Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect," "will," "may" and words of similar meaning. These forward-looking statements include, but are not limited to:

• statements of our goals, intentions and expectations;

• statements regarding our business plans, prospects, growth and operating strategies;

• statements regarding the asset quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• general economic conditions, either nationally or in our market areas, that are worse than expected;

• competition among depository and other financial institutions;

• inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

• adverse changes in the securities markets;

• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

• our ability to enter new markets successfully and capitalize on growth opportunities;

• our ability to successfully integrate acquired entities, if any;

• changes in consumer spending, borrowing and savings habits;

• changes in our organization, compensation and benefit plans;

• changes in our financial condition or results of operations that reduce capital available to pay dividends; and

• changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Territorial Bancorp Inc.'s Prospectus dated May 15, 2009, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 26, 2009.

Comparison of Financial Condition at September 30, 2009 and December 31, 2008

Assets. At September 30, 2009, our assets were $1.4 billion, an increase of $132.1 million, or 10.8%, from $1.2 billion at December 31, 2008. The increase was caused by increases in cash and cash equivalents and investment securities held to maturity, partially offset by a decrease in loans.

Cash and Cash Equivalents. Cash and cash equivalents were $123.3 million at September 30, 2009 compared to $11.2 million at December 31, 2008. The increase resulted primarily from the receipt of net proceeds from our stock offering, which closed on July 10, 2009.

Loans. At September 30, 2009, total loans (including loans held for sale of $3.2 million) were $614.9 million, or 45.3% of total assets. During the nine months ended September 30, 2009, the loan portfolio decreased $27.2 million, or 4.2%. The decrease was caused primarily by a decrease in one- to four-family residential real estate loans of $19.4 million, as we sold $74.6 million of longer-term loans during the nine months ended September 30, 2009. Home equity loans and lines of credit also decreased by $7.1 million.

Securities. At September 30, 2009, our securities portfolio totaled $575.2 million, or 42.4% of assets. At September 30, 2009, all of such securities were classified as held-to-maturity, and none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as loans having less than full documentation) loans.

During the nine months ended September 30, 2009, our securities portfolio increased $47.4 million, or 9.0%, as we invested the increase in deposits, loan repayments and a portion of the net proceeds of our stock offering into Freddie Mac, Fannie Mae, and Ginnie Mae mortgage-backed securities and collateralized mortgage obligations.

At September 30, 2009, we owned trust preferred securities with a carrying value of $3.5 million. This portfolio consists of two securities (PreTSL XXIII and PreTSL XXIV), which represent investments in a pool of debt obligations issued primarily by holding companies for Federal Deposit Insurance Corporation-insured financial institutions. At September 30, 2009, these securities were graded CC and C, respectively.

In reviewing our investment in the trust preferred securities, we concluded that we did not have the intent to sell either trust preferred security, and it was not more likely than not that we would be required to sell either trust preferred security before the anticipated recovery.

The trust preferred securities market is considered inactive as only four sales transactions of similarly rated securities have occurred over the past twelve months. In addition, there have been no new issues of pooled trust preferred securities since 2007. Because the trust preferred securities market is inactive, we use a discounted cash flow model to determine the estimated fair value of the trust preferred securities and to determine whether they are other-than-temporarily impaired.

We had previously considered our investment in PreTSL XXIV other-than-temporarily impaired as of December 31, 2008, and we recorded a $2.5 million impairment charge during the quarter ended December 31, 2008. The cumulative effect of our adoption of new accounting pronouncements, effective January 1, 2009, resulted in the reclassification of $1.5 million, net of tax of $958,000, of securities impairment from retained earnings to accumulated other comprehensive loss. Based on our continued review, we considered our investment in this security to have experienced additional other-than-temporary impairment as of March 31, 2009, June 30, 2009 and September 30, 2009, and recorded an additional $3.5 million impairment charge due to credit losses with respect to this security during the nine months ended September 30, 2009

In reviewing our investment in the second trust preferred security (PreTSL
XXIII), our discounted cash flow analysis indicated that we should be able to recover the entire amortized cost basis of the security. Accordingly, as of September 30, 2009, we did not consider our investment in the second trust preferred security to have experienced other-than-temporary impairment.

We own common stock of the Federal Home Loan Bank of Seattle with an aggregate cost and fair value as of September 30, 2009 of $12.3 million based on its par value. There is no market for our Federal Home Loan Bank of Seattle common stock. Moody's Investor Service and Standard and Poor's Rating Services have affirmed the FHLB of Seattle's credit rating of Aaa and AA+/A1+, respectively. Standard and Poor's also removed the FHLB of Seattle from Credit Watch Negative.

Recent published reports indicate that certain member banks of the Federal Home Loan Bank System may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels. In an extreme situation, it is possible that the capital of a Federal Home Loan Bank, including the Federal Home Loan Bank of Seattle, could be substantially diminished or reduced to zero. In addition, the Federal Home Loan Bank of Seattle stopped paying dividends during the fourth quarter of 2008.

Deposits. During the nine months ended September 30, 2009, our deposits grew $61.7 million, or 6.7%. The increase was caused by our continuing to promote higher than market rates for our savings accounts (which increased $173.1 million during the nine-month period), offsetting a decrease of $103.9 million in certificates of deposit. During the nine months ended September 30, 2009, we continued to lower the rates we pay on certificates of deposit because of increased liquidity from other sources, such as the net proceeds from our stock offering, as well as principal repayments on loans and mortgage-backed securities, allowing these deposits to run off.

Borrowings. Historically, our borrowings consisted primarily of advances from the Federal Home Loan Bank of Seattle and funds borrowed under repurchase agreements. During the nine months ended September 30, 2009, our borrowings decreased $45 million, or 25.7%. During the quarter ended March 31, 2009, we repaid all of our outstanding Federal Home Loan Bank advances, and our reverse repurchase agreements increased $15.0 million, or 13.0% during that quarter. We also repaid $24.7 million of subordinated debentures during the quarter ended September 30, 2009. We have not required further borrowings to fund our operations. Instead, we have funded our operations with the net proceeds from our stock offering, additional deposits and principal repayments on loans and mortgage-backed securities.

Equity. At September 30, 2009, our equity was $215.8 million, an increase of $116.4 million, or 117.1%, from $99.4 million at December 31, 2008. The increase resulted from the completion of our stock offering in July 2009, as well as net income of $5.7 million for the nine months ended September 30, 2009.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and rates, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.

                                                             For the Three Months Ended September 30,
                                                         2009                                        2008
                                          Average                                     Average
                                        Outstanding                    Yield/       Outstanding                    Yield/
                                          Balance         Interest    Rate (1)        Balance         Interest    Rate (1)
                                                                      (Dollars in thousands)

Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (5)     $    557,497      $   7,882       5.66 %    $    556,017      $   7,968       5.73 %
Multi-family residential                       3,681             65       7.06             4,241             77       7.26
Construction, commercial and other            17,672            280       6.34            19,260            332       6.90
Home equity loans and lines of credit         23,268            382       6.57            29,522            515       6.98
Other loans                                    7,013            116       6.62             5,806            103       7.10

Total loans                                  609,131          8,725       5.73           614,846          8,995       5.85
Investment securities:
U.S. government sponsored
mortgage-backed securities                   545,943          6,529       4.78           520,512          6,389       4.91
Municipal bonds                                   -              -          -                 -              -          -
Trust preferred securities                     3,677             -          -              7,054             87       4.93
Other                                             -              -          -                 -              -          -

Total securities                             549,620          6,529       4.75           527,566          6,476       4.91
Other                                        207,420             49       0.09            13,018             48       1.47

Total interest-earning assets              1,366,171         15,303       4.48         1,155,430         15,519       5.37
Non-interest-earning assets                   36,363                                      73,525

Total assets                            $  1,402,534                                $  1,228,955


Interest-bearing liabilities:
Savings accounts                        $    536,263      $   1,946       1.45 %    $    397,863      $   1,528       1.54 %
Certificates of deposit                      324,937          1,381       1.70           402,673          2,800       2.78
Money market accounts                        102,907             87       0.34            81,582             12       0.06
Checking and Super NOW accounts               19,343              3       0.06            20,371              3       0.06

Total interest-bearing deposit               983,450          3,417       1.39           902,489          4,343       1.92
Federal Home Loan Bank advances                   57             -          -             18,995            119       2.51
Other borrowings                             152,091          1,500       3.95           140,433          1,561       4.45

Total interest-bearing liabilities         1,135,598          4,917       1.73         1,061,917          6,023       2.27
Non-interest-bearing liabilities              62,248                                      68,917

Total liabilities                          1,197,846                                   1,130,834
Equity                                       204,688                                      98,121

Total liabilities and equity            $  1,402,534                                $  1,228,955


Net interest income                                       $  10,386                                   $   9,496

Net interest rate spread (2)                                              2.75 %                                      3.10 %
Net interest-earning assets (3)         $    230,573                                $     93,513

Net interest margin (4)                                                   3.04 %                                      3.29 %

Average of interest-earning assets to
interest-bearing liabilities                  120.30 %                                    108.81 %

(1) Annualized

(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

(5) Average balance includes loans held for sale.

                                                               For the Nine Months Ended September 30,
                                                          2009                                          2008
                                          Average                                        Average
                                        Outstanding                       Yield/       Outstanding                    Yield/
                                          Balance         Interest       Rate (1)        Balance         Interest    Rate (1)
                                                                       (Dollars in thousands)

Interest-earning assets:
Loans:
Real estate loans:
First mortgage:
One- to four-family residential (5)     $    566,374      $  24,489          5.77 %    $    536,761      $  22,960       5.70 %
Multi-family residential                       3,714            198          7.11             4,348            235       7.21
Construction, commercial and other            18,048            863          6.38            19,118          1,000       6.97
Home equity loans and lines of credit         25,633          1,278          6.65            28,640          1,500       6.98
Other loans                                    6,596            329          6.65             6,253            338       7.21

Total loans                                  620,365         27,157          5.84           595,120         26,033       5.83
Investment securities:
U.S. government sponsored
mortgage-backed securities                   520,186         18,766          4.81           520,095         19,084       4.89
Municipal bonds                                   -              -             -              4,008            112       3.73
Trust preferred securities                     3,821             (8 )       (0.28 )           7,064            296       5.59
Other                                             -              -             -                613             10       2.18

Total securities                             524,007         18,758          4.77           531,780         19,502       4.89
Other                                        108,354             72          0.09            14,480            146       1.34

Total interest-earning assets              1,252,726         45,987          4.89         1,141,380         45,681       5.34
Non-interest-earning assets                   50,452                                         58,210

Total assets                            $  1,303,178                                   $  1,199,590


Interest-bearing liabilities:
Savings accounts                        $    477,050      $   5,594          1.56 %    $    393,082      $   4,483       1.52 %
Certificates of deposit                      360,574          5,215          1.93           401,846          9,721       3.23
Money market accounts                         99,810            227          0.30            82,514             37       0.06
Checking and Super NOW accounts               19,701              8          0.05            20,773              9       0.06

Total interest-bearing deposits              957,135         11,044          1.54           898,215         14,250       2.12
Federal Home Loan Bank advances                5,257             33          0.84            17,414            440       3.37
Other borrowings                             152,498          4,553          3.98           135,511          4,636       4.56

Total interest-bearing liabilities         1,114,890         15,630          1.87         1,051,140         19,326       2.45
Non-interest-bearing liabilities              51,132                                         52,056

Total liabilities                          1,166,022                                      1,103,196
Equity                                       137,156                                         96,394

Total liabilities and equity            $  1,303,178                                   $  1,199,590


Net interest income                                       $  30,357                                      $  26,355

Net interest rate spread (2)                                                 3.02 %                                      2.89 %
Net interest-earning assets (3)         $    137,836                                   $     90,240

Net interest margin (4)                                                      3.23 %                                      3.08 %

Average of interest-earning assets to
interest-bearing liabilities                  112.36 %                                       108.58 %

(1) Annualized

(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

(5) Average balance includes loans held for sale.

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

General. Net income decreased $1.7 million, or 69.4%, to $729,000 for the three months ended September 30, 2009 from $2.4 million for the three months ended September 30, 2008. The decrease was primarily caused by a reduction in non-interest income of $2.6 million and an increase in non-interest expense of $927,000, offset by an increase in net interest income of $890,000.

Net Interest Income. Net interest income increased $890,000, or 9.4%, to $10.4 million for the three months ended September 30, 2009 from $9.5 million for the three months ended September 30, 2008. Interest expense decreased $1.1 million, or 18.4%, as declining market interest rates for certificates of deposit and certificate of deposit runoff allowed us to reduce our total deposit expense by $926,000. Interest and dividend income decreased $216,000, or 1.4%, as our average balance of loans decreased by $5.7 million, or 0.9%, and the average yield we earned on loans decreased 12 basis points to 5.73% for the three months ended September 30, 2009 compared to 5.85% for the three months ended September 30, 2008. The interest rate spread and net interest margin were 2.75% and 3.04%, respectively, for the three months ended September 30, 2009, compared to 3.10% and 3.29% for the three months ended September 30, 2008.

Interest and Dividend Income. Interest and dividend income decreased $216,000, or 1.4%, to $15.3 million for the three months ended September 30, 2009 from $15.5 million for the three months ended September 30, 2008. A decrease in interest income on loans was partially offset by an increase in interest income on securities. Interest income on loans decreased $270,000, or 3.0%, to $8.7 million for the three months ended September 30, 2009 from $9.0 million for the three months ended September 30, 2008, as our average balance of loans decreased $5.7 million, or 0.9%, and the rate we earned on loans decreased 12 basis points to 5.73% for the three months ended September 30, 2009 compared to 5.85% for the three months ended September 30, 2008. Our average balance of home equity loans and lines of credit decreased $6.3 million, or 21.2%, as a result of loan payoffs. All of our loan categories experienced decreased interest rates, reflecting continued decreases in market interest rates. Interest income on securities increased $53,000 to $6.53 million for the three months ended September 30, 2009 from $6.48 million for the three months ended September 30, 2008, as our average balance of investment securities increased $22.1 million, or 4.2%, and the yield we earned on investment securities decreased 16 basis points to 4.75% for the three months ended September 30, 2009 compared to 4.91% for the three months ended September 30, 2008. The increase in our average securities portfolio was caused primarily by our investing the increase in funding from deposits, loan repayments and a portion of the net proceeds of our stock offering into Freddie Mac, Fannie Mae, and Ginnie Mae mortgage-backed securities and collateralized mortgage obligations.

Interest Expense. Interest expense decreased $1.1 million, or 18.4%, to $4.9 million for the three months ended September 30, 2009 from $6.0 million for the three months ended September 30, 2008. Interest expense on deposits decreased $926,000, or 21.3%, caused by a decrease in interest expense on certificates of deposit of $1.4 million, or 50.7%. The rates we paid on certificates of deposit decreased 108 basis points, and we experienced a $77.7 million, or 19.3%, decrease in the average balance of certificates of deposit. We have lowered the rates we pay on certificates of deposit because of increased liquidity from other sources, such as the net proceeds from our stock offering and principal repayments on loans and mortgage-backed securities, allowing these deposits to run off. However, interest expense on passbook and statement savings accounts increased $418,000, or 27.4%, to $1.9 million for the three months ended September 30, 2009 from $1.5 million for the three months ended September 30, 2008. The average balance of these deposits increased $138.4 million, or 34.8%, to $536.3 million for the three months ended September 30, 2009 from $397.9 million for the three months

ended September 30, 2008. The increase was caused by our continuing to promote higher than market rates for our savings accounts, as well as our holding subscription funds for our stock offering in passbook savings accounts. Interest expense on borrowings decreased $180,000, or 10.7%, resulting from our repaying all of our outstanding Federal Home Loan Bank advances and subordinated debentures, and the average rate we paid on borrowings decreased, reflecting continued decreases in market interest rates.

Provision for Loan Losses. We recorded a provision for loan losses of $10,000 and a reversal of provision of $13,000 for the three months ended September 30, 2009 and 2008, respectively. Non-performing loans totaled $3.0 million at September 30, 2009, or 0.49% of total loans at that date, compared to $149,000 of non-performing loans at December 31, 2008, $4,000 of non-performing loans at September 30, 2008 and $106,000 of non-performing loans at December 31, 2007. Non-performing loans as of September 30, 2009 consisted primarily of one- to four-family residential real estate loans. We experienced net recoveries of $3,000 and $0 for the three months ended September 30, 2009 and 2008, respectively. The allowance for loan losses to total loans was 0.32% and 0.12% at September 30, 2009 and 2008, respectively. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at September 30, 2009 and 2008.

Non-Interest Income. The following table summarizes changes in non-interest income between the three months ended September 30, 2009 and 2008.

                                                 Three Months Ended
                                                   September 30,                   Change
                                                 2009           2008      $ Change        % Change
                                                                 (In thousands)

Other-than-temporary impairment loss on
investments, net                              $   (2,716 )     $    -     $  (2,716 )          N/A
. . .