SOURCE: Timberland Bancorp, Inc.

January 23, 2007 16:00 ET

Timberland Bancorp Reports Strong First Fiscal Quarter Earnings of $0.54 per Share Led by Solid Loan Growth and Brisk Origination Activity

HOQUIAM, WA -- (MARKET WIRE) -- January 23, 2007 -- Timberland Bancorp, Inc. (NASDAQ: TSBK), the holding company for Timberland Bank, today reported that strong loan growth and excellent asset quality contributed to solid fiscal first quarter 2007 results. First quarter profits were near the record levels of its fiscal first quarter of 2006 with net income totaling $1.95 million, or $0.54 per diluted share, for the quarter ended December 31, 2006, compared to $2.01 million, or $0.55 per diluted share, for the quarter ended December 31, 2005.

Quarterly Highlights (1Q07 compared to 1Q06) -

--  The loan portfolio increased 15% to $452 million from $392 million.
--  Total deposits increased 6% to $434 million, with non-interest bearing
    deposits increasing 10%.
--  Loan originations increased 23%, with continuing strength in
    construction and land development lending.
--  Asset quality remains strong -- NPA ratio of 0.04%.
    
"The investment we are making in expanding our team of business bankers is generating solid returns," said Michael Sand, President and CEO. "The addition of five exceptional business bankers in fast-growing Pierce and King Counties has produced a significant increase in loan originations and net loans outstanding during the past two quarters. We are particularly pleased with the increase in construction and commercial real estate originations that resulted from the successful efforts of each of our lending officers."

"The increase in net loans outstanding exceeded the increase in deposits during the quarter. As a result short term advances were obtained from the Federal Home Loan Bank of Seattle. These advances at an average rate of approximately 5.45% contributed to a slight margin compression during the quarter. Late in the quarter the Bank was able to take advantage of two special advance programs offered by the FHLB to significantly reduce its interest expense by obtaining $30 million in advances at an average rate of 4.11%. Going forward we will be focusing on the acquisition of core deposits to support our success in increasing net loans outstanding," Sand continued.

Led by aerospace, software and service industries Western Washington's economy continues to generate above average growth. Solid improvements in personal income and continued population growth are providing support for our lending initiatives. "Our lending and deposit gathering emphasis in Western Washington is directly linked to the strong regional economy," said Sand. The following highlights some of the economic data detailed in the recently published 2006 - 2007 Pierce County Economic Index ("PCEI") Report:

--  For 2005 and 2006, the PCEI should increase by a cumulative 10.4% one
    of the best 2-year periods on record and is expected to remain solid
    through 2007.
    
--  Per capita income from 2004 through 2007 is expected to increase at an
    average annual rate of 8%. By the end of 2007 per capita income is expected
    to increase to $39,800 -- a 25% gain in three years.
    
--  The single family housing index is expected to increase by 4% over
    2005, setting another record for total activity. For 2007, the housing
    index is expected to decline by 1.2% compared to 2006. The multiple-family
    market is expected to be tight and condominium conversions should moderate
    in 2007.
    
--  The office market segment should show some real gains and the market
    for industrial space  should remain strong through 2007. The Port of Tacoma
    is forecasting a 51% increase in container business over the next five
    years.
    
Operating Results

Revenue (net interest income before provision for loan losses plus non-interest income) for the quarter ended December 31, 2006 increased 2% to $7.8 million from $7.6 million for the quarter ended December 31, 2005. Net interest income before the provision for loan losses increased 4% to $6.3 million with interest income increasing 16% and interest expense increasing 44%. Loan growth contributed to the increase in net interest income, and partially offset rising funding costs.

Following the industry trend, the net interest margin compressed to 4.74% for the quarter ended December 31, 2006. In the first fiscal quarter one year ago, Timberland's net interest margin of 4.87% was increased by 11 basis points as a result of the collection of $131,000 ($86,000 net of tax) of non-accrual interest and prepayment penalties. This added $0.02 per diluted share to last year's first fiscal quarter earnings. Net interest margin also decreased from the immediate prior quarter's net interest margin of 4.91% (or 4.80% net of $138,000 in non-accrual interest). The margin compression was primarily due to increased funding costs, which outpaced the increased yield on interest earning assets. The funding cost increases were primarily a result of increased reliance on FHLB advances to fund loan growth and increased market rates being paid for deposit accounts. "The flat yield curve is a challenge for the banking industry, which is seeing the lowest net interest margin level in seventeen years," said Dean Brydon, CFO.

Non-interest income decreased 5% to $1.48 million for the current quarter from $1.56 million for the quarter ended December 31, 2005 primarily due a reduction in fee income from the sale of non-deposit investments.

Total operating (non-interest) expenses increased 6% to $4.9 million for the current quarter from $4.6 million for the quarter ended December 31, 2005. "Increased employee and advertising expenses in addition to the expenses associated with growing our business banking team were the primary reasons for the increase. We are also investing in new technologies that will improve customer service and reduce costs. These new programs will be introduced in 2007 and should start contributing to our productivity in the second half of the year," said Sand. The efficiency ratio for the first quarter of fiscal 2007 increased to 63.13% from 60.03% in the immediate prior quarter and 61.16% a year ago.

Return on equity (ROE) was 9.94% for the quarter ended December 31, 2006, compared to 10.70% for the quarter ended December 31, 2005. Return on average assets (ROA) was 1.35% for the quarter ended December 31, 2006 compared to 1.46% for the same period a year ago.

Balance Sheet Management

Total assets increased 12% on an annualized basis during the quarter and 8% year-over-year. Assets increased to $594 million compared to $577 million at the end of fiscal 2006 and $548 million a year ago due to strong loan portfolio growth. Total loans increased by $27 million in the first fiscal quarter and grew $60 million during the past year. Total loans increased by 6% to $452 million at December 31, 2006 from $425 million at September 30, 2006, and were up 15% from the $392 million reported one year ago. Loan originations increased 23% to $81 million for the quarter ended December 31, 2006 from $66 million for the same period one year ago. The Bank also continued to sell fixed rate one-to-four family mortgage loans into the secondary market for asset-liability management purposes. Fixed rate one-to-four family mortgage loan sales totaled $7.2 million for the quarter ended December 31, 2006 compared to $7.5 million for the same period a year ago.

LOAN PORTFOLIO
($ in thousands)
                    Dec. 31,           Sept. 30,          Dec. 31,
                    2006               2006               2005
                    Amount   Percent   Amount   Percent   Amount   Percent
                   --------- -------  --------- -------  --------- -------
Mortgage Loans:
   One-to-four
    family (1)     $ 100,204    19.1% $  98,709    20.1% $  97,544    21.5%
   Multi-family       18,391     3.5%    17,689     3.6%    20,909     4.6%
   Commercial        139,700    26.6%   137,609    28.1%   128,216    28.2%
   Construction
    and land
    development      170,788    32.5%   146,855    29.9%   128,210    28.2%
   Land               34,986     6.6%    29,598     6.0%    26,921     5.9%
                   --------- -------  --------- -------  --------- -------
     Total
      mortgage
      loans          464,069    88.3%   430,460    87.7%   401,800    88.4%

Consumer Loans:
   Home equity and
    second
    mortgage          38,434     7.3%    37,435     7.6%    33,669     7.4%
   Other              11,051     2.1%    11,127     2.3%     9,199     2.0%
                   --------- -------  --------- -------  --------- -------
                      49,485     9.4%    48,562     9.9%    42,868     9.4%

Commercial
 business loans       12,136     2.3%    11,803     2.4%     9,855     2.2%
                   --------- -------  --------- -------  --------- -------
Total loans        $ 525,690   100.0% $ 490,825   100.0% $ 454,523   100.0%

Less:
   Undisbursed
    portion of
    construction
    loans in
    process          (66,810)           (59,260)           (56,049)
   Unearned income    (2,889)            (2,798)            (2,813)
      Allowance
       for loan
       losses         (4,121)            (4,122)            (4,117)
                   ---------          ---------          ---------
Total loans
 receivable, net   $ 451,870          $ 424,645          $ 391,544

(1)  Includes loans held-for-sale
Total deposits increased $3 million to $434 million at December 31, 2006, compared to $431 million at September 30, 2006, and grew 6% or $24 million from one year ago. Core deposits comprised 87% of Timberland's total deposits at December 31, 2006. "Increasing core deposits is a key component of our long-term strategy and our bankers are doing a great job of building our presence and sustaining client relationships in our home markets," Sand commented.





DEPOSIT BREAKDOWN
($ in thousands)

                       Dec. 31,          Sept. 30,         Dec. 31,
                       2006              2006              2005
                       Amount   Percent  Amount   Percent  Amount   Percent
                      --------- ------- --------- ------- --------- -------

Non-interest bearing  $  55,121     13% $  57,905     13% $  50,070     12%
N.O.W. checking          88,428     21%    89,509     21%    91,741     23%
Savings                  61,324     14%    60,235     14%    62,895     15%
Money market accounts    44,660     10%    42,378     10%    46,309     11%
Certificates of
 deposit under
 $100,000               126,819     29%   128,183     30%   121,737     30%
                      --------- ------  --------- ------  --------- ------
  Total Core Deposits   376,352     87%   378,210     88%   372,752     91%
Certificates of
 deposit $100,000 and
 over                    57,897     13%    52,851     12%    37,924      9%
                      --------- ------  --------- ------  --------- ------
   Total Deposits     $ 434,249    100% $ 431,061    100% $ 410,676    100%
Total shareholders' equity was $77.3 million at December 31, 2006, compared to $79.4 million at September 30, 2006, as the Company continued to manage its capital through stock buybacks and dividends. During the quarter Timberland repurchased 112,505 shares for $4.2 million as it completed its current share repurchase program and announced another 5% share repurchase program. The 112,505 shares were repurchased at an average price of $37.12 per share. Cumulatively, Timberland has repurchased 3.6 million shares or 54.3% of the 6.6 million shares that were issued in its initial public offering in January 1998. The average price of the 3.6 million repurchased shares was $16.64 per share. The Company also paid an $0.18 per share dividend during the quarter, which represents the 35th consecutive quarter a cash dividend has been paid.

Asset Quality

Asset quality remained solid as the non-performing assets to total asset ratio was 0.04% at December 31, 2006 with only $1,000 in net charge-offs during the quarter. The allowance for loan losses totaled $4.1 million at December 31, 2006, or 0.91% of loans receivable and 1,724% of non-performing loans. The allowance for loan losses was $4.1 million, or 0.97% of loans receivable and 5,152% of non-performing loans at September 30, 2006, and at December 31, 2005 the allowance for loan losses was $4.1 million, or 1.05% of loans receivable and 152% of non-performing loans. The Company's non-performing loans totaled only $239,000 at December 31, 2006, and consisted of three single family mortgage loans and two consumer loans.

About Timberland Bancorp, Inc.

Timberland Bancorp, Inc. stock trades on the NASDAQ global market under the symbol "TSBK." The Bank operates 21 branches in the state of Washington in Hoquiam, Aberdeen, Ocean Shores, Montesano, Elma, Olympia, Lacey, Tumwater, Yelm, Puyallup, Edgewood, Tacoma, Spanaway (Bethel Station), Gig Harbor, Poulsbo, Silverdale, Auburn, Winlock, and Toledo.



TIMBERLAND BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT                    Three Months Ended
($ in thousands, except per share)         Dec. 31,   Sept. 30,  Dec. 31,
    (unaudited)                              2006       2006       2005
                                           ---------  ---------  ---------
Interest and dividend income
Loans receivable                           $   8,786  $   8,252  $   7,485
Investments and mortgage-backed
 securities                                      454        510        536
Dividends                                        420        401        323
Federal funds sold                                65         97         77
Interest bearing deposits in banks                39         23         24
                                           ---------  ---------  ---------
      Total interest and dividend income       9,764      9,283      8,445

Interest expense
Deposits                                       2,589      2,351      1,688
Federal Home Loan Bank ("FHLB") advances         882        659        720
Other borrowings                                  17         13         10
                                           ---------  ---------  ---------
     Total interest expense                    3,488      3,023      2,418
                                           ---------  ---------  ---------
     Net interest income                       6,276      6,260      6,027
Provision for loan losses                          -          -          -
                                           ---------  ---------  ---------
     Net interest income after provision
      for loan losses                          6,276      6,260      6,027

Non-interest income
Service charges on deposits                      706        755        720
Gain on sale of loans, net                       107        122        116
BOLI net earnings                                114        116        111
Escrow fees                                       31         33         32
Servicing income on loans sold                   132        160        108
ATM transaction fees                             263        284        235
Other                                            128        183        233
                                           ---------  ---------  ---------
     Total non-interest income                 1,481      1,653      1,555

Non-interest expense
Salaries and employee benefits                 2,785      2,650      2,630
Premises and equipment                           624        598        609
Advertising                                      177        187        136
Loss (gain) from real estate operations          (17)       (85)       (53)
ATM expenses                                     119        129         98
Postage and courier                              105        116        115
Amortization of core deposit intangible           71         82         82
State and local taxes                            139        138        160
Professional fees                                177        243        187
Other                                            717        692        673
                                           ---------  ---------  ---------
     Total non-interest expense                4,897      4,750      4,637

Income before federal income taxes             2,860      3,163      2,945
Federal income taxes                             906      1,019        939
                                           ---------  ---------  ---------
     Net income                            $   1,954  $   2,144  $   2,006
                                           =========  =========  =========
Earnings per common share:
     Basic                                 $    0.56  $    0.61  $    0.57
     Diluted                               $    0.54  $    0.59  $    0.55
Weighted average shares outstanding:
     Basic                                 3,503,883  3,517,377  3,504,526
     Diluted                               3,623,108  3,645,477  3,625,620



TIMBERLAND BANCORP, INC.
CONSOLIDATED BALANCE SHEET
($ in thousands) (unaudited)               Dec. 31,   Sept 30,   Dec. 31,
                                             2006       2006       2005
Assets                                     ---------  ---------  ---------
Cash and due from financial institutions
   Non-interest bearing                    $  17,764  $  14,870  $  17,557
   Interest-bearing deposits in banks          2,847      2,619      1,104
   Federal funds sold                          4,655      5,400      3,875
                                           ---------  ---------  ---------
                                              25,266     22,889     22,536
Investments and mortgage-backed
 securities:
   Held-to-maturity                               73         75         90
   Available-for-sale                         69,772     81,408     87,814
FHLB Stock                                     5,705      5,705      5,705
                                           ---------  ---------  ---------
                                              75,550     87,188     93,609

Loans receivable                             454,736    426,318    394,414
Loans held-for-sale                            1,255      2,449      1,247
Less: Allowance for loan losses               (4,121)    (4,122)    (4,117)
                                           ---------  ---------  ---------
Net loans receivable                         451,870    424,645    391,544

Accrued interest receivable                    2,884      2,806      2,319
Premises and equipment                        16,756     16,730     16,050
Other real estate owned and other
 repossessed items                                 2         15        144
Bank owned life insurance                     12,065     11,951     11,612
Goodwill                                       5,650      5,650      5,650
Core deposit intangible                        1,434      1,506      1,752
Mortgage servicing rights                        964        932        929
Other assets                                   1,737      2,775      1,602
                                           ---------  ---------  ---------
Total Assets                               $ 594,178  $ 577,087  $ 547,747
                                           =========  =========  =========

Liabilities and Shareholders' Equity
Non-interest-bearing deposits                 55,121     57,905     50,070
Interest-bearing deposits                    379,128    373,156    360,606
                                           ---------  ---------  ---------
    Total deposits                           434,249    431,061    410,676

FHLB advances                                 78,446     62,761     56,805
Other borrowings: repurchase agreements        1,322        947      1,305
Other liabilities and accrued expenses         2,881      2,953      3,006
                                           ---------  ---------  ---------
Total Liabilities                            516,898    497,722    471,792
                                           ---------  ---------  ---------

Shareholders' Equity
Common stock- $.01 par value; 50,000,000
 shares authorized;
  December 31, 2006 - 3,670,861 shares
   issued and outstanding
  September 30, 2006 - 3,757,676 shares
   issued and outstanding
  December 31, 2005 - 3,757,037 shares
   issued and outstanding                         37         38         38
Additional paid-in-capital                    17,380     20,888     22,013
Unearned shares- Employee Stock Ownership
 Plan                                         (3,239)    (3,305)    (3,701)
Unearned shares- Management Recognition
 and Development Plan                           (233)      (188)         -
Retained earnings                             64,209     62,933     58,672
Accumulated other comprehensive loss            (874)    (1,001)    (1,067)
                                           ---------  ---------  ---------
Total Shareholders' Equity                    77,280     79,365     75,955
                                           ---------  ---------  ---------
Total Liabilities and Shareholders' Equity $ 594,178  $ 577,087  $ 547,747
                                           =========  =========  =========



KEY FINANCIAL RATIOS AND DATA
($ in thousands, except per share)               Three Months Ended
 (unaudited)                               Dec. 31,   Sept. 30,  Dec. 31,
                                             2006       2006       2005
                                           ---------  ---------  ---------
PERFORMANCE RATIOS:
Return on average assets (a)                    1.35%      1.53%      1.46%
Return on average equity (a)                    9.94%     10.89%     10.70%
Net interest margin (a)                         4.74%      4.91%      4.87%
Efficiency ratio                               63.13%     60.03%     61.16%

                                            Dec. 31,  Sept. 30,   Dec. 31,
                                              2006       2006       2005
                                           ---------  ---------  ---------
ASSET QUALITY RATIOS:
Non-performing loans                       $     239  $      80  $   2,707
OREO & other repossessed assets                    2         15        144
                                           ---------  ---------  ---------
Total non-performing assets                $     241  $      95  $   2,851
Non-performing assets to total assets           0.04%      0.02%      0.52%
Allowance for loan losses to
 non-performing loans                          1,724%     5,152%       152%

Book value per share (b)                   $   21.05  $   21.12  $   20.22
Book value per share (c)                   $   22.37  $   22.44  $   21.64
Tangible book value per share (b) (d)      $   19.12  $   19.22  $   18.25
Tangible book value per share  (c) (d)     $   20.32  $   20.41  $   19.53

(a) Annualized
(b) Calculation includes ESOP shares not committed to be released
(c) Calculation excludes ESOP shares not committed to be released
(d) Calculation subtracts goodwill and core deposit intangible from the
    equity component

                                                 Three Months Ended
                                            Dec. 31,  Sept. 30,  Dec. 31,
                                              2006       2006       2005
AVERAGE BALANCE SHEET:                     ---------  ---------  ---------
Average total loans                        $ 439,294  $ 411,012  $ 390,776
Average total interest earning assets        529,572    510,180    495,290
Average total assets                         580,114    560,941    549,361
Average total interest bearing deposits      376,365    372,371    361,620
Average FHLB advances & other borrowings      65,970     48,518     56,939
Average shareholders' equity                  78,646     78,724     74,996
Disclaimer

This report contains certain "forward-looking statements." The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protection of such safe harbor with forward looking statements. These forward-looking statements may describe future plans or strategies and include the Company's expectations of future financial results. Forward-looking statements are subject to a number of risks and uncertainties that might cause actual results to differ materially from stated objectives. These risk factors include but are not limited to the effect of interest rate changes, competition in the financial services market for both deposits and loans as well as regional and general economic conditions. The words "believe," "expect," "anticipate," "estimate," "project," and similar expressions identify forward-looking statements. The Company's ability to predict results or the effect of future plans or strategies is inherently uncertain and undue reliance should not be placed on such statements.

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