The following analysis discusses the material changes in the financial condition and results of operations of the Company at and for the three and nine months ended June 30, 2009. This analysis as well as other sections of this report contains certain "forward-looking statements."

Certain matters discussed in this Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and nonperforming assets 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 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 and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Federal Reserve and 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, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; 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 risk associated with the loans on our balance sheet; staffing fluctuations in response to

product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or 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 manage loan delinquency rates; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business including changes in regulatory polices and principles, including the interpretation of regulatory capital or other rules; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; 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 detailed in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended September 30, 2008. Any of the forward-looking statements that we make in this Form 10-Q and in the other public statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements.

Overview

Timberland Bancorp, Inc., a Washington corporation, was organized on September 8, 1997 for the purpose of becoming the holding company for Timberland Savings Bank, SSB upon the Bank's conversion from a Washington-chartered mutual savings bank to a Washington-chartered stock savings bank ("Conversion"). The Conversion was completed on January 12, 1998 through the sale and issuance of 13,225,000 shares of common stock by the Company. At June 30, 2009, the Company had total assets of $675.49 million and total shareholders' equity of $88.76 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.

The Bank was established in 1915 as "Southwest Washington Savings and Loan Association." In 1935, the Bank converted from a state-chartered mutual savings and loan association to a federally-chartered mutual savings and loan association, and in 1972 changed its name to "Timberland Federal Savings and Loan Association." In 1990, the Bank converted to a federally chartered mutual savings bank under the name "Timberland Savings Bank, FSB." In 1991, the Bank converted to a Washington-chartered mutual savings bank and changed its name to "Timberland Savings Bank, SSB." In 2000, the Bank changed its name to "Timberland Bank." The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable legal limits. The Bank has been a member of the Federal Home Loan Bank System since 1937. The Bank is regulated by the Washington State Department of Financial Institutions, Division of Banks and the FDIC.

The Bank is a community-oriented bank which offers a variety of deposit and loan products to its customers. The Bank operates 22 branches (including its main office in Hoquiam) in the following market areas in the state of Washington:

* Grays Harbor County
* Thurston County
* Pierce County
* King County
* Kitsap County
* Lewis County

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 and loans for the construction of one- to four-family residences. Since 2001, the Bank has expanded its business banking capabilities and has emphasized the origination of commercial real estate and commercial business loans.

Critical Accounting Policies and Estimates

The Company has identified several accounting 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.

Allowance for Loan Losses. The allowance for loan losses is maintained at a level sufficient to provide for probable loan losses based on evaluating known and inherent risks in the portfolio. The allowance is based upon management's comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability may not be assured. The appropriate allowance for loan loss level is estimated based upon factors and trends identified by management at the time consolidated financial statements are prepared.

While the Company believes it has established its existing allowance for loan losses in accordance with accounting principles generally accepted in the United States, there can be no assurance that regulators, in reviewing the Company's loan portfolio, will not request the Company to significantly increase or decrease its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed elsewhere in this document. Although management believes the levels of the allowance as of both June 30, 2009 and September 30, 2008 were adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions, results of examinations by the Company's or the Bank's regulators or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations.

Mortgage Servicing Rights. Mortgage servicing rights ("MSRs") are capitalized when acquired through the origination of loans that are subsequently sold with servicing rights retained and are amortized to servicing income on loans sold in proportion to and over the period of estimated net servicing income. The value of MSRs at the date of the sale of loans is determined based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and prepayment rates on the underlying loans. The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated cash flows from the servicing assets to those estimated at the time servicing assets were originated. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the MSRs portfolio. The Company's methodology for estimating the fair value of

MSRs is highly sensitive to changes in assumptions. For example, the determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on the fair value. Thus, any measurement of MSRs' fair value is limited by the conditions existing and assumptions as of the date made. Those assumptions may not be appropriate if they are applied at different times.

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

Comparison of Financial Condition at June 30, 2009 and September 30, 2008

The Company's total assets decreased by $6.39 million, or 0.9%, to $675.49 million at June 30, 2009 from $681.88 million at September 30, 2008. The decrease was primarily attributable to a decrease in net loans receivable and investment securities, which were partially offset by increases in OREO, premises and equipment, cash equivalents and MSRs.

Net loans receivable decreased by $11.92 million, or 2.1%, to $545.77 million at June 30, 2009 from $557.69 million at September 30, 2008 primarily as a result of a decrease in construction and land development loan balances, home equity loan balances, commercial business loan balances and an increase in the allowance for loan losses.

Total deposits decreased by $11.15 million, or 2.2%, to $487.42 million at June 30, 2009 from $498.57 million at September 30, 2008, primarily as a result of a decrease in brokered certificate of deposit account balances and money market account balances. These decreases were partially offset by increases in N.O.W. checking account balances and non-brokered certificate of deposit account balances.

Shareholders' equity increased by $13.91 million, or 18.6%, to $88.76 million at June 30, 2009 from $74.84 million at September 30, 2008. The increase in shareholders' equity was primarily a result of the sale of $16.64 million in senior preferred stock to the U.S. Treasury Department as part of the Treasury's Capital Purchase Program.

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

 Cash Equivalents: Cash equivalents increased by $1.10 million, or 2.6%, to $43.97 million at June 30, 2009 from $42.87 million at September 30, 2008, primarily as a result of an increase in interest bearing deposits in banks. The increase in interest bearing deposits in banks was partially offset by a decrease in federal funds sold.

Investment Securities and Mortgage-backed Securities: Investment and mortgage-backed securities decreased by $7.24 million, or 23.1%, to $24.09 million at June 30, 2009 from $31.33 million at September 30, 2008. The decrease was primarily as a result of regular amortization and prepayments on mortgage-backed securities, a $3.04 million OTTI charge recorded on private label mortgage-backed securities and a $372,000 decrease in market value on available for sale securities adjusted through the other comprehensive loss equity account. The securities on which the OTTI charges were recognized were acquired from the in-kind redemption of the Bank's investment in the AMF family of mutual funds in June 2008.

At June 30, 2009, the Company's securities' portfolio was comprised of mortgage-backed securities of $23.11 million (of which $10.20 million were classified as held to maturity), mutual funds of $954,000 and U.S. agency securities of $27,000. For additional information, see Note 3 of the Notes to Condensed Consolidated Financial Statements contained in "Item 1, Financial Statements."

Loans: Net loans receivable decreased by $11.92 million, or 2.1% to $545.77 million at June 30, 2009 from $557.69 million at September 30, 2008. The decrease in the portfolio was primarily a result of a $30.42 million decrease in construction loans (net of undisbursed portion of construction loans in process), a $7.27 million decrease in consumer loans, a $5.82 million decrease in commercial business loans, a $1.96 million decrease in one- to four-family loans (including loans held for sale) and a $4.39 million increase in the allowance for loan losses. These decreases to net loans receivable were partially offset by a $32.72 million increase in commercial real estate loans and a $5.04 million increase in land loans. The decrease in construction loans was primarily the result of a $14.88 million decrease in multi-family and condominium construction loans, a $12.80 million decrease in custom and owner / builder construction loans, an $11.56 million decrease in one- to four-family speculative construction loans, and a $7.54 million decrease in land development loans; which were partially offset by a $2.44 million increase in commercial real estate construction loans.

Loan originations increased to $236.99 million for the nine months ended June 30, 2009 from $204.60 million for the nine months ended June 30, 2008. The increase in loan volume was primarily a result of increased demand to refinance one- to four-family mortgage loans at historically low interest rates. The Bank continued to sell longer-term fixed rate loans for asset liability management purposes and to generate non-interest income. The Bank sold fixed rate one- to four-family mortgage loans totaling $140.88 million for the nine months ended June 30, 2009 compared to $35.31 million for the nine months ended June 30, 2008.

For additional information, see Note 5 of the Notes to Condensed Consolidated Financial Statements contained in "Item 1, Financial Statements."

Premises and Equipment: Premises and equipment increased by $1.29 million, or 7.6%, to $18.17 million at June 30, 2009 from $16.88 million at September 30, 2008. The increase was primarily a result of capitalized construction costs on the Bank's new branch facility in Lewis County, which opened in May 2009.

Goodwill and Core Deposit Intangible: The value of goodwill at $5.65 million at June 30, 2009 remained unchanged from September 30, 2008. The amortized value of the core deposit intangible decreased to $809,000 at June 30, 2009 from $972,000 at September 30, 2008. The $163,000 decrease is attributable to scheduled amortization of the CDI.

Deposits: Deposits decreased by $11.15 million, or 2.2%, to $487.42 million at June 30, 2009 from $498.57 million at September 30, 2008. The decrease was primarily a result of a $25.96 million decrease in brokered certificate of deposit account balances, an $8.39 million decrease in money market account balances and a $1.80

million decrease in non-interest bearing account balances. These decreases were partially offset by an $11.72 million increase in N.O.W. checking account balances and a $13.37 million increase in non-brokered certificate of deposit account balances. For additional information, see the section entitled "Deposit Breakdown" included herein.

FHLB Advances and Other Borrowings: FHLB advances and other borrowings decreased by $9.72 million, or 9.2%, to $95.66 million at June 30, 2009 from $105.39 million at September 30, 2008 as the Bank used a portion of its liquid assets to repay maturing FHLB advances. For additional information, see "FHLB Advance Maturity Schedule" included herein.

Shareholders' Equity: Total shareholders' equity increased by $13.91 million, or 18.6%, to $88.76 million at June 30, 2009 from $74.84 million at September 30, 2008. The increase was primarily a result of the sale of $16.64 million in senior preferred stock to the U.S. Treasury Department as part of the Treasury's Capital Purchase Program. As part of the transaction, the Company also issued warrants to the Treasury to purchase up to $2.5 million in common stock. The transaction is part of the Treasury's program to encourage qualified financial institutions to build capital to increase the flow of financing to businesses and consumers and to support the U.S. economy.

Also impacting shareholders' equity during the nine months ended June 30, 2009 was the payment of $2.64 million in cash dividends on common and preferred stock and an $823,000 increase in the accumulated other comprehensive loss equity category.

The Company did not repurchase any shares of its common stock during the nine months ended June 30, 2009. As part of the Company's participation in the Treasury's Capital Purchase Program, the existing share repurchase plan announced on February 25, 2008 was suspended indefinitely. For additional information, see Item 2 of Part II of this Form 10-Q.

Non-performing Assets: Non-performing assets consist of non-accrual loans, non-accrual investment securities, and OREO and other repossessed assets. At June 30, 2009, three loans totaling $830,000 were 90 days or more past due and still accruing interest. At September 30, 2008, no loans were 90 days or more past due and still accruing interest. Non-performing assets to total assets increased to 4.88% at June 30, 2009 from 1.83% at September 30, 2008, as non-accrual loans increased by $13.12 million to $25.11 million at June 30, 2009 from $11.99 million at September 30, 2008, OREO and other repossessed assets increased by $7.19 million to $7.70 million at June 30, 2009 from $511,000 at September 30, 2008 and non-accrual investment securities increased by $175,000.

Total non-accrual loans of $25.11 million at June 30, 2009 were comprised of 46 loans and 38 credit relationships. Included in these non-accrual loans were:

* Five land development loans totaling $5.88 million (of which the largest had a balance of $2.12 million)
* Two condominium construction loans totaling $5.68 million (of which the largest had a balance of $4.29 million)
* Eight commercial real estate loans totaling $5.50 million (of which the largest had a balance $1.65 million)
* 13 land loans totaling $3.38 million (of which the largest had a balance of $986,000)
* Seven single family home loans totaling $2.32 million (of which the largest had a balance of $995,000)
* Seven single family speculative loans totaling $2.17 million (of which the largest had a balance of $546,000)
* Two commercial business loans totaling $93,000
* Two home equity loans totaling $92,000.

The Company had net charge-offs totaling $2.98 million for the nine months ended June 30, 2009. The charge-offs were primarily associated with construction and land development loans. In recognition of a real estate market that reflected lower valuations during the period, net charge-offs consisted of the following:
* $1.38 million on land development loans
* $1.02 million on single family speculative construction loans
* $250,000 on one commercial business loan
* $174,000 on loans secured by land
* $100,000 on home equity loans
* $41,000 on a single family home loan
* $13,000 on other consumer loans.

OREO and other repossessed assets totaled $7.70 million at June 30, 2009 and consisted of 27 individual properties representing 11 relationships. The properties consisted of 17 single family homes totaling $4.77 million, one land development project with a balance of $2.26 million and nine land loans totaling $665,000.

For additional information, see Note 5 of the Notes to Condensed Consolidated Financial Statements contained in "Item 1, Financial Statements."

Deposit Breakdown
-----------------
The following table sets forth the composition of the Bank's deposit balances.

                                             At                  At
                                        June 30, 2009     September 30, 2008
                                        -------------     ------------------
                                                   (In thousands)

Non-interest bearing                      $ 50,153           $ 51,955
N.O.W. checking                            102,186             90,468
Savings                                     56,303             56,391
Money market accounts                       61,992             70,379
Certificates of deposit under $100         140,924            130,313
Certificates of deposit $100 and over       75,861             73,107
Certificates of deposit - brokered             - -             25,959
                                          --------           --------
Total deposits                            $487,419           $498,572

FHLB Advance Maturity Schedule
------------------------------
The Bank has short- and long-term borrowing lines with the FHLB of Seattle
with total credit on the lines equal to 30% of the Bank's total assets,
limited by available collateral.  Borrowings are considered short-term when
the original maturity is less than one year.  FHLB advances consisted of the
following:

                                          At June 30,        At September 30,
                                             2009                  2008
                                       Amount    Percent    Amount     Percent
                                       -----------------    ------------------
                                               (Dollars in thousands)

Short-term                            $   - -        --%    $    - -       --%
Long-term                              95,000     100.0      104,628    100.0
                                      -------     -----     --------    -----

Total FHLB advances                   $95,000     100.0%    $104,628    100.0%
                                      =======     =====     ========    =====

The Bank's FHLB borrowings mature at various dates through September 2017 and bear interest at rates ranging from 3.49% to 4.66%. The weighted average interest rate on FHLB borrowings at June 30, 2009 was 4.11%. Principal reduction amounts due for future years ending September 30 are as follows (in thousands):

Remainder of 2009       $   - -
2010                     20,000
2011                     20,000
2012                     10,000
2013                        - -
Thereafter               45,000
                        -------
Total                   $95,000
                        =======

A portion of these advances have a putable feature and may be called by the FHLB earlier than the above schedule indicates.

Comparison of Operating Results for the Three and Nine Months Ended June 30, 2009 and 2008

The Company reported net income of $1.06 million for the quarter ended June 30, 2009 compared to a net loss of $(546,000) for the quarter ended June 30, 2008. Diluted earnings per common share increased to $0.12 for the quarter ended June 30, 2009 from a loss of $(0.08) for the quarter ended June 30, 2008. The increase in net income and earnings per diluted common share was primarily attributable to a $3.57 million increase in non-interest income for the quarter ended June 30, 2009 as non-interest income for the quarter ended June 30, 2008 was reduced by a $2.82 million loss on the redemption of mutual funds. Partially offsetting the increased non-interest income for the current quarter was a $1.45 million increase in non-interest expense, a $500,000 increase in provision for loan losses and a $308,000 decrease in net interest income.

The Company reported net income of $27,000 for the nine months ended June 30, 2009 compared to net income of $2.66 million for the nine months ended June 30, 2008. However, income available to common shareholders after adjusting for the preferred stock dividend and the preferred stock discount accretion was a loss of $(489,000) for the nine months ended June 30, 2009. Diluted . . .