-----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, Vx+J4g4gDqUmV+6TRC+zRF2uq29DqXNJEgG4y6DWVzuD5NsPpvcSgxZbloy75NEU S49PddT9GmTWzjvVTi9SEA== 0000356171-03-000002.txt : 20030415 0000356171-03-000002.hdr.sgml : 20030415 20030415123016 ACCESSION NUMBER: 0000356171-03-000002 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030404 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20030415 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10661 FILM NUMBER: 03649954 BUSINESS ADDRESS: STREET 1: TRICO BANCSHARES STREET 2: 63 CONSTITUTION DRIVE CITY: CHICO STATE: CA ZIP: 95973 BUSINESS PHONE: 5308980300 MAIL ADDRESS: STREET 1: TRICO BANCSHARES STREET 2: 63 CONSTITUTION DRIVE CITY: CHICO STATE: CA ZIP: 95973 8-K 1 tcbk_nstnclosing-8k.txt TCBK - NSTN CLOSING FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 8-K CURRENT REPORT Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): April 4, 2003 TriCo Bancshares (Exact name of registrant as specified in its charter) California 0-10661 94-2792841 - ------------------------ --------------- -------------------- (State or other (Commission File No.) (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 63 Constitution Drive, Chico, California 95973 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (530) 898-0300 - -------------------------------------------------------------------------------- Item 2: Acquisition or Disposition of Assets TriCo Bancshares (NASDAQ:TCBK), parent company of Tri Counties Bank, acquired North State National Bank, a national banking organization located in Chico, California, by the merger of North State into its wholly owned subsidiary, Tri Counties Bank, effective 5:01 pm on April 4, 2003. The acquisition and the related merger agreement dated October 3, 2003, was approved by the California Department of Financial Institutions, the Federal Deposit Insurance Corporation, and the shareholders of North State National Bank on March 4, March 7, and March 19, 2003, respectively. Under the terms of the merger agreement, TriCo will issue $13,090,105 in cash, 723,511 shares of TriCo common stock, and options to purchase 79,587 shares of TriCo common stock at an average exercise price of $6.22 per share in exchange for all of the 1,234,375 common shares and options to purchase 79,937 common shares of North State National Bank outstanding as of April 4, 2003. The shares of TriCo common stock to be issued were registered on a Form S-4 Registration Statement declared effective on February 3, 2003. At March 31, 2003, TriCo Bancshares had 7,080,470 shares of common stock outstanding. Based upon TriCo's closing stock price of $25.65 on April 4, 2003, the aggregate value of the cash and the TriCo options and common stock to be issued in the merger would be approximately $33,195,000. Item 7: Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statements of Businesses Acquired. Attached as Exhibit 99.1 are the audited financial statements for North State National Bank for the year ended December 31, 2002. (b) Pro Forma Financial Information. Attached as Exhibit 99.2 is pro forma unaudited financial information reflecting the acquisition of North State National Bank. (c) Exhibits. The following is furnished in accordance with the provisions of Item 601 of Regulation S-K. (99.3) Press release dated April 7, 2003 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRICO BANCSHARES Date: April 15, 2003 By: /s/ Thomas J. Reddish --------------------------------- Thomas J. Reddish, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) INDEX TO EXHIBITS Exhibit No. Description - ----------- -------------------------------------------- 99.1 Audited Financial Statements of North State National Bank for the years ended December 31, 2001 and 2002 99.2 Pro Forma Unaudited Financial Information 99.3 Press release dated April 7, 2003 99.4 Consent of Perry-Smith, LLP Exhibit 99.1 NORTH STATE NATIONAL BANK FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 AND INDEPENDENT AUDITOR'S REPORT INDEPENDENT AUDITOR'S REPORT The Board of Directors and Shareholders North State National Bank We have audited the accompanying balance sheet of North State National Bank as of December 31, 2002 and 2001, and the related statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of North State National Bank as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ Perry-Smith LLP Sacramento, California January 30, 2003, except for Note 15, as to which the date is March 19, 2003
NORTH STATE NATIONAL BANK BALANCE SHEET December 31, 2002 and 2001 2002 2001 ------------------ ------------------ ASSETS Cash and due from banks $ 7,049,271 $ 5,898,143 Interest-bearing deposits 476,880 5,430,320 Federal funds sold 3,215,000 3,302,000 Investment securities (market value of $49,359,400 in 2002 and $39,116,350 in 2001) (Notes 2 and 12) 49,310,796 39,082,324 Loans, less reserve for loan losses of $935,210 in 2002 and $984,913 in 2001 (Notes 3, 7 and 13) 81,777,473 72,561,635 Bank premises and equipment, net (Note 4) 1,389,216 1,428,075 Accrued interest receivable and other assets (Note 5) 935,707 1,201,746 ------------------ ------------------ $ 144,154,343 $ 128,904,243 ================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 25,778,639 $ 23,273,698 Interest bearing (Note 6) 104,098,184 92,895,294 ------------------ ------------------ Total deposits 129,876,823 116,168,992 Accrued interest payable and other liabilities 230,951 416,875 ------------------ ------------------ Total liabilities 130,107,774 116,585,867 ------------------ ------------------ Commitments and contingencies (Note 7) Shareholders' equity (Note 8): Common stock - par value $2.50 per share; authorized - 2,500,000 shares, issued and outstanding - 1,226,740 shares in 2002 and 1,224,190 shares in 2001 3,066,850 3,060,475 Additional paid-in capital 4,243,711 4,231,914 Retained earnings 6,375,194 4,832,457 Accumulated other comprehensive income (Notes 2 and 9) 360,814 193,530 ------------------ ------------------ Total shareholders' equity 14,046,569 12,318,376 ------------------ ------------------ $ 144,154,343 $ 128,904,243 ================== ==================
The accompanying notes are an integral part of these financial statements.
NORTH STATE NATIONAL BANK INCOME STATEMENT For the Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ------------------ ------------------ ------------------ Interest income: Interest and fees on loans $ 5,636,228 $ 6,114,267 $ 6,165,070 Interest on Federal funds sold 116,726 226,706 142,466 Interest on investment securities: Taxable 2,044,624 2,145,518 2,288,491 Exempt from Federal income taxes 59,463 64,222 69,171 ------------------ ------------------ ------------------ Total interest income 7,857,041 8,550,713 8,665,198 ------------------ ------------------ ------------------ Interest expense: Interest on deposits (Note 6) 2,007,558 3,247,983 3,773,707 Interest on short-term borrowings (Note 12) 29,747 ------------------ ------------------ ------------------ Total interest expense 2,007,558 3,247,983 3,803,454 ------------------ ------------------ ------------------ Net interest income 5,849,483 5,302,730 4,861,744 Provision for loan losses (Note 3) 169,000 ------------------ ------------------ ------------------ Net interest income after provision for loan losses 5,849,483 5,133,730 4,861,744 ------------------ ------------------ ------------------ Non-interest income: Service charges 340,552 335,242 302,579 Gain on sales and calls of investment securities (Note 2) 55,130 141,351 Other income 142,983 148,474 132,008 ------------------ ------------------ ------------------ Total non-interest income 538,665 625,067 434,587 ------------------ ------------------ ------------------ Other expenses: Salaries and employee benefits (Notes 3 and 14) 1,528,740 1,492,409 1,486,475 Occupancy (Notes 4 and 7) 198,656 197,110 181,242 Equipment (Note 4) 235,211 272,374 262,398 Other (Note 11) 933,930 782,366 733,373 ------------------ ------------------ ------------------ Total other expenses 2,896,537 2,744,259 2,663,488 ------------------ ------------------ ------------------ Income before income taxes 3,491,611 3,014,538 2,632,843 Income taxes (Note 5) 1,459,000 1,226,000 1,054,000 ------------------ ------------------ ------------------ Net income $ 2,032,611 $ 1,788,538 $ 1,578,843 ================== ================== ================== Basic earnings per share (Note 8) $ 1.66 $ 1.47 $ 1.31 ============ =========== ============ Diluted earnings per share (Note 8) $ 1.59 $ 1.41 $ 1.26 ============ =========== ============
The accompanying notes are an integral part of these financial statements.
NORTH STATE NATIONAL BANK STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 2002, 2001 and 2000 Accumulated Common Stock Additional Other --------------------------- Paid-In Retained Comprehensive Shareholders' Comprehensive Shares Amount Capital Earnings Income (Loss) Equity Income ------------- ------------- ------------- ------------- ------------- ------------- ------------- Balance, January 1, 2000 1,193,861 $2,984,652 $4,191,823 $2,188,497 $(705,798) $8,659,174 Comprehensive income (Note 9): Net income 1,578,843 1,578,843 $1,578,843 Other comprehensive income, net of tax: Unrealized gains on available-for- sale investment securities 538,881 538,881 538,881 ------------ Total comprehensive income $2,117,724 ============ Cash dividend ($.25 per share) (Note 8) (300,668) (300,668) Issuance of common stock under stock option plan (Note 8) 13,994 34,985 34,099 69,084 Retirement of common stock (4,082) (10,205) (36,744) (46,949) ------------- ------------- ------------- ------------- ------------- ------------- Balance, December 31, 2000 1,203,773 3,009,432 4,189,178 3,466,672 (166,917) 10,498,365 Comprehensive income (Note 9): Net income 1,788,538 1,788,538 $1,788,538 Other comprehensive income, net of tax: Unrealized gains on available-for- sale investment securities 360,447 360,447 360,447 ------------ Total comprehensive income $2,148,985 ============ Cash dividend ($.35 per share) (Note 8) (422,753) (422,753) Issuance of common stock under stock option plan (Note 8) 20,417 51,043 42,736 93,779 ------------- ------------- ------------- ------------- ------------- ------------- Balance, December 31, 2001 1,224,190 3,060,475 4,231,914 4,832,457 193,530 12,318,376 ------------- ------------- ------------- ------------- ------------- ------------- (Continued)
NORTH STATE NATIONAL BANK STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Continued) For the Years Ended December 31, 2002, 2001 and 2000 Accumulated Common Stock Additional Other --------------------------- Paid-In Retained Comprehensive Shareholders' Comprehensive Shares Amount Capital Earnings Income (Loss) Equity Income ------------- ------------- ------------- ------------- ------------- ------------- ------------- Balance, December 31, 2001 1,224,190 $3,060,475 $4,231,914 $4,832,457 $193,530 $12,318,376 Comprehensive income (Note 9): Net income 2,032,611 2,032,611 $2,032,611 Other comprehensive income, net of tax: Unrealized gains on available-for- sale investment securities 167,284 167,284 167,284 ------------ Total comprehensive income $2,199,895 ============ Cash dividend ($.40 per share) (Note 8) (489,874) (489,874) Stock options exercised and related tax benefit (Note 8) 2,550 6,375 11,797 18,172 ------------- ------------- ------------- ------------- ------------- ------------- Balance, December 31, 2002 1,226,740 $3,066,850 $4,243,711 $6,375,194 $360,814 $14,046,569 ============= ============= ============= ============= ============= =============
2002 2001 -------- -------- Disclosure of reclassification amount, net of taxes (Note 9): Net unrealized holding gains arising during the year $199,597 $444,311 Less: reclassification adjustment for net gains included in net income 32,313 83,864 -------- -------- Net unrealized gains on available-for-sale investment securities $167,284 $360,447 ======== ========
The accompanying notes are an integral part of these financial statements. NORTH STATE NATIONAL BANK STATEMENT OF CASH FLOWS For the Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ----------- ----------- ----------- Cash flows from operating activities: Net income $2,032,611 $1,788,538 $1,578,843 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 169,000 Increase in deferred loan origination fees and costs, net 49,513 38,913 32,869 Depreciation and amortization 177,738 211,049 201,804 Amortization of investment security premiums and accretion of discounts, net 195,580 67,834 9,271 Decrease (increase) in accrued interest receivable and other assets 170,516 139,756 (55,219) (Decrease) increase in accrued interest payable and other liabilities (185,924) (203,965) 135,952 Deferred taxes (24,000) (98,000) (12,000) Gain on sales and calls of investment securities (55,130) (141,351) ----------- ----------- ----------- Net cash provided by operating activities 2,360,904 1,971,774 1,891,520 ----------- ----------- ----------- Cash flows from investing activities: Proceeds from matured held-to-maturity investment securities 15,000 160,000 140,000 Proceeds from matured available-for-sale investment securities 64,757,063 6,252,000 6,102,000 Proceeds from the sale and call of available- for-sale investment securities 22,658,561 26,270,075 2,000,000 Proceeds from redeemed Federal Home Loan Bank stock 131,500 Purchase of available-for-sale invest- ment securities (106,029,956)(38,216,168) (4,723,694) Proceeds from principal repayments from held-to-maturity mortgage- related securities 278,432 Proceeds from principal repayments from available-for-sale mortgage- related securities 8,517,217 3,538,924 886,628 Increase in loans, net (9,265,351) (2,855,189) (6,178,385) Purchase of equipment (138,879) (41,941) (85,461) Proceeds from sale of equipment 21,853 ----------- ----------- ----------- Net cash used in investing activities (19,486,345) (4,892,299) (1,427,127) ----------- ----------- ----------- (Continued) NORTH STATE NATIONAL BANK STATEMENT OF CASH FLOWS (Continued) For the Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ----------- ----------- ----------- Cash flows from financing activities: Net increase (decrease) in demand, interest-bearing and savings deposits $18,180,863 $9,931,139 $(1,192,978) Net (decrease) increase in time deposits (4,473,032) 842,327 1,809,586 Proceeds from exercised stock options 18,172 93,779 69,084 Cash paid for retirement of stock (46,949) Cash dividend paid (489,874) (422,753) (300,668) ----------- ----------- ----------- Net cash provided by financing activities 13,236,129 10,444,492 338,075 ----------- ----------- ----------- (Decrease) increase in cash and cash equivalents (3,889,312) 7,523,967 802,468 Cash and cash equivalents at beginning of year 14,630,463 7,106,496 6,304,028 ----------- ----------- ----------- Cash and cash equivalents at end of year $10,741,151 $14,630,463 $7,106,496 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest expense $2,119,990 $3,514,348 $3,623,061 Income taxes $1,520,971 $1,258,991 $1,123,813 Non-cash investing activities: Net change in unrealized gain (loss) on available-for-sale investment securities $286,807 $616,441 $924,345 The accompanying notes are an integral part of these financial statements. NORTH STATE NATIONAL BANK NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General North State National Bank (the "Bank") commenced operations on March 15, 1982. The Bank operates two branches and its primary source of revenue is providing loans to small businesses, professionals, agricultural entities and individuals in the Greater Chico Urban Area. The accounting and reporting policies of the Bank conform with generally accepted accounting principles and prevailing practices within the banking industry. Reclassifications Certain reclassifications have been made to prior years' balances to conform to classifications used in 2002. Investment Securities Investments are classified into the following categories: - Available-for-sale securities reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders' equity. - Held-to-maturity securities, which management has the positive intent and ability to hold, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums. Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value. Gains or losses on the sale of securities are computed using the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. In addition, unrealized losses that are other than temporary are recognized in earnings for all investments. NORTH STATE NATIONAL BANK NOTES TO FINANCIAL STATEMENTS (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Loans are stated at principal balances outstanding and interest is accrued daily based upon outstanding loan balances. However, when, in the opinion of management, loans are considered to be impaired and the future collectibility of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest accrued but unpaid is charged against income. Payments received are applied to reduce principal to the extent necessary to ensure collection. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal. An impaired loan is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical matter, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (including both principal and interest) in accordance with the contractual terms of the loan agreement. Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans. Reserve for Loan Losses The reserve for loan losses is maintained to provide for losses related to impaired loans and other losses that can be expected to occur in the normal course of business. The reserve is determined based on estimates made by management, to include consideration of the character of the loan portfolio, specifically identified problem loans, potential losses inherent in the portfolio taken as a whole and economic conditions in the Bank's service area. Loans determined to be impaired or classified are individually evaluated by management for specific risk of loss. In addition, a reserve factor is assigned to currently performing loans based on the Bank's historical experience. Management also computes specific and expected loss reserves for loan commitments. These estimates are particularly susceptible to changes in the economic environment and market conditions. The Bank's Loan Committee reviews the adequacy of the reserve for loan losses quarterly, to include consideration of the relative risks in the portfolio and current economic conditions. The reserve is adjusted based on that review if, in the judgment of the Loan Committee and management, changes are warranted. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Reserve for Loan Losses (Continued) This reserve is established through a provision for loan losses which is charged to expense. Additions to the reserve are expected to maintain the adequacy of the total reserve after loan losses and loan growth. The reserve for loan losses at December 31, 2002 and 2001, respectively, reflects management's estimate of potential losses in the portfolio. Other Real Estate Other real estate includes real estate acquired in full or partial settlement of loan obligations. When property is acquired, any excess of the Bank's recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property is charged against the reserve for loan losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or writedowns resulting from permanent impairments are recorded in other income or expense as incurred. At December 31, 2002 and 2001, the Bank held no other real estate. Bank Premises and Equipment Bank premises and equipment are carried at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful life of Bank premises is estimated to be forty years. The useful lives of improvements to Bank premises, furniture and equipment are estimated to be one to twenty-five years. Leasehold improvements are amortized over the life of the asset or the life of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. Income Taxes Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings Per Share Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Bank. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted EPS. Cash Equivalents For the purpose of the statement of cash flows, cash and due from banks interest-bearing deposits and Federal funds sold are considered to be cash equivalents. Generally, interest-bearing deposits are held in money market accounts and Federal funds are sold for one day periods. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Stock-Based Compensation At December 31, 2002, the Bank has one stock-based employee compensation plan, the North State National Bank 1995 Stock Option Plan, which is described more fully in Note 8. The Bank accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-Based Compensation (Continued) No stock options were granted in 2002 and 2001 and no pro forma financial information is shown for these years. Pro forma adjustments to the Bank's net earnings and earnings per share are disclosed during the years in which the options become vested and all options vested prior to the beginning of 2001. The following table illustrates the effect on net earnings and earnings per share if the Bank had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the year ended December 31, 2000. 2000 ---------- Net income, as reported $1,578,843 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects 49,656 ---------- Pro forma net income $1,529,187 ========== Basic earnings per share - as reported $1.31 Basic earnings per share - pro forma $1.27 Diluted earnings per share - as reported $1.26 Diluted earnings per share - pro forma $1.22 Weighted average fair value of options granted during the year $6.01 The fair value of each option is estimated on the date of grant using an option-pricing model with the following assumptions: 2000 -------- Dividend yield 2.15% Expected volatility 16.79% Risk-free interest rate 6.69% Expected option life 10 years 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impact of New Financial Accounting Standards In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This Statement is effective for fiscal years beginning after May 15, 2002. Adoption of this Statement is not expected to have a material effect on the Bank's financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This Statement is effective for exit or disposal activities initiated after December 31, 2002. Adoption of this Statement is not expected to have a material effect on the Bank's financial statements. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This Statement, which addresses financial accounting and reporting matters for the acquisition of all or part of a financial institution, applies to all such transactions except those between two or more mutual enterprises. This Statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and related interpretations. This Statement requires a financial institution to apply SFAS No. 144 and evaluate long-term customer relationship intangible assets (core deposit intangibles) for impairment. Under SFAS No. 72, a financial institution may have recorded an unidentifiable intangible asset arising from a business combination. If certain criteria in SFAS No. 147 are met, the amount of the unidentifiable intangible asset will be reclassified to goodwill upon adoption of this Statement and any amortization amounts that were incurred after the adoption of SFAS No. 142 must be reversed. Reclassified goodwill would then be measured for impairment under the provisions of SFAS No. 142. Provisions of this Statement are applicable on or after October 1, 2002. In management's opinion, the adoption of this Statement did not have a material effect on the Bank's financial position or results of operations. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impact of New Financial Accounting Standards (Continued) In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reporting containing financial statements for interim periods beginning after December 15, 2002. Because the Bank accounts for the compensation cost associated with its stock option plan under the intrinsic value method, the alternative methods of transition will not apply to the Bank. The additional disclosure requirements of the Statement are included in these financial statements. In management's opinion, the adoption of this Statement did not have a material impact on the Bank's financial position or results of operations. 2. INVESTMENT SECURITIES The amortized cost and estimated market value of investment securities at December 31, 2002 and 2001 consisted of the following: Available-for-Sale: - ------------------- 2002 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------ ------------ ------------ U.S. Treasury securities $501,170 $13,830 $515,000 U.S. Government agencies 24,370,085 277,079 $(164) 24,647,000 U.S. Government guaranteed mort- gage-related securities 12,016,236 325,815 (51) 12,342,000 Corporate debt securities 9,995,000 9,995,000 Federal Home Loan Bank stock 336,600 336,600 Federal Reserve Bank stock 218,800 218,800 ------------ ------------ ------------ ------------ $47,437,891 $616,724 $(215) $48,054,400 ============ ============ ============ ============ 2. INVESTMENT SECURITIES (Continued) Available-for-Sale: (Continued) - ------------------- Net unrealized gains on available-for-sale investment securities totaling $616,509 were recorded, net of $255,695 in tax liabilities, as accumulated other comprehensive income within shareholders' equity at December 31, 2002. Proceeds and gross realized gains from the sale or call of available-for-sale investment securities totaled $22,658,561 and $55,130, respectively, for the year ended December 31, 2002. 2001 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------ ------------ ------------ U.S. Treasury securities $501,987 $22,013 $524,000 U.S. Government agencies 20,888,757 213,846 $(88,603) 21,014,000 U.S. Government guaranteed mort- gage-related securities 15,554,554 213,645 (31,199) 15,737,000 Federal Home Loan Bank stock 318,700 318,700 Federal Reserve Bank stock 215,650 215,650 ------------ ------------ ------------ ------------ $37,479,648 $449,504 $(119,802) $37,809,350 ============ ============ ============ ============ Net unrealized gains on available-for-sale investment securities totaling $329,702 were recorded, net of $136,172 in tax liabilities, as accumulated other comprehensive income within shareholders' equity at December 31, 2001. Proceeds and gross realized gains from the sale or call of available-for-sale investment securities totaled $26,270,075 and $141,351, respectively, for the year ended December 31, 2001. There were no sales of available-for-sale investment securities for the year ended December 31, 2000. Held-to-Maturity: - ----------------- 2002 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------ ------------ ------------ Obligations of states and political sub- divisions $1,256,396 $48,604 $ - $1,305,000 ============ ============ ============ ============ 2. INVESTMENT SECURITIES (Continued) Held-to-Maturity (Continued) - ---------------- 2001 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------ ------------ ------------ Obligations of states and political sub- divisions $1,272,974 $34,026 $ - $1,307,000 ============ ============ ============ ============ There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2002, 2001 and 2000. The amortized cost and estimated market value of investment securities at December 31, 2002 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-Sale Held-to-Maturity --------------------------- --------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ------------- ------------- ------------- ------------- Within one year $11,497,403 $11,523,000 $221,563 $227,000 After one year through five years 23,255,815 23,520,000 429,833 447,000 After five years through ten years 605,000 631,000 ------------- ------------- ------------- ------------- 34,753,218 35,043,000 $1,256,396 $1,305,000 ============= ============= Investment securities not due at a single maturity date: U.S. Government guaranteed mortgage-related securities 12,016,236 12,342,000 SBA loan pools 113,037 114,000 Federal Home Loan Bank stock 336,600 336,600 Federal Reserve Bank stock 218,800 218,800 -------------- -------------- $47,437,891 $48,054,400 ============== ============== 2. INVESTMENT SECURITIES (Continued) Investment securities with amortized costs totaling $4,114,422 and $1,799,228 and estimated market values totaling $4,254,000 and $1,915,000 were pledged to secure public deposits, treasury tax and loan accounts and over-night borrowing arrangements with the Federal Reserve Bank at December 31, 2002 and 2001, respectively. In addition, investment securities with amortized costs totaling $8,158,244 and $9,321,220 and estimated market values totaling $8,249,000 and $9,411,000 were pledged to secure State of California time deposits at December 31, 2002 and 2001, respectively. The required investment in Federal Home Loan Bank and Federal Reserve Bank stock is determined by the Federal Home Loan Bank and Federal Reserve based upon the level of transaction activity. Therefore, sale of those investments may be restricted. 3. LOANS Outstanding loans are summarized as follows: December 31, -------------------------- 2002 2001 ------------ ------------ Commercial and agricultural $21,475,823 $21,467,262 Real estate - mortgage 51,970,379 44,131,982 Real estate - construction 7,688,756 5,391,888 Installment 1,758,030 2,686,208 ------------ ------------ 82,892,988 73,677,340 Deferred loan fees, net (180,305) (130,792) Reserve for loan losses (935,210) (984,913) ------------ ------------ $81,777,473 $72,561,635 ============ ============ Changes in the reserve for loan losses were as follows: Year Ended December 31, -------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Balance, beginning of year $984,913 $818,126 $969,917 Provision for loan losses 169,000 Losses charged to reserve (71,121) (6,019) (199,856) Recoveries 21,418 3,806 48,065 ------------ ------------ ------------ Balance, end of year $935,210 $984,913 $818,126 ============ ============ ============ 3. LOANS (Continued) No loans were considered to be impaired at December 31, 2002 and 2001. No loans were considered to be impaired during 2002 or 2001 and the average recorded investment in impaired loans for the year ended December 31, 2000 was $100,000. No interest income on impaired loans was recognized during the years ended December 31, 2002, 2001 and 2000. There were no nonaccrual loans at December 31, 2002 and 2001. At December 31, 2000, nonaccrual loans totaled $172,900. There was no interest foregone on nonaccrual loans for the years ended December 31, 2002 and 2001. Interest foregone on nonaccrual loans totaled $15,000 for the year ended December 31, 2000. Salaries and employee benefits totaling $90,014, $68,004 and $70,127 have been deferred as loan origination costs during 2002, 2001 and 2000, respectively. 4. BANK PREMISES AND EQUIPMENT Bank premises and equipment consisted of the following: December 31, -------------------------- 2002 2001 ------------ ------------ Land $405,896 $405,896 Bank premises 1,700,622 1,693,975 Furniture, fixtures and equipment 2,279,741 2,147,509 Leasehold improvements 129,601 129,601 ------------ ------------ 4,515,860 4,376,981 Less accumulated depreciation and amortization (3,126,644) (2,948,906) ------------ ------------ $1,389,216 $1,428,075 ============ ============ Depreciation and amortization included in occupancy and equipment expense totaled $177,738, $211,049 and $201,804 for the years ended December 31, 2002, 2001 and 2000, respectively. 5. INCOME TAXES The provision for income taxes for the years ended December 31, 2002, 2001 and 2000 consisted of the following: Federal State Total ------------- ------------- ------------- 2002 - ---- Current $1,089,000 $394,000 $1,483,000 Deferred (22,000) (2,000) (24,000) ------------- ------------- ------------- Income tax expense $1,067,000 $392,000 $1,459,000 ============= ============= ============= 2001 - ---- Current $980,000 $342,000 $1,322,000 Deferred (76,000) (20,000) (96,000) ------------- ------------- ------------- Income tax expense $904,000 $322,000 $1,226,000 ============= ============= ============= 2000 - ---- Current $777,000 $289,000 $1,066,000 Deferred (12,000) (12,000) ------------- ------------- ------------- Income tax expense $765,000 $289,000 $1,054,000 ============= ============= ============= Deferred tax assets (liabilities) are comprised of the following at December 31, 2002 and 2001: 2002 2001 ------------ ------------ Deferred tax assets: Reserve for loan losses $304,000 $304,000 Bank premises and equipment 2,000 Future benefit of state income tax deduction 129,000 118,000 ------------ ------------ Total deferred tax assets 435,000 422,000 ------------ ------------ Deferred tax liabilities: Bank premises and equipment (19,000) Future liability of state deferred tax assets (33,000) (33,000) Federal Home Loan Bank dividends (56,000) (48,000) Unrealized gain on available-for-sale investment securities (256,000) (136,000) ------------ ------------- Total deferred tax liabilities (345,000) (236,000) ------------ ------------- Net deferred tax assets $90,000 $186,000 ============ ============= 5. INCOME TAXES (Continued) The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate to operating income before income taxes. The significant items comprising these differences for the years ended December 31, 2002, 2001 and 2000 consisted of the following:
2002 2001 2000 ------------------ ------------------ ------------------ Amount Rate % Amount Rate % Amount Rate % ----------- ------ ----------- ------ ----------- ------ Federal income tax expense, at statutory rate $1,187,153 34.0 $1,024,943 34.0 $895,167 34.0 State franchise tax, net of Federal tax effect 250,795 7.2 216,276 7.2 188,757 7.2 Interest on obligations of states and political subdivisions (18,952) (.5) (19,398) (.6) (20,144) (.8) Other 40,004 1.1 4,179 .1 (9,780) (.4) ----------- ------ ----------- ------ ----------- ------ Total income tax expense $1,459,000 41.8 $1,226,000 40.7 $1,054,000 40.0 =========== ====== =========== ====== =========== ======
6. INTEREST-BEARING DEPOSITS Interest-bearing deposits consisted of the following: December 31, -------------------------- 2002 2001 ------------ ------------ Savings $ 4,926,387 $ 4,649,275 Money market 48,354,089 33,458,575 NOW accounts 18,198,768 17,695,472 Time, $100,000 or more 20,352,070 21,966,979 Other time 12,266,870 15,124,993 ------------ ------------ $104,098,184 $92,895,294 ============ ============ Aggregate annual maturities of time deposits are as follows: Year Ending December 31, ---------------------- 2003 $27,788,753 2004 1,651,095 2005 868,304 2006 23,878 2007 2,286,910 -------------- $32,618,940 ============== 6. INTEREST-BEARING DEPOSITS (Continued) Interest expense related to interest-bearing deposits consisted of the following: Year Ended December 31, -------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Savings $ 48,250 $ 80,143 $ 113,925 Money market 909,287 1,132,396 1,504,984 NOW accounts 35,189 136,874 284,301 Time, $100,000 or more 631,202 1,119,052 1,073,209 Other time 383,630 779,518 797,288 ------------ ------------ ------------ $2,007,558 $3,247,983 $3,773,707 ============ ============ ============ 7. COMMITMENTS AND CONTINGENCIES Lease The Bank leases a branch facility with an option to renew this lease for one ten-year term after the initial lease term expires February 28, 2004. Rental expense included in occupancy expense totaled $41,484, $38,341 and $37,712 for the years ended December 31, 2002, 2001 and 2000, respectively. The lease has the following future minimum lease payments: Year Ending December 31, ------------------ 2003 $41,484 2004 6,914 ------------ $48,398 ============ Financial Instruments With Off-Balance-Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and letters of credit as it does for loans included on the balance sheet. 7. COMMITMENTS AND CONTINGENCIES (Continued) Financial Instruments With Off-Balance-Sheet Risk (Continued) The following financial instruments represent off-balance-sheet credit risk: December 31, ------------------------------- 2002 2001 --------------- --------------- Commitments to extend credit $19,659,000 $19,023,000 Letters of credit $ 131,000 $ 300,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, commercial and residential real estate, farmland and deposit accounts. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. At December 31, 2002, commercial loan commitments represent approximately 83% of total commitments. Approximately 81% of these commercial loan commitments are unsecured or secured by collateral other than first deeds of trust on real estate and generally have variable interest rates. Loan commitments secured by residential real estate represent approximately 7% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. The majority of real estate loan commitments also have variable interest rates. Unsecured consumer lines of credit, generally having variable interest rates, represent the remaining 10% of total commitments. Significant Concentrations of Credit Risk The Bank grants commercial, agricultural, real estate mortgage, real estate construction and consumer loans to customers throughout Butte County. At December 31, 2002 and 2001, in management's judgment, a concentration of loans existed in real-estate related loans. At these dates, approximately 72% and 67% of the Bank's loans were real-estate related, respectively. 7. COMMITMENTS AND CONTINGENCIES (Continued) Significant Concentrations of Credit Risk (Continued) Although management believes the loans within these concentrations have no more than the normal risk of collectibility, a substantial decline in the performance of the economy in general or a decline in real estate values in the Bank's primary market area, in particular, could have an adverse impact on collectibility, increase the level of real-estate related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition of the Bank. Correspondent Banking Agreements The Bank maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Uninsured deposits totaled $11,188,800 at December 31, 2002. Federal Reserve Requirements Banks are required to maintain reserves at the Federal Reserve Bank or in the form of vault cash equal to a percentage of their reservable deposits. The reserve balances required at December 31, 2002 and 2001 were $237,000 and $722,000. Legal Proceedings In the normal course of business, the Bank becomes contingently liable on matters related to transactions that are not reflected in the accompanying financial statements. After reviewing pending and threatened actions and proceedings with legal counsel, management believes that the outcome of such actions or proceedings will not have a material adverse effect on operations or the financial condition of the Bank. 8. SHAREHOLDERS' EQUITY Dividends Upon declaration by the Board of Directors, all shareholders of record will be entitled to receive dividends. Under applicable Federal laws, the Comptroller of the Currency restricts the total dividend payment of any national banking association in any calendar year to the net income of the year, as defined, combined with the net income for the two preceding years, less distributions made to shareholders during the same three-year period. At December 31, 2002, retained earnings of $4,186,697 were free of such restrictions. On April 16, 2002, April 17, 2001 and April 18, 2000, the Board of Directors declared $.40, $.35 and $.25 cash dividends, respectively, to shareholders of record at the close of business on May 1, 2002, 2001 and 2000, payable June 1, 2002, 2001 and 2000. 8. SHAREHOLDERS' EQUITY (Continued) Earnings Per Share A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows: Weighted Average Number of Net Shares Per Share For the Year Ended Income Outstanding Amount - -------------------------------- -------------- -------------- -------------- December 31, 2002 - ----------------- Basic earnings per share $2,032,611 1,224,681 $ 1.66 ============== Effect of dilutive stock options 56,626 -------------- -------------- Diluted earnings per share $2,032,611 1,281,307 $ 1.59 ============== ============== ============== December 31, 2001 - ----------------- Basic earnings per share $1,788,538 1,216,493 $ 1.47 ============== Effect of dilutive stock options 50,906 -------------- -------------- Diluted earnings per share $1,788,538 1,267,399 $ 1.41 ============== ============== ============== December 31, 2000 - ----------------- Basic earnings per share $1,578,843 1,201,440 $ 1.31 ============== Effect of dilutive stock options 54,577 -------------- -------------- Diluted earnings per share $1,578,843 1,256,017 $ 1.26 ============== ============== ============== Stock Options On April 19, 1995, the shareholders approved the adoption of the North State National Bank 1995 Stock Option Plan. At December 31, 2002, 254,338 shares of the Bank's common stock were reserved for distribution under the plan. The plan includes both incentive options, which may be granted to full-time salaried officers and employees of the Bank, and nonqualified options, which may be granted to Directors and full-time salaried officers and employees. The price of all options may not be less than the fair market value of the stock at the date the option is granted. The purchase price of exercised options is payable in full in cash or with common stock previously acquired by the optionee. All options expire on a date determined by the Board of Directors, but not later than ten years from the date of grant. All outstanding options under the plan vested immediately upon grant. 8. SHAREHOLDERS' EQUITY (Continued) Stock Options (Continued) A summary of the activity within the plan follows:
2002 2001 2000 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- --------- ----------- --------- ----------- --------- Options outstanding, beginning of year 90,122 $6.51 113,289 $6.29 112,384 $5.32 Options granted 18,500 $11.62 Options exercised (2,550) $7.13 (20,417) $4.59 (13,994) $4.94 Options canceled (2,750) $11.70 (3,601) $8.72 ----------- ----------- ----------- Options outstanding and exercisable, end of year 87,572 $6.49 90,122 $6.51 113,289 $6.29 =========== =========== ===========
A summary of options outstanding at December 31, 2002 follows: Number of Weighted Number of Options Average Options Outstanding Remaining Exercisable December 31, Contractual December 31, Range of Exercise Prices 2002 Life 2002 ------------------------ --------------- --------------- ---------------- $ 3.15 46,328 2.6 years 46,328 $ 5.37 4,079 3.4 years 4,079 $ 9.77 8,800 6.2 years 8,800 $ 10.23 275 6.2 years 275 $ 10.68 15,840 5.9 years 15,840 $ 11.12 2,000 7.3 years 2,000 $ 11.25 700 7.3 years 700 $ 11.75 9,550 7.0 years 9,550 --------------- ---------------- 87,572 87,572 =============== ================ 8. SHAREHOLDERS' EQUITY (Continued) Regulatory Capital The Bank is subject to certain regulatory capital requirements administered by the Office of the Comptroller of the Currency (OCC). Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Each of these components is defined in the regulations. Management believes that the Bank met all its capital adequacy requirements as of December 31, 2002 and 2001. In addition, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below. There are no conditions or events since the last notification by the OCC that management believes have changed the Bank's category.
2002 2001 ------------------------- ------------------------ Amount Ratio Amount Ratio -------------- --------- -------------- --------- Leverage Ratio - -------------- North State National Bank $13,686,000 9.4% $12,125,000 9.5% Minimum requirement for "Well-Capitalized" institution $ 7,265,000 5.0% $ 6,357,500 5.0% Minimum regulatory requirement $ 5,812,000 4.0% $ 5,086,000 4.0% Tier 1 Risk-Based Capital Ratio North State National Bank $13,686,000 14.3% $12,125,000 15.0% Minimum requirement for "Well-Capitalized" institution $ 5,742,000 6.0% $ 4,848,700 6.0% Minimum regulatory requirement $ 3,828,000 4.0% $ 3,232,400 4.0% Total Risk-Based Capital Ratio North State National Bank $14,621,000 15.3% $13,110,000 16.2% Minimum requirement for "Well-Capitalized" institution $ 9,569,000 10.0% $ 8,081,100 10.0% Minimum regulatory requirement $ 7,656,000 8.0% $ 6,464,900 8.0%
9. COMPREHENSIVE INCOME Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income that historically has not been recognized in the calculation of net income. Unrealized gains and losses on the Bank's available-for-sale investment securities are included in other comprehensive income. Total comprehensive income and the components of accumulated other comprehensive income are presented in the Statement of Changes in Shareholders' Equity. At December 31, 2002, 2001 and 2000, the Bank held securities classified as available-for-sale which had unrealized gains as follows: Before Tax After Tax Expense Tax ---------- ---------- ---------- For the Year Ended December 31, 2002 Other comprehensive income: Unrealized holding gains $341,937 $(142,340) $199,597 Reclassification adjustment for gains included in net income 55,130 (22,817) 32,313 ---------- ---------- ---------- Total other comprehensive income $286,807 $(119,523) $167,284 ========== ========== ========== For the Year Ended December 31, 2001 Other comprehensive income: Unrealized holding gains $757,792 $(313,481) $444,311 Reclassification adjustment for gains included in net income 141,351 (57,487) 83,864 ---------- ---------- ---------- Total other comprehensive income $616,441 $(255,994) $360,447 ========== ========== ========== For the Year Ended December 31, 2000 Other comprehensive income: Unrealized holding gains $924,345 $(385,464) $538,881 ========== ========== ========== 10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Bank's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The following methods and assumptions were used by the Bank to estimate the fair value of its financial instruments at December 31, 2002 and 2001: Cash and cash equivalents: For cash and cash equivalents, the carrying amount is estimated to be fair value. Investment securities: For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers. Loans: For variable-rate loans that reprice frequently with no significant change in credit risk, the carrying amount is estimated to be fair value. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness. The carrying amount of accrued interest receivable approximates its fair value. Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow analyses using interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. Commitments to extend credit: Commitments to extend credit are primarily for variable rate loans. For these commitments, there is no difference between the committed amounts and their fair values. Commitments to fund fixed rate loans and letters of credit are at rates which approximate fair value at each reporting date. 10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The estimated fair values of the Bank's financial instruments are as follows:
December 31, 2002 December 31, 2001 --------------------------------- --------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------------- --------------- --------------- ---------------- Financial assets: Cash and due from banks $ 7,049,271 $ 7,049,271 $ 5,898,143 $ 5,898,143 Interest-bearing deposits 476,880 476,880 5,430,320 5,430,320 Federal funds sold 3,215,000 3,215,000 3,302,000 3,302,000 Investment securities 49,310,796 49,359,400 39,082,324 39,116,350 Loans 81,777,473 83,129,000 72,561,635 74,301,000 Accrued interest receivable 704,948 704,948 883,497 883,497 Financial liabilities: Deposits $ 129,876,823 $ 130,188,000 $ 116,168,992 $ 116,482,000 Accrued interest payable 160,288 160,288 272,720 272,720 Off-balance-sheet financial instruments: Commitments to extend credit $ 19,659,000 $ 19,659,000 $ 19,023,000 $ 19,023,000 Letters of credit 131,000 131,000 300,000 300,000
11. OTHER EXPENSES Other expenses for the years ended December 31, 2002, 2001 and 2000 consisted of the following: 2002 2001 2000 -------- -------- -------- Professional fees $134,728 $113,466 $119,558 Director fees 78,400 79,200 66,000 Advertising 49,083 49,492 52,524 Other operating expenses 671,719 540,208 495,291 -------- -------- -------- $933,930 $782,366 $733,373 ======== ======== ======== 12. SHORT-TERM BORROWING ARRANGEMENTS The Bank has $5,000,000 in unsecured short-term borrowing agreements with its correspondent banks. The Bank can also borrow up to $400,000 on an overnight basis from the Federal Reserve Bank secured by investment securities with amortized costs totaling $455,227 and estimated market values totaling $478,000. In addition, the Bank has reverse repurchase agreements totaling $10,000,000 with two securities firms. The Bank can also borrow approximately $2,500,000 from the Federal Home Loan Bank subject to various pledging options. There were no short-term borrowings outstanding at December 31, 2002 and 2001. 13. RELATED PARTY TRANSACTIONS During the normal course of business, the Bank enters into transactions with related parties, including executive officers and directors. These transactions include borrowings from the Bank with substantially the same terms, including rates and collateral, as loans to unrelated parties. The following is a summary of the aggregate activity involving related party borrowers during 2002: Balance, January 1, 2002 $ 2,995,870 Disbursements 5,995,921 Amounts repaid (3,515,685) ----------- Balance, December 31, 2002 $ 5,476,106 =========== Undisbursed commitments to related parties, December 31, 2002 $ 1,902,047 =========== 14. EMPLOYEE BENEFIT PLAN The Bank's California Bankers Association Prototype Profit Sharing and Salary Deferral 401(k) Plan is available to employees meeting certain age and length of service requirements. Under the Plan, employees can defer a selected portion of their annual compensation and the Bank may match each employee contribution in an amount to be determined annually under a formula established by the Board of Directors. During 2002, 2001 and 2000, the Bank's contribution totaled $24,000, $28,000 and $24,000, respectively. 15. ACQUISITION AGREEMENT AND PLAN OF MERGER On October 7, 2002, the Bank and TriCo Bancshares announced the signing of a definitive Acquisition Agreement and Plan of Merger (the "Agreement") in which TriCo Bancshares will acquire all of the common shares and unexercised options of the Bank. The Agreement has been approved by the Bank's Board of Directors, shareholders and bank regulatory authorities. The Bank anticipates that the merger will be completed on or about April 1, 2003. The agreed upon purchase price, based on an average closing price of $26.12 per share of TriCo Bancshares common stock, is approximately $34,000,000 and consists of cash and common shares of TriCo Bancshares. EXHIBIT 99.2 Pro Forma Unaudited Financial Information The merger will be accounted for under the purchase method of accounting. The method requires that the purchase price be allocated to the acquired assets and liabilities of North State on the basis of their estimated fair values as of the date of the merger. As a result, on completion of the merger, TriCo will establish a new accounting and reporting basis for the acquired assets which will be reflected in the future consolidated financial statements of TriCo. The following pro forma tables present the combined historical financial statements of TriCo and North State, adjusted to give effect to the merger on a pro forma purchase accounting basis. The pro forma condensed consolidated balance sheet gives effect to the merger as if it occurred on December 31, 2002. The pro forma condensed consolidated statements of income give effect to the merger as if it occurred as of the beginning of the first period presented for the year ended December 31, 2001 and for the year ended December 31, 2002, and include adjustments directly attributable to the merger and expected to have a continuing impact on the combined entity. We expect to incur reorganization expenses as a result of merging the companies. The unaudited pro forma statements of income reflect anticipated reorganization expenses resulting from the merger. We also anticipate that the merger will provide the combined company with some financial benefits that include reduced operating expense and opportunities to earn more revenue. However, we do not reflect any of these anticipated cost savings or benefits in the pro forma information. This pro forma financial information is provided for informational purposes only and does not attempt to predict or suggest future results. The pro forma information also does not attempt to show how the combined company would actually have performed had TriCo and North State been combined throughout those periods. All adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of results of the unaudited historical interim periods have been included. The information in the following tables are based on the historical financial information of TriCo and North State. You should carefully review this historical information.
TriCo Bancshares and North State National Bank Pro Forma Condensed Consolidated Balance Sheet At December 31, 2002 --------------------------------------------------------- North Pro Forma TriCo State Adjustments Total --------------------------------------------------------- (dollars in thousands; unaudited) Assets Cash and due from banks $ 67,170 $ 7,526 $(5,090) 1 $ 69,606 Federal funds sold 8,100 3,215 (8,000) 1 3,315 --------------------------------------------------------- Cash and cash equivalents 75,270 10,741 (13,090) 1 72,921 Investment securities 338,024 49,311 494 387,384 Loans 687,522 82,713 -- 770,235 Allowance for loan losses (14,377) (935) -- (15,312) Premises and equipment, net 17,224 1,389 -- 18,613 Cash value of life insurance 15,208 -- -- 15,208 Other real estate owned 932 -- -- 932 Accrued interest receivable 5,644 935 -- 6,579 Core deposit intangible 4,043 -- 5,195 5 9,238 Goodwill -- -- 15,195 7 15,195 Other assets 15,084 0 (2,078) 6 13,006 ------------------------------------------------------- Total assets $ 1,144,574 $144,154 $ 5,271 $1,293,999 ======================================================= Liabilities Deposits: Noninterest-bearing demand 232,499 25,779 -- 258,278 Interest-bearing demand 182,816 18,199 -- 201,015 Savings 297,926 53,280 -- 351,206 Time certificates 291,996 32,619 -- 324,615 ------------------------------------------------------- Total deposits 1,005,237 129,877 -- 1,135,114 Accrued interest payable and other liabilities 17,399 231 690 2 18,320 Long-term debt and other borrowings 22,924 -- -- 22,924 ------------------------------------------------------- Total liabilities $ 1,045,560 $130,108 $ 690 $1,176,358 ======================================================= Shareholders' equity Common stock 50,472 3,067 15,560 69,099 Additional paid-in capital -- 4,243 (4,243) 0 Retained earnings 46,239 6,375 (6,375) 46,239 Accumulated other comprehensive income 2,303 361 (361) 2,303 ------------------------------------------------------- Total shareholders' equity 99,014 14,046 4,5813 117,641 ------------------------------------------------------- Total liabilities and shareholders' equity $1,144,574 $144,154 $ 5,271 $1,293,999 ======================================================= Tier 1 capital $ 91,641 $13,686 $(13,731) 8 $91,596 Tier 2 capital 10,737 935 -- 11,672 Total capital 102,378 14,621 (13,731) 8 103,268 Risk weighted assets 855,288 95,706 -- 950,994 Average assets $ 1,140,000 $145,893 $(13,090) $1,272,803 Tier 1 risk-based capital ratio 10.7% 14.3% 9.6% Total risk-based capital ratio 12.0% 15.3% 10.9% Leverage ratio 8.3% 9.4% 7.2%
- ------------------------ See Notes to Pro Forma Unaudited Financial Information.
TriCo Bancshares and North State National Bank Pro Forma Condensed Consolidated Statements of Income Year Ended December 31, 2002 ---------------------------------------------------------- TriCo North State Adjust Total ---------------------------------------------------------- (dollars in thousands, except share and per share amounts; unaudited) Interest income: Interest and fees on loans $ 52,472 $ 5,636 $ 58,108 Interest on federal funds sold 606 117 $(100) 9 623 Interest on investment securities 11,618 2,104 13,722 ---------------------------------------------------------- Total interest income 64,696 7,857 (100) 72,453 Interest expense: Interest on deposits 11,620 2,007 13,627 Interest on short-term borrowing 2 -- 2 Interest on long-term debt 1,292 -- 1,292 ---------------------------------------------------------- Total interest expense 12,914 2,007 14,921 ---------------------------------------------------------- Net interest income 51,782 5,850 (100) 57,532 ---------------------------------------------------------- Provision for loan losses 2,800 -- 2,800 ---------------------------------------------------------- Net interest income after provision for loan losses 48,982 5,850 (100) 54,732 ---------------------------------------------------------- Noninterest income: Service charges and fees 11,286 341 11,627 Gain on sale of investments -- 55 55 Gain on sale of loans 3,641 -- 3,641 Commissions on sale of NDIP 2,467 -- 2,467 Other 1,786 143 1,929 ---------------------------------------------------------- Total noninterest income 19,180 539 19,719 Noninterest expense: Salaries and related benefits 24,290 1,529 25,819 Intangible amortization 911 -- 779 10 1,690 Other 20,770 1,368 22,138 ---------------------------------------------------------- Total noninterest expense 45,971 2,897 779 49,647 ---------------------------------------------------------- Income before income taxes 22,191 3,492 (879) 24,804 Provision for income taxes 8,122 1,459 (352) 9,229 ---------------------------------------------------------- Net income $ 14,069 $ 2,033 $ (527) $ 15,575 ============================================================ Shares outstanding end of period 7,061,000 1,224,190 (500,190) 11 7,785,000 Average shares outstanding 7,019,000 1,224,000 (500,000) 11 7,743,000 Diluted shares outstanding 7,193,000 1,281,000 (497,000) 11 7,977,000 Per share data Basic earnings $2.00 $1.66 $2.01 Diluted earnings $1.96 $1.59 $1.95
- ------------------------ See Notes to Pro Forma Unaudited Financial Information.
TriCo Bancshares and North State National Bank Pro Forma Condensed Consolidated Statements of Income Year Ended December 31, 2001 ---------------------------------------------------------- TriCo North State Adjust Total ---------------------------------------------------------- (dollars in thousands, except share and per share amounts; unaudited) Interest income: Interest and fees on loans $ 58,730 $ 6,114 $ 64,844 Interest on federal funds sold 1,506 227 $(100) 9 1,633 Interest on investment securities 11,762 2,210 13,972 ---------------------------------------------------------- Total interest income 71,998 8,551 80,449 Interest expense: Interest on deposits 21,507 3,248 24,755 Interest on short-term borrowing 7 -- 7 Interest on long-term debt 1,972 -- 1,972 ---------------------------------------------------------- Total interest expense 23,486 3,248 26,734 ---------------------------------------------------------- Net interest income 48,512 5,303 (100) 53,715 ---------------------------------------------------------- Provision for loan losses 4,400 169 4,569 ---------------------------------------------------------- Net interest income after provision for loan losses 44,112 5,134 (100) 49,146 ---------------------------------------------------------- Noninterest income: Service charges and fees 8,095 335 8,430 Gain on sale of investments 1,756 141 1,897 Gain on sale of loans 2,095 -- 2,095 Commissions on sale of NDIP 2,576 -- 2,576 Other 1,716 149 1,865 ---------------------------------------------------------- Total noninterest income 16,238 625 16,863 Noninterest expense: Salaries and related benefits 21,199 1,492 22,691 Intangible amortization 911 -- 779 10 1,690 Other 18,497 1,252 19,749 ---------------------------------------------------------- Total noninterest expense 40,607 2,744 779 44,130 ---------------------------------------------------------- Income before income taxes 19,743 3,015 (879) 21,879 Provision for income taxes 7,324 1,226 (352) 8,198 ---------------------------------------------------------- Net income $ 12,419 $ 1,789 $ (527) $ 13,681 ============================================================ Shares outstanding end of period 7,000,980 1,224,190 (500,190) 11 7,724,980 Average shares outstanding 7,072,588 1,216,493 (492,493) 11 7,796,588 Diluted shares outstanding 7,219,229 1,267,399 (483,399) 11 8,003,229 Per share data Basic earnings $1.76 $1.47 $1.77 Diluted earnings $1.72 $1.41 $1.72
- ------------------------ See Notes to Pro Forma Unaudited Financial Information. Notes to Pro Forma Unaudited Financial Information The pro forma unaudited financial information was prepared based on North State shareholders receiving consideration of $13,090,000 in cash, 723,512 shares of TriCo stock valued at $23.81, and options to purchase 79,587 shares of TriCo stock at an average price of $6.22 per share. The total value of the stock and option portion of the consideration was $18,627,000. The $23.81 per share value of TriCo common stock noted above is the average closing price on the five trading days surrounding the merger agreement announcement date of October 7, 2002. The following adjustments were made: (1) Represents the $13,090,000 cash to be paid in the merger. (2) Represents the estimated nonrecurring costs to be recognized prior to the transaction which had not been paid or accrued as of December 31, 2002, net of the appropriate tax benefits at an assumed marginal tax rate of 40%. The estimated total pretax amounts of these expenses are as follows: Additional employee benefits $ 400,000 Discontinued operations 150,000 Direct costs of transaction 600,000 ----------- Total $1,150,000 =========== (3) Represents the net effect of the issuance of TriCo stock and options for TriCo stock as part of the merger consideration and the elimination of North State's shareholders' equity as of December 31, 2002 in accordance with the purchase method of accounting for the transaction. Total value of TriCo stock and option consideration given $18,627,000 Total value of North State shareholders' equity on December 31, 2002 (14,046,000) ------------ Net adjustment to pro forma shareholders' equity $ 4,581,000 ============ (4) Represents the market valuation of North State's investments as of December 31, 2002. (5) Represents the identified core-deposit intangible asset estimated to be in the range of 3%-5% of North State's total deposits. These figures assume an estimate of 4% of North State's total deposits. (6) Represents the deferred tax credit related to the core-deposit intangible. Assuming a marginal tax rate of 40%, this adjustment is 40% of the identified core-deposit intangible adjustment. (7) Represents the unidentified intangible asset (goodwill) created in accordance with the purchase method of accounting for the transaction. The amount is calculated as follows: Cash consideration $13,090,000 Stock and option consideration 18,627,000 ------------- Total consideration $31,717,000 Less: North State's shareholders' equity (14,046,000) Less: Core-deposit intangible (5,195,000) Add: Deferred tax credit related to core-deposit intangible 2,078,000 Add: Nonrecurring costs net of tax 690,000 Less: Investment market valuation adjustment (49,000) ------------- Total goodwill $15,195,000 ============= (8) Represents the addition to pro forma shareholders' equity as described in note 3 above less the sum of the intangible items described in notes 5, 6 and 7 above. (9) Represents reduction in interest income from $8 million of federal funds sold which is expected to be used as part of the $13,000,000 cash to be paid to North State shareholders. (10) Represents core-deposit amortization based on $5,195,000 of core-deposit intangible being created in the merger amortized on an accelerated basis over 10 years. (11) Represents replacement of North State's outstanding common stock and options to purchase common stock with TriCo common stock and options to purchase common stock resulting in an increase of approximately 724,000 shares of TriCo stock outstanding and fully diluted shares of approximately 784,000. EXHIBIT 99.3 PRESS RELEASE Contact: Thomas J. Reddish Vice President & CFO For Immediate Release (530) 898-0300 TRICO BANCSHARES ANNOUNCES CLOSING OF ACQUISITION OF NORTH STATE NATIONAL BANK ------------------------------------------------------------------------------ Chico, CA - April 7, 2003. TriCo Bancshares (NASDAQ:TCBK), parent company of Tri Counties Bank, announced its acquisition of North State National Bank by the merger of North State into its wholly owned subsidiary, Tri Counties Bank, effective 5:01 pm on April 4, 2003. The acquisition and the related merger agreement dated October 3, 2003, was approved by the California Department of Financial Institutions, the Federal Deposit Insurance Corporation, and the shareholders of North State National Bank on March 4, March 7, and March 19, 2003, respectively. Under terms of the merger agreement, TriCo will issue $13,090,105 in cash, 723,511 shares of TriCo common stock, and options to purchase 79,587 TriCo common shares at an average exercise price of $6.22 per share in exchange for all of the 1,234,375 common shares and options to purchase 79,937 common shares of North State National Bank outstanding as of April 4, 2003. At March 31, 2003, TriCo Bancshares had 7,080,470 shares of common stock outstanding. Based upon TriCo's closing stock price of $25.65 on April 4, 2003, the aggregate value of the cash and the TriCo options and common stock to be issued in the merger would be approximately $33,195,000. The two former branches of North State National Bank opened today for business as Tri Counties Bank branches, and all customer service systems have been converted to Tri Counties Bank systems. Tri Counties Bank headquartered in Chico, California, has a 28 year history in the banking industry. Following the acquisition of North State, Tri Counties Bank now has approximately $1.3 billion in assets, and operates 34 traditional branch locations and 10 in-store branch locations in 20 California counties. Tri Counties Bank offers financial services and provides a diversified line of products and services to consumers and businesses, which include demand, savings and time deposits, consumer finance, online banking, mortgage lending, and commercial banking throughout its market area. It operates a network of 55 ATMs and a 24-hour, seven days a week telephone customer service center. Brokerage services are provided at the Bank's offices by the Bank's association with Raymond James Financial, Inc. For further information please visit the Tri Counties Bank web-site at http://www.tricountiesbank. 63 Constitution Drive, Chico, California 95973 Exhibit 99.4 CONSENT AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We hereby consent to the use in this Form 8-K of our report dated January 30, 2003 (except for Note 15, as to which the date is March 19, 2003), relating to the financial statements of North State National Bank. /s/ Perry-Smith LLP Sacramento, California April 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----