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, 1999
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) 842-4200
(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. $7,003,872.
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 of such stock, as of a specified date within the past 60
days. At the average bid and asked prices of stock as of December 31,1999 of
$10.00 the aggregate market value of voting stock held by non-affiliates is
$6,866,060.00.
(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, 1999
there were 1,006,860 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART II, Item 7. - External Auditor's Report to the Board.
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) 842-4200.
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. Highway 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 several areas 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,
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, two branches 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, 1999, the Bank had 66 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.
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 1999, 1998 and 1997 are as follows:
Capital Year End 1999 1998 1997
Total Capital 13.07 13.45 13.70
Tier One 12.50 12.83 12.99
Leverage 8.85 8.66 8.62
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.
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
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. For example,
the Gramm-Leach-Bliley banking reform law included provisions that
significantly reduce the frequency of CRA exams for small banks with
satisfactory and outstanding ratings; it will, however, impose new
administrative and regulatory burdens on community banks. The extent and
severity of these burdens will not be unknown until the regulations are final,
banks have implemented them, and examiners have reviewed banks? compliance.
Addressing the Year 2000
The "Year 2000 Problem" related to a computer systems ability to recognize and
properly respond to the change to the year 2000. The Bank concentrated many
hours and resources during 1999 to being prepared for the change. All systems
were tested, contingency plans were in place and customers were kept informed
of the bank's progress in addressing Y2K. The Bank made a smooth transition
from 1999 to 2000 with no problems. The Bank will continue to monitor all
systems through the future "key" dates such as February 29, but foresees no
system problems.
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
1999.
PART II
ITEM 5.
Market for Registrant's Common Equity and Related Stockholder Matters
The Corporation has 1,006,840 shares of common stock outstanding, held by
approximately 1102 shareholders of record on December 31, 1999.
The directors and officers of the Corporation and the Bank hold 31.81% 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
pink sheet traded with 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, 1997 12.50 10.00 27,100
June, 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
March, 1999 10.50 10.125 700
June,1999 10.50 8.125 3,800
Sept., 1999 11.00 8.125 5,500
Dec., 1999 10.00 10.00 4,100
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.
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 past years dividends have been based on management's assessment
of earnings after the external auditor had completed the year end audit.
In 1999 a $.25 per share cash dividend was paid in April and a $.25 per share
was paid in November. 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 is exploring the possibility of moving the Mt. Shasta branch to a
location more convenient to the customers of that city, opening a loan
production office in the city of Redding to expand its lending area, and
opening a website to provide internet banking to its customers.
The bank presently offers electronic tax deposits capability, ACH capability
and wire transfer services. The Bank has enrolled in the Treasury's deposit
program - offering low or no cost deposit accounts to persons receiving ACH
deposits for federal payments.
It is the intention of the Corporation and Bank to continue operation as a
full service bank to the communities in which it serves.
Result of Operations
The Corporation ended the year with net income of $809,000, which equates to
$.80 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 1999 - $110; December 1998 - $118; December 1997 - $86.
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 in it's
immediate service area (average unemployment in 1999 in Siskiyou County
was 13%), 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.
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 judgment, 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. 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 71% of the Bank's portfolio is comprised of loans with adjustable
rates.
The Bank has subscribed to a Risk Management program that monitors the
Bank's sensitivity to market conditions. At December 1999, the margin risk
cushion for the bank was 41 basis points before the interest rate margin was
adversely affected.
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, 1999,
cash and due from banks, and federal funds sold constituted 8.52% of total
assets. Add the funds in investments and the total is 33.98% of total assets.
In addition, the Bank has an unused federal funds line of credit for
$2,000,000 with a correspondent institution and has established the ability to
borrow through the Fed Discount Window.
At year end 1999 the Bank's loans outstanding to deposit ratio was 69.8%,
while the ratio of loans outstanding plus commitments to deposits was 79.9%.
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. The relatively
low inflation of the past two years, therefore, has had little impact on the
Bank's 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 External Auditor's report to the Board.
Other Selected Financial Data
I. Distribution of Assets, Liabilities and Stockholders' Equity; interest
rates and interest differential
A. AVERAGE BALANCE SHEETS
(in thousands)
1999 1998
ASSETS
Cash and Due from Banks
(Non-interest bearing) $ 6,324 $ 4,840
(Interest bearing) 100 -0-
Taxable Investment Securities
Available for Sale 13,311 11,531
Held to Maturity 6 1,336
Non-taxable Investment Securities
Available for Sale 3,638 486
Held to Maturity 4,085 5,332
Fed Funds Sold 5,563 13,154
Cash Value Life Insurance 1,963 1,330
Loans - Net of unearned
loan fees 54,449 48,329
Allowance for Loan Losses (393) (386)
Fixed Assets net of
accumulated depreciation 2,414 2,477
Other Assets 1,219 1,067
TOTAL ASSETS $92,679 $89,496
1999 1998
LIABILITIES
Demand Deposits 17,200 $15,781
Interest Bearing Demand Deposits 10,902 11,841
Savings Deposits 30,874 30,897
Time Deposits 24,668 22,680
Fed Funds Purchased 325 -0-
Non Interest Bearing -0- -0-
Other liabilities 1,302 656
TOTAL LIABILITIES 85,271 81,855
CAPITAL
Contributed Capital 2,294 2,294
Additional Paid in Capital 699 698
Retained Earnings 4,599 4,649
Unrealized Loss Available
For Sale Securities (184) -0-
TOTAL CAPITAL 7,408 7,641
TOTAL LIABILITIES
AND CAPITAL $92,679 $89,496
B. ANALYSIS OF INTEREST EARNINGS
($ amounts in thousands)
INTEREST EARNED AND AVERAGE YIELD
1999 1998
$ % $ %
Taxable Investment Securities
Available for Sale 745 688
Yield 5.42 6.47
Held to Maturity 0 138
Yield 0 5.39
Non Taxable Securities
Available for Sale 206 28
Yield 4.74 5.09
Held to Maturity 161 288
Yield 5.38 4.87
Fed Funds Sold 251 586
Yield 4.67 5.23
Cash Value Life Insurance 72 69
Yield 5.49 5.44
Loans 5,076 4,325
Yield (after allowance) 8.74 10.32
AVERAGE YIELD
ALL Interest Earning Assets 8.23 8.27
INTEREST PAID AND AVERAGE RATE
Demand Deposits 153 205
Rate 1.36 1.85
Savings Deposits 962 1,100
Rate 3.13 3.35
Time Deposits 1122 796
Rate 4.42 5.08
AVERAGE RATE PAID 3.32 3.53
Average Including
Non Interest Deposits 2.66 2.82
NET YIELD ON INTEREST EARNING ASSETS 5.57 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.
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
1999
Income
Taxable Investment Securities
Available for Sale 113 (96) 17
Held to Maturity (70) 0 (70)
Non-Taxable Investment Securities
Available for Sale 137 48 185
Held to Maturity (62) (42) (104)
Fed Funds Sold (389) (34) (423)
Cash Value Life Insurance 32 (17) 15
Loans (After Allowance) 587 (107) 480
Expense
Demand Deposits (16) (40) (56)
Savings Deposits (1) (54) (55)
Time Deposits 102 (150) (48)
Income 1998
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
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.
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
1999 1998
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 5.21 1,000 5.09
Maturing in one to five years 11,550 5.21 10,750 5.70
Maturing in five to ten years 1,250 6.29 750 6.18
Held to Maturity
US Agencies & Corporations
Maturing in one year or less -0- -0- -0- -0-
Maturing in one to five years 5 8.60 508 6.18
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 -0- -0- 100 4.74
Maturing in one to five years 445 4.91 359 4.27
Maturing in five to ten years 320 4.67 346 3.70
Maturing in over ten years 3,425 4.62 -0- -0-
Held to Maturity
State and Political Subdivisions
Maturing in one year or less 1,270 4.88 1,773 4.42
Maturing in one to five years 1,760 5.06 3,174 4.94
Maturing in five to ten years 85 6.18 82 6.04
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, 1999, 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.
III. LOAN PORTFOLIO
A. LOAN TYPES
December 31,
1999 1998
Commercial, Financial and Agricultural $51,501 $43,991
Real Estate Construction 1,924 2,933
Real Estate Mortgage 2,430 2,790
Installment Loans to Individuals
(Including overdraft lines) 2,181 2,687
TOTAL $58,036 $52,401
B. MATURITIES AND SENSITIVITIES OF
LOANS TO CHANGES IN INTEREST RATES
FOR SELECTED LOAN TYPES
December 31,
LOAN TYPES 1999 1998
Commercial, Financial and Agricultural
Due within one year $24,721 $24,374
Due one to five years 20,085 7,653
Due over five years 6,695 11,964
Total $51,501 $43,991
Interest rate
Fixed rate $11,534 $16,206
Floating rate 39,967 27,785
Total $51,501 $43,991
Real Estate Construction
Due within one year $ 1,924 $2,933
Due one to five years -0- -0-
Due over five years -0- -0-
Total $ 1,924 $2,933
Interest Rate
Fixed rate $ -0- $ -0-
Floating Rate 1,924 2,933
Total $ 1,924 $ 2,933
C. RISK ELEMENTS
1. NONACCRUAL, PAST DUE AND RESTRICTED LOANS
1999 1998
a. Loans accounted for on a
nonaccrual basis 13 -0-
b. Accruing loans past due 90
days or more -0- -0-
c. Troubled Debt restructured -0- -0-
Gross income that would have occurred
if the above notes were paid according
to note terms
a. Non-accrual $0.2 -0-
b. Troubled Debt -0- -0-
Income accrued and included in net
income
a. Non-accrual -0- -0-
b. Troubled debt -0- -0-
NON ACCRUAL LOAN POLICY - Management's policy on placing loans on
non-accrual 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 no potential loan problems
other than loans with known problems as 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.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
1999 1998
A. Balance at January 1 $ 378 $ 401
Loans Charged Off
Commercial, Financial and
Agricultural (69) (10)
Installment loans to Individuals -0- (122)
Real Estate - Mortgage -0- -0-
Recoveries
Commercial 9 13
Installment 18 13
Net Charge Offs (42) (106)
Additional Charges to Operations 36 83
Balance at December 31 $ 372 $ 378
Ratio of Net charge offs to
loans outstanding 0.07% 0.20%
For a discussion of the factors that describe management's 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."
C. 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.
1999 1998
Percent Percent
Amount of Total Amount of Total
Commercial, Financial
and Agricultural $51,501 88.74% $43,991 83.95%
Real Estate Construction 1,924 3.31 2,933 5.60
Real Estate Mortgage 2,430 4.19 2,790 5.32
Installment loans to
Individuals 2,181 3.76 2,686 5.13
TOTAL $ 58,036 100.00 $52,400 100.00
V. DEPOSITS
1999 1998
Average Average Average Average
Balance Rate Paid Balance Rate Paid
Non-interest Bearing
Demand Deposits 16,770 -0- 15,780 -0-
Interest Bearing
Demand Deposits 11,225 1.36% 11,841 1.77%
Savings Deposits 30,713 3.13% 30,897 3.29%
Time Deposits 25,391 4.42% 22,681 4.71%
MATURITY OF TIME DEPOSITS $100,000 OR MORE.
1999 1998
Three months or less $ 753 $ 876
Over three under six months 1,344 1,048
Over six under twelve months 3,006 2,369
Over twelve 717 634
VI. RETURN ON EQUITY AND ASSETS
1. Return on Average Assets 0.90% 1.05%
2. Return on Equity 10.73% 12.04%
3. Dividend Pay-out Ratio 63.00% 55.46%
4. Equity to Asset Ratio 8.42% 8.66%
VII. SHORT TERM BORROWING
1. Amounts outstanding
at year end -0- -0-
2. Maximum at any month end 1,700 -0-
3. Average amount outstanding
for year 59 -0-
Average interest paid 5.61% -0-
ITEM 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
PART III
ITEM 9.
Directors of the Registrant
Information concerning the directors of the registrant is included in item 11
Security Ownership of Certain Beneficial Owners and Management of this report.
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.
Executive Officers
Robert J. Youngs 65 Chief Executive Officer and Director
President, Chief Executive of the bank since June 1, 1983.
Officer of the Bank and President of the Bank from June 1983
the Corporation, Director to June 1, 1999. Mr. Youngs retired
of the Bank and Corporation as officer of the Bank and Corporation
December 31, 1999. Remains Director.
John A. Linton 59 Executive Vice President and Director
President of the bank the Bank since Jan 1998 and June 1998
CAO of the Corporation respectively. President of the Bank
Since June 1, 1999. CAO of the
Corporation since June 1, 1999.
Assumes CEO of Bank, CEO and President
of Corporation Jan. 1, 2000.
Roger B. Ebert 65 Senior Vice President and Loan Admin
Senior Vice President -istrator of the Bank since February
and Loan Administrator of 1983. Retired September 30, 1999.
David R. Kaiser 39 Senior Vice President and Loan Admin
Senior Vice President -istrator of the Bank since September
and Loan Administrator of 1999.
of the Bank
Helen L. Gaulden 59 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.
VP and Treasurer of 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
The following table summarizes the remuneration earned in 1999 by each
Executive Officer of Bancshares and the Bank whose total remuneration exceeded
$60,000, and by all Executive Officers of Bancshares and the Bank as a group.
Cash and Cash Equivalent Forms of Remuneration
Name of Individual Capacities Salaries, Fees Securities Aggregate of
or Number of In Which Directors Fees, or Property Contingent
Persons in Group Served Commissions Insurance, Forms of
or Bonuses Benefits Remuneration
Reimbursements
Personal Benefits
Robert J. Youngs President & $138,000. (1) $0
C EO
Bancshares
John A. Linton CEO & President $104,300. (1)
Of Bank, CAO
Bancshares.
Helen L. Gaulden Senior Vice $64,900. (1)
President,
Cashier &
Treasurer of
Bank &
Bancshares
Executive Officers Officers $382,194.
as a group
Notes: (1) The Bank has paid and plans to continue to pay premiums on certain
life insurance policy coverage for Bancshares and Bank Executive Officers in
excess of that normally provided Bank employees. It is the opinion of
Bancshares' Board of Directors that the total personal benefit paid to any
Executive Officer of Bancshares or the Bank during the year was less than
$5,000.
COMPENSATION PURSUANT TO PLANS
The Bank initiated, in the first quarter of 1994, a Salary Continuation Plan
for its three executive officers. A Salary Continuation Plan (SCP) is a non
- -qualified, executive benefit plan in which the bank agrees to pay the executive
additional benefits in the future, usually at retirement. Because the SCP is a
non-qualified plan, the bank can selectively reward certain key executives
without regard to the non-discrimination requirements of qualified plans.
The SCP is embodied in a written agreement between the bank and the executive(s)
selected to participate in the Plan. The SCP is an unfunded plan, which means
that the executive has no rights under the agreement beyond those of a general
creditor of the bank, and there are no specific assets set aside by the bank in
connection with the establishment of the Plan. The accounting rules concerning
the Plan require that the bank accrue sufficient expenses so that the present
value of the benefits to be paid to the executive at retirement is reflected as
a liability on the bank's books by the time of retirement. The SCP typically
provides that, if the covered executive dies prior to or during retirement, the
bank will pay the benefits set forth in the agreement to the deceased
executive's beneficiary or estate.
The Plan is informally linked with a single premium universal life insurance
policy, which is purchased by the bank in connection with its implementation.
The executive is the insured under the policy, but the bank is the owner and
the beneficiary of the policy. The executive has no claim on the insurance
policy, its cash value or the proceeds thereof. The cash surrender value of the
single premium insurance policy(ies) is carried on the bank's books in "other
assets" consistent with generally accepted accounting principles.
During the pre-retirement period, there are no tax consequences to the covered
executive with respect to the Plan agreement and there are no tax deductions to
the bank in connection with the Plan. The cash value of the insurance policy
increases through interest credited by the insurance company. The increase in
the insurance cash value is not taxable income. After retirement, the benefit
payments to the executive are taxable income and are tax-deductible expenses to
the bank as they are paid. If the executive were to die, either prior to or
during retirement, the bank will receive the insurance proceeds from the policy
tax free, except for possible alternative minimum taxes, and the payments made
by the bank to the executive's beneficiary will be tax-deductible expenses to
the bank. Since the present value of the bank's obligation to the executive has
been booked as of the retirement date, the impact on the bank's income statement
after retirement is minimal.
The Plan was established as follows:
ANNUAL DURATION
RETIREMENT RETIREMENT OF RETIREMENT
NAME AGE BENEFIT BENEFIT
Robert J. Youngs, 65 $48,000.00 10 Years
CEO
Roger B. Ebert 65 $24,000.00 10 Years
Sr. Vice President &
Loan Administrator
Helen L. Gaulden 65 $20,000.00 10 Years
Sr. Vice President &
Cashier
In 1999, by board resolution, the plan for Robert J. Youngs was amended
extending the duration period of retirement benefit to 15 years.
The board also established a plan for Executive Vice President John A. Linton.
Mr. Linton was appointed President of the Bank on July 1, 1999. Mr. Linton's
plan is as follows:
John A. Linton 65 $48,000.00 10 Years
Roger B. Ebert retired on September 30, 1999 and recieved payments totaling
$6,000.00 in fiscal year 1999.
Payment schedules will be selected by the covered employees at retirement.
Amounts in the plan have not been included in the previous cash compensation
table. Mr. Ebert elected monthly payments of $2,000.00 per month.
Amounts accrued pursuant to the plan for the accounts of the named individuals
and group during the last fiscal year are as follows:
Robert J. Youngs $86,955.
John A. Linton 27,459.
Roger B. Ebert 3,681.
Helen L. Gaulden 31,428.
Total as a Group $149,523.
In the first quarter of 1994, the Bank initiated a 401(K) plan in which all
employees can participate. The 401(K) is a qualified plan. Employees may
elect to deposit up to 15% of gross wages in the plan and the Bank contributes
an additional 10% of the employees' election.
STOCK OPTION PLAN
The Bank maintained an Incentive and Non-qualified Stock Option Plan ("Plan")
which was originally adopted by the Board of Directors of the Bank on February
12, 1998, and which was duly approved by shareholders of the Bank on May 14,
1998.
Summary of the Plan
The Plan will be administered by the Board of Directors. All options under the
Plan will be granted at an exercise price of not less than 100 percent of the
fair market value of the shares of Common Stock on the date of grant, except
for an incentive stock option granted to an optionee who at the time of the
grant owns more than 10% of the total combined voting power of all classes of
stock of the Company or a subsidiary of the Company in which case the option
price shall not be less than 110% of the fair market value of such stock. The
purchase price of any shares purchased upon exercise is payable in full in cash
or, subject to applicable law, with Common Stock previously acquired by the
optionee and held by the optionee for a period of at least six months. The
equivalent dollar value of shares used to effect a purchase shall be the fair
market value of the Common Stock on the date of exercise.
Options granted pursuant to the Plan shall be for a term of up to ten (10)
years, except for certain incentive stock options. Each option shall be
exercisable in installments and upon such conditions as the Board of Directors
shall determine. Options granted shall vest over a period no greater than five
years, and no less than 20% of such option shall vest annually. Optionees shall
have the right to exercise all or a portion of the option at any time or
from time to time with respect to the vested part of their stock options. If
any option shall expire without being exercised in full, the shares will again
become available for granting of stock options under the Plan. The Plan shall
expire on February 12, 2008.
Incentive stock options may be granted to full-time salaried officers and
management level employees of the Company or a subsidiary. No director who is
not also a full-time salaried officer or management level employee may be
granted an incentive stock option pursuant to the Plan. No incentive stock
option with a term of more than five (5) years may be granted to any person who
at the time of grant owns stock possessing more than 10% of the total combined
voting power or value of all classes of stock of the Company or a subsidiary of
the Company. Non-qualified stock options may be granted to directors, full
- -time salaried officers and management level employees of the Company or its
subsidiaries.
Incentive Stock Options. If the optionee is employed by the Company (or a
subsidiary) continuously from the date of grant until at least three months
before the option is exercised and otherwise satisfies the requirements of the
Plan and applicable law, the optionee will not recognize taxable income upon the
exercise of the option. If the optionee is not employed by the Company (or a
subsidiary) continuously from the date of grant until at least three months
before the option is exercised for reason other than death or disability, the
optionee will recognize ordinary income at the time the option is exercised.
The Company will be allowed a deduction for federal income tax purposes only
if and to the extent that the optionee recognizes ordinary income. Upon
exercise of an incentive stock option, the excess of the fair market value of
the shares received over the option price at the time of exercise
is treated as an item of tax preference which may result in the imposition of
the alternative minimum tax.
On a subsequent sale of shares acquired by the exercise of an incentive stock
option, gain or loss will be recognized in an amount equal to the difference
between the amount realized on the sale and the optionee's tax basis of the
shares sold. If a disposition (generally a sale, exchange, gift or similar
lifetime transfer of legal title) of stock received pursuant to an incentive
stock option does not take place until more than two years after the grant of
such option and more than one year after the exercise of such option, any gain
or loss realized on such disposition will be treated as long-term capital gain
or loss. Under such circumstances, the Company will not be entitled to a
deduction for income tax purposes in connection with the exercise of the option.
If a disposition of stock received pursuant to an exercise of an incentive
stock option occurs within two years after the grant of such option or one year
after the exercise of such option, the optionee must treat any gain realized as
ordinary income to the extent of the lesser of (i) the fair market value of such
stock as of the date of exercise less the option price, or (ii) the amount
realized on disposition of the stock less the option price. Such ordinary
income realized is deductible by the Company for federal income tax purposes.
Any additional amount realized on the disposition will be taxable as either
long-term or short-term capital gain, depending on the holding period.
Non-qualified Stock Options. In general, when an optionee exercises a
Non-qualified stock option, the optionee recognizes ordinary income in the
amount of the excess of the fair market value of the shares received upon
exercise over the aggregate amount paid for those shares, and the Company may
deduct as an expense the amount of income so recognized by the optionee. For
capital gains purposes, the holding period of the shares begins upon the
exercise of the option, and the optionee's basis in the shares is equal to the
fair market value of the shares on the date of exercise.
If, upon exercise of a nonqualified option, the optionee pays all or part of
the purchase price by delivering to the Company shares of already-owned stock,
there are no federal income tax consequences to the optionee or the Company to
the extent of the number of shares so delivered. As to any additional shares
issued, the optionee recognizes ordinary income equal to the aggregate fair
market value of the additional shares received, less any cash paid to the
Company, and the Company is allowed to deduct as an expense the amount of such
income.
For purposes of calculating tax upon disposition of the shares acquired, the
holding period and basis of the new shares, to the extent of the number of old
shares delivered, is the same as for those old shares. The holding period for
the additional shares begins on the date the option is exercised, and the basis
in those additional shares is equal to the taxable income recognized by the
optionee, plus the amount of any cash paid to the Company.
Upon a subsequent disposition of the shares received on exercise, the difference
between the amount realized on such disposition and the fair market value of the
shares on the date of exercise generally will be treated as a separate capital
gain or loss.
Other Terms and Conditions
Options under the Plan shall not be transferable by the optionee during the
optionee's lifetime. In the event of termination of employment or cessation as
a director as a result of the optionee's death or disability, to the extent
exercisable on the date employment or directorship terminates, the option shall
remain exercisable for up to one (1) year (but not beyond the end of the
original option term) by the disabled optionee or, in the event of death of the
optionee, by the person or persons to whom rights under the option shall have
passed by will or the laws of descent and distribution. In addition, if an
optionee dies during the three month period referred to below, the option shall
expire one year after the date of such death or the date the option expires
whichever is earlier.
If an optionee's employment is terminated, unless termination was for cause or
if an optionee's directorship is terminated, the optionee shall have the right,
for a three-month period after such termination, to exercise that portion of
the option which was exercisable immediately prior to such termination. If an
optionee's employment is terminated for cause (which shall include malfeasance
or gross misfeasance in the performance of duties or conviction of a crime
involving moral turpitude), the option shall expire within 30 days of the date
of termination. However, in no event may the option be exercised after the end
of the original option term.
In the event of certain changes in the outstanding Common Stock, such as stock
dividends, stock splits, recapitalization, reclassification, reorganization,
merger, stock consolidation or otherwise, appropriate and proportionate
adjustments shall be made in the number, kind and exercise price of shares
covered by any unexercised options or portions thereof. In the event of
a liquidation of the Company or upon a reorganization, merger or consolidation
of the Company with one or more corporations, the result of which the Company
is not the surviving corporation or the Company becomes a subsidiary of another
corporation, a sale of substantially all of the assets of the Company to
another corporation, or upon a sale representing more than 80% of equity
securities voting power of the Company to any person or entity (any one of
which shall be referred to as a "Terminating Event"), the Plan shall terminate
and all options theretofore granted shall completely vest and become
immediately exercisable. All outstanding options not exercised by the time of
the Terminating Event shall at such time terminate. However, any options not
exercised at the time of a Terminating Event shall not terminate if they have
been assumed or substituted by the successor corporation.
The Board of Directors reserves the right to suspend, amend or terminate the
Plan, and, with the consent of the optionee, make such modifications of the
terms and conditions of his/her option as it deems advisable, except that the
Board of Directors may not, without further approval of a majority of the
shareholders, increase the maximum number of shares covered by the Plan, change
the minimum option price, increase the maximum term of options under the Plan
or permit options to be granted to anyone other than a director, officer or
management level employee.
In 1999, with the authority stated above, modified the terms of options granted
in 1998 from $12.50 per share to $10.00 per share to more realistically reflect
the market price of the outstanding stock.
ITEM 11.
Security Ownership of Certain Beneficial Owners and Management
Bancshares' Board of Directors knows of no person who beneficially owns more
than 5% of the outstanding Common Stock of Bancshares as of December 31, 1999,
with the exception of director nominees Gareld J. Collins, Norman E. Fiock, Don
L. Hilton and Robert J. Youngs, and Director Emeritus, Charles J. Cooley, who
owns beneficially 63,244 or 6.28%.
The beneficial ownership of Bancshares Common Stock by such individuals is
shown in the chart below.
Unless otherwise indicated, each director has sole investment and voting power
or shares such power with his or her spouse) with regard to the shares set
forth in the following table. The source of the information provided in the
table is Bancshares' records.
DIRECTOR, AGE AND YEAR PRINCIPAL OCCUPATION SHARES OF COMMON STOCK
FIRST BECAME DIRECTOR DURING PAST FIVE YEARS BENEFICIALLY OWNED ON
December 31, 1999
STEPHEN P. BRADLEY President, Shasta Forest 16,320 indirect(1) 1.63%
Age 62 Products
Elected (Bank) 1999
Elected (Bancshares) 1999
GARELD J. COLLINS General Partner, Enterprises 7.34%
Age 86 Investments 73,866 indirect (2)(6)
Elected (Bank) 1979
Elected (Bancshares) 1991
RICHARD S. DAY (5) Secretary, Timberline. 12,800 direct 2.26%
Age 82 Bancshares, Timberline 10,000 indirect(6)
Elected (Bank) 1979 Community Bank; Retired
Elected (Bancshares) 1991 Business Executive
NORMAN E. FIOCK Retired cattle rancher b 9.44%
Age 75 and Farmer 95,024 indirect (3)(6)
Elected (Bank) 1979
Elected (Bancshares) 1991
DON L. HILTON Chairman, Timberline 8.37%
Age 63 Community Bank, President,84,234 indirect (4)(6)
Elected (Bank) 1981 Don Hilton Enterprises And Shasta Holiday, Inc.
Elected (Bancshares) 1991 And Shasta Holiday, Inc.
JOHN A LINTON CEO & Pres., Timberline 500 direct 2.04%
Age 59 Community Bank,Timberline 20,000 indirect (6)
Elected (Bank) 1998 Bancshares, Inc.
Elected (Bancshares) 1998
ROBERT J. YOUNGS Chairman, Timberline 71,264 direct 8.07%
Age 65 Bancshares, Inc. 10,000 indirect(6)
Elected (Bank) 1983 Retired Banker
Elected (Bancshares) 1991
9 DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (7) 415,254 direct 41.24%*
and indirect
* percentage includes both direct and indirect beneficial ownership.
(1)Includes 2808 shares held by Stephen P. Bradley and Barbara R. Bradley
Trust of which Mr. Bradley is trustee and 3512 shares held by the Shasta
Forest Products, Inc. Profit Sharing Fund of which Mr. Bradley is trustee.
(2)Includes 63,866 shares held by the Gareld J. and V. June Collins Trust, of
which Mr. Collins is trustee.
(3)Includes 76,974 shares held by the Norman E. and Mayme E. Fiock Trust, of
which Mr. Fiock is trustee, and 8,050 shares held by Mr. Fiock's wife.
(4)Includes 72,646 shares held in revocable trusts of which Mr. Hilton is
trustee and1,500 shares held by Don Hilton in trust for Mr. Hilton?s two
grandchildren.
(5)Mr. Day assumed the position of Bank Secretary on June 8, 1988, and
Bancshares Secretary on May 9, 1991.
(6)Includes Bancshares Common Stock subject to Options under Bancshares Stock
Option Plan. (See later Section entitled "Stock Option Plan").
(7)Includes the 6 directors and 1 Executive Officer listed in the chart along
with two other Executive Officers.
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 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
John A. Linton, President &
CEO and Director of the Corporation
and the Bank
3/09/00
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.
Date 3/09/00
Stephen P. Bradley,
Board of Directors
Date 3/09/00
Richard S. Day, Secretary
Board of Directors
Date 3/09/00
Gareld J. Collins,
Board of Directors
Date 3/09/00
Norman E. Fiock,
Board of Directors
Date 3/09/00
Don L. Hilton, Chairman
Board of Directors of Bank
Date 3/09/00
Robert J. Youngs, Chairman
Board of Directors of Corporation
Date 3/09/00
Helen L. Gaulden, Treasurer
Sr. Vice President of Corporation
Sr. Vice President/Cashier of Bank
INDEPENDENT AUDITORS' 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,
1999, 1998 and 1997, and the related consolidated statements of income,
comprehensive income, changes in 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
fairly, in all material respects, the consolidated financial position of
Timberline Bancshares, Inc. and subsidiary as of December 31, 1999, 1998 and
1997, and the consolidated 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, LLP
Yreka, California
January 26, 2000
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999, 1998 and 1997
($ in thousands)
1999 1998 1997
ASSETS
Cash and due from banks,
non-interest bearing $ 6,951 $ 4,785 $ 5,224
Interest bearing deposits
in other banks 100 100 -
Federal funds sold 800 9,800 7,000
Securities available for sale 17,215 13,296 13,132
Securities to be held to maturity 3,172 5,538 7,205
Cash surrender value of officers'
life insurance 2,317 1,361 1,303
Loans, less allowance for loan losses
Of 1999-$372; 1998-$378; 1997-$401 57,554 51,904 48,100
Premises and equipment 1,874 2,009 2,032
Other assets 1,717 1,731 1,581
Total assets $ 91,700 $ 90,524 $ 85,577
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 16,409 $ 15,937 $ 15,407
Savings 41,083 44,774 46,127
Time, under $100 19,839 16,361 12,354
Time, $100 and over 5,820 4,927 3,670
Total deposits 83,151 81,999 77,558
Other liabilities 766 653 541
Total liabilities 83,917 82,652 78,099
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, no par value, authorized
2,000,0000 shares,issued and outstanding
shares 1999-1,006,860;1998-1,006,810;
1997-1,006,726 2,993 2,993 2,992
Additional paid-in capital 1 1 1
Retained earnings 5,189 4,883 4,467
Accumulated other comprehensive
income (loss):
Unrealized holding gains (losses)
on securities available for sale (400) (5) 18
Total stockholders' equity 7,783 7,872 7,478
Total liabilities and
stockholders' equity $ 91,700 $ 90,524 $ 85,577
The accompanying notes are an integral part of these consolidated financial
statements.
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
For The Years Ended December 31, 1999, 1998 and 1997
($ in thousands, except per share)
1999 1998 1997
Interest income:
Interest on fees and loans $ 5,112 $ 4,923 $ 4,568
Interest on federal funds sold 251 674 586
Interest on securities
available for sale 902 750 735
Interest on securities to be
held to maturity 210 336 409
Interest, other 111 74 69
TOTAL 6,586 6,757 6,367
Interest expense:
Interest on deposits 2,237 2,397 2,100
Interest on short-term borrowings 4 - -
TOTAL 2,241 2,397 2,100
Net interest income 4,345 4,360 4,267
Provision for loan losses (28) 83 -
Net interest income after
provision for loan losses 4,373 4,277 4,267
Other income:
Service charges 406 412 411
Gain on sale of premises and equipment - - 2
Gain on securities available for sale - - 3
Other 18 16 14
TOTAL 424 428 430
Other expenses:
Salaries and employee benefits 2,114 1,984 1,827
Occupancy expenses 401 392 402
Equipment and data processing expenses 296 313 318
Other operating expenses 893 793 816
TOTAL 3,704 3,482 3,363
Income before income taxes 1,093 1,223 1,334
Income tax expense 284 304 347
Net Income $ 809 $ 919 $ 987
Earnings per common share:
Basic $ 0.80 $ 0.91 $ 0.99
Assuming dilution $ 0.80 $ 0.91 $ 0.98
The accompanying notes are an integral part of these consolidated financial
statements.
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
For The Years Ended December 31, 1999, 1998 and 1997
($ in thousands)
1999 1998 1997
Net income, per consolidated
statements of income $ 809 $ 919 $ 987
Other comprehensive income (loss):
Unrealized holding gains (losses) on
securities available for sale arising
during the year (717) (41) 67
Reclassification adjustment for (gains)
losses included in net income - - -
Other comprehensive income (loss) (717) (41) 67
Income tax expense (benefit) related to other
comprehensive income (loss) (322) (18) 30
Other comprehensive income (loss)
net of income tax (395) (23) 37
Total comprehensive income $ 414 $ 896 $ 1,024
The accompanying notes are an integral part of these consolidated financial
statements.
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For The Years Ended December 31, 1999, 1998 and 1997
($ in thousands)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income(loss) Total
Balance, 12/31/96 954,484 $ 2,813 $ 1 $ 3,982 $ (19) $ 6,777
Net income - - - 987 - 987
Other comprehensive
income (loss) net of
income tax; change
in unrealized gain
(loss) on securities
available for sale,
net of deferred
income tax of $30 - - - - 37 37
Cash dividend declared - - - (502) - (502)
Options exercised by
employees & directors 52,242 179 - - - 179
Balance, 12/31/97 1,006,726 2,992 $ 1 4,467 18 7,478
Net income - - - 919 - 919
Other comprehensive
income (loss) net of
income tax; change
in unrealized gain
(loss) on securities
available for sale,
net of deferred
income tax
benefit of $18 - - - - (23) (23)
Cash dividend declared - - - (503) - (503)
Options exercised by
employees & directors 84 1 - - - 1
Balance, 12/31/98 1,006,810 2,993 1 4,883 (5) 7,872
Net income - - - 809 - 809
Other comprehensive
income (loss) net of
income tax; change
in unrealized gain
(loss) on securities
available for sale,
net of deferred
income tax of $322 - - - - (395) (395)
Cash dividend declared - - - (503) - (503)
Options exercised by
employees & directors 50 - - - - -
Balance, 12/31/99 1,006,860 $ 2,993 $ 1 $ 5,189 $ (400) $ 7,783
The accompanying notes are an integral part of these consolidated financial
statements.
TIMBERLINE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1999, 1998 and 1997
($ in thousands)
1999 1998 1997
Cash flows from operating activities:
Net income $ 809 $ 919 $ 987
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 215 195 191
Provision for loan losses (28) 83 -
(Gain) on sale of premises and equipment - - (2)
(Gain) on sale of securities
available for sale - - (3)
Net (increase) decrease in other assets 336 (132) (89)
Net increase in other liabilities 113 112 111
Net cash provided by operating activities 1,445 1,177 1,195
Cash flows from investing activities:
Net (increase) in interest bearing
deposits in other banks - (100) -
Net (increase) decrease in federal funds sold 9,000 (2,800) 5,700
Purchases of securities available for sale (7,911) (22,205) (16,640)
Proceeds from sales of securities
available for sale - - 1,185
Proceeds from maturities of securities
available for sale 3,350 22,000 8,815
Purchases of securities to be
held to maturity - (991) -
Proceeds from sales of securities to be
held to maturity - - -
Proceeds from maturities of securities
to be held to maturity 2,291 2,658 2,369
Net (increase) in loans (5,622) (3,887) (9,393)
Purchases of premises and equipment (80) (172) (124)
Proceeds from sales of premises and equipment - - 2
(Increase) in cash surrender value of
officers' life insurance policies (956) (58) (54)
Net cash provided by (used in)
investing activities 72 (5,555) (8,140)
Cash flows from financing activities:
Net increase in deposits 1,152 4,441 7,290
Proceeds from note payable 11 - -
Principal payments on note payable (11) - -
Dividends paid (503) (503) (502)
Proceeds from exercise of stock options - 1 179
Net cash provided by financing activities 649 3,939 6,967
Net increase (decrease) in cash and
due from banks 2,166 (439) 22
Cash and due from banks at beginning of year 4,785 5,224 5,202
Cash and due from banks at end of year $ 6,951 $ 4,785 $ 5,224
Interest paid $ 2,257 $ 2,387 $ 2,141
Income taxes paid $ 377 $ 336 $ 417
The accompanying notes are an integral part of these consolidated financial
statements.
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 its 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 inter-company balances 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 office in Medford, Oregon. The Bank grants agribusiness, commercial,
residential, construction, and consumer loans throughout northern California,
and 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
judgments 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.
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 accumulated other comprehensive income
(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 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 has purchased life insurance on several key officers. Under the
policies, the Bank receives the cash surrender value if the policy is
terminated and, upon death of the insured, receives all benefits payable.
Foreclosed Property:
Foreclosed property consists of real estate and other assets acquired through
customers' loan defaults. Foreclosed property is carried at the lower of fair
value, less the estimated cost to sell, or cost. Routine maintenance costs,
declines in market value and net losses on disposal are included in other
operating expenses. Foreclosed property is included in "other assets" on the
Company's balance sheet.
Loan Origination Fees and Costs:
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield on the related loan. The deferred
fees and costs are netted against outstanding loan balances, and are amortized
over the life of the loan.
Income Taxes:
Provisions for income taxes are based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and include 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:
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
proceeds from the exercise of the dilutive items.
Net income per common share (basic and diluted) is computed as follows:
Per-Share
Income Shares Amount
For the Year Ended December 31, 1999:
Basic Net Income Per Common Share:
Income available to common stockholders $809,981 1,006,860 $ 0.80
Effect of dilutive securities:
Stock options (anti-dilutive) - -
Diluted Net Income Per Common Share:
Income available to common stockholders $809,981 1,006,860 $ 0.80
(Stock options are anti-dilutive in 1999 since exercise price is higher than
average market price)
For the Year Ended December 31, 1998:
Basic Net Income Per Common Share:
Income available to common stockholders $919,235 1,006,737 $ 0.91
Effect of dilutive securities:
Stock options (ant-idilutive) - -
Diluted Net Income Per Common Share:
Income available to common stockholders $919,235 1,006,737 $ 0.91
(Stock options are anti-dilutive in 1998 since exercise price is higher than
average market price)
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 - 10,664
Diluted Net Income Per Common Share:
Income available to common stockholders $987,100 1,002,747 $ 0.98
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, 1999, 1998 and 1997 are summarized a follows:
Amortized Gross Gross
or Accreted Unrealized Unrealized
Cost Gains Losses Fair Value
December 31, 1999:
Securities available for sale:
U.S. Government and
Agency Securities $ 13,750 $ - $ 371 $ 13,379
State and political
Subdivisions 4,191 - 355 3,836
TOTAL $ 17,941 $ - $ 726 $ 17,215
Securities to be held to maturity:
U.S. Government and
Agency Securities $ 5 $ - $ - $ 5
State and political
Subdivisions 3,167 26 2 3,191
TOTAL $ 3,172 $ 26 $ 2 $ 3,196
December 31, 1998:
Securities available for sale:
U.S. Government and
Agency Securities $12,500 $ 9 $ 16 $ 12,493
State and political
Subdivisions 804 19 20 803
TOTAL $13,304 $ 28 $ 36 $ 13,296
Securities to be held to maturity:
U.S. Government and
Agency Securities $ 509 $ 2 $ - $ 511
State and political
Subdivisions 5,029 116 - 5,145
TOTAL $ 5,538 $ 118 $ - $ 5,656
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
TOTAL $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
TOTAL $ 7,205 $ 102 $ 1 7,306
Securities carried at approximately $5,390 at December 31, 1999; $3,234 at
December 31, 1998; and $2,740 at December 31, 1997, and were pledged to
Secure public deposits and for other purposes required or permitted by law.
Gross realized gains on sales of securities available for sale were $-0-,
$-0-, and $3 for the years ended December 31, 1999, 1998 and 1997,
respectively. There were no sales of securities to be held to maturity for
the years ended December 31, 1999, 1998 and 1997. Gross realized losses on
sales of securities were $-0- for all types of securities for the years ended
December 31,1999, 1998 and 1997.
Gross proceeds from the sale of securities were $-0-, $-0-, and $1,185, for
the years ended December 31, 1999, 1998 and 1997, respectively. The
applicable income taxes were approximately $-0-, $-0-, and $508 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The amortized cost and estimated fair value of securities held to maturity and
available for sale at December 31, 1999, by contractual maturity, are as
follows:
Available for Sale Held to Maturity
Amortized Amortized
Cost Fair Value Cost Fair Value
Amounts maturing in:
One year or less $ 1,000 $ 990 $ 1,273 $ 1,275
After one year
through five years 12,429 12,103 1,817 1,836
After five years
through ten years 1,091 1,040 82 85
After ten years
through fifteen years 3,421 3,082 - -
TOTAL $ 17,941 $ 17,215 $ 3,172 $ 3,196
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The components of loans in the consolidated balance sheets were as follows:
December 31,
1999 1998 1997
Commercial $ 51,501 $ 43,991 $ 40,977
Real Estate construction 1,924 2,933 787
Residential mortgage 2,430 2,790 2,809
Consumer installment 2,181 2,686 3,110
Credit cards - - 904
TOTAL 58,036 52,400 48,587
Deferred loan fees and costs (110) (118) (86)
Allowance for loan losses (372) (378) (401)
Loans, net $ 57,554 $ 51,904 $ 48,100
Loans classified as non-accrual approximated $13, $0, and $0 as of
December 31, 1999, 1998 and 1997, respectively.
The changes in the allowance for loan losses were as follows:
December 31,
1999 1998 1997
Balance, beginning of year $ 378 $ 401 $ 491
Loans charged off (5) (132) (93)
Recoveries 27 26 3
Provision for loan losses (28) 83 -
Balance, end of year $ 372 $ 378 $ 401
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 1999, 1998 and 1997,
respectively.
Information concerning pledged assets is contained in Note 3.
NOTE 6 - PREMISES AND EQUIPMENT:
Major classifications of premises and equipment are as follows:
December 31,
1999 1998 1997
Premises $ 2,631 $ 2,621 $ 2,538
Equipment 1,114 1,177 1,089
3,745 3,798 3,627
Accumulated depreciation (1,871) (1,789) (1,595)
$ 1,874 $ 2,009 $ 2,032
Depreciation expense $ 215 $ 195 $ 191
Certain facilities and equipment are leased under various operating leases.
Rental expense was $72, $117 and $104 in 1999, 1998 and 1997, respectively.
Future minimum rental commitments under noncancelable leases are:
2000 $ 45
2001 44
2002 43
2003 43
2004 43
Thereafter 1,048
TOTAL $1,266
NOTE 7 - TIME CERTIFICATES OF DEPOSIT MATURITIES:
Time certificates of deposit under $100 maturing in years ending December 31,
as of December 31, 1999:
2000 $18,472
2001 836
2002 294
2003 96
2004 44
Thereafter 97
TOTAL $19,839
Time certificates of deposit $100 and over maturing in years ending December 31,
as of December 31, 1999
2000 $ 5,103
2001 378
2002 100
2003 110
2004 129
Thereafter -
TOTAL $ 5,820
NOTE 8 - 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.
In addition, 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 contribute to the plan, within limits established by the Internal
Revenue Service. In addition, the Bank may make matching contributions and/or
profit sharing contributions to the Plan. For 1999, 1998 and 1997
respectively, the Bank made ten percent matching contributions totaling $5, $4
and $4. Participants have the ability to direct the investment of the
contributions, within guidelines established by the Bank.
NOTE 9 - NOTES PAYABLE AND OTHER DEBT
During 1999, the Company established a line of credit with another financial
institution. The maximum amount available was $100, and bore interest at the
lender's prime rate. The Company borrowed, and repaid, $11; there were no
amounts outstanding at December 31, 1999, and the line of credit was canceled
prior to December 31, 1999.
During 1999, the Bank established the ability to borrow from the Federal
Reserve Bank of San Francisco "discount window". Terms of any borrowings will
be established at the time of borrowing. No amounts were borrowed from this
source during 1999.
NOTE 10 - INCOME TAXES:
Total applicable income taxes reported in the consolidated income statements
for the years ended December 31, 1999, 1998 and 1997 included the following
components:
December 31,
1999 1998 1997
Currently paid or payable:
Federal $ 256 $ 291 $ 261
State 116 117 89
TOTAL 372 408 350
Increase (decrease) in deferred taxes:
Federal (76) (70) (2)
State (12) (34) (1)
TOTAL (88) (104) (3)
Income tax expense $ 284 $ 304 $ 347
The deferred tax assets were comprised of the following:
December 31,
1999 1998 1997
Difference in allowance for loan
losses between financial statement
and income tax purposes $ 69 $ 74 $ 67
Timing differences in deductibility
of state taxes 39 40 34
Difference in allowance for losses
on foreclosed property between
financial statement and income tax
purposes 55 25 24
Timing difference in deductibility
of deferred compensation 295 211 116
Difference in depreciation expense
between financial statement and
income tax purposes - 20 -
Deferred tax on unrealized holding
losses on securities available
for sale 325 - -
Total deferred tax asset 783 370 241
The deferred tax liabilities were
comprised of the following:
Difference in depreciation expense
between financial statement
and income tax purposes (15) (-) (2)
Other (26) (41) (14)
Total deferred tax liability (41) (41) (16)
Net deferred tax asset $ 742 $ 329 $ 225
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:
December 31,
1999 1998 1997
Taxes at statutory federal
income tax rate $ 372 $ 416 $ 454
Increase (decrease) in
taxes resulting from:
Tax exempt income (126) (120) (117)
State income taxes, net of
federal income taxes 87 80 79
Deferred compensation 67 34 60
Other (116) (106) (129)
$ 284 $ 304 $ 347
NOTE 11 - STOCK OPTION PLAN:
At December 31, 1999 and 1998, the Company had a stock based compensation
plan, which is described below. During 1997, the Company had a stock based
compensation plan, also described below, which expired during 1998. The
Company applies APB Opinion 25, "Accounting For Stock Issued To Employees",
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. For
all options granted, the compensation costs for 1999, 1998 and 1997 as
determined under SFAS No. 123 (based on the fair value of options at the
grant date) were not material.
The Board of Directors, in 1999, modified the terms of the options granted
in 1998, which provides certain directors and employees with an opportunity
to purchase the Company's common stock. The modification re-valued the grant
price to $10.00 per share. Under the plan, the Company may grant either
incentive or non-qualified stock options to purchase up to 300,000 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. Current options outstanding have an exercise price of
$10.00 per share.
The Company's prior stock option plan (the 1989 option plan) expired in 1998
and all outstanding options had been exercised.
Weighted
Average
Number of Exercise
Shares Price
Options outstanding at Dec. 31, 1996 (Remaining life
(1989 Option Plan) 52,242 $ 3.42 of 2.5 years)
Granted - -
Exercised (52,242) 3.42
Forfeited - -
Options outstanding at Dec. 31, 1997
- -
Granted 72,000 12.50
Exercised (84) 12.50
Forfeited - -
Options outstanding at Dec. 31, 1998 (Remaining life
71,916 12.50 of 9.5 years)
Granted 55,500 10.00
Exercised (50) 10.00
Forfeited (5,000) 10.00
Options outstanding at Dec. 31, 1999 (Remaining life
122,366 10.00 of 8.5 years)
NOTE 12 - TIMBERLINE BANCSHARES, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL STATEMENTS:
Condensed Balance Sheets:
December 31,
1999 1998 1997
ASSETS
Cash and due from banks, bank
subsidiary, non-interest bearing $ - $ 3 $ 2
Investment in wholly owned
Subsidiary 8,145 7,838 7,417
Other assets 38 36 41
Total assets $8,183 $7,877 $7,460
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ - $ - $ -
Stockholders' equity 8,183 7,877 7,460
Total liabilities and
stockholders' equity $8,183 $7,877 $7,460
Condensed Income Statements:
December 31,
1999 1998 1997
Operating income:
Dividends from subsidiary $ 520 $ 523 $ 502
Other - - -
TOTAL 520 523 502
Operating expenses:
Other expense 26 34 20
Income (loss) before income taxes
and equity in undistributed net
income of subsidiary 494 489 482
Income tax benefit 8 11 6
Income (loss) before equity in
undistributed net income of
subsidiary 502 500 488
Equity in undistributed net
income of subsidiary 307 419 499
Net income $ 809 $ 919 $ 987
Accumulated
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
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 employees
and directors 52,242 179 - - 179
Balance, December 31, 1997 1,006,726 $ 2,992 $ 1 $ 4,467 $ 7,460
Net income - - - 919 919
Cash dividend declared - - - (503) (503)
Options exercised by employees
and directors 84 1 - - 1
Balance, December 31, 1998 1,006,810 $ 2,993 $ 1 $ 4,883 $ 7,877
Net income - - - 809 809
Cash dividend declared - - - (503) (503)
Options exercised by employees
and directors 50 - - - -
Balance, December 31, 1999 1,006,860 $ 2,993 $ 1 $ 5,189 $ 8,183
Condensed Statements of Cash Flows:
December 31,
1999 1998 1997
Cash flows from operating activities:
Net income $ 809 $ 919 $ 987
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in net income of
Subsidiary (827) (943) (1,001)
Dividends received from subsidiary 520 523 502
Net (increase) decrease in
other assets (2) 5 15
Net cash provided by operating
Activities 500 504 503
Cash flows from investing activities;
Capital investment in subsidiary - (1) (179)
Cash flows from financing activities:
Proceeds from note payable 11 - -
Principal payments on note payable (11) - -
Dividends paid (503) (503) (502)
Proceeds from the exercise
of stock options - 1 179
Net cash (used in) financing
Activities (503) (502) (323)
Net increase (decrease) in cash
and due from banks (3) 1 1
Cash and due from banks at
beginning of year 3 2 1
Cash and due from banks at
end of year $ - $ 3 $ 2
Interest paid $ - $ - $ -
Income taxes paid $ 377 $ 336 $ 417
NOTE 13 - 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 amounts represent credit risk at December 31:
1999 1998 1997
Unused commercial loan commitments $ 8,172 $ 8,364 $ 6,451
Unused overdraft protection lines 85 80 82
Stand-by letters of credit 130 130 115
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 and credit cards allow customers
to buy goods and services or obtain cash advances.
Standby letters of credit are issued by the Bank to ensure its customers'
performance in dealings with others.
Since many of the unused commitments are expected to expire unused or to be
utilized only partially, the total amount of unused commitments does not
represent future cash requirement. The Bank did not incur any losses on its
commitments in 1999, 1998 or 1997.
NOTE 14 - 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, 1999,
1998 and 1997, $611, $395, and $270 of such loans, respectively, were
outstanding. An analysis of the activity during 1999 in respect to such loans
is as follows:
Balance, December 31, 1998 $ 395
Additions 591
Deletions (375)
Balance, December 31, 1999 $ 611
NOTE 15 - 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, 1999, that the
Bank could declare, without the prior approval of the California State Banking
Department, are approximately $1,226.
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 capital 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, 1999, 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 Department purposes. The Bank's actual
ratios as of that date were 12.50%, 13.07% and 8.85% respectively. As of June
30, 1998, 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 1999, 1998 and 1997.
NOTE 16 - 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 due from banks, Interest bearing deposits in other banks, and Federal
Funds Sold:
The carrying amount is a reasonable estimate of fair value.
Investment Securities:
Fair value equals quoted market prices, if available. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
Cash Surrender Value of Officers' Life Insurance:
The carrying amount is a reasonable estimate of fair value.
Loans:
For certain homogeneous categories of loans, such as residential mortgages,
and consumer installment loans, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value of other types of loans is estimated
by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposits:
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. The fair value of
fixed maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
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 counterparties. 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 cancel 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, 1999 are as follows:
Carrying Amount Fair Value
Financial assets:
Cash and due from banks $ 6,951 $ 6,951
Interest bearing deposits in other banks 100 100
Federal funds sold 800 800
Investment securities 20,387 20,411
Cash surrender value of officers' life insurance 2,317 2,317
Loans 57,926 57,926
Less allowance for loan losses (372) (372)
Financial liabilities:
Deposits 83,151 83,151
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, 1998 are as follows:
Carrying Amount Fair Value
Financial assets:
Cash and due from banks $ 4,785 $ 4,785
Interest bearing deposits in other banks 100 100
Federal funds sold 9,800 9,800
Investment securities 18,834 18,952
Cash surrender value of officers' life insurance 1,361 1,361
Loans 52,282 52,282
Less allowance for loan losses (378) (378)
Financial liabilities:
Deposits 81,888 81,888
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, 1997 are as follows:
Carrying Amount Fair Value
Financial assets:
Cash and due from banks $ 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.)
NOTE 17 - 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.
