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

Effective October 3, 2007, the Bank established the Timberland Bank Employee Stock Ownership and 401(k) Plan (“KSOP”) by combining the existing Timberland Bank Employee Stock Ownership Plan (established in 1997) and the Timberland Bank 401(k) Profit Sharing Plan (established in 1970). The KSOP is comprised of two components, the ESOP and the 401(k) Plan. The KSOP benefits employees with at least one year of service who are 21 years of age or older. It may be funded by Bank contributions in cash or stock for the ESOP and in cash only for the 401(k) profit sharing. Employee vesting occurs over six years.

ESOP

The amount of the annual contribution is discretionary, except that it must be sufficient to enable the ESOP to service its debt. All dividends received by the ESOP are used to pay debt service. Dividends of $120,000 and $72,000 were used to service the debt during the years ended September 30, 2014 and 2013, respectively. There were no dividends used to service debt for the year ended September 30, 2012. As the Plan makes each payment of principal and interest, an appropriate percentage of stock is released and allocated annually to eligible employee accounts, in accordance with applicable regulations. As of September 30, 2014, 335,187 ESOP shares had been distributed to participants.

In January 1998, the ESOP borrowed $7,930,000 from the Company to purchase 1,058,000 shares of common stock of the Company. The loan is being repaid primarily from the Bank’s contributions to the ESOP and is scheduled to be fully repaid by March 31, 2019. The interest rate on the loan is 8.5%. Interest expense on the ESOP debt was $206,000, $237,000 and

$266,000 for the years ended September 30, 2014, 2013 and 2012, respectively. The balance of the loan at September 30, 2014 was $2,183,000.

Shares held by the ESOP as of September 30, 2014, 2013 and 2012 were classified as follows:



	2014	2013	2012
Unallocated shares	158,702	193,968	229,234
Shares released for allocation	564,111	592,468	597,641
Total ESOP shares	722,813	786,436	826,875

The approximate fair market value of the ESOP’s unallocated shares at September 30, 2014, 2013 and 2012, was $1,673,000, $1,746,000 and $1,375,000, respectively. Compensation expense recognized under the ESOP for the years ended September 30, 2014, 2013 and 2012 was $242,000, $202,000, and $165,000, respectively.

401(k)

Eligible employees may contribute a portion of their wages to the 401(k) part of the plan up to the maximum established by the Internal Revenue Service. Contributions by the Bank are at the discretion of the Board except for a 3% safe harbor contribution which is mandatory according to the plan document. Bank contributions totaled $302,000, $289,000 and $283,000 for the years ended September 30, 2014, 2013 and 2012, respectively.