TIMBERLINE BANCSHARES INC.
ANNUAL REPORT FOR 1996
FINANCIAL HIGHLIGHTS
Percent
1996 1995 Change
FOR THE YEAR
Net Interest Income $ 4,075 $ 4,143 -1.64%
Net Income before
Taxes 1,350 1,417 -4.73%
Net Income 912 938 -2.77%
PER SHARE
Net earnings for the
year .97 1.04 -6.73%
Book Value at
Year End 7.10 6.93 2.45%
(Includes Capital & Loan
Loss Reserve)
AT YEAR END
Assets 77,475 76,380 1.43%
Investment Securities
and Fed Funds Sold 28,696 28,461 .83%
Loans 39,198 39,525 -.83%
Deposits 70,268 69,833 .62%
Stockholder's Equity 6,777 6,227 8.83%
Amounts are stated in thousands except earnings per share and Book Value which
are stated in actual dollars.
This statement has not been reviewed
or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
LETTER TO OUR SHAREHOLDERS
1996 was another good year at Timberline Bancshares. Not a
record setter, but a very respectable 1.19% Return on average assets
and a 16.6% Return on beginning equity bodes well by all standards.
We maintained a higher than normal liquidity with a lower loan
to deposit ratio than usual or historic for the Bank. The principal
reason for this anomaly was our desire to prepare for a new affinity
credit card program that we had acquired. The system began later
in the year than anticipated and thus slowed earnings modestly for
the year. It is now moving forward and should produce increased
income for 1997.
Besides the credit card program, we accomplished some
significant shareholder benefits during 1996. The one hundred
percent (100%) stock split had the desired results by increasing the
individual share value from the $15.25 reported to you last year to
the current $11.50 plus value for twice the number of shares, or an
equivalency of $23.00 per share on the original pre-split value
which equates to a fifty percent (50%) increase in market value.
We continue to move forward with the technological changes as
needed to stay abreast of the industry.
We are also continuing our effort to establish a branch
presence in southern Oregon, as discussed here last year.
Your Board and Executive Officers will move forward in a
steady, consistent direction as we have in the past continuing to
enhance shareholder value and community service.
Have you thanked an employee lately for the fine job they are
doing on your behalf?
Sincerely,
Robert J. Youngs
President and CEO
Timberline Bancshares Inc.
Timberline Community Bank
IN OUR OPINION
Having read the President's letter, you are aware that the Bank did
well in 1996.
Having granted a 100% stock split, the Bank maintained a respectable
$.97 per share earnings. With net interest income down due to a
continued softening in loan demand, a lower rate of return than in
years past on investments purchased (rates on new instruments being
naturally lower since rates overall are lower), and maintaining a
higher rate of liquidity in anticipation of the affinity program,
the bank's earnings were a modest amount less than 1995 when
reported earnings per share was $1.04. This was accomplished by a
careful management of funds and control of operating expenses.
In 1997, management will be reviewing all products offered our
customers, including but not limited to, types of deposit accounts,
loan accounts, debit check cards, and check imaging. We will decide
on new products to offer, old products to possibly eliminate. And,
in conjunction, we will be reviewing the charges we assess our
customers for our service. Timberline Community Bank has not raised
fees charged to our customers since 1994.
In a future filled with a changing banking environment, we look
forward to 1997 with the intention of maintaining the safety and
soundness of the Bank, continuing the steady growth of the past and
serving our communities with the sound banking principals upon which
the Bank was founded.
-1-
OUR MISSION REMAINS
Timberline Community Bank was formed for the specific purpose of
providing banking facilities and products in the Bank's serving
area.
The following is our mission statement:
To serve all the Banking needs within our geographic
boundaries, as defined in our Community Reinvestment Act Statement,
within normal industry credit underwriting and regulatory standards.
To purposely fill gaps left by major banking institutions.
To consistently return a reasonable level of earnings to our
shareholders.
To protect the integrity of our shareholders' investment.
To be a good corporate citizen to the communities which we
serve.
To maintain the highest possible standards of conduct to our
customers and our fellow employees.
To assist others in our industry when possible.
-2-
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholders of Timberline Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of
Timberline Bancshares, Inc. (a California corporation) and subsidiary as
of December 31, 1996, 1995, and 1994, and the related consolidated statements
of income, stockholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present, in all material respects, the financial position of Timberline
Bancshares, Inc. and subsidiary as of December 31, 1996, 1995, and 1994, and
the results of their operations and their cash flows for years then ended in
conformity with generally accepted accounting principles.
Carlson, Pavlik and Drageset
Certified Public Accountants
Yreka, California
February 3, 1997
BALANCE SHEET
-3-
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996, 1995 and 1994
($ in thousands, except per share)
1996 1995 1994
ASSETS
Cash and Due from banks-Non interest bearing $ 5,202 $ 4,163 $ 4,543
Federal funds sold 12,700 10,200 800
Securities Available for Sale 6,422 7,251 7,136
Securities Held to Maturity 9,574 11,010 14,585
Cash surrender value of officers'
life insurance 1,249 1,192 1,145
Loans, less allowance for loan losses
of 1996-$491; 1995-$475; 1994-$473 38,707 39,050 43,035
Premises and Equipment, net 2,097 2,240 2,394
Other assets 1,524 1,274 1,408
Total Assets $77,475 $76,380 $75,046
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $14,025 $12,805 $12,396
Savings and NOW deposits 45,646 49,066 51,034
Time, under $100 8,879 6,526 4,588
Time, $100 and over 1,718 1,436 976
Total Deposits 70,268 69,833 68,994
Other liabilities 430 320 443
Total Liabilities 70,698 70,153 69,437
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value,
authorized shares 2,000,000;
issued and outstanding shares
1996-954,484; 1995-457,683;
1994-444,471; 2,813 2,678 2,588
Additional paid in capital 1 1 1
Retained earnings 3,982 3,545 3,058
Unrealized holding gains(losses) on
securities available for sale (19) 3 (38)
Total stockholders' equity 6,777 6,227 5,609
Total liabilities and
stockholders' equity $77,475 $76,380 $75,046
The accompanying notes are an integral part of these financial statements
-4-
STATEMENT OF INCOME
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements
For The Years Ended December 31, 1996, 1995, and 1994
($ in thousands, except per share)
1996 1995 1994
Interest Income:
Interest and fees on loans $4,338 $4,902 $4,672
Interest on federal funds sold 691 250 116
Interest on securities available
for sale 407 407 288
Interest on securities to be held
to maturity 667 816 710
6,103 6,375 5,786
Interest Expense:
Interest on deposits 2,028 2,232 1,839
Net Interest Income 4,075 4,143 3,947
Provision for loan losses 15 41 230
Net interest income after
provision for loan losses 4,060 4,102 3,717
Other income:
Service charges 373 382 375
Gain on sale of premises and equipment 2 2 -
Gain on sale of other real estate - 24 -
Recovery on fidelity bond - - 269
Other 20 32 22
395 440 666
Other Expenses:
Salaries and employee benefits 1,689 1,640 1,571
Occupancy expenses 396 350 331
Equipment and data processing
expenses 303 331 345
Other operating expenses 717 804 934
3,105 3,125 3,181
Income before income taxes 1,350 1,417 1,202
Income tax expense 438 479 483
Net Income $ 912 $ 938 $ 719
Earnings per common share $ .97 $ 1.04 $ 0.85
The accompanying notes are an integral part of these financial statements.
-5-
STATEMENT OF STOCKHOLDERS' EQUITY
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For The Years Ended December 31, 1996, 1995, and 1994
Unrealized
Holding
Gains
(Losses)
On
($ in thousands) Additional Securities
Common Stock Paid-in Retained Available
Shares Amount Capital Earnings For Sale Total
Balance, December 31,
1993 366,423 $2,294 $ 1 $ 2,569 - $4,864
Net Income - - - 719 - 719
Cash dividends
declared - - (230) - (230)
Options exercised by
directors and
employees 42,125 294 - - - 294
Stock Split 35,923 - - - - -
Net change in
unrealized holding
gains (losses) in
securities available
for sale - - - - (38) (38)
Balance, December 31,
1994 444,471 2,588 1 3,058 (38) 5,609
Net Income - - - 938 - 938
Cash Dividends
declared - - - (451) - (451)
Options exercised by
directors and
employees 13,212 90 - - - 90
Net change in
unrealized holding
gains (losses) in
securities available
for sale - - - - 41 41
Balance, December 31,
1995 457,683 $2,678 $1 $3,545 $3 $6,227
Net Income - - - 912 - 912
Cash dividends declared - - - (475) - (475)
Options exercised by
Directors and employees 24,682 135 - - - 135
Stock split 472,119 - - - - -
Net change in unrealized
Gains(losses)in
Securities available
For sale - - - - (22) (22)
Balance, December 31,
1996 954,484 $2,813 $1 $3,982 $(19) $6,777
The accompanying notes are an integral part of these financial statements.
-6-
STATEMENT OF CASH FLOWS
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1996, 1995, and 1994
($ in thousands, except per share)
1996 1995 1994
Cash flows from operating activities:
Net income $ 912 $ 938 $ 719
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 193 155 141
Provision for loan losses 15 41 230
(Gain)Loss on sale of premises and equipment (2) (2) 7
Net (increase) decrease in other assets (228) 92 (182)
Net increase (decrease) in other liabilities 103 (116) 72
Net cash provided by operating activities 993 1,108 987
Cash flows from investing activities:
Net (increase) decrease in federal funds sold (2,500) (9,400) (400)
Purchases of securities available for sale (6,543) (9,031) (7,171)
Proceeds from sales of securities
available for sale - 250 -
Proceeds from maturities of securities
available for sale 7,331 9,889 7,995
Purchase of securities to be held to maturity (4,315) (1,158) (8,726)
Proceeds from sales of securities to be held
to maturity - - -
Proceeds from maturities of securities held
to maturity 5,751 3,568 1,558
Net (increase) decrease in loans 328 3,944 68
Purchase of premises and equipment (47) ( 10) (764)
Proceeds from sales of premises and equipment 3 11 1
(Increase) in cash surrender value of
officers' life insurance policies (57) (47) (1,145)
Net cash (used in) investing activities (49) (1,966) (8,584)
Cash flows from financing activities:
Net increase in deposits 435 839 8,066
dividends paid (475) (451) (230)
Proceeds from exercise of stock options 135 90 294
Net cash provided by financing activities 95 478 8,130
Net increase (decrease) in cash and
due from banks 1,039 (380) 533
Cash and due from banks at
beginning of year 4,163 4,543 4,010
Cash and due from banks at year end $5,202 $4,163 $4,543
Interest paid $1,956 $2,260 $1,794
Income taxes paid $ 610 $ 721 $ 593
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
-7-
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
($ in thousands, except per share)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Timberline Bancshares, Inc.
(the Company) and subsidiary (the Bank) are in accordance with generally
accepted accounting principles and conform to general practices within the
banking industry. The more significant of the principles used in preparing
the financial statements are briefly described below.
Consolidation:
The consolidated financial statements include the accounts of Timberline
Bancshares, Inc. (the "Company") and its wholly owned subsidiary, Timberline
Community Bank (the "Bank"). All intercompany accounts and transactions have
been eliminated in consolidation.
Nature of Operations:
The Company is a bank holding company, formed to be the sole shareholder of the
Bank. Its major source of income is dividends paid by the Bank.
The Bank operates eight branch locations in Siskiyou County, California, and
a loan production office in Medford, Oregon. The Bank grants agribusiness,
commercial, residential construction, and consumer loans throughout northern
California and southern Oregon.
Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The material estimate that is particularly susceptible to change relates to
the determination of the allowance for loan losses. While management uses
available information to recognize losses on loans, further reductions in the
carrying amount of loans may be necessary based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the estimated losses on loans. Such
agencies may require the Bank to recognize additional losses based on their
judgements about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the estimated losses
on loans may change materially in the near term. However, the amount of the
change that is reasonably possible cannot be estimated.
-8-
Presentation of Cash Flows:
For the purposes of reporting cash flows, cash and due from banks includes cash
on hand and amounts due from banks (including cash items in process of
clearing). Cash flows from loans originated by the Bank, deposits, and federal
funds sold are reported net.
Investment securities:
The Company's investments in securities are classified in three categories and
accounted for as follows:
Trading Securities: Government bonds held principally for resale in the near
term and mortgage-backed securities held for sale in conjunction with the Bank's
mortgage banking activities are classified as trading securities and recorded
at their fair values. Realized and unrealized gains and losses on trading
securities are included in other income. The Company had no trading securities.
Securities Available for Sale: Securities available for sale consist of bonds,
notes and debentures not classified as trading securities or as securities to
be held to maturity.
Securities to be Held to Maturity: Bonds, notes and debentures for which the
Bank has the positive intent and ability to hold to maturity are reported at
cost, adjusted for amortization of premiums, and accretion of discounts which
are recognized in interest income using the interest method over the period to
maturity.
Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The allowance
for loan losses is established through a provision for loan losses charged to
expenses. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrowers'
ability to pay. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful. Management believes this method of discontinuing
accrual of interest is more accurate than the use of an arbitrary method, such
as stopping the accrual of interest when a loan is 90 days past due. Loans
deemed uncollectible are charged to the allowance. Provisions for loan losses
and recoveries on loans previously charged off are added to the allowance.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the useful lives of
the assets which range from three to thirty-three years.
-9-
Cash Surrender Value of Officers' Life Insurance:
The Bank purchased life insurance on several key officers during 1994. Under
the policies, the Bank receives the cash surrender value if the policy is
terminated and, upon death of the insured, receives all benefits payable.
Foreclosed Property:
Foreclosed property consists of real estate and other assets acquired through
customers' loan defaults. Foreclosed property is carried at the lower of fair
value, less the estimated cost to sell, or cost. Routine maintenance costs,
declines in market value and net losses on disposal are included in other
operating expenses. Foreclosed property is included in "other assets" on
the Company's balance sheet.
Loan Origination Fees and Costs:
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield on the related loan. The deferred
fees and costs are netted against outstanding loan balances, and are amortized
over the life of the loan.
Income Taxes:
Provisions for income taxes are based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and included deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
Deferred taxes are computed on the liability method as prescribed in SFAS
No. 109, "Accounting for Income Taxes."
The Company and its subsidiary file a consolidated Federal income tax return
and a combined California income tax return. The subsidiary provides for
income taxes on a separate-return basis, and remits to the Company amounts
determined to be currently payable.
Off-Balance Sheet Financial Instruments:
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and stand-by
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded.
NOTE 2 - NET INCOME PER COMMON SHARE:
Net income per common share of stock is computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents include shares issuable
on the exercise of stock options when the market price of the common stock
exceeds the exercise price of the options. This increase in the number of
common shares was reduced by the number of common shares assumed to have been
purchased (limited to 20% of the outstanding common shares) with the proceeds
from the exercise of the options. Retroactive effect has been given for
subsequent stock dividends and splits.
Therefore, the following number of shares were assumed to have been outstanding
at December 31:
1996 942,143
1995 898,152
1994 845,658
-10-
NOTE 3 - INVESTMENT SECURITIES:
The Company accounts for investment securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 115 requires that
securities available for sale be carried at fair value, with the net unrealized
holding gain or loss recognized as a separate component of stockholders' equity.
The carrying amounts of investment securities as shown in the consolidated
balance sheets at December 31, 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
($ in thousands)
December 31, 1996:
Securities available for Sale:
U.S. Government and agency securities $ 5,750 $ 2 $ 38 $ 5,714
State and political subdivisions 707 3 2 708
$ 6,457 $ 5 $ 40 $ 6,422
Securities to be held to maturity:
U.S. Government and agency securities $ 3,381 $ 8 $ 8 $ 3,381
State and political subdivisions 6,193 69 10 6,252
$ 9,574 $ 77 $ 18 $ 9,633
December 31, 1995:
Securities Available for Sale:
U.S. Government and agency securities $ 6,831 $ 8 $ 6 $ 6,833
State and political subdivisions 415 3 - 418
$ 7,246 $ 11 $ 6 $ 7,251
Securities to be held to Maturity:
U.S. Government and agency securities $ 5,290 $ 35 $ 24 $ 5,301
State and political subdivisions 5,673 77 2 5,748
Other securities 47 5 - 52
$ 11,010 $ 117 $ 26 $11,101
December 31, 1994:
Securities Available for Sale:
U. S. Government and federal securities $ 7,206 $ - $ 70 $ 7,136
Securities to be held to Maturity:
U. S. Government and agency securities $ 8,615 $ 1 $ 412 $ 8,204
State and political subdivisions 5,622 23 170 5,475
Other securities 348 - 9 339
$ 14,585 $ 24 $ 591 $14,018
</TABLE>
In November of 1995, the Company elected to transfer some investments from the
"held to maturity" category to the "available for sale" category, as permitted
by the Financial Accounting Standards Board "A Guide to Implementation of
Statement No. 115". The amortized cost of the securities transferred was
$1,165; the related unrealized loss recognized was $2. The Company decided to
change the category of these securities because the securities have floating
interest rates or are unrated securities.
Securities carried at approximately $2,428 at December 31,1996, $1,465 at
December 31, 1995, and $1,570 at December 31, 1994 were pledged to secure public
deposits and for other purposes required or permitted by law.
Gross realized gains and gross realized losses on sales of securities were $-0-
for all types of securities for the years ended December 31, 1996 and 1995; and
1994.
Gross proceeds from the sale of securities were $-0-, $250, and $-0-, for the
years ended December 31, 1996, 1995 and 1994 respectively. The applicable
income taxes were approximately $-0-, $-0-, and $-0- for the years ended
December 31, 1996, 1995 and 1994, respectively.
-11-
Information about the maturity distribution of debt investment securities is
presented on page 16 of the 10K-SB for 1996.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The components of loans in the consolidated balance sheets were as follows:
December 31
1996 1995 1994
Commercial $ 34,188 $ 34,288 $ 35,978
Real estate construction 567 724 2,412
Residential mortgage 3,025 3,139 3,695
Consumer installment 1,484 1,497 1,597
39,264 39,648 43,682
Deferred fees and costs ( 66) (123) (174)
Allowance for loan losses (491) (475) (473)
Loans, net $38,707 $39,050 $43,035
Loans classified as non-accrual approximated $-0-, $334 and $182 as of December
31, 1996, 1995, and 1994, respectively.
The changes in the allowance for loan losses were as follows:
December 31
1996 1995 1994
Balance, beginning of year $475 $473 $389
Loans charged off (4) ( 47) (149)
Recoveries 5 8 3
Provision for loan losses 15 41 230
Balance, end of year $491 $475 $473
NOTE 5 - PLEDGED AND RESTRICTED ASSETS
The Federal Reserve Board requires that banks maintain non-interest bearing
cash balances in accordance with the Board's reserve requirements. The average
non-interest bearing cash balance maintained to meet reserve requirements was
approximately $600, $600 and $600 during 1996, 1995, and 1994, respectively.
Information concerning pledged assets is contained in Note 3.
NOTE 6 - PREMISES AND EQUIPMENT:
Major classifications of premises and equipment are as follows:
December 31
1996 1995 1994
Premises $2,491 $2,491 $2,498
Equipment 1,027 993 1,010
3,518 3,484 3,508
Accumulated depreciation (1,421) (1,244) (1,114)
$2,097 $2,240 $2,394
Depreciation expense $ 189 $ 155 $ 141
-12-
Certain facilities and equipment are leased under various operating leases.
Rental expense was $113, $115 and $111 in 1996, 1995 and 1994, respectively.
Future minimum rental commitments under noncancelable leases are:
1997 $ 78
1998 53
1999 39
2000 39
2001 39
Thereafter 1,120
$1,368
NOTE 7 - EMPLOYEE BENEFITS
The Bank has a non-qualified salary continuation plan for several key executive
officers that provides for certain amounts to be paid to the officers upon
their retirement at age 65, or upon certain terminations of employment. The
Bank purchased single premium life insurance policies on the lives of the
officers to assist with the funding of the plan.
Also, the Bank has a 401(k) Employee Retirement Plan. Employees must meet
certain age and hour requirements in order to be eligible to participate.
Employees can make contributions to the plan, within limits established by the
Internal Revenue Service. In addition, the Bank may make matching contributions
and/or profit sharing contributions to the Plan. For 1996, 1995 and 1994
respectively, the Bank made ten percent matching contributions totaling $4,
$4 and $3. Participants have the ability to direct the investment of the
contributions, within guidelines established by the Bank.
NOTE 8 - INCOME TAXES
Total applicable income taxes reported in the consolidated income statements
for the years ended December 31, 1996, 1995, and 1994 included the following
components:
1996 1995 1994
Current paid or payable:
Federal $442 $353 $407
State 180 172 178
622 525 585
Increase (decrease) in deferred taxes:
Federal ( 157) ( 41) ( 74)
State ( 27) ( 5) (28)
( 184) ( 46) (102)
Income tax expense $438 $479 $483
The deferred tax assets were
comprised of the following:
Difference in allowance for loan
losses between financial statements
and income tax purposes $ 103 $ 15 $ 76
Timing differences in deductibility
of state taxes 49 58 61
Difference in allowance for losses on
foreclosed property between financial
statements and income tax purposes 18 14 -
Timing difference in deductibility
of deferred compensation 100 49 -
Other - 5 12
Total deferred tax asset $270 $141 $149
-13-
The deferred tax liabilities were comprised of the following:
Difference in depreciation expense
between financial statement and
income tax purposes $ 48 $ 45 $ 42
Use of cash basis for income
tax purposes - 58 115
Total deferred tax liability $ 48 $ 103 $ 157
Deferred tax assets and deferred tax liabilities are included in the
consolidated balance sheets under the captions "Other assets" and
"Other liabilities" respectively.
The reasons for the differences between applicable income taxes and the amount
computed at the applicable regular federal tax rate of 34 percent were as
follows:
1996 1995 1994
Taxes at statutory federal
income tax rate $ 459 $ 490 $ 409
Increase (decrease) in taxes
resulting from:
- Tax exempt income (112) (104) ( 89)
- State income taxes, net of
federal income taxes 101 107 91
- Officers' life insurance -0- 10 13
- Deferred Compensation 62 37 25
- Other (72) (61) 34
$ 438 $ 479 $ 483
NOTE 9 - STOCK OPTION PLAN:
The Company has a stock option plan (the 1989 option plan) which provides
certain employees with an opportunity to purchase the Company's common stock.
Under the plan, the Company may grant either incentive or non-qualified stock
options to purchase up to 242,446 shares. The option price per share may not
be less than the fair market value of the stock on the date of the grant, and
the maximum term of the options may not exceed ten years. In addition,
employee-directors are limited to 64,420 share options and non-employee
directors are limited to 14,642 share options under the plan.
Stock option transactions are summarized as follows:
Option Price Number of
Per Share Shares
High Low
Balance, December 31, 1993 7.68 7.51 93,169
Adjustment for stock split 6.98 6.83 9,312
Forfeited 6.98 6.83 (1,464)
Exercised 6.98 6.83 (42,125)
Balance, December 31, 1994 6.98 6.83 58,892
Exercised 6.98 6.83 (13,212)
Balance, December 31, 1995 6.98 $6.83 45,680
Adjustment for stock split 3.50 3.42 31,244
Exercised 3.50 3.42 (24,682)
Balance, December 31, 1996 3.50 3.42 52,242
-14-
The following disclosures are required under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation", and are presented
for 1996 only.
Weighted Average
Number Exercise
Of Shares Price
Options outstanding at
December 31, 1995, adjusted
for subsequent stock split 91,360 $ 3.43
Options outstanding and
exercisable at December 31, 1996 52,242 3.42
(Remaining life of 2.5 years)
Options exercised during 1996,
adjusted for stock split 39,118 3.45
Options granted during 1996
Other than via stock split adjustments) - -
No stock options were forfeited or expired during 1996. No compensation costs
have been recognized in the consolidated income statements since no options
were granted. Also, there were no modifications to existing outstanding stock
options during 1996.
NOTE 10 - TIMBERLINE BANCSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS:
Condensed Balance Sheets:
December 31,
1996 1995 1994
ASSETS
Cash and due from banks, bank
subsidiary, non-interest bearing $ 1 $ 3 $ 2
Investment in wholly owned
subsidiary 6,739 6,167 5,594
Other assets 56 54 51
Total Assets $ 6,796 $ 6,224 $ 5,647
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities $ - $ - $ -
Stockholders Equity 6,796 6,224 5,647
Total Liabilities and
Stockholders' Equity $ 6,796 $ 6,224 $ 5,647
-15-
Condensed Income Statements:
December 31,
1996 1995 1994
Operating Income:
Dividends from subsidiary $ 491 $ 472 $ 243
Other 2 - -
493 472 243
Operating Expenses:
Other expense 25 23 31
Income (loss) before income taxes
and equity in undistributed net
income of subsidiary 468 449 212
Income tax benefit 7 7 10
Income (loss) before equity in
undistributed net income of
subsidiary 475 456 222
Equity in undistributed net income of
subsidiary 437 482 497
Net Income $ 912 $ 938 $ 719
<TABLE>
<CAPTION>
Condensed Statements of Changes in Stockholders' Equity:
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 366,423 $2,294 $ 1 $2,569 $4,864
Net Income - - - 719 719
Cash dividends declared - - - (230) (230)
Options exercised by employees
and directors 42,125 294 - - 294
Stock split 35,923 - - - -
Balance, December 31, 1994 444,471 2,588 1 3,058 5,647
Net Income - - - 938 938
Cash dividend declared - - - (451) (451)
Options exercised by employees
and directors 13,212 90 - - 90
Balance, December 31, 1995 457,683 $2,678 $ 1 $3,545 $6,224
Net Income - - - 912 912
Cash dividend declared - - - (475) (475)
Options exercised by employees
and directors 24,682 135 - - 135
Stock split 472,119 - - - -
Balance, December 31, 1996 954,484 $2,813 $ 1 $3,982 $6,796
</TABLE>
Condensed Statements of Cash Flows:
December 31
1996 1995 1994
Cash Flows from Operating
Activities:
Net Income $912 $938 $719
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in net income of
subsidiary (928) (954) (740)
Dividends received from
subsidiary 491 471 243
Net (increase) decrease
in other assets (2) (3) 10
Net cash provided by (used)
operating activities 473 452 232
-16-
Cash Flows from Investing
Activities:
Capital investment in subsidiary (135) (90) (294)
Cash Flows from Financing
Activities:
Dividends paid (475) (451) (230)
Proceeds from exercise of
stock options 135 90 294
Net cash provided (used in)
financing activities (340) (361) 64
Net increase (decrease) in cash
and due from banks (2) 1 2
Cash and due from banks at
beginning of year 3 2 -
Cash and due from banks
at end of year $ 1 $ 3 $ 2
NOTE 11 - FINANCIAL INSTRUMENTS:
In the normal course of business, the Bank is a party to financial instruments
which contain risks that are not required to be reflected in a traditional
balance sheet. These financial instruments include commitments to extend
credit and letters of credit. The Bank manages these risks by using the same
credit risk management processes as it does for financial instruments reflected
on the balance sheet. Credit risk for these instruments is considered in
management's assessment of the adequacy of the allowance for credit losses.
Credit Risk:
The disclosures in this note represent the Bank's credit exposure should every
counter party to the financial instruments with off-balance-sheet credit risk
fail to perform completely according to the terms of the contracts and the
collateral and other security, if any, for the exposure prove to be of no value
to the Bank. The Bank's credit exposure for commitments to extend credit and
letters of credit is represented by the contractual amounts of those
instruments. The Bank believes its credit procedures minimize these risks.
Market Risk:
This note does not address the amounts of market losses the Bank would incur
if future changes in market prices make financial instruments with
off-balance-sheet market risk less valuable or more onerous. The measurement
of market risk associated with financial instruments is meaningful only when
all related and offsetting on- and off-balance-sheet transactions are
aggregated, and the resulting net positions are identified. The Bank maintains
risk management policies that monitor and limit exposure to market risks.
Collateral and Other Security Arrangements:
The credit risk of both on-and off-balance-sheet financial instruments varies
based on many factors, including the value of collateral held and other
security arrangements. To mitigate credit risk, the Bank generally determines
the need for specific covenant, guarantee and collateral requirements on a
case-by-case basis, depending on the nature of the financial instrument and
the customer's credit worthiness. The Bank may also receive comfort letters
and oral assurances. The amount and type of collateral held to reduce credit
risk varies but may include real estate, machinery, equipment, inventory and
accounts receivable, as well as cash on deposit, stocks, bonds, and other
marketable securities that are generally held in the Bank's possession or at
another appropriate custodian or depository. This collateral is valued
and inspected on a regular basis to ensure both its existence and adequacy.
The Bank requests additional collateral when appropriate.
-17-
Commitments to Extend Credit and Letters of Credit:
The following table summarizes credit risk for those financial instruments
whose contract amount represent credit risk at December 31,:
1996 1995 1994
Unused commercial loan commitments $ 5,793 $ 5,135 $ 6,114
Unused overdraft protection lines 82 80 96
Stand by letters of credit 118 168 118
Commercial loan commitments are agreements to make or acquire a loan as long
as the agreed-upon terms (e.g., expiry, covenants or notice) are met. The
Bank's commitments to purchase or extend loans help its customers meet their
liquidity needs. Overdraft protection lines allow customers to buy goods and
services or obtain cash advances.
Standby letters of credit are issued by the Bank to ensure its customers'
performance in dealings with others.
Since many of the unused commitments are expected to expire unused or to be
utilized only partially, the total amount of unused commitments does not
represent future cash requirement. The Bank has not incurred any losses on
its commitments in 1996, 1995 or 1994.
NOTE 12 - RELATED PARTIES:
The Bank has loans outstanding to certain of its Directors and executive
officers and to partnerships or companies in which a director or executive
officer has at least a 10 percent beneficial interest. At December 31, 1996,
1995 and 1994 $319, $349, and $475 of such loans, respectively, were
outstanding. An analysis of the activity during 1996 in respect to such loans
is as follows:
Balance, December 31, 1995 $ 349
Additions 103
Collections (133)
Balance, December 31, 1996 $ 319
NOTE 13 - REGULATORY MATTERS
The Bank, a state bank, is subject to the dividend restrictions set forth by
the California State Banking Department. Under such restrictions, the Bank
may not, without prior approval of the California State Banking Department,
declare dividends in excess of the lesser of A) retained earnings, or;
B) net income for the last three years less any distributions to stockholders
made during the last three years. The dividends, as of December 31, 1996,
that the Bank could declare, without the prior approval of the California State
Banking Department, is approximately $1,417.
The Bank is subject to various regulatory capital requirements administered by
the Federal Depository Insurance Corporation and the California State Banking
Department. Failure to meet minimum regulatory capital requirements can
initiate certain mandatory, and possible additional discretionary, actions by
regulators that if undertaken, could have a direct material impact on the
Bank's financial statements. Under the regulatory adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines involving quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The bank's capital amounts and classification
under the prompt corrective action guidelines are also subject to qualitative
judgements by the regulators about components, risk weightings, and other
factors.
-18-
At December 31, 1996, those ratio requirements were: Tier 1, Total, and
Leveraged capital ratios (as defined) of 6%, 10%, and 5% for Federal Depository
Insurance Corporation purposes and a Leveraged Capital Ratio of 6.5% for
California State Banking Departments purposes. The Bank's actual ratios as of
that date were 14.12%, 15.15% and 8.71% respectively. As of August 22, 1994,
the most recent notification from the Federal Deposit Insurance Corporation,
the Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since the most
recent notification that management believes have changed the Bank's prompt
corrective action category.
Federal banking law restricts the Bank from extending credit to the Company,
as the parent bank holding company, in excess of 10 percent of the Bank's
capital stock and surplus, as defined. Any such extensions of credit are
subject to strict collateral requirements. The Company had no such borrowing
from the Bank during 1996, 1995 and 1994.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
During 1995, the Company adopted SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments". The disclosures required by SFAS No. 107 need only
be made on a going forward basis; thus, the disclosures are not provided for
years prior to 1995.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and Federal Funds Sold:
The carrying amount is a reasonable estimate of fair value.
Investment Securities:
Fair value equals quoted market prices, if available. If a quoted market
price is not available, fair value is estimated using quoted market prices
for similar securities.
Cash Surrender Value of Officers' Life Insurance:
The carrying amount is a reasonable estimate of fair value.
Loans:
For certain homogeneous categories of loans, such as residential mortgages,
and consumer installment loans, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value of other types of loans is estimated
by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits:
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit is estimated using the rates currently offered
for deposits of similar remaining maturities.
-19-
Commitments to Extend Credit and Letters of Credit:
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counter parties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated costs to terminate them or otherwise settle obligations with the
counter parties at the reporting date.
The estimated fair values of the Company's financial instruments at
December 31, 1996 are as follows:
Carrying Fair
Amount Value
Financial Assets:
Cash $ 5,202 $ 5,202
Federal Funds Sold 12,700 12,700
Investment securities 15,996 16,055
Cash surrender value of
officers' life insurance 1,249 1,249
Loans 39,198 39,195
Less allowance for loan losses (491) (491)
Financial liabilities:
Deposits 70,268 70,268
Unrecognized financial instruments:
Commitments to extend credit - -
Letters of credit - -
(The amounts shown under "Carrying Amount" represent deferred fees arising
from those unrecognized financial instruments.)
The estimated fair values of the Company's financial instruments at December
31, 1995 are as follows:
Carrying Fair
Amount Value
Financial assets:
Cash $ 4,163 $ 4,163
Federal funds sold 10,200 10,200
Investment securities 18,261 18,352
Cash surrender value of officers
Life insurance 1,192 1,192
Loans 39,525 39,671
Less allowance for loan losses (475) (475)
Financial liabilities:
Deposits 69,833 69,826
Unrecognized financial Instruments:
Commitments to extend credit (8) (8)
Letters of credit - -
(The amounts shown under "Carrying Amount" represent deferred fees arising
from those unrecognized financial instruments.)
-20-
NOTE 15 - CONTINGENCIES:
The Bank is a party to several lawsuits arising out of its normal course of
business. In the opinion of management and legal counsel, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial statements.
The Bank has entered into an agreement with another financial institution to
participate in an "affinity" credit card program. The other financial
institution is to act as the lead bank, with the Bank participating in 50
percent of the outstanding balances on the credit cards, and reimbursing the
lead bank for 50 percent of the start up costs. As of December 31, 1996,
there were no outstanding balances, and start up costs had not been incurred.
-21-
FIVE YEARS AT A GLANCE
December 31,
1996 1995 1994 1993 1992
($ in thousands except # of shares, per share income and dividends)
Interest Income $ 6,103 $ 6,375 $ 5,786 $ 5,240 $ 5,015
Interest Expense 2,028 2,232 1,839 1,747 1,868
Net Interest Income 4,075 4,143 3,947 3,493 3,147
Provision of loan losses ( 15) ( 41) (230) (144) (128)
Net interest income
after provision for
loan losses 4,060 4,102 3,717 3,349 3,019
Other income 395 440 666 428 395
Total operating expenses 3,105 3,125 3,181 2,856 2,675
Net income before taxes
and extraordinary item 1,350 1,417 1,202 921 739
Income Taxes (438) (479) (483) (330) (259)
Net Income 912 938 719 591 480
Weighted average shares
outstanding used for
computing earnings
per share 942,143 898,152 845,658 412,223 402,346
Net income per share $ .97 $ 1.04 $ .85 $ 1.43 $ 1.19
Cash Dividends $474,681 $451,685 $ 229,528 $ 4,897 $ 4,600
Cash Dividends per share : $.50 per share 4/96, 100% stock split 6/96, and $.25
per share 10/96; $.50 per share 4/95 and $.50 per share 10/95; 10% stock split
plus $.50 per share - 1994; 10% stock split - 1993; 10% stock split - 1992.
-22-
IN REGULATION
The Corporation is a bank holding company registered under the
Bank Holding Company Act of 1956 and is subject to the
supervision of the Board of Governors of the Federal Reserve
System.
The Bank is subject to supervision, regulation and regular
examination by the California State Banking Department. The
deposits of the Bank are insured up to the maximum legal
limits by the Bank Insurance Fund, which is managed by the
Federal Deposit Insurance Corporation, and the Bank is
therefore subject to applicable provisions of the Federal
Deposit Insurance Act and regulations of the FDIC.
The statutes and regulations administered by these agencies
govern all aspects of the Bank's business, including required
reserves against deposits, loans, investments, dividends,
compliance, internal controls, and the establishment of new
branches and other banking facilities.
Many new regulations have been passed since 1990 that impact
the Bank and its operations, such as the Community
Reinvestment Act, the guidelines for a well capitalized bank
(10% risk based, 6% tier one capital, and 5% leveraged
capital), the guidelines for loan to value ratios, the Truth
in Savings Act, and many more.
Recent studies conducted by the federal government and other
entities concerned with the banking industry have shown that
the cost of implementing and complying with the many
regulations passed in the last few years is onerous -
especially to small community banks.
In 1996 regulatory authorities refined some regulations with
the intent of insuring safety and soundness while relieving
some of the reporting burdens on small community banks. The
most notable of these were the amendments to the CRA which
streamlined the reporting for small banks and the state
banking authority going online with federal authorities for
the quarterly called reports submitted by banks, thereby
eliminating the preparing and mailing of a separate report.
The impact of further possible changes on the bank cannot be
predicted at this time.
-23-
IN OUR COMMUNITY
We continue to serve as the Bank, the Directors and the
employees give not only monetary donations but many hours of
their time in support of the local governments, civic
organizations, charitable organizations and school activities.
Over the years we have sponsored, or donated to, or
participated in, or been a member of the following:
Kiwanis, Rotary,The Siskiyou County Fair Board
Chambers of Commerce throughout Siskiyou County
The city planning department
Soroptimists
Siskiyou Balloon Faire
Yreka Banner Program
Community Theater "At Last" Program
Farm Bureau Scholarships
Timberline Community Bank Scholarship through United Scholarships
Junior Golfers Tourney
Klamath River Fire Department Fund Raisers
Yreka City Golf Tournament
High School Safe Graduation Programs
Lions Auction
Annual "Rex Club Tournament" for sports activities
Elks Tournament
Elks Crippled Children
DARE program
Yreka YMCA program
United Way
March of Dimes
Yreka Rotary Bike Event
Cancer Fund, Daffodil Days
National Young Leaders Conference
California Special Olympics
Siskiyou Child Care Council
Yreka Community Television
Siskiyou General Hospital Building Fund
Christmas Giving Tree
Annual Fireman of the Year awards dinner
and so on...
We intend to continue our support of our community in 1997
with active participation in memberships and with donations as
in the past.
-24-
MEMBERS OF THE BOARD
ROBERT E. BANNING, Retired owner and operator of R.E.Banning Co.
GARELD J. COLLINS, Enterprise Investments
RICHARD S. DAY, Secretary of the Board, retired Business Executive
NORMAN E. FIOCK, Chairman of the Board, Retired Rancher
DON L. HILTON, Personal Investments
ELMO M. SMITH, Retired Bank Executive
ROBERT J. YOUNGS, President and Chief Executive Officer
Board Member Charles J. Cooley has become Director Emeritus.
Members of the Board of Timberline Bancshares, Inc. are also members and
serve in the same capacity of the Board of Timberline Community Bank.
EXECUTIVE OFFICERS
Robert J. Youngs, President and Chief Executive Officer of Bancshares
and Bank
Helen L. Gaulden, Sr. Vice President & Treasurer of Bancshares,
Sr. Vice Pres. & Cashier of Bank
Roger B. Ebert, Sr. Vice President and Loan Administrator of Bank
-25-
SERVING YOU AS OFFICERS
ADMINISTRATION
Mary Nielsen Assistant Vice President , Accounting
Linda Hager Assistant Vice President, Note Dept.
Supervisor
Terri Newton Assistant Vice President, Branch Operations
Administrator
David A. Caulkins Compliance Officer
Mike Jones Electronic Bank Officer
YREKA BRANCH
Grace J. Hester Vice President and Branch Manager
Ted Krishisky Loan Officer
Toyzanne Henry Loan Officer
Denise Hunt Operations Supervisor
GREENVIEW BRANCH
Ron Robison Assistant Vice President and Branch Manager
Shirley Spallino Operations Supervisor
WEED BRANCH
Susan Simas Branch Supervisor
MCCLOUD BRANCH
Joni Dalton Branch Supervisor
DUNSMUIR BRANCH
Aurora DeClusion Branch Supervisor
DORRIS BRANCH
Sandra Hamilton Assistant Vice President and Branch Manager
TULELAKE BRANCH
Cindy Reeves Branch Supervisor
MT SHASTA BRANCH
Adriane Dorst Branch Supervisor
LOAN PRODUCTION OFFICE
Jim Tompkins Assistant Vice President and Office Manager
-26-
THANK YOU CHARLIE
To those of you who have been fortunate enough to have personally known
Charles J. Cooley for any of his 97 years (98 in May) you will, I'm sure, agree
he is one fine gentleman.
Charlie has served his community all of his active life and not the least
of his accomplishments has been his affiliation since its inception with
Timberline Bancshares and Timberline Community Bank.
As one of the original founders, he stepped forward to place himself and
his personal assets on the line and, along with the other stalwart gentlemen
who founded the bank, saw to the enormous task of organizing, forming and
operating Siskiyou County's first new independent bank in a hundred years.
Yes, there were hard times during the initial startup, but Charlie and
his fellow originators, including Bob Banning and Don Hilton who came on board
during the "crisis years", persevered and kept the faith in their vision.
Today, some 17 years later, the community has been and continues to be
well served by the institution they brought forth.
Charles has now, in his senior years, decided to move himself from active
directorate management and has been designated as a Director Emeritus.
As the President of this institution for the past 14 years on behalf of
myself and my fellow officers and staff, I say "Charlie, you have been and will
always be a wonderful person to work with and for and you truly are a gentle
man.
We will not miss Charlie, for he will visit with us frequently and we will
always value his counsel.
