Employee Stock Ownership and 401(k) Plan

12 Months Ended

Sep. 30, 2018

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 21 years of age or older. The Bank may fund the ESOP with contributions of cash or stock, and may fund the 401(k) Plan with contributions of cash. Employee vesting occurs over six years.

ESOP

In January 1998, the ESOP borrowed $7,930,000 from the Company to purchase 1,058,000 shares of common stock of the Company. The loan is being repaid primarily from the Bank’s contributions to the ESOP and is scheduled to be fully repaid by March 31, 2019. The interest rate on the loan is 8.5%. Interest expense on the ESOP debt was $53,000, $96,000 and

$136,000 for the years ended September 30, 2018, 2017 and 2016, respectively. The balance of the loan at September 30, 2018 was $285,000.

The amount of the Bank's annual contribution is discretionary, except that it must be sufficient to enable the ESOP to service its debt. All dividends received by the ESOP are used to pay debt service. Dividends of $291,000, $293,000 and $243,000 were used to service the debt during the years ended September 30, 2018, 2017 and 2016, respectively. As the Plan makes each payment of principal and interest, an appropriate percentage of stock is released and allocated annually to eligible employee accounts, in accordance with applicable regulations. As of September 30, 2018, an aggregate of 588,717 ESOP shares, which were previously released for allocation to participants, had been distributed to participants.

Shares held by the ESOP as of September 30, 2018, 2017 and 2016 were classified as follows:



	2018	2017	2016
Unallocated shares	17,639	52,905	88,171
Shares released for allocation	451,644	489,665	535,927
Total ESOP shares	469,283	542,570	624,098

The approximate fair market value of the ESOP’s unallocated shares at September 30, 2018, 2017 and 2016 was $551,000, $1,658,000 and $1,389,000, respectively. Compensation expense recognized under the ESOP for the years ended September 30, 2018, 2017 and 2016 was $823,000, $495,000, and $233,000, respectively.

401(k) Plan

Eligible employees may contribute a portion of their wages to the 401(k) Plan up to the maximum established 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 $379,000, $358,000 and $333,000 for the years ended September 30, 2018, 2017 and 2016, respectively.