TIMBERLAND BANCORP INC (TSBK) stock intrinsic value fair value estimate & owner earnings analysis

Timberland Bancorp owns Timberland Bank, a community bank in western Washington that has operated since 1915. It takes local retail and business deposits and lends them out, mostly against real estate, through about two dozen branches in Grays Harbor, Pierce, Thurston, King, Kitsap and Lewis Counties. It also runs a small residential mortgage business. At June 30, 2026 the bank had $2.06 billion of assets, $1.76 billion of deposits (of which only about $43 million were brokered at the last year-end), $1.52 billion of loans and just $10 million of Federal Home Loan Bank advances. Shareholders' equity was $273 million, about 13% of assets, or roughly $258 million after removing $15 million of acquisition goodwill. The holding company has no bonds of its own. How we treat debt. For a bank, deposits and borrowings are the raw material of the business and interest on them is an operating cost. We value the bank's cash earnings after that interest and do not subtract deposits or advances as debt, which would count the funding cost twice. In each case below, the business value is the value to shareholders; nothing further is owed ahead of the common stock. The bank's leverage (deposits are about 6.5 times equity) is charged in the bear case instead. Earning power. We measure cash earnings from operating cash flow, removing timing swings in loans held for sale and other working-capital items, subtracting stock compensation as a real cost, and subtracting the spending needed to maintain branches and systems. On that basis, cash earnings over fiscal 2021-2025 ran between $23.1 million and $28.4 million a year, or 1.27% to 1.53% of average assets, with a median of about 1.37%. Those five years cover a full rate cycle: near-zero rates in 2021-22, a margin peak in 2023, a deposit-cost squeeze in 2024 (cash earnings fell 15%) and recovery in 2025, when the net interest margin rose from 3.54% to 3.76%. We use the 1.37% median as normal earning power on today's balance sheet, about $28 million or $3.59 per share on 7.86 million diluted shares. Results for the first nine months of fiscal 2026 are running ahead of that (net income $23.1 million and $2.92 per share, versus $20.7 million and $2.60 a year earlier), but one favourable rate period is not enough to raise the normal level. An important accounting judgement: cash-based earnings add back loan-loss provisions, while actual losses show up elsewhere. Net charge-offs were close to zero for years ($240,000 in fiscal 2025, $54,000 in fiscal 2024). That is unusually benign and not permanent, so every case carries an explicit charge for credit losses. The bank's own record sets the stress: in fiscal 2009 and 2010 it provided $6.1 million and $5.1 million for loan losses on a balance sheet of about $700 million, and problem assets reached about 5.5% of assets. Commercial real estate, construction, multi-family and land loans make up roughly three-quarters of the book, which is the main credit risk. Growth. We credit only growth the bank has actually sustained: assets grew about 3% a year from September 2021 to June 2026, a stretch that included the 2023 deposit outflow. Growth requires capital, so we hold back 10% of any asset growth as equity, using the roughly $54 million of equity above that level first. Buybacks are not counted as extra growth because they come out of the same cash we are valuing. No growth is assumed after year ten in any case; the century-old deposit franchise is assumed to keep earning at its year-ten level without further increase. Base case: earning power of 1.37% of assets less a through-cycle credit cost of 0.12% of assets, with assets growing 2% a year for ten years. Year-one cash earnings are about $26 million, slightly below the $27 million earned in fiscal 2025 and far below that year's 13% growth, which came from margins recovering after the 2024 squeeze rather than anything repeatable. Earnings reach about $31 million by year ten and hold there. The business is worth about $507 million, or $64.51 per share, with nothing owed ahead of shareholders. Bear case: a regional real-estate downturn of the 2009-2010 kind hits the concentrated commercial real estate and construction book, with pre-tax credit losses of about 1.0% of assets a year for three years, a little heavier than the bank's own 2009-2010 provisions relative to its size. Deposit competition holds normal earning power at 1.15% of assets, below the squeezed 2024 level, and assets do not grow. Cash earnings fall to roughly $7 million in each stress year but stay positive, and the bank's surplus capital absorbs the losses without a share issue. The business is worth about $349 million, or $44.41 per share. That is above tangible book value of about $33 per share because a low-cost, local deposit base that has survived more than a century, including the 2009-2010 cycle, keeps earning after the losses are taken; the capital is not used up by the stress. Bull case: the fiscal 2025-2026 margin of about 3.76% or better holds, keeping earning power near 1.45% of assets with light credit costs of 0.06%, and assets keep growing at the 3% pace of the last five years. The business is worth about $594 million, or $75.59 per share, with nothing owed ahead of shareholders. What changed since our previous analysis two weeks ago: nothing material in the business. We now carry a somewhat heavier normal credit cost in the base case (0.12% of assets rather than 0.08%) because the recent near-zero charge-offs are the exception for a book this concentrated in commercial real estate, and the bear case now assumes a slightly harsher margin and loss path. The bull case is marginally higher. Our estimates moved from $45 / $65 / $75 to $44 / $65 / $76 per share. Margin-of-safety price. We are fairly sure of the earnings level: five years through a full rate cycle sit in a narrow band, and the bank barely borrows. The worst plausible event is a Puget Sound commercial real estate bust deeper than 2009-2010, combined with a deposit run like the 2023 regional-bank scare. With 13% equity, minimal wholesale funding and few brokered deposits, the structure looks able to survive that, though tangible book value (about $33 per share) is the realistic floor if losses ran well past history. The things we are most likely to be wrong about are the size of the next credit cycle and whether today's margin holds; being wrong on both points toward the mid-$40s, not lower. During the holding period the bank pays about $1.04 a year in dividends and buys back stock. At $40 a share, cash earnings are about 9% of the price, and if the shares merely moved to base-case value over an assumed three-to-four-year holding period, the base case implies a return including dividends near 20% a year; if the bear case arrived first, the bear value would still be above that price. The margin-of-safety price is $40. What would make this wrong: credit losses in the commercial real estate and construction book well beyond the bank's 2009-2010 experience, or a lasting loss of deposit share in its Puget Sound markets.