UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2003 Commission file number 0-10661
- ------------------------------- ------------------------------
TRICO BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2792841
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 530/898-0300
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Class: Common stock, no par value
Outstanding shares as of August 14, 2003: 7,854,101
TABLE OF CONTENTS
Page
Forward Looking Statements 1
PART I - FINANCIAL INFORMATION 2
Item 1 - Financial Statements 2
Financial Summary 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 26
Item 4 - Controls and Procedures 28
PART II - OTHER INFORMATION 29
Item 1 - Legal Proceedings 29
Item 4 - Submission of Matters to a Vote of Security Holders 29
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 31
Exhibits 32
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q 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 war in Iraq;
- 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.
On April 4, 2003, the Company acquired North State National Bank, located in
Chico, California. Many possible events or factors could affect the future
financial results and performance of 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.
The reader is directed to the Company's annual report on Form 10-K for the year
ended December 31, 2002, for further discussion of factors which could affect
the Company's business and cause actual results to differ materially from those
expressed in any forward-looking statement made in this report.
-1-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited) (Unaudited)
At June 30, At December 31,
2003 2002 2002
------------------------------- -----------------
Assets:
Cash and due from banks $65,051 $54,094 $67,170
Federal funds sold 3,200 27,800 8,100
------------------------------- -----------------
Cash and cash equivalents 68,251 81,894 75,270
Investment securities available for sale 354,040 234,544 338,024
Loans
Commercial 147,746 138,770 125,982
Consumer 237,704 171,178 201,858
Real estate mortgages 407,218 321,260 319,969
Real estate construction 59,622 40,592 39,713
------------------------------- -----------------
852,290 671,800 687,522
Allowance for loan losses (13,455) (13,613) (14,377)
------------------------------- -----------------
Loans, net of allowance for loan losses 838,835 658,187 673,145
Premises and equipment, net 19,830 16,195 17,224
Cash value of life insurance 34,633 14,927 15,208
Other real estate owned 1,551 71 932
Accrued interest receivable 6,001 5,419 5,644
Deferred income taxes 7,154 8,411 8,429
Intangible assets 22,189 4,615 4,043
Other assets 8,418 5,298 6,655
------------------------------- -----------------
Total Assets $1,360,902 $1,029,561 $1,144,574
=============================== =================
Liabilities:
Deposits:
Noninterest-bearing demand $260,861 $188,546 $232,499
Interest-bearing demand 204,538 169,343 182,816
Savings 393,198 255,264 297,926
Time certificates, $100,000 and over 111,249 81,828 90,404
Other time certificates 203,759 202,929 201,592
------------------------------- -----------------
Total deposits 1,173,605 897,910 1,005,237
Federal funds purchased 17,400 - -
Accrued interest payable 2,615 2,639 2,927
Other Liabilities 19,810 12,950 14,472
Long-term debt and other borrowings 22,905 22,940 22,924
------------------------------- -----------------
Total Liabilities 1,236,335 936,439 1,045,560
------------------------------- -----------------
Shareholders' Equity:
Authorized - 20,000,000 shares of common
stock Issued and outstanding:
7,852,110 at June 30, 2003 70,015
7,025,690 at June 30, 2002 50,047
7,060,965 at December 31, 2002 50,472
Retained earnings 51,119 41,682 46,239
Accumulated other comprehensive income, net 3,433 1,393 2,303
------------------------------- -----------------
Total Shareholders' Equity 124,567 93,122 99,014
------------------------------- -----------------
Total Liabilities and Shareholders' Equity $1,360,902 $1,029,561 $1,144,574
=============================== =================
See accompanying notes to unaudited condensed consolidated financial statements
-2-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
---------------------------------------------------------
Interest Income:
Interest and fees on loans $14,713 $13,046 $27,702 $26,054
Interest on federal funds sold 18 167 102 333
Interest on investment securities
available for sale
Taxable 2,939 2,309 5,683 4,539
Tax exempt 491 553 1,023 1,107
---------------------------------------------------------
Total interest income 18,161 16,075 34,510 32,033
---------------------------------------------------------
Interest Expense:
Interest on interest-bearing demand deposits 132 114 250 235
Interest on savings 906 675 1,626 1,354
Interest on time certificates of deposit 2,023 2,068 3,982 4,211
Interest on short-term borrowing 63 - 63 1
Interest on long-term debt 321 322 639 641
---------------------------------------------------------
Total interest expense 3,445 3,179 6,560 6,442
---------------------------------------------------------
Net Interest Income 14,716 12,896 27,950 25,591
---------------------------------------------------------
Provision for loan losses 150 500 300 1,300
---------------------------------------------------------
Net Interest Income After Provision for
Loan Losses 14,566 12,396 27,650 24,291
---------------------------------------------------------
Noninterest Income:
Service charges and fees 3,985 2,141 7,485 4,114
Gain on sale of loans 1,319 539 2,452 1,502
Commissions on sale of non-deposit
investment products 461 738 909 1,277
Other 789 525 1,104 876
---------------------------------------------------------
Total Noninterest Income 6,554 3,943 11,950 7,769
---------------------------------------------------------
Noninterest Expense:
Salaries and related benefits 7,636 5,773 14,513 11,512
Other 6,732 5,190 12,506 9,853
---------------------------------------------------------
Total Noninterest Expense 14,368 10,963 27,019 21,365
---------------------------------------------------------
Income Before Income Taxes 6,752 5,376 12,581 10,695
---------------------------------------------------------
Provision for income taxes 2,498 2,011 4,714 4,001
---------------------------------------------------------
Net Income $4,254 $3,365 $7,867 $6,694
---------------------------------------------------------
Comprehensive Income:
Change in unrealized gain on securities
available for sale, net 745 2,004 1,130 2,048
---------------------------------------------------------
Comprehensive Income $4,999 $5,369 $8,997 $8,742
=========================================================
Average Shares Outstanding 7,796 7,011 7,434 7,002
Diluted Average Shares Outstanding 8,021 7,214 7,658 7,166
Per Share Data
Basic Earnings $0.55 $0.48 $1.06 $0.96
Diluted Earnings $0.53 $0.47 $1.03 $0.93
Dividends Paid $0.20 $0.20 $0.40 $0.40
See accompanying notes to unaudited condensed consolidated financial statements
-3-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, unaudited)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income (Loss), net Total
-----------------------------------------------
Balance, December 31, 2001 $49,679 $37,909 ($655) $86,933
Net income for the period 6,694 6,694
Exercise of stock options,
including tax benefits 439 439
Repurchase of common stock (71) (119) (190)
Dividends (2,802) (2,802)
Unrealized gain on securities
available for sale, net 2,048 2,048
-----------------------------------------------
Balance June 30, 2002 $50,047 $41,682 $1,393 $93,122
===============================================
Balance, December 31, 2002 $50,472 $46,239 $2,303 $99,014
Net income for the period 7,867 7,867
Issuance of stock and options
related to merger 18,527 18,527
Exercise of stock options,
including tax benefits 1,016 1,016
Dividends (2,987) (2,987)
Unrealized gain on securities
available for sale, net 1,130 1,130
-----------------------------------------------
Balance June 30, 2003 $70,015 $51,119 $3,433 $124,567
===============================================
See accompanying notes to unaudited condensed consolidated financial statements
-4-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
For the six months
ended June 30,
2003 2002
-------------------------------
Operating Activities:
Net income $7,867 $6,694
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 1,323 1,316
Amortization of intangible assets 552 455
Provision for loan losses 300 1,300
Amortization of investment securities premium, net 1,819 702
Deferred income taxes - (66)
Investment security gains net (100) -
Originations of loans for resale (115,962) (79,578)
Proceeds from sale of loans originated for resale 117,135 80,154
Gain on sale of loans (2,452) (1,502)
Amortization of mortgage servicing rights 543 313
Gain on sale of other real estate owned (60) -
(Gain) loss on sale of fixed assets (3) 19
Change in assets and liabilities:
Decrease in interest receivable 185 103
Decrease in interest payable (386) (849)
Decrease in other assets and liabilities 3,329 2,287
-------------------------------
Net Cash Provided by Operating Activities 14,090 11,348
-------------------------------
Investing Activities:
Net cash obtained in mergers and acquisitions 7,450 -
Proceeds from maturities of securities available-for-sale 122,570 60,067
Proceeds from sale of securities available-for-sale 12,139 -
Purchases of securities available-for-sale (109,717) (67,448)
Net (increase) decrease in loans (90,439) (13,813)
Proceeds from sale of premises and equipment 10 8
Purchases of property and equipment (1,555) (942)
Proceeds from sale of other real estate owned 60 -
Purchase of life insurance (18,910) -
-------------------------------
Net Cash Used by Investing Activities (78,392) (22,128)
-------------------------------
Financing Activities:
Net increase in deposits 42,319 17,517
Net increase in Federal funds purchased 17,400 -
Payments of principal on long-term debt agreements (19) (16)
Repurchase of Common Stock - (190)
Dividends paid (2,987) (2,802)
Exercise of stock options/issuance of Common Stock 570 201
-------------------------------
Net Cash Provided by Financing Activities 57,283 14,710
-------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (7,019) 3,930
-------------------------------
Cash and Cash Equivalents and Beginning of Period 75,270 77,964
-------------------------------
Cash and Cash Equivalents at End of Period $68,251 $81,894
===============================
Supplemental Disclosure of Noncash Activities:
Unrealized gain on securities available for sale $1,830 $3,275
Loans transferred to other real estate owned $619 -
Supplemental Disclosure of Cash Flow Activity:
Cash paid for interest expense $6,872 $7,291
Cash paid for income taxes $3,010 $2,000
Income tax benefit from stock option exercises $446 $238
The acquisition of North State National Bank
Involved the following:
Common stock issued $18,527
Liabilities assumed $126,722
Fair value of assets acquired, other than cash
and cash equivalents ($119,102)
Core deposit intangible ($3,365)
Goodwill ($15,332)
Net cash and cash equivalents received $7,450
See accompanying notes to unaudited condensed consolidated financial statements
-5-
TRICO BANCSHARES
Financial Summary
(dollars in thousands, except per share amounts)
(Unaudited) (Unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------
Net Interest Income (FTE) $15,000 $13,222 $28,543 $26,222
Provision for loan losses (150) (500) (300) (1,300)
Noninterest income 6,554 3,943 11,950 7,769
Noninterest expense (14,368) (10,963) (27,019) (21,365)
Provision for income taxes (FTE) (2,782) (2,337) (5,307) (4,632)
--------------------------------------------------------------
Net income $4,254 $3,365 $7,867 $6,694
==============================================================
Average shares outstanding 7,796 7,011 7,434 7,002
Diluted average shares outstanding 8,021 7,214 7,658 7,166
Shares outstanding at period end 7,852 7,026 7,852 7,026
As Reported:
Basic earnings per share $0.55 $0.48 $1.06 $0.96
Diluted earnings per share $0.53 $0.47 $1.03 $0.93
Return on assets 1.27% 1.33% 1.26% 1.34%
Return on equity 13.88% 14.72% 14.07% 14.80%
Net interest margin 5.02% 5.74% 5.09% 5.75%
Net loan charge-offs to average loans 0.96% 0.14% 0.58% 0.23%
Efficiency ratio (FTE) 66.66% 63.87% 66.73% 62.85%
Average Balances:
Total assets $1,339,107 $1,009,727 $1,244,433 $1,000,099
Earning assets 1,194,618 921,486 1,121,452 912,041
Total loans 801,493 648,618 740,734 645,350
Total deposits 1,146,211 879,579 1,075,032 871,304
Shareholders' equity $122,567 $91,429 $111,853 $90,467
Balances at Period End:
Total assets $1,360,902 $1,029,561
Earning assets 1,209,530 934,144
Total loans 852,290 671,800
Total deposits 1,173,605 897,910
Shareholders' equity $124,567 $93,122
Financial Ratios at Period End:
Allowance for loan losses to loans 1.58% 2.03%
Book value per share $15.86 $13.25
Equity to assets 9.15% 9.04%
Total capital to risk assets 10.37% 12.01%
Dividends Paid Per Share $0.20 $0.20 $0.40 $0.40
Dividend Payout Ratio 37.74% 42.55% 38.83% 43.01%
-6-
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: General Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim period presented. The interim results for the three and six month
periods ended June 30, 2003 and 2002 are not necessarily indicative of the
results expected for the full year. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes as well as other information included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
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 33 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 that 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. During the
six months ended June 30, 2003 and throughout 2002, 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.
-7-
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.
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 six months ended June 30, 2003 for cash proceeds equal to the
fair value of the loans.
The following table summarizes the Company's mortgage servicing rights assets as
of June 30, 2003 and December 31, 2002.
December 31, June 30,
(Dollars in thousands) 2002 Additions Reductions 2003
-----------------------------------------------
Mortgage Servicing Rights $2,821 $1,279 ($543) $3,557
===============================================
-8-
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 June 30, 2003, the Company had no mortgage loans held for sale. At June 30,
2003 and December 31, 2002, the Company serviced real estate mortgage loans for
others of $353 million and $307 million, respectively.
Intangible Assets
The Company reviews for impairment of certain intangibles held, at the end of
each calendar year or 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.
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 June
30, 2003 and December 31, 2002.
December 31, June 30,
(Dollar in Thousands) 2002 Additions Reductions 2003
-----------------------------------------------
Core deposit intangibles $10,278 $3,365 - $13,643
Accumulated amortization (6,636) - ($552) (7,188)
-----------------------------------------------
Core deposit intangibles, net $3,642 $3,365 ($552) $6,455
===============================================
Core deposit intangibles are amortized over their expected useful lives. Such
lives are periodically reassessed to determine if any amortization period
adjustments are indicated. The following table summarizes the Company's
estimated core deposit intangible amortization for each of the five succeeding
years:
Estimated Core Deposit
Intangible Amortization
Years Ended (Dollar in thousands)
----------- -----------------------
2003 $1,207
2004 $1,358
2005 $1,381
2006 $1,395
2007 $490
Thereafter $1,176
The following table summarizes the Company's minimum pension liability
intangible as of June 30, 2003 and December 31, 2002.
December 31, June 30,
(Dollar in Thousands) 2002 Additions Reductions 2003
------------------------------------------
Minimum pension liability intangible $401 - - $401
==========================================
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates.
-9-
Goodwill
The following table summarizes the Company's goodwill intangible as of June 30,
2003 and December 31, 2002.
December 31, June 30,
(Dollar in Thousands) 2002 Additions Reductions 2003
-----------------------------------------------
Goodwill - $15,332 - $15,332
===============================================
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.
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:
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except per share amounts) 2003 2002 2003 2002
---- ---- ---- ----
Net income As reported $4,254 $3,365 $7,867 $6,694
Pro forma $4,198 $3,312 $7,755 $6,588
Basic earnings per share As reported $0.55 $0.48 $1.06 $0.96
Pro forma $0.54 $0.47 $1.04 $0.94
Diluted earnings per share As reported $0.53 $0.47 $1.03 $0.93
Pro forma $0.52 $0.46 $1.01 $0.92
Stock-based employee compensation
cost, net of related tax effects,
included in net income As reported $0 $0 $0 $0
Pro forma $56 $53 $108 $102
-10-
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 (loss)
for the six months ended June 30, 2003 and 2002 are reported as follows:
Six Months Ended June 30,
2003 2002
-----------------------------
Unrealized Gain on Securities (in thousands)
Beginning Balance $3,048 $117
Unrealized gain arising during the
period, net of tax 1,130 2,048
-----------------------------
Ending Balance $4,178 $2,165
-----------------------------
Minimum Pension Liability
Beginning Balance ($745) ($772)
Change in minimum pension liability,
net of tax - -
-----------------------------
Ending Balance ($745) ($772)
-----------------------------
Total accumulated other comprehensive
income (loss), net $3,433 $1,393
-----------------------------
Reclassifications
Certain amounts previously reported in the 2002 financial statements have been
reclassified to conform to the 2003 presentation. These reclassifications did
not affect previously reported net income or total shareholders' equity.
Acquisition
TriCo Bancshares (NASDAQ:TCBK), parent company of Tri Counties Bank, acquired
North State National Bank, a national banking organization located in Chico,
California, by the merger of North State into its wholly owned subsidiary, Tri
Counties Bank, effective 5:01 pm on April 4, 2003. The acquisition and the
related merger agreement dated October 3, 2002, was approved by the California
Department of Financial Institutions, the Federal Deposit Insurance Corporation,
and the shareholders of North State National Bank on March 4, March 7, and March
19, 2003, respectively. At the time of the acquisition, North State had total
assets of $140 million, investment securities of $41 million, loans of $76
million, and deposits of $126 million. The acquisition was accounted for using
the purchase method of accounting. The amount of goodwill recorded as of the
merger date, which represented the excess of the total purchase price over the
estimated fair value of net asset acquired, was approximately $15.3 million. The
Company recorded a core deposit intangible, which represents the excess of the
fair value of North State's deposits over their book value on the acquisition
date, of approximately $3.4 million. This core deposit intangible is scheduled
to be amortized over a seven-year average life.
Under the terms of the merger agreement, TriCo paid $13,090,057 in cash, issued
723,512 shares of TriCo common stock, and issued options to purchase 79,587
shares of TriCo common stock at an average exercise price of $6.22 per share in
exchange for all of the 1,234,375 common shares and options to purchase 79,937
common shares of North State National Bank outstanding as of April 4, 2003.
-11-
The pro forma financial information in the following table illustrates the
combined operating results of TriCo and North State National Bank for the six
months ended June 30, 2003 and 2002 as if the acquisition of North State
National Bank had occurred as of January 1, 2002. The pro forma financial
information is presented for informational purposes and is not necessarily
indicative of the results of operations that would have occurred if TriCo and
North State National Bank had constituted a single entity as of or January 1,
2002. The pro forma financial information is also not necessarily indicative of
the future results of operations of the combined company. In particular, any
opportunity to achieve certain cost savings as a result of the acquisition has
not been included in the pro forma financial information.
For the six months ended June 30,
2003 2002
---- ----
(in thousands except earnings per share)
Net interest income $29,386 $28,471
Provision for loan losses 300 1,300
Noninterest income 12,141 8,033
Noninterest expense 28,175 22,973
Income tax expense 4,891 4,645
Net income $8,161 $7,586
Basic earnings per share $1.05 $0.98
Diluted earnings per share $1.01 $0.95
The only significant pro forma adjustment is the amortization expense relating
to core deposit intangible, and the income tax benefit associated with the pro
forma adjustment.
Subsequent Events
On July 30, 2003, TriCo declared a quarterly cash dividend of $0.20 (twenty
cents) per share at its meeting held on July 29, 2003. The dividend is payable
on September 30, 2003 to holders of record at the close of business on September
9, 2003.
On July 31, 2003, TriCo completed an offering of 20,000 shares of cumulative
trust preferred securities for cash in an aggregate amount of $20,000,000. The
trust preferred securities are due in 30 years with an interest rate that resets
quarterly at three-month LIBOR plus 3.05%, or 4.16% for the first quarterly
interest period. The trust preferred securities were issued through an
underwriting syndicate to which the Company paid underwriting fees of $7.50 per
trust preferred security or an aggregate of $150,000. The net proceeds of
$19,850,000 will be used to finance the opening of new branches, improve bank
services and technology, repurchase shares of the Company's common stock as
described below and increase the Company's capital.
The trust preferred securities have not been and will not be registered under
the Securities Act of 1933, as amended, or applicable state securities laws and
were sold pursuant to an exemption from registration under the Securities Act of
1933. The trust preferred securities may not be offered or sold in the United
States absent registration or an applicable exemption from the registration
requirements of the Securities Act of 1933, as amended, and applicable state
securities laws.
The Company formed a subsidiary business trust, TriCo Capital Trust I, to issue
the trust preferred securities. Concurrently with the issuance of the trust
preferred securities, the trust issued 619 shares of common stock to the Company
for $1,000 per share or an aggregate of $619,000. In addition, the Company
issued a Junior Subordinated Debenture to the Trust in the amount of
$20,619,000. The terms of the Junior Subordinated Debenture are materially
consistent with the terms of the trust preferred securities issued by TriCo
Capital Trust I.
Also on July 31, 2003, the Company announced the termination of its stock
repurchase plan to repurchase 150,000 shares of common stock originally
announced on October 19, 2001. There were 118,800 shares repurchased under the
plan and the remaining 31,200 shares had not been repurchased. The Company has
adopted a new stock repurchase plan for the repurchase of up to 250,000 shares
of the Company's common stock from time to time as market conditions allow. The
250,000 shares authorized for repurchase under this plan represent approximately
3.2% of the Company's approximately 7,852,000 common shares outstanding as of
July 31, 2003. This new plan has no stated expiration date for the repurchases.
-12-
On August 1, 2003, the Company reported that its nonperforming assets, net of
government agency guarantees, decreased $15,127,000 (68%) to $6,963,000 at July
31, 2003 compared to $22,090,000 at June 30, 2003. The decrease is mainly due to
the collection of two nonperforming commercial real estate loans to a single
entity collateralized by a single building. The collection was realized on July
31, 2003 via the Company's receipt of net proceeds of $11,474,000 from the sale
of the building. The collection resulted in a recovery of $346,000 of the
$1,900,000 charged-off on these loans during the quarter ended June 30, 2003.
The recovery will be reflected in the Company's results of operations for the
quarter ended September 30, 2003.
Impact of Recently Issued Financial Accounting Pronouncements
In January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin ("ARB") 51, consolidated financial statements, to
certain entities (called variable interest entities) in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The disclosure
requirements of this Interpretation are effective for all financial statements
issued after January 31, 2003. The consolidation requirements apply to all
variable interest entities created after January 31, 2003. In addition, public
companies must apply the consolidation requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence as of
the beginning of annual or interim periods beginning after June 15, 2003. Given
the nature of the Company's operations, management does not expect this
Interpretation to have a significant impact on the consolidated financial
statements.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, to provide clarification of
certain terms and investment characteristics identified in Statement 133.
Statement 149 is to be applied prospectively and is effective for contracts
entered into or modified after June 30, 2003. The Company does not expect the
adoption of the Statement will have a material impact on the consolidated
financial statements.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The provisions
of this Statement are effective for financial instruments entered into or
modified after May 31, 2003, and otherwise are effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. Given the nature of the
Company's liability and equity instruments, management does not expect this
Statement to have a material impact to the consolidated financial statements
upon adoption of the Statement on July 1, 2003.
-13-
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
As TriCo Bancshares (the "Company") has not commenced any business operations
independent of Tri Counties Bank (the "Bank"), the following discussion pertains
primarily to the Bank. Average balances, including such 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.
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. 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, intangible assets, 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. (See caption "Allowance for
Loan Losses" for a more detailed discussion).
Results of Operations
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 Notes thereto.
The Company had quarterly earnings of $4,254,000, or $0.53 per diluted share,
for the three months ended June 30, 2003. These results represent a 12.8%
increase from the $0.47 earnings per diluted share reported for the three months
ended June 30, 2002 on earnings of $3,365,000. The improvement in results from
the year-ago quarter was due to a $1,778,000 (13.4%) increase in fully
tax-equivalent net interest income to $15,000,000, a $350,000 (70.0%) decrease
in provision for loan losses to $150,000, and a $2,611,000 (66.2%) increase in
noninterest income to $6,554,000. These contributing factors were offset by a
$3,405,000 (31.1%) increase in noninterest expense to $14,368,000 for the
quarter ended June 30, 2003. The Company reported earnings of $7,867,000, or
$1.03 per diluted share, for the six months ended June 30, 2003. These results
represent a 10.8% increase from the $0.93 earnings per diluted share reported
for the six months ended June 30, 2002 on earnings of $6,694,000. The
improvement in results from the year-ago period was due to a $2,321,000 (8.9%)
increase in fully tax-equivalent net interest income to $28,543,000, a
$1,000,000 (76.9%) decrease in provision for loan losses to $300,000, and a
$4,181,000 (53.8%) increase in noninterest income to $11,950,000. These
contributing factors were offset by a $5,654,000 (26.5%) increase in noninterest
expense to $27,019,000 for the six months ended June 30, 2003. Included in the
Company's results of operations for the three-month and six-month periods ended
June 30, 2003, are the effects of the acquisition of North State National Bank
on April 4, 2003.
-14-
Following is a summary of the components of fully taxable equivalent ("FTE") net
income for the periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
---------------------------------------------
2003 2002 2003 2002
---------------------------------------------
Net Interest Income (FTE) $15,000 $13,222 $28,543 $26,222
Provision for loan losses (150) (500) (300) (1,300)
Noninterest income 6,554 3,943 11,950 7,769
Noninterest expense (14,368) (10,963) (27,019) (21,365)
Provision for income taxes (FTE) (2,782) (2,337) (5,307) (4,632)
---------------------------------------------
Net income $4,254 $3,365 $7,867 $6,694
=============================================
Net income for the second quarter of 2003 was $889,000 (26.4%) more than for the
same quarter of 2002. A significant increase in noninterest income (up
$2,611,000 or 66.2%), a $350,000 (70.0%) decrease in provision for loan losses,
and a $1,778,000 (13.5%) increase in fully taxable equivalent net interest
income more than offset an increase in noninterest expenses (up $3,405,000 or
31.1%). The increase in noninterest income from the year-ago quarter was mainly
due to an increase in service charges and fee income on deposit products (up
$1,844,000 or 86.1% to $3,985,000), and an increase in gain on sale of loans (up
$780,000 or 144.7% to $1,319,000). The increase in service charges and fee
income was mainly due to the introduction of an overdraft privilege deposit
product in July 2002 that has added a new stream of recurring noninterest
income. The increase in gain on sale of loans is due to the Company's ability to
originate and sell an increased volume of residential real estate mortgage loans
in the current environment of record mortgage refinance. The decrease in
provision for loan losses (down $350,000 or 70.0% to $150,000) was due to stable
loan quality and the maintenance of adequate loss reserve levels. The increase
in net interest income (FTE) was due to an increase in average balance of
interest-earning assets (up $273 million or 29.6%) that was partially offset by
a 72 basis point decrease in net interest margin. The increase in noninterest
expense was mainly due to an increase in salary and benefit expense (up
$1,863,000 or 32.3% to $7,636,000). The increase in salary and benefits expense
was mainly due to annual salary increases, increased commission and incentive
expense, and new employees at four new branches the Company opened during 2002
and from the merger with North State National Bank on April 4, 2003. Other
noninterest expense also increased (up $1,542,000 or 29.7% to $6,732,000) due to
the new branch openings in 2002, the merger with North State, and expenses
related to increased mortgage banking activity and a new deposit product
introduced in July 2002.
Net income for the six months ended June 30, 2003 was $1,173,000 (17.5%) more
than for the same period of 2002. A significant increase in noninterest income
(up $4,181,000 or 53.8%), a $1,000,000 (76.9%) decrease in provision for loan
losses, and a $2,321,000 (8.9%) increase in fully taxable equivalent net
interest income more than offset an increase in noninterest expenses (up
$5,654,000 or 26.5%). The increase in noninterest income from the year-ago
period was mainly due to an increase in service charges and fee income on
deposit products (up $3,371,000 or 81.9% to $7,485,000), and an increase in gain
on sale of loans (up $950,000 or 63.2% to $2,452,000). The increase in service
charges and fee income was mainly due to the introduction of an overdraft
privilege deposit product in July 2002 that has added a new stream of recurring
noninterest income. The increase in gain on sale of loans is due to the
Company's ability to originate and sell an increased volume of residential real
estate mortgage loans in the current environment of record mortgage refinance.
The decrease in provision for loan losses (down $1,000,000 or 76.9% to $300,000)
was due to stable loan quality and the maintenance of adequate loss reserve
levels. The increase in net interest income (FTE) was due to an increase in
average balance of interest-earning assets (up $209.4 million or 23.0%) that was
partially offset by a 66 basis point decrease in net interest margin. The
increase in noninterest expense was mainly due to an increase in salary and
benefit expense (up $3,001,000 or 26.1% to $14,513,000). The increase in salary
and benefits expense was mainly due to annual salary increases, increased
commission and incentive expense, and new employees at four new branches the
Company opened during 2002 and from the merger with North State National Bank on
April 4, 2003. Other noninterest expense also increased (up $2,653,000 or 26.9%
to $12,506,000) due to the new branch openings in 2002, the merger with North
State, and expenses related to increased mortgage banking activity and a new
deposit product introduced in July 2002.
-15-
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------------------------------
2003 2002 2003 2002
------------------------------------------------
Interest income $18,161 $16,075 $34,510 $32,033
Interest expense (3,445) (3,179) (6,560) (6,442)
FTE adjustment 284 326 593 631
------------------------------------------------
Net interest income (FTE) $15,000 $13,222 $28,543 $26,222
================================================
Average earning assets $1,194,618 $921,486 $1,121,452 $912,041
Net interest margin (FTE) 5.02% 5.74% 5.09% 5.75%
The Company's primary source of revenue is net interest income, or the
difference between interest income on earning assets and interest expense in
interest-bearing liabilities. Net interest income (FTE) during the first quarter
of 2003 increased $1,778,000 (13.4%) from the same period in 2002 to
$15,000,000. The increase in net interest income (FTE) was due to the increased
average balances of earning assets (up $273,132,000 or 29.6% to $1.19 billion)
that was partially offset by a 72 basis point decrease in net interest margin
(FTE).
Net interest income (FTE) during the first six months of 2003 increased
$2,321,000 (8.9%) from the same period in 2002 to $28,543,000. The increase in
net interest income (FTE) was due to the increased average balances of earning
assets (up $209,411,000 or 23.0% to $1.12 billion) that was partially offset by
a 66 basis point decrease in net interest margin (FTE).
Interest and Fee Income
Interest and fee income (FTE) for the second quarter of 2003 increased
$2,044,000 (12.5%) from the second quarter of 2002. The increase was the net
effect of higher average interest-earning assets (up $273.1 million or 29.6% to
$1.19 billion) that was partially offset by a 94 basis point decrease in the
yield on those average earning assets to 6.18%. The growth in interest-earning
assets was led by a $152.9 million (65.3%) increase in average investment
security balances to $387.2 million, and a $152.9 million (23.6%) increase in
average loan balances. The average balance of federal funds sold decreased $32.7
million (84.6%) to $5,970,000.
The average yield on the Company's earning assets decreased to 6.18% from 7.12%
for the quarter ended June 30, 2002. This downward trend in yields was
reflective of general interest rate markets during much of the twelve months
ended June 30, 2003.
Interest and fee income (FTE) for the six months ended June 30, 2003 increased
$2,439,000 (7.5%) from the same period of 2002. The increase was the net effect
of higher average interest-earning assets (up $209.4 million or 23.0% to $1.12
billion) that was partially offset by a 90 basis point decrease in the yield on
those average earning assets to 6.26%. The growth in interest-earning assets was
led by a $136.0 million (59.8%) increase in average investment security balances
to $363.5 million, and a $95.4 million (14.8%) increase in average loan balances
to $740.7 million. The average balance of federal funds sold decreased $22.0
million (56.1%) to $17.2 million.
The average yield on the Company's earning assets decreased to 6.26% for the six
month period ended June 30, 2003 from 7.16% for the same period in 2002. This
downward trend in yields was reflective of general interest rate markets during
the twelve months ended June 30, 2003. In addition, deposit growth outstripped
loan growth during this period, which resulted in most of the growth in
interest-earning assets being in lower yielding investment securities instead of
relatively higher yielding loans.
-16-
Interest Expense
Interest expense increased $266,000 (8.4%) to $3,445,000 in the second quarter
of 2003 compared to $3,179,000 in the year-ago quarter. The average balance of
interest-bearing liabilities increased $221.9 million (30.4%) to $952.1 million
in the second quarter compared to $730.2 million in the year-ago quarter. The
increase in interest-bearing liabilities was concentrated in the lower earning
interest-bearing demand deposits (up $37.8 million or 21.7%), and savings
deposits (up $121.7 million or 47.5%). The average balance of the higher earning
time deposits was up $43.1 million (15.5%) from the year-ago quarter. In
addition, the average balance of noninterest-bearing deposits increased $64.1
million (37.2%) from the year-ago quarter, and the average balance of Federal
funds purchased was $19.6 million in the quarter ended June 30, 2003 compared to
$0 in the year-ago quarter. The average rate paid for all categories of
interest-bearing liabilities decreased from the average rate paid in the
year-ago quarter as a result of general market interest rate changes.
Interest expense increased $118,000 (1.8%) to $6,560,000 for the six months
ended June 30, 2003 compared to $6,442,000 in the year-ago period. The average
balance of interest-bearing liabilities increased $161.1 million (22.2%) to
$885.7 million for the six months ended June 30, 2003 compared to $724.6 million
in the year-ago period. The increase in interest-bearing liabilities was
concentrated in the lower earning interest-bearing demand deposits (up $26.6
million or 15.4%), and savings deposits (up $92.2 million or 36.2%). The average
balance of the higher earning time deposits was up $32.6 million (11.9%) from
the year-ago period. In addition, for the six months ended June 30, 2003, the
average balance of noninterest-bearing deposits increased $52.3 million (30.8%)
from the year-ago period, and the average balance of Federal funds purchased was
$9.8 million in the six months ended June 30, 2003 compared to $0 in the
year-ago six month period. The average rate paid for all categories of
interest-bearing liabilities decreased from the average rate paid in the
year-ago quarter as a result of general market interest rate changes.
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------
2003 2002 2003 2002
----------------------------------------------
Yield on earning assets 6.18% 7.12% 6.26% 7.16%
Rate paid on interest-bearing
Liabilities 1.45% 1.74% 1.48% 1.78%
----------------------------------------------
Net interest spread 4.73% 5.38% 4.78% 5.38%
Impact of all other net
noninterest-bearing funds 0.29% 0.36% 0.31% 0.37%
----------------------------------------------
Net interest margin 5.02% 5.74% 5.09% 5.75%
==============================================
Net interest margin in the second quarter of 2003 decreased 72 basis points
compared to the second quarter of 2002. Net interest margin for the six months
ended June 30, 2003 decreased 66 basis points compared to the six months ended
June 30, 2002. Throughout much of 2002, the Company was able to decrease the
rates it paid on interest-bearing deposits approximately as fast as the rates on
interest-earning assets decreased. By doing so, the Company was able to maintain
a relatively high net interest margin throughout much of 2002. However, in the
fourth quarter of 2002, it became increasingly difficult to reduce the rates
paid on interest-bearing deposits. As a result, the Company's net interest
margin began to decrease. Also, throughout much of 2002, the Company grew
deposits faster than it grew loans. As a result, much of the available funds
from these deposits were invested in securities rather than higher yielding
loans, and this also contributed to a decrease in net interest margin. During
the quarter ended June 30, 2003, the Company's growth rate for loans exceeded
its growth rate for deposits, and this faster loan growth rate helped to slow
down the rate of decrease in the Company's net interest margin.
-17-
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, 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).
For the three months ended
----------------------------------------------------------------
June 30, 2003 June 30, 2002
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- ------------------------------
Assets:
Loans $801,493 $14,713 7.34% $648,618 $13,046 8.05%
Investment securities - taxable 348,375 2,939 3.37% 189,675 2,309 4.87%
Investment securities - nontaxable 38,780 775 8.00% 44,541 879 7.89%
Federal funds sold 5,970 18 1.21% 38,652 167 1.73%
Total earning assets 1,194,618 18,445 6.18% 921,486 16,401 7.12%
Other assets 144,489 88,241
---------- ----------
Total assets $1,339,107 $1,009,727
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $211,561 132 0.25% $173,782 114 0.26%
Savings deposits 377,830 906 0.96% 256,153 675 1.05%
Time deposits 320,268 2,023 2.53% 277,202 2,068 2.98%
Federal funds purchased 19,556 63 1.29% - - -
Other borrowings 22,908 321 5.61% 23,109 322 5.57%
----------------------------- ------------------------------
Total interest-bearing liabilities 952,123 3,445 1.45% 730,246 3,179 1.74%
Noninterest-bearing deposits 236,552 172,442
Other liabilities 27,865 15,610
Shareholders' equity 122,567 91,429
---------- ----------
Total liabilities and
shareholders' equity $1,339,107 $1,009,727
========== ==========
Net interest spread(1) 4.73% 5.38%
Net interest income and interest margin(2) $15,000 5.02% $13,222 5.74%
================== ====================
(1) Net interest spread represents the average yield earned on assets minus the
average rate paid on interest-earning assets minus the average rate paid on
interest-bearing liabilities
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of earning
assets.
-18-
For the six months ended
----------------------------------------------------------------
June 30, 2003 June 30, 2002
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- ------------------------------
Assets:
Loans $740,734 $27,702 7.48% $645,350 $26,054 8.07%
Investment securities - taxable 323,556 5,683 3.51% 182,966 4,539 4.96%
Investment securities - nontaxable 39,958 1,616 8.09% 44,538 1,738 7.80%
Federal funds sold 17,204 102 1.19% 39,187 333 1.70%
Total earning assets 1,121,452 35,103 6.26% 912,041 32,664 7.16%
Other assets 122,981 88,058
---------- ----------
Total assets $1,244,433 $1,000,099
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $199,289 250 0.25% $172,694 235 0.27%
Savings deposits 347,098 1,626 0.94% 254,916 1,355 1.06%
Time deposits 306,596 3,982 2.60% 273,947 4,211 3.07%
Federal funds purchased 9,778 63 1.29% - - -
Other borrowings 22,913 639 5.58% 23,030 641 5.57%
----------------------------- ------------------------------
Total interest-bearing liabilities 885,674 6,560 1.48% 724,587 6,442 1.78%
Noninterest-bearing deposits 222,049 169,747
Other liabilities 24,857 15,298
Shareholders' equity 111,853 90,467
---------- ----------
Total liabilities and
shareholders' equity $1,244,433 $1,000,099
========== ==========
Net interest spread(1) 4.78% 5.38%
Net interest income and interest margin(2) $28,543 5.09% $26,222 5.75%
================== ====================
(1) Net interest spread represents the average yield earned on assets minus the
average rate paid on interest-earning assets minus the average rate paid on
interest-bearing liabilities
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of earning
assets.
-19-
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income (FTE)
and interest expense from changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in thousands).
Three months ended June 30, 2003
compared with three months
ended June 30, 2002
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $3,077 ($1,410) $1,667
Investment securities 2,082 (1,556) 526
Federal funds sold (141) (8) (149)
---------------------------------
Total earning assets 5,018 (2,974) 2,044
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 25 (7) 18
Savings deposits 319 (88) 231
Time deposits 321 (366) (45)
Federal funds purchased 63 - 63
Other borrowings (3) 2 (1)
---------------------------------
Total interest-bearing liabilities 725 (459) 266
---------------------------------
Increase (decrease) in Net Interest Income $4,293 ($2,515) $1,778
=================================
Six months ended June 30, 2003
compared with six months
ended June 30, 2002
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $3,849 (2,201) 1,648
Investment securities 3,753 (2,731) 1,022
Federal funds sold (187) (44) (231)
---------------------------------
Total earning assets 7,415 (4,976) 2,439
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 36 (21) 15
Savings deposits 489 (218) 271
Time deposits 501 (730) (229)
Federal funds purchased 63 - 63
Other borrowings (3) 1 (2)
---------------------------------
Total interest-bearing liabilities 1,086 (968) 118
---------------------------------
Increase (decrease) in Net Interest Income $6,329 ($4,008) $2,321
=================================
-20-
Provision for Loan Losses
The Company provided $150,000 for loan losses in the second quarter of 2003
versus $500,000 in the second quarter of 2002. During the second quarter of
2003, the Company recorded $1,916,000 of net loan charge offs versus $224,000 of
net loan charge-offs in the year earlier quarter. The increase in charge-offs is
primarily due to a $1,900,000 charge-off related to two commercial real estate
loans to a single entity collateralized by a single building. The Company had
previously established a specific allowance for the two commercial real estate
loans noted above in its allowance for loan losses. See "Subsequent Events"
beginning on Page 12 for a description of the Company's collection of these two
commercial real estate loans.
The Company provided $300,000 for loan losses during the six months ended June
30, 2003 versus $1,300,000 during the six months ended June 30, 2002. During the
six months ended June 30, 2003, the Company recorded $2,150,000 of net loan
charge offs versus $745,000 of net loan charge-offs in the year earlier
six-month period.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended Six months ended
June 30, June 30,
--------------------------------------------
2003 2002 2003 2002
--------------------------------------------
Service charges on deposit
accounts $3,192 $1,566 $6,050 $3,031
ATM fees and interchange 597 438 1,117 811
Other service fees 196 137 318 272
Gain on sale of loans 1,319 539 2,452 1,502
Commissions on sale of
nondeposit investment products 461 738 909 1,277
Gain on sale of investments 100 - 100 -
Increase in cash value of life
insurance 376 205 515 324
Other noninterest income 313 320 489 552
--------------------------------------------
Total noninterest income $6,554 $3,943 $11,950 $7,769
============================================
Noninterest income for the second quarter of 2003 increased $2,611,000 (66.2%)
to $6,554,000 from $3,943,000 in the year-ago quarter. The increase in
noninterest income from the year-ago quarter was mainly due to an increase in
service charges on deposit products (up $1,626,000 or 104% to $3,192,000), and
an increase in gain on sale of loans (up $780,000 or 145% to $1,319,000). The
increase in service charges income was mainly due to the introduction of an
overdraft privilege deposit product in July 2002 that has added a new stream of
recurring noninterest income. The increase in gain on sale of loans is due to
the Company's ability to originate and sell an increased volume of residential
real estate mortgage loans in the current environment of record mortgage
refinance. This high level of mortgage refinance activity may not continue. ATM
fees and interchange income increased from the year-ago quarter (up $159,000 or
36.3% to $597,000) due to expansion of Company's ATM network and increased debit
card usage.
Noninterest income for the six months ended June 30, 2003 increased $4,181,000
(53.8%) to $11,950,000 from $7,769,000 in the same period in 2002. The increase
in noninterest income from the year-ago period was mainly due to an increase in
service charges on deposit products (up $3,019,000 or 99.6% to $6,050,000), and
an increase in gain on sale of loans (up $950,000 or 63.2% to $2,452,000). The
increase in service charges income was mainly due to the introduction of an
overdraft privilege deposit product in July 2002 that has added a new stream of
recurring noninterest income. The increase in gain on sale of loans is due to
the Company's ability to originate and sell an increased volume of residential
real estate mortgage loans in the current environment of record mortgage
refinance. This high level of mortgage refinance activity may not continue. ATM
fees and interchange income increased from the year-ago quarter (up $306,000 or
37.7% to $1,117,000) due to expansion of Company's ATM network and increased
debit card usage.
-21-
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Six months ended
June 30, June 30,
----------------------------------------------
2003 2002 2003 2002
----------------------------------------------
Salaries $4,792 $3,746 $9,042 $7,391
Commissions and incentives 1,361 839 2,472 1,690
Employee benefits 1,483 1,188 2,999 2,431
Equipment 890 717 1,682 1,405
Occupancy 832 776 1,579 1,506
Professional fees 641 396 1,215 629
Telecommunications 392 332 783 671
Data processing and software 349 254 640 492
Advertising and marketing 370 301 642 466
Courier service 260 229 508 449
ATM network charges 255 214 487 406
Intangible amortization 324 227 552 455
Postage 230 189 428 331
Operational losses 176 64 306 103
Assessments 65 55 125 111
Other 1,948 1,436 3,559 2,829
----------------------------------------------
Total $14,368 $10,963 $27,019 $21,365
==============================================
Average full time
equivalent staff 513 427 490 422
Noninterest expense
to revenue (FTE) 66.66% 63.87% 66.73% 62.85%
Noninterest expense for the second quarter of 2003 increased $3,405,000 (31.1%)
to $14,368,000 from $10,963,000 in the second quarter of 2002. The increase in
noninterest expense was mainly due to a $1,863,000 (32.3%) increase in salary
and benefit expense to $7,636,000. The increase in salary and benefits expense
was mainly due to annual salary increases, increased commission and incentive
expense, and new employees at the Company's four newly opened branches in 2002
and from the merger with North State National Bank on April 4, 2003. Noninterest
expense excluding salaries and benefits also increased (up $1,542,000 or 29.7%
to $6,732,000). Approximately $236,000 of this increase was expenses related to
the overdraft privilege product introduced in July 2002, and included in
professional fees. Also related to the overdraft privilege product introduced in
July 2002, was a $112,000 increase in operational losses from the year-ago
quarter. Increased advertising expenses accounted for $69,000 of the increase in
other noninterest expense.
Noninterest expense for the first six months of 2003 increased $5,654,000
(26.5%) to $27,019,000 from $21,365,000 in the first six months of 2002. The
increase in noninterest expense was mainly due to a $3,001,000 (26.1%) increase
in salary and benefit expense to $14,513,000. The increase in salary and
benefits expense was mainly due to annual salary increases, increased commission
and incentive expense, and new employees at the Company's four newly opened
branches in 2002 and from the merger with North State National Bank on April 4,
2003. Noninterest expense excluding salaries and benefits also increased (up
$2,653,000 or 26.9% to $12,506,000). Approximately $442,000 of this increase was
expenses related to the overdraft privilege product introduced in July 2002, and
included in professional fees. Also related to the overdraft privilege product
introduced in July 2002, was a $203,000 increase in operational losses from the
year-ago period. Increased advertising expenses accounted for $176,000 of the
increase in other noninterest expense.
-22-
Provision for Income Tax
The effective tax rate for the three months ended June 30, 2003 was 37.0% and
reflects a decrease from 37.4% for the three months ended June 30, 2002. The
effective tax rate for the six months ended June 30, 2003 was 37.5% and reflects
a decrease from 37.4% for the six months ended June 30, 2002. The provision for
income taxes for all periods presented is primarily attributable to the
respective level of earnings and the incidence of allowable deductions,
particularly from tax-exempt loans, state and municipal securities, and bank
owned life insurance.
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention to ensure collection.
The following is a summary of classified assets on the dates indicated (dollars
in thousands):
At June 30, 2003 At December 31, 2002
------------------------- ------------------------
Gross Guaranteed Net Gross Guaranteed Net
-----------------------------------------------------
Classified loans $48,321 $11,958 $36,363 $52,642 $12,280 $40,062
Other classified assets 1,551 - 1,551 932 - 932
-----------------------------------------------------
Total classified assets $49,872 $11,958 $37,914 $53,574 $12,280 $40,994
=====================================================
Allowance for loan losses/
Classified loans 35.5% 35.1%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies at June 30, 2003, decreased $3.1
million (7.5%) to $37.9 million from $41.0 million at December 31, 2002.
Nonperforming Loans
Loans are reviewed on an individual basis for reclassification to nonaccrual
status when any one of the following occurs: the loan becomes 90 days past due
as to interest or principal, the full and timely collection of additional
interest or principal becomes uncertain, the loan is classified as doubtful by
internal credit review or bank regulatory agencies, a portion of the principal
balance has been charged off, or the Company takes possession of the collateral.
Loans that are placed on nonaccrual even though the borrowers continue to repay
the loans as scheduled are classified as "performing nonaccrual" and are
included in total nonperforming loans. The reclassification of loans as
nonaccrual does not necessarily reflect Management's judgment as to whether they
are collectible.
Interest income is not accrued on loans where Management has determined that the
borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual, any previously accrued but unpaid interest
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.
Interest income on nonaccrual loans, which would have been recognized during the
six months, ended June 30, 2003, if all such loans had been current in
accordance with their original terms, totaled $1,212,000. Interest income
actually recognized on these loans during the six months ended June 30, 2003 was
$154,000.
-23-
The Company'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 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.
As shown in the following table, total nonperforming assets net of guarantees of
the U.S. Government, including its agencies and its government-sponsored
agencies, increased $13.0 million (142%) to $22.1 million during the first six
months of 2003. The increase in nonperforming assets is primarily due to two
commercial real estate loans collateralized by a single building. Nonperforming
assets net of guarantees represent 1.62% of total assets. All nonaccrual loans
are considered to be impaired when determining the need for a specific valuation
allowance. The Company continues to make a concerted effort to work problem and
potential problem loans to reduce risk of loss.
(dollars in thousands):
At June 30, 2003 At December 31, 2002
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $10,770 $8,157 $2,613 $13,199 $8,432 $4,767
Nonperforming, nonaccrual loans 16,045 1,668 14,377 4,091 718 3,373
------------------------------------------------------
Total nonaccrual loans 26,815 9,825 16,990 17,290 9,150 8,140
Loans 90 days past due and still accruing 3,549 - 3,549 40 - 40
------------------------------------------------------
Total nonperforming loans 30,364 9,825 20,539 17,330 9,150 8,180
Other real estate owned 1,551 - 1,551 932 - 932
------------------------------------------------------
Total nonperforming assets $31,915 $9,825 $22,090 $18,262 $9,150 $9,112
======================================================
Nonperforming loans to total loans 2.41% 1.19%
Allowance for loan losses/nonperforming loans 66% 176%
Nonperforming assets to total assets 1.62% 0.80%
Allowance for loan losses to nonperforming assets 61% 158%
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 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
purposes of this discussion, "loans" shall include all loans and lease contracts
that are part of the Company's portfolio.
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 portfolio, and to a lesser extent the
Company's loan 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
occur 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.
-24-
The Company's method for assessing the appropriateness of the allowance includes
specific allowances for identified problem loans and leases as determined by
SFAS 114, formula allowance factors for pools of credits, and allowances for
changing environmental factors (e.g., interest rates, growth, economic
conditions, etc.). Allowance factors for loan pools are based on the previous 5
years historical loss experience by product type. Allowances for specific loans
are based on SFAS 114 analysis of individual credits. 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. This process is
explained in detail in the notes to the Company's Consolidated Financial
Statements in its Annual Report on Form 10-K for the year ended December 31,
2002.
Based on the current conditions of the loan portfolio, Management believes that
the $13,455,000 allowance for loan losses at June 30, 2003 is adequate to absorb
probable losses inherent in the Company'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 the loan loss provision, net credit losses and
allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------
2003 2002 2003 2002
-----------------------------------------------
Balance, beginning of period $14,293 $13,337 $14,377 $13,058
Addition through merger 928 - 928 -
Loan loss provision 150 500 300 1,300
Loans charged off (2,063) (282) (2,343) (843)
Recoveries of previously
charged-off loans 147 58 193 98
-----------------------------------------------
Net charge-offs (1,916) (224) (2,150) (745)
-----------------------------------------------
Balance, end of period $13,455 $13,613 $13,455 $13,613
===============================================
Allowance for loan losses/loans outstanding 1.58% 2.03%
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management. On
July 31, 2003, TriCo completed an offering of 20,000 shares of cumulative trust
preferred securities for cash in an aggregate amount of $20,000,000. The trust
preferred securities are due in 30 years with an interest rate that resets
quarterly at three-month LIBOR plus 3.05%, or 4.16% for the first quarterly
interest period. The trust preferred securities were issued through an
underwriting syndicate to which the Company paid underwriting fees of $7.50 per
trust preferred security or an aggregate of $150,000. The net proceeds of
$19,850,000 will be used to finance the opening of new branches, improve bank
services and technology, repurchase shares of the Company's common stock as
described below and increase the Company's capital.
Also on July 31, 2003, the Company announced the termination of its stock
repurchase plan to repurchase 150,000 shares of common stock originally
announced on October 19, 2001. There were 118,800 shares repurchased under the
plan and the remaining 31,200 shares had not been repurchased. The Company has
adopted a new stock repurchase plan for the repurchase of up to 250,000 shares
of the Company's common stock from time to time as market conditions allow. The
250,000 shares authorized for repurchase under this plan represent approximately
3.2% of the Company's approximately 7,852,000 common shares outstanding as of
July 31, 2003, 2003. This new plan has no stated expiration date for the
repurchases.
-25-
The Company's primary capital resource is shareholders' equity, which was $124.6
million at June 30, 2003. This amount represents an increase of $25,553,000 from
December 31, 2002, the net result of issuance of common stock and options
related to the merger with North State National Bank ($18,527,000),
comprehensive income for the period ($8,997,000), and the issuance of common
shares via the exercise of stock options ($1,016 million), partially offset by
dividends paid ($2,987,000). The Company's ratio of equity to total assets was
9.15%, 9.04%, and 8.65% as of June 30, 2003, June 30, 2002, and December 31,
2002, respectively.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
To Be Well
At June 30, At Minimum Capitalized Under
----------------- December 31, Regulatory Prompt Corrective
2003 2002 2002 Requirement Action Provisions
------------------------------------------------------------------
Tier I Capital 9.12% 10.75% 10.71% 4.00% 6.00%
Total Capital 10.37% 12.01% 11.97% 8.00% 10.00%
Leverage ratio 7.45% 8.55% 8.27% 4.00% 5.00%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Company has an Asset and Liability Management Committee (ALCO)
which establishes and monitors guidelines to control the sensitivity of earnings
to changes in interest rates.
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 Company's assets, liabilities and off-balance sheet items. The
Company 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 Company 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-
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.
At June 30, 2003 and 2002, the results of the simulations noted above indicate
that the balance sheet is slightly asset sensitive (earnings increase when
interest rates rise). The magnitude of all the simulation results noted above is
within the Company'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.
At June 30, 2003 and 2002, the Company had no derivative financial instruments.
Liquidity
The Company's principal source of asset liquidity is federal funds sold and
marketable investment securities available for sale. At June 30, 2003, federal
funds sold and investment securities available for sale totaled $357 million,
representing an increase of $11 million or 3.2% from December 31, 2002, and an
increase of $95 million or 36.3% from June 30, 2002. In addition, the Company
generates additional liquidity from its operating activities. The Company's
profitability during the first six months of 2003 generated cash flows from
operations of $14.1 million compared to $11.3 million during the first six
months of 2002. Additional cash flows may be provided by financing activities,
primarily the acceptance of deposits and borrowings from banks. Sales and
maturities of investment securities produced cash inflows of $135 million during
the six months ended June 30, 2003 compared to $60 million for the six months
ended June 30, 2002. During the six months ended June 30, 2003, the Company
invested $110 million, $90 million, and $19 million in securities, net loan
growth, and life insurance policies, respectively, compared to $67 million and
$14 million used to purchase investments and net loan growth, respectively,
during the first six months of 2002. These changes in investment, loan, and life
insurance balances contributed to net cash used for investing activities of $78
million during the six months ended June 30, 2003, compared to net cash used for
investing activities of $22 million during the six months ended June 30, 2002.
Financing activities provided net cash of $57 million during the six months
ended June 30, 2003, compared to net cash provided by financing activities of
$15 million during the six months ended June 30, 2002. Increases in deposit
balances and Federal funds borrowed accounted for $42 million and $17 million of
financing sources of funds, respectively, during the six months ended June 30,
2003, compared to deposit balance increases that accounted for $18 million of
financing sources of funds during the six months ended June 30, 2002. Dividends
paid used $3.0 million and $2.8 million of cash during the six months ended June
30, 2003 and June 30, 2002, respectively. Also, the Company's liquidity is
dependent on dividends received from the Bank. Dividends from the Bank are
subject to certain regulatory restrictions.
-27-
Item 4. 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 June 30, 2003 ("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.
(b) 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.
-28-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; all such actions are of a routine nature and arise in the normal
course of business of the Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on May 13,
2003.
(b) and (c) The following nine directors were elected at the meeting:
Votes For Votes Against/Withheld Abstentions
--------- ---------------------- -----------
William J. Casey 5,188,013 37,956 -
Donald J. Amaral 5,187,153 38,816 -
Craig S. Compton 5,187,807 38,162 -
Wendell J. Lundberg 5,188,013 37,956 -
Donald E. Murphy 5,187,699 38,270 -
Steve G. Nettleton 5,192,538 33,431 -
Richard P. Smith 5,026,844 199,126 -
Carroll R. Taresh 4,949,504 276,465 -
Alex A. Vereschagin, Jr. 5,188,013 37,956 -
The shareholders ratified the appointment of KPMG LLP as independent public
accountants of the Company for 2003. 5,662,636 shares were voted for the
ratification, 10,541 shares against and 31,732 shares abstained.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1* Restated Articles of Incorporation dated May 9, 2003, filed as
Exhibit 3.1 to TriCo's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003
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 between TriCo and each of
Craig Carney (dated February 27, 2003), Richard O'Sullivan (date
February 24, 2003), and Thomas Reddish (dated April 10, 2001),
filed as Exhibit 10.9 to TriCo's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001
-29-
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)
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)
10.13* Employment Agreement between TriCo and Richard O'Sullivan dated
April 10, 2001, filed as Exhibit 10.13 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003
Computation of earnings per share
11.1 Tri Counties Bank, a California banking corporation, and TriCo
Capital Trust I, a Delaware business trust, are the only
subsidiaries of Registrant
21.1 Tri Counties Bank, a California banking corporation, and TriCo
Capital Trust I, a Delaware business trust, are the only
subsidiaries of Registrant
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
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32.1 Section 1350 Certification of CEO
32.2 Section 1350 Certification of CFO
* Previously filed and incorporated by reference.
(b) Reports on Form 8-K
During the quarter ended June 30, 2003 the Company filed the following
Current Reports on Form 8-K:
Description Date of Report
------------------------------------ --------------------
Closing of acquisition of North April 15, 2003
State National Bank by TriCo
Bancshares and Tri Counties Bank.
Quarterly results of operations. April 23, 2003
Quarterly results of operations. July 30, 2003
Declaration of $0.20 per common July 30, 2003
share dividend payable September 30,
2003 to holders of record on
September 9, 2003; trust preferred
issuance; cancellation of existing
stock repurchase plan; approval of
new stock repurchase plan;
substantial reduction in
nonperforming assets.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
Date: August 14, 2003 /s/ Thomas J. Reddish
-----------------------------------
Thomas J. Reddish
Vice President and Chief Financial Officer
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Exhibit 11.1
TRICO BANCSHARES
Computation of Earnings Per Share on Common and Common Equivalent Shares and on
Common Shares Assuming Full Dilution
For the For the
three months six months
ended June 30, ended June 30,
(In thousands, except per share data) 2003 2002 2003 2002
----------------------------------------
Weighted average number of common
shares outstanding - basic 7,796 7,011 7,434 7,002
Add exercise of options reduced by
the number of shares that could
have been purchased with the
proceeds of such exercise 225 203 224 164
----------------------------------------
Weighted average number of common
shares outstanding - diluted 8,021 7,214 7,658 7,166
========================================
Net income $4,254 $3,365 $7,867 $6,694
Basic earnings per share $0.55 $0.48 $1.06 $0.96
Diluted earnings per share $0.53 $0.47 $1.03 $0.93
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Exhibit 31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as Amended
I, Richard P. Smith, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have;
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003 /s/ Richard P. Smith
-------------------------------------
Richard P. Smith
President and Chief Executive Officer
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Exhibit 31.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as Amended
I, Thomas J. Reddish, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have;
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003 /s/ Thomas J. Reddish
-------------------------------------
Thomas J. Reddish
Vice President and Chief Financial
Officer
-34-
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350.
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ending June 30, 2003 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
A signed original of this written statement required by Section 906 has been
provided to TriCo Bancshares and will be retained by TriCo Bancshares and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350.
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ending June 30, 2003 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
A signed original of this written statement required by Section 906 has been
provided to TriCo Bancshares and will be retained by TriCo Bancshares and
furnished to the Securities and Exchange Commission or its staff upon request.
-35-