TIMBERLINE BANCSHARES INC.
ANNUAL REPORT
1997
FINANCIAL HIGHLIGHTS
Percent
1997 1996 Change
FOR THE YEAR
Net Interest Income $ 4,267 $ 4,075 4.71%
Net Income before
Taxes 1,334 1,350 -1.18%
Net Income 987 912 8.22%
PER SHARE
Net earnings for the
year .99 .97 2.06%
Book Value at
Year End 7.43 7.10 4.65%
(Includes Capital & Loan
Loss Reserve)
AT YEAR END
Assets 85,577 77,475 10.46%
Investment Securities
and Fed Funds Sold 28,640 28,696 - .19%
Loans 48,100 38,707 24.27%
Deposits 77,558 70,628 10.37%
Stockholder's Equity 7,478 6,777 10.34%
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
1997 turned out to be a year of significant gains in both
loans and deposits, most of which occurred in the later part of the
year.
This was brought about by refocusing our direction in mid
year. It became evident that the credit card program we bought into
in 1996 was not going to be as strong as we anticipated both in
volume and profitability. Therefore, we began in the third quarter
of 1997 to expand our lending area to encompass all of western
Oregon, which has been well received by the local independent banks
in the state.
Timberline and our lead bank on the card program are in the
process of selling the portfolio, which we expect to have
accomplished early in 1998.
Return on assets and on beginning equity remain at excellent
levels for 1997 as well as per share earnings as shown throughout
this report.
We did make a pass at acquiring a small southern Oregon bank
last fall. After much hand wringing and contemplation they decided
to back out but the search for an Oregon presence continues.
As we continue to grow in 1998 and prepare to greet the new
millennium at the end of 1999 our goal is to continue orderly growth
and improve earnings.
We are also beginning the task of acquiring senior management
level personnel to allow for a seamless transition as the current
executive officers near retirement.
Sincerely,
Robert J. Youngs
President and CEO
Timberline Bancshares Inc.
Timberline Community Bank
I
IN OUR OPINION
It is always a pleasure to say "The Bank did very well". And with
a return on average assets of a respectable 1.15% and a return on
beginning equity of 14.56%, the Bank did indeed do very well.
For the past several years the Bank has maintained an orderly growth
in both assets and deposits and, by careful management, a
respectable 5.21% average yield spread which is reflected in the net
interest income figures. Non-taxable investments, investments in
the County's Enterprise Zone and timing differences in taxable
income as explained in the audited financials have also greatly
improved the Bank's tax position.
The other side of the growth picture is the increase in operating
expenses as expansion, regulation, and implementation of new
products and services correspondingly increases the need for a
greater workforce thereby increasing salary expense, the need for
additional equipment and processing ability thereby increasing the
equipment and data processing expense and other expenses inherent
with servicing a greater number of customers.
The Bank for example has increased management personnel with two key
employees - an Electronic Banking Officer and a Compliance Officer.
These employees are instrumental in bringing new products, such as
the Voice Response Telephone System installed in the latter part of
the year to provide 24 hour banking, to the Bank's customers at the
same time ensuring that the Bank is in full compliance with all
regulations.
Implementation of FDIC's risk analysis policy, simply put the
monitoring of what would happen to capital if the current interest
rate structure were to change by a given number of basis points,
which is now reviewed on a quarterly basis and gives management
insight for maintaining a profitable interest point spread and
appropriate repricing opportunities in both assets and liabilities.
The Bank has also expended considerable time and money on the Year
2000 computer problem that faces everyone at the end of the century.
All areas affected have been identified, large corporate customers
have been notified, all Bank's vendors have been contacted and
progress reports and testing have been initiated on an ongoing
basis. The Bank will take all necessary steps to insure that the
Year 2000 will not cause interruption of service to any of the
Bank's customers.
-1-
It is the Bank's intention to continue to implement new products and
comply with new regulations and at the same time maintain operating
expenses at the most possible minimum level.
Once again, in closing, it is a pleasure to say "the Bank had a very
good year" and management looks forward to maintaining that standard
in the years to come.
-2-
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 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.
-3-
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, 1997, 1996, and 1995, 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, 1997, 1996, and 1995,
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 2, 1998
-4-
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997, 1996 and 1995
($ in thousands)
<TABLE> <C> <C> <C>
1997 1996 1995
ASSETS
Cash and Due from banks-Non interest bearing 5,224 5,202 4,163
Federal funds sold 7,000 12,700 10,200
Securities Available for Sale 13,132 6,422 7,251
Securities Held to Maturity 7,205 9,574 11,010
Cash surrender value of officers'
life insurance 1,303 1,249 1,192
Loans, less allowance for loan losses
of 1997-$401; 1996-$491; 1995-$475. 48,100 38,707 39,050
Premises and Equipment 2,032 2,097 2,240
Other assets 1,581 1,524 1,274
Total Assets $85,577 $77,475 $76,380
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $15,407 $14,025 $12,805
Savings and NOW deposits 46,127 45,646 49,066
Time, under $100 12,354 8,879 6,526
Time, $100 and over 3,670 1,718 1,436
Total Deposits 77,558 70,268 69,833
Other liabilities 541 430 320
Total Liabilities 78,099 70,698 70,153
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY;
Common stock, no par value,
authorized shares 2,000,000;
issued and outstanding shares
1997-1,006,726; 1996-954,484; 1995-457,683 2,992 2,813 2,678
Additional paid in capital 1 1 1
Retained earnings 4,467 3,982 3,545
Unrealized holding gains(losses) on
securities available for sale 18 (19) 3
Total stockholders' equity 7,478 6,777 6,227
Total liabilities and
stockholders' equity $85,577 $77,475 $76,380
</TABLE>
The accompanying notes are an integral part of these financial statements
-5-
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Income Statements
For The Years Ended December 31, 1997, 1996, and 1995
($ in thousands, except per share)
1997 1996 1995
Interest Income:
Interest and fees on loans $4,568 $4,338 $4,902
Interest on federal funds sold 586 691 250
Interest on securities available
for sale 735 407 407
Interest on securities to be held
to maturity 478 667 816
TOTAL 6,367 6,103 6,375
Interest Expense:
Interest on deposits 2,100 2,028 2,232
Net Interest Income 4,267 4,075 4,143
Provision for loan losses - 15 41
Net interest income after
provision for loan losses 4,267 4,060 4,102
Other income:
Service charges 411 373 382
Gain on sale of premises and equipment 2 2 2
Gain on sale of other real estate - - 24
Gain on sale of securities available for sale 3 - -
Other 14 20 32
TOTAL 430 395 440
Other Expenses:
Salaries and employee benefits 1,827 1,689 1,640
Occupancy expenses 402 396 350
Equipment and data processing
expenses 318 303 331
Other operating expenses 816 717 804
TOTAL 3,363 3,105 3,125
Income before income taxes 1,334 1,350 1,417
Income tax expense 347 438 479
Net Income $ 987 $ 912 $ 938
Earnings per common share Basic $ .99 $ .97 $ 1.04
Assuming dilution $ .98 $ .92 $ .97
The accompanying notes are an integral part of these financial statements.
-6-
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For The Years Ended December 31, 1997, 1996, and 1995
($in thousands)
<TABLE> <C> <C> <C> <C> <C> <C>
Unrealized
Holding
Gains
(Losses)
On
Common Additional Securities
Stock Paid-in Retained Available
Shares Amount Capital Earnings For Sale Total
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 holding
gains (losses) in
securities available
for sale - - - - (22) (22)
Balance, December 31,
1996 954,484 $2,813 $1 $3,982 (19) $6,777
Net Income - - - 987 - 987
Cash dividends declared - - - (502) - (502)
Options exercised by
Directors and employees 52,242 179 - - - 179
Net change in unrealized
Gains(losses)in
Securities available
For sale - - - - 37 37
Balance, December 31,
1997 1,006,726 $2,992 $1 $4,467 $ 18 $7,478
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1997, 1996, and 1995
($ in thousands, except per share)
<TABLE> <C> <C> <C>
1997 1996 1995
Cash flows from operating activities:
Net income $ 987 $ 912 $ 938
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 191 193 155
Provision for loan losses - 15 41
(Gain)Loss on sale of premises and equipment (2) (2) (2)
(Gain)Loss on sale of security available for sale (3) - -
Net (increase) decrease in other assets (89) (228) 92
Net increase (decrease) in other liabilities 111 103 (116)
Net cash provided by operating activities 1,195 993 1,108
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 5,700 (2,500) (9,400)
Purchases of securities available for sale (16,640) (6,543) (9,013)
Proceeds from sales of securities
available for sale 1,185 - 250
Proceeds from maturities of securities
available for sale 8,815 7,331 9,889
Purchase of securities to be held to maturity - (4,315) (1,158)
Proceeds from sales of securities
to be held to maturity - - -
Proceeds from maturities of securities
held to maturity 2,369 5,751 3,568
Net (increase) decrease in loans (9,393) 328 3,944
Purchase of premises and equipment (124) ( 47) ( 10)
Proceeds from sales of premises and equipment 2 3 11
(Increase) in cash surrender value of
officers' life insurance policies (54) (57) (47)
Net cash (used in) investing activities (8,140) ( 49) (1,966)
Cash flows from financing activities:
Net increase in deposits 7,290 435 839
Dividends paid (502) (475) (451)
Proceeds from exercise of stock options 179 135 90
Net cash provided by financing activities 6,967 95 478
Net increase (decrease) in cash and
due from banks 22 1,039 (380)
Cash and due from banks at
beginning of year 5,202 4,163 4,543
Cash and due from banks at year end $5,224 $5,202 $4,163
Interest paid $2,141 $1,956 $2,260
Income taxes paid $ 417 $ 610 $ 721
</TABLE>
The accompanying notes are an integral part of these financial statements.
-8-
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
($ in thousands, except net income per share information)
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. and its wholly owned subsidiary, Timberline Community Bank.
All significant 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.
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.
-9-
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.
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.
-10-
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.
Common Stock:
The Company has only one class of common stock. No special rights or
privileges are ascribed to any shares.
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:
During the year ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share".
SFAS No. 128 requires changes to the way the Company calculates net income per
common share. SFAS No. 128 also requires that prior years' net income per
common share be recalculated using the new methods.
Net income per common share is presented under two methods; basic and
diluted. Basic net income per common share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per common share is calculated
by dividing income available to common shareholders, as adjusted, by the
weighted average number of common shares outstanding during the year, adjusted
for dilutive items. The dilutive items are calculated using the treasury stock
method, which assumes repurchase of common shares with the proceed from the
exercise of the dilutive items.
Net income per common share (basic and diluted) is computed as follows:
Per-Share
Income Shares Amount
(In whole dollars)
For the Year Ended December 31, 1997:
Basic Net Income Per Common Share:
Income available to common stockholders $ 987,100 992,103 $ 0.99
Effect of dilutive securities:
Stock Options - 10,644
Diluted Net Income Per Common Share:
Income available to common stockholders $ 987,100 1,002,747 $ 0.98
-11-
For the Year Ended December 31, 1996:
Basic Net Income Per Common Share:
Income available to common stockholders $ 912,193 942,143 $ 0.97
Effect of dilutive securities:
Stock options - 46,252
Diluted Net Income Per Common Share:
Income available to common stockholders $ 912,193 988,395 $ 0.92
For the Year Ended December 31, 1995:
Basic Net Income Per Common Share:
Income available to common stockholders $ 938,322 898,152 $ 1.04
Effect of dilutive securities:
Stock Options - 70,142
Diluted Net Income Per Common share:
Income available to common stockholders $ 938,322 968,294 $ 0.97
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, 1997, 1996 and 1995 are summarized as follows:
Amortized Gross Gross
Or Accreted Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997:
Securities available for sale:
U. S. Government and agency
Securities $ 13,000 $ 34 $ 2 $ 13,032
State and political subdivisions 100 - - 100
$ 13,100 $ 34 $ 2 $ 13,132
Securities to be held to maturity:
U.S.Government and agency
Securities $ 1,617 $ - $ 1 $ 1,616
State and political subdivisions 5,588 102 - $ 5,690
$ 7,205 $102 $ 1 $ 7,306
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
-12-
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
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 $2,740 at December 31, 1997, $2,428 at
December 31,1996, and $1,465 at December 31, 1995 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
$3, $-0-, and $-0- for the years ended December 31, 1997, 1996 and 1995,
respectively. There were no sales of securities to be held to maturity for
the years ended December 31, 1997, 1996 and 1995. Gross realized losses on
sales of securities were $-0- for all types of securities for the years ended
December 31, 1997, 1996 and 1995.
Gross proceeds from the sale of securities were $1,185, $-0-, and $250 for the
years ended December 31, 1997, 1996 and 1995 respectively. The applicable
income taxes were approximately $508, $-0-, and $-0- for the years ended
December 31, 1997, 1996 and 1995, respectively.
Information about the maturity distribution of debt investment securities is
presented on page 14 of the 10K-SB for 1997.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The components of loans in the consolidated balance sheets were as follows:
December 31
1997 1996 1995
Commercial $40,977 $34,188 $34,288
Real Estate construction 787 567 724
Residential Mortgage 2,809 3,025 3,139
Consumer installment 3,110 1,484 1,497
Credit cards 904 - -
48,587 39,264 39,648
Deferred fees and costs (86) (66) (123)
Allowance for loan losses (401) (491) (475)
Loans, net $48,100 $38,707 $39,050
-13-
Loans classified as non-accrual approximated $-0-, $-0-, and $334 as of December
31, 1997, 1996, and 1995, respectively.
The changes in the allowance for loan losses were as follows:
December
1997 1996 1995
Balance, beginning of year $491 $475 $473
Loans charged off (93) (4) (47)
Recoveries 3 5 8
Provision for loan losses - 15 41
Balance, end of year $401 $491 $475
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 1997, 1996, and 1995, 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
1997 1996 1995
Premises $2,538 $2,491 $2,491
Equipment 1,089 1,027 993
3,627 3,518 3,484
Accumulated depreciation (1,595) (1,421) (1,244)
$2,032 $2,097 $2,240
Depreciation expense $ 190 $ 189 $ 155
Certain facilities and equipment are leased under various operating leases.
Rental expense was $ 117, $113, and $115 in 1997, 1996 and 1995, respectively.
Future minimum rental commitments under noncancelable leases are:
1998 60
1999 41
2000 41
2001 41
2002 41
Thereafter 1,131
$1,355
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
-14-
Internal Revenue Service. In addition, the Bank may make matching contributions
and/or profit sharing contributions to the Plan. For 1997, 1996 and 1995
respectively, the Bank made ten percent matching contributions totaling $4, $4
and $4 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, 1997, 1996, and 1995 included
the following components:
1997 1996 1995
Current paid or payable:
Federal $261 $442 $353
State 89 180 172
350 622 525
Increase (decrease) in deferred taxes:
Federal (2) (157) (41)
State (1) (27) (5)
(3) ( 184) (46)
Income tax expense $347 $438 $479
The deferred tax assets were comprised of the following:
1997 1996 1995
Difference in allowance for loan
losses between financial statements
and income tax purposes $67 $ 103 $ 15
Timing differences in deductibility
of state taxes 34 49 58
Difference in allowance for losses
on foreclosed property between
financial statements and income tax
purposes 24 18 14
Timing difference in deductibility of
deferred compensation 116 100 49
Other - - 5
Total deferred tax asset $241 $270 $141
The deferred tax liabilities were comprised of the following:
1997 1996 1995
Difference in depreciation expense
between financial statement and
income tax purposes $ 2 $ 48 $ 45
Other 14 - -
Use of cash basis for income
tax purposes - - 58
Total deferred tax liability $ 16 $ 48 $ 103
Deferred tax assets and deferred tax liabilities are included in the
consolidated balance sheets under the captions "Other assets" and
"Other liabilities".
-15-
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:
1997 1996 1995
Taxes at statutory federal
income tax rate $ 454 $ 459 $ 490
Increase (decrease) in taxes
resulting from:
- Tax exempt income (117) (112) (104)
- State income taxes, net of
federal income taxes 79 101 107
- Officers' life insurance -0- -0- 10
- Deferred Compensation 60 62 37
- Other (129) (72) (61)
$ 347 $ 438 $ 479
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, 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
Exercised 3.50 3.42 52,242
Balance, December 31, 1997 - - -
The following disclosures are required under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation", and are presented
for 1997 and 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)
-16-
Options exercised during 1996,
adjusted for stock split 39,118 3.45
Options granted during 1996
(Other than via stock split adjustments) - -
Options exercised during 1997 52,242 3.42
Options outstanding and
exercisable at December 31, 1997 - -
Options granted during 1997 - -
No stock options were forfeited or expired during 1997 or 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 1997 or 1996.
NOTE 10 - TIMBERLINE BANCSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS:
Condensed Balance Sheets:
December 31,
1997 1996 1995
ASSETS
Cash and due from banks, bank
subsidiary, non-interest bearing $ 2 $ 1 $ 3
Investment in wholly owned subsidiary 7,417 6,739 6,167
Other assets 41 56 54
Total Assets $7,460 $ 6,796 $ 6,224
LIABILITIES AND
STOCKHOLDERS' EQUITY
LIABILITIES $ - $ - $ -
STOCKHOLDERS' EQUITY 7,460 6,796 6,224
Total Liabilities and
Stockholders' Equity $ 7,460 $ 6,796 $ 6,224
Condensed Income Statements:
December 31,
1997 1996 1995
Operating Income:
Dividends from subsidiary $502 $ 491 $ 472
Other - 2 -
502 493 472
Operating Expenses:
Other expense 20 25 23
Income (loss) before income taxes
and equity in undistributed net income
of subsidiary 482 468 449
Income tax benefit 6 7 7
Income (loss) before equity in
undistributed net income of subsidiary 488 475 456
-17-
Equity in undistributed net income of
subsidiary 499 437 482
Net Income $ 987 $ 912 $ 938
Condensed Statements of Changes in Stockholders' Equity:
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
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
directors and employees 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
directors and employees 24,682 135 - - 135
Stock split 472,119 - - - -
Balance, December 31, 1996 954,484 $2,813 $ 1 $3,982 $6,796
Net income - - - 987 987
Cash Dividend declared (502) (502)
Options exercised by
directors and employees 52.242 179 - - 179
Balance, December 31, 1997 1,006,726 $2,992 $ 1 $4,467 $7,460
Condensed Statements of Cash Flows:
December 31
1997 1996 1995
Cash Flows from Operating Activities:
Net Income $987 $912 $938
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of subsidiary (1001) (928) (954)
Dividends received from subsidiary 502 491 471
Net (increase) decrease in other assets 15 (2) (3)
Net cash provided by (used) operating
activities 503 473 452
Cash Flows from Investing Activities:
Capital investment in subsidiary (179) (135) (90)
Cash Flows from Financing Activities:
Dividends paid (502) (475) (451)
Proceeds from exercise of stock options 179 135 90
Net cash provided (used in)
financing activities (323) (340) (361)
Net increase (decrease) in cash and due
from banks 1 (2) 1
-18-
Cash and due from banks at beginning of
year 1 3 2
Cash and due from banks at end of year $ 2 $ 1 $ 3
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.
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,:
1997 1996 1995
Unused commercial loan commitments $6,541 $ 5,793 $ 5,135
Unused overdraft protection lines 82 82 80
Stand by letters of credit 115 118 168
Unused credit card commitments 1,241 - -
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.
-19-
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 1997, 1996 or 1995.
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, 1997,
1996 and 1995, $270, $319, and $349 of such loans, respectively, were
outstanding. An analysis of the activity during 1997 in respect to such loans
is as follows:
Balance, December 31, 1996 $ 319
Additions -
Collections (49)
Balance, December 31, 1997 $ 270
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, 1997, that the
Bank could declare, without the prior approval of the California State Banking
Department, is approximately $1,368.
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.
At December 31, 1997, 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 12.99%, 13.70% and 8.62% respectively. As of May 8, 1997, 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 1997, 1996 and 1995.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
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.
-20-
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.
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,
1997 are as follows:
Carrying Fair
Amount Value
Financial Assets:
Cash $ 5,224 $ 5,224
Federal Funds Sold 7,000 7,000
Investment securities 20,337 20,438
Cash surrender value of officers' life insurance 1,303 1,303
Loans 48,501 48,506
Less allowance for loan losses (401) (401)
Financial liabilities:
Deposits 77,558 77,558
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,
1996 are as follows:
Carrying Fair
Amount Value
Financial assets:
Cash $ 5,202 $ 5,202
Federal funds sold 12,700 12,700
-21-
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' live 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.)
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.
-22-
FIVE YEARS AT A GLANCE
December 31,
1997 1996 1995 1994 1993
($ in thousands except # of shares, per share income and dividends)
Interest Income $6,367 $ 6,103 $ 6,375 $ 5,786 $ 5,240
Interest Expense 2,100 2,028 2,232 1,839 1,747
Net Interest Income 4,267 4,075 4,143 3,947 3,493
Provision of loan losses 0 ( 15) ( 41) (230) (144)
Net interest income
after provision for loan losses 4,267 4,060 4,102 3,717 3,349
Other income 430 395 440 666 428
Total operating expenses 3,363 3,105 3,125 3,181 2,856
Net income before taxes
and extraordinary item 1,334 1,350 1,417 1,202 921
Income Taxes (347) (438) (479) (483) (330)
Net Income 987 912 938 719 591
Weighted average shares
outstanding used for
computing earnings
per share 992,103 942,143 898,152 845,658 412,223
Net income per share $ .99 $ .97 $ 1.04 $ .85 $ 1.43
Cash Dividends $502 $475 $451 $229 $ 4
Cash Dividends per share : $.25 per share 5/97 and $.25 per share 10/97;
$.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.
-23-
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 1997 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.
-24-
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, Madrone Hospice
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, Cancer Daffodil Days
National Teen Leadership 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, donation of the City clock on the
corner of Main and Broadway,
and so on...
We intend to continue our support of our community in 1998 with active
participation in memberships and with donations as in the past.
-25-
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
CHARLES J. COOLEY, 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
-26-
SERVING YOU AS OFFICERS
ADMINISTRATION
Mary Nielsen Assistant Vice President , Human resources
Linda Hager Assistant Vice President, Note Dept.
Terri Barham Assistant Vice President, Branch Operations
Administrator
David A. Caulkins Compliance Officer
Michael Jones Electronic Banking Officer
YREKA BRANCH
Grace J. Hester Vice President and Branch Manager
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
-27-
