Timberland Bancorp - 10-Q quarterly report FY2013 Q2

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____ to _____.

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)	(IRS Employer Identification No.)



624 Simpson Avenue, Hoquiam, Washington	98550
(Address of principal executive offices)	(Zip Code)

(360) 533-4747

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _X_ No __

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

Large accelerated filer ___ Accelerated Filer Non-accelerated filer __ Smaller reporting company _X_

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ___ No _X_

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

CLASS SHARES OUTSTANDING AT APRIL 30, 2013

Common stock, $.01 par value 7,045,036

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INDEX



PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income	5

	Condensed Consolidated Statements of Comprehensive Income	7

	Condensed Consolidated Statements of Shareholders’ Equity	8

	Condensed Consolidated Statements of Cash Flows	9

	Notes to Unaudited Condensed Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	49

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3.	Defaults Upon Senior Securities	50

Item 4.	Mine Safety Disclosures	50

Item 5.	Other Information	50

Item 6.	Exhibits	51

SIGNATURES
Certifications
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2013 and September 30, 2012

(Dollars in thousands, except per share amounts)

(Unaudited)



	March 31, 2013			September 30, 2012
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$	11,250		$	11,008
Interest-bearing deposits in banks	74,550			85,660
Total cash and cash equivalents	85,800			96,668

Certificates of deposit (“CDs”) held for investment (at cost which approximates fair value)	26,057			23,490
Mortgage-backed securities (“MBS”) and other investments - held to maturity, at amortized cost (estimated fair value $3,440 and $3,632)	3,060			3,339
MBS and other investments - available for sale	4,463			4,945
Federal Home Loan Bank of Seattle (“FHLB”) stock	5,553			5,655

Loans receivable	554,313			548,878
Loans held for sale	3,787			1,427
Less: Allowance for loan losses	(11,313		)	(11,825		)
Net loans receivable	546,787			538,480

Premises and equipment, net	18,126			17,886
Other real estate owned (“OREO”) and other repossessed assets, net	15,031			13,302
Accrued interest receivable	2,081			2,183
Bank owned life insurance (“BOLI”)	16,812			16,524
Goodwill	5,650			5,650
Core deposit intangible (“CDI”)	184			249
Mortgage servicing rights (“MSRs”), net	2,412			2,011
Prepaid Federal Deposit Insurance Corporation (“FDIC”) insurance assessment	758			1,186
Other assets	5,347			5,386
Total assets	$	738,121		$	736,954

Liabilities and shareholders’ equity
Liabilities:
Deposits:
Non-interest-bearing demand	$	80,938		$	75,296
Interest-bearing	520,647			522,630
Total deposits	601,585			597,926

FHLB advances	45,000			45,000
Repurchase agreements	549			855
Other liabilities and accrued expenses	2,456			2,854
Total liabilities	649,590			646,635

See notes to unaudited condensed consolidated financial statements

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TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

March 31, 2013 and September 30, 2012

(Dollars in thousands, except per share amounts)

(Unaudited)



Shareholders’ equity
Preferred stock, $.01 par value; 1,000,000 shares authorized; 12,065 shares, Series A, issued and outstanding - March 31, 2013 16,641 shares, Series A, issued and outstanding; - September 30, 2012 redeemable at $1,000 per share	$	11,842		$	16,229
Common stock, $.01 par value; 50,000,000 shares authorized; 7,045,036 shares issued and outstanding	10,524			10,484
Unearned shares issued to Employee Stock Ownership Plan (“ESOP”)	(1,587		)	(1,719		)
Retained earnings	68,198			65,788
Accumulated other comprehensive loss	(446		)	(463		)
Total shareholders’ equity	88,531			90,319
Total liabilities and shareholders’ equity	$	738,121		$	736,954

See notes to unaudited condensed consolidated financial statements

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TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the three and six months ended March 31, 2013 and 2012

(Dollars in thousands, except per share amounts)

(Unaudited)



	Three Months Ended March 31,						Six Months Ended March 31,
	2013			2012			2013			2012
Interest and dividend income

Loans receivable	$	7,395		$	7,607		$	14,809		$	15,412
MBS and other investments	70			109			147			234
Dividends from mutual funds	5			7			17			20
Interest-bearing deposits in banks	82			81			168			170
Total interest and dividend income	7,552			7,804			15,141			15,836

Interest expense

Deposits	650			1,035			1,378			2,204
FHLB advances	461			496			933			1,058
Total interest expense	1,111			1,531			2,311			3,262

Net interest income	6,441			6,273			12,830			12,574

Provision for loan losses	1,175			1,050			1,375			1,700

Net interest income after provision for loan losses	5,266			5,223			11,455			10,874

Non-interest income

Other than temporary impairment (“OTTI”) on MBS and other investments	4			(94		)	(3		)	(183		)
Adjustment for portion recorded as (transferred from) other comprehensive income (loss) before taxes	(29		)	—			(32		)	30
Net OTTI on MBS and other investments	(25		)	(94		)	(35		)	(153		)

Gain on sales of MBS and other investments	—			20			—			20
Service charges on deposits	827			890			1,774			1,860
ATM and debit card interchange transaction fees	521			540			1,036			1,057
BOLI net earnings	144			154			287			311
Gain on sales of loans, net	833			596			1,475			1,155
Escrow fees	44			22			79			49
Valuation recovery on MSRs	221			142			475			226
Fee income from non-deposit investment sales	31			26			56			38
Other	182			197			346			374
Total non-interest income, net	2,778			2,493			5,493			4,937

See notes to unaudited condensed consolidated financial statements

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TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)

For the three and six months ended March 31, 2013 and 2012

(Dollars in thousands, except per share amounts)

(Unaudited)



	Three Months Ended March 31,						Six Months Ended March 31,
	2013			2012			2013			2012
Non-interest expense
Salaries and employee benefits	$	3,086		$	3,055		$	6,200		$	5,983
Premises and equipment	725			682			1,415			1,332
Advertising	172			172			349			380
OREO and other repossessed assets, net	506			434			794			936
ATM	196			197			417			392
Postage and courier	122			139			235			257
Amortization of CDI	32			37			65			74
State and local taxes	157			152			296			301
Professional fees	192			232			434			411
FDIC insurance	128			241			369			466
Other insurance	43			53			95			109
Loan administration and foreclosure	49			372			187			533
Data processing and telecommunications	305			315			592			615
Deposit operations	129			193			293			416
Other	342			298			820			589
Total non-interest expense	6,184			6,572			12,561			12,794

Income before federal and state income taxes	1,860			1,144			4,387			3,017

Provision for federal and state income taxes	582			336			1,401			927
Net income	1,278			808			2,986			2,090

Preferred stock dividends	(207		)	(208		)	(408		)	(416		)
Preferred stock discount accretion	(126		)	(59		)	(189		)	(118		)
Repurchase of preferred stock at a discount	255			—			255			—

Net income to common shareholders	$	1,200		$	541		$	2,644		$	1,556

Net income per common share
Basic	$	0.18		$	0.08		$	0.39		$	0.23
Diluted	$	0.17		$	0.08		$	0.39		$	0.23

Weighted average common shares outstanding
Basic	6,815,782			6,780,516			6,815,782			6,780,516
Diluted	6,889,504			6,780,516			6,854,879			6,780,516

Dividends paid per common share	$	0.03		$	—		$	0.03		$	—

See notes to unaudited condensed consolidated financial statements

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TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three and six months ended March 31, 2013 and 2012

(In thousands)

(Unaudited)



	Three Months Ended March 31,						Six Months Ended March 31,
	2013			2012			2013			2012
Comprehensive income:
Net income	$	1,278		$	808		$	2,986		$	2,090
Unrealized holding loss on securities available for sale, net of tax	(8		)	(42		)	(27		)	(56		)
Change in OTTI on securities held to maturity, net of tax:
Additions to OTTI	—			(13		)	—			(27		)
Additional amount recognized (recovered) related to credit loss for which OTTI was previously recognized	18			8			18			(4		)
Amount reclassified to credit loss for previously recorded market loss	1			5			3			11
Accretion of OTTI securities held to maturity, net of tax	11			15			23			26

Total comprehensive income	$	1,300		$	781		$	3,003		$	2,040

See notes to unaudited condensed consolidated financial statements

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TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the six months ended March 31, 2013 and the year ended September 30, 2012

(Dollars in thousands, except per share amounts)

(Unaudited)



	Number of Shares			Amount						Unearned Shares Issued to ESOP						Accumulated Other Compre- hensive Loss
	Preferred Stock		Common Stock	Preferred Stock			Common Stock			Unearned Shares Issued to ESOP			Retained Earnings			Accumulated Other Compre- hensive Loss			Total
Balance, September 30, 2011	16,641		7,045,036	$	15,989		$	10,457		$	(1,983	)	$	62,270		$	(528	)	$	86,205

Net income	—		—	—			—			—			4,590			—			4,590
Accretion of preferred stock discount	—		—	240			—			—			(240		)	—			—
5% preferred stock dividend	—		—	—			—			—			(832		)	—			(832		)
Earned ESOP shares	—		—	—			(65		)	264			—			—			199
MRDP (1) compensation expense	—		—	—			77			—			—			—			77
Stock option compensation expense	—		—	—			15			—			—			—			15
Unrealized holding gain on securities available for sale, net of tax	—		—	—			—			—			—			14			14
Change in OTTI on securities held to maturity, net of tax	—		—	—			—			—			—			5			5
Accretion of OTTI on securities held to maturity, net of tax	—		—	—			—			—			—			46			46

Balance, September 30, 2012	16,641		7,045,036	16,229			10,484			(1,719		)	65,788			(463		)	90,319

Net income	—		—	—			—			—			2,986			—			2,986
Accretion of preferred stock discount	—		—	189			—			—			(189		)	—			—
Redemption of preferred stock	(4,576	)	—	(4,576		)	—			—			255			—			(4,321		)
5% preferred stock dividend	—		—	—			—			—			(431		)	—			(431		)
Common stock dividend ($0.03 per common share)	—		—	—			—			—			(211		)	—			(211		)
Earned ESOP shares	—		—	—			(6		)	132			—			—			126
MRDP compensation expense	—		—	—			22			—			—			—			22
Stock option compensation expense	—		—	—			24			—			—			—			24
Unrealized holding loss on securities available for sale, net of tax	—		—	—			—			—			—			(27		)	(27		)
Change in OTTI on securities held to maturity, net of tax	—		—	—			—			—			—			21			21
Accretion of OTTI on securities held to maturity, net of tax	—		—	—			—			—			—			23			23

Balance, March 31, 2013	12,065		7,045,036	$	11,842		$	10,524		$	(1,587	)	$	68,198		$	(446	)	$	88,531

__________________________

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

See notes to unaudited condensed consolidated financial statements

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TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended March 31, 2013 and 2012

(Dollars in thousands)

(Unaudited)



	Six Months Ended March 31,
	2013			2012
Cash flows from operating activities
Net income	$	2,986		$	2,090
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,375			1,700
Depreciation	528			460
Deferred federal income taxes	55			353
Amortization of CDI	65			74
Earned ESOP shares	132			132
MRDP compensation expense	22			55
Stock option compensation expense	24			7
(Gain) loss on sales of OREO and other repossessed assets, net	(219		)	294
Provision for OREO losses	619			372
Gain on sale of premises and equipment	(8		)	—
BOLI net earnings	(287		)	(311		)
Gain on sales of loans, net	(1,475		)	(1,155		)
Decrease in deferred loan origination fees	(243		)	(86		)
Net OTTI on MBS and other investments	35			153
Gain on sale of MBS and other investments	—			(20		)
Valuation recovery on MSRs	(475		)	(226		)
Loans originated for sale	(53,957		)	(43,684		)
Proceeds from sales of loans	53,072			47,588
Decrease (increase) in other assets, net	566			(774		)
(Decrease) increase in other liabilities and accrued expenses, net	(398		)	153
Net cash provided by operating activities	2,417			7,175

Cash flows from investing activities
Net increase in CDs held for investment	(2,567		)	(1,521		)
Proceeds from maturities and prepayments of MBS and other investments available for sale	447			617
Proceeds from maturities and prepayments of MBS and other investments held to maturity	317			364
Proceeds from the sale of MBS and other investments	—			743
Redemption of FHLB stock	102			—
Increase in loans receivable, net	(10,861		)	(9,908		)
Additions to premises and equipment	(768		)	(710		)
Proceeds from sale of premises and equipment	8			—
Proceeds from sale of OREO and other repossessed assets	1,653			698
Net cash used in investing activities	(11,669		)	(9,717		)

See notes to unaudited condensed consolidated financial statements

Table of Contents

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the six months ended March 31, 2013 and 2012

(Dollars in thousands)

(Unaudited)



	Six Months Ended March 31,
	2013			2012
Cash flows from financing activities
Increase in deposits, net	3,659			11,918
Repayment of FHLB Advances	—			(10,000		)
Increase (decrease) in repurchase agreements, net	(306		)	219
ESOP tax effect	(6		)	(39		)
Repurchase of preferred stock	(4,321		)	—
Dividends paid	(642		)	—
Net cash provided by (used in) financing activities	(1,616		)	2,098

Net decrease in cash and cash equivalents	(10,868		)	(444		)
Cash and cash equivalents
Beginning of period	96,668			112,065
End of period	$	85,800		$	111,621

Supplemental disclosure of cash flow information
Income taxes paid	$	1,793		$	918
Interest paid	2,356			3,390

Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	$	4,452		$	1,937
Loans originated to facilitate the sale of OREO	670			3,360

See notes to unaudited condensed consolidated financial statements

Timberland Bancorp, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation: The accompanying unaudited condensed consolidated financial statements for Timberland Bancorp, Inc. (“Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim condensed consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012 (“2012 Form 10-K”). The unaudited condensed consolidated results of operations for the six months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2013.

(b) Principles of Consolidation: The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Timberland Bank (“Bank”), and the Bank’s wholly-owned subsidiary, Timberland Service Corp. All significant inter-company transactions and balances have been eliminated in consolidation.

(c) Operating Segment: The Company has one reportable operating segment which is defined as community banking in western Washington under the operating name, “Timberland Bank.”

(d) The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

(e) Certain prior period amounts have been reclassified to conform to the March 31, 2013 presentation with no change to net income or total shareholders’ equity previously reported.

(2) REGULATORY MATTERS

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

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

(3) PREFERRED STOCK RECEIVED IN TROUBLED ASSET RELIEF PROGRAM (“TARP”) CAPITAL PURCHASE PROGRAM (“CPP”)

On December 23, 2008, the Company received $16.64 million from the U.S. Treasury Department (“Treasury”) as a part of the Treasury’s CPP, which was established as part of the TARP. The Company sold 16,641 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), with a liquidation value of $1,000 per share and a related warrant to purchase 370,899 shares of the Company’s common stock at an exercise price of $6.73 per share (subject to anti-dilution adjustments) at any time through December 23, 2018. The Series A Preferred Stock pays a 5.0% dividend for the first five years, after which the rate increases to 9.0% if the preferred shares are not redeemed by the Company.

The Series A Preferred Stock was initially recorded at the amount of proceeds received. The discount from the liquidation value is accreted to the expected call date and charged to retained earnings. This accretion is recorded using the level-yield method. Preferred dividends accrued and any accretion is deducted from net income for computing net income to common shareholders and net income per share computations.

On November 13, 2012, the Company’s outstanding 16,641 shares of Series A Preferred Stock were sold by the Treasury as part of its efforts to manage and recover its investments under the TARP. While the sale of these Series A Preferred shares to new owners did not result in any proceeds to the Company and did not change the Company’s capital position or accounting for these securities, it did eliminate restrictions put in place by the Treasury on TARP recipients. The Treasury retained its related warrant to purchase up to 370,899 shares of the Company’s common stock.

During the quarter ended March 31, 2013, the Company purchased and retired 4,576 shares of its Series A Preferred Stock for $4.32 million; a discount from par value of $255,000. The discount from par value on the repurchased shares was recorded as an increase to net income to common shareholders. This increase to net income to common shareholders was partially offset by $62,000 of accelerated discount accretion on the shares purchased. Even though the Company MOU has been rescinded, approval from the FRB is still required before Series A Preferred Stock can be purchased and retired. Therefore, future repurchases of the the Series A Preferred Stock are contingent upon receiving approval from the FRB.

(4) MBS AND OTHER INVESTMENTS

MBS and other investments have been classified according to management’s intent and are as follows as of March 31, 2013 and September 30, 2012 (dollars in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2013
Held to Maturity
MBS:
U.S. government agencies	$	1,345	$	41	$	(2	)	$	1,384
Private label residential	1,701		376		(37		)	2,040
U.S. agency securities	14		2		—			16
Total	$	3,060	$	419	$	(39	)	$	3,440

Available for Sale
MBS:
U.S. government agencies	$	2,480	$	125	$	—		$	2,605
Private label residential	907		66		(110		)	863
Mutual funds	1,000		—		(5		)	995
Total	$	4,387	$	191	$	(115	)	$	4,463

September 30, 2012
Held to Maturity
MBS:
U.S. government agencies	$	1,493	$	44	$	(3	)	$	1,534
Private label residential	1,819		309		(60		)	2,068
U.S. agency securities	27		3		—			30
Total	$	3,339	$	356	$	(63	)	$	3,632

Available for Sale
MBS:
U.S. government agencies	$	2,828	$	147	$	—		$	2,975
Private label residential	1,001		65		(109		)	957
Mutual funds	1,000		13		—			1,013
Total	$	4,829	$	225	$	(109	)	$	4,945

Table of Contents

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time these unrealized losses existed as of March 31, 2013 (dollars in thousands):



	Less Than 12 Months						12 Months or Longer						Total
	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses
Held to Maturity
MBS:
U.S. government agencies	$	1	$	—		3	$	95	$	(2	)	4	$	96	$	(2	)
Private label residential	—		—			—	263		(37		)	20	263		(37		)
Total	$	1	$	—		3	$	358	$	(39	)	24	$	359	$	(39	)

Available for Sale
MBS:
Private label residential	$	—	$	—		—	$	586	$	(110	)	4	$	586	$	(110	)
Mutual Funds	995		(5		)	1	—		—			—	995		(5		)
Total	$	995	$	(5	)	1	$	586	$	(110	)	4	$	1,581	$	(115	)

The following table summarizes the estimated fair value and gross unrealized losses for all securities and the length of time the unrealized losses existed as of September 30, 2012 (dollars in thousands):



	Less Than 12 Months						12 Months or Longer						Total
	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses			Qty	Estimated Fair Value		Gross Unrealized Losses
Held to Maturity
MBS:
U.S. government agencies	$	7	$	—		1	$	100	$	(3	)	4	$	107	$	(3	)
Private label residential	17		(1		)	1	423		(59		)	28	440		(60		)
Total	$	24	$	(1	)	2	$	523	$	(62	)	32	$	547	$	(63	)

Available for Sale
MBS:
Private label residential	$	—	$	—		—	$	651	$	(109	)	4	$	651	$	(109	)
Total	$	—	$	—		—	$	651	$	(109	)	4	$	651	$	(109	)

During the three months ended March 31, 2013 and 2012, the Company recorded net OTTI charges through earnings on residential MBS of $25,000 and $94,000, respectively. During the six months ended March 31, 2013 and 2012, the Company recorded net OTTI charges through earnings on residential MBS of $35,000 and $153,000, respectively. The Company provides for the bifurcation of OTTI into (i) amounts related to credit losses which are recognized through earnings, and (ii)amounts related to all other factors which are recognized as a component of other comprehensive income (loss).

To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of each 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 and prepayment speeds

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included in 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 estimate of the credit loss component on OTTI securities as of March 31, 2013 and September 30, 2012:



	Range				Weighted
	Minimum		Maximum		Average
At March 31, 2013
Constant prepayment rate	6.00	%	15.00	%	10.52	%
Collateral default rate	0.15	%	25.91	%	7.75	%
Loss severity rate	6.99	%	78.36	%	45.51	%

At September 30, 2012
Constant prepayment rate	6.00	%	15.00	%	8.77	%
Collateral default rate	0.06	%	28.40	%	8.74	%
Loss severity rate	0.52	%	76.03	%	48.28	%

The following tables present the OTTI for the three and six months ended March 31, 2013 and 2012 (dollars in thousands):



	Three Months Ended March 31, 2013						Three Months Ended March 31, 2012
	Held To Maturity			Available For Sale			Held To Maturity			Available For Sale
Total OTTI	$	4		$	—		$	(88	)	$	(6	)
Adjustment for portion recorded as (transferred from) other comprehensive income (loss) before taxes (1)	(29		)	—			—			—
Net OTTI recognized in earnings (2)	$	(25	)	$	—		$	(88	)	$	(6	)

	Six Months Ended March 31, 2013						Six Months Ended March 31, 2012
	Held To Maturity			Available For Sale			Held To Maturity			Available For Sale
Total OTTI	$	(2	)	$	(1	)	$	(140	)	$	(43	)
Adjustment for portion recorded as (transferred from) other comprehensive income (loss) before taxes (1)	(32		)	—			30			—
Net OTTI recognized in earnings (2)	$	(34	)	$	(1	)	$	(110	)	$	(43	)

________________________


(1)	Represents OTTI related to all other factors.


(2)	Represents OTTI related to credit losses.

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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 and the remaining impairment loss related to all other factors recognized in other comprehensive income for the six months ended March 31, 2013 and 2012 (in thousands):



	Six Months Ended March 31,
	2013			2012
Beginning balance of credit loss	$	2,703		$	3,361
Additions:
Credit losses for which OTTI was not previously recognized	5			66
Additional increases to the amount related to credit loss for which OTTI was previously recognized	30			87
Subtractions:
Realized losses previously recorded as credit losses	(384		)	(419		)
Ending balance of credit loss	$	2,354		$	3,095

There was no realized gain on sale of securities for either the three or six months ended March 31, 2013. There was a gross realized gain on sale of securities for both the three and six months ended March 31, 2012 of $20,000. During the three months ended March 31, 2013, the Company recorded a $152,000 realized loss (as a result of the securities being deemed worthless) on 15 held to maturity residential MBS and six available for sale residential MBS, of which the entire amount had been recognized previously as a credit loss. During the six months ended March 31, 2013, the Company recorded a $384,000 realized loss (as a result of the securities being deemed worthless) on 17 held to maturity residential MBS and six available for sale residential MBS, of which the entire amount had been recognized previously as a credit loss. During the three months ended March 31, 2012, the Company recorded a $223,000 realized loss (as a result of the securities being deemed worthless) on 18 held to maturity residential MBS and one available for sale residential MBS, of which the entire amount had been recognized previously as a credit loss. During the six months ended March 31, 2012, the Company recorded a $419,000 realized loss (as a result of the securities being deemed worthless) on 20 held to maturity residential MBS and one available for sale residential MBS, of which the entire amount had been recognized previously as a credit loss.

The amortized cost of residential mortgage-backed and agency securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral, retail repurchase agreements and other non-profit organization deposits totaled $5.08 million and $5.70 million at March 31, 2013 and September 30, 2012, respectively.

The contractual maturities of debt securities at March 31, 2013 were as follows (dollars in thousands). Expected maturities may differ from scheduled maturities as a result of 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	$	—	$	—	$	—	$	—
Due after one year to five years	25		27		32		32
Due after five to ten years	15		15		18		18
Due after ten years	3,020		3,398		3,337		3,418
Total	$	3,060	$	3,440	$	3,387	$	3,468

(5) GOODWILL

The Company performed its fiscal year 2012 goodwill impairment test during the quarter ended June 30, 2012 with the assistance of a third-party firm specializing in goodwill impairment valuations for financial institutions. The third-party analysis was conducted as of May 31, 2012 and concluded that the fair value of goodwill was $30.0 million, which exceeded the carrying value of $5.7 million by 426%.

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The goodwill impairment test involved a two-step process. Step one of the goodwill impairment test estimated the fair value of the reporting unit utilizing the allocation of corporate value approach, the income approach and the market approach in order to derive an enterprise value for the Company.

The allocation of corporate value approach applies the aggregate market value of the Company and divides it among the reporting units. The Company has a single reporting unit. The aggregate market value was based on the Company's common stock market price on May 31, 2012, adjusted for a control premium and the value of preferred stock (at its liquidation value). A key assumption in this approach is the control premium applied to the aggregate market value. A control premium is utilized as the value of a company from the perspective of a controlling interest and is generally higher than the widely quoted market price per share. The Company used an expected control premium of 30%, which was based on comparable transaction history.

The income approach uses a reporting unit's projection of estimated operating results and cash flows that are discounted using a rate that reflects current market conditions. The projection uses management's estimates of economic and market conditions over the projected period including growth rates in loans and deposits, estimates of future expected changes in net interest margins and cash expenditures. Key assumptions used by the Company in its discounted cash flow model (income approach) included an annual revenue growth rate that approximated 3.8%, a net interest margin that approximated 3.9% and a return on assets that ranged from 0.47% to 0.74% (average of 0.64%). In addition to the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the income approach were the discount rate of 12.6% utilized for the Company's cash flow estimate and a terminal value of 1.1 times the ending book value of the reporting unit. The Company used a build-up approach in developing the discount rate that included an assessment of the risk free interest rate, the rate of return expected from publicly traded stocks based on an analysis of historical data, the industry the Company operates in and the size of the Company.

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

The Company calculated a fair value of its reporting unit of $62 million using the corporate value approach, $77 million using the income approach and $77 million using the market approach. The concluded value based on the average of the three methods under the step one test was $72 million. The results of the Company's step one test indicated that the reporting unit's fair value was less than its recorded value and therefore the Company performed a step two analysis.

The Company then calculated the implied fair value of its reporting unit under step two of the goodwill impairment test. Under this approach, the Company calculated the fair value for the assets and liabilities of the reporting unit. The calculated implied fair value of the Company's goodwill exceeded the recorded value by $24.3 million.

Under the step two process significant adjustments were made to the fair value of the Company's loans receivable compared to its recorded value. The Company utilized a comparable transaction approach using comparable loan sales. In the comparable transaction approach a weighted average discount rate was used that approximated the discount for similar loan sales by the FDIC. A key assumption used by the Company was determining the appropriate discount rate to apply to each loan category. The Company segmented its loan portfolio into three categories: performing loans with credit quality grades of pass; performing loans with credit quality grades of watch, special mention or substandard; and nonperforming loans. Performing loans with credit quality grades of pass were discounted by 5%, performing loans with credit quality grades of watch, special mention or substandard were discounted by 20% and nonperforming loans were discounted by 75%. These weighted average discount rates approximated the discount for similar loan sales by the FDIC. Increases in the pricing for future reported loan sale transactions could have a significant impact on the implied fair value of goodwill under the step two process.

A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others; a significant decline in the expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Key assumptions used in the annual goodwill impairment test are highly judgmental and include: selection of comparable companies, amount of control premium, projected cash flows, discount rate applied to projected cash flows and method of estimating fair value of loans. Any change in these indicators or key assumptions could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.

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As of March 31, 2013, management believes that there have been no events or changes in the circumstances that would indicate a potential impairment. No assurances can be given, however, that the Company will not record an impairment loss on goodwill in the future.

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(6) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable and loans held for sale consisted of the following at March 31, 2013 and September 30, 2012 (dollars in thousands):



	March 31, 2013					September 30, 2012
	Amount			Percent		Amount			Percent
Mortgage loans:
One- to four-family (1)	$	108,304		18.9	%	$	106,979		18.8	%
Multi-family	47,330			8.3		47,521			8.4
Commercial	283,307			49.5		256,254			45.1
Construction and land development	39,658			6.9		56,406			9.9
Land	35,323			6.2		39,655			7.0
Total mortgage loans	513,922			89.8		506,815			89.2

Consumer loans:
Home equity and second mortgage	32,080			5.6		32,814			5.8
Other	5,570			1.0		6,183			1.1
Total consumer loans	37,650			6.6		38,997			6.9

Commercial business loans	20,388			3.6		22,588			3.9

Total loans receivable	571,960			100.0	%	568,400			100.0	%
Less:
Undisbursed portion of construction loans in process	(12,161		)			(16,325		)
Deferred loan origination fees	(1,699		)			(1,770		)
Allowance for loan losses	(11,313		)			(11,825		)

Total loans receivable, net	$	546,787				$	538,480

________________________

(1) Includes loans held for sale.

Construction and Land Development Loan Portfolio Composition

The following table sets forth the composition of the Company’s construction and land development loan portfolio at March 31, 2013 and September 30, 2012 (dollars in thousands):



	March 31, 2013				September 30, 2012
	Amount		Percent		Amount		Percent
Custom and owner/builder	$	32,515	82.0	%	$	33,345	59.1	%
Speculative one- to four-family	1,718		4.3		1,880		3.4
Commercial real estate	4,521		11.4		20,247		35.9
Multi-family (including condominiums)	345		0.9		345		0.6
Land development	559		1.4		589		1.0
Total construction and land development loans	$	39,658	100.0	%	$	56,406	100.0	%

Allowance for Loan Losses

The following tables set forth information for the three and six months ended March 31, 2013 and March 31, 2012 regarding activity in the allowance for loan losses (dollars in thousands):

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	Three Months Ended March 31, 2013
	Beginning Allowance		Provision /(Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,829	$	258		$	261	$	20	$	1,846
Multi-family	945		(14		)	116		—		815
Commercial	4,463		640			656		50		4,497
Construction – custom and owner/builder	294		(10		)	—		—		284
Construction – speculative one- to four-family	132		9			—		—		141
Construction – commercial	371		(286		)	—		—		85
Construction – multi-family	—		—			—		—		—
Construction – land development	20		(8		)	—		—		12
Land	2,285		409			498		1		2,197
Consumer loans:
Home equity and second mortgage	722		225			166		—		781
Other	249		(4		)	6		—		239
Commercial business loans	459		(44		)	—		1		416
Total	$	11,769	$	1,175		$	1,703	$	72	$	11,313



	Six Months Ended March 31, 2013
	Beginning Allowance		Provision /(Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,558	$	791		$	524	$	21	$	1,846
Multi-family	1,156		(226		)	116		1		815
Commercial	4,247		856			656		50		4,497
Construction – custom and owner/builder	386		(102		)	—		—		284
Construction – speculative one- to four-family	128		13			—		—		141
Construction – commercial	429		(344		)	—		—		85
Construction – multi-family	—		—			—		—		—
Construction – land development	—		(128		)	6		146		12
Land	2,392		510			707		2		2,197
Consumer loans:
Home equity and second mortgage	759		206			184		—		781
Other	254		(9		)	6		—		239
Commercial business loans	516		(192		)	—		92		416
Total	$	11,825	$	1,375		$	2,199	$	312	$	11,313

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	Three Months Ended March 31, 2012
	Beginning Allowance		Provision /(Credit)		Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	785	$	197	$	52	$	1	$	931
Multi-family	1,309		(21)		—		—		1,288
Commercial	3,509		228		—		—		3,737
Construction – custom and owner/builder	260		7		—		—		267
Construction – speculative one- to four-family	164		7		—		—		171
Construction – commercial	807		54		—		—		861
Construction – multi-family	390		114		—		—		504
Construction – land development	96		(1)		—		—		95
Land	2,657		320		247		7		2,737
Consumer loans:
Home equity and second mortgage	409		75		53		—		431
Other	390		(18)		19		—		353
Commercial business loans	1,196		88		395		—		889
Total	$	11,972	$	1,050	$	766	$	8	$	12,264



	Six Months Ended March 31, 2012
	Beginning Allowance		Provision /(Credit)		Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	760	$	289	$	120	$	2	$	931
Multi-family	1,076		212		—		—		1,288
Commercial	4,035		210		508		—		3,737
Construction – custom and owner/builder	222		45		—		—		267
Construction – speculative one- to four-family	169		1		—		1		171
Construction – commercial	794		67		—		—		861
Construction – multi-family	354		(300)		—		450		504
Construction – land development	79		246		230		—		95
Land	2,795		396		532		78		2,737
Consumer loans:
Home equity and second mortgage	460		74		103		—		431
Other	415		(42)		20		—		353
Commercial business loans	787		502		401		1		889
Total	$	11,946	$	1,700	$	1,914	$	532	$	12,264

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The following table presents information on the loans evaluated individually for impairment and collectively evaluated for impairment in the allowance for loan losses at March 31, 2013 and September 30, 2012 (dollars in thousands):



	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment			Collectively Evaluated for Impairment		Total
March 31, 2013
Mortgage loans:
One- to four-family	$	824	$	1,022	$	1,846	$	6,867	789	$	101,437	$	108,304
Multi-family	408		407		815		6,232		7,239	41,098		47,330
Commercial	802		3,695		4,497		17,918			265,389		283,307
Construction – custom and owner/builder	13		271		284		100			21,608		21,708
Construction – speculative one- to four-family	95		46		141		697			793		1,490
Construction – commercial	—		85		85		—			3,395		3,395
Construction – multi-family	—		—		—		345			—		345
Construction – land development	—		12		12		525			34		559
Land	574		1,623		2,197		6,000			29,323		35,323
Consumer loans:
Home equity and second mortgage	72		709		781		753			31,327		32,080
Other	—		239		239		15			5,555		5,570
Commercial business loans	—		416		416		—			20,388		20,388
Total	$	2,788	$	8,525	$	11,313	$	39,452		$	520,347	$	559,799


September 30, 2012
Mortgage loans:
One- to four-family	$	678	$	880	$	1,558	$	5,282		$	101,697	$	106,979
Multi-family	711		445		1,156		6,879			40,642		47,521
Commercial	667		3,580		4,247		17,192			239,062		256,254
Construction – custom and owner/Builder	15		371		386		309			20,159		20,468
Construction – speculative one- to four-family	109		19		128		1,027			495		1,522
Construction – commercial	—		429		429		—			17,157		17,157
Construction – multi-family	—		—		—		345			—		345
Construction – land development	—		—		—		589			—		589
Land	686		1,706		2,392		8,613			31,042		39,655
Consumer loans:
Home equity and second mortgage	36		723		759		562			32,252		32,814
Other	—		254		254		7			6,176		6,183
Commercial business loans	—		516		516		—			22,588		22,588
Total	$	2,902	$	8,923	$	11,825	$	40,805		$	511,270	$	552,075

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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 ongoing 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. Assets in this category do not expose the Company to sufficient risk to warrant a substandard classification.

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

Loss: Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets 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.

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The following table lists the loan credit risk grades utilized by the Company that serve as credit quality indicators at March 31, 2013 and September 30, 2012 (dollars in thousands):



March 31, 2013	Loan Grades
	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	95,629	$	3,379	$	2,910	$	6,386	$	108,304
Multi-family	37,783		137		8,621		789		47,330
Commercial	254,167		3,547		16,695		8,898		283,307
Construction – custom and owner/builder	21,608		—		—		100		21,708
Construction – speculative one- to four-family	633		696		—		161		1,490
Construction – commercial	3,395		—		—		—		3,395
Construction – multi-family	—		—		—		345		345
Construction – land development	—		—		—		559		559
Land	21,391		5,944		2,557		5,431		35,323
Consumer loans:
Home equity and second mortgage	29,916		1,015		246		903		32,080
Other	5,515		40		—		15		5,570
Commercial business loans	19,375		893		120		—		20,388
Total	$	489,412	$	15,651	$	31,149	$	23,587	$	559,799
September 30, 2012
Mortgage loans:
One- to four-family	$	93,668	$	4,000	$	4,343	$	4,968	$	106,979
Multi-family	35,703		107		10,220		1,491		47,521
Commercial	228,036		1,722		11,515		14,981		256,254
Construction – custom and owner/builder	17,621		—		2,538		309		20,468
Construction – speculative one- to four-family	304		191		700		327		1,522
Construction – commercial	17,157		—		—		—		17,157
Construction – multi-family	—		—		—		345		345
Construction – land development	—		—		—		589		589
Land	22,700		5,788		2,554		8,613		39,655
Consumer loans:
Home equity and second mortgage	29,777		1,488		788		761		32,814
Other	6,136		40		—		7		6,183
Commercial business loans	20,777		834		286		691		22,588
Total	$	471,879	$	14,170	$	32,944	$	33,082	$	552,075

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The following tables present an age analysis of past due status of loans by category at March 31, 2013 and September 30, 2012 (dollars in thousands):



	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
March 31, 2013
Mortgage loans:
One- to four-family	$	1,027	$	512	$	4,984	$	—	$	6,523	$	101,781	$	108,304
Multi-family	—		—		789		—		789		46,541		47,330
Commercial	1,057		—		7,239		6		8,302		275,005		283,307
Construction – custom and owner/builder	—		—		100		—		100		21,608		21,708
Construction – speculative one- to four- family	—		—		—		—		—		1,490		1,490
Construction – commercial	—		—		—		—		—		3,395		3,395
Construction – multi-family	—		—		345		—		345		—		345
Construction – land development	—		—		525		—		525		34		559
Land	107		426		6,000		—		6,533		28,790		35,323
Consumer loans:
Home equity and second mortgage	229		51		453		152		885		31,195		32,080
Other	—		125		15		—		140		5,430		5,570
Commercial business loans	—		17		—		—		17		20,371		20,388
Total	$	2,420	$	1,131	$	20,450	$	158	$	24,159	$	535,640	$	559,799

September 30, 2012
Mortgage loans:
One- to four-family	$	1,987	$	—	$	3,382	$	142	$	5,511	$	101,468	$	106,979
Multi-family	3,402		—		1,449		—		4,851		42,670		47,521
Commercial	1,071		—		6,049		6		7,126		249,128		256,254
Construction – custom and owner/ builder	—		—		309		—		309		20,159		20,468
Construction – speculative one- to four- family	—		—		327		700		1,027		495		1,522
Construction – commercial	—		—		—		—		—		17,157		17,157
Construction – multi-family	—		—		345		—		345		—		345
Construction – land development	—		—		589		—		589		—		589
Land	943		—		8,613		200		9,756		29,899		39,655
Consumer loans:
Home equity and second mortgage	277		14		261		150		702		32,112		32,814
Other	4		—		7		—		11		6,172		6,183
Commercial business loans	—		15		—		—		15		22,573		22,588
Total	$	7,684	$	29	$	21,331	$	1,198	$	30,242	$	521,833	$	552,075

Impaired Loans

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

The categories of non-accrual loans and impaired loans overlap, although they are not coextensive. The Company considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status, such as the financial strength of the borrower, the estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due.

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Following is a summary of information related to impaired loans as of March 31, 2013 and for the three and six months then ended (in thousands):




	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		QTD Average Recorded Investment (1)		YTD Average Recorded Investment (2)		QTD Interest Income Recognized (1)		YTD Interest Income Recognized (2)		QTD Cash Basis Interest Income Recognized (1)		YTD Cash Basis Interest Income Recognized (2)
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,910	$	2,406	$	—	$	1,892	$	1,723	$	—	$	5	$	—	$	4
Multi-family	788		1,770		—		789		315		—		3		—		3
Commercial	11,188		14,314		—		10,576		11,554		153		160		136		143
Construction – custom and owner/builder	—		—		—		102		166		—		—		—		—
Construction – speculative one- to four-family	—		—		—		—		65		—		—		—		—
Construction – commercial	—		—		—		—		—		—		—		—		—
Construction – multi-family	345		810		—		345		276		—		—		—		—
Construction – land development	525		3,279		—		525		603		—		—		—		—
Land	3,818		5,082		—		4,582		5,429		3		3		3		3
Consumer loans:
Home equity and second mortgage	195		456		—		229		321		—		—		—		—
Other	15		21		—		11		9		—		—		—		—
Commercial business loans	—		46		—		—		15		—		—		—		—
Subtotal	18,784		28,184		—		19,051		20,476		156		171		139		153

With an allowance recorded:
Mortgage loans:
One- to four-family	4,957		5,041		824		4,612		3,629		26		46		19		34
Multi-family	5,444		5,444		408		6,152		6,598		72		157		54		120
Commercial	6,730		7,386		802		6,732		6,730		78		177		60		142
Construction – custom and owner/builder	100		100		13		100		102		—		—		—		—
Construction – speculative one- to four-family	697		697		95		698		699		7		13		4		8
Construction – commercial	—		—		—		—		1,078		—		89		—		71
Construction – multi-family	—		—		—		—		74		—		—		—		—
Construction - land development	—		—		—		—		—		—		—		—		—
Land	2,182		2,204		574		2,340		3,020		7		15		7		15
Consumer loans:
Home equity and second mortgage	558		558		72		430		489		4		8		3		6
Other	—		—		—		—		—		—		—		—		—
Commercial business loans	—		—		—		—		—		—		—		—		—
Subtotal	20,668		21,430		2,788		21,064		22,419		194		505		147		396

Total
Mortgage loans:
One- to four-family	6,867		7,447		824		6,504		5,352		26		51		19		38
Multi-family	6,232		7,214		408		6,941		6,913		72		160		54		123
Commercial	17,918		21,700		802		17,308		18,284		231		337		196		285
Construction – custom and owner/builder	100		100		13		202		268		—		—		—		—

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Construction – speculative one- to four-family	$	697	$	697	$	95	$	698	$	764	$	7	$	13	$	4	$	8
Construction – commercial	—		—		—		—		1,078		—		89		—		71
Construction – multi-family	345		810		—		345		350		—		—		—		—
Construction – land development	525		3,279		—		525		603		—		—		—		—
Land	6,000		7,286		574		6,922		8,449		10		18		10		18
Consumer loans:
Home equity and second mortgage	753		1,014		72		659		810		4		8		3		6
Other	15		21		—		11		9		—		—		—		—
Commercial business loans	—		46		—		—		15		—		—		—		—
Total	$	39,452	$	49,614	$	2,788	$	40,115	$	42,895	$	350	$	676	$	286	$	549

________________________________________________


(1)	For the three months ended March 31, 2013


(2)	For the six months ended March 31, 2013

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Following is a summary of information related to impaired loans as of and for the year ended September 30, 2012 (in thousands):



	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		YTD Average Recorded Investment (1)		YTD Interest Income Recognized (1)		YTD Cash Basis Interest Income Recognized (1)
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,510	$	1,605	$	—	$	1,838	$	20	$	16
Multi-family	—		982		—		—		1		1
Commercial	7,596		8,664		—		14,491		543		348
Construction – custom and owner/builder	208		208		—		209		—		—
Construction – speculative one- to four-family	327		327		—		65		—		—
Construction – commercial	—		2,066				—		14		14
Construction – multi-family	345		810		—		338		—		—
Construction – land development	589		3,497		—		1,089		14		14
Land	5,989		8,247		—		6,279		28		16
Consumer loans:
Home equity and second mortgage	261		383		—		482		—		—
Other	7		7		—		5		—		—
Commercial business loans	—		166		—		32		2		2
Subtotal	16,832		26,962		—		24,828		622		411

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

______________________________________________

(1) For the year ended September 30, 2012

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The following table sets forth information with respect to the Company’s non-performing assets at March 31, 2013 and September 30, 2012 (dollars in thousands):



	March 31, 2013			September 30, 2012
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family	$	4,984		$	3,382
Multi-family	789			1,449
Commercial	7,239			6,049
Construction – custom and owner/builder	100			309
Construction – speculative one- to four-family	—			327
Construction – multi-family	345			345
Construction – land development	525			589
Land	6,000			8,613
Consumer loans:
Home equity and second mortgage	453			261
Other	15			7
Total loans accounted for on a non-accrual basis	20,450			21,331

Accruing loans which are contractually past due 90 days or more	158			1,198

Total of non-accrual and 90 days past due loans (1)	20,608			22,529

Non-accrual investment securities	2,264			2,442

OREO and other repossessed assets	15,031			13,302
Total non-performing assets (2)	$	37,903		$	38,273

Troubled debt restructured loans on accrual status	$	13,012		$	13,410

Non-accrual and 90 days or more past due loans as a percentage of loans receivable	3.69		%	4.09		%

Non-accrual and 90 days or more past due loans as a percentage of total assets	2.79		%	3.06		%

Non-performing assets as a percentage of total assets	5.14		%	5.19		%

Loans receivable (3)	$	558,100		$	550,305

Total assets	$	738,121		$	736,954

___________________________________

(1) Includes troubled debt restructured loans totaling $10.8 million and $10.1 million reported as non-accrual loans at March 31, 2013 and September 30, 2012, respectively.

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

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

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Troubled debt restructured loans are loans for which the Company, for economic or legal reasons related to the borrower’s financial condition, has granted a significant concession to the borrower that it would otherwise not consider. The loan terms which have been modified or restructured due to a borrower’s financial difficulty include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals. Troubled debt restructured loans are considered impaired loans and are individually evaluated for impairment. Troubled debt restructured loans can be classified as either accrual or non-accrual. Troubled debt restructured loans are classified as non-performing loans unless they have been performing in accordance with modified terms for a period of at least six months. The Company had $23.8 million in troubled debt restructured loans included in impaired loans at March 31, 2013 and had $1,000 in commitments to lend additional funds on these loans. The Company had $23.5 million in troubled debt restructured loans included in impaired loans at September 30, 2012 and had $1,000 in commitments to lend additional funds on these loans.

The following table sets forth information with respect to the Company’s troubled debt restructured loans by interest accrual status as of March 31, 2013 and September 30, 2012 (dollars in thousands):



	March 31, 2013
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,884	$	202	$	2,086
Multi-family	5,444		—		5,444
Commercial	4,688		5,548		10,236
Construction – speculative one- to four-family	696		—		696
Construction – land development	—		525		525
Land	—		4,377		4,377
Consumer loans:
Home equity and second mortgage	300		180		480
Total	$	13,012	$	10,832	$	23,844



	September 30, 2012
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	1,900	$	—	$	1,900
Multi-family	5,430		—		5,430
Commercial	5,079		4,862		9,941
Construction – speculative one- to four-family	700		—		700
Construction – land development	—		526		526
Land	—		4,445		4,445
Consumer loans:
Home equity and second mortgage	301		261		562
Total	$	13,410	$	10,094	$	23,504

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The following table sets forth information with respect to the Company’s troubled debt restructurings by portfolio segment that occurred during the six months ended March 31, 2013 and the year ended September 30, 2012 (dollars in thousands):



Six Months Ended	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Balance at March 31, 2013
March 31, 2013	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Balance at March 31, 2013
One-to four-family (1)	1	$	209	$	209	$	202
Commercial (2)	1	750		750		747
Total	2	$	959	$	959	$	949



Year Ended	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Balance at September 30, 2013
September 30, 2012	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Balance at September 30, 2013
One-to four-family (1)	1	$	373	$	373	$	372
Commercial (1)	1	2,718		2,718		2,657
Land (2)	1	249		249		233
Total	3	$	3,340	$	3,340	$	3,262

___________________________

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

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

There were no troubled debt restructured loans that were recorded in the six months ended March 31, 2013 or the year ended September 30, 2012 that have subsequently defaulted.

(7) 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 the outstanding warrant to purchase common stock. In accordance with the Financial Accounting Standards Board (“FASB”) guidance for stock compensation, shares owned by the Bank’s ESOP that have not been allocated are not considered to be outstanding for the purpose of computing basic and diluted net income per common share. At March 31, 2013 and 2012, there were 227,154 and 264,520 shares, respectively, that had not been allocated under the Bank’s ESOP.

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	Three Months Ended March 31,						Six Months Ended March 31,
	2013			2012			2013			2012
	(In thousands, except for per share data)
Basic net income per common share computation
Numerator – net income	$	1,278		$	808		$	2,986		$	2,090
Preferred stock dividends	(207		)	(208		)	(408		)	(416		)
Preferred stock discount accretion	(126		)	(59		)	(189		)	(118		)
Repurchase of preferred stock at a discount	255			—			255			—
Net income to common shareholders	$	1,200		$	541		$	2,644		$	1,556

Denominator – weighted average common shares outstanding	6,815,782			6,780,516			6,815,782			6,780,516

Basic net income per common share	$	0.18		$	0.08		$	0.39		$	0.23

Diluted net income per common share computation
Numerator – net income	$	1,278		$	808		$	2,986		$	2,090
Preferred stock dividends	$	(207	)	$	(208	)	$	(408	)	$	(416	)
Preferred stock discount accretion	(126		)	(59		)	(189		)	(118		)
Repurchase of preferred stock at a discount	255			—			255			—
Net income to common shareholders	$	1,200		$	541		$	2,644		$	1,556

Denominator – weighted average common shares outstanding	6,815,782			6,780,516			6,815,782			6,780,516
Effect of dilutive stock options (1)	15,538			—			10,324			—
Effect of dilutive stock warrant (2)	58,184			—			28,773			—
Weighted average common shares and common stock equivalents	6,889,504			6,780,516			6,854,879			6,780,516

Diluted net income per common share	$	0.17		$	0.08		$	0.39		$	0.23

____________________________________________

(1) For the three months and six months ended March 31, 2013, options to purchase 166,390 and 168,455 shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per common share because their effect would have been anti-dilutive. For the three months and six months ended March 31, 2012, options to purchase 154,476 and 145,053 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) For the three and six months ended March 31, 2012, a warrant to purchase 370,899 shares of common stock was outstanding but not included in the computation of diluted net income per common share because the warrant's exercise price was greater than the average market price of the common stock, and, therefore, its effect would have been anti-dilutive.

(8) STOCK PLANS AND STOCK BASED COMPENSATION

Stock Option Plans

Under the Company’s stock option plans (the 1999 Stock Option Plan and the 2003 Stock Option Plan), the Company was able to grant options for up to a combined total of 1,622,500 shares of common stock to employees, officers and directors. Shares issued may be purchased in the open market or may be issued from authorized and unissued shares. The exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. Generally, options vest in 20% annual installments on each of the five anniversaries from the date of the grant. At March 31, 2013, options for 157,338 shares are available for future grant under the 2003 Stock Option Plan, and no shares are available for future grant under the 1999 Stock Option Plan.

Activity under the plans for the six months ended March 31, 2013 and 2012 is as follows:

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	Six Months Ended March 31, 2013				Six Months Ended March 31, 2012
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Options outstanding, beginning of period	195,626		$	7.97	137,726		$	9.25
Granted	29,000		6.00		33,500		4.01
Forfeited	(56,680	)	9.52		(2,200	)	4.55
Options outstanding, end of period	167,946		$	7.10	169,026		$	8.27

Options exercisable, end of period	68,446		$	9.55	122,326		$	9.84

The aggregate intrinsic value of options outstanding at March 31, 2013 was $350,000.

At March 31, 2013, there were 99,500 unvested options with an aggregate grant date fair value of $208,000, all of which the Company assumes will vest. The aggregate intrinsic value of unvested options at March 31, 2013 was $278,000. There were 8,800 options with an aggregate grant date fair value of $13,000 that vested during the six months ended March 31, 2013.

At March 31, 2012, there were 46,700 unvested options with an aggregate grant date fair value of $69,000, all of which the Company assumes will vest. There were 5,000 options with an aggregate grant date fair value of $6,000 that vested during the six months ended March 31, 2012.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the weighted average assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury rate of a similar term as the stock option at the particular grant date. The expected life is based on historical data, vesting terms and estimated exercise dates. The expected dividend yield is based on the most recent quarterly dividend on an annualized basis in effect at the time the options were granted. The expected volatility is based on historical volatility of the Company’s stock price. There were 33,500 options granted during the six months ended March 31, 2012 with an aggregate grant date fair value of $52,000. There were 29,000 options granted during the six months ended March 31, 2013 with an aggregate grant date fair value of $69,000.

The Black-Scholes option pricing model was used in estimating the fair value of option grants. The weighted average assumptions used for options granted during the six months ended March 31, 2013 were:



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

Stock Grant Plan

The Company adopted the Management Recognition and Development Plan (“MRDP”) in 1998 for the benefit of employees, officers and directors of the Company. The objective of the MRDP is to retain and attract personnel of experience and ability in key positions by providing them with a proprietary interest in the Company.

The MRDP allowed for the issuance to participants of up to 529,000 shares of the Company’s common stock. Awards under the MRDP were made in the form of shares of common stock that are subject to restrictions on the transfer of ownership and are subject to a five-year vesting period. Compensation expense is the amount of the fair value of the common stock at the date of the grant to the plan participants and is recognized over a five-year vesting period, with 20% vesting on each of the five anniversaries from the date of the grant.

There were no MRDP shares granted to officers or directors during the six months ended March 31, 2013 and 2012. At March 31, 2013, there were no shares available for future awards under the MRDP.

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At March 31, 2013, there were a total of 3,848 unvested MRDP shares with an aggregate grant date fair value of$28,000. There were 5,613 MRDP shares that vested during the six months ended March 31, 2013 with an aggregate grant date fair value of $57,000.

At March 31, 2012, there were a total of 15,161 unvested MRDP shares with an aggregated grant date fair value of $155,000. There were 7,231 MRDP shares that vested during the six months ended March 31, 2012 with an aggregated grant date fair value of $79,000. There were 100 MRDP shares forfeited during the six months ended March 31, 2012 with a grant date fair value of $1,000. At March 31, 2012, there were no shares available for future awards under the MRDP.

Expenses for Stock Compensation Plans

Compensation expenses for all stock-based plans were as follows:



	Six Months Ended March 31,
	2013				2012
	(Dollars in thousands)
	Stock Options		Stock Grants		Stock Options		Stock Grants
Compensation expense recognized in income	$	24	$	22	$	7	$	55
Related tax benefit recognized	$	8	$	7	$	2	$	19

As of March 31, 2013, the compensation expense yet to be recognized for stock-based awards that have been awarded but not vested for the years ending September 30 is as follows (dollars in thousands):



	Stock Options		Stock Grants		Total Awards
Remainder of 2013	$	26	$	16	$	42
2014	50		2		52
2015	44		—		44
2016	44		—		44
2017	35		—		35
2018	1		—		1
Total	$	200	$	18	$	218

(9) FAIR VALUE MEASUREMENTS

GAAP requires disclosure of estimated fair values for financial instruments. Such estimates are subjective in nature, and significant judgment is required regarding the risk characteristics of various financial instruments at a discrete point in time. Therefore, such estimates could vary significantly if assumptions regarding uncertain factors were to change. In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for certain items which are not defined as financial instruments but which may have significant value. The Company does not believe that it would be practicable to estimate a representational fair value for these types of items as of March 31, 2013 and September 30, 2012. Because GAAP excludes certain items from fair value disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.

Accounting guidance regarding fair value measurements defines fair value and establishes a framework for measuring fair value in accordance with GAAP. Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The following definitions describe the levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting

entity has the ability to access at the measurement date.

Level 2: Significant observable inputs other than quoted prices included within Level 1, such as

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quoted prices in markets that are not active, and inputs other than quoted prices that are observable or

can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the

assumptions market participants would use in pricing an asset or liability based on the best information

available in the circumstances.

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

MBS and Other Investments Available for Sale

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

The following table summarizes the balances of assets and liabilities measured at estimated fair value on a recurring basis at March 31, 2013 (dollars in thousands):



	Estimated Fair Value
	Level 1		Level 2		Level 3		Total
Available for Sale Securities
MBS:
U.S. government agencies	$	—	$	2,605	$	—	$	2,605
Private label residential	—		863		—		863
Mutual funds	995		—		—		995
Total	$	995	$	3,468	$	—	$	4,463

There were no transfers among Level 1, Level 2 and Level 3 during the six months ended March 31, 2013.

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



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

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

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

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

Impaired Loans: A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The specific reserve for collateral dependent impaired loans was based on the estimated fair value of the collateral less estimated costs to sell. The estimated fair value of collateral was determined based primarily on appraisals. In some cases, adjustments were made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. Such adjustments may be significant and typically result in a Level 3

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classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

MBS and Other Investments Held to Maturity: The estimated fair value of MBS and other investments are based upon the assumptions market participants would use in pricing the security. Such assumptions include quoted market prices (Level 1), market prices of similar securities or observable inputs (Level 2) and unobservable inputs such as dealer quotes, discounted cash flows or similar techniques (Level 3).

OREO and Other Repossessed Assets, net: The Company’s OREO and other repossessed assets are initially recorded at estimated fair value less estimated costs to sell. This amount becomes the property’s new basis. Estimated fair value was generally determined by management based on a number of factors, including third-party appraisals of estimated fair value in an orderly sale. Estimated costs to sell were based on standard market factors. The valuation of OREO and other repossessed items is subject to significant external and internal judgment.

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

The following table summarizes the balances of assets measured at estimated fair value on a non-recurring basis at March 31, 2013, and the total losses resulting from these estimated fair value adjustments for the six months ended March 31, 2013 (dollars in thousands):



	Estimated Fair Value
	Level 1		Level 2		Level 3		Total Losses
Impaired loans:
Mortgage Loans;
One-to four-family	$	—	$	—	$	4,133	$	261
Multi-family	—		—		5,036		116
Commercial	—		—		5,928		656
Construction – customer and owner/builder	—		—		87		—
Construction – speculative one- to- four-family	—		—		602		—
Land	—		—		1,608		498
Consumer loans:
Home equity and second mortgage	—		—		486		166
Total impaired loans (1)	—		—		17,880		1,697
MBS – held to maturity (2):
Private label residential	—		241		—		35
OREO and other repossessed items (3)	—		—		15,031		619
Total	$	—	$	241	$	32,911	$	2,351

_______________________


(1)	The loss represents charge-offs on collateral dependent loans for estimated fair value adjustment based on the estimated fair value of the collateral. Fair value is the recorded investment less the related allowance.


(2)	The loss represents OTTI credit-related charges on held-to-maturity MBS.


(3)	The loss represents the results of management’s periodic reviews of the recorded value to determine whether the property continues to be recorded at the lower of its recorded book value or estimated fair value, net of estimated costs to sell.

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



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

_______________________


(1)	The loss represents charge-offs on collateral dependent loans for estimated fair value adjustment based on the estimated fair value of the collateral. Fair value is the recorded investment less the related allowance.


(2)	The loss represents OTTI credit-related charges on held-to-maturity MBS.


(3)	The loss represents the results of management’s periodic reviews of the recorded value to determine whether the property continues to be recorded at the lower of its recorded book value or estimated fair value, net of estimated costs to sell.


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

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the date indicated (dollars in thousands):



	March 31, 2013
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired loans	$	17,880	Market approach	Appraised value of underlying collateral less selling costs	NA

Other real estate owned	$	15,031	Market approach	Lower of appraised value or listing price less selling costs	NA

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

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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.

The following methods and assumptions were used by the Company in estimating fair value of its other financial instruments:

Cash and Cash Equivalents: The estimated fair value of financial instruments that are short-term or re-price frequently and that have little or no risk are considered to have an estimated fair value equal to the recorded value.

CDs Held for Investment: The estimated fair value of financial instruments that are short-term or re-price frequently and that have little or no risk are considered to have an estimated fair value equal to the recorded value.

FHLB Stock: No ready market exists for this stock, and it has no quoted market value. However, redemption of this stock has historically been at par value. Accordingly, cost is deemed to be a reasonable estimate of fair value.

Loans Receivable, Net: At March 31, 2013 and September 30, 2012, because of an illiquid market for loan sales, the fair value of loans was estimated using comparable market statistics. The loan portfolio was segregated into various categories, and a weighted average valuation discount that approximated similar loan sales was applied to each category.

Loans Held for Sale: The estimated fair value is based on quoted market prices obtained from the Federal Home Loan Mortgage Corporation.

Accrued Interest: The recorded amount of accrued interest approximates the estimated fair value.

Deposits: The estimated fair value of deposits with no stated maturity date is included at the amount payable on demand. The estimated fair value of fixed maturity certificates of deposit is computed by discounting future cash flows using the rates currently offered by the Bank for deposits of similar remaining maturities.

FHLB Advances: The estimated fair value of FHLB advances is computed by discounting the future cash flows of the borrowings at a rate which approximates the current offering rate of the borrowings with a comparable remaining life.

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

Off-Balance-Sheet Instruments: Since the majority of the Company’s off-balance-sheet instruments consist of variable-rate commitments, the Company has determined that they do not have a distinguishable estimated fair value.

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The estimated fair values of financial instruments were as follows as of March 31, 2013 and September 30, 2012 (dollars in thousands):



	March 31, 2013
			Fair Value Measurements Using:
	Recorded Amount		Total		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	85,800	$	85,800	$	85,800	$	—	$	—
CDs held for investment	26,057		26,057		26,057		—		—
MBS and other investments	7,523		7,903		1,011		6,892		—
FHLB stock	5,553		5,553		5,553		—		—
Loans receivable, net	543,000		494,044		—		—		494,044
Loans held for sale	3,787		3,907		3,907		—		—
Accrued interest receivable	2,081		2,081		2,081		—		—

Financial Liabilities
Deposits:
Non-interest-bearing demand	$	80,938	$	80,938	$	80,938	$	—	$	—
Interest-bearing	520,647		522,378		333,347		—		189,031
Total deposits	601,585		603,317		414,286		—		189,031
FHLB advances	45,000		50,189		—		50,189		—
Repurchase agreements	549		549		549		—		—
Accrued interest payable	359		359		359		—		—



	September 30, 2012
			Fair Value Measurements Using:
	Recorded Amount		Total		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	96,668	$	96,668	$	96,668	$	—	$	—
CDs held for investment	23,490		23,490		23,490		—		—
MBS and other investments	8,284		8,577		1,043		7,534		—
FHLB stock	5,655		5,655		5,655		—		—
Loans receivable, net	537,053		502,147		—		—		502,147
Loans held for sale	1,427		1,504		1,504		—		—
Accrued interest receivable	2,183		2,183		2,183		—		—

Financial Liabilities
Deposits:
Non-interest-bearing demand	$	75,296	$	75,296	$	75,296	$	—	$	—
Interest-bearing	522,630		524,823		317,181		—		207,642
Total deposits	597,926		600,119		392,477		—		207,642
FHLB advances	45,000		51,115		—		51,115		—
Repurchase agreements	855		855		855		—		—
Accrued interest payable	404		404		404		—		—

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(10) RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB issued updated guidance regarding reporting amounts reclassified out of accumulated other comprehensive income. The guidance requires an entity to provide information about the amount reclassified out of accumulated other comprehensive income by component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of this updated guidance did not have a material impact on the Company's condensed consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Form 10-Q, the terms “we,” “our” and “Company” refer to Timberland Bancorp, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to “Bank” in this Form 10-Q, we are referring to Timberland Bank, a wholly-owned subsidiary of Timberland Bancorp, Inc. and the Bank’s wholly-owned subsidiary, Timberland Service Corporation.

The following analysis discusses the material changes in the consolidated financial condition and results of operations of the Company at and for the three and six months ended March 31, 2013. This analysis as well as other sections of this report contains certain “forward-looking statements.”

Certain matters discussed in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our future operations. 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 and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause 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 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 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 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 and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames

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and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common and preferred stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, 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 2012 Form 10-K.

Any of the forward-looking statements that we make in this Form 10-Q 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 report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. We caution readers not to place undue reliance on any forward-looking statements. These risks could cause our actual results for fiscal 2013 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 financial condition and results of operations as well as its stock price performance.

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 22 branches (including its main office in Hoquiam). At March 31, 2013, the Company had total assets of $738.12 million and total shareholders’ equity of $88.53 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.

The profitability of the Company’s operations depends primarily on its net interest income after provision for 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. Net interest income is affected by changes in the volume and mix of interest earning assets, interest earned on those assets, the volume and mix of interest bearing liabilities and interest paid on those interest bearing liabilities. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

The provision for 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 provision for loan losses reflects the amount that the Company believes is adequate to cover estimated credit losses in its loan portfolio.

Net income is also affected by non-interest income and non-interest expenses. For the three and six month periods ended March 31, 2013, non-interest income consisted primarily of service charges on deposit accounts, gain on sale of loans, ATM transaction fees, an increase in the cash surrender value of life insurance and other operating income. Non-interest income is increased by valuation recoveries on MSRs and reduced by valuation allowances on MSRs. Non-interest income is reduced by net OTTI losses on MBS and other investments. Non-interest expenses consisted primarily of salaries and employee benefits, premises and equipment, advertising, ATM expenses, OREO expenses, postage and courier expenses, professional fees, deposit insurance premiums, other insurance premiums, state and local taxes, loan administration and foreclosure expenses, deposit operation expenses and data processing expenses and telecommunication expenses. Non-interest income and non-interest expenses are affected by the growth of our operations and growth in the number of loan and deposit accounts.

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.

The Bank is a community-oriented bank which has traditionally offered a variety of savings products to its retail customers while concentrating its lending activities on real estate mortgage loans. 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-

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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.

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 Condensed Consolidated Financial Statements. Critical accounting policies and estimates are discussed in the Company’s 2012 Form 10-K under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies and Estimates.” That discussion highlights estimates the Company makes that involve uncertainty or potential for substantial change. There have not been any material changes in the Company’s critical accounting policies and estimates as compared to the disclosure contained in the Company’s 2012 Form 10-K.

Comparison of Financial Condition at March 31, 2013 and September 30, 2012

The Company’s total assets increased by $1.17 million, or 0.16%, to $738.12 million at March 31, 2013 from $736.95 million at September 30, 2012. The increase in total assets was primarily due to an increase in net loans receivable, CDs held for investment and OREO and other repossessed assets. These increases were partially offset by a decrease in total cash and cash equivalents.

Net loans receivable increased by $8.31 million, or 1.5%, to $546.79 million at March 31, 2013 from $538.48 million at September 30, 2012. The increase was primarily due to an increase in commercial real estate and one-to four-family loan balances. These increases were partially offset by decreases in construction and land development, land, commercial business and consumer loan balances.

Total deposits increased by $3.66 million, or 0.6%, to $601.59 million at March 31, 2013 from $597.93 million at September 30, 2012, primarily as a result of increases in money market account balances, non-interest bearing account balances, savings account balances and N.O.W. checking account balances. These increases were partially offset by a decrease in certificates of deposit account balances.

Shareholders’ equity decreased by $1.79 million, or 2.0%, to $88.53 million at March 31, 2013 from $90.32 million at September 30, 2012. The decrease in shareholders’ equity was primarily a result of the repurchase of 4,576 shares of Series A Preferred Stock and the payment of dividends on preferred and common stock. These decreases to shareholder's equity were partially offset by net income for the six months ended March 31, 2013.

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

Cash and Cash Equivalents and CDs Held for Investment: Cash and cash equivalents and CDs held for investment decreased by $8.30 million or 6.9%, to $111.86 million at March 31, 2013 from $120.16 million at September 30, 2012. The decrease was primarily used to fund loan growth and resulted in a $10.87 million decrease in cash and cash equivalents, which was partially offset by a $2.57 million increase in CDs held for investment.

MBS (Mortgage-backed Securities) and Other Investments: MBS and other investments decreased by $761,000, or 9.2%, to $7.52 million at March 31, 2013 from $8.28 million at September 30, 2012, primarily as a result of scheduled amortization and prepayments on MBS. OTTI charges of $35,000 were recorded on private label residential MBS during the six months ended March 31, 2013. For additional information on MBS and other investments, see Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Loans: Net loans receivable increased by $8.31 million, or 1.5%, to $546.79 million at March 31, 2013 from $538.48 million at September 30, 2012. The increase in the portfolio was primarily a result of a $27.05 million increase in commercial real estate loan balances, a $1.33 million increase in one-to four-family loan balances and a $4.16 million decrease in the undisbursed portion of construction loans in process. These increases to net loans receivable were partially offset by decreases of $16.75 million in construction and land development loan balances, $4.33 million in land loan balances, $2.20 million in commercial business loan balances, and $1.35 million in consumer loan balances. The increase in commercial real estate loan balances and the decrease in construction loan balances were primarily due to several large commercial construction loan projects converting to permanent financing during the six months ended March 31, 2013. The Company continued to reduce its exposure to land development and land loans. Land development loan balances decreased to $559,000 at March 31, 2013. The land loan portfolio decreased to $35.23 million at March 31, 2013, an 11.0% decrease from September 30, 2012. The land loan

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portfolio consists of 293 loans on a variety of land types including individual building lots, acreage, raw land and commercially zoned properties. The average loan balance for the entire land loan portfolio was approximately $121,000 at March 31, 2013.

Loan originations increased $7.95 million, or 7.8%, to $110.00 million for the six months ended March 31, 2013 from $102.05 million for the six months ended March 31, 2012. The Company continued to sell longer-term fixed rate loans for asset liability management purposes and to generate non-interest income. The Company sold fixed rate one- to four-family mortgage loans totaling $53.1 million for the six months ended March 31, 2013 compared to $46.81 million for the six months ended March 31, 2012.

For additional information, see Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Premises and Equipment: Premises and equipment increased by $240,000, or 1.3%, to $18.13 million at March 31, 2013 from $17.89 million at September 30, 2012. The increase was primarily due to several remodeling projects at branch offices.

OREO (Other Real Estate Owned): OREO and other repossessed assets increased by $1.73 million, or 13.0%, to $15.03 million at March 31, 2013 from $13.30 million at September 30, 2012. The increase was primarily due to the addition of $4.45 million in OREO properties and other repossessed assets and was partially offset by the disposition of $2.11 million in OREO properties and other repossessed assets and lower of cost or fair value losses of $619,000. At March 31, 2013, total OREO consisted of 56 individual properties. The properties consisted of eight commercial real estate properties totaling $6.07 million, 34 land parcels totaling $5.01 million, 11 single family homes totaling $1.55 million and three multi-family properties totaling $2.40 million.

Goodwill and CDI: The recorded amount of goodwill of $5.65 million at March 31, 2013 was unchanged from September 30, 2012. The recorded amount of the CDI decreased $65,000, or 26.1%, to $184,000 at March 31, 2013 from $249,000 at September 30, 2012. The decrease was attributable to scheduled amortization of the CDI.

Prepaid FDIC Insurance Assessment: The prepaid FDIC insurance assessment decreased $428,000, or 36.1%, to $758,000 at March 31, 2013 from $1.19 million at September 30, 2012 as a portion of the prepaid amount was expensed.

Deposits: Deposits increased by $3.66 million, or 0.6%, to $601.59 million at March 31, 2013 from $597.93 million at September 30, 2012. The increase was primarily the result of increases of $9.94 million in money market account balances, $5.64 million in non-interest account balances, $4.30 million in savings account balance and $1.93 million in N.O.W. checking account balances. These increases were partially offset by an $18.15 million decrease in certificates of deposit account balances. The increase in money market account balances was primarily due to a number of deposit customers converting their certificates of deposit accounts to money market accounts. The Company had no brokered deposits at March 31, 2013 or September 30, 2012.

FHLB Advances: The Company has short- and long-term borrowing lines with the FHLB of Seattle with total credit available 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. At March 31, 2013 FHLB advances and other borrowings consisted of long-term FHLB advances with scheduled maturities at various dates in fiscal 2017 and bear interest at rates ranging from 3.69% to 4.34%. A portion of these advances may be called by the FHLB at a date earlier than the scheduled maturity date. FHLB advances remained unchanged at $45.00 million at March 31, 2013 and September 30, 2012.

Shareholders’ Equity: Total shareholders’ equity decreased by $1.79 million, or 2.0%, to $88.53 million at March 31, 2013 from $90.32 million at September 30, 2012. The decrease was primarily due to the repurchase of 4,576 shares of Series A Preferred Stock for $4.32 million and the payment of $642,000 in dividends on common and preferred stock. These decreases to shareholders' equity were partially offset by net income of $2.99 million for the six months ended March 31, 2013.

Comparison of Operating Results for the Three and Six Months Ended March 31, 2013 and 2012

Net income increased $470,000, or 58.2%, to $1.28 million for the quarter ended March 31, 2013 from net income of $808,000 for the quarter ended March 31, 2012. Net income to common shareholders, after adjusting for the preferred stock dividend, the preferred stock discount accretion and the repurchase of preferred stock at a discount increased $659,000, or 121.8%, to $1.20 million for the quarter ended March 31, 2013 from $541,000 for the quarter ended March 31, 2012. The increase in earnings for the quarter was primarily a result of decreased non-interest expenses, increased non-interest income and increased

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net interest income, which was partially offset by increased provision for loan losses. Net income per diluted common share increased $0.09, or 112.5%, to $0.17 for the quarter ended March 31, 2013 from $0.08 for the quarter ended March 31, 2012.

Net income increased $896,000, or 42.9%, to $2.99 million for the six months ended March 31, 2013 from $2.09 million for the six months ended March 31, 2012. Net income to common shareholders after adjusting for the preferred stock dividend, the preferred stock discount accretion and the repurchase of preferred stock at a discount increased $1.09 million, or 69.9%, to $2.64 million for the six months ended March 31, 2013 from $1.56 million for the six months ended March 31, 2012. The increase in earnings for the six months ended March 31, 2013 was primarily a result of increased non-interest income, decreased provision for loan losses, increased net interest income and decreased non-interest expenses. Net income per diluted common share increased $0.16, or 69.6%, to $0.39 for the six months ended March 31, 2013 from $0.23 for the six months ended March 31, 2012.

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

Net Interest Income: Net interest income increased by $168,000, or 2.68%, to $6.44 million for the quarter ended March 31, 2013 from $6.27 million for the quarter ended March 31, 2012. The increase in net interest income was primarily attributable to an increase in the net interest margin to 3.83% for the quarter ended March 31, 2013 from 3.72% for the quarter ended March 31, 2012 as the decrease in interest expense was greater than the decrease in interest income.

Total interest and dividend income decreased by $252,000 or 3.2%, to $7.55 million for the quarter ended March 31, 2013 from $7.80 million for the quarter ended March 31, 2012 as the yield on interest bearing assets decreased to 4.49% from 4.63%. The decrease in the weighted average yield on interest bearing assets was primarily a result of decreased market rates for loans. Total interest expense decreased by $420,000, or 27.4%, to $1.11 million for the quarter ended March 31, 2013 from $1.53 million for the quarter ended March 31, 2012 as the average rate paid on interest bearing liabilities decreased to 0.80% for the quarter ended March 31, 2013 from 1.07% for the quarter ended March 31, 2012. The decrease in funding costs was primarily a result of a decrease in overall market rates and a change in the composition of the deposit base as the percentage of higher costing certificates of deposit account balances decreased.

Net interest income increased by $256,000, or 2.0%, to $12.83 million for the six months ended March 31, 2013 from $12.57 million for the six months ended March 31, 2012. The net interest margin for the six months ended March 31, 2013 increased to 3.80% compared to 3.73% for the six months ended March 31, 2012 as the decrease in interest expense was greater than the decrease in interest income.

Total interest and dividend income decreased by $695,000, or 4.4%, to $15.14 million for the six months ended March 31, 2013 from $15.84 million for the six months ended March 31, 2012 as the yield on interest bearing assets decreased to 4.49% for the six months ended March 31, 2013 from 4.69% for the six months ended March 31, 2012. Total interest expense decreased by $951,000, or 29.2%, to $2.31 million for the six months ended March 31, 2013 from $3.26 million for the six months ended March 31, 2012 as the average rate paid on interest bearing liabilities decreased to 0.82% for the six months ended March 31, 2013 from 1.13% for the six months ended March 31, 2012.

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Average Balances, Interest and Average Yields/Cost

The following tables 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-bearing 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. (Dollars in thousands)



	Three Months Ended March 31,
	2013						2012
	Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost
Interest-bearing assets: (1)
Loans receivable (2)	$	557,426	$	7,395	5.31	%	$	540,858	$	7,607	5.63	%
MBS and other investments (2)	6,721		70		4.17		9,025		109		4.83
FHLB stock and equity securities	6,595		5		0.31		6,703		7		4.20
Interest-bearing deposits	102,367		82		0.32		117,384		81		0.28
Total interest-bearing assets	673,109		7,552		4.49		673,960		7,804		4.63
Non-interest-bearing assets	65,709						58,912
Total assets	$	738,818					$	732,882

Interest-bearing liabilities:
Savings accounts	$	90,015	11		0.05		$	86,809	76		0.35
Money market accounts	87,055		64		0.30		68,178		86		0.51
N.O.W. accounts	150,675		115		0.31		155,584		156		0.40
Certificates of deposit	191,089		460		0.98		219,135		717		1.31
Short-term borrowings	599		—		0.05		637		—		0.05
Long-term borrowings (3)	45,000		461		4.15		45,330		496		4.39
Total interest-bearing liabilities	564,433		1,111		0.80		575,673		1,531		1.07
Non-interest-bearing liabilities	82,330						69,622
Total liabilities	646,763						645,295
Shareholders' equity	92,055						87,587
Total liabilities and
shareholders' equity	$	738,818					$	732,882


Net interest income			$	6,441					$	6,273

Interest rate spread					3.69	%					3.56	%
Net interest margin (4)					3.83	%					3.72	%
Ratio of average interest-bearing assets to average interest-bearing liabilities					119.25	%					117.08	%

_________________


(1)	Interest yield on loans and MBS is calculated assuming a 30/360 basis; interest yield on all other categories is based on daily interest basis.


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


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


(4)	Net interest income divided by total average interest-bearing assets, annualized.

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	Six Months Ended March 31,
	2013						2012
	Average Balance		Interest and Dividends		Yield/ Cost		Average Balance		Interest and Dividends		Yield/ Cost
Interest-bearing assets: (1)
Loans receivable (2)	$	555,404	$	14,809	5.31	%	$	539,359	$	15,412	5.71	%
MBS and other investments (2)	6,909		147		4.17		9,323		234		5.02
FHLB stock and equity securities	6,626		17		0.30		6,703		20		0.60
Interest-bearing deposits	105,673		168		0.32		119,322		170		0.28
Total interest-bearing assets	674,612		15,141		4.49		674,707		15,836		4.69
Non-interest-bearing assets	64,720						59,877
Total assets	$	739,332					$	734,584

Interest-bearing liabilities:
Savings accounts	$	88,749	32		0.07		$	85,654	159		0.37
Money market accounts	83,826		127		0.30		65,931		182		0.55
N.O.W. accounts	150,375		235		0.31		154,948		366		0.47
Certificates of deposit	196,123		984		1.01		221,361		1,497		1.35
Short-term borrowings	625		—		0.05		598		—		0.05
Long-term borrowings (3)	45,000		933		4.16		50,191		1,058		4.20
Total interest-bearing liabilities	564,698		2,311		0.82		578,683		3,262		1.13
Non-interest-bearing liabilities	83,253						68,843
Total liabilities	647,951						647,256
Shareholders' equity	91,381						87,058
Total liabilities and
shareholders' equity	$	739,332					$	734,584


Net interest income			$	12,830					$	12,574

Interest rate spread					3.67	%					3.56	%
Net interest margin (4)					3.80	%					3.73	%
Ratio of average interest-bearing assets to average interest-bearing liabilities					119.46	%					116.59	%

_________________


(1)	Interest yield on loans and MBS is calculated assuming a 30/360 basis; interest yield on all other categories is based on daily interest basis.


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


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


(4)	Net interest income divided by total average interest-bearing assets, annualized.

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Rate Volume Analysis

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



	Three months ended March 31, 2013 compared to three months ended March 31, 2012 increase (decrease) due to									Six months ended March 31, 2013 compared to six months ended March 31, 2012 increase (decrease) due to
	Rate			Volume			Net Change			Rate			Volume			Net Change
Interest-bearing assets:
Loans receivable (1)	$	(440	)	$	228		$	(212	)	$	(734	)	$	131		$	(603	)
MBS and other investments	(14		)	(25		)	(39		)	(32		)	(55		)	(87		)
FHLB stock and equity securities	(2		)	—			(2		)	(3		)	—			(3		)
Interest-bearing deposits	12			(11		)	1			9			(11		)	(2		)
Total net (decrease) increase in income on interest-bearing assets	(444		)	192			(252		)	(760		)	65			(695		)

Interest-bearing liabilities:
Savings accounts	(68		)	3			(65		)	(127		)	—			(127		)
N.O.W accounts	(36		)	(5		)	(41		)	(121		)	(10		)	(131		)
Money market accounts	(42		)	20			(22		)	(65		)	10			(55		)
Certificates of deposit accounts	(171		)	(86		)	(257		)	(354		)	(159		)	(513		)
Short-term borrowings	—			—			—			—			—			—
Long-term borrowings	(30		)	(5		)	(35		)	(12		)	(113		)	(125		)

Total net decrease in expense on interest-bearing liabilities	(347		)	(73		)	(420		)	(679		)	(272		)	(951		)

Net increase (decrease) in net interest income	$	(97	)	$	265		$	168		$	(81	)	$	337		$	256

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

Provision for Loan Losses: The provision for loan losses increased $125,000, or 11.9%, to $1.18 million for the quarter ended March 31, 2013 from $1.05 million for the quarter ended March 31, 2012. Net charge-offs for the quarter ended March 31, 2013 increased to $1.63 million from $758,000 for the quarter ended March 31, 2013. The increase in the provision for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012 was primarily due to the increased charge-offs, which were partially offset by a change in the composition of the loan portfolio (discussed below).

The provision for loan losses decreased $325,000, or 19.1% to $1.38 million for the six months ended March 31, 2013 from $1.70 million for the six months ended March 31, 2013. Net charge-offs for the six months ended March 31, 2013 were $1.89 million compared to $1.38 million for the six months ended March 31, 2012.

The decrease in the provision for loan losses for the six months ended March 31, 2013 was primarily due to a change in the composition of the loan portfolio as the level of higher risk loan categories (net construction and land development loans and land loans) decreased $27.56 million to $62.82 million at March 31, 2013 from $90.38 million at March 31, 2012. In addition, non-accrual loans decreased to $20.45 million at March 31, 2013 from $26.62 million at March 31, 2012. Partially offsetting the improved risk composition of the loan portfolio and the reduction in non-accrual levels was an increase in the level of net charge-offs.

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The Company has established a comprehensive methodology for determining the provision for loan losses. On a quarterly basis the Company performs an analysis that considers pertinent factors underlying the quality of the loan portfolio. The 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. Based on its comprehensive analysis, management believes the allowance for loan losses of $11.31 million at March 31, 2013 (2.03% of loans receivable and loans held for sale and 54.9% 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. Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be allocated to each loan. The aggregate principal impairment reserve amount determined at March 31, 2013 was $2.79 million. The allowance for loan losses was $12.26 million (2.24% of loans receivable and loans held for sale and 41.4% of non-performing loans) at March 31, 2012.

While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proved incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact the Company’s consolidated financial condition and results of operations. In addition, the determination of the amount of the Company’s allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their analysis of information available to them at the time of their examination. 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 Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements contained in “Item 1, Financial Statements.”

Non-interest Income: Total non-interest income increased $285,000, or 11.4%, to $2.78 million for the quarter ended March 31, 2013 from $2.49 million for the quarter ended March 31, 2012, primarily due to a $237,000 increase in gain on sale of loans. The increase in gain on sales of loans was primarily a result of an increased volume of fixed rate one-to four-family loans that were sold and an increased pricing spread on the sale of these loans during the quarter ended March 31, 2013.

Total non-interest income increased $556,000, or 11.3%, to $5.49 million for the six months ended March 31, 2013 from $4.94 million for the six months ended March 31, 2012. The increase was primarily due to a $320,000 increase in gains on sales of loans and a $249,000 increase in the valuation recovery on MSRs. The increase in gain on sale of loans was primarily a result of an increased volume of fixed rate one-to four-family loans sold during the six months ended March 31, 2013.

The valuation recovery on MSRs was based on a third party valuation of the MSR asset. The Company recorded valuation recoveries on MSRs for the three and six months ended March 31, 2013 of $221,000 and $475,000, respectively compared to recoveries for three and six months ended March 31, 2012 of $142,000 and $226,000, respectively. At March 31, 2013, the MSR asset had no remaining valuation allowance available for future recovery.

Non-interest Expense: Total non-interest expense decreased by $388,000, or 5.9%, to $6.18 million for the quarter ended March 31, 2013 from $6.57 million for the quarter ended March 31, 2012. The decrease was primarily the result of a $323,000 decrease in loan administration and foreclosure expenses and a $113,000 decrease in FDIC insurance expenses. These decreases were partially offset by a $72,000 increase in OREO and other repossessed assets expense. The decrease in loan administration and foreclosures expenses were primarily due to a reduction in loans in the foreclosures process. The decrease in FDIC insurance expenses were primarily due to lower assessment rates as a result of the Bank MOU being rescinded. The increase in OREO and other repossessed assets expense was primarily due to an increased level of valuation adjustments on OREO properties.

Total non-interest expense decreased $233,000, or 1.8%, to $12.56 million for the six months ended March 31, 2013 from $12.79 million for the six months ended March 31, 2012. The decrease was primarily due to a $346,000 decrease in loan administration and foreclosure expenses and a $142,000 decrease in OREO and other repossessed assets expense. These decreases were partially offset by a $217,000 increase in salaries and employee benefits expense. The decrease in loan administration and foreclosures expenses were primarily due to a reduction in loans in the foreclosures process. The decrease in OREO and other repossessed assets expense was primarily due to gains on sale of OREO properties that reduced the expense for the six months ended March 31, 2013. The increase in salaries and employee benefits expense was primarily due to annual salary adjustments implemented during the quarter ended December 31, 2012 and a one-time benefit from changing the Company’s employee medical insurance provider during the comparable period one year ago. This one-time benefit reduced the salaries and employee benefits expense for the six months ended March 31, 2012 by $99,000.

Provision for Federal and State Income Taxes: The provision for federal and state income taxes increased $246,000, or 73.2%, to $582,000 for the quarter ended March 31, 2013 from $336,000 for the quarter ended March 31, 2012, primarily as a

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result of increased income before taxes. The Company's effective tax rate was 31.29% for the quarter ended March 31, 2013 and 29.37% for the quarter ended March 31, 2012.

The provision for federal and state income taxes increased $474,000, or 51.1%, to $1.40 million for the six months ended March 31, 2013 from $927,000 for the six months ended March 31, 2012, primarily due to increased income before taxes. The Company's effective tax rate was 31.94% for the six months ended March 31, 2013 and 30.73% for the six months ended March 31, 2012.

Liquidity

The Company’s primary sources of funds are customer deposits, proceeds from principal and interest payments on loans and MBS, proceeds from the sale of loans, proceeds from maturing securities and maturing CDs held for investment, FHLB advances, and other borrowings. While 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.

Liquidity management is both a short and long-term responsibility of the Bank’s management. The Bank adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, and (iv) yields available on interest-bearing deposits. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term investments

The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2013, the Bank’s regulatory liquidity ratio (net cash, and short-term and marketable assets, as a percentage of net deposits and short-term liabilities) was 17.4%.

The Company’s total cash and cash equivalents decreased by $10.87 million, or 12.7% to $85.80 million at March 31, 2013 from $96.67 million at September 30, 2012. If the Bank requires funds that exceed its ability to generate them internally, it has additional borrowing capacity with the FHLB and the FRB. At March 31, 2013 the Bank maintained an uncommitted credit facility with the FHLB that provided for immediately available advances up to an aggregate amount equal to 30% of total assets, limited by available collateral, under which $45.00 million was outstanding and $172.26 million was available for additional borrowings. The Bank also maintains a short-term borrowing line with the FRB with available total credit based on eligible collateral. At March 31,2013, the Bank had $54.38 million available for borrowings with the FRB and there was no outstanding balance on this borrowing line.

The Bank’s primary investing activity is the origination of one- to four-family mortgage loans, commercial mortgage loans, construction loans, consumer loans, and commercial business loans. At March 31 2013, the Bank had loan commitments totaling $29.48 million and undisbursed construction loans in process totaling $12.16 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 March 31, 2013 totaled $121.2 million. Historically, the Bank has been able to retain a significant amount of its CDs as they mature. At March 31, 2013, the Bank had no brokered deposits.

Capital Resources

Timberland Bancorp, Inc. 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. Timberland Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC.

The capital adequacy requirements are quantitative measures established by regulation that require Timberland Bancorp, Inc. and the Bank to maintain minimum amounts and ratios of capital. Federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital. Under current FDIC regulations, insured state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage capital to total assets of at least 3.0%, (4.0% to 5.0% for all but the most highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at least 8.0%. The Federal Reserve requires Timberland Bancorp, Inc. to maintain capital adequacy that generally parallels the FDIC requirements. At March 31, 2013, Timberland Bancorp, Inc. and the Bank each exceeded all applicable capital requirements.

The following table compares the Company’s and the Bank’s actual capital amounts at March 31, 2013 to its minimum regulatory capital requirements at that date (dollars in thousands):

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	Actual				Regulatory Minimum To Be “Adequately Capitalized”				To Be “Well Capitalized” Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 leverage capital:
Consolidated	$	83,843	11.43	%	$	29,347	4.00	%	N/A		N/A
Timberland Bank	80,328		10.98		29,277		4.00		$	36,596	5.00

Tier 1 risk adjusted capital:
Consolidated	83,843		14.95		22,427		4.00		N/A		N/A
Timberland Bank	80,328		14.33		22,418		4.00		33,627		6.00

Total risk–based capital
Consolidated	90,905		16.21		44,854		8.00		N/A		N/A
Timberland Bank	87,387		15.59		44,836		8.00		56,045		10.00

Key Financial Ratios and Data

(Dollars in thousands, except per share data)



	Three Months Ended March 31,				Six Months Ended March 31,
	2013		2012		2013		2012
PERFORMANCE RATIOS:
Return on average assets (1)	0.69	%	0.44	%	0.81	%	0.57	%
Return on average equity (1)	5.56	%	3.69	%	6.54	%	4.80	%
Net interest margin (1)	3.83	%	3.72	%	3.80	%	3.73	%
Efficiency ratio	67.08	%	74.97	%	68.55	%	73.06	%



	At March 31, 2013	At September 30, 2012	At March 31, 2012
BOOK VALUES:
Book value per common share	10.89	10.52	10.20
Tangible book value per common share (2)	10.06	9.68	9.35

______________________


(1)	Annualized


(2)	Calculation subtracts goodwill and core deposit intangible from the equity component.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in information concerning market risk from the information provided in the Company’s Form 10-K for the fiscal year ended September 30, 2012.

Item 4. 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 report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2013 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and

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communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner to allow timely decisions regarding required disclosure, 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 March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company continued, however, to implement suggestions from its internal auditor and independent auditors to strengthen existing controls. The Company does not expect that its disclosure controls and procedures and internal control 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; as over time, controls may 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither the Company nor the Bank is a party to any material legal proceedings at this time. From time to time,

the Bank is involved in various claims and legal actions arising in the ordinary course of business.

Item 1A. Risk Factors

There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company’s

2012 Form 10-K, other than the risk factors related to the Company MOU. On January 15, 2013, the FRB notified the Company that the Company MOU had been rescinded.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None to be reported.

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Item 6. Exhibits

(a) Exhibits



	3.1	Articles of Incorporation of the Registrant (1)
	3.2	Certificate of Designation relating to the Company’s Fixed Rate Cumulative Perpetual Preferred Stock Series A (2)
	3.3	Amended and Restated Bylaws of the Registrant (3)
	4.1	Warrant to purchase shares of Company’s common stock dated December 23, 2008 (2)
	4.2	Letter Agreement (including Securities Purchase Agreement Standard Terms attached as Exhibit A) dated December 23, 2008 between the Company and the United States Department of the Treasury (2)
	10.1	Employee Severance Compensation Plan, as revised (4)
	10.2	Employee Stock Ownership Plan (4)
	10.3	1999 Stock Option Plan (5)
	10.4	Management Recognition and Development Plan (5)
	10.5	2003 Stock Option Plan (6)
	10.6	Form of Incentive Stock Option Agreement (7)
	10.7	Form of Non-qualified Stock Option Agreement (7)
	10.8	Form of Management Recognition and Development Award Agreement (7)
	10.9	Employment Agreement with Michael R. Sand (8)
	10.10	Employment Agreement with Dean J. Brydon (8)
	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes OxleyAct
	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act
	32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act
	101	The following materials from Timberland Bancorp Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted on Extensible Business Reporting Language (XBRL) (a) Condensed Consolidated Balance Sheets; (b) Condensed Consolidated Statements of Income; (c) Condensed Consolidated Statements of Comprehensive Income; (d) Condensed Consolidated Statements of Shareholders’ Equity; (e) Condensed Consolidated Statements of Cash Flows; and (f) Notes to Unaudited Condensed Consolidated Financial Statements (9)

_________________


(1)	Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (333- 35817).


(2)	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 23, 2008.


(3)	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 29, 2010.


(4)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1997; and to the Registrant’s Current Report on Form 8-K dated April 13, 2007, and to the Registrant’s Current Report on Form 8-K dated December 18, 2007.


(5)	Incorporated by reference to the Registrant’s 1999 Annual Meeting Proxy Statement dated December 15, 1998.


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


(7)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended September 30, 2005.


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


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

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SIGNATURES

Pursuant to the requirements 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: May 10, 2013	By: /s/ Michael R. Sand
	Michael R. Sand
	Chief Executive Officer
	(Principal Executive Officer)

Date: May 10, 2013	By: /s/ Dean J. Brydon
	Dean J. Brydon
	Chief Financial Officer
	(Principal Financial Officer)

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EXHIBIT INDEX



Exhibit No.	Description of Exhibit

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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted on Extensible Business Reporting Language (XBRL) (a) Condensed Consolidated Balance Sheets; (b) Condensed Consolidated Statements of Operations; (c) Condensed Consolidated Statements of Comprehensive Income (Loss); (d) Condensed Consolidated Statements of Shareholders’ Equity; (e) Condensed Consolidated Statements of Cash Flows; and (f) Notes to Unaudited Condensed Consolidated Financial Statements

Timberland Bancorp - 10-Q quarterly report FY2013 Q2

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