-----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, M2WkqWAmwRd5pXEC6rfD70Nj/FB+F5KIyQhlqvLqcxqePXEkUyeHrcKOmWy9VBTl FY/hnSLo/BXRgA4I6HxyQA== 0000356171-01-000001.txt : 20010315 0000356171-01-000001.hdr.sgml : 20010315 ACCESSION NUMBER: 0000356171-01-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010314 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: 1567643 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 0001.txt 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, 2000 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 February 13, 2001, was approximately $85,522,000. This computation excludes a total of 1,914,352 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 February 13, 2001, was 7,177,226 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, 2000, for Item 7, and Registrant's Proxy Statement for use in connection with its 2001 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. X --- PART I 1. BUSINESS Formation of Bank Holding Company. TriCo Bancshares (hereinafter the "Company") 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 State of California Department of Financial Institutions 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, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare, and Yuba. The Bank currently has 30 traditional branches, and 7 in-store branches. 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. In November 1998 the Bank converted its Bakersfield and Sacramento loan production offices to full service branches. In July 1999, the Bank opened a supermarket branch at Beale Air Force Base. The Bank opened branch offices in Visalia and Modesto, during August 1999 and January 2000, respectively. In August of 2000, the Bank opened its most recent branch in Paradise. 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 Raymond James Financial Services, Inc. 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 regions of California where its branches are located. At December 31, 2000, the total of the Bank's consumer installment loans outstanding was $101,548,000 (15.9%), the total of commercial loans outstanding was $277,935,000 (43.4%), and the total of real estate loans including construction loans of $37,999,000 was $260,908,000 (40.7%). 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. -2- 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 almost 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 obtain 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. In addition to the banking services referred to above, pursuant to California law, TCB Real Estate Corporation, a wholly-owned subsidiary of the Bank, was engaged in limited real estate investments until December 1998. At that time, TCB Real Estate Corporation divested its remaining real estate investments. Such investments consisted 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 did 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 Corporation and to terminate its operations. The Bank and the FDIC agreed to a plan that called for the divestiture by June 30, 1999. TCB Real Estate Corporation was dissolved on April 27, 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 and Supervision." Employees. At December 31, 2000, the Company and the Bank employed 473 persons, including five executive officers. Full time equivalent employees were 392. 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. 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 may be higher than on deposits, and therefore 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 high growth stock market environment mutual funds have become a major source of competition for savings dollars. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company and its subsidiary 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. 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. -3- 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 regulation 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 so closely related to banking or managing or controlling banks as to be a proper incident thereto. Notwithstanding this prohibition, under the Financial Services Modernization Act of 1999, the Company may engage in any activity, and may acquire and retain the shares of any company engaged in any activity, that the FRB, in coordination with the Secretary of the Treasury, determines (by regulation or order) to be financial in nature or incidental to such financial activities. Furthermore, such law dictates several activities that are considered to be financial in nature, and therefore are not subject to FRB approval. 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. 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 on a consolidated basis. -4- Qualifying capital is divided into two tiers. Tier 1 capital consists generally of common stockholders' 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, 2000, 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 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, not shareholders. As of December 31, 2000, the deposit insurance premium rate was $0.0208 per $100.00 in deposits. 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. The Bank's 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 total 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 total 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 certain of the highest-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 on deposits, 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. -5- Bank Regulation. The federal regulatory agencies are required to adopt regulations, which will establish safety and soundness standards that 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 that 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. Governmental Monetary Policies and Economic Conditions. The principal sources of funds essential to the business of banks and bank holding companies are deposits, stockholders' 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. The Company is principally engaged in traditional community banking activities provided through its thirty branches and seven in-store branches located throughout Northern and Central California. Community banking activities include the Bank's commercial and retail lending, deposit gathering and investment and liquidity management activities. In addition to its community banking services, the Bank offers investment brokerage and leasing services. In 1998 and prior, the Company held investments in real estate through its wholly-owned subsidiary, TCB Real Estate. These activities were monitored and reported by Bank management as separate operating segments. -6- 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 that house administrative and data processing functions and 33 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 Visalia Branch Hilltop Branch 2914 W. Main Street 1250 Hilltop Drive Visalia, CA 93291 Redding, CA 96049 2,400 square feet 6,252 square feet Leased 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 Willows Branch Fall River Mills Branch 210 North Tehama Street 43308 Highway 299 East Willows, CA 95988 Fall River Mills, CA 96028 4,800 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 Palo Cedro Branch Yuba City Branch 9125 Deschutes Road 1441 Colusa Avenue Palo Cedro, CA 96073 Yuba City, CA 95993 3,400 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 - month to month -7- 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 Offices1 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 Redding Branch2 Data Processing Center 1810 Market Street 1103 Fortress Redding, CA 96001 Chico, CA 95926 14,000 square feet 13,600 square feet Owned Leased - term expires 2011 Bakersfield Branch Sacramento Branch 5201 California Ave., Suite 102 1760 Challenge Way, Suite 100 Bakersfield, CA 93309 Sacramento, CA 95815 3,200 square feet 3,005 square feet Leased - term expires 2000 Leased - term expires 2000 Headquarters Building Redding Downtown Branch 63 Constitution Drive 1845 California Street Chico, CA 95973 Redding, CA 96001 30,000 square feet 3,265 square feet Owned Owned Modesto Branch Paradise Branch 3320 Tully Road, Suite 3 6848 "Q" Skyway Modesto, CA 95350 Paradise, CA 95969 3,850 square feet 6,600 square feet Leased Leased 1This leased building was vacated in 1998 and is being subleased. 2This building was vacated in 1997 and is currently being leased. -8- 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. -9- 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, 1999 $ 18.25 $ 15.44 401,800 June 30, 1999 18.75 15.81 680,100 September 30, 1999 20.00 16.75 417,900 December 31, 1999 20.50 17.00 363,800 March 31, 2000 19.25 14.75 563,400 June 30, 2000 17.00 15.44 446,100 September 30, 2000 17.50 15.69 620,900 December 31, 2000 17.00 14.75 232,700 1Quarterly trading activity has been compiled from NASDAQ trading reports. Holders As of February 13, 2001, there were approximately 1,808 holders of record of the Company's Common Stock. Dividends The Company has paid quarterly dividends since March 1990. The Company paid quarterly dividends of $0.20 per share in the second, third and fourth quarters of 2000, $0.19 per share in the first quarter of 2000 as well as the final two quarters in 1999, and $0.16 per share in the first and second quarters of 1999. 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 therefore, 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 receive dividends when and as declared by the Bank's Board of Directors, out of funds legally available therefore, subject to the powers of 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 lesser 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 $7,117,500 to the Company in 2000. As of December 31, 2000 and subject to the limitations and restrictions under applicable law, the Bank had funds available for dividends in the amount of $17,867,000. 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. -10-
6. FIVE YEAR SELECTED FINANCIAL DATA (in thousands, except share data) 2000 1999 1998 1997 1996 Statement of Operations Data:1 Interest income $76,653 $68,589 $65,138 $59,877 $49,148 Interest expense 28,543 24,370 25,296 23,935 19,179 Net interest income 48,110 44,219 39,842 35,942 29,969 Provision for loan losses 5,000 3,550 4,200 3,000 777 Net interest income after provision for loan losses 43,110 40,669 35,642 32,942 29,192 Noninterest income 14,645 12,101 12,869 9,566 6,636 Noninterest expense 37,895 34,833 34,692 32,932 23,485 Income before income taxes 19,860 17,937 13,819 9,576 12,343 Provision for income taxes 7,237 6,534 5,049 3,707 5,037 Net income $12,623 $11,403 $8,770 $5,869 $7,306 Share Data:2 Diluted earnings per share $1.72 $1.56 $1.21 $0.81 $1.04 Cash dividend paid per share 0.79 0.70 0.49 0.43 0.39 Common shareholders' equity at year end 11.87 10.22 10.22 9.31 8.73 Balance Sheet Data at year end4: Total loans, gross $640,391 $587,979 $532,433 $448,967 $439,218 Total assets 972,071 924,796 904,599 826,165 694,859 Total deposits 837,832 794,110 769,173 724,094 595,621 Total shareholders' equity 85,233 73,123 72,029 65,124 60,777 Total long-term debt 33,983 45,505 37,924 11,440 24,281 Selected Financial Ratios: Return on average assets 1.35% 1.26% 1.03% 0.75% 1.18% Return on average common shareholders' equity 16.03% 15.59% 12.80% 9.34% 13.03% Total risk-based capital ratio 12.22% 11.77% 11.83% 11.90% 13.58% Net interest margin3 5.73% 5.49% 5.28% 5.16% 5.37% Allowance for loan losses to total loans outstanding at end of year 1.82% 1.88% 1.54% 1.44% 1.39% 1 Tax-exempt securities are presented on an actual yield basis. 2 Retroactively adjusted to reflect 3-for-2 stock split effected in 1998. 3 Calculated on a tax equivalent basis. 4 The 1996 data reflects changes due to the purchase of Sutter Buttes Savings Bank.
-11- 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 2000 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 in Management's Discussion and Analysis (pages __ through __ 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 2000 Annual Report to Shareholders, are incorporated herein by reference: Pages of Exhibit 13.1 as Electronically Filed Report of Independent Public Accountants 27 Consolidated Balance Sheets as of December 31, 2000 and 1999 1 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 2 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 3 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 4 Notes to Consolidated Financial Statements 6 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -12- 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 8, 2001. 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 8, 2001. 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 8, 2001. 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 8, 2001. Said information is incorporated herein by reference. -13- 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 date, filed as Exhibit 3.2 to Registrant's Report on Form 10-K, filed for the year ended December 31, 1992, are incorporated herein by reference. 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. -14- 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 2000 Annual Report to Shareholders.* 21.1 Tri Counties Bank, a California banking corporation, is the only subsidiary of Registrant. 23.1 Report of Arthur Andersen LLP 27.1 Financial Data Schedule * Deemed filed only with respect to those portions thereof incorporated herein by reference. (b) Reports on Form 8-K: None -15- 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: February 13, 2001 TRICO BANCSHARES By: /s/ Richard P. Smith Richard P. Smith, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below. Date: February 13, 2001 /s/ Richard P. Smith Richard P. Smith, President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 13, 2001 /s/ Thomas J. Reddish Thomas J. Reddish, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: February 13, 2001 /s/ Everett B. Beich Everett B. Beich, Director Date: February 13, 2001 /s/ William J. Casey William J. Casey, Director and Vice Chairman of the Board Date: February 13, 2001 /s/ Craig S. Compton Craig S. Compton, Director Date: February 13, 2001 /s/ Brian D. Leidig Brian D. Leidig, Director Date: February 13, 2001 /s/ Wendell J. Lundberg Wendell J. Lundberg, Director Date: February 13, 2001 /s/ Donald E. Murphy Donald E. Murphy, Director Date: February 13, 2001 /s/ Robert H. Steveson Robert H. Steveson, Director and Co-Chairman of the Board -16- Date: February 13, 2001 /s/ Carroll R. Taresh Carroll R. Taresh, Director Date: February 13, 2001 /s/ Alex A. Vereschagin, Jr. Alex A. Vereschagin, Jr., Director and Chairman of the Board -17-
EXHIBIT 11.1 COMPUTATIONS OF EARNINGS PER SHARE Years ended December 31 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Shares used in the computation of earnings per share1 Weighted daily average of shares outstanding 7,191,790 7,129,560 7,017,306 6,978,089 6,769,735 Shares used in the computation of diluted earnings per share 7,340,729 7,318,520 7,267,602 7,246,011 7,034,627 ========= ========= ========= ========= ========= Net income used in the computation of earnings per common stock $12,623 $11,403 $8,770 $5,869 $7,306 ======= ======= ====== ====== ====== Basic earnings per share $ 1.76 $ 1.60 $ 1.25 $ 0.84 $ 1.08 ======= ======= ======= ======= ======= Diluted earnings per share $ 1.72 $ 1.56 $ 1.21 $ 0.81 $ 1.04 ======= ======= ======= ======= ======= 1Retroactively adjusted for stock dividends and stock splits.
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EXHIBIT 13.1 TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, 2000 1999 Assets Cash and due from banks $ 58,190 $ 52,036 Federal funds sold -- 8,400 ------------------------------ Cash and cash equivalents 58,190 60,436 Securities available-for-sale 229,110 231,708 Loans: Commercial 277,935 262,916 Consumer 101,548 79,589 Real estate mortgages 222,909 207,197 Real estate construction 37,999 38,277 ------------------------------ 640,391 587,979 Less: Allowance for loan losses 11,670 11,037 ------------------------------ Net loans 628,721 576,942 Premises and equipment, net 16,772 16,043 Cash value of life insurance 13,753 12,258 Other real estate owned 1,441 760 Accrued interest receivable 6,935 6,076 Deferred income taxes 8,418 10,764 Intangible assets 5,464 6,429 Other assets 3,267 3,380 ------------------------------ Total assets $ 972,071 $ 924,796 ============================== Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand $ 168,542 $ 155,937 Interest-bearing demand 150,749 143,923 Savings 214,158 222,615 Time certificates, $100,000 and over 93,342 73,462 Other time certificates 211,041 198,173 ------------------------------ Total deposits 837,832 794,110 Federal funds purchased 500 -- Accrued interest payable 5,245 4,193 Other liabilities 9,278 7,865 Long-term debt and other borrowings 33,983 45,505 ------------------------------ Total liabilities 886,838 851,673 Commitments and contingencies (Note H) Shareholders' equity: Common stock, no par value: Authorized 20,000,000 shares; issued and outstanding 7,181,226 and 7,152,329 shares, respectively 50,428 50,043 Retained earnings 35,129 28,613 Accumulated other comprehensive income (loss) (324) (5,533) ------------------------------- Total shareholders' equity 85,233 73,123 ------------------------------- Total liabilities and shareholders' equity $ 972,071 $ 924,796 =============================== See Notes to Consolidated Financial Statements
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Exhibit 13.1 TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except earnings per share) Years Ended December 31, 2000 1999 1998 Interest Income: Interest and fees on loans $ 62,161 $ 53,395 $ 48,506 Interest on investment securities-taxable 11,704 12,500 14,622 Interest on investment securities-tax exempt 2,250 2,229 1,860 Interest on federal funds sold 538 465 150 ------------------------------------------------ Total interest income 76,653 68,589 65,138 Interest expense: Interest on interest-bearing demand deposits 2,360 2,287 2,932 Interest on savings 6,837 6,811 6,473 Interest on time certificates of deposit 13,324 8,970 11,685 Interest on time certificates of deposit, $100,000 and over 2,482 3,209 1,775 Interest on short-term borrowing 623 386 816 Interest on long-term debt 2,917 2,707 1,615 ------------------------------------------------ Total interest expense 28,543 24,370 25,296 ------------------------------------------------ Net interest income 48,110 44,219 39,842 Provision for loan losses 5,000 3,550 4,200 ------------------------------------------------ Net interest income after provision for loan losses 43,110 40,669 35,642 Noninterest income: Service charges and fees 7,484 7,127 7,387 Gain on sale of investments -- 24 316 Other income 7,161 4,950 5,166 Total noninterest income 14,645 12,101 12,869 ------------------------------------------------ Noninterest expense: Salaries and related expenses 19,912 17,837 16,803 Other, net 17,983 16,996 17,889 ------------------------------------------------ Total noninterest expense 37,895 34,833 34,692 ------------------------------------------------ Income before income taxes 19,860 17,937 13,819 Income taxes 7,237 6,534 5,049 ------------------------------------------------ Net income $12,623 $11,403 $ 8,770 ================================================ Basic earnings per common share $ 1.76 $ 1.60 $ 1.25 Diluted earnings per common share $ 1.72 $ 1.56 $ 1.21 See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998 (in thousands, except share amounts) Common Stock Accumulated Number Other of Retained Comprehensive Comprehensive Shares Amount Earnings Income (Loss) Total Income ------------------------------------------------------------------ Balance, December 31, 1997 4,662,649 $48,161 $16,956 $7 $65,124 Exercise of Common Stock options 60,125 532 532 3-for-2 Common Stock split 2,330,271 Repurchase of Common Stock (2,055) (21) (39) (60) Common Stock cash dividends (3,430) (3,430) Stock option amortization 166 166 Comprehensive income: Net income 8,770 8,770 $8,770 Other comprehensive income, net of tax: Cumulative effect of change in accounting principle 337 337 337 Change in unrealized loss on securities, net of tax and reclassification adjustments (Note A): 590 590 590 --------------- Comprehensive income $9,697 ---------------------------------------------------=============== Balance, December 31, 1998 7,050,990 48,838 22,257 934 72,029 Exercise of Common Stock options 106,440 1,074 1,074 Repurchase of Common Stock (5,101) (35) (51) (86) Common Stock cash dividends (4,996) (4,996) Stock option amortization 166 166 Comprehensive income: Net income 11,403 11,403 $11,403 Other comprehensive income, net of tax: Change in unrealized gain on securities, net of tax and reclassification adjustments (Note A): (6,467) (6,467) (6,467) --------------- Comprehensive income $4,936 ---------------------------------------------------=============== Balance, December 31, 1999 7,152,329 50,043 28,613 (5,533) 73,123 Exercise of Common Stock options 78,625 665 665 Repurchase of Common Stock (49,728) (349) (427) (776) Common Stock cash dividends (5,680) (5,680) Stock option amortization 69 69 Comprehensive income: Net income 12,623 12,623 $12,623 Other comprehensive income, net of tax: Change in unrealized gain on securities, net of tax and reclassification adjustments (Note A): 5,209 5,209 5,209 --------------- Comprehensive income $17,832 ---------------------------------------------------=============== Balance, December 31, 2000 7,181,226 $50,428 $35,129 ($324) $85,233 ================================================== See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years ended December 31, 2000 1999 1998 Operating activities: Net income $12,623 $ 11,403 $ 8,770 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,000 3,550 4,200 Provision for losses on other real estate owned 25 10 377 Provision for premises impairment and lease loss -- -- 175 Depreciation and amortization 2,641 2,615 2,611 Amortization of intangible assets 965 1,135 1,338 (Accretion) amortization of investment security (discounts) premiums, net 217 538 128 Deferred income taxes (650) (410) (2,084) Investment security gains, net -- (24) (316) Gain on receipt of insurance company stock (1,510) -- -- Gain on sale of loans (525) (800) (497) (Gain) loss on sale of other real estate owned, net (83) (178) 96 Amortization of stock options 69 166 166 Change in assets and liabilities: Increase in interest receivable (859) (255) (120) Increase (decrease) in interest payable 1,052 330 (176) (Increase) decrease in other assets and liabilities (127) (2,481) 678 ------------------------------------------ Net cash provided by operating activities 18,838 15,599 15,346 Investing activities : Proceeds from maturities of securities held-to-maturity -- -- 18,523 Proceeds from maturities of securities available-for-sale 39,663 64,496 82,214 Proceeds from sales of securities available-for-sale -- 14,137 87,094 Purchases of securities available-for-sale (27,567) (41,372) (199,335) Net increase in loans (57,805) (56,138) (86,066) Purchases of premises and equipment (2,998) (2,058) (1,225) Proceeds from sale of other real estate owned 928 1,268 1,711 Proceeds from sale of premises and equipment 40 44 1,110 Proceeds from sale of real estate properties -- -- 554 ------------------------------------------ Net cash used by investing activities (47,739) (19,623) (95,420) Financing activities: Net increase in deposits 43,722 24,937 45,079 Net increase (decrease) in federal funds borrowed 500 (14,000) (1,300) Borrowings under long-term debt agreements 35,000 21,000 31,500 Payments of principal on long-term debt agreements (46,522) (13,419) (5,016) Repurchase of Common Stock (776) (86) (60) Cash dividends - Common (5,680) (4,996) (3,430) Issuance of Common Stock 411 541 308 ------------------------------------------ Net cash provided by financing activities 26,655 13,977 67,081 ------------------------------------------ Increase (decrease) in cash and cash equivalents (2,246) 9,953 (12,993) Cash and cash equivalents at beginning of year 60,436 50,483 63,476 ------------------------------------------ Cash and cash equivalents at end of year $ 58,190 $ 60,436 $ 50,483 ========================================== -4- Supplemental information: Cash paid for taxes $ 7,573 $ 7,240 $ 6,965 Cash paid for interest expense $ 27,491 $ 24,040 $ 25,472 Non-cash assets acquired through foreclosure $ 1,551 $ 673 $ 644
Supplemental schedule of non-cash investing and financing activities: On October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 133 (see Note A) and in connection with the adoption, elected to transfer investment securities carried at $78,901,000 from the held-to-maturity classification to the available-for-sale classification. See Notes to Consolidated Financial Statements -5- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2000, 1999 and1998 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 30 branch offices and 7 in-store branch offices in the California counties of Butte, Del Norte, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare and Yuba. The Company's operating policy since its inception has emphasized retail banking. Most of the Company's customers are retail customers and small to medium sized businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with 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 2000 and 1999, 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 other comprehensive income in shareholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Effective October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS 133 did not materially impact the financial position or results of operations of the Company as the Company does not utilize derivative instruments in its operations or engage in any hedging activities. As allowed by the Statement, in connection with the adoption of SFAS 133, the Bank reclassified investment securities carried at $78,901,000 from the held-to-maturity classification to the available-for-sale classification. As a result of this transfer, an unrealized gain of $337,000, net of tax, was recognized in other comprehensive income as a cumulative effect of change in accounting principle. -6- Loans Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in Management's judgment are well secured and in the process of collection, they may not be classified as nonaccrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans, leases and commitments to extend credit, based on evaluations of the collectibility, impairment and prior loss experience of loans, leases and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Certain impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Mortgage Operations The Company sold substantially all of its conforming long-term residential mortgage loans originated during 2000, 1999, and 1998 for cash proceeds equal to the fair value of the loans. The Company records originated mortgage servicing rights as assets by allocating the total cost basis between the loan and the servicing right based on their relative fair values. The recorded value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum. At December 31, 2000, the Company had no mortgage loans held for sale. At December 31, 2000 and 1999, the Company serviced real estate mortgage loans for others of $149 million and $149 million, respectively. Premises and Equipment Premises and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 years for land improvements and buildings. -7- 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. Comprehensive Income For the Company, comprehensive income includes net income reported on the statement of income and changes in the fair value of its available-for-sale investments reported as a component of shareholders' equity. The changes in the components of other comprehensive income for the years ended December 31, 2000, 1999, and 1998 are reported as follows:
2000 1999 1998 (in thousands) Unrealized gain (loss) arising during the period, net of tax $5,209 $(6,452) $1,128 Reclassification adjustment for net realized gains on securities available for sale included in net income during the year, net of tax of $0 , $9 and $115, respectively -- (15) (201) ----------------------------------------- $5,209 $(6,467) $927 =========================================
-8- Reclassifications Certain amounts previously reported in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. These reclassifications did not affect previously reported net income or total shareholders' equity. Note B - Restricted Cash Balances Reserves (in the form of deposits with the Federal Reserve Bank) of $500,000 were maintained to satisfy Federal regulatory requirements at December 31, 2000 and December 31, 1999. 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, 2000 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------ (in thousands) Securities Available-for-Sale U.S. Treasury securities and obligations of U.S. government corporations and agencies $31,308 $35 $(170) $31,173 Obligations of states and political subdivisions 44,721 778 (123) 45,376 Mortgage-backed securities 136,410 31 (1,355) 135,086 Other securities 17,183 1,831 (1,539) 17,475 ------------------------------------------------------------ Totals $229,622 $2,675 $(3,187) $229,110 ============================================================ December 31, 1999 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------------------------- (in thousands) Securities Available-for-Sale U.S. Treasury securities and obligations of U.S. government corporations and agencies $31,447 $16 $ (887) $30,576 Obligations of states and political subdivisions 44,969 40 (2,394) 42,615 Mortgage-backed securities 137,980 1 (5,392) 132,589 Other securities 26,029 170 (271) 25,928 ----------------------------------------------------------- Totals $240,425 $227 $(8,944) $231,708 ===========================================================
-9- The amortized cost and estimated fair value of debt securities at December 31, 2000 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 Available-for-Sale Due in one year $5,305 $5,299 Due after one year through five years 29,687 29,605 Due after five years through ten years 48,958 48,594 Due after ten years 140,215 138,323 ----------------------------------- Other Securities 5,457 7,289 ----------------------------------- Totals $229,622 $229,110 =================================== Proceeds from sales of securities available-for-sale were as follows: Gross Gross Gross For the Year Proceeds Gains Losses (in thousands) 2000 $ -- $ -- $ -- 1999 $14,137 $ 24 $ -- 1998 $87,094 $331 $ 15 Investment securities with an aggregate carrying value of $128,500,000 and $106,585,000 at December 31, 2000 and 1999, 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, 2000 1999 1998 (in thousands) Balance, beginning of year $11,037 $8,206 $6,459 Provision for loan losses 5,000 3,550 4,200 Loans charged off (4,705) (1,082) (2,755) Recoveries of loans previously charged off 338 363 302 ---------------------------------- Balance, end of year $11,670 $11,037 $8,206 Loans classified as nonaccrual amounted to approximately $ 12,262,000, $1,758,000 and $1,045,000 at December 31, 2000, 1999, and 1998, 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 $731,000, $69,000 and $220,000, in 2000, 1999 and 1998, respectively. -10- As of December 31, the Company's recorded investment in impaired loans and the related valuation allowance were as follows (in thousands): 2000 Recorded Valuation Investment Allowance Impaired loans - Valuation allowance required $16,191 $3,266 No valuation allowance required 25,322 ----------------------------------- Total impaired loans $41,513 $3,266 1999 Recorded Valuation Investment Allowance Impaired loans - Valuation allowance required $649 $215 No valuation allowance required 3,943 -- ----------------------------------- Total impaired loans $4,592 $215 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 $23,053,000, $5,147,000 and $9,459,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The Company recognized interest income on impaired loans of $2,962,000, $371,000 and $565,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Note E - Premises and Equipment Premises and equipment were comprised of: December 31, 2000 1999 (in thousands) Premises $12,215 $11,814 Furniture and equipment 15,180 14,040 27,395 25,854 Less: Accumulated depreciation and amortization (14,181) (13,372) 13,214 12,482 Land and land improvements 3,558 3,561 $16,772 $16,043 Depreciation and amortization of premises and equipment amounted to $2,152,000, $2,281,000 and $2,251,000 in 2000, 1999 and 1998, respectively. -11- Note F - Time Deposits At December 31, 2000, the scheduled maturities of time deposits were as follows (in thousands): Scheduled Maturities 2001 $285,427 2002 12,796 2003 5,992 2004 20 2005 and thereafter 148 --------- Total $304,383
Note G - Long-Term Debt and Other Borrowings Long-term debt is as follows: December 31, 2000 1999 (in thousands) FHLB loan, fixed rate of 5.41% payable on May 30, 2000 $ -- $20,000 FHLB loan, fixed rate of 5.84% payable on November 6, 2000 -- 1,500 FHLB loan, fixed rate of 5.90% payable on January 16, 2001 1,000 1,000 FHLB loan, fixed rate of 7.36% payable on November 30, 2001 10,000 -- FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable by FHLB on a quarterly basis beginning April 7, 2003 20,000 20,000 FHLB loan, fixed rate of 5.35% payable on December 9, 2008 1,500 1,500 FHLB loan, fixed rate of 5.77% payable on February 23, 2009 1,000 1,000 Capital lease obligation on premises, effective rate of 13% payable monthly in varying amounts through December 1, 2009 483 505 ------------------------- Total long-term debt $33,983 $45,505
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, 2000, this line provided for maximum borrowings of $117,121,000 of which $33,500,000 was outstanding, leaving $83,621,000 available. The maximum month-end outstanding balances of short term reverse repurchase agreements in 2000 and 1999 were $16,611,000 and $5,000,000, respectively. The Company has available unused lines of credit totaling $64,500,000 for Federal funds transactions at December 31, 2000. -12- Note H - Commitments and Contingencies (See also Note P) At December 31, 2000, 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) 2001 $ 88 $1,000 2002 89 897 2003 90 861 2004 91 744 2005 92 552 Thereafter 379 2,495 --------------------------- Future minimum lease payments 829 $6,549 Less amount representing interest 346 --------------------------- Present value of future lease payments $ 483 Rent expense under operating leases was $971,000 in 2000, $1,013,000 in 1999, and $1,066,000 in 1998. 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 or results from operations. Note I - Dividend Restrictions The Bank paid to the Company cash dividends in the aggregate amounts of $7,118,000, $5,170,000 and $3,650,000 in 2000, 1999 and 1998, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California Department of Financial Institutions. California banking laws limit the Bank's ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period. Under this regulation, at December 31, 2000, the Bank may pay dividends of $17,867,000. -13- 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 1995 Plan, the option price cannot be less than the fair market value of the Common Stock at the date of grant. Options for the '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 plans 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, 1997 671,357 $4.95 to $18.25 $5.65 Options exercised (60,125) 4.95 to 18.25 5.12 Options forfeited (1,350) 18.25 to 18.25 18.25 Outstanding at December 31, 1998 609,882 4.95 to 18.25 7.37 Options exercised (106,440) 4.95 to 5.24 5.09 Options forfeited (2,551) 5.24 to 18.25 12.89 Outstanding at December 31, 1999 500,891 4.95 to 18.25 7.82 Options granted 118,900 16.13 to 16.13 16.13 $3.99 Options exercised (78,625) 5.24 to 5.24 5.24 Options forfeited (750) 18.25 to 18.25 18.25 Outstanding at December 31, 2000 540,416 $4.95 to $18.25 $10.01 *Adjusted for the 3-for-2 Common Stock split effected October 30, 1998.
Of the stock options outstanding as of December 31, 2000, options on 426,902 shares were exercisable at a weighted average price of $8.38. 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 $69,000, $166,000, and $166,000 for the 1993 Plan options in 2000, 1999 and 1998, respectively. Had compensation cost for these plans been determined in accordance with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 2000 1999 1998 Net income As reported $12,623 $11,403 $8,770 Pro forma $12,507 $11,330 $8,697 Basic earnings per share As reported $1.76 $1.60 $1.25 Pro forma $1.74 $1.59 $1.24 Diluted earnings per share As reported $1.72 $1.56 $1.21 Pro forma $1.70 $1.55 $1.20 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 2000: risk-free interest rate of 6.65%; expected dividend yield of 4.7%; expected life of 6 years; expected volatility of 30%. No options were granted in 1999 and 1998. -14-
Note K - Other Noninterest Income and Expenses The components of other noninterest income were as follows: Years Ended December 31, 2000 1999 1998 (in thousands) Commissions on sale of investment and insurance products $ 2,784 $ 2,319 $ 2,066 Gain on sale of loans and leases 525 800 497 Increase in cash value of insurance policies 657 373 336 Sale of customer checks 286 283 263 Gain (loss) on sale of other real estate owned 83 178 (96) Gain on sale of credit card portfolio -- -- 897 Receipt of stock from insurance company demutualization 1,510 -- -- Other 1,316 997 1,203 ------------------------------------------- Total other noninterest income $7,161 $4,950 $5,166
The components of other noninterest expenses were as follows: Years Ended December 31, 2000 1999 1998 (in thousands) Equipment and data processing $3,376 $ 3,525 $ 3,551 Occupancy 2,587 2,456 2,353 Advertising 1,336 943 879 Professional fees 1,005 1,027 1,046 Intangible amortization 965 1,135 1,338 Telecommunications 957 906 976 Postage 486 552 548 Assessments 222 179 174 Net other real estate owned expense 127 62 540 Provision for premises impairment and lease loss -- -- 175 Operational losses 807 273 334 Other 6,115 5,938 5,975 ------------------------------------------- Total other noninterest expenses $17,983 $16,996 $17,889
-15- Note L - Income Taxes The current and deferred components of the income tax provision were comprised of: Years Ended December 31, 2000 1999 1998 (in thousands) Current Tax Provision: Federal $5,890 $ 5,013 $ 5,245 State 1,997 1,931 1,888 ------------------------------------------- Total current 7,887 6,944 7,133 Deferred Tax Benefit: Federal (511) (152) (1,621) State (139) (258) (463) ------------------------------------------- Total deferred (650) (410) (2,084) ------------------------------------------- Total income taxes $ 7,237 $ 6,534 $ 5,049 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 $2,996,000 in 2000, $(3,846,000) in 1999 and $657,000 in 1998, and benefits related to employee stock options of $243,000 in 2000, $246,000 in 1999 and $224,000 in 1998 were recorded directly to shareholders' equity. The provisions for income taxes applicable to income before taxes for the years ended December 31, 2000, 1999 and 1998 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, 2000 1999 1998 Federal statutory income tax rate 34.0% 34.0% 34.0% State income taxes, net of federal tax benefit 6.2 6.3 6.8 Tax-exempt interest on municipal obligations (3.9) (3.9) (4.1) Other 0.1 -- (0.2) ---------------------------- Effective Tax Rate 36.4% 36.4% 36.5% -16- The components of the net deferred tax asset of the Company as of December 31, were as follows: 2000 1999 (in thousands) Deferred Tax Assets: Loan losses $ 5,015 $ 4,586 Deferred compensation 2,948 2,519 Intangible amortization 882 823 Nonaccrual interest 335 31 Stock option amortization 243 286 Unrealized loss on securities 188 3,184 OREO write downs 181 266 Other 323 816 -------------------------- Total deferred tax assets 10,115 12,511 Deferred Tax Liabilities: Securities income (833) -- Securities accretion (384) (299) Depreciation (339) (671) Capital leases (105) (101) State taxes (36) (351) Other (325) -------------------------- Total deferred tax liability (1,697) (1,747) -------------------------- Net deferred tax asset $ 8,418 $10,764 -17- Note M - Retirement Plans Substantially all employees with at least one year of service are covered by a discretionary employee stock ownership plan (ESOP). Contributions are made to the plan at the discretion of the Board of Directors. Contributions to the plan(s) totaling $842,000 in 2000, $881,000 in 1999, and $640,000 in 1998 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 ($7,938,000 and $7,247,000 at December 31, 2000 and 1999, respectively) to pay the retirement obligations. 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, 2000 and 1999, the cash values exceeded the recorded liabilities. The following table sets forth the plans' status: December 31, 2000 1999 (in thousands) Change in benefit obligation: Benefit obligation at beginning of year $(4,378) $(3,933) Service cost (74) (70) Interest cost (317) (275) Amendments (181) (78) Actuarial loss (322) (158) Benefits paid 138 136 ------------------------ Benefit obligation at end of year $(5,134) $(4,378) Change in plan assets: Fair value of plan assets at beginning of year $ -- $ -- Fair value of plan assets at end of year $ -- $ -- Funded status $(5,134) $(4,378) Unrecognized net obligation existing at January 1, 1986 148 183 Unrecognized net actuarial loss 1,264 983 Unrecognized prior service cost 333 166 ------------------------ Accrued benefit cost $(3,389) $(3,046) Years Ended December 31, 2000 1999 1998 (in thousands) Net pension cost included the following components: Service cost-benefits earned during the period $ 74 $ 70 $ 53 Interest cost on projected benefit obligation 317 275 256 Amortization of net obligation at transition 35 35 35 Amortization of prior service cost 13 11 10 Recognized net actuarial loss 41 43 47 Net periodic pension cost $480 $434 $401 The net periodic pension cost was determined using a discount rate assumption of 7.25% for 2000, 7.0% for 1999, and 7.0% for 1998, respectively. The rates of increase in compensation used in each year were 0% to 5%. -18- Note N - Earnings per Share The Company's basic and diluted earnings per share are as follows (in thousands except per share data):
Year Ended December 31, 2000 Weighted Average Income Shares Per Share Amount Basic Earnings per Share Net income available to common shareholders $12,623 7,191,790 $1.76 Common stock options outstanding -- 148,939 Diluted Earnings per Share Net income available to common shareholders $12,623 7,340,729 $1.72 ======= ========= Year Ended December 31, 1999 Weighted Average Income Shares Per Share Amount Basic Earnings per Share Net income available to common shareholders $11,403 7,129,560 $1.60 Common stock options outstanding -- 188,960 Diluted Earnings per Share Net income available to common shareholders $11,403 7,318,520 $1.56 ======= ========= Year Ended December 31, 1998 Weighted Average Income Shares Per Share Amount Basic Earnings per Share Net income available to common shareholders $8,770 7,017,306 $1.25 Common stock options outstanding -- 259,296 Diluted Earnings per Share Net income available to common shareholders $8,770 7,276,602 $1.21 ======= =========
-19- 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 2000: Balance Balance December 31, Advances/ Removed/ December 31, 1999 New Loans Payments 2000 (in thousands) $9,912 $1,390 $4,779 $6,523 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, 2000 1999 (in thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial loans $79,808 $74,992 Consumer loans 55,528 49,735 Real estate mortgage loans 477 364 Real estate construction loans 22,289 13,581 Standby letters of credit 1,229 1,988 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. -20- Note Q - Concentration of Credit Risk The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio within the business segments located in this geographical area. Note R - Disclosure of Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value. Cash and due from banks, accrued interest receivable and payable, and short-term borrowings are considered short-term instruments. For these short-term instruments their carrying amount approximates their fair value. Securities For all securities, fair values are based on quoted market prices or dealer quotes. See Note C for further analysis. Loans The fair value of variable rate loans is the current carrying value. The interest rates on these loans are regularly adjusted to market rates. The fair value of other types of fixed rate loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The allowance for loan losses is a reasonable estimate of the valuation allowance needed to adjust computed fair values for credit quality of certain loans in the portfolio. Deposit Liabilities and Long-Term Debt The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. These values do not consider the estimated fair value of the Company's core deposit intangible, which is a significant unrecognized asset of the Company. The fair value of time deposits and debt is based on the discounted value of contractual cash flows. Commitments to Extend Credit and Standby Letters of Credit The fair value of letters of credit and standby letters of credit is not significant. The estimated fair values of the Company's financial instruments are as follows: December 31, 2000 Carrying Fair Financial assets: Amount Value (in thousands) Cash and cash equivalents $ 58,190 $ 58,190 Securities: Available-for-sale 229,110 229,110 Loans, net 628,721 637,389 Accrued interest receivable 6,935 6,935 Financial liabilities: Deposits 837,832 795,101 Federal funds purchased 500 500 Accrued interest payable 5,245 5,245 Long-term borrowings 33,983 35,066 -21- December 31, 1999 Carrying Fair Financial assets: Amount Value (in thousands) Cash and cash equivalents $ 60,436 $ 60,436 Securities: Available-for-sale 231,708 231,708 Loans, net 576,942 562,406 Accrued interest receivable 6,076 6,076 Financial liabilities: Deposits 794,110 735,559 Federal funds purchased -- -- Accrued interest payable 4,193 4,193 Long-term borrowings 45,505 44,244 Note S - TriCo Bancshares Financial Statements TriCo Bancshares (Parent Only) Balance Sheets December 31, Assets 2000 1999 (in thousands) Cash $ 272 $ 161 Securities available-for-sale 180 180 Investment in Tri Counties Bank 83,457 71,855 Other assets 1,324 927 -------------------------- Total assets $85,233 $73,123 ========================== Liabilities and shareholders' equity Total liabilities $ -- $ -- Shareholders' equity: Common stock, no par value: Authorized 20,000,000 shares; issued and outstanding 7,181,226 and 7,152,329 shares, respectively $ 50,428 $ 50,043 Retained earnings 35,129 28,613 Accumulated other comprehensive income (loss) (324) (5,533) -------------------------- Total shareholders' equity 85,233 73,123 -------------------------- Total liabilities and shareholders' equity $85,233 $73,123 ========================== -22- Statements of Income Years Ended December 31, 2000 1999 1998 (in thousands) Interest income $ 18 $ 1 $ -- Administration expense 980 385 369 --------------------------- Loss before equity in net income of Tri Counties Bank (962) (384) (369) Equity in net income of Tri Counties Bank: Distributed 7,118 5,170 3,650 Undistributed 6,070 6,459 5,338 Income tax credits 397 158 151 --------------------------- Net income $12,623 $11,403 $8,770 ===========================
Statements of Cash Flows Years ended December 31, 2000 1999 1998 (in thousands) Operating activities: Net income $12,623 $11,403 $8,770 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed equity in Tri Counties Bank (6,070) (6,459) (5,338) Deferred income taxes (397) (158) (153) Decrease in other operating assets and liabilities -- (8) (76) Net cash provided by operating activities 6,156 4,778 3,203 Investing activities: Purchases of securities available-for-sale -- (180) -- Net cash used for investing activities -- (180) -- Financing activities: Issuance of common stock 411 541 309 Repurchase of common stock (776) (86) (60) Cash dividends - common (5,680) (4,996) (3,430) Net cash used for financing activities (6,045) (4,541) (3,181) Increase in cash and cash equivalents 111 57 22 Cash and cash equivalents at beginning of year 161 104 82 Cash and cash equivalents at end of year $ 272 $ 161 $ 104
-23- Note T - Regulatory Matters The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2000, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2000, 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, 2000: Total Capital (to Risk Weighted Assets): Consolidated $89,302 12.20% =>$58,537 =>8.0% =>$73,172 =>10.0% Tri Counties Bank $87,414 11.97% =>$58,417 =>8.0% =>$73,021 =>10.0% Tier I Capital (to Risk Weighted Assets): Consolidated $80,156 10.95% =>$29,268 =>4.0% =>$43,903 => 6.0% Tri Counties Bank $78,255 10.72% =>$29,208 =>4.0% =>$43,812 => 6.0% Tier I Capital (to Average Assets): Consolidated $80,156 8.41% =>$38,128 =>4.0% =>$47,660 => 5.0% Tri Counties Bank $78,255 8.22% =>$38,069 =>4.0% =>$47,587 => 5.0% As of December 31, 1999: Total Capital (to Risk Weighted Assets): Consolidated $80,808 11.77% =>$54,916 =>8.0% =>$68,645 =>10.0% Tri Counties Bank $79,556 11.61% =>$54,827 =>8.0% =>$68,534 =>10.0% Tier I Capital (to Risk Weighted Assets): Consolidated $72,227 10.52% =>$27,458 =>4.0% =>$41,187 => 6.0% Tri Counties Bank $70,959 10.35% =>$27,413 =>4.0% =>$41,120 => 6.0% Tier I Capital (to Average Assets): Consolidated $72,227 7.78% =>$37,130 =>4.0% =>$46,413 => 5.0% Tri Counties Bank $70,959 7.65% =>$37,093 =>4.0% =>$46,367 => 5.0%
-24- Note U - Summary of Quarterly Results of Operations (unaudited) The following table sets forth the results of operations for the four quarters of 2000 and 1999, 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.
2000 Quarters Ended December 31, September 30, June 30, March 31, (Dollars in thousands, except per share data) Interest income $19,887 $19,912 $18,960 $17,894 Interest expense 7,584 7,641 6,910 6,408 -------- -------- -------- -------- Net interest income 12,303 12,271 12,050 11,486 Provision for loan losses 1,500 1,800 900 800 -------- -------- -------- -------- Net interest income after provision for loan losses 10,803 10,471 11,150 10,686 Noninterest income 3,445 3,334 3,240 4,626 Noninterest expense 10,116 9,305 9,450 9,024 -------- -------- -------- -------- Income before income taxes 4,132 4,500 4,940 6,288 Income tax expense 1,428 1,653 1,796 2,360 -------- -------- -------- -------- Net income $ 2,704 $ 2,847 $ 3,144 $ 3,928 ======= ======= ======= ======= Per common share: Net income (diluted) $ 0.37 $ 0.39 $ 0.43 $ 0.54 ======= ======= ======= ======= Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.19 ======= ======= ======= ======= 1999 Quarters Ended December 31, September 30, June 30, March 31, (Dollars in thousands, except per share data) Interest income $18,092 $17,558 $16,594 $16,345 Interest expense 6,442 6,237 5,853 5,838 -------- -------- -------- -------- Net interest income 11,650 11,321 10,741 10,507 Provision for loan losses 965 875 870 840 -------- -------- -------- -------- Net interest income after provision for loan losses 10,685 10,446 9,871 9,667 Noninterest income 2,923 2,848 3,368 2,962 Noninterest expense 8,820 8,640 8,887 8,486 -------- -------- -------- -------- Income before income taxes 4,788 4,654 4,352 4,143 Income tax expense 1,703 1,721 1,601 1,509 -------- -------- -------- -------- Net income $ 3,085 $ 2,933 $ 2,751 $ 2,634 ======= ======= ======= ======= Per common share: Net income (diluted) $ 0.42 $ 0.40 $ 0.38 $ 0.36 ======= ======= ======= ======= Dividends $ 0.19 $ 0.19 $ 0.16 $ 0.16 ======= ======= ======= =======
-25- Note V - Business Segments The Company is principally engaged in traditional community banking activities provided through its 30 branches and 7 in-store branches located throughout Northern and Central California. Community banking activities include the Bank's commercial and retail lending, deposit gathering and investment and liquidity management activities. In addition to its community banking services, the Bank offers investment brokerage and leasing services. In 1998 and prior, the Company held investments in real estate through its wholly-owned subsidiary, TCB Real Estate. These activities are monitored and reported by Bank management as separate operating segments. The accounting policies of the segments are the same as those described in Note A. The Company evaluates segment performance based on net interest income, or profit or loss from operations, before income taxes not including nonrecurring gains and losses. As permitted under the Statement, the results of the separate branches have been aggregated into a single reportable segment, Community Banking. The Company's leasing, investment brokerage and real estate segments do not meet the prescribed aggregation or materiality criteria and therefore are reported as "Other" in the following table. Summarized financial information for the years ended December 31, 2000, 1999 and 1998 concerning the Bank's reportable segments is as follows: Community Banking Other Total 2000 Net interest income $ 47,228 $ 882 $ 48,110 Noninterest income 11,506 3,139 14,645 Noninterest expense 35,913 1,982 37,895 Net income 11,328 1,295 12,623 Assets $956,447 $15,624 $972,071 1999 Net interest income $ 43,540 $ 679 $ 44,219 Noninterest income 9,668 2,433 12,101 Noninterest expense 33,558 1,275 34,833 Net income 10,237 1,166 11,403 Assets $915,890 $8,906 $924,796 1998 Net interest income $ 39,789 $ 53 $ 39,842 Noninterest income 10,777 2,092 12,869 Noninterest expense 33,416 1,276 34,692 Net income 8,203 567 8,770 Assets $901,580 $3,019 $904,599 -26- 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, 2000 and 1999, 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, 2000. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TriCo Bancshares and Subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with auditing standards generally accepted in the United States. /s/ Arthur Andersen, LLP San Francisco, California January 17, 2001 -27- Management's Discussion and Analysis of Financial Condition and Results of Operations As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Interest income and net interest income are presented on a tax equivalent basis. In addition to the historical information contained herein, this Annual Report contains certain forward-looking statements. The reader of this Annual Report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company's actual results could differ materially from those suggested by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, competition effects, fee and other noninterest income earned as well as other factors. This entire Annual Report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Overview 2000 was another outstanding year for TriCo Bancshares and Tri Counties Bank, and marked the Bank's twenty-fifth year of existence. During the year, the Company continued its expansion into the San Joaquin Valley with the opening of a branch in Modesto, and added to its presence north of Sacramento with the opening of a branch in Paradise. In 2000, the Bank also refocused and added resources to enhance its retail and small business banking delivery systems. At the same time the Bank was expanding, it was able to improve the profitability of its entire operation from the Oregon border to Bakersfield. Strong loan demand and expense control allowed the Bank to increase its loan to deposit ratio, net interest margin and efficiency ratio in 2000. 2000 was the third year in which every employee's compensation was tied to the financial performance of the employee's business unit, the business units they support, and the Bank overall. The combination of growth and increased internal cooperation resulted in a 10.7% increase in net income during 2000. Management believes the Bank is positioned to realize continued growth in earnings and returns for shareholders in 2001. The Company had earnings of $12,623,000 for the year ended December 31, 2000 versus $11,403,000 for 1999. Diluted earnings per share for the same years were $1.72 and $1.56, respectively. Net interest income for 2000 was $49,280,000 which was an increase of $3,907,000 (8.6%) over 1999. The interest income component of net interest income was up 11.6% to $77,823,000. Interest and fees on loans were up $8,766,000 (16.4%) to $62,161,000 as average loans outstanding increased $57,979,000 (10.2%) to $624,717,000 and the average earnings rate on loans increased 53 basis points to 9.95%. Interest income on investment securities and federal funds sold decreased $686,000 (4.2%) to $15,662,000 mostly due to lower average balances. Interest expense was up $4,173,000 (17.1%) to $28,543,000. This increase was due to an increase in the average rate paid on interest bearing liabilities from 3.57% to 4.05%, as well as an increase in average balances of interest bearing liabilities from $682,358,000 to $704,005,000. Net interest margin was 5.73% in 2000 versus 5.49% in 1999. The Bank provided $5,000,000 to the allowance for loan losses in 2000 compared to $3,550,000 in 1999. Net loan charge-offs in 2000 were $4,367,000 compared to $719,000 in 1999. At year-end 2000 and 1999 the allowance for loan losses as a percentage of gross loans was 1.82% and 1.88%, respectively. Noninterest income is comprised of "service charges and fees" and "other income". Service charge and fee income increased $357,000 (5.0%) to $7,484,000 in 2000 versus year ago results. Other income was up $2,187,000 (44.0%) to $7,161,000 from $4,974,000 in 1999. The increase in other income included a one-time pre-tax income item of $1,510,000. This one-time item represents the initial value of 88,796 common shares of John Hancock Financial Services, Inc. (JHF) which the Bank received as a consequence of its ownership of certain insurance policies through John Hancock Mutual Life Insurance Company and John Hancock's conversion from a mutual company to a stock company. Also during 2000, income from the sale of mutual funds, annuities and insurance increased $465,000 (20.1%) to $2,784,000. Overall, noninterest income increased $2,544,000 (21.0%) for the year to $14,645,000. -28- Noninterest expenses increased $3,062,000 (8.8%) to $37,895,000 in 2000. The Company's efficiency ratio, which is noninterest expense divided by the sum of noninterest income and fully tax-equivalent net interest income, improved to 59.3% in 2000 from 60.6% in 1999. Salary and benefit expenses increased $2,075,000 (11.6%) to $19,912,000 in 2000. Incentive and commission related salary expenses increased $444,000 (24.3%) to $2,274,000 in 2000. Base salaries and benefits increased $1,631,000 (10.2%) in 2000. The increase in base salaries was mainly due to a 3.7% increase in average full time equivalent employees (FTEs) from 378 during 1999 to 392 during 2000, and an average annual base salary and benefits expense increase of 6.5% during 2000. The large increase in incentive and commission related salary expense was more than offset by revenue growth. These results are consistent with the Bank's strategy of working more efficiently with fewer employees who are compensated in part based on their business unit's performance. Other noninterest expenses increased $987,000 (5.8%) to $17,983,000 in 2000. Assets of the Company totaled $972,071,000 at December 31, 2000 which was an increase of $47,275,000 (5.1%) from 1999 ending balances. For 2000, the Company realized a return on assets of 1.35% and a return on shareholders' equity of 16.03% versus 1.26% and 15.59%, respectively, in 1999. The Company ended 2000 with a Tier 1 capital ratio of 11.0% and a total risk-based capital ratio of 12.2%. 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 strong returns for our shareholders. -29-
(A) Results of Operations Years Ended December 31, 2000 1999 1998 1997 1996 (in thousands, except earnings per share amounts) Interest income: Interest and fees on loans $ 62,161 $ 53,395 $ 48,506 $ 44,903 $ 38,227 Interest on investment securities-taxable 11,704 12,500 14,622 13,791 10,409 Interest on investment securities-tax exempt1 3,420 3,383 2,809 958 207 Interest on federal funds sold 538 465 150 553 392 ---------------------------------------------------------------- Total interest income 77,823 69,743 66,087 60,205 49,235 Interest expense: Interest on deposits 25,003 21,277 22,865 22,682 17,201 Interest on short-term borrowing 623 386 816 537 359 Interest on long-term debt 2,917 2,707 1,615 716 1,619 ---------------------------------------------------------------- Total interest expense 28,543 24,370 25,296 23,935 19,179 ---------------------------------------------------------------- Net interest income 49,280 45,373 40,791 36,270 30,056 Provision for loan losses 5,000 3,550 4,200 3,000 777 ---------------------------------------------------------------- Net interest income after provision for loan losses 44,280 41,823 36,591 33,270 29,279 Noninterest income: Service charges, fees and other 14,645 12,077 12,553 9,548 6,636 Investment securities gains (losses), net -- 24 316 18 -- ---------------------------------------------------------------- Total noninterest income 14,645 12,101 12,869 9,566 6,636 Noninterest expenses: Salaries and employee benefits 19,912 17,837 16,803 15,671 11,989 Other, net 17,983 16,996 17,889 17,261 11,496 ---------------------------------------------------------------- Total noninterest expenses 37,895 34,833 34,692 32,932 23,485 Net income before income taxes 21,030 19,091 14,768 9,904 12,430 Income taxes 7,237 6,534 5,049 3,707 5,037 Tax equivalent adjustment2 1,170 1,154 949 328 87 ---------------------------------------------------------------- Net income $12,623 $11,403 $ 8,770 $ 5,869 $ 7,306 ================================================================ Basic earnings per common share2 $ 1.76 $ 1.60 $ 1.25 $ 0.84 $ 1.08 Diluted earnings per common share2 $ 1.72 $ 1.56 $ 1.21 $ 0.81 $ 1.04 Cash dividend paid per share $ 0.79 $ 0.70 $ 0.49 $ 0.43 $ 0.39 Selected Balance Sheet Information Total Assets $972,071 $924,796 $904,599 $826,165 $694,859 Long-term Debt $33,983 $45,505 $37,924 $11,440 $24,281 1 Interest on tax-free securities is reported on a tax equivalent basis of 1.52 for 2000, 1.52 for 1999, 1.52 for 1998, 1.52 for 1997, and 1.72 for 1996. 2 Restated on a historical basis to reflect the 3-for-2 stock split effected October 30, 1998.
-30- 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 2000 totaled $49,280,000 which was up $3,907,000 (8.6%) over the prior year. Interest income increased $8,080,000 (11.6%) to $77,823,000 in 2000. Average outstanding loan balances of $624,717,000 for 2000 reflected a 10.2% increase over 1999 balances. This increase in average loan balances contributed an additional $5,462,000 to interest income and was the major factor in the improvement in net interest income. The average yield received on loans rose 53 basis points to 9.95% which increased interest income by $3,304,000. This increase in average yield resulted from increases in market interest rates that began in 1999 and reached their high in the spring of 2000. Average balances of investment securities decreased $24,178,000 (9.7%) to $226,163,000. The lower volume of securities resulted in a decrease in interest income of $1,534,000. An increase of 35 basis points in the average tax effective yield on investments added $775,000 to interest income. Interest expense increased $4,173,000 (17.1%) to $28,543,000 in 2000. Higher average balances of interest- bearing liabilities added $1,009,000 to interest expense in 2000 as compared to 1999, while a higher average rate paid for those balances increased interest expense by $3,164,000. Net interest margin for 2000 was 5.73% versus 5.49% in 1999. Net interest income for 1999 totaled $45,373,000 which was up $4,582,000 (11.2%) over the prior year. Average outstanding loan balances of $566,738,000 for 1999 reflected a 16.2% increase over 1998 balances. This increase contributed an additional $7,873,000 to interest income and was the major factor in the improvement in net interest income. The average yield received on loans fell 53 basis points to 9.42% which reduced interest income by $2,984,000. This decrease in average yield resulted from reductions in market interest rates that began in 1998 and reached their low in the spring of 1999 before beginning to rise in the fall of 1999. Average balances of investment securities decreased $31,706,000 (11.2%) to $250,341,000. The lower volume of securities resulted in a decrease in interest income of $1,959,000. An increase of 16 basis points in the average tax effective yield on investments added $411,000 to interest income. Interest expense decreased $926,000 (3.7%) to $24,370,000 in 1999. Higher average balances of interest- bearing liabilities added $1,225,000 to interest expense in 1999 as compared to 1998, while a lower average rate paid for those balances reduced interest expense by $2,151,000. Net interest margin for 1999 was 5.49% versus 5.28% in 1998. 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. -31-
Table One: Analysis of Net Interest Margin on Earning Assets 2000 1999 1998 Average Yield/ Average Yield/ Average Yield/ Assets Balance1 Income Rate Balance1 Income Rate Balance1 Income Rate (dollars in thousands) Earning assets: Loans2,3 $624,717 $62,161 9.95% $566,738 $53,395 9.42% $487,598 $48,506 9.95% Securities - taxable 181,316 11,704 6.46% 205,489 12,500 6.08% 245,499 14,622 5.96% Securities - nontaxable4 44,847 3,420 7.63% 44,852 3,383 7.54% 36,548 2,809 7.69% Federal funds sold 8,696 538 6.19% 8,733 465 5.32% 2,663 150 5.63% --------------------------------------------------------------------------------------------- Total earning assets 859,576 77,823 9.05% 825,812 69,743 8.45% 772,308 66,087 8.56% Cash and due from banks 39,295 37,206 33,819 Premises and equipment 16,622 16,260 17,448 Other assets, net 42,150 37,210 32,921 Less: Unrealized gain (loss) on securities (8,112) (3,508) 355 Less: Allowance for loan losses (11,741) (9,525) (7,270) --------- --------- --------- Total assets $937,790 $903,455 $849,581 Liabilities and shareholders' equity Interest-bearing demand deposits $149,412 2,360 1.58% $145,558 2,287 1.57% $137,001 2,932 2.14% Savings deposits 218,286 6,837 3.13% 224,368 6,811 3.04% 212,291 6,473 3.05% Time deposits 278,968 15,806 5.67% 255,659 12,179 4.76% 257,805 13,460 5.22% Federal funds purchased 7,753 524 6.76% 7,024 356 5.07% 8,025 446 5.56% Repurchase agreements 1,508 99 6.56% 614 30 4.89% 6,474 370 5.72% Long-term debt 48,078 2,917 6.07% 49,135 2,707 5.51% 28,426 1,615 5.68% --------------------------------------------------------------------------------------------- Total interest-bearing liabilities 704,005 28,543 4.05% 682,358 24,370 3.57% 650,022 25,296 3.89% Noninterest-bearing deposits 141,767 135,511 119,929 Other liabilities 13,277 12,465 11,109 Shareholders' equity 78,741 73,121 68,521 --------- --------- --------- Total liabilities and shareholders' equity $937,790 $903,455 $849,581 Net interest rate spread5 5.00% 4.87% 4.67% Net interest income/net interest margin6 $49,280 5.73% $45,373 5.49% $40,791 5.28% 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 $2,928,000 in 2000, $2,853,000 in 1999, and $2,958,000 in 1998. 4 Interest income is stated on a tax equivalent basis of 1.52 in 2000, 1999, and 1998. 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.
-32-
Table Two: Analysis of Volume and Rate Changes on Net Interest Income and Expenses 2000 over 1999 1999 over 1998 Yield/ Yield/ Volume Rate 4 Total Volume Rate 4 Total Increase (decrease) in (dollars in thousands) interest income: Loans1,2 $ 5,462 $ 3,304 $ 8,766 $ 7,873 $(2,984) $ 4,889 Investment securities3 (1,534) 775 (759) (1,959) 411 (1,548) Federal funds sold (2) 75 73 342 (27) 315 ------------------------------------------------------------------------- Total 3,926 4,154 8,080 6,256 (2,600) 3,656 Increase (decrease) in interest expense: Demand deposits (interest-bearing) 61 12 73 183 (828) (645) Savings deposits (185) 211 26 368 (30) 338 Time deposits 1,110 2,517 3,627 (112) (1,169) (1,281) Federal funds purchased 37 131 168 (56) (34) (90) Repurchase agreements 44 25 69 (335) (5) (340) Long-term borrowings (58) 268 210 1,177 (85) 1,092 ------------------------------------------------------------------------- Total 1,009 3,164 4,173 1,225 (2,151) (926) ------------------------------------------------------------------------- Increase (decrease) in net interest income $ 2,917 $ 990 $ 3,907 $ 5,031 $ (449) $ 4,582 1 Nonaccrual loans are included. 2 Interest income on loans includes fees on loans of $2,928,000 in 2000, $2,853,000 in 1999, and $2,958,000 in 1998. 3 Interest income is stated on a tax equivalent basis of 1.52 in 2000, 1999, and 1998. 4 The rate/volume variance has been included in the rate variance.
Provision for Loan Losses In 2000, the Bank provided $5,000,000 for loan losses compared to $3,550,000 in 1999. Net loan charge-offs increased $3,648,000 (507%) to $4,367,000 during 2000. Included in the $4,367,000 of net loan charge-offs during 2000 is $3,800,000 of charge-offs on a group of agricultural related loans to one borrower. As of December 31, 2000, the Company's recorded net book value for this nonperforming loan relationship after charge-offs was approximately $8,400,000. Net charge-offs of consumer installment loans decreased $63,000 (56%). Net charge-offs of commercial, financial and agricultural loans increased $3,631,000 (675%), while net charge-offs of real estate mortgage loans increased $80,000 (116%). The 2000 charge-offs represented 0.70% of average loans outstanding versus 0.13% the prior year. Nonperforming loans were 2.29% of total loans at year end versus 0.46% in 1999. The ratio of allowance for loan losses to nonperforming loans was 80% versus 412% at the end of 1999. In 1999, the Bank provided $3,550,000 for loan losses compared to $4,200,000 in 1998. Net loan charge-offs decreased $1,734,000 (70.7%) to $719,000 during 1999. Net charge-offs of consumer installment loans decreased $460,000 (80.4%) mainly due to the sale of the Bank's credit card portfolio in May 1998. Net charge-offs of commercial, financial and agricultural loans decreased $1,163,000 (68.4%), while net charge-offs of real estate mortgage loans decreased $111,000 (61.7%). The 1999 charge-offs represented 0.13% of average loans outstanding versus 0.50% the prior year. Nonperforming loans were 0.46% of total loans at year end versus 0.31% in 1998. The ratio of allowance for loan losses to nonperforming loans was 412% versus 493% at the end of 1998 (See balance sheet analysis "Nonaccrual, Past Due and Restructured Loans" for further discussion). -33- Service Charges and Fees and Other Income For 2000, service charge and fee income increased $357,000 (5.0%) to $7,484,000 compared to $7,127,000 in 1999. This increase was due mainly to increased ATM fees. Other income was up $2,187,000 (44.0%) to $7,161,000 from $4,974,000 in 1999. The increase in other income included a one-time pre-tax income item of $1,510,000 from the receipt of common stock. This one-time item represents the initial value of 88,796 common shares of John Hancock Financial Services, Inc. (JHF) which the Bank received as a consequence of its ownership of certain insurance policies through John Hancock Mutual Life Insurance Company and John Hancock's conversion from a mutual company to a stock company. The Bank continues to own the JHF shares in its securities available-for-sale, and as of December 31, 2000 has recorded an additional $1,831,000 unrealized gain since the receipt of these shares. Significant changes in the following items also contributed to the net increase in other income: commissions on non-deposit investment product sales increased $465,000 to $2,784,000, income from the increase in cash value of insurance policies increased $284,000 to $657,000, and gain on sale of loans decreased $275,000 to $525,000. Overall, noninterest income increased $2,544,000 (21.0%) for the year to $14,645,000. For 1999, service charge and fee income decreased $260,000 (3.5%) to $7,127,000 compared to $7,387,000 in 1998. This decrease was mainly due to $283,000 of non-recurring credit card related fee income that was recorded subsequent to the sale of the Bank's credit card portfolio in May of 1998. Other income was down $508,000 (9.3%) to $4,974,000 from $5,482,000 in 1998. The decrease in other income included a gain on sale of the credit card portfolio of $897,000 in 1998, gain on the sale of investments of $24,000 in 1999 compared to $316,000 in 1998, gain on sale of loans of $800,000 in 1999 versus $497,000 in 1998, and income from the sale of mutual funds, annuities and insurance of $2,318,000 in 1999 compared to $2,066,000 in 1998. Overall, noninterest income decreased $768,000 (6.0%) for the year to $12,101,000. Excluding the effect of the credit card portfolio, which was sold in May 1998, noninterest income would have increased $412,000 (3.5%) to $12,101,000 in 1999 versus $11,689,000 in 1998. Securities Transactions During 2000 the Bank had no sales of securities. Also during 2000, the Bank received proceeds from maturities of securities totaling $39,663,000, and used $29,077,000 to purchase securities. For 1999 the Bank realized net gains of $24,000 on the sale of securities with market values of $14,137,000. In addition, the Bank received proceeds from maturities of securities totaling $64,496,000. During 1999 the Bank purchased $41,372,000 of securities. Salaries and Benefits Salary and benefit expenses increased $2,075,000 (11.6%) to $19,912,000 in 2000. Incentive and commission related salary expenses increased $444,000 (24.3%) to $2,274,000 in 2000. Base salaries and benefits increased $1,631,000 (10.2%) in 2000. The increase in base salaries was mainly due to a 3.7% increase in average full time equivalent employees (FTEs) from 378 during 1999 to 392 during 2000, and an average annual base salary and benefits expense increase of 6.5% during 2000. The large increase in incentive and commission related salary expense was more than offset by revenue growth. These results are consistent with the Bank's strategy of working more efficiently with fewer employees who are compensated in part based on their business unit's performance or on their ability to generate revenue. Salary and benefit expenses increased $1,034,000 (6.2%) to $17,837,000 in 1999. Base salaries increased $528,000 (4.5%). Average full time equivalent employees were 378 in 1999 versus 376 in 1998. Incentive and commission related salary expenses increased $328,000 (21.8%) to $1,830,000 in 1999. Other Expenses Other expenses increased $987,000 (5.8%) to $17,983,000 in 2000. Approximately $534,000 of the increase was due to operational losses that went from $273,000 in 1999 to $807,000 in 2000. Contributing to the increase in operational losses during 2000 was a $434,000 fraud loss due to a single deposit relationship that was identified in the fourth quarter of 2000. Advertising expense increased $390,000 to $1,336,000 in 2000. Intangible asset amortization decreased $170,000 in 2000 to $965,000. Other expenses decreased $893,000 (5.0%) to $16,996,000 in 1999. Approximately $478,000 of the decrease was due to reduced expenses and provisions related to other real estate owned which decreased to $62,000 in 1999 from $540,000 in 1998. Intangible asset amortization decreased $203,000 in 1999 to $1,135,000. -34- Provision for Taxes The effective tax rate on income was 36.4%, 36.4%, and 36.5% in 2000, 1999, and 1998, respectively. The effective tax rate was greater than the federal statutory tax rate due to state tax expense of $1,857,000, $1,680,000, and $1,425,000, in these years. Tax-free income of $2,250,000, $2,229,000, and $1,860,000 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): 2000 1999 1998 Return on total assets 1.35% 1.26% 1.03% Return on shareholders' equity 16.03% 15.59% 12.80% Shareholders' equity to total assets 8.78% 8.09% 8.07% Common shareholders' dividend payout ratio 45.00% 43.81% 39.11% During 2000, return on assets increased to 1.35% from 1.26% in 1999. The increase in ROA was due to increased productivity and the Bank's continued loan growth. The Company's efficiency ratio (noninterest expense divided by net interest income plus noninterest income) improved to 59.3% in 2000 from 60.6% in 1999. Return on assets increased in 1999 to 1.26% from the 1.03% achieved in 1998. Return on shareholders' equity increased to 16.03% in 2000 from 15.59% in 1999. The higher ROE in 2000 resulted from average capital increasing 7.7% while net income increased 10.7%. In 1999, return on shareholders' equity increased to 15.59% from 12.80% in 1998. The higher ROE in 1999 was due to a 30.0% increase in net income while average shareholders' equity increased only 6.7%. In 2000, the average shareholders' equity to average asset ratio increased to 8.78% from 8.09%. The shareholders' average equity to average assets ratio for 1999 increased to 8.09% from 8.07% for 1998. In 2000, dividends paid to common shareholders totaled $5,680,000 compared to $4,996,000 in 1999. The resulting common shareholders' dividend payout ratio of 45.0% in 2000 compared to 43.8% in 1999. (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, 2000, these four categories accounted for approximately 43%, 16%, 35%, and 6% of the Bank's loan portfolio, respectively, as compared to 45%, 13%, 35%, and 7%, at December 31, 1999. The shift in the percentages was primarily due to the Bank's efforts to increase its consumer loan portfolio during 2000. 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, 2000 loans totaled $640,391,000 which was an 8.9% ($52,412,000) increase over the balances at the end of 1999. Demand for commercial and agriculture related loans was strong in 2000. Demand for residential mortgage loans decreased significantly starting in the fall of 1999, and was replaced somewhat by demand for home equity loans, which the Bank classifies as consumer loans. The average loan to deposit ratio in 2000 was 79.2% compared to 74.5% in 1999. -35- At December 31, 1999, loans totaled $587,979,000 which was a 10.4% ($55,546,000) increase over the balances at the end of 1998. Demand for commercial and agriculture related loans was strong in 1999. Total loan balances at the Bank's southernmost branches, which include its Sacramento office and its San JoaquinValley offices, increased $56,105,000 to $113,128,000 during 1999 while loan balances at the Bank's northern branches decreased $559,000 to $474,851,000 in 1999. From January 1999 to July 1999, the Bank sold approximately $26,275,000 of fixed rate residential mortgage loans out of its loan portfolio that were originated prior to December 31, 1998. Excluding the sale of these fixed rate residential mortgage loans, loan balances in the Bank's northern branches would have increased approximately $25,716,000 in 1999. The average loan to deposit ratio in 1999 was 74.5% compared to 67.2% in 1998.
Loan Portfolio Composite December 31, 2000 1999 1998 1997 1996 (dollars in thousands) Commercial, financial and agricultural $277,935 $262,916 $211,773 $165,813 $176,868 Consumer installment 101,548 79,589 72,512 87,950 75,498 Real estate mortgage 222,909 207,197 211,072 160,954 160,575 Real estate construction 37,999 38,277 37,076 34,250 26,348 ---------------------------------------------------------------------- Total loans $640,391 $587,979 $532,433 $448,967 $439,289
Nonaccrual, Past Due and Restructured Loans During 2000, nonperforming assets increased $11,227,000 (326%) to a total of $14,668,000. Nonperforming loans increased $10,546,000 (393%) to $13,227,000, and other real estate owned (OREO) increased $681,000 (90%) to $1,441,000 during 2000. The ratio of nonperforming loans to total loans at December 31, 2000 was 2.07% versus 0.46% at the end of 1999. Included in the balance of nonperforming loans at December 31, 2000 is $8,400,000 that represents the Company's recorded net book value for a group of agricultural related loans to one borrower. The Company believes the problems with this loan relationship are not applicable to the Company's agriculture loan portfolio generally as the Company believes that the weakness in this loan relationship was not due to crop failure or overall weakness in the agriculture sectors in which this borrower operates. Rather, the Company believes the losses on this loan relationship is unique to this particular borrower. Excluding the large nonperforming loan relationship noted above, the ratio of nonperforming loans to total loans at December 31, 2000 would have been 0.75%. Classifications of nonperforming loans as a percent of the total at the end of 2000 were as follows: secured by real estate, 57%; loans to farmers, 40%; commercial loans, 2.5%; and consumer loans, 0.5%. During 1999, nonperforming assets increased $364,000 (11.8%) to a total of $3,441,000. Nonperforming loans increased $1,016,000 (61.0%) to $2,681,000, and other real estate owned (OREO) decreased $652,000 (46.2%) to $760,000 during 1999. The ratio of nonperforming loans to total loans at December 31, 1999 was 0.46% versus 0.31% at the end of 1998. The continued low ratio of nonperforming loans to total loans was due in part to favorable economic conditions and three years of operation under an enhanced system, which focuses on early identification of problem loans followed by prompt action to ensure performance or charge-off of the loan. Classifications of nonperforming loans as a percent of the total at the end of 1999 were as follows: secured by real estate, 84%; loans to farmers, 11%; commercial loans, 3%; 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. -36- Interest income is not accrued on loans where Management has determined that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, any previously accrued but unpaid interest is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection on principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Interest income on nonaccrual loans, which would have been recognized during the year, ended December 31, 2000, if all such loans had been current in accordance with their original terms, totaled $1,824,000. Interest income actually recognized on these loans in 2000 was $1,093,000. 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, 2000 1999 1998 1997 1996 (dollars in thousands) Nonaccrual loans $12,262 $ 1,758 $ 1,045 $ 4,721 $ 9,044 Accruing loans past due 90 days or more 965 923 620 528 20 ---------------------------------------------------------------------------- Total nonperforming loans $13,227 2,681 1,665 5,249 9,064 Other real estate owned 1,441 760 1,412 2,230 1,389 ---------------------------------------------------------------------------- Total nonperforming assets $14,668 $ 3,441 $ 3,077 $ 7,479 $10,453 Nonincome producing investments in real estate held by Bank's real estate development subsidiary $ -- $ -- $ -- $ 856 $ 1,173 Nonperforming loans to total loans 2.07% 0.46% 0.31% 1.17% 2.06% Allowance for loan losses to nonper- forming loans 88% 412% 493% 123% 67% Nonperforming assets to total assets 1.51% 0.37% 0.34% 0.91% 1.50% Allowance for loan losses to nonper- forming assets 80% 321% 267% 86% 58%
-37- Allowance for Loan Losses Credit risk is inherent in the business of lending. As a result, the Company maintains an Allowance for Loan Losses to absorb losses inherent in the Company's loan and lease portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's Allowance for Loan Losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio. For the remainder of this discussion, "loans" shall include all loans and lease contracts, which are a part of the Bank's portfolio. Assessment of the Adequacy of the Allowance for Loan Losses The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan and lease portfolio, and to a lesser extent the Company's loan and lease commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies. The Company's method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowances for identified problem loans are based on specific analysis of individual credits. Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. Allowances for changing environmental factors are Management's best estimate of the probable impact these changes have had on the loan portfolio as a whole. The Components of the Allowance for Loan Losses As noted above, the overall allowance consists of a specific allowance, a formula allowance, and an allowance for environmental factors. The first component, the specific allowance, results from the analysis of identified problem credits and the evaluation of sources of repayment including collateral, as applicable. Through Management's ongoing loan grading process, individual loans are identified that have conditions that indicate the borrower may be unable to pay all amounts due under the contractual terms. These loans are evaluated individually by Management and specified allowances for loan losses established where applicable. The amount of this component is disclosed in Note D to the consolidated financial statements. In addition to loans identified for specific allowance analysis, Management may identify additional loans for specific allowance analysis. The second component, the formula allowance, is an estimate of the probable losses that have occurred across the major loan categories in the Company's loan portfolio. This analysis is based on loan grades by pool and the loss history of these pools. This analysis covers the Company's entire loan portfolio including unused commitments but excludes any loans, which were analyzed individually for specific allowances as discussed above. The total amount allocated for this component is determined by applying loss estimation factors to outstanding loans and loan commitments. The loss factors are based primarily on the Company's historical loss experience tracked over a five-year period and adjusted as appropriate for the input of current trends and events. Because historical loss experience varies for the different categories of loans, the loss factors applied to each category also differ. In addition, there is a greater chance that the Company has suffered a loss from a loan that was graded less than satisfactory than if the loan was last graded satisfactory. Therefore, for any given category, a larger loss estimation factor is applied to less than satisfactory loans than to those that the Company last graded as satisfactory. The resulting formula allowance is the sum of the allocations determined in this manner. The third or "unallocated" component of the allowance for credit losses is a component that is not allocated to specific loans or groups of loans, but rather is intended to absorb losses that may not be provided for by the other components. -38- There are several primary reasons that the other components discussed above might not be sufficient to absorb the losses present in portfolios, and the unallocated portion of the allowance is used to provide for the losses that have occurred because of them. The first is that there are limitations to any credit risk grading process. The volume of loans makes it impractical to re-grade every loan every quarter. Therefore, it is possible that some currently performing loans not recently graded will not be as strong as their last grading and an insufficient portion of the allowance will have been allocated to them. Grading and loan review often must be done without knowing whether all relevant facts are at hand. Troubled borrowers may deliberately or inadvertently omit important information from reports or conversations with lending officers regarding their financial condition and the diminished strength of repayment sources. The second is that the loss estimation factors are based primarily on historical loss totals. As such, the factors may not give sufficient weight to such considerations as the current general economic and business conditions that affect the Company's borrowers and specific industry conditions that affect borrowers in that industry. The factors might also not give sufficient weight to other environmental factors such as changing economic conditions and interest rates, portfolio growth, entrance into new markets or products, and other characteristics as may be determined by Management. Specifically, in assessing how much unallocated allowance needed to be provided at December 31, 2000, Management considered the following: o with respect to loans to the agriculture industry, Management considered the effects on borrowers of weather conditions and overseas market conditions for exported products as well as commodity prices in general; o with respect to changes in the interest rate environment Management considered the recent changes in interest rates and the resultant economic impact it may have had on borrowers with high leverage and/or low profitability; and o with respect to loans to borrowers in new markets and growth in general, Management considered the relatively short seasoning of such loans and the lack of experience with such borrowers. Each of these considerations was assigned a factor and applied to a portion or all of the loan portfolio. Since these factors are not derived from experience and are applied to large non-homogeneous groups of loans, they are considered unallocated and are available for use across the portfolio as a whole. At December 31, 2000 the allowance for loan losses was $11,670,000 consisting of a specific allowance of $3,266,000, a formula allowance of $5,414,000, and an unallocated allowance of $2,990,000. At December 31, 1999 the allowance for loan losses was $11,037,000 consisting of a specific allowance of $600,000, a formula allowance of $6,606,000, and an unallocated allowance of $3,831,000. The increase in the specific allowance portion of the reserve was due to the overall increase in classified and impaired loans, which under the Company's allowance methodology are analyzed for specific reserve. As these classified and impaired loans were analyzed for specific reserve, they were excluded from the loan balances that were subject to the formula allowance portion of the reserve; and resulted in a decrease in the formula allowance portion of the reserve. The allowance for loan losses to total loans at December 31, 2000 was 1.82% versus 1.88% at the end of 1999. At December 31, 1998, the allowance for loan losses to total loans was 1.54%. Based on the current conditions of the loan portfolio, Management believes that the $11,670,000 allowance for loan losses at December 31, 2000 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. -39-
The following table summarizes, for the years indicated, the activity in the allowance for loan losses: December 31, 2000 1999 1998 1997 1996 (dollars in thousands) Balance, beginning of year $ 11,037 $ 8,206 $ 6,459 $ 6,097 $ 5,580 Provision charged to operations 5,000 3,550 4,200 3,000 777 Loans charged off: Commercial, financial and agricultural (4,450) (865) (1,865) (1,289) (283) Consumer installment (103) (148) (702) (1,551) (909) Real estate mortgage (152) (69) (188) -- -- ----------------------------------------------------------------------------- Total loans charged-off (4,705) (1,082) (2,755) (2,840) (1,192) Recoveries: Commercial, financial and agricultural 281 327 164 85 243 Consumer installment 54 36 130 117 66 Real estate mortgage 3 -- 8 -- -- ----------------------------------------------------------------------------- Total recoveries 338 363 302 202 309 ----------------------------------------------------------------------------- Net loans charged-off (4,367) (719) (2,453) (2,638) (883) Balance added through acquisition -- -- -- -- 623 ----------------------------------------------------------------------------- Balance, year end $ 11,670 $ 11,037 $ 8,206 $ 6,459 $ 6,097 ============================================================================= Average total loans $624,717 $566,738 $487,598 $448,117 $368,550 Ratios: Net charge-offs during period to average loans outstanding during period 0.70% 0.13% 0.50% 0.59% 0.24% Provision for loan losses to aver- age loans outstanding 0.80% 0.63% 0.86% 0.67% 0.21% Allowance to loans at year end 1.82% 1.88% 1.54% 1.44% 1.39%
-40- The following tables summarize the allocation of the allowance for loan losses between loan types at December 31, 2000 and 1999: December 31, 2000 (dollars in thousands) Percent of loans in each category to Balance at End of Period Applicable to: Amount total loans Commercial, financial and agricultural $6,873 43.4% Consumer installment 1,373 15.9% Real estate mortgage 2,925 34.8% Real estate construction 499 5.9% ------- ------ $11,670 100.0% December 31, 1999 (dollars in thousands) Percent of loans in each category to Balance at End of Period Applicable to: Amount total loans Commercial, financial and agricultural 5,224 44.7% Consumer installment 1,464 13.6% Real estate mortgage 3,671 35.2% Real estate construction 678 6.5% ------- ------ $11,037 100.0% Investment in Real Estate Properties During 1998, the subsidiary divested all investment properties pursuant to an agreement between the Bank and the FDIC. Other Real Estate Owned The December 31, 2000 balance of Other Real Estate Owned (OREO) was $1,441,000 versus $760,000 in 1999. Properties foreclosed in 2000 and remaining in the Bank's possession at year-end were valued at $1,037,000 net of a valuation allowance of $15,000. The Bank disposed of properties with a value of $928,000 in 2000. OREO properties consist of a mixture of land, single family residences, and commercial buildings. Intangible Assets At December 31, 2000 and 1999, the Bank had intangible assets totaling $5,464,000 and $6,429,000, respectively. The intangible assets are the result of the Bank's 1997 acquisitions of certain Wells Fargo branches and Sutter Buttes Savings Bank. Amortization of intangible assets amounting to $965,000, $1,135,000 and $1,338,000 was recorded in 2000, 1999, and 1998, respectively. -41- Deposits Deposits at December 31, 2000 were up $43,722,000 (5.5%) over the 1999 year-end balances to $837,832,000. All categories of deposits except savings increased in 2000. Included in the December 31, 2000 and 1999 certificate of deposit balances is $40,000,000 from the State of California. Deposits at December 31, 1999 were up $24,937,000 (3.2%) to $794,110,000 over the 1998 year-end balances. All categories of deposits except interest-bearing demand deposits increased in 1999. The Bank often experiences significant deposit balance increases at year-end due to agricultural and small business customers depositing year-end receipts. The magnitude of this year-end deposit increase varies from year to year. Interest-bearing demand deposits were up 14.3% from year-end 1997 to year-end 1998, and then down 3.9% from year-end 1998 to year-end 1999. Long-Term Debt During 2000, the Bank repaid $46,522,000 of long-term debt, and added $35,000,000 under long-term debt agreements. In 1999, the Bank made principal payments of $13,419,000 on long-term debt obligations, and added $21,000,000 under long-term debt agreements. Equity See Note T 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, net income and market value of equity under changing interest environments. Market value of equity is the net present value of estimated cash flows from the Bank's assets, liabilities and off-balance sheet items. The Bank uses simulation models to forecast net interest margin, net income and market value of equity. Simulation of net interest margin, net income and market value of equity under various interest rate scenarios is the primary tool used to measure interest rate risk. Using computer-modeling techniques, the Bank is able to estimate the potential impact of changing interest rates on net interest margin, net income and market value of equity. A balance sheet forecast is prepared using inputs of actual loan, securities and interest-bearing liability (i.e. deposits/borrowings) positions as the beginning base. In the simulation of net interest margin and net income under various interest rate scenarios, the forecast balance sheet is processed against seven interest rate scenarios. These seven interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and six additional rate ramp scenarios ranging from +300 to -300 basis points around the flat scenario in 100 basis point increments. These ramp scenarios assume that interest rates increase or decrease evenly (in a "ramp" fashion) over a twelve-month period and remain at the new levels beyond twelve months. -42- The following table summarizes the effect on net interest income and net income due to changing interest rates as measured against a flat rate (no change) scenario: Interest Rate Risk Simulation of Net Interest Income and Net Income as of December 31, 2000 Estimated Change in Estimated Change in Change in Interest Net Interest Income (NII) Net Income (NI) Rates (Basis Points) (as % of "flat" NII) (as % of "flat" NI) +300 (ramp) 1.25% 2.75% +200 (ramp) 1.03% 2.29% +100 (ramp) 0.66% 1.48% + 0 (flat) -- -- -100 (ramp) (1.52)% (3.39)% -200 (ramp) (3.15)% (7.04)% -300 (ramp) (5.21)% (11.64)% In the simulation of market value of equity under various interest rate scenarios, the forecast balance sheet is processed against seven interest rate scenarios. These seven interest rate scenarios include the flat rate scenario described above, and six additional rate shock scenarios ranging from +300 to - -300 basis points around the flat scenario in 100 basis point increments. These rate shock scenarios assume that interest rates increase or decrease immediately (in a "shock" fashion) and remain at the new level in the future. The following table summarizes the effect on market value of equity due to changing interest rates as measured against a flat rate (no change) scenario: Interest Rate Risk Simulation of Market Value of Equity as of December 31, 2000 Estimated Change in Change in Interest Market Value of Equity (MVE) Rates (Basis Points) (as % of "flat" MVE) +300 (shock) (10.74)% +200 (shock) (6.92)% +100 (shock) (3.35)% + 0 (flat) -- -100 (shock) 2.14% -200 (shock) 2.12% -300 (shock) (2.08)% These results indicate that the balance sheet is slightly asset sensitive since earnings increase when interest rates rise. The magnitude of all the simulation results noted above is within the Bank's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding tables. For example, although certain of the Bank's assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain of the Bank's asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in the preceding table. Further, a change in U.S. Treasury rates accompanied by a change in the shape of the treasury yield curve could result in different estimations from those presented herein. Accordingly, the results in the preceding tables should not be relied upon as indicative of actual results in the event of changing market interest rates. Additionally, the resulting estimates of changes in market value of equity are not intended to represent, and should not be construed to represent, estimates of changes in the underlying value of the Bank. -43- Interest rate sensitivity is a function of the repricing characteristics of the Bank's portfolio of assets and liabilities. One aspect of these repricing characteristics is the time frame within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. An analysis of the repricing time frames of interest-bearing assets and liabilities is sometimes called a "gap" analysis because it shows the gap between assets and liabilities repricing or maturing in each of a number of periods. Another aspect of these repricing characteristics is the relative magnitude of the repricing for each category of interest earning asset and interest-bearing liability given various changes in market interest rates. Gap analysis gives no indication of the relative magnitude of repricing given various changes in interest rates. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity gaps are measured as the difference between the volumes of assets and liabilities in the Bank's current portfolio that are subject to repricing at various time horizons. The following interest rate sensitivity table shows the Bank's repricing gaps as of December 31, 2000. In this table transaction deposits, which may be repriced at will by the Bank, have been included in the less than 3-month category. The inclusion of all of the transaction deposits in the less than 3-month repricing category causes the Bank to appear liability sensitive. Because the Bank may reprice its transaction deposits at will, transaction deposits may or may not reprice immediately with changes in interest rates. In recent years of moderate interest rate changes the Bank's earnings have reacted as though the gap position is slightly asset sensitive mainly because the magnitude of interest-bearing liability repricing has been less than the magnitude of interest-earning asset repricing. This difference in the magnitude of asset and liability repricing is mainly due to the Bank's strong core deposit base, which although they may be repriced within three months, historically, the timing of their repricing has been longer than three months and the magnitude of their repricing has been minimal. Due to the limitations of gap analysis, as described above, the Bank does not actively use gap analysis in managing interest rate risk. Instead, the Bank relies on the more sophisticated interest rate risk simulation model described above as its primary tool in measuring and managing interest rate risk.
Interest Rate Sensitivity - December 31, 2000 Repricing within: Less than 3 3 - 6 6 - 12 1 - 5 Over months months months years 5 years (dollars in thousands) Interest-earning assets: Securities $ 52,094 $ 8,431 $ 17,918 $ 90,838 $ 54,884 Loans 304,835 31,642 59,550 172,827 60,942 ------------------------------------------------------------------------------- Total interest-earning assets $ 356,929 $ 40,073 $ 77,468 $ 263,665 $ 115,826 Interest-bearing liabilities Transaction deposits $ 364,908 $ --- $ --- $ --- $ --- Time 117,716 71,815 95,895 18,819 136 Fed funds purchased 500 --- --- --- --- Long-term borrowings 1,007 7 10,016 169 22,783 ------------------------------------------------------------------------------- Total interest-bearing liabilities $ 484,131 $ 71,822 $ 105,911 $ 18,988 $ 22,919 ------------------------------------------------------------------------------- Interest sensitivity gap $ (127,202) $ (31,749) $ (28,443) $ 244,677 $ 92,907 Cumulative sensitivity gap $ (127,202) $ (158,951) $ (187,394) $ 57,283 $ 150,190 As a percentage of earning assets: Interest sensitivity gap (14.90%) (3.72%) (3.33%) 28.65% 10.88% Cumulative sensitivity gap (14.90%) (18.61%) (21.94%) 6.71% 17.59%
-44- 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 $47,739,000 in 2000, which means that assets were not generally used for liquidity purposes. Increased loan balances were responsible for the major use of funds in this category. Liquidity is generated from liabilities through deposit growth and short-term borrowings. These activities are included under financing activities in the Consolidated Statement of Cash Flows. In 2000, financing activities provided funds totaling $26,655,000. Internal deposit growth provided funds amounting to $43,722,000. The Bank also had available correspondent banking lines of credit totaling $64,500,000 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 2000, operating activities provided cash of $18,838,000. In connection with the adoption of SFAS 133 on October 1, 1998, the Bank reclassified its entire portfolio of held-to-maturity investment securities, with a carrying value of $78,901,000, to the available-for-sale classification. The AFS securities plus cash and cash equivalents in excess of reserve requirements totaled $286,800,000 at December 31, 2000, which was 29.5% of total assets at that time. This was down from $291,644,000 and 31.5% at the end of 1999. 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, 2000 and 1999, the Bank had $40,000,000 of these State deposits. Certificates of Deposit in Denominations of $100,000 or More Amounts as of December 31, 2000 1999 1998 (in thousands) Time remaining until maturity: Less than 3 months $55,721 $52,260 $47,957 3 months to 6 months 14,002 10,906 7,208 6 months to 12 months 18,686 7,228 3,812 More than 12 months 4,933 3,068 5,880 ------------------------------------------ Total $93,342 $73,462 $64,857 -45-
Loan demand also affects the Bank's liquidity position. The following table presents the maturities of loans at December 31, 2000: Loan Maturities - December 31, 2000 After One But Within Within After 5 One Year 5 Years Years Total (in thousands) Loans with predetermined interest rates: Commercial, financial and agricultural $27,996 $57,041 $18,949 $103,986 Consumer installment 12,159 27,557 15,946 55,662 Real estate mortgage 5,089 22,286 59,824 87,199 Real estate construction 16,680 0 320 17,000 ------------------------------------------------------------ $61,924 $106,884 $95,039 $263,847 Loans with floating interest rates: Commercial, financial and agricultural $114,076 $65,195 $97,757 $277,028 Consumer installment 44,371 32 0 44,403 Real estate mortgage 17,855 1,729 14,274 33,858 Real estate construction 9,721 11,472 62 21,255 ------------------------------------------------------------ $186,023 $78,428 $112,093 $376,544 ------------------------------------------------------------ Total loans $247,947 $185,312 $207,132 $640,391
The maturity distribution and yields of the available-for-sale investment portfolio is presented in the following table. The timing of the maturities indicated in the table below is based on final contractual maturities. Most mortgage-backed securities return principal throughout their contractual lives. As such, the weighted average life of mortgage-backed securities based on outstanding principal balance is usually significantly shorter than the final contractual maturity indicated below. At December 31, 2000, the Bank had no held-to-maturity securities.
Securities Maturities and Weighted Average Tax Equivalent Yields - December 31, 2000 After One Year After Five Years Within but Through but Through After Ten One Year Five Years Ten Years Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield (dollars in thousands) Securities Available-for-Sale U.S. Treasury securities and obligations of U.S. government corporations and agencies $4,998 4.92% $9,932 5.74% $16,243 7.05% $ -- -- % $31,173 6.29% Obligations of states and political subdivisions 301 7.69% 4,178 5.72% 1,643 6.86% 39,254 7.80% 45,376 7.57% Mortgage-backed securities -- -- % 15,496 6.32% 30,708 5.83% 88,882 6.60% 135,086 6.39% Corporate bonds 10,186 7.88% 10,186 7.88% Other securities 3,948 8.04% 3,948 8.04% Other equities 3,341 0.00% 3,341 0.00% ------------------------------------------------------------------------------------- Total securities available-for-sale $5,299 5.08% $29,606 6.04% $48,594 6.27% $145,611 6.90% $229,110 6.71% ------------------------------------------------------------------------------------- Total all securities $5,299 5.08% $29,606 6.04% $48,594 6.27% $145,611 6.90% $229,110 6.71%
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. -46- 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, 2000 commitments to extend credit were the Bank's only financial instruments with off-balance sheet risk. The Bank has not entered into any contracts for financial derivative instruments such as futures, swaps, options, etc. Loan commitments increased to $163,667,000 from $140,660,000 at December 31, 1999. The commitments represent 25.6% of the total loans outstanding at year-end 2000 versus 23.9% a year ago. Disclosure of Fair Value The intent of presenting the fair values of financial instruments is to depict the market's assessment of the present value of net future cash flows discounted to reflect both current interest rates and the market's assessment of the risk that the cash flows will not occur. In determining fair values, the Bank used the carrying amount for cash, short-term investments, accrued interest receivable, short-term borrowings and accrued interest payable, as all of these instruments are short-term in nature. Securities are reflected at quoted market values. Loans and deposits have a long-term time horizon, which required more complex calculations for fair value determination. Loans are grouped into homogeneous categories and broken down between fixed and variable rate instruments. Loans with a variable rate, that reprice immediately, are valued at carrying value. The fair value of fixed rate instruments is estimated by discounting the future cash flows using current rates. Credit risk and repricing risk factors are included in the current rates. Fair value for nonaccrual loans is reported at carrying value and is included in the net loan total. Since the allowance for loan losses exceeds any potential adjustment for credit problems, no further valuation adjustment has been made. Demand deposits, savings and certain money market accounts are short term in nature so the carrying value equals the fair value. For deposits that extend over a period in excess of four months, the fair value is estimated by discounting the future cash payments using the rates currently offered for deposits of similar remaining maturities. At 2000 year-end, the fair values calculated on the Bank's assets are 0.88% above the carrying values versus 1.60% below the carrying values at year-end 1999. The change in the calculated fair value percentage relates to the loan category and is the result of changes in interest rates in 2000 (See Note R of the financial statements). -47- EX-23.1 2 0002.txt EXHIBIT 23.1 EXHIBIT 23.1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 17, 2001, included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statements No. 33-88704 and No. 33-62063. /s/ Arthur Andersen, LLP San Francisco, California March 9, 2001 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
9 1,000 Year Dec-31-2000 Dec-31-2000 57,390 800 0 0 229,110 0 0 640,391 11,670 972,071 837,832 500 14,523 33,983 0 0 50,428 34,805 972,071 62,161 13,954 538 76,653 25,003 28,543 48,110 5,000 0 37,895 19,860 19,860 0 0 12,623 1.76 1.72 9.05 12,262 965 0 0 11,037 4,705 338 11,670 11,670 0 0
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