Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year Commission File Number 0-10661
ended December 31, 1996
TriCo Bancshares
----------------
(Exact name of registrant as specified in its charter)
California 94-2792841
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Independence Circle, Chico, California 95973
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(916) 898-0300
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
-------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of March 25, 1997, was approximately $92,538,574. This
computation excludes a total of 1,382,097 shares which are beneficially owned by
the officers and directors of Registrant who may be deemed to be the affiliates
of Registrant under applicable rules of the Securities and Exchange Commission.
The number of shares outstanding of Registrant's classes of common stock, as of
March 25, 1997, was 4,641,623 shares of Common Stock, without par value.
The following documents are incorporated herein by reference into the parts of
Form 10-K indicated: Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1996, for Item 7 and Registrant's Proxy Statement for
use in connection with its 1997 Annual Meeting of Shareholders for Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K.
PART I
1. BUSINESS
Formation of Bank Holding Company
TriCo Bancshares (hereinafter the "Company" or "Registrant") was
incorporated under the laws of the State of California on October 13, 1981. It
was organized at the direction of the Board of Directors of Tri Counties Bank
(the "Bank") for the purpose of forming a bank holding company. On September 7,
1982, a wholly-owned subsidiary of the Company was merged with and into the Bank
resulting in the shareholders of the Bank becoming the shareholders of the
Company and the Bank becoming the wholly-owned subsidiary of the Company. (The
merger of the wholly-owned subsidiary of the Company with and into the Bank is
hereafter referred to as the "Reorganization.") At the time of the
Reorganization, the Company became a bank holding company subject to the
supervision of the Board of Governors of the Federal Reserve System (the
"Board") in accordance with the Bank Holding Company Act of 1956, as amended.
The Bank remains subject to the supervision of the California State Banking
Department and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank
currently is the only subsidiary of the Company and the Company has not yet
commenced any business operations independent of the Bank.
Provision of Banking Services
The Bank was incorporated as a California banking corporation on June
26, 1974, and received its Certificate of Authority to begin banking operations
on March 11, 1975.
The Bank engages in the general commercial banking business in the
California counties of Butte, Del Norte, Glenn, Lake, Lassen, Madera, Mendocino,
Merced, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, and Yuba counties. The
Bank currently has 24 traditional and seven in-store branch offices. It opened
its first banking office in Chico, California in 1975, followed by branch
offices in Willows, Durham and Orland, California. The Bank opened its fifth
banking office at an additional location in Chico in 1980. On March 27, 1981,
the Bank acquired the assets of Shasta County Bank and thereby acquired six
additional offices. These offices are located in the communities of Bieber,
Burney, Cottonwood, Fall River Mills, Palo Cedro and Redding, California. On
November 7, 1987, the Bank purchased the deposits and premises of the Yreka
Branch of Wells Fargo Bank, thereby acquiring an additional branch office. On
August 1, 1988, the Bank opened a new office in Chico at East 20th Street and
Forest Avenue. The Bank opened a branch office in Yuba City on September 10,
1990. The Bank opened four supermarket branches in 1994. These supermarket
branches were opened on March 7, March 28, June 6 and June 13, 1994 in Red
Bluff, Yuba City, and two in Redding respectively. The Bank added one
conventional branch in Redding through its acquisition of Country National Bank
on July 21, 1994. On November 7, 1995, the Bank opened a supermarket branch in
Chico. In March 1996 the Bank opened its sixth supermarket branch in Grass
Valley. The acquisition of Sutter Buttes Savings Bank in October 1996 added a
branch in Marysville. In 1996 the Bank entered into an agreement with Wells
Fargo Bank, N.A. to purchase nine branches. This acquisition was completed on
February 21, 1997. The acquired branches are located in Crescent City, Weed, Mt.
Shasta, Susanville, Covelo, Middletown, Patterson, Gustine and Chowchilla. This
acquisition expanded the Bank's market area from the Sacramento Valley and
intermountain areas to include parts of the northern coastal region and the
northern San Joaquin Valley.
General Banking Services. The Bank conducts a commercial banking
business including accepting demand, savings and time deposits and making
commercial, real estate, and consumer loans. It also offers installment note
collection, issues cashier's checks and money orders, sells travelers checks and
provides safe deposit boxes and other customary banking services. Brokerage
services are provided at the Bank's offices by the Bank's association with
Investment Service of America (ISFA) under the name INVEST. The Bank does not
offer trust services or international banking services.
The Bank's operating policy since its inception has emphasized retail
banking. Most of the Bank's customers are retail customers and small to
medium-sized businesses. The business of the Bank emphasizes serving the needs
of local businesses, farmers and ranchers, retired individuals and wage earners.
The majority of the Bank's loans are direct loans made to individuals and
businesses in the area. At December 31, 1996, the total of the Bank's consumer
installment loans outstanding was $75,498,000 (17.2%), the total of commercial
loans outstanding was $176,868,000 (40.3%), and the total of real estate loans
including construction loans of $26,348,000 was $186,923,000 (42.5%). The Bank
takes real estate, listed and unlisted securities, savings and time deposits,
automobiles, machinery, equipment, inventory, accounts receivable and notes
receivable secured by property as collateral for loans.
2
Most of the Bank's deposits are attracted from individuals and
business-related sources. No single person or group of persons provides a
material portion of the Bank's deposits, the loss of any one or more of which
would have a materially adverse effect on the business of the Bank, nor is a
material portion of the Bank's loans concentrated within a single industry or
group of related industries.
In order to attract loan and deposit business from individuals and
small to medium-sized businesses, branches of the Bank set lobby hours to
accommodate local demands. In general, lobby hours are from 9:00 a.m. to 5:00
p.m. Monday through Thursday, and from 9:00 a.m. to 6:00 p.m. on Friday. Certain
branches with less activity open later and close earlier. Some Bank offices also
utilize drive-up facilities operating from 9:00 a.m. to 7:00 p.m. The
supermarket branches are open from 9:00 a.m. to 7:00 p.m. Monday through
Saturday and 11:00 a.m. to 5:00 p.m. on Sunday.
The Bank offers 24 hour ATMs at all branch locations. The ATMs are
linked to several national and regional networks such as CIRRUS and STAR. In
addition, banking by telephone on a 24 hour toll-free number is available to all
customers. This service allows a customer to inquire for account balances and
most recent transactions, transfer moneys between accounts, make loan payments,
and obtain interest rate information.
Other activities. The Bank presently offers the banking services
referred to above and pursuant to California legislation, TCB Real Estate
Corporation, a wholly-owned subsidiary of the Bank, engages in limited real
estate investment. Such investment consists of holding certain real property for
the purpose of development or as income earning assets. The amount of the Bank's
assets committed to such investment does not exceed the total of the Bank's
capital and surplus. In 1996 the FDIC directed the Bank to divest the properties
held by TCB Real Estate Corp. and to terminate its operations. The Bank and FDIC
have agreed to a plan that will accomplish the divestiture by June 30, 1999.
The Bank may in the future engage in other businesses either directly
or indirectly through subsidiaries acquired or formed by the Bank subject to
regulatory constraints. See "Regulation, Supervision and Permitted Activities of
the Company."
Employees. At December 31, 1996, the Company and the Bank employed 339
persons, including four executive officers. No employees of the Company or the
Bank are presently represented by a union or covered under a collective
bargaining agreement. Management believes that its employee relations are
excellent.
Competition. The banking business in California generally, and in the
Bank's primary service area specifically, is highly competitive with respect to
both loans and deposits. It is dominated by a relatively small number of major
banks with many offices operating over a wide geographic area. Among the
advantages such major banks have over the Bank are their ability to finance wide
ranging advertising campaigns and to allocate their investment assets to regions
of high yield and demand. By virtue of their greater total capitalization such
institutions have substantially higher lending limits than does the Bank since
legal lending limits to an individual customer are limited to a percentage of a
Bank's total capital accounts.
In addition to competing with savings institutions, commercial banks
compete with other financial markets for funds. Yields on corporate and
government debt securities and other commercial paper affect the ability of
commercial banks to attract and hold deposits. Commercial banks also compete for
available funds with money market instruments and mutual funds. During past
periods of high interest rates, money market funds have provided substantial
competition to banks for deposits and they may continue to do so in the future.
In today's stock market environment mutual funds have become a major source of
competition for savings dollars.
The Bank relies substantially on local promotional activity, personal
contacts by its officers, directors, employees and shareholders, extended hours,
personalized service and its reputation in the communities it services to
compete effectively.
3
Regulation and Supervision
As a registered bank holding company under the Bank Holding Company Act
of 1956 (the "BHC Act"), the Company is subject to the regulations and
supervision of the Board of Governors of the Federal Reserve System ("FRB"). The
BHC Act requires the Company to file reports with the FRB and provide additional
information requested by the FRB. The Company must receive the approval of the
FRB before it may acquire all or substantially all of the assets of any bank, or
ownership or control of the voting shares of any bank if, after giving effect to
such acquisition of shares, the Company would own or control more than 5 percent
of the voting shares of such bank.
The Company and any subsidiaries it may acquire or organize will be
deemed to be affiliates of the Bank within the Federal Reserve Act. That Act
establishes certain restrictions which limit the extent to which the Bank can
supply its funds to the Company and other affiliates. The Company is also
subject to restrictions on the underwriting and the public sale and distribution
of securities. It is prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property, or
furnishing of services.
The Company is prohibited from engaging in, or acquiring direct or
indirect control of any company engaged in non-banking activities, unless the
FRB by order or regulation has found such activities to be closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Under California law, dividends and other distributions by the Company
are subject to declaration by the Board of Directors at its discretion out of
net assets. Dividends cannot be declared and paid when such payment would make
the Company insolvent.
FRB policy prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowings or other arrangements that
might adversely affect the holding company's financial position. The policy
further declares that a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality and overall financial
condition. Other FRB policies forbid the payment by bank subsidiaries to their
parent companies of management fees which are unreasonable in amount or exceed a
fair market value of the services rendered (or, if no market exists, actual
costs plus a reasonable profit).
In addition, the FRB has authority to prohibit banks that it regulates
from engaging in practices which in the opinion of the FRB are unsafe or
unsound. Such practices may include the payment of dividends under some
circumstances. Moreover, the payment of dividends may be inconsistent with
capital adequacy guidelines. The Company may be subject to assessment to restore
the capital of the Bank should it become impaired.
Federal Reserve Regulation "Y" (12 C.F.R. Part 225) sets forth those
activities which are regarded as closely related to banking or managing or
controlling banks and, thus, are permissible activities that may be engaged in
by bank holding companies subject to approval in individual cases by the FRB.
Litigation has challenged the validity of certain activities authorized by the
FRB for bank holding companies, and the FRB has various regulations and
applications in this regard still under consideration.
The Company is subject to the minimum capital requirements of the FRB.
As a result of these requirements, the growth in assets of the Company is
limited by the amount of its capital accounts as defined by the FRB. Capital
requirements may have an affect on profitability and the payment of
distributions by the Company. If the Company is unable to increase its assets
without violating the minimum capital requirements, or is forced to reduce
assets, its ability to generate earnings would be reduced. Furthermore, earnings
may need to be retained rather than paid as distributions to shareholders.
The FRB has adopted guidelines utilizing a risk-based capital
structure. These guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. For bank holding
companies with less than $150 million in consolidated assets, the guidelines
apply on a bank-only basis unless the holding company is engaged in non-bank
activity involving significant leverage or has a significant amount of
outstanding debt that is held by the general public. The Company currently has
consolidated assets of more than $150 million; accordingly, the risk-based
capital guidelines apply to the Company.
4
Qualifying capital is divided into two tiers. Tier 1 capital consists
generally of common stockholder's equity, qualifying noncumulative perpetual
preferred stock, qualifying cumulative perpetual preferred stock (up to 25
percent of total Tier 1 capital) and minority interests in the equity accounts
of consolidated subsidiaries less goodwill and certain other intangible assets.
Tier 2 capital consists of, among other things, allowance for loan and lease
losses up to 1.25 percent of weighted risk assets, perpetual preferred stock,
hybrid capital instruments, perpetual debt, mandatory convertible debt
securities, subordinated debt and intermediate-term preferred stock. Tier 2
capital qualifies as part of total capital up to a maximum of 100 percent of
Tier 1 capital. Amounts in excess of these limits may be issued but are not
included in the calculation of risk-based capital ratios. As of December 31,
1996 the Company must have a minimum ratio of qualifying total capital to
weighted risk assets of 8 percent, of which at least 4 percent must be in the
form of Tier 1 capital.
The Federal regulatory agencies have adopted a minimum Tier 1 leverage
ratio which is intended to supplement risk-based capital requirements and to
ensure that all financial institutions, even those that invest predominantly in
low-risk assets, continue to maintain a minimum level of Tier 1 capital. These
regulations provide that a banking organization's minimum Tier 1 leverage ratio
be determined by dividing its Tier 1 capital by its quarterly average total
assets, less goodwill and certain other intangible assets. Under the current
rules, TriCo is required to maintain a minimum Tier 1 leverage ratio of 4
percent.
Insurance of Deposits.
The Bank's deposit accounts are insured up to a maximum of $100,000 per
depositor by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC issues
regulations and generally supervises the operations of its insured banks. This
supervision and regulation is intended primarily for the protection of
depositors.
Effective June 1, 1995, deposit insurance premiums decreased from $.23
per $100.00 of deposits to $.04 per $100.00 of deposits. Effective January 1,
1996, the insurance rate was reduced to $0.00 per $100.00. This rate will remain
in effect as long as the Bank Insurance Fund is capitalized at its legal limit.
In November 1990, federal legislation was passed which removed the cap on the
amount of deposit insurance premiums that can be charged by the FDIC. Under this
legislation, the FDIC is able to increase deposit insurance premiums as it sees
fit. This could result in a significant increase in the cost of doing business
for the Bank in the future. The FDIC now has authority to adjust deposit
insurance premiums paid by insured banks every six months.
Risk-Based Capital Requirements.
The Bank is subject to the minimum capital requirements of the FDIC. As
a result of these requirements, the growth in assets of the Bank is limited by
the amount of its capital accounts as defined by the FRB. Capital requirements
may have an effect on profitability and the payment of dividends on the common
stock of the Bank. If the Bank is unable to increase its assets without
violating the minimum capital requirements or is forced to reduce assets, its
ability to generate earnings would be reduced. Further, earnings may need to be
retained rather than paid as dividends to the Company.
Federal banking law requires the federal banking regulators to take
"prompt corrective action" with respect to banks that do not meet minimum
capital requirements. In response to this requirement, the FDIC adopted final
rules based upon the five capital tiers defined by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA); well capitalized, adequately
capitalized, under capitalized, significantly under capitalized and critically
under capitalized. For example, the FDIC's rules provide that an institution is
"well-capitalized" if its risk-based capital ratio is 10 percent or greater; its
Tier 1 risk-based capital ratio is 6 percent or greater; its leverage ratio is 5
percent or greater; and the institution is not subject to a capital directive or
an enforceable written agreement or order. A bank is "adequately capitalized" if
its risk-based capital ratio is 8 percent or greater; its Tier 1 risk-based
capital ratio is 4 percent or greater; and its leverage ratio is 4 percent or
greater (3 percent or greater for "one" rated institutions). An institution is
"significantly undercapitalized" if its risk-based capital ratio is less than 6
percent; its Tier 1 risk-based capital ratio is less than 3 percent; or its
tangible equity (Tier 1 capital) to total assets is equal to or less than 2
percent. An institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it engages in unsafe
or unsound banking practices.
5
No sanctions apply to institutions which are "well" or "adequately"
capitalized under the prompt corrective action requirements. Undercapitalized
institutions are required to submit a capital restoration plan for improving
capital. In order to be accepted, such plan must include a financial guaranty
from the institution's holding company that the institution will return to
capital compliance. If such a guarantee were deemed to be a commitment to
maintain capital under the federal Bankruptcy Code, a claim for a subsequent
breach of the obligations under such guarantee in a bankruptcy proceeding
involving the holding company would be entitled to a priority over third-party
general unsecured creditors of the holding company. Undercapitalized
institutions are prohibited from making capital distributions or paying
management fees to controlling persons; may be subject to growth limitations;
and acquisitions, branching and entering into new lines of business are
restricted. Finally, the institution's regulatory agency has discretion to
impose certain of the restrictions generally applicable to significantly
undercapitalized institutions.
In the event an institution is deemed to be significantly
undercapitalized, it may be required to: sell stock; merge or be acquired;
restrict transactions with affiliates; restrict interest rates paid; divest a
subsidiary; or dismiss specified directors or officers. If the institution is a
bank holding company, it may be prohibited from making any capital distributions
without prior approval of the FRB and may be required to divest a subsidiary. A
critically undercapitalized institution is generally prohibited from making
payments on subordinated debt and may not, without the approval of the FDIC,
enter into a material transaction other than in the ordinary course of business;
engage in any covered transaction; or pay excessive compensation or bonuses.
Critically undercapitalized institutions are subject to appointment of a
receiver or conservator.
Bank Regulation.
The federal regulatory agencies are required to adopt regulations which
will establish safety and soundness standards which will apply to banks and bank
holding companies. These standards must address bank operations, management,
asset quality, earnings, stock valuation and employee compensation. A bank
holding company or bank failing to meet established standards will face
mandatory regulatory enforcement action.
The grounds upon which a conservator or receiver of a bank can be
appointed have been expanded. For example, a conservator or receiver can be
appointed for a bank which fails to maintain minimum capital levels and has no
reasonable prospect of becoming adequately capitalized.
Federal law also requires, with some exception, that each bank have an
annual examination performed by its primary federal regulatory agency, and an
outside independent audit. The outside audit must consider bank regulatory
compliance in addition to financial statement reporting.
Federal law also restricts the acceptance of brokered deposits by
insured depository institutions and contains a number of consumer banking
provisions, including disclosure requirements and substantive contractual
limitations with respect to deposit accounts.
Recent Legislation
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company and its
subsidiaries are particularly susceptible to being affected by enactment of
federal and state legislation which may have the effect of increasing or
decreasing the cost of doing business, modifying permissible activities or
enhancing the competitive position of other financial institutions.
In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 was enacted by Congress. Under the act, beginning on September 29, 1995,
bank holding companies may acquire banks in any state, notwithstanding contrary
state law, and all banks commonly owned by a bank holding company may act as
agents for one another. An agent bank may receive deposits, renew time deposits,
accept payments, and close and service loans for its principal banks but will
not be considered to be a branch of the principal banks.
In response to the Riegle-Neal Act, California enacted the California
Interstate Banking and Branching Act of 1995. This act became effective
September 29, 1995. Under this act, an out-of-state bank can only enter into
interstate branch banking within California by acquiring an existing bank
operating within California. The California bank must have been in existence for
five years at the time of acquisition.
6
Governmental Monetary Policies and Economic Conditions
The principal sources of funds essential to the business of banks and
bank holding companies are deposits, stockholder's equity and borrowed funds.
The availability of these various sources of funds and other potential sources,
such as preferred stock or commercial paper, and the extent to which they are
utilized, depends on many factors, the most important of which are the FRB's
monetary policies and the relative costs of different types of funds. An
important function of the FRB is to regulate the national supply of bank credit
in order to combat recession and curb inflationary pressure. Among the
instruments of monetary policy used by the Federal Reserve Board to implement
these objections are open market operations in United States Government
securities, changes in the discount rate on bank borrowings, and changes in
reserve requirements against bank deposits. The monetary policies of the FRB
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future. In view of the
recent changes in regulations affecting commercial banks and other actions and
proposed actions by the federal government and its monetary and fiscal
authorities, including proposed changes in the structure of banking in the
United States, no prediction can be made as to future changes in interest rates,
credit availability, deposit levels, the overall performance of banks generally
or the Company and its subsidiaries in particular.
7
General
The Company conducts all of its business operations within a single
geographic area and within a single industry segment.
2. PROPERTIES
As the Company has not yet acquired any properties independent of the
Bank, its only subsidiary, the properties of the Bank and the Bank's
subsidiaries comprise all of the properties of the Company.
Bank Properties
The Bank owns and leases properties which house administrative and data
processing functions and 31 banking offices. Major owned and leased facilities
are listed below.
Park Plaza Branch Pillsbury Branch
780 Mangrove Avenue 2171 Pillsbury Road
Chico, CA 95926 Chico, CA 95926
10,000 square feet 5,705 square feet
Leased - term expires 2010 Owned
Purchasing and Printing Department Hilltop Branch
2560-C Dominic Drive 1250 Hilltop Drive
Chico, CA 95928 Redding, CA 96049
8,400 square feet 6,252 square feet
Leased - term expires 1995 Owned
Burney Branch Cottonwood Branch
37093 Main Street 3349 Main Street
Burney, CA 96013 Cottonwood, CA 96022
3,500 square feet 4,900 square feet
Owned Owned
Information Administration Fall River Mills Branch
110 Independence Circle 43308 Highway 299 East
Chico, CA 95926 Fall River Mills, CA 96028
7,480 square feet 2,200 square feet
Owned Owned
Orland Branch Durham Branch
100 E. Walker Street 9411 Midway
Orland, CA 95963 Durham, CA 95938
3,000 square feet 2,150 square feet
Owned Owned
Redding Branch Willows Branch
1810 Market Street 210 North Tehama Street
Redding, CA 96001 Willows, CA 95988
14,000 square feet 4,800 square feet
Owned Owned
Palo Cedro Branch Yuba City Branch
9125 Deschutes Road 1441 Colusa Avenue
Palo Cedro, CA 96073 Yuba City, CA 9599
34,000 square feet 6,900 square feet
Owned Owned
Chowchilla Branch Covelo Branch
305 Trinity Street 76405 Covelo Road
Chowchilla, CA 93610 Covelo, Ca 95428
6,000 square feet 3,000 square feet
Leased - term expires 2009 Leased - term expires 1997
8
Crescent City Branch Gustine Branch
936 Third Street 319 Fifth Street
Crescent City, CA 95531 Gustine, CA 95322
4,700 square feet 5,100 square feet
Owned Owned
Marysville Branch Middletown Branch
729 E Street 21097 Calistoga Street
Marysville, CA 95901 Middletown, CA 95461
1,600 square feet 2,600 square feet
Leased - term expires 2001 Leased - term expires 2002
Mt. Shasta Branch Patterson Branch
204 Chestnut Street 17 Plaza
Mt. Shasta, CA 96067 Patterson, CA 95363
6,500 square feet 4,000 square feet
Leased - term expires 2007 Owned
Susanville Branch Weed Branch
1605 Main Street 303 Main Street
Susanville, CA 96130 Weed, CA 96094
7,200 square feet 6,200 square feet
Leased - term expires 2002 Owned
TriCo Offices Yreka Branch
15 Independence Circle 165 South Broadway
Chico, CA 95926 Yreka, CA 96097
7,000 square feet 6,000 square feet
Leased - term expires 2011 Owned
Administration Offices Data Processing Center
40 Philadelphia Drive 1103 Fortress
Chico, CA 95926 Chico, CA 95926
7,000 square feet 13,600 square feet
Owned Leased - term expires 2011
3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material legal
proceedings, other than ordinary routine litigation incidental to the business
of the Company and the Bank, nor is any of their property the subject of any
such proceedings.
4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
9
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Stock of the Company trades on the NASDAQ National Market under
the symbol "TCBK." The shares were first listed in the NASDAQ Stock Market in
April 1993. The active market makers on NASDAQ include: Hoefer & Arnett,
Incorporated, Piper Jaffray Companies Inc., Sutro & Co. Inc. and Van Kasper &
Co. Inc.
The following table summarizes the Common Stock high and low trading prices
and volume of shares traded by quarter as reported by NASDAQ. The prices have
been adjusted to reflect the five-for-four stock split effected as a stock
dividend in September 1995.
Prices of the Approximate
Company's Common Trading
Stock Volume
Quarter Ended:(1),(2) High Low (in shares)
March 31, 1995 $ 12.80 $ 10.80 118,010
June 30, 1995 13.20 12.20 213,026
September 30, 1995 16.60 12.00 535,140
December 31, 1995 16.40 14.50 236,821
March 31, 1996 18.50 15.75 579,810
June 30, 1996 18.75 16.88 266,608
September 30, 1996 22.25 17.00 478,820
December 31, 1996 22.50 19.50 365,032
(1) Quarterly trading activity has been compiled from NASDAQ trading reports.
(2) Adjusted to reflect the 5-for-4 stock split effected on September 22, 1995.
Holders
As of December 31, 1996, there were approximately 1,832 holders of record
of the Company's Common Stock.
Dividends
The Company has paid quarterly dividends since March 1990. For the first
two quarters of 1996, the Company paid dividends of $0.13 per share. A quarterly
dividend of $0.16 per share was paid in the third and fourth quarters. In 1995
the Company paid quarterly dividends at $.08 per share for the first three
quarters (adjusted for the 5-for-4 split) and $.13 per share in the fourth
quarter. The holders of Common Stock of the Company are entitled to receive cash
dividends when and as declared by the Board of Directors, out of funds legally
available therefor, subject to the restrictions set forth in the California
General Corporation Law (the "Corporation Law"). The Corporation Law provides
that a corporation may make a distribution to its shareholders if the
corporation's retained earnings equal at least the amount of the proposed
distribution.
The Company, as sole shareholder of the Bank, is entitled to dividends when
and as declared by the Bank's Board of Directors, out of funds legally available
therefore, subject to the powers of the Federal Deposit Insurance Corporation
(the "FDIC") and the restrictions set forth in the California Financial Code
(the "Financial Code"). The Financial Code provides that a bank may not make any
distributions in excess of the lessor of: (i) the bank's retained earnings, or
(ii) the bank's net income for the last three fiscal years, less the amount of
any distributions made by the bank to its shareholders during such period.
However, a bank may, with the prior approval of the California Superintendent of
Banks (the "Superintendent"), make a distribution to its shareholders of up to
the greater of (A) the bank's retained earnings, (B) the bank's net income for
its last fiscal year, or (C) the bank's net income for its current fiscal year.
If the Superintendent determines that the shareholders' equity of a bank is
inadequate or that a distribution by the bank to its shareholders would be
unsafe or unsound, the Superintendent may order a bank to refrain from making a
proposed distribution. The FDIC may also order a bank to refrain from making a
proposed distribution when, in its opinion, the payment of such would be an
unsafe or unsound practice. The Bank paid dividends totaling $4,800,000 to the
Company in 1996. As of December 31, 1996 and subject to the limitations and
restrictions under applicable law, the Bank had funds available for dividends in
the amount of $12,767,000.
The Federal Reserve Act limits the loans and advances that the Bank may
make to its affiliates. For purposes of such Act, the Company is an affiliate of
the Bank. The Bank may not make any loans, extensions of credit or advances to
the Company if the aggregate amount of such loans, extensions of credit,
advances and any repurchase agreements and investments exceeds 10% of the
capital stock and surplus of the Bank. Any such permitted loan or advance by the
Bank must be secured by collateral of a type and value set forth in the Federal
Reserve Act.
10
6. FIVE YEAR SELECTED FINANCIAL DATA
(in thousands, except share data)
1996 1995 1994 1993(4) 1992(4)
Statement of Operations Data:(1)
Interest income $49,148 $46,011 $43,240 $40,947 $40,272
Interest expense 19,179 17,988 15,680 13,996 15,600
Net interest income 29,969 28,023 27,560 26,951 24,672
Provision for loan losses 777 335 316 1,858 2,101
Net interest income after
provision for loan losses 29,192 27,688 27,244 25,093 22,571
Noninterest income 6,636 5,933 5,025 6,726 5,572
Noninterest expense 23,485 21,661 22,058 20,225 18,031
Income before income taxes 12,343 11,960 10,211 11,594 10,112
Provision for income taxes 5,037 4,915 4,350 4,779 4,112
Net income $7,306 $7,045 $5,861 $6,815 $6,000
Share Data:(2)
Primary earnings per share $ 1.56 $1.46 $1.18 $1.42 $1.46
Cash dividend paid per share 0.59 0.37 0.32 0.31 0.28
Common shareholders' equity
at year end 13.10 11.92 10.10 10.05 8.46
Balance Sheet Data at year end5:
Total loans, gross $439,218 $318,766 $307,103 $305,902 $317,518
Total assets 694,859 603,554 593,834 575,897 492,404
Total deposits 595,621 516,193 491,172 515,999 451,346
Total shareholders' equity 60,777 53,213 48,231 47,068 36,545
Selected Financial Ratios:
Return on average assets 1.18 % 1.22 % .99 % 1.25 % 1.25 %
Return on average common
shareholders' equity 13.03 % 13.95 % 12.42 % 15.81% 19.48 %
Leverage ratio 8.99 % 8.92 % 8.75 % 8.18 % 7.39 %
Total risk-based capital ratio 13.58 % 15.17 % 14.65 % 14.02 % 11.94 %
Net interest margin(3) 5.37 % 5.36 % 5.18 % 5.49 % 5.76 %
Allowance for loan losses to total
loans outstanding at end of year 1.39 % 1.75 % 1.83 % 1.95 % 1.51 %
1 Tax-exempt securities are presented on an actual yield basis.
2 Retroactively adjusted to reflect 5-for-4 stock split effected in 1995, and the 12% and 15% stock
dividends declared in 1993 and 1992, respectively.
3 Calculated on a tax equivalent basis.
4 Restated on a historical basis to reflect the July 21, 1994 acquisition of Country National Bank on a
pooling-of-interests basis.
5 The 1996 data reflects changes due to the purchase of Sutter Buttes Savings Bank. See Note R of Registrant's
1996 Annual Report to Shareholders.
11
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Management's Discussion and Analysis of Financial Condition and Results
of Operations, included in Registrant's 1996 Annual Report to Shareholders,
(pages 29 through 46 of Exhibit 13.1 as electronically filed) is incorporated
herein by reference.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditor's report,
included in Registrant's 1996 Annual Report to Shareholders, are incorporated
herein by reference:
Pages of Exhibit 13.1
as Electronically Filed
Report of Independent Public Accountants 28
Consolidated Balance Sheets as of
December 31, 1996 and 1995 1
Consolidated Statements of Income
for the three years ended December 31,
1996, 1995 and 1994 2
Consolidated Statements of Changes in
Shareholders' Equity for the three
years ended December 31, 1996,
1995 and 1994 3
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994 4
Notes to Consolidated Financial
Statements 6
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
12
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Registrant's directors and executive officers
will be set forth under the caption, "Proposal No. 1 - Election of Directors of
the Company" in Registrant's Proxy Statement for use in connection with the
Annual Meeting of Shareholders to be held on or about May 20, 1997. Said
information is incorporated herein by reference.
11. EXECUTIVE COMPENSATION
Information regarding compensation of Registrant's directors and
executive officers will be set forth under the caption, "Proposal No. 1 -
Election of Directors of the Company" in Registrant's Proxy Statement for use in
connection with the Annual Meeting of Shareholders to be held on or about May
20, 1997. Said information is incorporated herein by reference.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners,
directors and executive officers of Registrant will be set forth under the
caption, "Information concerning the Solicitation" in Registrant's Proxy
Statement for use in connection with the Annual Meeting of Shareholders to be
held on or about May 20, 1997. Said information is incorporated herein by
reference.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
set forth under the caption, "Proposal No. 1 - Election of Directors of the
Company" in Registrant's Proxy Statement for use in connection with the Annual
Meeting of Shareholders to be held on or about May 20, 1997. Said information is
incorporated herein by reference.
13
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements:
A list of the consolidated financial statements of
Registrant incorporated herein is included in Item 8 of this Report.
2. Financial Statement Schedules:
Schedules have been omitted because they are not
applicable or are not required under the instructions contained in Regulation
S-X or because the information required to be set forth therein is included in
the consolidated financial statements or notes thereto.
3. Exhibits Filed herewith:
Exhibit No. Exhibits
3.1 Articles of Incorporation, as amended to date, filed as
Exhibit 3.1 to Registrant's Report on Form 10-K, filed for
the year ended December 31, 1989, are incorporated herein
by reference.
3.2 Bylaws, as amended to 1992, filed as Exhibit 3.2 to
Registrant's Report on Form 10-K, filed for the year ended
December 31, 1992, are incorporated herein by reference.
4.2 Certificate of Determination of Preferences of Series B
Preferred Stock, filed as Appendix A to Registrant's
Registration Statement on Form S-1 (No. 33-22738), is
incorporated herein by reference.
10.1 Lease for Park Plaza Branch premises entered into as of
September 29, 1978, by and between Park Plaza Limited
Partnership as lessor and Tri Counties Bank as lessee,
filed as Exhibit 10.9 to the TriCo Bancshares Registration
Statement on Form S-14 (Registration No. 2-74796) is
incorporated herein by reference.
10.2 Lease for Administration Headquarters premises entered into
as of April 25, 1986, by and between Fortress-Independence
Partnership (A California Limited Partnership) as lessor
and Tri Counties Bank as lessee, filed as Exhibit 10.6 to
Registrant's Report on Form 10-K filed for the year ended
December 31, 1986, is incorporated herein by reference.
10.3 Lease for Data Processing premises entered into as of April
25, 1986, by and between Fortress-Independence Partnership
(A California Limited Partnership) as lessor and Tri
Counties Bank as lessee, filed as Exhibit 10.7 to
Registrant's Report on Form 10-K filed for the year ended
December 31, 1986, is incorporated herein by reference.
14
10.4 Lease for Chico Mall premises entered into as of March 11,
1988, by and between Chico Mall Associates as lessor and
Tri Counties Bank as lessee, filed as Exhibit 10.4 to
Registrant's Report on Form 10-K filed for the year ended
December 31, 1988, is incorporated by reference.
10.5 First amendment to lease entered into as of May 31, 1988 by
and between Chico Mall Associates and Tri Counties Bank,
filed as Exhibit 10.5 to Registrant's Report on Form 10-K
filed for the year ended December 31, 1988, is incorporated
by reference.
10.9 Employment Agreement of Robert H. Steveson, dated December
12, 1989 between Tri Counties Bank and Robert H. Steveson,
filed as Exhibit 10.9 to Registrant's Report on Form 10-K
filed for the year ended December 31, 1989, is incorporated
by reference.
10.11 Lease for Purchasing and Printing Department premises
entered into as of February 1, 1990, by and between Dennis
M. Casagrande as lessor and Tri Counties Bank as lessee,
filed as Exhibit 10.11 to Registrant's Report on Form 10-K
filed for the year ended December 31, 1991, is incorporated
herein by reference.
10.12 Addendum to Employment Agreement of Robert H. Steveson,
dated April 9, 1991, filed as Exhibit 10.12 to Registrant's
Report on Form 10-K filed for the year ended December 31,
1991, is incorporated herein by reference.
10.13 The 1993 Non-Qualified Stock Option Plan filed as Exhibit
4.1, the Non-Qualified Stock Option Plan filed as Exhibit
4.2 and the Incentive Stock Option Plan filed as Exhibit
4.3 to Registrant's Form S-8 Registration No. 33-88704
dated January 19, 1995 and the 1995 Incentive Stock Option
Plan filed as Exhibit 4.1 to Registrant's Form S-8,
Registration No. 33-62063 dated August 23, 1995, are
incorporated herein by reference.
11.1 Computation of earnings per share.
13.1 TriCo Bancshares 1996 Annual Report to Shareholders.*
21.1 Tri Counties Bank, a California banking corporation, is the
only subsidiary of Registrant.
23.1 Consent of Arthur Andersen LLP
* Deemed filed only with respect to those portions thereof incorporated
herein by reference.
(b) Reports on Form 8-K:
1. 8-K filed October 25, 1996 for the acquisition of
Sutter Buttes Savings Bank. No financial statements
were required to be filed.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 11,1997 TRICO BANCSHARES
By: /s/ Robert H. Steveson
Robert H. Steveson, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 11, 1997 /s/ Robert H. Steveson
-----------------------------------
Robert H. Steveson, President, Chief Executive
Officer and Director (Principal Executive Officer)
Date: March 11, 1997 /s/ Robert M. Stanberry
-----------------------------------
Robert M. Stanberry, Vice President and Chief
Financial Officer (Principal Financial and Accounting
Officer)
Date: March 11, 1997 /s/ Everett B. Beich
-----------------------------------
Everett B. Beich, Director and Vice Chairman of
the Board
Date: March 11, 1997 /s/ William J. Casey
-----------------------------------
William J. Casey, Director
Date: March 11, 1997 /s/ Craig S. Compton
-----------------------------------
Craig S. Compton, Director
Date: March 11, 1997 /s/ Richard C. Guiton
-----------------------------------
Richard C. Guiton, Director
Date: March 11, 1997
-----------------------------------
Douglas F. Hignell, Secretary and Director
16
Date: March 11, 1997 /s/ Brian D. Leidig
-----------------------------------
Brian D. Leidig, Director
Date: March 11, 1997 /s/ Wendell J. Lundberg
-----------------------------------
Wendell J. Lundberg, Director
Date: March 11, 1997 /s/ Donald E. Murphy
-----------------------------------
Donald E. Murphy, Director
Date: March 11, 1997 /s/ Rodney W. Peterson
-----------------------------------
Rodney W. Peterson, Director
Date: March 11, 1997 /s/ Alex A. Vereschagin
-----------------------------------
Alex A. Vereschagin, Jr., Director and
Chairman of the Board
17
EXHIBIT 11.1
COMPUTATIONS OF EARNINGS PER SHARE
Years ended December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Shares used in the
computation of
earnings per share(1)
Weighted daily average
of shares outstanding 4,513,157 4,430,092 4,389,802 4,094,009 3,534,855
Shares used in the
computation of primary
earnings per shares
4,689,751 4,656,893 4,641,383 4,338,255 3,556,836
========= ========= ========= ========= =========
Shares used in the
computation of fully diluted
earnings per share 4,709,080 4,693,188 4,642,197 4,416,135 3,556,836
========== ========= ========= ========= =========
Net income used in the
computation of earnings
per common stock:
Income before adjustment
for interest expense on
convertible capital $7,306 $7,045 $5,861 $6,815 $6,000
Adjustment for preferred
stock dividend 0 (245) (420) (630) (797)
Net income, as adjusted $7,306 $6,800 $5,441 $6,185 $5,203
========= ========= ========= ========= =========
Primary earnings per share $ 1.46 $ 1.18 $ 1.42 $ 1.46 $ 1.56
========= ========= ========= ========= ==========
Fully diluted earnings
per share $ 1.55 $ 1.45 $ 1.18 $ 1.40 $ 1.46
========== ========== ========== ========== ==========
(1) Retroactively adjusted for stock dividends and stock splits.
EXHIBIT 13.1
TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
Assets 1996 1995
Cash and due from banks $ 52,231 $ 39,673
Federal funds sold -- 25,600
------------------------------
Cash and cash equivalents 52,231 65,273
Securities held-to-maturity (approximate fair value $103,488 and $116,576), respectively 104,713 116,865
Securities available-for-sale 65,316 76,246
Loans:
Commercial 176,868 152,173
Consumer 75,498 64,445
Real estate mortgages 160,575 81,888
Real estate construction 26,348 20,260
------------------------------
439,289 318,766
Less: Allowance for loan losses 6,097 5,580
------------------------------
Net loans 433,192 313,186
Premises and equipment, net 14,717 13,189
Investment in real estate properties 1,173 1,173
Other real estate owned 1,389 631
Accrued interest receivable 4,572 4,609
Deferred income taxes 4,267 3,106
Other assets 13,289 9,276
------------------------------
Total assets $694,859 $603,554
==============================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand $100,879 $ 90,308
Interest-bearing demand 97,178 84,314
Savings 172,789 161,479
Time certificates, $100,000 and over 32,889 13,439
Other time certificates 191,886 166,653
------------------------------
Total deposits 595,621 516,193
Federal funds purchased 4,900 --
Accrued interest payable 3,047 3,162
Other liabilities 6,233 4,694
Long-term debt and other borrowings 24,281 26,292
------------------------------
Total liabilities 634,082 550,341
Commitments and contingencies (Note H)
Shareholders' equity:
Common stock, no par value: Authorized 20,000,000 shares;
issued and outstanding 4,641,223 and 4,464,828 shares, respectively 47,652 44,315
Retained earnings 14,076 9,548
Unrealized loss on securities available-for-sale, net (951) (650)
------------------------------
Total shareholders' equity 60,777 53,213
------------------------------
Total liabilities and shareholders' equity $694,859 $603,554
==============================
See Notes to Consolidated Financial Statements
Exhibit 13.1
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share)
Years Ended December 31,
1996 1995 1994
Interest income:
Interest and fees on loans $ 38,227 $ 33,776 $ 30,641
Interest on investment securities--taxable 10,409 11,706 12,247
Interest on investment securities--tax exempt 120 158 229
Interest on federal funds sold 392 371 123
--------------------------------------------------
Total interest income 49,148 46,011 43,240
Interest expense:
Interest on interest-bearing demand deposits 2,226 2,000 2,066
Interest on savings 5,032 5,167 6,442
Interest on time certificates of deposit 8,820 8,736 5,333
Interest on time certificates of deposit, $100,000 and over 1,123 328 61
Interest on short-term borrowing 359 526 719
Interest on long-term debt 1,619 1,231 1,059
--------------------------------------------------
Total interest expense 19,179 17,988 15,680
--------------------------------------------------
Net interest income 29,969 28,023 27,560
Provision for loan losses 777 335 316
--------------------------------------------------
Net interest income after provision for loan losses 29,192 27,688 27,244
Noninterest income:
Service charges and fees 4,924 4,163 3,570
Other income 1,712 1,770 1,455
--------------------------------------------------
Total noninterest income 6,636 5,933 5,025
Noninterest expenses:
Salaries and related expenses 11,989 10,787 10,550
Other, net 11,496 10,874 11,508
--------------------------------------------------
Total noninterest expenses 23,485 21,661 22,058
--------------------------------------------------
Net income before income taxes 12,343 11,960 10,211
Income taxes 5,037 4,915 4,350
--------------------------------------------------
Net income $ 7,306 $ 7,045 $ 5,861
Preferred stock dividends -- 245 420
--------------------------------------------------
Net income available to common shareholders $ 7,306 $ 6,800 $ 5,441
==================================================
Primary earnings per common share $ 1.56 $ 1.46 $ 1.18
Fully diluted earnings per common share $ 1.55 $ 1.45 $ 1.18
See Notes to Consolidated Financial Statements
Exhibit 13.1 - 2
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
(in thousands, except share amounts)
Series B
Preferred Stock Common Stock
Number Number Unrealized
of of Retained Loss on
Shares Amount Shares Amount Earnings Securities, Net Total
-----------------------------------------------------------------------------
Balance, December 31, 1993 8,000 $ 3,899 3,436,254 $42,818 $ 351 $-- $47,068
Exercise of Common Stock options -- -- 77,453 403 -- -- 403
Series B Preferred Stock cash
dividends -- -- (420) -- (420)
Common Stock cash dividends -- -- -- -- (1,304) -- (1,304)
Cumulative effect of change in
accounting method for investment
securities -- -- -- -- -- 270 270
Change in unrealized holding loss
on securities -- -- -- -- -- (3,978) (3,978)
Stock option amortization -- -- -- 331 -- -- 331
Net income -- -- -- -- 5,861 -- 5,861
-----------------------------------------------------------------------------
Balance, December 31, 1994 8,000 3,899 3,513,707 43,552 4,488 (3,708) 48,231
Redemption of Preferred Stock (8,000) (3,899) -- -- (101) -- (4,000)
Exercise of Common Stock options -- -- 72,694 554 -- -- 554
5-for-4 Common Stock split -- -- 878,427 -- -- -- --
Series B Preferred Stock cash
dividends -- -- -- -- (245) -- (245)
Common Stock cash dividends -- -- -- -- (1,639) -- (1,639)
Change in unrealized holding loss
on securities -- -- -- -- -- 3,058 3,058
Stock option amortization -- -- -- 209 -- -- 209
Net income -- -- -- -- 7,045 -- 7,045
-----------------------------------------------------------------------------
Balance, December 31, 1995 -- -- 4,464,828 44,315 9,548 (650) 53,213
Issuance of Common Stock -- -- 102,868 2,134 -- -- 2,134
Exercise of Common Stock options -- -- 89,950 1,157 -- -- 1,157
Repurchase of Common Stock -- -- (16,423) (163) (132) -- (295)
Common Stock cash dividends -- -- -- -- (2,646) -- (2,646)
Change in unrealized loss
on securities -- -- -- -- -- (301) (301)
Stock option amortization -- -- -- 209 -- -- 209
Net income -- -- -- -- 7,306 -- 7,306
-----------------------------------------------------------------------------
Balance, December 31, 1996 -- $-- 4,641,223 $47,652 $14,076 $ (951) $60,777
=============================================================================
See Notes to Consolidated Financial Statements
Exhibit 13.1 - 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
1996 1995 1994
Operating activities:
Net income $ 7,306 $ 7,045 $ 5,861
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 777 335 316
Provision for losses on other real estate owned 202 99 53
Depreciation and amortization 1,809 1,600 1,405
(Accretion) amortization of investment
security (discounts) premiums, net 28 117 450
Deferred income taxes (930) (134) (90)
Investment security losses, net -- 10 23
(Gain) loss on sale of loans 3 (56) (173)
(Gain) loss on sale of other real estate owned, net (5) (78) 54
Origination of loans held for sale (31,959) (9,666) (8,943)
Proceeds from loan sales 17,147 9,835 8,186
Amortization of stock options 209 209 331
Change in assets and liabilities net of effects from purchase of Sutter
Buttes:
(Increase) decrease in interest receivable 344 139 (1,106)
Increase (decrease) in interest payable (495) 1,402 30
(Increase) decrease in other assets and liabilities (6,239) (876) (1,777)
-----------------------------------------
Net cash provided (used) by operating activities (11,803) 9,981 4,620
-----------------------------------------
Investing activities :
Proceeds from maturities of securities held-to-maturity 19,179 19,516 15,374
Purchases of securities held-to-maturity (5,516) (2,740) (22,439)
Proceeds from maturities of securities available-for-sale 24,353 12,427 23,282
Proceeds from sales of securities available-for-sale -- 6,993 36,490
Purchases of securities available-for-sale (13,704) (5,638) (74,619)
Net (increase) decrease in loans (47,292) (12,529) (1,968)
Purchases of premises and equipment (2,526) (1,335) (2,025)
Proceeds from sale of other real estate owned 673 1,862 2,408
Purchase of Sutter Buttes net of cash acquired (997) -- --
-----------------------------------------
Net cash provided (used) by investing activities (25,830) 18,556 (23,497)
-----------------------------------------
Financing activities:
Net increase (decrease) in deposits 23,486 25,021 (24,827)
Net increase in federal funds borrowed 4,900 -- --
Borrowings (payments) under repurchase agreements -- (30,457) 30,457
Borrowings under long-term debt agreements -- 9,828 11,400
Payments of principal on long-term debt agreements (2,011) (2,035) (45)
Redemption of Preferred Stock -- (4,000) --
Repurchase of Common Stock (295) -- --
Cash dividends-- Preferred -- (245) (420)
Cash dividends-- Common (2,646) (1,639) (1,304)
Issuance of Common Stock 1,157 554 403
-----------------------------------------
Net cash provided (used) by financing activities 24,591 (2,973) 15,664
-----------------------------------------
Increase (decrease) in cash and cash equivalents (13,042) 25,564 (3,213)
Cash and cash equivalents at beginning of year 65,273 39,709 42,922
-----------------------------------------
Cash and cash equivalents at end of year $ 52,231 $ 65,273 $ 39,709
=========================================
Supplemental information
Cash paid for taxes $ 5,727 $ 5,240 $ 3,809
Cash paid for interest expense $ 19,908 $ 16,586 $ 15,650
Non-cash assets acquired through foreclosure $ 1,628 $ 390 $ 1,016
Exhibit 13.1 - 4
Supplemental schedule of non-cash investing and financing activities:
On October 16, 1996, the Company purchased all of the capital stock of Sutter
Buttes Savings Bank in exchange for cash of approximately $2,036,000 and
approximately 102,900 shares of the Company's stock. Based on the average value
of the Company's stock for the ten days preceding the transaction, the total
purchase price was approximately $4,171,000. In conjunction with the
acquisition, liabilities were assumed as follows:
(in thousands)
Fair value of assets acquired $64,931
Cash and stock paid for capital stock (4,171)
Liabilities assumed $60,760
See Notes to Consolidated Financial Statements
Exhibit 13.1 - 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1996, 1995
and 1994
Note A - General Summary of Significant Accounting Policies
The accounting and reporting policies of TriCo Bancshares (the "Company")
conform to generally accepted accounting principles and general practices within
the banking industry. The following are descriptions of the more significant
accounting and reporting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary, Tri Counties Bank (the "Bank"), and the
wholly-owned subsidiaries of the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation. All data have been restated
on a historical basis to reflect the July 21, 1994 acquisition of Country
National Bank on a pooling-of-interests basis.
Nature of Operations
The Company operates twenty four branch offices and seven in-store branches
in the California counties of Butte, Del Norte, Glenn, Lake, Lassen, Madera,
Mendocino, Merced, Shasta, Siskiyou, Stanislaus, Sutter, Tehama and Yuba. The
Company's operating policy since its inception has emphasized retail banking.
Most of the Company's customers are retail customers and small to medium sized
businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Securities
The Company classifies its debt and marketable equity securities into one
of three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling in the
near term. Held-to-maturity securities are those securities which the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
In 1996 and 1995 the Company did not have any securities classified as trading.
Available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Unrealized gains and losses, net of the
related tax effect, on available-for-sale securities are reported as a separate
component of shareholders' equity until realized.
Premiums and discounts are amortized or accreted over the life of the
related investment security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses for securities are included in earnings and are
derived using the specific identification method for determining the cost of
securities sold.
The Company adopted the provisions of Statement of Financial Accounting
Standards No.115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115) as of January 1, 1994. The effect of adopting SFAS 115 was
to recognize an unrealized gain (net of tax) of $270,000 as an increase in
shareholders' equity.
Exhibit 13.1 - 6
Loans
Loans are reported at the principal amount outstanding, net of unearned
income and the allowance for loan losses. Loan origination and commitment fees
and certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over the estimated life
of the loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is generally
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. When loans are 90
days past due, but in Management's judgment are well secured and in the process
of collection, they may not be classified as nonaccrual. When a loan is placed
on nonaccrual status, all interest previously accrued but not collected is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when Management believes that the collectibility of the principal is
unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. The allowance is an amount that Management
believes will be adequate to absorb probable losses inherent in existing loans,
leases and commitments to extend credit, based on evaluations of the
collectibility, impairment and prior loss experience of loans, leases and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and size of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans, commitments, and current
and anticipated economic conditions that may affect the borrower's ability to
pay.
The Company adopted Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan (SFAS 114), and Statement of
Financial Accounting Standards No. 118, Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures (SFAS 118), as of January 1, 1995.
Under these statements, a loan is impaired when it is probable the Company will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. SFAS 114 requires that certain impaired loans be measured based
on the present value of expected future cash flows discounted at the loan's
original effective interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the impaired
loan is less than the recorded investment in the loan, the impairment is
recorded through a valuation allowance.
The Company had previously measured the allowance for loan losses using
methods similar to those prescribed in SFAS 114. As a result of adopting these
statements, no additional allowance for loan losses was required as of January
1, 1995.
Mortgage Operations
The Company sold substantially all of its conforming long term residential
mortgage loans originated during 1996, 1995 and 1994 for cash proceeds equal to
the fair value of the loans. In May 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 122, Accounting for
Mortgage Servicing Rights (SFAS 122). SFAS 122 requires the recognition of
originated mortgage servicing rights as assets by allocating the total costs
incurred between the loan and the servicing right based on their relative fair
values. Historically, the cost of the originated servicing rights was not
recognized as an asset and was charged to earnings when the related loan was
sold.
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. SFAS 122 requires the
Company to assess capitalized mortgage servicing rights for impairment based
upon the fair value of those rights at each reporting date. For purposes of
measuring impairment, the rights are stratified based upon the product type,
term and interest rates. Fair value is determined by discounting estimated net
future cash flows from mortgage servicing activities using discount rates that
approximate current market rates and estimated prepayment rates, among other
assumptions. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceeds their fair value.
Impairment, if any, is recognized through a valuation allowance for each
individual stratum.
Exhibit 13.1 - 7
The Company adopted SFAS 122 on Jnauray 1, 1996. The overall impact of
adopting this Statement on the Company's financial statements was not material.
At December 31, 1996, mortgage loans held for sale totaled $1,165,000. The
Company had entered into commitments to sell all of these loans at year end. At
December 31, 1996 and 1995, the Company serviced real estate mortgage loans for
others of $148 million and $136 million, respectively.
Premises and Equipment
Premises and equipment, including those acquired under capital lease, are
stated at cost less accumulated depreciation and amortization. Depreciation and
amortization expenses are computed using the straight-line method over the
estimated useful lives of the related assets or lease terms. Asset lives range
from 3-10 years for furniture and equipment and 15-30 years for land
improvements and buildings.
Investment in Real Estate Properties
Investment in real estate properties is stated at the lower of cost or
market and consists of properties either acquired directly or transferred from
other real estate owned for the purpose of development or to be held as
income-earning assets.
Subsequent to acquisition or transfer, properties included in the
investment in real estate properties account are periodically evaluated. Any
decline in value below the carrying amount of a property is included in other
expenses. Income and expenses on the investment in real estate properties are
included in other expenses.
Other Real Estate Owned
Real estate acquired by foreclosure is carried at the lower of the recorded
investment in the property or its fair value less estimated disposition costs.
Prior to foreclosure, the value of the underlying loan is written down to the
fair value of the real estate to be acquired less estimated disposition costs by
a charge to the allowance for loan losses, when necessary. Any subsequent
write-downs are recorded as a valuation allowance with a charge to other
expenses in the income statement. Expenses related to such properties, net of
related income, and gains and losses on their disposition, are included in other
expenses.
Identifiable Intangible Assets
Identifiable intangible assets that are included in other assets are
amortized using an accelerated method over a period of ten years.
Income Taxes
The Company's accounting for income taxes is based on an asset and
liability approach. The Company recognizes the amount of taxes payable or
refundable for the current year, and deferred tax assets and liabilities for the
future tax consequences that have been recognized in its financial statements or
tax returns. The measurement of tax assets and liabilities is based on the
provisions of enacted tax laws.
Earnings Per Common Share
Earnings per common share are computed based on the weighted average number
of shares of common stock and common stock equivalents outstanding. The weighted
average number of shares used in the computation of primary earnings per common
share were: 4,689,751 for 1996, 4,656,893 for 1995 and 4,641,384 for 1994. The
weighted average number of shares used in the computation of fully diluted
earnings per common share were: 4,709,080 for 1996, 4,693,188 for 1995 and
4,642,197 for 1994. The 1995 and 1994 share amounts have been adjusted for the
1995 five-for-four stock split. Common stock equivalent shares consist of
options outstanding under the Company's qualified and non-qualified stock option
plans.
Exhibit 13.1 - 8
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and Federal funds sold.
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-based Compensation (SFAS 123) as of January 1, 1996. This
Statement defines a fair value based method of accounting for stock-based
compensation. As permitted by SFAS 123, the Company elected to continue to
account for stock options under APB Opinion No. 25, under which no compensation
cost has been recognized.
Reclassifications
Certain amounts previously reported in the 1995 financial statements have
been reclassified to conform to the 1996 presentation.
Note B - Restricted Cash Balances
Reserves (in the form of deposits with the Federal Reserve Bank) of
$8,345,000 and $7,909,000 were maintained to satisfy Federal regulatory
requirements at December 31, 1996 and December 31, 1995. These reserves are
included in cash and due from banks in the accompanying balance sheet.
Exhibit 13.1 - 9
Note C - Investment Securities
The amortized cost and estimated fair values of investments in debt securities
are summarized in the following tables:
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Securities Held-to-Maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 22,792 $ 223 $ (33) $ 22,982
Obligations of states and political subdivisions 719 -- (5) 714
Mortgage-backed securities 81,202 349 (1,759) 79,792
Totals $104,713 $ 572 $(1,797) $103,488
Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 30,219 $ 101 $ (9) $ 30,311
Obligations of states and political subdivisions 1,453 27 -- 1,480
Mortgage-backed securities 30,260 93 (1,203) 29,150
Other securities 4,375 -- -- 4,375
Totals $ 66,307 $ 221 $ (1,212) $ 65,316
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Securities Held-to-Maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 29,744 $ 588 $ (34) $ 30,298
Obligations of states and political subdivisions 849 -- (9) 840
Mortgage-backed securities 86,272 493 (1,327) 85,438
Totals $116,865 $ 1,081 $(1,370) $116,576
Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 42,038 $ 225 $ (45) $ 42,218
Obligations of states and political subdivisions 1,700 42 -- 1,742
Mortgage-backed securities 29,076 28 (486) 28,618
Other securities 3,668 -- -- 3,668
Totals $ 76,482 $ 295 $ (531) $ 76,246
Exhibit 13.1 - 10
The amortized cost and estimated fair value of debt securities at December
31, 1996 by contractual maturity are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
(in thousands)
Securities Held-to-Maturity
Due in one year $ 1,275 $ 1,275
Due after one year through five years 26,132 26,250
Due after five years through ten years 9,207 9,186
Due after ten years 68,099 66,777
Totals $104,713 $103,488
Securities Available-for-Sale
Due in one year $ 14,514 $ 14,517
Due after one year through five years 17,927 18,047
Due after five years through ten years 1,226 1,152
Due after ten years 28,265 27,225
61,932 60,941
Other Securities 4,375 4,375
Totals $ 66,307 $ 65,316
Proceeds from sales of securities available for sale:
Gross Gross Gross
For the Year Proceeds Gains Losses
(in thousands)
1996 $ 0 $ 0 $ 0
1995 $ 6,993 $ 40 $ 50
1994 $ 36,490 $ 117 $ 140
On November 17, 1995, the Company adopted the FASB Special Report
concerning the implementation of SFAS 115 and it elected to transfer certain
treasury securities with an amortized cost of $10,062,266 and an unrealized gain
of $1,034,922 from the held-to-maturity to the available-for-sale category.
Investment securities with an aggregate carrying value of $75,125,000 and
$35,930,000 at December 31, 1996 and 1995, respectively, were pledged as
collateral for specific borrowings, lines of credit and local agency deposits.
Exhibit 13.1 - 11
Note D - Allowance for Loan Losses
Activity in the allowance for loan losses was as follows:
Years Ended December 31,
1996 1995 1994
(in thousands)
Balance, beginning of year $5,580 $5,608 $5,973
Balance acquired from Sutter Buttes 623 -- --
Provision for loan losses 777 335 316
Loans charged off (1,192) (581) (1,050)
Recoveries of loans previously charged off 309 218 369
-----------------------------------------
Balance, end of year $6,097 $5,580 $5,608
Loans classified as nonaccrual amounted to approximately $9,044,000, $2,213,000,
and $1,122,000 at December 31, 1996, 1995 and 1994, respectively. These
nonaccrual loans were classified as impaired as of December 31, 1996 and 1995
and included in the recorded balance in impaired loans for the respective years
shown below. If interest on those loans had been accrued, such income would have
been approximately $902,000, $166,000, and $123,000 in 1996, 1995 and 1994,
respectively.
As of December 31, the Company's recorded investment in impaired loans and
the related valuation allowance calculated under SFAS 114 were as follows:
1996
Recorded Valuation
Investment Allowance
Impaired loans -
Valuation allowance required $ 2,525 $605
No valuation allowance required 13,829 --
-----------------------------------
Total impaired loans $ 16,354 $605
1995
Recorded Valuation
Investment Allowance
Impaired loans -
Valuation allowance required $ 552 $380
No valuation allowance required 4,534 --
-----------------------------------
Total impaired loans $ 5,086 $380
This valuation allowance is included in the allowance for loan losses shown
above for the respective year. The average recorded investment in impaired loans
was $10,720,000 and $3,579,000 for the years ended December 31, 1996 and 1995,
respectively. The Company recognized interest income on impaired loans of
$729,000 and $345,000 for the years ended December 31, 1996 and 1995,
respectively.
Exhibit 13.1 - 12
Note E - Premises and Equipment
Premises and equipment were comprised of:
December 31,
1996 1995
(in thousands)
Premises $11,227 $10,366
Furniture and equipment 11,036 9,118
22,263 19,484
Less:
Accumulated depreciation
and amortization (10,369) (8,964)
11,894 10,520
Land and land improvements 2,823 2,669
$14,717 $13,189
Depreciation and amortization of premises and equipment amounted to
$1,497,000, $1,344,000 and $1,202,000 in 1996, 1995 and 1994, respectively.
Note F - Time Deposits
At December 31, 1996, the scheduled maturities of time deposits were as follows
(in thousands):
Scheduled
Maturities
1997 $214,915
1998 5,324
1999 2,143
2000 2,178
2001 and thereafter 215
Total $224,775
Exhibit 13.1 - 13
Note G - Long-Term Debt and Other Borrowings
Long-term debt is as follows:
December 31,
1996 1995
(in thousands)
FHLB loan, fixed rate of 5.14% payable on March 21, 1996 -- 2,000
FHLB loan, fixed rate of 5.53% payable on March 21, 1997 3,000 3,000
FHLB loan, effective rate of 4.38% payable on April 28, 1998 5,000 5,000
FHLB loan, fixed rate of 5.62% payable on February 4, 1999 400 400
FHLB loan, fixed rate of 6.14% payable on March 21, 1999 3,000 3,000
FHLB loan, fixed rate of 5.84% payable on November 6, 2000 1,500 1,500
FHLB loan, fixed rate of 5.90% payable January 16, 2001 1,000 1,000
FHLB repurchase agreements, fixed rate of 5.85% payable on July 17, 1997 9,828 9,828
Capital lease obligation on premises, effective rate of 13% payable
monthly in varying amounts through December 1, 2009 553 564
------------------------
Total long-term debt $24,281 $26,292
The Company maintains a collateralized line of credit with the Federal Home
Loan Bank of San Francisco. Based on the FHLB stock requirements at December 31,
1996, this line provided for maximum borrowings of $63,690,000 of which
$13,900,000 was outstanding, leaving $49,790,000 available. The maximum
month-end outstanding balances of short term repurchase agreements in 1996 and
1995 were $0 and $25,475,000, respectively. The Company has available unused
lines of credit totaling $45,100,000 for Federal funds transactions.
Note H - Commitments and Contingencies (See also Note O)
At December 31, 1996, future minimum commitments under non-cancelable
capital and operating leases with initial or remaining terms of one year or more
are as follows:
Capital Operating
Leases Leases
(in thousands)
1997 $ 84 $ 803
1998 85 767
1999 86 586
2000 87 376
2001 88 281
Thereafter 741 2,192
----------------------------
Future minimum lease payments 1,171 $ 5,005
Less amount representing interest 618
-------
Present value of future lease payments $ 553
Rent expense under operating leases was $799,000 in 1996, $887,000 in 1995, and
$767,000 in 1994.
The Company is a defendant in legal actions arising from normal business
activities. Management believes that these actions are without merit or that the
ultimate liability, if any, resulting from them will not materially affect the
Company's financial position.
Exhibit 13.1 - 14
Note I - Dividend Restrictions
The Bank paid to the Company cash dividends in the aggregate amounts of
$4,800,000, $3,200,000 and none ($0) in 1996, 1995 and 1994, respectively. The
Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the
California State Banking Department. California banking laws limit the Bank's
ability to pay dividends to the lesser of (1) retained earnings or (2) net
income for the last three fiscal years, less cash distributions paid during such
period. Under this regulation, at December 31, 1996, the Bank may pay dividends
of $12,767,000.
Note J - Stock Options
In May 1995, the Company adopted the TriCo Bancshares 1995 Incentive Stock
Option Plan (`95 Plan) covering key employees. Under the `95 Plan 187,500 shares
as adjusted for the September 1995 5-for-4 stock split were reserved for
issuance. The option price cannot be less than the fair market value of the
Common Stock at the date of grant. Options for the `95 Plan expire on the tenth
anniversary of the grant date.
The Company also has outstanding options under one plan approved in 1993 and two
plans approved in 1989. Options under the 1993 plan vest over a six year period.
Options under the 1989 plan vest 20% annually. Unexercised options for the 1993
and 1989 plans terminate 10 years from the date of the grant.
Stock option activity is summarized in the following table:
Weighted Weighted
Average Average
Number Option Price Exercise Fair Value
of Shares* Per Share Price of Grants
Outstanding at December 31, 1994 560,274 $ 7.43 to $ 7.86 $ 7.72
Options granted 31,250 7.86 to 13.20 $10.81 $5.07
Options exercised (72,694) 7.43 to 7.86 $ 7.60
Outstanding at December 31, 1995 518,830 7.43 to 13.20 $ 7.93
Options granted 20,000 18.38 to 18.38 $18.38 $5.35
Options exercised (89,950) 7.43 to 7.86 $ 7.63
Options forfeited (23,030) 7.86 to 7.86 $ 7.86
Outstanding at December 31, 1996 425,850 $ 7.43 to $18.38 $ 8.48
*1995 activity is adjusted for the 5-for-4 Common Stock split effected September 22, 1995
Of the stock options outstanding as of December 31, the number of options
exercisable are as follows:
Number Option Price Wtd Ave.
of Shares Per Share Ex. Price
Exercisable at December 31, 1995 272,794 $ 7.43 to $13.20 $ 7.69
Exercisable at December 31, 1996 268,772 $ 7.43 to $18.38 $ 7.89
Exhibit 13.1 - 15
The Company has stock options outstanding under the four option plans described
above. The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined in accordance SFAS 123, the additional compensation cost
that would have been recorded in 1996 and 1995 would not have been material.
However, because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.76 and 5.92 percent; expected dividend yields of 3.48 and 2.46
percent; expected lives of 6 and 6 years; expected volatility of 30.22 and 31.38
percent, respectively.
Note K - Other Noninterest Expenses and Income
The components of other noninterest expenses were as follows:
Years Ended December 31,
1996 1995 1994
(in thousands)
Equipment and data processing $ 2,483 $ 2,508 $ 2,497
Occupancy 1,682 1,573 1,469
Professional fees 901 593 1,172
Advertising 713 563 650
Telecommunications 653 361 418
Postage 436 405 335
Net other real estate owned expense 261 201 190
Assessments 80 727 1,199
Other 4,287 3,943 3,578
------------------------------------------
Total other operating expenses $11,496 $10,874 $11,508
Commissions on sales of annuities and mutual funds in the amounts of
$1,255,000, $900,000, and $988,000 for the years 1996, 1995 and 1994 are
included in other income.
Note L - Income Taxes
The current and deferred components of the income tax provision were
comprised of:
Years Ended December 31,
1996 1995 1994
(in thousands)
Current Tax Provision:
Federal $ 4,439 $ 3,640 $ 3,189
State 1,528 1,409 1,251
-------------------------------------------
Total current 5,967 5,049 4,440
Deferred Tax Benefit:
Federal (769) (36) (21)
State (161) (98) (69)
-------------------------------------------
Total deferred (930) (134) (90)
-------------------------------------------
Total income taxes $ 5,037 $ 4,915 $ 4,350
Exhibit 13.1 - 16
Taxes recorded directly to shareholders' equity are not included in the
preceding table. These taxes (benefits) relating to changes in the unrealized
gains and losses on available-for-sale investment securities amounting to
$231,000 in 1996 and $2,473,000 in 1995 were recorded directly to shareholders'
equity.
The provisions for income taxes applicable to income before taxes for the
years ended December 31, 1996, 1995, and 1994 differ from amounts computed by
applying the statutory Federal income tax rates to income before taxes.
The effective tax rate and the statutory federal income tax rate are
reconciled as follows:
Years Ended December 31,
1996 1995 1994
Federal statutory income tax rate 34.2% 34.2% 34.0%
State income taxes, net of federal tax benefit 7.4 7.4 8.0
Tax-exempt interest on municipal obligations (.3) (.4) (.8)
Merger expenses not deductible for tax purposes -- -- 1.5
Other (.5) (.1) (.1)
-------------------------
Effective Tax Rate 40.8% 41.1% 42.6%
The components of the net deferred tax asset of the Company as of December
31, were as follows:
1996 1995
(in thousands)
Deferred Tax Assets:
Loan losses $ 2,050 $ 2,151
Unrealized loss on securities 731 500
Deferred compensation 1,693 1,348
OREO write downs 244 178
Loss on investment in real estate 232 228
Other 586 162
--------------------------
Total deferred tax assets 5,536 4,567
Deferred Tax Liabilities:
Depreciation (798) (608)
Capital leases (86) (78)
Securities accretion (385) (273)
Other -- (502)
--------------------------
Total deferred tax liability (1,269) (1,461)
--------------------------
Net deferred tax asset $ 4,267 $ 3,106
Exhibit 13.1 - 17
Note M - Retirement Plans
Substantially all employees with at least one year of service are covered
by a discretionary employee stock ownership plan (ESOP). Contributions are made
to the plan at the discretion of the Board of Directors. Country National Bank,
acquired by the Company in 1994, had an ESOP which was merged into the Company's
plan in 1995. Contributions to the plan(s) totaling $500,000 in 1996, $432,000
in 1995, and $378,000 in 1994 are included in salary expense.
The Company has a supplemental retirement plan for directors and a
supplemental executive retirement plan covering key executives. These plans are
non-qualified defined benefit plans and are unsecured and unfunded. The Company
has purchased insurance on the lives of the participants and intends to use the
cash values of these policies ($5,163,000 and $3,926,000 at December 31, 1996
and 1995, respectively) to pay the retirement obligations.
The following table sets forth the plans' status:
December 31,
1996 1995
(in thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $(3,113) $(2,795)
==========================
Accumulated benefit obligation (3,289) (2,795)
==========================
Projected benefit obligation for service rendered to date (3,704) (2,795)
==========================
Plan assets at fair value $ -- $ --
==========================
Projected benefit obligation in excess of plan assets $(3,704) $(2,795)
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 1,296 664
Prior service cost not yet
recognized in net periodic pension cost 113 123
Unrecognized net obligation at transition 287 322
--------------------------
Accrued pension cost included in other liabilities $(2,008) $(1,686)
==========================
Years Ended December 31,
1996 1995 1994
(in thousands)
Net pension cost included the following components:
Service cost-benefits earned during the period $135 $100 $114
Interest cost on projected benefit obligation 204 159 158
Net amortization and deferral 72 46 69
----------------------------------------
Net periodic pension cost $411 $305 $341
========================================
The net periodic pension cost was determined using a discount rate
assumption of 7.0% for 1996, 7.0% for 1995, and 7.75% for 1994. The rates of
increase in compensation used in each year were 0% to 5%.
The Company has an Executive Deferred Compensation Plan which allows
directors and key executives designated by the Board of Directors of the Company
to defer a portion of their compensation. The Company has purchased insurance on
the lives of the participants and intends to use the cash values of these
policies to pay the compensation obligations. At December 31, 1996 and 1995 the
cash values exceeded the recorded liabilities.
Exhibit 13.1 - 18
Note N - Related Party Transactions
Certain directors, officers, and companies with which they are associated
were customers of, and had banking transactions with, the Company or its
Subsidiary in the ordinary course of business. It is the Company's policy that
all loans and commitments to lend to officers and directors be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other borrowers of the
Bank.
The following table summarizes the activity in these loans for 1996.
Balance Balance
December 31, Advances/ December 31,
1995 New Loans Payments 1996
(in thousands)
$ 8,472 $ 2,003 $ 2,553 $ 7,922
Note O - Financial Instruments With Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Contractual Amount
December 31,
1996 1995
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans $37,923 $27,763
Consumer loans 61,113 39,114
Real estate mortgage loans 428 335
Real estate construction loans 18,415 10,815
Standby letters of credit 1,112 414
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on Management's credit evaluation of the customer.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties.
Exhibit 13.1 - 19
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements. Most standby
letters of credit are issued for one year or less. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Collateral requirements vary, but in general
follow the requirements for other loan facilities.
Note P - Concentration of Credit Risk
The Company grants agribusiness, commercial and residential loans to
customers located throughout the northern Sacramento Valley and northern
mountain regions of California. The Company has a diversified loan portfolio
within the business segments located in this geographical area.
Note Q - Disclosure of Fair Value of Financial Instruments
Cash & Short-Term Investments
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities
For all securities, fair values are based on quoted market prices or dealer
quotes. See Note C for further analysis.
Loans
The fair value of variable rate loans is the current carrying value. These
loans are regularly adjusted to market rates. The fair value of other types of
fixed rate loans is estimated by discounting the future cash flows using current
rates at which similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities. The allowance for loan losses is a
reasonable estimate of the valuation allowance needed to adjust computed fair
values for credit quality of certain loans in the portfolio.
Accrued Interest Receivable
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Deposit Liabilities and Long-Term Debt
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. These
values do not consider the estimated fair value of the Company's core deposit
intangible, which is a significant unrecognized asset of the Company. The fair
value of time deposits and debt is based on the discounted value of contractual
cash flows.
Other Liabilities
Other liabilities represent short-term instruments. The carrying amount is
a reasonable estimate of fair value.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of letters of credit and standby letters of credit is not
significant.
Accrued Interest Payable
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Exhibit 13.1 - 20
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1996
Carrying Fair
Financial assets: Amount Value
(In thousands)
Cash and short-term investments $ 52,231 $ 52,231
Securities:
Held-to-maturity 104,713 103,488
Available-for-sale 65,316 65,316
Loans, net 433,192 434,250
Accrued interest receivable 4,572 4,572
Financial liabilities:
Deposits 595,621 595,696
Accrued interest payable 3,047 3,047
Other liabilities 6,233 6,233
Long-term borrowings 24,281 24,403
December 31, 1995
Carrying Fair
Financial assets: Amount Value
(In thousands)
Cash and short-term investments $ 65,273 $ 65,273
Securities:
Held-to-maturity 116,865 116,576
Available-for-sale 76,246 76,246
Loans, net 313,186 316,764
Accrued interest receivable 4,609 4,609
Financial liabilities:
Deposits 516,193 516,653
Accrued interest payable 3,162 3,162
Other liabilities 4,694 4,694
Long-term borrowings 26,292 26,430
Exhibit 13.1 - 21
Note R - Acquisitions
On October 16, 1996, the Company acquired all of the capital stock of Sutter
Buttes Savings Bank (Sutter Buttes) in exchange for cash of approximately
$2,036,000 and approximately 102,900 shares of the Company's stock. Based on the
average value of the Company's stock for the ten days preceding the transaction,
the total purchase price was approximately $4,171,000. The transaction was
accounted for as a purchase, with the excess of the purchase price over the fair
value of Sutter Buttes' net assets being assigned to core deposit intangible
assets. Results of operations of Sutter Buttes are included in the consolidated
financial statements subsequent to October 16, 1996. Sutter Buttes was merged
into the Bank concurrent with the acquisition.
Pro forma operating results of the Company, assuming the acquisition had been
made as of January 1, 1995 is as follows:
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(in thousands, except per share data) Year ended December 31,
1996 1995
Summary of Income:
Net interest income $ 31,503 $ 29,458
Provision for loan losses 997 334
Noninterest income 6,924 6,422
Noninterest expense 25,466 23,394
Net income 7,056 7,290
Net income available to common shareholders $ 7,056 $ 7,045
Per Common Share:
Primary earnings per common share $1.48 $1.48
Fully diluted earnings per common share $1.47 $1.47
Selected Balance Sheet Data:
Investment securities $170,029 $194,897
Loans 439,289 376,906
Assets 694,771 667,137
Deposits 595,621 573,599
Equity $ 60,689 $ 55,480
Note S - Future Financial Accounting Standards
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (SFAS 125), Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This statement establishes new criteria for determining whether a transfer of
financial assets should be accounted for as a sale or as a pledge of collateral
in a secured borrowing. The statement was subsequently amended by SFAS 127 to
defer the effective date of the statement's provisions relevant to the Company
until 1998. The Company does not expect that the adoption of this Statement will
have a material impact on its financial position or results of operations.
Exhibit 13.1 - 22
Note T - TriCo Bancshares Financial Statements
TriCo Bancshares (Parent Only) Balance Sheets
December 31,
Assets 1996 1995
(in thousands)
Cash $ 517 $ 134
Investment in Tri Counties Bank 60,171 52,868
Other assets 460 303
-------------------------
Total assets $61,148 $53,305
=========================
Liabilities and shareholders' equity
Total liabilities $ 371 $ 92
Shareholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares;
issued and outstanding 4,641,223
and 4,464,828 shares, respectively 47,652 44,315
Retained earnings 14,076 9,548
Unrealized loss on securities available-for-sale, net (951) (650)
-------------------------
Total shareholders' equity 60,777 53,213
-------------------------
Total liabilities and shareholders' equity $61,148 $53,305
=========================
Statements of Income
Years Ended December 31,
1996 1995 1994
(in thousands)
Interest income $ -- $ -- $ --
Administration expense 296 282 334
------------------------------------------
Loss before equity in net income of Tri Counties Bank (296) (282) (334)
Equity in net income of Tri Counties Bank:
Distributed 4,800 3,200 --
Undistributed 2,654 4,010 6,103
Income tax credits 148 117 92
------------------------------------------
Net income $7,306 $ 7,045 $ 5,861
==========================================
Exhibit 13.1 - 23
Statements of Cash Flows
Years ended December 31,
1996 1995 1994
(in thousands)
Operating activities:
Net income $7,306 $7,045 $5,861
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Undistributed equity in Tri Counties Bank (2,654) (4,010) (6,103)
Deferred income taxes (157) (117) (92)
Increase (decrease) in other operating assets and liabilities 279 19 (168)
------------------------------------------
Net cash provided by (used for) operating activities 4,774 2,937 (502)
------------------------------------------
Investing activities:
Capital contributed to
Tri Counties Bank (4,741) -- (183)
------------------------------------------
Net cash provided by (used for) investing activities (4,741) -- (183)
------------------------------------------
Financing activities:
Issuance of common stock 3,291 554 403
Repurchase of common stock (295) -- --
Redemption of preferred stock -- (4,000) --
Cash dividends-- preferred -- (245) (420)
Cash dividends-- common (2,646) (1,639) (1,304)
------------------------------------------
Net cash provided by (used for) financing activities 350 (5,330) (1,321)
------------------------------------------
Increase (decrease) in cash and cash equivalents 383 (2,393) (2,006)
Cash and cash equivalents at beginning of year 134 2,527 4,533
------------------------------------------
Cash and cash equivalents at end of year $ 517 $134 $2,527
==========================================
Exhibit 13.1 - 24
Note U - Regulatory Matters
The Company is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $66,690 13.58% =>$39,280 =>8.0% =>$49,100 =>10.0%
Tri Counties Bank $66,084 13.47% =>$39,244 =>8.0% =>$49,055 =>10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated $60,593 12.34% =>$19,640 =>4.0% =>$29,460 => 6.0%
Tri Counties Bank $59,987 12.23% =>$19,622 =>4.0% =>$29,433 => 6.0%
Tier I Capital (to Average Assets):
Consolidated $60,593 8.99% =>$26,960 =>4.0% =>$33,700 => 5.0%
Tri Counties Bank $59,987 8.91% =>$26,930 =>4.0% =>$33,663 => 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated $58,700 15.17% =>$30,958 =>8.0% =>$38,698 =>10.0%
Tri Counties Bank $58,350 15.09% =>$30,935 =>8.0% =>$38,669 =>10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated $53,863 13.92% =>$15,479 =>4.0% =>$23,219 => 6.0%
Tri Counties Bank $53,517 13.84% =>$15,468 =>4.0% =>$23,201 => 6.0%
Tier I Capital (to Average Assets):
Consolidated $53,863 8.92% =>$24,142 =>4.0% =>$30,178 => 5.0%
Tri Counties Bank $53,517 8.87% =>$24,130 =>4.0% =>$30,163 => 5.0%
Exhibit 13.1 - 25
Note V - Subsequent Events
On February 21, 1997, the Bank purchased and assumed substantially all of the
deposit liabilities of nine branches from Wells Fargo Bank, N.A, San Francisco.
In connection with the acquisition of such deposit liabilities and related cash
balances, Tri Counties Bank also acquired certain other assets of the branches,
including real estate (four branches), furniture and fixtures and a relatively
insignificant amount of loans which were secured by deposit accounts. All assets
constituting plant and equipment or other physical property will continue to be
used in the banking business. Wells Fargo Bank retained all other revenue
producing assets which had originated from these branches.
A preliminary summary of the deposit liabilities and limited assets acquired by
Tri Counties Bank is shown below:
Total deposits (liabilities) acquired $150,090,000
Less assets acquired
Furniture and fixtures 214,000
Land and premises 585,000
Loans 183,000
----------
Total assets acquired 982,000
Less premium paid for deposits 9,108,000
----------
Net cash received by Tri Counties Bank
for the deposits acquired $140,000,000
Exhibit 13.1 - 26
Note W - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters
of 1996 and 1995 and is unaudited; however, in the opinion of management, it
reflects all adjustments (which include only normal recurring adjustments)
necessary to present fairly the summarized results for such periods.
1996 Quarters Ended
(Dollars in thousands, except per share data) December 31, September 30, June 30, March 31,
Interest income $13,276 $12,584 $11,744 $11,629
Interest expense 5,290 4,856 4,498 4,535
-------- -------- -------- --------
Net interest income 7,986 7,728 7,246 7,094
Provision for loan losses 150 537 50 40
--------- --------- --------- ---------
Net interest income after
provision for loan losses 7,836 7,191 7,196 7,054
Noninterest income 1,845 1,745 1,580 1,466
Noninterest expense 6,339 5,817 5,824 5,505
-------- -------- -------- --------
Income before income taxes 3,342 3,119 2,952 3,015
Taxable-equivalent adjustment 17 22 22 24
Income tax expense 1,288 1,276 1,226 1,247
-------- -------- -------- --------
Net income $ 2,037 $ 1,821 $ 1,704 $ 1,744
======= ======= ======= =======
Net income applicable to common stock $ 2,037 $ 1,821 $ 1,704 $ 1,744
======= ======= ======= =======
Per common share:
Net income $ 0.43 $ 0.39 $ 0.37 $ 0.38
======= ======= ======= =======
Dividends $ 0.16 $ 0.16 $ 0.13 $ 0.13
======= ======= ======= =======
1995 Quarters Ended
(Dollars in thousands, except per share data) December 31, September 30, June 30, March 31,
Interest income $11,800 $11,658 $11,334 $11,333
Interest expense 4,645 4,529 4,441 4,373
-------- -------- -------- --------
Net interest income 7,155 7,129 6,893 6,960
Provision for loan losses 100 160 35 40
-------- -------- --------- ---------
Net interest income after
provision for loan losses 7,055 6,969 6,858 6,920
Noninterest income 1,421 1,442 1,638 1,432
Noninterest expense 5,382 5,252 5,471 5,556
-------- -------- -------- --------
Income before income taxes 3,094 3,159 3,025 2,796
Taxable-equivalent adjustment 21 29 32 32
Income tax expense 1,266 1,286 1,229 1,134
-------- -------- -------- --------
Net income $ 1,807 $ 1,844 $ 1,764 $ 1,630
======= ======= ======= =======
Net income applicable to common stock $ 1,807 $ 1,809 $ 1,659 $ 1,525
======= ======= ======= =======
Per common share:
Net income $ 0.38 $ 0.39 $ 0.36 $ 0.33
======= ======= ======= =======
Dividends $ 0.13 $ 0.08 $ 0.08 $ 0.08
======= ======= ======= =======
Exhibit 13.1 - 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of TriCo Bancshares and Subsidiary:
We have audited the accompanying consolidated balance sheets of TriCo
Bancshares (a California corporation) and Subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TriCo
Bancshares and Subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, effective
January 1, 1994, the Corporation changed its method of accounting for certain
investments in debt and equity securities as required by Statement of Financial
Accounting Standards No. 115.
/s/Arthur Andersen LLP
San Francisco, California
January 21, 1997
Exhibit 13.1 - 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As TriCo Bancshares (the "Company" ) has not commenced any business
operations independent of Tri Counties Bank (the "Bank"), the following
discussion pertains primarily to the Bank. Average balances, including such
balances used in calculating certain financial ratios, are generally comprised
of average daily balances for the Company. Except within the "overview" section,
interest income and net interest income are presented on a tax equivalent basis.
In addition to the historical information contained herein, this Annual
Report contains certain forward-looking statements. The reader of this Annual
Report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially form those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments, rates paid on deposits,
competition effects, fee and other noninterest income earned as well as other
factors. This entire Annual Report should be read to put such forward-looking
statements in context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
Overview
The Bank continued along its growth path in 1996. The year started with the
opening of a loan production office in Sacramento which was quickly followed in
March by the opening of the seventh in-store branch in Albertson's Grass Valley
supermarket. In June the Company announced the signing of an agreement to
purchase Sutter Buttes Savings Bank. That acquisition closed on October 16 which
was the same day the Bank announced entering into an agreement with Wells Fargo
Bank, N.A. to purchase the deposits and operations of nine of its Northern
California branches. The Sutter Buttes acquisition added $64,210,000 in loans
and $56,023,000 of deposits. Subsequent to year end on February 21, 1997, the
purchase of the Wells Fargo branch deposits closed. Approximately, $150,090,000
in deposits were added through this transaction. (See Note W entitled
"Subsequent Events" in the financial statements.) This growth was made possible
by the work that has been going on for the past several years to upgrade the
Bank's computer technology and to reorganize its service delivery functions.
Management believes the Bank is well positioned to continue along a growth path.
The Company had record earnings of $7,306,000 for the year ended
December 31, 1996 versus $7,045,000 for 1995. Fully diluted earnings per share
for the years were $1.55 and $1.45, respectively. Earnings per common share in
1996 have benefited from the redemption of all outstanding preferred stock in
the third quarter of 1995, as the Company paid preferred stock dividends
totaling $245,000 in the first nine months of 1995.
For 1996 net interest income was $29,969,000 which was an increase of
$1,946,000 over 1995. The interest income component of net interest income was
up 6.8% or $3,137,000. Interest and fees on loans was up $4,451,000 to
$38,227,000 as average loans outstanding increased $60,077,000 to $368,550,000.
To fund these loans, the securities portfolio was allowed to runoff from an
average balance of $210,205,000 in 1995 to $183,222,000 in 1996. As a result,
interest income on the securities portfolio decreased $1,364,000 or 11.4%
Interest expense was up $1,191,000 or 6.6%. This increase was due to higher
average balances of interest bearing liabilities as the average rate paid on
them was relatively flat. The net interest margin was 5.37% in 1996 versus 5.36%
in 1995.
Noninterest income is comprised of "service charges and fees" and
"other income". Service charge and fee income increased 18.2% or $761,000 in
1996 versus year ago results. Both higher account volumes and higher fee rates
contributed to the increase in this category. Other income was down slightly
from $1,780,000 in 1995 to $1,712,000 in 1996. Overall, noninterest income
increased $703,000 or 11.9% for the year.
Exhibit 13.1 - 29
Noninterest expenses increased $1,824,000 or 8.4% in 1996 versus 1995.
Salary and benefit expenses were up 11.2% and accounted for $1,202,000 of this
increase. The higher salary expense reflects costs for additional employees at
two new in-store branches, two loan production offices, support and branch
personnel from the Sutter Buttes acquisition, fringe benefits and normal salary
increases. Other expenses increased 5.7% or $622,000. Costs relating to customer
deposit services, ATM networks, credit card servicing and telecommunications
were up $698,000 or 46.4%. These costs reflect higher volumes related to the
products and new computer networks. Provision for OREO valuation allowance,
professional fees, advertising and promotional expenses also significantly
increased. A 1996 decrease in FDIC insurance of $647,000 or 94.6% helped offset
the higher operating costs.
Assets of the Company totaled $694,859,000 at December 31, 1996 which
was an increase of $91,305,000 from 1995 ending balances.
For 1996 the Company realized a return on assets of 1.18% and a return
on shareholders' equity of 13.0% versus 1.22% and 13.8% in 1995. The Company
ended 1996 with a leverage ratio of 8.99%, a Tier 1 capital ratio of 12.3% and a
total risk-based capital ratio of 13.6%.
Management's continuing goal for the Bank is to deliver a full array of
competitive products to its customers while maintaining the personalized
customer service of a community bank. We believe this strategy will provide
continued growth and above average returns for our shareholders.
Exhibit 13.1 - 30
(A) Results of Operations
Years Ended December 31,
1996 1995 1994 1993(1) 1992(1)
(in thousands, except earnings per share amounts)
Interest income:
Interest and fees on loans $ 38,227 $ 33,776 $ 30,641 $ 31,795 $ 33,695
Interest on investment securities--taxable 10,409 11,706 12,247 8,585 6,170
Interest on investment securities--tax exempt(2) 207 272 401 426 489
Interest on federal funds sold 392 371 123 329 129
--------------------------------------------------------------
Total interest income 49,235 46,125 43,412 41,135 40,483
Interest expense:
Interest on deposits 17,201 16,231 13,902 13,006 15,427
Interest on short-term borrowing 359 526 719 739 65
Interest on long-term debt 1,619 1,231 1,059 251 108
--------------------------------------------------------------
Total interest expense 19,179 17,988 15,680 13,996 15,600
--------------------------------------------------------------
Net interest income 30,056 28,137 27,732 27,139 24,883
Provision for loan losses 777 335 316 1,858 2,101
--------------------------------------------------------------
Net interest income after provision
for loan losses 29,279 27,802 27,416 25,281 22,782
Noninterest income:
Service charges, fees and other 6,636 5,943 5,048 5,304 5,205
Investment securities gains (losses), net -- (10) (23) 1,421 367
--------------------------------------------------------------
Total noninterest income 6,636 5,933 5,025 6,725 5,572
Noninterest expenses:
Salaries and employee benefits 11,989 10,787 10,550 9,072 8,460
Other, net 11,496 10,874 11,508 11,152 9,570
--------------------------------------------------------------
Total noninterest expenses 23,485 21,661 22,058 20,224 18,030
--------------------------------------------------------------
Net income before income taxes 12,430 12,074 10,383 11,782 10,324
Income taxes 5,037 4,915 4,350 4,779 4,113
Tax equivalent adjustment(2) 87 114 172 188 211
--------------------------------------------------------------
Net income $ 7,306 $ 7,045 $ 5,861 $ 6,815 $ 6,000
==============================================================
Primary earnings per common share(3) $ 1.56 $ 1.46 $ 1.18 $ 1.42 $ 1.46
Fully diluted earnings per common share(3) $ 1.55 $ 1.45 $ 1.18 $ 1.40 $ 1.46
Selected Balance Sheet Information
Total Assets $694,859 $603,554 $593,834 $575,897 $492,404
Long-term Debt 24,281 26,292 18,499 7,144 907
Preferred Stock -- -- 3,899 3,899 6,086
(1)Restated on a historical basis to reflect the July 21, 1994 acquisition of Country National Bank on a
pooling-of-interests basis.
(2)Interest on tax-free securities is reported on a tax equivalent basis of 1.72 for 1996, 1.72 for 1995, 1.75 for 1994,
1.79 for 1993, and 1.76 for 1992.
(3)Restated on a historical basis to reflect the 5-for-4 stock split effected
September 22, 1995.
Exhibit 13.1 - 31
Net Interest Income/Net Interest Margin
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income for 1996 totaled $30,056,000 which was up 6.8%
($1,919,000) over the prior year. Average outstanding loan balances of
$368,550,000 for 1996 reflected a 19.5% increase over 1995 balances. These
higher balances contributed an additional $6,578,000 to interest income and was
the major factor in the improvement in net interest income. The average yield
received on loans fell 58 basis points to 10.37% which offset interest income by
$2,127,000. The reduction of the loan yields was due to increased market
competition and also in part to the acquisition of Sutter Buttes Savings Bank in
October of 1996. A high percentage of Sutter Buttes' loans were mortgage loans
with fixed interest rates averaging less than 8%. Average balances of investment
securities decreased $26,983,000 (12.8%) as these monies were deployed into
loans. The lower volume of securities resulted in a decrease in interest income
of $1,546,000.
Interest expense increased $1,191,000 (6.6%) in 1996 over 1995. Higher
volumes in all interest bearing liability categories except savings accounts and
long term debt accounted for the increase. Interest expense on time deposits was
up $1,230,000 due to higher average balances of $22,390,000 in 1996. Average
rates paid on interest bearing liabilities in 1996 were down only 1 basis point
to 4.05% which had a small favorable effect on interest expense. Net interest
margin for 1996 was 5.37% versus 5.36% in 1995.
In 1995 net interest income increased $405,000 (1.5%) to $28,137,000. The
interest income component increased $2,713,000 (6.3%) to $46,125,000. Rates
received on loans in 1995 averaged 10.95% which was 85 basis points higher than
rates received in 1994. The higher rates accounted for the majority of the
increase in interest income. Average loans outstanding also increased modestly
in 1995 as did rates received on securities and Federal Funds sold. These
increases were offset in part by an 8.1% ($18,411,000) decrease in average
balances of investment securities which resulted in a reduction of $1,052,000 in
interest income.
For 1995 the interest expense component increased $2,308,000 (14.7%) to
$17,988,000 over 1994. Most of this increase can be attributed to higher rates
paid on time certificates of deposit in 1995. The average rate paid on time
certificates increased 133 basis points or 32% over the 1994 average. This large
increase was due to the local competitive market environment. During part of the
year, Management did not raise the rates to meet the local competition and as a
result some deposit runoff was experienced. For the year, average balances on
interest-bearing deposits decreased $9,118,000 (2.2%). The higher rates on time
certificates also caused customers to shift some funds from savings to time
certificates. Average balances in savings accounts decreased $44,572,000 (21.1%)
as time certificate balances increased $35,179,000 (27.1%). The effect of the
changes in the net interest income and the average balances of the interest
earning assets and the interest-bearing liabilities resulted in an overall
increase of 18 basis points in net interest margin. Net interest margin for 1995
was 5.36% versus 5.18% in 1994.
Table One, Analysis of Net Interest Margin on Earning Assets, and Table
Two, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and past trends
of the Bank's interest income and expenses. Table One provides an analysis of
net interest margin on earning assets setting forth average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Two presents an analysis of volume and rate change on net interest income
and expense.
Exhibit 13.1 - 32
Table One: Analysis of Net Interest Margin on Earning Assets
1996 1995 1994
Average Yield/ Average Yield/ Average Yield/
Assets Balance(1) Income Rate Balance(1) Income Rate Balance(1) Income Rate
(dollars in thousands)
Earning assets:
Loans(2),(3) $368,550 38,227 10.37 % $308,473 $33,776 10.95% $303,497 $30,641 10.10%
Securities - taxable 180,836 10,409 5.76 % 207,163 11,706 5.65% 224,447 12,247 5.46%
Securities - nontaxable(4) 2,386 207 8.68 % 3,042 272 8.93% 4,169 401 9.62%
Federal funds sold 7,405 392 5.29 % 6,702 371 5.54% 3,727 123 3.30%
---------------------------------------------------------------------------------------------
Total earning assets 559,177 49,235 8.80 % 525,380 46,125 8.78% 535,840 43,412 8.10%
Cash and due from banks 31,867 29,150 31,935
Premises and equipment 14,068 13,206 13,151
Other assets, net 23,046 19,537 19,240
Less: Unrealized loss
on securities (1,841) (3,156) (3,538)
Less: Allowance for loan
losses (5,597) (5,636) (5,917)
--------- -------- ---------
Total assets $620,720 $578,481 $590,711
Liabilities and
shareholders' equity
Interest-bearing demand
deposits $ 89,278 2,226 2.49 % $ 81,408 2,000 2.46% $ 81,133 2,066 2.55%
Savings deposits 163,637 5,032 3.08 % 166,637 5,167 3.10% 211,209 6,442 3.05%
Time deposits 187,355 9,943 5.31 % 164,965 9,064 5.49% 129,786 5,394 4.16%
Federal funds purchased 6,485 359 5.54 % 1,953 120 6.14% 3,726 174 4.67%
Repurchase agreements 9,828 603 6.14 % 6,696 406 6.06% 10,727 545 5.08%
Long-term debt 17,434 1,016 5.83 % 21,416 1,231 5.75% 20,637 1,059 5.13%
---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 474,017 19,179 4.05 % 443,075 17,988 4.06% 457,218 15,680 3.43%
Noninterest-bearing
deposits 79,843 76,184 79,776
Other liabilities 10,776 8,196 6,014
Shareholders' equity 56,084 51,026 47,703
--------- -------- ---------
Total liabilities and
shareholders' equity $620,720 $578,481 $590,711
Net interest rate spread(5) 4.76 % 4.72% 4.67%
Net interest income/net
interest margin(6) $30,056 5.37 % $28,137 5.36% $27,732 5.18%
(1)Average balances are computed principally on the basis of daily balances.
(2)Nonaccrual loans are included.
(3)Interest income on loans includes fees on loans of $1,926,000 in 1996,
$1,676,000 in 1995, and $1,701,000 in 1994.
(4)Interest income is stated on a tax equivalent basis of 1.72 in 1996, 1.72
for 1995, and 1.75 for 1994.
(5)Net interest rate spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.
(6)Net interest margin is computed by dividing net interest income by total
average earning assets.
Exhibit 13.1 - 33
Table Two: Analysis of Volume and Rate Changes on Net Interest Income and Expenses
1996 over 1995 1995 over 1994
Yield/ Yield/
Volume Rate (4) Total Volume Rate (4) Total
(dollars in thousands)
Increase (decrease) in
interest income:
Loans(1),(2) $ 6,578 $ (2,127) $ 4,451 $ 502 $ 2,633 $ 3,135
Investment securities(3) (1,546) 184 (1,362) (1,052) 382 (670)
Federal funds sold 39 (18) 21 98 150 248
--------------------------------------------------------------------------
Total 5,071 (1,961) 3,110 (452) 3,165 2,713
Increase (decrease) in interest expense:
Demand deposits
(interest-bearing) 193 33 226 7 (73) (66)
Savings deposits (93) (42) (135) (1,359) 84 (1,275)
Time deposits 1,230 (351) 879 1,462 2,208 3,670
Federal funds purchased 278 (39) 239 (83) 29 (54)
Repurchase agreements 190 7 197 (205) 66 (139)
Long-term borrowings (229) 14 (215) 40 132 172
--------------------------------------------------------------------------
Total 1,569 (378) 1,191 (138) 2,446 2,308
--------------------------------------------------------------------------
Increase (decrease) in
net interest income $ 3,502 $ (1,583) $ 1,919 $ (314) $ 719 $ 405
==========================================================================
(1) Nonaccrual loans are included.
(2) Interest income on loans includes fees on loans of $1,926,000 in 1996, $1,676,000 in 1995, and $1,701,000 in 1994.
(3) Interest income is stated on a tax equivalent basis of 1.72 in 1996, 1.72 for 1995, and 1.75 for.
(4) The rate/volume variance has been included in the rate variance.
Provision for Loan Losses
The 1996 provision for loan losses of $777,000 was a significant increase
over the 1995 provision of $335,000. Net loan charge-offs for 1996 increased to
$883,000 from $363,000 in 1995. Consumer installment loans which include credit
cards accounted for all of the increase. Management has implemented new credit
review procedures and contracted with outside credit collection agencies to help
improve the credit card portfolio performance. The 1996 charge-offs represented
0.24% of average loans outstanding versus 0.12% the prior year. Nonperforming
loans were 2.06% of total loans at year end versus 0.76% in 1995. The allowance
for loan losses to nonperforming loans was 67% versus 226% at the end of 1995.
(See balance sheet analysis "Allowance for Loan Losses" for further discussion.)
The Bank provided $335,000 for loan losses in 1995 which was a slight
increase over the 1994 provision of $316,000. This provision essentially
maintained the allowance for loan losses at a constant level as the provision
and loan recoveries were just $28,000 less than the loans charged off. Net
charge-offs for the year were only 0.12% of average loans outstanding which was
reflective of the continuing quality of the loan portfolio. Net charge-offs for
1994 were .22% of average loans. Nonperforming loans were 0.76% of total loans
at year end versus 0.37% in 1994. The allowance for loan losses to nonperforming
loans was 226% versus 489% at the end of 1994.
Service Charges and Fees and Other Income
For 1996 service charge and fee income was up 18.3% to $4,924,000 over 1995
results. The growth came from higher account volumes and some selective fee
increases. Other income reflected a small decrease overall on a year over year
basis. However, within this category commissions on the sale of annuities and
mutual funds increased $355,000 or 39.5%. This favorable change was offset by
decreases in nonrecurring items from 1995 levels.
Exhibit 13.1 - 34
Service charge and fee income grew by 16.6% to $4,163,000 in 1995. Most of
the increase came from fee increases on returned checks coupled with volume
increases. The 20.4% or $302,000 increase in other income resulted from a
mixture of changes within the category and nonrecurring items. Gains on the sale
of loans was down for the second straight year as origination of mortgage loans
continued to be soft. Commissions on the sales of mutual funds and annuities
decreased 5% to 8% as sales were soft in the first part of 1995.
Securities Transactions
No securities were sold in 1996. The Bank was able to fund loan growth
through the maturities of investment securities and growth in deposits.
The Bank had very few securities transactions in 1995. It realized a total
net loss of $10,000 for the year on sales of securities. The flat yield curve
present for most of 1995 presented few opportunities to invest at rates
attractive to Bank Management.
Salaries and Benefits
Salary and benefit expenses were up $1,202,000 or 11.2% from the 1995
levels to total $11,989,000 in 1996. Increases in staffing levels for the
Bakersfield and Sacramento loan offices, the Grass Valley in-store branch, nine
months of staffing for the Chico in-store branch and the addition of staff from
the Sutter Buttes Savings Bank acquisition as well as normal salary progression
contributed to the increase. Components of salaries and benefits which increased
significantly included; Base salary and wages, $536,000; commissions on
annuities and mutual funds, $75,000; retirement plans, $193,000; and deferred
income plan, $208,000.
Salary and benefit expenses increased 2.25% or $237,000 in 1995. Base
salaries increased $259,000 (3.6%) and were reflective of the full year effect
of staffing for the in-store branches and normal salary reviews. Management
incentive payments for 1995 were less than those for 1994, as approximately
$245,000 in one time bonus and termination payments were made to Country
National Bank employees in 1994. Group insurance expenses decreased 10.0% mostly
due to a one time premium refund.
Other Expenses
For 1996 other expenses increased $622,000 or 5.7%. Costs relating to
customer deposit services, ATM networks, credit card servicing, and
telecommunications were up $698,000 or 46.4%. These costs reflect higher volumes
related to the products, new computer networks and business locations. Provision
for OREO valuation allowance, advertising and promotional expenses also had
significant increases. There were also one time costs related to the Sutter
Buttes acquisition. A 1996 decrease in FDIC insurance of $647,000 or 94.6%
helped offset the higher operating costs.
Other expenses decreased $634,000 or 5.5% in 1995. In September the FDIC
significantly reduced deposit insurance premiums retroactive to June 1995. For
the year, the lower insurance premium and lower average deposits resulted in a
favorable change of $478,000 from 1994. The absence of the one time merger costs
(related to the Country National Bank (CNB) acquisition) of approximately
$840,000 incurred in 1994 also favorably impacted other expenses in 1995. A 9.0%
($302,000) increase in premise and equipment expenses, which were mostly due to
the full year effect of the in-store branches, partially offset these large
decreases. Net increases in various other expenses totaled approximately
$380,000 with no single expense classification being significant.
Provision for Taxes
The effective tax rate on income was 40.8%, 41.1% and 42.62% in 1996, 1995,
and 1994. The effective tax rate was greater than the federal statutory tax rate
due to state tax expense of $1,359,000, $1,311,000 and $1,182,000 in these
years. Tax-free income of $120,000, $158,000 and $229,000 from investment
securities in these years helped to reduce the effective tax rate. In 1994
nondeductible expenses related to the CNB merger were incurred which increased
the effective tax rate in that year.
Exhibit 13.1 - 35
Return on Average Assets and Equity
The following table sets forth certain ratios for the Company for the last
three years (using average balance sheet data):
1996 1995 1994
Return on total assets 1.18% 1.22% .99%
Return on shareholders' equity 13.03% 13.81% 12.29%
Return on common shareholders' equity 13.03% 13.95% 12.42%
Shareholders' equity to total assets 8.75% 8.82% 8.06%
Common shareholders' equity to total assets 8.75% 8.82% 7.42%
Common shareholders' dividend payout ratio 36.22% 24.10% 23.97%
For 1996 return on assets reflected a slight decrease from 1.22% in 1995 to
1.18%. Net income increased at a lower rate than average assets. Return on
assets rebounded in 1995 to 1.22% from the 0.99% achieved in 1994. The higher
return was achieved through improved earnings applied to average assets which
were $12,230,000 lower in 1995.
Return on shareholders' equity fell to 13.0% in 1996 from 13.8% in 1995.
The lower ROE resulted from average capital increasing 9.9% while net income
increased 3.7%. The return on shareholder's equity improved to 13.8% in 1995
versus the 12.3% return achieved in 1994. The improved ROE for 1995 was
reflective of both increased earnings and higher average shareholders' equity.
The acquisition of the nine Wells Fargo branches in 1997 should favorably
affect ROE as earnings should increase without additional capital being
required. Conversely, ROA should decrease until loans can be made as most of the
funds will be invested in securities which have lower yields than loans.
Since all of the Company's preferred shares have been redeemed, the return
on shareholders' equity and the return on common shareholders' equity for 1996
are the same. In 1995 and 1994 the difference between the return on Common
shareholders' equity and return on shareholders' equity had been narrowing. This
change was due to the reduction of the dividend amounts paid for preferred stock
dividends. In August of 1995, the Company had redeemed its Series B Preferred
Stock and in December of 1993, it had redeemed its Series C Preferred Stock. The
annual dividend requirements for these two issues were $420,000 and $229,000
respectively.
The assets added by the Sutter Buttes acquisition contributed to the
decrease in the Shareholders' equity to assets ratio for 1996 to 8.75% from
8.82%. In 1995, the total shareholders' equity to asset ratio increased to 8.8%
from 8.1%. The 1995 change reflected the combination of a reduction in average
assets, increased earnings and the redemption of the Series B Preferred Stock.
The Common shareholders' equity to assets ratio changed from 7.4% in 1994
to 8.8% in 1995 and 8.8% in 1996. These ratios are impacted by the same factors
as the total equity ratios except for the direct effect of reduction in total
capital for the redemption of the preferred stock issues.
The dividend payout ratio increased to 36.2% in 1996 from 24.1% in 1995.
The common dividends paid totaled $2,646,000 up from $1,639,000. The Company is
well capitalized and so the higher dividend payout does not affect operations.
In 1994, dividends paid to Common shareholders totaled $1,304,000. The resulting
Common shareholders' dividend payout ratio of 24.1% in 1995 was .1% higher than
the payout for 1994.
Exhibit 13.1 - 36
(B) Balance Sheet Analysis
Loans
The Bank concentrates its lending activities in four principal areas:
commercial loans (including agricultural loans); consumer loans; real estate
mortgage loans (residential and commercial loans and mortgage loans originated
for sale); and real estate construction loans. At December 31, 1996, these four
categories accounted for approximately 40%, 17%, 37%, and 6% of the Bank's loan
portfolio respectively as compared to 48%, 20%, 26% and 6%, at December 31, 1995
The shift in the percentages was primarily due to the Sutter Buttes loans which
consisted almost entirely of mortgage loans. The interest rates charged for the
loans made by the Bank vary with the degree of risk, the size and maturity of
the loans, the borrower's relationship with the Bank and prevailing money market
rates indicative of the Bank's cost of funds.
The majority of the Bank's loans are direct loans made to individuals,
farmers and local businesses. The Bank relies substantially on local promotional
activity, personal contacts by bank officers, directors and employees to compete
with other financial institutions. The Bank makes loans to borrowers whose
applications include a sound purpose, a viable repayment source and a plan of
repayment established at inception and generally backed by a secondary source of
repayment.
At December 31, 1996 loans totaled $439,289,000 which was a 37.8% increase
over the balances at the end of 1995. Internal growth accounted for about half
of the increase and the Sutter Buttes acquisition added $60,815,000. Loan demand
improved in 1996 as economic conditions rebounded from the slow growth of the
prior several years. Additions to the loan staff and improved calling programs
also helped generate new customers. With the acquisition of the nine Wells Fargo
Bank branches completed in February 1997, Management anticipates the Bank will
have the financing to aggressively pursue opportunities to further increase its
loan production in 1997. The average loan to deposit ratio in 1996 was 70.8% as
compared to 63.1% in 1995.
Loan activity, while not robust in 1995, reflected some improvements over
1994 as average loans outstanding increased 1.6% to $308,473,000 and year end
balances increased 3.8% to $318,766,000. The average loan to deposit ratio in
1995 was 63.1% versus 60.7% in 1994.
In 1993 the Bank installed a new software system which resulted in some
changes in the loan classifications. The classifications for 1992 have not been
restated in the following table. The loan mix has remained fairly constant in
the four years prior to 1996. As discussed above the mix changed this year with
the addition of the Sutter Buttes loans.
Management would anticipate that growth in 1997 will focus on the
commercial and consumer elements of the portfolio.
Loan Portfolio Composite
December 31,
1996 1995 1994 1993 1992
(dollars in thousands)
Commercial, financial and
agricultural $176,868 $152,173 $153,957 $140,750 $150,685
Consumer installment 75,498 64,445 58,471 55,654 47,726
Real estate mortgage 160,575 81,888 76,673 88,887 88,715
Real estate construction 26,348 20,260 18,002 20,611 30,392
------------------------------------------------------------------------------
Total loans $439,289 $318,766 $307,103 $305,902 $317,518
==============================================================================
Nonaccrual, Past Due and Restructured Loans
During 1996 nonperforming assets increased $7,389,000 to a total of
$10,453,000 at December 31, 1996. Nonaccrual loans accounted for most of the
change. Commercial loans secured by nonfarm nonresidential real estate increased
$3,686,000 to a total of $4,350,000. Loans to one borrower accounted for
$2,322,000 of that total. There were several loans totaling about $1,000,000 in
the process of being renewed which were more than 90 days past due. Also, as
loan balances outstanding increase, some increase in nonperforming loans can be
expected. The increase in nonperforming loans was also due in part to more
stringent policies for removing poorly performing loans from nonaccrual status
and to change in local economy. Management has not changed underwriting
standards that should materially affect the risk in the loan portfolio. The
ratio of nonperforming loans to total loans at December 31, 1996 was 2.06%
versus .76% at the end of 1995. Classifications of nonperforming loans as a
percent of the total at the end of 1996 were as follows: secured by real estate,
79%; loans to farmers, 1%; commercial loans, 18%; and consumer loans, 2%.
Management has implemented some new monitoring procedures in an effort to
improve the timeliness of payments and collections, and actively manage the
level of nonperforming loans.
Exhibit 13.1 - 37
Nonperforming assets at December 31, 1995 totaled $3,064,000 which was a
6.3% decrease from 1994. The OREO component had a significant decrease from
$2,124,000 in 1994 to $631,000 in 1995. However, this decrease was offset in
great part by an increase in nonperforming loans. They increased from $1,146,000
in 1994 to $2,433,000 in 1995. The nonperforming loans at December 31, 1995
consisted of numerous lower value loans with the largest being about $188,000.
With this increase, the ratio of nonperforming loans to total loans was .76% as
compared to .37% in 1994.
Commercial, real estate and consumer loans are reviewed on an individual
basis for reclassification to nonaccrual status when any one of the following
occurs: the loan becomes 90 days past due as to interest or principal, the full
and timely collection of additional interest or principal becomes uncertain, the
loan is classified as doubtful by internal credit review or bank regulatory
agencies, a portion of the principal balance has been charged off, or the Bank
takes possession of the collateral. The reclassification of loans as nonaccrual
does not necessarily reflect Management's judgment as to whether they are
collectible.
Interest income is not accrued on loans where Management has determined
that the borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in process of collection. When
a loan is placed on nonaccrual, any previously accrued but unpaid interest is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection on principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
Interest income on nonaccrual loans which would have been recognized during
the year ended December 31, 1996, if all such loans had been current in
accordance with their original terms, totaled $902,000. Interest income actually
recognized on these loans in 1996 was $493,000.
The Bank's policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due Management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed 30
days. Loans where the collateral has been repossessed are classified as OREO or,
if the collateral is personal property, the loan is classified as other assets
on the Company's financial statements.
Management considers both the adequacy of the collateral and the other
resources of the borrower in determining the steps to be taken to collect
nonaccrual loans. Alternatives that are considered are foreclosure, collecting
on guarantees, restructuring the loan or collection lawsuits.
Exhibit 13.1 - 38
The following table sets forth the amount of the Bank's nonperforming
assets as of the dates indicated.
December 31,
1996 1995 1994 1993 1992
(dollars in thousands)
Nonaccrual loans $ 9,044 $ 2,213 $ 1,122 $ 1,595 $ 583
Accruing loans past due
90 days or more 20 220 24 126 1,611
-----------------------------------------------------------------------------
Total nonperforming loans 9,064 2,433 1,146 1,721 2,194
Other real estate owned 1,389 631 2,124 3,624 1,860
-----------------------------------------------------------------------------
Total nonperforming assets $10,453 $ 3,064 $ 3,270 $ 5,345 $ 4,054
=============================================================================
Nonincome producing investments
in real estate held by Bank's real
estate development subsidiary $ 1,173 $ 1,173 $ 1,173 $ 1,172 $ 1,240
Nonperforming loans to total loans 2.06% .76% .37% .56% .69%
Allowance for loan losses to nonper-
forming loans 67% 229% 489% 347% 219%
Nonperforming assets to total assets 1.50% .51% .55% .93% .82%
Allowance for loan losses to nonper-
forming assets 58% 182% 171% 112% 118%
Allowance for Loan Losses Activity
In determining the adequacy of the allowance for loan losses, Management
relies primarily on its review of the loan portfolio both to ascertain whether
there are probable losses to be recorded and to assess the loan portfolio in the
aggregate. Problem loans are examined on an individual basis to determine
estimated probable loss. In addition, Management considers current and projected
loan mix and loan volumes, historical net loan loss experience for each loan
category and current and anticipated economic conditions affecting each loan
category. Loan growth and the addition of the Sutter Buttes loans in 1996
resulted in a change in the mix of loans outstanding at the end of the year
versus year end 1995. The types of mortgage loans Sutter Buttes held in its
portfolio generally require a lower allowance for loan losses. Consequently, the
allowance for loan losses to total loans at December 31, 1996 was 1.39% versus
1.75% at the end of 1995.
The primary risk elements considered by Management with respect to
installment and residential real estate loans is lack of timely payment and the
value of the collateral. The primary risk elements considered by Management with
respect to its credit card portfolio are general economic conditions, timeliness
of payments and the potential for fraud and over limit credit draws. The primary
risk elements considered by Management with respect to real estate construction
loans are the financial condition of borrowers, fluctuations in real estate
values in the Bank's market areas, fluctuations in interest rates, timeliness of
payments, the availability of conventional financing, the demand for housing in
the Bank's market areas and general economic conditions. The primary risk
elements with respect to commercial loans are the financial condition of the
borrower, general economic conditions in the Bank's market area, the sufficiency
of collateral, the timeliness of payment and, with respect to adjustable rate
loans, interest rate fluctuations.
Exhibit 13.1 - 39
Based on the current conditions of the loan portfolio, Management believes
that the $6,097,000 allowance for loan losses at December 31, 1996 is adequate
to absorb probable losses inherent in the Bank's loan portfolio. No assurance
can be given, however, that adverse economic conditions or other circumstances
will not result in increased losses in the portfolio.
The following table summarizes, for the years indicated, the activity in
the allowance for loan losses:
December 31,
1996 1995 1994 1993 1992
(dollars in thousands)
Balance, beginning of year $ 5,580 $ 5,608 $ 5,973 $ 4,798 $ 4,156
Provision charged to operations 777 335 316 1,858 2,101
Loans charged off:
Commercial, financial and
agricultural (283) (149) (338) (653) (875)
Consumer installment (909) (432) (712) (622) (719)
Real estate mortgage -- -- -- -- (23)
------------------------------------------------------------------------------
Total loans charged-off (1,192) (581) (1,050) (1,275) (1,617)
Recoveries:
Commercial, financial and
agricultural 243 98 205 380 106
Consumer installment 66 120 164 212 52
------------------------------------------------------------------------------
Total recoveries 309 218 369 592 158
------------------------------------------------------------------------------
Net loans charged-off (883) (363) (681) (683) (1,459)
Balance added through acquisition 623 -- -- -- --
------------------------------------------------------------------------------
Balance, year end $ 6,097 $ 5,580 $ 5,608 $ 5,973 $ 4,798
==============================================================================
Average total loans $368,550 $308,473 $303,497 $314,691 $318,839
Ratios:
Net charge-offs during period
to average loans outstanding
during period .24% .12% .22% .22% .46 %
Provision for loan losses to aver-
age loans outstanding .21% .11% .10% .59% .66 %
Allowance to loans at year end(1) 1.39% 1.75% 1.83% 1.95% 1.51 %
(1) Banker's acceptances and commercial paper are not included.
Exhibit 13.1 - 40
As part of its loan review process, Management has allocated the overall
allowance based on specific identified problem loans and historical loss data.
The following tables summarize the allocation of the allowance for loan losses
at December 31, 1996 and 1995.
December 31, 1996
(dollars in thousands)
Percent of
loans in each
category to
Balance at End of Period Applicable to: Amount total loans
Commercial, financial and agricultural $ 2,457 40.3%
Real Estate--construction 366 6.0%
Real Estate--mortgage 2,231 36.6%
Installment loans to individuals 1,043 17.1%
------------------------
$ 6,097 100.0%
December 31, 1995
(dollars in thousands)
Percent of
loans in each
category to
Balance at End of Period Applicable to: Amount total loans
Commercial, financial and agricultural $ 3,932 47.7%
Real Estate--construction -- 6.4%
Real Estate--mortgage 355 25.7%
Installment loans to individuals 1,293 20.2%
------------------------
$ 5,580 100.0%
Investment in Real Estate Properties
At December 31, 1996 and 1995, $1,173,000 of property was held by a subsidiary
of the Bank for the purposes of development. In 1996 the FDIC directed the Bank
to divest the properties held by TCB Real Estate Corp. and to terminate its
operations. The Bank and FDIC have agreed to a plan that will accomplish the
divestiture by June 30, 1999.
Other Real Estate Owned
The December 31, 1996 balance of Other Real Estate Owned (OREO) was
$1,389,000 versus $631,000 in 1995. One property accounted for $557,000 of the
1996 total. Properties foreclosed in 1996 and remaining in the Bank's possession
at year end were valued at $1,175,000 net of a valuation allowance of $101,600.
The Bank disposed of properties with a value of $668,000 in 1996. OREO
properties consist of a mixture of land, single family residences and commercial
buildings. OREO had decreased $1,493,000 in 1995.
Exhibit 13.1 - 41
Deposits
Total deposits at December 31, 1996 had increased $79,428,000 (15.4%) to
$595,621,000 over the 1995 year end balances. On the date of closing in October
1996, Sutter Buttes had deposits totaling $56,023,000. Because of these acquired
deposits, growth occurred in all deposit categories. Certificates of deposit
with balances over $100,000 increased from $13,439,000 in 1995 to $32,889,000.
Of the increase, $6,000,000 was attributable to a State of California CD,
approximately $5,500,000 was from Sutter Buttes and the balance was from
internal growth. Prior to 1996, the Bank paid lower rates on CD's over $100,000
than it did on CD's under $100,000. This policy was changed in 1996.
Deposits at December 31, 1995 were up 5.1% to $516,193,000 over the 1994
year end balances. In-store deposits almost doubled in 1995 ending the year at
$29,605,000. There was growth in both the interest-bearing and
noninterest-bearing demand deposits. However, most of the growth was
attributable to time certificates of deposit (CD's). They increased $49,334,000
or 37.7% during 1995. At the same time, savings deposits decreased $29,321,000
(15.4%). Depositors moved funds from savings to CD's as the yields on CD's often
were 200-300 basis points higher. The local market conditions dictated the high
CD rates. The increase of $12.3 million in the over $100,000 CD category was
largely attributable to a $9.0 million deposit from the State of California.
This deposit had a 90 day maturity and was renewable at the Bank's option.
Accrued Interest Payable
At December 31, 1996, accrued interest payable reflected a decrease of
$115,000 to $3,047,000. The decrease was mainly due to lower rates of interest
being accrued on time certificates of deposit. At December 31, 1995, the balance
of accrued interest payable was $3,162,000 which was an increase of $1,402,000
over the 1994 year end. This increase was attributable to the higher rates and
balances in time certificates of deposit.
Long-Term Debt
In 1996 the Bank made principal payments of $2,011,000 on long term debt
obligations. No new long term debt was incurred.
During 1995 the Bank incurred long term debt in the amount of $9,828,000
with a term of two years. This debt was in the form of a repurchase agreement.
The Bank also retired $2,000,000 of long term debt during the year.
Equity
See Note U in the financial statements for a discussion of regulatory capital
requirements. With the inclusion of the deposits and assets acquired by the
purchase of the deposits of nine branches from Wells Fargo Bank, both the Bank
and the Company will continue to be well capitalized. Management believes that
the Company's capital is adequate to support anticipated growth, meet the cash
dividend requirements of the Company and meet the future risk-based capital
requirements of the Bank and the Company.
Liquidity and Interest Rate Sensitivity
Liquidity refers to the Bank's ability to provide funds at an acceptable
cost to meet loan demand and deposit withdrawals, as well as contingency plans
to meet unanticipated funding needs or loss of funding sources. These objectives
can be met from either the asset or liability side of the balance sheet. Asset
liquidity sources consist of the repayments and maturities of loans, selling of
loans, short-term money market investments, maturities of securities and sales
of securities from the available-for-sale portfolio. These activities are
generally summarized as investing activities in the Consolidated Statement of
Cash Flows. Net cash used by investing activities totaled approximately
($25,830,000) in 1996. The loan growth was responsible for the major use of
funds in this category.
Liquidity is generated from liabilities through deposit growth and
short-term borrowings. These activities are included under financing activities
in the cash flow statement. In 1996 funds totaling $24,591,000 were provided by
financing activities. Deposit growth and Federal funds borrowed provided funds
amounting to $28,400,000. The Bank also had available correspondent banking
lines of credit totaling $45,100,000 at year end. While these sources are
expected to continue to provide significant amounts of funds in the future,
their mix, as well as the possible use of other sources, will depend on future
economic and market conditions.
Exhibit 13.1 - 42
Liquidity is also provided or used through the results of operating
activities. In 1996 operating activities used cash of ($11,803,000).
Since the adoption of SFAS 115 January 1, 1994, Management has targeted the
available-for-sale portfolio (AFS) to be maintained at 35-40% of the total
securities holdings. The AFS securities plus cash in excess of reserve
requirements totaled $109,202,000 which was 15.7% of total assets at year end.
This was down from $133,610,000 and 22.1% at the end of 1995. Subsequent to the
end of 1996, the Board of Directors approved Management's recommendation that up
to 100% of the future securities purchases could be placed in the
available-for-sale category. This allows for more flexibility in managing the
investment portfolio.
The overall liquidity of the Bank is enhanced by the sizable core deposits
which provide a relatively stable funding base. The maturity distribution of
certificates of deposit in denominations of $100,000 or more is set forth in the
following table. These deposits are generally more rate sensitive than other
deposits and, therefore, are more likely to be withdrawn to obtain higher yields
elsewhere if available. The Bank participates in a program wherein the State of
California places time deposits with the Bank at the Bank's option. At December
31, 1996 and 1995 the Bank had $15,000,000 and $9,000,000 respectively, of these
State deposits.
Certificates of Deposit in Denominations of $100,000 or More
Amounts as of
December 31,
1996 1995 1994
(in thousands)
Time remaining until maturity:
Less than 3 months $ 19,443 $ 9,985 $ 401
3 months to 6 months 3,396 2,909 717
6 months to 12 months 7,480 545 --
More than 12 months 2,570 -- --
--------------------------------------------
Total $ 32,889 $ 13,439 $ 1,118
Loan demand also affects the Bank's liquidity position. The following table
present the maturities of performing loans at December 31, 1996.
Loan Maturities - December 31, 1996
After
One But
Within Within After 5
One Year 5 Years Years Total
(in thousands)
Loans with predetermined interest rates:
Commercial, financial and agricultural $ 6,318 $ 24,362 $ 29,841 $ 60,521
Consumer installment 5,278 13,577 8,066 26,921
Real estate mortgage 2,294 15,266 34,870 52,430
Real estate construction 5,285 100 76 5,461
-----------------------------------------------------------
19,175 53,305 72,853 145,333
Loans with floating interest rates:
Commercial, financial and agricultural 57,894 26,575 31,878 116,347
Consumer installment 16,693 2,089 29,795 48,577
Real estate mortgage 13,338 20,701 74,106 108,145
Real estate construction 20,887 -- -- 20,887
-----------------------------------------------------------
108,812 49,365 135,779 293,956
-----------------------------------------------------------
Total loans $127,987 $102,670 $208,632 $439,289
===========================================================
Exhibit 13.1 - 43
Interest rate sensitivity is a function of the repricing characteristics of
the Bank's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or
maturity. Interest rate sensitivity management focuses on the maturity of assets
and liabilities and their repricing during periods of changes in market interest
rates. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the Bank's current portfolio that are
subject to repricing at various time horizons. The differences are known as
interest sensitivity gaps. As reflected in the following repricing tables, the
Bank had a liability sensitive position at December 31, 1996 and 1995. This gap
position would indicate that as interest rates rise, the Bank's earnings should
be adversely impacted and conversely, as interest rates fall, earnings should be
favorably impacted. Because the Bank's deposit liabilities do not reprice
immediately with changes in interest rates, in recent years of moderate interest
rate changes the Bank's earnings have reacted as though the gap position is
slightly asset sensitive.
Interest Rate Sensitivity - December 31, 1996
Repricing within:
3 3 - 6 6 - 12 1 - 5 Over
months months months years 5 years
(dollars in thousands)
Interest-earning assets:
Securities $ 15,546 $ 4,216 $ 12,142 $95,132 $ 42,993
Loans 236,821 36,833 16,808 53,698 95,129
-------------------------------------------------------------------------------
Total interest-earning assets $ 252,367 $ 41,049 $ 28,950 $148,830 $138,122
Interest-bearing liabilities
Transaction deposits $ 269,967 $ -- $ -- $ -- $ --
Time 83,191 60,702 71,022 9,860 --
Short-term borrowings 4,900 -- -- -- --
Long-term borrowings 8,003 3 9,834 5,978 463
-------------------------------------------------------------------------------
Total interest-bearing liabilities $ 366,061 $ 60,705 $ 80,856 $ 15,838 $ 463
-------------------------------------------------------------------------------
Interest sensitivity gap $(113,694) $(19,656) $ (51,906) $132,992 $137,659
Cumulative sensitivity gap (113,694) (133,350) (185,256) (52,264) 85,395
As a percentage of earning assets:
Interest sensitivity gap (18.66%) (3.23%) (8.52%) 21.83% 22.59%
Cumulative sensitivity gap (18.66%) (21.89%) (30.40%) (8.58%) 14.01%
Exhibit 13.1 - 44
Interest Rate Sensitivity - December 31, 1995
Repricing within:
3 3 - 6 6 - 12 1 - 5 Over
months months months years 5 years
(dollars in thousands)
Interest-earning assets:
Securities $ 10,403 $ 9,802 $ 17,195 $111,822 $ 44,125
Fed funds sold 25,600 -- -- -- --
Loans 190,443 7,262 14,336 40,123 66,602
-------------------------------------------------------------------------------
Total interest-earning assets $226,446 $ 17,064 $ 31,531 $151,945 $110,727
Interest-bearing liabilities
Transaction deposits $245,793 $ -- $ -- $ -- $ --
Time 56,402 88,906 29,263 5,520 --
Long-term borrowings 7,003 3 6 18,128 1,152
-------------------------------------------------------------------------------
Total interest-bearing liabilities $309,198 $ 88,909 $ 29,269 $ 23,648 $ 1,152
-------------------------------------------------------------------------------
Interest sensitivity gap $(82,752) $(71,845) $ 2,262 $128,297 $109,575
Cumulative sensitivity gap (82,752) (154,597) (152,336) (24,039) 85,537
As a percentage of earning assets:
Interest sensitivity gap (15.39%) (13.36%) 0.42% 23.86% 20.38%
Cumulative sensitivity gap (15.39%) (28.75%) (28.33%) (4.47%) 15.91%
The maturity distribution and yields of the investment portfolios are presented
in the following tables:
Securities Maturities and Weighted Average Yields - December 31, 1996
After One Year After Five Years
Within but Through but Through After Ten
One Year Five Years Ten Years Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
Securities Held-to-Maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 1,085 5.72% $ 21,942 6.17% $ -- -- $ -- -- $ 23,027 6.15%
Mortgage-backed securities -- -- 3,896 5.84% 9,289 6.11% 68,403 5.92% 81,588 5.93%
-----------------------------------------------------------------------------------
Total securities held-to-maturit $ 1,275 5.45% $ 26,367 6.08% $ 9,289 6.11% $68,403 5.92% $105,334 5.94%
Securities Available-for-Sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 14,304 5.68% $ 15,914 5.94% $ -- -- -- -- $ 30,218 5.81%
Obligations of states and political subdivisions 210 5.33% 1,113 5.31% 130 7.00% -- -- 1,453 5.46%
Mortgage-backed securities -- -- 900 7.23% $ 1,096 5.05% 28,265 5.58% 30,261 5.67%
Other securities -- -- -- -- -- -- 4,375 -- 4,375 --
-----------------------------------------------------------------------------------
Total securities available-for-sale $ 14,514 5.67% $ 17,927 5.31% $ 1,226 7.00% $32,640 5.58% $ 66,307 5.46%
-----------------------------------------------------------------------------------
Total all securities $ 15,789 5.66% $ 44,294 5.96% $10,515 5.26% $101,043 5.58% $171,641 5.70%
===================================================================================
Less: unrealized loss on securities transferred from available-for-sale $ (621)
Less: unrealized loss on securities available-for-sale (991)
---------
Total $170,029
=========
Exhibit 13.1 - 45
The principal cash requirements of the Company are dividends on Common
Stock when declared. The Company is dependent upon the payment of cash dividends
by the Bank to service its commitments. The Company expects that the cash
dividends paid by the Bank to the Company will be sufficient to meet this
payment schedule.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital
leases. (See Note H of the financial statements for the terms.) These
commitments do not significantly impact operating results.
As of December 31, 1996 commitments to extend credit were the only
financial instruments with off-balance sheet risk. The Bank has not entered into
any contracts for financial derivative instruments such as futures, swaps,
options etc. Loan commitments increased to $118,991,000 from $78,441,000 at
December 31, 1995. Much of the increase relates to credit cards. The commitments
represent 27.1% of the total loans outstanding at year end 1996 versus 28.6% a
year ago.
Disclosure of Fair Value
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards Number 107, Disclosures about Fair Value of Financial
Statements, requires the disclosure of fair value of most financial instruments,
whether recognized or not recognized in the financial statements. The intent of
presenting the fair values of financial instruments is to depict the market's
assessment of the present value of net future cash flows discounted to reflect
both current interest rates and the market's assessment of the risk that the
cash flows will not occur.
In determining fair values, the Bank used the carrying amount for cash,
short-term investments, accrued interest receivable, short-term borrowings and
accrued interest payable as all of these instruments are short term in nature.
Securities are reflected at quoted market values. Loans and deposits have a long
term time horizon which required more complex calculations for fair value
determination. Loans are grouped into homogeneous categories and broken down
between fixed and variable rate instruments. Loans with a variable rate, which
reprice immediately, are valued at carrying value. The fair value of fixed rate
instruments is estimated by discounting the future cash flows using current
rates. Credit risk and repricing risk factors are included in the current rates.
Fair value for nonaccrual loans is reported at carrying value and is included in
the net loan total. Since the allowance for loan losses exceeds any potential
adjustment for nonaccrual valuation, no further valuation adjustment has been
made.
Demand deposits, savings and certain money market accounts are short term
in nature so the carrying value equals the fair value. For deposits that extend
over a period in excess of four months, the fair value is estimated by
discounting the future cash payments using the rates currently offered for
deposits of similar remaining maturities.
At 1996 year end, the fair values calculated on the Bank's assets are .02%
below the carrying values versus .5% above the carrying values in 1995. The
small change in the calculated fair value percentage relates to the securities
and loan categories and is the result of minor changes in interest rates in
1996. (See Note Q of the financial statements)
Exhibit 13.1 - 46