EXHIBIT 13.1
TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts) December 31,
2001 2000
Assets
Cash and due from banks $ 59,264 $ 58,190
Federal funds sold 18,700 --
---------------------------------
Cash and cash equivalents 77,964 58,190
Investment securities 224,590 229,110
Loans:
Commercial 130,054 148,135
Consumer 155,046 120,247
Real estate mortgages 326,897 334,010
Real estate construction 46,735 37,999
---------------------------------
658,732 640,391
Less: Allowance for loan losses 13,058 11,670
---------------------------------
Net loans 645,674 628,721
Premises and equipment, net 16,457 16,772
Cash value of life insurance 14,602 13,753
Other real estate owned 71 1,441
Accrued interest receivable 5,522 6,935
Deferred income taxes 9,334 8,418
Intangible assets 5,070 5,464
Other assets 6,163 3,267
---------------------------------
Total assets $ 1,005,447 $ 972,071
=================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand $ 190,386 $ 168,542
Interest-bearing demand 165,542 150,749
Savings 247,399 214,158
Time certificates, $100,000 and over 70,302 93,342
Other time certificates 206,764 211,041
---------------------------------
Total deposits 880,393 837,832
Federal funds purchased -- 500
Accrued interest payable 3,488 5,245
Other liabilities 11,677 9,278
Long-term debt and other borrowings 22,956 33,983
---------------------------------
Total liabilities 918,514 886,838
Commitments and contingencies (Note H)
Shareholders' equity:
Common stock, no par value: Authorized 20,000,000 shares;
issued and outstanding 7,000,980 and 7,181,226 shares, respectively 49,679 50,428
Retained earnings 37,909 35,129
Accumulated other comprehensive income (loss) (655) (324)
---------------------------------
Total shareholders' equity 86,933 85,233
---------------------------------
Total liabilities and shareholders' equity $ 1,005,447 $ 972,071
=================================
See Notes to Consolidated Financial Statements
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share)
Years Ended December 31,
2001 2000 1999
Interest income:
Interest and fees on loans $ 60,104 $ 62,161 $ 53,395
Interest on investment securities--taxable 9,543 11,704 12,500
Interest on investment securities--tax exempt 2,219 2,250 2,229
Interest on federal funds sold 1,506 538 465
-------------------------------------------------
Total interest income 73,372 76,653 68,589
Interest expense:
Interest on interest-bearing demand deposits 1,487 2,360 2,287
Interest on savings 4,759 6,837 6,811
Interest on time certificates of deposit 10,871 11,325 8,970
Interest on time certificates of deposit, $100,000 and over 4,390 4,481 3,209
Interest on short-term borrowing 7 623 386
Interest on long-term debt 1,972 2,917 2,707
-------------------------------------------------
Total interest expense 23,486 28,543 24,370
-------------------------------------------------
Net interest income 49,886 48,110 44,219
Provision for loan losses 4,400 5,000 3,550
-------------------------------------------------
Net interest income after provision for loan losses 45,486 43,110 40,669
Noninterest income:
Service charges and fees 8,095 7,484 7,127
Gain on sale of investments 36 -- 24
Gain on sale of insurance company stock 1,756 -- --
Gain on receipt of insurance company stock -- 1,510 --
Other income 5,174 5,651 4,950
Total noninterest income 15,061 14,645 12,101
-------------------------------------------------
Noninterest expense:
Salaries and related expenses 21,396 19,912 17,837
Other, net 19,408 17,983 16,996
-------------------------------------------------
Total noninterest expense 40,804 37,895 34,833
-------------------------------------------------
Income before income taxes 19,743 19,860 17,937
Income taxes 7,324 7,237 6,534
-------------------------------------------------
Net income $12,419 $12,623 $11,403
=================================================
Basic earnings per common share $ 1.76 $ 1.76 $ 1.60
Diluted earnings per common share $ 1.72 $ 1.72 $ 1.56
See Notes to Consolidated Financial Statements
-2-
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999 (in thousands, except share amounts)
Common Stock Accumulated
Number Other
of Retained Comprehensive Comprehensive
Shares Amount Earnings Income (Loss) Total Income
------------------------------------------------------------------
Balance, December 31, 1998 7,050,990 $48,838 $22,257 $934 $72,029
Exercise of Common Stock options 106,440 1,074 1,074
Repurchase of Common Stock (5,101) (35) (51) (86)
Common Stock cash dividends (4,996) (4,996)
Stock option amortization 166 166
Comprehensive income:
Net income 11,403 11,403 $11,403
Other comprehensive income, net of tax:
Change in unrealized (loss) on securities, net of tax
and reclassification adjustments (Note A): (6,467)
Other comprehensive loss: (6,467) (6,467) (6,467)
---------------
Comprehensive income $4,936
---------------------------------------------------===============
Balance, December 31, 1999 7,152,329 50,043 28,613 (5,533) 73,123
Exercise of Common Stock options 78,625 665 665
Repurchase of Common Stock (49,728) (349) (427) (776)
Common Stock cash dividends (5,680) (5,680)
Stock option amortization 69 69
Comprehensive income:
Net income 12,623 12,623 $12,623
Other comprehensive income, net of tax:
Change in unrealized gain on securities, net of tax
and reclassification adjustments (Note A): 5,209
Other comprehensive income: 5,209 5,209 5,209
---------------
Comprehensive income $17,832
---------------------------------------------------===============
Balance, December 31, 2000 7,181,226 50,428 35,129 (324) 85,233
Exercise of Common Stock options 192,530 1,872 1,872
Repurchase of Common Stock (372,776) (2,621) (3,997) (6,618)
Common Stock cash dividends (5,642) (5,642)
Comprehensive income:
Net income 12,419 12,419 $12,419
Other comprehensive income, net of tax:
Change in unrealized gain on securities, net of tax
and reclassification adjustments (Note A): 441
Change in minimum pension liability,
net of tax (Note A): (772)
Other comprehensive income: (331) (331) (331)
---------------
Comprehensive income $12,088
---------------------------------------------------===============
Balance, December 31, 2001 7,000,980 $49,679 $37,909 ($655) $86,933
===================================================
See Notes to Consolidated Financial Statements
-3-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
2001 2000 1999
Operating activities:
Net income $12,419 $12,623 $ 11,403
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 4,400 5,000 3,550
Provision for losses on other real estate owned 18 25 10
Depreciation and amortization 2,708 2,641 2,615
Amortization of intangible assets 911 965 1,135
(Accretion) amortization of investment
security (discounts) premiums, net 398 217 538
Deferred income taxes (660) (650) (410)
Investment security gains, net (36) -- (24)
Gain on receipt of insurance company stock -- (1,510) --
Gain on sale of insurance company stock (1,756) -- --
Gain on sale of loans (918) (525) (800)
Gain on sale of other real estate owned, net (80) (83) (178)
Amortization of stock options -- 69 166
Change in assets and liabilities:
Decrease (increase) in interest receivable 1,413 (859) (255)
Increase (decrease) in interest payable (1,757) 1,052 330
Increase in other assets and liabilities (2,756) (127) (2,481)
------------------------------------------
Net cash provided by operating activities 14,304 18,838 15,599
Investing activities :
Proceeds from maturities of securities available-for-sale 85,619 39,663 64,496
Proceeds from sales of securities available-for-sale 14,119 -- 14,137
Purchases of securities available-for-sale (93,125) (27,567) (41,372)
Net increase in loans (20,760) (57,805) (56,138)
Purchases of premises and equipment (1,951) (2,998) (2,058)
Proceeds from sale of other real estate owned 1,757 928 1,268
Proceeds from sale of premises and equipment 32 40 44
------------------------------------------
Net cash used by investing activities (14,309) (47,739) (19,623)
Financing activities:
Net increase in deposits 42,561 43,722 24,937
Net increase (decrease) in federal funds purchased (500) 500 (14,000)
Borrowings under long-term debt agreements -- 35,000 21,000
Payments of principal on long-term debt agreements (11,027) (46,522) (13,419)
Repurchase of Common Stock (6,618) (776) (86)
Cash dividends-- Common (5,642) (5,680) (4,996)
Issuance of Common Stock 1,005 411 541
------------------------------------------
Net cash provided by financing activities 19,779 26,655 13,977
------------------------------------------
Increase (decrease) in cash and cash equivalents 19,774 (2,246) 9,953
Cash and cash equivalents at beginning of year 58,190 60,436 50,483
------------------------------------------
Cash and cash equivalents at end of year $ 77,964 $ 58,190 $ 60,436
==========================================
Supplemental information:
Cash paid for taxes $ 9,089 $ 7,573 $ 7,240
Cash paid for interest expense $ 25,243 $ 27,491 $ 24,040
Non-cash assets acquired through foreclosure $ 325 $ 1,551 $ 673
See Notes to Consolidated Financial Statements
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2001, 2000
and 1999
Note A - General Summary of Significant Accounting Policies
The accounting and reporting policies of TriCo Bancshares (the "Company")
conform to generally accepted accounting principles and general practices within
the banking industry. 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,
its wholly-owned subsidiary, Tri Counties Bank (the "Bank"), and TCB Real Estate
Corporation which was a wholly-owned subsidiary of the Bank until TCB Real
Estate Corporation was dissolved on April 27, 1999. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Nature of Operations
The Company operates 30 branch offices and 7 in-store branch offices in the
California counties of Butte, Del Norte, Glenn, Kern, Lake, Lassen, Madera,
Mendocino, Merced, Nevada, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter,
Tehama, Tulare and Yuba. The Company's operating policy since its inception has
emphasized retail banking. Most of the Company's customers are retail customers
and small to medium sized businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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
2001 and 2000, 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.
-5-
Loans
Loans are reported at the principal amount outstanding, net of unearned
income and the allowance for loan losses.
Loan origination and commitment fees and certain direct loan origination
costs are deferred, and the net amount is amortized as an adjustment of the
related loan's yield over the estimated life of the loan.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is generally discontinued
either when reasonable doubt exists as to the full, timely collection of
interest or principal or when a loan becomes contractually past due by 90 days
or more with respect to interest or principal. When loans are 90 days past due,
but in Management's judgment are well secured and in the process of collection,
they may not be classified as nonaccrual. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed. Income on
such loans is then recognized only to the extent that cash is received and where
the future collection of principal is probable. Interest accruals are resumed on
such loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of Management, the loans are estimated to be
fully collectible as to both principal and interest.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when Management believes that the collectibility of the principal is
unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. The allowance is an amount that Management
believes will be adequate to absorb probable losses inherent in existing loans,
leases and commitments to extend credit, based on evaluations of the
collectibility, impairment and prior loss experience of loans, leases and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and size of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans, commitments, and current
economic conditions that may affect the borrower's ability to pay.
The Company defines a loan as impaired when it is probable the Company will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Certain 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
The Company sold substantially all of its conforming long-term residential
mortgage loans originated during 2001, 2000, and 1999 for cash proceeds equal to
the fair value of the loans. The Company records originated mortgage servicing
rights as assets by allocating the total cost basis between the loan and the
servicing right based on their relative fair values.
At December 31, 2001, the Company's recorded value of mortgage servicing
rights totaled $1,512,000. The recorded value of mortgage servicing rights 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, 2001, the Company had no mortgage loans held for sale. At
December 31, 2001 and 2000, the Company serviced real estate mortgage loans for
others of $196 million and $149 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.
-6-
Identifiable Intangible Assets
Identifiable intangible assets consist 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.
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 and the pro forma disclosures required by SFAS 123 are
included in Note J.
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, 2001, 2000, and 1999 are reported as follows:
2001 2000 1999
(in thousands)
Unrealized Gain (Loss) on Securities
Beginning Balance ($324) ($5,533) $ 934
Unrealized gain (loss) arising during the period, net of tax (669) $5,209 ($6,452)
Less: Reclassification adjustment for net realized gains
on securities available for sale included in net
income during the year, net of tax of $681, $0 and
($9), respectively 1,110 -- (15)
-----------------------------------------
Ending Balance $117 ($324) ($5,533)
-----------------------------------------
2001 2000 1999
Minimum Pension Liability (in thousands)
Beginning Balance $ -- $ -- $ --
Change in minimum pension liability, net of tax
of ($517), $0 and $0, respectively ($772) -- --
-----------------------------------------
Ending Balance ($772) -- --
-----------------------------------------
Total accumulated other comprehensive income (loss) ($655) ($324) ($5,533)
=========================================
-7-
Reclassifications
Certain amounts previously reported in the 2000 and 1999 financial
statements have been reclassified to conform to the 2001 presentation. These
reclassifications did not affect previously reported net income or total
shareholders' equity.
Accounting Pronouncements
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which
establishes the accounting and reporting standards of goodwill and intangible
assets. Because the Company currently has no recorded goodwill, the
implementation of this statement did not have a material impact on the Company's
financial position or result of operations.
Note B - 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, 2001
and December 31, 2000. These reserves are included in cash and due from banks in
the accompanying balance sheets.
Note C - 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 cost of $4,000,000 and $3,762,000 at December 31, 2001 and 2000,
respectively:
December 31, 2001
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
(in thousands)
Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $29,991 $ 34 $ (142) $29,883
Obligations of states and political subdivisions 44,524 833 (124) 45,233
Mortgage-backed securities 131,972 1,246 (217) 133,001
Corporate debt securities 13,731 177 (1,620) 12,288
------------------------------------------------------------
Total securities available-for-sale 220,218 2,290 (2,103) 220,405
Other securities 4,185 4,185
------------------------------------------------------------
Totals investment securities $224,403 $2,290 $(2,103) $224,590
============================================================
December 31, 2000
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 $31,308 $35 $ (170) $31,173
Obligations of states and political subdivisions 44,721 778 (123) 45,376
Mortgage-backed securities 136,410 31 (1,355) 135,086
Corporate debt securities 11,726 (1,539) 10,187
Equity securities 1,510 1,831 3,341
------------------------------------------------------------
Total securities available-for-sale 225,675 2,675 (3,187) 225,163
Other securities 3,947 3,947
------------------------------------------------------------
Totals $229,622 $2,675 $(3,187) $229,110
============================================================
-8-
The amortized cost and estimated fair value of debt securities at December
31, 2001 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 $ 755 $ 763
Due after one year through five years 47,877 48,305
Due after five years through ten years 23,152 23,437
Due after ten years 148,434 147,900
No stated maturity 4,185 4,185
-----------------------------------
Totals $224,403 $224,590
===================================
Proceeds from sales of investment securities were as follows:
Gross Gross Gross
For the Year Proceeds Gains Losses
(in thousands)
2001 $14,119 $1,796 $ 4
2000 $ -- $ -- $ --
1999 $14,137 $ 24 $ --
Investment securities with an aggregate carrying value of $93,605,000 and
$128,500,000 at December 31, 2001 and 2000, respectively, were pledged as
collateral for specific borrowings, lines of credit and local agency deposits.
Note D - Allowance for Loan Losses
Activity in the allowance for loan losses was as follows:
Years Ended December 31,
2001 2000 1999
(in thousands)
Balance, beginning of year $11,670 $11,037 $8,206
Provision for loan losses 4,400 5,000 3,550
Loans charged off (3,213) (4,705) (1,082)
Recoveries of loans previously charged off 201 338 363
Balance, end of year $13,058 $11,670 $11,037
Loans classified as nonaccrual amounted to approximately $5,466,000,
$12,262,000 and $1,758,000 at December 31, 2001, 2000, and 1999, 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 $260,000, $731,000 and $69,000, in 2001, 2000 and 1999,
respectively.
-9-
As of December 31, the Company's recorded investment in impaired loans and
the related valuation allowance were as follows (in thousands):
2001
Recorded Valuation
Investment Allowance
Impaired loans -
Valuation allowance required $6,050 $881
No valuation allowance required -- --
-----------------------------------
Total impaired loans $6,050 $881
2000
Recorded Valuation
Investment Allowance
Impaired loans -
Valuation allowance required $9,614 $1,785
No valuation allowance required 3,613 --
-----------------------------------
Total impaired loans $13,227 $1,785
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 $9,639,000, $7,954,000 and $5,147,000 for the years ended December 31, 2001,
2000 and 1999, respectively. The Company recognized interest income on impaired
loans of $441,000, $1,171,000 and $371,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
Note E - Premises and Equipment
Premises and equipment were comprised of:
December 31,
2001 2000
(in thousands)
Premises $12,269 $12,215
Furniture and equipment 16,133 15,180
28,402 27,395
Less:
Accumulated depreciation
and amortization (15,466) (14,181)
12,936 13,214
Land and land improvements 3,521 3,558
$16,457 $16,772
Depreciation and amortization of premises and equipment amounted to
$2,243,000, $2,152,000 and $2,281,000 in 2001, 2000 and 1999, respectively.
-10-
Note F - Time Deposits
At December 31, 2001, the scheduled maturities of time deposits were as
follows (in thousands):
Scheduled
Maturities
2002 $254,462
2003 18,473
2004 3,025
2005 12
2006 and thereafter 1,094
---------
Total $277,066
Note G - Long-Term Debt and Other Borrowings
Long-term debt is as follows:
December 31,
2001 2000
(in thousands)
FHLB loan, fixed rate of 5.90% payable on January 16, 2001 $ -- $ 1,000
FHLB loan, fixed rate of 7.36% payable on November 30, 2001 -- 10,000
FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable
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 456 483
-------------------------
Total long-term debt $22,956 $33,983
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,
2001, this line provided for maximum borrowings of $93,602,000 of which
$22,500,000 was outstanding, leaving $71,102,000 available. The maximum
month-end outstanding balances of short term reverse repurchase agreements in
2001 and 2000 were $0 and $16,611,000, respectively. The Company has available
unused lines of credit totaling $50,000,000 for Federal funds transactions at
December 31, 2001.
-11-
Note H - Commitments and Contingencies (See also Note P)
At December 31, 2001, 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)
2002 $89 $922
2003 90 875
2004 91 757
2005 92 615
2006 93 447
Thereafter 286 1,839
---------------------------
Future minimum lease payments 741 $5,455
Less amount representing interest 285
---------------------------
Present value of future lease payments $ 456
Rent expense under operating leases was $1,241,000 in 2001, $971,000 in
2000, and $1,013,000 in 1999.
The Company is a defendant in legal actions arising from normal business
activities. Management believes, after consultation with legal counsel, that
these actions are without merit or that the ultimate liability, if any,
resulting from them will not materially affect the Company's financial position
or results from operations.
Note I - Shareholders' Equity
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of
$12,187,000, $7,118,000 and $5,170,000 in 2001, 2000 and 1999, 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,
2001, the Bank may pay dividends of $13,327,000.
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.
-12-
Stock Repurchase Plan
On March 15, 2001, the Company announced the completion of its stock
repurchase plan initially announced on July 20, 2000. Under this repurchase
plan, the Company repurchased a total of 150,000 shares of which 110,000 shares
were repurchased since December 31, 2000.
On October 19, 2001, the Company announced the completion of its stock
repurchase plan initially announced on March 15, 2001. Under this repurchase
plan, the Company repurchased a total of 150,000 shares.
Also on October 19, 2001, the Company announced that its Board of Directors
approved a new plan to repurchase, as conditions warrant, up to 150,000
additional shares of the Company's stock on the open market or in privately
negotiated transactions. The timing of purchases and the exact number of shares
to be purchased will depend on market conditions. The 150,000 shares covered by
this repurchase plan represent approximately 2.2% of the Company's 6,992,080
then outstanding common shares. As of December 31, 2001, the Company had
repurchased 108,800 shares under this new plan.
-13-
Note J - 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.
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.
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, 1998 609,882 $4.95 to $18.25 $7.37
Options exercised (106,440) 4.95 to 5.24 5.09
Options forfeited (2,551) 5.24 to 18.25 12.89
Outstanding at
December 31, 1999 500,891 4.95 to 18.25 7.82
Options granted 118,900 16.13 to 16.13 16.13 $3.99
Options exercised (78,625) 5.24 to 5.24 5.24
Options forfeited (750) 18.25 to 18.25 18.25
Outstanding at
December 31, 2000 540,416 4.95 to 18.25 10.01
Options granted 323,000 16.10 to 16.40 16.38 $3.26
Options exercised (192,530) 4.95 to 5.24 5.22
Options forfeited (12,000) 16.13 to 18.25 16.92
Outstanding at
December 31, 2001 658,886 $5.24 to $18.25 $14.41
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, 2001 by range of exercise price: Outstanding Options Exercisable Options
Weighted-Average
Range of Weighted-Average Remaining Weighted-Average
Exercise Price Number Exercise Price Contractual Life Number Exercise Price
$4-$6 92,860 $5.24 1.68 years 92,860 $5.24
$8-$10 25,876 $8.93 3.44 25,876 $8.93
$12-$14 30,000 $12.25 4.48 30,000 $12.25
$14-$16 15,000 $14.17 5.01 15,000 $14.17
$16-$18 434,400 $16.32 9.11 105,560 $16.28
$18-$20 60,750 $18.25 5.78 60,750 $18.25
Of the stock options outstanding as of December 31, 2001, 2000, and 1999,
options on shares totaling 330,046, 426,902, and 455,760, respectively, were
exercisable at weighted average prices of $12.50, $8.38, and $7.09,
respectively.
-14-
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, $69,000, and
$166,000 for the 1993 Plan options in 2001, 2000 and 1999, respectively. Had
compensation cost for these 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:
2001 2000 1999
Net income As reported $12,419 $12,623 $11,403
Pro forma $12,253 $12,507 $11,330
Basic earnings per share As reported $1.76 $1.76 $1.60
Pro forma $1.73 $1.74 $1.59
Diluted earnings per share As reported $1.72 $1.72 $1.56
Pro forma $1.70 $1.70 $1.55
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 2001, and 2000: risk-free interest rate of 4.80%
and 6.65%; expected dividend yield of 4.9% and 4.7%; expected life of 6 years
and 6 years; expected volatility of 28% and 30%, respectively. No options were
granted in 1999.
Note K - Other Noninterest Income and Expenses
The components of other noninterest income were as follows:
Years Ended December 31,
2001 2000 1999
(in thousands)
Commissions on sale of investment and insurance products $ 2,576 $ 2,784 $ 2,319
Gain on sale of loans and leases 918 525 800
Increase in cash value of insurance policies 476 657 373
Sale of customer checks 283 286 283
Gain (loss) on sale of other real estate owned 80 83 178
Other 841 1,316 997
-------------------------------------------
Total other noninterest income $5,174 $5,651 $4,950
The components of other noninterest expenses were as follows:
Years Ended December 31,
2001 2000 1999
(in thousands)
Equipment and data processing $3,694 $3,376 $ 3,525
Occupancy 2,806 2,587 2,456
Telecommunications 1,253 957 906
Advertising 1,132 1,336 943
Professional fees 1,087 1,005 1,027
ATM network charges 913 770 705
Intangible amortization 911 965 1,135
Courier service 661 608 582
Postage 639 486 552
Operational losses 227 807 273
Assessments 223 222 179
Net other real estate owned expense 175 127 62
Other 5,687 4,737 4,651
-------------------------------------------
Total other noninterest expenses $19,408 $17,983 $16,996
-15-
Note L - Income Taxes
The current and deferred components of the income tax provision were
comprised of:
Years Ended December 31,
2001 2000 1999
(in thousands)
Current Tax Provision:
Federal $5,975 $5,890 $ 5,013
State 2,009 1,997 1,931
-------------------------------------------
Total current 7,984 7,887 6,944
Deferred Tax Benefit:
Federal (518) (511) (152)
State (142) (139) (258)
-------------------------------------------
Total deferred (660) (650) (410)
-------------------------------------------
Total income taxes $ 7,324 $ 7,237 $ 6,534
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 $517,000 in 2001, $0 in 2000, and $0 in 1999, unrealized
gains and losses on available-for-sale investment securities amounting to
$258,000 in 2001, $2,996,000 in 2000, and $(3,846,000) in 1999, and benefits
related to employee stock options of $(867,000) in 2001, $(254,000) in 2000, and
$(533,000) in 1999 were recorded directly to shareholders' equity.
The provisions for income taxes applicable to income before taxes for the
years ended December 31, 2001, 2000 and 1999 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,
2001 2000 1999
Federal statutory income tax rate 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit 6.5 6.2 6.3
Tax-exempt interest on municipal obligations (3.9) (3.9) (3.9)
Other (0.5) 0.1 --
----------------------------
Effective Tax Rate 37.1% 36.4% 36.4%
-16-
The components of the net deferred tax asset of the Company as of December
31, were as follows:
2001 2000
(in thousands)
Deferred Tax Assets:
Loan losses $ 5,614 $ 5,015
Deferred compensation 3,337 2,948
Intangible amortization 975 882
Nonaccrual interest 119 335
Stock option amortization 101 243
Unrealized loss on securities -- 188
OREO write downs 182 181
Other, net 438 323
--------------------------
Total deferred tax assets 10,766 10,115
Deferred Tax Liabilities:
Securities income (361) (833)
Securities accretion (401) (384)
Depreciation (448) (339)
Capital leases (106) (105)
State taxes (46) (36)
Unrealized gain on securities (70) --
---------------------------
Total deferred tax liability (1,432) (1,697)
---------------------------
Net deferred tax asset $ 9,334 $ 8,418
-17-
Note M - 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 $850,000 in 2001, $842,000 in 2000, and $881,000 in 1999 are
included in salary expense.
The Company has an Executive Deferred Compensation Plan, which allows
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 compensation obligations. At December 31, 2001 and 2000, the
cash values exceeded the recorded liabilities.
The Company has a supplemental retirement plan for directors and a
supplemental executive retirement plan covering key executives. These plans are
non-qualified defined benefit plans and are unsecured and unfunded. The Company
has purchased insurance on the lives of the participants and intends to use the
cash values of these policies ($8,298,000 and $7,938,000 at December 31, 2001
and 2000, respectively) to pay the retirement obligations.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions," the Bank recorded in
Other Liabilities an additional minimum pension liability of $1,803,000 related
to the supplemental retirement plan as of December 31, 2001. 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 $772,000, representing the after-tax impact, at December 2001.
The following table sets forth the plans' status:
December 31,
2001 2000
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $(5,134) $(4,378)
Service cost (86) (74)
Interest cost (372) (317)
Amendments (108) (181)
Actuarial gain (loss) (862) (322)
Benefits paid 301 138
------------------------
Benefit obligation at end of year $(6,261) $(5,134)
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ --
Fair value of plan assets at end of year $ -- $ --
Funded status $(6,261) $(5,134)
Unrecognized net obligation existing at January 1, 1986 115 148
Unrecognized net actuarial loss 2,075 1,264
Unrecognized prior service cost 402 333
Intangible asset (517) --
Accumulated other comprehensive income (1,289) --
------------------------
Accrued benefit cost $(5,475) $(3,389)
-18-
Years Ended December 31,
2001 2000 1999
(in thousands)
Net pension cost included the following components:
Service cost-benefits earned during the period $ 86 $ 74 $ 70
Interest cost on projected benefit obligation 372 317 275
Amortization of net obligation at transition 35 35 35
Amortization of prior service cost 39 13 11
Recognized net actuarial loss 53 41 43
Net periodic pension cost $585 $480 $434
The net periodic pension cost was determined using a discount rate assumption of
7.25% for 2001, 7.25% for 2000, and 7.0% for 1999, respectively. The rates of
increase in compensation used in each year were 2.5% to 5%.
-19-
Note N - 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, 2001
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $12,419 7,072,588 $1.76
Common stock options outstanding -- 146,641
Diluted Earnings per Share
Net income available to common shareholders $12,419 7,219,229 $1.72
======= =========
Year Ended December 31, 2000
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $12,623 7,191,790 $1.76
Common stock options outstanding -- 148,939
Diluted Earnings per Share
Net income available to common shareholders $12,623 7,340,729 $1.72
======= =========
Year Ended December 31, 1999
Weighted Average
Income Shares Per Share Amount
Basic Earnings per Share
Net income available to common shareholders $11,403 7,129,560 $1.60
Common stock options outstanding -- 188,960
Diluted Earnings per Share
Net income available to common shareholders $11,403 7,318,520 $1.56
======= =========
-20-
Note O - Related Party Transactions
Certain directors, officers, and companies with which they are associated
were customers of, and had banking transactions with, the Company or its
Subsidiary 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 2001:
Balance Balance
December 31, Advances/ Removed/ December 31,
2000 New Loans Payments 2001
(in thousands)
$6,523 $923 $1,077 $6,369
Note P - 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,
2001 2000
(in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit:
Commercial loans $72,646 $79,808
Consumer loans 91,170 55,528
Real estate mortgage loans 2,932 477
Real estate construction loans 23,952 22,289
Standby letters of credit 4,391 1,229
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.
-21-
Note Q - 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 R - 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 C for further analysis.
Loans
The fair value of variable rate loans is the current carrying value. The
interest rates on these loans are regularly adjusted to market rates. The fair
value of other types of fixed rate loans is estimated by discounting the future
cash flows using current rates at which similar loans would be made to borrowers
with similar credit ratings for the same remaining maturities. The allowance for
loan losses is a reasonable estimate of the valuation allowance needed to adjust
computed fair values for credit quality of certain loans in the portfolio.
Deposit Liabilities and Long-Term Debt
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. These
values do not consider the estimated fair value of the Company's core deposit
intangible, which is a significant unrecognized asset of the Company. The fair
value of time deposits and debt is based on the discounted value of contractual
cash flows.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of letters of credit and standby letters of credit is not
significant.
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 2001
Carrying Fair
Financial assets: Amount Value
(in thousands)
Cash and due from banks $59,264 $59,264
Federal funds sold 18,700 18,700
Securities:
Available-for-sale 224,590 224,590
Loans, net 645,674 637,000
Accrued interest receivable 5,522 5,522
Financial liabilities:
Deposits 880,393 832,380
Accrued interest payable 3,488 3,488
Long-term borrowings 22,956 24,156
-22-
December 31, 2000
Carrying Fair
Financial assets: Amount Value
(in thousands)
Cash and due from banks $ 58,190 $ 58,190
Securities:
Available-for-sale 229,110 229,110
Loans, net 628,721 637,389
Accrued interest receivable 6,935 6,935
Financial liabilities:
Deposits 837,832 795,101
Federal funds purchased 500 500
Accrued interest payable 5,245 5,245
Long-term borrowings 33,983 35,066
Note S - TriCo Bancshares Financial Statements
TriCo Bancshares (Parent Only) Balance Sheets
December 31,
Assets 2001 2000
(in thousands)
Cash and Cash equivalents $241 $ 272
Securities available-for-sale 180 180
Investment in Tri Counties Bank 85,446 83,457
Other assets 1,066 1,324
--------------------------
Total assets $86,933 $85,233
==========================
Liabilities and shareholders' equity
Total liabilities $ -- $ --
Shareholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares;
issued and outstanding 7,000,980
and 7,181,226 shares, respectively $49,679 $ 50,428
Retained earnings 37,909 35,129
Accumulated other comprehensive income (loss) (655) (324)
--------------------------
Total shareholders' equity 86,933 85,233
--------------------------
Total liabilities and shareholders' equity $86,933 $85,233
==========================
-23-
Statements of Income Years Ended December 31,
2001 2000 1999
(in thousands)
Interest income $ 17 $ 18 $ 1
Administration expense 980 980 385
---------------------------
Loss before equity in net income of Tri Counties Bank (963) (962 (384)
Equity in net income of Tri Counties Bank:
Distributed 12,187 7,118 5,170
Undistributed 798 6,070 6,459
Income taxes 397 397 158
---------------------------
Net income $12,419 $12,623 $11,403
===========================
Statements of Cash Flows
Years ended December 31,
2001 2000 1999
(in thousands)
Operating activities:
Net income $12,419 $12,623 $11,403
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed equity in Tri Counties Bank (798) (6,070) (6,459)
Deferred income taxes (397) (397) (158)
Decrease in other operating assets and liabilities -- -- (8)
Net cash provided by operating activities 11,224 6,156 4,778
Investing activities:
Purchases of securities available-for-sale -- -- (180)
Net cash used for investing activities -- -- (180)
Financing activities:
Issuance of common stock 1,005 411 541
Repurchase of common stock (6,618) (776) (86)
Cash dividends-- common (5,642) (5,680) (4,996)
Net cash used for financing activities (11,255) (6,045) (4,541)
Increase (decrease) in cash and cash equivalents (31) 111 57
Cash and cash equivalents at beginning of year 272 161 104
Cash and cash equivalents at end of year $ 241 $ 272 $ 161
-24-
Note T - Regulatory Matters
The Company is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 2001, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table below. There are no conditions or events since that
notification that Management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2001:
Total Capital (to Risk Weighted Assets):
Consolidated $91,418 11.68% =>$62,620 =>8.0% =>$78,275 =>10.0%
Tri Counties Bank $89,253 11.43% =>$62,466 =>8.0% =>$78,083 =>10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated $81,595 10.43% =>$31,310 =>4.0% =>$46,965 => 6.0%
Tri Counties Bank $79,454 10.18% =>$31,233 =>4.0% =>$46,850 => 6.0%
Tier I Capital (to Average Assets):
Consolidated $81,595 8.17% =>$39,941 =>4.0% =>$49,926 => 5.0%
Tri Counties Bank $79,454 7.97% =>$39,865 =>4.0% =>$49,832 => 5.0%
As of December 31, 2000:
Total Capital (to Risk Weighted Assets):
Consolidated $89,302 12.20% =>$58,537 =>8.0% =>$73,172 =>10.0%
Tri Counties Bank $87,414 11.97% =>$58,417 =>8.0% =>$73,021 =>10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated $80,156 10.95% =>$29,268 =>4.0% =>$43,903 => 6.0%
Tri Counties Bank $78,255 10.72% =>$29,208 =>4.0% =>$43,812 => 6.0%
Tier I Capital (to Average Assets):
Consolidated $80,156 8.41% =>$38,128 =>4.0% =>$47,660 => 5.0%
Tri Counties Bank $78,255 8.22% =>$38,069 =>4.0% =>$47,587 => 5.0%
-25-
Note U - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four
quarters of 2001 and 2000, 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.
2001 Quarters Ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data)
Interest income $17,284 $18,613 $18,714 $18,761
Interest expense 4,356 5,612 6,323 7,195
------- -------- -------- --------
Net interest income 12,928 13,001 12,391 11,566
Provision for loan losses 1,150 600 775 1,875
------- ------ --------- --------
Net interest income after
provision for loan losses 11,778 12,401 11,616 9,691
Noninterest income 3,559 3,411 3,241 4,850
Noninterest expense 10,233 10,517 10,284 9,770
------- ------- ------- -------
Income before income taxes 5,104 5,295 4,573 4,771
Income tax expense 1,746 2,050 1,736 1,792
------- -------- -------- -------
Net income $3,358 $ 3,245 $ 2,837 $ 2,979
====== ======= ======= =======
Per common share:
Net income (diluted) $ 0.47 $ 0.45 $ 0.39 $ 0.41
======= ======= ======= =======
Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= =======
2000 Quarters Ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data)
Interest income $19,887 $19,912 $18,960 $17,894
Interest expense 7,584 7,641 6,910 6,408
-------- -------- -------- --------
Net interest income 12,303 12,271 12,050 11,486
Provision for loan losses 1,500 1,800 900 800
-------- -------- --------- ---------
Net interest income after
provision for loan losses 10,803 10,471 11,150 10,686
Noninterest income 3,445 3,334 3,240 4,626
Noninterest expense 10,116 9,305 9,450 9,024
------- -------- -------- --------
Income before income taxes 4,132 4,500 4,940 6,288
Income tax expense 1,428 1,653 1,796 2,360
-------- -------- -------- --------
Net income $ 2,704 $ 2,847 $ 3,144 $ 3,928
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.37 $ 0.39 $ 0.43 $ 0.54
======= ======= ======= =======
Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.19
======= ======= ======= =======
-26-
Note V - Business Segments
The Company is principally engaged in traditional community banking
activities provided through its 30 branches and 7 in-store branches located
throughout Northern and Central California. Community banking activities include
the Bank's commercial and retail lending, deposit gathering and investment and
liquidity management activities. In addition to its community banking services,
the Bank offers investment brokerage and leasing services. These activities are
monitored and reported by Bank management as separate operating segments.
The accounting policies of the segments are the same as those described in
Note A. The Company evaluates segment performance based on net interest income,
or profit or loss from operations, before income taxes not including
nonrecurring gains and losses.
The results of the separate branches have been aggregated into a single
reportable segment, Community Banking. The Company's leasing, investment
brokerage and real estate segments do not meet allowed aggregation or
materiality criteria and therefore are reported as "Other" in the following
table.
Summarized financial information for the years ended December 31, 2001,
2000 and 1999 concerning the Bank's reportable segments is as follows:
Community
Banking Other Total
2001
Net interest income $ 48,178 $ 1,708 $ 49,886
Noninterest income 12,154 2,907 15,061
Noninterest expense 38,851 1,953 40,804
Net income 10,729 1,690 12,419
Assets $990,279 $15,168 $1,005,447
2000
Net interest income $ 47,228 $ 882 $ 48,110
Noninterest income 11,506 3,139 14,645
Noninterest expense 35,913 1,982 37,895
Net income 11,328 1,295 12,623
Assets $956,447 $15,624 $972,071
1999
Net interest income $ 43,540 $ 679 $ 44,219
Noninterest income 9,668 2,433 12,101
Noninterest expense 33,558 1,275 34,833
Net income 10,237 1,166 11,403
Assets $915,890 $8,906 $924,796
-27-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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
-28-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
As TriCo Bancshares (the "Company") has not commenced any business
operations independent of Tri Counties Bank (the "Bank"), the following
discussion pertains primarily to the Bank. Average balances, including such
balances used in calculating certain financial ratios, are generally comprised
of average daily balances for the Company. Interest income and net interest
income are presented on a tax equivalent basis.
In addition to the historical information contained herein, this Annual
Report contains certain forward-looking statements. The reader of this Annual
Report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments, rates paid on deposits,
competition effects, fee and other noninterest income earned as well as other
factors. This entire Annual Report should be read to put such forward-looking
statements in context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
Overview
Despite the effects of a slowing economy and a decrease in the prime
lending rate from 9.50% to 4.75%, 2001 was another successful year for TriCo
Bancshares and Tri Counties Bank. During 2001, the Company reached the milestone
of $1 billion in assets, ending the year with $1,005,447,000 in assets. During
the year, the Company's retail banking and mortgage banking operations performed
very well, and helped offset declines in commercial lending and sale of
nondeposit investment products. Despite the historic decrease in interest rates
noted above, the Company was able to maintain its net interest margin at 5.73%
during 2001.
Consumer loans grew 29% to $155,046,000 during 2001, while total loans grew
3% to $658,732,000. Deposits grew 5% to $880,393,000 during 2001 despite
$20,000,000 of time deposits from the State of California that were allowed to
mature and not be renewed by the Bank. Had those $20,000,000 of State time
deposits been allowed to renew, deposits would have grown 7.5% during 2001. Gain
on sale of loans increased 75% to $918,000 while income from the sale of
nondeposit investment products decreased 7% to $2,576,000.
The Company had earnings of $12,419,000 for the year ended December 31,
2001 versus $12,623,000 for 2000. Diluted earnings per share were $1.72 for each
of 2001 and 2000.
Net interest income for 2001 was $51,040,000 and was an increase of
$1,760,000 (3.6%) over 2000. The interest income component of net interest
income was down 4.2% to $74,526,000. Interest and fees on loans were down
$2,057,000 (3.3%) to $60,104,000 as average loans outstanding increased
$22,600,000 (3.6%) to $647,317,000 and the average earnings rate on loans
decreased 66 basis points to 9.29%. Interest income on investment securities and
federal funds sold decreased $1,240,000 (7.9%) to $14,422,000 due to lower
average interest rates. Interest expense was down $5,057,000 (17.7%) to
$23,486,000. This decrease was due to a decrease in the average rate paid on
interest bearing liabilities from 4.05% in 2000 to 3.28% in 2001.
The Bank provided $4,400,000 to the allowance for loan losses in 2001
compared to $5,000,000 in 2000. Net loan charge-offs in 2001 were $3,012,000
compared to $4,367,000 in 2000. At year-end 2001 and 2000 the allowance for loan
losses as a percentage of gross loans was 1.98% and 1.82%, respectively.
Noninterest income is comprised of "service charges and fees", "gain on
sale of investments", and "other income". Service charge and fee income
increased $611,000 (8.2%) to $8,095,000 in 2001 versus year ago results. During
2001, the Company sold its investment in insurance company stock and recognized
a gain of $1,756,000. In 2000, the Company recognized a gain of $1,510,000 on
the receipt of its investment in insurance company stock when the insurance
company demutualized. Other income was down $477,000 (8.4%) to $5,174,000 in
2001 from $5,651,000 in 2000.
-29-
Noninterest expenses increased $2,909,000 (7.7%) to $40,804,000 in 2001.
The Company's efficiency ratio, which is noninterest expense divided by the sum
of noninterest income and fully tax-equivalent net interest income, was 61.7% in
2001 compared 59.3% in 2000.
Salary and benefit expenses increased $1,484,000 (7.5%) to $21,396,000 in
2001. Incentive and commission related salary expenses increased $310,000
(13.6%) to $2,584,000 in 2001. Base salaries and benefits increased $744,000
(5.5%) to $14,183,000 in 2001. The increase in base salaries was mainly due to a
2.6% increase in average full time equivalent employees (FTEs) from 392 during
2000 to 402 during 2001, and an average annual base salary increase of 2.9%
during 2001. Other noninterest expenses increased $1,425,000 (7.9%) to
$19,408,000 in 2001.
Assets of the Company totaled $1,005,447,000 at December 31, 2001 and
represented an increase of $33,376,000 (3.4%) from 2000 ending balances.
For 2001, the Company realized a return on assets of 1.27% and a return on
shareholders' equity of 14.19% versus 1.35% and 16.03%, respectively, in 2000.
The Company ended 2001 with a Tier 1 capital ratio of 10.43% and a total
risk-based capital ratio of 11.68% versus 10.95% and 12.20%, respectively, in
2000.
Management's continuing goal for the Bank is to deliver a full array of
competitive products to its customers while maintaining the personalized
customer sales and service of a community bank. We believe this strategy will
provide continued growth and the ability to achieve strong returns for our
shareholders.
-30-
(A) Results of Operations
Years Ended December 31,
2001 2000 1999 1998 1997
Interest income: (in thousands, except earnings per share amounts)
Interest and fees on loans $ 60,104 $ 62,161 $ 53,395 $ 48,506 $ 44,903
Interest on investment securities--taxable 9,543 11,704 12,500 14,622 13,791
Interest on investment securities--tax exempt1 3,373 3,420 3,383 2,809 958
Interest on federal funds sold 1,506 538 465 150 553
----------------------------------------------------------------
Total interest income 74,526 77,823 69,743 66,087 60,205
Interest expense:
Interest on deposits 21,507 25,003 21,277 22,865 22,682
Interest on short-term borrowing 7 623 386 816 537
Interest on long-term debt 1,972 2,917 2,707 1,615 716
----------------------------------------------------------------
Total interest expense 23,486 28,543 24,370 25,296 23,935
----------------------------------------------------------------
Net interest income 51,040 49,280 45,373 40,791 36,270
Provision for loan losses 4,400 5,000 3,550 4,200 3,000
----------------------------------------------------------------
Net interest income after provision
for loan losses 46,640 44,280 41,823 36,591 33,270
Noninterest income:
Service charges, fees and other 13,269 14,645 12,077 12,553 9,548
Investment securities gains (losses), net 1,792 -- 24 316 18
----------------------------------------------------------------
Total noninterest income 15,061 14,645 12,101 12,869 9,566
Noninterest expenses:
Salaries and employee benefits 21,396 19,912 17,837 16,803 15,671
Other, net 19,408 17,983 16,996 17,889 17,261
----------------------------------------------------------------
Total noninterest expenses 40,804 37,895 34,833 34,692 32,932
Net income before income taxes 20,897 21,030 19,091 14,768 9,904
Income taxes 7,324 7,237 6,534 5,049 3,707
Tax equivalent adjustment2 1,154 1,170 1,154 949 328
----------------------------------------------------------------
Net income $12,419 $12,623 $11,403 $ 8,770 $ 5,869
================================================================
Basic earnings per common share2 $ 1.76 $ 1.76 $ 1.60 $ 1.25 $ 0.84
Diluted earnings per common share2 $ 1.72 $ 1.72 $ 1.56 $ 1.21 $ 0.81
Cash dividend paid per share $ 0.80 $ 0.79 $ 0.70 $ 0.49 $ 0.43
Selected Balance Sheet Information
Total Assets $1,005,447 $972,071 $924,796 $904,599 $826,165
Long-term Debt 22,956 $33,983 $45,505 $37,924 $11,440
1 Interest on tax-free securities is reported on a tax equivalent basis of 1.52 for 2001, 2000, 1999, 1998, and 1997.
2 Restated on a historical basis to reflect the 3-for-2 stock split effected October 30, 1998.
-31-
Net Interest Income/Net Interest Margin
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income for 2001 totaled $51,040,000 and was up $1,760,000
(3.6%) over the prior year. Interest income decreased $3,297,000 (4.2%) to
$74,526,000 in 2001. Average outstanding loan balances of $647,317,000 for 2001
reflected a 3.6% increase over 2000 average loan balances. The increase in
average loan balances contributed an additional $2,249,000 to interest income,
while a 66 basis points decrease in the average yield on loans resulted in a
$4,306,000 decrease in interest income when compared to 2000. This decrease in
average yield on loans resulted from eleven Federal Reserve interest rate cuts
over the year totaling 475 basis points and a corresponding decrease in the
prime lending rate from 9.50% to 4.75%. The average balance of investment
securities decreased $22,083,000 (9.8%) to $204,080,000, and resulted in a
$1,477,000 decrease in interest income. A decrease of 36 basis points in the
average tax effective yield on investments to 6.33% in 2001 from 6.69% in 2000
reduced interest income by $731,000. A $30,508,000 increase in the average
balance of fed funds sold during 2001 to $39,204,000 increased interest income
by $1,887,000, while a 235 basis point decrease in the average yield on fed
funds to 3.84% decreased interest income by $919,000.
Interest expense decreased $5,057,000 (17.7%) to $23,486,000 in 2001. This
decrease was due to a 77 basis point decrease in the average rate paid on
interest bearing liabilities from 4.05% to 3.28%. Net interest margin was 5.73%
in 2001 and 2000.
Net interest income for 2000 totaled $49,280,000 and was up $3,907,000
(8.6%) over the prior year. Interest income increased $8,080,000 (11.6%) to
$77,823,000 in 2000. Average outstanding loan balances of $624,717,000 for 2000
reflected a 10.2% increase over 1999 balances. This increase in average loan
balances contributed an additional $5,462,000 to interest income and was the
major factor in the improvement in net interest income. The average yield
received on loans rose 53 basis points to 9.95% which increased interest income
by $3,304,000. This increase in average yield resulted from increases in market
interest rates that began in 1999 and reached their high in the spring of 2000.
Average balances of investment securities decreased $24,178,000 (9.7%) to
$226,163,000. The lower volume of securities resulted in a decrease in interest
income of $1,534,000. An increase of 35 basis points in the average tax
effective yield on investments added $775,000 to interest income.
Interest expense increased $4,173,000 (17.1%) to $28,543,000 in 2000.
Higher average balances of interest- bearing liabilities added $1,009,000 to
interest expense in 2000 as compared to 1999, while a higher average rate paid
for those balances increased interest expense by $3,164,000. Net interest margin
for 2000 was 5.73% versus 5.49% in 1999.
Table One, Analysis of Net Interest Margin on Earning Assets, and Table
Two, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and past trends
of the Bank's interest income and expenses. Table One provides an analysis of
net interest margin on earning assets setting forth average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Two presents an analysis of volume and rate change on net interest income
and expense.
-32-
Table One: Analysis of Net Interest Margin on Earning Assets
2001 2000 1999
Average Yield/ Average Yield/ Average Yield/
Assets Balance1 Income Rate Balance1 Income Rate Balance1 Income Rate
(dollars in thousands)
Earning assets:
Loans2,3 $647,317 $60,104 9.29% $624,717 $62,161 9.95% $566,738 $53,395 9.42%
Securities - taxable 159,465 9,543 5.98% 181,316 11,704 6.46% 205,489 12,500 6.08%
Securities - nontaxable4 44,615 3,373 7.56% 44,847 3,420 7.63% 44,852 3,383 7.54%
Federal funds sold 39,204 1,506 3.84% 8,696 538 6.19% 8,733 465 5.32%
---------------------------------------------------------------------------------------------
Total earning assets 890,601 74,526 8.37% 859,576 77,823 9.05% 825,812 69,743 8.45%
Cash and due from banks 42,458 39,295 37,206
Premises and equipment 16,749 16,622 16,260
Other assets, net 40,453 42,150 37,210
Unrealized gain (loss)
on securities 495 (8,112) (3,508)
Less: Allowance for loan
losses (12,214) (11,741) (9,525)
--------- --------- ---------
Total assets $978,542 $937,790 $903,455
Liabilities and
shareholders' equity
Interest-bearing demand
deposits $156,629 1,487 0.95% $149,412 2,360 1.58% $145,558 2,287 1.57%
Savings deposits 225,137 4,759 2.11% 218,286 6,837 3.13% 224,368 6,811 3.04%
Time deposits 301,023 15,261 5.07% 278,968 15,806 5.67% 255,659 12,179 4.76%
Federal funds purchased 289 7 2.42% 7,753 524 6.76% 7,024 356 5.07%
Repurchase agreements -- -- 1,508 99 6.56% 614 30 4.89%
Long-term debt 32,133 1,972 6.14% 48,078 2,917 6.07% 49,135 2,707 5.51%
---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 715,211 23,486 3.28% 704,005 28,543 4.05% 682,358 24,370 3.57%
Noninterest-bearing
deposits 160,152 141,767 135,511
Other liabilities 15,660 13,277 12,465
Shareholders' equity 87,519 78,741 73,121
Total liabilities and
shareholders' equity $978,542 $937,790 $903,455
--------- --------- ---------
Net interest rate spread5 5.08% 5.00% 4.87%
Net interest income/net
interest margin6 $51,040 5.73% $49,280 5.73% $45,373 5.49%
1 Average balances are computed principally on the basis of daily balances.
2 Nonaccrual loans are included.
3 Interest income on loans includes fees on loans of $4,671,000 in 2001,
$2,928,000 in 2000, and $2,853,000 in 1999.
4 Interest income is stated on a tax equivalent basis of 1.52 in 2001, 2000,
and 1999.
5 Net interest rate spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.
6 Net interest margin is computed by dividing net interest income by total
average earning assets.
-33-
Table Two: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
2001 over 2000 2000 over 1999
Yield/ Yield/
Volume Rate 4 Total Volume Rate 4 Total
(dollars in thousands)
Increase (decrease) in
interest income:
Loans1,2 $ 2,249 $(4,306) $(2,057) $ 5,462 $ 3,304 $ 8,766
Investment securities3 (1,477) (731) (2,208) (1,534) 775 (759)
Federal funds sold 1,887 (919) 968 (2) 75 73
--------------------------------------------------------------------------
Total 2,659 (5,956) (3,297) 3,926 4,154 8,080
Increase (decrease) in
interest expense:
Demand deposits (interest-bearing) 114 (987) (873) 61 12 73
Savings deposits 215 (2,293) (2,078) (185) 211 26
Time deposits 1,250 (1,795) (545) 1,110 2,517 3,627
Federal funds purchased (504) (13) (517) 37 131 168
Repurchase agreements (99) -- (99) 44 25 69
Long-term borrowings (967) 22 (945) (58) 268 210
--------------------------------------------------------------------------
Total 9 (5,066) (5,057) 1,009 3,164 4,173
--------------------------------------------------------------------------
Increase (decrease) in
net interest income $ 2,650 $ (890) $ 1,760 $ 2,917 $ 990 $ 3,907
1 Nonaccrual loans are included.
2 Interest income on loans includes fees on loans of $4,671,000 in 2001,
$2,928,000 in 2000, and $2,853,000 in 1999.
3 Interest income is stated on a tax equivalent basis of 1.52 in 2001, 2000,
and 1999.
4 The rate/volume variance has been included in the rate variance.
Provision for Loan Losses
In 2001, the Bank provided $4,400,000 for loan losses compared to
$5,000,000 in 2000. Net loan charge-offs decreased $1,355,000 (31%) to
$3,012,000 during 2001. Included in the $3,012,000 of net loan charge-offs
during 2001 is $2,000,000 of charge-offs on a group of agricultural related
loans to one borrower. During the quarter ended March 31, 2001, the Company
received proceeds of $6,079,000 from the sale of this nonperforming
agricultural-related loan relationship that was first reported as nonperforming
in the quarter ended September 30, 2000. The Company recorded charge-offs
related to this loan relationship of $2,000,000 in 2001 and $3,800,000 in 2000.
This loan relationship was sold to a third party without recourse to the
Company. As such, the Company is not subject to any future charge-offs related
to this loan relationship. Net charge-offs of consumer installment loans
increased $51,000 (104%). Net charge-offs of commercial, financial and
agricultural loans decreased $1,400,000 (34%), while net charge-offs of real
estate mortgage loans decreased $6,000 (4%). The 2001 charge-offs represented
0.47% of average loans outstanding versus 0.70% in 2000. Nonperforming loans as
a percentage of total loans were 0.92% and 2.29% at December 31, 2001 and 2000,
respectively. The ratio of allowance for loan losses to nonperforming loans was
216% at the end of 2001 versus 80% at the end of 2000.
In 2000, the Bank provided $5,000,000 for loan losses compared to
$3,550,000 in 1999. Net loan charge-offs increased $3,648,000 (507%) to
$4,367,000 during 2000. Included in the $4,367,000 of net loan charge-offs
during 2000 is $3,800,000 of charge-offs on a group of agricultural related
loans to one borrower as previously discussed. As of December 31, 2000, the
Company's recorded net book value for this nonperforming loan relationship after
charge-offs was approximately $8,400,000. Net charge-offs of consumer
installment loans decreased $63,000 (56%). Net charge-offs of commercial,
financial and agricultural loans increased $3,631,000 (675%), while net
charge-offs of real estate mortgage loans increased $80,000 (116%). The 2000
charge-offs represented 0.70% of average loans outstanding versus 0.13% the
prior year. Nonperforming loans were 2.29% of total loans at year end versus
0.46% in 1999. The ratio of allowance for loan losses to nonperforming loans was
80% versus 412% at the end of 1999.
-34-
Service Charges and Fees and Other Income
Service charge and fee income increased $611,000 (8.2%) to $8,095,000 in
2001 versus year ago results. During 2001, the Company sold its investment in
insurance company stock and recognized a gain of $1,756,000. In 2000, the
Company recognized a gain of $1,510,000 on the receipt of its investment in
insurance company stock when the insurance company demutualized. Other income
was down $477,000 (8.4%) to $5,174,000 in 2001 from $5,651,000 in 2000, and was
mainly due to $421,000 of nonrecurring miscellaneous recoveries in 2000. Also
affecting other income in 2001 was a $208,000 (7.5%) decrease in commissions on
sale of nondeposit investment and insurance products to $2,576,000, a $181,000
(28%) decrease in increase in cash value of insurance policies to $476,000, and
a $393,000 (75%) increase in gain on sale of loans and leases to $918,000.
For 2000, service charge and fee income increased $357,000 (5.0%) to
$7,484,000 compared to $7,127,000 in 1999. This increase was due mainly to
increased ATM fees. Other income was up $2,187,000 (44.0%) to $7,161,000 from
$4,974,000 in 1999. The increase in other income included a one-time pre-tax
income item of $1,510,000 from the receipt of common stock. This one-time item
represents the initial value of common shares of an insurance company which the
Bank received as a consequence of its ownership of certain insurance policies
through the insurance company and the conversion of the insurance company from a
mutual company to a stock company. Significant changes in the following items
also contributed to the net increase in other income: commissions on non-deposit
investment product sales increased $465,000 (20.1%) to $2,784,000, income from
the increase in cash value of insurance policies increased $284,000 (76.1%) to
$657,000, and gain on sale of loans decreased $275,000 (34.4%) to $525,000.
Overall, noninterest income increased $2,544,000 (21.0%) for the year to
$14,645,000.
Securities Transactions
During 2001 the Bank realized net gains of $36,000 on the sale of
securities with market values of $10,853,000. Also, the Bank realized a gain of
$1,756,000 on the sale of its investment in an insurance company with a market
value of $3,266,000. In addition, the Bank received proceeds from maturities of
securities totaling $85,619,000. During 2001 the Bank purchased $93,125,000 of
securities.
During 2000 the Bank had no sales of securities. Also during 2000, the Bank
received proceeds from maturities of securities totaling $39,663,000, and used
$29,077,000 to purchase securities.
Salaries and Benefits
Salary and benefit expenses increased $1,484,000 (7.5%) to $21,396,000 in
2001. Incentive and commission related salary expenses increased $310,000
(13.6%) to $2,584,000 in 2001. Base salaries and benefits increased $744,000
(5.5%) to $14,183,000 in 2001. The increase in base salaries was mainly due to a
2.6% increase in average full time equivalent employees (FTEs) from 392 during
2000 to 402 during 2001, and an average annual base salary increase of 2.9%
during 2001.
Salary and benefit expenses increased $2,075,000 (11.6%) to $19,912,000 in
2000. Incentive and commission related salary expenses increased $444,000
(24.3%) to $2,274,000 in 2000. Base salaries and benefits increased $1,631,000
(10.2%) to $13,440,000 in 2000. The increase in base salaries was mainly due to
a 3.7% increase in average full time equivalent employees (FTEs) from 378 during
1999 to 392 during 2000, and an average annual base salary and benefits expense
increase of 6.5% during 2000. The large increase in incentive and commission
related salary expense was more than offset by revenue growth. 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.
Other Expenses
Other expenses increased $1,425,000 (7.9%) to $19,408,000 in 2001. Expenses
related to equipment and data processing, occupancy, telecommunications, and ATM
network charges contributed $318,000, $219,000, $296,000, and $143,000 to the
increase in other expense during 2001, respectively. Also contributing to the
increase in other expenses in 2001 was a $314,000 (34%) increase in various loan
production expenses to $1,252,000. Helping to offset these increases in other
expenses were reductions of $580,000 in operational losses and $204,000 in
advertising during 2001. The decrease in operational losses was mainly due to a
nonrecurring $434,000 customer fraud loss in 2000.
Other expenses increased $987,000 (5.8%) to $17,983,000 in 2000.
Approximately $534,000 of the increase was due to operational losses that went
from $273,000 in 1999 to $807,000 in 2000. Contributing to the increase in
operational losses during 2000 was a $434,000 customer fraud loss due to a
single deposit relationship that was identified in the fourth quarter of 2000.
Advertising expense increased $390,000 (41.2%) to $1,336,000 in 2000. Intangible
asset amortization decreased $170,000 (15.0%) in 2000 to $965,000.
-35-
Provision for Taxes
The effective tax rate on income was 37.1%, 36.4%, and 36.4%, in 2001,
2000, and 1999, respectively. The effective tax rate was greater than the
federal statutory tax rate due to state tax expense of $1,867,000, $1,857,000,
and $1,680,000, respectively, in these years. Tax-free income of $2,219,000,
$2,250,000, and $2,229,000, respectively, from investment securities in these
years helped to reduce the effective tax rate.
Return on Average Assets and Equity
The following table sets forth certain ratios for the Company for the last
three years (using average balance sheet data):
2001 2000 1999
Return on total assets 1.27% 1.35% 1.26%
Return on shareholders' equity 14.19% 16.03% 15.59%
Shareholders' equity to total assets 8.65% 8.78% 8.09%
Common shareholders' dividend payout ratio 45.43% 45.00% 43.81%
During 2001, return on assets decreased to 1.27% from 1.35% in 2000. The
Company's efficiency ratio (noninterest expense divided by net interest income
plus noninterest income) was 61.7% in 2001 versus 59.3% in 2000. Return on
assets increased in 2000 to 1.35% from 1.26% in 1999.
Return on shareholders' equity decreased to 14.19% in 2001 from 16.03% in
2000. The lower ROE in 2001 resulted from average equity increasing 11.2% while
net income decreased 1.6%. In 2000, return on shareholders' equity increased to
16.03% from 15.59% in 1999.
In 2001, the average shareholders' equity to average asset ratio decreased
to 8.65% from 8.78%. The shareholders' average equity to average assets ratio
for 2000 increased to 8.78% from 8.09% for 1999.
In 2001, dividends paid to common shareholders totaled $5,642,000 compared
to $5,680,000 in 2000. The resulting common shareholders' dividend payout ratio
was 45.43% in 2001 compared to 45.00% in 2000.
(B) Balance Sheet Analysis
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, 2001, these four
categories accounted for approximately 20%, 23%, 50%, and 7% of the Bank's loan
portfolio, respectively, as compared to 23%, 19%, 52%, and 6%, at December 31,
2000. The shift in the percentages was primarily due to the Bank's ability to
increase its consumer loan portfolio during 2001. 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, 2001 loans totaled $658,732,000 and was a 2.9%
($18,341,000) increase over the balances at the end of 2000. Demand for
commercial and agriculture related loans weakened as the economy weakened in
2001. Demand for home equity loans remained strong throughout 2001, while
residential mortgage loans increased significantly throughout 2001. The average
loan-to-deposit ratio in 2001 was 76.8% compared to 79.2% in 2000.
At December 31, 2000 loans totaled $640,391,000 and was an 8.9%
($52,412,000) increase over the balances at the end of 1999. Demand for
commercial and agriculture related loans were strong in 2000. Demand for
residential mortgage loans decreased significantly starting in the fall of 1999,
and was replaced somewhat by demand for home equity loans, which the Bank
classifies as consumer loans. The average loan to deposit ratio in 2000 was
79.2% compared to 74.5% in 1999.
-36-
Loan Portfolio Composite
December 31,
2001 2000 1999 1998 1997
(dollars in thousands)
Commercial, financial and
agricultural $130,054 $148,135 $138,313 $106,796 $78,765
Consumer installment 155,046 120,247 79,273 71,634 87,520
Real estate mortgage 326,897 334,010 332,116 316,927 248,432
Real estate construction 46,735 37,999 38,277 37,076 34,250
----------------------------------------------------------------------
Total loans $658,732 $640,391 $587,979 $532,433 $448,967
Nonaccrual, Past Due and Restructured Loans
During 2001, nonperforming assets decreased $8,547,000 (58%) to 6,121,000.
Nonperforming loans decreased $7,177,000 (54%) to $6,050,000, and other real
estate owned (OREO) decreased $1,370,000 (95%) to $71,000 during 2001. The ratio
of nonperforming loans to total loans at December 31, 2001 was 0.92% versus
2.07% at the end of 2000. The decrease in the ratio of nonperforming loans to
total loans was due in part to the sale of one nonperforming loan relationship
during 2001 that accounted for $8,400,000 of nonperforming loan balances at
December 31, 2000. During the quarter ended March 31, 2001, the Company received
proceeds of $6,079,000 from the sale of this nonperforming agricultural-related
loan relationship that was first reported as nonperforming in the quarter ended
September 30, 2000. The Company recorded charge-offs related to this loan
relationship of $2,000,000 in 2001 and $3,800,000 in 2000. This loan
relationship was sold to a third party without recourse to the Company. As such,
the Company is not subject to any future charge-offs related to this loan
relationship. Classifications of nonperforming loans as a percent of the total
at the end of 2001 were as follows: secured by real estate, 65%; loans to
farmers, 4%; commercial loans, 30%; and consumer loans, 1%.
During 2000, nonperforming assets increased $11,227,000 (326%) to a total
of $14,668,000. Nonperforming loans increased $10,546,000 (393%) to $13,227,000,
and other real estate owned (OREO) increased $681,000 (90%) to $1,441,000 during
2000. The ratio of nonperforming loans to total loans at December 31, 2000 was
2.07% versus 0.46% at the end of 1999. As noted above, included in the balance
of nonperforming loans at December 31, 2000 was $8,400,000 that represents the
Company's recorded net book value for a group of agricultural related loans to
one borrower. Excluding the large nonperforming loan relationship noted above,
the ratio of nonperforming loans to total loans at December 31, 2000 would have
been 0.75%. Classifications of nonperforming loans as a percent of the total at
the end of 2000 were as follows: secured by real estate, 57%; loans to farmers,
40%; commercial loans, 2.5%; and consumer loans, 0.5%.
Commercial, real estate and consumer loans are reviewed on an individual
basis for reclassification to nonaccrual status when any one of the following
occurs: the loan becomes 90 days past due as to interest or principal, the full
and timely collection of additional interest or principal becomes uncertain, the
loan is classified as doubtful by internal credit review or bank regulatory
agencies, a portion of the principal balance has been charged off, or the Bank
takes possession of the collateral. The reclassification of loans as nonaccrual
does not necessarily reflect Management's judgment as to whether they are
collectible.
Interest income is not accrued on loans where Management has determined
that the borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual, any previously accrued but unpaid interest
is reversed. Income on such loans is then recognized only to the extent that
cash is received and where the future collection on principal is probable.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of
Management, the loans are estimated to be fully collectible as to both principal
and interest.
Interest income on nonaccrual loans, which would have been recognized
during the year, ended December 31, 2001, if all such loans had been current in
accordance with their original terms, totaled $260,000. Interest income actually
recognized on these loans in 2001 was $392,000.
-37-
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 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.
The following table sets forth the amount of the Bank's nonperforming
assets as of the dates indicated:
December 31,
2001 2000 1999 1998 1997
(dollars in thousands)
Nonaccrual loans $5,466 $12,262 $ 1,758 $ 1,045 $ 4,721
Accruing loans past due
90 days or more 584 965 923 620 528
-----------------------------------------------------------------------------
Total nonperforming loans 6,050 $13,227 2,681 1,665 5,249
Other real estate owned 71 1,441 760 1,412 2,230
-----------------------------------------------------------------------------
Total nonperforming assets $6,121 $14,668 $ 3,441 $ 3,077 $ 7,479
Nonincome producing investments
in real estate held by Bank's real
estate development subsidiary $ -- $ -- $ -- $ -- $ 856
Nonperforming loans to total loans 0.92% 2.07% 0.46% 0.31% 1.17%
Allowance for loan losses to nonper-
forming loans 216% 88% 412% 493% 123%
Nonperforming assets to total assets 0.61% 1.51% 0.37% 0.34% 0.91%
Allowance for loan losses to nonper-
forming assets 213% 80% 321% 267% 86%
-38-
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.
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.
-39-
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 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 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, 2001, Management considered the following:
o 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;
o 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
o 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.
The following table sets forth the components of the Bank's loan loss
reserve as of the dates indicated:
December 31,
2001 2000
(dollars in thousands)
Specific allowance $ 5,672 $ 3,266
Formula allowance 4,685 5,414
Unallocated allowance 2,701 2,990
-------------------------
Total allowance $13,058 $11,670
The increase in the specific allowance portion of the reserve at December
31, 2001 and 2000 was due to the overall increase in classified and impaired
loans, which under the Company's allowance methodology are analyzed for specific
reserve. As these classified and impaired loans were analyzed for specific
reserve, they were excluded from the loan balances that were subject to the
formula allowance portion of the reserve; and resulted in a decrease in the
formula allowance portion of the reserve.
The allowance for loan losses to total loans at December 31, 2001 was 1.98%
versus 1.82% at the end of 2000. At December 31, 1999, the allowance for loan
losses to total loans was 1.88%.
Based on the current conditions of the loan portfolio, Management believes
that the $13,058,000 allowance for loan losses at December 31, 2001 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.
-40-
The following table summarizes, for the years indicated, the activity in
the allowance for loan losses:
December 31,
2001 2000 1999 1998 1997
(dollars in thousands)
Balance, beginning of year $ 11,670 $ 11,037 $ 8,206 $ 6,459 $ 6,097
Provision charged to operations 4,400 5,000 3,550 4,200 3,000
Loans charged off:
Commercial, financial and
agricultural (2,861) (4,450) (865) (1,865) (1,289)
Consumer installment (134) (103) (148) (702) (1,551)
Real estate mortgage (218) (152) (69) (188) --
-----------------------------------------------------------------------------
Total loans charged-off (3,213) (4,705) (1,082) (2,755) (2,840)
Recoveries:
Commercial, financial and
agricultural 92 281 327 164 85
Consumer installment 34 54 36 130 117
Real estate mortgage 75 3 -- 8 --
-----------------------------------------------------------------------------
Total recoveries 201 338 363 302 202
-----------------------------------------------------------------------------
Net loans charged-off (3,012) (4,367) (719) (2,453) (2,638)
-----------------------------------------------------------------------------
Balance, year end $ 13,058 $ 11,670 $ 11,037 $ 8,206 $ 6,459
=============================================================================
Average total loans 647,317 $624,717 $566,738 $487,598 $448,117
Ratios:
Net charge-offs during period
to average loans outstanding
during period 0.47% 0.70% 0.13% 0.50% 0.59%
Provision for loan losses to aver-
age loans outstanding 0.68% 0.80% 0.63% 0.86% 0.67%
Allowance to loans at year end 1.98% 1.82% 1.88% 1.54% 1.44%
-41-
The following tables summarize the allocation of the allowance for loan
losses between loan types at December 31, 2001 and 2000:
December 31, 2001
(dollars in thousands)
Percent of
loans in each
category to
Balance at End of Period Applicable to: Amount total loans
Commercial, financial and agricultural $6,929 19.8%
Consumer installment 1,896 23.5%
Real estate mortgage 3,709 49.6%
Real estate construction 524 7.1%
------- ------
$13,058 100.0%
December 31, 2000
(dollars in thousands)
Percent of
loans in each
category to
Balance at End of Period Applicable to: Amount total loans
Commercial, financial and agricultural $6,873 23.1%
Consumer installment 1,373 18.8%
Real estate mortgage 2,925 52.2%
Real estate construction 499 5.9%
------- ------
$11,670 100.0%
Investment in Real Estate Properties
During 1998, the subsidiary divested all investment properties pursuant to
an agreement between the Bank and the FDIC.
Other Real Estate Owned
The December 31, 2001 balance of Other Real Estate Owned (OREO) was $71,000
versus $1,441,000 in 2000. The Bank disposed of properties with a value of
$1,757,000 in 2001. OREO properties consist of a mixture of land, single family
residences, and commercial buildings.
Intangible Assets
At December 31, 2001 and 2000, the Bank had intangible assets totaling
$5,070,000 and $5,464,000, respectively. The intangible assets resulted of the
Bank's 1997 acquisitions of certain Wells Fargo branches and Sutter Buttes
Savings Bank, and the recognition of an additional minimum pension liability in
2001. Intangible assets at December 31, 2001 and 2000 are comprised of the
following:
December 31,
2001 2000
(dollars in thousands)
Core-deposit intangible $4,553 $5,464
Additional minimum pension liability 517 --
Total intangible assets $5,070 $5,464
------ ------
Amortization of core deposit intangible assets amounting to $911,000,
$965,000 and $1,135,000 was recorded in 2001, 2000, and 1999, respectively. The
minimum pension liability intangible asset is not amortized but adjusted
annually based upon actuarial estimates.
-42-
Deposits
Deposits at December 31, 2001 were up $42,561,000 (5.1%) to $880,393,000
over 2000 year-end balances. All categories of deposits except certificates of
deposit increased in 2001. Included in the December 31, 2001 certificate of
deposit balance is $20,000,000 from the State of California, which represents a
decrease of $20,000,000 from the $40,000,000 the State of California had on
deposit at the Bank at December 31, 2000. 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. During 2001, the Bank elected
not to renew $20,000,000 of the $40,000,000 State certificates of deposit that
were outstanding at December 31, 2000. Had the $20,000,000 in State deposits
been allowed to renew, the Bank would have ended 2001 with deposits totaling
$900,393,000 which would have represented year-over-year deposit growth of
$62,561,000 (7.5%).
Deposits at December 31, 2000 were up $43,722,000 (5.5%) over the 1999
year-end balances to $837,832,000. All categories of deposits except savings
increased in 2000. Included in the December 31, 2000 and 1999 certificate of
deposit balances is $40,000,000 from the State of California.
Long-Term Debt
In 2001, the Bank made principal payments of $11,027,000 on long-term debt
obligations. During 2000, the Bank repaid $46,522,000 of long-term debt, and
added $35,000,000 under long-term debt agreements. See Note G to the
consolidated financial statements.
Equity
See Note I and Note T in the financial statements for a discussion of
Shareholder's equity and regulatory capital, respectively. Management believes
that the Company's capital is adequate to support anticipated growth, meet the
cash dividend requirements of the Company and meet the future risk-based capital
requirements of the Bank and the Company.
Market Risk Management
Overview. The goal for managing the assets and liabilities of the Bank is
to maximize shareholder value and earnings while maintaining a high quality
balance sheet without exposing the Bank to undue interest rate risk. The Board
of Directors has overall responsibility for the Company's interest rate risk
management policies. The Bank has an Asset and Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits, investing in securities and issuing debt. Interest rate risk is the
primary market risk associated with asset/liability management. Sensitivity of
earnings to interest rate changes arises when yields on assets change in a
different time period or in a different amount from that of interest costs on
liabilities. To mitigate interest rate risk, the structure of the balance sheet
is managed with the goal that movements of interest rates on assets and
liabilities are correlated and contribute to earnings even in periods of
volatile interest rates. The asset/liability management policy sets limits on
the acceptable amount of variance in net interest margin, net income and market
value of equity under changing interest environments. Market value of equity is
the net present value of estimated cash flows from the Bank's assets,
liabilities and off-balance sheet items. The Bank uses simulation models to
forecast net interest margin, net income and market value of equity.
Simulation of net interest margin, net income and market value of equity
under various interest rate scenarios is the primary tool used to measure
interest rate risk. Using computer-modeling techniques, the Bank is able to
estimate the potential impact of changing interest rates on net interest margin,
net income and market value of equity. A balance sheet forecast is prepared
using inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various
interest rate scenarios, the forecast balance sheet is processed against seven
interest rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
-43-
The following table summarizes the effect on net interest income and net
income due to changing interest rates as measured against a flat rate (no
change) scenario:
Interest Rate Risk Simulation of Net Interest Income and Net Income as of
December 31, 2001
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) 2.48% 5.71%
+200 (ramp) 1.68% 3.86%
+100 (ramp) 0.83% 1.91%
+ 0 (flat) -- --
-100 (ramp) (1.57)% (3.63)%
-200 (ramp) (3.75)% (8.65)%
-300 (ramp) (6.43)% (14.82)%
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,
2001
Estimated Change in
Change in Interest Market Value of Equity (MVE)
Rates (Basis Points) (as % of "flat" MVE)
+300 (shock) (3.71)%
+200 (shock) (2.60)%
+100 (shock) (1.41)%
+ 0 (flat) --
-100 (shock) (0.64)%
-200 (shock) (2.43)%
-300 (shock) 1.52%
These results indicate that the balance sheet is slightly asset sensitive
since earnings increase when interest rates rise. The magnitude of all the
simulation results noted above is within the Bank's policy guidelines. The asset
liability management policy limits aggregate market risk, as measured in this
fashion, to an acceptable level within the context of risk-return trade-offs.
The simulation results noted above do not incorporate any management
actions, which might moderate the negative consequences of interest rate
deviations. Therefore, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the preceding tables. For
example, although certain of the Bank's assets and liabilities may have similar
maturities or repricing time frames, they may react in different degrees to
changes in market interest rates. In addition, the interest rates on certain of
the Bank's asset and liability categories may precede, or lag behind, changes in
market interest rates. Also, the actual rates of prepayments on loans and
investments could vary significantly from the assumptions utilized in deriving
the results as presented in the preceding table. Further, a change in U.S.
Treasury rates accompanied by a change in the shape of the treasury yield curve
could result in different estimations from those presented herein. Accordingly,
the results in the preceding tables should not be relied upon as indicative of
actual results in the event of changing market interest rates. Additionally, the
resulting estimates of changes in market value of equity are not intended to
represent, and should not be construed to represent, estimates of changes in the
underlying value of the Bank.
-44-
Interest rate sensitivity is a function of the repricing characteristics of
the Bank's portfolio of assets and liabilities. One aspect of these repricing
characteristics is the time frame within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity. An analysis of the repricing time frames of
interest-bearing assets and liabilities is sometimes called a "gap" analysis
because it shows the gap between assets and liabilities repricing or maturing in
each of a number of periods. Another aspect of these repricing characteristics
is the relative magnitude of the repricing for each category of interest earning
asset and interest-bearing liability given various changes in market interest
rates. Gap analysis gives no indication of the relative magnitude of repricing
given various changes in interest rates. Interest rate sensitivity management
focuses on the maturity of assets and liabilities and their repricing during
periods of changes in market interest rates. Interest rate sensitivity gaps are
measured as the difference between the volumes of assets and liabilities in the
Bank's current portfolio that are subject to repricing at various time horizons.
The following interest rate sensitivity table shows the Bank's repricing
gaps as of December 31, 2001. 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, 2001
Repricing within:
Less than 3 3 - 6 6 - 12 1 - 5 Over
months months months years 5 years
(dollars in thousands)
Interest-earning assets:
Securities $ 54,460 $ 17,820 $ 24,042 $102,393 $ 40,204
Loans 311,529 28,601 42,230 207,505 63,519
--------------------------------------------------------------------------------
Total interest-earning assets $365,989 $46,421 $66,272 $309,898 $103,723
Interest-bearing liabilities
Transaction deposits $412,743 $ --- $ --- $ --- $ ---
Time 117,609 63,678 73,373 22,479 125
Fed funds purchased --- --- --- --- ---
Long-term borrowings 8 9 18 194 22,727
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Total interest-bearing liabilities $530,360 $63,687 $73,391 $22,673 $22,852
--------------------------------------------------------------------------------
Interest sensitivity gap $(164,370) $ (17,266) $ (7,120) $287,226 $ 80,870
Cumulative sensitivity gap $(164,370) $(181,636) $(188,756) $ 98,470 $179,340
As a percentage of earning assets:
Interest sensitivity gap (18.42%) (1.94%) (0.80%) 32.19% 9.06%
Cumulative sensitivity gap (18.42%) (20.36%) (21.15%) 11.04% 20.10%
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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
$14,309,000 in 2001, which means that assets were not generally used for
liquidity purposes. 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 2001, financing activities
provided funds totaling $19,779,000. Internal deposit growth provided funds
amounting to $42,561,000. The Bank also had available correspondent banking
lines of credit totaling $50,000,000 at year-end. 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 2001, operating activities provided cash of $14,304,000.
In connection with the adoption of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), on October 1, 1998, the Bank reclassified its entire portfolio of
held-to-maturity investment securities, with a carrying value of $78,901,000, to
the available-for-sale classification. The AFS securities plus cash and cash
equivalents in excess of reserve requirements totaled $302,054,000 at December
31, 2001, which was 30.0% of total assets at that time. This was up from
$286,800,000 and 29.5% at the end of 2000.
The overall liquidity of the Bank is enhanced by the sizable core deposits,
which provide a relatively stable funding base. 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, 2001 and 2000, the Bank had $20,000,000 and $40,000,000 of these State
deposits, respectively.
Certificates of Deposit in Denominations of $100,000 or More
Amounts as of
December 31,
2001 2000 1999
(in thousands)
Time remaining until maturity:
Less than 3 months $38,114 $55,721 $52,260
3 months to 6 months 10,431 14,002 10,906
6 months to 12 months 15,383 18,686 7,228
More than 12 months 6,374 4,933 3,068
------------------------------------------
Total $70,302 $93,342 $73,462
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Loan demand also affects the Bank's liquidity position. The following table
presents the maturities of loans at December 31, 2001:
Loan Maturities - December 31, 2001
After
One But
Within Within After 5
One Year 5 Years Years Total
(in thousands)
Loans with predetermined interest rates:
Commercial, financial and agricultural $15,200 $26,006 $2,291 $43,497
Consumer installment 14,652 39,642 28,648 82,942
Real estate mortgage 12,305 53,060 64,466 129,831
Real estate construction 19,909 0 420 20,329
------------------------------------------------------------
$62,066 $118,708 $95,825 $276,599
Loans with floating interest rates:
Commercial, financial and agricultural $67,341 $15,344 $3,872 $86,557
Consumer installment 72,095 0 8 72,103
Real estate mortgage 27,413 50,606 119,046 197,065
Real estate construction 17,449 8,548 411 26,408
------------------------------------------------------------
$184,298 $74,498 $123,337 $382,133
------------------------------------------------------------
Total loans $246,364 $193,206 $219,162 $658,732
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, 2001, the Bank had no held-to-maturity
securities.
Securities Maturities and Weighted Average Tax Equivalent Yields - December 31, 2001
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
(dollars in thousands)
Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ -- -- % $29,883 5.74% $ -- -- % $ -- -- % $29,883 5.74%
Obligations of states and political subdivisions 763 5.53% 3,618 5.76% 3,688 7.06% 37,164 7.84% 45,233 7.58%
Mortgage-backed securities 12,635 6.21% 19,749 5.75% 100,616 6.06% 133,000 6.03%
Corporate bonds 2,169 7.65% 10,120 3.08% 12,289 3.89%
-------------------------------------------------------------------------------------
Total securities available-for-sale $763 5.53% $48,305 5.95% $23,437 5.96% $147,900 6.31% $220,405 6.19%
Other securities 4,185 5.20% 4,185 5.20%
-------------------------------------------------------------------------------------
Total investment securities $763 5.53% $48,305 5.95% $23,437 5.96% $152,085 6.28% $224,590 6.17%
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.
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Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital
leases. (See Note H of the financial statements for the terms.) These
commitments do not significantly impact operating results.
As of December 31, 2001 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 $195,091,000 from $163,667,000 at
December 31, 2000. The commitments represent 29.6% of the total loans
outstanding at year-end 2001 versus 25.6% a year ago.
Disclosure of Fair Value
The intent of presenting the fair values of financial instruments is to
depict the market's assessment of the present value of net future cash flows
discounted to reflect both current interest rates and the market's assessment of
the risk that the cash flows will not occur.
In determining fair values, the Bank used the carrying amount for cash,
short-term investments, accrued interest receivable, short-term borrowings and
accrued interest payable, as all of these instruments are short-term in nature.
Securities are reflected at quoted market values. Loans and deposits have a
long-term time horizon, which required more complex calculations for fair value
determination. Loans are grouped into homogeneous categories and broken down
between fixed and variable rate instruments. Loans with a variable rate, that
reprice immediately, are valued at carrying value. The fair value of fixed rate
instruments is estimated by discounting the future cash flows using current
rates. Credit risk and repricing risk factors are included in the current rates.
Fair value for nonaccrual loans is reported at carrying value and is included in
the net loan total. Since the allowance for loan losses exceeds any potential
adjustment for credit problems, no further valuation adjustment has been made.
Demand deposits, savings and certain money market accounts are short term
in nature so the carrying value equals the fair value. For deposits that extend
over a period in excess of four months, the fair value is estimated by
discounting the future cash payments using the rates currently offered for
deposits of similar remaining maturities.
At 2001 year-end, the fair values calculated on the Bank's assets are 0.87%
below the carrying values versus 0.88% above the carrying values at year-end
2000. The change in the calculated fair value percentage relates to the loan
category and is the result of changes in interest rates in 2001 (See Note R of
the financial statements).
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