SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year Commission File Number 0-10661
ended December 31, 1997
TriCo Bancshares
(Exact name of registrant as specified in its charter)
California 94-2792841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(530) 898-0300
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of March 10, 1998, was approximately $98,856,000. This
computation excludes a total of 1,369,451 shares which are beneficially owned by
the officers and directors of Registrant who may be deemed to be the affiliates
of Registrant under applicable rules of the Securities and Exchange Commission.
The number of shares outstanding of Registrant's classes of common stock, as of
March 10, 1998, was 4,664,649 shares of Common Stock, without par value.
The following documents are incorporated herein by reference into the parts of
Form 10-K indicated: Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1997, for Item 7 and Registrant's Proxy Statement for
use in connection with its 1998 Annual Meeting of Shareholders for Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.
PART I
1. BUSINESS
Formation of Bank Holding Company
TriCo Bancshares (hereinafter the "Company" or "Registrant") was
incorporated under the laws of the State of California on October 13, 1981. It
was organized at the direction of the Board of Directors of Tri Counties Bank
(the "Bank") for the purpose of forming a bank holding company. On September 7,
1982, a wholly-owned subsidiary of the Company was merged with and into the Bank
resulting in the shareholders of the Bank becoming the shareholders of the
Company and the Bank becoming the wholly-owned subsidiary of the Company. (The
merger of the wholly-owned subsidiary of the Company with and into the Bank is
hereafter referred to as the "Reorganization.") At the time of the
Reorganization, the Company became a bank holding company subject to the
supervision of the Board of Governors of the Federal Reserve System (the
"Board") in accordance with the Bank Holding Company Act of 1956, as amended.
The Bank remains subject to the supervision of the California State Banking
Department and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank
currently is the only subsidiary of the Company and the Company has not yet
commenced any business operations independent of the Bank.
Provision of Banking Services
The Bank was incorporated as a California banking corporation on June
26, 1974, and received its Certificate of Authority to begin banking operations
on March 11, 1975.
The Bank engages in the general commercial banking business in the
California counties of Butte, Del Norte, Glenn, Lake, Lassen, Madera, Mendocino,
Merced, Nevada, Shasta, Siskiyou, Stanislaus, Sutter, Tehama and Yuba. It has
loan production offices in Kern and Sacramento counties. The Bank currently has
24 traditional branches, 7 in-store branches and two loan production offices. It
opened its first banking office in Chico, California in 1975, followed by branch
offices in Willows, Durham and Orland, California. The Bank opened its fifth
banking office at an additional location in Chico in 1980. On March 27, 1981,
the Bank acquired the assets of Shasta County Bank and thereby acquired six
additional offices. These offices are located in the communities of Bieber,
Burney, Cottonwood, Fall River Mills, Palo Cedro and Redding, California. On
November 7, 1987, the Bank purchased the deposits and premises of the Yreka
Branch of Wells Fargo Bank, thereby acquiring an additional branch office. On
August 1, 1988, the Bank opened a new office in Chico at East 20th Street and
Forest Avenue. The Bank opened a branch office in Yuba City on September 10,
1990. The Bank opened four supermarket branches in 1994. These supermarket
branches were opened on March 7, March 28, June 6 and June 13, 1994 in Red
Bluff, Yuba City, and two in Redding respectively. The Bank added one
conventional branch in Redding through its acquisition of Country National Bank
on July 21, 1994. On November 7, 1995, the Bank opened a supermarket branch in
Chico. In March 1996 the Bank opened its sixth supermarket branch in Grass
Valley. The acquisition of Sutter Buttes Savings Bank in October 1996 added a
branch in Marysville. Loan production offices were established in Bakersfield
and Sacramento in 1996. On February 21, 1997, the Bank purchased nine branches
from Wells Fargo Bank, N.A. The acquired branches are located in Crescent City,
Weed, Mt. Shasta, Susanville, Covelo, Middletown, Patterson, Gustine and
Chowchilla. This acquisition expanded the Bank's market area from the Sacramento
Valley and intermountain areas to include parts of the northern coastal region
and the northern San Joaquin Valley.
General Banking Services. The Bank conducts a commercial banking
business including accepting demand, savings and time deposits and making
commercial, real estate, and consumer loans. It also offers installment note
collection, issues cashier's checks and money orders, sells travelers checks and
provides safe deposit boxes and other customary banking services. Brokerage
services are provided at the Bank's offices by the Bank's association with
INVEST Financial Corporation. The Bank does not offer trust services or
international banking services.
The Bank's operating policy since its inception has emphasized retail
banking. Most of the Bank's customers are retail customers and small to
medium-sized businesses. The business of the Bank emphasizes serving the needs
of local businesses, farmers and ranchers, retired individuals and wage earners.
The majority of the Bank's loans are direct loans made to individuals and
businesses in the area. At December 31, 1997, the total of the Bank's consumer
installment loans outstanding was $87,950,000 (19.6%), the total of commercial
loans outstanding was $165,813,000 (36.9%), and the total of real estate loans
including construction loans of $34,250,000 was $195,204,000 (43.5%). The Bank
takes real estate, listed and unlisted securities, savings and time deposits,
automobiles, machinery, equipment, inventory, accounts receivable and notes
receivable secured by property as collateral for loans.
Most of the Bank's deposits are attracted from individuals and
business-related sources. No single person or group of persons provides a
material portion of the Bank's deposits, the loss of any one or more of which
would have a materially adverse effect on the business of the Bank, nor is a
material portion of the Bank's loans concentrated within a single industry or
group of related industries.
In order to attract loan and deposit business from individuals and
small to medium-sized businesses, branches of the Bank set lobby hours to
accommodate local demands. In general, lobby hours are from 9:00 a.m. to 5:00
p.m. Monday through Thursday, and from 9:00 a.m. to 6:00 p.m. on Friday. Certain
branches with less activity open later and close earlier. Some Bank offices also
utilize drive-up facilities operating from 9:00 a.m. to 7:00 p.m. The
supermarket branches are open from 9:00 a.m. to 7:00 p.m. Monday through
Saturday and 11:00 a.m. to 5:00 p.m. on Sunday.
The Bank offers 24 hour ATMs at all branch locations. The ATMs are
linked to several national and regional networks such as CIRRUS and STAR. In
addition, banking by telephone on a 24 hour toll-free number is available to all
customers. This service allows a customer to inquire for account balances and
most recent transactions, transfer moneys between accounts, make loan payments,
and obtain interest rate information.
In February 1998, the Bank became the first bank in the Northern
Sacramento Valley to offer banking services on the Internet. This banking
service provides customers one more tool for anywhere, anytime access to their
accounts.
Other activities. The Bank presently offers the banking services
referred to above and pursuant to California legislation, TCB Real Estate
Corporation, a wholly-owned subsidiary of the Bank, engages in limited real
estate investment. Such investment consists of holding certain real property for
the purpose of development or as income earning assets. The amount of the Bank's
assets committed to such investment does not exceed the total of the Bank's
capital and surplus. In 1996 the FDIC directed the Bank to divest the properties
held by TCB Real Estate Corp. and to terminate its operations. The Bank and FDIC
have agreed to a plan that will accomplish the divestiture by June 30, 1999.
The Bank may in the future engage in other businesses either directly
or indirectly through subsidiaries acquired or formed by the Bank subject to
regulatory constraints. See "Regulation, Supervision and Permitted Activities of
the Company."
Employees. At December 31, 1997, the Company and the Bank employed 467
persons, including four executive officers. Full time equivalent employees were
calculated at 381. No employees of the Company or the Bank are presently
represented by a union or covered under a collective bargaining agreement.
Management believes that its employee relations are excellent.
Competition. The banking business in California generally, and in the
Bank's primary service area specifically, is highly competitive with respect to
both loans and deposits. It is dominated by a relatively small number of major
banks with many offices operating over a wide geographic area. Among the
advantages such major banks have over the Bank are their ability to finance wide
ranging advertising campaigns and to allocate their investment assets to regions
of high yield and demand. By virtue of their greater total capitalization such
institutions have substantially higher lending limits than does the Bank since
legal lending limits to an individual customer are limited to a percentage of a
Bank's total capital accounts.
In addition to competing with savings institutions, commercial banks
compete with other financial markets for funds. Yields on corporate and
government debt securities and other commercial paper affect the ability of
commercial banks to attract and hold deposits. Commercial banks also compete for
available funds with money market instruments and mutual funds. During past
periods of high interest rates, money market funds have provided substantial
competition to banks for deposits and they may continue to do so in the future.
In today's stock market environment mutual funds have become a major source of
competition for savings dollars.
The Bank relies substantially on local promotional activity, personal
contacts by its officers, directors, employees and shareholders, extended hours,
personalized service and its reputation in the communities it services to
compete effectively.
Regulation and Supervision
As a registered bank holding company under the Bank Holding Company Act
of 1956 (the "BHC Act"), the Company is subject to the regulations and
supervision of the Board of Governors of the Federal Reserve System ("FRB"). The
BHC Act requires the Company to file reports with the FRB and provide additional
information requested by the FRB. The Company must receive the approval of the
FRB before it may acquire all or substantially all of the assets of any bank, or
ownership or control of the voting shares of any bank if, after giving effect to
such acquisition of shares, the Company would own or control more than 5 percent
of the voting shares of such bank.
The Company and any subsidiaries it may acquire or organize will be
deemed to be affiliates of the Bank within the Federal Reserve Act. That Act
establishes certain restrictions which limit the extent to which the Bank can
supply its funds to the Company and other affiliates. The Company is also
subject to restrictions on the underwriting and the public sale and distribution
of securities. It is prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property, or
furnishing of services.
The Company is prohibited from engaging in, or acquiring direct or
indirect control of any company engaged in non-banking activities, unless the
FRB by order or regulation has found such activities to be closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Under California law, dividends and other distributions by the Company
are subject to declaration by the Board of Directors at its discretion out of
net assets. Dividends cannot be declared and paid when such payment would make
the Company insolvent.
FRB policy prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowings or other arrangements that
might adversely affect the holding company's financial position. The policy
further declares that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition. Other FRB policies forbid the payment by bank subsidiaries to their
parent companies of management fees which are unreasonable in amount or exceed a
fair market value of the services rendered (or, if no market exists, actual
costs plus a reasonable profit).
In addition, the FRB has authority to prohibit banks that it regulates
from engaging in practices which in the opinion of the FRB are unsafe or
unsound. Such practices may include the payment of dividends under some
circumstances. Moreover, the payment of dividends may be inconsistent with
capital adequacy guidelines. The Company may be subject to assessment to restore
the capital of the Bank should it become impaired.
Federal Reserve Regulation "Y" (12 C.F.R. Part 225) sets forth those
activities which are regarded as closely related to banking or managing or
controlling banks and, thus, are permissible activities that may be engaged in
by bank holding companies subject to approval in individual cases by the FRB.
Litigation has challenged the validity of certain activities authorized by the
FRB for bank holding companies, and the FRB has various regulations and
applications in this regard still under consideration.
The Company is subject to the minimum capital requirements of the FRB.
As a result of these requirements, the growth in assets of the Company is
limited by the amount of its capital accounts as defined by the FRB. Capital
requirements may have an affect on profitability and the payment of
distributions by the Company. If the Company is unable to increase its assets
without violating the minimum capital requirements, or is forced to reduce
assets, its ability to generate earnings would be reduced. Furthermore, earnings
may need to be retained rather than paid as distributions to shareholders.
The FRB has adopted guidelines utilizing a risk-based capital
structure. These guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. For bank holding
companies with less than $150 million in consolidated assets, the guidelines
apply on a bank-only basis unless the holding company is engaged in non-bank
activity involving significant leverage or has a significant amount of
outstanding debt that is held by the general public. The Company currently has
consolidated assets of more than $150 million; accordingly, the risk-based
capital guidelines apply to the Company.
Qualifying capital is divided into two tiers. Tier 1 capital consists
generally of common stockholder's equity, qualifying noncumulative perpetual
preferred stock, qualifying cumulative perpetual preferred stock (up to 25
percent of total Tier 1 capital) and minority interests in the equity accounts
of consolidated subsidiaries less goodwill and certain other intangible assets.
Tier 2 capital consists of, among other things, allowance for loan and lease
losses up to 1.25 percent of weighted risk assets, perpetual preferred stock,
hybrid capital instruments, perpetual debt, mandatory convertible debt
securities, subordinated debt and intermediate-term preferred stock. Tier 2
capital qualifies as part of total capital up to a maximum of 100 percent of
Tier 1 capital. Amounts in excess of these limits may be issued but are not
included in the calculation of risk-based capital ratios. As of December 31,
1997 the Company must have a minimum ratio of qualifying total capital to
weighted risk assets of 8 percent, of which at least 4 percent must be in the
form of Tier 1 capital.
The Federal regulatory agencies have adopted a minimum Tier 1 leverage
ratio which is intended to supplement risk-based capital requirements and to
ensure that all financial institutions, even those that invest predominantly in
low-risk assets, continue to maintain a minimum level of Tier 1 capital. These
regulations provide that a banking organization's minimum Tier 1 leverage ratio
be determined by dividing its Tier 1 capital by its quarterly average total
assets, less goodwill and certain other intangible assets. Under the current
rules, the Company is required to maintain a minimum Tier 1 leverage ratio of 4
percent.
Insurance of Deposits.
The Bank's deposit accounts are insured up to a maximum of $100,000 per
depositor by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC issues
regulations and generally supervises the operations of its insured banks. This
supervision and regulation is intended primarily for the protection of
depositors.
Effective January 1, 1996, the deposit insurance rate was reduced to
$0.00 per $100.00. This rate will remain in effect as long as the Bank Insurance
Fund is capitalized at its legal limit. In November 1990, federal legislation
was passed which removed the cap on the amount of deposit insurance premiums
that can be charged by the FDIC. Under this legislation, the FDIC is able to
increase deposit insurance premiums as it sees fit. This could result in a
significant increase in the cost of doing business for the Bank in the future.
The FDIC now has authority to adjust deposit insurance premiums paid by insured
banks every six months.
Risk-Based Capital Requirements.
The Bank is subject to the minimum capital requirements of the FDIC. As
a result of these requirements, the growth in assets of the Bank is limited by
the amount of its capital accounts as defined by the FRB. Capital requirements
may have an effect on profitability and the payment of dividends on the common
stock of the Bank. If the Bank is unable to increase its assets without
violating the minimum capital requirements or is forced to reduce assets, its
ability to generate earnings would be reduced. Further, earnings may need to be
retained rather than paid as dividends to the Company.
Federal banking law requires the federal banking regulators to take
"prompt corrective action" with respect to banks that do not meet minimum
capital requirements. In response to this requirement, the FDIC adopted final
rules based upon the five capital tiers defined by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA); well capitalized, adequately
capitalized, under capitalized, significantly under capitalized and critically
under capitalized. For example, the FDIC's rules provide that an institution is
"well-capitalized" if its risk-based capital ratio is 10 percent or greater; its
Tier 1 risk-based capital ratio is 6 percent or greater; its leverage ratio is 5
percent or greater; and the institution is not subject to a capital directive or
an enforceable written agreement or order. A bank is "adequately capitalized" if
its risk-based capital ratio is 8 percent or greater; its Tier 1 risk-based
capital ratio is 4 percent or greater; and its leverage ratio is 4 percent or
greater (3 percent or greater for "one" rated institutions). An institution is
"significantly undercapitalized" if its risk-based capital ratio is less than 6
percent; its Tier 1 risk-based capital ratio is less than 3 percent; or its
tangible equity (Tier 1 capital) to total assets is equal to or less than 2
percent. An institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it engages in unsafe
or unsound banking practices.
No sanctions apply to institutions which are "well" or "adequately"
capitalized under the prompt corrective action requirements. Undercapitalized
institutions are required to submit a capital restoration plan for improving
capital. In order to be accepted, such plan must include a financial guaranty
from the institution's holding company that the institution will return to
capital compliance. If such a guarantee were deemed to be a commitment to
maintain capital under the federal Bankruptcy Code, a claim for a subsequent
breach of the obligations under such guarantee in a bankruptcy proceeding
involving the holding company would be entitled to a priority over third-party
general unsecured creditors of the holding company. Undercapitalized
institutions are prohibited from making capital distributions or paying
management fees to controlling persons; may be subject to growth limitations;
and acquisitions, branching and entering into new lines of business are
restricted. Finally, the institution's regulatory agency has discretion to
impose certain of the restrictions generally applicable to significantly
undercapitalized institutions.
In the event an institution is deemed to be significantly
undercapitalized, it may be required to: sell stock; merge or be acquired;
restrict transactions with affiliates; restrict interest rates paid; divest a
subsidiary; or dismiss specified directors or officers. If the institution is a
bank holding company, it may be prohibited from making any capital distributions
without prior approval of the FRB and may be required to divest a subsidiary. A
critically undercapitalized institution is generally prohibited from making
payments on subordinated debt and may not, without the approval of the FDIC,
enter into a material transaction other than in the ordinary course of business;
engage in any covered transaction; or pay excessive compensation or bonuses.
Critically undercapitalized institutions are subject to appointment of a
receiver or conservator.
Bank Regulation.
The federal regulatory agencies are required to adopt regulations which
will establish safety and soundness standards which will apply to banks and bank
holding companies. These standards must address bank operations, management,
asset quality, earnings, stock valuation and employee compensation. A bank
holding company or bank failing to meet established standards will face
mandatory regulatory enforcement action.
The grounds upon which a conservator or receiver of a bank can be
appointed have been expanded. For example, a conservator or receiver can be
appointed for a bank which fails to maintain minimum capital levels and has no
reasonable prospect of becoming adequately capitalized.
Federal law also requires, with some exception, that each bank have an
annual examination performed by its primary federal regulatory agency, and an
outside independent audit. The outside audit must consider bank regulatory
compliance in addition to financial statement reporting.
Federal law also restricts the acceptance of brokered deposits by
insured depository institutions and contains a number of consumer banking
provisions, including disclosure requirements and substantive contractual
limitations with respect to deposit accounts.
Recent Legislation
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company and its
subsidiaries are particularly susceptible to being affected by enactment of
federal and state legislation which may have the effect of increasing or
decreasing the cost of doing business, modifying permissible activities or
enhancing the competitive position of other financial institutions.
In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 was enacted by Congress. Under the act, beginning on September 29, 1995,
bank holding companies may acquire banks in any state, notwithstanding contrary
state law, and all banks commonly owned by a bank holding company may act as
agents for one another. An agent bank may receive deposits, renew time deposits,
accept payments, and close and service loans for its principal banks but will
not be considered to be a branch of the principal banks.
In response to the Riegle-Neal Act, California enacted the California
Interstate Banking and Branching Act of 1995. This act became effective
September 29, 1995. Under this act, an out-of-state bank can only enter into
interstate branch banking within California by acquiring an existing bank
operating within California. The California bank must have been in existence for
five years at the time of acquisition.
Governmental Monetary Policies and Economic Conditions
The principal sources of funds essential to the business of banks and
bank holding companies are deposits, stockholder's equity and borrowed funds.
The availability of these various sources of funds and other potential sources,
such as preferred stock or commercial paper, and the extent to which they are
utilized, depends on many factors, the most important of which are the FRB's
monetary policies and the relative costs of different types of funds. An
important function of the FRB is to regulate the national supply of bank credit
in order to combat recession and curb inflationary pressure. Among the
instruments of monetary policy used by the Federal Reserve Board to implement
these objections are open market operations in United States Government
securities, changes in the discount rate on bank borrowings, and changes in
reserve requirements against bank deposits. The monetary policies of the FRB
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future. In view of the
recent changes in regulations affecting commercial banks and other actions and
proposed actions by the federal government and its monetary and fiscal
authorities, including proposed changes in the structure of banking in the
United States, no prediction can be made as to future changes in interest rates,
credit availability, deposit levels, the overall performance of banks generally
or the Company and its subsidiaries in particular.
General
The Company conducts all of its business operations within a single
geographic area and within a single industry segment.
2. PROPERTIES
As the Company has not yet acquired any properties independent of the
Bank, its only subsidiary, the properties of the Bank and the Bank's
subsidiaries comprise all of the properties of the Company.
Bank Properties
The Bank owns and leases properties which house administrative and data
processing functions and 31 banking offices. Major owned and leased facilities
are listed below.
Park Plaza Branch Pillsbury Branch
780 Mangrove Avenue 2171 Pillsbury Road
Chico, CA 95926 Chico, CA 95926
10,000 square feet 5,705 square feet
Leased - term expires 2010 Owned
Purchasing and Printing Department Hilltop Branch
2560-C Dominic Drive 1250 Hilltop Drive
Chico, CA 95928 Redding, CA 96049
8,400 square feet 6,252 square feet
Leased - term expires 1995 Owned
Burney Branch Cottonwood Branch
37093 Main Street 3349 Main Street
Burney, CA 96013 Cottonwood, CA 96022
3,500 square feet 4,900 square feet
Owned Owned
Information Administration1 Fall River Mills Branch
110 Independence Circle 43308 Highway 299 East
Chico, CA 95973 Fall River Mills, CA 96028
7,480 square feet 2,200 square feet
Owned Owned
Orland Branch Durham Branch
100 E. Walker Street 9411 Midway
Orland, CA 95963 Durham, CA 95938
3,000 square feet 2,150 square feet
Owned Owned
Redding Branch(2) Willows Branch
1810 Market Street 210 North Tehama Street
Redding, CA 96001 Willows, CA 95988
14,000 square feet 4,800 square feet
Owned Owned
Palo Cedro Branch Yuba City Branch
9125 Deschutes Road 1441 Colusa Avenue
Palo Cedro, CA 96073 Yuba City, CA 9599
34,000 square feet 6,900 square feet
Owned Owned
Chowchilla Branch Covelo Branch
305 Trinity Street 76405 Covelo Road
Chowchilla, CA 93610 Covelo, Ca 95428
6,000 square feet 3,000 square feet
Leased - term expires 2009 Leased - term expires 1997
Crescent City Branch Gustine Branch
936 Third Street 319 Fifth Street
Crescent City, CA 95531 Gustine, CA 95322
4,700 square feet 5,100 square feet
Owned Owned
Marysville Branch Middletown Branch
729 E Street 21097 Calistoga Street
Marysville, CA 95901 Middletown, CA 95461
1,600 square feet 2,600 square feet
Leased - term expires 2001 Leased - term expires 2002
Mt. Shasta Branch Patterson Branch
204 Chestnut Street 17 Plaza
Mt. Shasta, CA 96067 Patterson, CA 95363
6,500 square feet 4,000 square feet
Leased - term expires 2007 Owned
Susanville Branch Weed Branch
1605 Main Street 303 Main Street
Susanville, CA 96130 Weed, CA 96094
7,200 square feet 6,200 square feet
Leased - term expires 2002 Owned
TriCo Offices(3) Yreka Branch
15 Independence Circle 165 South Broadway
Chico, CA 95973 Yreka, CA 96097
7,000 square feet 6,000 square feet
Leased - term expires 2011 Owned
Administration Offices(1) Data Processing Center
40 Philadelphia Drive 1103 Fortress
Chico, CA 95973 Chico, CA 95926
7,000 square feet 13,600 square feet
Owned Leased - term expires 2011
Headquarters Building Redding Downtown Branch
63 Constitution Drive 1845 California Street
Chico, CA 95973 Redding, CA 96001
30,000 square feet Owned
Owned
(1) These two buildings were sold subsequent to December 31, 1997.
(2) This building was vacant at December 31, 1997 and is available for lease..
(3) This leased building was vacated subsequent to December 31, 1997 and is
available for sublease.
3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material legal
proceedings, other than ordinary routine litigation incidental to the business
of the Company and the Bank, nor is any of their property the subject of any
such proceedings.
4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Stock of the Company trades on the NASDAQ National Market under
the symbol "TCBK." The shares were first listed in the NASDAQ Stock Market in
April 1993.
The following table summarizes the Common Stock high and low trading prices
and volume of shares traded by quarter as reported by NASDAQ.
Prices of the Approximate
Company's Common Trading
Stock Volume
Quarter Ended:(1) High Low (in shares)
March 31, 1996 $ 18.50 $ 15.75 579,810
June 30, 1996 18.75 16.88 266,608
September 30, 1996 22.25 17.00 478,820
December 31, 1996 22.50 19.50 365,032
March 31, 1997 27.00 21.25 323,607
June 30, 1997 28.75 22.14 344,839
September 30, 1997 29.25 24.25 223,892
December 31, 1997 34.00 25.63 225,956
(1) Quarterly trading activity has been compiled from NASDAQ trading reports.
Holders
As of December 31, 1997, there were approximately 1,925 holders of record
of the Company's Common Stock.
Dividends
The Company has paid quarterly dividends since March 1990. In 1997 the
Company paid quarterly dividends of $0.16 per share for all four quarters. For
each of the first two quarters of 1996, the Company paid dividends of $0.13 per
share. A quarterly dividend of $0.16 per share was paid in the third and fourth
quarters of 1996. The holders of Common Stock of the Company are entitled to
receive cash dividends when and as declared by the Board of Directors, out of
funds legally available therefor, subject to the restrictions set forth in the
California General Corporation Law (the "Corporation Law"). The Corporation Law
provides that a corporation may make a distribution to its shareholders if the
corporation's retained earnings equal at least the amount of the proposed
distribution.
The Company, as sole shareholder of the Bank, is entitled to dividends when
and as declared by the Bank's Board of Directors, out of funds legally available
therefore, subject to the powers of the Federal Deposit Insurance Corporation
(the "FDIC") and the restrictions set forth in the California Financial Code
(the "Financial Code"). The Financial Code provides that a bank may not make any
distributions in excess of the lessor of: (i) the bank's retained earnings, or
(ii) the bank's net income for the last three fiscal years, less the amount of
any distributions made by the bank to its shareholders during such period.
However, a bank may, with the prior approval of the California Superintendent of
Banks (the "Superintendent"), make a distribution to its shareholders of up to
the greater of (A) the bank's retained earnings, (B) the bank's net income for
its last fiscal year, or (C) the bank's net income for its current fiscal year.
If the Superintendent determines that the shareholders' equity of a bank is
inadequate or that a distribution by the bank to its shareholders would be
unsafe or unsound, the Superintendent may order a bank to refrain from making a
proposed distribution. The FDIC may also order a bank to refrain from making a
proposed distribution when, in its opinion, the payment of such would be an
unsafe or unsound practice. The Bank paid dividends totaling $3,000,000 to the
Company in 1997. As of December 31, 1997 and subject to the limitations and
restrictions under applicable law, the Bank had funds available for dividends in
the amount of $9,695,000.
The Federal Reserve Act limits the loans and advances that the Bank may
make to its affiliates. For purposes of such Act, the Company is an affiliate of
the Bank. The Bank may not make any loans, extensions of credit or advances to
the Company if the aggregate amount of such loans, extensions of credit,
advances and any repurchase agreements and investments exceeds 10% of the
capital stock and surplus of the Bank. Any such permitted loan or advance by the
Bank must be secured by collateral of a type and value set forth in the Federal
Reserve Act.
6. FIVE YEAR SELECTED FINANCIAL DATA
(in thousands, except share data)
1997 1996 1995 1994 1993(4)
Statement of Operations Data:(1)
Interest income $59,877 $49,148 $46,011 $43,240 $40,947
Interest expense 23,935 19,179 17,988 15,680 13,996
Net interest income 35,942 29,969 28,023 27,560 26,951
Provision for loan losses 3,000 777 335 316 1,858
Net interest income after
provision for loan losses 32,942 29,192 27,688 27,244 25,093
Noninterest income 9,566 6,636 5,933 5,025 6,726
Noninterest expense 32,932 23,485 21,661 22,058 20,225
Income before income taxes 9,576 12,343 11,960 10,211 11,594
Provision for income taxes 3,707 5,037 4,915 4,350 4,779
Net income $5,869 $7,306 $7,045 $5,861 $6,815
Share Data:(2)
Diluted earnings per share $1.21 $ 1.56 $1.46 $1.18 $1.42
Cash dividend paid per share 0.64 0.59 0.37 0.32 0.31
Common shareholders' equity
at year end 13.97 13.10 11.92 10.10 10.05
Balance Sheet Data at year end(5):
Total loans, gross $448,967 $439,218 $318,766 $307,103 $305,902
Total assets 826,165 694,859 603,554 593,834 575,897
Total deposits 724,094 595,621 516,193 491,172 515,999
Total shareholders' equity 65,124 60,777 53,213 48,231 47,068
Selected Financial Ratios:
Return on average assets 0.75 % 1.18 % 1.22 % .99 % 1.25 %
Return on average common
shareholders' equity 9.34 % 13.03 % 13.95 % 12.42 % 15.81%
Total risk-based capital ratio 11.90 % 13.58 % 15.17 % 14.65 % 14.02 %
Net interest margin(3) 5.16 % 5.37 % 5.36 % 5.18 % 5.49 %
Allowance for loan losses to total
loans outstanding at end of year 1.44 % 1.39 % 1.75 % 1.83 % 1.95 %
1 Tax-exempt securities are presented on an actual yield basis.
2 Retroactively adjusted to reflect 5-for-4 stock split effected in 1995, and 12% stock
dividend declared in 1993.
3 Calculated on a tax equivalent basis.
4 Restated on a historical basis to reflect the July 21, 1994 acquisition of Country National Bank on a
pooling-of-interests basis.
5 The 1996 data reflects changes due to the purchase of Sutter Buttes Savings
Bank. See Note S of Registrant's 1997 Annual Report to Shareholders.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Management's Discussion and Analysis of Financial Condition and Results
of Operations, included in Registrant's 1997 Annual Report to Shareholders,
(pages through of Exhibit 13.1 as electronically filed) is incorporated
herein by reference.
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Discussion is included Management's Discussion and Analysis (pages 29
through 48 of Exhibit 13.1 as electronically filed) and is incorporated herein
by reference.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditor's report,
included in Registrant's 1997 Annual Report to Shareholders, are incorporated
herein by reference:
Pages of Exhibit 13.1
as Electronically Filed
Report of Independent Public Accountants 28
Consolidated Balance Sheets as of
December 31, 1997 and 1996 1
Consolidated Statements of Income
for the three years ended December 31,
1997, 1996 and 1995 2
Consolidated Statements of Changes in
Shareholders' Equity for the three
years ended December 31, 1997,
1996 and 1995 3
Consolidated Statements of Cash Flows
for the years ended December 31, 1997,
1996 and 1995 4
Notes to Consolidated Financial
Statements 6
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Registrant's directors and executive officers
will be set forth under the caption, "Proposal No. 1 - Election of Directors of
the Company" in Registrant's Proxy Statement for use in connection with the
Annual Meeting of Shareholders to be held on or about May 19, 1998. Said
information is incorporated herein by reference.
11. EXECUTIVE COMPENSATION
Information regarding compensation of Registrant's directors and
executive officers will be set forth under the caption, "Proposal No. 1 -
Election of Directors of the Company" in Registrant's Proxy Statement for use in
connection with the Annual Meeting of Shareholders to be held on or about May
19, 1998. Said information is incorporated herein by reference.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners,
directors and executive officers of Registrant will be set forth under the
caption, "Information Concerning the Solicitation" in Registrant's Proxy
Statement for use in connection with the Annual Meeting of Shareholders to be
held on or about May 19, 1998. Said information is incorporated herein by
reference.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
set forth under the caption, "Proposal No. 1 - Election of Directors of the
Company" in Registrant's Proxy Statement for use in connection with the Annual
Meeting of Shareholders to be held on or about May 19, 1998. Said information is
incorporated herein by reference.
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements:
A list of the consolidated financial statements of
Registrant incorporated herein is included in Item 8 of this Report.
2. Financial Statement Schedules:
Schedules have been omitted because they are not
applicable or are not required under the instructions contained in Regulation
S-X or because the information required to be set forth therein is included in
the consolidated financial statements or notes thereto.
3. Exhibits Filed herewith:
Exhibit No. Exhibits
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.
3.2 Bylaws, as amended to 1992, 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.
4.2 Certificate of Determination of Preferences of Series B
Preferred Stock, filed as Appendix A to Registrant's
Registration Statement on Form S-1 (No. 33-22738), is
incorporated herein by reference.
10.1 Lease for Park Plaza Branch premises entered into as of
September 29, 1978, by and between Park Plaza Limited
Partnership as lessor and Tri Counties Bank as lessee,
filed as Exhibit 10.9 to the TriCo Bancshares Registration
Statement on Form S-14 (Registration No. 2-74796) is
incorporated herein by reference.
10.2 Lease for Administration Headquarters premises entered into
as of April 25, 1986, by and between Fortress-Independence
Partnership (A California Limited Partnership) as lessor
and Tri Counties Bank as lessee, filed as Exhibit 10.6 to
Registrant's Report on Form 10-K filed for the year ended
December 31, 1986, is incorporated herein by reference.
10.3 Lease for Data Processing premises entered into as of April
25, 1986, by and between Fortress-Independence Partnership
(A California Limited Partnership) as lessor and Tri
Counties Bank as lessee, filed as Exhibit 10.7 to
Registrant's Report on Form 10-K filed for the year ended
December 31, 1986, is incorporated herein by reference.
10.4 Lease for Chico Mall premises entered into as of March 11,
1988, by and between Chico Mall Associates as lessor and
Tri Counties Bank as lessee, filed as Exhibit 10.4 to
Registrant's Report on Form 10-K filed for the year ended
December 31, 1988, is incorporated by reference.
10.5 First amendment to lease entered into as of May 31, 1988 by
and between Chico Mall Associates and Tri Counties Bank,
filed as Exhibit 10.5 to Registrant's Report on Form 10-K
filed for the year ended December 31, 1988, is incorporated
by reference.
10.9 Employment Agreement of Robert H. Steveson, dated December
12, 1989 between Tri Counties Bank and Robert H. Steveson,
filed as Exhibit 10.9 to Registrant's Report on Form 10-K
filed for the year ended December 31, 1989, is incorporated
by reference.
10.11 Lease for Purchasing and Printing Department premises
entered into as of February 1, 1990, by and between Dennis
M. Casagrande as lessor and Tri Counties Bank as lessee,
filed as Exhibit 10.11 to Registrant's Report on Form 10-K
filed for the year ended December 31, 1991, is incorporated
herein by reference.
10.12 Addendum to Employment Agreement of Robert H. Steveson,
dated April 9, 1991, filed as Exhibit 10.12 to Registrant's
Report on Form 10-K filed for the year ended December 31,
1991, is incorporated herein by reference.
10.13 The 1993 Non-Qualified Stock Option Plan filed as Exhibit
4.1, the Non-Qualified Stock Option Plan filed as Exhibit
4.2 and the Incentive Stock Option Plan filed as Exhibit
4.3 to Registrant's Form S-8 Registration No. 33-88704
dated January 19, 1995 and the 1995 Incentive Stock Option
Plan filed as Exhibit 4.1 to Registrant's Form S-8,
Registration No. 33-62063 dated August 23, 1995, are
incorporated herein by reference.
11.1 Computation of earnings per share.
13.1 TriCo Bancshares 1997 Annual Report to Shareholders.*
21.1 Tri Counties Bank, a California banking corporation, is the
only subsidiary of Registrant.
23.1 Consent of Arthur Andersen LLP
* Deemed filed only with respect to those portions thereof incorporated
herein by reference.
(b) Reports on Form 8-K:
1. 8-K filed February 21, 1997 for the acquisition of
deposit liabilities and fixed assets of nine Northern
California branches from Wells Fargo Bank N.A., San
Francisco.
No financial statements were required to be filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 10, 1998 TRICO BANCSHARES
By: /s/ Robert H. Steveson
Robert H. Steveson, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 10, 1998 /s/ Robert H. Steveson
--------------------------------
Robert H. Steveson, President, Chief Executive
Officer and Director (Principal Executive Officer)
Date: March 10, 1998 /s/ Robert M. Stanberry
--------------------------------
Robert M. Stanberry, Vice President and Chief
Financial Officer (Principal Financial and Accounting
Officer)
Date: March 10, 1998 /s/ Everett B. Beich
--------------------------------
Everett B. Beich, Director and Vice Chairman of
the Board
Date: March 10, 1998 /s/ William J. Casey
--------------------------------
William J. Casey, Director
Date: March 10, 1998 /s/ Craig S. Compton
--------------------------------
Craig S. Compton, Director
Date: March 10, 1998
--------------------------------
Richard C. Guiton, Director
Date: March 10, 1998 /s/ Douglas F. Hignell
--------------------------------
Douglas F. Hignell, Secretary and Director
Date: March 10, 1998 /s/ Brian D. Leidig
--------------------------------
Brian D. Leidig, Director
Date: March 10, 1998 /s/ Wendell J. Lundberg
--------------------------------
Wendell J. Lundberg, Director
Date: March 10, 1998 /s/ Donald E. Murphy
--------------------------------
Donald E. Murphy, Director
Date: March 10, 1998
--------------------------------
Rodney W. Peterson, Director
Date: March 10, 1998 /s/ Alex A. Vereschagin, Jr.
--------------------------------
Alex A. Vereschagin, Jr., Director and
Chairman of the Board
EXHIBIT 11.1
COMPUTATIONS OF EARNINGS PER SHARE
Years ended December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Shares used in the
computation of
earnings per share(1)
Weighted daily average
of shares outstanding 4,652,059 4,513,157 4,430,092 4,389,802 4,094,009
Shares used in the
computation of diluted
earnings per shares 4,830,674 4,689,751 4,656,893 4,641,383 4,338,255
========= ========= ========= ========= =========
Net income used in the
computation of earnings
per common stock:
Income before adjustment
for interest expense on
convertible capital $5,869 $7,306 $7,045 $5,861 $6,815
Adjustment for preferred
stock dividend 0 0 (245) (420) (630)
Net income, as adjusted $5,869 $7,306 $6,800 $5,441 $6,185
========= ========= ========= ========= =========
Basic earnings per share $ 1.26 $ 1.62 $ 1.53 $ 1.24 $ 1.51
========= ========= ========= ========= =========
Diluted earnings per share $ 1.21 $ 1.56 $ 1.46 $ 1.18 $ 1.42
========= ========= ========= ========= =========
(1) Retroactively adjusted for stock dividends and stock splits.
EXHIBIT 13.1
TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
Assets 1997 1996
Cash and due from banks $ 48,476 $ 52,231
Repurchase agreements 15,000 --
------------------------------
Cash and cash equivalents 63,476 52,231
Securities held-to-maturity (approximate fair value $88,950 and $103,488), respectively 90,764 104,713
Securities available-for-sale 175,753 65,316
Loans:
Commercial 165,813 176,868
Consumer 87,950 75,498
Real estate mortgages 160,954 160,575
Real estate construction 34,250 26,348
------------------------------
448,967 439,289
Less: Allowance for loan losses 6,459 6,097
------------------------------
Net loans 442,508 433,192
Premises and equipment, net 18,901 14,717
Investment in real estate properties 856 1,173
Other real estate owned 2,230 1,389
Accrued interest receivable 5,701 4,572
Deferred income taxes 4,132 4,267
Intangible assets 8,902 1,036
Other assets 12,942 12,253
------------------------------
Total assets $826,165 $694,859
==============================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand $122,069 $100,879
Interest-bearing demand 130,958 97,178
Savings 216,402 172,789
Time certificates, $100,000 and over 48,907 32,889
Other time certificates 205,758 191,886
------------------------------
Total deposits 724,094 595,621
Federal funds purchased 15,300 4,900
Accrued interest payable 4,039 3,047
Other liabilities 6,168 6,233
Long-term debt and other borrowings 11,440 24,281
------------------------------
Total liabilities 761,041 634,082
Commitments and contingencies (Note H)
Shareholders' equity:
Common stock, no par value: Authorized 20,000,000 shares;
issued and outstanding 4,662,649 and 4,641,223 shares, respectively 48,161 47,652
Retained earnings 16,956 14,076
Unrealized gain/(loss) on securities available-for-sale, net 7 (951)
------------------------------
Total shareholders' equity 65,124 60,777
------------------------------
Total liabilities and shareholders' equity $826,165 $694,859
==============================
See Notes to Consolidated Financial Statements
Exhibit 13.1
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share)
Years Ended December 31,
1997 1996 1995
Interest income:
Interest and fees on loans $ 44,903 $ 38,227 $ 33,776
Interest on investment securities--taxable 13,791 10,409 11,706
Interest on investment securities--tax exempt 630 120 158
Interest on federal funds sold 553 392 371
--------------------------------------------------
Total interest income 59,877 49,148 46,011
Interest expense:
Interest on interest-bearing demand deposits 2,781 2,226 2,000
Interest on savings 6,400 5,032 5,167
Interest on time certificates of deposit 11,481 8,820 8,736
Interest on time certificates of deposit, $100,000 and over 2,020 1,123 328
Interest on short-term borrowing 537 359 526
Interest on long-term debt 716 1,619 1,231
--------------------------------------------------
Total interest expense 23,935 19,179 17,988
--------------------------------------------------
Net interest income 35,942 29,969 28,023
Provision for loan losses 3,000 777 335
--------------------------------------------------
Net interest income after provision for loan losses 32,942 29,192 27,688
Noninterest income:
Service charges and fees 6,745 4,924 4,163
Other income 2,821 1,712 1,770
--------------------------------------------------
Total noninterest income 9,566 6,636 5,933
Noninterest expenses:
Salaries and related expenses 15,671 11,989 10,787
Other, net 17,261 11,496 10,874
--------------------------------------------------
Total noninterest expenses 32,932 23,485 21,661
--------------------------------------------------
Net income before income taxes 9,576 12,343 11,960
Income taxes 3,707 5,037 4,915
--------------------------------------------------
Net income $ 5,869 $ 7,306 $ 7,045
Preferred stock dividends -- -- 245
--------------------------------------------------
Net income available to common shareholders $ 5,869 $ 7,306 $ 6,800
==================================================
Basic earnings per common share $ 1.26 $ 1.62 $ 1.53
Diluted earnings per common share $ 1.21 $ 1.56 $ 1.46
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(in thousands, except share amounts)
Series B
Preferred Stock Common Stock
Number Number Unrealized
of of Retained Gain/(Loss) on
Shares Amount Shares Amount Earnings Securities, NetTotal
------------------------------------------------------------------------
Balance, December 31, 1994 8,000 $3,899 3,513,707 $43,552 $4,488 $(3,708) $48,231
Redemption of Preferred Stock (8,000) (3,899) -- -- (101) -- (4,000)
Exercise of Common Stock options -- -- 72,694 554 -- -- 554
5-for-4 Common Stock split -- -- 878,427 -- -- -- --
Series B Preferred Stock cash
dividends -- -- -- -- (245) -- (245)
Common Stock cash dividends -- -- -- -- (1,639) -- (1,639)
Change in unrealized holding loss
on securities -- -- -- -- -- 3,058 3,058
Stock option amortization -- -- -- 209 -- -- 209
Net income -- -- -- -- 7,045 -- 7,045
------------------------------------------------------------------------
Balance, December 31, 1995 -- -- 4,464,828 44,315 9,548 (650) 53,213
Issuance of Common Stock -- -- 102,868 2,134 -- -- 2,134
Exercise of Common Stock options -- -- 89,950 1,157 -- -- 1,157
Repurchase of Common Stock -- -- (16,423) (163) (132) -- (295)
Common Stock cash dividends -- -- -- -- (2,646) -- (2,646)
Change in unrealized loss
on securities -- -- -- -- -- (301) (301)
Stock option amortization -- -- -- 209 -- -- 209
Net income -- -- -- -- 7,306 -- 7,306
------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 4,641,223 47,652 14,076 (951) 60,777
Exercise of Common Stock options -- -- 22,526 332 -- -- 332
Repurchase of Common Stock -- -- (1,100) (11) (19) -- (30)
Common Stock cash dividends -- -- -- -- (2,970) -- (2,970)
Change in unrealized gain/(loss)
on securities -- -- -- -- -- 958 958
Stock option amortization -- -- -- 188 -- -- 188
Net income -- -- -- -- 5,869 -- 5,869
------------------------------------------------------------------------
Balance, December 31, 1997 -- $-- 4,662,649 $48,161 $16,956 $ 7 $65,124
========================================================================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
1997 1996 1995
Operating activities:
Net income $ 5,869 $ 7,306 $ 7,045
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,000 777 335
Provision for losses on other real estate owned 169 202 99
Provision for premises impairment and lease loss 300 -- --
Depreciation and amortization 2,438 1,809 1,600
Amortization of intangible assets 1,342 34 --
(Accretion) amortization of investment
security (discounts) premiums, net (273) 28 117
Deferred income taxes (601) (930) (134)
Investment security (gains)losses, net (18) -- 10
(Gain) loss on sale of loans (260) 3 (56)
(Gain) loss on sale of other real estate owned, net 11 (5) (78)
Amortization of stock options 188 209 209
Change in assets and liabilities net of effects from purchase of Sutter
Buttes (1996 only):
(Increase) decrease in interest receivable (1,129) 344 139
Increase (decrease) in interest payable 992 (495) 1,402
(Increase) decrease in other assets and liabilities (10,078) (6,273) (876)
-------------------------------------------
Net cash provided by operating activities 1,950 3,009 9,812
Investing activities :
Proceeds from maturities of securities held-to-maturity 14,116 19,179 19,516
Purchases of securities held-to-maturity -- (5,516) (2,740)
Proceeds from maturities of securities available-for-sale 35,604 24,353 12,427
Proceeds from sales of securities available-for-sale 29,033 -- 6,993
Purchases of securities available-for-sale (173,327) (13,704) (5,638)
Net decrease in loans (13,915) (62,104) (12,360)
Purchases of premises and equipment (5,968) (2,526) (1,335)
Proceeds from sale of other real estate owned 838 673 1,862
Purchases and additions to real estate properties (288) -- --
Purchase of Sutter Buttes net of cash acquired -- (997) --
-------------------------------------------
Net cash provided (used) by investing activities (113,907) (40,642) 18,725
Financing activities:
Net increase (decrease) in deposits 128,473 23,486 25,021
Net increase in federal funds borrowed 10,400 4,900 --
Borrowings (payments) under repurchase agreements -- -- (30,457)
Borrowings under long-term debt agreements -- -- 9,828
Payments of principal on long-term debt agreements (12,841) (2,011) (2,035)
Redemption of Preferred Stock -- -- (4,000)
Repurchase of Common Stock (30) (295) --
Cash dividends-- Preferred -- -- (245)
Cash dividends-- Common (2,970) (2,646) (1,639)
Issuance of Common Stock 170 1,157 554
-------------------------------------------
Net cash provided (used) by financing activities 123,202 24,591 (2,973)
-------------------------------------------
Increase (decrease) in cash and cash equivalents 11,245 (13,042) 25,564
Cash and cash equivalents at beginning of year 52,231 65,273 39,709
-------------------------------------------
Cash and cash equivalents at end of year $ 63,476 $ 52,231 $ 65,273
===========================================
Supplemental information
Cash paid for taxes $ 3,907 $ 5,727 $ 5,240
Cash paid for interest expense $ 22,943 $ 19,908 $ 16,586
Non-cash assets acquired through foreclosure $ 1,859 $ 1,628 $ 390
Supplemental schedule of non-cash investing and financing activities:
On October 16, 1996, the Company purchased all of the capital stock of Sutter
Buttes Savings Bank in exchange for cash of approximately $2,036,000 and
approximately 102,900 shares of the Company's stock. Based on the average value
of the Company's stock for the ten days preceding the transaction, the total
purchase price was approximately $4,171,000. In conjunction with the
acquisition, liabilities were assumed as follows:
(in thousands)
Fair value of assets acquired $64,931
Cash and stock paid for capital stock (4,171)
Liabilities assumed $60,760
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1997, 1996
and 1995
Note A - General Summary of Significant Accounting Policies
The accounting and reporting policies of TriCo Bancshares (the "Company")
conform to generally accepted accounting principles and general practices within
the banking industry. The following are descriptions of the more significant
accounting and reporting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary, Tri Counties Bank (the "Bank"), and the
wholly-owned subsidiaries of the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Operations
The Company operates twenty four branch offices, seven in-store branches
and two loan production offices in the California counties of Butte, Del Norte,
Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento,
Shasta, Siskiyou, Stanislaus, Sutter, Tehama and Yuba. The Company's operating
policy since its inception has emphasized retail banking. Most of the Company's
customers are retail customers and small to medium sized businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Securities
The Company classifies its debt and marketable equity securities into one
of three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling in the
near term. Held-to-maturity securities are those securities which the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
In 1997 and 1996 the Company did not have any securities classified as trading.
Available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Unrealized gains and losses, net of the
related tax effect, on available-for-sale securities are reported as a separate
component of shareholders' equity until realized.
Premiums and discounts are amortized or accreted over the life of the
related investment security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses for securities are included in earnings and are
derived using the specific identification method for determining the cost of
securities sold.
Loans
Loans are reported at the principal amount outstanding, net of unearned
income and the allowance for loan losses. Loan origination and commitment fees
and certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over the estimated life
of the loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is generally
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. When loans are 90
days past due, but in Management's judgment are well secured and in the process
of collection, they may not be classified as nonaccrual. When a loan is placed
on nonaccrual status, all interest previously accrued but not collected is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when Management believes that the collectibility of the principal is
unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. The allowance is an amount that Management
believes will be adequate to absorb probable losses inherent in existing loans,
leases and commitments to extend credit, based on evaluations of the
collectibility, impairment and prior loss experience of loans, leases and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and size of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans, commitments, and current
and anticipated economic conditions that may affect the borrower's ability to
pay.
The Company defines a loan as impaired when it is probable the Company will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Certain impaired loans are measured based on the present value
of expected future cash flows discounted at the loan's original effective
interest rate. As a practical expedient, impairment may be measured based on the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance.
Mortgage Operations
The Company sold substantially all of its conforming long term residential
mortgage loans originated during 1997, 1996 and 1995 for cash proceeds equal to
the fair value of the loans. Statement of Financial Accounting Standards No.
122, Accounting for Mortgage Servicing Rights (SFAS 122) requires the
recognition of originated mortgage servicing rights as assets by allocating the
total costs incurred between the loan and the servicing right based on their
relative fair values. Historically, the cost of the originated servicing rights
was not recognized as an asset and was charged to earnings when the related loan
was sold.
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. SFAS 122 requires the
Company to assess 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 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.
The Company adopted SFAS 122 on January 1, 1996. The overall impact of
adopting this Statement on the Company's 1996 financial statements was not
material. At December 31, 1997, the Company had no mortgage loans held for sale.
At December 31, 1997 and 1996, the Company serviced real estate mortgage loans
for others of $147 million and $148 million, respectively.
Premises and Equipment
Premises and equipment, including those acquired under capital lease, are
stated at cost less accumulated depreciation and amortization. Depreciation and
amortization expenses are computed using the straight-line method over the
estimated useful lives of the related assets or lease terms. Asset lives range
from 3-10 years for furniture and equipment and 15-40 years for land
improvements and buildings.
Investment in Real Estate Properties
Investment in real estate properties is stated at the lower of cost or
market value and consists of properties either acquired directly or transferred
from other real estate owned for the purpose of development or to be held as
income-earning assets.
Subsequent to acquisition or transfer, properties included in the
investment in real estate properties account are periodically evaluated. Any
decline in market value below the carrying amount of a property is included in
other expenses. Income and expenses on the investment in real estate properties
are included in other expenses.
Other Real Estate Owned
Real estate acquired by foreclosure is carried at the lower of the recorded
investment in the property or its fair value less estimated disposition costs.
Prior to foreclosure, the value of the underlying loan is written down to the
fair value of the real estate to be acquired less estimated disposition costs by
a charge to the allowance for loan losses, when necessary. Any subsequent
write-downs are recorded as a valuation allowance with a charge to other
expenses in the income statement. Expenses related to such properties, net of
related income, and gains and losses on their disposition, are included in other
expenses.
Identifiable Intangible Assets
Identifiable intangible assets are included in other assets and are
amortized using an accelerated method over a period of ten years.
Income Taxes
The Company's accounting for income taxes is based on an asset and
liability approach. The Company recognizes the amount of taxes payable or
refundable for the current year, and deferred tax assets and liabilities for the
future tax consequences that have been recognized in its financial statements or
tax returns. The measurement of tax assets and liabilities is based on the
provisions of enacted tax laws.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and Federal funds sold.
Stock-based Compensation
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25). Under this method, compensation expense is recognized for awards of
options to purchase shares of common stock to employees under compensatory plans
only if the fair market value of the stock at the option grant date (or other
measurement date, if later) is greater than the amount the employee must pay to
acquire the stock. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue
using the intrinsic value method or to adopt a fair value based method to
account for stock option plans. The fair value based method results in
recognizing as expense over the vesting period the fair value of all stock-based
awards on the date of grant. The Company has elected to continue to use the
intrinsic value method and the pro forma disclosures required by SFAS 123 are
included in Note J.
Reclassifications
Certain amounts previously reported in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.
Note B - Restricted Cash Balances
Reserves (in the form of deposits with the Federal Reserve Bank) of
$500,000 and $8,345,000 were maintained to satisfy Federal regulatory
requirements at December 31, 1997 and December 31, 1996. These reserves are
included in cash and due from banks in the accompanying balance sheet.
Note C - Investment Securities
The amortized cost and estimated fair values of investments in debt securities
are summarized in the following tables:
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Securities Held-to-Maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 21,805 $ 179 $ (16) $ 21,968
Obligations of states and political subdivisions 530 1 -- 531
Mortgage-backed securities 68,429 281 (2,259) 66,451
---------------------------------------------------------------
Totals $ 90,764 $ 461 $(2,275) $ 88,950
Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 100,886 $ 263 $ -- $ 101,149
Obligations of states and political subdivisions 13,218 582 (1) 13,799
Mortgage-backed securities 36,557 56 (429) 36,184
Short-term corporate obligations 19,960 -- -- 19,960
Other securities 4,661 -- -- 4,661
---------------------------------------------------------------
Totals $ 175,282 $ 901 $ (430) $ 175,753
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Securities Held-to-Maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 22,792 $ 223 $ (33) $ 22,982
Obligations of states and political subdivisions 719 -- (5) 714
Mortgage-backed securities 81,202 349 (1,759) 79,792
---------------------------------------------------------------
Totals $ 104,713 $ 572 $ (1,797) $ 103,488
Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 30,219 $ 101 $ (9) $ 30,311
Obligations of states and political subdivisions 1,453 27 -- 1,480
Mortgage-backed securities 30,260 93 (1,203) 29,150
Other securities 4,375 -- -- 4,375
---------------------------------------------------------------
Totals $ 66,307 $ 221 $ (1,212) $ 65,316
The amortized cost and estimated fair value of debt securities at December
31, 1997 by contractual maturity are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
(in thousands)
Securities Held-to-Maturity
Due in one year $ 3,000 $ 2,984
Due after one year through five years 23,089 23,259
Due after five years through ten years 8,652 8,708
Due after ten years 56,023 53,999
------------------------------------
Totals $ 90,764 $ 88,950
Securities Available-for-Sale
Due in one year $ 56,729 $ 56,787
Due after one year through five years 65,818 66,047
Due after five years through ten years 7,149 7,142
Due after ten years 40,925 41,116
------------------------------------
170,612 171,092
Other Securities 4,661 4,661
------------------------------------
Totals $175,282 $175,753
Proceeds from sales of securities available for sale were as follows:
Gross Gross Gross
For the Year Proceeds Gains Losses
(in thousands)
1997 $ 29,033 $ 19 $ 1
1996 $ -- $ -- $ --
1995 $ 6,993 $ 40 $ 50
Investment securities with an aggregate carrying value of $109,967,000 and
$75,125,000 at December 31, 1997 and 1996, respectively, were pledged as
collateral for specific borrowings, lines of credit and local agency deposits.
Note D - Allowance for Loan Losses
Activity in the allowance for loan losses was as follows:
Years Ended December 31,
1997 1996 1995
(in thousands)
Balance, beginning of year $6,097 $5,580 $5,608
Balance acquired from Sutter Buttes -- 623 --
Provision for loan losses 3,000 777 335
Loans charged off (2,840) (1,192) (581)
Recoveries of loans previously charged off 202 309 218
----------------------------------
Balance, end of year $6,459 $6,097 $5,580
Loans classified as nonaccrual amounted to approximately $4,721,000,
$9,044,000, and $2,213,000 at December 31, 1997, 1996 and 1995, respectively.
These nonaccrual loans were classified as impaired and are included in the
recorded balance in impaired loans for the respective years shown below. If
interest on those loans had been accrued, such income would have been
approximately $460,000, $902,000, and $166,000 in 1997, 1996 and 1995,
respectively.
As of December 31, the Company's recorded investment in impaired loans and
the related valuation allowance were as follows:
1997
Recorded Valuation
Investment Allowance
Impaired loans -
Valuation allowance required $ 1,476 $162
No valuation allowance required 11,739 --
----------------------------------
Total impaired loans $13,215 $162
1996
Recorded Valuation
Investment Allowance
Impaired loans -
Valuation allowance required $ 2,525 $605
No valuation allowance required 13,829 --
----------------------------------
Total impaired loans $16,354 $605
This valuation allowance is included in the allowance for loan losses
shown above for the respective year. The average recorded investment in impaired
loans was $ 14,784,000, $10,720,000 and $3,579,000 for the years ended December
31, 1997, 1996 and 1995, respectively. The Company recognized interest income on
impaired loans of $1,118,000, $729,000 and $345,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
Note E - Premises and Equipment
Premises and equipment were comprised of:
December 31,
1997 1996
(in thousands)
Premises $13,973 $11,227
Furniture and equipment 12,912 11,036
---------------------------------
26,885 22,263
Less:
Accumulated depreciation
and amortization (11,836) (10,369)
---------------------------------
15,049 11,894
Land and land improvements 3,852 2,823
---------------------------------
$18,901 $14,717
Depreciation and amortization of premises and equipment amounted to
$2,100,000, $1,497,000, and $1,344,000 in 1997, 1996 and 1995, respectively. In
1997, the Company provided $300,000 for the impairment of certain properties and
leaseholds which it vacated and is in the process of disposing.
Note F - Time Deposits
At December 31, 1997, the scheduled maturities of time deposits were as
follows (in thousands):
Scheduled
Maturities
1998 $239,305
1999 7,438
2000 7,081
2001 600
2002 and thereafter 241
----------
Total $254,665
Note G - Long-Term Debt and Other Borrowings
Long-term debt is as follows:
December 31,
1997 1996
(in thousands)
FHLB loan, fixed rate of 5.53% payable on March 21, 1997 -- $ 3,000
FHLB loan, effective rate of 5.13% payable on April 28, 1998 $ 5,000 5,000
FHLB loan, fixed rate of 5.62% payable on February 4, 1999 400 400
FHLB loan, fixed rate of 6.14% payable on March 21, 1999 3,000 3,000
FHLB loan, fixed rate of 5.84% payable on November 6, 2000 1,500 1,500
FHLB loan, fixed rate of 5.90% payable January 16, 2001 1,000 1,000
FHLB repurchase agreements, fixed rate of 5.85% payable on July 17, 1997 -- 9,828
Capital lease obligation on premises, effective rate of 13% payable
monthly in varying amounts through December 1, 2009 540 553
--------------------------
Total long-term debt $11,440 $24,281
The Company maintains a collateralized line of credit with the Federal Home
Loan Bank of San Francisco. Based on the FHLB stock requirements at December 31,
1997, this line provided for maximum borrowings of $78,335,000 of which
$10,900,000 was outstanding, leaving $67,435,000 available. The maximum
month-end outstanding balances of short term reverse repurchase agreements in
1997 and 1996 were $16,300,000 and $0, respectively. The Company has available
unused lines of credit totaling $49,700,000 for Federal funds transactions.
Note H - Commitments and Contingencies (See also Note O)
At December 31, 1997, future minimum commitments under non-cancelable
capital and operating leases with initial or remaining terms of one year or more
are as follows:
Capital Operating
Leases Leases
(in thousands)
1998 $ 85 $ 843
1999 86 644
2000 87 357
2001 88 238
2002 89 221
Thereafter 652 1,988
----------------------------
Future minimum lease payments 1,087 $4,291
Less amount representing interest 547
-------
Present value of future lease payments $ 540
Rent expense under operating leases was $1,059,000 in 1997, $799,000 in
1996, and $887,000 in 1995.
The Company is a defendant in legal actions arising from normal business
activities. Management believes that these actions are without merit or that the
ultimate liability, if any, resulting from them will not materially affect the
Company's financial position.
Note I - Dividend Restrictions
The Bank paid to the Company cash dividends in the aggregate amounts of
$3,000,000, $4,800,000, and $3,200,000 in 1997, 1996 and 1995, respectively. The
Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the
California State Banking Department. California banking laws limit the Bank's
ability to pay dividends to the lesser of (1) retained earnings or (2) net
income for the last three fiscal years, less cash distributions paid during such
period. Under this regulation, at December 31, 1997, the Bank may pay dividends
of $9,695,000.
Note J - Stock Options
In May 1995, the Company adopted the TriCo Bancshares 1995 Incentive Stock
Option Plan (`95 Plan) covering key employees. Under the `95 Plan 187,500 shares
as adjusted for the September 1995 5-for-4 stock split were reserved for
issuance. The option price cannot be less than the fair market value of the
Common Stock at the date of grant. Options for the `95 Plan expire on the tenth
anniversary of the grant date.
The Company also has outstanding options under one plan approved in 1993
and two plans approved in 1989. Options under the 1993 plan were granted at an
exercise price less than the fair market value of the common stock and vest over
a six year period. Options under the 1989 plan vest 20% annually. Unexercised
options for the 1993 and 1989 plans terminate 10 years from the date of the
grant.
Stock option activity is summarized in the following table:
Weighted Weighted
Average Average
Number Option Price Exercise Fair Value
of Shares* Per Share Price of Grants
Outstanding at December 31, 1994 560,274 $ 7.43 to $ 7.86 $ 7.72
Options granted 31,250 7.86 to 13.20 10.81 $5.07
Options exercised (72,694) 7.43 to 7.86 7.60
Outstanding at December 31, 1995 518,830 7.43 to 13.20 7.93
Options granted 20,000 18.38 to 18.38 18.38 5.35
Options exercised (89,950) 7.43 to 7.86 7.63
Options forfeited (23,030) 7.86 to 7.86 7.86
Outstanding at December 31, 1996 425,850 7.43 to 18.38 8.48
Options granted 56,000 21.25 to 27.38 26.28 $8.39
Options exercised (22,526) 7.43 to 7.86 7.55
Options forfeited (12,600) 7.86 to 7.86 7.86
Outstanding at December 31, 1997 446,724 $ 7.43 to $27.38 $ 8.48
*1995 activity is adjusted for the 5-for-4 Common Stock split effected September 22, 1995
Of the stock options outstanding as of December 31, 1997, options on
327,376 shares were exercisable at a weighted average price of $8.79.
The Company has stock options outstanding under the four option plans
described above. The Company accounts for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized except for the options
granted under the 1993 plan. The Company recognized expense of $188,000,
$209,000 and $209,000 for the 1993 Plan options in 1997, 1996 and 1995
respectively. Had compensation cost for these plans been determined in
accordance SFAS 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1997 1996 1995
Net income As reported $5,869 $7,306 $7,045
Pro forma $5,829 $7,285 $7,037
Basic earnings per share As reported $1.26 $1.62 $1.54
Pro forma $1.25 $1.61 $1.53
Diluted earnings per share As reported $1.21 $1.56 $1.46
Pro forma $1.21 $1.55 $1.46
However, because the Statement 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995, respectively: risk-free
interest rates of 6.06, 6.76, and 5.92 percent; expected dividend yields of
2.46, 3.48, and 2.46 percent; expected lives of 6, 6, and 6 years; expected
volatility of 30.49, 30.22, and 31.38 percent, respectively.
Note K - Other Noninterest Expenses and Income
The components of other noninterest expenses were as follows:
Years Ended December 31,
1997 1996 1995
(in thousands)
Equipment and data processing $ 3,390 $ 2,483 $ 2,508
Occupancy 2,214 1,682 1,573
Intangible amortization 1,342 34 --
Professional fees 998 901 593
Telecommunications 922 653 361
Advertising 753 713 563
Postage 535 436 405
Provision for premises impairment and lease loss 300 -- --
Net other real estate owned expense 277 261 201
Assessments 155 80 727
Other 6,375 4,253 3,943
------------------------------
Total other operating expenses $17,261 $11,496 $10,874
Commissions on sales of annuities and mutual funds in the amounts of
$1,963,000, $1,255,000, and $900,000 for the years 1997, 1996 and 1995 are
included in other income.
Note L - Income Taxes
The current and deferred components of the income tax provision were
comprised of:
Years Ended December 31,
1997 1996 1995
(in thousands)
Current Tax Provision:
Federal $ 3,360 $ 4,439 $ 3,640
State 948 1,528 1,409
--------------------------------------------
Total current 4,308 5,967 5,049
Deferred Tax Benefit:
Federal (614) (769) (36)
State 13 (161) (98)
--------------------------------------------
Total deferred (601) (930) (134)
--------------------------------------------
Total income taxes $ 3,707 $ 5,037 $ 4,915
Taxes recorded directly to shareholders' equity are not included in the
preceding table. These taxes (benefits) relating to changes in the unrealized
gains and losses on available-for-sale investment securities amounting to
$736,000 in 1997 and ($231,000) in 1996, and benefits related to employee stock
options of $148,000 in 1997 and $233,000 in 1996 were recorded directly to
shareholders' equity.
The provisions for income taxes applicable to income before taxes for the
years ended December 31, 1997, 1996, and 1995 differ from amounts computed by
applying the statutory Federal income tax rates to income before taxes. The
effective tax rate and the statutory federal income tax rate are reconciled as
follows:
- Years Ended December 31,
1997 1996 1995
Federal statutory income tax rate 34.0% 34.2% 34.2%
State income taxes, net of federal tax benefit 6.4 7.4 7.4
Tax-exempt interest on municipal obligations (1.9) (.3) (.4)
Other -- (.5) (.1)
------------------------------
Effective Tax Rate 38.5% 40.8% 41.1%
The components of the net deferred tax asset of the Company as of December
31, were as follows:
1997 1996
(in thousands)
Deferred Tax Assets:
Loan losses $ 2,333 $ 2,050
Unrealized loss on securities -- 731
Deferred compensation 1,960 1,693
OREO write downs 227 244
Loss on investment in real estate 360 232
Intangible amortization 291 --
Other 245 586
---------------------------
Total deferred tax assets 5,416 5,536
Deferred Tax Liabilities:
Depreciation (828) (798)
Capital leases (92) (86)
Securities accretion (364) (385)
---------------------------
Total deferred tax liability (1,284) (1,269)
---------------------------
Net deferred tax asset $ 4,132 $ 4,267
Note M - Retirement Plans
Substantially all employees with at least one year of service are covered
by a discretionary employee stock ownership plan (ESOP). Contributions are made
to the plan at the discretion of the Board of Directors. Country National Bank,
acquired by the Company in 1994, had an ESOP which was merged into the Company's
plan in 1995. Contributions to the plan(s) totaling $828,000 in 1997, $500,000
in 1996, and $432,000 in 1995 are included in salary expense.
The Company has a supplemental retirement plan for directors and a
supplemental executive retirement plan covering key executives. These plans are
non-qualified defined benefit plans and are unsecured and unfunded. The Company
has purchased insurance on the lives of the participants and intends to use the
cash values of these policies $5,870,000 and $5,163,000 at December 31, 1997 and
1996, respectively) to pay the retirement obligations.
The following table sets forth the plans' status:
December 31,
1997 1996
(in thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $(3,213) $(3,113)
===========================
Accumulated benefit obligation (3,463) (3,289)
===========================
Projected benefit obligation for service rendered to date (3,693) (3,704)
===========================
Plan assets at fair value $ -- $ --
===========================
Projected benefit obligation in excess of plan assets $(3,693) $(3,704)
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 252 1,296
Prior service cost not yet
recognized in net periodic pension cost 103 113
Unrecognized net obligation at transition 979 287
---------------------------
Accrued pension cost included in other liabilities $(2,359) $(2,008)
Years Ended December 31,
1997 1996 1995
(in thousands)
Net pension cost included the following components:
Service cost-benefits earned during the period $120 $135 $100
Interest cost on projected benefit obligation 262 204 159
Net amortization and deferral 113 72 46
----------------------------------------
Net periodic pension cost $495 $411 $305
The net periodic pension cost was determined using a discount rate
assumption of 7.0% for 1997, 7.0% for 1996 and 7.0% for 1995. The rates of
increase in compensation used in each year were 0% to 5%. The Company has an
Executive Deferred Compensation Plan which allows directors and key executives
designated by the Board of Directors of the Company to defer a portion of their
compensation. The Company has purchased insurance on the lives of the
participants and intends to use the cash values of these policies to pay the
compensation obligations. At December 31, 1997 and 1996 the cash values exceeded
the recorded liabilities.
Note N - Earnings per Share
The Company adopted SFAS No. 128, Earnings per Share (SFAS 128), effective
December 15, 1997. SFAS 128 replaces primary and fully diluted earnings per
share with basic and diluted earnings per share calculations. Basic earnings per
share is computed by dividing net income, less dividends on preferred stock, by
the weighted average common shares outstanding. Diluted earnings per share is
computed by dividing net income, less dividends on preferred stock, by the
weighted average common shares outstanding including the dilutive effects of
potential common shares (e.g. stock options). Diluted earnings per share
calculations result in the same primary earnings per share previously reported
by the Company. The Company's basic and diluted earnings per share are as
follows (in thousands except per share data):
Year Ended December 31, 1997
Weighted Average
Income Shares Per-Share Amount
Basic Earnings per Share
Net income available to common shareholders $5,869 4,652,059 $1.26
Common stock options outstanding -- 178,615
---------
Diluted Earnings per Share
Net income available to common shareholders $5,869 4,830,674 $1.21
====== =========
Year Ended December 31, 1996
Weighted Average
Income Shares Per-Share Amount
Basic Earnings per Share
Net income available to common shareholders $7,306 4,513,157 $1.62
Common stock options outstanding -- 176,594
---------
Diluted Earnings per Share
Net income available to common shareholders $7,306 4,689,751 $1.56
====== =========
Year Ended December 31, 1995
Weighted Average
Income Shares Per-Share Amount
Net income $7,045
Less: Preferred stock dividends (245)
-------
Basic Earnings per Share
Net income available to common shareholders $6,800 4,430,092 $1.53
Common stock options outstanding -- 226,801
---------
Diluted Earnings per Share
Net income available to common shareholders $6,800 4,656,893 $1.46
====== =========
Note O - Related Party Transactions
Certain directors, officers, and companies with which they are associated
were customers of, and had banking transactions with, the Company or its
Subsidiary in the ordinary course of business. It is the Company's policy that
all loans and commitments to lend to officers and directors be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other borrowers of the
Bank.
The following table summarizes the activity in these loans for 1997.
Balance Balance
December 31, Advances/ December 31,
1996 New Loans Payments 1997
(in thousands)
7,922 884 2,179 6,627
Note P - Financial Instruments With Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Contractual Amount
December 31,
1997 1996
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans $52,579 $37,923
Consumer loans 78,785 61,113
Real estate mortgage loans 667 428
Real estate construction loans 11,985 18,415
Standby letters of credit 1,789 1,112
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on Management's credit evaluation of the customer.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. Most standby
letters of credit are issued for one year or less. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Collateral requirements vary, but in general
follow the requirements for other loan facilities.
Note Q - Concentration of Credit Risk
The Company grants agribusiness, commercial and residential loans to
customers located throughout the northern San Joaquin Valley, the northern
Sacramento Valley and northern mountain regions of California. The Company has a
diversified loan portfolio within the business segments located in this
geographical area.
Note R - Disclosure of Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practical to estimate that
value. Cash and due from banks, accrued interest receivable and payable, and
short-term borrowings are considered short-term instruments. For these
short-term instruments their carrying amount approximates their fair value.
Securities
For all securities, fair values are based on quoted market prices or dealer
quotes. See Note C for further analysis.
Loans
The fair value of variable rate loans is the current carrying value. These
loans are regularly adjusted to market rates. The fair value of other types of
fixed rate loans is estimated by discounting the future cash flows using current
rates at which similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities. The allowance for loan losses is a
reasonable estimate of the valuation allowance needed to adjust computed fair
values for credit quality of certain loans in the portfolio.
Deposit Liabilities and Long-Term Debt
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. These
values do not consider the estimated fair value of the Company's core deposit
intangible, which is a significant unrecognized asset of the Company. The fair
value of time deposits and debt is based on the discounted value of contractual
cash flows.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of letters of credit and standby letters of credit is not
significant.
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1997
Carrying Fair
Financial assets: Amount Value
(In thousands)
Cash and short-term investments $ 63,476 $ 63,476
Securities:
Held-to-maturity 90,764 88,950
Available-for-sale 175,753 175,753
Loans, net 442,508 446,439
Accrued interest receivable 5,701 5,701
Financial liabilities:
Deposits 724,094 724,188
Federal Funds purchased 15,300 15,300
Accrued interest payable 4,039 4,039
Other liabilities 6,168 6,168
Long-term borrowings 11,440 11,524
December 31, 1996
Carrying Fair
Financial assets: Amount Value
(In thousands)
Cash and short-term investments $ 52,231 $ 52,231
Securities:
Held-to-maturity 104,713 103,488
Available-for-sale 65,316 65,316
Loans, net 433,192 434,250
Accrued interest receivable 4,572 4,572
Financial liabilities:
Deposits 595,621 595,696
Accrued interest payable 3,047 3,047
Other liabilities 6,233 6,233
Long-term borrowings 24,281 24,403
Note S - Acquisitions
On February 21, 1997, the Bank purchased and assumed substantially all of
the deposit liabilities of nine branches from Wells Fargo Bank, N.A, San
Francisco. In connection with the acquisition of such deposit liabilities and
related cash balances, The Bank also acquired certain other assets of the
branches, including real estate (four branches), furniture and fixtures and a
relatively insignificant amount of loans which were secured by deposit accounts.
All assets constituting plant and equipment or other physical property will
continue to be used in the banking business. Wells Fargo Bank retained all other
revenue producing assets which had originated from these branches.
A summary of the deposit liabilities and limited assets acquired by the
Bank is shown below. These assets and liabilities were recorded in the
respective captions in the Company's consolidated balance sheet on the
acquisition date.
Total deposits (liabilities) acquired $150,090,000
Less assets acquired
Furniture and fixtures 214,000
Land and premises 585,000
Loans 183,000
----------
Total assets acquired 982,000
Less premium paid for deposits 9,108,000
----------
Net cash received by Tri Counties Bank
for the deposits acquired $140,000,000
On October 16, 1996, the Company acquired all of the capital stock of
Sutter Buttes Savings Bank (Sutter Buttes) in exchange for cash of approximately
$2,036,000 and approximately 102,900 shares of the Company's stock. Based on the
average value of the Company's stock for the ten days preceding the transaction,
the total purchase price was approximately $4,171,000. The transaction was
accounted for as a purchase, with the excess of the purchase price over the fair
value of Sutter Buttes' net assets being assigned to core deposit intangible
assets. Results of operations of Sutter Buttes are included in the consolidated
financial statements subsequent to October 16, 1996. Sutter Buttes was merged
into the Bank concurrent with the acquisition.
Pro forma operating results of the Company, assuming the Sutter Buttes
acquisition had been made as of January 1, 1995 is as follows:
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(in thousands, except per share data) Year ended December 31,
1996 1995
Summary of Income:
Net interest income $ 31,503 $ 29,458
Provision for loan losses 997 334
Noninterest income 6,924 6,422
Noninterest expense 25,466 23,394
Net income 7,056 7,290
Net income available to common shareholders $ 7,056 $ 7,045
Per Common Share:
Basic earnings per common share $1.54 $1.54
Diluted earnings per common share $1.48 $1.48
Selected Balance Sheet Data:
Investment securities $170,029 $194,897
Loans 439,289 376,906
Assets 694,771 667,137
Deposits 595,621 573,599
Equity $ 60,689 $ 55,480
Note T - TriCo Bancshares Financial Statements
TriCo Bancshares (Parent Only) Balance Sheets
December 31,
Assets 1997 1996
(in thousands)
Cash $ 82 $ 517
Investment in Tri Counties Bank 64,510 60,171
Other assets 608 460
---------------------------
Total assets $65,200 $61,148
===========================
Liabilities and shareholders' equity
Total liabilities $ 76 $ 371
Shareholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares;
issued and outstanding 4,662,649
and 4,641,223 shares, respectively 48,161 47,652
Retained earnings 16,956 14,076
Unrealized loss on securities available-for-sale, net 7 (951)
---------------------------
Total shareholders' equity 65,124 60,777
---------------------------
Total liabilities and shareholders' equity $65,200 $61,148
===========================
Statements of Income Years Ended December 31,
1997 1996 1995
(in thousands)
Interest income $ -- $ -- $ --
Administration expense 321 296 282
------------------------------------------
Loss before equity in net income of Tri Counties Bank (321) (296) (282)
Equity in net income of Tri Counties Bank:
Distributed 3,000 4,800 3,200
Undistributed 3,031 2,654 4,010
Income tax credits 159 148 117
------------------------------------------
Net income $5,869 $7,306 $7,045
===========================================
Statements of Cash Flows
Years ended December 31,
1997 1996 1995
(in thousands)
Operating activities:
Net income $5,869 $7,306 $7,045
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Undistributed equity in Tri Counties Bank (3,031) (2,654) (4,010)
Deferred income taxes (148) (157) (117)
Increase (decrease) in other operating assets and liabilities (295) 279 19
------------------------------------------
Net cash provided by operating activities 2,395 4,774 2,937
Investing activities:
Capital contributed to
Tri Counties Bank -- (4,741) --
------------------------------------------
Net cash used for investing activities -- (4,741) --
Financing activities:
Issuance of common stock 170 3,291 554
Repurchase of common stock (30) (295) --
Redemption of preferred stock -- -- (4,000)
Cash dividends-- preferred -- -- (245)
Cash dividends-- common (2,970) (2,646) (1,639)
------------------------------------------
Net cash provided by (used for) financing activities (2,830) 350 (5,330)
------------------------------------------
Increase (decrease) in cash and cash equivalents (435) 383 (2,393)
Cash and cash equivalents at beginning of year 517 134 2,527
------------------------------------------
Cash and cash equivalents at end of year $ 82 $ 517 $ 134
==========================================
Note U - Regulatory Matters
The Company is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1997, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $62,673 11.90% =>$42,132 =>8.0% =>$52,665 =>10.0%
Tri Counties Bank $62,059 11.80% =>$42,083 =>8.0% =>$52,604 =>10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated $56,215 10.67% =>$21,066 =>4.0% =>$31,599 => 6.0%
Tri Counties Bank $55,601 10.57% =>$21,042 =>4.0% =>$31,563 => 6.0%
Tier I Capital (to Average Assets):
Tri Counties Bank $55,601 6.94% =>$21,042 =>4.0% =>$26,302 => 5.0%
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $66,690 13.58% =>$39,280 =>8.0% =>$49,100 =>10.0%
Tri Counties Bank $66,084 13.47% =>$39,244 =>8.0% =>$49,055 =>10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated $60,593 12.34% =>$19,640 =>4.0% =>$29,460 => 6.0%
Tri Counties Bank $59,987 12.23% =>$19,622 =>4.0% =>$29,433 => 6.0%
Tier I Capital (to Average Assets):
Tri Counties Bank $59,987 8.91% =>$26,930 =>4.0% =>$33,663 => 5.0%
Note V - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four
quarters of 1997 and 1996 and is unaudited; however, in the opinion of
management, it reflects all adjustments (which include only normal recurring
adjustments) necessary to present fairly the summarized results for such
periods.
1997 Quarters Ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data)
Interest income $15,742 $15,597 $14,873 $13,993
Interest expense 6,101 6,127 6,099 5,608
-------- -------- -------- --------
Net interest income 9,641 9,470 8,774 8,385
Provision for loan losses 800 1,000 600 600
-------- -------- --------- ---------
Net interest income after
provision for loan losses 8,841 8,470 8,174 7,785
Noninterest income 2,584 2,477 2,408 2,097
Noninterest expense 8,620 8,200 8,820 7,292
-------- -------- -------- --------
Income before income taxes 2,805 2,747 1,762 2,590
Taxable-equivalent adjustment 100 98 95 35
Income tax expense 1,093 1,035 588 991
-------- -------- -------- --------
Net income $ 1,612 $ 1,614 $ 1,079 $ 1,564
======= ======= ======= =======
Net income applicable to common stock $ 1,612 $ 1,614 $ 1,079 $ 1,564
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.33 $ 0.33 $ 0.22 $ 0.32
======= ======= ======= =======
Dividends $ 0.16 $ 0.16 $ 0.16 $ 0.16
======= ======= ======= =======
1996 Quarters Ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data)
Interest income $13,276 $12,584 $11,744 $11,629
Interest expense 5,290 4,856 4,498 4,535
-------- -------- -------- --------
Net interest income 7,986 7,728 7,246 7,094
Provision for loan losses 150 537 50 40
--------- --------- --------- ---------
Net interest income after
provision for loan losses 7,836 7,191 7,196 7,054
Noninterest income 1,845 1,745 1,580 1,466
Noninterest expense 6,339 5,817 5,824 5,505
-------- -------- -------- --------
Income before income taxes 3,342 3,119 2,952 3,015
Taxable-equivalent adjustment 17 22 22 24
Income tax expense 1,288 1,276 1,226 1,247
-------- -------- -------- --------
Net income $ 2,037 $ 1,821 $ 1,704 $ 1,744
======= ======= ======= =======
Net income applicable to common stock $ 2,037 $ 1,821 $ 1,704 $ 1,744
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.43 $ 0.39 $ 0.37 $ 0.38
======= ======= ======= =======
Dividends $ 0.16 $ 0.16 $ 0.13 $ 0.13
======= ======= ======= =======
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of TriCo Bancshares and Subsidiary:
We have audited the accompanying consolidated balance sheets of TriCo
Bancshares (a California corporation) and Subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TriCo
Bancshares and Subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
San Francisco, California
January 23, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As TriCo Bancshares (the "Company") has not commenced any business
operations independent of Tri Counties Bank (the "Bank"), the following
discussion pertains primarily to the Bank. Average balances, including such
balances used in calculating certain financial ratios, are generally comprised
of average daily balances for the Company. Except within the "overview" section,
interest income and net interest income are presented on a tax equivalent basis.
In addition to the historical information contained herein, this Annual
Report contains certain forward-looking statements. The reader of this Annual
Report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments, rates paid on deposits,
competition effects, fee and other noninterest income earned as well as other
factors. This entire Annual Report should be read to put such forward-looking
statements in context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
Overview
Often in the path of progress there is some regression along the way.
Operating results for the Company in 1997 reflect such a setback. The February
1997 acquisition of the deposits and facilities of nine Northern California
branches from Wells Fargo Bank, N.A. (sometimes referred to as "Wells") added
approximately $150,090,000 in deposits and set the stage for expansion of the
Bank's marketing area. However, the direct and indirect operating expenses
related to servicing the new branches were higher than expected and loan growth
in these branches was lower than expected. As a result, earnings for 1997 were
lower than in 1996. Management believes that the major issues of integrating the
new branches and support departments had been resolved by the end of 1997.
Consequently, Management believes that the Bank is positioned to realize growth
in earnings and returns for shareholders in 1998.
The Company had earnings of $5,869,000 for the year ended December 31, 1997
versus $7,306,000 for 1996. Diluted earnings per share for the same years were
$1.21 and $1.56, respectively.
Both the acquisition of Sutter Buttes Savings Bank (sometimes referred to
as "Sutter Buttes") in October 1996 and the branch purchase from Wells Fargo
Bank contributed to increased operating revenues for 1997. Net interest income
for 1997 was $35,942,000 which was an increase of $5,973,000 (19.9%) over 1996.
The interest income component of net interest income was up 21.8% or
$10,729,000. Interest and fees on loans was up $6,676,000 to $44,903,000 as
average loans outstanding increased $79,567,000 to $448,117,000. Interest income
on investment securities and Federal Funds sold increased $4,053,000 (37.1%) to
$14,974,000 mostly due to higher average balances. Interest expense was up
$4,756,000 or 24.8%. This increase was due to higher average balances of
interest bearing liabilities as the average rate paid on them declined 9 basis
points. The net interest margin was 5.16% in 1997 versus 5.37% in 1996.
The Bank significantly increased its provision for loan losses in 1997 as
net loans charged off totaled $2,640,000 versus $883,000 in the prior year. The
provision for 1997 was $3,000,000 compared to $777,000 in 1996. At year end 1997
and 1996 the allowance for loan losses as a percent of gross loans were 1.44%
and 1.39%, respectively.
Noninterest income is comprised of "service charges and fees" and "other
income". Service charge and fee income increased 37.0% or $1,821,000 in 1997
versus year ago results. Both higher account volumes and higher fee rates
contributed to the increase in this category. Other income was up 64.8% from
$1,712,000 in 1996 to $2,821,000 in 1997.Overall, noninterest income increased
$2,930,000 or 44.2% for the year.
Noninterest expenses increased $9,447,000 or 40.2% in 1997 versus 1996.
Conversion costs and direct operating expenses for the nine acquired branches
accounted for $3,233,000 of the increase. Another $177,000 was attributable to
operating costs of the one branch retained from Sutter Buttes. Amortization of
goodwill relating to both the Sutter Buttes Saving Bank and the nine branch
acquisition added $1,308,000 to expenses for the year. Thus, 50% of the
increased expenses were directly attributable to the acquisitions.
Salary and benefit expenses not directly related to the acquired branches
were up $1,848,000 (15.4%). The higher salary expense reflects costs for
additional employees in support departments, loan officers and normal salary
increases. Other expenses exclusive of the direct costs related to the acquired
branches increased 28.8% or $3,310,000. Costs relating servicing the new
branches for items such as armored car service, courier service, ATM networks,
credit card servicing, deposit accounts and telecommunications were up
significantly in 1997.
Assets of the Company totaled $826,165,000 at December 31, 1997 which was
an increase of $131,306,000 from 1996 ending balances.
For 1997, the Company realized a return on assets of 0.75% and a return on
shareholders' equity of 9.34% versus 1.18% and 13.03% in 1996. The Company ended
1997 with a Tier 1 capital ratio of 10.7% and a total risk-based capital ratio
of 11.9%.
Management's continuing goal for the Bank is to deliver a full array of
competitive products to its customers while maintaining the personalized
customer service of a community bank. We believe this strategy will provide
continued growth and the ability to achieve above average returns for our
shareholders.
(A) Results of Operations
Years Ended December 31,
1997 1996 1995 1994 1993(1)
(in thousands, except earnings per share amounts)
Interest income:
Interest and fees on loans $ 44,903 $ 38,227 $ 33,776 $ 30,641 $ 31,795
Interest on investment securities--taxable 13,791 10,409 11,706 12,247 8,585
Interest on investment securities--tax exempt(2) 958 207 272 401 426
Interest on federal funds sold 553 392 371 123 329
----------------------------------------------------------------
Total interest income 60,205 49,235 46,125 43,412 41,135
Interest expense:
Interest on deposits 22,682 17,201 16,231 13,902 13,006
Interest on short-term borrowing 537 359 526 719 739
Interest on long-term debt 716 1,619 1,231 1,059 251
----------------------------------------------------------------
Total interest expense 23,935 19,179 17,988 15,680 13,996
----------------------------------------------------------------
Net interest income 36,270 30,056 28,137 27,732 27,139
Provision for loan losses 3,000 777 335 316 1,858
----------------------------------------------------------------
Net interest income after provision
for loan losses 33,270 29,279 27,802 27,416 25,281
Noninterest income:
Service charges, fees and other 9,548 6,636 5,943 5,048 5,304
Investment securities gains (losses), net 18 -- (10) (23) 1,421
----------------------------------------------------------------
Total noninterest income 9,566 6,636 5,933 5,025 6,725
Noninterest expenses:
Salaries and employee benefits 15,671 11,989 10,787 10,550 9,072
Other, net 17,261 11,496 10,874 11,508 11,152
----------------------------------------------------------------
Total noninterest expenses 32,932 23,485 21,661 22,058 20,224
----------------------------------------------------------------
Net income before income taxes 9,904 12,430 12,074 10,383 11,782
Income taxes 3,707 5,037 4,915 4,350 4,779
Tax equivalent adjustment(2) 328 87 114 172 188
----------------------------------------------------------------
Net income $ 5,869 $ 7,306 $ 7,045 $ 5,861 $ 6,815
================================================================
Basic earnings per common share(3) $ 1.26 $ 1.62 $ 1.54 $ 1.24 $ 1.51
Diluted earnings per common share(3) $ 1.21 $ 1.56 $ 1.46 $ 1.18 $ 1.42
Selected Balance Sheet Information
Total Assets $826,165 $694,859 $603,554 $593,834 $575,897
Long-term Debt 11,440 24,281 26,292 18,499 7,144
Preferred Stock -- -- -- 3,899 3,899
1 Restated on a historical basis to reflect the July 21, 1994 acquisition of Country National Bank on a
pooling-of-interests basis.
2 Interest on tax-free securities is reported on a tax equivalent basis of 1.52 for 1997, 1.72 for 1996, 1.72 for 1995,
1.75 for 1994, and 1.79 for 1993.
3 Restated on a historical basis to reflect the 5-for-4 stock split effected
September 22, 1995.
Net Interest Income/Net Interest Margin
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income for 1997 totaled $36,270,000 which was up 20.7%
($6,214,000) over the prior year. Average outstanding loan balances of
$448,117,000 for 1997 reflected a 21.6% increase over 1996 balances. This
increase contributed an additional $8,253,000 to interest income and was the
major factor in the improvement in net interest income. The average yield
received on loans fell 35 basis points to 10.02% which offset interest income by
$1,577,000. The reduction of the loan yields was due to increased market
competition and also in part to the acquisition of Sutter Buttes Savings Bank in
October of 1996. A high percentage of Sutter Buttes' loans were mortgage loans
with fixed interest rates averaging less than 8%. Average balances of investment
securities increased $61,483,000 (33.6%) due primarily to the investment of net
proceeds received in the Wells branch acquisition. The higher volume of
securities resulted in an increase in interest income of $3,800,000.
Interest expense increased $4,756,000 (24.8%) in 1997 over 1996. Higher
volumes in all interest bearing deposit categories as a result of the purchase
of certain deposits from Wells Fargo Bank accounted for the increase. Interest
expense on time deposits was up $3,424,000 due to an increase in average
balances of $64,519,000 in 1997. Average rates paid on interest bearing
liabilities in 1997 were down 9 basis point to 3.96% which had a small favorable
effect on interest expense. Net interest margin for 1997 was 5.16% versus 5.37%
in 1996.
Net interest income for 1996 totaled $30,056,000 which was up 6.8%
($1,919,000) over the prior year. Average outstanding loan balances of
$368,550,000 for 1996 reflected a 19.5% increase over 1995 balances. This
increase contributed an additional $6,578,000 to interest income and was the
major factor in the improvement in net interest income. The average yield
received on loans fell 58 basis points to 10.37% which offset interest income by
$2,127,000. The reduction of the loan yields was due to increased market
competition and also in part to the acquisition of Sutter Buttes Savings Bank in
October of 1996. Average balances of investment securities decreased $26,983,000
(12.8%) as these funds were deployed into loans. The lower volume of securities
resulted in a decrease in interest income of $1,546,000.
Interest expense increased $1,191,000 (6.6%) in 1996 over 1995. Higher
volumes in all interest bearing liability categories except savings accounts and
long term debt accounted for the increase. Interest expense on time deposits was
up $1,230,000 due to higher average balances of $22,390,000 in 1996. Average
rates paid on interest bearing liabilities in 1996 were down only 1 basis point
to 4.05% which had a small favorable effect on interest expense. Net interest
margin for 1996 was 5.37% versus 5.36% in 1995.
Table One, Analysis of Net Interest Margin on Earning Assets, and Table
Two, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and past trends
of the Bank's interest income and expenses. Table One provides an analysis of
net interest margin on earning assets setting forth average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Two presents an analysis of volume and rate change on net interest income
and expense.
Table One: Analysis of Net Interest Margin on Earning Assets
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
Assets Balance1 Income Rate Balance1 Income Rate Balance1 Income Rate
(dollars in thousands)
Earning assets:
Loans(2),(3) $448,117 $44,903 10.02 % $368,550 $38,227 10.37% $308,473 $33,776 10.95%
Securities - taxable 233,389 13,791 5.91 % 180,836 10,409 5.76% 207,163 11,706 5.65%
Securities - nontaxable(4) 11,316 958 8.47 % 2,386 207 8.68% 3,042 272 8.93%
Federal funds sold 9,956 553 5.55 % 7,405 392 5.29% 6,702 371 5.54%
---------------------------------------------------------------------------------------------
Total earning assets 702,778 60,205 8.57 % 559,177 49,235 8.80% 525,380 46,125 8.78%
Cash and due from banks 36,671 31,867 29,150
Premises and equipment 16,838 14,068 13,206
Other assets, net 33,413 23,046 19,537
Less: Unrealized loss
on securities (1,203) (1,841) (3,156)
Less: Allowance for loan
losses (6,185) (5,597) (5,636)
--------- --------- ---------
Total assets $782,312 $620,720 $578,481
Liabilities and
shareholders' equity
Interest-bearing demand
deposits $122,390 2,781 2.27 % $ 89,278 2,226 2.49% $ 81,408 2,000 2.46%
Savings deposits 208,232 6,400 3.07 % 163,637 5,032 3.08% 166,637 5,167 3.10%
Time deposits 251,874 13,501 5.36 % 187,355 9,943 5.31% 164,965 9,064 5.49%
Federal funds purchased 4,144 235 5.67 % 6,485 359 5.54% 1,953 120 6.14%
Repurchase agreements 5,331 302 5.66 % 9,828 603 6.14% 6,696 406 6.06%
Long-term debt 12,096 716 5.92 % 17,434 1,016 5.83% 21,416 1,231 5.75%
---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 604,067 23,935 3.96 % 474,017 19,179 4.05% 443,075 17,988 4.06%
Noninterest-bearing
deposits 105,198 79,843 76,184
Other liabilities 10,204 10,776 8,196
Shareholders' equity 62,843 56,084 51,026
Total liabilities and
--------- --------- ---------
shareholders' equity $782,312 $620,720 $578,481
Net interest rate spread(5) 4.61 % 4.75% 4.72%
Net interest income/net
interest margin(6) $36,270 5.16 % $30,056 5.37% $28,137 5.36%
1 Average balances are computed principally on the basis of daily balances .
2 Nonaccrual loans are included.
3 Interest income on loans includes fees on loans of $2,058,000 in 1997,
$1,926,000 in 1996, and $1,676,000 in 1995.
4 Interest income is stated on a tax equivalent basis of 1.52 in 1997, 1.7
in 1996, and 1.72 for 1995.
5 Net interest rate spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.
6 Net interest margin is computed by dividing net interest income by total
average earning assets.
Table Two: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
1997 over 1996 1996 over 1995
Yield/ Yield/
Volume Rate (4) Total Volume Rate (4) Total
(dollars in thousands)
Increase (decrease) in
interest income:
Loans(1),(2) $ 8,253 $ (1,577) $ 6,676 $ 6,578 $ (2,127) $ 4,451
Investment securities(3) 3,800 333 4,133 (1,546) 184 (1,362)
Federal funds sold 135 26 161 39 (18) 21
--------------------------------------------------------------------------
Total 12,188 (1,218) 10,970 5,071 (1,961) 3,110
Increase (decrease) in
interest expense:
Demand deposits
(interest-bearing) 826 (271) 555 193 33 226
Savings deposits 1,371 (3) 1,368 (93) (42) (135)
Time deposits 3,424 134 3,558 1230 (351) 879
Federal funds purchased (130) 6 (124) 278 (39) 239
Repurchase agreements (276) (25) (301) 190 7 197
Long-term borrowings (311) 11 (300) (229) 14 (215)
--------------------------------------------------------------------------
Total 4,904 (148) 4,756 1,569 (378) 1,191
--------------------------------------------------------------------------
Increase (decrease) in
net interest income $ 7,284 $ (1,070) $ 6,214 $ 3,502 $ (1,583) $ 1,919
1 Nonaccrual loans are included.
2 Interest income on loans includes fees on loans of $2,058,000 in 1997, $1,926,000 in 1996, and $1,676,000 in 1995.
3 Interest income is stated on a tax equivalent basis of 1.52 in 1997, 1.72 in 1996, and 1.72 for.
4 The rate/volume variance has been included in the rate variance.
Provision for Loan Losses
The 1997 provision for loan losses of $3,000,000 was a significant increase
over the 1996 provision of $777,000. Net loan charge-offs for 1997 increased to
$2,638,000 from $883,000 in 1996. Consumer installment loans which include
credit cards accounted for $591,000 of the increase while commercial, financial
and agricultural loans accounted for $1,166,000 of the increase. Early in 1997
the bank adopted a more aggressive grading procedure for loans. This process
resulted in a higher number of loans being classified and charged off. There
also was an increase in bankruptcy filings which adversely affected the consumer
loan and credit card portfolios. The 1997 charge-offs represented 0.59% of
average loans outstanding versus 0.24% the prior year. Nonperforming loans were
1.17% of total loans at year end versus 2.06% in 1996. The allowance for loan
losses to nonperforming loans was 123% versus 67% at the end of 1996. (See
balance sheet analysis "Allowance for Loan Losses" for further discussion.)
The 1996 provision for loan losses of $777,000 was a significant increase
over the 1995 provision of $335,000. Net loan charge-offs for 1996 increased to
$883,000 from $363,000 in 1995. Consumer installment loans which include credit
cards accounted for all of the increase. In late 1996 management implemented new
credit review procedures and contracted with outside credit collection agencies
to help improve the credit card portfolio performance. The 1996 charge-offs
represented 0.24% of average loans outstanding versus 0.12% the prior year.
Nonperforming loans were 2.06% of total loans at year end versus 0.76% in 1995.
The allowance for loan losses to nonperforming loans was 67% versus 226% at the
end of 1995. Service Charges and Fees and Other Income
For 1997 service charge and fee income was up 37.0% to $6,745,000 over 1996
results. The growth came from higher account volumes primarily due to the
purchase of certain Wells deposit accounts and some selective fee increases.
Other income was up 64.8% to $2,821,000 over 1996 results. Within this category
commissions on the sale of annuities and mutual funds increased $708,000 or
56.4%, and gain on sale of loans increased to $260,000 versus a loss of $3,000
in 1996.
For 1996 service charge and fee income was up 18.3% to $4,924,000 over 1995
results. The growth came from higher account volumes and some selective fee
increases. Other income reflected a small decrease overall on a year over year
basis. However, within this category commissions on the sale of annuities and
mutual funds increased $355,000 or 39.5%.
This favorable change was offset by decreases in non-recurring items from 1995
levels.
Securities Transactions
For 1997 the Bank realized net gains of $18,000 on the sale of securities
with market values of $29,033,000. The Bank purchased $173,327,000 of securities
with proceeds from the sale of securities noted above, proceeds from maturities
of securities totaling $49,720,000, and cash received in conjunction with the
purchase of certain Wells deposits.
No securities were sold in 1996. The Bank was able to fund loan growth
through the maturities of investment securities and growth in deposits.
Salaries and Benefits
Salary and benefit expenses increased 30.7% or $3,682,000 in 1997. Base
salaries increased $3,208,000 (40.5%) primarily due to the purchase of nine
Wells branches and their associated staff. Other components of salaries and
benefits which increased significantly included; overtime, $174,000; retirement
plans, $275,000; and payroll taxes, $250,000. Management and employee incentive
expense decreased $281,000. Approximately 50% of the total salary increase was
directly related to the conversion and ongoing operations of the purchased
branches. There was additional staffing in loan production offices and support
functions plus normal salary increases which also contributed to the increased
costs..
Salary and benefit expenses were up $1,202,000 or 11.2% from the 1995
levels to total $11,989,000 in 1996. Increases in staffing levels for the
Bakersfield and Sacramento loan offices, the Grass Valley in-store branch, nine
months of staffing for the Chico in-store branch and the addition of staff from
the Sutter Buttes Savings Bank acquisition as well as normal salary progression
contributed to the increase. Components of salaries and benefits which increased
significantly included; Base salary and wages, $536,000; commissions on
annuities and mutual funds, $75,000; retirement plans, $193,000; and deferred
income plan, $208,000.
Other Expenses
Other expenses increased $5,765,000 (50.1%) in 1997. Of this amount
$1,240,000 (21.5%) was directly related to the ongoing operations and $1,308,000
(22.7%) was for amortization of goodwill for the acquired branches. Another
$326,000 (5.7%) were one time conversion costs for the nine branches. The
following analysis excludes costs directly incurred by the new branches. Much of
the cost was incurred to support the new branches. Occupancy and equipment costs
increased $713,000 (19.5%), most of which was related to depreciation of
equipment. Charges for ATM network and transactions increased $194,000 (77.0%)
as a result of more terminals and increased volumes. Courier services were up
$218,000 (76.0%) as the new branches are located in a large geographic area.
Telecommunications increased $199,000 (30.5%). Loan origination fees waived for
home equity loans increased $150,000 (220.6%) as a result of increased volume.
The Bank also expensed $300,000 for declines in the value of certain bank
premises which were vacated in connection with the Bank's decision to move its
administrative offices and one branch office to new facilities.
For 1996 other expenses increased $622,000 or 5.7%. Costs relating to
customer deposit services, ATM networks, credit card servicing, and
telecommunications were up $698,000 or 46.4%. These costs reflect higher volumes
related to the products, new computer networks and business locations. Provision
for OREO valuation allowance, advertising and promotional expenses also had
significant increases. There were also one time costs related to the Sutter
Buttes acquisition. A 1996 decrease in FDIC insurance of $647,000 or 94.6%
helped offset the higher operating costs.
Provision for Taxes
The effective tax rate on income was 38.5%, 40.8%, and 41.1% and in 1997,
1996, and 1995. The effective tax rate was greater than the federal statutory
tax rate due to state tax expense of $961,000, $1,367,000, and $1,311,000 in
these years. Tax-free income of $630,000, $120,000, and $158,000 from investment
securities in these years helped to reduce the effective tax rate.
Return on Average Assets and Equity
The following table sets forth certain ratios for the Company for the last
three years (using average balance sheet data):
1997 1996 1995
Return on total assets 0.75% 1.18% 1.22%
Return on shareholders' equity 9.34% 13.03% 13.81%
Return on common shareholders' equity 9.34% 13.03% 13.95%
Shareholders' equity to total assets 8.04% 9.03% 8.82%
Common shareholders' dividend payout ratio 50.61% 36.22% 24.10%
Return on assets decreased in 1997 to 0.75% from the 1.18% achieved in
1996. The lower return was the result of decreased earnings applied to higher
average assets of $161,592,000 in 1997. For 1996 return on assets reflected a
slight decrease from 1.22% in 1995 to 1.18%. Net income increased at a lower
rate than average assets in 1996, causing the decrease.
Return on shareholders' equity fell to 9.34% in 1997 from 13.03% in 1996.
The lower ROE resulted from average capital increasing 12.1% while net income
decreased 19.7%. The return on shareholder's equity decreased to 13.03% in 1996
versus the 13.81% return achieved in 1995. The lower ROE resulted from average
capital increasing 9.9% while net income increased 3.7%.
Since all of the Company's preferred shares have been redeemed, the return
on shareholders' equity and the return on common shareholders' equity for 1997
and 1996 are the same. In 1995 the difference between the return on Common
shareholders' equity and return on shareholders' equity had been narrowing. This
change was due to the reduction of the amounts paid for preferred stock
dividends. In August of 1995, the Company had redeemed its Series B Preferred
Stock. The annual dividend requirements for this issue was $420,000.
In 1997, the average shareholders' equity to average asset ratio decreased
to 8.04% from 9.03%. The 1997 change reflected the increase in assets as a
result of the Wells branch acquisition which outweighed the increase in
shareholders' equity. The shareholders' average equity to average assets ratio
for 1996 increased to 9.03% from 8.82% for 1995.
The dividend payout ratio increased to 50.6% in 1997 from 36.2% in 1996.
The common dividends paid totaled $2,970,000 up from $2,646,000. The Company is
well capitalized and so the higher dividend payout does not affect operations.
In 1995, dividends paid to Common shareholders totaled $1,639,000. The resulting
Common shareholders' dividend payout ratio of 36.2% in 1996 was 12.1% higher
than the payout for 1995.
(B) Balance Sheet Analysis
Loans
The Bank concentrates its lending activities in four principal areas:
commercial loans (including agricultural loans); consumer loans; real estate
mortgage loans (residential and commercial loans and mortgage loans originated
for sale); and real estate construction loans. At December 31, 1997, these four
categories accounted for approximately 37%, 20%, 36%, and 7% of the Bank's loan
portfolio, respectively, as compared to 40%, 17%, 37% and 6%, at December 31,
1996. The shift in the percentages was primarily due to increased real estate
construction and home equity lending, and a decrease in commercial and
agricultural loans. The interest rates charged for the loans made by the Bank
vary with the degree of risk, the size and maturity of the loans, the borrower's
relationship with the Bank and prevailing money market rates indicative of the
Bank's cost of funds.
The majority of the Bank's loans are direct loans made to individuals,
farmers and local businesses. The Bank relies substantially on local promotional
activity, personal contacts by bank officers, directors and employees to compete
with other financial institutions. The Bank makes loans to borrowers whose
applications include a sound purpose, a viable repayment source and a plan of
repayment established at inception and generally backed by a secondary source of
repayment.
At December 31, 1997 loans totaled $448,967,000 which was a 2.20% increase
over the balances at the end of 1996. Demand for real estate construction and
home equity loans continued to improve in 1997 as economic conditions remained
favorable. Additions to the loan staff and improved calling programs also helped
generate new customers. With the acquisition of the nine Wells branches
completed in February 1997, Management believes the Bank has the financing to
aggressively pursue opportunities to further increase its loan production in
1998. Management anticipates that loan growth in 1998 will focus on the
commercial and consumer elements of the portfolio. The average loan to deposit
ratio in 1997 was 65.2% as compared to 70.8% in 1996, due primarily to the Wells
branch acquisition.
At December 31, 1996 loans totaled $439,289,000 which was a 37.8% increase
over the balances at the end of 1995. Internal growth accounted for about half
of the increase and the Sutter Buttes acquisition added $60,815,000. Loan demand
improved in 1996 as economic conditions rebounded from the slow growth of the
prior several years. The average loan to deposit ratio in 1996 was 70.8% as
compared to 63.1% in 1995.
Loan Portfolio Composite
December 31,
1997 1996 1995 1994 1993
(dollars in thousands)
Commercial, financial and
agricultural $165,813 $176,868 $152,173 $153,957 $140,750
Consumer installment 87,950 75,498 64,445 58,471 55,654
Real estate mortgage 160,954 160,575 81,888 76,673 88,887
Real estate construction 34,250 26,348 20,260 18,002 20,611
--------------------------------------------------------------------------------
Total loans $448,967 $439,289 $318,766 $307,103 $305,902
Nonaccrual, Past Due and Restructured Loans
Nonperforming assets at December 31, 1997 totaled $7,479,000 which was a
28.5% decrease from year end 1996. The OREO component increased from $1,389,000
at year end 1996 to $2,230,000 at year end 1997. However, this increase was
offset by a substantial decrease in nonperforming loans from $9,064,000 at year
end 1996 to $5,249,000 at year end 1997. The decrease in nonperforming loans was
due in part to the improved financial condition of certain borrowers and the
impact of new monitoring procedures put into place at the end of 1996 in an
effort to improve the timeliness of payments and collections and actively manage
the level of nonperforming loans. The nonperforming loans at December 31, 1997
consisted of numerous loans including 12 loans over $100,000. The largest
nonperforming loan balance to any one borrower was approximately $600,000. At
December 31, 1997, the ratio of nonperforming loans to total loans was 1.17% as
compared to 2.06% for year end 1996. Classifications of nonperforming loans as a
percent of the total at the end of 1997 were as follows: secured by real estate,
79%; loans to farmers, 9%; commercial loans, 6%; and consumer loans, 6%.
During 1996 nonperforming assets increased $7,389,000 to a total of
$10,453,000 at December 31, 1996. Nonaccrual loans accounted for most of the
change. Commercial loans secured by nonfarmnonresidential real estate increased
$3,686,000 to a total of $4,350,000. Loans to one borrower accounted for
$2,322,000 of that total. There were several loans totaling about $1,000,000 in
the process of being renewed which were more than 90 days past due. The increase
in nonperforming loans was also due in part to more stringent policies for
removing poorly performing loans from nonaccrual status and to change in the
local economy. The ratio of nonperforming loans to total loans at December 31,
1996 was 2.06% versus .76% at the end of 1995. Classifications of nonperforming
loans as a percent of the total at the end of 1996 were as follows: secured by
real estate, 79%; loans to farmers, 1%; commercial loans, 18%; and consumer
loans, 2%.
Commercial, real estate and consumer loans are reviewed on an individual
basis for reclassification to nonaccrual status when any one of the following
occurs: the loan becomes 90 days past due as to interest or principal, the full
and timely collection of additional interest or principal becomes uncertain, the
loan is classified as doubtful by internal credit review or bank regulatory
agencies, a portion of the principal balance has been charged off, or the Bank
takes possession of the collateral. The reclassification of loans as nonaccrual
does not necessarily reflect Management's judgment as to whether they are
collectible.
Interest income is not accrued on loans where Management has determined
that the borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in process of collection. When
a loan is placed on nonaccrual, any previously accrued but unpaid interest is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection on principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
Interest income on nonaccrual loans which would have been recognized during
the year ended December 31, 1997, if all such loans had been current in
accordance with their original terms, totaled $519,000. Interest income actually
recognized on these loans in 1997 was $354,000.
The Bank's policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due Management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed 30
days. Loans where the collateral has been repossessed are classified as OREO or,
if the collateral is personal property, the loan is classified as other assets
on the Company's financial statements.
Management considers both the adequacy of the collateral and the other
resources of the borrower in determining the steps to be taken to collect
nonaccrual loans. Alternatives that are considered are foreclosure, collecting
on guarantees, restructuring the loan or collection lawsuits.
The following table sets forth the amount of the Bank's nonperforming
assets as of the dates indicated.
December 31,
1997 1996 1995 1994 1993
(dollars in thousands)
Nonaccrual loans $ 4,721 $ 9,044 $ 2,213 $ 1,122 $ 1,595
Accruing loans past due
90 days or more 528 20 220 24 126
------------------------------------------------------------------------------
Total nonperforming loans 5,249 9,064 2,433 1,146 1,721
Other real estate owned 2,230 1,389 631 2,124 3,624
------------------------------------------------------------------------------
Total nonperforming assets $ 7,479 $10,453 $ 3,064 $ 3,270 $ 5,345
Nonincome producing investments
in real estate held by Bank's real
estate development subsidiary $ 856 $ 1,173 $ 1,173 $ 1,173 $ 1,172
Nonperforming loans to total loans 1.17% 2.06% .76% .37% .56%
Allowance for loan losses to nonper-
forming loans 123% 67% 229% 489% 347%
Nonperforming assets to total assets .91% 1.50% .51% .55% .93%
Allowance for loan losses to nonper-
forming assets 86% 58% 182% 171% 112%
Allowance for Loan Losses Activity
In determining the adequacy of the allowance for loan losses, Management
relies primarily on its review of the loan portfolio both to ascertain whether
there are probable losses to be recorded and to assess the loan portfolio in the
aggregate. Problem loans are examined on an individual basis to determine
estimated probable loss. In addition, Management considers current and projected
loan mix and loan volumes, historical net loan loss experience for each loan
category and current and anticipated economic conditions affecting each loan
category. At December 31, 1997 the allowance for loan losses to total loans was
1.44% versus 1.39% at the end of 1996. The allowance for loan losses to total
loans at December 31, 1996 was 1.39% versus 1.75% at the end of 1995. This
decline was a result of loan growth and the addition of the Sutter Buttes loans
in 1996 resulted in a change in the mix of loans outstanding at the end of the
year versus year end 1995. The types of mortgage loans Sutter Buttes held in its
portfolio generally required a lower allowance for loan losses.
The primary risk elements considered by Management with respect to
installment and residential real estate loans is lack of timely payment and the
value of the collateral. The primary risk elements considered by Management with
respect to its credit card portfolio are general economic conditions, timeliness
of payments and the potential for fraud and over limit credit draws. The primary
risk elements considered by Management with respect to real estate construction
loans are the financial condition of borrowers, fluctuations in real estate
values in the Bank's market areas, fluctuations in interest rates, timeliness of
payments, the availability of conventional financing, the demand for housing in
the Bank's market areas and general economic conditions. The primary risk
elements with respect to commercial loans are the financial condition of the
borrower, general economic conditions in the Bank's market area, the sufficiency
of collateral, the timeliness of payment and, with respect to adjustable rate
loans, interest rate fluctuations.
Based on the current conditions of the loan portfolio, Management believes
that the $6,459,000 allowance for loan losses at December 31, 1997 is adequate
to absorb probable losses inherent in the Bank's loan portfolio. No assurance
can be given, however, that adverse economic conditions or other circumstances
will not result in increased losses in the portfolio.
The following table summarizes, for the years indicated, the activity in
the allowance for loan losses:
December 31,
1997 1996 1995 1994 1993
(dollars in thousands)
Balance, beginning of year $ 6,097 $ 5,580 $ 5,608 $ 5,973 $ 4,798
Provision charged to operations 3,000 777 335 316 1,858
Loans charged off:
Commercial, financial and
agricultural (1,289) (283) (149) (338) (653)
Consumer installment (1,551) (909) (432) (712) (622)
Real estate mortgage -- -- -- -- --
------------------------------------------------------------------------------
Total loans charged-off (2,840) (1,192) (581) (1,050) (1,275)
Recoveries:
Commercial, financial and
agricultural 85 243 98 205 380
Consumer installment 117 66 120 164 212
------------------------------------------------------------------------------
Total recoveries 202 309 218 369 592
------------------------------------------------------------------------------
Net loans charged-off (2,638) (883) (363) (681) (683)
Balance added through acquisition -- 623 -- -- --
------------------------------------------------------------------------------
Balance, year end $ 6,459 $ 6,097 $ 5,580 $ 5,608 $ 5,973
==============================================================================
Average total loans $448,117 $368,550 $308,473 $303,497 $314,691
Ratios:
Net charge-offs during period
to average loans outstanding
during period .59% .24% .12% .22% .22%
Provision for loan losses to aver-
age loans outstanding .67% .21% .11% .10% .59%
Allowance to loans at year end 1.44% 1.39% 1.75% 1.83% 1.95%
As part of its loan review process, Management has allocated the overall
allowance based on specific identified problem loans and historical loss data.
The following tables summarize the allocation of the allowance for loan losses
at December 31, 1997 and 1996.
December 31, 1997
(dollars in thousands)
Percent of
loans in each
category to
Balance at End of Period Applicable to: Amount total loans
Commercial, financial and agricultural $2,157 36.93%
Real estate construction 59 7.63%
Real estate mortgage 2,266 35.85%
Consumer installment 1,977 19.59%
------------------------
$6,459 100.0%
December 31, 1996
(dollars in thousands)
Percent of
loans in each
category to
Balance at End of Period Applicable to: Amount total loans
Commercial, financial and agricultural $ 2,457 40.3%
Real estate construction 366 6.0%
Real estate mortgage 2,231 36.6%
Consumer installment 1,043 17.1%
------------------------
$6,097 100.0%
Investment in Real Estate Properties
At December 31, 1997 and 1996, property held by a subsidiary of the Bank
for the purposes of development was $856,000 and $1,173,000 respectively.
Subsequent to December 31, 1997, one of the properties with a carrying value of
$429,000 was sold. In 1996 the FDIC directed the Bank to divest the properties
held by TCB Real Estate Corp. and to terminate its operations. The Bank and FDIC
have agreed to a plan that will accomplish the divestiture by June 30, 1999.
Other Real Estate Owned
The December 31, 1997 balance of Other Real Estate Owned (OREO) was
$2,230,000 versus $1,389,000 in 1996. One property accounted for $767,000 of the
1997 balance. Development costs of $210,000 were incurred on that property
during 1997. Properties foreclosed in 1997 and remaining in the Bank's
possession at year end were valued at $1,495,000 net of a valuation allowance of
$83,000. The Bank disposed of properties with a value of $838,000 in 1997. OREO
properties consist of a mixture of land, single family residences and commercial
buildings. OREO had increased $758,000 in 1996.
Intangible Assets
At December 31, 1997, the Bank had intangible assets totaling $8,902,000.
During 1997 the Bank recorded additions of $9,066,000 and $142,000 related to
the Wells and Sutter Buttes acquisitions, respectively. Amortization of
intangible assets amounting $1,342,000 was recorded in 1997. In 1996, the Bank
recorded an intangible asset related to the Sutter Buttes acquisition in the
amount of $1,070,000. The balance of $1,036,000 at December 31,1996 reflected
amortization of $34,000 for the year.
Deposits
Deposits at December 31, 1997 were up $128,473,000 (21.6%) to $724,094,000
over the 1996 year end balances. Deposits at the branches acquired from Wells
Fargo Bank totaled $146,795,000 at year end. These balances reflected a net
runoff of 6.85% from the date of acquisition. During 1997, time certificates of
deposit not related to the Wells branches decreased $18,937,000 or 8.4%. It is
believed that competitive pressures from alternative products such as mutual
funds and annuities contributed to this decline.
Total deposits at December 31, 1996 had increased $79,428,000 (15.4%) to
$595,621,000 over the 1995 year end balances. On the date of closing of the
Sutter Buttes acquisition in October 1996, Sutter Buttes had deposits totaling
$56,023,000. Because of these acquired deposits, growth occurred in all deposit
categories. Certificates of deposit with balances over $100,000 increased from
$13,439,000 in 1995 to $32,889,000. Of the increase, $6,000,000 was attributable
to a State of California CD, approximately $5,500,000 was from Sutter Buttes and
the balance was from internal growth. Prior to 1996, the Bank paid lower rates
on CD's over $100,000 than it did on CD's under $100,000.
This policy was changed in 1996.
Accrued Interest Payable
At December 31, 1997, the balance of accrued interest payable was
$4,039,000 which was an increase of $992,000 over the 1996 year end. This
increase was attributable to higher deposit totals. At December 31, 1996,
accrued interest payable reflected a decrease of $115,000 to $3,047,000. The
decrease was mainly due to lower rates of interest being accrued on time
certificates of deposit.
Long-Term Debt
During 1997 the Bank retired $12,841,000 of long term debt during the year.
In 1996 the Bank made principal payments of $2,011,000 on long term debt
obligations. No new long term debt was incurred.
Equity
See Note U in the financial statements for a discussion of regulatory
capital requirements. Management believes that the Company's capital is adequate
to support anticipated growth, meet the cash dividend requirements of the
Company and meet the future risk-based capital requirements of the Bank and the
Company.
Market Risk Management
Overview. The goal for managing the assets and liabilities of the Bank is
to maximize shareholder value and earnings while maintaining a high quality
balance sheet without exposing the Bank to undue interest rate risk. The Board
of Directors has overall responsibility for the Company's interest rate risk
management policies. The Bank has an Asset and Liability Management
Committee(ALCO) which establishes and monitors guidelines to control the
sensitivity of earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits, investing in securities and issuing debt. Interest rate risk is the
primary market risk associated with asset/liability management. Sensitivity of
earnings to interest rate changes arises when yields on assets change in a
different time period or in a different amount from that of interest costs on
liabilities. To mitigate interest rate risk, the structure of the balance sheet
is managed with the goal that movements of interest rates on assets and
liabilities are correlated and contribute to earnings even in periods of
volatile interest rates. The asset/liability management policy sets limits on
the acceptable amount of variance in net interest margin and market value of
equity under changing interest environments. The Bank uses simulation models to
forecast earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the sensitivity
of earnings to interest rate changes. Using computer modeling techniques the
Bank is able to estimate the potential impact of changing interest rates on
earnings. 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. The forecast balance sheet is processed against four
interest rate scenarios which are provided by an independent economic
forecasting company. The scenarios include a most likely rate forecast, a rising
rate forecast, a flat rate forecast and a falling rate forecast. The Bank's 1998
earnings forecast is determined by utilizing a forecast balance sheet projected
from year end 1997 balances. (The Bank does not hold any assets in trading
accounts.)
The following assumptions were used in the modeling activity:
Total asset growth of 1.4% based on ending balances
Loan growth of 9.6% based on average balances
Investment growth of 0.7% based on average balances
Deposit growth of 3.5% based on ending balances
Balance sheet target balances were the same for all rate scenarios
Ending prime rate of interest for most likely rates 8.25%, for rising
rates 10.28%, for flat rates 8.5% and for falling rates 6.0%
The following table summarizes the effect on earnings before taxes of
changing interest rates as measured against a flat rate (no change) scenario.
Interest Rate Risk Simulation of Income Before Income Taxes as of
December 31, 1997
Estimated Impact on
1998 Income Before
Income Taxes
(in thousands)
Variation from flat rate scenario
Most likely rates $257
Rising rates 54
Falling rates (196)
The simulations of earnings 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.
The Bank also uses a second simulation model which rate shocks the balance
sheet with an immediate parallel shift in interest rates of +100 and -100 basis
points(bp). This simulation model provides estimates of the future market value
of equity(MVE) and net interest margins(NIM). MVE measures the impact on equity
due to the changes in the market values of assets and liabilities as a result of
a change in interest rates. NIM is described above under the heading "Net
Interest Income/Net Interest Margin". The Bank measures the volatility of these
benchmarks using a twelve month time horizon. Using the December 31, 1997
balance sheet as the base for the simulation, the following table summarizes the
effect on NIM and net interest income of a +/-100 basis point change in interest
rates:
Interest Rate Risk Simulation of NIM as of December 31, 1997
% Change Change
in NIM in Net Interest
from Current Margin
12 Mo. Horizon 12 Month Horizon
(in thousands)
-100bp ( 4.11%) ($1,366)
0bp ( 0.82%) ($ 171)
+100bp 2.47% $ 997
These results indicate that the balance sheet is asset sensitive since
earnings increase when interest rates rise. The magnitude of the NIM change is
within the Bank's policy guidelines. The asset liability management policy
limits aggregate market risk, as measured in this fashion, to an acceptable
level within the context of risk-return trade-offs.
Gap analysis provides another measure of interest rate risk. The Bank does
not actively use gap analysis in managing interest rate risk. It is presented
here for comparative purposes. Interest rate sensitivity is a function of the
repricing characteristics of the Bank's portfolio of assets and liabilities.
These repricing characteristics are the time frames within which the
interest-bearing assets and liabilities are subject to change in interest rates
either at replacement, repricing or maturity. Interest rate sensitivity
management focuses on the maturity of assets and liabilities and their repricing
during periods of changes in market interest rates. Interest rate sensitivity is
measured as the difference between the volumes of assets and liabilities in the
Bank's current portfolio that are subject to repricing at various time horizons.
The differences are known as interest sensitivity gaps.
As reflected in the following repricing table at December 31, 1997, the
Bank is liability sensitive in the short term. This gap position would indicate
that as interest rates rise, the Bank's earnings should be adversely impacted
and conversely, as interest rates fall, earnings should be favorably impacted.
Because the Bank's deposit liabilities do not reprice immediately with changes
in interest rates, in recent years of moderate interest rate changes the Bank's
earnings have reacted as though the gap position is slightly asset sensitive.
Interest Rate Sensitivity - December 31, 1997
Repricing within:
3 3 - 6 6 - 12 1 - 5 Over
months months months years 5 years
(dollars in thousands)
Interest-earning assets:
Securities $ 36,451 $ 7,562 $ 39,652 $131,246 $ 51,606
Fed funds sold 15,000 --- --- --- ---
Loans 232,318 40,892 18,079 57,509 100,169
-------------------------------------------------------------------------------
Total interest-earning assets $283,769 $48,454 $57,731 $188,755 $151,775
Interest-bearing liabilities
Transaction deposits $347,360 $ --- $ --- $ --- $ ---
Time 102,914 71,773 64,605 14,584 789
Short-term borrowings 15,300 --- --- --- ---
Long-term borrowings 5,003 3 6 5,999 429
-------------------------------------------------------------------------------
Total interest-bearing liabilities $470,577 $71,776 $64,611 $ 20,583 $ 1,218
-------------------------------------------------------------------------------
Interest sensitivity gap $(186,808) $(23,322) $ (6,880) $168,172 $150,557
Cumulative sensitivity gap (186,808) (210,130) (217,010) (48,838) 101,719
As a percentage of earning assets:
Interest sensitivity gap (25.57%) (3.19%) (0.94%) 23.02% 20.61%
Cumulative sensitivity gap (25.57%) (28.76%) (29.70%) 6.68% 13.93%
Liquidity
Liquidity refers to the Bank's ability to provide funds at an acceptable
cost to meet loan demand and deposit withdrawals, as well as contingency plans
to meet unanticipated funding needs or loss of funding sources. These objectives
can be met from either the asset or liability side of the balance sheet. Asset
liquidity sources consist of the repayments and maturities of loans, selling of
loans, short-term money market investments, maturities of securities and sales
of securities from the available-for-sale portfolio. These activities are
generally summarized as investing activities in the Consolidated Statement of
Cash Flows. Net cash used by investing activities totaled approximately
($113,907,000) in 1997. The purchase of securities was responsible for the major
use of funds in this category.
Liquidity is generated from liabilities through deposit growth and
short-term borrowings. These activities are included under financing activities
in the cash flow statement. In 1997 funds totaling $108,202,000 were provided by
financing activities. Deposit growth as a result of the purchase of the Wells
branches provided funds amounting to $128,473,000. The Bank also had available
correspondent banking lines of credit totaling $49,700,000 at year end. While
these sources are expected to continue to provide significant amounts of funds
in the future, their mix, as well as the possible use of other sources, will
depend on future economic and market conditions.
Liquidity is also provided or used through the results of operating
activities. In 1997 operating activities provided cash of $1,905,000.
Since the adoption of SFAS 115 January 1, 1994 and prior to 1997,
Management targeted the available-for-sale portfolio (AFS) to be maintained at
35-40% of the total securities holdings. During 1997, the Board of Directors
approved Management's recommendation that up to 100% of the future securities
purchases be placed in the available-for-sale category. When SFAS 115 was
implemented, it was believed that the unrealized losses which might be incurred
in the AFS portfolio would be used in the determination of capital for
regulatory reporting purposes. Subsequently, the FDIC has issued a directive
that eliminates using the unrealized losses in determining regulatory capital.
Consequently, classifying securities in the AFS portfolio provides management
more flexibility in managing the investment portfolio as securities may be sold
as the Bank's needs dictate. AFS securities at December 31, 1997 were 66.4% of
the total securities holdings. The AFS securities plus cash in excess of reserve
requirements totaled $223,753,000 which was 27.1% of total assets at year end.
This was up from $109,202,000 and 15.7% at the end of 1996.
The overall liquidity of the Bank is enhanced by the sizable core deposits
which provide a relatively stable funding base. The maturity distribution of
certificates of deposit in denominations of $100,000 or more is set forth in the
following table. These deposits are generally more rate sensitive than other
deposits and, therefore, are more likely to be withdrawn to obtain higher yields
elsewhere if available. The Bank participates in a program wherein the State of
California places time deposits with the Bank at the Bank's option. At December
31, 1997 and 1996 the Bank had $25,000,000 and $15,000,000 respectively, of
these State deposits.
Certificates of Deposit in Denominations of $100,000 or More
Amounts as of
December 31,
1997 1996 1995
(in thousands)
Time remaining until maturity:
Less than 3 months $31,029 $ 19,443 $ 9,985
3 months to 6 months 8,312 3,396 2,909
6 months to 12 months 7,572 7,480 545
More than 12 months 1,994 2,570 --
--------------------------------------------
Total $48,907 $ 32,889 $ 13,439
Loan demand also affects the Bank's liquidity position. The following table
present the maturities of loans at December 31, 1997.
Loan Maturities - December 31, 1997
After
One But
Within Within After 5
One Year 5 Years Years Total
(in thousands)
Loans with predetermined interest rates:
Commercial, financial and agricultural $ 9,739 $24,816 $24,614 $59,169
Consumer installment 5,668 13,213 21,588 40,469
Real estate mortgage 6,023 16,053 33,076 55,152
Real estate construction 6,698 116 52 6,866
-------------------------------------------------------------
$28,128 $54,198 $79,330 $161,656
Loans with floating interest rates:
Commercial, financial and agricultural $56,205 $25,241 $25,198 $106,644
Consumer installment 17,333 2,494 27,654 47,481
Real estate mortgage 12,389 21,889 71,524 105,802
Real estate construction 27,384 --- --- 27,384
-------------------------------------------------------------
$113,311 $49,624 $124,376 $287,311
-------------------------------------------------------------
Total loans $141,439 $103,822 $203,706 $448,967
The maturity distribution and yields of the investment portfolios are presented
in the following tables:
Securities Maturities and Weighted Average Yields - December 31, 1997
After One Year After Five Years
Within but Through but Through After Ten
One Year Five Years Ten Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
Securities Held-to-Maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $3,000 5.31% $18,805 6.30% $ -- $ -- $21,805 6.17%
Obligations of states and
political subdivisions -- 530 4.35% -- -- 530 4.35%
Mortgage-backed securities -- 3,754 5.73% 8,652 6.45% 56,023 5.90% 68,429 5.96%
--------------------------------------------------------------------------------------
Total securities held-to-maturity $3,000 5.31% $23,089 6.16% $8,652 6.45% $56,023 5.90% $90,764 6.00%
Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $36,514 5.84% $64,635 5.99% $ -- $ -- $101,149 5.93%
Obligations of states and
political subdivisions 226 5.11% 751 5.38% 135 7.00% 12,687 .64% 13,799 5.63%
Mortgage-backed securities 87 8.50% 661 7.01% 7,006 6.16% 28,430 5.93% 36,184 6.00%
Short-term corporate obligations 19,960 6.07% -- -- -- 19,960 6.07%
Other securities -- -- -- 4,661 4,661
--------------------------------------------------------------------------------------
Total securities available-for-sale $56,787 5.92% $66,047 5.99% $7,141 6.17% $45,778 5.84% $175,753 5.94%
--------------------------------------------------------------------------------------
Total all securities $59,787 5.89% $89,136 6.04% $15,793 6.32% $101,801 5.88% $266,517 5.96%
======================================================================================
The principal cash requirements of the Company are dividends on Common
Stock when declared. The Company is dependent upon the payment of cash dividends
by the Bank to service its commitments. The Company expects that the cash
dividends paid by the Bank to the Company will be sufficient to meet this
payment schedule.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital
leases. (See Note H of the financial statements for the terms.) These
commitments do not significantly impact operating results.
As of December 31, 1997 commitments to extend credit were the only
financial instruments with off-balance sheet risk. The Bank has not entered into
any contracts for financial derivative instruments such as futures, swaps,
options etc. Loan commitments increased to $145,805,000 from $118,991,000 at
December 31, 1996. Much of the increase relates to credit cards. The commitments
represent 32.5% of the total loans outstanding at year end 1997 versus 27.16% a
year ago.
Disclosure of Fair Value
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards Number 107, Disclosures about Fair Value of Financial
Statements, requires the disclosure of fair value of most financial instruments,
whether recognized or not recognized in the financial statements. The intent of
presenting the fair values of financial instruments is to depict the market's
assessment of the present value of net future cash flows discounted to reflect
both current interest rates and the market's assessment of the risk that the
cash flows will not occur.
In determining fair values, the Bank used the carrying amount for cash,
short-term investments, accrued interest receivable, short-term borrowings and
accrued interest payable as all of these instruments are short term in nature.
Securities are reflected at quoted market values. Loans and deposits have a long
term time horizon which required more complex calculations for fair value
determination. Loans are grouped into homogeneous categories and broken down
between fixed and variable rate instruments. Loans with a variable rate, which
reprice immediately, are valued at carrying value. The fair value of fixed rate
instruments is estimated by discounting the future cash flows using current
rates. Credit risk and repricing risk factors are included in the current rates.
Fair value for nonaccrual loans is reported at carrying value and is included in
the net loan total. Since the allowance for loan losses exceeds any potential
adjustment for nonaccrual valuation, no further valuation adjustment has been
made.
Demand deposits, savings and certain money market accounts are short term
in nature so the carrying value equals the fair value. For deposits that extend
over a period in excess of four months, the fair value is estimated by
discounting the future cash payments using the rates currently offered for
deposits of similar remaining maturities.
At 1997 year end, the fair values calculated on the Bank's assets are .26%
above the carrying values versus .02% below the carrying values at year end
1996. The change in the calculated fair value percentage relates to the
securities and loan categories and is the result of changes in interest rates in
1997. (See Note Q of the financial statements)
Year 2000 Project
The Company, like most businesses heavily dependent on computer processing
systems, will be required to ensure its applications will function properly in
the year 2000. The company is committed to attaining Year 2000 compliance,
ensuring that information systems accurately process dates and times, including
calculating, comparing and sequencing data, from, into and between the 20th and
21st centuries.
To meet this commitment, The Year 2000 Project is well underway at the Bank
and involves employees from all levels of the organization. Each operating
department is represented to address its individual issues. The project plan
covers all phases of the Year 2000 effort in the discovery, planning and
implementation process. A senior executive has been appointed to manage the
company-wide efforts. Immediate attention has been focused on four areas:
reliance on vendors, exchange/transmission of data with external parties,
corporate borrower compliance efforts and internal system evaluation, testing
and adjustments if necessary. The assessment phase of the project includes
ongoing communication with vendors and service providers related to the four
areas mentioned. The assessment phase is nearing completion and includes the
identification of hardware, software, networks, various processing platforms and
customer and vendor interdependencies. The assessment also includes
environmental systems that may be dependent on embedded microchip technology.
Ongoing notification and follow-up communication is underway with identified
vendors and service providers. The Bank's main system software provider, Fiserv
CBS Worldwide, used globally by hundreds of financial institutions, has
ITAA*2000 certification, a process that indicates that Fiserv CBS Worldwide has
the capabilities to successfully address the Year 2000 challenge. The
company-wide target date to complete testing and updates is December 31, 1998
for internal systems and external service providers. Any final testing and
implementations are targeted for the first quarter of 1999.
The Company has established a process of ongoing communication with the
Bank's senior management and Board of Directors regarding the progress of the
Year 2000 project.
At this time, it is not expected that any substantial expenses will be
incurred in becoming Year 2000 compliant. Major processing systems are covered
by on-going maintenance agreements. Management expects that existing staff will
be able to complete tasks related to Year 2000 issues without significant
overtime costs.