10-Q 1 tcb10q2q01.txt TCBK FORM 10-Q 2ND QTR SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 2001 Commission file number 0-10661 ------------------------------- ------------------------------ TRICO BANCSHARES (Exact name of registrant as specified in its charter) California 94-2792841 ------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 63 Constitution Drive, Chico, California 95973 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 530/898-0300 ------------------------------------------------------------------------------ Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of Class: Common stock, no par value Outstanding shares as of August 3, 2001: 7,053,580 TRICO BANCSHARES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands) June 30, December 31, --------- ------------ 2001 2000 Assets: Cash and due from banks $ 47,893 $ 58,190 Federal funds sold and repurchase agreements 39,800 -- --------- ------------ Cash and cash equivalents 87,693 58,190 Securities available-for-sale 185,031 229,110 Loans, net of allowance for loan losses of $11,920 and $11,670, respectively 650,838 628,721 Premises and equipment, net 16,876 16,772 Cash Value of Life Insurance 14,319 13,753 Other real estate owned 998 1,441 Accrued interest receivable 5,941 6,935 Intangible assets 5,490 5,464 Other assets 13,107 11,685 --------- ------------ Total assets $ 980,293 $ 972,071 ========= =========== Liabilities: Deposits: Noninterest-bearing demand $ 166,559 $ 168,542 Interest-bearing demand 150,028 150,749 Savings 220,429 214,158 Time certificates 307,707 304,383 --------- ------------ Total deposits 844,723 837,832 Federal funds purchased -- 500 Accrued interest payable and other liabilities 16,851 14,523 Long term borrowings 32,969 33,983 --------- ------------ Total liabilities 894,543 886,838 Shareholders' equity: Common stock 49,577 50,428 Retained earnings 36,573 35,129 Accumulated other comprehensive loss (400) (324) --------- ------------ Total shareholders' equity 85,750 85,233 --------- ------------ Total liabilities and shareholders' equity $ 980,293 $ 972,071 ========= ===========
TRICO BANCSHARES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands except earnings per common share) For the three months For the six months ended June 30, ended June 30, 2001 2000 2001 2000 Interest income: Interest and fees on loans $ 15,355 $ 15,385 $ 30,457 $ 29,448 Interest on investment securities-taxable 2,258 2,969 4,956 6,049 Interest on investment securities-tax exempt 554 556 1,111 1,114 Interest on federal funds sold 547 50 951 243 -------------- ------------- ------------ ------------- Total interest income 18,714 18,960 37,475 36,854 -------------- ------------- ------------ ------------- Interest expense: Interest on deposits 5,816 5,933 12,506 11,702 Interest on federal funds purchased - 208 1 217 Interest on repurchase agreements - 84 - 85 Interest on other borrowings 507 685 1,011 1,314 -------------- ------------- ------------ ------------- Total interest expense 6,323 6,910 13,518 13,318 -------------- ------------- ------------ ------------- Net interest income 12,391 12,050 23,957 23,536 Provision for loan losses 775 900 2,650 1,700 -------------- ------------- ------------ ------------- Net interest income after provision for loan losses 11,616 11,150 21,307 21,836 Noninterest income: Service charges and fees 2,097 1,886 3,970 3,693 Gain on sale of insurance company stock - - 1,756 - Gain on receipt of insurance company stock - - - 1,510 Other income 1,144 1,354 2,365 2,663 -------------- ------------- ------------ ------------- Total noninterest income 3,241 3,240 8,091 7,866 -------------- ------------- ------------ ------------- Noninterest expenses: Salaries and related expenses 5,258 4,948 10,416 9,782 Other, net 5,026 4,502 9,638 8,692 -------------- ------------- ------------ ------------- Total noninterest expenses 10,284 9,450 20,054 18,474 -------------- ------------- ------------ ------------- Net income before income taxes 4,573 4,940 9,344 11,228 Income taxes 1,736 1,796 3,528 4,156 -------------- ------------- ------------ ------------- Net income $ 2,837 $ 3,144 $ 5,816 $ 7,072 ============== ============= ============ ============= Basic earnings per common share $ 0.40 $ 0.44 $ 0.82 $ 0.99 ============== ============= ============ ============= Diluted earnings per common share $ 0.39 $ 0.43 $ 0.80 $ 0.96 ============== ============= ============ =============
TRICO BANCSHARES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (in thousands, except number of shares) Common stock Accumulated ------------------------- Other Number Retained Comprehensive Comprehensive of shares Amount earnings Loss Total Income ------------------------------------------------------------------------------------- Balance, December 31, 2000 7,181,226 $50,428 $35,129 ($324) $85,233 Exercise of Common Stock options 38,830 318 318 Repurchase of Common Stock (166,476) (1,169) (1,541) (2,710) Common stock cash dividends (2,831) (2,831) Comprehensive income: Net income 5,816 5,816 $5,816 Other comprehensive income: Change in unrealized loss on securities, net of tax 284 284 284 Change in minimum pension liability, net of tax (360) (360) (360) ---------------- Comprehensive income $5,740 ------------------------------------------------------------------- ---------------- Balance, June 30, 2001 7,053,580 $49,577 $36,573 ($400) $85,750 -------------------------------------------------------------------
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the six months ended June 30, 2001 2000 -------------- -------------- Operating activities: Net income $ 5,816 $ 7,072 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,650 1,700 Provision for losses on other real estate owned 18 10 Depreciation and amortization 1,349 1,256 Amortization of intangible assets 455 482 Accretion and amortization of investment securities discounts and premiums, net 100 141 Deferred income taxes 169 (173) Investment security (gains) losses, net (1,756) - Gain on sale of OREO (31) (50) Gain on sale of loans (284) (179) Loss on sale of fixed assets 8 44 Amortization of stock options - 69 Decrease (increase) in interest receivable 994 (523) Increase in interest payable 304 454 Decrease in other assets and liabilities (1,386) (474) -------------- -------------- Net cash provided by operating activities 8,406 9,829 -------------- -------------- Investing activities: Proceeds from maturities of securities available-for-sale 43,044 23,596 Proceeds from sales of securities available-for-sale 3,265 - Purchases of securities available-for-sale (127) (8,955) Proceeds from sale of fixed assets 9 30 Net increase in loans (24,811) (52,101) Purchases of premises and equipment (1,221) (2,253) Proceeds from sale of OREO 784 304 -------------- -------------- Net cash provided (used) by investing activities 20,943 (39,379) -------------- -------------- Financing activities: Net increase (decrease) in deposits 6,891 (6,543) Net increase (decrease) in Fed funds purchased (500) 17,000 Net increase in repurchase agreements - 4,900 Borrowings under long-term debt agreements - 35,000 Payments of principal on long-term debt agreements (1,014) (20,011) Repurchase of common stock (2,710) (154) Cash dividends - Common (2,831) (2,801) Exercise of common stock options 318 301 -------------- -------------- Net cash provided by financing activities 154 27,692 -------------- -------------- Increase (decrease) in cash and cash equivalents 29,503 (1,858) Cash and cash equivalents at beginning of period 58,190 59,636 -------------- -------------- Cash and cash equivalents at end of period $ 87,693 $ 57,778 ============== ============== Supplemental information Cash paid for taxes $ 3,100 $ 3,961 Cash paid for interest expense $ 13,214 $ 12,864
Item 1. Notes to Condensed Consolidated Financial Statements Note A - Basis of Presentation The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in Management's opinion, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results for such interim periods. Certain information and disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to SEC rules or regulations; however, the Company believes that the disclosures made are adequate to make the information presented not misleading. The interim results for the six months ended June 30, 2001 and 2000 are not necessarily indicative of results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company's Annual Report for the year ended December 31, 2000. Note B - Comprehensive Income For the Company, comprehensive income includes net income reported on the statement of income, changes in the fair value of its available-for-sale investments and changes in minimum pension liability reported as other comprehensive income. The following table presents net income adjusted by these elements to determine total comprehensive income (in thousands). Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 Net income $ 2,837 $ 3,144 $ 5,816 $ 7,072 Net change in unrealized gains (losses) on securities available-for-sale (172) 815 284 283 Net change in minimum pension liability (360) -- (360) -- ------- ------- ------- ------- Comprehensive income (loss) $ 2,305 $ 3,959 $ 5,740 $ 7,355 ======= ======= ======= ======= Note C - Earnings per Share The Company's basic and diluted earnings per share are as follows (in thousands except per share data): Three Months Ended June 30, 2001 Weighted Average Per-Share Income Shares Amount Basic Earnings per Share Net income available to common shareholders $2,837 7,078,085 $0.40 Common stock options outstanding -- 132,268 Diluted Earnings per Share Net income available to common shareholders $2,837 7,210,353 $0.39 ====== ========= Three Months Ended June 30, 2000 Weighted Average Per-Share Income Shares Amount Basic Earnings per Share Net income available to common shareholders $3,144 7,188,003 $0.44 Common stock options outstanding -- 152,309 Diluted Earnings per Share Net income available to common shareholders $3,144 7,340,312 $0.43 ====== ========= Six Months Ended June 30, 2001 Weighted Average Per-Share Income Shares Amount Basic Earnings per Share Net income available to common shareholders $5,816 7,109,299 $0.82 Common stock options outstanding -- 130,553 Diluted Earnings per Share Net income available to common shareholders $5,816 7,239,852 $0.80 ====== ========= Six Months Ended June 30, 2000 Weighted Average Per-Share Income Shares Amount Basic Earnings per Share Net income available to common shareholders $7,072 7,179,853 $0.99 Common stock options outstanding -- 159,388 Diluted Earnings per Share Net income available to common shareholders $7,072 7,339,241 $0.96 ====== ========= Note D - Business Segments The Company is principally engaged in traditional community banking activities provided through its twenty-nine branches and eight in-store branches located throughout Northern California. Community banking activities include the Bank's commercial and retail lending, deposit gathering and investment and liquidity management activities. In addition to its community banking services, the Bank offers investment brokerage and leasing services. The results of the separate branches have been aggregated into a single reportable segment, Community Banking. The Company's leasing, investment brokerage and real estate segments do not meet prescribed aggregation or materiality criteria and, therefore, are reported as "Other" in the following table. Summarized financial information concerning the Bank's reportable segments is as follows (in thousands): Community Banking Other Total Three Months Ended June 30, 2001 Net interest income $ 12,136 $ 255 $ 12,391 Noninterest income 2,608 633 3,241 Noninterest expense 9,838 446 10,284 Net income 2,623 214 2,837 Assets $965,400 $14,893 $980,293 Three Months Ended June 30, 2000 Net interest income $ 11,825 $ 225 $ 12,050 Noninterest income 2,404 836 3,240 Noninterest expense 8,904 546 9,450 Net income 2,858 286 3,144 Assets $947,383 $13,684 $961,067 Six Months Ended June 30, 2001 Net interest income $ 23,506 $ 451 $ 23,957 Noninterest income 6,765 1,326 8,091 Noninterest expense 19,139 915 20,054 Net income 5,400 416 5,816 Assets $965,400 $14,893 $980,293 Six Months Ended June 30, 2000 Net interest income $ 23,131 $ 405 $ 23,536 Noninterest income 6,330 1,536 7,866 Noninterest expense 17,503 971 18,474 Net income 6,536 536 7,072 Assets $947,383 $13,684 $961,067 Note E - Other Income Included in the results for the six months ended June 30, 2001 is a one-time pre-tax income item of $1,756,000. This one-time item represents the realized gain recorded by the Company upon the sale of 88,796 common shares of John Hancock Financial Services, Inc. (JHF) for proceeds of $3,265,000. Included in the results for the six months ended June 30, 2000 is 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. Note F - Stock Repurchase Plan On March 15, 2001, the Company announced the completion of its stock repurchase plan initially announced on July 20, 2000. Under this repurchase plan, the Company repurchased a total of 150,000 shares of which 110,000 shares were repurchased during the quarter ended March 31, 2001. Also on March 15, 2001, the Company announced that its Board of Directors approved a new plan to repurchase, as conditions warrant, up to 150,000 additional shares of the Company's stock on the open market or in privately negotiated transactions. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. The 150,000 shares covered by this repurchase plan represent approximately 2.1% of the Company's 7,080,226 then outstanding common shares. As of July 10, 2001, the Company had repurchased 52,500 shares under this new plan. Note G - Shareholder Rights Plan On June 25, 2001, the Company announced that its Board of Directors adopted and entered into a Shareholder Rights Plan designed to protect and maximize shareholder value and to assist the Board of Directors in ensuring fair and equitable benefit to all shareholders in the event of a hostile bid to acquire the Company. The Company adopted this Rights Plan to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, the Rights Plan imposes a significant penalty upon any person or group that acquires 15% or more of the Company's outstanding common stock without the approval of the Company's Board of Directors. The Rights Plan was not adopted in response to any known attempt to acquire control of the Company. Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was declared for each common share held of record as of the close of business on July 10, 2001. No separate certificates evidencing the Rights will be issued unless and until they become exercisable. The Rights generally will not become exercisable unless an acquiring entity accumulates or initiates a tender offer to purchase 15% or more of the Company's common stock. In that event, each Right will entitle the holder, other than the unapproved acquirer and its affiliates, to purchase either the Company's common stock or shares in an acquiring entity at one-half of market value. The Right's initial exercise price, which is subject to adjustment, is $49.00. The Company's Board of Directors generally will be entitled to redeem the Rights at a redemption price of $.01 per Right until an acquiring entity acquires a 15% position. The Rights expire on July 10, 2011. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Except within the "overview" section, interest income and net interest income are presented on a tax equivalent basis. In addition to the historical information contained herein, this Quarterly Report contains certain forward-looking statements. The reader of this Quarterly 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 Quarterly 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 The Company had earnings of $2,837,000 for the quarter ended June 30, 2001. The quarterly earnings represented a 9.8% decrease over the $3,144,000 reported for the same period of 2000. Diluted earnings per share for the second quarter of 2001 were $0.39 versus $0.43 in the year earlier period. Earnings for the six months ended June 30, 2001 were $5,816,000 versus year ago results of $7,072,000, and represented a 17.8% decrease. The diluted earnings per share were $0.80 and $0.96 for the respective six-month periods. Included in the results for the six months ended June 30, 2001 was a $1,756,000 pretax gain on the sale of the Company's equity investment in John Hancock Financial Services, Inc. (JHF). In the six months ended June 30, 2000, the Company recorded a $1,510,000 pretax gain from the initial receipt of its investment in JHF. Excluding the gains associated with the shares of JHF, the Company would have reported diluted earnings per share of $0.65 and $0.84 in the six months ended June 30, 2001 and 2000, respectively. Pretax earnings for the second quarter of 2001 were $4,573,000 versus $4,940,000 for the same period in 2000. Net interest income reflected growth of $341,000 (2.8%) to $12,391,000. The interest income component was down $246,000 (1.3%) to $18,714,000 mainly due to Federal Reserve interest rate cuts totaling 275 basis points since December 31, 2000. Interest expense for the quarter ended June 30, 2001 decreased $587,000 (8.5%) from the year-ago quarter to $6,323,000 as a result of the Bank's efforts to reprice its liabilities. Net interest margin was 5.76% for the second quarter of 2001 versus 5.85% in the same quarter of the prior year. The provision for loan losses of $775,000 for the second quarter of 2001 was $125,000 lower than the $900,000 recorded in the same quarter of 2000. Noninterest income for the second quarter of 2001 increased $1,000 to $3,241,000 from $3,240,000 during the same period in 2000. Income from service charges and fees increased $211,000 (11.2%) to $2,097,000, primarily due to increased account service charges. Other income decreased $210,000 (15.5%) to $1,144,000 in the second quarter of 2001 versus the same quarter in 2000. Accounting for the decrease in other income was a $253,000 (31%) decrease in commissions on the sale of insurance, mutual funds and annuities from $816,000 to $563,000. This decrease was partially offset by an increase in gain on sale of loans, which was up $38,000 (37%) to $142,000 for the quarter ended June 30, 2001. Noninterest expense increased $834,000 (8.8%) in the second quarter 2001 versus 2000. Salary and benefit expense increased $310,000 (6.3%) on a quarter-over-quarter basis to $5,258,000. Base salary expense increased $180,000 (5.4%) due to a 2% increase in average full-time equivalent employees to 398, and a 3.4% rate of annual salary increases. An increase in the quarterly employee retirement expense accrual accounted for the majority of the remaining increase in salary and benefits expense. Other noninterest expenses increased $524,000 (11.6%) to $5,026,000 in the second quarter of 2001. Contributing to the increase in other noninterest expense was a $169,000 (13.4%) increase in premises and equipment expense that was primarily related to facility maintenance and computer network upgrade. Also contributing to the increase in other noninterest expense was a $58,000 (25.1%) increase in telephone expense, and a $79,000 (209%) increase in legal fees related to nonperforming loans. Utilities expense was up $9,000 (12%) over the year-ago quarter. Assets of the Company totaled $980,293,000 at June 30, 2001 and represented increases of $8,222,000 (0.9%) and $19,226,000 (2.0%) from December 31, 2000 and June 30, 2000 ending balances, respectively. Changes in earning assets from the prior year quarter-end balances included an increase in loans of $23,188,000 (3.6%) to $662,758,000 and a decrease in securities of $32,256,000 (14.8%) to $185,031,000. The Company invested $39,800,000 of overnight Fed funds at June 30, 2001 compared to net overnight borrowings of $20,900,000 at June 30, 2000. Deposits at June 30, 2001 were up $57,156,000 (7.3%) to $844,723,000 from $787,567,000 at June 30, 2000. From year-end 2000 balances, nonperforming assets have decreased $7,676,000 (52.3%) and total $6,992,000 at June 30, 2001. Nonperforming assets were 0.71% of total assets at quarter end versus 1.51% at December 31, 2000. Year to date 2001, on an annualized basis, the Company realized a return on assets of 1.21% and a return on equity of 13.48% versus 1.54% and 18.78% in the first half of 2000. TriCo Bancshares ended the quarter with a Tier 1 capital ratio of 10.5% and a total risk-based capital ratio of 11.7%. The following tables provide a summary of the major elements of income and expense for the second quarter of 2001 compared with the second quarter of 2000 and for the first six months of 2001 compared with the first six months of 2000. TRICO BANCSHARES CONDENSED COMPARATIVE INCOME STATEMENT (in thousands, except earnings per common share) Three months ended June 30, Percentage 2001 2000 Change increase (decrease) Interest income $ 19,002 $ 19,241 (1.2%) Interest expense 6,323 6,910 (8.5%) -------------- -------------- Net interest income 12,679 12,331 2.8% Provision for loan losses 775 900 (13.9%) -------------- -------------- Net interest income after 11,904 11,431 4.1% provision for loan losses Noninterest income 3,241 3,240 0.0% Noninterest expenses 10,284 9,450 8.8% -------------- -------------- Net income before income taxes 4,861 5,221 (6.9%) Income taxes 1,736 1,796 (3.3%) Tax equivalent adjustment1 288 281 2.5% -------------- -------------- Net income $ 2,837 $ 3,144 (9.8%) ============== ============== Diluted earnings per common share $ 0.39 $ 0.43 (9.3%) 1Interest on tax-free securities is reported on a tax equivalent basis of 1.52 for June 30, 2001 and 2000. TRICO BANCSHARES CONDENSED COMPARATIVE INCOME STATEMENT (in thousands, except earnings per common share) Six months ended June 30, Percentage 2001 2000 Change increase (decrease) Interest income $ 38,053 $ 37,422 1.7% Interest expense 13,518 13,318 1.5% -------------- -------------- Net interest income 24,535 24,104 1.8% Provision for loan losses 2,650 1,700 55.9% -------------- -------------- Net interest income after 21,885 22,404 (2.3%) provision for loan losses Noninterest income 8,091 7,866 2.9% Noninterest expenses 20,054 18,474 8.6% -------------- -------------- Net income before income taxes 9,922 11,796 (15.9%) Income taxes 3,528 4,156 (15.1%) Tax equivalent adjustment1 578 568 1.8% -------------- -------------- Net income $ 5,816 $ 7,072 (17.8%) ============== ============== Diluted earnings per common share $ 0.80 $ 0.96 (16.7%) 1Interest on tax-free securities is reported on a tax equivalent basis of 1.52 for June 30, 2001 and 2000. 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 comprises the major portion of the Bank's income. During the first six months of 2001, the Fed Reserve Bank lowered the Fed funds target rate 275 basis points to 3.75%. The Company's internal financial models indicate that like many of its community banking peers, in periods of falling interest rates its net interest margin is expected to compress slightly. Conversely, in periods of rising interest rates, its net interest margin is expected to expand slightly. During periods of extreme interest rate changes, such as in the first six months of 2001, this compression or expansion of net interest margin is temporarily compounded by the fact that generally, the Company's assets change their rates faster than the Company's liabilities change their rates. During the quarter ended March 31, 2001, this margin compression was at its highest level as the Fed cut interest rates 150 basis points, and the Company's net interest margin fell to 5.41% from 5.83% in the quarter ended December 31, 2000. During the quarter ended June 30, 2001, the Fed cut interest rates 125 basis points, but the repricing of the Company's liabilities began to catch up with the repricing of its assets, and the Company's net interest margin recovered to 5.76%. For the three months ended June 30, 2001, interest income on a fully tax-equivalent basis decreased $239,000 (1.2%) over the same period in 2000. The average balance of total earning assets was higher by $36,393,000 (4.3%). Average loan and Fed funds sold balances were up $18,042,000 (2.9%) and $46,693,000 (1,452%), respectively, while average security balances were down $28,342,000 (12.9%). The average yield on loans, securities and Fed funds sold was lower by 30, 45 and 184 basis points respectively. The overall yield on average earning assets decreased 48 basis points to 8.64%. For the second quarter of 2001, interest expense decreased $587,000 (8.5%) over the year earlier period. Average balances of interest-bearing liabilities were up $10,688,000 (1.5%). The average rate paid on interest bearing liabilities decreased 40 basis points to 3.56% from the year-ago quarter. The combined effect of the decreases in interest income and interest expense for the second quarter of 2001 versus 2000 resulted in an increase of $348,000 (2.8%) in net interest income. Net interest margin was down 9 basis points to 5.76% from 5.85% for the same periods in 2001 and 2000. The six-month period ending June 30, 2001, reflects an interest income increase of $631,000 (1.7%) over the same period in 2000. The average balance of total earning assets was higher by $42,963,000 (5.1%). Average loan and Fed funds sold balances were up $32,062,000 (5.3%) and $31,700,000 (376%), respectively, while average security balances were down $20,799,000 (9.3%). The average yield on loans, securities and Fed funds sold was lower by 18, 37 and 102 basis points respectively. The overall yield on average earning assets decreased 29 basis points to 8.67%. Interest expense for the six-month period increased $200,000 (1.5%) from the same period in 2000. The average balance of total interest-bearing liabilities increased $18,477,000 (2.7%). The average rate paid on total interest-bearing liabilities decreased 5 basis points to 3.80%. The combined effect of the increase in interest income and interest expense for the first six months of 2001 versus 2000 resulted in an increase of $431,000 (1.8%) in net interest income. Net interest margin decreased 18 basis points to 5.59% from 5.77%. The following four tables provide summaries of the components of the interest income, interest expense and net interest margins on earning assets for the quarter and six month periods ended June 30, 2001 versus the same periods in 2000.
TRICO BANCSHARES ANALYSIS OF CHANGE IN NET INTEREST MARGIN ON EARNING ASSETS (in thousands) Three Months Ended June 30, 2001 June 30, 2000 Average Income/ Yield/ Average Income/ Yield/ Balance1 Expense Rate Balance1 Expense Rate Assets Earning assets Loan 2,3 $638,685 $ 15,355 9.62% $620,643 $ 15,385 9.92% Securities4 191,475 3,100 6.48% 219,817 3,806 6.93% Federal funds sold 49,908 547 4.38% 3,215 50 6.22% ------------- ------------ ----------- ------------- ------------- ----------- Total earning assets 880,068 19,002 8.64% 843,675 19,241 9.12% ------------ ------------- Cash and due from bank 39,940 37,092 Premises and equipment 16,955 16,131 Other assets,net 40,965 42,507 Less: allowance for loan losses (11,605) (12,056) ------------- ------------- Total $966,323 $927,349 ============= ============= Liabilities and shareholders' equity Interest-bearing Demand deposits $150,471 435 1.16% $148,609 584 1.57% Savings deposits 216,534 1,163 2.15% 215,533 1,640 3.04% Time deposits 309,439 4,218 5.45% 269,765 3,709 5.50% Fed funds purchased 102 1 3.92% 12,556 208 6.63% Repurchase agreements - - 5,179 84 6.49% Long-term debt 32,928 506 6.15% 47,144 685 5.81% ------------- ------------ ----------- ------------- ------------- ----------- Total interest-bearing liabilities 709,474 6,323 3.56% 698,786 6,910 3.96% ------------ ------------- Noninterest-bearing deposits 154,336 138,409 Other liabilities 16,172 13,410 Shareholders' equity 86,341 76,744 ------------- ------------- Total liabilities and shareholders' equity $966,323 $927,349 ============= ============= Net interest rate spread5 5.08% 5.16% Net interest income/net $ 12,679 $ 12,331 ============ ============= interest margin6 5.76% 5.85% ============ ============= 1Average balances are computed principally on the basis of daily balances. 2Nonaccrual loans are included. 3Interest income on loans includes fees on loans of $1,158,000 in 2001 and $715,000 in 2000. 4Interest income is stated on a tax equivalent basis of 1.52 at June 30, 2001 and 2000. 5Net interest rate spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. 6Net interest margin is computed by dividing net interest income by total average earning assets.
TRICO BANCSHARES ANALYSIS OF CHANGE IN NET INTEREST MARGIN ON EARNING ASSETS (in thousands) Six Months Ended June 30, 2001 June 30, 2000 Average Income/ Yield/ Average Income/ Yield/ Balance1 Expense Rate Balance1 Expense Rate Assets Earning assets Loan 2,3 $ 635,713 $30,457 9.58% $ 603,651 $29,448 9.76% Securities4 202,447 6,645 6.56% 223,246 7,731 6.93% Federal funds sold 40,139 951 4.74% 8,439 243 5.76% ------------- ------------ ----------- ------------- ------------- ----------- Total earning assets 878,299 38,053 8.67% 835,336 37,422 8.96% ------------ ------------- Cash and due from bank 40,229 36,827 Premises and equipment 16,923 16,078 Other assets,net 40,388 41,717 Less: allowance for loan losses (12,020) (11,730) ------------- ------------- Total $ 963,819 $ 918,228 ============= ============= Liabilities and shareholders' equity Interest-bearing Demand deposits $ 151,428 957 1.26% $ 147,924 1,162 1.57% Savings deposits 217,418 2,787 2.56% 219,719 3,335 3.04% Time deposits 308,959 8,762 5.67% 269,272 7,205 5.35% Fed funds purchased 51 1 3.92% 6,570 217 6.61% Repurchase agreements - - 2,629 85 6.47% Long-term debt 33,058 1,011 6.12% 46,323 1,314 5.67% ------------- ------------ ----------- ------------- ------------- ----------- Total interest-bearing liabilities 710,914 13,518 3.80% 692,437 13,318 3.85% ------------ ------------- Noninterest-bearing deposits 150,978 137,262 Other liabilities 15,610 13,202 Shareholders' equity 86,317 75,327 ------------- ------------- Total liabilities and shareholders' equity $ 963,819 $ 918,228 ============= ============= Net interest rate spread5 4.86% 5.11% Net interest income/net $24,535 $24,104 ============ ============= interest margin6 5.59% 5.77% ============ ============= 1Average balances are computed principally on the basis of daily balances. 2Nonaccrual loans are included. 3Interest income on loans includes fees on loans of $2,069,000 in 2001 and $1,321,000 in 2000. 4Interest income is stated on a tax equivalent basis of 1.52 at June 30, 2001 and 2000. 5Net interest rate spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. 6Net interest margin is computed by dividing net interest income by total average earning assets.
TRICO BANCSHARES ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND EXPENSE (in thousand) For the three months ended June 30, 2001 over 2000 Yield/ Volume Rate4 Total ----------------- ----------------- ----------------- Increase (decrease) in interest income: Loans 1,2 $ 447 $ (477) $ (30) Investment securities3 (491) (215) (706) Federal funds sold 726 (229) 497 ----------------- ----------------- ----------------- Total 682 (921) (239) ----------------- ----------------- ----------------- Increase (decrease) in interest expense: Demand deposits (interest-bearing) 7 (156) (149) Savings deposits 8 (485) (477) Time deposits 545 (36) 509 Federal funds purchased (206) (1) (207) Repurchase agreements (84) - (84) Long-term debt (207) 28 (179) ----------------- ----------------- ----------------- Total 63 (650) (587) ----------------- ----------------- ----------------- Increase in net interest income $ 619 $ (271) $ 348 ================= ================= ================= 1Nonaccrual loans are included. 2Interest income on loans includes fee income on loans of $1,158,000 in 2001 and $715,000 in 2000. 3Interest income is stated on a tax equivalent basis of 1.52 for June 30, 2001 and 2000 respectively. 4The rate/volume variance has been included in the rate variance.
TRICO BANCSHARES ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND EXPENSE (in thousand) For the six months ended June 30, 2001 over 2000 Yield/ Volume Rate4 Total ----------------- ----------------- ----------------- Increase (decrease) in interest income: Loans 1,2 $ 1,564 $ (555) $ 1,009 Investment securities3 (721) (365) (1,086) Federal funds sold 913 (205) 708 ----------------- ----------------- ----------------- Total 1,756 (1,125) 631 ----------------- ----------------- ----------------- Increase (decrease) in interest expense: Demand deposits (interest-bearing) 28 (233) (205) Savings deposits (35) (513) (548) Time deposits 1,062 495 1,557 Federal funds purchased (215) (1) (216) Repurchase agreements (85) - (85) Long-term debt (376) 73 (303) ----------------- ----------------- ----------------- Total 379 (179) 200 ----------------- ----------------- ----------------- Increase in net interest income $ 1,377 $ (946) $ 431 ================= ================= ================= 1Nonaccrual loans are included. 2Interest income on loans includes fee income on loans of $2,069,000 in 2001 and $1,321,000 in 2000. 3Interest income is stated on a tax equivalent basis of 1.52 for June 30, 2001 and 2000. 4The rate/volume variance has been included in the rate variance.
Provision for Loan Losses The Bank provided $775,000 for loan losses in the second quarter of 2001 versus $900,000 in 2000. Net charge-offs for all loans in the second quarter of 2001 totaled $196,000 versus $222,000 in the year earlier period. For the six months ended June 30, 2001 and 2000, the Bank provided $2,650,000 and $1,700,000 for loan losses, respectively. Net charge-offs for all loans during the six months ended June 30, 2001 and 2000 were $2,400,000 and $145,000, respectively. Included in the net charge-offs during the six months ended June 30, 2001 is $2,000,000 of charge offs related to a single borrower. (Also see reference to this single borrower in the discussion of "Nonperforming Loans" below.) Noninterest Income Noninterest income for the second quarter of 2001 increased $1,000 to $3,241,000 from $3,240,000 during the same period in 2000. Income from service charges and fees increased $211,000 (11.2%) to $2,097,000, primarily due to increased account service charges and ATM fees. Other income decreased $210,000 (15.5%) to $1,144,000 in the second quarter of 2001 versus the same quarter in 2000. Accounting for the decrease in other income was a $253,000 (31%) decrease in commissions on the sale of insurance, mutual funds and annuities from $816,000 to $563,000. This decrease was partially offset by an increase in gain on sale of loans which was up $38,000 (37%) to $142,000 for the quarter ended June 30, 2001. For the six months ended June 30, 2001, noninterest income was up $225,000 (2.9%) over the same period for 2000. As described above, during the quarters ended March 31, 2001 and 2000, the Company recorded one-time pre-tax income items of $1,756,000 and $1,510,000, respectively from the receipt and sale of John Hancock Financial Services, Inc. common stock. Excluding these one-time events, noninterest income for the six months ended June 30, 2001 would have decreased $21,000 (0.3%) to $6,335,000. Service charges and fee income was up $277,000 (7.5%) to $3,970,000 mainly due to increased account service charges and ATM fees. Other income decreased $298,000 (11.2%) to $2,365,000. Accounting for the decrease in other income was a $295,000 (20%) decrease in commissions on the sale of insurance, mutual funds and annuities from $1,480,000 to $1,185,000. This decrease was partially offset by an increase in gain on sale of loans which increased $105,000 (59%) to $284,000. Noninterest Expense Noninterest expense increased $834,000 (8.8%) in the second quarter 2001 versus 2000. Salary and benefit expense increased $310,000 (6.3%) on a quarter-over-quarter basis to $5,258,000. Base salary expense increased $180,000 (5.4%) due to a 2% increase in average full-time equivalent employees to 398, and a 3.4% rate of annual salary increases. Employee retirement expense accruals increased $138,000 (49%) due mainly to increased supplemental executive retirement plan and employee stock ownership plan accruals. Other noninterest expenses increased $524,000 (11.6%) to $5,026,000 in the second quarter of 2001. Contributing to the increase in other noninterest expense was a $169,000 (13.4%) increase in premises and equipment expense that was primarily related to facility maintenance and computer network upgrade. Utilities expense, which is included in premises and equipment expense, was up $9,000 (12%) over the year-ago quarter. Also contributing to the increase in other noninterest expense was a $98,000 (46%) increase in professional service fees comprised mostly of legal fees related to nonperforming loans. Operating expenses such as telephone, armored car, courier, ATM, and office supplies taken as a whole were up $107,000 (9%) from the year-ago quarter, with telephone expense being up $58,000 (25%) due primarily to the cost of enhanced data lines required by the Company's network. For the first six months noninterest expenses increased $1,580,000 (8.6%) to $20,054,000 in 2001 compared to 2000. Salary and benefit expense increased $634,000 (6.5%) to $10,416,000. Base salary expense increased $412,000 (6.3%) due to a 2.3% increase in average full-time equivalent employees to 395, and a 4.0% rate of annual salary increases. Employee retirement expense accruals increased $148,000 (24%) due mainly to increased supplemental executive retirement plan and employee stock ownership plan accruals. Other noninterest expenses increased $946,000 (10.9%) to $9,638,000. Contributing to the increase in other noninterest expense was a $135,000 (5.2%) increase in premises and equipment expense that was primarily related to facility maintenance and computer network upgrade. Utilities expense, which is included in premises and equipment expense, was up $30,000 (19%) over the year-ago period. Also contributing to the increase in other noninterest expense was a $203,000 (47%) increase in professional service fees comprised mostly of legal fees related to nonperforming loans. Operating expenses such as telephone, armored car, courier, ATM, and office supplies taken as a whole were up $327,000 (14%) from the year-ago quarter, with telephone expense being up $73,000 (16%) due primarily to the cost of enhanced data lines required by the Company's network, and postage expense up $109,000 (53%) due to special customer mailings in the quarter ended March 31, 2001. Provision for Income Taxes The effective tax rate for the six months ended June 30, 2001 was 37.8% and reflects an increase from 37.0% in the year earlier period. Loans At June 30, 2001, loan balances were $23,188,000 (3.6%) higher than the ending balances at June 30, 2000 and $22,367,000 (3.5%) higher than the ending balances at December 31, 2000. On a year-over-year basis at June 30, consumer and real estate construction loan balances were higher by $32,829,000 (31.8%) and $6,086,000 (18.1%), respectively. Commercial and real estate mortgage loan balances were lower by $3,504,000 (2.3%) and $12,223,000 (3.5%), respectively. Securities At June 30, 2001, securities available-for-sale had a fair value of $185,031,000 and an amortized cost of $185,096,000. This portfolio contained mortgage-backed securities with an amortized cost of $119,398,000 of which $10,306,000 were CMOs. At June 30, 2001, the Company had no securities classified as held-to-maturity Nonperforming Loans As shown in the following table, total nonperforming assets have decreased 52.3% to $6,992,000 in the first six months of 2001. Included in the nonaccrual loans balance at December 31, 2000 was approximately $8,400,000 related to a single borrower that was subsequently sold in the quarter ended March 31, 2001 without recourse to the Company. Nonperforming assets represent 0.71% of total assets. All nonaccrual loans are considered to be impaired when determining the need for a specific valuation allowance. The Collections Department personnel continue to make a concerted effort to work problem and potential problem loans to reduce risk of loss. June 30, December 31, 2001 2000 Nonaccrual loans $ 5,044 $ 12,262 Accruing loans past due 90 days or more 950 965 Restructured loans (in compliance with modified terms) 0 0 --------------- -------------- Total nonperforming loans 5,994 13,227 Other real estate owned 998 1,441 --------------- -------------- Total nonperforming assets $ 6,992 $ 14,668 =============== ============== Nonperforming loans to total loans 0.90% 2.07% Allowance for loan losses to nonperforming loans 199% 88% Nonperforming assets to total assets 0.71% 1.51% Allowance for loan losses to nonperforming assets 170% 80% Allowance for Loan Loss Credit risk is inherent in the business of lending. As a result, the Company maintains an Allowance for Loan Losses to absorb losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's Allowance for Loan Losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio. For purposes of this discussion, "loans" shall include all loans and lease contracts, that are part of the Company's portfolio. The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan portfolio, and to a lesser extent the Company's loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occur at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies. The Company's method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans and leases as determined by SFAS 114, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. Allowances for specific loans are based on SFAS 114 analysis of individual credits. Allowances for changing environmental factors are Management's best estimate of the probable impact these changes have had on the loan portfolio as a whole. This process is explained in detail in the notes to the Company's Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2000. The following table presents information concerning the allowance and provision for loan losses for the six months ended. June 30, June 30, 2001 2000 (in thousands) (in thousands) Balance, beginning of period $ 11,670 $ 11,037 Provision charged to operations 2,650 1,700 Loans charged off (2,537) (424) Recoveries of loans previously charged off 137 279 ----------------- ----------------- Balance, end of period $ 11,920 $ 12,592 ================= ================= Ending loan portfolio $ 662,758 $ 639,570 ================= ================= Allowance to loans as a percentage of ending loan portfolio 1.80% 1.97% ================= ================= Equity The following table indicates the amounts of regulatory capital of the Company.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of June 30, 2001 (amounts in thousands): Total Capital to Risk Weighted Assets: Consolidated $89,786 11.74% =>$61,342 =>8.0% =>$76,678 =>10.0% Tri Counties Bank $87,787 11.51% =>$61,015 =>8.0% =>$76,269 =>10.0% Tier I Capital to Risk Weighted Assets: Consolidated $80,201 10.48% =>$30,671 =>4.0% =>$46,007 =>6.0% Tri Counties Bank $78,224 10.26% =>$30,507 =>4.0% =>$45,762 =>6.0% Tier I Capital to Average Assets: Consolidated $80,201 8.35% =>$38,432 =>4.0% =>$48,041 =>5.0% Tri Counties Bank $78,224 8.16% =>$38,364 =>4.0% =>$47,956 =>5.0%
Item 3. MARKET RISK MANAGEMENT There have not been any significant changes in the market risk profile of the Bank since December 31, 2000. PART II Other Information (a) Item 6. Exhibits Filed Herewith Exhibit No. Exhibits 3.1 Articles of Incorporation, as amended to date, filed as Exhibit 3.1 to Registrant's Report on Form 10-K, filed for the year ended December 31, 1989, are incorporated herein by reference. 3.2 Bylaws, as amended to 1992, filed as Exhibit 3.2 to Registrant's Report on Form 10-K, filed for the year ended December 31, 1992, are incorporated herein by reference. 10.1 Lease for Park Plaza Branch premises entered into as of September 29, 1978, by and between Park Plaza Limited Partnership as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.9 to the TriCo Bancshares Registration Statement on Form S-14 (Registration No. 2-74796) is incorporated herein by reference. 10.2 Lease for Administration Headquarters premises entered into as of April 25, 1986, by and between Fortress-Independence Partnership (A California Limited Partnership) as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.6 to Registrant's Report on Form 10-K filed for the year ended December 31, 1986, is incorporated herein by reference. 10.3 Lease for Data Processing premises entered into as of April 25, 1986, by and between Fortress-Independence Partnership (A California Limited Partnership) as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.7 to Registrant's Report on Form 10-K filed for the year ended December 31, 1986, is incorporated herein by reference. 10.4 Lease for Chico Mall premises entered into as of March 11, 1988, by and between Chico Mall Associates as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.4 to Registrant's Report on Form 10-K filed for the year ended December 31, 1988, is incorporated by reference. 10.5 First amendment to lease entered into as of May 31, 1988 by and between Chico Mall Associates and Tri Counties Bank, filed as Exhibit 10.5 to Registrant's Report on Form 10-K filed for the year ended December 31, 1988, is incorporated by reference. 10.9 Employment Agreement of Robert H. Steveson, dated December 12, 1989 between Tri Counties Bank and Robert H. Steveson, filed as Exhibit 10.9 to Registrant's Report on Form 10-K filed for the year ended December 31, 1989, is incorporated by reference. 10.12 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. 21.1 Tri Counties Bank, a California banking corporation, is the only subsidiary of Registrant. (b) Reports on Form 8-K: During the quarter ended June 30, 2001, the Registrant filed a Current Report on Form 8-K dated June 25, 2001 containing a press release announcing the adoption of a Shareholders Rights Plan and a copy of the Shareholders Rights Plan. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRICO BANCSHARES Date /s/ Richard P. Smith ---------------------------- ----------------------------- Richard P. Smith President and Chief Executive Officer Date /s/ Thomas J. Reddish ---------------------------- ----------------------------- Thomas J. Reddish Vice President and Chief Financial Officer