FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 33-40799
TIMBERLINE BANCSHARES, INC.
(Exact Name of Registrant as specified in its charter)
CALIFORNIA 68-0269988
(State of Incorporation) (I.R.S. Employer
Identification Number)
123 North Main St.
Yreka, California 96097
Address of Principal executive offices and zip code)
(530) 842-6191
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year. $7,184,146.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices ofsuch stock, as of a specified date within the past 60
days. At the average bid and asked prices of stock as of December 31,1998 of
$11.13 the aggregate market value of voting stock held by non-affiliates is
$7,641,234.72.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PAST FIVE YEARS)
Not applicable
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of December 31, 1998 there were
1,006,810 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PART II, Item 7. - Annual report to security holders for fiscal year ended
December 31, 1998.
PART III - Registrant's definitive Proxy Statement
PART I
ITEM 1.
Business
Timberline Bancshares, Inc. ("Corporation") was incorporated as a California
Corporation on July 1, 1991 for the purpose of becoming a bank holding company
of the Bank. The Corporation's executive offices are at 123 North Main St.,
Yreka, California and its telephone number is (530) 842-6191.
The Corporation's sole subsidiary is the Bank and its sole activities are the
commercial banking activities engaged in through the Bank. As a bank holding
company, the Corporation may in the future invest in additional banking
subsidiaries or in those non-banking subsidiaries which are permissible for a
bank holding company,subject to the required approvals of the Federal Reserve
Board.
Business of the Bank
General.
The Bank was organized as a state chartered banking corporation on June 6, 1979
and commenced operations on June 23, 1980. It currently has eight banking
offices, two ATM locations, and one loan production office. The banking offices
consist of the main office located at 123 North Main Street, Yreka, California,
a branch office located at 6701 N. Hiway 3, Greenview, California, a branch
office located at 150 Alamo Ave., Weed, California, a branch office located at
328 Main Street, McCloud, California, a branch office located at 5800 Dunsmuir
Ave., Dunsmuir, California, a branch office located at 3rd & California Streets,
Dorris, California, a branch office located at 398 Main Street, Tulelake,
California, and a branch office located at 309 N. Mt. Shasta Blvd., Mt. Shasta,
California. The bank's ATMs are located in a grocery store in Yreka,
California, and a through-the-wall unit at the Tulelake Branch. All eight
banking offices and the two ATMs are located in the County of Siskiyou. The
loan production office is located at 1237 N. Riverside, Suite 25, Medford,
Oregon.
Description of Business.
The Bank engages in the general commercial banking business. It accepts
checking and savings deposits, offers money market deposit accounts and
certificates of deposit, makes secured and unsecured commercial, installment,
mortgage and other term loans,and offers other customary banking services. The
Bank does not offer trust services and does not presently intend to do so.
Market Area.
The Bank's primary market area and the source of most of its loans and deposits
encompasses the County of Siskiyou, California. Additional lending, through the
loan production office, encompass the southern sections of Jackson, Josephine
and Klamath Counties in the State of Oregon.
Competition.
The banking business generally, and specifically in the market area served by
the Bank, is highly competitive with respect to both loans and deposits. The
Bank competes for loans and deposits with three major banks, as well as an
independent bank, a regional bank, a savings bank, a credit union,
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mortgage companies, insurance companies and investment brokers. The Bank also
competes with money market funds, which have provided significant competition
for banks with respect to deposits. Other competition for deposits in today's
low yield investment atmosphere are government issues. And while the Bank has
maintained a steady increase in market share over the past ten years, further
constraints to deposit and loan growth in the future will be the risked based
capital and the loan to value guidelines imposed by the regulatory bodies.
At present in Siskiyou County, there are seven branches of major banks, two
branches of a credit union, one branch of a regional bank, two branches of a
savings bank and five branches of another independent bank. The Bank attempts
to compete by offering personalized and specialized services to its customers.
The Bank's promotional activities emphasize the advantages of doing business
with a locally owned, independent institution attuned to the particular needs of
the community. The Bank further promotes its image by being very involved in
local organizations and charities.
Employees.
At December 31, 1998, the Bank had 61 full-time and 11 part-time employees.
Supervision and Regulation of the Corporation.
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 ("Board"). As a bank holding company, the
Corporation must obtain the approval of the Board before it may acquire all or
substantially all of the assets of any bank, or ownership or control of the
voting shares of any bank if, after giving effect to such acquisition of shares,
the Corporation would own or control more than 5% of the voting shares of such
bank. With certain limited exceptions, the Corporation is prohibited from
engaging in or acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any company engaged in non-banking activities, unless
the Federal Reserve Board determines that such activities are so closely related
to banking as to be a proper incident thereof.
The Corporation and any subsidiary which it may acquire or organize in the
future are deemed to be affiliates of the Bank within the meaning set forth in
the Federal Reserve Act. This means, for example, that there are limitations on
loans by the Bank to affiliates, on investments by the Bank in any affiliate's
stock and on the Bank's taking any affiliate's stock as collateral for loans to
any borrower. All affiliate transactions must satisfy certain limitations and
otherwise be on terms and conditions that are consistent with safe and sound
banking practices. In this regard, the Bank generally may not purchase from any
affiliate a low-quality asset (as that term is defined in the Federal Reserve
Act). Also, transactions by the Bank with an affiliate must be on substantially
the same terms as would be available for non-affiliates.
The Corporation and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit. For example, the Bank
generally may not extend credit on the condition that the customer obtain some
additional service from the Bank or the Corporation, or refrain from obtaining
such service from a competitor.
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The Bank.
As a state chartered entity, 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 ("FDIC"), 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, internal controls, and the establishment of new branches
and other banking facilities.
Capital Regulations.
The regulatory authorities require banks and bank holding companies to maintain
adequate capital and have adopted capital leverage guidelines for evaluating the
capital adequacy of banks and bank holding companies. For bank holding
companies with consolidated assets of less than $150,000,000 the capital
guidelines are considered on a bank-only basis unless (a) the holding company is
engaged in nonbank activity involving significant leverage, or (b) the parent
company has a significant amount of outstanding debt that is held by the general
public. With the enactment of Section 38 of the FDI Act effective December 19,
1992 the guidelines for a well capitalized institution are measured as follows:
(1) Total risk-based capital ratio of 10% or greater,
(2) Tier 1 risk-based capital ratio of 6% or greater, and
(3) leverage ratio of 5% or greater.
The capital requirement under California State Banking regulation for a state-
chartered bank is a leverage ratio of 6.5% or greater.
Tier 1 capital is defined to consist primarily of common equity, retained
earnings, and certain qualified perpetual preferred stock. Under risk-based
capital guidelines assets are categorized according to risk and the various
categories are assigned risk weightings. Assets considered to present less risk
than others require allocation of less capital. In addition, off-balance sheet
and contingent liabilities and commitments must be categorized and included as
assets for this purpose.
The capital of the Bank as of year end 1998, 1997 and 1996 are as follows:
Capital Year End: 1998 1997 1996
Total Capital 13.45% 13.70% 13.67%
Tier One 12.83% 12.99% 13.31%
Leverage 8.66% 8.62% 8.63%
The risk-based guidelines and the leverage ratios may affect the allocation of
the Bank's assets between various types of loans and investments, may affect the
growth rate of the Bank, and may affect the payment of dividends in the future.
However,management does not believe the affects will necessarily be adverse.
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Impact of Accounting Policies.
Accounting standards as implemented by the Financial Accounting Standard Board
can and do have an impact on the Bank's financial statements and, consequently,
on management decisions. A prime example is the adoption of SFAS 115
"Accounting for certain investments in debt and equity securities."
As implemented, SFAS 115 requires banks to place investments in three
categories; "Available for Sale", "Held to Maturity", and "Trading". Those
investments placed in the Available for Sale and Trading categories must then be
reported at market value. Unrealized holding gains and losses for trading
securities shall be included in earnings. Unrealized holding gains and losses
for available for sale securities shall be excluded from earnings and reported
as a net amount in a separate component of Shareholders' Equity until realized.
If an instrument in the Held to Maturity category is subsequently sold, then the
whole portfolio may have to be reported at market value.
Historically, a bank's investment portfolio has been a very flexible tool used
to manage liquidity, enhance tax positions, increase earnings, and as pledged to
accept public fund deposits. Those funds placed in investments are the funds
not used for loans, cash reserves and fed funds. In the past, a bank could, as
loan demand rose, select an investment instrument to sell taking into
consideration a gain or loss, the tax benefit, the reinvestment benefit, current
market conditions, and the maturity schedule of the portfolio. With SFAS 115, a
bank must now decide - at time of purchase - which instruments it may sell in
the future for liquidity management.
Another example is SFAS No. 114 "Accounting by Creditors for Impairment of a
Loan" which became affective in 1995. SFAS 114 requires that the impairment of
a loan be measured by using the present value of expected future cash flows,
discounted at the loan's effective interest rate to calculate "specific
reserves" for loan loss as opposed to the Bank's general reserve. The exception
is that collateral value may be used in place of cash flow.
As the greater portion of the Bank's loan portfolio is fully collateralized, the
full impact of this accounting standard may not be deemed significant to the
bank.
Impact of Monetary Policies.
Banking is a business in which profitability depends on rate differentials. In
general, the difference between the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's investment portfolio
and the interest rate paid by the Bank on its deposits and its other borrowings
comprise the major portion of the Bank's earnings. To the extent that the Bank
is not able to compensate for the increases in the cost of deposits and other
borrowings with greater income from loans, securities and fees, the net earnings
of the Bank will be reduced. The interest rates paid and received by the Bank
are highly sensitive to many factors which are beyond the control of the Bank,
including the influence of domestic economic conditions.
The earnings and growth of the Bank are also affected by the monetary and fiscal
policy of the United States and its agencies. These agencies can and do
implement national monetary policy, which is used in part to curb inflation and
combat recession. Among the instruments of monetary policy used by these
agencies are open market transactions in U.S. Government securities, changes in
the discount rates of member bank borrowings and changes in reserve
requirements. The actions of these agencies have had a significant effect on
lending by banks, investments and deposits, and such actions are expected to
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and such actions are expected to continue to have a substantial effect in the
future. The nature and timing of any further changes in such policies and their
impact on the Bank cannot be predicted.
New and Pending Legislation.
Certain legislative and regulatory proposals which could affect the Corporation,
the Bank and the banking business in general are pending, or may be introduced,
before the United States Congress, the California State Legislature, and Federal
and state government agencies. It is not known to what extent, if any, these
proposals will be enacted and what effect such legislation would have on the
structure, regulation and competitive relationship of financial institutions.
It is likely, however, that many of these proposals could subject the
Corporation and the Bank to increased regulation, disclosure and reporting
requirements and would increase competition to the Bank and increase its cost of
doing business.
Addressing the Year 2000
The "Year 2000 Problem" relates to a computer systems ability to recognize and
properly respond to the change to the year 2000. This problem has two critical
elements. The first is that many systems only store two digit year dates,
therefore when the date rolls to `00' it treats the date as `1900'. This
creates a problem for systems that use dates for calculation purposes (ie,
interest bearing accounts, loans, and billing systems). The second is that the
year 2000 is a leap year which can create a problem if the systems are not
programmed to recognize the additional day. The bank, in a review of all
aspects of its day to day operations has identified the year 2000 compliance
issues. Each issue is further reviewed for renovation and resource
requirements, validation of the changes made, and contingency plans should
the renovation fail. In addition to reviewing its operations, the Bank has
contacted its vendors and large loan customers to heighten awareness to this
problem. The Bank has, and will continue to take, all necessary steps to be
prepared for the advent of the year 2000.
ITEM 2. - Properties
The Corporation properties do not exceed 10% of the total assets.
ITEM 3. - Legal Proceedings
Neither the Corporation nor the Bank is a party to any pending legal
proceedings, other than proceedings arising in the ordinary course of the Bank's
business. None of these are expected to have a material impact on the financial
position or results of operations of the Registrant.
ITEM 4.
Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of shareholders in the fourth quarter of
1998. The annual report for year ending December 31, 1998 and the proxy
statement for the annual meeting to be held on May 13, 1999 have been
incorporated by reference to this report and are enclosed.
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PART II
ITEM 5.
Market for Registrant's Common Equity and Related Stockholder Matters
The Corporation has 1,006,810 shares of common stock outstanding, held by
approximately 1126 shareholders of record on December 31, 1998.
The directors and officers of the Corporation and the Bank hold 38.55% of the
outstanding shares. The directors and officers have the right to acquire
additional shares upon the exercise of options granted pursuant to the
Corporation's Stock Option
Plan.
The firm of Hoefer and Arnett, located in San Francisco, and Paine Webber of
Chico are currently making a market in the stock. The stock is currently listed
on NASDAQ as TBLC.
The following chart shows the high and low bid quotations and the volume of
transactions on Timberline Bancshares, Inc. stock for the periods indicated, as
reported by the market makers, and does not include privately negotiated
transactions that were not conducted through market makers. This information
has been provided to the Corporation by the market makers. The prices indicated
below do not necessarily represent actual transactions and do not include retail
mark-ups, mark-downs or commissions.
Bid Quotations for the Corporation's Common Stock
Approx.
Quarter Ended High Low Volume
March, 1996 16.00 15.00 2,100
June, 1996 17.25 15.75 1,600
Sept., 1996 9.75 8.75 12,600
Dec., 1996 10.00 9.00 4,300
March 31, 1997 12.50 10.00 27,100
June 30, 1997 14.25 13.00 12,400
Sept., 1997 16.25 14.00 19,000
Dec., 1997 16.25 14.75 10,300
March, 1998 13.75 13.00 13,100
June, 1998 15.00 13.50 9,700
Sept., 1998 12.00 10.25 4,500
Dec., 1998 11.75 10.50 2,400
There is no assurance that any significant trading market for the shares will
develop in the future and there are no assurances as to the price at which
shares may be traded in the future.
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Dividends
It was the policy of management, during the initial years of the Bank's
operations, to retain earnings, if any, for the purpose of increasing the
capital resources of the Bank. Consequently, cash dividends were first paid in
1987. For the past three years dividends have been based on management's
assessment of earnings after the external auditor had completed the year end
audit.
In 1998 a $.25 per share cash dividend was paid in May and a $.25 per share cash
dividend was paid in October. In 1997 a $.25 per share cash dividend was paid
in May and a $.25 per share cash dividend was paid in October. In 1996 a $.50
per share cash dividend was paid in April, a 100% stock split was granted in
June and a $.25 per share cash dividend was paid in October. In 1995 a $.50 per
share cash dividend was paid in April based on the bank's performance in 1994,
and a $.50 per share cash dividend was paid in October based on the performance
of the first eight months of the year. In 1994 a 10% stock split was declared
in March and issued in May based on year end 1993 performance and in September a
$0.50 per share of stock cash dividend was declared and paid on October 1, 1994
based on the Bank's performance through the first eight months of 1994. In 1993
a 10% stock split was declared in April and issued in June based on year end
1992 performance. In 1992 a 10% stock split was declared in April and issued in
June based on year end 1991 performance. There is no assurance that dividends
will be paid again, or, if paid, what the amount of any such dividends will be.
The future dividend policy of the Corporation is subject to the discretion of
the Board of Directors and will depend upon a number of factors, including
earnings, financial condition, cash needs, general business conditions, and
capital adequacy.
The Corporations's primary source of income is the receipt of dividends from
the Bank. The Bank's ability to pay dividends will depend on the same general
conditions as listed for the Corporation above.
ITEM 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Corporation's sole subsidiary is Timberline Community Bank ("Bank"), and its
sole activities are the commercial banking activities engaged in through the
Bank. The Bank commenced operations on June 23, 1980. It engages in the
general commercial banking business, with special emphasis on the banking needs
of the people in the communities it serves. The Corporation assumed control of
the Bank on June 8, 1992.
Plan of Operation
It is the intention of the Corporation and Bank to continue operation as a full
service bank to the communities in which it serves. As previously mentioned,
the Bank has facilities in eight locations throughout Siskiyou County,
California and a loan production office in Oregon.
Future plans are to increase market share in the areas served by the Bank,
enhance services to the Bank's customers and maintain the Bank in a well-
capitalized, well-run manner. The Bank offers electronic tax deposits
capability, ACH capability and wire transfer services and may offer additional
electronic services in the future. These decisions wil be made as it is deemed
necessary for the Bank to remain competitive.
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Result of Operations
The Corporation ended the year with net income of $919,000, which equates to
$.91 earnings per share.
Net Interest Income
The primary source of the Bank's income is the difference between (1) the
interest earned on its loan and investment portfolio, occasionally interest
bearing deposits with other banks and federal funds sold, and (2) the interest
paid on deposits and other borrowed funds. This difference is referred to as
net interest income, and is the first consideration to understand the factors
that affect the Corporation's profitability. Interest income earned on loans,
which includes loan fee income, is primarily a function of the amount of loans
outstanding and the rates prevailing on these loans. Interest paid on deposits
depends on the composition of the deposit base and the rates paid to attract
deposits.
Interest income on loans includes loan fees which are a product of origination
and commitment fees and certain direct loan origination costs. Portions of
these fees are deferred and amortized over the life of the loan as an adjustment
of the loan's yield. The deferred fee balances, in thousands, are as follows:
December 1998 - $118; December 1997 - $86; December 1996 - $66. These fees are
netted out of total loans on the Bank's balance sheets for these periods.
Overall loan portfolio yields are affected by deferred loan fees. As stated
above, these fees are amortized to income over the life of the loan with which
they are associated and serve to increase loan portfolio yield. The allowance
for loan losses has no direct effect on yield. Loans carried as non-accrual
serve to reduce the portfolio yield as the balance of a non-accrual loan is
maintained in the loan total but no interest is accrued.
Net interest income, in addition to changes in interest rates, is also affected
by the general mix of interest bearing assets and interest bearing liabilities.
The differences in the earning assets from year to year depend on such factors
as loan demand in the different categories such as more demand for commercial
loans, less demand for installment loans, or possibly less demand for loans
overall.
In the past couple of years, the Bank has seen a steady decline in loan demand
as the general public reacted to the uncertain economic conditions, changes in
rates initiated by the Federal Reserve Bank, and competition from other lending
entities.
The Bank's excess funds are then invested in other instruments such as
securities and fed funds sold. This can result in a smaller point spread
between rates earned and rates paid, thus reducing net income. On the deposit
or rates paid mix, today's sophisticated depositor is continually looking for
the best rates available. This dictates, to a certain degree, the rates a Bank
pays on deposits in order to retain the depositor, which in turn has a direct
affect on net interest income.
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Non-Interest Income
Non-interest income is derived primarily from service charges on deposit
accounts, fees for processing collections for customers, fees for services
provided to customers such as notary, use of copy machine, use of fax, legal
process fees, charges for safe deposit box rental, sale of travelers checks,
check cashing fees for non-bank customers, and other charges of a similar
nature. Other non-interest income can be from gain on sales of investments and
assets. Non-interest income can fluctuate from year to year because of many
factors, including volume of accounts being service charged, amount of legal
research done from year to year, or investments held or sold from year to year.
Non-Interest Expense
Non-interest expenses include salaries and employee benefits, occupancy expense,
equipment expense, legal fees, assessment fees, supplies, and the general
expenses required for the operation of the Corporation and the Bank.
Significant Element of Loss
None.
Future Trends
The Bank has experienced the steady decline in lending due to competition from
credit unions, auto companies financing their own products, people shifting
small credits to credit cards and greater competition for lending dollars from
sources other than banks in the real estate and commercial lending markets.
The Bank makes commercial loans primarily to small and medium sized businesses
and to professionals. While the Bank emphasizes commercial lending, management
does not believe that there is any significant concentration of commercial loans
to any specific type of business or industry. Since the Bank lends commercially
in California and Southern Oregon direct and in California and Oregon through
participations, management also believes that the commercial lending is not
concentrated in any one economic area and therefore is not subject to economic
swings in any one given area.
It is the Bank's policy to collateralize all loans unless, in management's
estimation, the credit worthiness, cash flow and character of the borrower
justify extension of credit on an unsecured basis. Management recognizes the
inherent risk in making unsecured loans but, in management's judgement, such
unsecured loans are justified based on the credit worthiness and financial
strength of the borrowers. So called "character" loans comprise a very small
percentage of the Bank's commercial portfolio, however, as the Bank prefers to
follow the loan-to-value ratio guidelines as set by the regulatory authorities.
Management believes that its secured loans are adequately collateralized to
minimize loss in the event of default in payment of interest or principal.
Interest Rate Sensitivity
The Bank attempts to lend at competitive interest rates and to reduce exposure
to interest rate fluctuations by making most of its loans at adjustable interest
rates and limiting the maturity of most loans, or establishing a short call
period on a longer maturity.
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The Bank makes daily estimates of cash funding requirements and attempts to
maintain adequate cash reserves to cover foreseeable liquidity demands.
Interest rate risk can be reduced through the practice of making variable
interest rate loans which are tied to some outside rate index. These loans
"float", or adjust their rate as the interest rate environment changes.
Approximately 58.62% of the Bank's portfolio are comprised of loans with
adjustable rates.
Deposits
The Bank relies primarily on deposits to fund borrowers' needs. The
deregulation of interest rates on deposit accounts has resulted in a continuing
shift from non-interest bearing to interest bearing accounts. This shift of
funds has increased and will continue to increase the cost of deposits to banks
generally as well as this Bank.
The Bank obtains deposits primarily from local businesses, loan customers,
senior citizens, general customers that enjoy banking with a community bank, and
personal contacts by directors, officers and the Bank's involvement in community
organizations. The Bank does not have any brokered deposits.
Liquidity
Liquidity is a bank's ability to meet possible deposit withdrawals, to meet loan
commitments and increased loan demand, and to take advantage of other investment
opportunities as they arise.
The Bank's liquidity is monitored on a daily basis. At December 31, 1998, cash
and due from banks, and federal funds sold constituted 16.23% of total assets.
Add the funds in investments and the total is 37.05% of total assets. In
addition, the Bank has an unused federal funds line of credit for $2,000,000
with a correspondent institution. At year end 1998 the Bank's loan to deposit
ratio was 63.0%.
Inflation
Inflation affects the Bank and the banking business generally because of its
effect on interest rates and loan demand. To offset inflation and the resulting
changes in interest rates and market demands, the Bank attempts to maintain
liquid interest bearing assets and to manage its assets and liabilities such
that they can be repriced within a short period of time. In addition to its
effect on market conditions and interest rates, inflation affects the
Corporation by increasing the cost of operations.
Effects of Economic Changes
The client base of the bank, management feels, is broad enough to minimize the
effects economic changes may have on the area. The economy of the area
encompasses ranching, farming, the timber industry, tourism, and a large base of
governmental agencies.
ITEM 7.
Financial Statements
Incorporated by reference to the Annual Shareholders Report enclosed.
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Other Selected Financial Data
I. Distribution of Assets, Liabilities and Stockholders' Equity; interest
rates and interest differential
A. AVERAGE BALANCE SHEETS
(in thousands)
1998 1997
ASSETS
Cash and Due from Banks
(Non-interest bearing) $ 4,840 $ 4,629
Taxable Investment Securities
Available for Sale 11,531 10,635
Held to Maturity 1,336 2,570
Non-taxable Investment Securities
Available for Sale 486 558
Held to Maturity 5,332 5,917
Fed Funds Sold 13,154 11,205
Cash Value Life Insurance 1,330 1,274
Loans - Net of unearned
loan fees 48,329 42,391
Allowance for Loan Losses (386) (476)
Fixed Assets net of
accumulated depreciation 2,477 2,266
Other Assets 1,067 1,140
TOTAL ASSETS $89,496 $82,109
LIABILITIES
Demand Deposits 15,781 $14,888
Interest Bearing
Demand Deposits 11,841 11,060
Savings Deposits 30,897 32,862
Time Deposits 22,680 15,656
Non Interest Bearing -0- -0-
Other liabilities 656 538
TOTAL LIABILITIES 81,855 75,004
CAPITAL
Contributed Capital 2,294 2,294
Additional Paid in Capital 698 642
Retained Earnings 4,649 4,169
TOTAL CAPITAL 7,641 7,105
TOTAL LIABILITIES
AND CAPITAL $89,496 $82,109
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B. ANALYSIS OF INTEREST EARNINGS
($ amounts in thousands)
INTEREST EARNED AND AVERAGE YIELD
1998 1997
$ % $ %
Taxable Investment Securities
Available for Sale 728 688
Yield 6.32 6.47
Held to Maturity 70 138
Yield 5.28 5.39
Non Taxable Securities
Available for Sale 21 28
Yield 4.33 5.09
Held to Maturity 265 288
Yield 4.97 4.87
Fed Funds Sold 674 586
Yield 5.12 5.23
Cash Value Life Insurance 67 69
Yield 5.51 5.44
Loans 4,596 4,325
Yield (after allowance) 9.59 10.32
AVERAGE YIELD
ALL Interest Earning Assets 8.03 8.27
INTEREST PAID AND AVERAGE RATE
Demand Deposits 209 205
Rate 1.77 1.85
Savings Deposits 1,018 1,100
Rate 3.29 3.35
Time Deposits 1,170 796
Rate 5.16 5.08
AVERAGE RATE PAID 3.66 3.53
Average Including
Non Interest Deposits 2.95 2.82
NET YIELD ON INTEREST EARNING ASSETS 5.08 5.45
NOTE: For the purpose of the above analysis, non-accruing loans are included
within the loans total unless written off. Non-accruing loans are discussed in
C - Risk Elements.
-13-
C. ANALYSIS OF ACTUAL CHANGES IN INTEREST
Income and Expense and allocation between volume and rate
Allocation Allocation
to change to change
in Volume in Rate Total
1998
Income
Taxable Investment Securities
Available for Sale 58 (18) 40
Held to Maturity (67) (1) (68)
Non-Taxable Investment Securities
Available for Sale (4) (3) (7)
Held to Maturity (28) 5 (23)
Fed Funds Sold 102 (14) 88
Cash Value Life Insurance 3 (5) (2)
Loans (After Allowance) 621 (350) 271
Expense
Demand Deposits 14 (10) 4
Savings Deposits (65) (18) (83)
Time Deposits 357 17 374
Income 1997
Taxable Investment Securities
Available for Sale 256 67 323
Held to Maturity (134) (36) (170)
Non-Taxable Investment Securities
Available for Sale (12) (2) (14)
Held to Maturity 3 (7) (4)
Fed Funds Sold (97) (9) (106)
Cash Value Life Insurance 3 (3) 0
Loans (After Allowance) 396 (163) 233
Expense
Demand Deposits 8 14 22
Savings Deposits (82) (56) (138)
Time Deposits 157 46 203
NOTE: Variances attributable to simultaneous rate and volume changes are
allocated equally.
The above analysis does not include any out of period items or adjustments.
Loan fees are not included in interest income. Return on tax exempt income is
actual and has not been adjusted to a tax equivalent basis.
-14-
II. INVESTMENT PORTFOLIO
A. The Book value of each category of investment security for the two years is
shown in "Note - 3 - Investment Securities" in the audited financial statements
incorporated by reference in the annual report.
B. Maturity and Yield Characteristics
1998 1997
Average Average
Cost Yield Cost Yield
Taxable Investment Securities
Available for Sale
US Treasury's
Maturing in one year or less -0- -0- -0- -0-
Maturing in one to five years -0- -0- -0- -0-
US Agencies & Corporations
Maturing in one year or less 1,000 5.09 1,500 6.77
Maturing in one to five years 10,750 5.70 4,000 5.77
Maturing in five to ten years 750 6.18 7,500 7.06
Held to Maturity
US Agencies & Corporations
Maturing in one year or less -0- -0- 1,101 5.68
Maturing in one to five years 508 6.18 516 7.40
Maturing in five to ten years -0- -0- -0- -0-
State and Political Subdivisions
Maturing in one year or less -0- -0- -0- -0-
Non-Taxable Securities
Available for Sale
State and Political Subdivisions
Maturing in one year or less 100 4.74 -0- -0-
Maturing in one to five years 359 4.27 100 4.75
Maturing in five to ten years 346 3.70 -0- -0-
Held to Maturity
State and Political Subdivisions
Maturing in one year or less 1,773 4.42 702 5.03
Maturing in one to five years 3,174 4.94 4,383 4.76
Maturing in five to ten years 82 6.04 503 5.19
Maturing in over ten years -0- -0- -0- -0-
Tax exempt income is actual and has not been adjusted to a tax equivalent basis
C. No investment at December 31, 1998, in the aggregate, in any one issue
exceeds 10% of stockholders' equity. The term "issuer" does not include the US
Government or its political subdivisions and agencies as defined in the
instructions.
-15-
III. LOAN PORTFOLIO
A. LOAN TYPES
December 31,
1998 1997
Commercial, Financial and Agricultural $43,991 $40,976
Real Estate Construction 2,933 787
Real Estate Mortgage 2,790 2,808
Installment Loans to Individuals
(Including overdraft lines) 2,687 4,015
TOTAL $52,401 $48,586
B. MATURITIES AND SENSITIVITIES OF
LOANS TO CHANGES IN INTEREST RATES
FOR SELECTED LOAN TYPES
December 31,
LOAN TYPES 1998 1997
Commercial, Financial and Agricultural
Due within one year $24,374 $30,231
Due one to five years 7,653 7,196
Due over five years 11,964 3,549
Total $43,991 $40,976
Interest rate
Fixed rate $16,206 $ 7,997
Floating rate 27,785 32,979
Total $43,991 $40,976
Real Estate Construction
Due within one year $ 2,933 $ 787
Due one to five years -0- -0-
Due over five years -0- -0-
Total $ 2,933 $ 787
Interest Rate
Fixed rate $ -0- $ -0-
Floating Rate 2,933 787
Total $ 2,933 $ 787
-16-
C. RISK ELEMENTS
1. NONACCRUAL, PAST DUE AND RESTRICTED LOANS
1998 1997
a. Loans accounted for on a
nonaccrual basis -0- -0-
b. Accruing loans past due 90
days or more -0- 309
c. Troubled Debt restructured -0- -0-
Gross income that would have occurred
if the above notes were paid according
to note terms
a. Nonaccrual -0- -0-
b. Troubled Debt -0- -0-
Income accrued and included in net
income
a. Nonaccrual -0- -0-
b. Troubled debt -0- -0-
NON ACCRUAL LOAN POLICY - Management's policy on placing loans on nonaccrual
status is discussed in the audited financial statements, "Note 1 - Summary of
Significant Accounting Policies."
2. POTENTIAL PROBLEM LOANS
At the end of the current period the Bank has a potential problem loan for
$5 that is uncollateralized. The bank anticipates a net loss potential of $5.
All other loans with known problems are disclosed above.
3. FOREIGN LOANS
The Bank never has had and does not anticipate ever having foreign loans, so
this section does not apply.
4. LOAN CONCENTRATIONS
All loan concentrations are shown in IIIA of this report.
D. OTHER INTEREST BEARING ASSETS
None.
-17-
IV. SUMMARY OF LOAN LOSS EXPERIENCE
1998 1997
A. Balance at January 1 $ 401 $ 491
Loans Charged Off
Commercial, Financial and
Agricultural (10) (30)
Installment loans to Individuals (122) (63)
Real Estate - Mortgage -0- -0-
Recoveries
Commercial 13 1
Installment 13 2
Net Charge Offs (106) (90)
Additional Charges to Operations 83 0
Balance at December 31 $ 378 $ 401
Ratio of Net charge offs to
loans outstanding 0.20% 0.19%
For a discussion of the factors that describe managements determination of the
addition to the allowance for loan losses see the notes to the Audited Financial
Statements, "Note - 1 - Summary of Significant Accounting Policies."
B. The following table sets forth the allocation for loan losses for the years
ended. It should not be construed that the amount allocated to a particular
segment is the only amount available against the loan portfolio. In addition,
the amounts allocated by segment may not be indicative of future charge off
trends.
1998 1997
Percent Percent
Amount of Total Amount of Total
Commercial, Financial
and Agricultural $43,991 83.95% $ 45,316 84.34%
Real Estate Construction 2,933 5.60 870 1.62
Real Estate Mortgage 2,790 5.32 3,106 5.78
Installment loans to
Individuals 2,686 5.13 4,438 8.26
TOTAL $ 52,400 100.00 $ 53,730 100.00
V. DEPOSITS
1998 1997
Average Average Average Average
Balance Rate Paid Balance Rate Paid
Noninterest Bearing
Demand Deposits 15,780 -0- 13,777 -0-
Interest Bearing
Demand Deposits 11,841 1.77% 11,060 1.85%
Savings Deposits 30,897 3.29% 32,862 3.35%
Time Deposits 22,681 4.71% 15,656 5.08%
-18-
MATURITY OF TIME DEPOSITS $100,000 OR MORE.
1998 1997
Three months or less $ 876 $ 581
Over three under six months 1,048 917
Over six under twelve months 2,369 2,073
Over twelve 634 651
VI. RETURN ON EQUITY AND ASSETS
1. Return on Average Assets 1.05% 1.28%
2. Return on Equity 12.04% 13.64%
3. Dividend Payout Ratio 55.46% 51.00%
4. Equity to Asset Ratio 8.66% 8.99%
VII. SHORT TERM BORROWING
1. Amounts outstanding
at year end -0- -0-
2. Maximum at any month end -0- -0-
3. Average amount outstanding
for year -0- -0-
Average interest paid -0- -0-
ITEM 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
PART III
ITEM 9.
Directors of the Registrant
Incorporated by reference to the enclosed Proxy Statement for annual meeting to
be held May 13, 1999.
Each director is elected by Shareholder vote to a term of one year.
No director has been involved in material legal proceedings in the last five
years.
-19-
Executive Officers
Robert J. Youngs 64 President and Chief Executive Officer
President, Chief Executive and Director of the Bank since June
Officer of the Bank and 1, 1983.
the Corporation, Director
of the Bank and Corporation
John A. Linton 58 Executive Vice President and Director
Executive Vice President of the Bank since Jan 1998 and June
the bank 1998 respectively.
Roger B. Ebert 64 Senior Vice President and Loan Admin-
Senior Vice President istrator of the Bank since February
and Loan Administrator of 1983.
of the Bank
Helen L. Gaulden 58 Senior Vice President/Cashier of the
Senior Vice President Bank since January 1985. Joined the
Cashier of the Bank Bank at its inception in June 1980.
Vice President and Treasurer
of the Corporation
Each executive officer is appointed to a one year term at the annual
organizational meeting by the board of directors.
No executive officer has been involved in material legal proceedings for the
last five years.
ITEM 10.
Executive Compensation
Incorporated by reference to the enclosed Proxy Statement for the annual meeting
to be held May 13, 1999.
ITEM 11.
Security Ownership of Certain Beneficial Owners and Management
The Corporation knows of no person who is the beneficial owner of more than 5%
of the Corporation's outstanding shares who is not a director or management.
Ownership of directors and management is incorporated by reference to the
enclosed Proxy Statement for the annual meeting to be held May 14, 1998.
ITEM 13.
Certain Relationships and Related Transactions
The Bank has had in the ordinary course of business, and expects to have in the
future, banking transactions with its directors, officers and their associates,
including transactions with corporations of which such persons are directors,
officers or controlling shareholders. The transactions involving loans have
been and will be entered into with such persons in the ordinary course of
business, on substantially the same terms, including interest rates
-20-
and collateral, as those prevailing at the time for comparable transactions with
other persons, and on terms not involving more than the normal risk of
collectibility or presenting other unfavorable features. In addition, loans to
insiders, such as officers, directors, and certain other persons are subject to
limitations and requirements as set by the regulatory agencies that oversee the
Corporation and the Bank.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TIMBERLINE BANCSHARES, INC.
By: ss/Robert J.Youngs
Robert J. Youngs, President &
CEO and Director of the Corporation
and the Bank
3/11/99
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in capacities on the dates indicated.
ss/Stephen P.Bradley Date 3/11/99
Stephen P. Bradley,
Board of Directors
Ss/Richard S. Day Date 3/11/99
Richard S. Day, Secretary
Board of Directors
ss/Gareld J. Collins Date 3/11/99
Gareld J. Collins, Chairman
Board of Directors
ss/Norman E. Fiock Date 3/11/99
Norman E. Fiock,
Board of Directors
ss/Don L. Hilton Date 3/11/99
Don L. Hilton
Board of Directors
ss/John A. Linton Date 3/11/99
John A. Linton, Executive Vice
President, Board of Directors
ss/Gaulden Date 3/11/99
Helen L. Gaulden, Treasurer
Sr. Vice President of Corporation
Sr. Vice President/Cashier of Bank
