SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year Commission File Number 0-10661
ended December 31, 2003
TriCo Bancshares
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(Exact name of Registrant as specified in its charter)
California 94-2792841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(530) 898-0300
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES X NO
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The aggregate market value of the voting common stock held by non-affiliates of
the Registrant, as of February 24, 2004, was approximately $196,167,000. This
computation excludes a total of 2,135,085 shares that are beneficially owned by
the officers and directors of Registrant who may be deemed to be the affiliates
of Registrant under applicable rules of the Securities and Exchange Commission.
The number of shares outstanding of Registrant's common stock, as of February
24, 2004, was 7,780,175 shares of common stock, without par value.
The following documents are incorporated herein by reference into the parts of
Form 10-K indicated: Registrant's Proxy Statement for use in connection with its
2004 Annual Meeting of Shareholders, for Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.
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TABLE OF CONTENTS
Page Number
PART I
Item 1 Business 2
Item 2 Properties 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 11
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 35
Item 8 Financial Statements and Supplementary Data 36
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 69
Item 9A Controls and Procedures 69
PART III
Item 10 Directors and Executive Officers of the Registrant 70
Item 11 Executive Compensation 70
Item 12 Security Ownership of Certain Beneficial Owners
and Management, and Related Stockholder Matters 70
Item 13 Certain Relationships and Related Transactions 70
Item 14 Principal Accountant Fees and Services 70
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 70
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. When you see any of the
words "believes", "expects", "anticipates", "estimates", or similar expressions,
mean making forward-looking statements. A number of factors, some of which are
beyond the Company's ability to predict or control, could cause future results
to differ materially from those contemplated. These factors include but are not
limited to:
- a continued slowdown in the national and California economies;
- increased economic uncertainty created by the recent terrorist attacks
on the United States and the actions taken in response;
- the prospect of additional terrorist attacks in the United States and
the uncertain effect of these events on the national and regional
economies;
- changes in the interest rate environment;
- changes in the regulatory environment;
- significantly increasing competitive pressure in the banking industry;
- operational risks including data processing system failures or fraud;
- volatility of rate sensitive deposits; and
- asset/liability matching risks and liquidity risks.
PART I
ITEM 1. BUSINESS
Information About TriCo Bancshares' Business
TriCo Bancshares (the "Company") was incorporated in California on October 13,
1981. It was organized at the direction of the board of directors of Tri
Counties Bank (the "Bank") for the purpose of forming a bank holding company. On
September 7, 1982, the shareholders of Tri Counties Bank became the shareholders
of TriCo and Tri Counties Bank became a wholly owned subsidiary of TriCo. At
that time, TriCo became a bank holding company subject to the supervision of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended. Tri
Counties Bank remains subject to the supervision of the California Department of
Financial Institutions and the FDIC. On July 31, 2003, the Company formed a
subsidiary business trust, TriCo Capital Trust I, to issue trust preferred
securities. Tri Counties Bank and TriCo Capital Trust I currently are the only
subsidiaries of TriCo and TriCo is not conducting any business operations
independent of Tri Counties Bank and TriCo Capital Trust I.
For financial reporting purposes, the financial statements of the Bank are
consolidated into the financial statements of the Company. Historically, issuer
trusts, such as TriCo Capital Trust, that issued trust preferred securities have
been consolidated by their parent companies and trust preferred securities have
been treated as eligible for Tier 1 capital treatment by bank holding companies
under Federal Reserve rules and regulations relating to minority interests in
equity accounts of consolidated subsidiaries. Applying the provisions of the
Financial Accounting Standards Board Revised Interpretation No. 46 (FIN 46R),
the Company is no longer permitted to consolidate the issuer trusts, beginning
on December 31, 2003. Although the Federal Reserve has stated in its July 2,
2003 Supervisory Letter that trust preferred securities will be treated as Tier
1 capital until notice is given to the contrary, the Supervisory Letter also
indicates that the Federal Reserve will review the regulatory implications of
any accounting treatment changes and will provide further guidance if necessary
or warranted.
On April 4, 2003, TriCo Bancshares 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. 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 assets acquired, was approximately $15.5
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.
Additional information concerning the Company can be found on our website at
www.tcbk.com. Copies of our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports are
available free of charge through our website at Investor Information---"SEC
Filings" and "Annual Reports" as soon as reasonably practicable after the
Company files these reports to the Securities and Exchange Commission.
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Business of Tri Counties Bank
Tri Counties Bank was incorporated as a California banking corporation on June
26, 1974, and received its certificate of authority to begin banking operations
on March 11, 1975. Tri Counties Bank engages in the general commercial banking
business in the California counties of Butte, Contra Costa, Del Norte, Fresno,
Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer,
Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare and Yuba. Tri
Counties Bank currently has 33 traditional branches and 12 in-store branches.
General Banking Services
The Bank conducts a commercial banking business including accepting demand,
savings and time deposits and making commercial, real estate, and consumer
loans. It also offers installment note collection, issues cashier's checks and
money orders, sells travelers checks and provides safe deposit boxes and other
customary banking services. Brokerage services are provided at the Bank's
offices by the Bank's association with Raymond James Financial Services, Inc.
The Bank does not offer trust services or international banking services.
The Bank has emphasized retail banking since it opened. Most of the Bank's
customers are retail customers and small to medium-sized businesses. The Bank
emphasizes serving the needs of local businesses, farmers and ranchers, retired
individuals and wage earners. The majority of the Bank's loans are direct loans
made to individuals and businesses in the regions of California where its
branches are located. At December 31, 2003, the total of the Bank's consumer
installment loans outstanding was $319,029,000 (32.5%), the total of commercial
loans outstanding was $142,252,000 (14.5%), and the total of real estate loans
including construction loans of $61,591,000 was $519,960,000 (53.0%). The Bank
takes real estate, listed and unlisted securities, savings and time deposits,
automobiles, machinery, equipment, inventory, accounts receivable and notes
receivable secured by property as collateral for loans.
Most of the Bank's deposits are attracted from individuals and business-related
sources. No single person or group of persons provides a material portion of the
Bank's deposits, the loss of any one or more of which would have a materially
adverse effect on the business of the Bank, nor is a material portion of the
Bank's loans concentrated within a single industry or group of related
industries.
In order to attract loan and deposit business from individuals and small to
medium-sized businesses, branches of the Bank set lobby hours to accommodate
local demands. In general, lobby hours are from 9:00 a.m. to 5:00 p.m. Monday
through Thursday, and from 9:00 a.m. to 6:00 p.m. on Friday. Certain branches
with less activity open later and close earlier. Some Bank offices also utilize
drive-up facilities operating from 9:00 a.m. to 7:00 p.m. The supermarket
branches are open from 9:00 a.m. to 7:00 p.m. Monday through Saturday and 11:00
a.m. to 5:00 p.m. on Sunday.
The Bank offers 24-hour ATMs at almost all branch locations. The ATMs are linked
to several national and regional networks such as CIRRUS and STAR. In addition,
banking by telephone on a 24-hour toll-free number is available to all
customers. This service allows a customer to obtain account balances and most
recent transactions, transfer moneys between accounts, make loan payments, and
obtain interest rate information.
In February 1998, the Bank became the first bank in the Northern Sacramento
Valley to offer banking services on the Internet. This banking service provides
customers one more tool for anywhere, anytime access to their accounts.
Other Activities
The Bank may in the future engage in other businesses either directly or
indirectly through subsidiaries acquired or formed by the Bank subject to
regulatory constraints. See "Regulation and Supervision."
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Employees
At December 31, 2003, the Company and the Bank employed 610 persons, including
five executive officers. Full time equivalent employees were 532. No employees
of the Company or the Bank are presently represented by a union or covered under
a collective bargaining agreement. Management believes that its employee
relations are excellent.
Competition
The banking business in California generally, and in the Bank's primary service
area of Northern and Central California specifically, is highly competitive with
respect to both loans and deposits. It is dominated by a relatively small number
of major banks with many offices operating over a wide geographic area. Among
the advantages such major banks have over the Bank is their ability to finance
wide ranging advertising campaigns and to allocate their investment assets to
regions of high yield and demand. By virtue of their greater total
capitalization such institutions have substantially higher lending limits than
does the Bank.
In addition to competing with savings institutions, commercial banks compete
with other financial markets for funds. Yields on corporate and government debt
securities and other commercial paper may be higher than on deposits, and
therefore affect the ability of commercial banks to attract and hold deposits.
Commercial banks also compete for available funds with money market instruments
and mutual funds. During past periods of high interest rates, money market funds
have provided substantial competition to banks for deposits and they may
continue to do so in the future. Mutual funds are also a major source of
competition for savings dollars.
The Bank relies substantially on local promotional activity, personal contacts
by its officers, directors, employees and shareholders, extended hours,
personalized service and its reputation in the communities it services to
compete effectively.
Regulation and Supervision
As a consequence of the extensive regulation of commercial banking activities in
California and the United States, the business of the Company and the Bank are
particularly susceptible to changes in state and federal legislation and
regulations, which may have the effect of increasing the cost of doing business,
limiting permissible activities or increasing competition. Following is a
summary of some of the laws and regulations which effect their business. This
summary should be read with the management's discussion and analysis of
financial condition and results of operation included at Item 7 of this report.
As a registered bank holding company under the Bank Holding Company Act of 1956
(the "BHC Act"), the Company is subject to the regulation and supervision of the
Board of Governors of the Federal Reserve System ("FRB"). The BHC Act requires
the Company to file reports with the FRB and provide additional information
requested by the FRB. The Company must receive the approval of the FRB before it
may acquire all or substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to such
acquisition of shares, the Company would own or control more than 5 percent of
the voting shares of such bank.
The Company and any subsidiaries it may acquire or organize will be deemed to be
affiliates of the Bank within the Federal Reserve Act. That Act establishes
certain restrictions, which limit the extent to which the Bank can supply its
funds to the Company and other affiliates. The Company is also subject to
restrictions on the underwriting and the public sale and distribution of
securities. It is prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property, or
furnishing of services.
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The Company is generally prohibited from engaging in, or acquiring direct or
indirect control of any company engaged in non-banking activities, unless the
FRB by order or regulation has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Notwithstanding this prohibition, under the Financial Services Modernization Act
of 1999, the Company may engage in any activity, and may acquire and retain the
shares of any company engaged in any activity, that the FRB, in coordination
with the Secretary of the Treasury, determines (by regulation or order) to be
financial in nature or incidental to such financial activities. Furthermore,
such law dictates several activities that are considered to be financial in
nature, and therefore are not subject to FRB approval.
The Bank, as a state-chartered bank, is subject to regulation, supervision and
regular examination by the California Department of Financial Institutions
("DFI") and is also subject to the regulations of the FDIC. Federal and
California statutes and regulations relate to many aspects of the Bank's
operations, some of which are described below. The DFI regulates the number and
location of branch offices and may permit a bank to maintain branches only to
the extent allowable under state law for state banks. California law presently
permits a bank to locate a branch in any locality in California.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act was enacted in 1999 and became effective in 2000. The
act is a financial modernization law that is the result of a decade of debate in
the Congress regarding a fundamental reformation of the nation's financial
system. The law is subdivided into seven titles, by functional area. Title I
acts to facilitate affiliations among banks, insurance companies and securities
firms. Title II narrows the exemptions from the securities laws previously
enjoyed by banks, requires the Federal Reserve and the SEC to work together to
draft rules governing certain securities activities of banks and creates a new,
voluntary investment bank holding company. Title III restates the proposition
that the states are the functional regulators for all insurance activities,
including the insurance activities by depository institutions. The law
encourages the states to develop uniform or reciprocal rules for the licensing
of insurance agents. Title IV prohibits the creation of additional unitary
thrift holding companies. Title V imposes significant requirements on financial
institutions related to the transfer of nonpublic personal information. These
provisions require each institution to develop and distribute to accountholders
an information disclosure policy, and requires that the policy allow customers
to, and for the institution to honor a customer's request to, "opt-out" of the
proposed transfer of specified nonpublic information to third parties. Title VI
reforms the Federal Home Loan Bank system to allow broader access among
depository institutions to the systems advance programs, and to improve the
corporate governance and capital maintenance requirements for the system. Title
VII addresses a multitude of issues including disclosure of ATM surcharging
practices, disclosure of agreements among non-governmental entities and insured
depository institutions which donate to non-governmental entities regarding
donations made in connection with the Community Reinvestment Act and disclosure
by the recipient non-governmental entities of how such funds are used.
Additionally, the law extends the period of time between Community Reinvestment
Act examinations of community banks.
The Company has undertaken efforts to comply with all provisions of the
Gramm-Leach-Bliley Act and all implementing regulations, including the
development of appropriate policies and procedures to meet their
responsibilities in connection with the privacy provisions of Title V of that
act.
Safety and Soundness Standards
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
implemented certain specific restrictions on transactions and required the
regulators to adopt overall safety and soundness standards for depository
institutions related to internal control, loan underwriting and documentation,
and asset growth. Among other things, FDICIA limits the interest rates paid on
deposits by undercapitalized institutions, the use of brokered deposits and the
aggregate extension of credit by a depository institution to an executive
officer, director, principal stockholder or related interest, and reduces
deposit insurance coverage for deposits offered by undercapitalized institutions
for deposits by certain employee benefits accounts.
-5-
The federal financial institution agencies published a final rule effective on
August 9, 1995, implementing safety and soundness standards. The FDICIA added a
new Section 39 to the Federal Deposit Insurance Act which required the agencies
to establish safety and soundness standards for insured financial institutions
covering:
- internal controls, information systems and internal audit systems;
- loan documentation;
- credit underwriting;
- interest rate exposure;
- asset growth;
- compensation, fees and benefits;
- asset quality, earnings and stock valuation; and
- excessive compensation for executive officers, directors or principal
shareholders which could lead to material financial loss.
The agencies issued the final rule in the form of guidelines only for
operational, managerial and compensation standards and reissued for comment
proposed standards related to asset quality and earnings which are less
restrictive than the earlier proposal in November 1993. Unlike the earlier
proposal, the guidelines under the final rule do not apply to depository
institution holding companies and the stock valuation standard was eliminated.
If an agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial institution
to submit to the agency an acceptable plan to achieve compliance with the
standard. If the agency requires submission of a compliance plan and the
institution fails to timely submit an acceptable plan or to implement an
accepted plan, the agency must require the institution to correct the
deficiency. Under the final rule, an institution must file a compliance plan
within 30 days of a request to do so from the institution's primary federal
regulatory agency. The agencies may elect to initiate enforcement action in
certain cases rather than rely on an existing plan particularly where failure to
meet one or more of the standards could threaten the safe and sound operation of
the institution.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized. Additionally, under FDICIA, a bank may not make any
capital distribution, including the payment of dividends, if after making such
distribution the bank would be in any of the "under-capitalized" categories
under the FDIC's Prompt Corrective Action regulations.
Under the Financial Institution's Supervisory Act, the FDIC also has the
authority to prohibit a bank from engaging in business practices that the FDIC
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of a bank and other factors that the FDIC could assert that the
payment of dividends or other payments in some circumstances might be such an
unsafe or unsound practice and thereby prohibit such payment.
Under California law, dividends and other distributions by the Company are
subject to declaration by the board of directors at its discretion out of net
assets. Dividends cannot be declared and paid when such payment would make the
Company insolvent. Federal Reserve policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position. The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition. Other Federal Reserve policies forbid the payment
by bank subsidiaries to their parent companies of management fees, which are
unreasonable in amount or exceed a fair market value of the services rendered
(or, if no market exists, actual costs plus a reasonable profit).
In addition, the Federal Reserve has authority to prohibit banks that it
regulates from engaging in practices, which in the opinion of the Federal
Reserve are unsafe or unsound. Such practices may include the payment of
dividends under some circumstances. Moreover, the payment of dividends may be
inconsistent with capital adequacy guidelines. The Company may be subject to
assessment to restore the capital of the Bank should it become impaired.
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Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention on compliance with
consumer protection laws and their implementing regulations. Examination and
enforcement have become more intense in nature, and insured institutions have
been advised to monitor carefully compliance with such laws and regulations. The
Company is subject to many federal consumer protection statues and regulations,
some of which are discussed below.
The Community Reinvestment Act is intended to encourage insured depository
institutions, while operating safely and soundly, to help meet the credit needs
of their communities. This act specifically directs the federal regulatory
agencies to assess a bank's record of helping meet the credit needs of its
entire community, including low- and moderate-income neighborhoods, consistent
with safe and sound practices. This act further requires the agencies to take a
financial institution's record of meeting its community credit needs into
account when evaluating applications for, among other things, domestic branches,
mergers or acquisitions, or holding company formations. The agencies use the
Community Reinvestment Act assessment factors in order to provide a rating to
the financial institution. The ratings range from a high of "outstanding" to a
low of "substantial noncompliance."
The Equal Credit Opportunity Act generally prohibits discrimination in any
credit transaction, whether for consumer or business purposes, on the basis of
race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act. The
Truth-in-Lending Act is designed to ensure that credit terms are disclosed in a
meaningful way so that consumers may compare credit terms more readily and
knowledgeably. As a result of the such act, all creditors must use the same
credit terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the total payments and
the payment schedule, among other things.
The Fair Housing Act regulates many practices, including making it unlawful for
any lender to discriminate in its housing-related lending activities against any
person because of race, color, religion, national origin, sex, handicap or
familial status. A number of lending practices have been found by the courts to
be, or may be considered, illegal under this Act, including some that are not
specifically mentioned in the Act itself. The Home Mortgage Disclosure Act grew
out of public concern over credit shortages in certain urban neighborhoods and
provides public information that will help show whether financial institutions
are serving the housing credit needs of the neighborhoods and communities in
which they are located. This act also includes a "fair lending" aspect that
requires the collection and disclosure of data about applicant and borrower
characteristics as a way of identifying possible discriminatory lending patterns
and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act requires lenders to provide
borrowers with disclosures regarding the nature and cost of real estate
settlements. Also, this act prohibits certain abusive practices, such as
kickbacks, and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursements and other
penalties. Due to heightened regulatory concern related to compliance with these
acts generally, the Company may incur additional compliance costs or be required
to expend additional funds for investments in their local community.
-7-
USA Patriot Act of 2001
The USA Patriot Act was enacted in 2001 in response to the terrorist attacks in
New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Patriot
Act is intended to strengthen U.S. law enforcement and the intelligence
communities' ability to work together to combat terrorism on a variety of
levels. The potential impact of the Patriot Act on financial institutions is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and requires various regulations,
including:
- Due diligence requirements for financial institutions that administer,
maintain, or manage private bank accounts or correspondent accounts for
non-U.S. persons;
- Standards for verifying customer identification at account opening;
- Rules to promote cooperation among financial institutions, regulators,
and law enforcement entities to assist in the identification of parties
that may be involved in terrorism or money laundering;
- Reports to be filed by non-financial trades and business with the
Treasury Department's Financial Crimes Enforcement Network for
transactions exceeding $10,000; and
- The filing of suspicious activities reports by securities brokers and
dealers if they believe a customer may be violating U.S. laws and
regulations.
Capital Requirements
Federal regulation imposes upon all financial institutions a variable system of
risk-based capital guidelines designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to promote uniformity in the definition of bank
capital uniform nationally.
The Bank and the Company are subject to the minimum capital requirements of the
FDIC, and the Federal Reserve, respectively. As a result of these requirements,
the growth in assets is limited by the amount of its capital accounts as defined
by the respective regulatory agency. Capital requirements may have an effect on
profitability and the payment of dividends on the common stock of the Bank and
the Company. If an entity is unable to increase its assets without violating the
minimum capital requirements or is forced to reduce assets, its ability to
generate earnings would be reduced.
The Federal Reserve, and the FDIC have adopted guidelines utilizing a risk-based
capital structure. Qualifying capital is divided into two tiers. Tier 1 capital
consists generally of common stockholders' equity, qualifying noncumulative
perpetual preferred stock, qualifying cumulative perpetual preferred stock (up
to 25% of total Tier 1 capital) and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets.
Tier 2 capital consists of, among other things, allowance for loan and lease
losses up to 1.25% of weighted risk assets, perpetual preferred stock, hybrid
capital instruments, perpetual debt, mandatory convertible debt securities,
subordinated debt and intermediate-term preferred stock. Tier 2 capital
qualifies as part of total capital up to a maximum of 100% of Tier 1 capital.
Amounts in excess of these limits may be issued but are not included in the
calculation of risk-based capital ratios. Under these risk-based capital
guidelines, the Bank and the Company are required to maintain capital equal to
at least 8% of its assets, of which at least 4% must be in the form of Tier 1
capital.
The guidelines also require the Company and the Bank to maintain a minimum
leverage ratio of 4% of Tier 1 capital to total assets (the "leverage ratio").
The leverage ratio is determined by dividing an institution's Tier 1 capital by
its quarterly average total assets, less goodwill and certain other intangible
assets. The leverage ratio constitutes a minimum requirement for the most
well-run banking organizations. See Note 21 in the financial statements at Item
8 of this report for a discussion about the Company's risk-based capital ratios.
Prompt Corrective Action
Prompt Corrective Action Regulations of the federal bank regulatory agencies
establish five capital categories in descending order (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized), assignment to which depends upon the institution's
total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage
ratio. Institutions classified in one of the three undercapitalized categories
are subject to certain mandatory and discretionary supervisory actions, which
include increased monitoring and review, implementation of capital restoration
plans, asset growth restrictions, limitations upon expansion and new business
activities, requirements to augment capital, restrictions upon deposit gathering
and interest rates, replacement of senior executive officers and directors, and
requiring divestiture or sale of the institution. Both the Company and the Bank
have been classified as a well-capitalized bank since adoption of these
regulations.
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Impact of Monetary Policies
Banking is a business that depends on interest rate differentials. In general,
the difference between the interest paid by a bank on its deposits and other
borrowings, and the interest rate earned by banks on loans, securities and other
interest-earning assets comprises the major source of banks' earnings. Thus, the
earnings and growth of banks are subject to the influence of economic conditions
generally, both domestic and foreign, and also to the monetary and fiscal
policies of the United States and its agencies, particularly the Federal
Reserve. The Federal Reserve implements national monetary policy, such as
seeking to curb inflation and combat recession, by its open-market dealings in
United States government securities, by adjusting the required level of reserves
for financial institutions subject to reserve requirements and through
adjustments to the discount rate applicable to borrowings by banks which are
members of the Federal Reserve. The actions of the Federal Reserve in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates. The nature and timing of any future changes in such
policies and their impact on the Company cannot be predicted. In addition,
adverse economic conditions could make a higher provision for loan losses a
prudent course and could cause higher loan loss charge-offs, thus adversely
affecting the Company's net earnings.
Insurance of Deposits
The Bank's deposit accounts are insured up to a maximum of $100,000 per
depositor by the FDIC. The FDIC issues regulations and generally supervises the
operations of its insured banks. This supervision and regulation is intended
primarily for the protection of depositors, not shareholders.
As of December 31, 2003, the deposit insurance premium rate was $0.0154 per
$100.00 in deposits. In November 1990, federal legislation was passed which
removed the cap on the amount of deposit insurance premiums that can be charged
by the FDIC. Under this legislation, the FDIC is able to increase deposit
insurance premiums as it sees fit. This could result in a significant increase
in the cost of doing business for the Bank in the future. The FDIC now has
authority to adjust deposit insurance premiums paid by insured banks every six
months.
Securities Laws
The Company is subject to the periodic reporting requirements of the Securities
and Exchange Act of 1934, as amended, which include filing annual, quarterly and
other current reports with the Securities and Exchange Commission.
The Sarbanes-Oxley Act was enacted in 2002 to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to securities
laws. Among other things, this act:
- Prohibits a registered public accounting firm from performing specified
nonaudit services contemporaneously with a mandatory audit;
- Requires thechief executive officer and chief financial officer of an
issuer to certify each annual or quarterly report filed with the
Securities and Exchange Commission;
- Requires an issuer to disclose all material off-balance sheet
transactions that may have a material effect on an issuer's financial
status; and
- Prohibits insider transactions in an issuer's stock during lock-out
periods of an issuer's pension plans.
The Company is also required to comply with the rules and regulations of the
Nasdaq Stock Market, Inc.
-9-
ITEM 2. PROPERTIES
The Company is engaged in the banking business through 45 offices in 21 counties
in Northern and Central California including nine offices in Butte County, eight
in Shasta County, three each in Sacramento and Siskiyou Counties, two each in
Glenn, Sutter, Lassen, Yuba, and Stanislaus Counties, and one each in Madera,
Merced, Lake, Mendocino, Del Norte, Tehama, Nevada, Contra Costa, Kern, Tulare,
Placer and Fresno Counties. All offices are constructed and equipped to meet
prescribed security requirements.
The Company owns 17 branch office locations and one administrative building and
leases 28 branch office locations and 5 administrative facilities. Most of the
leases contain multiple renewal options and provisions for rental increases,
principally for changes in the cost of living index, property taxes and
maintenance.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries, are party to any material pending
legal proceeding, nor is their property the subject of any material pending
legal proceeding, except routine legal proceedings arising in the ordinary
course of their business. None of these proceedings is expected to have a
material adverse impact upon the Company's business, financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders during the fourth
quarter of 2003.
-10-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the NASDAQ National Market System
("NASDAQ") under the symbol "TCBK." The following table shows the high and the
low prices for the common stock, for each quarter in the past two years, as
reported by NASDAQ:
2003: High Low
First quarter $26.77 $24.31
Second quarter $26.00 $24.10
Third quarter $29.87 $25.20
Fourth quarter $34.18 $29.81
2002:
First quarter $21.05 $18.05
Second quarter $27.40 $21.10
Third quarter $27.45 $21.60
Fourth quarter $25.25 $22.01
As of February 24, 2004 there were approximately 1,817 shareholders of record of
the Company's common stock.
Effective April 4, 2003, the Company (i) issued 723,512 shares of its common
stock pursuant to a registration statement on Form S-4, (ii) issued options to
purchase 79,587 shares of its common stock, and (iii) paid $13,090,057 in cash
to the former shareholders of North State National Bank. Additional information
concerning this acquisition is found under Item 1 of this report.
The Company has paid cash dividends on its common stock in every quarter since
March 1990, and it is currently the intention of the Board of Directors of the
Company to continue payment of cash dividends on a quarterly basis. There is no
assurance, however, that any dividends will be paid since they are dependent
upon earnings, financial condition and capital requirements of the Company and
the Bank. As of December 31, 2003, $23.9 million was available for payment of
dividends by the Company to its shareholders, under applicable laws and
regulations. The Company paid cash dividends of $0.20 per common share in each
of the quarters ended March 31, June 30, September 30, and December 31, 2003 and
2002.
As discussed in Note 10 to the consolidated financial statements included as
Item 8 of this report, in June 2001, the Company announced that its Board of
Directors adopted and entered into a Shareholder Rights Plan designed to protect
and maximize shareholder value and to assist the Board of Directors in ensuring
fair and equitable benefit to all shareholders in the event of a hostile bid to
acquire the Company.
The Company adopted a new stock repurchase plan on July 31, 2003 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 represented 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. As of December 31, 2003, the Company
had purchased 27,500 shares under this plan. The following table shows the
repurchases made by the Company under this plan during the fourth quarter of
2003:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number
of Shares purchased paid per share shares purchased as of shares that may yet
part of publicly be purchased under the
announced plans or plans or programs
programs
- -----------------------------------------------------------------------------------------------------
Oct. 1-31, 2003 - - - 241,900
Nov. 1-30, 2003 1,700 $32.00 1,700 240,200
Dec. 1-31, 2003 17,700 $32.22 17,700 222,500
-11-
ITEM 6. SELECTED FINANCIAL DATA
TRICO BANCSHARES
Financial Summary
(in thousands, except per share amounts)
=========================================================================================================
Year ended December 31, 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Interest income $73,969 $64,696 $71,998 $76,327 $67,808
Interest expense 13,089 12,914 23,486 28,543 24,370
- ---------------------------------------------------------------------------------------------------------
Net interest income 60,880 51,782 48,512 47,784 43,438
Provision for loan losses 1,250 2,800 4,400 5,000 3,550
Noninterest income 22,909 19,180 16,238 14,922 12,775
Noninterest expense 55,527 45,971 40,607 37,846 34,726
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 27,012 22,191 19,743 19,860 17,937
Provision for income taxes 10,124 8,122 7,324 7,237 6,534
- ---------------------------------------------------------------------------------------------------------
Net income $16,888 $14,069 $12,419 $12,623 $11,403
- ---------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $2.21 $2.00 $1.76 $1.76 $1.60
Diluted 2.14 1.96 1.72 1.72 1.56
Per share:
Dividends paid $0.80 $0.80 $0.80 $0.79 $0.70
Book value at December 31 16.33 14.02 12.42 11.87 10.22
Tangible book value at December 31 13.58 13.45 11.69 11.11 9.32
Average common shares outstanding 7,641 7,019 7,073 7,192 7,130
Average diluted common shares outstanding 7,879 7,193 7,219 7,341 7,319
Shares outstanding at December 31 7,834 7,061 7,001 7,181 7,152
At December 31:
Loans, net $967,468 $673,145 $645,674 $628,721 $576,942
Total assets 1,468,755 1,144,574 1,005,447 972,071 924,796
Total deposits 1,236,823 1,005,237 880,393 837,832 794,110
Debt financing and notes payable 22,887 22,924 22,956 33,983 45,505
Junior subordinated debt 20,619 - - - -
Shareholders' equity 127,960 99,014 86,933 85,233 73,123
Financial Ratios:
For the year:
Return on assets 1.27% 1.35% 1.27% 1.35% 1.26%
Return on equity 14.24% 15.03% 14.19% 16.03% 15.59%
Net interest margin1 5.23% 5.61% 5.58% 5.70% 5.40%
Net loan losses to average loans 0.34% 0.22% 0.47% 0.70% 0.13%
Efficiency ratio1 65.39% 63.66% 61.62% 59.25% 60.53%
Average equity to average assets 8.91% 9.00% 8.94% 8.40% 8.09%
At December 31:
Equity to assets 8.71% 8.65% 8.65% 8.77% 7.91%
Total capital to risk-adjusted assets 11.56% 11.97% 11.68% 12.20% 11.77%
Allowance for loan losses to loans 1.40% 2.09% 1.98% 1.82% 1.88%
1 Fully taxable equivalent
-12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's discussion and analysis of its financial condition and results of
operations is intended to provide a better understanding of the significant
changes and trends relating to the Company's financial condition, results of
operations, liquidity and interest rate sensitivity. The following discussion is
based on the Company's consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Please read the Company's audited consolidated
financial statements and the related notes included as Item 8 of this report.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those that materially affect the financial statements
and are related to the adequacy of the allowance for loan losses, investments,
mortgage servicing rights, and intangible assets. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The Company's
policies related to estimates on the allowance for loan losses, other than
temporary impairment of investments and impairment of intangible assets can be
found in Note 1 to the Company's audited consolidated financial statements and
the related notes included as Item 8 of this report.
As the Company has not commenced any business operations independent of the
Bank, the following discussion pertains primarily to the Bank. Average balances,
including balances used in calculating certain financial ratios, are generally
comprised of average daily balances for the Company. Within Management's
Discussion and Analysis of Financial Condition and Results of Operations,
interest income and net interest income are generally presented on a fully
tax-equivalent (FTE) basis.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the consolidated financial statements of the Company and the related notes
at Item 8 of this report.
-13-
Net Income
Following is a summary of the Company's net income for the past three years
(dollars in thousands, except per share amounts):
Components of Net Income
- -----------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
-------------------------------
Net interest income * $62,005 $53,029 $49,666
Provision for loan losses (1,250) (2,800) (4,400)
Noninterest income 22,909 19,180 16,238
Noninterest expense (55,527) (45,971) (40,607)
Taxes * (11,249) (9,369) (8,478)
-------------------------------
$16,888 $14,069 $12,419
===============================
Net income per average fully-diluted share $2.14 $1.96 $1.72
Net income as a percentage of average
shareholders' equity 14.24% 15.03% 14.19%
Net income as a percentage of average
total assets 1.27% 1.35% 1.27%
=============================================================================
* Fully tax-equivalent (FTE)
Earnings in 2003 increased $2.8 million (20.0%) from 2002. Net interest income
(FTE) grew $9.0 million (16.9%) due to a $239.1 million (25.3%) increase in
average earning assets that was partially offset by a net interest margin that
fell 38 basis points. The loan loss provision was reduced by $1.6 million in
2003 from 2002, and noninterest income increased $3.7 million (19.4%) while
noninterest expense also increased $9.6 million (20.8%).
The Company achieved earnings of $14.1 million in 2002, representing a 13.7%
increase from the $12.4 million earned in 2001, which was down 1.6% from 2000
earnings of $12.6 million. Net interest income on a fully tax-equivalent basis
for 2002 increased $3.4 million (6.8%) compared to 2001. Higher average balances
of interest earning assets added $4.4 million to net interest income on a fully
tax-equivalent basis, while changes in interest rates reduced net interest
income on a fully tax-equivalent basis by $1.0 million. The loan loss provision
was reduced by $1.6 million (36.4%), and noninterest income grew $2.9 million
(18.1%). Partially offsetting this higher revenue, noninterest expense expanded
$5.4 million (13.2%).
The Company's return on average total assets was 1.27% in 2003, compared to
1.35% and 1.27% in 2002 and 2001, respectively. Return on average equity in 2003
was 14.24%, compared to 15.03% in 2002 and 14.19% percent in 2001.
Net Interest Income
The Company's primary source of revenue is net interest income, which is the
difference between interest income on earning assets and interest expense on
interest-bearing liabilities. Net interest income (FTE) increased $9.0 million
(17.0%) to $62.0 million from 2002 to 2003. Net interest income (FTE) increased
$3.4 million (6.8%) from 2001 to $53.0 million in 2002.
Following is a summary of the Company's net interest income for the past three
years (dollars in thousands):
Components of Net Interest Income
-----------------------------------------------------------------
Year ended December 31, 2003 2002 2001
-------------------------------
Interest income $73,969 $64,696 $71,998
Interest expense (13,089) (12,914) (23,486)
FTE adjustment 1,125 1,247 1,154
-------------------------------
Net interest income (FTE) $62,005 $53,029 $49,666
=================================================================
Net interest margin (FTE) 5.23% 5.61% 5.58%
=================================================================
-14-
Interest income (FTE) increased $9.2 million (13.9%) from $65.9 million in 2002
to $75.1 million in 2003, due to increased volume of earning assets that was
partially offset by lower yields on earning assets. During 2003, the average
balance of loans and investment securities grew $167.0 million (25.3%) and $97.2
million (39.2%), respectively, while the average balance of federal funds sold
declined $25.1 million (68.5%). Yields on loans and investment securities fell
to 7.37% and 4.05%, respectively, in 2003 from 7.94% and 5.19%, respectively, in
2002. Overall, the yield on the Company's earning assets decreased from 6.98% in
2002 to 6.34% in 2003. The decrease in average yield on interest-earning assets
reduced interest income (FTE) by $8.7 million, while a net increase of $239.1
million (25.3%) in average balances of interest earning assets added $17.9
million to interest income (FTE) during 2003.
Interest expense increased $0.2 million (1.4%) in 2003 due to a $195.4 million
(26.2%) increase in average balance of interest-bearing liabilities that was
offset by a 34 basis point decrease in the average rate paid on interest-bearing
liabilities from 1.73% to 1.39%. Average balances of interest bearing demand,
savings, and time deposits were up $31.8 million (18.1%), $120.0 million
(45.4%), and $17.7 million (6.3%), respectively. The decrease in average yield
on interest-bearing liabilities reduced interest expense by $2.3 million, while
the increase in average balances of interest bearing liabilities added $2.5
million to interest expense during 2003.
Interest income (FTE) decreased $7.2 million (9.9%) from 2001 to 2002, the net
effect of lower earning-asset yields partially offset by higher average balances
of those assets. The total yield on earning assets dropped from 8.21% in 2001 to
6.98% in 2002, following the trend in overall interest markets in which federal
funds rates were reduced to historical lows ending 2002 at 1.25%. The average
yield on loans decreased 113 basis points to 7.94% during 2002. The decrease in
average yield on interest-earning assets reduced interest income (FTE) by $11.1
million, while a $54.8 million (6.2%) increase in average balances of
interest-earning assets added $3.9 million to interest income (FTE) during 2002.
Interest expense decreased $10.6 million (45.0%) in 2002 from $23.5 million in
2001, principally due to lower rates paid. The average rate paid on
interest-bearing liabilities was 1.73% in 2002, 155 basis points or 47% lower
than in 2001. The most pronounced declines included rates paid on savings
deposits (down from 2.11% to 1.02%) and time deposits (down from 5.07% to
2.99%). Rates paid on interest-bearing demand deposits decreased 68 basis points
to 0.27%. The decrease in the average rate paid on interest-bearing liabilities
decreased interest expense by $10.1 million, and changes in the mix of average
balances of interest-bearing liabilities decreased interest expense by $509,000
in 2002 despite an overall increase of $30.8 million (4.3%) in the average
balance of interest-bearing liabilities.
Net Interest Margin
Following is a summary of the Company's net interest margin for the past three
years:
Components of Net Interest Margin
--------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
-----------------------------
Yield on earning assets 6.34% 6.98% 8.21%
Rate paid on interest-bearing liabilities 1.39% 1.73% 3.28%
-----------------------------
Net interest spread 4.95% 5.24% 4.93%
Impact of all other net
noninterest-bearing funds 0.28% 0.35% 0.65%
-----------------------------
Net interest margin (FTE) 5.23% 5.61% 5.58%
==========================================================================
During 2002, the Company was able to maintain a relatively stable net interest
margin by aggressively reducing rates paid on interest-bearing liabilities as
yields on earning assets decreased along with market interest rates. During
2003, it became increasingly difficult to decrease rates on interest-bearing
liabilities as market interest rates continued to decrease. In addition, the
positive impact of all other net noninterest bearing funds on net interest
margin was reduced due to the lower market rates of interest at which they could
be invested.
-15-
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the past three years, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average earning assets and resulting yields,
and the amount of interest expense paid on interest bearing liabilities. Average
loan balances include nonperforming loans. Interest income includes proceeds
from loans on nonaccrual loans only to the extent cash payments have been
received and applied to interest income. Yields on securities and certain loans
have been adjusted upward to reflect the effect of income thereon exempt from
federal income taxation at the current statutory tax rate (dollars in
thousands):
Year ended December 31, 2003
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $827,673 $60,997 7.37%
Investment securities - taxable 306,647 10,903 3.56%
Investment securities - nontaxable 38,562 3,065 7.95%
Federal funds sold 11,573 129 1.11%
---------- ----------
Total earning assets 1,184,455 75,094 6.34%
----------
Other assets 146,099
----------
Total assets $1,330,554
==========
Liabilities and shareholders' equity
Interest-bearing demand deposits $208,347 488 0.23%
Savings deposits 384,455 3,441 0.90%
Time deposits 299,799 7,328 2.44%
Federal funds purchased 17,645 189 1.07%
Other borrowings 22,903 1,288 5.62%
Junior subordinated debt 8,333 355 4.26%
---------- ----------
Total interest-bearing liabilities 941,482 13,089 1.39%
----------
Noninterest-bearing demand 245,538
Other liabilities 24,941
Shareholders' equity 118,593
----------
Total liabilities and shareholders' equity $1,330,554
==========
Net interest spread (1) 4.95%
Net interest income and interest margin (2) $62,005 5.23%
========== ========
(1) Net interest spread represents the average yield earned on interest earning
assets less the average rate paid on interest bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
-16-
Year ended December 31, 2002
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $660,668 $52,472 7.94%
Investment securities - taxable 204,155 9,430 4.62%
Investment securities - nontaxable 43,871 3,435 7.83%
Federal funds sold 36,692 606 1.65%
---------- ----------
Total earning assets 945,386 65,943 6.98%
----------
Other assets 94,080
----------
Total assets $1,039,466
==========
Liabilities and shareholders' equity
Interest-bearing demand deposits $176,484 469 0.27%
Savings deposits 264,444 2,710 1.02%
Time deposits 282,084 8,441 2.99%
Federal funds purchased 116 2 1.47%
Other borrowings 22,939 1,292 5.63%
---------- ---------- -
Total interest-bearing liabilities 746,067 12,914 1.73%
----------
Noninterest-bearing demand 182,569
Other liabilities 17,250
Shareholders' equity 93,580
----------
Total liabilities and shareholders' equity $1,039,466
==========
Net interest spread (1) 5.24%
Net interest income and interest margin (2) $53,029 5.61%
========== ========
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Year ended December 31, 2001
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $647,317 $58,730 9.07%
Investment securities - taxable 159,465 9,543 5.98%
Investment securities - nontaxable 44,615 3,373 7.56%
Federal funds sold 39,204 1,506 3.84%
---------- ----------
Total earning assets 890,601 73,152 8.21%
----------
Other assets 87,941
----------
Total assets $978,542
==========
Liabilities and shareholders' equity
Interest-bearing demand deposits $156,629 1,487 0.95%
Savings deposits 225,137 4,759 2.11%
Time deposits 301,023 15,261 5.07%
Federal funds purchased 289 7 2.42%
Long-term debt 32,133 1,972 6.14%
---------- ----------
Total interest-bearing liabilities 715,211 23,486 3.28%
----------
Noninterest-bearing demand 160,152
Other liabilities 15,660
Shareholders' equity 87,519
----------
Total liabilities and shareholders' equity $978,542
==========
Net interest spread (1) 4.93%
Net interest income and interest margin (2) $49,666 5.58%
========== ========
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
-17-
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth a summary of the changes in the Company's
interest income and interest expense from changes in average asset and liability
balances (volume) and changes in average interest rates for the past three
years. The rate/volume variance has been included in the rate variance. Amounts
are calculated on a fully taxable equivalent basis (dollars in thousands):
2003 over 2002 2002 over 2001
-----------------------------------------------------------------------------
Yield/ Yield/
Volume Rate Total Volume Rate Total
-----------------------------------------------------------------------------
Increase (decrease) in (dollars in thousands)
interest income:
Loans $13,264 ($4,739) $8,525 $1,211 ($7,469) ($6,258)
Investment securities 5,041 (3,938) 1,103 2,781 (2,832) (51)
Federal funds sold (415) (62) (477) (96) (804) (900)
-----------------------------------------------------------------------------
Total 17,890 (8,739) 9,151 3,896 (11,105) (7,209)
-----------------------------------------------------------------------------
Increase (decrease) in
interest expense:
Demand deposits (interest-bearing) 85 (66) 19 188 (1,206) (1,018)
Savings deposits 1,230 (499) 731 831 (2,880) (2,049)
Time deposits 530 (1,643) (1,113) (960) (5,860) (6,820)
Federal funds purchased 257 (70) 187 (4) (1) (5)
Junior subordinated debt 355 - 355 - - -
Long-term borrowings (2) (2) (4) (564) (116) (680)
-----------------------------------------------------------------------------
Total 2,455 (2,280) 175 (509) (10,063) (10,572)
-----------------------------------------------------------------------------
Increase (decrease) in
net interest income $15,435 ($6,459) $8,976 $4,405 ($1,042) $3,363
=============================================================================
Provision for Loan Losses
In 2003, the Bank provided $1.25 million for loan losses compared to $2.8
million in 2002. Net loan charge-offs increased $1.3 million (87%) to $2.8
million during 2003. Included in the $2.8 million of net loan charge-offs during
2003 is a net charge-off of $1.6 million related to two commercial real estate
loans to a single entity that was 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. Collection of
the loan was realized on July 31, 2003 through receipt of net proceeds of $11.5
million from the sale of the building. The collection resulted in a recovery of
$0.3 million of the $1.9 million charged-off on these loans during the quarter
ended June 30, 2003. Net charge-offs of consumer installment loans increased
$191,000 (93%). Net charge-offs of commercial, financial and agricultural loans
increased $465,000 (99%) in 2003, while net charge-offs of real estate mortgage
loans increased $655,000 (81%). The 2003 charge-offs represented 0.34% of
average loans outstanding versus 0.22% in 2002. Nonperforming loans net of
government agency guarantees as a percentage of total loans were 0.45% and 1.19%
at December 31, 2003 and 2002, respectively. The ratio of allowance for loan
losses to nonperforming loans was 313% at the end of 2003 versus 176% at the end
of 2002.
In 2002, the Bank provided $2.8 million for loan losses compared to $4.4 million
in 2001. Net loan charge-offs decreased $1.5 million (51%) to $1.5 million
during 2002. Net charge-offs of commercial, financial and agricultural loans
decreased $2.3 million (83%) in 2002, while net charge-offs of real estate
mortgage and consumer installment loans increased $662,000 (463%) and $105,000
(205%), respectively. The 2002 net charge-offs represented 0.22% of average
loans outstanding versus 0.47% in 2001. Nonperforming loans net of government
agency guarantees were 1.19% of total loans at December 31, 2002 versus 0.92% at
December 31, 2001. The ratio of allowance for loan losses to nonperforming loans
was 176% at the end of 2002 versus 216% at the end of 2001.
-18-
Noninterest Income
The following table summarizes the Company's noninterest income for the past
three years (dollars in thousands):
Components of Noninterest Income
---------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
--------------------------------
Service charges on deposit accounts $12,495 $8,915 $5,875
ATM fees and interchange 2,220 1,823 1,423
Other service fees 1,782 1,261 1,133
Amortization of mortgage servicing rights,
net of mortgage servicing fees (1,356) (713) (336)
Provision for mortgage servicing
rights valuation allowance (600) - -
Gain on sale of loans 4,168 3,641 2,095
Commissions on sale of
nondeposit investment products 1,766 2,467 2,576
Gain on sale of investments 197 - 1,792
Increase in cash value of life insurance 1,296 606 476
Other noninterest income 941 1,180 1,204
--------------------------------
Total noninterest income $22,909 $19,180 $16,238
===========================================================================
Noninterest income increased $3.7 million (19.4%) to $22.9 million in 2003.
Service charges on deposit accounts was up $3.6 million (40.2%) due to 2003
being the first full year of the Company's overdraft privilege product that was
introduced in July 2002. ATM fees and interchange, and other service fees were
up $0.4 million (21.8%) and $0.5 million (41.3%) due to expansion of the
Company's ATM network and customer base through de-novo branch expansion and the
acquisition of North State National Bank. Overall, mortgage banking activities,
which includes amortization of mortgage servicing rights net of mortgage
servicing fees, provision for mortgage servicing valuation allowance, and gain
on sale of loans, accounted for $2.2 million of noninterest income in the 2003
compared to $2.9 million in 2002. The increase in the amortization of mortgage
servicing rights and the provision for mortgage servicing valuation allowance
taken in 2003 are the result of the recent peak in mortgage refinance activity.
While the Company benefits from increased gain on sale of loans during periods
of high levels of mortgage refinance activity, it may also experience increased
amortization and provisions for mortgage servicing valuations of mortgage
servicing rights. Commissions on sale of nondeposit investment products
decreased $0.7 million (28.4%) in 2003 due to lower demand for annuity products.
Income from increase in cash value of life insurance increased $0.7 million
(114%) due to an increase in life insurance owned by the Company from $15.2
million at December 31, 2002 to $39.0 million at December 31, 2003.
Noninterest income increased $2.9 million (18.1%) to $19.2 million in 2002. The
increase was mainly due to a $3.0 million (52%) increase in service charges on
deposit accounts to $8.9 million, and a $1.5 million (74%) increase in gain on
sale of loans to $3.6 million during 2002. Except for a $1.8 million gain from
sale of investments and insurance company stock in 2001, noninterest income
would have increased $4.7 million (29.2%). The increase in service charges on
deposit accounts was almost entirely due to the introduction of the Company's
overdraft privilege product in July 2002. The increase in gain on sale of loans
is due to continued and increased residential mortgage refinance activity during
2002.
Securities Transactions
During 2003 the Bank realized net gains of $0.2 million on the sale of
securities with market values of $22.3 million. In addition, during 2003, the
Bank received proceeds from maturities of securities totaling $205 million,
purchased $169.2 million of securities, and acquired $39.7 million of securities
through the acquisition of North State national Bank.
During 2002 the Bank had no sales of securities. Also during 2002, the Bank
received proceeds from maturities of securities totaling $131.6 million, and
used $241.8 million to purchase securities.
-19-
Noninterest Expense
The following table summarizes the Company's other noninterest expense for the
past three years:
Components of Noninterest Expense (dollars in thousands)
---------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001
-------------------------------------
Salaries and benefits $29,714 $24,290 $21,199
Equipment and data processing 4,947 4,095 3,694
Occupancy 3,493 2,954 2,806
Professional fees 2,315 1,696 1,087
Telecommunications 1,539 1,422 1,253
Advertising 1,062 1,263 1,132
Intangible amortization 1,207 911 911
ATM network charges 1,043 847 913
Postage 855 801 639
Courier service 795 720 661
Operational losses 657 534 227
Assessments 268 233 223
Net other real estate owned expense 124 26 175
Other 7,508 6,179 5,687
-------------------------------------
Total noninterest expense $55,527 $45,971 $40,607
============================================================================
Average full time equivalent staff 505 435 403
Noninterest expense to revenue (FTE) 65.39% 63.66% 61.62%
Salary and benefit expenses increased $5.4 million (22.3%) in 2003 compared to
2002. Base salaries and benefits increased $3.3 million (20.9%) to $19.1 million
in 2003. The increase in base salaries was mainly due to a 16.1% increase in
average full time equivalent employees from 435 in 2002 to 505 in 2003, and
annual salary increases. Incentive and commission related salary expenses
increased $1.0 million (28.6%) to $4.5 million in 2003. The increase in
incentive and commission expenses was directly tied to significant loan,
deposit, and revenue growth during 2003. Benefits expense, including retirement,
medical and workers' compensation insurance, and taxes, increased $1.1 million
(21.6%) to $6.2 million during 2003.
Salary and benefit expenses increased $3.1 million (14.6%) to $24.3 million in
2002 compared to 2001. Base salaries increased $1.4 million (9.5%) to $15.7
million in 2002. The increase in base salaries was mainly due to an 8.2%
increase in average full time equivalent employees from 403 during 2001 to 435
during 2002, primarily due to the opening of four branches in 2002. Incentive
and commission related salary expenses increased $866,000 (33.5%) to $3.5
million in 2002. The increase in incentive and commission related salary expense
was mainly due to increased commissions paid on origination of residential
mortgage loans, and other functions that exhibited exceptional performance
during 2002. These results are consistent with the Bank's strategy of working
more efficiently with fewer employees who are compensated in part based on their
business unit's performance or on their ability to generate revenue. Benefits
expense, including retirement, medical and workers' compensation insurance, and
taxes, increased $855,000 (20.2%) to $5.1 million during 2002.
Other noninterest expense increased $4.1 million (18.9%) to $25.8 million in
2003. Increases in the areas of equipment and data processing, occupancy,
telecommunications, and ATM network charges were mainly due to the first full
year of operation of the Oroville, Brentwood, and Natomas branches, the opening
in 2003 of branches in Chico, Roseville and Folsom, the continued operation of
one branch added through the acquisition of North State National Bank in April
2003, and enhancements to data processing and ATM network equipment. One-time
merger expenses related to the North State acquisition were insignificant. All
expense reductions realized through the acquisition of North State were effected
immediately upon acquisition in April 2003. Increases in professional fees and
operational losses were related to the first full year operation of the
Company's overdraft privilege product introduced in July 2002, and were more
than offset by the large revenue that product is producing. The increase in
intangible amortization was due to the North State acquisition.
Other expenses increased $2.3 million (11.7%) to $21.7 million in 2002.
Increases in the areas of equipment and data processing, occupancy,
telecommunications, courier service, and other were mainly due to the opening of
four branches in 2002. Increases in professional fees and operational losses
were related to the overdraft privilege product introduced in July 2002, and
were more than offset by the large revenue that product is producing.
-20-
Provision for Taxes
The effective tax rate on income was 37.5%, 36.6%, and 37.1% in 2003, 2002, and
2001, respectively. The effective tax rate was greater than the federal
statutory tax rate due to state tax expense of $2.7 million, $2.0 million, and
$1.9 million, respectively, in these years. Tax-exempt income of $2.0 million,
$2.2 million, and $2.2 million, respectively, from investment securities in
these years helped to reduce the effective tax rate.
Financial Ratios
The following table shows the Company's key financial ratios for the past three
years:
Year ended December 31, 2003 2002 2001
--------------------------------
Return on average total assets 1.27% 1.35% 1.27%
Return on average shareholders' equity 14.24% 15.03% 14.19%
Shareholders' equity to total assets 8.71% 8.65% 8.65%
Common shareholders' dividend payout ratio 36.36% 39.95% 45.43%
==============================================================================
Loans
The Bank concentrates its lending activities in four principal areas: commercial
loans (including agricultural loans), consumer loans, real estate mortgage loans
(residential and commercial loans and mortgage loans originated for sale), and
real estate construction loans. At December 31, 2003, these four categories
accounted for approximately 14%, 33%, 47%, and 6% of the Bank's loan portfolio,
respectively, as compared to 18%, 29%, 47%, and 6%, at December 31, 2002. The
shift in the percentages was primarily due to the Bank's ability to increase its
consumer loan portfolio during 2003. The shift in percentages is reflected in
the Company's assessment of the adequacy of the allowance for loan losses. The
increase in consumer loans during 2003 was mainly due to increases in home
equity lines of credit and automobile loans. The interest rates charged for the
loans made by the Bank vary with the degree of risk, the size and maturity of
the loans, the borrower's relationship with the Bank and prevailing money market
rates indicative of the Bank's cost of funds.
The majority of the Bank's loans are direct loans made to individuals, farmers
and local businesses. The Bank relies substantially on local promotional
activity, personal contacts by bank officers, directors and employees to compete
with other financial institutions. The Bank makes loans to borrowers whose
applications include a sound purpose, a viable repayment source and a plan of
repayment established at inception and generally backed by a secondary source of
repayment.
At December 31, 2003 loans totaled $981 million and was a 43% ($294 million)
increase over the balances at the end of 2002. Contributing to the increase in
loans was $76 million of loans obtained through the acquisition of North State
National Bank on April 4, 2003. Demand for commercial and agriculture related
loans, commercial real estate mortgage loans, and real estate construction loans
improved in the Company's market areas in 2003. Demand for home equity and auto
loans remained strong throughout 2003. The average loan-to-deposit ratio in 2003
was 72.2% compared to 71.1% in 2002.
At December 31, 2002 loans totaled $687.5 million and was a 4.4% ($28.8 million)
increase over the balances at the end of 2001. Demand for home equity loans and
auto loans (both classified as consumer loans) were strong throughout 2002.
Residential mortgage loan activity was extremely strong in 2002, but the Company
generally sells all such loans. Commercial and agriculture related loan growth
continued to be relatively weak in 2002 as the economy continued to be weak, and
competition for such loans was high. The average loan-to-deposit ratio in 2002
was 71.1% compared to 76.8% in 2001.
-21-
Loan Portfolio Composite
The following table shows the Company's loan balances for the past five years:
December 31,
(dollars in thousands) 2003 2002 2001 2000 1999
--------------------------------------------------------------------------
Commercial, financial and agricultural $142,252 $125,982 $130,054 $148,135 $138,313
Consumer installment 319,029 201,858 155,046 120,247 79,273
Real estate mortgage 458,369 319,969 326,897 334,010 332,116
Real estate construction 61,591 39,713 46,735 37,999 38,277
--------------------------------------------------------------------------
Total loans $981,241 $687,522 $658,732 $640,391 $587,979
==========================================================================
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 December 31, 2003 At December 31, 2002
------------------------- ------------------------
Gross Guaranteed Net Gross Guaranteed Net
-----------------------------------------------------
Classified loans $29,992 $18,783 $11,209 $52,264 $12,202 $40,062
Other classified assets 932 - 932 932 - 932
-----------------------------------------------------
Total classified assets $30,924 $18,783 $12,141 $53,196 $12,202 $40,994
=====================================================
Allowance for loan losses/
Classified loans 113.4% 35.1%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies at December 31, 2003, decreased
$28.9 million (70%) to $12.1 million from $41.0 million at December 31, 2002.
Nonperforming Assets
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is generally discontinued either
when reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by 90 days or more with
respect to interest or principal. When loans are 90 days past due, but in
Management's judgment are well secured and in the process of collection, they
may not be classified as nonaccrual. When a loan is placed on nonaccrual status,
all interest previously accrued but not collected is reversed. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of Management, the loans are estimated to be
fully collectible as to both principal and interest. The reclassification of
loans as nonaccrual does not necessarily reflect management's judgment as to
whether they are collectible.
Interest income on nonaccrual loans, which would have been recognized during the
year, ended December 31, 2003, if all such loans had been current in accordance
with their original terms, totaled $1.1 million. Interest income actually
recognized on these loans in 2003 was $372,000.
-22-
The Bank's policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed 30
days. Loans where the collateral has been repossessed are classified as other
real estate owned ("OREO") or, if the collateral is personal property, the loan
is classified as other assets on the Company's financial statements.
Management considers both the adequacy of the collateral and the other resources
of the borrower in determining the steps to be taken to collect nonaccrual
loans. Alternatives that are considered are foreclosure, collecting on
guarantees, restructuring the loan or collection lawsuits.
-23-
The following tables set forth the amount of the Bank's nonperforming assets net
of guarantees of the U.S. government, including its agencies and its
government-sponsored agencies, as of the dates indicated:
December 31, 2003 December 31, 2002
------------------------- -------------------------
(dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $10,997 $7,936 $3,061 $13,199 $8,432 $4,767
Nonperforming, nonaccrual loans 2,551 1,252 1,299 4,091 718 3,373
------------------------------------------------------
Total nonaccrual loans 13,548 9,188 4,360 17,290 9,150 8,140
Loans 90 days past due and still accruing 34 - 34 40 - 40
------------------------------------------------------
Total nonperforming loans 13,582 9,188 4,394 17,330 9,150 8,180
Other real estate owned 932 - 932 932 - 932
------------------------------------------------------
Total nonperforming loans and OREO $14,514 $9,188 $5,326 $18,262 $9,150 $9,112
======================================================
Nonperforming loans to total loans 0.45% 1.19%
Allowance for loan losses/nonperforming loans 313% 176%
Nonperforming assets to total assets 0.36% 0.80%
December 31, 2001 December 31, 2000
------------------------- -------------------------
(dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $2,733 - $2,733 $4,331 $142 $4,189
Nonperforming, nonaccrual loans 3,120 $387 2,733 8,161 88 8,073
------------------------------------------------------
Total nonaccrual loans 5,853 387 5,466 12,492 230 12,262
Loans 90 days past due and still accruing 584 - 584 965 - 965
------------------------------------------------------
Total nonperforming loans 6,437 387 6,050 13,457 230 13,227
Other real estate owned 71 - 71 1,441 - 1,441
------------------------------------------------------
Total nonperforming loans and OREO $6,508 387 $6,121 $14,898 $230 $14,668
======================================================
Nonperforming loans to total loans 0.92% 2.07%
Allowance for loan losses/nonperforming loans 216% 88%
Nonperforming assets to total assets 0.61% 1.51%
December 31, 1999
-------------------------
(dollars in thousands): Gross Guaranteed Net
-------------------------
Performing nonaccrual loans $666 $62 $604
Nonperforming, nonaccrual loans 1,662 508 1,154
-------------------------
Total nonaccrual loans 2,328 570 1,758
Loans 90 days past due and still accruing 923 - 923
-------------------------
Total nonperforming loans 3,251 570 2,681
Other real estate owned 760 - 760
-------------------------
Total nonperforming loans and OREO $4,011 $570 $3,441
=========================
Nonperforming loans to total loans 0.46%
Allowance for loan losses/nonperforming loans 412%
Nonperforming assets to total assets 0.37%
-24-
During 2003, nonperforming assets net of government guarantees decreased $3.8
million (42%) to $5.3 million. Nonperforming loans decreased $3.8 million (46%)
to $4.4 million. The ratio of nonperforming loans to total loans at December 31,
2003 was 0.45% versus 1.19% at the end of 2002. Classifications of nonperforming
loans as a percent of the total at the end of 2003 were as follows: secured by
real estate, 66%; loans to farmers, 19%; commercial loans, 10%; and consumer
loans, 5%.
During 2002, nonperforming assets net of government guarantees increased $3
million (49%) to a total of $9.1 million. Nonperforming loans net of government
guarantees increased $2.1 million (35%) to $8.2 million, and other real estate
owned (OREO) increased $861,000 to $932,000 during 2002. The ratio of
nonperforming loans to total loans at December 31, 2002 was 1.19% versus 0.92%
at the end of 2001. Classifications of nonperforming loans as a percent of total
loans at the end of 2002 were as follows: secured by real estate, 62%; loans to
farmers, 27%; commercial loans, 10%; and consumer loans, 1%.
Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, the Company
maintains an allowance for loan losses to absorb losses inherent in the
Company's loan and lease portfolio. This is maintained through periodic charges
to earnings. These charges are shown in the consolidated income statements as
provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of
reasons, not all losses are immediately known to the Company and, of those that
are known, the full extent of the loss may not be quantifiable at that point in
time. The balance of the Company's allowance for loan losses is meant to be an
estimate of these unknown but probable losses inherent in the portfolio.
For the remainder of this discussion, "loans" shall include all loans and lease
contracts, which are a part of the Bank's portfolio.
Assessment of the Adequacy of the Allowance for Loan Losses
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan and lease portfolio, and to a lesser
extent the Company's loan and lease commitments. These assessments include the
periodic re-grading of credits based on changes in their individual credit
characteristics including delinquency, seasoning, recent financial performance
of the borrower, economic factors, changes in the interest rate environment,
growth of the portfolio as a whole or by segment, and other factors as
warranted. Loans are initially graded when originated. They are re-graded as
they are renewed, when there is a new loan to the same borrower, when identified
facts demonstrate heightened risk of nonpayment, or if they become delinquent.
Re-grading of larger problem loans occurs at least quarterly. Confirmation of
the quality of the grading process is obtained by independent credit reviews
conducted by consultants specifically hired for this purpose and by various bank
regulatory agencies.
The Company's method for assessing the appropriateness of the allowance includes
specific allowances for identified problem loans and leases, formula allowance
factors for pools of credits, and allowances for changing environmental factors
(e.g., interest rates, growth, economic conditions, etc.). Allowances for
identified problem loans are based on specific analysis of individual credits.
Allowance factors for loan pools are based on the previous 5 years historical
loss experience by product type. Allowances for changing environmental factors
are management's best estimate of the probable impact these changes have had on
the loan portfolio as a whole.
The Components of the Allowance for Loan Losses
As noted above, the overall allowance consists of a specific allowance, a
formula allowance, and an allowance for environmental factors. The first
component, the specific allowance, results from the analysis of identified
credits that meet management's criteria for specific evaluation. These loans are
reviewed individually to determine if such loans are considered impaired.
Impaired loans are those where management has concluded that it is probable that
the borrower will be unable to pay all amounts due under the contractual terms.
Loans specifically reviewed, including those considered impaired, are evaluated
individually by management for loss potential by evaluating sources of
repayment, including collateral as applicable, and a specified allowance for
loan losses is established where necessary.
-25-
The second component, the formula allowance, is an estimate of the probable
losses that have occurred across the major loan categories in the Company's loan
portfolio. This analysis is based on loan grades by pool and the loss history of
these pools. This analysis covers the Company's entire loan portfolio including
unused commitments but excludes any loans, which were analyzed individually and
assigned a specific allowance as discussed above. The total amount allocated for
this component is determined by applying loss estimation factors to outstanding
loans and loan commitments. The loss factors are based primarily on the
Company's historical loss experience tracked over a five-year period and
adjusted as appropriate for the input of current trends and events. Because
historical loss experience varies for the different categories of loans, the
loss factors applied to each category also differ. In addition, there is a
greater chance that the Company has suffered a loss from a loan that was graded
less than satisfactory than if the loan was last graded satisfactory. Therefore,
for any given category, a larger loss estimation factor is applied to less than
satisfactory loans than to those that the Company last graded as satisfactory.
The resulting formula allowance is the sum of the allocations determined in this
manner.
The third or "unallocated" component of the allowance for credit losses is a
component that is not allocated to specific loans or groups of loans, but rather
is intended to absorb losses that may not be provided for by the other
components.
There are several primary reasons that the other components discussed above
might not be sufficient to absorb the losses present in portfolios, and the
unallocated portion of the allowance is used to provide for the losses that have
occurred because of them.
The first reason is that there are limitations to any credit risk grading
process. The volume of loans makes it impractical to re-grade every loan every
quarter. Therefore, it is possible that some currently performing loans not
recently graded will not be as strong as their last grading and an insufficient
portion of the allowance will have been allocated to them. Grading and loan
review often must be done without knowing whether all relevant facts are at
hand. Troubled borrowers may deliberately or inadvertently omit important
information from reports or conversations with lending officers regarding their
financial condition and the diminished strength of repayment sources.
The second reason is that the loss estimation factors are based primarily on
historical loss totals. As such, the factors may not give sufficient weight to
such considerations as the current general economic and business conditions that
affect the Company's borrowers and specific industry conditions that affect
borrowers in that industry. The factors might also not give sufficient weight to
other environmental factors such as changing economic conditions and interest
rates, portfolio growth, entrance into new markets or products, and other
characteristics as may be determined by Management.
Specifically, in assessing how much unallocated allowance needed to be provided
at December 31, 2003, management considered the following:
- with respect to loans to the agriculture industry, management
considered the effects on borrowers of weather conditions and overseas
market conditions for exported products as well as commodity prices in
general;
- with respect to changes in the interest rate environment management
considered the recent changes in interest rates and the resultant
economic impact it may have had on borrowers with high leverage and/or
low profitability; and
- with respect to loans to borrowers in new markets and growth in
general, management considered the relatively short seasoning of such
loans and the lack of experience with such borrowers.
Each of these considerations was assigned a factor and applied to a
portion or all of the loan portfolio. Since these factors are not
derived from experience and are applied to large non-homogeneous
groups of loans, they are considered unallocated and are available for
use across the portfolio as a whole.
-26-
The following table sets forth the Bank's loan loss reserve as of the dates
indicated:
December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------------------------------------------------
(dollars in thousands)
Specific allowance $1,003 $5,299 $5,672 $3,266 $600
Formula allowance 12,481 8,839 7,183 8,067 10,250
Unallocated allowance 289 239 203 337 187
-------------------------------------------------------------
Total allowance $13,773 $14,377 $13,058 $11,670 $11,037
=============================================================
The allowance for loan losses to total loans at December 31, 2003 was 1.40%
versus 2.09% at the end of 2002. At December 31, 2001, the allowance for loan
losses to total loans was 1.98%.
Based on the current conditions of the loan portfolio, management believes that
the $13.8 million allowance for loan losses at December 31, 2003 is adequate to
absorb probable losses inherent in the Bank's loan portfolio. No assurance can
be given, however, that adverse economic conditions or other circumstances will
not result in increased losses in the portfolio.
The following table summarizes, for the years indicated, the activity in the
allowance for loan losses:
December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------
(dollars in thousands)
Balance, beginning of year $14,377 $13,058 $11,670 $11,037 $8,206
Addition through merger 928 -- -- -- --
Provision charged to operations 1,250 2,800 4,400 5,000 3,550
Loans charged off:
Commercial, financial and
agricultural (1,142) (668) (2,861) (4,450) (865)
Consumer installment (475) (299) (134) (103) (148)
Real estate mortgage (2,136) (819) (218) (152) (69)
----------------------------------------------------------------
Total loans charged-off (3,753) (1,786) (3,213) (4,705) (1,082)
----------------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 206 197 92 281 327
Consumer installment 79 94 34 54 36
Real estate mortgage 686 14 75 3 --
----------------------------------------------------------------
Total recoveries 971 305 201 338 363
----------------------------------------------------------------
Net loans charged-off (2,782) (1,481) (3,012) (4,367) (719)
----------------------------------------------------------------
Balance, year end $13,773 $14,377 $13,058 $11,670 $11,037
================================================================
Average total loans $827,673 $660,668 $647,317 $624,717 $566,738
----------------------------------------------------------------
Ratios:
Net charge-offs during period
to average loans outstanding
during period 0.34% 0.22% 0.47% 0.70% 0.13%
Provision for loan losses to aver-
age loans outstanding 0.15% 0.42% 0.68% 0.80% 0.63%
Allowance to loans at year end 1.40% 2.09% 1.98% 1.82% 1.88%
----------------------------------------------------------------
-27-
The following tables summarize the allocation of the allowance for loan losses
between loan types:
December 31, 2003 December 31, 2002 December 31, 2001
------------------------- ------------------------ ------------------------
(dollars in thousands) Percent of Percent of Percent of
loans in each loans in each loans in each
category to category to category to
Amount total loans Amount total loans Amount total loans
Balance at end of period applicable to:
Commercial, financial and agricultural $2,762 14.5% $6,791 18.4% $6,929 19.8%
Consumer installment 4,233 32.5% 2,833 29.4% 1,896 23.5%
Real estate mortgage 5,976 46.7% 4,229 46.4% 3,709 49.6%
Real estate construction 802 6.3% 524 5.8% 524 7.1%
--------- -------- --------- -------- --------- --------
$13,773 100.0% $14,377 100.0% $13,058 100.0%
========= ======== ========= ======== ========= ========
December 31, 2000 December 31, 1999
----------------------- -----------------------
(dollars in thousands) Percent of Percent of
loans in each loans in each
category to category to
Balance at end of period applicable to: Amount total loans Amount total loans
Commercial, financial and agricultural $6,873 43.4% $5,224 44.7%
Consumer installment 1,373 15.9% 1,464 13.6%
Real estate mortgage 2,925 34.8% 3,671 35.2%
Real estate construction 499 5.9% 678 6.5%
--------- -------- -------- --------
$11,670 100.0% $11,037 100.0%
========= ======== ======== ========
Other Real Estate Owned
The other real estate owned (OREO) balance was $932,000 at December 31, 2003 and
2002. The Bank disposed of properties with a value of $613,000 in 2003. OREO
properties consist of a mixture of land, single family residences, and
commercial buildings.
Intangible Assets
At December 31, 2003 and 2002, the Bank had intangible assets totaling $21.6
million and $4.0 million, respectively. The intangible assets resulted from the
Bank's 1997 acquisitions of certain Wells Fargo branches and Sutter Buttes
Savings Bank, the April 2003 acquisition of North State National Bank, and an
additional minimum pension liability related to the Company's supplemental
retirement plans. Intangible assets at December 31, 2003 and 2002 were comprised
of the following:
December 31,
2003 2002
--------------------------
(dollars in thousands)
Core-deposit intangible $5,800 $3,642
Additional minimum pension liability 285 401
Goodwill 15,519 -
--------------------------
Total intangible assets $21,604 $4,043
==========================
Amortization of core deposit intangible assets amounting to $1,207,000,
$911,000, and $911,000 was recorded in 2003, 2002, and 2001, respectively. The
minimum pension liability intangible asset is not amortized but adjusted
annually based upon actuarial estimates.
Deposits
Deposits at December 31, 2003 were up $232 million (23%) to $1.237 billion over
2002 year-end balances. All categories of deposits except certificates of
deposit increased in 2002. On April 4, 2003, the Company acquired North State
National Bank which at the time had deposits totaling $126 million. Included in
the December 31, 2003 certificate of deposit balance is $20 million from the
State of California.
-28-
Deposits at December 31, 2002 were up $124.8 million (14.2%) over the 2001
year-end balances to $1.0 billion. All categories of deposits increased in 2002.
Included in the December 31, 2002 certificate of deposit balances is $20 million
from the State of California. The Bank participates in a deposit program offered
by the State of California whereby the State may make deposits at the Banks
request subject to collateral and credit worthiness constraints. The negotiated
rates on these State deposits are generally favorable to other wholesale funding
sources available to the Bank.
Long-Term Debt
In 2003, the Bank made principal payments of $37,000 on long-term debt
obligations. During 2002, the Bank repaid $32,000 of long-term debt. See Note 7
to the consolidated financial statements at Item 8 of this report.
Junior Subordinated Debt
See Note 8 in the financial statements at Item 8 of this report for a discussion
about the Company's issuance of junior subordinated debt during 2003.
Equity
See Note 10 and Note 21 in the financial statements at Item 8 of this report for
a discussion of shareholders' equity and regulatory capital, respectively.
Management believes that the Company's capital is adequate to support
anticipated growth, meet the cash dividend requirements of the Company and meet
the future risk-based capital requirements of the Bank and the Company.
Market Risk Management
Overview. The goal for managing the assets and liabilities of the Bank is to
maximize shareholder value and earnings while maintaining a high quality balance
sheet without exposing the Bank to undue interest rate risk. The Board of
Directors has overall responsibility for the Company's interest rate risk
management policies. The Bank has an Asset and Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability management
include but are not limited to lending, accepting and placing deposits,
investing in securities and issuing debt. Interest rate risk is the primary
market risk associated with asset/liability management. Sensitivity of earnings
to interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin, net income and market value of equity
under changing interest environments. Market value of equity is the net present
value of estimated cash flows from the Bank's assets, liabilities and
off-balance sheet items. The Bank uses simulation models to forecast net
interest margin, net income and market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Bank is able to estimate the
potential impact of changing interest rates on net interest margin, net income
and market value of equity. A balance sheet forecast is prepared using inputs of
actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
-29-
The following table summarizes the effect on net interest income and net income
due to changing interest rates as measured against a flat rate (no interest rate
change) scenario. The simulation results shown below assume no changes in the
structure of the Company's balance sheet over the twelve months being measured
(a "flat" balance sheet scenario), and that deposit rates will track general
interest rate changes by approximately 50%:
Interest Rate Risk Simulation of Net Interest Income and Net Income as of
December 31, 2003
Estimated Change in Estimated Change in
Change in Interest Net Interest Income (NII) Net Income (NI)
Rates (Basis Points) (as % of "flat" NII) (as % of "flat" NI)
+300 (ramp) (0.73%) (1.48%)
+200 (ramp) (0.77%) (1.59%)
+100 (ramp) (0.78%) (1.60%)
+ 0 (flat) -- --
-100 (ramp) 0.87% 1.80%
-200 (ramp) 1.26% 2.60%
-300 (ramp) 0.60% 1.22%
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
- -300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
The following table summarizes the effect on market value of equity due to
changing interest rates as measured against a flat rate (no change) scenario:
Interest Rate Risk Simulation of Market Value of Equity as of December 31, 2003
Estimated Change in
Change in Interest Market Value of Equity (MVE)
Rates (Basis Points) (as % of "flat" MVE)
+300 (shock) (4.83%)
+200 (shock) (3.17%)
+100 (shock) (1.52%)
+ 0 (flat) --
-100 (shock) (0.76%)
-200 (shock) 2.10%
-300 (shock) 5.27%
These results indicate that given a "flat" balance sheet scenario, and if
deposit rates track general interest rate changes by approximately 50%, the
Company's balance sheet is slightly asset sensitive for interest rate changes
greater than +/- 100 basis points, and is slightly liability sensitive for
interest rate changes less than +/- 100 basis points. The primary reason for
this result is the effect of interest rate floors that exist on many of the
Company's variable rate loans. In a declining interest rate environment, when
the interest rate of a variable rate loan reaches its interest rate floor, the
loan interest rate will not decrease further if market interest rates continue
to decline. Conversely, the interest rate of a variable rate loan that is at its
floor will not increase when market interest rates increase until market
interest rates have increased sufficiently to move the loan interest rate above
its floor rate. "Asset sensitive" implies that earnings increase when interest
rates rise, and decrease when interest rates decrease. "Liability sensitive"
implies that earnings decrease when interest rates rise, and increase when
interest rates decrease. The magnitude of all the simulation results noted above
is within the Bank's policy guidelines. The asset liability management policy
limits aggregate market risk, as measured in this fashion, to an acceptable
level within the context of risk-return trade-offs.
-30-
The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations. In
addition, the simulation results noted above contain various assumptions such as
a flat balance sheet, and the rate that deposit interest rates change as general
interest rates change. Therefore, they do not reflect likely actual results, but
serve as conservative estimates of interest rate risk.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the preceding tables. For
example, although certain of the Bank's assets and liabilities may have similar
maturities or repricing time frames, they may react in different degrees to
changes in market interest rates. In addition, the interest rates on certain of
the Bank's asset and liability categories may precede, or lag behind, changes in
market interest rates. Also, the actual rates of prepayments on loans and
investments could vary significantly from the assumptions utilized in deriving
the results as presented in the preceding table. Further, a change in U.S.
Treasury rates accompanied by a change in the shape of the treasury yield curve
could result in different estimations from those presented herein. Accordingly,
the results in the preceding tables should not be relied upon as indicative of
actual results in the event of changing market interest rates. Additionally, the
resulting estimates of changes in market value of equity are not intended to
represent, and should not be construed to represent, estimates of changes in the
underlying value of the Bank.
Interest rate sensitivity is a function of the repricing characteristics of the
Bank's portfolio of assets and liabilities. One aspect of these repricing
characteristics is the time frame within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity. An analysis of the repricing time frames of
interest-bearing assets and liabilities is sometimes called a "gap" analysis
because it shows the gap between assets and liabilities repricing or maturing in
each of a number of periods. Another aspect of these repricing characteristics
is the relative magnitude of the repricing for each category of interest earning
asset and interest-bearing liability given various changes in market interest
rates. Gap analysis gives no indication of the relative magnitude of repricing
given various changes in interest rates. Interest rate sensitivity management
focuses on the maturity of assets and liabilities and their repricing during
periods of changes in market interest rates. Interest rate sensitivity gaps are
measured as the difference between the volumes of assets and liabilities in the
Bank's current portfolio that are subject to repricing at various time horizons.
-31-
The following interest rate sensitivity table shows the Bank's repricing gaps as
of December 31, 2003. In this table transaction deposits, which may be repriced
at will by the Bank, have been included in the less than 3-month category. The
inclusion of all of the transaction deposits in the less than 3-month repricing
category causes the Bank to appear liability sensitive. Because the Bank may
reprice its transaction deposits at will, transaction deposits may or may not
reprice immediately with changes in interest rates. In recent years of moderate
interest rate changes the Bank's earnings have reacted as though the gap
position is slightly asset sensitive mainly because the magnitude of
interest-bearing liability repricing has been less than the magnitude of
interest-earning asset repricing. This difference in the magnitude of asset and
liability repricing is mainly due to the Bank's strong core deposit base, which
although they may be repriced within three months, historically, the timing of
their repricing has been longer than three months and the magnitude of their
repricing has been minimal.
Due to the limitations of gap analysis, as described above, the Bank does not
actively use gap analysis in managing interest rate risk. Instead, the Bank
relies on the more sophisticated interest rate risk simulation model described
above as its primary tool in measuring and managing interest rate risk.
Interest Rate Sensitivity - December 31, 2003
Repricing within:
-------------------------------------------------------------------------------
(dollars in thousands) Less than 3 3 - 6 6 - 12 1 - 5 Over
months months months years 5 years
-------------------------------------------------------------------------------
Interest-earning assets:
Securities $34,784 $20,019 $41,336 $178,058 $37,969
Loans 407,424 36,603 57,391 335,209 130,841
-------------------------------------------------------------------------------
Total interest-earning assets $442,208 $56,622 $98,728 $513,267 $168,810
-------------------------------------------------------------------------------
Interest-bearing liabilities
Transaction deposits $662,336 $ --- $ --- $ --- $ ---
Time 89,547 47,076 48,120 91,154 128
Long-term borrowings 11 11 24 21,760 1,081
Junior subordinated debt 20,619 --- --- --- ---
-------------------------------------------------------------------------------
Total interest-bearing liabilities $772,513 $47,088 $48,144 $112,914 $1,209
-------------------------------------------------------------------------------
Interest sensitivity gap ($330,305) $9,534 $50,584 $400,354 $167,601
Cumulative sensitivity gap ($330,305) ($320,771) ($270,187) $130,166 $297,768
As a percentage of earning assets:
Interest sensitivity gap (25.81%) 0.75% 3.95% 31.29% 13.10%
Cumulative sensitivity gap (25.81%) (25.07%) (21.11%) 10.17% 23.27%
Liquidity
Liquidity refers to the Bank's ability to provide funds at an acceptable cost to
meet loan demand and deposit withdrawals, as well as contingency plans to meet
unanticipated funding needs or loss of funding sources. These objectives can be
met from either the asset or liability side of the balance sheet. Asset
liquidity sources consist of the repayments and maturities of loans, selling of
loans, short-term money market investments, maturities of securities and sales
of securities from the available-for-sale portfolio. These activities are
generally summarized as investing activities in the Consolidated Statement of
Cash Flows. Net cash used by investing activities totaled approximately $179.5
million in 2003. Increased loan balances were responsible for the major use of
funds in this category.
Liquidity is generated from liabilities through deposit growth and short-term
borrowings. These activities are included under financing activities in the
Consolidated Statement of Cash Flows. In 2003, financing activities provided
funds totaling $159.3 million. Internal deposit growth provided funds amounting
to $105.5 million. The Bank also had available correspondent banking lines of
credit totaling $40 million at year-end. In addition, at December 31, 2003, the
Company had loans and securities available to pledge towards future borrowings
from the Federal Home Loan Bank of up to $165 million. As of December 31, 2003,
the Company had $22.9 million of long-term debt and other borrowings as
described in Note 7 of the consolidated financial statements of the Company and
the related notes at Item 8 of this report. While these sources are expected to
continue to provide significant amounts of funds in the future, their mix, as
well as the possible use of other sources, will depend on future economic and
market conditions. Liquidity is also provided or used through the results of
operating activities. In 2003, operating activities provided cash of $25.8
million.
-32-
The Bank classifies its entire investment portfolio as available for sale (AFS).
The AFS securities plus cash and cash equivalents in excess of reserve
requirements totaled $396.9 million at December 31, 2003, which was 27.0% of
total assets at that time. This was down from $412.8 million and 36.1% at the
end of 2002.
The maturity distribution of certificates of deposit in denominations of
$100,000 or more is set forth in the following table. These deposits are
generally more rate sensitive than other deposits and, therefore, are more
likely to be withdrawn to obtain higher yields elsewhere if available. The Bank
participates in a program wherein the State of California places time deposits
with the Bank at the Bank's option. At December 31, 2003 and 2002, the Bank had
$20 million of these State deposits.
Certificates of Deposit in Denominations of $100,000 or More
Amounts as of December 31,
----------------------------------
(dollars in thousands) 2003 2002 2001
----------------------------------
Time remaining until maturity:
Less than 3 months $39,264 $32,932 $38,114
3 months to 6 months 11,018 16,311 10,431
6 months to 12 months 9,413 12,455 15,383
More than 12 months 94,805 28,706 6,374
----------------------------------
Total $94,500 $90,404 $70,302
==================================
Loan demand also affects the Bank's liquidity position. The following table
presents the maturities of loans at December 31, 2003:
Loan Maturities - December 31, 2003
After
One But
Within Within After 5
One Year 5 Years Years Total
---------------------------------------------------------------
(dollars in thousands)
Loans with predetermined interest rates:
Commercial, financial and agricultural $20,262 $35,302 $13,429 $68,993
Consumer installment 31,044 78,763 73,124 182,931
Real estate mortgage 25,559 77,029 122,654 225,242
Real estate construction 17,851 998 2,157 21,006
---------------------------------------------------------------
$94,716 $192,092 $211,364 $498,172
---------------------------------------------------------------
Loans with floating interest rates:
Commercial, financial and agricultural $53,315 $11,707 $8,238 $73,260
Consumer installment 135,795 303 - 136,098
Real estate mortgage 24,471 55,915 152,739 233,125
Real estate construction 24,553 11,004 5,029 40,586
---------------------------------------------------------------
$238,134 $78,929 $166,006 $483,069
---------------------------------------------------------------
Total loans $332,850 $271,021 $377,370 $981,241
===============================================================
-33-
The maturity distribution and yields of the investment portfolio is presented in
the following table. The timing of the maturities indicated in the table below
is based on final contractual maturities. Most mortgage-backed securities return
principal throughout their contractual lives. As such, the weighted average life
of mortgage-backed securities based on outstanding principal balance is usually
significantly shorter than the final contractual maturity indicated below. At
December 31, 2003, the Bank had no held-to-maturity securities.
Securities Maturities and Weighted Average Tax Equivalent Yields - December 31,
2003
After One Year After Five Years
Within but Through but Through After Ten
One Year Five Years Ten Years Years Total
------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------------------------
Securities Available-for-Sale (dollars in thousands)
US Treasury securities and
obligations of US government
corporations and agencies $5,036 2.21% $4,507 5.74% $-- 0% $-- 0% $9,543 3.88%
Obligations of states and
political subdivisions 1,809 5.72% 1,000 5.97% 6,704 7.88% 28,833 7.73% 38,346 7.61%
Mortgage-backed securities 14 3.84% 7,633 5.33% 202,948 3.83% 40,664 5.42% 251,259 4.13%
Corporate bonds 2,205 7.65% 10,120 2.12% 12,325 3.11%
- --------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $6,859 3.14% $15,345 5.83% $209,652 3.96% $79,617 5.84% $311,473 4.51%
Other securities 4,963 4.84% 4,963 4.84%
------------------------------------------------------------------------------------
Total investment securities $6,859 3.14% $15,345 5.83% $209,652 3.96% $84,580 5.78% $316,436 4.52%
==========================================================================================================================
The principal cash requirements of the Company are dividends on common stock
when declared. The Company is dependent upon the payment of cash dividends by
the Bank to service its commitments. The Company expects that the cash dividends
paid by the Bank to the Company will be sufficient to meet this payment
schedule. Dividends from the Bank are subject to certain regulatory
restrictions.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases. See
Note 9 of the financial statements at Item 8 of this report for the terms. These
commitments do not significantly impact operating results. As of December 31,
2003 commitments to extend credit were the Bank's only financial instruments
with off-balance sheet risk. The Bank has not entered into any contracts for
financial derivative instruments such as futures, swaps, options, etc. Loan
commitments increased to $332.9 million from $227.2 million at December 31,
2002. The commitments represent 33.9% of the total loans outstanding at year-end
2003 versus 33.0% at December 31, 2002.
-34-
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as
of December 31, 2003:
Less than 1-3 3-5 More than
(dollars in thousands) Total one year years years 5 years
----------------------------------------------------------------
Federal funds purchased $39,500 $39,500 - - -
FHLB loan, fixed rate of 5.41%
payable on April 7, 2008, callable
in its entirety by FHLB on a quarterly
basis beginning April 7, 2003 20,000 - - $20,000 -
FHLB loan, fixed rate of 5.35%
payable on December 9, 2008 1,500 - - 1,500 -
FHLB loan, fixed rate of 5.77%
payable on February 23, 2009 1,000 - - - $1,000
Capital lease obligation on premises,
effective rate of 13% payable
monthly in varying amounts
through December 1, 2009 562 90 183 187 102
Junior subordinated debt, adjustable rate
of three-month LIBOR plus 3.05%,
callable in whole or in part by the
Company on a quarterly basis beginning
October 7, 2008, matures October 7, 2033 20,619 - - - 20,619
Operating lease obligations 6,254 1,172 1,835 1,428 1,819
Deferred compensation(1) 5,195 269 505 438 3,983
Supplemental retirement plans(1) 3,567 498 937 774 1,358
Employment agreements 253 253 - - -
----------------------------------------------------------------
Total contractual obligations $98,450 $41,782 $3,460 $24,327 $28,881
================================================================
(1) These amounts represent known certain payments to participants under
the Company's deferred compensation and supplemental retirement plans.
See Note 21 in the financial statements at Item 8 of this report for
additional information related to the Company's deferred compensation
and supplemental retirement plan liabilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk Management" under Item 7 of this report.
-35-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets as of December 31, 2003 and 2002 37
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2003, 2002, and 2001 38
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2003, 2002, and 2001 39
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001 40
Notes to Consolidated Financial Statements 41
Independent Auditors' Report 66
Management's Letter of Financial Responsibility 68
-36-
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands)
At December 31,
2003 2002
-------------------------------
Assets:
Cash and due from banks $80,603 $67,170
Federal funds sold 326 8,100
-------------------------------
Cash and cash equivalents 80,929 75,270
Investment securities available for sale 316,436 338,024
Loans
Commercial 142,252 125,982
Consumer 319,029 201,858
Real estate mortgages 458,369 319,969
Real estate construction 61,591 39,713
-------------------------------
981,241 687,522
Allowance for loan losses (13,773) (14,377)
-------------------------------
Loans, net of allowance for loan losses 967,468 673,145
Premises and equipment, net 19,521 17,224
Cash value of life insurance 38,980 15,208
Other real estate owned 932 932
Accrued interest receivable 6,027 5,644
Intangible assets 21,604 4,043
Other assets 16,858 15,084
-------------------------------
Total Assets $1,468,755 $1,144,574
===============================
Liabilities:
Deposits:
Noninterest-bearing demand $298,462 $232,499
Interest-bearing demand 220,875 182,816
Savings 441,461 297,926
Time certificates, $100,000 and over 94,500 90,404
Other time certificates 181,525 201,592
-------------------------------
Total deposits 1,236,823 1,005,237
Fed funds purchased 39,500 -
Accrued interest payable 2,638 2,927
Other Liabilities 18,328 14,472
Long-term debt and other borrowings 22,887 22,924
Junior subordinated debt 20,619 -
-------------------------------
Total Liabilities 1,340,795 1,045,560
-------------------------------
Shareholders' Equity:
Common stock, no par value: Authorized 20,000,000 shares;
Issued and outstanding:
7,834,124 at December 31, 2003 69,767
7,060,965 at December 31, 2002 50,472
Retained earnings 56,379 46,239
Accumulated other comprehensive income, net 1,814 2,303
-------------------------------
Total Shareholders' Equity 127,960 99,014
-------------------------------
Total Liabilities and Shareholders' Equity $1,468,755 $1,144,574
===============================
See Notes to Consolidated Financial Statements
-37-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Years ended December 31,
------------------------------------------
2003 2002 2001
------------------------------------------
Interest Income:
Interest and fees on loans $60,997 $52,472 $58,730
Interest on federal funds sold 129 606 1,506
Interest on investment securities available for sale
Taxable 10,903 9,430 9,543
Tax exempt 1,940 2,188 2,219
------------------------------------------
Total interest income 73,969 64,696 71,998
------------------------------------------
Interest Expense:
Interest on interest-bearing demand deposits 488 469 1,487
Interest on savings 3,441 2,710 4,759
Interest on time certificates of deposit 7,328 8,441 15,261
Interest on short-term borrowing 189 2 7
Interest on long-term debt 1,288 1,292 1,972
Interest on junior subordinated debt 355 - -
------------------------------------------
Total interest expense 13,089 12,914 23,486
------------------------------------------
Net Interest Income 60,880 51,782 48,512
------------------------------------------
Provision for loan losses 1,250 2,800 4,400
------------------------------------------
Net Interest Income After Provision for Loan Losses 59,630 48,982 44,112
------------------------------------------
Noninterest Income:
Service charges and fees 14,541 11,286 8,095
Gain on sale of investments 197 - 36
Gain on sale of loans 4,168 3,641 2,095
Commissions on sale of non-deposit investment products1, 766 2,467 2,576
Other 2,237 1,786 1,680
Gain on sale of insurance company stock - - 1,756
------------------------------------------
Total Noninterest Income 22,909 19,180 16,238
------------------------------------------
Noninterest Expense:
Salaries and related benefits 29,714 24,290 21,199
Other 25,813 21,681 19,408
------------------------------------------
Total Noninterest Expense 55,527 45,971 40,607
------------------------------------------
Income Before Income Taxes 27,012 22,191 19,743
------------------------------------------
Provision for income taxes 10,124 8,122 7,324
------------------------------------------
Net Income 16,888 $14,069 $12,419
------------------------------------------
Comprehensive Income:
Change in unrealized (loss) gain on securities
available for sale, net (529) 2,931 441
Net change in minimum pension liability 40 27 (772)
------------------------------------------
Comprehensive Income $16,399 $17,027 $12,088
==========================================
Average Shares Outstanding 7,641 7,019 7,073
Diluted Average Shares Outstanding 7,879 7,193 7,219
Per Share Data
Basic Earnings $2.21 $2.00 $1.76
Diluted Earnings $2.14 $1.96 $1.72
Dividends Paid $0.80 $0.80 $0.80
See Notes to Consolidated Financial Statements
-38-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income, net Total
-------------------------------------------------
Balance, December 31, 2000 $50,428 $35,129 ($324) $85,233
Net income for the period 12,419 12,419
Stock issued, including
stock option tax benefits 1,872 1,872
Repurchase of common stock (2,621) (3,997) (6,618)
Dividends (5,642) (5,642)
Unrealized gain on securities available
for sale, net 441 441
Change in minimum pension liability, net (772) (772)
-------------------------------------------------
Balance, December 31, 2001 $49,679 $37,909 ($655) $86,933
Net income for the period 14,069 14,069
Stock issued, including
stock option tax benefits 863 863
Repurchase of common stock (70) (119) (189)
Dividends (5,620) (5,620)
Unrealized gain on securities available
for sale, net 2,931 2,931
Change in minimum pension liability, net 27 27
-------------------------------------------------
Balance, December 31, 2002 $50,472 $46,239 $2,303 $99,014
Net income for the period 16,888 16,888
Issuance of stock and options
related to merger 18,383 18,383
Stock issued, including
stock option tax benefits 1,157 1,157
Repurchase of common stock (245) (608) (853)
Dividends (6,140) (6,140)
Unrealized gain on securities available
for sale, net (529) (529)
Change in minimum pension liability, net 40 40
-------------------------------------------------
Balance December 31, 2003 $69,767 $56,379 $1,814 $127,960
=================================================
See Notes to Consolidated Financial Statements
-39-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended December 31,
2003 2002 2001
----------------------------------------------------
Operating Activities:
Net income $16,888 $14,069 $12,419
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment, and amortization 3,059 2,608 2,708
Amortization of intangible assets 1,207 911 911
Provision for loan losses 1,250 2,800 4,400
Amortization of investment securities premium, net 3,514 1,841 398
Investment security gains, net (197) - (1,792)
Originations of loans for resale (175,640) (177,796) (125,675)
Proceeds from sale of loans originated for resale 177,860 179,415 126,961
Gain on sale of loans (4,168) (3,641) (2,095)
Amortization of mortgage servicing rights 1,356 713 223
Provision for mortgage servicing rights valuation allowance 600 - -
Loss (gain) on sale of fixed assets 2 8 (9)
Gain on sale of other real estate owned, net (113) (8) (80)
Provision for losses on other real estate owned - - 18
Change in assets and liabilities:
Decrease (increase) in interest receivable 159 (122) 1,413
Decrease in interest payable (289) (561) (1,757)
Increase (decrease) in other assets and liabilities 310 2,069 (2,821)
----------------------------------------------------
Net Cash Provided by Operating Activities 25,798 22,306 15,222
----------------------------------------------------
Investing Activities:
Net cash obtained in mergers and acquisitions 7,450 - -
Proceeds from maturities of securities available-for-sale 205,021 131,592 85,619
Proceeds from sale of securities available-for-sale 22,320 - 14,119
Purchases of securities available-for-sale (169,163) (241,794) (93,125)
Net increase in loans (220,016) (31,203) (21,678)
Proceeds from sale of premises and equipment 20 17 32
Purchases of property and equipment (2,746) (3,121) (1,951)
Proceeds from sale of other real estate owned 726 79 1,757
Investment in subsidiary (619) - -
Purchase of life insurance (22,475) - -
----------------------------------------------------
Net Cash Used by Investing Activities (179,482) (144,430) (15,227)
----------------------------------------------------
Financing Activities:
Net increase in deposits 105,537 124,844 42,561
Net increase (decrease) in federal funds purchased 39,500 - (500)
Payments of principal on long-term debt agreements (37) (32) (11,027)
Issuance of junior subordinated debt 20,619 - -
Repurchase of Common Stock (853) (189) (6,618)
Dividends paid (6,140) (5,620) (5,642)
Exercise of stock options/issuance of Common Stock 717 427 1,005
----------------------------------------------------
Net Cash Provided by Financing Activities 159,343 119,430 19,779
----------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 5,659 (2,694) 19,774
----------------------------------------------------
Cash and Cash Equivalents and Beginning of Period 75,270 77,964 58,190
----------------------------------------------------
Cash and Cash Equivalents at End of Period $80,929 $75,270 $77,964
====================================================
Supplemental Disclosure of Noncash Activities:
Unrealized (loss) gain on securities available for sale ($990) $5,073 $699
Loans transferred to other real estate owned 613 932 325
Supplemental Disclosure of Cash Flow Activity:
Cash paid for interest expense 13,378 13,475 25,243
Cash paid for income taxes 8,160 7,900 9,089
Income tax benefit from stock option exercises 440 $436 $867
The acquisition of North State National Bank Involved the following:
Common stock issued 18,383
Liabilities assumed 126,648
Fair value of assets acquired, other than cash
and cash equivalents (118,697)
Core deposit intangible (3,365)
Goodwill (15,519)
Net cash and cash equivalents received $7,450
See Notes to Consolidated Financial Statements
-40-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2003, 2002
and 2001
Note 1 - General Summary of Significant Accounting Policies
The accounting and reporting policies of TriCo Bancshares (the "Company")
conform to generally accepted accounting principles. The following are
descriptions of the more significant accounting and reporting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Nature of Operations
The Company operates 33 branch offices and 12 in-store branch offices in the
California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern,
Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer, Sacramento, Shasta,
Siskiyou, Stanislaus, Sutter, Tehama, Tulare and Yuba. The Company's operating
policy since its inception has emphasized retail banking. Most of the Company's
customers are retail customers and small to medium sized businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, investments, intangible assets, income taxes and contingencies. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The one accounting estimate that materially affects the financial
statements is the allowance for loan losses.
Investment Securities
The Company classifies its debt and marketable equity securities into one of
three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling in the
near term. Held-to-maturity securities are those securities which the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale. In
2003 and 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 an other than temporary decline in value has occurred.
Loans
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over the estimated life
of the loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is generally
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. When loans are 90
days past due, but in Management's judgment are well secured and in the process
of collection, they may be classified as accrual. 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.
-41-
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 2003, 2002, and 2001 for cash proceeds equal to the fair value
of the loans.
The following table summarizes the Company's mortgage servicing rights assets as
of December 31, 2003 and 2002.
December 31, December 31,
(Dollars in thousands) 2002 Additions Reductions 2003
-------------------------------------------------
Mortgage Servicing Rights $2,821 $1,948 ($1,356) $3,413
Valuation allowance - - (600) (600)
Mortgage servicing rights, net
of valuation allowance $2,821 $1,948 ($1,956) $2,813
=================================================
The recorded value of mortgage servicing rights is included in other assets, and
is amortized in proportion to, and over the period of, estimated net servicing
revenues. The Company assesses capitalized mortgage servicing rights for
impairment based upon the fair value of those rights at each reporting date. For
purposes of measuring impairment, the rights are stratified based upon the
product type, term and interest rates. Fair value is determined by discounting
estimated net future cash flows from mortgage servicing activities using
discount rates that approximate current market rates and estimated prepayment
rates, among other assumptions. The amount of impairment recognized, if any, is
the amount by which the capitalized mortgage servicing rights for a stratum
exceeds their fair value. Impairment, if any, is recognized through a valuation
allowance for each individual stratum.
At December 31, 2003, the Company had no mortgage loans held for sale. At
December 31, 2003 and 2002, the Company serviced real estate mortgage loans for
others of $357 million and $307 million, respectively.
Premises and Equipment
Premises and equipment, including those acquired under capital lease, are stated
at cost less accumulated depreciation and amortization. Depreciation and
amortization expenses are computed using the straight-line method over the
estimated useful lives of the related assets or lease terms. Asset lives range
from 3-10 years for furniture and equipment and 15-40 years for land
improvements and buildings.
Other Real Estate Owned
Real estate acquired by foreclosure is carried at the lower of the recorded
investment in the property or its fair value less estimated disposition costs.
Prior to foreclosure, the value of the underlying loan is written down to the
fair value of the real estate to be acquired less estimated disposition costs by
a charge to the allowance for loan losses, when necessary. Any subsequent
write-downs are recorded as a valuation allowance with a charge to other
expenses in the income statement together with other expenses related to such
properties, net of related income. Gains and losses on disposition of such
property are included in other income or other expenses as applicable.
-42-
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assets (SFAS 142), as of January 1, 2002. Pursuant to SFAS 142,
goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the provisions of
SFAS 142. SFAS 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FASB
Statement of Financial Accounting Standard No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets (SFAS 144).
As of the date of adoption, the Company had identifiable intangible assets
consisting of core deposit premiums and minimum pension liability. Core deposit
premiums are amortized using an accelerated method over a period of ten years.
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates.
The following table summarizes the Company's core deposit intangible as of
December 31, 2003 and 2002.
December 31, December 31,
(Dollar in Thousands) 2002 Additions Reductions 2003
-------------------------------------------------
Core deposit intangibles $10,278 $3,365 - $13,643
Accumulated amortization (6,636) - ($1,207) (7,843)
-------------------------------------------------
Core deposit intangibles, net $3,642 $3,365 ($1,207) $5,800
=================================================
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)
------------- -------------------------
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 December 31, 2003 and 2002.
December 31, December 31,
(Dollar in Thousands) 2002 Additions Reductions 2003
--------------------------------------------
Minimum pension liability intangible $401 - ($116) $285
============================================
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates.
The following table summarizes the Company's goodwill intangible as of December
31, 2003 and December 31, 2002.
December 31, December 31,
(Dollar in Thousands) 2002 Additions Reductions 2003
--------------------------------------------
Goodwill - 15,519 - 15,519
============================================
Impairment of Long-Lived Assets and Goodwill
The Company adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did
not affect the Company's financial statements. In accordance with SFAS 144,
long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
-43-
On December 31 of each year, goodwill is tested for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. This determination is made at
the reporting unit level and consists of two steps. First, the Company
determines the fair value of a reporting unit and compares it to its carrying
amount. Second, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any excess of the carrying amount of
the reporting unit's goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation, in accordance
with FASB Statement of Financial Accounting Standard No. 141, Business
Combinations (SFAS 141). The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill.
Income Taxes
The Company's accounting for income taxes is based on an asset and liability
approach. The Company recognizes the amount of taxes payable or refundable for
the current year, and deferred tax assets and liabilities for the future tax
consequences that have been recognized in its financial statements or tax
returns. The measurement of tax assets and liabilities is based on the
provisions of enacted tax laws.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold.
Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25). Under this method, compensation expense is recognized for awards of
options to purchase shares of common stock to employees under compensatory plans
only if the fair market value of the stock at the option grant date (or other
measurement date, if later) is greater than the amount the employee must pay to
acquire the stock. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue
using the intrinsic value method or to adopt a fair value based method to
account for stock option plans. The fair value based method results in
recognizing as expense over the vesting period the fair value of all stock-based
awards on the date of grant. The Company has elected to continue to use the
intrinsic value method.
Had compensation cost for the Company's option plans been determined in
accordance with SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
(in thousands, except per share amounts) 2003 2002 2001
Net income As reported $16,888 $14,069 $12,419
Pro forma $16,622 $13,857 $12,253
Basic earnings per share As reported $2.21 $2.00 $1.76
Pro forma $2.18 $1.97 $1.73
Diluted earnings per share As reported $2.14 $1.96 $1.72
Pro forma $2.11 $1.93 $1.70
Stock-based employee compensation
cost, net of related tax effects,
included in net income As reported $0 $0 $0
Pro forma $266 $212 $166
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2003, 2002, and 2001: risk-free interest rate of
2.87%, 4.01%, and 4.80%; expected dividend yield of 3.3%, 3.3% and 4.9%;
expected life of 6 years, 6 years and 6 years; expected volatility of 27%, 27%
and 28%, respectively. The weighted average grant date fair value of an option
to purchase one share of common stock granted in 2003, 2002, and 2001 was $8.57,
$5.37, and $3.26, respectively.
-44-
Comprehensive Income
For the Company, comprehensive income includes net income reported on the
statement of income, changes in the fair value of its available-for-sale
investments, and changes in the minimum pension liability reported as a
component of shareholders' equity. The changes in the components of accumulated
other comprehensive income for the years ended December 31, 2003, 2002, and 2001
are reported as follows:
2003 2002 2001
----------------------------------------
Unrealized Gain (Loss) on Securities (in thousands)
Beginning Balance $3,048 $117 ($324)
Unrealized gain (loss) arising during the period, net of tax (529) 2,931 (669)
Less: Reclassification adjustment for net realized gains
on securities available for sale included in net
income during the year, net of tax of $0, $0 and $681, respectively -- -- 1,110
----------------------------------------
Ending Balance $2,519 $3,048 $117
========================================
Minimum Pension Liability
Beginning Balance $(745) ($772) $ --
Change in minimum pension liability, net of tax
of $27, $18, and ($517), respectively 40 27 ($772)
----------------------------------------
Ending Balance $(705) ($745) ($772)
========================================
Total accumulated other comprehensive income (loss), net $1,814 $2,303 ($655)
========================================
Recently Issued Accounting Standards
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (VIEs), which was issued in January
2003. The Company will be required to apply FIN 46R to variable interests in
VIEs created after December 31, 2003. For variable interests in VIEs created
before January 1, 2004, the FIN 46R will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. The Company currently does not have any
VIEs that are within the scope of this Statement.
FASB Statement of Financial Accounting Standard No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150), was issued in May 2003. SFAS 150 establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 also includes required
disclosures for financial instruments within its scope. For the Company, SFAS
150 was effective for instruments entered into or modified after May 31, 2003
and otherwise will be effective as of January 1, 2004, except for mandatorily
redeemable financial instruments. For certain mandatorily redeemable financial
instruments, SFAS 150 will be effective for the Company on January 1, 2005. The
effective date has been deferred indefinitely for certain other types of
mandatorily redeemable financial instruments. The Company currently does not
have any financial instruments that are within the scope of this Statement.
Recently Adopted Accounting Standards
In June 2001, FASB Statement of Financial Accounting Standard No. 143,
Accounting for Asset Retirement Obligations (SFAS 143), was issued. SFAS 143
requires the Company to record the fair value of an asset retirement obligation
as a liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development, and/or normal use of the assets. The
Company also would record a corresponding asset that is depreciated over the
life of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation would be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. The Company was required to adopt SFAS 143 on January
1, 2003. The adoption of SFAS 143 had no effect on the Company's financial
statements.
-45-
In April 2002, FASB Statement of Financial Accounting Standard No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections (SFAS 145), was issued. SFAS 145 amends existing
guidance on reporting gains and losses on the extinguishment of debt to prohibit
the classification of the gain or loss as extraordinary, as the use of such
extinguishments have become part of the risk management strategy of many
companies. SFAS 145 also amends FASB Statement of Financial Accounting Standard
No. 13, Accounting for Leases (SFAS 13), to require sale-leaseback accounting
for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of SFAS 145 related to the
rescission of FASB Statement of Financial Accounting Standard No. 4, Reporting
Gains and Losses from Extinguishment of Debt, were applied in fiscal years
beginning after May 15, 2002. The provisions of SFAS 145 related to SFAS 13 were
effective for transactions occurring after May 15, 2002. The adoption of SFAS
145 had no effect on the Company's financial statements.
In June 2002, FASB Statement of Financial Accounting Standard No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), was
issued. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity". The provisions of SFAS 146 were effective for exit or
disposal activities initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS 146 had no effect on the Company's financial
statements.
In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statement of Financial
Accounting Standards No. 5, 57 and 107 and a rescission of FASB Interpretation
No. 34 (FIN 45), was issued. This FIN 45 enhances the disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation were applicable to guarantees issued or
modified after December 31, 2002 and the disclosure requirements were effective
for financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 had no effect on the Company's financial
statements.
In December 2002, FASB Statement of Financial Accounting Standard No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123 (SFAS 148), was issued. SFAS 148 amends FASB
Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation (SFAS 123), to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements. Disclosures required by this standard are included in the notes to
these consolidated financial statements.
In December 2003, FASB Statement of Financial Accounting Standard No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS
132 revised), was issued. SFAS 132 (revised) prescribes employers' disclosures
about pension plans and other postretirement benefit plans; it does not change
the measurement or recognition of those plans. SFAS 132 retains and revises the
disclosure requirements contained in the original SFAS 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The Statement generally is effective for fiscal years ending
after December 15, 2003. Disclosures required by this standard are included in
the notes to these consolidated financial statements.
Reclassifications
Certain amounts previously reported in the 2002 and 2001 financial statements
have been reclassified to conform to the 2003 presentation. These
reclassifications did not affect previously reported net income or total
shareholders' equity.
Note 2 - Restricted Cash Balances
Reserves (in the form of deposits with the Federal Reserve Bank) of $500,000
were maintained to satisfy Federal regulatory requirements at December 31, 2003
and December 31, 2002. These reserves are included in cash and due from banks in
the accompanying balance sheets.
-46-
Note 3 - Investment Securities
The amortized cost and estimated fair values of investments in debt and equity
securities are summarized in the following tables. Also included in the
following table are other securities that do not have readily determinable fair
value because their ownership is restricted and they lack a market. These other
securities are carried at cost and consist mainly of Federal Home Loan Bank
stock with a cost of $4,779,000 and $4,228,000 at December 31, 2003 and 2002,
respectively:
December 31, 2003
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
Securities Available-for-Sale (in thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $9,462 $81 $-- $9,543
Obligations of states and political subdivisions 35,736 2,610 -- 38,346
Mortgage-backed securities 248,251 3,385 (377) 251,259
Corporate debt securities 13,754 210 (1,639) 12,325
------------------------------------------------------------
Total securities available-for-sale 307,203 6,286 (2,016) 311,473
Other securities 4,963 -- -- 4,963
------------------------------------------------------------
Totals $312,166 $6,286 $(2,016) $316,436
============================================================
December 31, 2002
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
Securities Available-for-Sale (in thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 58,823 $ 319 $ - $ 59,142
Obligations of states and political subdivision 42,016 2,028 (8) 44,036
Mortgage-backed securities 213,770 4,693 - 218,463
Corporate debt securities 13,742 261 (2,033) 11,970
------------------------------------------------------------
Total securities available-for-sale 328,351 7,301 (2,041) 333,611
Other securities 4,413 -- -- 4,413
------------------------------------------------------------
Totals investment securities $ 332,764 $ 7,301 $ (2,041) $ 338,024
============================================================
-47-
The amortized cost and estimated fair value of debt securities at December 31,
2003 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
------------------------------
(in thousands)
Investment Securities
Due in one year $6,808 $6,859
Due after one year through five years 14,737 15,345
Due after five years through ten years 208,196 209,652
Due after ten years 77,462 79,617
No stated maturity 4,963 4,963
------------------------------
Totals $312,166 $316,436
==============================
Proceeds from sales of investment securities were as follows:
Gross Gross Gross
For the Year Proceeds Gains Losses
- -----------------------------------------------------------
(in thousands)
2003 $22,320 $197 $0
2002 -- -- --
2001 $14,119 $1,796 $4
Investment securities with an aggregate carrying value of $162,942,000 and
$104,561,000 at December 31, 2003 and 2002, respectively, were pledged as
collateral for specific borrowings, lines of credit and local agency deposits.
Gross unrealized losses on investment securities and the fair value of the
related securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2003, were as follows:
Less than 12 months 12 months or more Total
----------------------- --------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
-------------------------------------------------------------------
Securities Available-for-Sale: (in thousands)
Mortgage-backed securities $66,117 ($377) $ -- $ -- $66,117 ($377)
Corporate debt securities -- -- 10,120 (1,639) 10,120 (1,639)
-------------------------------------------------------------------
Total securities available-for-sale $66,117 ($377) $10,120 ($1,639) $76,237 ($2,016)
===================================================================
Mortgage-backed securities: The unrealized losses on investments in
mortgage-backed securities were caused by interest rate increases. The
contractual cash flows of these securities are guaranteed by U.S. Government
Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that
the securities would not be settled at a price less than the amortized cost of
the investment. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because the Company has the ability
and intent to hold these investments until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired.
Corporate debt securities: The investments in corporate debt securities with
unrealized losses are comprised of variable-rate trust preferred bonds issued by
bank holding companies that mature in 2027 and 2028. The unrealized losses on
corporate debt securities were caused by interest rate increases. Two of the
bank holding companies representing $8.3 million of the $10.1 million of
corporate bonds with unrealized losses are rated investment grade by major
outside credit rating agencies, and their credit ratings have not diminished
since the bonds were purchased by the Company. The bank holding companies
representing the remaining $1.8 million of bonds are not rated by credit rating
agencies. At least annually, the Company performs its own analysis of the credit
worthiness of each of the corporate debt issuing companies in question. Nothing
in those analyses indicates that the unrealized losses are due to anything other
than increases in interest rates. Because the decline in fair value is
attributable to changes in interest rates and not credit quality, and because
the Company has the intent and ability to hold these investments until a market
price recovery or maturity, these investments are not considered
other-than-temporarily impaired.
-48-
Note 4 - Allowance for Loan Losses
Activity in the allowance for loan losses was as follows:
Years Ended December 31,
2003 2002 2001
--------------------------------
(in thousands)
Balance, beginning of year $14,377 $13,058 $11,670
Addition through merger 928 - -
Provision for loan losses 1,250 2,800 4,400
Loans charged off (3,753) (1,786) (3,213)
Recoveries of loans previously charged off 971 305 201
--------------------------------
Balance, end of year $13,773 $14,377 $13,058
================================
Loans classified as nonaccrual, net of guarantees of the U.S. government,
including its agencies and its government-sponsored agencies, amounted to
approximately $4,360,000, $8,140,000 and $5,466,000 at December 31, 2003, 2002,
and 2001, respectively. These nonaccrual loans were classified as impaired and
are included in the recorded balance in impaired loans for the respective years
shown below. If interest on those loans had been accrued, such income would have
been approximately $1,071,000, $477,000 and $260,000 in 2003, 2002 and 2001,
respectively.
As of December 31, the Company's recorded investment in impaired loans and the
related valuation allowance were as follows (in thousands):
2003
-----------------------------
Recorded Valuation
Investment Allowance
-----------------------------
Impaired loans -
Valuation allowance required $4,360 $369
No valuation allowance required -- --
-----------------------------
Total impaired loans $4,360 $369
=============================
2002
-----------------------------
Recorded Valuation
Investment Allowance
-----------------------------
Impaired loans -
Valuation allowance required $8,140 $881
No valuation allowance required -- --
-----------------------------
Total impaired loans $8,140 $881
=============================
This valuation allowance is included in the allowance for loan losses shown
above for the respective year. The average recorded investment in impaired loans
was $6,270,000, $7,115,000 and, $9,639,000 for the years ended December 31,
2003, 2002 and 2001, respectively. The Company recognized interest income on
impaired loans of $372,000, $733,000 and $441,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
-49-
Note 5 - Premises and Equipment
Premises and equipment were comprised of:
December 31,
2003 2002
-------------------------
(in thousands)
Premises $15,254 $13,031
Furniture and equipment 20,045 18,092
-------------------------
35,299 31,123
Less:
Accumulated depreciation
and amortization (19,841) (17,401)
-------------------------
15,458 13,722
Land and land improvements 4,063 3,502
-------------------------
$19,521 $17,224
=========================
Depreciation and amortization of premises and equipment amounted to $2,701,000,
$2,329,000, and $2,243,000 in 2003, 2002 and 2001, respectively.
Note 6 - Time Deposits
At December 31, 2003, the scheduled maturities of time deposits were as follows
(in thousands):
Scheduled
Maturities
----------
2004 $184,742
2005 18,444
2006 8,914
2007 51,087
2008 and thereafter 12,838
----------
Total $276,025
==========
Note 7 - Long-Term Debt and Other Borrowings
Long-term debt is as follows:
December 31,
2003 2002
--------------------------
(in thousands)
FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable
in its entirety by FHLB on a quarterly basis beginning April 7, 2003 $20,000 $20,000
FHLB loan, fixed rate of 5.35% payable on December 9, 2008 1,500 1,500
FHLB loan, fixed rate of 5.77% payable on February 23, 2009 1,000 1,000
Capital lease obligation on premises, effective rate of 13% payable
monthly in varying amounts through December 1, 2009 387 424
--------------------------
Total long-term debt $22,887 $22,924
==========================
The Company maintains a collateralized line of credit with the Federal Home Loan
Bank of San Francisco. Based on the FHLB stock requirements at December 31,
2003, this line provided for maximum borrowings of $128,330,000 of which
$62,000,000 was outstanding, leaving $66,330,000 available. The maximum
month-end outstanding balances of short term reverse repurchase agreements in
2003 and 2002 were $0 and $0, respectively. The Company has available unused
lines of credit totaling $40,000,000 for Federal funds transactions at December
31, 2003.
-50-
Note 8 - Junior Subordinated Debt
On July 31, 2003, 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, TriCo Capital Trust I 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
mandatorily redeemable upon maturity on October 7, 2033 with an interest rate
that resets quarterly at three-month LIBOR plus 3.05%, or 4.16% for the first
quarterly interest period. TriCo Capital Trust I has the right to redeem the
trust preferred securities on or after October 7, 2008. 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.
As a result of the adoption of FIN 46R, the Company deconsolidated TriCo Capital
Trust I as of and for year ended December 31, 2003. The $20,619,000 of junior
subordinated debentures issued by TriCo Capital Trust I were reflected as junior
subordinated debt in the consolidated balance sheet at December 31, 2003. The
common stock issued by TriCo Capital Trust I was recorded in other assets in the
consolidated balance sheet at December 31, 2003.
Prior to December 31, 2003, TriCo Capital Trust I was a consolidated subsidiary
and was included in liabilities in the consolidated balance sheet, as "Trust
preferred securities." The common securities and debentures, along with the
related income effects were eliminated in the consolidated financial statements.
The debentures issued by TriCo Capital Trust I, less the common securities of
TriCo Capital Trust I, continue to qualify as Tier 1 capital under interim
guidance issued by the Board of Governors of the Federal Reserve System (Federal
Reserve Board).
Note 9 - Commitments and Contingencies (See also Note 17)
At December 31, 2003, future minimum commitments under non-cancelable capital
and operating leases with initial or remaining terms of one year or more are as
follows:
Capital Operating
Leases Leases
------------------------------
(in thousands)
2004 $90 $1,172
2005 91 980
2006 92 855
2007 93 764
2008 94 664
Thereafter 102 1,819
------------------------------
Future minimum lease payments 562 $6,254
Less amount representing interest 175 ==========
-------
Present value of future lease payments $387
=======
Rent expense under operating leases was $1,442,000 in 2003, $1,201,000 in 2002,
and $1,241,000 in 2001.
The Company is a defendant in legal actions arising from normal business
activities. Management believes, after consultation with legal counsel, that
these actions are without merit or that the ultimate liability, if any,
resulting from them will not materially affect the Company's financial position
or results from operations.
-51-
Note 10 - Shareholders' Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of
$2,810,000, $5,779,000 and $12,187,000 in 2003, 2002 and 2001, respectively. The
Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the
State of California Department of Financial Institutions. California banking
laws limit the Bank's ability to pay dividends to the lesser of (1) retained
earnings or (2) net income for the last three fiscal years, less cash
distributions paid during such period. Under this regulation, at December 31,
2003, the Bank may pay dividends of $23,912,000.
Shareholders' Rights Plan
On June 25, 2001, the Company announced that its Board of Directors adopted and
entered into a Shareholder Rights Plan designed to protect and maximize
shareholder value and to assist the Board of Directors in ensuring fair and
equitable benefit to all shareholders in the event of a hostile bid to acquire
the Company.
The Company adopted this Rights Plan to protect stockholders from coercive or
otherwise unfair takeover tactics. In general terms, the Rights Plan imposes a
significant penalty upon any person or group that acquires 15% or more of the
Company's outstanding common stock without approval of the Company's Board of
Directors. The Rights Plan was not adopted in response to any known attempt to
acquire control of the Company.
Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was
declared for each common share held of record as of the close of business on
July 10, 2001. No separate certificates evidencing the Rights will be issued
unless and until they become exercisable.
The Rights generally will not become exercisable unless an acquiring entity
accumulates or initiates a tender offer to purchase 15% or more of the Company's
common stock. In that event, each Right will entitle the holder, other than the
unapproved acquirer and its affiliates, to purchase either the Company's common
stock or shares in an acquiring entity at one-half of market value.
The Right's initial exercise price, which is subject to adjustment, is $49.00
per Right. The Company's Board of Directors generally will be entitled to redeem
the Rights at a redemption price of $.01 per Right until an acquiring entity
acquires a 15% position. The Rights expire on July 10, 2011.
Stock Repurchase Plan
On March 15, 2001, the Company announced the completion of its stock repurchase
plan initially announced on July 20, 2000 and initiated a new stock repurchase
plan. Under the July 2000 repurchase plan, the Company repurchased a total of
150,000 shares of which 110,000 shares were repurchased in 2001.
On October 19, 2001, the Company announced the completion of its March 2001
stock repurchase plan under which it repurchased a total of 150,000 shares.
Also on October 19, 2001, the Company announced a new stock repurchase plan to
repurchase up to 150,000 shares.
On July 31, 2003, the Company announced the termination of its October 2001
stock repurchase plan under which it repurchased 118,800 shares and the
remaining 31,200 shares had not been repurchased. The Company adopted a new
stock repurchase plan on July 31, 2003 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 represented
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. As of December 31, 2003, the Company had purchased 27,500
shares under this plan.
Note 11 - Stock Options
In May 2001, the Company adopted the TriCo Bancshares 2001 Stock Option Plan
(2001 Plan) covering officers, employees, directors of, and consultants to the
Company. Under the 2001 Plan, the option price cannot be less than the fair
market value of the Common Stock at the date of grant except in the case of
substitute options. Options for the 2001 Plan expire on the tenth anniversary of
the grant date. Vesting schedules under the 2001 Plan are determined
individually for each grant.
In May 1995, the Company adopted the TriCo Bancshares 1995 Incentive Stock
Option Plan (1995 Plan) covering key employees. Under the 1995 Plan, the option
price cannot be less than the fair market value of the Common Stock at the date
of grant. Options for the 1995 Plan expire on the tenth anniversary of the grant
date. Vesting schedules under the 1995 Plan are determined individually for each
grant.
-52-
The Company also has outstanding options under the TriCo Bancshares 1993
Nonqualified Stock Option Plan (1993 Plan). Options under the 1993 Plan were
granted at an exercise price less than the fair market value of the common stock
and vest over a six year period. Unexercised options for the 1993 Plan terminate
10 years from the date of the grant.
Stock option activity is summarized in the following table:
Weighted Weighted
Average Average
Number Option Price Exercise Fair Value
Of Shares Per Share Price of Grants
Outstanding at
December 31, 2000 540,416 $4.95 to $18.25 10.01
Options granted 323,000 16.10 to 16.40 16.38 $3.26
Options exercised (192,530) 4.95 to 5.24 5.22
Options forfeited (12,000) 16.13 to 18.25 16.92
Outstanding at
December 31, 2001 658,886 $5.24 to $18.25 14.41
Options granted 40,500 23.44 to 24.76 23.88 $5.37
Options exercised (69,986) 5.24 to 18.25 6.10
Options forfeited (2,000) 24.25 to 24.25 24.25
Outstanding at
December 31, 2002 627,400 $5.24 to $24.76 $15.92
Options granted 276,587 $3.17 to $26.65 $19.94 $8.57
Options exercised (77,147) $3.17 to $18.25 $9.30
Options forfeited (2,492) $10.73 to $24.25 $21.58
Outstanding at
December 31, 2003 824,348 $3.17 to $26.65 $17.87
The following table shows the number, weighted-average exercise price, and the
weighted average remaining contractual life of options outstanding, and the
number and weighted-average exercise price of options exercisable as of December
31, 2003 by range of exercise price:
Outstanding Options Exercisable Options
------------------------------------------------ -----------------------------
Weighted-Average
Range of Weighted-Average Remaining Weighted-Average
Exercise Price Number Exercise Price Contractual Life Number Exercise Price
$2-$4 34,095 $3.17 1.62 years 34,095 $3.17
$4-$6 9,304 $5.25 1.54 9,304 $5.25
$8-$10 15,525 $8.93 1.44 15,525 $8.93
$10-$12 15,604 $10.86 5.08 15,604 $10.86
$12-$14 30,000 $12.25 2.48 30,000 $12.25
$14-$16 15,000 $14.17 3.01 15,000 $14.17
$16-$18 418,070 $16.32 7.11 273,790 $16.30
$18-$20 53,250 $18.25 3.78 53,250 $18.25
$22-$24 20,000 $23.44 8.94 - -
$24-$26 193,500 $25.29 9.40 46,000 $25.04
$26-$28 20,000 $26.42 9.22 - -
Of the stock options outstanding as of December 31, 2003, 2002, and 2001,
options on shares totaling 492,568, 333,284, and 330,046, respectively, were
exercisable at weighted average prices of $15.49, $14.70, and $12.50,
respectively.
The Company has stock options outstanding under the three option plans described
above. The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized except for the options granted
under the 1993 plan. The Company recognized expense of $0, $0, and $0 for the
1993 Plan options in 2003, 2002 and 2001, respectively.
-53-
Note 12 - Other Noninterest Income and Expenses
The components of other noninterest income were as follows:
Years Ended December 31,
2003 2002 2001
------------------------------
(in thousands)
Increase in cash value of insurance policies $1,296 $606 $476
Sale of customer checks 229 264 283
Gain on sale of other real estate owned 113 7 80
Other 599 909 841
------------------------------
Total other noninterest income $2,237 $1,786 $1,680
==============================
The components of other noninterest expenses were as follows:
Years Ended December 31,
2003 2002 2001
------------------------------
(in thousands)
Equipment and data processing $4,947 $4,095 $3,694
Occupancy 3,493 2,954 2,806
Professional fees 2,315 1,696 1,087
Telecommunications 1,539 1,422 1,253
Advertising 1,062 1,263 1,132
Intangible amortization 1,207 911 911
ATM network charges 1,043 847 913
Postage 855 801 639
Courier service 795 720 661
Operational losses 657 534 227
Assessments 268 233 223
Net other real estate owned expense 124 26 175
Other 7,508 6,179 5,687
------------------------------
Total other noninterest expenses $25,813 $21,681 $19,408
==============================
-54-
Note 13 - Income Taxes
The current and deferred components of the income tax provision were comprised
of:
Years Ended December 31,
2003 2002 2001
------------------------------
(in thousands)
Current Tax Provision:
Federal $7,686 $6,826 $5,975
State 2,720 2,543 2,009
------------------------------
Total current 10,406 9,369 7,984
Deferred Tax Benefit:
Federal (198) (735) (518)
State (84) (512) (142)
------------------------------
Total deferred (282) (1,247) (660)
------------------------------
Provision for income taxes $10,124 $8,122 $7,324
==============================
Taxes recorded directly to shareholders' equity are not included in the
preceding table. These taxes (benefits) relating to changes in minimum pension
liability amounting to ($27,000) in 2003, ($19,000) in 2002, and $541,000 in
2001, unrealized gains and losses on available-for-sale investment securities
amounting to ($461,000) in 2003, $2,142 in 2002, and $258,000 in 2001, and
benefits related to employee stock options of ($440,000) in 2003, ($436,000) in
2002, and ($867,000) in 2001 were recorded directly to shareholders' equity.
The provisions for income taxes applicable to income before taxes for the years
ended December 31, 2002, 2002 and 2001 differ from amounts computed by applying
the statutory Federal income tax rates to income before taxes. The effective tax
rate and the statutory federal income tax rate are reconciled as follows:
Years Ended December 31,
2003 2002 2001
----------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 6.3 6.0 6.5
Tax-exempt interest on municipal obligations (2.4) (3.3) (3.9)
Other (1.4) (1.1) (0.5)
----------------------------
Effective Tax Rate 37.5% 36.6% 37.1%
============================
-55-
The components of the net deferred tax asset of the Company as of December 31,
were as follows:
2003 2002
--------------------------
(in thousands)
Deferred Tax Assets:
Loan losses $5,678 $6,045
Deferred compensation 4,058 3,523
Intangible amortization 1,066 980
State taxes 873 871
Pension liability 494 522
Nonaccrual interest 450 201
Fixed asset write down 232 232
OREO write downs 76 160
Merger related NOL carryforward 20 -
Stock option amortization 8 32
--------------------------
Total deferred tax assets 12,955 12,566
--------------------------
Deferred Tax Liabilities:
Unrealized gain on securities (1,795) (2,221)
Core deposit premium (1,290) -
Depreciation (511) (645)
Securities income (560) (419)
Securities accretion (389) (418)
Merger related fixed asset valuations (379) -
Capital leases (92) (95)
Other, net (205) (339)
--------------------------
Total deferred tax liability (5,221) (4,137)
--------------------------
Net deferred tax asset $7,734 $8,429
==========================
Note 14 - Retirement Plans
Substantially all employees with at least one year of service are covered by a
discretionary employee stock ownership plan (ESOP). Contributions are made to
the plan at the discretion of the Board of Directors. Contributions to the
plan(s) totaling $975,000 in 2003, $955,000 in 2002, and $850,000 in 2001 are
included in salary expense.
The Company has an Executive Deferred Compensation Plan and a Director Deferred
Compensation Plan, which allow directors and key executives designated by the
Board of Directors of the Company to defer a portion of their compensation. The
Company has purchased insurance on the lives of the participants and intends to
use the cash values of these policies to pay the deferred compensation
obligations of $5,195,000 and $4,451,000 at December 31, 2003 and 2002,
respectively.
The Company has a supplemental retirement plan for directors and a supplemental
executive retirement plan covering key executives. These plans are non-qualified
defined benefit plans and are unsecured and unfunded. The Company has purchased
insurance on the lives of the participants and intends to use the cash values of
these policies to pay the retirement obligations.
The cash values of the insurance policies purchased to fund the deferred
compensation obligations and the retirement obligations were $38,980,000 and
$15,208,000 at December 31, 2003 and 2002, respectively.
The Company recorded in Other Liabilities an additional minimum pension
liability of $1,459,000 related to the supplemental retirement plan as of
December 31, 2003. These amounts represent the amount by which the accumulated
benefit obligations for this retirement plan exceeded the fair value of plan
assets plus amounts previously accrued related to the plan. These additional
liabilities have been offset by an intangible asset to the extent of previously
unrecognized net transitional obligation and unrecognized prior service costs of
each plan. The amount in excess of previously unrecognized prior service cost
and unrecognized net transitional obligation is recorded as a reduction of
shareholders' equity in the amount of $705,000, representing the after-tax
impact, at December 31, 2003.
-56-
The following table sets forth the plans' status:
December 31,
2003 2002
--------------------
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $(6,681) $(6,261)
Service cost (125) (107)
Interest cost (418) (428)
Amendments -- --
Actuarial loss (112) (367)
Benefits paid 490 482
--------------------
Benefit obligation at end of year $(6,846) $(6,681)
====================
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ --
--------------------
Fair value of plan assets at end of year $ -- $ --
====================
Funded status $(6,846) $(6,681)
Unrecognized net obligation existing at January 1, 1986 45 80
Unrecognized net actuarial loss 2,313 2,354
Unrecognized prior service cost 240 321
Intangible asset (285) (401)
Accumulated other comprehensive income (1,175) (1,243)
--------------------
Accrued benefit cost $(5,708) $(5,570)
====================
Years Ended December 31,
2003 2002 2001
------------------------
(in thousands)
Net pension cost included the following components:
Service cost-benefits earned during the period $125 $107 $ 86
Interest cost on projected benefit obligation 418 428 372
Amortization of net obligation at transition 35 35 35
Amortization of prior service cost 81 81 39
Recognized net actuarial loss 153 87 53
------------------------
Net periodic pension cost $812 $738 $585
========================
The net periodic pension cost was determined using a discount rate assumption of
6.50% for 2003, 7.00% for 2002 and 7.25% for 2001, respectively. The rates of
increase in compensation used in each year were 2.5% to 5%.
-57-
Note 15 - Earnings per Share
The Company's basic and diluted earnings per share are as follows (in thousands
except per share data):
Year Ended December 31, 2003
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $16,888 7,641,051 $2.21
Common stock options outstanding -- 237,653
------- ---------
Diluted Earnings per Share
Net income available to common shareholders $16,888 7,878,704 $2.14
======= ========= =====
Year Ended December 31, 2002
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $14,069 7,019,205 $2.00
Common stock options outstanding -- 173,809
------- ---------
Diluted Earnings per Share
Net income available to common shareholders $14,069 7,193,014 $1.96
======= ========= =====
Year Ended December 31, 2001
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $12,419 7,072,588 $1.76
Common stock options outstanding -- 146,641
------- ---------
Diluted Earnings per Share
Net income available to common shareholders $12,419 7,219,229 $1.72
======= ========= =====
Excluded from the computation of diluted earnings per share were 0, 36,000, and
0 options for the years ended December 31, 2003, 2002, and 2001, respectively,
because the effect of these options was antidilutive.
Note 16 - Related Party Transactions
Certain directors, officers, and companies with which they are associated were
customers of, and had banking transactions with, the Company or the Bank in the
ordinary course of business. It is the Company's policy that all loans and
commitments to lend to officers and directors be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other borrowers of the Bank.
The following table summarizes the activity in these loans for 2003:
Balance Balance
December 31, Advances/ Removed/ December 31,
2002 New Loans Payments 2003
-------------------------------------------------------------------
(in thousands)
$3,338 $4,228 $2,905 $4,661
-58-
Note 17 - Financial Instruments With Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Contractual Amount
December 31,
--------------------------
2003 2002
(in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit:
Commercial loans $86,555 $69,295
Consumer loans 172,704 117,917
Real estate mortgage loans 15,350 6,028
Real estate construction loans 46,741 25,105
Standby letters of credit 11,582 8,818
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates of one year or less or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on Management's credit evaluation of the customer. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. Most standby letters
of credit are issued for one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Collateral requirements vary, but in general follow the
requirements for other loan facilities.
Note 18 - Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to
customers located throughout the northern San Joaquin Valley, the Sacramento
Valley and northern mountain regions of California. The Company has a
diversified loan portfolio within the business segments located in this
geographical area.
Note 19 - Disclosure of Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practical to estimate that
value. Cash and due from banks, fed funds purchased and sold, accrued interest
receivable and payable, and short-term borrowings are considered short-term
instruments. For these short-term instruments their carrying amount approximates
their fair value.
Securities
For all securities, fair values are based on quoted market prices or dealer
quotes. See Note 3 for further analysis.
Loans
The fair value of variable rate loans is the current carrying value. The
interest rates on these loans are regularly adjusted to market rates. The fair
value of other types of fixed rate loans is estimated by discounting the future
cash flows using current rates at which similar loans would be made to borrowers
with similar credit ratings for the same remaining maturities. The allowance for
loan losses is a reasonable estimate of the valuation allowance needed to adjust
computed fair values for credit quality of certain loans in the portfolio.
-59-
Deposit Liabilities and Long-Term Debt
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. These values do
not consider the estimated fair value of the Company's core deposit intangible,
which is a significant unrecognized asset of the Company. The fair value of time
deposits and debt is based on the discounted value of contractual cash flows.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation with the
counter parties at the reporting date.
Fair value for financial instruments are management's estimates of the values at
which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including, any mortgage banking
operations, deferred tax assets, and premises and equipment. Further, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on the fair value estimates and have not been
considered in any of these estimates.
The estimated fair values of the Company's financial instruments are as follows:
December 31, 2003
-----------------------------
Carrying Fair
Amount Value
-----------------------------
Financial assets: (in thousands)
Cash and due from banks $80,603 $80,603
Federal funds sold 326 326
Securities:
Available-for-sale 316,436 316,436
Loans, net 967,468 928,243
Accrued interest receivable 6,027 6,027
Financial liabilities:
Deposits 1,236,823 1,185,923
Accrued interest payable 2,638 2,638
Federal funds purchased 39,500 39,500
Long-term debt 22,887 25,180
Junior subordinated debt 20,619 20,619
Contract Fair
Off-balance sheet: Amount Value
-----------------------------
Commitments 321,350 32,135
Standby letters of credit 11,582 116
December 31, 2002
-----------------------------
Carrying Fair
Amount Value
-----------------------------
Financial assets: (in thousands)
Cash and due from banks $67,170 $67,170
Federal funds sold 8,100 8,100
Securities:
Available-for-sale 338,024 338,024
Loans, net 673,145 667,535
Accrued interest receivable 5,644 5,644
Financial liabilities:
Deposits 1,005,237 972,323
Accrued interest payable 2,927 2,927
Long-term debt 22,924 25,347
Contract Fair
Off-balance sheet: Amount Value
-----------------------------
Commitments 218,345 21,835
Standby letters of credit 8,818 88
-60-
Note 20 - TriCo Bancshares Financial Statements
TriCo Bancshares (Parent Only) Balance Sheets
December 31,
Assets 2003 2002
--------------------------
(in thousands)
Cash and Cash equivalents $6,187 $239
Securities available-for-sale 180 180
Investment in Tri Counties Bank 139,834 96,708
Other assets 2,441 1,887
--------------------------
Total assets $148,642 $99,014
==========================
Liabilities and shareholders' equity
Other liabilities $ 63 $ --
Junior subordinated debt 20,619 --
--------------------------
Total liabilities $20,682 $ --
--------------------------
Shareholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares;
issued and outstanding 7,834,124
and 7,060,965 shares, respectively $69,767 $50,472
Retained earnings 56,379 46,239
Accumulated other comprehensive income, net 1,814 2,303
--------------------------
Total shareholders' equity 127,960 99,014
--------------------------
Total liabilities and shareholders' equity $148,642 $99,014
==========================
Statements of Income Years Ended December 31,
2003 2002 2001
------------------------------
(in thousands)
Interest income $ 18 $ 18 $ 17
Interest expense (355) -- --
Administration expense (559) (416) (980)
------------------------------
Loss before equity in net income of
Tri Counties Bank (896) (398) (963)
Equity in net income of Tri Counties Bank:
Distributed 2,810 5,779 12,187
Undistributed 14,592 8,522 798
Income taxes (382) (166) (397)
------------------------------
Net income $16,888 $14,069 $12,419
==============================
-61-
Statements of Cash Flows
Years ended December 31,
2003 2002 2001
-------------------------------------------
(in thousands)
Operating activities:
Net income $16,888 $14,069 $12,419
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed equity in Tri Counties Bank (14,592) (8,522) (798)
Other assets and liabilities (72) (167) (397)
-------------------------------------------
Net cash provided by operating activities 2,224 5,380 11,224
-------------------------------------------
Investing activities:
Investment in TriCo Capital Trust I (619) -- --
Capital contributed to Tri Counties Bank (28,383) -- --
-------------------------------------------
Net cash used in investing activities (29,002) -- --
-------------------------------------------
Financing activities:
Issuance of junior subordinated debt 20,619 -- --
Issuance of common stock related to acquisition 18,383 -- --
Issuance of common stock through option exercise 717 427 1,005
Repurchase of common stock (853) (189) (6,618)
Cash dividends-- common (6,140) (5,620) (5,642)
-------------------------------------------
Net cash provided by (used for) financing activities 32,726 (5,382) (11,255)
-------------------------------------------
Increase (decrease) in cash and cash equivalents 5,948 (2) (31)
Cash and cash equivalents at beginning of year 239 241 272
-------------------------------------------
Cash and cash equivalents at end of year $6,187 $239 $241
===========================================
Note 21 - Regulatory Matters
The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 2003, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that Management believes have changed the institution's category.
-62-
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
To Be Well
(Dollars in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2003:
Total Capital (to Risk Weighted Assets):
Consolidated $137,328 11.57% =>$94,991 =>8.0% =>$118,739 =>10.0%
Tri Counties Bank $131,017 11.04% =>$94,926 =>8.0% =>$118,658 =>10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $123,555 10.41% =>$47,496 =>4.0% =>$71,243 => 6.0%
Tri Counties Bank $117,244 9.88% =>$47,463 =>4.0% =>$71,195 => 6.0%
Tier 1 Capital (to Average Assets):
Consolidated $123,555 8.68% =>$56,962 =>4.0% =>$71,203 => 5.0%
Tri Counties Bank $117,244 8.24% =>$56,948 =>4.0% =>$71,185 => 5.0%
As of December 31, 2002:
Total Capital (to Risk Weighted Assets):
Consolidated $102,378 11.97% =>$68,427 =>8.0% =>$85,534 =>10.0%
Tri Counties Bank $100,046 11.73% =>$68,259 =>8.0% =>$85,324 =>10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $91,641 10.71% =>$34,213 =>4.0% =>$51,320 => 6.0%
Tri Counties Bank $89,335 10.47% =>$34,130 =>4.0% =>$51,195 => 6.0%
Tier 1 Capital (to Average Assets):
Consolidated $91,641 8.27% =>$44,304 =>4.0% =>$55,380 => 5.0%
Tri Counties Bank $89,335 8.08% =>$44,222 =>4.0% =>$55,278 => 5.0%
Note 22 - Acquisition
The Company acquired North State National Bank 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 assets acquired, was approximately $15.5
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, the Company paid $13,090,057 in cash,
issued 723,512 shares of common stock, and issued options to purchase 79,587
shares of 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.
-63-
The pro forma financial information in the following table illustrates the
combined operating results of the Company and North State National Bank for the
years ended December 31, 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 the Company
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 year ended December 31,
2003 2002
-------------------------------
(in thousands except earnings per share)
Net interest income $62,316 $57,631
Provision for loan losses 1,250 2,800
Noninterest income 23,100 19,719
Noninterest expense 56,711 49,260
Income tax expense 10,331 9,424
Net income $17,124 $15,866
Basic earnings per share $2.19 $2.05
Diluted earnings per share $2.12 $1.99
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.
-64-
Note 23 - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters
of 2003 and 2002, and is unaudited; however, in the opinion of Management, it
reflects all adjustments (which include only normal recurring adjustments)
necessary to present fairly the summarized results for such periods.
2003 Quarters Ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data)
Interest income $20,354 $19,105 $18,161 $16,349
Interest expense 3,224 3,305 3,445 3,115
------- ------- ------- -------
Net interest income 17,130 15,800 14,716 13,234
Provision for loan losses 800 150 150 150
------- ------- ------- -------
Net interest income after
provision for loan losses 16,330 15,650 14,566 13,084
Noninterest income 5,753 5,206 6,554 5,396
Noninterest expense 14,459 14,049 14,368 12,651
------- ------- ------- -------
Income before income taxes 7,624 6,807 6,752 5,829
Income tax expense 2,941 2,469 2,498 2,216
------- ------- ------- -------
Net income $ 4,683 $ 4,338 $ 4,254 $ 3,613
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.58 $ 0.54 $ 0.53 $ 0.50
======= ======= ======= =======
Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= =======
2002 Quarters Ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data)
Interest income $16,228 $16,435 $16,075 $15,958
Interest expense 3,245 3,227 3,179 3,263
------- ------- ------- -------
Net interest income 12,983 13,208 12,896 12,695
Provision for loan losses 800 700 500 800
------- ------- ------- -------
Net interest income after
provision for loan losses 12,183 12,508 12,396 11,895
Noninterest income 5,998 5,413 3,943 3,826
Noninterest expense 12,473 12,133 10,963 10,402
------- ------- ------- -------
Income before income taxes 5,708 5,788 5,376 5,319
Income tax expense 1,960 2,161 2,011 1,990
------- ------- ------- -------
Net income $3,748 $ 3,627 $ 3,365 $ 3,329
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.52 $ 0.50 $ 0.47 $ 0.47
======= ======= ======= =======
Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= =======
-65-
Independent Auditors' Report
To the Board of Directors
TriCo Bancshares and Subsidiaries:
We have audited the accompanying consolidated balance sheets of TriCo Bancshares
and Subsidiary for the years ended December 31, 2003 and 2002, and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of TriCo
Bancshares and Subsidiaries for the year ended December 31, 2001 were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated January
18, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TriCo Bancshares and
Subsidiary as of December 31, 2003 and 2002, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Sacramento, California
January 29, 2004
-66-
Independent Auditors' Report(1)
To the Board of Directors and Shareholders of TriCo Bancshares and Subsidiary:
We have audited the accompanying consolidated balance sheets of TriCo
Bancshares (a California corporation) and Subsidiary as of December 31, 2001 and
2000, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TriCo
Bancshares and Subsidiary as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
San Francisco, California
January 18, 2002
(1) This report is a copy of a previously issued report and the predecessor
auditor has not reissued the report. Revisions to prior-period financial
statements are considered inconsequential.
-67-
MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY
To Our Shareholders:
The Management of TriCo Bancshares is responsible for the preparation,
integrity, reliability and consistency of the information contained in this
annual report. The consolidated financial statements, which necessarily include
amounts based on judgments and estimates, were prepared in conformity with
generally accepted accounting principles and prevailing practices in the banking
industry. All other financial information appearing throughout this annual
report is presented in a manner consistent with the consolidated financial
statements.
Management has established and maintains a system of internal controls that
provides reasonable assurance that the underlying financial records are reliable
for preparing the consolidated financial statements, and that assets are
safeguarded from unauthorized use or loss. This system includes extensive
written policies and operating procedures and a comprehensive internal audit
function, and is supported by the careful selection and training of staff, an
organizational structure providing for division of responsibility, and a Code of
Ethics covering standards of personal and business conduct.
Management believes that, as of December 31, 2003, the Company's internal
control environment is adequate to provide reasonable assurance as to the
integrity and reliability of the consolidated financial statements and related
financial information contained in the annual report. However, there are limits
inherent in all systems of internal accounting control and Management recognizes
that errors or irregularities may occur. Based on the recognition that the costs
of such systems should not exceed the benefits to be derived, Management
believes the Company's system provides an appropriate cost/benefit balance.
The system of internal controls is under the general oversight of the Board of
Directors acting through its Audit Committee, which is comprised entirely of
outside directors. The Audit Committee monitors the effectiveness of and
compliance with internal controls through a continuous program of internal
audit. This is accomplished through periodic meetings with Management, internal
auditors and independent auditors to assure that each is carrying out their
responsibilities.
The Company's 2003 consolidated financial statements have been audited by KPMG
LLP, independent certified public auditors elected by the shareholders. All
financial records and related data, as well as the minutes of shareholders and
directors meetings, have been made available to them. Management believes that
all representations made to the independent auditors during their audit were
valid and appropriate.
Richard P. Smith
President and Chief Executive Officer
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
-68-
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On March 22, 2002, the Company decided not to renew the engagement of its
independent public accountants, Arthur Andersen LLP ("Andersen"). This
determination followed the Company's decision to seek proposals from other
independent accountants to audit the Company's consolidated financial statements
for the year ending December 31, 2002.
The decision not to renew the engagement of Andersen was made by the Board of
Directors based upon a recommendation of its Audit Committee.
During the Company's fiscal year ended December 31, 2001, and during the interim
period from December 31, 2001 through March 22, 2002, there were no
disagreements between the Company and Andersen on any matter of accounting
principles, financial statement disclosure, or auditing scope or procedure
which, if not resolved to Andersen's satisfaction, would have caused Andersen to
make reference to the matter of the disagreement in connection with their
reports. The audit reports of Andersen on the consolidated financial statements
of the Company as of December 31, 2001 and 2000 and for each of the three years
in the period ended December 31, 2001 did not contain any adverse opinion or
disclaimer of opinion, nor were these opinions qualified or modified as to
uncertainty, audit scope or accounting principles. The Company requested that
Andersen furnish it with a letter, addressed to the commission stating whether
or not it agrees with the above statements. The letter from Andersen is
incorporated by reference from the Company's 8-K dated March 27, 2002.
Effective March 22, 2002, the Board of Directors, based upon a recommendation of
its Audit Committee, retained KPMG LLP ("KPMG") as its independent accountants
to audit the Company's consolidated financial statements for the year ending
December 31, 2002. The decision to retain KPMG was ratified by shareholders at
the Annual Meeting of Shareholders in May 2002.
During the Company's two fiscal years ended December 31, 2001, and during the
interim period through March 22, 2002, there were no reportable events as
defined in Item 301 (a)(1)(v) of Regulation S-K.
During the Company's two fiscal years ended December 31, 2001, and during the
interim period through March 22, 2002, the Company did not consult with KPMG
regarding either:
(i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type
of audit opinion that might be rendered on the Company's
financial statements; or
(ii) any matter that was either the subject of a disagreement
(as defined in Item 304(a)(1)(iv) of regulation S-K and
related instruction to this Item) or a reportable event
identified (as described in Item 304(a)(1)(v) of
Regulation S-K and related instruction to this Item).
ITEM 9A. CONTROLS AND PROCEDURES
The Chief Executive Officer, Richard P. Smith, and the Chief Financial Officer,
Thomas J. Reddish, evaluated the effectiveness of the Company's disclosure
controls and procedures as of December 31, 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.
-69-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers of the registrant
required by this Item 10 is incorporated herein by reference from the Company's
Proxy Statement for the annual meeting of shareholders to be held on May 4,
2004, which will be filed with the Commission pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference
from the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 4, 2004, which will be filed with the Commission pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated herein by reference
from the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 4, 2004, which will be filed with the Commission pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by reference
from the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 4, 2004, which will be filed with the Commission pursuant to
Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference
from the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 4, 2004, which will be filed with the Commission pursuant to
Regulation 14A.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. All Financial Statements.
The consolidated financial statements of Registrant are listed at page
36 of Item 8 of this report, and are incorporated herein by reference.
2. Financial statement schedules.
Schedules have been omitted because they are not applicable or are not
required under the instructions contained in Regulation S-X or because
the information required to be set forth therein is included in the
consolidated financial statements or notes thereto at Item 8 of this
report.
3. Exhibits.
The following documents are included or incorporated by reference in
this annual report on Form 10-K, and this list includes the Exhibit
Index.
-70-
Exhibit No. Exhibit Index
- ----------- -------------
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 dated April 10, 2001, between
TriCo and each of Richard O'Sullivan, Thomas Reddish, Ray Rios and
Richard Smith, and dated February 27, 2003 between TriCo and Craig
Carney filed as Exhibit 10.9 to TriCo's Report on Form 10-Q for the
quarter ended September 30, 2001
10.3* TriCo's 1993 Non-Qualified Stock Option Plan filed as Exhibit 4.1 to
TriCo's Form S-8 Registration Statement dated January 18, 1995 (No.
33-88704)
10.4* TriCo's Non-Qualified Stock Option Plan filed as Exhibit 4.2 to
TriCo's Form S-8 Registration Statement dated January 18, 1995 (No.
33-88704)
10.5* TriCo's Incentive Stock Option Plan filed as Exhibit 4.3 to TriCo's
Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704)
10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to
TriCo's Form S-8 Registration Statement dated August 23, 1995 (No.
33-62063)
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
-71-
10.14* Form of Joint Beneficiary Agreement effective March 31, 2003 between
Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig
Carney, Robert Elmore, Greg Gill, Richard Miller, Andrew Mastorakis,
Richard O'Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith,
filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003
10.15* Form of Joint Beneficiary Agreement effective March 31, 2003 between
Tri Counties Bank and each of Don Amaral, William Casey, Craig
Compton, John Hasbrook, Michael Koehnen, Wendell Lundberg, Donald
Murphy, Carroll Taresh, and Alex Vereshagin, filed as Exhibit 10.15 to
TriCo's Quarterly Report on Form 10-Q for the quarter ended September
30, 2003
10.16* Form of Tri-Counties Bank Executive Long Term Care Agreement effective
June 10, 2003 between Tri Counties Bank and each of Craig Carney,
Andrew Mastorakis, Richard Miller, Richard O'Sullivan, and Thomas
Reddish, filed as Exhibit 10.16 to TriCo's Quarterly Report on Form
10-Q for the quarter ended September 30, 2003
10.17* Form of Tri-Counties Bank Director Long Term Care Agreement effective
June 10, 2003 between Tri Counties Bank and each of Don Amaral,
William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald
Murphy, Carroll Taresh, and Alex Verischagin, filed as Exhibit 10.17
to TriCo's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003
10.18 Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of the directors of TriCo Bancshares/Tri
Counties Bank effective on the date that each director is first
elected.
11.1 Computation of earnings per share
21.1 Tri Counties Bank, a California banking corporation, and TriCo Capital
Trust I, a Delaware business trust, are the only subsidiaries of
Registrant
23.1 Consent of KPMG LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
32.1 Section 1350 Certification of CEO
32.2 Section 1350 Certification of CFO
*Previously filed and incorporated herein by reference.
(b) Reports on Form 8-K:
During the quarter ended December 31, 2003 the Company filed the following
Current Reports on Form 8-K:
Description Date of Report
------------------------------------------- ---------------
Quarterly results of operations October 24, 2003
(c) Exhibits filed:
See Exhibit Index under Item 15(a)(3) above for the list of exhibits
required to be filed by Item 601 of regulation S-K with this report.
(d) Financial statement schedules filed:
See Item 15(a)(2) above.
-72-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 5, 2003 TRICO BANCSHARES
By: /s/ Richard P. Smith
----------------------------------------
Richard P. Smith, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Date: March 5, 2004 /s/ Richard P. Smith
----------------------------------------
Richard P. Smith, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: March 5, 2004 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: March 5, 2004 /s/ Donald J. Amaral
----------------------------------------
Donald J. Amaral, Director
Date: March 5, 2004 /s/ William J. Casey
----------------------------------------
William J. Casey, Director and Chairman
of the Board
Date: March 5, 2004 /s/ Craig S. Compton
----------------------------------------
Craig S. Compton, Director
Date: March 5, 2004 /s/ Wendell J. Lundberg
----------------------------------------
Wendell J. Lundberg, Director
Date: March 5, 2004 /s/ Donald E. Murphy
----------------------------------------
Donald E. Murphy, Director and
Vice Chairman of the Board
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Date: March 5, 2004 /s/ Steve G. Nettleton
----------------------------------------
Steve G. Nettleton, Director
Date: March 5, 2004 /s/ Carroll R. Taresh
----------------------------------------
Carroll R. Taresh, Director
Date: March 5, 2004 /s/ Alex A. Vereschagin
----------------------------------------
Alex A. Vereschagin, Jr., Director
-74-
EXHIBITS
Exhibit 10.18
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is entered into on __________,
by and between TriCo Bancshares/Tri Counties Bank, a California corporation
("Company"), and ______________________________ ("Director"), a director of the
Company.
Recitals
It is in the best interests of the Company to attract and retain qualified
directors to serve this Company.
In order to attract and retain such persons, it is necessary to provide
assurance that their interests will be protected and defended to the extent
permitted by applicable law if a claim is brought or threatened against them
based upon their actions as directors of this Company.
It is now and has always been the express policy of the Company to
indemnify its directors so as to provide them with the maximum possible
protection permitted by law.
The substantial increase in corporate litigation subjects directors to
expensive litigation risks at the same time the availability of directors'
liability insurance has been limited.
Director believes that the protection available under the Company's
Certificate of Incorporation and insurance policies may not be adequate in the
present circumstances, and may not be willing to continue to serve as a director
without adequate protection, and the Company desires Director to continue to
serve in such capacity.
NOW, THEREFORE, the parties agree as follows:
Terms of Agreement
Agreement to Serve. Director agrees to continue to serve as a director of
the Company for so long as he or she is duly elected or appointed or until such
time as he or she tenders his or her resignation in writing.
Definitions. As used in this Agreement:
a. The term "Proceeding" shall include any threatened, pending or
completed action or proceeding, whether of a civil, criminal,
administrative or investigative nature, in which Director is or was a party
or is threatened to be made a party by reason of the fact that Director is
or was a director of the Company (or any subsidiary of the Company), or is
or was serving at the request of the Company as a director, officer,
employee or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise.
b. The term "Expenses" shall include, without limitation, expenses of
investigation, judicial or administrative proceedings or appeals, amounts
paid in settlement by or on behalf of Director, attorneys' fees and
disbursements and any expenses of establishing a right to indemnification
under paragraph 7 of this Agreement, but shall not include amounts of
judgments, fines or penalties against Director.
Indemnity in Third-Party Proceedings. The Company shall indemnify Director
in accordance with the provisions of this paragraph 3 against all Expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
by Director in connection with the Proceeding (other than a Proceeding by or in
the right of the Company to procure a judgment in its favor), but only if
Director acted in good faith and in a manner which he or she reasonably believed
to be in the best interests of the Company, and, in the case of a criminal
proceeding, had no reasonable cause to believe that his or her conduct was
unlawful. The termination of any such Proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that Director did not act in good faith in a manner
which he or she reasonably believed to be in the best interests of the Company,
or that Director had reasonable cause to believe that his or her conduct was
unlawful.
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Indemnity in Proceedings by or in the Right of the Company. The Company
shall indemnify Director in accordance with the provisions of this paragraph 4
against all Expenses actually and reasonably incurred by Director in connection
with the defense or settlement of any Proceeding if Director acted in good faith
and in a manner which he or she believed to be in the best interests of the
Company and its shareholders, except that no indemnification for Expenses shall
be made under this paragraph 4 in respect of any claim, issue or matter as to
which Director shall have been adjudged to be liable to the Company in the
performance of his or her duty to the Company and its shareholders, unless and
only to the extent that the court in which such Proceeding is or was pending
shall determine upon application that, in view of all the circumstances of the
case, Director is fairly and reasonably entitled to indemnity for such Expenses
and then only to the extent such court shall determine.
Indemnification of Expenses of Successful Party. Notwithstanding any other
provision of this Agreement, to the extent that Director has been successful on
the merits in defense of any Proceeding, or in defense of any claim, issue or
matter therein, Director shall be indemnified against all Expenses actually and
reasonably incurred by Director in connection therewith.
Advances of Expenses. At the written request of Director, the Expenses
incurred by Director in any Proceeding shall be paid by the Company prior to the
final disposition of such Proceeding, provided that Director shall undertake in
writing to repay such amount to the extent that it is determined ultimately that
Director is not entitled to indemnification. If the Company makes an advance of
expenses pursuant to this paragraph 6, the Company shall be subrogated to every
right of recovery Director may have against any insurance carrier from whom the
Company has purchased insurance for such purpose.
Right of Director to Indemnification Upon Application; Procedure Upon
Application.
a. Any indemnification under paragraphs 3 and 4 or advance under
paragraph 6 shall be paid by the Company no later than 45 days after
receipt of the written request of Director, unless a determination is made
within said 45-day period by (1) the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to the Proceeding
in respect of which indemnification is being sought, or (2) if a quorum of
disinterested directors is not available, independent legal counsel in a
written opinion (which counsel shall be appointed by a quorum of the Board
of Directors), or (3) the stockholders of the Company with the shares owned
by Director to be indemnified not being entitled to vote thereon, or (4)
the court in which the Proceeding is or was pending upon application made
by the Company or Director or the attorney or other person rendering
services in connection with the defense, whether or not the application is
opposed by the Company, that Director has not met the relevant standards
for indemnification set forth in paragraphs 3 and 4.
b. The right to indemnification or advancement of Expenses as provided by
this Agreement shall be enforceable by Director in any court of competent
jurisdiction. The burden of proving that indemnification or advances are
not appropriate shall be on the Company. Neither the failure of the Company
(including its Board of Directors or independent legal counsel or
stockholders) to have made a determination prior to the commencement of
such action that Director has met the applicable standard of conduct nor an
actual determination by the Company (including its Board of Directors or
independent legal counsel or stockholders) that Director has not met such
standard shall be a defense to the action or create a presumption that
Director has not met the applicable standard of conduct. Director's
Expenses actually and reasonably incurred in connection with successfully
establishing his or her right to indemnification or advances, in whole or
in part, shall also be indemnified by the Company.
c. With respect to any Proceeding for which indemnification is requested,
the Company will be entitled to participate therein at its own expense and,
except as otherwise provided below, the Company may assume the defense
thereof, with counsel satisfactory to Director. After notice from the
Company to Director of its election to assume the defense of a Proceeding,
the Company will not be liable to Director under this Agreement for any
Expenses subsequently incurred by Director in connection with the defense
thereof, other than as provided below. The Company shall not settle any
Proceeding in any manner which would impose any penalty or limitation on
Director without Director's written consent. Director shall have the right
to employ counsel in any Proceeding but the fees and expenses of such
counsel incurred after notice from the Company of its assumption of the
defense of the Proceeding shall be at the expense of Director, unless (i)
the employment of counsel by Director has been authorized by the Company,
(ii) Director shall have reasonably concluded that there may be a conflict
of interest between the Company and Director in the conduct of the defense
of a Proceeding, or (iii) the Company shall not in fact have employed
counsel to assume the defense of a Proceeding, in each of which cases the
fees and expenses of Director's counsel shall be advanced by the Company.
Notwithstanding the foregoing, the Company shall not be entitled to assume
the defense of any Proceeding brought by or in the right of the Company.
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Limitation on Indemnification. No payment pursuant to this Agreement shall
be made by the Company:
a. to indemnify or advance funds to Director for Expenses with respect to
Proceedings initiated or brought voluntarily by Director and not by way of
defense, except with respect to Proceedings brought to establish or enforce
a right to indemnification under this Agreement, but such indemnification
or advancement of Expenses may be provided by the Company in specific cases
if the Board of Directors finds it to be appropriate;
b. to indemnify Director for any Expenses, judgments, fines or penalties
sustained in any Proceeding for which payment is actually made to Director
under a valid and collectible insurance policy, except in respect of any
excess beyond the amount of payment under such insurance;
c. to indemnify Director for any Expenses, judgments, fines or penalties
sustained in any Proceeding for an accounting of profits made from the
purchase or sale by Director of securities of the Company pursuant to the
provisions of section 16(b) of the Securities Exchange Act of 1934, the
rules and regulations promulgated thereunder and amendments thereto or
similar provisions of any federal, state or local statutory law;
d. to indemnify Director for any Expenses, judgments, fines or penalties
resulting from Director's conduct which is finally adjudged to have been
willful misconduct, knowingly fraudulent or deliberately dishonest;
e. if a court of competent jurisdiction finally determines that such
payment hereunder is unlawful; or
f. if contrary to section 317 of the California Corporations Code.
Indemnification Hereunder Not Exclusive. The indemnification and
advancement of Expenses provided by this Agreement shall not be deemed exclusive
of any other rights to which Director may be entitled under the Certificate of
Incorporation or the Bylaws of the Company, any agreement, any vote of
stockholders or disinterested directors, the California Corporations Code, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office. The indemnification provided by this
Agreement shall continue as to Director even though he or she may have ceased to
be a director and shall inure to the benefit of the heirs and personal
representatives of Director.
Partial Indemnification. If Director is entitled under any provision of
this Agreement to indemnification by the Company for a portion of the Expenses,
judgments, fines or penalties actually and reasonably incurred by him or her in
any Proceeding but not, however, for the total amount thereof, the Company shall
nevertheless indemnify Director for the portion of such Expenses, judgments,
fines or penalties to which Director is entitled.
Maintenance of Liability Insurance.
a. The Company hereby covenants and agrees that, as long as Director
continues to serve as a director of the Company and thereafter as long as
Director may be subject to any Proceeding, the Company, subject to
subsection 11(c) below, shall maintain in full force and effect Directors'
and Officers' liability insurance ("D&O Insurance") in reasonable amounts
from established and reputable insurers.
b. In all D&O Insurance policies, Director shall be named as an insured
in such a manner as to provide the Director the same rights and benefits as
are accorded to the most favorably insured of the Company's directors and
officers.
c. Notwithstanding the foregoing, the Company shall have no obligation to
obtain or maintain D&O Insurance if the Company determines in good faith
that such insurance is not reasonably available, the premium costs for such
insurance are disproportionate to the amount of coverage provided, the
coverage provided by such insurance is so limited by exclusions that it
provides an insufficient benefit, or Director is covered by similar
insurance maintained by a subsidiary of the Company.
-77-
Savings Clause. If this Agreement or any portion hereof is invalidated on
any ground by any court of competent jurisdiction, the Company shall
nevertheless indemnify Director to the extent permitted by any applicable
portion of this Agreement that has not been invalidated or by any other
applicable law.
Notice. Director shall, as a condition precedent to his or her right to be
indemnified under this Agreement, give to the Company notice in writing as soon
as practicable of any Proceeding for which indemnity will or could be sought
under this Agreement. Notice to the Company shall be directed to TriCo
Bancshares, 63 Constitution Drive, Chico, California 95973, Attn: President (or
such other address as the Company shall designate in writing to Director).
Notice shall be deemed received three days after the date postmarked if sent by
prepaid mail, properly addressed. In addition, Director shall give the Company
such information and cooperation as it may reasonably require and as shall be
within Director's power.
Counterparts. This Agreement may be executed in any number of counterparts,
all of which shall be deemed to constitute one and the same instrument.
Applicable Law. This Agreement shall be governed by, and construed and
interpreted in accordance with, the law of the State of California.
Successors and Assigns. This Agreement shall be binding upon the Company
and its successors and assigns.
Amendments. No amendment, waiver, modification, termination or cancellation
of this Agreement shall be effective unless in writing signed by both parties
hereto. The indemnification rights afforded to Director hereby are contract
rights and may not be diminished, eliminated or otherwise affected by amendments
to the Certificate of Incorporation or Bylaws of the Company or by other
agreements.
Survival of Company's Obligations. The obligations hereunder shall survive
all the following to the extent not prohibited by applicable law:
a. Director's resignation or removal from office for any reason.
b. A change in control of the Company.
c. The merger, reorganization, sale of assets, dissolution, liquidation
or conversion of the Company.
d. The bankruptcy or insolvency of the Company.
e. Any amendment of the Company's Certificate of Incorporation or Bylaws.
f. Any action by a state or federal banking agency including, without
limitation, the California State Banking Department, the Board of Governors
of the Federal Reserve System and the Federal Deposit Insurance Corporation
to liquidate or place in receivership the Company or any of its assets or
subsidiaries.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
DIRECTOR
----------------------------------------
Print Name:
TRICO BANCSHARES/TRI COUNTIES BANK,
a California corporation
By:
----------------------------------------
Title: President and Chief
Executive Officer
-78-
Exhibit 11.1
TRICO BANCSHARES
Computation of Earnings Per Share on Common and Common Equivalent Shares and on
Common Shares Assuming Full Dilution
Years ended December 31
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Shares used in the computation
of earnings per share
Weighted daily average
of shares outstanding 7,641,051 7,019,205 7,072,588 7,191,790 7,129,560
Shares used in the computation
of diluted earnings per share 7,878,704 7,193,014 7,219,229 7,340,729 7,318,520
========= ========= ========= ========= =========
Net income used in the computation
of earnings per common stock $16,888 $14,069 $12,419 $12,623 $11,403
======= ======= ======= ======= =======
Basic earnings per share $ 2.21 $ 2.00 $ 1.76 $ 1.76 $ 1.60
======= ======= ======= ======= =======
Diluted earnings per share $ 2.14 $ 1.96 $ 1.72 $ 1.72 $ 1.56
======= ======= ======= ======= =======
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Exhibit 23.1
Independent Auditors' Consent
To the Audit Committee of the Board of Directors
TriCo Bancshares and Subsidiaries:
We consent to the incorporation by reference in the registration statements
(Nos. 33-88702, 33-62063, and 33-66064) on Form S-8 of our report dated January
29, 2004, relating to the consolidated balance sheets of TriCo Bancshares and
Subsidiary as of December 31, 2003 and 2002 and the related consolidated
statements of income and comprehensive income, shareholders' equity and cash
flows for the years ended December 31, 2003 and 2002, which report appears in
the December 31, 2003, annual report on Form 10-K of TriCo Bancshares and
Subsidiary.
Our report, dated January 29, 2004, contains an explanatory paragraph indicating
that the related consolidated statements of income and comprehensive income,
shareholders' equity, and cash flows of TriCo Bancshares and Subsidiary for the
year ended December 31, 2001 were audited by other auditors who have ceased
operations.
/s/ KPMG LLP
Sacramento, California
March 9, 2004
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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 annual report on Form 10-K of TriCo Bancshares;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 annual 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: March 5, 2004 /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 annual report on Form 10-K of TriCo Bancshares;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-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 annual 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: March 5, 2004 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
-82-
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350.
In connection with the Annual Report of TriCo Bancshares (the "Company") on Form
10-K for the year ending December 31, 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 Annual Report of TriCo Bancshares (the "Company") on Form
10-K for the year ending December 31, 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
Executive 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.
-83-