XNAS:TSBK Timberland Bancorp, Inc. Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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• TIMBERLAND BANCORP, INC. FORM 10-Q • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32 • EXHIBIT 101-INS • EXHIBIT 101-PRE • EXHIBIT 101-LAB • EXHIBIT 101-DEF • EXHIBIT 101-CAL • EXHIBIT 101-SCH

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, 2012

[ ] 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, 2012
Common stock, $.01 par value	7,045,036

INDEX

		Page
PART I. FINANCIAL INFORMATION

	Item 1. Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income	4-5

	Condensed Consolidated Statements of Comprehensive Income	6

	Condensed Consolidated Statements of Shareholders’ Equity	7

	Condensed Consolidated Statements of Cash Flows	8-9

	Notes to Unaudited Condensed Consolidated Financial Statements	10-37

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37-54

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	55

	Item 4. Controls and Procedures	55

PART II. OTHER INFORMATION

	Item 1. Legal Proceedings	55

	Item 1A. Risk Factors	55

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56

	Item 3. Defaults Upon Senior Securities	56

	Item 4. Mine Safety Disclosures	56

	Item 5. Other Information	56

	Item 6. Exhibits	56-57

SIGNATURES		58

Certifications

Exhibit 31.1

Exhibit 31.2

Exhibit 32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2012 and September 30, 2011

(Dollars in thousands, except per share amounts)

(Unaudited)

	March 31,	September 30,
	2012	2011
Assets
Cash and cash equivalents:
Cash and due from financial institutions	$ 11,154	$ 11,455
Interest-bearing deposits in banks	100,467	100,610
Total cash and cash equivalents	111,621	112,065

Certificates of deposit (“CDs”) held for investment (at cost which approximates fair value)	20,180	18,659
Mortgage-backed securities (“MBS”) and other investments - held to maturity, at amortized cost (estimated fair value $3,828 and $4,229)	3,706	4,145
MBS and other investments - available for sale	5,261	6,717
Federal Home Loan Bank of Seattle (“FHLB”) stock	5,705	5,705

Loans receivable	545,961	535,926
Loans held for sale	1,296	4,044
Less: Allowance for loan losses	(12,264)	(11,946)
Net loans receivable	534,993	528,024

Premises and equipment, net	17,640	17,390
Other real estate owned (“OREO”) and other repossessed assets, net	8,024	10,811
Accrued interest receivable	2,369	2,411
Bank owned life insurance (“BOLI”)	16,228	15,917
Goodwill	5,650	5,650
Core deposit intangible (“CDI”)	323	397
Mortgage servicing rights (“MSRs”), net	2,284	2,108
Prepaid Federal Deposit Insurance Corporation (“FDIC”) insurance assessment	1,643	2,103
Other assets	7,082	6,122
Total assets	$742,709	$738,224

Liabilities and shareholders’ equity
Liabilities:
Deposits: Non-interest-bearing demand	$ 69,633	$ 64,494
Deposits: Interest-bearing	534,963	528,184
Total deposits	604,596	592,678

FHLB advances	45,000	55,000
Repurchase agreements	948	729
Other liabilities and accrued expenses	4,181	3,612
Total liabilities	654,725	652,019

Shareholders’ equity
Preferred stock, $.01 par value; 1,000,000 shares authorized; 16,641 shares, Series A, issued and outstanding; $1,000 per share liquidation value	16,107	15,989
Common stock, $.01 par value; 50,000,000 shares authorized; 7,045,036 shares issued and outstanding	10,480	10,457
Unearned shares - Employee Stock Ownership Plan (“ESOP”)	(1,851)	(1,983)
Retained earnings	63,826	62,270
Accumulated other comprehensive loss	(578)	(528)
Total shareholders’ equity	87,984	86,205
Total liabilities and shareholders’ equity	$742,709	$738,224

See notes to unaudited condensed consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the three and six months ended March 31, 2012 and 2011

(Dollars in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,		Six Months Ended March 31,
	2012	2011	2012	2011
Interest and dividend income

Loans receivable	$7,607	$8,240	$15,412	$16,774
MBS and other investments	109	162	234	344
Dividends from mutual funds	7	8	20	16
Interest-bearing deposits in banks	81	83	170	170
Total interest and dividend income	7,804	8,493	15,836	17,304

Interest expense

Deposits	1,035	1,591	2,204	3,342
FHLB advances	496	550	1,058	1,279
Total interest expense	1,531	2,141	3,262	4,621

Net interest income	6,273	6,352	12,574	12,683

Provision for loan losses	1,050	700	1,700	1,600

Net interest income after provision for loan
Losses	5,223	5,652	10,874	11,083

Non-interest income

Other than temporary impairment (“OTTI”)
on MBS and other investments	(94)	(9)	(123)	(154)
Adjustment for portion recorded as other
comprehensive loss (before taxes)	--	(26)	(30)	(17)
Net OTTI on MBS and other investments	(94)	(35)	(153)	(171)

Realized losses on MBS and other investments	--	(2)	--	(2)
Gain on sales of MBS and other investments	20	--	20	79
Service charges on deposits	890	898	1,860	1,882
ATM transaction fees	540	458	1,057	869
BOLI net earnings	154	118	311	240
Gain on sales of loans, net	596	266	1,155	967
Servicing income (expense) on loans sold	4	16	13	(20)
Escrow fees	22	18	49	39
Valuation recovery on MSRs	142	206	226	840
Fee income from non-deposit investment sales	26	17	38	48
Other	193	148	361	289
Total non-interest income, net	2,493	2,108	4,937	5,060

See notes to unaudited condensed consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)

For the three and six months ended March 31, 2012 and 2011

(Dollars in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,		Six Months Ended March 31,
	2012	2011	2012	2011
Non-Interest expense

Salaries and employee benefits	$ 3,055	$ 3,115	$ 5,983	$ 6,243
Premises and equipment	682	658	1,332	1,328
Advertising	172	201	380	368
OREO and other repossessed assets, net	434	6	936	434
ATM expenses	197	206	392	380
Postage and courier	139	146	257	261
Amortization of CDI	37	42	74	83
State and local taxes	152	160	301	320
Professional fees	232	196	411	377
FDIC insurance	241	332	466	672
Other insurance	53	89	109	243
Loan administration and foreclosure	372	267	533	365
Data processing and telecommunications	315	281	615	561
Deposit operations	193	140	416	245
Other	298	339	589	674
Total non-interest expense	6,572	6,178	12,794	12,554

Income before federal and state income taxes	1,144	1,582	3,017	3,589

Provision for federal and state income taxes	336	499	927	1,147

Net income	808	1,083	2,090	2,442

Preferred stock dividends	(208)	(208)	(416)	(416)
Preferred stock discount accretion	(59)	(56)	(118)	(111)

Net income to common shareholders	$ 541	$ 819	$ 1,556	$ 1,915

Net income per common share
Basic	$ 0.08	$ 0.12	$ 0.23	$ 0.28
Diluted	$ 0.08	$ 0.12	$ 0.23	$ 0.28

Weighted average common shares outstanding
Basic	6,780,516	6,745,250	6,780,516	6,745,250
Diluted	6,780,516	6,745,250	6,780,516	6,745,250

See notes to unaudited condensed consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three and six months ended March 31, 2012 and 2011

(In thousands)

(Unaudited)

	Three Months Ended March 31,		Six Months Ended March 31,
	2012	2011	2012	2011
Comprehensive income:
Net income	$ 808	$ 1,083	$ 2,090	$ 2,442
Unrealized holding gain (loss) on securities
available for sale, net of tax	(42)	27	(56)	(48)
Change in OTTI on securities held to maturity, net of tax:
Additions	(13)	(8)	(27)	(55)
Additional amount recognized related to credit loss for which OTTI was previously
recognized	8	13	(4)	9
Amount reclassified to credit loss for
previously recorded market loss	5	12	11	57
Accretion of OTTI securities held to maturity,
net of tax	15	13	26	19

Total comprehensive income	$ 781	$ 1,140	$ 2,040	$ 2,424

See notes to unaudited condensed consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the six months ended March 31, 2012 and the year ended September 30, 2011

(Dollars in thousands)

(Unaudited)

	Number of Shares		Amount		Unearned		Accumulated Other Compre-
	Preferred Stock	Common Stock	Preferred Stock	Common Stock	Shares ESOP	Retained Earnings	hensive Loss	Total

Balance, September 30, 2010	16,641	7,045,036	$15,764	$10,377	$(2,247)	$62,238	$(724)	$85,408

Net income	--	--	--	--	--	1,089	--	1,089
Accretion of preferred stock discount	--	--	225	--	--	(225)	--	--
5% preferred stock dividend	--	--	--	--	--	(832)	--	(832)
Earned ESOP shares	--	--	--	(61)	264	--	--	203
MRDP (1) compensation expense	--	--	--	134	--	--	--	134
Stock option compensation expense	--	--	--	7	--	--	--	7
Unrealized holding gain on securities available for sale, net of tax	--	--	--	--	--	--	14	14
Change in OTTI on securities held to maturity, net of tax	--	--	--	--	--	--	139	139
Accretion of OTTI on securities held to maturity, net of tax	--	--	--	--	--	--	43	43

Balance, September 30, 2011	16,641	7,045,036	15,989	10,457	(1,983)	62,270	(528)	86,205

Net income	--	--	--	--	--	2,090	--	2,090
Accretion of preferred stock discount	--	--	118	--	--	(118)	--	--
5% preferred stock dividend	--	--	--	--	--	(416)	--	(416)
Earned ESOP shares	--	--	--	(39)	132	--	--	93
MRDP compensation expense	--	--	--	55	--	--	--	55
Stock option compensation expense	--	--	--	7	--	--	--	7
Unrealized holding loss on securities available for sale, net of tax	--	--	--	--	--	--	(56)	(56)
Change in OTTI on securities held to maturity, net of tax	--	--	--	--	--	--	(20)	(20)
Accretion of OTTI on securities held to maturity, net of tax				--	--	--	26	26

Balance, March 31, 2012	16,641	7,045,036	$16,107	$10,480	$(1,851)	$63,826	$(578)	$87,984

__________________________

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

See notes to unaudited condensed consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended March 31, 2012 and 2011

(Dollars in thousands)

(Unaudited)

	Six Months Ended March 31,
	2012	2011
Cash flow from operating activities
Net income	$ 2,090	$ 2,442
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,700	1,600
Depreciation	460	499
Deferred federal income taxes	353	128
Amortization of CDI	74	83
Earned ESOP shares	132	132
MRDP compensation expense	55	85
Stock option compensation expense	7	3
Loss (gain) on sales of OREO and other repossessed assets, net	294	(555)
Provision for OREO losses	372	684
Loss on disposition of premises and equipment	--	3
BOLI net earnings	(311)	(240)
Gain on sales of loans, net	(1,155)	(967)
Decrease in deferred loan origination fees	(86)	(169)
Net OTTI on MBS and other investments	153	171
Gain on sales of MBS and other investments	(20)	(79)
Realized losses on held to maturity securities	--	2
Valuation recovery on MSRs	(226)	(840)
Loans originated for sale	(43,684)	(35,449)
Proceeds from sales of loans	47,588	38,217
(Decrease) increase in other assets, net	(774)	409
Increase in other liabilities and accrued expenses, net	153	316
Net cash provided by operating activities	7,175	6,475

Cash flow from investing activities
Net (increase) decrease in CDs held for investment	(1,521)	617
Proceeds from maturities and prepayments of MBS and other investments available for sale	617	981
Proceeds from maturities and prepayments of MBS and other investments held to maturity	364	497
Proceeds from sales of MBS and other investments	743	2,272
Increase in loans receivable, net	(9,908)	(3,395)
Additions to premises and equipment	(710)	(225)
Proceeds from sales of OREO and other repossessed assets	698	1,777
Net cash (used in) provided by investing activities	(9,717)	2,524

Cash flow from financing activities
Increase in deposits, net	11,918	18,294
Repayment of FHLB advances	(10,000)	(20,000)
Increase (decrease) in repurchase agreements	219	(27)
ESOP tax effect	(39)	(55)
Net cash provided by (used in) financing activities	2,098	(1,788)

See notes to unaudited condensed consolidated financial statements

TIMBERLAND BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the six months ended March 31, 2012 and 2011

(Dollars in thousands)

(Unaudited)

	Six Months Ended March 31,
	2012	2011

Net (decrease) increase in cash and cash equivalents	$ (444)	$ 7,211
Cash and cash equivalents
Beginning of period	112,065	111,786
End of period	$ 111,621	$ 118,997

Supplemental disclosure of cash flow information
Income taxes paid	$ 918	$ 1,137
Interest paid	3,390	4,738

Supplemental disclosure of non-cash investing activities
Loans transferred to OREO and other repossessed assets	$ 1,937	$ 2,065
Loan originated to facilitate the sale of OREO	3,360	1,538

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, 2011 (“2011 Form 10-K”). The unaudited condensed consolidated results of operations for the six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2012.

(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 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, 2012 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 (“Division”) determined that the Bank required supervisory attention and, on December 29, 2009, entered into an agreement on a Memorandum of Understanding with the Bank (“Bank MOU”). Under the Bank MOU, the Bank must, among other things, maintain Tier 1 Capital of not less than 10.0% of the Bank’s adjusted total assets and maintain capital ratios above the “well capitalized” thresholds as defined under FDIC Rules and Regulations; obtain the prior consent from the FDIC and the Division prior to the Bank declaring a dividend to its holding company; and not engage in any transactions that would materially change the Bank’s balance sheet composition including growth in total assets of five percent or more or significant changes in funding sources without the prior non-objection of the FDIC.

In addition, on February 1, 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 (“Company MOU”). Under the Company MOU, the Company must, among other things, 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. The FRB has denied the Company’s requests to pay dividends on its Series A Preferred Stock issued under the U.S. Treasury Department’s Capital Purchase Program (“CPP”) for quarterly payments due for the last eight quarters commencing with the payments due May 15, 2010. For additional information on the CPP, see Note 3 below entitled “U.S Treasury Department’s Capital Purchase Program.”

(3) U.S. TREASURY DEPARTMENT’S CAPITAL PURCHASE PROGRAM

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. The CPP was established as part of the Troubled Asset Relief Program (“TARP”). The Company sold 16,641 shares of senior preferred stock with a related warrant to purchase 370,899 shares of the Company’s common stock at a price of $6.73 per share at any time through December 23, 2018. The 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.

Preferred stock is initially recorded at the amount of proceeds received. Any 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 paid (or accrued) and any accretion is deducted from net income for computing net income to common shareholders and net income per share computations.

Under the Company MOU, the Company must, among other things, obtain prior written approval or non-objection from the FRB to declare or pay any dividends. The FRB has denied the Company’s requests to pay dividends on its Series A Preferred Stock issued under the CPP for quarterly payments due for the last eight quarters commencing with the payment due May 15, 2010. There can be no assurances that the FRB will approve such payments or dividends in the future. The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all cumulative preferred dividends that are due. Since dividends on the Series A Preferred Stock have not been paid for at least six quarters, the Treasury has the right to appoint two members to the Company’s Board of Directors.

(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, 2012 and September 30, 2011 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2012
Held to Maturity
MBS:
U.S. government agencies	$	1,690	$	34	$	(8	)	$	1,716
Private label residential		1,989		200		(106	)		2,083
U.S. agency securities		27		2		--			29
Total	$	3,706	$	236	$	(114	)	$	3,828

Available for Sale
MBS:
U.S. government agencies	$	3,165	$	116	$	--		$	3,281
Private label residential		1,086		60		(159	)		987
Mutual funds		1,000		--		(7	)		993
Total	$	5,251	$	176	$	(166	)	$	5,261

September 30, 2011
Held to Maturity
MBS:
U.S. government agencies	$	1,831	$	45	$	(4	)	$	1,872
Private label residential		2,287		311		(271	)		2,327
U.S. agency securities		27		3		--			30
Total	$	4,145	$	359	$	(275	)	$	4,229

Available for Sale
MBS:
U.S. government agencies	$	4,395	$	188	$	--		$	4,583
Private label residential		1,227		59		(152	)		1,134
Mutual funds		1,000		--		--			1,000
Total	$	6,622	$	247	$	(152	)	$	6,717

The estimated fair value of temporarily impaired securities, the amount of unrealized losses and the length of time these unrealized losses existed as of March 31, 2012 are as follows (dollars in thousands):

	Less Than 12 Months					12 Months or Longer					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Held to Maturity MBS:
U.S. government agencies	$	119	$	(2	)	$	338	$	(6	)	$	457	$	(8	)
Private label residential		68		(3	)		729		(103	)		797		(106	)
Total	$	187	$	(5	)	$	1,067	$	(109	)	$	1,254	$	(114	)

Available for Sale
MBS:
U.S. government agencies	$	- -	$	- -		$	- -	$	- -		$	- -	$	- -
Private label residential		- -		- -			669		(159	)		669		(159	)
Mutual funds		- -		- -			993		(7	)		993		(7	)
Total	$	- -	$	- -		$	1,662	$	(166	)	$	1,662	$	(166	)

During the three months ended March 31, 2012 and 2011, the Company recorded net OTTI charges through earnings on residential MBS of $94,000 and $35,000, respectively. During the six months ended March 31, 2012 and 2011, the Company recorded net OTTI charges through earnings on residential MBS of $153,000 and $171,000, 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, prepayment speeds and third-party analytic reports. Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans. The following table presents a summary of the significant inputs utilized to measure management’s estimate of the credit loss component on OTTI securities as of March 31, 2012 and September 30, 2011:

	Range							Weighted
	Minimum			Maximum			Average
At March 31, 2012
Constant prepayment rate		6.00	%		15.00	%			9.05	%
Collateral default rate		0.01	%		26.53	%			10.38	%
Loss severity rate		0.23	%		79.24	%			52.30	%

At September 30, 2011
Constant prepayment rate		6.00	%		15.00	%			10.71	%
Collateral default rate		0.43	%		24.23	%			8.03	%
Loss severity rate		11.93	%		64.54	%			39.22	%

The following tables present the OTTI for the three and six months ended March 31, 2012 and 2011 (dollars in thousands):

	Three Months Ended March 31, 2012		Three Months Ended March 31, 2011
	Held To Maturity	Available For Sale	Held To Maturity	Available For Sale
Total OTTI	$ 88	$ 6	$ 8	$ 1
Portion of OTTI recognized in other comprehensive (income) loss (before income taxes) (1)	--	--	26	--
Net OTTI recognized in earnings (2)	$ 88	$ 6	$ 34	$ 1

	Six Months Ended March 31, 2012		Six Months Ended March 31, 2011
	Held To Maturity	Available For Sale	Held To Maturity	Available For Sale
Total OTTI	$ 140	$ 43	$ 153	$ 1
Portion of OTTI recognized in other comprehensive (income) loss (before income taxes) (1)	(30)	--	17	--
Net OTTI recognized in earnings (2)	$ 110	$ 43	$ 170	$ 1

________________________

(1)	Represents OTTI related to all other factors.

(2)	Represents OTTI related to credit losses.

The following table presents a roll-forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings and the remaining impairment loss related to all other factors recognized in other comprehensive income for the six months ended March 31, 2012 and 2011 (in thousands):

	Six Months Ended March 31,
	2012			2011
Beginning balance of credit loss	$	3,361		$	4,725
Additions:
Credit losses for which OTTI was not previously recognized		66			47
Additional increases to the amount related to credit loss for which OTTI was previously recognized		87			124
Subtractions:
Realized losses previously recorded as credit losses		(419	)		(881	)
Ending balance of credit loss	$	3,095		$	4,015

There was a gross realized gain on sale of securities for both the three and six months ended March 31, 2012 of $20,000. There were no gross realized gains on sale of MBS and other investments for the three months ended March 31, 2011. There was a gross realized gain on sale of MBS and other investments for the six months ended March 31, 2011 of $79,000. 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. During the three months ended March 31, 2011, the Company recorded a $386,000 realized loss (as a result of the securities being deemed worthless) on 17 held to maturity residential MBS of which $384,000 had previously been recognized as a credit loss. During the six months ended March 31, 2011, the Company recorded a $883,000 realized loss on 18 held to maturity residential MBS and one available for sale residential MBS of which $881,000 had previously been recognized 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 $6.28 million and $7.88 million at March 31, 2012 and September 30, 2011, respectively.

The contractual maturities of debt securities at March 31, 2012 are 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	$ 14	$ 14	$ --	$ --
Due after one year to five years	7	8	77	82
Due after five to ten years	35	37	--	- -
Due after ten years	3,650	3,769	4,174	4,186
Total	$ 3,706	$ 3,828	$ 4,251	$ 4,268

(5) FHLB STOCK

The Company views its investment in the FHLB stock as a long-term investment. Accordingly, when evaluating it for impairment, the value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value. The determination of whether a decline affects the ultimate recovery is influenced by criteria such as: 1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and length of time a decline has persisted; 2) the impact of legislative and regulatory changes on the FHLB; and 3) the liquidity position of the FHLB. On October 25, 2010, the FHLB announced that it had entered into a Consent Agreement with the Federal Housing Finance Agency (“FHFA”), which requires the FHLB to take certain specific actions related to its business and operations. As of its latest regulatory filing, the FHLB reported that it had met all of its regulatory capital requirements, but remained classified as “undercapitalized” by the FHFA. The FHLB will not pay a dividend or repurchase capital stock while it is classified as undercapitalized. While the FHLB was classified as undercapitalized, the Company does not believe that its investment in the FHLB is impaired as of March 31, 2012. However, this estimate could change in the near term if: 1) significant other-than-temporary losses are incurred on the FHLB’s MBS causing a significant decline in its regulatory capital status; 2) the economic losses resulting from credit deterioration on the FHLB’s MBS increases significantly; or 3) capital preservation strategies being utilized by the FHLB become ineffective.

(6) LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable and loans held for sale consisted of the following at March 31, 2012 and September 30, 2011 (dollars in thousands):

	March 31, 2012						September 30, 2011
	Amount			Percent			Amount			Percent
Mortgage loans:
One- to four-family (1)	$	105,570			18.8	%	$	114,680			20.5	%
Multi-family		30,745			5.5			30,982			5.5
Commercial		255,327			45.6			246,037			43.9
Construction and land development		57,069			10.2			52,484			9.4
Land		44,553			7.9			49,236			8.8
Total mortgage loans		493,264			88.0			493,419			88.1

Consumer loans:
Home equity and second mortgage		33,979			6.1			36,008			6.4
Other		6,234			1.1			8,240			1.5
Total consumer loans		40,213			7.2			44,248			7.9

Commercial business loans		26,881			4.8			22,510			4.0

Total loans receivable		560,358			100.0	%		560,177			100.0	%

Less:
Undisbursed portion of construction loans in process		(11,245	)					(18,265	)
Deferred loan origination fees		(1,856	)					(1,942	)
Allowance for loan losses		(12,264	)					(11,946	)

Total loans receivable, net	$	534,993					$	528,024

_________________________

(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, 2012 and September 30, 2011 (dollars in thousands):

	March 31, 2012					September 30, 2011
	Amount		Percent			Amount		Percent
Custom and owner/builder	$	28,109		49.3	%	$	26,205		49.9	%
Speculative one- to four-family		2,271		4.0			1,919		3.7
Commercial real estate		17,079		29.9			12,863		24.5
Multi-family (including condominiums)		8,632		15.1			9,322		17.8
Land development		978		1.7			2,175		4.1
Total construction and land development loans	$	57,069		100.0	%	$	52,484		100.0	%

Allowance for Loan Losses

The following tables set forth information for the three and six months ended March 31, 2012 and March 31, 2011 regarding activity in the allowance for loan losses (dollars in thousands):

	For the 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

	For the 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

	For the Three Months Ended March 31, 2011
	Beginning Allowance		Provision / (Credit)			Charge- offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	738	$	(44	)	$	104	$	148	$	738
Multi-family		875		131			--		10		1,016
Commercial		3,431		670			23		101		4,179
Construction – custom and owner / builder		365		(19	)		--		--		346
Construction – speculative one- to four-family		333		(61	)		12		--		260
Construction – commercial		457		(278	)		--		--		179
Construction – multi-family		227		36			--		--		263
Construction – land development		71		440			483		--		28
Land		3,526		(14	)		282		24		3,254
Consumer loans:
Home equity and second mortgage		846		(312	)		36		7		505
Other		441		(4	)		2		1		436
Commercial business loans		439		155			--		--		594
Total	$	11,749	$	700		$	942	$	291	$	11,798

	For the Six Months Ended March 31, 2011
	Beginning Allowance		Provision / (Credit)			Charge-offs		Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	530	$	293		$	233	$	148	$	738
Multi-family		393		604			--		19		1,016
Commercial		3,173		952			47		101		4,179
Construction – custom and owner / builder		481		(135	)		--		--		346
Construction – speculative one- to four-family		414		(114	)		40		--		260
Construction – commercial		245		(66	)		--		--		179
Construction – multi-family		245		18			--		--		263
Construction – land development		240		271			483		--		28
Land		3,709		(81	)		413		39		3,254
Consumer loans:
Home equity and second mortgage		922		(310	)		114		7		505
Other		451		13			30		2		436
Commercial business loans		461		155			22		--		594
Total	$	11,264	$	1,600		$	1,382	$	316	$	11,798

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, 2012 and September 30, 2011 (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, 2012
Mortgage loans:
One- to four-family	$	272	$	659	$	931	$	4,437	$	101,133	$	105,570
Multi-family		959		329		1,288		6,910		23,835		30,745
Commercial		202		3,535		3,737		18,389		236,938		255,327
Construction – custom and owner / builder		5		262		267		314		20,906		21,220
Construction – speculative one- to four-family		24		147		171		700		1,180		1,880
Construction – commercial		661		200		861		5,390		8,001		13,391
Construction – multi-family		25		479		504		370		7,985		8,355
Construction – land development		--		95		95		769		209		978
Land		830		1,907		2,737		10,279		34,274		44,553
Consumer loans:
Home equity and second mortgage		7		424		431		1,094		32,885		33,979
Other		--		353		353		8		6,226		6,234
Commercial business loans		--		889		889		44		26,837		26,881
Total	$	2,985	$	9,279	$	12,264	$	48,704	$	500,409	$	549,113
September 30, 2011
Mortgage loans:
One- to four-family	$	45	$	715	$	760	$	3,701	$	110,979	$	114,680
Multi-family		632		444		1,076		5,482		25,500		30,982
Commercial		255		3,780		4,035		19,322