SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2002 Commission file number 0-10661
- ------------------------------------ ------------------------------
TRICO BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2792841
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 530/898-0300
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Class: Common stock, no par value
Outstanding shares as of November 12, 2002: 7,045,050
TABLE OF CONTENTS
Page
Forward Looking Statements 1
PART I - FINANCIAL INFORMATION 2
Item 1 - Financial Statements 2
Financial Summary 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 23
Item 4 - Controls and Procedures 24
PART II - OTHER INFORMATION 25
Item 1 - Legal Proceedings 25
Item 6 - Exhibits and Reports on Form 8-K 25
Signatures 25
Certifications 26
Exhibits 28
Exhibit 11.1 - Computation of Earnings Per Share 28
Exhibit 99.1 - Certification Required by 18 U.S.C. Section 1350 29
Exhibit 99.2 - Certification Required by 18 U.S.C. Section 1350 29
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. A number of factors, some
of which are beyond the Company's ability to predict or control, could cause
future results to differ materially from those contemplated. These factors
include but are not limited to (1) a continued slowdown in the national and
California economies; (2) increased economic uncertainty created by the recent
terrorist attacks in the United States and the uncertain effect of these events
on the national and regional economies; (4) changes in the interest rate
environment; (5) changes in the regulatory environment; (6) significantly
increasing competitive pressure in the banking industry; (7) operational risks
including data processing system failures or fraud; (8) the effect of
acquisitions and integration of acquired businesses; (9) volatility of rate
sensitive deposits; (10) asset/liability matching risks and liquidity risks; and
(11) changes in the securities markets.
The reader is directed to the Company's annual report on Form 10-K for the year
ended December 31, 2001, for further discussion of factors which could affect
the Company's business and cause actual results to differ materially from those
expressed in any forward-looking statement made in this report.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited) (Unaudited)
At September 30, At December 31,
2002 2001 2001
---------------------------------------------------
Assets:
Cash and due from banks $56,749 $48,317 $59,264
Federal funds sold 23,400 27,000 18,700
---------------------------------------------------
Cash and cash equivalents 80,149 75,317 77,964
Investment securities available for sale 268,921 210,789 224,590
Loans
Commercial 142,290 151,772 130,054
Consumer 191,601 149,258 155,046
Real estate mortgages 313,191 322,096 326,897
Real estate construction 36,472 45,031 46,735
---------------------------------------------------
683,554 668,157 658,732
Allowance for loan losses (14,382) (12,437) (13,058)
---------------------------------------------------
Loans, net of allowance for loan losses 669,172 655,720 645,674
Premises and equipment, net 16,583 16,510 16,457
Cash value of life insurance 15,045 14,559 14,602
Other real estate owned - 723 71
Accrued interest receivable 5,552 6,087 5,522
Deferred income taxes 7,957 8,164 9,334
Intangible assets 4,387 5,262 5,070
Other assets 5,757 3,019 6,163
---------------------------------------------------
Total Assets $1,073,523 $996,150 $1,005,447
===================================================
Liabilities:
Deposits:
Noninterest-bearing demand $202,895 $177,970 $190,386
Interest-bearing demand 175,883 155,304 165,542
Savings 268,182 228,367 247,399
Time certificates, $100,000 and over 86,945 80,865 70,302
Other time certificates 203,990 216,974 206,764
---------------------------------------------------
Total deposits 937,895 859,480 880,393
Accrued interest payable 2,608 4,350 3,488
Other Liabilities 13,667 10,977 11,677
Long-term debt and other borrowings 22,932 32,963 22,956
---------------------------------------------------
Total Liabilities 977,102 907,770 918,514
===================================================
Shareholders' Equity:
Authorized - 20,000,000 shares of common stock
Issued and outstanding:
7,035,590 at September 30, 2002 50,188
7,018,080 at September 30, 2001 49,395
7,000,980 at December 31, 2001 49,679
Retained earnings 43,900 37,974 37,909
Accumulated other comprehensive income, net 2,333 1,011 (655)
---------------------------------------------------
Total Shareholders' Equity 96,421 88,380 86,933
===================================================
Total Liabilities and Shareholders' Equity $1,073,523 $996,150 $1,005,447
===================================================
2
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited) (Unaudited)
Three months ended Nine months ended
2002 2001 2002 2001
-------------------------------------------------------
Interest Income:
Interest and fees on loans $13,333 $15,132 $39,387 $44,993
Interest on federal funds sold 143 370 476 1,321
Interest on investment securities available for sale
Taxable 2,410 2,202 6,949 7,158
Tax exempt 549 555 1,656 1,666
-------------------------------------------------------
Total interest income 16,435 18,259 48,468 55,138
-------------------------------------------------------
Interest Expense:
Interest on interest-bearing demand deposits 115 368 350 1,325
Interest on savings 656 1,107 2,011 3,899
Interest on time certificates of deposit 2,129 3,623 6,340 12,380
Interest on short-term borrowing 1 2 1 3
Interest on long-term debt 326 512 967 1,523
-------------------------------------------------------
Total interest expense 3,227 5,612 9,669 19,130
-------------------------------------------------------
Net Interest Income 13,208 12,647 38,799 36,008
-------------------------------------------------------
Provision for loan losses 700 600 2,000 3,250
-------------------------------------------------------
Net Interest Income After Provision for Loan Losses 12,508 12,047 36,799 32,758
-------------------------------------------------------
Noninterest Income:
Service charges and fees 3,521 2,045 7,635 6,015
Gain on sale of investments - - - 1,756
Gain on sale of loans 752 494 2,254 1,292
Commissions on sale of non-deposit investment products 712 678 1,989 1,865
Other 428 496 1,304 1,390
-------------------------------------------------------
Total Noninterest Income 5,413 3,713 13,182 12,318
-------------------------------------------------------
Noninterest Expense:
Salaries and related benefits 6,344 5,431 17,856 15,765
Other 5,789 5,034 15,642 14,672
-------------------------------------------------------
Total Noninterest Expense 12,133 10,465 33,498 30,437
-------------------------------------------------------
Income Before Income Taxes 5,788 5,295 16,483 14,639
-------------------------------------------------------
Provision for income taxes 2,161 2,050 6,163 5,578
-------------------------------------------------------
Net Income $3,627 $3,245 $10,320 $9,061
-------------------------------------------------------
Comprehensive Income:
Change in unrealized gain (loss) on
securities available for sale, net 940 1,411 2,988 1,695
Net change in minimum pension liability - - - (360)
-------------------------------------------------------
Comprehensive Income $4,567 $4,656 $13,308 $10,396
=======================================================
Average Shares Outstanding 7,026 7,044 7,010 7,087
Diluted Average Shares Outstanding 7,231 7,231 7,188 7,237
Per Share Data
Basic Earnings $0.52 $0.46 $1.47 $1.28
Diluted Earnings $0.50 $0.45 $1.44 $1.25
Dividends Paid $0.20 $0.20 $0.60 $0.60
3
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, unaudited)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income, net Total
---------------------------------------------------
Balance, December 31, 2000 $50,428 $35,129 ($324) $85,233
Net income for the period 9,061 9,061
Stock issued, including
stock option tax benefits 386 386
Repurchase of common stock (1,419) (1,979) (3,398)
Dividends (4,237) (4,237)
Unrealized gain on securities available
for sale, net 1,695 1,695
Change in minimum pension liability, net (360) (360)
---------------------------------------------------
Balance September 30, 2001 $49,395 $37,974 $1,011 $88,380
===================================================
Balance, December 31, 2001 $49,679 $37,909 ($655) $86,933
Net income for the period 10,320 10,320
Stock issued, including
stock option tax benefits 579 579
Repurchase of common stock (70) (119) (189)
Dividends (4,210) (4,210)
Unrealized gain on securities available
for sale, net 2,988 2,988
---------------------------------------------------
Balance September 30, 2002 $50,188 $43,900 $2,333 $96,421
===================================================
4
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
For the nine months
ended September 30,
2002 2001
-------------------------------
Operating Activities:
Net income $10,320 $9,061
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 1,956 1,891
Amortization of intangible assets 683 683
Provision for loan losses 2,000 3,250
Amortization of investment securities premium, net 1,080 139
Deferred income taxes (108) (365)
Investment security gains, net - (1,756)
Originations of loans for resale (113,271) (84,545)
Proceeds from sale of loans originated for resale 114,227 85,028
Gain on sale of loans (2,254) (1,292)
Amortization of mortgage servicing rights 498 223
Loss (gain) on sale of fixed assets 10 (4)
Gain on sale of other real estate owned, net (8) (48)
Provision for losses on other real estate owned - 18
Change in assets and liabilities:
(Increase) decrease in interest receivable (30) 848
Decrease in interest payable (880) (895)
Increase in other assets and liabilities 2,547 389
-------------------------------
Net Cash Provided by Operating Activities 16,770 12,625
-------------------------------
Investing Activities:
Proceeds from maturities of securities available-for-sale 87,365 63,331
Proceeds from sales of securities available-for-sale - 14,120
Purchases of securities available-for-sale (127,999) (54,738)
Net increase in loans (25,498) (30,576)
Proceeds from sale of premises and equipment 16 23
Purchases of property and equipment (1,902) (1,426)
Proceeds from sale of other real estate owned 79 1,075
-------------------------------
Net Cash Used by Investing Activities (67,939) (8,191)
-------------------------------
Financing Activities:
Net increase in deposits 57,502 21,648
Net decrease in federal funds purchased - (500)
Payments of principal on long-term debt agreements (24) (1,020)
Repurchase of Common Stock (189) (3,398)
Dividends paid (4,210) (4,237)
Exercise of stock options/issuance of Common Stock 275 200
-------------------------------
Net Cash Provided by Financing Activities 53,354 12,693
-------------------------------
Net Increase in Cash and Cash Equivalents 2,185 17,127
-------------------------------
Cash and Cash Equivalents and Beginning of Period 77,964 58,190
-------------------------------
Cash and Cash Equivalents at End of Period $80,149 $75,317
===============================
Supplemental Disclosure of Noncash Activities:
Unrealized gain (loss) on securities available for sale $4,777 $2,740
Loans transferred to other real estate owned - $327
Supplemental Disclosure of Cash Flow Activity:
Cash paid for interest expense $10,549 $20,025
Cash paid for income taxes $4,700 $5,775
Income tax benefit from stock option exercises $304 $186
5
TRICO BANCSHARES
Financial Summary
(dollars in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------------
Net Interest Income (FTE) $13,520 $12,923 $39,742 $36,958
Provision for loan losses (700) (600) (2,000) (3,250)
Noninterest income 5,413 3,713 13,182 12,318
Noninterest expense (12,133) (10,465) (33,498) (30,437)
Provision for income taxes (FTE) (2,473) (2,326) (7,106) (6,528)
-----------------------------------------------------------
Net income $3,627 $3,245 $10,320 $9,061
===========================================================
Average shares outstanding 7,026 7,044 7,010 7,087
Diluted average shares outstanding 7,231 7,231 7,188 7,237
Shares outstanding at period end 7,036 7,018 7,036 7,018
As Reported:
Basic earnings per share $0.52 $0.46 $1.47 $1.28
Diluted earnings per share $0.50 $0.45 $1.44 $1.25
Return on assets 1.39% 1.32% 1.36% 1.25%
Return on equity 15.17% 14.75% 14.92% 13.90%
Net interest margin 5.67% 5.78% 5.72% 5.58%
Net loan recoveries (losses) to average loans 0.04% (0.05%) (0.14%) (0.51%)
Efficiency ratio (FTE) 64.08% 62.91% 63.29% 61.77%
Average Balances:
Total assets $1,044,518 $982,387 $1,015,068 $970,086
Earning assets 954,611 894,670 926,387 883,816
Total loans 676,009 661,630 655,682 644,447
Total deposits 908,675 844,741 883,898 834,161
Shareholders' equity 95,645 88,005 92,212 86,886
Balances at Period End:
Total assets $1,073,523 $996,150
Earning assets 975,875 905,946
Total loans 683,554 668,157
Total deposits 937,895 859,480
Shareholders' equity 96,421 88,380
Financial Ratios at Period End:
Allowance for loan losses to loans 2.10% 1.86%
Book value per share $13.70 $12.59
Equity to assets 8.98% 8.87%
Total capital to risk assets 11.89% 11.69%
Dividends Paid Per Share $0.20 $0.20 $0.60 $0.60
Dividend Payout Ratio 38.75% 43.42% 40.80% 47.07%
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1:
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim period presented. The interim results for the nine months ended
September 30, 2002 and 2001 are not necessarily indicative of the results
expected for the full year. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and accompanying notes as well as other information included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Certain amounts previously reported in the 2001 financial statements have been
reclassified to conform to the 2002 presentation. These reclassifications did
not affect previously reported net income or total shareholders' equity.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 141, "Business Combinations" (SFAS 141),
and Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized after 2001, but instead be periodically
evaluated for impairment. Intangible assets with definite useful lives are
required to be amortized over their respective estimated useful lives to their
estimated residual values, and also reviewed for impairment.
Effective January 1, 2002, the Company was required to adopt the provisions of
SFAS 142. Accordingly, any goodwill and any intangible asset determined to have
an indefinite useful life that are acquired in a purchase business combination
will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate accounting literature. The Company was also
required to reassess the useful lives and residual values of all such intangible
assets and make any necessary amortization period adjustments by March 31, 2002.
No such adjustments were required to be made.
In addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company was required to test the intangible asset
for impairment in the first quarter of 2002. The Company has no intangibles with
indefinite useful life.
As of the date of adoption, the Company had identifiable intangible assets
consisting of core deposit premiums and minimum pension liability. Core deposit
premiums are amortized using an accelerated method over a period of ten years.
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates. The Company has no goodwill (unidentifiable
intangible assets).
7
Acquisition, Goodwill and Other Intangible Assets
The following table summarizes the Company's goodwill and other intangible
assets as of January 1, 2002 and September 30, 2002.
January 1, September 30,
(Dollar in Thousands) 2002 Additions Reductions 2002
----------------------------------------------
Core Deposit Intangibles $10,795 $10,795
Accumulated Amortization (5,725) (683) (6,408)
----------------------------------------------
Core Deposit Intangibles, net $5,070 ($683) $4,387
==============================================
Core deposit premiums are scheduled to amortize at a rate of $227,700 per
quarter through the quarter ended December 31, 2006.
Mortgage Operations
The Company sold substantially all of its conforming long-term residential
mortgage loans originated during the first nine months of 2002 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.
The following table summarizes the Company's mortgage servicing rights assets as
of January 1, 2002 and September 30, 2002.
January 1, September 30,
(Dollar in Thousands) 2002 Additions Reductions 2002
----------------------------------------------
Mortgage Servicing Rights $1,512 $1,298 ($498) $2,312
==============================================
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 September 30, 2002, the Company had no mortgage loans held for sale. At
September 30, 2002 and December 31, 2001, the Company serviced real estate
mortgage loans for others of $269 million and $196 million, respectively.
Noninterest Income
Included in the results for the nine months ended September 30, 2001 and the
three months ended March 31, 2001 is a one-time pre-tax income item of
$1,756,000. This one-time item represents the realized gain recorded by the
Company upon the sale of 88,796 common shares of John Hancock Financial
Services, Inc. (JHF) for proceeds of $3,265,000.
8
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
common shares outstanding on October 19, 2001. As of December 31, 2001, the
Company repurchased 108,800 shares under this new plan. During the quarters
ended March 31, 2002, June 30, 2002, and September 30, 2002, the Company
repurchased 10,000, 0, and 0 shares under this new plan, respectively.
Shareholder 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 the 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.
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.
Business Segments
The Company is principally engaged in traditional community banking activities
provided through its twenty-nine branches and eight in-store branches located
throughout Northern 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. 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 prescribed aggregation or materiality criteria and, therefore, are
reported as "Other" in the following table.
9
Summarized financial information concerning the Bank's reportable segments is as
follows (in thousands):
Community
Banking Other Total
Three Months Ended September 30, 2002
Net interest income $12,948 $260 $13,208
Noninterest income 4,534 879 5,413
Noninterest expense 11,567 566 12,133
Net income 3,272 355 3,627
Assets $1,057,071 $16,452 $1,073,523
Three Months Ended September 30, 2001
Net interest income $12,478 $169 $12,647
Noninterest income 2,954 759 3,713
Noninterest expense 9,826 639 10,465
Net income 3,066 179 3,245
Assets $980,270 $15,880 $996,150
Nine Months Ended September 30, 2002
Net interest income $38,053 $746 $38,799
Noninterest income 10,809 2,373 13,182
Noninterest expense 31,871 1,627 33,498
Net income 9,395 925 10,320
Assets $1,057,071 $16,452 $1,073,523
Nine Months Ended September 30, 2001
Net interest income $35,388 $620 $36,008
Noninterest income 10,233 2,085 12,318
Noninterest expense 28,692 1,745 30,437
Net income 8,466 595 9,061
Assets $980,270 $15,880 $996,150
Recently Issued Accounting Pronouncement
On October 3, 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS 144 supersedes Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental
provisions of that Statement. SFAS 144 also supersedes the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business". However, it retains the requirement in
Opinion 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
By broadening the presentation of discontinued operations to include more
disposal transactions, the FASB has enhanced management's ability to provide
information that helps financial statement users to assess the effects of a
disposal transaction on the ongoing operations of an entity. The Company adopted
the provisions of SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not
have a material impact on the financial condition or operating results of the
Company.
10
Subsequent Event
On October 7, 2002, TriCo Bancshares announced that on October 3, 2002 it signed
a definitive agreement with Tri Counties Bank, its wholly owned subsidiary, and
North State National Bank, pursuant to which TriCo Bancshares will acquire all
of the outstanding stock of North State National Bank in exchange for cash of
approximately $13 million, approximately 716,000 shares of TriCo Bancshares
common stock and options to purchase approximately 92,450 shares of TriCo
Bancshares common stock, subject to adjustments as set forth in the agreement.
Based upon a closing price of $23.92 per share of TriCo Bancshares common stock
on October 3, 2002, the transaction was valued at $31.8 million.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
As TriCo Bancshares (the "Company") has not commenced any business operations
independent of Tri Counties Bank (the "Bank"), the following discussion pertains
primarily to the Bank. Average balances, including such balances used in
calculating certain financial ratios, are generally comprised of average daily
balances for the Company. Within Management's Discussion and Analysis of
Financial Condition and Results of Operations, interest income and net interest
income are generally presented on a fully tax-equivalent (FTE) basis.
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, investments, intangible assets, income taxes and contingencies. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. (See caption "Allowance for Loan Losses" for a more detailed
discussion).
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
its subsidiaries' financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Consolidated Financial Statements of the Company and the Notes thereto.
The Company had earnings of $3,627,000 for the quarter ended September 30, 2002.
The quarterly earnings represent an 11.8% increase over the $3,245,000 reported
for the same period of 2001. Diluted earnings per share for the third quarter of
2002 were $0.50 versus $0.45 in the year earlier period. Earnings for the nine
months ended September 30, 2002 were $10,320,000 versus year ago results of
$9,061,000, and represented a 13.9% increase. The diluted earnings per share
were $1.44 and $1.25 for the nine-month periods ended September 30, 2002 and
2001, respectively. Included in the results for the nine months ended September
30, 2001, was a one-time pre-tax gain of $1,756,000 from the sale of insurance
company stock. Excluding the one-time gain noted above, the Company would have
reported diluted earnings per share of $1.44 and $1.10 in the nine month periods
ended September 30, 2002 and 2001, respectively.
11
Following is a summary of the components of fully taxable equivalent ("FTE") net
income for the periods indicated (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------
2002 2001 2002 2001
---------------------------------------------
Net interest income (FTE) $13,520 $12,923 $39,742 $36,958
Provision for loan losses (700) (600) (2,000) (3,250)
Noninterest income 5,413 3,713 13,182 12,318
Noninterest expense (12,133) (10,465) (33,498) (30,437)
Provision for income taxes (FTE) (2,473) (2,326) (7,106) (6,528)
---------------------------------------------
Net income $3,627 $3,245 $10,320 $9,061
=============================================
Net income for the third quarter of 2002 was $382,000 (11.8%) more than for the
same quarter of 2001. A significant increase in noninterest income (up $1.70
million or 45.8%), and an increase in net interest income (FTE) (up $597,000 or
4.6%) more than offset increases in noninterest expenses (up $1.67 million or
15.9%) and provision for loan losses (up $100,000 or 16.7%). The increase in
noninterest income from the year-ago quarter was mainly due to an increase in
service charges and fee income on deposit products (up $1,476,000 or 72.2% to
$3,521,000), and an increase in gain on sale of loans (up $258,000 or 52.2% to
$752,000). The increase in service charges and fee income was mainly due to the
introduction of an overdraft privilege deposit product in July 2002 that has
added a new stream of recurring noninterest income. The increase in gain on sale
of loans is due to the Company's ability to originate and sell an increased
volume of residential real estate mortgage loans in the current environment of
record mortgage refinance. The increase in net interest income (FTE) was due to
an increase in average balance of interest-earning assets (up $59.9 million)
that was partially offset by an 11 basis point decrease in net interest margin.
The increase in noninterest expense was mainly due to an increase in salary and
benefit expense (up $913,000 or 16.8% to $6,344,000). The increase in salary and
benefits expense was mainly due to annual salary increases, increased commission
and incentive expense, and new employees at the Company's newly opened branches
in Oroville (June 2002) and Brentwood (September 2002). Other noninterest
expense also increased (up $755,000 or 15.0% to $5,789,000). Approximately
$350,000 of this increase was recurring expenses related to the overdraft
privilege product introduced in July 2002, and noted above. Increased
advertising expenses accounted for $190,000 of the increase in other noninterest
expense.
Comparing the first nine months of 2002 to the first nine months of the prior
year, net income increased $1,259,000 (13.9%). Increases in net interest income
(FTE) (up $2.78 million or 7.5%) and noninterest income (up $864,000 or 7.0%),
and a decrease in provision for loan loss (down $1.25 million or 38.5%) were
only partially offset by an increase in noninterest expense (up $3.06 million or
10.1%). The increase in net interest income (FTE) was the result of increased
average earning asset balance (up $42.6 million or 4.8% to $926.4 million), and
a 14 basis point increase in net interest margin (FTE). The decrease in the
provision for loan losses was due to reduced loan losses (charge-offs) from the
year-ago period, and relatively stable loan credit quality. Driving the increase
in noninterest income was gain on sale of loans and fees from the overdraft
privilege product noted above. Driving the increase in noninterest expense were
annual salary increases, increased commission and incentive expense, and new
employees at the Company's newly opened branches in Oroville (June 2002) and
Brentwood (September 2002).
12
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------
2002 2001 2002 2001
------------------------------------------------
Interest income $16,435 $18,259 $48,468 $55,138
Interest expense (3,227) (5,612) (9,669) (19,130)
FTE adjustment 312 276 943 950
------------------------------------------------
Net interest income (FTE) $13,520 $12,923 $39,742 $36,958
================================================
Average earning assets $954,611 $894,670 $926,387 $883,816
Net interest margin (FTE) 5.67% 5.78% 5.72% 5.58%
The Company's primary source of revenue is net interest income, or the
difference between interest income on earning assets and interest expense in
interest-bearing liabilities. Net interest income (FTE) during the third quarter
of 2002 increased $597,000 (4.6%) from the same period in 2001 to $13,520,000.
The increase in net interest income (FTE) was due to the increased average
balances of earning assets (up $59.9 million or 6.7%) offset by an 11 basis
point decrease in net interest margin (FTE).
Comparing the first nine months of 2002 with the first nine months of the prior
year, net interest income (FTE) increased $2,784,000 (7.5%), with the increase
attributable to an increase in the average balance of interest-earning assets
(up $42.5 million or 4.8%) and a 14 basis point increase in net interest margin
(FTE).
Interest and Fee Income
Interest and fee income (FTE) for the third quarter of 2002 decreased $1.79
million (9.7%) from the third quarter of 2002. The decrease was the net effect
of higher average interest-earning assets (up $59.9 million or 6.7%), more than
offset by a 127 basis point decrease in the yield on those average earning
assets to 7.02%. The growth in interest-earning assets was led by a $54.3
million (28.4%) increase in average investment security balances to $245.6
million, and a $14.4 million (2.2%) increase in average loan balances. The
average balance of federal funds sold decreased $8.8 million (21.0%) to $33.0
million.
The average yield on the Company's earning assets decreased for the quarter from
8.29% in 2001 to 7.02% in 2002. This downward trend in yields was reflective of
general interest rate markets during much of 2001 and into 2002. In addition,
deposit growth outstripped loan growth during the periods, which resulted in
most of the growth in interest-earning assets being in lower yielding investment
securities instead of relatively higher yielding loans.
Comparing the first nine months of 2002 to 2001, interest and fee income (FTE)
decreased $6.67 million (11.9%). Consistent with the third quarter comparison,
the decrease was due to higher average balances of interest-earning assets, more
than offset by lower yields. The average balance of interest-earning assets
increased $42.6 million (4.8%). Average investment balances accounted for $34.9
million of the increase, while average loan balances accounted for $11.2 million
of the increase. Average federal funds sold balances decreased $3.6 million.
The average yield on interest-earning assets decreased from 8.46% in 2001 to
7.11% in 2002. This downward trend in yields was reflective of general interest
rate markets during much of 2001 and into 2002. As in the third quarter
comparison, deposit growth outstripped loan growth during the periods, which
resulted in most of the growth in interest-earning assets being in lower
yielding investment securities instead of relatively higher yielding loans.
13
Interest Expense
Interest expense decreased $2.39 million (42.5%) in the third quarter of 2002
compared to the year-ago quarter. The decrease was mainly due to a decrease in
the average rate paid on interest-bearing liabilities from 3.15% in the third
quarter of 2001 to 1.72% in the third quarter of 2002.
Average interest-bearing liabilities increased $35.2 million (4.9%) in the third
quarter compared to the year-ago quarter. The increase in interest-bearing
liabilities was concentrated in the lower earning interest-bearing demand
deposit (up $18.6 million or 11.9%), and savings deposits (up $37.2 million or
16.6%). The average balances of the higher earning time deposits (down $10.5
million or 3.5%) and long-term debt (down $10.2 million or 30.9%) were down from
the year-ago quarter. In addition, the average balance of noninterest-bearing
deposits increased $18.6 million (11.3%) from the year-ago quarter. The average
rate paid for all categories of interest-bearing liabilities decreased from the
average rate paid in the year-ago quarter as a result of general market interest
rate changes.
Interest expense decreased $9.46 million (49.5%) in the first nine months of
2002 compared to the first nine months of 2001. The decrease was due to a
decrease in the average rate paid on interest-bearing liabilities from 3.58% in
the first nine months of 2001 to 1.76% in first nine months of 2002.
Average interest-bearing liabilities increased $20.9 million (2.9%) in the first
nine months of 2002 compared to the year-ago nine-month period. The increase in
interest-bearing liabilities was concentrated in the lower earning
interest-bearing demand deposits (up $20.4 million or 13.3%), and savings
deposits (up $37.4 million or 17.0%). The average balances of the higher earning
time deposits (down $26.7 million or 8.8%) and long-term debt (down $10.1
million or 30.5%) were down from the year-ago nine-month period. In addition,
the average balance of noninterest-bearing deposits increased $18.7 million
(12.0%) from the year-ago nine-month period. The average rate paid for all
categories of interest-bearing liabilities decreased from the average rate paid
in the year-ago quarter as a result of general market interest rate changes.
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------
2002 2001 2002 2001
---------------------------------------------
Yield on earning assets 7.02% 8.29% 7.11% 8.46%
Rate paid on interest-bearing
Liabilities 1.72% 3.15% 1.76% 3.58%
---------------------------------------------
Net interest spread 5.30% 5.14% 5.35% 4.88%
Impact of all other net
noninterest-bearing funds 0.37% 0.64% 0.37% 0.70%
---------------------------------------------
Net interest margin 5.67% 5.78% 5.72% 5.58%
=============================================
The Company's aggressive reaction to declining market rates throughout 2001 and
into 2002 has allowed it to maintain a relatively stable net interest margin.
Net interest margin in the third quarter of 2002 decreased 11 basis points
compared to the third quarter of 2001. While the Company was able to reduce the
average rate paid on interest-bearing liabilities faster than the average yield
on interest-earning assets, and thus increase its net interest spread, the
positive impact of all other net noninterest-bearing funds on net interest
margin was reduced due to the lower market rates of interest at which they could
be invested.
14
Net interest margin for the first nine months of 2002 increased 14 basis points
compared to the first nine months of 2001. Lower yields on earning assets were
more than offset by the declining cost of interest-bearing liabilities and
resulted in a 47 basis point increase in net interest spread. The positive
impact of all other net noninterest-bearing funds on net interest margin was
reduced 33 basis points due to the lower market rates of interest at which they
could be invested.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average earning assets and resulting yields,
and the amount of interest expense paid on interest-bearing liabilities. Average
loan balances include nonperforming loans. Interest income includes proceeds
from loans on nonaccrual loans only to the extent cash payments have been
received and applied to interest income. Yields on securities and certain loans
have been adjusted upward to reflect the effect of income thereon exempt from
federal income taxation at the current statutory tax rate (dollars in
thousands).
For the three months ended
---------------------------------------------------------------
September 30, 2002 September 30, 2001
---------------------------------------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
------------------------------- ------------------------------
Assets:
Fed funds sold $32,961 $143 1.74% $41,744 $370 3.55%
Investment securities 245,641 3,272 5.33% 191,296 3,045 6.37%
Loans 676,009 13,332 7.89% 661,630 15,120 9.14%
------------------------------- ------------------------------
Total earning assets 954,611 16,747 7.02% 894,670 18,535 8.29%
Other assets 89,907 87,717
----------- ----------
Total assets $1,044,518 $982,387
=========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $175,964 115 0.26% $157,315 368 0.94%
Savings deposits 261,510 656 1.00% 224,338 1,111 1.98%
Time deposits 288,021 2,129 2.96% 298,505 3,618 4.85%
Fed funds purchased 246 1 1.63% 235 3 5.11%
Long-term debt 22,772 326 5.73% 32,963 512 6.21%
------------------------------- ------------------------------
Total interest-bearing liabilities 748,513 3,227 1.72% 713,356 5,612 3.15%
Noninterest-bearing deposits 183,180 164,583
Other liabilities 17,180 16,443
Shareholders' equity 95,645 88,005
----------- ----------
Total liabilities and shareholders' equity $1,044,518 $982,387
=========== ==========
Net interest spread(1) 5.30% 5.14%
Net interest income and interest margin(2) $13,520 5.67% $12,923 5.78%
==================== ==================
(1) Net interest spread represents the average yield earned on assets minus the
average rate paid on interest-earning assets minus the average rate paid on
interest-bearing liabilities
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of earning
assets.
15
For the nine months ended
---------------------------------------------------------------
September 30, 2002 September 30, 2001
---------------------------------------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
------------------------------- ------------------------------
Assets:
Fed funds sold $37,089 $476 1.71% $40,680 $1,321 4.33%
Investment securities 233,616 9,549 5.45% 198,689 9,690 6.50%
Loans 655,682 39,386 8.01% 644,447 45,077 9.33%
------------------------------- ------------------------------
Total earning assets 926,387 49,411 7.11% 883,816 56,088 8.46%
Other assets 88,681 86,260
----------- ----------
Total assets $1,015,068 $970,076
=========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $173,796 350 0.27% $153,412 1,325 1.15%
Savings deposits 257,138 2,011 1.04% 219,750 3,898 2.37%
Time deposits 278,690 6,340 3.03% 305,436 12,380 5.40%
Fed funds purchased 83 1 1.61% 113 4 4.25%
Long-term debt 22,943 967 5.62% 33,026 1,523 6.15%
------------------------------- ------------------------------
Total interest-bearing liabilities 732,650 9,669 1.76% 711,737 19,130 3.58%
Noninterest-bearing deposits 174,274 155,563
Other liabilities 15,932 15,890
Shareholders' equity 92,212 86,886
----------- ----------
Total liabilities and shareholders' equity $1,015,068 $970,076
=========== ==========
Net interest spread(1) 5.35% 4.88%
Net interest income and interest margin(2) $39,742 5.72% $36,958 5.58%
==================== ==================
(1) Net interest spread represents the average yield earned on assets minus the
average rate paid on interest-earning assets minus the average rate paid on
interest-bearing liabilities
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of earning
assets.
16
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income and
interest expense from changes in average asset and liability balances (volume)
and changes in average interest rates for the periods indicated. Changes not
solely attributable to volume or rates have been allocated in proportion to the
respective volume and rate components (dollars in thousands).
Three months ended September 30, 2002
compared with three months
ended September 30, 2001
-------------------------------------
Volume Rate Total
-------------------------------------
Increase (decrease) in interest income:
Fed funds sold ($78) (149) (227)
Investment securities 865 (638) 227
Loans 329 (2,117) (1,788)
-------------------------------------
Total earning assets 1,116 (2,904) (1,788)
-------------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 44 (297) (253)
Savings deposits 184 (639) (455)
Time deposits (127) (1,362) (1,489)
Fed funds purchased - (2) (2)
Long-term debt (158) (28) (186)
-------------------------------------
Total interest-bearing liabilities (57) (2,328) (2,385)
-------------------------------------
Increase (decrease) in Net Interest Income $1,173 ($576) $597
=====================================
Nine months ended September 30, 2002
compared with nine months
ended September 30, 2001
-------------------------------------
Volume Rate Total
-------------------------------------
Increase (decrease) in interest income:
Fed funds sold ($117) ($728) ($845)
Investment securities 1,703 (1,844) (141)
Loans 786 (6,477) (5,691)
-------------------------------------
Total earning assets 2,372 (9,049) (6,677)
-------------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 176 (1,151) (975)
Savings deposits 665 (2,552) (1,887)
Time deposits (1,083) (4,957) (6,040)
Fed funds purchased (1) (2) (3)
Long-term debt (465) (91) (556)
-------------------------------------
Total interest-bearing liabilities (708) (8,753) (9,461)
-------------------------------------
Increase (decrease) in Net Interest Income $3,080 ($296) $2,784
=====================================
17
Provision for Loan Losses
The Company provided $700,000 for loan losses in the third quarter of 2002
versus $600,000 in the third quarter of 2001. During the third quarter of 2002,
the Company recorded $69,000 of net recoveries of previously charged off loans
versus $83,000 of net loan charge-offs in the year earlier quarter.
For the nine months ended September 30, 2002 and 2001, the Company provided
$2,000,000 and $3,250,000 for loan losses, respectively. Net charge-offs for all
loans during the nine months ended September 30, 2002 and 2001 were $676,000 and
$2,483,000, respectively. Included in the net charge-offs during the nine months
ended September 30, 2001 is $2,000,000 of charge offs related to a single
borrower.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
---------------------------------------
2002 2001 2002 2001
---------------------------------------
Service charges on deposit accounts $2,886 $1,500 $5,918 $4,392
ATM fees and interchange 487 370 1,299 1,053
Other service fees 148 175 418 570
Gain on sale of investments - - - 1,756
Gain on sale of loans 752 494 2,254 1,292
Commissions on sale of
nondeposit investment products 712 678 1,989 1,865
Increase in cash value of life insurance 119 144 443 433
Other noninterest income 309 352 861 957
---------------------------------------
Total noninterest income $5,413 $3,713 $13,182 $12,318
=======================================
Noninterest income for the third quarter increased $1.70 million (45.8%) from
the year-ago quarter. The increase in noninterest income from the year-ago
quarter was mainly due to an increase in service charges on deposit products (up
$1,386,000 or 92.4% to $2,886,000), and an increase in gain on sale of loans (up
$258,000 or 52.2% to $752,000). The increase in service charges income was
mainly due to the introduction of an overdraft privilege deposit product in July
2002 that has added a new stream of recurring noninterest income. The increase
in gain on sale of loans is due to the Company's ability to originate and sell
an increased volume of residential real estate mortgage loans in the current
environment of record mortgage refinance. ATM fees and interchange income
increased from the year-ago quarter (up $117,000 or 31.6% to $487,000) due to
expansion of Company's ATM network and increased debit card usage.
Noninterest income for the first nine months of 2002 increased $864,000 (7.0%)
from the year-ago nine-month period. Included in noninterest income for the
first nine months of 2001 was a one-time gain of $1,756,000 on the sale of
insurance company stock. Excluding this one-time gain, noninterest income for
the first nine months of 2002 would have increased $2.62 million (24.8%) from
the year-ago nine-month period. The increase in noninterest income from the
year-ago quarter was mainly due to an increase in service charges on deposit
products (up $1,526,000 or 34.7% to $5,918,000), and an increase in gain on sale
of loans (up $962,000 or 74.5% to $2,254,000). As described in the results of
the third quarter of 2002, the increase in service charges income was mainly due
to the introduction of an overdraft privilege deposit product in July 2002, and
the increase in gain on sale of loans is due to the Company's ability to
originate and sell an increased volume of residential real estate mortgage loans
in the current environment of record mortgage refinance. ATM fees and
interchange income increased from the year-ago quarter (up $246,000 or 23.4% to
$1,299,000) due to expansion of Company's ATM network and increased debit card
usage.
18
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
----------------------------------------
2002 2001 2002 2001
----------------------------------------
Salaries $4,225 $3,671 $11,616 $10,747
Commissions and incentives 889 701 2,579 1,850
Employee benefits 1,230 1,059 3,661 3,168
Equipment 741 680 2,247 2,033
Occupancy 752 735 2,157 2,094
Professional fees 567 229 1,196 865
Telecommunications 364 350 1,035 895
Advertising and marketing 468 278 934 931
Data processing and software 272 233 764 715
Courier service 236 210 684 622
Intangible amortization 228 228 683 683
ATM network charges 205 250 611 689
Postage 212 152 543 464
Operational losses 191 51 295 140
Assessments 64 56 175 167
Other noninterest expense 1,489 1,582 4,318 4,374
----------------------------------------
Total $12,133 $10,465 $33,498 $30,437
========================================
Average full time equivalent staff 437 407 427 399
Noninterest expense to revenue (FTE) 64.1% 62.9% 63.3% 61.8%
Noninterest expense for the third quarter of 2002 increased $1,668,000 (15.9%).
The increase in noninterest expense was mainly due to a $913,000 (16.8%)
increase in salary and benefit expense to $6,344,000. The increase in salary and
benefits expense was mainly due to annual salary increases, increased commission
and incentive expense, and new employees at the Company's newly opened branches
in Oroville (June 2002) and Brentwood (September 2002). Other noninterest
expense also increased (up $755,000 or 15.0% to $5,789,000). Approximately
$350,000 of this increase was recurring expenses related to the overdraft
privilege product introduced in July 2002, and included in professional fees.
Also related to the overdraft privilege product introduced in July 2002, was the
$140,000 increase in operational losses from the year-ago quarter. Increased
advertising expenses accounted for $190,000 of the increase in other noninterest
expense.
Comparing the first nine months of 2002 to the prior year nine-month period,
noninterest expense increased $3,061,000 (10.1%). The increase in noninterest
expense was mainly due to a $2,091,000 (13.3%) increase in salary and benefit
expense to $17,856,000. As in the third quarter comparison, the increase in
salary and benefits expense was mainly due to annual salary increases, increased
commission and incentive expense, and new employees at the Company's newly
opened branches in Oroville (June 2002) and Brentwood (September 2002). Other
noninterest expense also increased (up $970,000 or 6.6% to $15,642,000).
Approximately $350,000 of this increase was recurring expenses related to the
overdraft privilege product introduced in July 2002, and included in
professional fees. Also related to the overdraft privilege product introduced in
July 2002, was the $140,000 increase in operational losses from the year-ago
quarter.
19
Provision for Income Tax
The effective tax rate for the nine months ended September 30, 2002 was 37.4%
and reflects a decrease from 38.1% in the year earlier period. The provision for
income taxes for all periods presented is primarily attributable to the
respective level of earnings and the incidence of allowable deductions,
particularly from tax-exempt loans and state and municipal securities.
Nonperforming Loans
Loans are reviewed on an individual basis for reclassification to nonaccrual
status when any one of the following occurs: the loan becomes 90 days past due
as to interest or principal, the full and timely collection of additional
interest or principal becomes uncertain, the loan is classified as doubtful by
internal credit review or bank regulatory agencies, a portion of the principal
balance has been charged off, or the Company takes possession of the collateral.
Loans that are placed on Nonaccrual even though the borrowers continue to repay
the loans as scheduled are classified as "performing nonaccrual" and are
included in total nonperforming loans. The reclassification of loans as
nonaccrual does not necessarily reflect Management's judgment as to whether they
are collectible.
Interest income is not accrued on loans where Management has determined that the
borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual, any previously accrued but unpaid interest
is reversed. Income on such loans is then recognized only to the extent that
cash is received and where the future collection of principal is probable.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of
Management, the loans are estimated to be fully collectible as to both principal
and interest.
Interest income on nonaccrual loans, which would have been recognized during the
nine months, ended September 30, 2002, if all such loans had been current in
accordance with their original terms, totaled $1,022,000. Interest income
actually recognized on these loans during the nine months ended September 30,
2002 was $422,000.
The Company's policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due Management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed 30
days. Loans where the collateral has been repossessed are classified as OREO or,
if the collateral is personal property, the loan is classified as other assets
on the Company's financial statements.
Management considers both the adequacy of the collateral and the other resources
of the borrower in determining the steps to be taken to collect nonaccrual
loans. Alternatives that are considered are foreclosure, collecting on
guarantees, restructuring the loan or collection lawsuits.
20
As shown in the following table, total nonperforming assets net of guarantees of
the U.S. Government, including its agencies and its government-sponsored
agencies, have increased $4.9 million (80%) to $11.0 million in the first nine
months of 2002. Nonperforming assets net of guarantees represent 1.03% of total
assets. Included in the balance of performing nonaccrual loans at September 30,
2002, are loans to one agriculture related borrower totaling $10,592,000 of
which $8,351,000 is guaranteed by a U.S. Government sponsored agency as to
principal and ninety days of interest. To date, the borrower has paid principal
and interest in accordance with the terms of the loans; however, due to the
financial condition of the borrower the Company has placed the loans in
performing nonaccrual status. All nonaccrual loans are considered to be impaired
when determining the need for a specific valuation allowance. The Company
continues to make a concerted effort to work problem and potential problem loans
to reduce risk of loss.
(dollars in thousands):
At September 30, 2002 At December 31, 2001
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
-----------------------------------------------------
Performing nonaccrual loans $14,042 $8,504 $5,538 $2,733 - $2,733
Nonperforming, nonaccrual loans 5,468 547 4,921 3,120 $387 2,733
-----------------------------------------------------
Total nonaccrual loans 19,510 9,051 10,459 5,853 387 5,466
Loans 90 days past due and still accruing 572 - 572 584 - 584
-----------------------------------------------------
Total nonperforming loans 20,082 9,051 11,031 6,437 387 6,050
Other real estate owned - - - 71 - 71
-----------------------------------------------------
Total nonperforming loans and OREO $20,082 $9,051 $11,031 $6,508 $387 $6,121
=====================================================
Nonperforming loans to total loans 1.61% 0.92%
Allowance for loan losses/nonperforming loans 130% 216%
Nonperforming assets to total assets 1.03% 0.61%
Allowance for loan losses to nonperforming assets 130% 213%
Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, the Company
maintains an Allowance for Loan Losses to absorb losses inherent in the
Company's loan portfolio. This is maintained through periodic charges to
earnings. These charges are shown in the Consolidated Income Statements as
provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of
reasons, not all losses are immediately known to the Company and, of those that
are known, the full extent of the loss may not be quantifiable at that point in
time. The balance of the Company's Allowance for Loan Losses is meant to be an
estimate of these unknown but probable losses inherent in the portfolio. For
purposes of this discussion, "loans" shall include all loans and lease contracts
that are part of the Company's portfolio.
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan portfolio, and to a lesser extent the
Company's loan commitments. These assessments include the periodic re-grading of
credits based on changes in their individual credit characteristics including
delinquency, seasoning, recent financial performance of the borrower, economic
factors, changes in the interest rate environment, growth of the portfolio as a
whole or by segment, and other factors as warranted. Loans are initially graded
when originated. They are re-graded as they are renewed, when there is a new
loan to the same borrower, when identified facts demonstrate heightened risk of
nonpayment, or if they become delinquent. Re-grading of larger problem loans
occur at least quarterly. Confirmation of the quality of the grading process is
obtained by independent credit reviews conducted by consultants specifically
hired for this purpose and by various bank regulatory agencies.
21
The Company's method for assessing the appropriateness of the allowance includes
specific allowances for identified problem loans and leases as determined by
SFAS 114, formula allowance factors for pools of credits, and allowances for
changing environmental factors (e.g., interest rates, growth, economic
conditions, etc.). Allowance factors for loan pools are based on the previous 5
years historical loss experience by product type. Allowances for specific loans
are based on SFAS 114 analysis of individual credits. Allowances for changing
environmental factors are Management's best estimate of the probable impact
these changes have had on the loan portfolio as a whole. This process is
explained in detail in the notes to the Company's Consolidated Financial
Statements in its Annual Report on Form 10-K for the year ended December 31,
2001.
Based on the current conditions of the loan portfolio, Management believes that
the $14,382,000 allowance for loan losses at September 30, 2002 is adequate to
absorb probable losses inherent in the Company's loan portfolio. No assurance
can be given, however, that adverse economic conditions or other circumstances
will not result in increased losses in the portfolio.
The following table summarizes the loan loss provision, net credit losses and
allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------
2002 2001 2002 2001
--------------------------------------------
Balance, beginning of period $13,613 $11,920 $13,058 $11,670
Loan loss provision 700 600 2,000 3,250
Loans charged off (72) (110) (915) (2,647)
Recoveries of previously
charged-off loans 141 27 239 164
--------------------------------------------
Net credit (losses) recoveries 69 (83) (676) (2,483)
--------------------------------------------
Balance, end of period $14,382 $12,437 $14,382 $12,437
============================================
Allowance for loan losses/loans outstanding 2.10% 1.86%
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management. As
previously announced on October 19, 2001, the Board of Directors approved a plan
to repurchase, as conditions warrant, up to 150,000 shares of the Company's
common 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. This repurchase plan represented approximately 2.2% of the
Company's 6,992,080 common shares outstanding on October 19, 2001, and is
open-ended. As of this date, the Company has repurchased 118,800 shares under
this plan, with 10,000 and 0 of those shares being repurchased in the nine-month
and three-month periods ended September 30, 2002, respectively.
The Company's primary capital resource is shareholders' equity, which was $96.4
million at September 30, 2002. This amount represents an increase of $9.5
million from December 31, 2001, the net result of comprehensive income for the
period ($13.3 million) and the issuance of common shares via the exercise of
stock options ($0.6 million), partially offset by share repurchases ($0.2
million) and dividends paid ($4.2 million). The Company's ratio of equity to
total assets was 8.98%, 8.87%, and 8.65% as of September 30, 2002, September 30,
2001, and December 31, 2001, respectively.
22
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
To Be Well
At September 30, At Minimum Capitalized Under
------------------ December 31, Regulatory Prompt Corrective
2002 2001 2001 Requirement Action Provisions
---------------------------------------------------------------
Tier I Capital 10.63% 10.44% 10.43% 4.00% 6.00%
Total Capital 11.89% 11.69% 11.68% 8.00% 10.00%
Leverage ratio 8.53% 8.35% 8.17% 4.00% 5.00%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Company has an Asset and Liability Management Committee (ALCO)
which establishes and monitors guidelines to control the sensitivity of earnings
to changes in interest rates.
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin, net income and market value of equity under changing interest
environments. Market value of equity is the net present value of estimated cash
flows from the Company's assets, liabilities and off-balance sheet items. The
Company uses simulation models to forecast net interest margin, net income and
market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Company is able to estimate
the potential impact of changing interest rates on net interest margin, net
income and market value of equity. A balance sheet forecast is prepared using
inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
- -300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
At September 30, 2002 and 2001, the results of the simulations noted above
indicate that the balance sheet is slightly asset sensitive (earnings increase
when interest rates rise). The magnitude of all the simulation results noted
above is within the Company's policy guidelines. The asset liability management
policy limits aggregate market risk, as measured in this fashion, to an
acceptable level within the context of risk-return trade-offs.
23
The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
At September 30, 2002 and 2001, the Company had no derivative financial
instruments.
Liquidity
The Company's principal source of asset liquidity is federal funds sold and
marketable investment securities available for sale. At September 30, 2002,
federal funds sold and investment securities available for sale totaled $292
million, representing an increase of $49 million from December 31, 2001. In
addition, the Company generates additional liquidity from its operating
activities. The Company's profitability during the first nine months of 2002 and
2001 generated cash flows from operations of $16.8 million and $12.6 million,
respectively. Additional cash flows may be provided by financing activities,
primarily the acceptance of deposits and borrowings from banks. During the nine
months ended September 30, 2002, sales and maturities of investment securities
produced cash inflows of $87.4 million. Also, during the nine months ended
September 30, 2002, the Company invested $128.0 million and $25.5 million in
securities and net loan growth, respectively. These changes in investment and
loan balances contributed to net cash used for investing activities of $67.9
million during the nine months ended September 30, 2002. Financing activities
provided net cash of $53.4 million during the nine months ended September 30,
2002. Deposit balance increases, and exercise of common stock options, accounted
for $57.5 million and $275,000 of financing sources of funds, respectively.
Dividends paid and the repurchase of common stock used $4.2 million and $189,000
of cash during the nine months ended September 30, 2002, respectively. Also, the
Company's liquidity is dependent on dividends received from the Bank. Dividends
from the Bank are subject to certain regulatory restrictions.
Item 4. Controls and Procedures
Within ninety days of the filing date of this Form 10-Q, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's President/Chief Executive Officer and the
Vice President/Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the President/Chief
Executive Officer and the Vice President/Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in timely
alerting them of material information relating to the Company (including the
Bank) required to be included in the Company's periodic SEC filings.
24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; all such actions are of a routine nature and arise in the normal
course of business of the Bank.
Item 6 - Items and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1*: Articles of Incorporation, as amended to date, filed as
Exhibit 3.1 to Registrant's Report on Form 10-K, filed for the year ended
December 31, 1989, are incorporated herein by reference.
Exhibit 3.2*: Bylaws, as amended to date, filed as Exhibit 3.2 to
Registrant's Report on Form 10-K, filed for the year ended December 31,
1992, are incorporated herein by reference.
Exhibit 11.1: Computation of Earnings Per Share on Common and Common
Equivalent Shares and on Common Shares Assuming Full Dilution.
Exhibit 21.1: Tri Counties Bank, a California banking corporation, is the
only subsidiary of Registrant.
Exhibit 99.1: CEO Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2: CFO Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Previously filed.
(b) Reports on Form 8-K
During the quarter ended September 30, 2002 the Company filed the following
Current Reports on Form 8-K:
Description Date of Report
----------------------------------- --------------------
Acquisition agreement and plan of merger October 3, 2002
by and among TriCo Bancshares, Tri
Counties Bank and North State National Bank
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
Date: November 12, 2002 /s/ Thomas J. Reddish
------------------------------------------
Thomas J. Reddish
Vice President and Chief Financial Officer
25
CERTIFICATIONS
I, Richard P. Smith, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have;
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors;
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002 /s/ Richard P. Smith
----------------------------------------
Richard P. Smith
President and Chief Executive Officer
26
I, Thomas J. Reddish, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have;
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors;
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish
Vice President and Chief
Financial Officer
27
EXHIBITS
Exhibit 11.1
TRICO BANCSHARES
Computation of Earnings Per Share on Common and Common Equivalent Shares and on
Common Shares Assuming Full Dilution
For the For the
three months nine months
ended September 30, ended September 30,
(In thousands, except per share data) 2002 2001 2002 2001
----------------------------------------
Weighted average number of common
shares outstanding - basic 7,026 7,044 7,010 7,087
Add exercise of options reduced by
the number of shares that could
have been purchased with the
proceeds of such exercise 205 187 178 150
----------------------------------------
Weighted average number of common
shares outstanding - diluted 7,231 7,231 7,188 7,237
========================================
Net income $3,627 $3,245 $10,320 $9,061
Basic earnings per share $0.52 $0.46 $1.47 $1.28
Diluted earnings per share $0.50 $0.45 $1.44 $1.25
28
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ending September 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Richard P. Smith
----------------------------------------------
Richard P. Smith
President and Chief Executive Officer
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ending September 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish,
Vice President and Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Thomas J. Reddish
----------------------------------------------
Thomas J. Reddish
Vice President and Chief Financial Officer
29