SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year Commission File Number 0-10661
ended December 31, 2002
TriCo Bancshares
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(Exact name of Registrant as specified in its charter)
California 94-2792841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(530) 898-0300
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES NO X
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The aggregate market value of the voting common stock held by non-affiliates of
the Registrant, as of March 18, 2003, was approximately $134,685,000. This
computation excludes a total of 1,968,408 shares which are beneficially owned
by the officers and directors of Registrant who may be deemed to be the
affiliates of Registrant under applicable rules of the Securities and Exchange
Commission.
The number of shares outstanding of Registrant's common stock, as of March 18,
2003, was 7,073,795 shares of common stock, without par value.
The following documents are incorporated herein by reference into the parts of
Form 10-K indicated: Registrant's Proxy Statement for use in connection with its
2003 Annual Meeting of Shareholders, for Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.
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TABLE OF CONTENTS
Page Number
PART I
Item 1 Business 2
Item 2 Properties 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security
Holders 9
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 7A Qualitative and Qualitative Disclosures About
Market Risk 31
Item 8 Financial Statements and Supplementary Data 31
Item 9 Changes in and Disagreements on Accounting and
Financial Disclosure 61
PART III
Item 10 Directors and Executive Officers of the Registrant 62
Item 11 Executive Compensation 62
Item 12 Security Ownership of Certain Beneficial Owners
and Management, and Related Stockholder Matters 62
Item 13 Certain Relationships and Related Transactions 62
Item 14 Controls and Procedures 62
Item 15 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 63
Item 16 Principal Accountant Fees and Services 65
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. When you see any of the
words "believes", "expects", "anticipates", "estimates", or similar expressions,
mean making forward-looking statements. A number of factors, some of which are
beyond the Company's ability to predict or control, could cause future results
to differ materially from those contemplated. These factors include but are not
limited to:
- a continued slowdown in the national and California economies;
- increased economic uncertainty created by the recent terrorist attacks
on the United States and the actions taken in response;
- the prospect of additional terrorist attacks in the United States and
the uncertain effect of these events on the national and regional
economies;
- changes in the interest rate environment;
- changes in the regulatory environment;
- significantly increasing competitive pressure in the banking industry;
- operational risks including data processing system failures or fraud;
- volatility of rate sensitive deposits; and
- asset/liability matching risks and liquidity risks.
In October 2002, the Company announced that it had entered into an agreement to
acquire North State National Bank located in Chico, California. Many possible
events or factors could affect the future financial results and performance of
the Company or North State National Bank before the merger, or the Company after
the merger, including:
- actual cost savings resulting from the merger are less than we
expected, we are unable to realize those cost savings as soon as we
expected or we incur additional or unexpected costs;
- revenues after the merger are less than we expected;
- competition among financial services companies increases;
- we have more trouble integrating our businesses than we expected;
- changes in the interest rate environment reduces our interest margins;
- general economic conditions change or are worse than we expected;
- legislative or regulatory changes adversely affect our business;
- changes occur in business conditions and inflation;
- personal or commercial customers' bankruptcies increase;
- changes occur in the securities markets; and
- technology-related changes are more difficult to make or more expensive
than we expected.
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PART I
ITEM 1. BUSINESS
Information About TriCo Bancshares' Business
TriCo Bancshares (the "Company") was incorporated in California on October 13,
1981. It was organized at the direction of the board of directors of Tri
Counties Bank (the "Bank") for the purpose of forming a bank holding company. On
September 7, 1982, the shareholders of Tri Counties Bank became the shareholders
of TriCo and Tri Counties Bank became a wholly owned subsidiary of TriCo. At
that time, TriCo became a bank holding company subject to the supervision of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended. Tri
Counties Bank remains subject to the supervision of the California Department of
Financial Institutions and the FDIC. Tri Counties Bank currently is the only
subsidiary of TriCo and TriCo is not conducting any business operations
independent of Tri Counties Bank.
On October 7, 2002, TriCo Bancshares announced that on October 3, 2002 it signed
a definitive agreement with Tri Counties Bank, its wholly owned subsidiary, and
North State National Bank, pursuant to which TriCo Bancshares will acquire all
of the outstanding stock of North State National Bank in exchange for cash of
approximately $13 million, approximately 716,000 shares of TriCo Bancshares
common stock and options to purchase approximately 92,450 shares of TriCo
Bancshares common stock, subject to adjustments as set forth in the agreement.
Based upon a closing price of $23.92 per share of TriCo Bancshares common stock
on October 3, 2002, the transaction was valued at $31.8 million. On March 19,
2003, shareholders of North State National Bank approved the proposed merger.
Business of Tri Counties Bank
Tri Counties Bank was incorporated as a California banking corporation on June
26, 1974, and received its certificate of authority to begin banking operations
on March 11, 1975. Tri Counties Bank engages in the general commercial banking
business in the California counties of Butte, Contra Costa, Del Norte, Fresno,
Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento,
Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare and Yuba. Tri Counties Bank
currently has 32 traditional branches and 10 in-store branches.
General Banking Services
The Bank conducts a commercial banking business including accepting demand,
savings and time deposits and making commercial, real estate, and consumer
loans. It also offers installment note collection, issues cashier's checks and
money orders, sells travelers checks and provides safe deposit boxes and other
customary banking services. Brokerage services are provided at the Bank's
offices by the Bank's association with Raymond James Financial Services, Inc.
The Bank does not offer trust services or international banking services.
The Bank has emphasized retail banking since it opened. Most of the Bank's
customers are retail customers and small to medium-sized businesses. The Bank
emphasizes serving the needs of local businesses, farmers and ranchers, retired
individuals and wage earners. The majority of the Bank's loans are direct loans
made to individuals and businesses in the regions of California where its
branches are located. At December 31, 2002, the total of the Bank's consumer
installment loans outstanding was $201,858,000 (29.4%), the total of commercial
loans outstanding was $125,982,000 (18.3%), and the total of real estate loans
including construction loans of $39,713,000 was $359,682,000 (52.3%). The Bank
takes real estate, listed and unlisted securities, savings and time deposits,
automobiles, machinery, equipment, inventory, accounts receivable and notes
receivable secured by property as collateral for loans.
Most of the Bank's deposits are attracted from individuals and business-related
sources. No single person or group of persons provides a material portion of the
Bank's deposits, the loss of any one or more of which would have a materially
adverse effect on the business of the Bank, nor is a material portion of the
Bank's loans concentrated within a single industry or group of related
industries.
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In order to attract loan and deposit business from individuals and small to
medium-sized businesses, branches of the Bank set lobby hours to accommodate
local demands. In general, lobby hours are from 9:00 a.m. to 5:00 p.m. Monday
through Thursday, and from 9:00 a.m. to 6:00 p.m. on Friday. Certain branches
with less activity open later and close earlier. Some Bank offices also utilize
drive-up facilities operating from 9:00 a.m. to 7:00 p.m. The supermarket
branches are open from 9:00 a.m. to 7:00 p.m. Monday through Saturday and 11:00
a.m. to 5:00 p.m. on Sunday.
The Bank offers 24-hour ATMs at almost all branch locations. The ATMs are linked
to several national and regional networks such as CIRRUS and STAR. In addition,
banking by telephone on a 24-hour toll-free number is available to all
customers. This service allows a customer to obtain account balances and most
recent transactions, transfer moneys between accounts, make loan payments, and
obtain interest rate information.
In February 1998, the Bank became the first bank in the Northern Sacramento
Valley to offer banking services on the Internet. This banking service provides
customers one more tool for anywhere, anytime access to their accounts.
Other Activities
The Bank may in the future engage in other businesses either directly or
indirectly through subsidiaries acquired or formed by the Bank subject to
regulatory constraints. See "Regulation and Supervision."
Employees
At December 31, 2002, the Company and the Bank employed 550 persons, including
five executive officers. Full time equivalent employees were 465. No employees
of the Company or the Bank are presently represented by a union or covered under
a collective bargaining agreement. Management believes that its employee
relations are excellent.
Competition
The banking business in California generally, and in the Bank's primary service
area specifically, is highly competitive with respect to both loans and
deposits. It is dominated by a relatively small number of major banks with many
offices operating over a wide geographic area. Among the advantages such major
banks have over the Bank is their ability to finance wide ranging advertising
campaigns and to allocate their investment assets to regions of high yield and
demand. By virtue of their greater total capitalization such institutions have
substantially higher lending limits than does the Bank.
In addition to competing with savings institutions, commercial banks compete
with other financial markets for funds. Yields on corporate and government debt
securities and other commercial paper may be higher than on deposits, and
therefore affect the ability of commercial banks to attract and hold deposits.
Commercial banks also compete for available funds with money market instruments
and mutual funds. During past periods of high interest rates, money market funds
have provided substantial competition to banks for deposits and they may
continue to do so in the future. Mutual funds are also a major source of
competition for savings dollars.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Company and its subsidiary are
particularly susceptible to being affected by enactment of federal and state
legislation which may have the effect of increasing or decreasing the cost of
doing business, modifying permissible activities or enhancing the competitive
position of other financial institutions.
The Bank relies substantially on local promotional activity, personal contacts
by its officers, directors, employees and shareholders, extended hours,
personalized service and its reputation in the communities it services to
compete effectively.
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Regulation and Supervision
As a consequence of the extensive regulation of commercial banking activities in
California and the United States, the business of the Company, and the Bank are
particularly susceptible to changes in state and federal legislation and
regulations, which may have the effect of increasing the cost of doing business,
limiting permissible activities or increasing competition. Following is a
summary of some of the laws and regulations which effect their business. This
summary should be read with the management's discussion and analysis of
financial condition and results of operation included at Item 7 of this report.
As a registered bank holding company under the Bank Holding Company Act of 1956
(the "BHC Act"), the Company is subject to the regulation and supervision of the
Board of Governors of the Federal Reserve System ("FRB"). The BHC Act requires
the Company to file reports with the FRB and provide additional information
requested by the FRB. The Company must receive the approval of the FRB 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 Company would own or control more than 5 percent of
the voting shares of such bank.
The Company and any subsidiaries it may acquire or organize will be deemed to be
affiliates of the Bank within the Federal Reserve Act. That Act establishes
certain restrictions, which limit the extent to which the Bank can supply its
funds to the Company and other affiliates. The Company is also subject to
restrictions on the underwriting and the public sale and distribution of
securities. It is prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property, or
furnishing of services.
The Company is generally prohibited from engaging in, or acquiring direct or
indirect control of any company engaged in non-banking activities, unless the
FRB by order or regulation has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Notwithstanding this prohibition, under the Financial Services Modernization Act
of 1999, the Company may engage in any activity, and may acquire and retain the
shares of any company engaged in any activity, that the FRB, in coordination
with the Secretary of the Treasury, determines (by regulation or order) to be
financial in nature or incidental to such financial activities. Furthermore,
such law dictates several activities that are considered to be financial in
nature, and therefore are not subject to FRB approval.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, is the result
of a decade of debate in the Congress regarding a fundamental reformation of the
nation's financial system. The law is subdivided into seven titles, by
functional area. Title I acts to facilitate affiliations among banks, insurance
companies and securities firms. Title II narrows the exemptions from the
securities laws previously enjoyed by banks, requires the Federal Reserve and
the SEC to work together to draft rules governing certain securities activities
of banks and creates a new, voluntary investment bank holding company. Title III
restates the proposition that the states are the functional regulators for all
insurance activities, including the insurance activities by depository
institutions. The law encourages the states to develop uniform or reciprocal
rules for the licensing of insurance agents. Title IV prohibits the creation of
additional unitary thrift holding companies. Title V imposes significant
requirements on financial institutions related to the transfer of nonpublic
personal information. These provisions require each institution to develop and
distribute to accountholders an information disclosure policy, and requires that
the policy allow customers to, and for the institution to honor a customer's
request to, "opt-out" of the proposed transfer of specified nonpublic
information to third parties. Title VI reforms the Federal Home Loan Bank system
to allow broader access among depository institutions to the systems advance
programs, and to improve the corporate governance and capital maintenance
requirements for the system. Title VII addresses a multitude of issues including
disclosure of ATM surcharging practices, disclosure of agreements among
non-governmental entities and insured depository institutions which donate to
non-governmental entities regarding donations made in connection with the
Community Reinvestment Act and disclosure by the recipient non-governmental
entities of how such funds are used. Additionally, the law extends the period of
time between Community Reinvestment Act examinations of community banks.
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The Company has undertaken efforts to comply with all provisions of the
Gramm-Leach-Bliley Act and all implementing regulations, including the
development of appropriate policies and procedures to meet their
responsibilities in connection with the privacy provisions of Title V of that
act.
Safety and Soundness Standards
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
implemented certain specific restrictions on transactions and required the
regulators to adopt overall safety and soundness standards for depository
institutions related to internal control, loan underwriting and documentation,
and asset growth. Among other things, FDICIA limits the interest rates paid on
deposits by undercapitalized institutions, the use of brokered deposits and the
aggregate extension of credit by a depository institution to an executive
officer, director, principal stockholder or related interest, and reduces
deposit insurance coverage for deposits offered by undercapitalized institutions
for deposits by certain employee benefits accounts.
The federal financial institution agencies published a final rule effective on
August 9, 1995, implementing safety and soundness standards. The FDICIA added a
new Section 39 to the Federal Deposit Insurance Act which required the agencies
to establish safety and soundness standards for insured financial institutions
covering:
- internal controls, information systems and internal audit systems;
- loan documentation;
- credit underwriting;
- interest rate exposure;
- asset growth;
- compensation, fees and benefits;
- asset quality, earnings and stock valuation; and
- excessive compensation for executive officers, directors or principal
shareholders which could lead to material financial loss.
The agencies issued the final rule in the form of guidelines only for
operational, managerial and compensation standards and reissued for comment
proposed standards related to asset quality and earnings which are less
restrictive than the earlier proposal in November 1993. Unlike the earlier
proposal, the guidelines under the final rule do not apply to depository
institution holding companies and the stock valuation standard was eliminated.
If an agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial institution
to submit to the agency an acceptable plan to achieve compliance with the
standard. If the agency requires submission of a compliance plan and the
institution fails to timely submit an acceptable plan or to implement an
accepted plan, the agency must require the institution to correct the
deficiency. Under the final rule, an institution must file a compliance plan
within 30 days of a request to do so from the institution's primary federal
regulatory agency. The agencies may elect to initiate enforcement action in
certain cases rather than rely on an existing plan particularly where failure to
meet one or more of the standards could threaten the safe and sound operation of
the institution.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized. Additionally, under FDICIA, a bank may not make any
capital distribution, including the payment of dividends, if after making such
distribution the bank would be in any of the "under-capitalized" categories
under the FDIC's Prompt Corrective Action regulations.
Under the Financial Institution's Supervisory Act, the FDIC also has the
authority to prohibit a bank from engaging in business practices that the FDIC
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of a bank and other factors that the FDIC could assert that the
payment of dividends or other payments in some circumstances might be such an
unsafe or unsound practice and thereby prohibit such payment.
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Under California law, dividends and other distributions by the Company are
subject to declaration by the board of directors at its discretion out of net
assets. Dividends cannot be declared and paid when such payment would make the
Company insolvent. Federal Reserve policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position. The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition. Other Federal Reserve policies forbid the payment
by bank subsidiaries to their parent companies of management fees, which are
unreasonable in amount or exceed a fair market value of the services rendered
(or, if no market exists, actual costs plus a reasonable profit).
In addition, the Federal Reserve has authority to prohibit banks that it
regulates from engaging in practices, which in the opinion of the Federal
Reserve are unsafe or unsound. Such practices may include the payment of
dividends under some circumstances. Moreover, the payment of dividends may be
inconsistent with capital adequacy guidelines. The Company may be subject to
assessment to restore the capital of the Bank should it become impaired.
Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention on compliance with
consumer protection laws and their implementing regulations. Examination and
enforcement have become more intense in nature, and insured institutions have
been advised to monitor carefully compliance with such laws and regulations. The
Company is subject to many federal consumer protection statues and regulations,
some of which are discussed below.
The Community Reinvestment Act is intended to encourage insured depository
institutions, while operating safely and soundly, to help meet the credit needs
of their communities. This act specifically directs the federal regulatory
agencies to assess a bank's record of helping meet the credit needs of its
entire community, including low- and moderate-income neighborhoods, consistent
with safe and sound practices. This act further requires the agencies to take a
financial institution's record of meeting its community credit needs into
account when evaluating applications for, among other things, domestic branches,
mergers or acquisitions, or holding company formations. The agencies use the
Community Reinvestment Act assessment factors in order to provide a rating to
the financial institution. The ratings range from a high of "outstanding" to a
low of "substantial noncompliance."
The Equal Credit Opportunity Act generally prohibits discrimination in any
credit transaction, whether for consumer or business purposes, on the basis of
race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act. The
Truth-in-Lending Act is designed to ensure that credit terms are disclosed in a
meaningful way so that consumers may compare credit terms more readily and
knowledgeably. As a result of the such act, all creditors must use the same
credit terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the total payments and
the payment schedule, among other things.
The Fair Housing Act regulates many practices, including making it unlawful for
any lender to discriminate in its housing-related lending activities against any
person because of race, color, religion, national origin, sex, handicap or
familial status. A number of lending practices have been found by the courts to
be, or may be considered, illegal under this Act, including some that are not
specifically mentioned in the Act itself. The Home Mortgage Disclosure Act grew
out of public concern over credit shortages in certain urban neighborhoods and
provides public information that will help show whether financial institutions
are serving the housing credit needs of the neighborhoods and communities in
which they are located. This act also includes a "fair lending" aspect that
requires the collection and disclosure of data about applicant and borrower
characteristics as a way of identifying possible discriminatory lending patterns
and enforcing anti-discrimination statutes.
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Finally, the Real Estate Settlement Procedures Act requires lenders to provide
borrowers with disclosures regarding the nature and cost of real estate
settlements. Also, this act prohibits certain abusive practices, such as
kickbacks, and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursements and other
penalties. Due to heightened regulatory concern related to compliance with these
acts generally, the Company may incur additional compliance costs or be required
to expend additional funds for investments in their local community.
USA Patriot Act of 2001
President Bush signed the USA Patriot Act of 2001 on October 26, 2001. This
legislation was enacted in response to the terrorist attacks in New York,
Pennsylvania and Washington, D.C. on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcement and the intelligence communities'
ability to work together to combat terrorism on a variety of levels. The
potential impact of the Patriot Act on financial institutions is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and requires various regulations, including:
- Due diligence requirements for financial institutions that administer,
maintain, or manage private bank accounts or correspondent accounts for
non-U.S. persons;
- Standards for verifying customer identification at account opening;
- Rules to promote cooperation among financial institutions, regulators,
and law enforcement entities to assist in the identification of parties
that may be involved in terrorism or money laundering;
- Reports to be filed by non-financial trades and business with the
Treasury Department's Financial Crimes Enforcement Network for
transactions exceeding $10,000; and
- The filing of suspicious activities reports by securities brokers and
dealers if they believe a customer may be violating U.S. laws and
regulations.
Capital Requirements
Federal regulation imposes upon all financial institutions a variable system of
risk-based capital guidelines designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to promote uniformity in the definition of bank
capital uniform nationally.
The Bank, and the Company are subject to the minimum capital requirements of the
FDIC, and the Federal Reserve, respectively. As a result of these requirements,
the growth in assets is limited by the amount of its capital accounts as defined
by the respective regulatory agency. Capital requirements may have an effect on
profitability and the payment of dividends on the common stock of the Bank, and
the Company. If an entity is unable to increase its assets without violating the
minimum capital requirements or is forced to reduce assets, its ability to
generate earnings would be reduced.
The Federal Reserve, and the FDIC have adopted guidelines utilizing a risk-based
capital structure. Qualifying capital is divided into two tiers. Tier 1 capital
consists generally of common stockholders' equity, qualifying noncumulative
perpetual preferred stock, qualifying cumulative perpetual preferred stock (up
to 25% of total Tier 1 capital) and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets.
Tier 2 capital consists of, among other things, allowance for loan and lease
losses up to 1.25% of weighted risk assets, perpetual preferred stock, hybrid
capital instruments, perpetual debt, mandatory convertible debt securities,
subordinated debt and intermediate-term preferred stock. Tier 2 capital
qualifies as part of total capital up to a maximum of 100% of Tier 1 capital.
Amounts in excess of these limits may be issued but are not included in the
calculation of risk-based capital ratios. Under these risk-based capital
guidelines, the Bank and the Company are required to maintain capital equal to
at least 8% of its assets, of which at least 4% must be in the form of Tier 1
capital.
The guidelines also require the Company and the Bank to maintain a minimum
leverage ratio of 4% of Tier 1 capital to total assets (the "leverage ratio").
The leverage ratio is determined by dividing an institution's Tier 1 capital by
its quarterly average total assets, less goodwill and certain other intangible
assets. The leverage ratio constitutes a minimum requirement for the most
well-run banking organizations.
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Prompt Corrective Action
Prompt Corrective Action Regulations of the federal bank regulatory agencies
establish five capital categories in descending order (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized), assignment to which depends upon the institution's
total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage
ratio. Institutions classified in one of the three undercapitalized categories
are subject to certain mandatory and discretionary supervisory actions, which
include increased monitoring and review, implementation of capital restoration
plans, asset growth restrictions, limitations upon expansion and new business
activities, requirements to augment capital, restrictions upon deposit gathering
and interest rates, replacement of senior executive officers and directors, and
requiring divestiture or sale of the institution. Both the Company and the Bank
have been classified as a well-capitalized bank since adoption of these
regulations.
Impact of Monetary Policies
Banking is a business that depends on interest rate differentials. In general,
the difference between the interest paid by a bank on its deposits and other
borrowings, and the interest rate earned by banks on loans, securities and other
interest-earning assets comprises the major source of banks' earnings. Thus, the
earnings and growth of banks are subject to the influence of economic conditions
generally, both domestic and foreign, and also to the monetary and fiscal
policies of the United States and its agencies, particularly the Federal
Reserve. The Federal Reserve implements national monetary policy, such as
seeking to curb inflation and combat recession, by its open-market dealings in
United States government securities, by adjusting the required level of reserves
for financial institutions subject to reserve requirements and through
adjustments to the discount rate applicable to borrowings by banks which are
members of the Federal Reserve. The actions of the Federal Reserve in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates. The nature and timing of any future changes in such
policies and their impact on the Company cannot be predicted. In addition,
adverse economic conditions could make a higher provision for loan losses a
prudent course and could cause higher loan loss charge-offs, thus adversely
affecting the Company's net earnings.
Insurance of Deposits
The Bank's deposit accounts are insured up to a maximum of $100,000 per
depositor by the FDIC. The FDIC issues regulations and generally supervises the
operations of its insured banks. This supervision and regulation is intended
primarily for the protection of depositors, not shareholders.
As of December 31, 2002, the deposit insurance premium rate was $0.0171 per
$100.00 in deposits. In November 1990, federal legislation was passed which
removed the cap on the amount of deposit insurance premiums that can be charged
by the FDIC. Under this legislation, the FDIC is able to increase deposit
insurance premiums as it sees fit. This could result in a significant increase
in the cost of doing business for the Bank in the future. The FDIC now has
authority to adjust deposit insurance premiums paid by insured banks every six
months.
ITEM 2. PROPERTIES
The Company is engaged in the banking business through 42 offices in 20 counties
in Northern and Central California including eight offices each in Butte and
Shasta Counties, three in Siskiyou County, two each in Glenn, Sutter, Lassen,
Yuba, Stanislaus and Sacramento Counties, and one each in Madera, Merced, Lake,
Mendocino, Del Norte, Tehama, Nevada, Contra Costa, Kern, Tulare and Fresno
Counties. All offices are constructed and equipped to meet prescribed security
requirements.
The Company owns 16 branch office locations and one administrative building and
leases 26 branch office locations and 5 administrative facilities. Most of the
leases contain multiple renewal options and provisions for rental increases,
principally for changes in the cost of living index, property taxes and
maintenance.
-8-
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiary, the Bank, is a party to any material
pending legal proceeding, nor is their property the subject of any material
pending legal proceeding, except ordinary routine legal proceedings arising in
the ordinary course of their business. None of these proceedings is expected to
have a material adverse impact upon the Company's business, financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's common stock is traded on the NASDAQ National Market System
("NASDAQ") under the symbol "TCBK." The following table shows the high and the
low prices for the common stock, for each quarter in the past two years, as
reported by NASDAQ:
2002: High Low
First quarter $21.05 $18.05
Second quarter $27.40 $21.10
Third quarter $27.45 $21.60
Fourth quarter $25.25 $22.01
2001:
First quarter $16.63 $14.88
Second quarter $17.33 $14.81
Third quarter $19.80 $16.75
Fourth quarter $19.74 $17.93
As of December 31, 2002, there were approximately 1,701 shareholders of record
of the Company's common stock.
On February 3, 2003, the Securities and Exchange Commission declared effective
the Company's S-4 Registration Statement relating to the issuance of up to
approximately 784,000 shares of the Company's common stock to shareholders of
North State National Bank. In October 2002, the Company and the Bank entered
into an agreement with North State National Bank to merge North State National
Bank into the Bank. At completion of the merger, former shareholders of North
State National Bank would receive Company common stock and/or cash with value
ranging from approximately $23.52 to $28.17 for each share of North State stock
outstanding, depending on the average closing price of the Company's common
stock. On October 3, 2003, the total merger consideration would have been valued
at $31.8 million. The merger remains subject to the approval of North State
shareholders and bank regulatory agencies.
The Company has paid cash dividends on its common stock in every quarter since
March 1990, and it is currently the intention of the Board of Directors of the
Company to continue payment of cash dividends on a quarterly basis. There is no
assurance, however, that any dividends will be paid since they are dependent
upon earnings, financial condition and capital requirements of the Company and
the Bank. As of December 31, 2002, $15,390,000 was available for payment of
dividends by the Company to its shareholders, under applicable laws and
regulations. The Company paid cash dividends of $0.20 per common share in each
of the quarters ended March 31, June 30, September 30, and December 31, 2002 and
2001.
As discussed in Note 9 to the consolidated financial statements included as Item
8 of this report, in June 2001, the Company announced that its Board of
Directors adopted and entered into a Shareholder Rights Plan designed to protect
and maximize shareholder value and to assist the Board of Directors in ensuring
fair and equitable benefit to all shareholders in the event of a hostile bid to
acquire the Company.
-9-
ITEM 6. SELECTED FINANCIAL DATA
TRICO BANCSHARES
Financial Summary
(in thousands, except per share amounts)
=========================================================================================================
Year ended December 31, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Interest income $64,696 $71,998 $76,327 $67,808 $64,404
Interest expense 12,914 23,486 28,543 24,370 25,296
- ---------------------------------------------------------------------------------------------------------
Net interest income 51,782 48,512 47,784 43,438 39,108
Provision for loan losses 2,800 4,400 5,000 3,550 4,200
Noninterest income 19,180 16,238 14,922 12,775 13,494
Noninterest expense 45,971 40,607 37,846 34,726 34,583
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 22,191 19,743 19,860 17,937 13,819
Provision for income taxes 8,122 7,324 7,237 6,534 5,049
- ---------------------------------------------------------------------------------------------------------
Net income $14,069 $12,419 $12,623 $11,403 $8,770
- ---------------------------------------------------------------------------------------------------------
Earnings per share1:
Basic $2.00 $1.76 $1.76 $1.60 $1.25
Diluted 1.96 1.72 1.72 1.56 1.21
Per share:
Dividends paid $0.80 $0.80 $0.79 $0.70 $0.49
Book value at December 31 14.02 12.42 11.87 10.22 10.22
Tangible book value at December 31 13.45 11.69 11.11 9.32 9.14
Average common shares outstanding 7,019 7,073 7,192 7,130 7,017
Average diluted common shares outstanding 7,193 7,219 7,341 7,319 7,277
Shares outstanding at December 31 7,061 7,001 7,181 7,152 7,051
At December 31:
Loans, net $673,145 $645,674 $628,721 $576,942 $524,227
Total assets 1,144,574 1,005,447 972,071 924,796 904,599
Total deposits 1,005,237 880,393 837,832 794,110 769,173
Debt financing and notes payable 22,924 22,956 33,983 45,505 37,924
Shareholders' equity 99,014 86,933 85,233 73,123 72,029
Financial Ratios:
For the year:
Return on assets 1.35% 1.27% 1.35% 1.26% 1.03%
Return on equity 15.03% 14.19% 16.03% 15.59% 12.80%
Net interest margin2 5.61% 5.58% 5.70% 5.40% 5.19%
Net loan losses to average loans 0.22% 0.47% 0.70% 0.13% 0.50%
Efficiency ratio2 63.66% 61.62% 59.25% 60.53% 64.58%
Average equity to average assets 9.00% 8.94% 8.40% 8.09% 8.07%
At December 31:
Equity to assets 8.65% 8.65% 8.77% 7.91% 7.96%
Total capital to risk-adjusted assets 11.97% 11.68% 12.20% 11.77% 11.83%
Allowance for loan losses to loans 2.09% 1.98% 1.82% 1.88% 1.54%
1 Retroactively adjusted to reflect 3-for-2 stock split effected in 1998
2 Fully taxable equivalent
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's discussion and analysis of its financial condition and results of
operations is intended to provide a better understanding of the significant
changes and trends relating to the Company's financial condition, results of
operations, liquidity and interest rate sensitivity. The following discussion is
based on the Company's consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Please read the Company's audited consolidated
financial statements and the related notes included as Item 8 of this report.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to the adequacy of the allowance for loan
losses, investments, and intangible assets. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The one accounting estimate
that materially affects the financial statements is the allowance for loan
losses. The Company's policies related to estimates on the allowance for loan
losses, other than temporary impairment of investments and impairment of
intangible assets can be found in Note 1 to the Company's audited consolidated
financial statements and the related notes included as Item 8 of this report.
As the Company has not commenced any business operations independent of the
Bank, the following discussion pertains primarily to the Bank. Average balances,
including balances used in calculating certain financial ratios, are generally
comprised of average daily balances for the Company. Within Management's
Discussion and Analysis of Financial Condition and Results of Operations,
interest income and net interest income are generally presented on a fully
tax-equivalent (FTE) basis.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the consolidated financial statements of the Company and the related notes
at Item 8 of this report.
-11-
Net Income
Following is a summary of the Company's net income for the past three years
(dollars in thousands, except per share amounts):
Components of Net Income
- -----------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
-------------------------------
Net interest income * $53,029 $49,666 $48,954
Provision for loan losses (2,800) (4,400) (5,000)
Noninterest income 19,180 16,238 14,922
Noninterest expense (45,971) (40,607) (37,846)
Taxes * (9,369) (8,478) (8,407)
-------------------------------
$14,069 $12,419 $12,623
===============================
Net income per average fully-diluted share $1.96 $1.72 $1.72
Net income as a percentage of average
shareholders' equity 15.03% 14.19% 16.03%
Net income as a percentage of average
total assets 1.35% 1.27% 1.35%
=============================================================================
* Fully tax-equivalent (FTE)
The Company achieved earnings of $14.1 million in 2002, representing a 13.3%
increase from the $12.4 million earned in 2001, which was down 1.6% from 2000
earnings of $12.6 million. Net interest income on a fully tax-equivalent basis
for 2002 increased $3.4 million (6.8%) compared to 2001. Higher average balances
of interest earning assets added $4.4 million to net interest income on a fully
tax-equivalent basis, while changes in interest rates reduced net interest
income on a fully tax-equivalent basis by $1.0 million. The loan loss provision
was reduced by $1.6 million (36.4%), and noninterest income grew $2.9 million
(18.1%). Partially offsetting this higher revenue, noninterest expense expanded
$5.4 million (13.2%).
Earnings in 2001 decreased $204,000 or 1.6% from 2000. Net interest income (FTE)
grew $712,000 (1.45%) due to a $31.0 million (3.61%) increase in average earning
assets that was partially offset by a net interest margin that fell 11 basis
points. The loan loss provision was reduced by $600,000 in 2001 from 2000, and
noninterest income increased $1.3 million (8.82%) while noninterest expense also
increased $2.8 million (7.30%).
The Company's return on average total assets was 1.35% in 2002, compared to
1.27% and 1.35% in 2001 and 2000, respectively. Return on average equity in 2002
was 15.03%, compared to 14.19% in 2001 and 16.03% percent in 2000.
Net Interest Income
The Company's primary source of revenue is net interest income, which is the
difference between interest income on earning assets and interest expense on
interest-bearing liabilities. Net interest income (FTE) increased $3.4 million
(6.8%) from 2001 to $53.0 million in 2002. Comparing 2001 to 2000, net interest
income (FTE) increased $712,000 or 1.45%.
Following is a summary of the Company's net interest income for the past three
years (dollars in thousands):
Components of Net Interest Income
-----------------------------------------------------------------
Year ended December 31, 2002 2001 2000
-------------------------------
Interest income $64,696 $71,998 $76,327
Interest expense (12,914) (23,486) (28,543)
FTE adjustment 1,247 1,154 1,170
-------------------------------
Net interest income (FTE) $53,029 $49,666 $48,954
=================================================================
Net interest margin (FTE) 5.61% 5.58% 5.70%
=================================================================
-12-
Interest income (FTE) decreased $7.2 million (9.9%) from 2001 to 2002, the net
effect of lower earning-asset yields partially offset by higher average balances
of those assets. The total yield on earning assets dropped from 8.21% in 2001 to
6.98% in 2002, following the trend in overall interest markets in which federal
funds rates were reduced to historical lows ending 2002 at 1.25%. The average
yield on loans decreased 113 basis points to 7.94% during 2002. The decrease in
average yield on interest-earning assets reduced interest income (FTE) by $11.1
million, while a $54.8 million (6.2%) increase in average balances of
interest-earning assets added $3.9 million to interest income (FTE) during 2002.
Interest expense decreased $10.6 million (45.0%) in 2002 from $23.5 million in
2001, principally due to lower rates paid. The average rate paid on
interest-bearing liabilities was 1.73% in 2002, 155 basis points or 47% lower
than in 2001. The most pronounced declines included rates paid on savings
deposits (down from 2.11% to 1.02%) and time deposits (down from 5.07% to
2.99%). Rates paid on interest-bearing demand deposits decreased 68 basis points
to 0.27%. The decrease in average rate paid on interest-bearing liabilities
decreased interest expense by $10.1 million, and changes in the mix of average
balances of interest-bearing liabilities decreased interest expense by $509,000
in 2002 despite an overall increase of $30.8 million (4.3%) in the average
balance of interest-bearing liabilities.
Interest income (FTE) decreased $4.4 million (5.6%) from 2000 to 2001, primarily
due to lower yields on earning assets. Yields on loans fell to 9.07% in 2001
from 9.90% in 2000. Overall, the yield on the Company's earning assets decreased
from 9.02% in 2000 to 8.21% in 2001. During 2001, the average balance of loans
and federal funds sold grew $22.6 million and $30.5 million, respectively, while
the average balance of investments declined $22.1 million. The decrease in
average yield on interest-earning assets reduced interest income (FTE) by $7.0
million, while a net increase of $31.0 million (3.6%) in average balances of
interest earning assets added $2.6 million to interest income (FTE) during 2001.
Interest expense decreased $5.1 million (17.7%) in 2001 due to a 77 basis point
decrease in the average rate paid on interest-bearing liabilities from 4.05% to
3.28%. The largest individual decrease was the rate paid on federal funds
purchased which fell 431 basis points to 2.42% in 2001. The average rate paid on
savings deposits also fell from 3.13% to 2.11%. Partially offsetting these
decreases was an $11.2 million (1.59%) increase in average interest-bearing
liabilities from 2000 to 2001.
Net Interest Margin
Following is a summary of the Company's net interest margin for the past three
years:
Components of Net Interest Margin
--------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
-----------------------------
Yield on earning assets 6.98% 8.21% 9.02%
Rate paid on interest-bearing liabilities 1.73% 3.28% 4.05%
-----------------------------
Net interest spread 5.24% 4.93% 4.96%
Impact of all other net
noninterest-bearing funds 0.35% 0.65% 0.74%
-----------------------------
Net interest margin (FTE) 5.61% 5.58% 5.70%
==========================================================================
The Company's aggressive reaction to declining market rates throughout 2001 and
2002 has allowed it to maintain a relatively stable net interest margin. While
the Company was able to reduce the average rate paid on interest bearing
liabilities at approximately the same rate or faster than the average yield on
interest earning assets, and thus maintain or increase its net interest spread,
the positive impact of all other net noninterest bearing funds on net interest
margin was reduced due to the lower market rates of interest at which they could
be invested. In addition, while the Company has been able to maintain a
relatively stable net interest margin throughout 2001 and 2002, it becomes
increasingly more difficult to do so as interest rates are reduced further.
-13-
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the past three years, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average earning assets and resulting yields,
and the amount of interest expense paid on interest bearing liabilities. Average
loan balances include nonperforming loans. Interest income includes proceeds
from loans on nonaccrual loans only to the extent cash payments have been
received and applied to interest income. Yields on securities and certain loans
have been adjusted upward to reflect the effect of income thereon exempt from
federal income taxation at the current statutory tax rate (dollars in
thousands):
Year ended December 31, 2002
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $660,668 $52,472 7.94%
Investment securities - taxable 204,155 9,430 4.62%
Investment securities - nontaxable 43,871 3,435 7.83%
Federal funds sold 36,692 606 1.65%
---------- ----------
Total earning assets 945,386 65,943 6.98%
----------
Other assets 94,080
----------
Total assets $1,039,466
==========
Liabilities and shareholders' equity
Interest-bearing demand deposits $176,484 469 0.27%
Savings deposits 264,444 2,710 1.02%
Time deposits 282,084 8,441 2.99%
Federal funds purchased 116 2 1.47%
Long-term debt 22,939 1,292 5.63%
---------- ----------
Total interest-bearing liabilities 746,067 12,914 1.73%
----------
Noninterest-bearing demand 182,569
Other liabilities 17,250
Shareholders' equity 93,580
----------
Total liabilities and shareholders' equity $1,039,466
==========
Net interest spread (1) 5.24%
Net interest income and interest margin (2) $53,029 5.61%
========== ========
(1) Net interest spread represents the average yield earned on interest earning
assets less the average rate paid on interest bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
-14-
Year ended December 31, 2001
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $647,317 $58,730 9.07%
Investment securities - taxable 159,465 9,543 5.98%
Investment securities - nontaxable 44,615 3,373 7.56%
Federal funds sold 39,204 1,506 3.84%
---------- ----------
Total earning assets 890,601 73,152 8.21%
----------
Other assets 87,941
----------
Total assets $978,542
==========
Liabilities and shareholders' equity
Interest-bearing demand deposits $156,629 1,487 0.95%
Savings deposits 225,137 4,759 2.11 %
Time deposits 301,023 15,261 5.07%
Federal funds purchased 289 7 2.42%
Long-term debt 32,133 1,972 6.14%
---------- ----------
Total interest-bearing liabilities 715,211 23,486 3.28%
----------
Noninterest-bearing demand 160,152
Other liabilities 15,660
Shareholders' equity 87,519
----------
Total liabilities and shareholders' equity $978,542
==========
Net interest spread (1) 4.93%
Net interest income and interest margin (2) $49,666 5.58%
========== ========
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Year ended December 31, 2000
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $624,717 $61,835 9.90%
Investment securities - taxable 181,316 11,704 6.46%
Investment securities - nontaxable 44,847 3,420 7.63%
Federal funds sold 8,696 538 6.19%
---------- ----------
Total earning assets 859,576 77,497 9.02%
----------
Other assets 78,214
----------
Total assets $937,790
==========
Liabilities and shareholders' equity
Interest-bearing demand deposits $149,412 2,360 1.58%
Savings deposits 218,286 6,837 3.13%
Time deposits 278,968 15,806 5.67%
Federal funds purchased 9,261 623 6.73%
Long-term debt 48,078 2,917 6.07%
---------- ----------
Total interest-bearing liabilities 704,005 28,543 4.05%
----------
Noninterest-bearing demand 141,767
Other liabilities 13,277
Shareholders' equity 78,741
----------
Total liabilities and shareholders' equity $937,790
==========
Net interest spread (1) 4.96%
Net interest income and interest margin (2) $48,954 5.70%
========== ========
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
-15-
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth a summary of the changes in the Company's
interest income and interest expense from changes in average asset and liability
balances (volume) and changes in average interest rates for the past three
years. The rate/volume variance has been included in the rate variance. Amounts
are calculated on a fully taxable equivalent basis (dollars in thousands):
2002 over 2001 2001 over 2000
-----------------------------------------------------------------------------
Yield/ Yield/
Volume Rate Total Volume Rate Total
-----------------------------------------------------------------------------
Increase (decrease) in (dollars in thousands)
interest income:
Loans $1,211 ($7,469) ($6,258) $2,237 ($5,342) ($3,105)
Investment securities 2,781 (2,832) (51) (1,477) (731) (2,208)
Federal funds sold (96) (804) (900) 1,887 (919) 968
-----------------------------------------------------------------------------
Total 3,896 (11,105) (7,209) 2,647 (6,992) (4,345)
-----------------------------------------------------------------------------
Increase (decrease) in
interest expense:
Demand deposits (interest-bearing) 188 (1,206) (1,018) 114 (987) (873)
Savings deposits 831 (2,880) (2,049) 215 (2,293) (2,078)
Time deposits (960) (5,860) (6,820) 1,250 (1,795) (545)
Federal funds purchased (4) (1) (5) (604) (12) (616)
Long-term borrowings (564) (116) (680) (967) 22 (945)
-----------------------------------------------------------------------------
Total (509) (10,063) (10,572) 8 (5,065) (5,057)
-----------------------------------------------------------------------------
Increase (decrease) in
net interest income $4,405 ($1,042) $3,363 $2,639 ($1,927) $712
=============================================================================
Provision for Loan Losses
In 2002, the Bank provided $2.8 million for loan losses compared to $4.4 million
in 2001. Net loan charge-offs decreased $1.5 million (51%) to $1.5 million
during 2002. Net charge-offs of commercial, financial and agricultural loans
decreased $2.3 million (83%) in 2002, while net charge-offs of real estate
mortgage and consumer installment loans increased $662,000 (463%) and $105,000
(205%), respectively. The 2002 net charge-offs represented 0.22% of average
loans outstanding versus 0.47% in 2001. Nonperforming loans were 1.19% of total
loans at December 31, 2002 versus 0.92% at December 31, 2001. The ratio of
allowance for loan losses to nonperforming loans was 176% at the end of 2002
versus 216% at the end of 2001.
In 2001, the Bank provided $4.4 million for loan losses compared to $5 million
in 2000. Net loan charge-offs decreased $1.4 million (31%) to $3 million during
2001. Included in the $3 million of net loan charge-offs during 2001 is $2
million of charge-offs on a group of agricultural related loans to one borrower.
During the quarter ended March 31, 2001, the Company received proceeds of $6.1
million from the sale of this nonperforming agricultural-related loan
relationship that was first reported as nonperforming in the quarter ended
September 30, 2000. The Company recorded charge-offs related to this loan
relationship of $2 million in 2001 and $3.8 million in 2000. This loan
relationship was sold to a third party without recourse to the Company. As such,
the Company is not subject to any future charge-offs related to this loan
relationship. Net charge-offs of consumer installment loans increased $51,000
(104%). Net charge-offs of commercial, financial and agricultural loans
decreased $1.4 million (34%) in 2001, while net charge-offs of real estate
mortgage loans decreased $6,000 (4%). The 2001 charge-offs represented 0.47% of
average loans outstanding versus 0.70% in 2000. Nonperforming loans as a
percentage of total loans were 0.92% and 2.29% at December 31, 2001 and 2000,
respectively. The ratio of allowance for loan losses to nonperforming loans was
216% at the end of 2001 versus 80% at the end of 2000.
-16-
Noninterest Income
The following table summarizes the Company's noninterest income for the past
three years (dollars in thousands):
Components of Noninterest Income
---------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
--------------------------------
Service charges on deposit accounts $8,915 $5,875 $5,421
ATM fees and interchange 1,823 1,423 1,250
Other service fees 548 797 813
Commissions on sale of
nondeposit investment products 2,467 2,576 2,784
Gain on sale of loans 3,641 2,095 802
Increase in cash value of life insurance 606 476 657
Other noninterest income 1,180 1,204 1,685
Gain on sale of investments - 36 -
Gain on sale of insurance company stock - 1,756 -
Gain on receipt of insurance company stock - - 1,510
--------------------------------
Total noninterest income $19,180 $16,238 $14,922
===========================================================================
Noninterest income increased $2.9 million (18.1%) to $19.2 million in 2002. The
increase was mainly due to a $3.0 million (52%) increase in service charges on
deposit accounts to $8.9 million, and a $1.5 million (74%) increase in gain on
sale of loans to $3.6 million during 2002. Except for a $1.8 million gain from
sale of investments and insurance company stock in 2001, noninterest income
would have increased $4.7 million (29.2%). The increase in service charges on
deposit accounts was almost entirely due to the introduction of the Company's
overdraft privilege product in July 2002. The increase in gain on sale of loans
is due to continued and increased residential mortgage refinance activity during
2002. The Company originated and sold residential mortgages totaling $178
million, $126 million, and $50 million in 2002, 2001, and 2000, respectively.
Noninterest income increased $1.3 million (8.8%) to $16.2 million in 2001. The
increase was mainly due to a $1.3 million (161%) increase in gain on sale of
loans to $2.1 million during 2001. During 2001, the Company sold its investment
in insurance company stock and recognized a gain of $1,756,000. In 2000, the
Company recognized a gain of $1,510,000 on the receipt of its investment in
insurance company stock when the insurance company demutualized.
Securities Transactions
During 2002 the Bank had no sales of securities. Also during 2002, the Bank
received proceeds from maturities of securities totaling $131.6 million, and
used $241.8 million to purchase securities.
During 2001 the Bank realized net gains of $36,000 on the sale of securities
with market values of $10.8 million. Also, the Bank realized a gain of $1.8
million on the sale of its investment in an insurance company with a market
value of $3.3 million. In addition, during 2001, the Bank received proceeds from
maturities of securities totaling $85.6 million, and purchased $93.1 million of
securities.
-17-
Noninterest Expense
Salaries and Benefits
Salary and benefit expenses increased $3.1 million (14.6%) to $24.3 million in
2002 compared to 2001. Base salaries increased $1.4 million (9.5%) to $15.7
million in 2002. The increase in base salaries was mainly due to an 8.2%
increase in average full time equivalent employees from 402 during 2001 to 435
during 2002, primarily due to the opening of four branches in 2002. Incentive
and commission related salary expenses increased $866,000 (33.5%) to $3.5
million in 2002. The increase in incentive and commission related salary expense
was mainly due to increased commissions paid on origination of residential
mortgage loans, and other functions that exhibited exceptional performance
during 2002. These results are consistent with the Bank's strategy of working
more efficiently with fewer employees who are compensated in part based on their
business unit's performance or on their ability to generate revenue. Benefits
expense, including retirement, medical and workers' compensation insurance, and
taxes, increased $855,000 (20.2%) to $5.1 million during 2002.
Salary and benefit expenses increased $1.3 million (6.7%) to $21.2 million in
2001 compared to 2000. Incentive and commission related salary expenses
increased $310,000 (13.6%) to $2.6 million in 2001. Base salaries and benefits
increased $744,000 (5.5%) to $14.2 million in 2001. The increase in base
salaries was mainly due to a 2.6% increase in average full time equivalent
employees from 392 during 2000 to 402 during 2001, and an average annual base
salary increase of 2.9% during 2001.
Other Noninterest Expenses
The following table summarizes the Company's other noninterest expense for the
past three years (dollars in thousands):
Components of Noninterest Expense
---------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
-------------------------------------
Equipment and data processing $4,095 $3,694 $3,376
Occupancy 2,954 2,806 2,587
Professional fees 1,696 1,087 1,005
Telecommunications 1,422 1,253 957
Advertising 1,263 1,132 1,336
Intangible amortization 911 911 965
ATM network charges 847 913 770
Postage 801 639 486
Courier service 720 661 608
Operational losses 534 227 807
Assessments 233 223 222
Net other real estate owned expense 26 175 127
Other 6,179 5,687 4,737
-------------------------------------
Total noninterest expense $21,681 $19,408 $17,983
============================================================================
Other expenses increased $2.3 million (11.7%) to $21.7 million in 2002.
Increases in the areas of equipment and data processing, occupancy,
telecommunications, courier service, and other were mainly due to the opening of
four branches in 2002. Increases in professional fees and operational losses
were related to the overdraft privilege product introduced in July 2002, and
were more than offset by the large revenue that product is producing.
Other noninterest expense increased $1.4 million (7.9%) to $19.4 million in
2001. Increases in the areas of equipment and data processing, occupancy,
telecommunications, and ATM network charges were mainly due to the first full
year of operation of the Paradise branch, and enhancements to data processing
and ATM network equipment. Also contributing to the increase in other expenses
in 2001 was a $314,000 (34%) increase in various loan production expenses to
$1.3 million. Helping to offset these increases in other expenses were
reductions of $580,000 in operational losses and $204,000 in advertising during
2001. The decrease in operational losses was mainly due to a nonrecurring
$434,000 customer fraud loss in 2000.
-18-
Provision for Taxes
The effective tax rate on income was 36.6%, 37.1%, and 36.4%, in 2002, 2001, and
2000, respectively. The effective tax rate was greater than the federal
statutory tax rate due to state tax expense of $2 million, $1.9 million, and
$1.9 million, respectively, in these years. Tax-free income of $2.2 million,
$2.2 million, and $2.3 million, respectively, from investment securities in
these years helped to reduce the effective tax rate.
Financial Ratios
The following table shows the Company's key financial ratios for the past three
years:
Year ended December 31, 2002 2001 2000
--------------------------------
Return on average total assets 1.35% 1.27% 1.35%
Return on average shareholders' equity 15.03% 14.19% 16.03%
Shareholders' equity to total assets 8.65% 8.65% 8.77%
Common shareholders' dividend payout ratio 39.95% 45.43% 45.00%
=============================================================================
Loans
The Bank concentrates its lending activities in four principal areas: commercial
loans (including agricultural loans), consumer loans, real estate mortgage loans
(residential and commercial loans and mortgage loans originated for sale), and
real estate construction loans. At December 31, 2002, these four categories
accounted for approximately 18%, 29%, 47%, and 6% of the Bank's loan portfolio,
respectively, as compared to 20%, 23%, 50%, and 7%, at December 31, 2001. The
shift in the percentages was primarily due to the Bank's ability to increase its
consumer loan portfolio during 2002. The increase in consumer loans during 2002
was mainly due to increases in home equity lines of credit and automobile loans.
The interest rates charged for the loans made by the Bank vary with the degree
of risk, the size and maturity of the loans, the borrower's relationship with
the Bank and prevailing money market rates indicative of the Bank's cost of
funds.
The majority of the Bank's loans are direct loans made to individuals, farmers
and local businesses. The Bank relies substantially on local promotional
activity, personal contacts by bank officers, directors and employees to compete
with other financial institutions. The Bank makes loans to borrowers whose
applications include a sound purpose, a viable repayment source and a plan of
repayment established at inception and generally backed by a secondary source of
repayment.
At December 31, 2002 loans totaled $687.5 million and was a 4.4% ($28.8 million)
increase over the balances at the end of 2001. Demand for home equity loans and
auto loans (both classified as consumer loans) were strong throughout 2002.
Residential mortgage loan activity was extremely strong in 2002, but the Company
generally sells all such loans. Commercial and agriculture related loan growth
continued to be relatively weak in 2002 as the economy continued to be weak, and
competition for such loans was high. The average loan-to-deposit ratio in 2002
was 71.1% compared to 76.8% in 2001.
At December 31, 2001 loans totaled $658.7 million and was a 2.9% ($18.3 million)
increase over the balances at the end of 2000. Demand for commercial and
agriculture related loans weakened as the economy weakened in 2001. Demand for
home equity loans remained strong throughout 2001, while residential mortgage
loans increased significantly throughout 2001. The average loan-to-deposit ratio
in 2001 was 76.8% compared to 79.2% in 2000.
-19-
Loan Portfolio Composite
The following table shows the Company's loan balances for the past three years:
December 31,
(dollars in thousands) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------
Commercial, financial and agricultural $125,982 $130,054 $148,135 $138,313 $106,796
Consumer installment 201,858 155,046 120,247 79,273 71,634
Real estate mortgage 319,969 326,897 334,010 332,116 316,927
Real estate construction 39,713 46,735 37,999 38,277 37,076
--------------------------------------------------------------------------
Total loans $687,522 $658,732 $640,391 $587,979 $532,433
==========================================================================
Nonperforming Assets
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is generally discontinued either
when reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by 90 days or more with
respect to interest or principal. When loans are 90 days past due, but in
Management's judgment are well secured and in the process of collection, they
may not be classified as nonaccrual. When a loan is placed on nonaccrual status,
all interest previously accrued but not collected is reversed. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of Management, the loans are estimated to be
fully collectible as to both principal and interest. The reclassification of
loans as nonaccrual does not necessarily reflect management's judgment as to
whether they are collectible.
Interest income on nonaccrual loans, which would have been recognized during the
year, ended December 31, 2002, if all such loans had been current in accordance
with their original terms, totaled $1.2 million. Interest income actually
recognized on these loans in 2002 was $733,000.
The Bank's policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed 30
days. Loans where the collateral has been repossessed are classified as other
real estate owned ("OREO") or, if the collateral is personal property, the loan
is classified as other assets on the Company's financial statements.
Management considers both the adequacy of the collateral and the other resources
of the borrower in determining the steps to be taken to collect nonaccrual
loans. Alternatives that are considered are foreclosure, collecting on
guarantees, restructuring the loan or collection lawsuits.
-20-
The following tables set forth the amount of the Bank's nonperforming assets net
of guarantees of the U.S. government, including its agencies and its
government-sponsored agencies, as of the dates indicated:
December 31, 2002 December 31, 2001
------------------------- -------------------------
(dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $13,199 $8,432 $4,767 $2,733 - $2,733
Nonperforming, nonaccrual loans 4,091 718 3,373 3,120 $387 2,733
------------------------------------------------------
Total nonaccrual loans 17,290 9,150 8,140 5,853 387 5,466
Loans 90 days past due and still accruing 40 - 40 584 - 584
------------------------------------------------------
Total nonperforming loans 17,330 9,150 8,180 6,437 387 6,050
Other real estate owned 932 - 932 71 - 71
------------------------------------------------------
Total nonperforming loans and OREO $18,262 $9,150 $9,112 $6,508 $387 $6,121
======================================================
Nonperforming loans to total loans 1.19% 0.92%
Allowance for loan losses/nonperforming loans 176% 216%
Nonperforming assets to total assets 0.80% 0.61%
Allowance for loan losses to nonperforming assets 158% 213%
December 31, 2000 December 31, 1999
------------------------- -------------------------
(dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $4,331 $142 $4,189 $666 $62 $604
Nonperforming, nonaccrual loans 8,161 88 8,073 1,662 508 1,154
------------------------------------------------------
Total nonaccrual loans 12,492 230 12,262 2,328 570 1,758
Loans 90 days past due and still accruing 965 - 965 923 - 923
------------------------------------------------------
Total nonperforming loans 13,457 230 13,227 3,251 570 2,681
Other real estate owned 1,441 - 1,441 760 - 760
------------------------------------------------------
Total nonperforming loans and OREO $14,898 $230 $14,668 $4,011 $570 $3,441
======================================================
Nonperforming loans to total loans 2.07% 0.46%
Allowance for loan losses/nonperforming loans 88% 412%
Nonperforming assets to total assets 1.51% 0.37%
Allowance for loan losses to nonperforming assets 80% 321%
December 31, 1998
---------------------------
(dollars in thousands): Gross Guaranteed Net
---------------------------
Performing nonaccrual loans $344 - $344
Nonperforming, nonaccrual loans 733 $32 701
Total nonaccrual loans 1,077 32 1,045
Loans 90 days past due and still accruing 620 - 620
Total nonperforming loans 1,697 1,665
Other real estate owned 1,412 - 1,412
Total nonperforming loans and OREO $3,109 $32 $3,077
Nonperforming loans to total loans 0.31%
Allowance for loan losses/nonperforming loans 493%
Nonperforming assets to total assets 0.34%
Allowance for loan losses to nonperforming assets 267%
During 2002, nonperforming assets net of government guarantees increased $3
million (49%) to a total of $9.1 million. Nonperforming loans net of government
guarantees increased $2.1 million (35%) to $8.2 million, and other real estate
owned (OREO) increased $861,000 to $932,000 during 2002. The ratio of
nonperforming loans to total loans at December 31, 2002 was 1.19% versus 0.92%
at the end of 2001. Classifications of nonperforming loans as a percent of total
loans at the end of 2002 were as follows: secured by real estate, 62%; loans to
farmers, 27%; commercial loans, 10%; and consumer loans, 1%.
-21-
During 2001, nonperforming assets net of government guarantees decreased $8.5
million (58%) to $6.1 million. Nonperforming loans decreased $7.2 million (54%)
to $6.1 million, and other real estate owned (OREO) decreased $1.4 million (95%)
to $71,000 during 2001. The ratio of nonperforming loans to total loans at
December 31, 2001 was 0.92% versus 2.07% at the end of 2000. The decrease in the
ratio of nonperforming loans to total loans was due in part to the sale of one
nonperforming loan relationship during 2001 that accounted for $8.4 million of
nonperforming loan balances at December 31, 2000. During the quarter ended March
31, 2001, the Company received proceeds of $6.1 million from the sale of this
nonperforming agricultural-related loan relationship that was first reported as
nonperforming in the quarter ended September 30, 2000. The Company recorded
charge-offs related to this loan relationship of $2 million in 2001 and $3.8
million in 2000. This loan relationship was sold to a third party without
recourse to the Company. As such, the Company is not subject to any future
charge-offs related to this loan relationship. Classifications of nonperforming
loans as a percent of the total at the end of 2001 were as follows: secured by
real estate, 65%; loans to farmers, 4%; commercial loans, 30%; and consumer
loans, 1%.
Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, the Company
maintains an allowance for loan losses to absorb losses inherent in the
Company's loan and lease portfolio. This is maintained through periodic charges
to earnings. These charges are shown in the consolidated income statements as
provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of
reasons, not all losses are immediately known to the Company and, of those that
are known, the full extent of the loss may not be quantifiable at that point in
time. The balance of the Company's allowance for loan losses is meant to be an
estimate of these unknown but probable losses inherent in the portfolio.
For the remainder of this discussion, "loans" shall include all loans and lease
contracts, which are a part of the Bank's portfolio.
Assessment of the Adequacy of the Allowance for Loan Losses
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan and lease portfolio, and to a lesser
extent the Company's loan and lease commitments. These assessments include the
periodic re-grading of credits based on changes in their individual credit
characteristics including delinquency, seasoning, recent financial performance
of the borrower, economic factors, changes in the interest rate environment,
growth of the portfolio as a whole or by segment, and other factors as
warranted. Loans are initially graded when originated. They are re-graded as
they are renewed, when there is a new loan to the same borrower, when identified
facts demonstrate heightened risk of nonpayment, or if they become delinquent.
Re-grading of larger problem loans occurs at least quarterly. Confirmation of
the quality of the grading process is obtained by independent credit reviews
conducted by consultants specifically hired for this purpose and by various bank
regulatory agencies.
The Company's method for assessing the appropriateness of the allowance includes
specific allowances for identified problem loans and leases, formula allowance
factors for pools of credits, and allowances for changing environmental factors
(e.g., interest rates, growth, economic conditions, etc.). Allowances for
identified problem loans are based on specific analysis of individual credits.
Allowance factors for loan pools are based on the previous 5 years historical
loss experience by product type. Allowances for changing environmental factors
are management's best estimate of the probable impact these changes have had on
the loan portfolio as a whole.
The Components of the Allowance for Loan Losses
As noted above, the overall allowance consists of a specific allowance, a
formula allowance, and an allowance for environmental factors. The first
component, the specific allowance, results from the analysis of identified
credits that meet management's criteria for specific evaluation. These loans are
reviewed individually to determine if such loans are considered impaired.
Impaired loans are those where management has concluded that it is probable that
the borrower will be unable to pay all amounts due under the contractual terms.
Loans specifically reviewed, including those considered impaired, are evaluated
individually by management for loss potential by evaluating sources of
repayment, including collateral as applicable, and a specified allowance for
loan losses is established where necessary.
-22-
The second component, the formula allowance, is an estimate of the probable
losses that have occurred across the major loan categories in the Company's loan
portfolio. This analysis is based on loan grades by pool and the loss history of
these pools. This analysis covers the Company's entire loan portfolio including
unused commitments but excludes any loans, which were analyzed individually and
assigned a specific allowance as discussed above. The total amount allocated for
this component is determined by applying loss estimation factors to outstanding
loans and loan commitments. The loss factors are based primarily on the
Company's historical loss experience tracked over a five-year period and
adjusted as appropriate for the input of current trends and events. Because
historical loss experience varies for the different categories of loans, the
loss factors applied to each category also differ. In addition, there is a
greater chance that the Company has suffered a loss from a loan that was graded
less than satisfactory than if the loan was last graded satisfactory. Therefore,
for any given category, a larger loss estimation factor is applied to less than
satisfactory loans than to those that the Company last graded as satisfactory.
The resulting formula allowance is the sum of the allocations determined in this
manner.
The third or "unallocated" component of the allowance for credit losses is a
component that is not allocated to specific loans or groups of loans, but rather
is intended to absorb losses that may not be provided for by the other
components.
There are several primary reasons that the other components discussed above
might not be sufficient to absorb the losses present in portfolios, and the
unallocated portion of the allowance is used to provide for the losses that have
occurred because of them.
The first reason is that there are limitations to any credit risk grading
process. The volume of loans makes it impractical to re-grade every loan every
quarter. Therefore, it is possible that some currently performing loans not
recently graded will not be as strong as their last grading and an insufficient
portion of the allowance will have been allocated to them. Grading and loan
review often must be done without knowing whether all relevant facts are at
hand. Troubled borrowers may deliberately or inadvertently omit important
information from reports or conversations with lending officers regarding their
financial condition and the diminished strength of repayment sources.
The second reason is that the loss estimation factors are based primarily on
historical loss totals. As such, the factors may not give sufficient weight to
such considerations as the current general economic and business conditions that
affect the Company's borrowers and specific industry conditions that affect
borrowers in that industry. The factors might also not give sufficient weight to
other environmental factors such as changing economic conditions and interest
rates, portfolio growth, entrance into new markets or products, and other
characteristics as may be determined by Management.
Specifically, in assessing how much unallocated allowance needed to be provided
at December 31, 2002, management considered the following:
- with respect to loans to the agriculture industry, management
considered the effects on borrowers of weather conditions and overseas
market conditions for exported products as well as commodity prices in
general;
- with respect to changes in the interest rate environment management
considered the recent changes in interest rates and the resultant
economic impact it may have had on borrowers with high leverage and/or
low profitability; and
- with respect to loans to borrowers in new markets and growth in
general, management considered the relatively short seasoning of such
loans and the lack of experience with such borrowers.
-23-
Each of these considerations was assigned a factor and applied to a portion or
all of the loan portfolio. Since these factors are not derived from experience
and are applied to large non-homogeneous groups of loans, they are considered
unallocated and are available for use across the portfolio as a whole. The
following table sets forth the Bank's loan loss reserve as of the dates
indicated:
December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------
(dollars in thousands)
Specific allowance $5,299 $5,672 $3,266 $600 $253
Formula allowance 8,839 7,183 8,067 10,250 7,744
Unallocated allowance 239 203 337 187 209
-------------------------------------------------------------
Total allowance $14,377 $13,058 $11,670 $11,037 $8,206
=============================================================
The allowance for loan losses to total loans at December 31, 2002 was 2.09%
versus 1.98% at the end of 2001. At December 31, 2000, the allowance for loan
losses to total loans was 1.82%.
Based on the current conditions of the loan portfolio, management believes that
the $14.4 million allowance for loan losses at December 31, 2002 is adequate to
absorb probable losses inherent in the Bank's loan portfolio. No assurance can
be given, however, that adverse economic conditions or other circumstances will
not result in increased losses in the portfolio.
The following table summarizes, for the years indicated, the activity in the
allowance for loan losses:
December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------
(dollars in thousands)
Balance, beginning of year $13,058 $11,670 $11,037 $8,206 $6,459
Provision charged to operations 2,800 4,400 5,000 3,550 4,200
Loans charged off:
Commercial, financial and
agricultural (668) (2,861) (4,450) (865) (1,865)
Consumer installment (299) (134) (103) (148) (702)
Real estate mortgage (819) (218) (152) (69) (188)
----------------------------------------------------------------
Total loans charged-off (1,786) (3,213) (4,705) (1,082) (2,755)
----------------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 197 92 281 327 164
Consumer installment 94 34 54 36 130
Real estate mortgage 14 75 3 -- 8
----------------------------------------------------------------
Total recoveries 305 201 338 363 302
----------------------------------------------------------------
Net loans charged-off (1,481) (3,012) (4,367) (719) (2,453)
----------------------------------------------------------------
Balance, year end $14,377 $13,058 $11,670 $11,037 $8,206
================================================================
Average total loans $660,668 $647,317 $624,717 $566,738 $487,598
----------------------------------------------------------------
Ratios:
Net charge-offs during period
to average loans outstanding
during period 0.22% 0.47% 0.70% 0.13% 0.50%
Provision for loan losses to aver-
age loans outstanding 0.42% 0.68% 0.80% 0.63% 0.86%
Allowance to loans at year end 2.09% 1.98% 1.82% 1.88% 1.54%
----------------------------------------------------------------
-24-
The following tables summarize the allocation of the allowance for loan losses
between loan types at December 31, 2002 and 2001:
December 31, 2002 December 31, 2001 December 31, 2000
------------------------- ------------------------ ------------------------
(dollars in thousands) Percent of Percent of Percent of
loans in each loans in each loans in each
category to category to category to
Amount total loans Amount total loans Amount total loans
Balance at end of period applicable to:
Commercial, financial and agricultural $6,791 18.4% $6,929 19.8% $6,873 43.4%
Consumer installment 2,833 29.4% 1,896 23.5% 1,373 15.9%
Real estate mortgage 4,229 46.4% 3,709 49.6% 2,925 34.8%
Real estate construction 524 5.8% 524 7.1% 499 5.9%
--------- -------- --------- -------- --------- --------
$14,377 100.0% $13,058 100.0% $11,670 100.0%
========= ======== ========= ======== ========= ========
December 31, 1999 December 31, 1998
----------------------- -----------------------
(dollars in thousands) Percent of Percent of
loans in each loans in each
category to category to
Balance at end of period applicable to: Amount total loans Amount total loans
Commercial, financial and agricultural $5,224 44.7% $3,345 39.8%
Consumer installment 1,464 13.6% 1,154 13.6%
Real estate mortgage 3,671 35.2% 3,153 39.6%
Real estate construction 678 6.5% 554 7.0%
--------- -------- -------- --------
$11,037 100.0% $8,206 100.0%
========= ======== ======== ========
Other Real Estate Owned
The December 31, 2002 balance of other real estate owned (OREO) was $932,000
versus $71,000 at December 31, 2001. The Bank disposed of properties with a
value of $79,000 in 2002. OREO properties consist of a mixture of land, single
family residences, and commercial buildings.
Intangible Assets
At December 31, 2002 and 2001, the Bank had intangible assets totaling $4
million and $5.1 million, respectively. The intangible assets resulted from the
Bank's 1997 acquisitions of certain Wells Fargo branches and Sutter Buttes
Savings Bank, and the recognition of an additional minimum pension liability in
2001. Intangible assets at December 31, 2002 and 2001 were comprised of the
following:
December 31,
2002 2001
--------------------------
(dollars in thousands)
Core-deposit intangible $3,642 $4,553
Additional minimum pension liability 401 517
--------------------------
Total intangible assets $4,043 $5,070
==========================
Amortization of core deposit intangible assets amounting to $911,000, $911,000,
and $965,000 was recorded in 2002, 2001, and 2000, respectively. The minimum
pension liability intangible asset is not amortized but adjusted annually based
upon actuarial estimates.
Deposits
Deposits at December 31, 2002 were up $124.8 million (14.2%) over the 2001
year-end balances to $1.0 billion. All categories of deposits increased in 2002.
Included in the December 31, 2002 certificate of deposit balances is $20 million
from the State of California. The Bank participates in a deposit program offered
by the State of California whereby the State may make deposits at the Banks
request subject to collateral and credit worthiness constraints. The negotiated
rates on these State deposits are generally favorable to other wholesale funding
sources available to the Bank.
-25-
Deposits at December 31, 2001 were up $42.6 million (5.1%) to $880.4 million
over 2000 year-end balances. All categories of deposits except certificates of
deposit increased in 2001. Included in the December 31, 2001 certificate of
deposit balance is $20 million from the State of California, which represents a
decrease of $20 million from the $40 million the State of California had on
deposit at the Bank at December 31, 2000. During 2001, the Bank elected not to
renew $20 million of the $40 million State certificates of deposit that were
outstanding at December 31, 2000.
Long-Term Debt
During 2002, the Bank repaid $32,000 of long-term debt. In 2001, the Bank made
principal payments of $11 million on long-term debt obligations. See Note 7 to
the consolidated financial statements at Item 8 of this report.
Equity
See Note 9 and Note 20 in the financial statements at Item 8 of this report for
a discussion of shareholder's equity and regulatory capital, respectively.
Management believes that the Company's capital is adequate to support
anticipated growth, meet the cash dividend requirements of the Company and meet
the future risk-based capital requirements of the Bank and the Company.
Market Risk Management
Overview. The goal for managing the assets and liabilities of the Bank is to
maximize shareholder value and earnings while maintaining a high quality balance
sheet without exposing the Bank to undue interest rate risk. The Board of
Directors has overall responsibility for the Company's interest rate risk
management policies. The Bank has an Asset and Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability management
include but are not limited to lending, accepting and placing deposits,
investing in securities and issuing debt. Interest rate risk is the primary
market risk associated with asset/liability management. Sensitivity of earnings
to interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin, net income and market value of equity
under changing interest environments. Market value of equity is the net present
value of estimated cash flows from the Bank's assets, liabilities and
off-balance sheet items. The Bank uses simulation models to forecast net
interest margin, net income and market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Bank is able to estimate the
potential impact of changing interest rates on net interest margin, net income
and market value of equity. A balance sheet forecast is prepared using inputs of
actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
-26-
The following table summarizes the effect on net interest income and net income
due to changing interest rates as measured against a flat rate (no change)
scenario:
Interest Rate Risk Simulation of Net Interest Income and Net Income as of
December 31, 2002
Estimated Change in Estimated Change in
Change in Interest Net Interest Income (NII) Net Income (NI)
Rates (Basis Points) (as % of "flat" NII) (as % of "flat" NI)
+300 (ramp) 1.27% 2.76%
+200 (ramp) 0.56% 1.23%
+100 (ramp) 0.03% 0.07%
+ 0 (flat) -- --
-100 (ramp) (0.93)% (2.01)%
-200 (ramp) (1.91)% (4.12)%
-300 (ramp) (3.75)% (8.07)%
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
- -300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
The following table summarizes the effect on market value of equity due to
changing interest rates as measured against a flat rate (no change) scenario:
Interest Rate Risk Simulation of Market Value of Equity as of December 31, 2002
Estimated Change in
Change in Interest Market Value of Equity (MVE)
Rates (Basis Points) (as % of "flat" MVE)
+300 (shock) 3.51%
+200 (shock) 3.00%
+100 (shock) 2.24%
+ 0 (flat) --
-100 (shock) (7.00)%
-200 (shock) (10.03)%
-300 (shock) (4.77)%
These results indicate that the balance sheet is slightly asset sensitive since
earnings increase when interest rates rise. The magnitude of all the simulation
results noted above is within the Bank's policy guidelines. The asset liability
management policy limits aggregate market risk, as measured in this fashion, to
an acceptable level within the context of risk-return trade-offs.
The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the preceding tables. For
example, although certain of the Bank's assets and liabilities may have similar
maturities or repricing time frames, they may react in different degrees to
changes in market interest rates. In addition, the interest rates on certain of
the Bank's asset and liability categories may precede, or lag behind, changes in
market interest rates. Also, the actual rates of prepayments on loans and
investments could vary significantly from the assumptions utilized in deriving
the results as presented in the preceding table. Further, a change in U.S.
Treasury rates accompanied by a change in the shape of the treasury yield curve
could result in different estimations from those presented herein. Accordingly,
the results in the preceding tables should not be relied upon as indicative of
actual results in the event of changing market interest rates. Additionally, the
resulting estimates of changes in market value of equity are not intended to
represent, and should not be construed to represent, estimates of changes in the
underlying value of the Bank.
-27-
Interest rate sensitivity is a function of the repricing characteristics of the
Bank's portfolio of assets and liabilities. One aspect of these repricing
characteristics is the time frame within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity. An analysis of the repricing time frames of
interest-bearing assets and liabilities is sometimes called a "gap" analysis
because it shows the gap between assets and liabilities repricing or maturing in
each of a number of periods. Another aspect of these repricing characteristics
is the relative magnitude of the repricing for each category of interest earning
asset and interest-bearing liability given various changes in market interest
rates. Gap analysis gives no indication of the relative magnitude of repricing
given various changes in interest rates. Interest rate sensitivity management
focuses on the maturity of assets and liabilities and their repricing during
periods of changes in market interest rates. Interest rate sensitivity gaps are
measured as the difference between the volumes of assets and liabilities in the
Bank's current portfolio that are subject to repricing at various time horizons.
The following interest rate sensitivity table shows the Bank's repricing gaps as
of December 31, 2002. In this table transaction deposits, which may be repriced
at will by the Bank, have been included in the less than 3-month category. The
inclusion of all of the transaction deposits in the less than 3-month repricing
category causes the Bank to appear liability sensitive. Because the Bank may
reprice its transaction deposits at will, transaction deposits may or may not
reprice immediately with changes in interest rates. In recent years of moderate
interest rate changes the Bank's earnings have reacted as though the gap
position is slightly asset sensitive mainly because the magnitude of
interest-bearing liability repricing has been less than the magnitude of
interest-earning asset repricing. This difference in the magnitude of asset and
liability repricing is mainly due to the Bank's strong core deposit base, which
although they may be repriced within three months, historically, the timing of
their repricing has been longer than three months and the magnitude of their
repricing has been minimal.
Due to the limitations of gap analysis, as described above, the Bank does not
actively use gap analysis in managing interest rate risk. Instead, the Bank
relies on the more sophisticated interest rate risk simulation model described
above as its primary tool in measuring and managing interest rate risk.
Interest Rate Sensitivity - December 31, 2002
Repricing within:
-------------------------------------------------------------------------------
(dollars in thousands) Less than 3 3 - 6 6 - 12 1 - 5 Over
months months months years 5 years
-------------------------------------------------------------------------------
Interest-earning assets:
Securities $47,661 $49,460 $59,805 $141,138 $38,387
Loans 344,356 31,624 47,189 205,256 39,920
-------------------------------------------------------------------------------
Total interest-earning assets $392,017 $81,084 $106,994 $346,394 $78,307
-------------------------------------------------------------------------------
Interest-bearing liabilities
Transaction deposits $480,742 $ --- $ --- $ --- $ ---
Time 84,209 65,410 61,137 81,121 119
Long-term borrowings 10 10 21 226 22,657
-------------------------------------------------------------------------------
Total interest-bearing liabilities $564,961 $65,420 $61,158 $81,347 $22,776
-------------------------------------------------------------------------------
Interest sensitivity gap ($172,944) $15,664 $45,836 $265,047 $55,530
Cumulative sensitivity gap ($172,944) ($157,280) ($111,444) $153,604 $209,134
As a percentage of earning assets:
Interest sensitivity gap (17.21%) 1.56% 4.56% 26.38% 5.53%
Cumulative sensitivity gap (17.21%) (15.65%) (11.09%) 15.29% 20.81%
-28-
Liquidity
Liquidity refers to the Bank's ability to provide funds at an acceptable cost to
meet loan demand and deposit withdrawals, as well as contingency plans to meet
unanticipated funding needs or loss of funding sources. These objectives can be
met from either the asset or liability side of the balance sheet. Asset
liquidity sources consist of the repayments and maturities of loans, selling of
loans, short-term money market investments, maturities of securities and sales
of securities from the available-for-sale portfolio. These activities are
generally summarized as investing activities in the Consolidated Statement of
Cash Flows. Net cash used by investing activities totaled approximately $144.4
million in 2002. Increased investment balances were responsible for the major
use of funds in this category.
Liquidity is generated from liabilities through deposit growth and short-term
borrowings. These activities are included under financing activities in the
Consolidated Statement of Cash Flows. In 2002, financing activities provided
funds totaling $119.4 million. Internal deposit growth provided funds amounting
to $124.8 million. The Bank also had available correspondent banking lines of
credit totaling $55.0 million at year-end. In addition, at December 31, 2002,
the Company had loans and securities available to pledge towards future
borrowings from the Federal Home Loan Bank of up to $197 million. As of December
31, 2002, the Company had $22.9 million of long-term debt and other borrowings
as described in Note 7 of the consolidated financial statements of the Company
and the related notes at Item 8 of this report. While these sources are expected
to continue to provide significant amounts of funds in the future, their mix, as
well as the possible use of other sources, will depend on future economic and
market conditions. Liquidity is also provided or used through the results of
operating activities. In 2002, operating activities provided cash of $22.3
million.
The Bank classifies its entire investment portfolio as available for sale (AFS).
The AFS securities plus cash and cash equivalents in excess of reserve
requirements totaled $412.8 million at December 31, 2002, which was 36.1% of
total assets at that time. This was up from $302.1 million and 30.0% at the end
of 2001.
The maturity distribution of certificates of deposit in denominations of
$100,000 or more is set forth in the following table. These deposits are
generally more rate sensitive than other deposits and, therefore, are more
likely to be withdrawn to obtain higher yields elsewhere if available. The Bank
participates in a program wherein the State of California places time deposits
with the Bank at the Bank's option. At December 31, 2002 and 2001, the Bank had
$20 million of these State deposits.
Certificates of Deposit in Denominations of $100,000 or More
Amounts as of December 31,
----------------------------------
(dollars in thousands) 2002 2001 2000
----------------------------------
Time remaining until maturity:
Less than 3 months $32,932 $38,114 $55,721
3 months to 6 months 16,311 10,431 14,002
6 months to 12 months 12,455 15,383 18,686
More than 12 months 28,706 6,374 4,933
----------------------------------
Total $90,404 $70,302 $93,342
-29-
Loan demand also affects the Bank's liquidity position. The following table
presents the maturities of loans at December 31, 2002:
Loan Maturities - December 31, 2002
After
One But
Within Within After 5
One Year 5 Years Years Total
---------------------------------------------------------------
(dollars in thousands)
Loans with predetermined interest rates:
Commercial, financial and agricultural $18,573 $34,214 $8,137 $60,924
Consumer installment 25,106 47,707 21,582 94,395
Real estate mortgage 26,217 49,193 57,394 132,804
Real estate construction 10,388 2,151 2,003 14,542
---------------------------------------------------------------
$80,284 $133,265 $89,116 $302,665
---------------------------------------------------------------
Loans with floating interest rates:
Commercial, financial and agricultural $47,382 $12,696 $4,980 $65,058
Consumer installment 107,462 - - 107,462
Real estate mortgage 28,205 48,281 110,680 187,166
Real estate construction 15,398 7,507 2,266 25,171
---------------------------------------------------------------
$198,447 $68,484 $117,926 $384,857
---------------------------------------------------------------
Total loans $278,731 $201,749 $207,042 $687,522
===============================================================
The maturity distribution and yields of the investment portfolio is presented in
the following table. The timing of the maturities indicated in the table below
is based on final contractual maturities. Most mortgage-backed securities return
principal throughout their contractual lives. As such, the weighted average life
of mortgage-backed securities based on outstanding principal balance is usually
significantly shorter than the final contractual maturity indicated below. At
December 31, 2002, the Bank had no held-to-maturity securities.
Securities Maturities and Weighted Average Tax Equivalent Yields - December 31, 2002
After One Year After Five Years
Within but Through but Through After Ten
One Year Five Years Ten Years Years Total
------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------------------------
Securities Available-for-Sale (dollars in thousands)
US Treasury securities and
obligations of US government
corporations and agencies $10,146 3.06% $48,995 5.74% - 0.00% - 0.00% $59,141 5.28%
Obligations of states and
political subdivisions 2,003 5.67% 1,700 5.86% 5,143 7.10% 35,190 7.90% 44,036 7.63%
Mortgage-backed securities - 0.00% 6,613 6.14% 81,982 4.47% 129,868 4.97% 218,463 4.82%
Corporate bonds - 0.00% 2,255 7.65% - 0.00% 9,716 2.51% 11,971 3.47%
- --------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $12,149 3.49% $59,563 5.86% $87,125 4.62% $174,774 5.42% $333,611 5.22%
Other securities 4,413 5.19% 4,413 5.19%
------------------------------------------------------------------------------------
Total investment securities $12,149 3.49% $59,563 5.86% $87,125 4.62% $179,187 5.42% $338,024 5.22%
==========================================================================================================================
The principal cash requirements of the Company are dividends on common stock
when declared. The Company is dependent upon the payment of cash dividends by
the Bank to service its commitments. The Company expects that the cash dividends
paid by the Bank to the Company will be sufficient to meet this payment
schedule. Dividends from the Bank are subject to certain regulatory
restrictions.
-30-
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases. See
Note 8 of the financial statements at Item 8 of this report for the terms. These
commitments do not significantly impact operating results. As of December 31,
2002 commitments to extend credit were the Bank's only financial instruments
with off-balance sheet risk. The Bank has not entered into any contracts for
financial derivative instruments such as futures, swaps, options, etc. Loan
commitments increased to $227.2 million from $195.1 million at December 31,
2001. The commitments represent 33.0% of the total loans outstanding at year-end
2002 versus 29.6% at December 31, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk Management" under Item 7 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets as of December 31, 2002 and 2001 32
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2002, 2001, and 2000 33
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2002, 2001, and 2000 34
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000 35
Notes to Consolidated Financial Statements 36
Independent Auditors' Report 58
Management's Letter of Financial Responsibility 60
-31-
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands)
At December 31,
2002 2001
-------------------------------
Assets:
Cash and due from banks $67,170 $59,264
Federal funds sold 8,100 18,700
-------------------------------
Cash and cash equivalents 75,270 77,964
Investment securities available for sale 338,024 224,590
Loans
Commercial 125,982 130,054
Consumer 201,858 155,046
Real estate mortgages 319,969 326,897
Real estate construction 39,713 46,735
-------------------------------
687,522 658,732
Allowance for loan losses (14,377) (13,058)
-------------------------------
Loans, net of allowance for loan losses 673,145 645,674
Premises and equipment, net 17,224 16,457
Cash value of life insurance 15,208 14,602
Other real estate owned 932 71
Accrued interest receivable 5,644 5,522
Deferred income taxes 8,429 9,334
Intangible assets 4,043 5,070
Other assets 6,655 6,163
-------------------------------
Total Assets $1,144,574 $1,005,447
===============================
Liabilities:
Deposits:
Noninterest-bearing demand $232,499 $190,386
Interest-bearing demand 182,816 165,542
Savings 297,926 247,399
Time 291,996 277,066
-------------------------------
Total deposits 1,005,237 880,393
Accrued interest payable 2,927 3,488
Other Liabilities 14,472 11,677
Long-term debt and other borrowings 22,924 22,956
-------------------------------
Total Liabilities 1,045,560 918,514
-------------------------------
Shareholders' Equity:
Common stock, no par value: Authorized 20,000,000 shares;
Issued and outstanding:
7,060,965 at December 31, 2002 50,472
7,000,980 at December 31, 2001 49,679
Retained earnings 46,239 37,909
Accumulated other comprehensive income, net 2,303 (655)
-------------------------------
Total Shareholders' Equity 99,014 86,933
-------------------------------
Total Liabilities and Shareholders' Equity $1,144,574 $1,005,447
===============================
See Notes to Consolidated Financial Statements
-32-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Years ended December 31,
------------------------------------------
2002 2001 2000
------------------------------------------
Interest Income:
Interest and fees on loans $52,472 $58,730 $61,835
Interest on federal funds sold 606 1,506 538
Interest on investment securities available for sale
Taxable 9,430 9,543 11,704
Tax exempt 2,188 2,219 2,250
------------------------------------------
Total interest income 64,696 71,998 76,327
------------------------------------------
Interest Expense:
Interest on interest-bearing demand deposits 469 1,487 2,360
Interest on savings 2,710 4,759 6,837
Interest on time certificates of deposit 8,441 15,261 15,806
Interest on short-term borrowing 2 7 623
Interest on long-term debt 1,292 1,972 2,917
------------------------------------------
Total interest expense 12,914 23,486 28,543
------------------------------------------
Net Interest Income 51,782 48,512 47,784
------------------------------------------
Provision for loan losses 2,800 4,400 5,000
------------------------------------------
Net Interest Income After Provision for Loan Losses 48,982 44,112 42,784
------------------------------------------
Noninterest Income:
Service charges and fees 11,286 8,095 7,484
Commissions on sale of non-deposit investment products 2,467 2,576 2,784
Gain on sale of loans 3,641 2,095 802
Other 1,786 1,680 2,342
Gain on sale of investments - 36 -
Gain on sale of insurance company stock - 1,756 -
Gain on receipt of insurance company stock - - 1,510
------------------------------------------
Total Noninterest Income 19,180 16,238 14,922
------------------------------------------
Noninterest Expense:
Salaries and related benefits 24,290 21,199 19,863
Other 21,681 19,408 17,983
------------------------------------------
Total Noninterest Expense 45,971 40,607 37,846
------------------------------------------
Income Before Income Taxes 22,191 19,743 19,860
------------------------------------------
Provision for income taxes 8,122 7,324 7,237
------------------------------------------
Net Income $14,069 $12,419 $12,623
------------------------------------------
Comprehensive Income:
Change in unrealized gain on securities available for sale, net 2,931 441 5,209
Net change in minimum pension liability 27 (772) -
------------------------------------------
Comprehensive Income $17,027 $12,088 $17,832
==========================================
Average Shares Outstanding 7,019 7,072 7,192
Diluted Average Shares Outstanding 7,193 7,219 7,341
Per Share Data
Basic Earnings $2.00 $1.76 $1.76
Diluted Earnings $1.96 $1.72 $1.72
Dividends Paid $0.80 $0.80 $0.79
See Notes to Consolidated Financial Statements
-33-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income, net Total
-------------------------------------------------
Balance, December 31, 1999 $50,043 $28,613 ($5,533) $73,123
Net income for the period 12,623 12,623
Stock issued, including
stock option tax benefits 665 665
Repurchase of common stock (349) (427) (776)
Dividends (5,680) (5,680)
Unrealized gain on securities available
for sale, net 5,209 5,209
-------------------------------------------------
Balance, December 31, 2000 $50,428 $35,129 ($324) $85,233
Net income for the period 12,419 12,419
Stock issued, including
stock option tax benefits 1,872 1,872
Repurchase of common stock (2,621) (3,997) (6,618)
Dividends (5,642) (5,642)
Unrealized gain on securities available
for sale, net 441 441
Change in minimum pension liability, net (772) (772)
-------------------------------------------------
Balance, December 31, 2001 $49,679 $37,909 ($655) $86,933
Net income for the period 14,069 14,069
Stock issued, including
stock option tax benefits 863 863
Repurchase of common stock (70) (119) (189)
Dividends (5,620) (5,620)
Unrealized gain on securities available
for sale, net 2,931 2,931
Change in minimum pension liability, net 27 27
-------------------------------------------------
Balance December 31, 2002 $50,472 $46,239 $2,303 $99,014
=================================================
See Notes to Consolidated Financial Statements
-34-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended December 31,
2002 2001 2000
----------------------------------------------------
Operating Activities:
Net income $14,069 $12,419 $12,623
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment, and amortization 2,608 2,708 2,641
Amortization of intangible assets 911 911 965
Provision for loan losses 2,800 4,400 5,000
Amortization of investment securities premium, net 1,841 398 217
Deferred income taxes (1,247) (660) (650)
Investment security gains, net - (1,792) (1,510)
Originations of loans for resale (177,796) (125,675) (50,254)
Proceeds from sale of loans originated for resale 179,415 126,961 50,798
Gain on sale of loans (3,641) (2,095) (802)
Amortization of mortgage servicing rights 713 223 186
Amortization of stock options - - 69
Loss (gain) on sale of fixed assets 8 (9) 77
Gain on sale of other real estate owned, net (8) (80) (83)
Provision for losses on other real estate owned - 18 25
Change in assets and liabilities:
(Increase) decrease in interest receivable (122) 1,413 (859)
(Decrease) increase in interest payable (561) (1,757) 1,052
Increase (decrease) in other assets and liabilities 3,316 (2,161) (132)
----------------------------------------------------
Net Cash Provided by Operating Activities 22,306 15,222 19,363
----------------------------------------------------
Investing Activities:
Proceeds from maturities of securities available-for-sale 131,592 85,619 39,663
Proceeds from sales of securities available-for-sale - 14,119 -
Purchases of securities available-for-sale (241,794) (93,125) (27,567)
Net increase in loans (31,203) (21,678) (58,330)
Proceeds from sale of premises and equipment 17 32 40
Purchases of property and equipment (3,121) (1,951) (2,998)
Proceeds from sale of other real estate owned 79 1,757 928
----------------------------------------------------
Net Cash Used by Investing Activities (144,430) (15,227) (48,264)
----------------------------------------------------
Financing Activities:
Net increase in deposits 124,844 42,561 43,722
Net (decrease) increase in federal funds purchased - (500) 500
Borrowings under long-term debt agreements - - 35,000
Payments of principal on long-term debt agreements (32) (11,027) (46,522)
Repurchase of Common Stock (189) (6,618) (776)
Dividends paid (5,620) (5,642) (5,680)
Exercise of stock options/issuance of Common Stock 427 1,005 411
----------------------------------------------------
Net Cash Provided by Financing Activities 119,430 19,779 26,655
----------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (2,694) 19,774 (2,246)
----------------------------------------------------
Cash and Cash Equivalents and Beginning of Period 77,964 58,190 60,436
----------------------------------------------------
Cash and Cash Equivalents at End of Period $75,270 $77,964 $58,190
====================================================
Supplemental Disclosure of Noncash Activities:
Loans transferred to other real estate owned 932 325 1,551
Supplemental Disclosure of Cash Flow Activity:
Cash paid for interest expense 13,475 25,243 27,491
Cash paid for income taxes 7,900 9,089 7,573
Income tax benefit from stock option exercises $436 $867 $254
See Notes to Consolidated Financial Statements
-35-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
Note 1 - General Summary of Significant Accounting Policies
The accounting and reporting policies of TriCo Bancshares (the "Company")
conform to generally accepted accounting principles. The following are
descriptions of the more significant accounting and reporting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Nature of Operations
The Company operates 32 branch offices and 10 in-store branch offices in the
California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern,
Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento, Shasta, Siskiyou,
Stanislaus, Sutter, Tehama, Tulare and Yuba. The Company's operating policy
since its inception has emphasized retail banking. Most of the Company's
customers are retail customers and small to medium sized businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, investments, intangible assets, income taxes and contingencies. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The one accounting estimate that materially affects the financial
statements is the allowance for loan losses.
Investment Securities
The Company classifies its debt and marketable equity securities into one of
three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling in the
near term. Held-to-maturity securities are those securities which the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale. In
2002 and 2001, the Company did not have any securities classified as either
held-to-maturity or trading.
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses, net of the related tax effect, on available-for-sale securities are
reported as a separate component of other comprehensive income in shareholders'
equity until realized.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses for securities are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
Unrealized losses due to fluctuations in fair value of securities held to
maturity or available for sale are recognized through earnings when it is
determined that a permanent decline in value has occurred.
Loans
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over the estimated life
of the loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is generally
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. When loans are 90
days past due, but in Management's judgment are well secured and in the process
of collection, they may not be classified as nonaccrual. When a loan is placed
on nonaccrual status, all interest previously accrued but not collected is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
-36-
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
Management believes that the collectibility of the principal is unlikely or,
with respect to consumer installment loans, according to an established
delinquency schedule. The allowance is an amount that Management believes will
be adequate to absorb probable losses inherent in existing loans, leases and
commitments to extend credit, based on evaluations of the collectibility,
impairment and prior loss experience of loans, leases and commitments to extend
credit. The evaluations take into consideration such factors as changes in the
nature and size of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, commitments, and current economic
conditions that may affect the borrower's ability to pay. The Company defines a
loan as impaired when it is probable the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan's original effective interest rate. As a practical
expedient, impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
When the measure of the impaired loan is less than the recorded investment in
the loan, the impairment is recorded through a valuation allowance.
Mortgage Operations
Transfers and servicing of financial assets and extinguishments of liabilities
are accounted for and reported based on consistent application of a
financial-components approach that focuses on control. Transfers of financial
assets that are sales are distinguished from transfers that are secured
borrowings. Retained interests (mortgage servicing rights) in loans sold are
measured by allocating the previous carrying amount of the transferred assets
between the loans sold and retained interest, if any, based on their relative
fair value at the date of transfer. Fair values are estimated using discounted
cash flows based on a current market interest rate.
The Company recognizes a gain and a related asset for the fair value of the
rights to service loans for others when loans are sold. The Company sold
substantially all of its conforming long-term residential mortgage loans
originated during 2002, 2001, and 2000 for cash proceeds equal to the fair value
of the loans.
The following table summarizes the Company's mortgage servicing rights assets as
of December 31, 2002 and 2001.
December 31, December 31,
(Dollars in thousands) 2001 Additions Reductions 2002
-------------------------------------------------
Mortgage Servicing Rights $1,512 $2,022 ($713) $2,821
=================================================
The recorded value of mortgage servicing rights is included in other assets, and
is amortized in proportion to, and over the period of, estimated net servicing
revenues. The Company assesses capitalized mortgage servicing rights for
impairment based upon the fair value of those rights at each reporting date. For
purposes of measuring impairment, the rights are stratified based upon the
product type, term and interest rates. Fair value is determined by discounting
estimated net future cash flows from mortgage servicing activities using
discount rates that approximate current market rates and estimated prepayment
rates, among other assumptions. The amount of impairment recognized, if any, is
the amount by which the capitalized mortgage servicing rights for a stratum
exceeds their fair value. Impairment, if any, is recognized through a valuation
allowance for each individual stratum.
At December 31, 2002, the Company had no mortgage loans held for sale. At
December 31, 2002 and 2001, the Company serviced real estate mortgage loans for
others of $307 million and $196 million, respectively.
Premises and Equipment
Premises and equipment, including those acquired under capital lease, are stated
at cost less accumulated depreciation and amortization. Depreciation and
amortization expenses are computed using the straight-line method over the
estimated useful lives of the related assets or lease terms. Asset lives range
from 3-10 years for furniture and equipment and 15-40 years for land
improvements and buildings.
Other Real Estate Owned
Real estate acquired by foreclosure is carried at the lower of the recorded
investment in the property or its fair value less estimated disposition costs.
Prior to foreclosure, the value of the underlying loan is written down to the
fair value of the real estate to be acquired less estimated disposition costs by
a charge to the allowance for loan losses, when necessary. Any subsequent
write-downs are recorded as a valuation allowance with a charge to other
expenses in the income statement together with other expenses related to such
properties, net of related income. Gains and losses on disposition of such
property are included in other income or other expenses as applicable.
-37-
Identifiable Intangible Assets
Identifiable intangible assets consist of core deposit intangibles and minimum
pension liability.
The following table summarizes the Company's core deposit intangible as of
December 31, 2002 and 2001.
December 31, December 31,
(Dollar in Thousands) 2001 Additions Reductions 2002
-------------------------------------------------
Core deposit intangibles $10,278 $10,278
Accumulated amortization (5,725) ($911) (6,636)
-------------------------------------------------
Core deposit intangibles, net $4,553 ($911) $3,642
=================================================
Core deposit premiums are scheduled to amortize at a rate of $227,700 per
quarter through the quarter ended December 31, 2006. Core deposit premiums are
amortized using an accelerated method over a period of ten years. The Company
reviews for impairment of certain intangibles held, whenever events or changes
indicate that the carrying amount of an asset may not be recoverable. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair market value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
The following table summarizes the Company's minimum pension liability
intangible as of December 31, 2002 and 2001.
December 31, December 31,
(Dollar in Thousands) 2001 Additions Reductions 2002
--------------------------------------------
Minimum pension liability intangible $517 ($116) $401
============================================
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates.
Income Taxes
The Company's accounting for income taxes is based on an asset and liability
approach. The Company recognizes the amount of taxes payable or refundable for
the current year, and deferred tax assets and liabilities for the future tax
consequences that have been recognized in its financial statements or tax
returns. The measurement of tax assets and liabilities is based on the
provisions of enacted tax laws.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold.
Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25). Under this method, compensation expense is recognized for awards of
options to purchase shares of common stock to employees under compensatory plans
only if the fair market value of the stock at the option grant date (or other
measurement date, if later) is greater than the amount the employee must pay to
acquire the stock. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue
using the intrinsic value method or to adopt a fair value based method to
account for stock option plans. The fair value based method results in
recognizing as expense over the vesting period the fair value of all stock-based
awards on the date of grant. The Company has elected to continue to use the
intrinsic value method.
Had compensation cost for the Company's option plans been determined in
accordance with SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
(in thousands, except per share amounts) 2002 2001 2000
Net income As reported $14,069 $12,419 $12,623
Pro forma $13,857 $12,253 $12,507
Basic earnings per share As reported $2.00 $1.76 $1.76
Pro forma $1.97 $1.73 $1.74
Diluted earnings per share As reported $1.96 $1.72 $1.72
Pro forma $1.93 $1.70 $1.70
Stock-based employee compensation
cost, net of related tax effects,
included in net income As reported $0 $0 $40
Pro forma $212 $166 $156
-38-
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000: risk-free interest rate of
4.01%, 4.80% and 6.65%; expected dividend yield of 3.3%, 4.9% and 4.7%; expected
life of 6 years, 6 years and 6 years; expected volatility of 27%, 28% and 30%,
respectively. The weighted average grant date fair value of an option to
purchase one share of common stock was %5.37, $3.26, and $3.99, respectively.
Comprehensive Income
For the Company, comprehensive income includes net income reported on the
statement of income, changes in the fair value of its available-for-sale
investments, and changes in the minimum pension liability reported as a
component of shareholders' equity. The changes in the components of accumulated
other comprehensive income for the years ended December 31, 2002, 2001, and 2000
are reported as follows:
2002 2001 2000
----------------------------------------
Unrealized Gain (Loss) on Securities (in thousands)
Beginning Balance $117 ($324) ($5,533)
Unrealized gain (loss) arising during the period, net of tax 2,931 (669) $5,209
Less: Reclassification adjustment for net realized gains
on securities available for sale included in net
income during the year, net of tax of $0, $681 and $0, respectively -- 1,110 --
----------------------------------------
Ending Balance $3,048 $117 ($324)
========================================
Minimum Pension Liability
Beginning Balance ($772) $ -- $ --
Change in minimum pension liability, net of tax
of 18, ($517), and $0, respectively 27 ($772) --
----------------------------------------
Ending Balance ($745) ($772) --
========================================
Total accumulated other comprehensive income (loss), net $2,303 ($655) ($324)
========================================
Reclassifications
Certain amounts previously reported in the 2001 and 2000 financial statements
have been reclassified to conform to the 2002 presentation. These
reclassifications did not affect previously reported net income or total
shareholders' equity.
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 141, "Business Combinations" (SFAS 141),
and Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized after 2001, but instead be periodically
evaluated for impairment. Intangible assets with definite useful lives are
required to be amortized over their respective estimated useful lives to their
estimated residual values, and also reviewed for impairment.
Effective January 1, 2002, the Company was required to adopt the provisions of
SFAS 142. Accordingly, any goodwill and any intangible asset determined to have
an indefinite useful life that are acquired in a purchase business combination
will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate accounting literature. The Company was also
required to reassess the useful lives and residual values of all such intangible
assets and make any necessary amortization period adjustments by March 31, 2002.
No such adjustments were required to be made.
As of the date of adoption, the Company had identifiable intangible assets
consisting of core deposit premiums and minimum pension liability. Core deposit
premiums are amortized using an accelerated method over a period of ten years.
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates. The Company has no goodwill (unidentifiable
intangible assets).
-39-
Note 2 - Restricted Cash Balances
Reserves (in the form of deposits with the Federal Reserve Bank) of $500,000
were maintained to satisfy Federal regulatory requirements at December 31, 2002
and December 31, 2001. These reserves are included in cash and due from banks in
the accompanying balance sheets.
Note 3 - Investment Securities
The amortized cost and estimated fair values of investments in debt and equity
securities are summarized in the following tables. Also included in the
following table are other securities that do not have readily determinable fair
value because their ownership is restricted and they lack a market. These other
securities are carried at cost and consist mainly of Federal Home Loan Bank
stock with a cost of $4,228,000 and $4,000,000 at December 31, 2002 and 2001,
respectively:
December 31, 2002
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
Securities Available-for-Sale (in thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 58,823 $ 319 $ - $ 59,142
Obligations of states and political subdivisions 42,016 2,028 (8) 44,036
Mortgage-backed securities 213,770 4,693 - 218,463
Corporate debt securities 13,742 261 (2,033) 11,970
------------------------------------------------------------
Total securities available-for-sale 328,351 7,301 (2,041) 333,611
Other securities 4,413 4,413
------------------------------------------------------------
Totals $ 332,764 $ 7,301 $ (2,041) $ 338,024
============================================================
December 31, 2001
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
Securities Available-for-Sale (in thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 29,991 $ 34 $ (142) $ 29,883
Obligations of states and political subdivisions 44,524 833 (124) 45,233
Mortgage-backed securities 131,972 1,246 (217) 133,001
Corporate debt securities 13,731 177 (1,620) 12,288
------------------------------------------------------------
Total securities available-for-sale 220,218 2,290 (2,103) 220,405
Other securities 4,185 4,185
------------------------------------------------------------
Totals investment securities $ 224,403 $ 2,290 $ (2,103) $ 224,590
============================================================
The amortized cost and estimated fair value of debt securities at December 31,
2002 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
-40-
Estimated
Amortized Fair
Cost Value
------------------------------
(in thousands)
Investment Securities
Due in one year $11,974 $12,149
Due after one year through five years 58,864 59,563
Due after five years through ten years 85,889 87,125
Due after ten years 171,624 174,774
No stated maturity 4,413 4,413
------------------------------
Totals $332,764 $338,024
==============================
Proceeds from sales of investment securities were as follows:
Gross Gross Gross
For the Year Proceeds Gains Losses
- -----------------------------------------------------------
(in thousands)
2002 -- -- --
2001 $14,119 $1,796 $4
2000 -- -- --
Investment securities with an aggregate carrying value of $104,561,000 and
$93,605,000 at December 31, 2002 and 2001, respectively, were pledged as
collateral for specific borrowings, lines of credit and local agency deposits.
Note 4 - Allowance for Loan Losses
Activity in the allowance for loan losses was as follows:
Years Ended December 31,
2002 2001 2000
--------------------------------
(in thousands)
Balance, beginning of year $13,058 $11,670 $11,037
Provision for loan losses 2,800 4,400 5,000
Loans charged off (1,786) (3,213) (4,705)
Recoveries of loans previously charged off 305 201 338
--------------------------------
Balance, end of year $14,377 $13,058 $11,670
================================
Loans classified as nonaccrual amounted to approximately $8,140,000, $5,466,000
and $12,262,000 at December 31, 2002, 2001, and 2000, respectively. These
nonaccrual loans were classified as impaired and are included in the recorded
balance in impaired loans for the respective years shown below. If interest on
those loans had been accrued, such income would have been approximately
$477,000, $260,000 and $731,000 in 2002, 2001 and 2000, respectively.
-41-
As of December 31, the Company's recorded investment in impaired loans and the
related valuation allowance were as follows (in thousands):
2002
-----------------------------
Recorded Valuation
Investment Allowance
-----------------------------
Impaired loans -
Valuation allowance required $8,180 $881
No valuation allowance required -- --
-----------------------------
Total impaired loans $8,180 $881
=============================
2001
-----------------------------
Recorded Valuation
Investment Allowance
-----------------------------
Impaired loans -
Valuation allowance required $6,050 $881
No valuation allowance required -- --
-----------------------------
Total impaired loans $6,050 $881
=============================
This valuation allowance is included in the allowance for loan losses shown
above for the respective year. The average recorded investment in impaired loans
was $7,115,000, $9,639,000 and, $7,954,000 for the years ended December 31,
2002, 2001 and 2000, respectively. The Company recognized interest income on
impaired loans of $733,000, $441,000 and $1,171,000 for the years ended December
31, 2002, 2001 and 2000, respectively.
Note 5 - Premises and Equipment
Premises and equipment were comprised of:
December 31,
2002 2001
-------------------------
(in thousands)
Premises $13,031 $12,269
Furniture and equipment 18,092 16,133
-------------------------
31,123 28,402
Less:
Accumulated depreciation
and amortization (17,401) (15,466)
-------------------------
13,722 12,936
Land and land improvements 3,502 3,521
-------------------------
$17,224 $16,457
=========================
Depreciation and amortization of premises and equipment amounted to $2,329,000,
$2,243,000 and $2,152,000 in 2002, 2001 and 2000, respectively.
-42-
Note 6 - Time Deposits
At December 31, 2002, the scheduled maturities of time deposits were as follows
(in thousands):
Scheduled
Maturities
----------
2003 $210,757
2004 17,970
2005 8,577
2006 966
2007 and thereafter 53,726
----------
Total $291,996
==========
Note 7 - Long-Term Debt and Other Borrowings
Long-term debt is as follows:
December 31,
2002 2001
--------------------------
(in thousands)
FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable
in its entirety by FHLB on a quarterly basis beginning April 7, 2003 $20,000 $20,000
FHLB loan, fixed rate of 5.35% payable on December 9, 2008 1,500 1,500
FHLB loan, fixed rate of 5.77% payable on February 23, 2009 1,000 1,000
Capital lease obligation on premises, effective rate of 13% payable
monthly in varying amounts through December 1, 2009 424 456
--------------------------
Total long-term debt $22,924 $22,956
==========================
The Company maintains a collateralized line of credit with the Federal Home Loan
Bank of San Francisco. Based on the FHLB stock requirements at December 31,
2002, this line provided for maximum borrowings of $58,848,000 of which
$22,500,000 was outstanding, leaving $36,348,000 available. The maximum
month-end outstanding balances of short term reverse repurchase agreements in
2002 and 2001 were $0 and $0, respectively. The Company has available unused
lines of credit totaling $52,500,000 for Federal funds transactions at December
31, 2002.
Note 8 - Commitments and Contingencies (See also Note 16)
At December 31, 2002, future minimum commitments under non-cancelable capital
and operating leases with initial or remaining terms of one year or more are as
follows:
Capital Operating
Leases Leases
------------------------------
(in thousands)
2003 $90 $1,115
2004 91 970
2005 92 828
2006 93 660
2007 94 604
Thereafter 192 2,102
------------------------------
Future minimum lease payments 652 $6,279
Less amount representing interest 228 ==========
-------
Present value of future lease payments $424
=======
Rent expense under operating leases was $1,201,000 in 2002, $1,241,000 in 2001
and $971,000 in 2000.
-43-
The Company is a defendant in legal actions arising from normal business
activities. Management believes, after consultation with legal counsel, that
these actions are without merit or that the ultimate liability, if any,
resulting from them will not materially affect the Company's financial position
or results from operations.
Note 9 - Shareholders' Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of
$5,779,000, $12,187,000 and $7,118,000 in 2002, 2001 and 2000, respectively. The
Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the
State of California Department of Financial Institutions. California banking
laws limit the Bank's ability to pay dividends to the lesser of (1) retained
earnings or (2) net income for the last three fiscal years, less cash
distributions paid during such period. Under this regulation, at December 31,
2002, the Bank may pay dividends of $15,390,000.
Shareholders' Rights Plan
On June 25, 2001, the Company announced that its Board of Directors adopted and
entered into a Shareholder Rights Plan designed to protect and maximize
shareholder value and to assist the Board of Directors in ensuring fair and
equitable benefit to all shareholders in the event of a hostile bid to acquire
the Company.
The Company adopted this Rights Plan to protect stockholders from coercive or
otherwise unfair takeover tactics. In general terms, the Rights Plan imposes a
significant penalty upon any person or group that acquires 15% or more of the
Company's outstanding common stock without approval of the Company's Board of
Directors. The Rights Plan was not adopted in response to any known attempt to
acquire control of the Company.
Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was
declared for each common share held of record as of the close of business on
July 10, 2001. No separate certificates evidencing the Rights will be issued
unless and until they become exercisable.
The Rights generally will not become exercisable unless an acquiring entity
accumulates or initiates a tender offer to purchase 15% or more of the Company's
common stock. In that event, each Right will entitle the holder, other than the
unapproved acquirer and its affiliates, to purchase either the Company's common
stock or shares in an acquiring entity at one-half of market value.
The Right's initial exercise price, which is subject to adjustment, is $49.00
per Right. The Company's Board of Directors generally will be entitled to redeem
the Rights at a redemption price of $.01 per Right until an acquiring entity
acquires a 15% position. The Rights expire on July 10, 2011.
Stock Repurchase Plan
On March 15, 2001, the Company announced the completion of its stock repurchase
plan initially announced on July 20, 2000. Under this repurchase plan, the
Company repurchased a total of 150,000 shares of which 110,000 shares were
repurchased since December 31, 2000.
On October 19, 2001, the Company announced the completion of its stock
repurchase plan initially announced on March 15, 2001. Under this repurchase
plan, the Company repurchased a total of 150,000 shares.
Also on October 19, 2001, the Company announced that its Board of Directors
approved a new plan to repurchase, as conditions warrant, up to 150,000
additional shares of the Company's stock on the open market or in privately
negotiated transactions. The timing of purchases and the exact number of shares
to be purchased will depend on market conditions. The 150,000 shares covered by
this repurchase plan represented approximately 2.2% of the Company's 6,992,080
then outstanding common shares. As of December 31, 2002, the Company had
repurchased 118,800 shares under this new plan.
Note 10 - Stock Options
In May 2001, the Company adopted the TriCo Bancshares 2001 Stock Option Plan
(2001 Plan) covering officers, employees, directors of, and consultants to the
Company. Under the 2001 Plan, the option price cannot be less than the fair
market value of the Common Stock at the date of grant except in the case of
substitute options. Options for the 2001 Plan expire on the tenth anniversary of
the grant date. Vesting schedules under the 2001 Plan are determined
individually for each grant.
In May 1995, the Company adopted the TriCo Bancshares 1995 Incentive Stock
Option Plan (1995 Plan) covering key employees. Under the 1995 Plan, the option
price cannot be less than the fair market value of the Common Stock at the date
of grant. Options for the 1995 Plan expire on the tenth anniversary of the grant
date. Vesting schedules under the 1995 Plan are determined individually for each
grant.
-44-
The Company also has outstanding options under the TriCo Bancshares 1993
Nonqualified Stock Option Plan (1993 Plan). Options under the 1993 Plan were
granted at an exercise price less than the fair market value of the common stock
and vest over a six year period. Unexercised options for the 1993 Plan terminate
10 years from the date of the grant.
Stock option activity is summarized in the following table:
Weighted Weighted
Average Average
Number Option Price Exercise Fair Value
Of Shares Per Share Price of Grants
Outstanding at
December 31, 1999 500,891 4.95 to 18.25 7.82
Options granted 118,900 16.13 to 16.13 16.13 $3.99
Options exercised (78,625) 5.24 to 5.24 5.24
Options forfeited (750) 18.25 to 18.25 18.25
Outstanding at
December 31, 2000 540,416 4.95 to 18.25 10.01
Options granted 323,000 16.10 to 16.40 16.38 $3.26
Options exercised (192,530) 4.95 to 5.24 5.22
Options forfeited (12,000) 16.13 to 18.25 16.92
Outstanding at
December 31, 2001 658,886 $5.24 to $18.25 $14.41
Options granted 40,500 23.44 to 24.76 23.88 $5.37
Options exercised (69,986) 5.24 to 18.25 6.10
Options forfeited (2,000) 24.25 to 24.25 24.25
Outstanding at
December 31, 2002 627,400 $5.24 to $24.76 $15.92
-45-
The following table shows the number, weighted-average exercise price, and the
weighted average remaining contractual life of options outstanding, and the
number and weighted-average exercise price of options exercisable as of December
31, 2002 by range of exercise price:
Outstanding Options Exercisable Options
------------------------------------------------ -----------------------------
Weighted-Average
Range of Weighted-Average Remaining Weighted-Average
Exercise Price Number Exercise Price Contractual Life Number Exercise Price
$4-$6 31,550 $5.24 0.92 years 31,550 $5.24
$8-$10 20,700 $8.93 2.44 20,700 $8.93
$12-$14 30,000 $12.25 3.48 30,000 $12.25
$14-$16 15,000 $14.17 4.01 15,000 $14.17
$16-$18 432,400 $16.32 8.11 176,284 $16.30
$18-$20 59,250 $18.25 4.78 59,250 $18.25
$22-$24 20,000 $23.44 9.94 - -
$24-$26 18,500 $24.32 9.37 500 $24.76
Of the stock options outstanding as of December 31, 2002, 2001, and 2000,
options on shares totaling 333,284, 330,046, and 426,902, respectively, were
exercisable at weighted average prices of $14.70, $12.50, and $8.38,
respectively.
The Company has stock options outstanding under the three option plans described
above. The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized except for the options granted
under the 1993 plan. The Company recognized expense of $0, $0, and $69,000 for
the 1993 Plan options in 2002, 2001 and 2000, respectively.
Note 11 - Other Noninterest Income and Expenses
The components of other noninterest income were as follows:
Years Ended December 31,
2002 2001 2000
------------------------------
(in thousands)
Increase in cash value of insurance policies $606 $476 $657
Sale of customer checks 264 283 286
Gain on sale of other real estate owned 7 80 83
Other 909 841 1,316
------------------------------
Total other noninterest income $1,786 $1,680 $2,342
==============================
The components of other noninterest expenses were as follows:
Years Ended December 31,
2002 2001 2000
------------------------------
(in thousands)
Equipment and data processing $4,095 $3,694 $3,376
Occupancy 2,954 2,806 2,587
Professional fees 1,696 1,087 1,005
Telecommunications 1,422 1,253 957
Advertising 1,263 1,132 1,336
Intangible amortization 911 911 965
ATM network charges 847 913 770
Postage 801 639 486
Courier service 720 661 608
Operational losses 534 227 807
Assessments 233 223 222
Net other real estate owned expense 26 175 127
Other 6,179 5,687 4,737
------------------------------
Total other noninterest expenses $21,681 $19,408 $17,983
==============================
-46-
Note 12 - Income Taxes
The current and deferred components of the income tax provision were comprised
of:
Years Ended December 31,
2002 2001 2000
------------------------------
(in thousands)
Current Tax Provision:
Federal $6,826 $5,975 $5,890
State 2,543 2,009 1,997
------------------------------
Total current 9,369 7,984 7,887
Deferred Tax Benefit:
Federal (735) (518) (511)
State (512) (142) (139)
------------------------------
Total deferred (1,247) (660) (650)
------------------------------
Provision for income taxes $8,122 $7,324 $7,237
==============================
Taxes recorded directly to shareholders' equity are not included in the
preceding table. These taxes (benefits) relating to changes in minimum pension
liability amounting to ($19,000) in 2002, $541,000 in 2001 and $0 in 2000,
unrealized gains and losses on available-for-sale investment securities
amounting to $2,142 in 2002, $258,000 in 2001 and $2,996,000 in 2000, and
benefits related to employee stock options of ($436,000) in 2002, ($867,000) in
2001 and ($254,000) in 2000 were recorded directly to shareholders' equity.
The provisions for income taxes applicable to income before taxes for the years
ended December 31, 2002, 2001 and 2000 differ from amounts computed by applying
the statutory Federal income tax rates to income before taxes. The effective tax
rate and the statutory federal income tax rate are reconciled as follows:
Years Ended December 31,
2002 2001 2000
----------------------------
Federal statutory income tax rate 35.0% 35.0% 34.0%
State income taxes, net of federal tax benefit 6.0 6.5 6.2
Tax-exempt interest on municipal obligations (3.3) (3.9) (3.9)
Other (1.1) (0.5) 0.1
----------------------------
Effective Tax Rate 36.6% 37.1% 36.4%
============================
-47-
The components of the net deferred tax asset of the Company as of December 31,
were as follows:
2002 2001
--------------------------
(in thousands)
Deferred Tax Assets:
Loan losses $6,045 $5,223
Deferred compensation 3,523 3,061
Intangible amortization 980 895
State taxes 871 695
Pension liability 522 541
Fixed asset write down 232 220
Nonaccrual interest 201 109
OREO write downs 160 167
Stock option amortization 32 93
--------------------------
Total deferred tax assets 12,566 11,004
--------------------------
Deferred Tax Liabilities:
Unrealized gain on securities (2,221) (79)
Depreciation (645) (658)
Securities income (419) (331)
Securities accretion (418) (368)
Capital leases (95) (98)
Other, net (339) (136)
--------------------------
Total deferred tax liability (4,137) (1,670)
--------------------------
Net deferred tax asset $8,429 $9,334
==========================
Note 13 - Retirement Plans
Substantially all employees with at least one year of service are covered by a
discretionary employee stock ownership plan (ESOP). Contributions are made to
the plan at the discretion of the Board of Directors. Contributions to the
plan(s) totaling $955,000 in 2002, $850,000 in 2001 and $842,000 in 2000 are
included in salary expense.
The Company has an Executive Deferred Compensation Plan and a Director Deferred
Compensation Plan, which allow directors and key executives designated by the
Board of Directors of the Company to defer a portion of their compensation. The
Company has purchased insurance on the lives of the participants and intends to
use the cash values of these policies ($6,564,000 and $6,304,000 at December 31,
2002 and 2001, respectively) to pay the deferred compensation obligations of
$4,451,000 and $3,609,000 at December 31, 2002 and 2001, respectively.
The Company has a supplemental retirement plan for directors and a supplemental
executive retirement plan covering key executives. These plans are non-qualified
defined benefit plans and are unsecured and unfunded. The Company has purchased
insurance on the lives of the participants and intends to use the cash values of
these policies ($8,644,000 and $8,298,000 at December 31, 2002 and 2001,
respectively) to pay the retirement obligations.
In accordance with the provisions of Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions," the Bank recorded in Other
Liabilities an additional minimum pension liability of $1,642,000 related to the
supplemental retirement plan as of December 31, 2002. These amounts represent
the amount by which the accumulated benefit obligations for this retirement plan
exceeded the fair value of plan assets plus amounts previously accrued related
to the plan. These additional liabilities have been offset by an intangible
asset to the extent of previously unrecognized net transitional obligation and
unrecognized prior service costs of each plan. The amount in excess of
previously unrecognized prior service cost and unrecognized net transitional
obligation is recorded as a reduction of shareholders' equity in the amount of
$745,000, representing the after-tax impact, at December 31, 2002.
-48-
The following table sets forth the plans' status:
December 31,
2002 2001
--------------------
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $(6,261) $(5,134)
Service cost (107) (86)
Interest cost (428) (372)
Amendments -- (108)
Actuarial gain (loss) (367) (862)
Benefits paid 482 301
--------------------
Benefit obligation at end of year $(6,681) $(6,261)
====================
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ --
--------------------
Fair value of plan assets at end of year $ -- $ --
====================
Funded status $(6,681) $(6,261)
Unrecognized net obligation existing at January 1, 1986 80 115
Unrecognized net actuarial loss 2,354 2,075
Unrecognized prior service cost 321 402
Intangible asset (401) (517)
Accumulated other comprehensive income (1,243) (1,289)
--------------------
Accrued benefit cost $(5,570) $(5,475)
====================
Years Ended December 31,
2002 2001 2000
------------------------
(in thousands)
Net pension cost included the following components:
Service cost-benefits earned during the period $107 $ 86 $ 74
Interest cost on projected benefit obligation 428 372 317
Amortization of net obligation at transition 35 35 35
Amortization of prior service cost 81 39 13
Recognized net actuarial loss 87 53 41
------------------------
Net periodic pension cost $738 $585 $480
========================
The net periodic pension cost was determined using a discount rate assumption of
7.00% for 2002, 7.25% for 2001 and 7.25% for 2000, respectively. The rates of
increase in compensation used in each year were 2.5% to 5%.
-49-
Note 14 - Earnings per Share
The Company's basic and diluted earnings per share are as follows (in thousands
except per share data):
Year Ended December 31, 2002
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $14,069 7,019,205 $2.00
Common stock options outstanding -- 173,809
------- --------
Diluted Earnings per Share
Net income available to common shareholders $14,069 7,193,014 $1.96
======= ========= =====
Year Ended December 31, 2001
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $12,419 7,072,588 $1.76
Common stock options outstanding -- 146,641
------- ---------
Diluted Earnings per Share
Net income available to common shareholders $12,419 7,219,229 $1.72
======= ========= =====
Year Ended December 31, 2000
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $12,623 7,191,790 $1.76
Common stock options outstanding -- 148,939
------- ---------
Diluted Earnings per Share
Net income available to common shareholders $12,623 7,340,729 $1.72
======= ========= =====
Excluded from the computation of diluted earnings per share were 36,000, 0, and
184,150 options for the years ended December 31, 2002, 2001, and 2000,
respectively, because the effect of these options was antidilutive.
Note 15 - Related Party Transactions
Certain directors, officers, and companies with which they are associated were
customers of, and had banking transactions with, the Company or the Bank in the
ordinary course of business. It is the Company's policy that all loans and
commitments to lend to officers and directors be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other borrowers of the Bank.
The following table summarizes the activity in these loans for 2002:
Balance Balance
December 31, Advances/ Removed/ December 31,
2001 New Loans Payments 2002
-------------------------------------------------------------------
(in thousands)
$6,369 $1,291 $4,322 $3,338
Note 16 - Financial Instruments With Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
-50-
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Contractual Amount
December 31,
--------------------------
2002 2001
(in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit:
Commercial loans $69,295 $72,646
Consumer loans 117,917 91,170
Real estate mortgage loans 6,028 2,932
Real estate construction loans 25,105 23,952
Standby letters of credit 8,818 4,391
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates of one year or less or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on Management's credit evaluation of the customer. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. Most standby letters
of credit are issued for one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Collateral requirements vary, but in general follow the
requirements for other loan facilities.
Note 17 - Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to
customers located throughout the northern San Joaquin Valley, the Sacramento
Valley and northern mountain regions of California. The Company has a
diversified loan portfolio within the business segments located in this
geographical area.
Note 18 - Disclosure of Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practical to estimate that
value. Cash and due from banks, fed funds purchased and sold, accrued interest
receivable and payable, and short-term borrowings are considered short-term
instruments. For these short-term instruments their carrying amount approximates
their fair value.
Securities
For all securities, fair values are based on quoted market prices or dealer
quotes. See Note 3 for further analysis.
Loans
The fair value of variable rate loans is the current carrying value. The
interest rates on these loans are regularly adjusted to market rates. The fair
value of other types of fixed rate loans is estimated by discounting the future
cash flows using current rates at which similar loans would be made to borrowers
with similar credit ratings for the same remaining maturities. The allowance for
loan losses is a reasonable estimate of the valuation allowance needed to adjust
computed fair values for credit quality of certain loans in the portfolio.
Deposit Liabilities and Long-Term Debt
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. These values do
not consider the estimated fair value of the Company's core deposit intangible,
which is a significant unrecognized asset of the Company. The fair value of time
deposits and debt is based on the discounted value of contractual cash flows.
-51-
Commitments to Extend Credit and Standby 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 credit worthiness of the counter parties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation with the
counter parties at the reporting date.
Fair value for financial instruments are management's estimates of the values at
which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including, any mortgage banking
operations, deferred tax assets, and premises and equipment. Further, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on the fair value estimates and have not been
considered in any of these estimates.
The estimated fair values of the Company's financial instruments are as follows:
December 31, 2002
-----------------------------
Carrying Fair
Amount Value
-----------------------------
Financial assets: (in thousands)
Cash and due from banks $67,170 $67,170
Federal funds sold 8,100 8,100
Securities:
Available-for-sale 338,024 338,024
Loans, net 673,145 667,535
Accrued interest receivable 5,644 5,644
Financial liabilities:
Deposits 1,005,237 972,323
Accrued interest payable 2,927 2,927
Long-term borrowings 22,924 25,347
Contract
Amount
-----------------------------
Off-balance sheet:
Commitments 218,345 21,835
Standby letters of credit 8,818 88
December 31, 2001
-----------------------------
Carrying Fair
Amount Value
-----------------------------
Financial assets: (in thousands)
Cash and due from banks $59,264 $59,264
Federal funds sold 18,700 18,700
Securities:
Available-for-sale 224,590 224,590
Loans, net 645,674 637,000
Accrued interest receivable 5,522 5,522
Financial liabilities:
Deposits 880,393 832,380
Accrued interest payable 3,488 3,488
Long-term borrowings 22,956 24,156
Contract
Amount
-----------------------------
Off-balance sheet:
Commitments 108,700 10,870
Standby letters of credit 4,391 44
-52-
Note 19 - TriCo Bancshares Financial Statements
TriCo Bancshares (Parent Only) Balance Sheets
December 31,
Assets 2002 2001
--------------------------
(in thousands)
Cash and Cash equivalents $239 $241
Securities available-for-sale 180 180
Investment in Tri Counties Bank 96,708 85,446
Other assets 1,887 1,066
--------------------------
Total assets $99,014 $86,933
==========================
Liabilities and shareholders' equity
Total liabilities $ -- $ --
--------------------------
Shareholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares;
issued and outstanding 7,060,965
and 7,000,980 shares, respectively $50,472 $49,679
Retained earnings 46,239 37,909
Accumulated other comprehensive income (loss) 2,303 (655)
--------------------------
Total shareholders' equity 99,014 86,933
--------------------------
Total liabilities and shareholders' equity $99,014 $86,933
==========================
Statements of Income Years Ended December 31,
2002 2001 2000
------------------------------
(in thousands)
Interest income $18 $17 $18
------------------------------
Administration expense 416 980 980
------------------------------
Loss before equity in net income of
Tri Counties Bank (398) (963) (962)
Equity in net income of Tri Counties Bank:
Distributed 5,779 12,187 7,118
Undistributed 8,522 798 6,070
Income taxes 166 397 397
------------------------------
Net income $14,069 $12,419 $12,623
==============================
-53-
Statements of Cash Flows
Years ended December 31,
2002 2001 2000
-------------------------------------------
(in thousands)
Operating activities:
Net income $14,069 $12,419 $12,623
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed equity in Tri Counties Bank (8,522) (798) (6,070)
Deferred income taxes (167) (397) (397)
-------------------------------------------
Net cash provided by operating activities 5,380 11,224 6,156
-------------------------------------------
Financing activities:
Issuance of common stock 427 1,005 411
Repurchase of common stock (189) (6,618) (776)
Cash dividends-- common (5,620) (5,642) (5,680)
-------------------------------------------
Net cash used for financing activities (5,382) (11,255) (6,045)
-------------------------------------------
(Decrease) increase in cash and cash equivalents (2) (31) 111
Cash and cash equivalents at beginning of year 241 272 161
-------------------------------------------
Cash and cash equivalents at end of year $239 $241 $272
===========================================
Note 20 - Regulatory Matters
The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 2002, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that Management believes have changed the institution's category.
-54-
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
(Dollars in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2002:
Total Capital (to Risk Weighted Assets):
Consolidated $102,378 11.97% =>$68,427 =>8.0% =>$85,534 =>10.0%
Tri Counties Bank $ 100,046 11.73% =>$68,259 =>8.0% =>$85,324 =>10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated $91,641 10.71% =>$34,213 =>4.0% =>$51,320 => 6.0%
Tri Counties Bank $89,335 10.47% =>$34,130 =>4.0% =>$51,195 => 6.0%
Tier I Capital (to Average Assets):
Consolidated $91,641 8.27% =>$44,304 =>4.0% =>$55,380 => 5.0%
Tri Counties Bank $89,369 8.08% =>$44,222 =>4.0% =>$55,278 => 5.0%
As of December 31, 2001:
Total Capital (to Risk Weighted Assets):
Consolidated $91,418 11.68% =>$62,620 =>8.0% =>$78,275 =>10.0%
Tri Counties Bank $89,253 11.43% =>$62,466 =>8.0% =>$78,083 =>10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated $81,595 10.43% =>$31,310 =>4.0% =>$46,965 => 6.0%
Tri Counties Bank $79,454 10.18% =>$31,233 =>4.0% =>$46,850 => 6.0%
Tier I Capital (to Average Assets):
Consolidated $81,595 8.17% =>$39,941 =>4.0% =>$49,926 => 5.0%
Tri Counties Bank $79,454 7.97% =>$39,865 =>4.0% =>$49,832 => 5.0%
Note 21 - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters
of 2002 and 2001, and is unaudited; however, in the opinion of Management, it
reflects all adjustments (which include only normal recurring adjustments)
necessary to present fairly the summarized results for such periods.
2002 Quarters Ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data)
Interest income $16,228 16,435 16,075 15,958
Interest expense 3,245 3,227 3,179 3,263
------- ------- ------- -------
Net interest income 12,983 13,208 12,896 12,695
Provision for loan losses 800 700 500 800
------- ------- ------- -------
Net interest income after
provision for loan losses 12,183 12,508 12,396 11,895
Noninterest income 5,998 5,413 3,943 3,826
Noninterest expense 12,473 12,133 10,963 10,402
------- ------- ------- -------
Income before income taxes 5,708 5,788 5,376 5,319
Income tax expense 1,960 2,161 2,011 1,990
------- ------- ------- -------
Net income $ 3,748 $ 3,627 $ 3,365 $ 3,329
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.52 $ 0.50 $ 0.47 $ 0.47
======= ======= ======= ========
Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= =======
-55-
2001 Quarters Ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data)
Interest income $16,860 $18,259 $18,327 $18,552
Interest expense 4,356 5,612 6,323 7,195
------- ------- ------- -------
Net interest income 12,504 12,647 12,004 11,357
Provision for loan losses 1,150 600 775 1,875
------- ------- ------- -------
Net interest income after
provision for loan losses 11,354 12,047 11,229 9,482
Noninterest income 3,920 3,713 3,577 5,028
Noninterest expense 10,170 10,465 10,233 9,739
------- ------- ------- -------
Income before income taxes 5,104 5,295 4,573 4,771
Income tax expense 1,746 2,050 1,736 1,792
------- ------- ------- -------
Net income $3,358 $ 3,245 $ 2,837 $ 2,979
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.47 $ 0.45 $ 0.39 $ 0.41
======= ======= ======= =======
Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= =======
Note 22 - Business Segments
The Company is principally engaged in traditional community banking activities
provided through its 32 branches and 10 in-store branches located throughout
Northern and Central California. Community banking activities include the Bank's
commercial and retail lending, deposit gathering and investment and liquidity
management activities. In addition to its community banking services, the Bank
offers investment brokerage and leasing services. These activities are monitored
and reported by Bank management as separate operating segments.
The accounting policies of the segments are the same as those described in Note
1. The Company evaluates segment performance based on net interest income, or
profit or loss from operations, before income taxes not including nonrecurring
gains and losses. The results of the separate branches have been aggregated into
a single reportable segment, Community Banking. The Company's leasing,
investment brokerage and real estate segments do not meet aggregation or
materiality criteria and therefore are reported as "Other" in the following
table.
Summarized financial information for the years ended December 31, 2002, 2001 and
2000 concerning the Bank's reportable segments is as follows (in thousands):
Community
Banking Other Total
2002
Net interest income $50,755 $1,027 $51,782
Noninterest income 16,243 2,937 19,180
Noninterest expense 43,904 2,067 45,971
Net income 12,864 1,205 14,069
Assets $1,128,148 $16,426 $1,144,574
2001
Net interest income $46,804 $1,708 $48,512
Noninterest income 13,331 2,907 16,238
Noninterest expense 38,654 1,953 40,607
Net income 10,729 1,690 12,419
Assets $990,279 $15,168 $1,005,447
2000
Net interest income $46,902 $882 $47,784
Noninterest income 11,783 3,139 14,922
Noninterest expense 35,864 1,982 37,846
Net income 11,328 1,295 12,623
Assets $956,447 $15,624 $972,071
-56-
Note 23 - Acquisition
On October 7, 2002, TriCo Bancshares announced that on October 3, 2002 it signed
a definitive agreement with Tri Counties Bank, its wholly owned subsidiary, and
North State National Bank, pursuant to which TriCo Bancshares will acquire all
of the outstanding stock of North State National Bank in exchange for cash of
approximately $13 million, approximately 716,000 shares of TriCo Bancshares
common stock and options to purchase approximately 92,450 shares of TriCo
Bancshares common stock, subject to adjustments as set forth in the agreement.
Based upon a closing price of $23.92 per share of TriCo Bancshares common stock
on October 3, 2002, the transaction was valued at $31.8 million. On March 19,
2003, shareholders of North State National Bank approved the proposed merger.
-57-
Independent Auditors' Report
To the Board of Directors
TriCo Bancshares and Subsidiary:
We have audited the accompanying consolidated balance sheet of TriCo Bancshares
and Subsidiary as of December 31, 2002, and the related consolidated statements
of income and comprehensive income, changes in shareholders' equity and cash
flows for the year 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 audit. The
consolidated financial statements of TriCo Bancshares as of December 31, 2001,
and for the two years then ended were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements in their report dated January 18, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TriCo
Bancshares and Subsidiary as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Sacramento, California
January 17, 2003
-58-
Independent Auditors' Report(1)
To the Board of Directors and Shareholders of TriCo Bancshares and Subsidiary:
We have audited the accompanying consolidated balance sheets of TriCo
Bancshares (a California corporation) and Subsidiary as of December 31, 2001 and
2000, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 financial position of TriCo
Bancshares and Subsidiary as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
San Francisco, California
January 18, 2002
(1) This report is a copy of a previously issued report and the predecessor
auditor has not reissued the report. Revisions to prior-period financial
statements are considered inconsequential.
-59-
MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY
To Our Shareholders:
The Management of TriCo Bancshares is responsible for the preparation,
integrity, reliability and consistency of the information contained in this
annual report. The consolidated financial statements, which necessarily include
amounts based on judgments and estimates, were prepared in conformity with
generally accepted accounting principles and prevailing practices in the banking
industry. All other financial information appearing throughout this annual
report is presented in a manner consistent with the consolidated financial
statements.
Management has established and maintains a system of internal controls that
provides reasonable assurance that the underlying financial records are reliable
for preparing the consolidated financial statements, and that assets are
safeguarded from unauthorized use or loss. This system includes extensive
written policies and operating procedures and a comprehensive internal audit
function, and is supported by the careful selection and training of staff, an
organizational structure providing for division of responsibility, and a Code of
Ethics covering standards of personal and business conduct.
Management believes that, as of December 31, 2002, the Company's internal
control environment is adequate to provide reasonable assurance as to the
integrity and reliability of the consolidated financial statements and related
financial information contained in the annual report. However, there are limits
inherent in all systems of internal accounting control and Management recognizes
that errors or irregularities may occur. Based on the recognition that the costs
of such systems should not exceed the benefits to be derived, Management
believes the Company's system provides an appropriate cost/benefit balance.
The system of internal controls is under the general oversight of the Board of
Directors acting through its Audit Committee, which is comprised entirely of
outside directors. The Audit Committee monitors the effectiveness of and
compliance with internal controls through a continuous program of internal
audit. This is accomplished through periodic meetings with Management, internal
auditors and independent auditors to assure that each is carrying out their
responsibilities.
The Company's 2002 consolidated financial statements have been audited by KPMG
LLP, independent certified public auditors elected by the shareholders. All
financial records and related data, as well as the minutes of shareholders and
directors meetings, have been made available to them. Management believes that
all representations made to the independent auditors during their audit were
valid and appropriate.
Richard P. Smith
President and Chief Executive Officer
Thomas J. Reddish
Vice President and Chief Financial Officer
-60-
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On March 22, 2002, the Company decided not to renew the engagement of its
independent public accountants, Arthur Andersen LLP ("Andersen"). This
determination followed the Company's decision to seek proposals from other
independent accountants to audit the Company's consolidated financial statements
for the year ending December 31, 2002.
The decision not to renew the engagement of Andersen was made by the Board of
Directors based upon a recommendation of its Audit Committee.
During the Company's the fiscal year ended December 31, 2001, and during the
interim period from December 31, 2001 through March 22, 2002, there were no
disagreements between the Company and Andersen on any matter of accounting
principles, financial statement disclosure, or auditing scope or procedure
which, if not resolved to Andersen's satisfaction, would have caused Andersen to
make reference to the matter of the disagreement in connection with their
reports. The audit reports of Andersen on the consolidated financial statements
of the Company as of December 31, 2001 and 2000 and for each of the three years
in the period ended December 31, 2001 did not contain any adverse opinion or
disclaimer of opinion, nor were these opinions qualified or modified as to
uncertainty, audit scope or accounting principles. The Company requested that
Andersen furnish it with a letter, addressed to the commission stating whether
or not it agrees with the above statements. The letter from Andersen is
incorporated by reference from the Company's 8-K dated March 27, 2002.
Effective March 22, 2002, the Board of Directors, based upon a recommendation of
its Audit Committee, retained KPMG LLP ("KPMG") as its independent accountants
to audit the Company's consolidated financial statements for the year ending
December 31, 2002. The decision to retain KPMG was ratified by shareholders at
the Annual Meeting of Shareholders in May 2002.
During the Company's two fiscal years ended December 31, 2001, and during the
interim period through March 22, 2002, there were no reportable events as
defined in Item 301 (a)(1)(v) of Regulation S-K.
During the Company's two fiscal years ended December 31, 2001, and during the
interim period through March 22, 2002, the Company did not consult with KPMG
regarding either:
(i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type
of audit opinion that might be rendered on the Company's
financial statements; or
(ii) any matter that was either the subject of a disagreement
(as defined in Item 304(a)(1)(iv) of regulation S-K and
related instruction to this Item) or a reportable event
identified (as described in Item 304(a)(1)(v) of
Regulation S-K and related instruction to this Item).
-61-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers of the registrant
required by this Item 10 is incorporated herein by reference from the "Board of
Directors", "Executive Officers" and "Ownership of Voting Securities" sections
of the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 13, 2003, which will be filed with the commission pursuant to
Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference
from the "Compensation of Executive Officers" section of the Company's Proxy
Statement for the annual meeting of shareholders to be held on May 13, 2003,
which will be filed with the commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table shows Company common stock authorized for issuance under the
Company's equity compensation plans as of December 31, 2002:
# of securities Weighted # of securities remaining
to be issued average available for future
upon exercise exercise price issuance under equity
of outstanding of outstanding compensation plans
options, warrants options, warrants (excluding securities
Plan category and rights (a) and rights (b) reflected in column (a)) (c)
- ------------- ------------------------------------------------------------
Equity compensation plans approved by security holders 627,400 $15.92 475,825
Equity compensation plans not approved by security holders 0 -- 0
The information required by this Item 12 is incorporated herein by reference
from the "Ownership of Voting Securities" section of the Company's Proxy
Statement for the annual meeting of shareholders to be held on May 13, 2003,
which will be filed with the commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by reference
from the "Committees and Meetings of the Board of Directors and Compensation of
Directors" sections of the Company's Proxy Statement for the annual meeting of
shareholders to be held on May 13, 2003, which will be filed with the commission
pursuant to Regulation 14A.
ITEM 14. CONTROLS AND PROCEDURES
(a) The Chief Executive Officer, Richard Smith, and the Chief Financial
Officer, Thomas Reddish, evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date within 90 days of the
filing of this report ("Evaluation Date"). Based on that evaluation,
they concluded that as of the Evaluation Date the Company's disclosure
controls and procedures are effective to allow timely communication to
them of information relating to the Company and the Bank required to
be disclosed in its filings with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as
amended ("Exchange Act"). Disclosure controls and procedures are
Company controls and other procedures that are designed to ensure that
information required to be disclosed by the Company in the reports
that it files under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms.
(a) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the Evaluation Date.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. All Financial Statements.
The consolidated financial statements of Registrant are listed at page
32 of Item 8 of this report, and are incorporated herein by reference.
2. Financial statement schedules.
Schedules have been omitted because they are not applicable or are not
required under the instructions contained in Regulation S-X or because
the information required to be set forth therein is included in the
consolidated financial statements or notes thereto at Item 8 of this
report.
3. Exhibits.
The following documents are included or incorporated by reference in
this annual report on Form 10-K, and this list includes the Exhibit
Index.
Exhibit No. Exhibit Index
- ----------- -------------
2* Acquisition Agreement and Plan of Merger dated October 3, 2002, by and
among TriCo Bancshares, Tri Counties Bank and North State National
Bank filed as Exhibit 2 to TriCo's Form S-2 Registration Statement
dated January 16, 2003 (No. 333-102546)
3.1* Articles of Incorporation of TriCo Bancshares, as amended, filed as
Exhibit 3.1 to TriCo's Report on Form 10-K for the year ended December
31, 1989.
3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to
TriCo's Form S-4 Registration Statement dated January 16, 2003 (No.
333-102546)
4* Certificate of Determination of Preferences of Series AA Junior
Participating Preferred Stock filed as Exhibit 3.3 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon
Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated
July 25, 2001
10.2* Form of Change of Control Agreement dated April 1, 2001, between TriCo
and each of Craig Carney, Richard O'Sullivan, Thomas Reddish, Ray Rios
and Richard Smith, filed as Exhibit 10.9 to TriCo's Report on Form
10-Q for the quarter ended September 30, 2001
10.3* TriCo's 1993 Non-Qualified Stock Option Plan filed as Exhibit 4.1 to
TriCo's Form S-8 Registration Statement dated January 18, 1995 (No.
33-88704)
10.4* TriCo's Non-Qualified Stock Option Plan filed as Exhibit 4.2 to
TriCo's Form S-8 Registration Statement dated January 18, 1995 (No.
33-88704)
10.5* TriCo's Incentive Stock Option Plan filed as Exhibit 4.3 to TriCo's
Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704)
10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to
TriCo's Form S-8 Registration Statement dated August 23, 1995 (No.
33-62063)
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10.7* TriCo's 2001 Stock Option Plan filed as Exhibit 4 to TriCo's Form S-8
Registration Statement dated July 27, 2001 (No. 33-66064)
10.8* Employment Agreement between TriCo and Richard Smith dated April 10,
2001, filed as Exhibit 10.8 to TriCo's Form S-4 Registration Statement
dated January 16, 2003 (No. 333-102546)
10.9* Tri Counties Bank Executive Deferred Compensation Plan dated September
1, 1987, as restated April 1, 1992, and amended November 12, 2002,
filed as Exhibit 10.9 to TriCo's Form S-4 Registration Statement dated
January 16, 2003 (No. 333-102546)
10.10* Tri Counties Bank Supplemental Retirement Plan for Directors dated
September 1, 1987, as restated January 1, 2001, filed as Exhibit 10.10
to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No.
333-102546)
10.11* Tri Counties Bank Supplemental Executive Retirement Plan effective
September 1, 1987, filed as Exhibit 10.11 to TriCo's Form S-4
Registration Statement dated January 16, 2003 (No. 333-102546)
10.12* Tri Counties Bank Deferred Compensation Plan for Directors effective
April 1, 1992, filed as Exhibit 10.12 to TriCo's Form S-4 Registration
Statement dated January 16, 2003 (No. 333-102546)
11.1 Computation of earnings per share
21.1 Tri Counties Bank, a California banking corporation, is the sole
subsidiary of Registrant
23.1 Consent of KPMG LLP
99.1 CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Previously filed and incorporated herein by reference.
(b) Reports on Form 8-K:
During the quarter ended December 31, 2002 the Company filed the following
Current Reports on Form 8-K:
Description Date of Report
------------------------------------------- ---------------
Acquisition agreement and plan of merger by October 3, 2002
and among TriCo Bancshares, Tri Counties
Bank and North State National Bank
(c) Exhibits filed:
See Exhibit Index under Item 15(a)(3) above for the list of exhibits
required to be filed by Item 601 of regulation S-K with this report.
(d) Financial statement schedules filed:
See Item 15(a)(2) above.
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ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 16 is incorporated herein by reference
from the "Independent Public Accountants" section of the Company's Proxy
Statement for the annual meeting of shareholders to be held on May 13, 2003,
which will be filed with the commission pursuant to Regulation 14A.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 18, 2003 TRICO BANCSHARES
By: /s/ Richard P. Smith
----------------------------------------
Richard P. Smith, President
and Chief Executive Officer
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 in
the capacities and on the dates indicated.
Date: March 18, 2003 /s/ Richard P. Smith
----------------------------------------
Richard P. Smith, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: March 18, 2003 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 18, 2003 /s/ Donald J. Amaral
----------------------------------------
Donald J. Amaral, Director
Date: March 18, 2003 /s/ William J. Casey
----------------------------------------
William J. Casey, Director and Chairman
of the Board
Date: March 18, 2003 /s/ Craig S. Compton
----------------------------------------
Craig S. Compton, Director
Date: March 20, 2003 /s/ Wendell J. Lundberg
----------------------------------------
Wendell J. Lundberg, Director
Date: March 18, 2003 /s/ Donald E. Murphy
----------------------------------------
Donald E. Murphy, Director and
Vice Chairman of the Board
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Date:
----------------------------------------
Robert H. Steveson, Director and Vice
Chairman of the Board
Date: March 18, 2003 /s/ Carroll R. Taresh
----------------------------------------
Carroll R. Taresh, Director
Date: March 18, 2003 /s/ Alex A. Vereschagin, Jr.
----------------------------------------
Alex A. Vereschagin, Jr., Director
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CERTIFICATIONS
I, Richard P. Smith, certify that;
1. I have reviewed this annual report on Form 10-K of TriCo Bancshares;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weakness in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 18, 2003 /s/ Richard P. Smith
--------------------------------------
Richard P. Smith
President and Chief Executive Officer
(Principal Executive Officer)
-67-
I, Thomas J. Reddish, certify that;
1. I have reviewed this annual report on Form 10-K of TriCo Bancshares;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. Evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weakness in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 18, 2003 /s/ Thomas J. Reddish
---------------------------------------
Thomas J. Reddish
Vice President and Chief Financial
Officer (Principal Financial Officer)
-68-
EXHIBITS
Exhibit 11.1
TRICO BANCSHARES
Computation of Earnings Per Share on Common and Common Equivalent Shares and on
Common Shares Assuming Full Dilution
Years ended December 31
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Shares used in the computation
of earnings per share1
Weighted daily average
of shares outstanding 7,019,205 7,072,588 7,191,790 7,129,560 7,017,306
Shares used in the computation
of diluted earnings per share 7,193,014 7,219,229 7,340,729 7,318,520 7,267,602
========= ========= ========= ========= =========
Net income used in the computation
of earnings per common stock $14,069 $12,419 $12,623 $11,403 $8,770
======= ======= ======= ======= ======
Basic earnings per share $ 2.00 $ 1.76 $ 1.76 $ 1.60 $ 1.25
======= ======= ======= ======= =======
Diluted earnings per share $ 1.96 $ 1.72 $ 1.72 $ 1.56 $ 1.21
======= ======= ======= ======= =======
1Retroactively adjusted for stock dividends and stock splits.
-69-
Exhibit 23.1
Independent Auditors' Consent
To the Audit Committee of the Board of Directors
TriCo Bancshares and Subsidiary:
We consent to the incorporation by reference in the registration statements
(Nos. 33-88702, 33-62063, and 33-66064) on Form S-8 of our report dated January
17, 2003, relating to the consolidated balance sheet of TriCo Bancshares and
Subsidiary as of December 31, 2002 and the related consolidated statements of
income and comprehensive income, and shareholders' equity and cash flows for the
year ended December 31, 2002, which report appears in the December 31, 2002,
annual report on Form 10-K of TriCo Bancshares and Subsidiary.
Our report, dated January 17, 2003, contains an explanatory paragraph indicating
that the consolidated balance sheet of TriCo Bancshares and Subsidiary as of
December 31, 2001, and the related statements of income, stockholders' equity
and comprehensive income, and cash flows for the two years then ended were
audited by other auditors who have ceased operations.
/s/ KPMG LLP
Sacramento, California
March 20, 2003
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Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Annual Report of TriCo Bancshares (the "Company") on Form
10-K for the period ending December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Richard P. Smith
------------------------------------------
Richard P. Smith
President and Chief Executive Officer
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Annual Report of TriCo Bancshares (the "Company") on Form
10-K for the period ending December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish,
Vice President and Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Thomas J. Reddish
------------------------------------------
Thomas J. Reddish
Vice President and Chief Financial Officer
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