-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GtosKsZlyJfNiNzrtChtnkJDyHCsymPr++xeGFUWfNo4f00cSkmlV4UdMGTsLQlK ndCVB07CwNVyMY+AyNz3Dg== 0000356171-98-000001.txt : 19980330 0000356171-98-000001.hdr.sgml : 19980330 ACCESSION NUMBER: 0000356171-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRICO BANCSHARES / CENTRAL INDEX KEY: 0000356171 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942792841 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10661 FILM NUMBER: 98576137 BUSINESS ADDRESS: STREET 1: TRI COUNTIES BANK ADMINISTRATION STREET 2: 40 PHILADELPHIA DRIVE CITY: CHICO STATE: CA ZIP: 95973 BUSINESS PHONE: 9168980300 MAIL ADDRESS: STREET 1: TRI COUNTIES BANK ADMINISTRATION STREET 2: 40 PHILADELPHIA DRIVE CITY: CHICO STATE: CA ZIP: 95973 10-K 1 FORM 10-K 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 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 63 Constitution Drive, Chico, California 95973 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(530) 898-0300 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 ------------------------------- (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 ----- ----- 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. EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 23, 1997, included in the Form 10-K, into the Corporation's previously filed Form S-8 Registration Statements No. 33-88704 and No. 33-62063 and Form S-3 Registration Statement No. 33-30557. /s/ Arthur Andersen LLP San Francisco, California March 26, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 Year DEC-31-1997 DEC-31-1997 63,476 0 0 0 175,753 90,764 88,950 448,967 6,459 826,165 724,094 15,300 10,207 11,440 0 0 48,161 16,963 826,165 44,903 14,421 553 59,877 22,682 23,935 35,942 3,000 18 32,932 9,576 9,576 0 0 5,869 1.26 1.21 8.57 4,721 528 0 0 6,097 2,840 202 6,459 6,459 0 0
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