UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest
event reported):
April 4, 2003
TriCo Bancshares
(Exact name of registrant as specified in its charter)
California 0-10661 94-2792841
- ------------------------ --------------- --------------------
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or organization)
63 Constitution Drive, Chico, California 95973
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (530) 898-0300
- --------------------------------------------------------------------------------
Item 2: Acquisition or Disposition of Assets
TriCo Bancshares (NASDAQ:TCBK), parent company of Tri Counties Bank,
acquired North State National Bank, a national banking organization located in
Chico, California, by the merger of North State into its wholly owned
subsidiary, Tri Counties Bank, effective 5:01 pm on April 4, 2003. The
acquisition and the related merger agreement dated October 3, 2003, was approved
by the California Department of Financial Institutions, the Federal Deposit
Insurance Corporation, and the shareholders of North State National Bank on
March 4, March 7, and March 19, 2003, respectively.
Under the terms of the merger agreement, TriCo will issue $13,090,105 in
cash, 723,511 shares of TriCo common stock, and options to purchase 79,587
shares of TriCo common stock at an average exercise price of $6.22 per share in
exchange for all of the 1,234,375 common shares and options to purchase 79,937
common shares of North State National Bank outstanding as of April 4, 2003. The
shares of TriCo common stock to be issued were registered on a Form S-4
Registration Statement declared effective on February 3, 2003. At March 31,
2003, TriCo Bancshares had 7,080,470 shares of common stock outstanding. Based
upon TriCo's closing stock price of $25.65 on April 4, 2003, the aggregate value
of the cash and the TriCo options and common stock to be issued in the merger
would be approximately $33,195,000.
Item 7: Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired. Attached as Exhibit
99.1 are the audited financial statements for North State National
Bank for the year ended December 31, 2002.
(b) Pro Forma Financial Information. Attached as Exhibit 99.2 is pro
forma unaudited financial information reflecting the acquisition
of North State National Bank.
(c) Exhibits. The following is furnished in accordance with the
provisions of Item 601 of Regulation S-K.
(99.3) Press release dated April 7, 2003
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, thereunto duly authorized.
TRICO BANCSHARES
Date: April 15, 2003 By: /s/ Thomas J. Reddish
---------------------------------
Thomas J. Reddish, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- --------------------------------------------
99.1 Audited Financial Statements of North State
National Bank for the years ended December
31, 2001 and 2002
99.2 Pro Forma Unaudited Financial Information
99.3 Press release dated April 7, 2003
99.4 Consent of Perry-Smith, LLP
Exhibit 99.1
NORTH STATE NATIONAL BANK
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000
AND
INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
and Shareholders
North State National Bank
We have audited the accompanying balance sheet of North State National Bank
as of December 31, 2002 and 2001, and the related statements of income, changes
in shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2002. These financial statements are the
responsibility of the Bank'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 of America. Those standards require that we plan
and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of North State National Bank as
of December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Perry-Smith LLP
Sacramento, California
January 30, 2003,
except for Note 15, as to which
the date is March 19, 2003
NORTH STATE NATIONAL BANK
BALANCE SHEET
December 31, 2002 and 2001
2002 2001
------------------ ------------------
ASSETS
Cash and due from banks $ 7,049,271 $ 5,898,143
Interest-bearing deposits 476,880 5,430,320
Federal funds sold 3,215,000 3,302,000
Investment securities (market value of $49,359,400
in 2002 and $39,116,350 in 2001) (Notes 2 and 12) 49,310,796 39,082,324
Loans, less reserve for loan losses of $935,210 in
2002 and $984,913 in 2001 (Notes 3, 7 and 13) 81,777,473 72,561,635
Bank premises and equipment, net (Note 4) 1,389,216 1,428,075
Accrued interest receivable and other assets (Note 5) 935,707 1,201,746
------------------ ------------------
$ 144,154,343 $ 128,904,243
================== ==================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 25,778,639 $ 23,273,698
Interest bearing (Note 6) 104,098,184 92,895,294
------------------ ------------------
Total deposits 129,876,823 116,168,992
Accrued interest payable and other liabilities 230,951 416,875
------------------ ------------------
Total liabilities 130,107,774 116,585,867
------------------ ------------------
Commitments and contingencies (Note 7)
Shareholders' equity (Note 8):
Common stock - par value $2.50 per share;
authorized - 2,500,000 shares, issued and
outstanding - 1,226,740 shares in 2002
and 1,224,190 shares in 2001 3,066,850 3,060,475
Additional paid-in capital 4,243,711 4,231,914
Retained earnings 6,375,194 4,832,457
Accumulated other comprehensive income
(Notes 2 and 9) 360,814 193,530
------------------ ------------------
Total shareholders' equity 14,046,569 12,318,376
------------------ ------------------
$ 144,154,343 $ 128,904,243
================== ==================
The accompanying notes are an integral
part of these financial statements.
NORTH STATE NATIONAL BANK
INCOME STATEMENT
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ ------------------ ------------------
Interest income:
Interest and fees on loans $ 5,636,228 $ 6,114,267 $ 6,165,070
Interest on Federal funds sold 116,726 226,706 142,466
Interest on investment securities:
Taxable 2,044,624 2,145,518 2,288,491
Exempt from Federal income taxes 59,463 64,222 69,171
------------------ ------------------ ------------------
Total interest income 7,857,041 8,550,713 8,665,198
------------------ ------------------ ------------------
Interest expense:
Interest on deposits (Note 6) 2,007,558 3,247,983 3,773,707
Interest on short-term borrowings (Note 12) 29,747
------------------ ------------------ ------------------
Total interest expense 2,007,558 3,247,983 3,803,454
------------------ ------------------ ------------------
Net interest income 5,849,483 5,302,730 4,861,744
Provision for loan losses (Note 3) 169,000
------------------ ------------------ ------------------
Net interest income after provision for
loan losses 5,849,483 5,133,730 4,861,744
------------------ ------------------ ------------------
Non-interest income:
Service charges 340,552 335,242 302,579
Gain on sales and calls of investment securities
(Note 2) 55,130 141,351
Other income 142,983 148,474 132,008
------------------ ------------------ ------------------
Total non-interest income 538,665 625,067 434,587
------------------ ------------------ ------------------
Other expenses:
Salaries and employee benefits (Notes 3 and 14) 1,528,740 1,492,409 1,486,475
Occupancy (Notes 4 and 7) 198,656 197,110 181,242
Equipment (Note 4) 235,211 272,374 262,398
Other (Note 11) 933,930 782,366 733,373
------------------ ------------------ ------------------
Total other expenses 2,896,537 2,744,259 2,663,488
------------------ ------------------ ------------------
Income before income taxes 3,491,611 3,014,538 2,632,843
Income taxes (Note 5) 1,459,000 1,226,000 1,054,000
------------------ ------------------ ------------------
Net income $ 2,032,611 $ 1,788,538 $ 1,578,843
================== ================== ==================
Basic earnings per share (Note 8) $ 1.66 $ 1.47 $ 1.31
============ =========== ============
Diluted earnings per share (Note 8) $ 1.59 $ 1.41 $ 1.26
============ =========== ============
The accompanying notes are an integral
part of these financial statements.
NORTH STATE NATIONAL BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
Accumulated
Common Stock Additional Other
--------------------------- Paid-In Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Income (Loss) Equity Income
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, January 1, 2000 1,193,861 $2,984,652 $4,191,823 $2,188,497 $(705,798) $8,659,174
Comprehensive income (Note 9):
Net income 1,578,843 1,578,843 $1,578,843
Other comprehensive income, net of tax:
Unrealized gains on available-for-
sale investment securities 538,881 538,881 538,881
------------
Total comprehensive income $2,117,724
============
Cash dividend ($.25 per share) (Note 8) (300,668) (300,668)
Issuance of common stock under stock
option plan (Note 8) 13,994 34,985 34,099 69,084
Retirement of common stock (4,082) (10,205) (36,744) (46,949)
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2000 1,203,773 3,009,432 4,189,178 3,466,672 (166,917) 10,498,365
Comprehensive income (Note 9):
Net income 1,788,538 1,788,538 $1,788,538
Other comprehensive income, net of tax:
Unrealized gains on available-for-
sale investment securities 360,447 360,447 360,447
------------
Total comprehensive income $2,148,985
============
Cash dividend ($.35 per share) (Note 8) (422,753) (422,753)
Issuance of common stock under stock
option plan (Note 8) 20,417 51,043 42,736 93,779
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 1,224,190 3,060,475 4,231,914 4,832,457 193,530 12,318,376
------------- ------------- ------------- ------------- ------------- -------------
(Continued)
NORTH STATE NATIONAL BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
For the Years Ended December 31, 2002, 2001 and 2000
Accumulated
Common Stock Additional Other
--------------------------- Paid-In Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Income (Loss) Equity Income
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 1,224,190 $3,060,475 $4,231,914 $4,832,457 $193,530 $12,318,376
Comprehensive income (Note 9):
Net income 2,032,611 2,032,611 $2,032,611
Other comprehensive income, net of tax:
Unrealized gains on available-for-
sale investment securities 167,284 167,284 167,284
------------
Total comprehensive income $2,199,895
============
Cash dividend ($.40 per share) (Note 8) (489,874) (489,874)
Stock options exercised and related tax
benefit (Note 8) 2,550 6,375 11,797 18,172
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 1,226,740 $3,066,850 $4,243,711 $6,375,194 $360,814 $14,046,569
============= ============= ============= ============= ============= =============
2002 2001
-------- --------
Disclosure of reclassification amount, net of taxes (Note 9):
Net unrealized holding gains arising during the year $199,597 $444,311
Less: reclassification adjustment for net gains included in net income 32,313 83,864
-------- --------
Net unrealized gains on available-for-sale investment securities $167,284 $360,447
======== ========
The accompanying notes are an integral
part of these financial statements.
NORTH STATE NATIONAL BANK
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income $2,032,611 $1,788,538 $1,578,843
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 169,000
Increase in deferred loan origination
fees and costs, net 49,513 38,913 32,869
Depreciation and amortization 177,738 211,049 201,804
Amortization of investment security
premiums and accretion of discounts,
net 195,580 67,834 9,271
Decrease (increase) in accrued interest
receivable and other assets 170,516 139,756 (55,219)
(Decrease) increase in accrued interest
payable and other liabilities (185,924) (203,965) 135,952
Deferred taxes (24,000) (98,000) (12,000)
Gain on sales and calls of investment
securities (55,130) (141,351)
----------- ----------- -----------
Net cash provided by operating
activities 2,360,904 1,971,774 1,891,520
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from matured held-to-maturity
investment securities 15,000 160,000 140,000
Proceeds from matured available-for-sale
investment securities 64,757,063 6,252,000 6,102,000
Proceeds from the sale and call of available-
for-sale investment securities 22,658,561 26,270,075 2,000,000
Proceeds from redeemed Federal Home
Loan Bank stock 131,500
Purchase of available-for-sale invest-
ment securities (106,029,956)(38,216,168) (4,723,694)
Proceeds from principal repayments
from held-to-maturity mortgage-
related securities 278,432
Proceeds from principal repayments
from available-for-sale mortgage-
related securities 8,517,217 3,538,924 886,628
Increase in loans, net (9,265,351) (2,855,189) (6,178,385)
Purchase of equipment (138,879) (41,941) (85,461)
Proceeds from sale of equipment 21,853
----------- ----------- -----------
Net cash used in investing
activities (19,486,345) (4,892,299) (1,427,127)
----------- ----------- -----------
(Continued)
NORTH STATE NATIONAL BANK
STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand,
interest-bearing and savings deposits $18,180,863 $9,931,139 $(1,192,978)
Net (decrease) increase in time deposits (4,473,032) 842,327 1,809,586
Proceeds from exercised stock options 18,172 93,779 69,084
Cash paid for retirement of stock (46,949)
Cash dividend paid (489,874) (422,753) (300,668)
----------- ----------- -----------
Net cash provided by financing
activities 13,236,129 10,444,492 338,075
----------- ----------- -----------
(Decrease) increase in cash and
cash equivalents (3,889,312) 7,523,967 802,468
Cash and cash equivalents at beginning
of year 14,630,463 7,106,496 6,304,028
----------- ----------- -----------
Cash and cash equivalents at end of year $10,741,151 $14,630,463 $7,106,496
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $2,119,990 $3,514,348 $3,623,061
Income taxes $1,520,971 $1,258,991 $1,123,813
Non-cash investing activities:
Net change in unrealized gain (loss)
on available-for-sale investment
securities $286,807 $616,441 $924,345
The accompanying notes are an integral
part of these financial statements.
NORTH STATE NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
North State National Bank (the "Bank") commenced operations on March 15, 1982.
The Bank operates two branches and its primary source of revenue is providing
loans to small businesses, professionals, agricultural entities and individuals
in the Greater Chico Urban Area.
The accounting and reporting policies of the Bank conform with generally
accepted accounting principles and prevailing practices within the banking
industry.
Reclassifications
Certain reclassifications have been made to prior years' balances to conform to
classifications used in 2002.
Investment Securities
Investments are classified into the following categories:
- Available-for-sale securities reported at fair value, with unrealized
gains and losses excluded from earnings and reported, net of taxes, as
accumulated other comprehensive income (loss) within shareholders'
equity.
- Held-to-maturity securities, which management has the positive intent
and ability to hold, reported at amortized cost, adjusted for the
accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the
time of purchase and may only change the classification in certain limited
circumstances. All transfers between categories are accounted for at fair value.
Gains or losses on the sale of securities are computed using the specific
identification method. Interest earned on investment securities is reported in
interest income, net of applicable adjustments for accretion of discounts and
amortization of premiums. In addition, unrealized losses that are other than
temporary are recognized in earnings for all investments.
NORTH STATE NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans are stated at principal balances outstanding and interest is accrued daily
based upon outstanding loan balances. However, when, in the opinion of
management, loans are considered to be impaired and the future collectibility of
interest and principal is in serious doubt, loans are placed on nonaccrual
status and the accrual of interest income is suspended. Any interest accrued but
unpaid is charged against income. Payments received are applied to reduce
principal to the extent necessary to ensure collection. Subsequent payments on
these loans, or payments received on nonaccrual loans for which the ultimate
collectibility of principal is not in doubt, are applied first to earned but
unpaid interest and then to principal.
An impaired loan is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
matter, at the loan's observable market price or the fair value of collateral if
the loan is collateral dependent. A loan is considered impaired when, based on
current information and events, it is probable that the Bank will be unable to
collect all amounts due (including both principal and interest) in accordance
with the contractual terms of the loan agreement.
Substantially all loan origination fees, commitment fees, direct loan
origination costs and purchase premiums and discounts on loans are deferred and
recognized as an adjustment of yield, to be amortized to interest income over
the contractual term of the loan. The unamortized balance of deferred fees and
costs is reported as a component of net loans.
Reserve for Loan Losses
The reserve for loan losses is maintained to provide for losses related to
impaired loans and other losses that can be expected to occur in the normal
course of business. The reserve is determined based on estimates made by
management, to include consideration of the character of the loan portfolio,
specifically identified problem loans, potential losses inherent in the
portfolio taken as a whole and economic conditions in the Bank's service area.
Loans determined to be impaired or classified are individually evaluated by
management for specific risk of loss. In addition, a reserve factor is assigned
to currently performing loans based on the Bank's historical experience.
Management also computes specific and expected loss reserves for loan
commitments. These estimates are particularly susceptible to changes in the
economic environment and market conditions.
The Bank's Loan Committee reviews the adequacy of the reserve for loan losses
quarterly, to include consideration of the relative risks in the portfolio and
current economic conditions. The reserve is adjusted based on that review if, in
the judgment of the Loan Committee and management, changes are warranted.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reserve for Loan Losses (Continued)
This reserve is established through a provision for loan losses which is charged
to expense. Additions to the reserve are expected to maintain the adequacy of
the total reserve after loan losses and loan growth. The reserve for loan losses
at December 31, 2002 and 2001, respectively, reflects management's estimate of
potential losses in the portfolio.
Other Real Estate
Other real estate includes real estate acquired in full or partial settlement of
loan obligations. When property is acquired, any excess of the Bank's recorded
investment in the loan balance and accrued interest income over the estimated
fair market value of the property is charged against the reserve for loan
losses. A valuation allowance for losses on other real estate is maintained to
provide for temporary declines in value. The allowance is established through a
provision for losses on other real estate which is included in other expenses.
Subsequent gains or losses on sales or writedowns resulting from permanent
impairments are recorded in other income or expense as incurred. At December 31,
2002 and 2001, the Bank held no other real estate.
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is determined
using the straight-line method over the estimated useful lives of the related
assets. The useful life of Bank premises is estimated to be forty years. The
useful lives of improvements to Bank premises, furniture and equipment are
estimated to be one to twenty-five years. Leasehold improvements are amortized
over the life of the asset or the life of the related lease, whichever is
shorter. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance and
repairs is charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. On the
balance sheet, net deferred tax assets are included in accrued interest
receivable and other assets.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock, such as
stock options, result in the issuance of common stock which shares in the
earnings of the Bank. The treasury stock method has been applied to determine
the dilutive effect of stock options in computing diluted EPS.
Cash Equivalents
For the purpose of the statement of cash flows, cash and due from banks
interest-bearing deposits and Federal funds sold are considered to be cash
equivalents. Generally, interest-bearing deposits are held in money market
accounts and Federal funds are sold for one day periods.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of 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 these estimates.
Stock-Based Compensation
At December 31, 2002, the Bank has one stock-based employee compensation plan,
the North State National Bank 1995 Stock Option Plan, which is described more
fully in Note 8. The Bank accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
No stock options were granted in 2002 and 2001 and no pro forma financial
information is shown for these years. Pro forma adjustments to the Bank's net
earnings and earnings per share are disclosed during the years in which the
options become vested and all options vested prior to the beginning of 2001. The
following table illustrates the effect on net earnings and earnings per share if
the Bank had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation for the year ended December 31, 2000.
2000
----------
Net income, as reported $1,578,843
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of related tax effects 49,656
----------
Pro forma net income $1,529,187
==========
Basic earnings per share - as reported $1.31
Basic earnings per share - pro forma $1.27
Diluted earnings per share - as reported $1.26
Diluted earnings per share - pro forma $1.22
Weighted average fair value of options
granted during the year $6.01
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following assumptions:
2000
--------
Dividend yield 2.15%
Expected volatility 16.79%
Risk-free interest rate 6.69%
Expected option life 10 years
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This Statement rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. This
Statement is effective for fiscal years beginning after May 15, 2002. Adoption
of this Statement is not expected to have a material effect on the Bank's
financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement is
effective for exit or disposal activities initiated after December 31, 2002.
Adoption of this Statement is not expected to have a material effect on the
Bank's financial statements.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. This Statement, which addresses financial accounting and reporting
matters for the acquisition of all or part of a financial institution, applies
to all such transactions except those between two or more mutual enterprises.
This Statement removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of SFAS No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
related interpretations. This Statement requires a financial institution to
apply SFAS No. 144 and evaluate long-term customer relationship intangible
assets (core deposit intangibles) for impairment. Under SFAS No. 72, a financial
institution may have recorded an unidentifiable intangible asset arising from a
business combination. If certain criteria in SFAS No. 147 are met, the amount of
the unidentifiable intangible asset will be reclassified to goodwill upon
adoption of this Statement and any amortization amounts that were incurred after
the adoption of SFAS No. 142 must be reversed. Reclassified goodwill would then
be measured for impairment under the provisions of SFAS No. 142. Provisions of
this Statement are applicable on or after October 1, 2002. In management's
opinion, the adoption of this Statement did not have a material effect on the
Bank's financial position or results of operations.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards (Continued)
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123.
This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reporting containing financial statements for interim periods
beginning after December 15, 2002. Because the Bank accounts for the
compensation cost associated with its stock option plan under the intrinsic
value method, the alternative methods of transition will not apply to the Bank.
The additional disclosure requirements of the Statement are included in these
financial statements. In management's opinion, the adoption of this Statement
did not have a material impact on the Bank's financial position or results of
operations.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, 2002 and 2001 consisted of the following:
Available-for-Sale:
- -------------------
2002
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Treasury
securities $501,170 $13,830 $515,000
U.S. Government
agencies 24,370,085 277,079 $(164) 24,647,000
U.S. Government
guaranteed mort-
gage-related
securities 12,016,236 325,815 (51) 12,342,000
Corporate debt
securities 9,995,000 9,995,000
Federal Home Loan
Bank stock 336,600 336,600
Federal Reserve
Bank stock 218,800 218,800
------------ ------------ ------------ ------------
$47,437,891 $616,724 $(215) $48,054,400
============ ============ ============ ============
2. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
- -------------------
Net unrealized gains on available-for-sale investment securities totaling
$616,509 were recorded, net of $255,695 in tax liabilities, as accumulated other
comprehensive income within shareholders' equity at December 31, 2002. Proceeds
and gross realized gains from the sale or call of available-for-sale investment
securities totaled $22,658,561 and $55,130, respectively, for the year ended
December 31, 2002.
2001
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Treasury
securities $501,987 $22,013 $524,000
U.S. Government
agencies 20,888,757 213,846 $(88,603) 21,014,000
U.S. Government
guaranteed mort-
gage-related
securities 15,554,554 213,645 (31,199) 15,737,000
Federal Home Loan
Bank stock 318,700 318,700
Federal Reserve
Bank stock 215,650 215,650
------------ ------------ ------------ ------------
$37,479,648 $449,504 $(119,802) $37,809,350
============ ============ ============ ============
Net unrealized gains on available-for-sale investment securities totaling
$329,702 were recorded, net of $136,172 in tax liabilities, as accumulated other
comprehensive income within shareholders' equity at December 31, 2001. Proceeds
and gross realized gains from the sale or call of available-for-sale investment
securities totaled $26,270,075 and $141,351, respectively, for the year ended
December 31, 2001. There were no sales of available-for-sale investment
securities for the year ended December 31, 2000.
Held-to-Maturity:
- -----------------
2002
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
Obligations of states
and political sub-
divisions $1,256,396 $48,604 $ - $1,305,000
============ ============ ============ ============
2. INVESTMENT SECURITIES (Continued)
Held-to-Maturity (Continued)
- ----------------
2001
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
Obligations of states
and political sub-
divisions $1,272,974 $34,026 $ - $1,307,000
============ ============ ============ ============
There were no sales or transfers of held-to-maturity investment securities for
the years ended December 31, 2002, 2001 and 2000.
The amortized cost and estimated market value of investment securities at
December 31, 2002 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Available-for-Sale Held-to-Maturity
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------- ------------- ------------- -------------
Within one year $11,497,403 $11,523,000 $221,563 $227,000
After one year
through five years 23,255,815 23,520,000 429,833 447,000
After five years
through ten years 605,000 631,000
------------- ------------- ------------- -------------
34,753,218 35,043,000 $1,256,396 $1,305,000
============= =============
Investment securities not due at a single maturity date:
U.S. Government
guaranteed
mortgage-related
securities 12,016,236 12,342,000
SBA loan pools 113,037 114,000
Federal Home
Loan Bank stock 336,600 336,600
Federal Reserve
Bank stock 218,800 218,800
-------------- --------------
$47,437,891 $48,054,400
============== ==============
2. INVESTMENT SECURITIES (Continued)
Investment securities with amortized costs totaling $4,114,422 and $1,799,228
and estimated market values totaling $4,254,000 and $1,915,000 were pledged to
secure public deposits, treasury tax and loan accounts and over-night borrowing
arrangements with the Federal Reserve Bank at December 31, 2002 and 2001,
respectively. In addition, investment securities with amortized costs totaling
$8,158,244 and $9,321,220 and estimated market values totaling $8,249,000 and
$9,411,000 were pledged to secure State of California time deposits at December
31, 2002 and 2001, respectively. The required investment in Federal Home Loan
Bank and Federal Reserve Bank stock is determined by the Federal Home Loan Bank
and Federal Reserve based upon the level of transaction activity. Therefore,
sale of those investments may be restricted.
3. LOANS
Outstanding loans are summarized as follows:
December 31,
--------------------------
2002 2001
------------ ------------
Commercial and agricultural $21,475,823 $21,467,262
Real estate - mortgage 51,970,379 44,131,982
Real estate - construction 7,688,756 5,391,888
Installment 1,758,030 2,686,208
------------ ------------
82,892,988 73,677,340
Deferred loan fees, net (180,305) (130,792)
Reserve for loan losses (935,210) (984,913)
------------ ------------
$81,777,473 $72,561,635
============ ============
Changes in the reserve for loan losses were as follows:
Year Ended December 31,
--------------------------------------
2002 2001 2000
------------ ------------ ------------
Balance, beginning of year $984,913 $818,126 $969,917
Provision for loan losses 169,000
Losses charged to reserve (71,121) (6,019) (199,856)
Recoveries 21,418 3,806 48,065
------------ ------------ ------------
Balance, end of year $935,210 $984,913 $818,126
============ ============ ============
3. LOANS (Continued)
No loans were considered to be impaired at December 31, 2002 and 2001. No loans
were considered to be impaired during 2002 or 2001 and the average recorded
investment in impaired loans for the year ended December 31, 2000 was $100,000.
No interest income on impaired loans was recognized during the years ended
December 31, 2002, 2001 and 2000.
There were no nonaccrual loans at December 31, 2002 and 2001. At December 31,
2000, nonaccrual loans totaled $172,900. There was no interest foregone on
nonaccrual loans for the years ended December 31, 2002 and 2001. Interest
foregone on nonaccrual loans totaled $15,000 for the year ended December 31,
2000.
Salaries and employee benefits totaling $90,014, $68,004 and $70,127 have been
deferred as loan origination costs during 2002, 2001 and 2000, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
--------------------------
2002 2001
------------ ------------
Land $405,896 $405,896
Bank premises 1,700,622 1,693,975
Furniture, fixtures and equipment 2,279,741 2,147,509
Leasehold improvements 129,601 129,601
------------ ------------
4,515,860 4,376,981
Less accumulated depreciation
and amortization (3,126,644) (2,948,906)
------------ ------------
$1,389,216 $1,428,075
============ ============
Depreciation and amortization included in occupancy and equipment expense
totaled $177,738, $211,049 and $201,804 for the years ended December 31, 2002,
2001 and 2000, respectively.
5. INCOME TAXES
The provision for income taxes for the years ended December 31, 2002, 2001 and
2000 consisted of the following:
Federal State Total
------------- ------------- -------------
2002
- ----
Current $1,089,000 $394,000 $1,483,000
Deferred (22,000) (2,000) (24,000)
------------- ------------- -------------
Income tax expense $1,067,000 $392,000 $1,459,000
============= ============= =============
2001
- ----
Current $980,000 $342,000 $1,322,000
Deferred (76,000) (20,000) (96,000)
------------- ------------- -------------
Income tax expense $904,000 $322,000 $1,226,000
============= ============= =============
2000
- ----
Current $777,000 $289,000 $1,066,000
Deferred (12,000) (12,000)
------------- ------------- -------------
Income tax expense $765,000 $289,000 $1,054,000
============= ============= =============
Deferred tax assets (liabilities) are comprised of the following at December 31,
2002 and 2001:
2002 2001
------------ ------------
Deferred tax assets:
Reserve for loan losses $304,000 $304,000
Bank premises and equipment 2,000
Future benefit of state income tax deduction 129,000 118,000
------------ ------------
Total deferred tax assets 435,000 422,000
------------ ------------
Deferred tax liabilities:
Bank premises and equipment (19,000)
Future liability of state deferred tax assets (33,000) (33,000)
Federal Home Loan Bank dividends (56,000) (48,000)
Unrealized gain on available-for-sale investment
securities (256,000) (136,000)
------------ -------------
Total deferred tax liabilities (345,000) (236,000)
------------ -------------
Net deferred tax assets $90,000 $186,000
============ =============
5. INCOME TAXES (Continued)
The provision for income taxes differs from amounts computed by applying the
statutory Federal income tax rate to operating income before income taxes. The
significant items comprising these differences for the years ended December 31,
2002, 2001 and 2000 consisted of the following:
2002 2001 2000
------------------ ------------------ ------------------
Amount Rate % Amount Rate % Amount Rate %
----------- ------ ----------- ------ ----------- ------
Federal income tax
expense, at statutory
rate $1,187,153 34.0 $1,024,943 34.0 $895,167 34.0
State franchise tax, net
of Federal tax effect 250,795 7.2 216,276 7.2 188,757 7.2
Interest on obligations
of states and political
subdivisions (18,952) (.5) (19,398) (.6) (20,144) (.8)
Other 40,004 1.1 4,179 .1 (9,780) (.4)
----------- ------ ----------- ------ ----------- ------
Total income tax
expense $1,459,000 41.8 $1,226,000 40.7 $1,054,000 40.0
=========== ====== =========== ====== =========== ======
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
--------------------------
2002 2001
------------ ------------
Savings $ 4,926,387 $ 4,649,275
Money market 48,354,089 33,458,575
NOW accounts 18,198,768 17,695,472
Time, $100,000 or more 20,352,070 21,966,979
Other time 12,266,870 15,124,993
------------ ------------
$104,098,184 $92,895,294
============ ============
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
----------------------
2003 $27,788,753
2004 1,651,095
2005 868,304
2006 23,878
2007 2,286,910
--------------
$32,618,940
==============
6. INTEREST-BEARING DEPOSITS (Continued)
Interest expense related to interest-bearing deposits consisted of the
following:
Year Ended December 31,
--------------------------------------
2002 2001 2000
------------ ------------ ------------
Savings $ 48,250 $ 80,143 $ 113,925
Money market 909,287 1,132,396 1,504,984
NOW accounts 35,189 136,874 284,301
Time, $100,000 or more 631,202 1,119,052 1,073,209
Other time 383,630 779,518 797,288
------------ ------------ ------------
$2,007,558 $3,247,983 $3,773,707
============ ============ ============
7. COMMITMENTS AND CONTINGENCIES
Lease
The Bank leases a branch facility with an option to renew this lease for one
ten-year term after the initial lease term expires February 28, 2004. Rental
expense included in occupancy expense totaled $41,484, $38,341 and $37,712 for
the years ended December 31, 2002, 2001 and 2000, respectively. The lease has
the following future minimum lease payments:
Year Ending
December 31,
------------------
2003 $41,484
2004 6,914
------------
$48,398
============
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business in order to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and letters of
credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the other
party for commitments to extend credit and letters of credit is represented by
the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and letters of credit as it does for loans
included on the balance sheet.
7. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
The following financial instruments represent off-balance-sheet credit risk:
December 31,
-------------------------------
2002 2001
--------------- ---------------
Commitments to extend credit $19,659,000 $19,023,000
Letters of credit $ 131,000 $ 300,000
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 or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
accounts receivable, inventory, commercial and residential real estate, farmland
and deposit accounts.
Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers.
At December 31, 2002, commercial loan commitments represent approximately 83% of
total commitments. Approximately 81% of these commercial loan commitments are
unsecured or secured by collateral other than first deeds of trust on real
estate and generally have variable interest rates. Loan commitments secured by
residential real estate represent approximately 7% of total commitments and are
generally secured by property with a loan-to-value ratio not to exceed 80%. The
majority of real estate loan commitments also have variable interest rates.
Unsecured consumer lines of credit, generally having variable interest rates,
represent the remaining 10% of total commitments.
Significant Concentrations of Credit Risk
The Bank grants commercial, agricultural, real estate mortgage, real estate
construction and consumer loans to customers throughout Butte County.
At December 31, 2002 and 2001, in management's judgment, a concentration of
loans existed in real-estate related loans. At these dates, approximately 72%
and 67% of the Bank's loans were real-estate related, respectively.
7. COMMITMENTS AND CONTINGENCIES (Continued)
Significant Concentrations of Credit Risk (Continued)
Although management believes the loans within these concentrations have no more
than the normal risk of collectibility, a substantial decline in the performance
of the economy in general or a decline in real estate values in the Bank's
primary market area, in particular, could have an adverse impact on
collectibility, increase the level of real-estate related nonperforming loans,
or have other adverse effects which alone or in the aggregate could have a
material adverse effect on the financial condition of the Bank.
Correspondent Banking Agreements
The Bank maintains funds on deposit with other federally insured financial
institutions under correspondent banking agreements. Uninsured deposits totaled
$11,188,800 at December 31, 2002.
Federal Reserve Requirements
Banks are required to maintain reserves at the Federal Reserve Bank or in the
form of vault cash equal to a percentage of their reservable deposits. The
reserve balances required at December 31, 2002 and 2001 were $237,000 and
$722,000.
Legal Proceedings
In the normal course of business, the Bank becomes contingently liable on
matters related to transactions that are not reflected in the accompanying
financial statements. After reviewing pending and threatened actions and
proceedings with legal counsel, management believes that the outcome of such
actions or proceedings will not have a material adverse effect on operations or
the financial condition of the Bank.
8. SHAREHOLDERS' EQUITY
Dividends
Upon declaration by the Board of Directors, all shareholders of record will be
entitled to receive dividends. Under applicable Federal laws, the Comptroller of
the Currency restricts the total dividend payment of any national banking
association in any calendar year to the net income of the year, as defined,
combined with the net income for the two preceding years, less distributions
made to shareholders during the same three-year period. At December 31, 2002,
retained earnings of $4,186,697 were free of such restrictions.
On April 16, 2002, April 17, 2001 and April 18, 2000, the Board of Directors
declared $.40, $.35 and $.25 cash dividends, respectively, to shareholders of
record at the close of business on May 1, 2002, 2001 and 2000, payable June 1,
2002, 2001 and 2000.
8. SHAREHOLDERS' EQUITY (Continued)
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations is as follows:
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
- -------------------------------- -------------- -------------- --------------
December 31, 2002
- -----------------
Basic earnings per share $2,032,611 1,224,681 $ 1.66
==============
Effect of dilutive stock options 56,626
-------------- --------------
Diluted earnings per share $2,032,611 1,281,307 $ 1.59
============== ============== ==============
December 31, 2001
- -----------------
Basic earnings per share $1,788,538 1,216,493 $ 1.47
==============
Effect of dilutive stock options 50,906
-------------- --------------
Diluted earnings per share $1,788,538 1,267,399 $ 1.41
============== ============== ==============
December 31, 2000
- -----------------
Basic earnings per share $1,578,843 1,201,440 $ 1.31
==============
Effect of dilutive stock options 54,577
-------------- --------------
Diluted earnings per share $1,578,843 1,256,017 $ 1.26
============== ============== ==============
Stock Options
On April 19, 1995, the shareholders approved the adoption of the North State
National Bank 1995 Stock Option Plan. At December 31, 2002, 254,338 shares of
the Bank's common stock were reserved for distribution under the plan. The plan
includes both incentive options, which may be granted to full-time salaried
officers and employees of the Bank, and nonqualified options, which may be
granted to Directors and full-time salaried officers and employees. The price of
all options may not be less than the fair market value of the stock at the date
the option is granted. The purchase price of exercised options is payable in
full in cash or with common stock previously acquired by the optionee. All
options expire on a date determined by the Board of Directors, but not later
than ten years from the date of grant. All outstanding options under the plan
vested immediately upon grant.
8. SHAREHOLDERS' EQUITY (Continued)
Stock Options (Continued)
A summary of the activity within the plan follows:
2002 2001 2000
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- --------- ----------- --------- ----------- ---------
Options outstanding,
beginning of year 90,122 $6.51 113,289 $6.29 112,384 $5.32
Options granted 18,500 $11.62
Options exercised (2,550) $7.13 (20,417) $4.59 (13,994) $4.94
Options canceled (2,750) $11.70 (3,601) $8.72
----------- ----------- -----------
Options outstanding and
exercisable, end of year 87,572 $6.49 90,122 $6.51 113,289 $6.29
=========== =========== ===========
A summary of options outstanding at December 31, 2002 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2002 Life 2002
------------------------ --------------- --------------- ----------------
$ 3.15 46,328 2.6 years 46,328
$ 5.37 4,079 3.4 years 4,079
$ 9.77 8,800 6.2 years 8,800
$ 10.23 275 6.2 years 275
$ 10.68 15,840 5.9 years 15,840
$ 11.12 2,000 7.3 years 2,000
$ 11.25 700 7.3 years 700
$ 11.75 9,550 7.0 years 9,550
--------------- ----------------
87,572 87,572
=============== ================
8. SHAREHOLDERS' EQUITY (Continued)
Regulatory Capital
The Bank is subject to certain regulatory capital requirements administered by
the Office of the Comptroller of the Currency (OCC). Failure to meet these
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 Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank'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 Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average assets. Each of
these components is defined in the regulations. Management believes that the
Bank met all its capital adequacy requirements as of December 31, 2002 and 2001.
In addition, the most recent notification from the OCC categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below.
There are no conditions or events since the last notification by the OCC that
management believes have changed the Bank's category.
2002 2001
------------------------- ------------------------
Amount Ratio Amount Ratio
-------------- --------- -------------- ---------
Leverage Ratio
- --------------
North State National Bank $13,686,000 9.4% $12,125,000 9.5%
Minimum requirement for "Well-Capitalized" institution $ 7,265,000 5.0% $ 6,357,500 5.0%
Minimum regulatory requirement $ 5,812,000 4.0% $ 5,086,000 4.0%
Tier 1 Risk-Based Capital Ratio
North State National Bank $13,686,000 14.3% $12,125,000 15.0%
Minimum requirement for "Well-Capitalized" institution $ 5,742,000 6.0% $ 4,848,700 6.0%
Minimum regulatory requirement $ 3,828,000 4.0% $ 3,232,400 4.0%
Total Risk-Based Capital Ratio
North State National Bank $14,621,000 15.3% $13,110,000 16.2%
Minimum requirement for "Well-Capitalized" institution $ 9,569,000 10.0% $ 8,081,100 10.0%
Minimum regulatory requirement $ 7,656,000 8.0% $ 6,464,900 8.0%
9. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of other comprehensive income that
historically has not been recognized in the calculation of net income.
Unrealized gains and losses on the Bank's available-for-sale investment
securities are included in other comprehensive income. Total comprehensive
income and the components of accumulated other comprehensive income are
presented in the Statement of Changes in Shareholders' Equity.
At December 31, 2002, 2001 and 2000, the Bank held securities classified as
available-for-sale which had unrealized gains as follows:
Before Tax After
Tax Expense Tax
---------- ---------- ----------
For the Year Ended December 31, 2002
Other comprehensive income:
Unrealized holding gains $341,937 $(142,340) $199,597
Reclassification adjustment for
gains included in net income 55,130 (22,817) 32,313
---------- ---------- ----------
Total other comprehensive
income $286,807 $(119,523) $167,284
========== ========== ==========
For the Year Ended December 31, 2001
Other comprehensive income:
Unrealized holding gains $757,792 $(313,481) $444,311
Reclassification adjustment for
gains included in net income 141,351 (57,487) 83,864
---------- ---------- ----------
Total other comprehensive
income $616,441 $(255,994) $360,447
========== ========== ==========
For the Year Ended December 31, 2000
Other comprehensive income:
Unrealized holding gains $924,345 $(385,464) $538,881
========== ========== ==========
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which it is
practicable to estimate fair value. These estimates are made at a specific point
in time based on relevant market data and information about the financial
instruments. These estimates do not reflect any premium or discount that could
result from offering the Bank's entire holdings of a particular financial
instrument for sale at one time, nor do they attempt to estimate the value of
anticipated future business related to the instruments. In addition, the tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any
of these estimates.
Because no market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
fair values presented.
The following methods and assumptions were used by the Bank to estimate the fair
value of its financial instruments at December 31, 2002 and 2001:
Cash and cash equivalents: For cash and cash equivalents, the carrying amount is
estimated to be fair value.
Investment securities: For investment securities, fair values are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using quoted market prices for similar
securities and indications of value provided by brokers.
Loans: For variable-rate loans that reprice frequently with no significant
change in credit risk, the carrying amount is estimated to be fair value. The
fair values for other loans are estimated using discounted cash flow analyses,
using interest rates being offered at each reporting date for loans with similar
terms to borrowers of comparable creditworthiness. The carrying amount of
accrued interest receivable approximates its fair value.
Deposits: The fair values for demand deposits are, by definition, equal to the
amount payable on demand at the reporting date represented by their carrying
amount. Fair values for fixed-rate certificates of deposit are estimated using
discounted cash flow analyses using interest rates being offered at each
reporting date by the Bank for certificates with similar remaining maturities.
The carrying amount of accrued interest payable approximates its fair value.
Commitments to extend credit: Commitments to extend credit are primarily for
variable rate loans. For these commitments, there is no difference between the
committed amounts and their fair values. Commitments to fund fixed rate loans
and letters of credit are at rates which approximate fair value at each
reporting date.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bank's financial instruments are as follows:
December 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- --------------- --------------- ----------------
Financial assets:
Cash and due from banks $ 7,049,271 $ 7,049,271 $ 5,898,143 $ 5,898,143
Interest-bearing deposits 476,880 476,880 5,430,320 5,430,320
Federal funds sold 3,215,000 3,215,000 3,302,000 3,302,000
Investment securities 49,310,796 49,359,400 39,082,324 39,116,350
Loans 81,777,473 83,129,000 72,561,635 74,301,000
Accrued interest receivable 704,948 704,948 883,497 883,497
Financial liabilities:
Deposits $ 129,876,823 $ 130,188,000 $ 116,168,992 $ 116,482,000
Accrued interest payable 160,288 160,288 272,720 272,720
Off-balance-sheet financial
instruments:
Commitments to extend
credit $ 19,659,000 $ 19,659,000 $ 19,023,000 $ 19,023,000
Letters of credit 131,000 131,000 300,000 300,000
11. OTHER EXPENSES
Other expenses for the years ended December 31, 2002, 2001 and 2000 consisted of
the following:
2002 2001 2000
-------- -------- --------
Professional fees $134,728 $113,466 $119,558
Director fees 78,400 79,200 66,000
Advertising 49,083 49,492 52,524
Other operating expenses 671,719 540,208 495,291
-------- -------- --------
$933,930 $782,366 $733,373
======== ======== ========
12. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has $5,000,000 in unsecured short-term borrowing agreements with its
correspondent banks. The Bank can also borrow up to $400,000 on an overnight
basis from the Federal Reserve Bank secured by investment securities with
amortized costs totaling $455,227 and estimated market values totaling $478,000.
In addition, the Bank has reverse repurchase agreements totaling $10,000,000
with two securities firms. The Bank can also borrow approximately $2,500,000
from the Federal Home Loan Bank subject to various pledging options. There were
no short-term borrowings outstanding at December 31, 2002 and 2001.
13. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions with
related parties, including executive officers and directors. These transactions
include borrowings from the Bank with substantially the same terms, including
rates and collateral, as loans to unrelated parties. The following is a summary
of the aggregate activity involving related party borrowers during 2002:
Balance, January 1, 2002 $ 2,995,870
Disbursements 5,995,921
Amounts repaid (3,515,685)
-----------
Balance, December 31, 2002 $ 5,476,106
===========
Undisbursed commitments to related parties,
December 31, 2002 $ 1,902,047
===========
14. EMPLOYEE BENEFIT PLAN
The Bank's California Bankers Association Prototype Profit Sharing and Salary
Deferral 401(k) Plan is available to employees meeting certain age and length of
service requirements. Under the Plan, employees can defer a selected portion of
their annual compensation and the Bank may match each employee contribution in
an amount to be determined annually under a formula established by the Board of
Directors. During 2002, 2001 and 2000, the Bank's contribution totaled $24,000,
$28,000 and $24,000, respectively.
15. ACQUISITION AGREEMENT AND PLAN OF MERGER
On October 7, 2002, the Bank and TriCo Bancshares announced the signing of a
definitive Acquisition Agreement and Plan of Merger (the "Agreement") in which
TriCo Bancshares will acquire all of the common shares and unexercised options
of the Bank. The Agreement has been approved by the Bank's Board of Directors,
shareholders and bank regulatory authorities. The Bank anticipates that the
merger will be completed on or about April 1, 2003. The agreed upon purchase
price, based on an average closing price of $26.12 per share of TriCo Bancshares
common stock, is approximately $34,000,000 and consists of cash and common
shares of TriCo Bancshares.
EXHIBIT 99.2
Pro Forma Unaudited Financial Information
The merger will be accounted for under the purchase method of accounting.
The method requires that the purchase price be allocated to the acquired assets
and liabilities of North State on the basis of their estimated fair values as of
the date of the merger. As a result, on completion of the merger, TriCo will
establish a new accounting and reporting basis for the acquired assets which
will be reflected in the future consolidated financial statements of TriCo. The
following pro forma tables present the combined historical financial statements
of TriCo and North State, adjusted to give effect to the merger on a pro forma
purchase accounting basis. The pro forma condensed consolidated balance sheet
gives effect to the merger as if it occurred on December 31, 2002. The pro forma
condensed consolidated statements of income give effect to the merger as if it
occurred as of the beginning of the first period presented for the year ended
December 31, 2001 and for the year ended December 31, 2002, and include
adjustments directly attributable to the merger and expected to have a
continuing impact on the combined entity.
We expect to incur reorganization expenses as a result of merging the
companies. The unaudited pro forma statements of income reflect anticipated
reorganization expenses resulting from the merger. We also anticipate that the
merger will provide the combined company with some financial benefits that
include reduced operating expense and opportunities to earn more revenue.
However, we do not reflect any of these anticipated cost savings or benefits in
the pro forma information. This pro forma financial information is provided for
informational purposes only and does not attempt to predict or suggest future
results. The pro forma information also does not attempt to show how the
combined company would actually have performed had TriCo and North State been
combined throughout those periods. All adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of results of the
unaudited historical interim periods have been included.
The information in the following tables are based on the historical financial
information of TriCo and North State. You should carefully review this
historical information.
TriCo Bancshares and North State National Bank
Pro Forma Condensed Consolidated Balance Sheet
At December 31, 2002
---------------------------------------------------------
North Pro Forma
TriCo State Adjustments Total
---------------------------------------------------------
(dollars in thousands; unaudited)
Assets
Cash and due from banks $ 67,170 $ 7,526 $(5,090) 1 $ 69,606
Federal funds sold 8,100 3,215 (8,000) 1 3,315
---------------------------------------------------------
Cash and cash equivalents 75,270 10,741 (13,090) 1 72,921
Investment securities 338,024 49,311 494 387,384
Loans 687,522 82,713 -- 770,235
Allowance for loan losses (14,377) (935) -- (15,312)
Premises and equipment, net 17,224 1,389 -- 18,613
Cash value of life insurance 15,208 -- -- 15,208
Other real estate owned 932 -- -- 932
Accrued interest receivable 5,644 935 -- 6,579
Core deposit intangible 4,043 -- 5,195 5 9,238
Goodwill -- -- 15,195 7 15,195
Other assets 15,084 0 (2,078) 6 13,006
-------------------------------------------------------
Total assets $ 1,144,574 $144,154 $ 5,271 $1,293,999
=======================================================
Liabilities
Deposits:
Noninterest-bearing demand 232,499 25,779 -- 258,278
Interest-bearing demand 182,816 18,199 -- 201,015
Savings 297,926 53,280 -- 351,206
Time certificates 291,996 32,619 -- 324,615
-------------------------------------------------------
Total deposits 1,005,237 129,877 -- 1,135,114
Accrued interest payable and
other liabilities 17,399 231 690 2 18,320
Long-term debt and other borrowings 22,924 -- -- 22,924
-------------------------------------------------------
Total liabilities $ 1,045,560 $130,108 $ 690 $1,176,358
=======================================================
Shareholders' equity
Common stock 50,472 3,067 15,560 69,099
Additional paid-in capital -- 4,243 (4,243) 0
Retained earnings 46,239 6,375 (6,375) 46,239
Accumulated other comprehensive income 2,303 361 (361) 2,303
-------------------------------------------------------
Total shareholders' equity 99,014 14,046 4,5813 117,641
-------------------------------------------------------
Total liabilities and shareholders' equity $1,144,574 $144,154 $ 5,271 $1,293,999
=======================================================
Tier 1 capital $ 91,641 $13,686 $(13,731) 8 $91,596
Tier 2 capital 10,737 935 -- 11,672
Total capital 102,378 14,621 (13,731) 8 103,268
Risk weighted assets 855,288 95,706 -- 950,994
Average assets $ 1,140,000 $145,893 $(13,090) $1,272,803
Tier 1 risk-based capital ratio 10.7% 14.3% 9.6%
Total risk-based capital ratio 12.0% 15.3% 10.9%
Leverage ratio 8.3% 9.4% 7.2%
- ------------------------
See Notes to Pro Forma Unaudited Financial Information.
TriCo Bancshares and North State National Bank
Pro Forma Condensed Consolidated Statements of Income
Year Ended December 31, 2002
----------------------------------------------------------
TriCo North State Adjust Total
----------------------------------------------------------
(dollars in thousands, except share and per share amounts; unaudited)
Interest income:
Interest and fees on loans $ 52,472 $ 5,636 $ 58,108
Interest on federal funds sold 606 117 $(100) 9 623
Interest on investment securities 11,618 2,104 13,722
----------------------------------------------------------
Total interest income 64,696 7,857 (100) 72,453
Interest expense:
Interest on deposits 11,620 2,007 13,627
Interest on short-term borrowing 2 -- 2
Interest on long-term debt 1,292 -- 1,292
----------------------------------------------------------
Total interest expense 12,914 2,007 14,921
----------------------------------------------------------
Net interest income 51,782 5,850 (100) 57,532
----------------------------------------------------------
Provision for loan losses 2,800 -- 2,800
----------------------------------------------------------
Net interest income after provision
for loan losses 48,982 5,850 (100) 54,732
----------------------------------------------------------
Noninterest income:
Service charges and fees 11,286 341 11,627
Gain on sale of investments -- 55 55
Gain on sale of loans 3,641 -- 3,641
Commissions on sale of NDIP 2,467 -- 2,467
Other 1,786 143 1,929
----------------------------------------------------------
Total noninterest income 19,180 539 19,719
Noninterest expense:
Salaries and related benefits 24,290 1,529 25,819
Intangible amortization 911 -- 779 10 1,690
Other 20,770 1,368 22,138
----------------------------------------------------------
Total noninterest expense 45,971 2,897 779 49,647
----------------------------------------------------------
Income before income taxes 22,191 3,492 (879) 24,804
Provision for income taxes 8,122 1,459 (352) 9,229
----------------------------------------------------------
Net income $ 14,069 $ 2,033 $ (527) $ 15,575
============================================================
Shares outstanding end of period 7,061,000 1,224,190 (500,190) 11 7,785,000
Average shares outstanding 7,019,000 1,224,000 (500,000) 11 7,743,000
Diluted shares outstanding 7,193,000 1,281,000 (497,000) 11 7,977,000
Per share data
Basic earnings $2.00 $1.66 $2.01
Diluted earnings $1.96 $1.59 $1.95
- ------------------------
See Notes to Pro Forma Unaudited Financial Information.
TriCo Bancshares and North State National Bank
Pro Forma Condensed Consolidated Statements of Income
Year Ended December 31, 2001
----------------------------------------------------------
TriCo North State Adjust Total
----------------------------------------------------------
(dollars in thousands, except share and per share amounts; unaudited)
Interest income:
Interest and fees on loans $ 58,730 $ 6,114 $ 64,844
Interest on federal funds sold 1,506 227 $(100) 9 1,633
Interest on investment securities 11,762 2,210 13,972
----------------------------------------------------------
Total interest income 71,998 8,551 80,449
Interest expense:
Interest on deposits 21,507 3,248 24,755
Interest on short-term borrowing 7 -- 7
Interest on long-term debt 1,972 -- 1,972
----------------------------------------------------------
Total interest expense 23,486 3,248 26,734
----------------------------------------------------------
Net interest income 48,512 5,303 (100) 53,715
----------------------------------------------------------
Provision for loan losses 4,400 169 4,569
----------------------------------------------------------
Net interest income after provision
for loan losses 44,112 5,134 (100) 49,146
----------------------------------------------------------
Noninterest income:
Service charges and fees 8,095 335 8,430
Gain on sale of investments 1,756 141 1,897
Gain on sale of loans 2,095 -- 2,095
Commissions on sale of NDIP 2,576 -- 2,576
Other 1,716 149 1,865
----------------------------------------------------------
Total noninterest income 16,238 625 16,863
Noninterest expense:
Salaries and related benefits 21,199 1,492 22,691
Intangible amortization 911 -- 779 10 1,690
Other 18,497 1,252 19,749
----------------------------------------------------------
Total noninterest expense 40,607 2,744 779 44,130
----------------------------------------------------------
Income before income taxes 19,743 3,015 (879) 21,879
Provision for income taxes 7,324 1,226 (352) 8,198
----------------------------------------------------------
Net income $ 12,419 $ 1,789 $ (527) $ 13,681
============================================================
Shares outstanding end of period 7,000,980 1,224,190 (500,190) 11 7,724,980
Average shares outstanding 7,072,588 1,216,493 (492,493) 11 7,796,588
Diluted shares outstanding 7,219,229 1,267,399 (483,399) 11 8,003,229
Per share data
Basic earnings $1.76 $1.47 $1.77
Diluted earnings $1.72 $1.41 $1.72
- ------------------------
See Notes to Pro Forma Unaudited Financial Information.
Notes to Pro Forma Unaudited Financial Information
The pro forma unaudited financial information was prepared based on North
State shareholders receiving consideration of $13,090,000 in cash, 723,512
shares of TriCo stock valued at $23.81, and options to purchase 79,587 shares of
TriCo stock at an average price of $6.22 per share. The total value of the stock
and option portion of the consideration was $18,627,000. The $23.81 per share
value of TriCo common stock noted above is the average closing price on the five
trading days surrounding the merger agreement announcement date of October 7,
2002. The following adjustments were made:
(1) Represents the $13,090,000 cash to be paid in the merger.
(2) Represents the estimated nonrecurring costs to be recognized prior to the
transaction which had not been paid or accrued as of December 31, 2002, net
of the appropriate tax benefits at an assumed marginal tax rate of 40%. The
estimated total pretax amounts of these expenses are as follows:
Additional employee benefits $ 400,000
Discontinued operations 150,000
Direct costs of transaction 600,000
-----------
Total $1,150,000
===========
(3) Represents the net effect of the issuance of TriCo stock and options for
TriCo stock as part of the merger consideration and the elimination of
North State's shareholders' equity as of December 31, 2002 in accordance
with the purchase method of accounting for the transaction.
Total value of TriCo stock
and option consideration given $18,627,000
Total value of North State
shareholders' equity on December 31, 2002 (14,046,000)
------------
Net adjustment to pro forma shareholders' equity $ 4,581,000
============
(4) Represents the market valuation of North State's investments as of December
31, 2002.
(5) Represents the identified core-deposit intangible asset estimated to be in
the range of 3%-5% of North State's total deposits. These figures assume an
estimate of 4% of North State's total deposits.
(6) Represents the deferred tax credit related to the core-deposit intangible.
Assuming a marginal tax rate of 40%, this adjustment is 40% of the
identified core-deposit intangible adjustment.
(7) Represents the unidentified intangible asset (goodwill) created in
accordance with the purchase method of accounting for the transaction. The
amount is calculated as follows:
Cash consideration $13,090,000
Stock and option consideration 18,627,000
-------------
Total consideration $31,717,000
Less: North State's shareholders' equity (14,046,000)
Less: Core-deposit intangible (5,195,000)
Add: Deferred tax credit related
to core-deposit intangible 2,078,000
Add: Nonrecurring costs net of tax 690,000
Less: Investment market valuation adjustment (49,000)
-------------
Total goodwill $15,195,000
=============
(8) Represents the addition to pro forma shareholders' equity as described in
note 3 above less the sum of the intangible items described in notes 5, 6
and 7 above.
(9) Represents reduction in interest income from $8 million of federal funds
sold which is expected to be used as part of the $13,000,000 cash to be
paid to North State shareholders.
(10) Represents core-deposit amortization based on $5,195,000 of core-deposit
intangible being created in the merger amortized on an accelerated basis
over 10 years.
(11) Represents replacement of North State's outstanding common stock and
options to purchase common stock with TriCo common stock and options to
purchase common stock resulting in an increase of approximately 724,000
shares of TriCo stock outstanding and fully diluted shares of approximately
784,000.
EXHIBIT 99.3
PRESS RELEASE Contact: Thomas J. Reddish
Vice President & CFO
For Immediate Release (530) 898-0300
TRICO BANCSHARES ANNOUNCES CLOSING OF ACQUISITION OF NORTH STATE NATIONAL BANK
------------------------------------------------------------------------------
Chico, CA - April 7, 2003. TriCo Bancshares (NASDAQ:TCBK), parent company
of Tri Counties Bank, announced its acquisition of North State National Bank by
the merger of North State into its wholly owned subsidiary, Tri Counties Bank,
effective 5:01 pm on April 4, 2003. The acquisition and the related merger
agreement dated October 3, 2003, was approved by the California Department of
Financial Institutions, the Federal Deposit Insurance Corporation, and the
shareholders of North State National Bank on March 4, March 7, and March 19,
2003, respectively.
Under terms of the merger agreement, TriCo will issue $13,090,105 in cash,
723,511 shares of TriCo common stock, and options to purchase 79,587 TriCo
common shares at an average exercise price of $6.22 per share in exchange for
all of the 1,234,375 common shares and options to purchase 79,937 common shares
of North State National Bank outstanding as of April 4, 2003. At March 31, 2003,
TriCo Bancshares had 7,080,470 shares of common stock outstanding. Based upon
TriCo's closing stock price of $25.65 on April 4, 2003, the aggregate value of
the cash and the TriCo options and common stock to be issued in the merger would
be approximately $33,195,000.
The two former branches of North State National Bank opened today for
business as Tri Counties Bank branches, and all customer service systems have
been converted to Tri Counties Bank systems.
Tri Counties Bank headquartered in Chico, California, has a 28 year history
in the banking industry. Following the acquisition of North State, Tri Counties
Bank now has approximately $1.3 billion in assets, and operates 34 traditional
branch locations and 10 in-store branch locations in 20 California counties. Tri
Counties Bank offers financial services and provides a diversified line of
products and services to consumers and businesses, which include demand, savings
and time deposits, consumer finance, online banking, mortgage lending, and
commercial banking throughout its market area. It operates a network of 55 ATMs
and a 24-hour, seven days a week telephone customer service center. Brokerage
services are provided at the Bank's offices by the Bank's association with
Raymond James Financial, Inc. For further information please visit the Tri
Counties Bank web-site at http://www.tricountiesbank.
63 Constitution Drive, Chico, California 95973
Exhibit 99.4
CONSENT AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Form 8-K of our report dated January
30, 2003 (except for Note 15, as to which the date is March 19, 2003), relating
to the financial statements of North State National Bank.
/s/ Perry-Smith LLP
Sacramento, California
April 14, 2003