333		—		—

The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, 2018 (dollars in thousands):

					Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	148,864	$	148,864	$	148,864	$	—	$	—
CDs held for investment	63,290		63,290		63,290		—		—
Investment securities	13,964		14,418		8,812		5,606		—
FHLB stock	1,190		1,190		1,190		—		—
Other investments	3,000		3,000		3,000		—		—
Loans held for sale	1,785		1,814		1,814		—		—
Loans receivable, net	725,391		711,071		—		—		711,071
Accrued interest receivable	2,877		2,877		2,877		—		—
Financial Liabilities
Certificates of deposit	141,808		140,831		—		—		140,831
Accrued interest payable	225		225		225		—		—

XML

Summary of Significant Accounting Policies: Premises and Equipment (Details)	12 Months Ended
	Sep. 30, 2019
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

XML

Consolidated Statements of Comprehensive Income (Parenthetical) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent [Abstract]
Unrealized holding gain (loss) on investment securities available-for-sale, taxes	$ 23	$ (8)	$ (12)
Reclassification adjustment for gain on sale of investment securities available-for-sale, taxes	0	0	0
Other Than Temporary Impairment Losses, Investments, Portion In Other Comprehensive Loss, Adjustments Related To Other Factors, Tax, Portion Attributable To Parent, Held-to-maturity Securities	(1)	(2)	12
Amount reclassified to credit loss for previously recorded market loss, taxes	3	1	2
Accretion of OTTI on investment securities held-to-maturity, taxes	$ 6	$ 10	$ 26

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Cash and cash equivalents:
Cash and due from financial institutions	$ 25,179	$ 20,238
Interest-bearing deposits in banks	117,836	128,626
Total cash and cash equivalents	143,015	148,864
Certificates of deposit (“CDs”) held for investment (at cost, which approximates fair value)	78,346	63,290
Investment securities held to maturity, at amortized cost (estimated fair value $32,580 and $13,264)	31,102	12,810
Investment securities available for sale, at fair value	22,532	1,154
Investments in equity securities, at fair value	958	0
Federal Home Loan Bank of Des Moines (“FHLB”) stock	1,437	1,190
Other investments, at cost	3,000	3,000
Loans held for sale	6,071	1,785
Loans receivable, net of allowance for loans losses of $9,690 and $9,530	886,662	725,391
Premises and equipment, net	22,830	18,953
Other real estate owned (“OREO”) and other repossessed assets, net	1,683	1,913
Accrued interest receivable	3,598	2,877
Bank owned life insurance (“BOLI”)	21,005	19,813
Goodwill	15,131	5,650
Core deposit intangible (“CDI”), net	2,031	0
Servicing rights, net	2,408	2,028
Escrow deposit for business combination	0	6,900
Other assets	5,323	2,672
Total assets	1,247,132	1,018,290
Deposits:
Non-interest-bearing demand	296,472	233,258
Interest-bearing	771,755	656,248
Total deposits	1,068,227	889,506
Other liabilities and accrued expenses	7,838	4,127
Total liabilities	1,076,065	893,633
Commitments and contingencies (See Note 16)
Shareholders’ equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued	0	0
Common stock, $0.01 par value; 50,000,000 shares authorized; 8,329,419 shares issued and outstanding - September 30, 2019 7,401,177 shares issued and outstanding - September 30, 2018	43,030	14,394
Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)	0	(133)
Retained earnings	127,987	110,525
Accumulated other comprehensive income (loss)	50	(129)
Total shareholders’ equity	171,067	124,657
Total liabilities and shareholders’ equity	$ 1,247,132	$ 1,018,290

XML

OREO and Other Repossessed Assets (Tables)

12 Months Ended

Sep. 30, 2019

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, 2019 and 2018 (dollars in thousands):

	2019					2018
	Amount			Number		Amount			Number
Balance, beginning of year	$	1,913		12		$	3,301		16
Addition due to South Sound Acquisition	25			1		—			—
Other additions	293			2		324			2
Writedowns	(24		)	—		(248		)	—
Sales	(524		)	(3	)	(1,464		)	(6	)
Balance, end of year	$	1,683		12		$	1,913		12

XML

Fair Value Measurements

12 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable or can be corroborated by observable market data.

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's assets measured at fair value on a recurring basis consist of investment securities available for sale and investments in equity securities. The estimated fair values of MBS are based upon market prices of similar securities or observable inputs (Level 2). The estimated fair values of mutual funds are based upon quoted market prices (Level 1).

The Company had no liabilities measured at fair value on a recurring basis at September 30, 2019 and 2018. The Company's assets measured at estimated fair value on a recurring basis at September 30, 2019 and 2018 are as follows (dollars in thousands):

	Estimated Fair Value
September 30, 2019	Level 1		Level 2		Level 3		Total
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	22,532	$	—	$	22,532
Investments in equity securities
Mutual funds	958		—		—		958
Total	$	958	$	22,532	$	—	$	23,490

September 30, 2018
Available for sale investment securities
MBS: U.S. government agencies	$	—	$	237	$	—	$	237
Mutual funds	917		—		—		917
Total	$	917	$	237	$	—	$	1,154

There were no transfers among Level 1, Level 2 and Level 3 during the years ended September 30, 2019 and 2018.

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

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

Impaired Loans: The estimated fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. The specific reserve for collateral dependent impaired loans is based on the estimated fair value of the collateral less estimated costs to sell, if applicable.  In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal and known changes in the market and in the collateral. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Investment Securities Held to Maturity: The estimated fair value of investment securities held to maturity is based upon the assumptions market participants would use in pricing the investment security.  Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

OREO and Other Repossessed Assets, net:  OREO and other repossessed assets are recorded at estimated fair value less estimated costs to sell.  Estimated fair value is generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale.  Estimated costs to sell are based on standard market factors.  The valuation of OREO and other repossessed assets is subject to significant external and internal judgment (Level 3).

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2019 (dollars in thousands):

	Estimated Fair Value
Impaired loans:	Level 1		Level 2		Level 3
Mortgage loans:
Land	$	—	$	—	$	114
Consumer loans:
Other					6
Commercial business loans	—		—		408
Total impaired loans	—		—		528
Investment securities – held to maturity:
MBS - Private label residential	—		2		—
OREO and other repossessed assets	—		—		1,683
Total	$	—	$	2	$	2,211

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, 2019 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	528	Market approach	Appraised value less estimated selling costs	NA
OREO and other repossessed assets	1,683		Market approach	Lower of appraised value or listing price less estimated selling costs	NA

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at September 30, 2018 (dollars in thousands):

	Estimated Fair Value
Impaired loans:	Level 1		Level 2		Level 3
Mortgage loans:
Land	$	—	$	—	$	119
Commercial business loans	—		—		107
Total impaired loans	—		—		226
Investment securities – held to maturity:
MBS - Private label residential	—		3		—
OREO and other repossessed assets	—		—		1,913
Total	$	—	$	3	$	2,139

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of September 30, 2018 (dollars in thousands):

	Estimated Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	226	Market approach	Appraised value less estimated selling costs	NA
OREO and other repossessed assets	1,913		Market approach	Lower of appraised value or listing price less estimated selling costs	NA

GAAP requires disclosure of estimated fair values for financial instruments.  Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time.  Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change.  In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed.  The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but which may have significant value.  The Company does not believe that it would be practicable to estimate a fair value for these types of items as of September 30, 2019 and 2018.  Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Additionally, in accordance with ASU 2016-01, which the Company adopted on October 1, 2018 on a prospective basis, the Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, 2019 (dollars in thousands):

					Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	143,015	$	143,015	$	143,015	$	—	$	—
CDs held for investment	78,346		78,346		78,346		—		—
Investment securities	53,634		55,112		3,949		51,163		—
Investments in equity securities	958		958		958		—		—
FHLB stock	1,437		1,437		1,437		—		—
Other investments	3,000		3,000		3,000		—		—
Loans held for sale	6,071		6,260		6,260		—		—
Loans receivable, net	886,662		892,495		—		—		892,495
Accrued interest receivable	3,598		3,598		3,598		—		—
Financial Liabilities
Certificates of deposit	165,655		166,852		—		—		166,852
Accrued interest payable	333		333		333		—		—

The recorded amounts and estimated fair values of financial instruments were as follows as of September 30, 2018 (dollars in thousands):

					Fair Value Measurements Using:
	Recorded Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	148,864	$	148,864	$	148,864	$	—	$	—
CDs held for investment	63,290		63,290		63,290		—		—
Investment securities	13,964		14,418		8,812		5,606		—
FHLB stock	1,190		1,190		1,190		—		—
Other investments	3,000		3,000		3,000		—		—
Loans held for sale	1,785		1,814		1,814		—		—
Loans receivable, net	725,391		711,071		—		—		711,071
Accrued interest receivable	2,877		2,877		2,877		—		—
Financial Liabilities
Certificates of deposit	141,808		140,831		—		—		140,831
Accrued interest payable	225		225		225		—		—

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.

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Business Combinations (Tables)

12 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Schedule of Business Acquisitions

For illustrative purposes only, the following table presents certain unaudited pro forma information for the years ended September 30, 2019 and 2018. This unaudited estimated pro forma information was calculated as if South Sound Bank had been acquired as of the beginning of the fiscal year ended September 30, 2018. The unaudited estimated pro forma information combines the historical results of South Sound Bank with the Company's consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the transaction occurred at the beginning of the fiscal year ended September 30, 2018. The unaudited pro forma information does not consider any changes to the provision for loan losses resulting from recording loans at fair value. Additionally, the Company expects to achieve further operating cost savings and other business synergies, including revenue growth as a result of the acquisition, which are not reflected in the pro forma amounts that follow. As a result, actual amounts would have differed from the unaudited pro forma information presented.

	Pro Forma for the Year Ended September 30,
	2019		2018
	(Dollars in thousands, except per share amounts)
Total revenues (net interest income plus non-interest income)	$	65,501	$	59,184
Net income	24,385		18,825
Basic net income per common share	2.93		2.28
Diluted net income per common share	2.88		2.23

The following table summarizes the fair value of consideration paid, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction:

	At October 1, 2018
	Book Value		Fair Value Adjustment			Estimated Fair Value
	(Dollars in thousands)
Total acquisition consideration						$	35,170
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired:
Cash and cash equivalents	$	21,187	$	—		21,187
CDs held for investment	2,973		—			2,973
FHLB stock	205		—			205
Investment securities held to maturity	19,891		(189		)	19,702
Investment securities available for sale	5,022		—			5,022
Loans receivable	123,627		(2,083		)	121,544
Premises and equipment	3,225		112			3,337
OREO	25		—			25
Accrued interest receivable	554		—			554
BOLI	2,629		—			2,629
CDI	—		2,483			2,483
Servicing rights	285		(4		)	281
Other assets	1,087		(511		)	576
Total assets	180,710		(192		)	180,518
Liabilities assumed:
Deposits	151,378		160			151,538
Other liabilities and accrued expenses	3,291		—			3,291
Total liabilities assumed	154,669		160			154,829
Total identifiable net assets acquired	$	26,041	$	(352	)	25,689
Goodwill recognized						$	9,481

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Goodwill and CDI

12 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and CDI

Goodwill and CDI

Goodwill

The following table presents the change in the recorded amount of goodwill for the year ended September 30, 2019 (dollars in thousands). There were no changes to the recorded amount of goodwill for the years ended September 30, 2018 and 2017.

Balance, beginning of year	$	5,650
Addition as a result of the South Sound Acquisition (see Note 2)	9,481
Balance, end of year	$	15,131

CDI

During the year ended September 30, 2019, the Company recorded a CDI of $2,483,000 in connection with the South Sound Acquisition. The net unamortized CDI totaled $2,031,000 at September 30, 2019. The CDI amortization expense totaled $452,000 for the year ended September 30, 2019.

Amortization expense for the CDI for fiscal years ending subsequent to September 30, 2019 is estimated to be as follows (dollars in thousands):

2020	$	406
2021	361
2022	316
2023	271
2024	226
Thereafter	451
Total	$	2,031

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Premises and Equipment: Minimum Net Rental Commitments Under Non-cancellable Leases (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Property, Plant and Equipment [Abstract]
2019	$ 315
2020	229
2021	35
Total minimum payments required	$ 579

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Loans Receivable and Allowance for Loan Losses: Loan Segment Risk Narrative (Details)	12 Months Ended
	Sep. 30, 2019
Accounts, Notes, Loans and Financing Receivable [Line Items]
Ratio of loans to appraisal or purchase price (as a percent)	90.00%
Mortgage loans, one-to-four family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Ratio of loans to appraisal or purchase price (as a percent)	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 (as a percent)	80.00%
Mortgage loans, land
Accounts, Notes, Loans and Financing Receivable [Line Items]
Ratio of loans to appraisal or purchase price (as a percent)	75.00%

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Loans Receivable and Allowance for Loan Losses: Financing Receivable Credit Quality Indicators (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	$ 899,150	$ 737,558
Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	877,552	720,600
Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	13,731	10,653
Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	2,547	3,123
Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	5,320	3,182
Mortgage loans, one-to-four family
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	132,661	115,941
Mortgage loans, one-to-four family | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	129,748	113,148
Mortgage loans, one-to-four family | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	296	882
Mortgage loans, one-to-four family | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	562	581
Mortgage loans, one-to-four family | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	2,055	1,330
Mortgage loans, multi-family
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	76,036	61,928
Mortgage loans, multi-family | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	76,036	61,928
Mortgage loans, multi-family | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, multi-family | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, multi-family | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, commercial
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	419,117	345,113
Mortgage loans, commercial | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	405,165	334,908
Mortgage loans, commercial | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	11,944	8,375
Mortgage loans, commercial | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	683	988
Mortgage loans, commercial | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	1,325	842
Mortgage loans, construction - custom and owner/builder
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	75,411	67,024
Mortgage loans, construction - custom and owner/builder | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	75,178	66,720
Mortgage loans, construction - custom and owner/builder | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	233	304
Mortgage loans, construction - custom and owner/builder | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - custom and owner/builder | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - speculative one-to-four family
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	10,779	7,107
Mortgage loans, construction - speculative one-to-four family | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	10,779	7,107
Mortgage loans, construction - speculative one-to-four family | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - speculative one-to-four family | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - speculative one-to-four family | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - commercial
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	24,051	23,440
Mortgage loans, construction - commercial | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	24,051	23,440
Mortgage loans, construction - commercial | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - commercial | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - commercial | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - multi-family
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	19,256	5,983
Mortgage loans, construction - multi-family | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	19,256	5,983
Mortgage loans, construction - multi-family | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - multi-family | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans, construction - multi-family | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans - construction - land development
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	1,803	1,567
Mortgage loans - construction - land development | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	1,659	1,567
Mortgage loans - construction - land development | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans - construction - land development | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Mortgage loans - construction - land development | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	144	0
Mortgage loans, land
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	30,770	25,546
Mortgage loans, land | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	28,390	22,810
Mortgage loans, land | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	952	988
Mortgage loans, land | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	1,217	1,505
Mortgage loans, land | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	211	243
Consumer loans, home equity and second mortgage
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	40,190	37,341
Consumer loans, home equity and second mortgage | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	39,364	36,697
Consumer loans, home equity and second mortgage | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	41	82
Consumer loans, home equity and second mortgage | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Consumer loans, home equity and second mortgage | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	785	562
Consumer loans, other
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	4,312	3,515
Consumer loans, other | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	4,257	3,480
Consumer loans, other | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	33	0
Consumer loans, other | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	0	0
Consumer loans, other | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	22	35
Commercial business loans
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	64,764	43,053
Commercial business loans | Pass
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	63,669	42,812
Commercial business loans | Watch
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	232	22
Commercial business loans | Special Mention
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	85	49
Commercial business loans | Substandard
Financing Receivable, Credit Quality Indicator [Line Items]
Loans receivable	$ 778	$ 170

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Fair Value Measurements: Estimated Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Recorded Amount
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	$ 143,015	$ 148,864
CDs held for investment	78,346	63,290
Investment securities	53,634	13,964
Investments in equity securities	958
FHLB stock	1,437	1,190
Other investments	3,000	3,000
Loans held for sale	6,071	1,785
Loans receivable, net	886,662	725,391
Accrued interest receivable	3,598	2,877
Certificates of deposit	165,655	141,808
Accrued interest payable	333	225
Fair Value
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	143,015	148,864
CDs held for investment	78,346	63,290
Investment securities	55,112	14,418
Investments in equity securities	958
FHLB stock	1,437	1,190
Other investments	3,000	3,000
Loans held for sale	6,260	1,814
Loans receivable, net	892,495	711,071
Accrued interest receivable	3,598	2,877
Certificates of deposit	166,852	140,831
Accrued interest payable	333	225
Fair Value | Fair Value, Inputs, Level 1
Fair value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	143,015	148,864
CDs held for investment	78,346	63,290
Investment securities	3,949	8,812
Investments in equity securities	958
FHLB stock	1,437	1,190
Other investments	3,000	3,000
Loans held for sale	6,260	1,814
Loans receivable, net	0	0
Accrued interest receivable	3,598	2,877
Certificates of deposit	0	0
Accrued interest payable	333	225
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
Investment securities	51,163	5,606
Investments in equity securities	0
FHLB stock	0	0
Other investments	0	0
Loans held for sale	0	0
Loans receivable, net	0	0
Accrued interest receivable	0	0
Certificates of deposit	0	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
Investment securities	0	0
Investments in equity securities	0
FHLB stock	0	0
Other investments	0	0
Loans held for sale	0	0
Loans receivable, net	892,495	711,071
Accrued interest receivable	0	0
Certificates of deposit	166,852	140,831
Accrued interest payable	$ 0	$ 0

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Servicing Rights - Summary of Loans serviced for Freddie Mac (Details) - Freddie Mac - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Servicing Assets at Fair Value [Line Items]
Loans serviced for Freddie Mac, Principal amount	$ 386,357	$ 370,928	$ 358,173
Loans serviced for SBA, Principal amount	$ 12,765	$ 754	$ 697

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Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands	Total	Common Stock	Unearned Shares Issued to ESOP	Retained Earnings	Accumulated Other Comprehensive Loss
Beginning Balance at Sep. 30, 2016	$ 96,834	$ 9,961	$ (661)	$ 87,709	$ (175)
Beginning Balance (in shares) at Sep. 30, 2016		6,943,868
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	14,167			14,167
Other comprehensive income	51				51
Exercise of stock warrant	2,496	$ 2,496
Exercise of stock warrant (in shares)		370,899
Exercise of stock options	$ 332	$ 332
Exercise of stock options (in shares)	46,310	46,310
Common stock dividends ($0.50, $0.60, and $0.78 per share, respectively)	$ (3,641)			(3,641)
Earned ESOP shares, net of income taxes	605	$ 341	264
Stock option/MRDP compensation expense	156	156
Ending Balance at Sep. 30, 2017	111,000	$ 13,286	(397)	98,235	(124)
Ending Balance (in shares) at Sep. 30, 2017		7,361,077
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	16,721			16,721
Other comprehensive income	(5)				(5)
Exercise of stock options	$ 318	$ 318
Exercise of stock options (in shares)	40,100	40,100
Common stock dividends ($0.50, $0.60, and $0.78 per share, respectively)	$ (4,431)			(4,431)
Earned ESOP shares, net of income taxes	882	$ 618	264
Stock option/MRDP compensation expense	172	172
Ending Balance at Sep. 30, 2018	124,657	$ 14,394	(133)	110,525	(129)
Ending Balance (in shares) at Sep. 30, 2018		7,401,177
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	24,020			24,020
Other comprehensive income	116				116
Repurchase of common stock	(499)	$ (499)
Repurchase of common stock (in shares)		(20,440)
Common stock issued for business combination	$ 28,267
Common stock issued for business combination (in shares)	904,826
Exercise of stock options	$ 401	$ 401
Exercise of stock options (in shares)	43,856	43,856
Common stock dividends ($0.50, $0.60, and $0.78 per share, respectively)	$ (6,495)			(6,495)
Earned ESOP shares, net of income taxes	441	$ 308	133
Stock option/MRDP compensation expense	159	159
Ending Balance at Sep. 30, 2019	$ 171,067	$ 43,030	$ 0	$ 127,987	$ 50
Ending Balance (in shares) at Sep. 30, 2019		8,329,419

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Summary of Significant Accounting Policies: FHLB Stock (Details) - USD ($)	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
FHLB, stock impairment charges	$ 0	$ 0
Minimum
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
FHLB, investment in capital stock, home loans (percent)	0.12%
FHLB, investment in capital stock, advances (percent)	4.00%

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Statement of Financial Position [Abstract]
Mortgage-backed securities and other investments held to maturity-fair value	$ 32,580	$ 13,264
Allowance for loan losses	$ 9,690	$ 9,530
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	0	0
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	8,329,419	7,401,177
Common stock shares outstanding	8,329,419	7,401,177

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Employee Stock Ownership and 401(k) Plan: Narrative (Details) $ in Thousands	1 Months Ended	12 Months Ended			144 Months Ended
	Jan. 31, 1998 USD ($) shares	Sep. 30, 2019 USD ($) component	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2019 shares
401(k)
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
401(k), employer safe harbor contribution (as a percent)		3.00%
401(k), employer contributions		$ 743	$ 379	$ 358
KSOP
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Number of components in KSOP | component		2
Required service period (in years)		1 year
Employee minimum age requirement (in years)		18 years
Award vesting period (in years)		6 years
ESOP
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
ESOP, loan borrowed from employer	$ 7,930
ESOP, shares purchased for plan (in shares) | shares	1,058,000
ESOP, interest rate on employer loan (as a percent)		8.50%
ESOP, interest expense on employer loan		$ 9	53	96
Dividends used for debt service		176	291	293
ESOP, shares distributed to participants (in shares) | shares					632,719
ESOP, fair value of unallocated shares			551	1,658
Earned ESOP shares		$ 318	$ 823	$ 495

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Summary of Significant Accounting Policies: Operations (Details)	12 Months Ended
	Sep. 30, 2019 branch segment
Accounting Policies [Abstract]
Number of branches | branch	24
Number of reportable operating segments | segment	1

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Accumulated Other Comprehensive Income (Loss) (Tables)

12 Months Ended

Sep. 30, 2019

Equity [Abstract]

Schedule of Changes in Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) ("AOCI") by component during the years ended September 30, 2019, 2018 and 2017 are as follows (dollars in thousands):

	Changes in fair value of available for sale securities [1]			Changes in OTTI on held to maturity securities [1]			Total [1]
2019
Balance of AOCI at the beginning of period	$	(58	)	$	(71	)	$	(129	)
Other comprehensive income	85			31			116
Adoption of ASU 2016-01	63			—			63
Balance of AOCI at the end of period	$	90		$	(40	)	$	50

2018
Balance of AOCI at the beginning of period	$	(19	)	$	(105	)	$	(124	)
Other comprehensive loss	(39		)	34			(5		)
Balance of AOCI at the end of period	$	(58	)	$	(71	)	$	(129	)
2017
Balance of AOCI at the beginning of period	$	4		$	(179	)	$	(175	)
Other comprehensive income	(23		)	74			51
Balance of AOCI at the end of period	$	(19	)	$	(105	)	$	(124	)

___________________

^[1] All amounts are net of income taxes.

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Stock Compensation Plans: Fair Value Assumptions (Details) - Stock Options - $ / shares	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected volatility (as a percent)	29.00%	17.00%	16.00%
Expected life (in years)	5 years	5 years	5 years
Expected dividend yield (as a percent)	3.28%	2.61%	1.85%
Risk free interest rate (as a percent)	1.53%	2.97%	1.89%
Grant date fair value per share (in dollars per share)	$ 5.116	$ 4.48	$ 3.84

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Selected Quarterly Financial Data (Unaudited)

12 Months Ended

Sep. 30, 2019

Quarterly Financial Information Disclosure [Abstract]

Selected Quarterly Financial Data (Unaudited)

Selected Quarterly Financial Data (Unaudited)

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

	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018
Interest and dividend income	$	14,384		$	14,185		$	13,841		$	13,315
Interest expense	(1,233		)	(1,248		)	(1,113		)	(971		)
Net interest income	13,151			12,937			12,728			12,344
Non-interest income	3,597			3,538			3,940			3,266
Non-interest expense (1)	(8,774		)	(8,967		)	(9,277		)	(8,562		)
Income before income taxes	7,974			7,508			7,391			7,048
Provision for income taxes	1,639			1,552			1,277			1,433
Net income	$	6,335		$	5,956		$	6,114		$	5,615
Net income per common share
Basic	$	0.76		$	0.71		$	0.74		$	0.68
Diluted (2)	$	0.75		$	0.70		$	0.72		$	0.66

__________________________________________

(1) During the quarters ended December 31, 2018, March 31, 2019, June 30, 2019 and September 30, 2019 the Company incurred expenses related to the acquisition of South Sound Bank of $64, $55, $328, and $15, respectively.

(2) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.

	September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017
Interest and dividend income	$	11,051		$	10,457		$	10,290		$	10,035
Interest expense	(781		)	(730		)	(666		)	(601		)
Net interest income	10,270			9,727			9,624			9,434
Non-interest income	3,180			3,145			3,082			3,137
Non-interest expense (1)	(7,658		)	(7,122		)	(7,221		)	(7,176		)
Income before income taxes	5,792			5,750			5,485			5,395
Provision for income taxes	1,370			1,334			1,216			1,781
Net income	$	4,422		$	4,416		$	4,269		$	3,614
Net income per common share
Basic (2)	$	0.60		$	0.60		$	0.58		$	0.49
Diluted (2)	$	0.59		$	0.59		$	0.57		$	0.48

__________________________________________

(1) During the quarters ended December 31, 2017, March 31, 2018, June 30, 2018, and September 30, 2018 the Company incurred expenses related to the acquisition of South Sound Bank of $9, $80, $181, and $346, respectively.

(2) The net income per common share amounts for the quarters do not add to the total for the fiscal year due to rounding.

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Investment Securities (Tables)

12 Months Ended

Sep. 30, 2019

Investments [Abstract]

Marketable Securities

Held to maturity and available for sale investment securities were as follows as of September 30, 2019 and 2018 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2019
Held to Maturity
Mortgage-backed securities ("MBS"):
U.S. government agencies	$	27,786	$	999	$	(2	)	$	28,783
Private label residential	317		490		(1		)	806
U.S. Treasury and U.S. government agency securities	2,999		—		(8		)	2,991
Total	$	31,102	$	1,489	$	(11	)	$	32,580
Available for Sale
MBS: U.S. government agencies	$	22,418	$	114	$	—		$	22,532
Total	$	22,418	$	114	$	—		$	22,532
September 30, 2018
Held to Maturity
MBS:
U.S. government agencies	$	1,385	$	8	$	(21	)	$	1,372
Private label residential	460		552		(2		)	1,010
U.S. Treasury and U.S. government agency securities	10,965		—		(83		)	10,882
Total	$	12,810	$	560	$	(106	)	$	13,264
Available for Sale
MBS: U.S. government agencies	$	231	$	7	$	(1	)	$	237
Mutual funds	1,000		—		(83		)	917
Total	$	1,231	$	7	$	(84	)	$	1,154

Unrealized Gain (Loss) on Investments

Held to maturity investment securities with unrealized losses were as follows as of September 30, 2019 (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	$	291	$	(1	)	2	$	76	$	(1	)	6	$	367	$	(2	)
Private label residential	—		—			—	23		(1		)	5	23		(1		)
U.S. Treasury and U.S. government agency securities	—		—			—	2,991		(8		)	1	2,991		(8		)
Total	$	291	$	(1	)	2	$	3,090	$	(10	)	12	$	3,381	$	(11	)

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2018 (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	$	954	$	(20	)	2	$	64	$	(1	)	5	$	1,018	$	(21	)
Private label residential	—		—			—	50		(2		)	8	50		(2		)
U.S. Treasury and U.S. government agency securities	7,946		(22		)	2	2,935		(61		)	1	10,881		(83		)
Total	$	8,900	$	(42	)	4	$	3,049	$	(64	)	14	$	11,949	$	(106	)
Available for Sale
MBS: U.S. government agencies	$	34	$	(1	)	1	$	—	$	—		—	$	34	$	(1	)
Mutual Funds	—		—			—	917		(83		)	1	917		(83		)
Total	$	34	$	(1	)	1	$	917	$	(83	)	1	$	951	$	(84	)

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, 2019, 2018 and 2017:

	Range				Weighted
	Minimum		Maximum		Average
September 30, 2019
Constant prepayment rate	6.00	%	15.00	%	10.67	%
Collateral default rate	3.00	%	19.70	%	10.40	%
Loss severity rate	—	%	10.59	%	4.07	%
September 30, 2018
Constant prepayment rate	6.00	%	15.00	%	12.91	%
Collateral default rate	—	%	10.42	%	5.03	%
Loss severity rate	—	%	75.00	%	37.25	%
September 30, 2017
Constant prepayment rate	6.00	%	15.00	%	10.40	%
Collateral default rate	0.03	%	10.75	%	4.84	%
Loss severity rate	1.00	%	62.00	%	41.75	%

Schedule of Other than Temporary Impairments

The following table presents the OTTI recoveries for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
	Held To Maturity			Held To Maturity			Held To Maturity
Total recoveries	$	71		$	73		$	38
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)	(12		)	(5		)	(5		)
Net recoveries recognized in earnings (2)	$	59		$	68		$	33

________________________

(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, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	1,153		$	1,301		$	1,505
Additions:
Additional increases to the amount           related to credit loss for which OTTI           was previously recognized	13			14			18
Subtractions:
Realized losses previously recorded           as credit losses	(23		)	(80		)	(171		)
Recovery of prior credit loss	(72		)	(82		)	(51		)
Balance, end of year	$	1,071		$	1,153		$	1,301

Schedule of Contractual Maturities of Debt Securities

The contractual maturities of debt securities at September 30, 2019 are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.

	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	3,025	$	3,017	$	—	$	—
Due after one year to five years	495		498		145		145
Due after five years to ten years	5,893		6,272		129		130
Due after ten years	21,689		22,793		22,144		22,257
Total	$	31,102	$	32,580	$	22,418	$	22,532

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Goodwill and CDI (Tables)

12 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Goodwill

Amortization expense for the CDI for fiscal years ending subsequent to September 30, 2019 is estimated to be as follows (dollars in thousands):

2020	$	406
2021	361
2022	316
2023	271
2024	226
Thereafter	451
Total	$	2,031

The following table presents the change in the recorded amount of goodwill for the year ended September 30, 2019 (dollars in thousands). There were no changes to the recorded amount of goodwill for the years ended September 30, 2018 and 2017.

Balance, beginning of year	$	5,650
Addition as a result of the South Sound Acquisition (see Note 2)	9,481
Balance, end of year	$	15,131

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OREO and Other Repossessed Assets

12 Months Ended

Sep. 30, 2019

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, 2019 and 2018 (dollars in thousands):

	2019					2018
	Amount			Number		Amount			Number
Balance, beginning of year	$	1,913		12		$	3,301		16
Addition due to South Sound Acquisition	25			1		—			—
Other additions	293			2		324			2
Writedowns	(24		)	—		(248		)	—
Sales	(524		)	(3	)	(1,464		)	(6	)
Balance, end of year	$	1,683		12		$	1,913		12

At both September 30, 2019 and 2018, OREO and other repossessed assets consisted of 12 OREO properties in Washington, with balances ranging from $13,000 to $874,000.   The Company recorded net gains on sales of OREO and other repossessed assets of $89,000, $229,000, and $54,000 for the years ended September 30, 2019, 2018 and 2017, respectively. Gains and losses on sales of OREO and other repossessed assets are recorded in the OREO and other repossessed assets, net category in non-interest expense in the accompanying consolidated statements of income.

At September 30, 2019, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession and the amount of one- to four-family properties in the process of foreclosure totaled $150,000. At September 30, 2018, there were no foreclosed residential real estate properties held in OREO as a result of obtaining physical possession and there were no one- to four-family properties in the process of foreclosure.

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Investment Securities

12 Months Ended

Sep. 30, 2019

Investments [Abstract]

Investment Securities

Investment Securities

Held to maturity and available for sale investment securities were as follows as of September 30, 2019 and 2018 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2019
Held to Maturity
Mortgage-backed securities ("MBS"):
U.S. government agencies	$	27,786	$	999	$	(2	)	$	28,783
Private label residential	317		490		(1		)	806
U.S. Treasury and U.S. government agency securities	2,999		—		(8		)	2,991
Total	$	31,102	$	1,489	$	(11	)	$	32,580
Available for Sale
MBS: U.S. government agencies	$	22,418	$	114	$	—		$	22,532
Total	$	22,418	$	114	$	—		$	22,532
September 30, 2018
Held to Maturity
MBS:
U.S. government agencies	$	1,385	$	8	$	(21	)	$	1,372
Private label residential	460		552		(2		)	1,010
U.S. Treasury and U.S. government agency securities	10,965		—		(83		)	10,882
Total	$	12,810	$	560	$	(106	)	$	13,264
Available for Sale
MBS: U.S. government agencies	$	231	$	7	$	(1	)	$	237
Mutual funds	1,000		—		(83		)	917
Total	$	1,231	$	7	$	(84	)	$	1,154

Held to maturity investment securities with unrealized losses were as follows as of September 30, 2019 (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	$	291	$	(1	)	2	$	76	$	(1	)	6	$	367	$	(2	)
Private label residential	—		—			—	23		(1		)	5	23		(1		)
U.S. Treasury and U.S. government agency securities	—		—			—	2,991		(8		)	1	2,991		(8		)
Total	$	291	$	(1	)	2	$	3,090	$	(10	)	12	$	3,381	$	(11	)

Held to maturity and available for sale investment securities with unrealized losses were as follows as of September 30, 2018 (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	$	954	$	(20	)	2	$	64	$	(1	)	5	$	1,018	$	(21	)
Private label residential	—		—			—	50		(2		)	8	50		(2		)
U.S. Treasury and U.S. government agency securities	7,946		(22		)	2	2,935		(61		)	1	10,881		(83		)
Total	$	8,900	$	(42	)	4	$	3,049	$	(64	)	14	$	11,949	$	(106	)
Available for Sale
MBS: U.S. government agencies	$	34	$	(1	)	1	$	—	$	—		—	$	34	$	(1	)
Mutual Funds	—		—			—	917		(83		)	1	917		(83		)
Total	$	34	$	(1	)	1	$	917	$	(83	)	1	$	951	$	(84	)

The Company has evaluated the investment securities in the above tables and has determined that the decline in their fair value is temporary.  The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities.  The Company has the ability and the intent to hold the investments until the fair value of these securities recovers.  

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

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

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of September 30, 2019, 2018 and 2017:

	Range				Weighted
	Minimum		Maximum		Average
September 30, 2019
Constant prepayment rate	6.00	%	15.00	%	10.67	%
Collateral default rate	3.00	%	19.70	%	10.40	%
Loss severity rate	—	%	10.59	%	4.07	%
September 30, 2018
Constant prepayment rate	6.00	%	15.00	%	12.91	%
Collateral default rate	—	%	10.42	%	5.03	%
Loss severity rate	—	%	75.00	%	37.25	%
September 30, 2017
Constant prepayment rate	6.00	%	15.00	%	10.40	%
Collateral default rate	0.03	%	10.75	%	4.84	%
Loss severity rate	1.00	%	62.00	%	41.75	%

The following table presents the OTTI recoveries for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
	Held To Maturity			Held To Maturity			Held To Maturity
Total recoveries	$	71		$	73		$	38
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)	(12		)	(5		)	(5		)
Net recoveries recognized in earnings (2)	$	59		$	68		$	33

________________________

(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, 2019, 2018 and 2017 (dollars in thousands):

	2019			2018			2017
Balance, beginning of year	$	1,153		$	1,301		$	1,505
Additions:
Additional increases to the amount           related to credit loss for which OTTI           was previously recognized	13			14			18
Subtractions:
Realized losses previously recorded           as credit losses	(23		)	(80		)	(171		)
Recovery of prior credit loss	(72		)	(82		)	(51		)
Balance, end of year	$	1,071		$	1,153		$	1,301

During the year ended September 30, 2019, the Company recorded a $23,000 net realized loss (as a result of investment securities being deemed worthless) on seventeen held to maturity investment securities, all of which had been recognized previously as a credit loss. During the year ended September 30, 2018, the Company recorded an $80,000 net realized loss (as a result of investment securities being deemed worthless) on sixteen held to maturity investment securities, all of which had been recognized previously as a credit loss.  During the year ended September 30, 2017, the Company recorded a $171,000 net realized loss (as a result of investment securities being deemed worthless) on twenty-two held to maturity investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits and FHLB collateral totaled $18,587,000 and $12,100,000 at September 30, 2019 and 2018, respectively.

The contractual maturities of debt securities at September 30, 2019 are as follows (dollars in thousands).  Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.

	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	3,025	$	3,017	$	—	$	—
Due after one year to five years	495		498		145		145
Due after five years to ten years	5,893		6,272		129		130
Due after ten years	21,689		22,793		22,144		22,257
Total	$	31,102	$	32,580	$	22,418	$	22,532

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Net Income Per Common Share

12 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Net Income Per Common Share

Net Income Per Common Share

Information regarding the calculation of basic and diluted net income per common share for the years ended September 30, 2019, 2018 and 2017 is as follows (dollars in thousands, except per share amounts):

	2019		2018		2017
Basic net income per common share computation
Numerator - net income to common shareholders	$	24,020	$	16,721	$	14,167
Denominator - weighted average common shares outstanding	8,318,928		7,334,577		7,136,690
Basic net income per common share	$	2.89	$	2.28	$	1.99
Diluted net income per common share computation
Numerator - net income to common shareholders	$	24,020	$	16,721	$	14,167
Denominator - weighted average common shares outstanding	8,318,928		7,334,577		7,136,690
Effect of dilutive stock options (1)	149,298		191,767		163,773
Effect of dilutive stock warrant (2)	—		—		79,590
Weighted average common shares outstanding-assuming dilution	8,468,226		7,526,344		7,380,053
Diluted net income per common share	$	2.84	$	2.22	$	1.92

___________________

(1) For the years ended September 30, 2019, 2018 and 2017, average options to purchase 102,920, 29,581 and 1,117 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share because their effect would have been anti-dilutive.

(2) Represented a warrant to purchase 370,899 shares of the Company's common stock at an exercise price of $6.73 per share (subject to anti-dilution adjustments) at any time through December 23, 2018 (the "Warrant"). The Warrant was granted on December 23, 2008 to the U.S. Treasury Department ("Treasury") as part of the Company's participation in the Treasury's Troubled Asset Relief Program. On June 12, 2013, the Treasury sold the Warrant to private investors. On January 31, 2017, the Warrant was exercised and 370,899 shares of the Company's common stock were issued in exchange for $2,496,000.

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Stock Compensation Plans

12 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement, Noncash Expense [Abstract]

Stock Compensation Plans

Stock Compensation Plans

Under the Company’s 2003 Stock Option Plan, the Company was able to grant options for up to 300,000 shares of common stock to employees, officers, directors and directors emeriti. Under the Company's 2014 Equity Incentive Plan, the Company is able to grant options and awards of restricted stock (with or without performance measures) for up to 352,366 shares of common stock to employees, officers, directors and directors emeriti.  Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant.  Generally, options and restricted stock vest in 20% annual installments on each of the five anniversaries from the date of the grant, and options generally have a maximum contractual term of ten years from the date of the grant.  At September 30, 2019, there were 30,076 shares of common stock available which may be awarded as options or restricted stock pursuant to future grants under the 2014 Equity Incentive Plan.

At both September 30, 2019 and 2018, there were no unvested restricted stock awards. There were no restricted stock grants awarded during the years ended September 30, 2019, 2018 and 2017.

Stock option activity for the years ended September 30, 2019, 2018 and 2017 is summarized as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding September 30, 2016	373,130		$	9.82
Options granted	58,250		29.69
Options exercised	(46,310	)	7.17
Options forfeited	(4,950	)	6.28
Outstanding September 30, 2017	380,120		13.23
Options granted	45,950		31.80
Options exercised	(40,100	)	7.92
Options forfeited	(5,150	)	13.39
Outstanding September 30, 2018	380,820		16.03
Options granted	46,840		27.14
Options exercised	(43,856	)	9.14
Options forfeited	(5,500	)	19.89
Outstanding September 30, 2019	378,304		$	18.15

The aggregate intrinsic value of options exercised during the years ended September 30, 2019 and 2018 was $864,000 and $894,000, respectively.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the weighted average assumptions noted in the following table.  The risk-free interest rate is based on the rate of a U.S. Treasury security with a similar term as the expected life of the stock option at the particular grant date.  The expected life is based on historical data, vesting terms and estimated exercise dates. The expected dividend yield is based on the most recent quarterly dividend on an annualized basis in effect at the time the options were granted, adjusted, if appropriate, for management's expectations regarding future dividends.  The expected volatility is based on historical volatility of the Company’s stock price.  There were 58,250 options granted during the year ended September 30, 2017 with an aggregate grant date fair value of $224,000. There were 45,950 options granted during the year ended September 30, 2018 with an aggregate grant date fair value of $206,000. There were 46,840 options granted during the year ended September 30, 2019 with an aggregate grant date fair value of $240,000.

The weighted average assumptions for options granted during the years ended September 30, 2019, 2018 and 2017 were as follows:

	2019			2018			2017
Expected volatility	29		%	17		%	16		%
Expected life (in years)	5			5			5
Expected dividend yield	3.28		%	2.61		%	1.85		%
Risk free interest rate	1.53		%	2.97		%	1.89		%
Grant date fair value per share	$	5.12		$	4.48		$	3.84

There were 77,540 options that vested during the year ended September 30, 2019 with a total fair value of $203,000. There were 76,450 options that vested during the year ended September 30, 2018 with a total fair value of $181,000. There were 69,800 options that vested during the year ended September 30, 2017 with a total fair value of $145,000.

At September 30, 2019, there were 160,750 unvested options with an aggregate grant date fair value of $605,000, all of which the Company assumes will vest.  The unvested options had an aggregate intrinsic value of $658,000 at September 30, 2019.  At September 30, 2018, there were 196,750 unvested options with an aggregate grant date fair value of $582,000.

Additional information regarding options outstanding at September 30, 2019 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	2,500	$	4.33	0.9	2,500	$	4.33	0.9
5.86 - 6.00	19,100	5.97		3.1	19,100	5.97		3.1
9.00	49,975	9.00		4.1	49,975	9.00		4.1
10.26 - 10.71	110,839	10.58		5.5	87,589	10.57		5.5
15.67	48,000	15.67		7.0	27,000	15.67		7.0
27.14	46,840	27.14		10.0	—	N/A		N/A
29.69	55,600	29.69		8.0	22,300	29.69		8.0
31.80	45,450	31.80		9.0	9,090	31.80		9.0
	378,304	$	18.15	6.7	217,554	$	13.21	5.5

The aggregate intrinsic value of options outstanding at September 30, 2019, 2018 and 2017 was $3,854,000, $5,813,000, and $6,882,000, respectively.

As of September 30, 2019, unrecognized compensation cost related to non-vested stock options was $604,000, which is expected to be recognized over a weighted average period of 2.45 years.

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FHLB Borrowings and Other Borrowings

12 Months Ended

Sep. 30, 2019

Advances from Federal Home Loan Banks [Abstract]

FHLB Borrowings and Other Borrowings

FHLB Borrowings and Other Borrowings

The Bank has long- and short-term borrowing lines with the FHLB with total credit on the lines equal to 45% of the Bank’s total assets, limited by available collateral.  The Bank had no FHLB borrowings outstanding at both September 30, 2019 and 2018.  Under the Advances, Pledge and Security Agreement entered into with the FHLB ("FHLB Borrowing Agreement"), virtually all of the Bank’s assets, not otherwise encumbered, are pledged as collateral for borrowings.

The Bank also has a letter of credit ("LOC") with the FHLB for the purpose of collateralizing Washington State public deposits. The LOC amount reduces the Bank's available borrowings under the FHLB Borrowing Agreement. The LOC had a limit of $23,000,000 as of September 30, 2019, all of which was available to draw upon.

The Bank also maintains a short-term borrowing line with the FRB with total credit based on eligible collateral.  At September 30, 2019 the Bank had a borrowing capacity on this line of $84,356,000. The Bank had no outstanding borrowings on this line at both September 30, 2019 and 2018.

The Bank has a short-term $10,000,000 overnight borrowing line with Pacific Coast Bankers' Bank. The borrowing line may be reduced or withdrawn at any time. The Bank had no outstanding borrowings on this line at both September 30, 2019 and 2018.

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FHLB Borrowings and Other Borrowings (Details) - USD ($)	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
FHLB borrowings, ratio of maximum borrowing capacity to total assets	45.00%
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	84,356,000
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	0	$ 0
Line of Credit | Letter of Credit
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Short-term overnight borrowings, maximum borrowing capacity	$ 23,000,000

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Investment Securities: Schedule of Other than Temporary Impairments (Details) - USD ($) $ in Thousands		12 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Held to Maturity
Held To Maturity - total (OTTI) recoveries		$ 71	$ 73	$ 38
Net recoveries on investment securities		59	68	33
Held-to-maturity Securities
Held to Maturity
Held To Maturity - total (OTTI) recoveries		71	73	38
Held To Maturity - adjustment for portion of OTTI recorded as (transferred from) other comprehensive income (before income taxes)	[1]	(12)	(5)	(5)
Net recoveries on investment securities	[2]	$ 59	$ 68	$ 33

[1] Represents OTTI related to all other factors.

[2] Represents OTTI related to credit losses.

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Restricted Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Federal Reserve Bank
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted assets	$ 1,898	$ 1,609

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Deposits: Schedule of Deposits (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Sep. 30, 2018
Deposits [Abstract]
Non-interest-bearing demand	$ 296,472	$ 233,258
NOW checking	297,055	225,290
Savings	164,506	151,404
Money market	144,539	137,746
Certificates of deposit	165,655	141,808
Total deposits	$ 1,068,227	$ 889,506

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Deposits (Tables)

12 Months Ended

Sep. 30, 2019

Deposits [Abstract]

Schedule of Deposits

Deposits consisted of the following at September 30, 2019 and 2018 (dollars in thousands):

	2019		2018
Non-interest-bearing demand	$	296,472	$	233,258
NOW checking	297,055		225,290
Savings	164,506		151,404
Money market	144,539		137,746
Certificates of deposit	165,655		141,808
Total	$	1,068,227	$	889,506

Scheduled maturities of certificates of deposit for future years

Scheduled maturities of certificates of deposit for fiscal years ending subsequent to September 30, 2019 are as follows (dollars in thousands):

2020	$	92,266
2021	38,724
2022	17,746
2023	8,113
2024	8,806
Total	$	165,655

Schedule of Interest Expense on Deposits

Interest expense on deposits by account type was as follows for the years ended September 30, 2019, 2018 and 2017 (dollars in thousands):

	2019		2018		2017
NOW checking	$	840	$	451	$	460
Savings	106		85		78
Money market	1,119		722		434
Certificates of deposit	2,500		1,520		1,246
Total	$	4,565	$	2,778	$	2,218

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Accumulated Other Comprehensive Income (Loss) (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance	$ 124,657	$ 111,000	$ 96,834
Ending Balance	171,067	124,657	111,000
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance	(129)	(124)	(175)
Other comprehensive income	116	(5)	51
Ending Balance	50	(129)	(124)
ASU 2016-01 | Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income	63
Available-for-sale Securities [Member] | Changes in fair value of available for sale securities
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance	(58)	(19)	4
Other comprehensive income	85	(39)	(23)
Ending Balance	90	(58)	(19)
Available-for-sale Securities [Member] | ASU 2016-01 | Changes in fair value of available for sale securities
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income	63
Held-to-maturity Securities | Changes in fair value of available for sale securities
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance	(71)	(105)	(179)
Other comprehensive income	31	34	74
Ending Balance	(40)	$ (71)	$ (105)
Held-to-maturity Securities | ASU 2016-01 | Changes in fair value of available for sale securities
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income	$ 0

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Condensed Financial Information - Parent Company Only: Condensed Statements of Operations, Parent Company (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2017
Operating income
Interest on deposits in banks									$ 5,172	$ 3,198	$ 1,586
Operating expenses									1,358	1,192	1,074
Income before income taxes and equity in undistributed income of Bank									29,921	22,422	21,243
Benefit for income taxes	$ 1,639	$ 1,552	$ 1,277	$ 1,433	$ 1,370	$ 1,334	$ 1,216	$ 1,781	5,901	5,701	7,076
Net income	$ 6,335	$ 5,956	$ 6,114	$ 5,615	$ 4,422	$ 4,416	$ 4,269	$ 3,614	24,020	16,721	14,167
Parent Company
Operating income
Interest on deposits in banks									67	37	27
Interest on loan receivable from ESOP									9	53	96
Dividends from Bank									6,607	4,429	1,390
Total operating income									6,683	4,519	1,513
Operating expenses									525	591	467
Income before income taxes and equity in undistributed income of Bank									6,158	3,928	1,046
Benefit for income taxes									(169)	(198)	(385)
Income before undistributed income of Bank									6,327	4,126	1,431
Equity in undistributed income of Bank									17,693	12,595	12,736
Net income									$ 24,020	$ 16,721	$ 14,167

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Stock Compensation Plans (Tables)

12 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement, Noncash Expense [Abstract]

Schedule of Stock Option Activity

Stock option activity for the years ended September 30, 2019, 2018 and 2017 is summarized as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding September 30, 2016	373,130		$	9.82
Options granted	58,250		29.69
Options exercised	(46,310	)	7.17
Options forfeited	(4,950	)	6.28
Outstanding September 30, 2017	380,120		13.23
Options granted	45,950		31.80
Options exercised	(40,100	)	7.92
Options forfeited	(5,150	)	13.39
Outstanding September 30, 2018	380,820		16.03
Options granted	46,840		27.14
Options exercised	(43,856	)	9.14
Options forfeited	(5,500	)	19.89
Outstanding September 30, 2019	378,304		$	18.15

Schedule of Fair Value Assumptions

The weighted average assumptions for options granted during the years ended September 30, 2019, 2018 and 2017 were as follows:

	2019			2018			2017
Expected volatility	29		%	17		%	16		%
Expected life (in years)	5			5			5
Expected dividend yield	3.28		%	2.61		%	1.85		%
Risk free interest rate	1.53		%	2.97		%	1.89		%
Grant date fair value per share	$	5.12		$	4.48		$	3.84

Schedule of Stock Option Plans, by Exercise Price Range

Additional information regarding options outstanding at September 30, 2019 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	2,500	$	4.33	0.9	2,500	$	4.33	0.9
5.86 - 6.00	19,100	5.97		3.1	19,100	5.97		3.1
9.00	49,975	9.00		4.1	49,975	9.00		4.1
10.26 - 10.71	110,839	10.58		5.5	87,589	10.57		5.5
15.67	48,000	15.67		7.0	27,000	15.67		7.0
27.14	46,840	27.14		10.0	—	N/A		N/A
29.69	55,600	29.69		8.0	22,300	29.69		8.0
31.80	45,450	31.80		9.0	9,090	31.80		9.0
	378,304	$	18.15	6.7	217,554	$	13.21	5.5

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Net Income Per Common Share (Tables)

12 Months Ended

Sep. 30, 2019

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, 2019, 2018 and 2017 is as follows (dollars in thousands, except per share amounts):

	2019		2018		2017
Basic net income per common share computation
Numerator - net income to common shareholders	$	24,020	$	16,721	$	14,167
Denominator - weighted average common shares outstanding	8,318,928		7,334,577		7,136,690
Basic net income per common share	$	2.89	$	2.28	$	1.99
Diluted net income per common share computation
Numerator - net income to common shareholders	$	24,020	$	16,721	$	14,167
Denominator - weighted average common shares outstanding	8,318,928		7,334,577		7,136,690
Effect of dilutive stock options (1)	149,298		191,767		163,773
Effect of dilutive stock warrant (2)	—		—		79,590
Weighted average common shares outstanding-assuming dilution	8,468,226		7,526,344		7,380,053
Diluted net income per common share	$	2.84	$	2.22	$	1.92

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(1) For the years ended September 30, 2019, 2018 and 2017, average options to purchase 102,920, 29,581 and 1,117 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share because their effect would have been anti-dilutive.

(2) Represented a warrant to purchase 370,899 shares of the Company's common stock at an exercise price of $6.73 per share (subject to anti-dilution adjustments) at any time through December 23, 2018 (the "Warrant"). The Warrant was granted on December 23, 2008 to the U.S. Treasury Department ("Treasury") as part of the Company's participation in the Treasury's Troubled Asset Relief Program. On June 12, 2013, the Treasury sold the Warrant to private investors. On January 31, 2017, the Warrant was exercised and 370,899 shares of the Company's common stock were issued in exchange for $2,496,000.