UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2003 Commission file number 0-10661
- -------------------------------- ------------------------------
TRICO BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2792841
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 530/898-0300
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Class: Common stock, no par value
Outstanding shares as of May 12, 2003: 7,825,060
TABLE OF CONTENTS
Page
Forward Looking Statements 1
PART I - FINANCIAL INFORMATION 2
Item 1 - Financial Statements 2
Financial Summary 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 21
Item 4 - Controls and Procedures 22
PART II - OTHER INFORMATION 23
Item 1 - Legal Proceedings 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
Certifications 25
Exhibits 27
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. When you see any of the
words "believes", "expects", "anticipates", "estimates", or similar expressions,
mean making forward-looking statements. A number of factors, some of which are
beyond the Company's ability to predict or control, could cause future results
to differ materially from those contemplated. These factors include but are not
limited to:
- a continued slowdown in the national and California economies;
- increased economic uncertainty created by the recent terrorist attacks
on the United States and the actions taken in response;
- the prospect of additional terrorist attacks in the United States and the
uncertain effect of these events on the national and regional economies;
- changes in the interest rate environment;
- changes in the regulatory environment;
- significantly increasing competitive pressure in the banking industry;
- operational risks including data processing system failures or fraud;
- volatility of rate sensitive deposits; and
- asset/liability matching risks and liquidity risks.
On April 4, 2003, the Company acquired North State National Bank, located in
Chico, California. Many possible events or factors could affect the future
financial results and performance of the Company after the merger including:
- actual cost savings resulting from the merger are less than we expected,
we are unable to realize those cost savings as soon as we expected or we
incur additional or unexpected costs;
- revenues after the merger are less than we expected;
- competition among financial services companies increases;
- we have more trouble integrating our businesses than we expected;
- changes in the interest rate environment reduces our interest margins;
- general economic conditions change or are worse than we expected;
- legislative or regulatory changes adversely affect our business;
- changes occur in business conditions and inflation;
- personal or commercial customers' bankruptcies increase;
- changes occur in the securities markets; and
- technology-related changes are more difficult to make or more expensive
than we expected.
The reader is directed to the Company's annual report on Form 10-K for the year
ended December 31, 2002, for further discussion of factors which could affect
the Company's business and cause actual results to differ materially from those
expressed in any forward-looking statement made in this report.
-1-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited) (Unaudited)
At March 31, At December 31,
2003 2002 2002
------------------------------- -----------------
Assets:
Cash and due from banks $58,925 $42,647 $67,170
Federal funds sold 10,100 55,200 8,100
------------------------------- -----------------
Cash and cash equivalents 69,025 97,847 75,270
Investment securities available for sale 354,007 222,594 338,024
Loans
Commercial 117,329 123,026 125,982
Consumer 210,633 157,428 201,858
Real estate mortgages 330,001 315,591 319,969
Real estate construction 35,810 41,164 39,713
------------------------------- -----------------
693,773 637,209 687,522
Allowance for loan losses (14,293) (13,338) (14,377)
------------------------------- -----------------
Loans, net of allowance for loan losses 679,480 623,871 673,145
Premises and equipment, net 17,542 16,136 17,224
Cash value of life insurance 29,257 14,722 15,208
Other real estate owned 1,608 71 932
Accrued interest receivable 5,891 5,480 5,644
Deferred income taxes 8,316 9,337 8,429
Intangible assets 3,815 4,842 4,043
Other assets 7,562 5,033 6,655
------------------------------- -----------------
Total Assets $1,176,503 $999,933 $1,144,574
=============================== =================
Liabilities:
Deposits:
Noninterest-bearing demand $226,373 $172,087 $232,499
Interest-bearing demand 188,575 174,852 182,816
Savings 324,584 256,845 297,926
Time certificates, $100,000 and over 94,089 73,134 90,404
Other time certificates 199,031 196,354 201,592
------------------------------- -----------------
Total deposits 1,032,652 873,272 1,005,237
Accrued interest payable 3,034 2,817 2,927
Other Liabilities 16,010 12,179 14,472
Long-term debt and other borrowings 22,915 22,948 22,924
------------------------------- -----------------
Total Liabilities 1,074,611 911,216 1,045,560
------------------------------- -----------------
Shareholders' Equity:
Authorized - 20,000,000 shares of common stock
Issued and outstanding:
7,080,470 at March 31, 2003 50,768
6,990,980 at March 31, 2002 49,608
7,060,965 at December 31, 2002 50,472
Retained earnings 48,436 39,720 46,239
Accumulated other comprehensive income (loss), net 2,688 (611) 2,303
------------------------------- -----------------
Total Shareholders' Equity 101,892 88,717 99,014
------------------------------- -----------------
Total Liabilities and Shareholders' Equity $1,176,503 $999,933 $1,144,574
=============================== =================
-2-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except earnings per share data)
(Unaudited)
Three months ended March 31,
2003 2002
----------------------------
Interest Income:
Interest and fees on loans $12,989 $13,008
Interest on federal funds sold 84 166
Interest on investment securities
available for sale
Taxable 2,744 2,230
Tax exempt 532 554
----------------------------
Total interest income 16,349 15,958
----------------------------
Interest Expense:
Interest on interest-bearing demand deposits 118 122
Interest on savings 720 680
Interest on time certificates of deposit 1,959 2,142
Interest on long-term debt 318 319
----------------------------
Total interest expense 3,115 3,263
----------------------------
Net Interest Income 13,234 12,695
----------------------------
Provision for loan losses 150 800
----------------------------
Net Interest Income After Provision for Loan Losses 13,084 11,895
----------------------------
Noninterest Income:
Service charges and fees 3,500 1,973
Gain on sale of loans 1,133 963
Commissions on sale of non-deposit investment products 448 538
Other 315 352
----------------------------
Total Noninterest Income 5,396 3,826
----------------------------
Noninterest Expense:
Salaries and related benefits 6,877 5,739
Other 5,774 4,663
----------------------------
Total Noninterest Expense 12,651 10,402
----------------------------
Income Before Income Taxes 5,829 5,319
----------------------------
Provision for income taxes 2,216 1,990
----------------------------
Net Income $3,613 $3,329
Comprehensive Income:
Change in unrealized gain on securities
available for sale, net 385 44
----------------------------
Comprehensive Income $3,998 $3,373
============================
Average Shares Outstanding 7,071 6,992
Diluted Average Shares Outstanding 7,250 7,117
Per Share Data
Basic Earnings $0.51 $0.48
Diluted Earnings $0.50 $0.47
Dividends Paid $0.20 $0.20
-3-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, unaudited)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income (Loss), net Total
-----------------------------------------------
Balance, December 31, 2001 $49,679 $37,909 ($655) $86,933
Net income for the period 3,329 3,329
Repurchase of common stock (71) (119) (190)
Dividends (1,399) (1,399)
Unrealized gain on securities
available for sale, net 44 44
-----------------------------------------------
Balance March 31, 2002 $49,608 $39,720 ($611) $88,717
===============================================
Balance, December 31, 2002 $50,472 $46,239 $2,303 $99,014
Net income for the period 3,613 3,613
Stock issued, including
stock option tax benefits 296 296
Dividends (1,416) (1,416)
Unrealized gain on securities
available for sale, net 385 385
-----------------------------------------------
Balance March 31, 2003 $50,768 $48,436 $2,688 $101,892
===============================================
-4-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
For the three months
ended March 31,
2003 2002
-------------------------------
Operating Activities:
Net income $3,613 $3,329
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 653 668
Amortization of intangible assets 228 228
Provision for loan losses 150 800
Amortization of investment securities premium, net 757 341
Deferred income taxes (42) (28)
Originations of loans for resale (53,210) (46,947)
Proceeds from sale of loans originated for resale 53,750 47,333
Gain on sale of loans (1,133) (963)
Amortization of mortgage servicing rights 256 143
(Gain) loss on sale of fixed assets (2) 20
Change in assets and liabilities:
(Increase) decrease in interest receivable (247) 42
Increase (decrease) in interest payable 107 (671)
Decrease in other assets and liabilities 762 1,879
-------------------------------
Net Cash Provided by Operating Activities 5,642 6,174
-------------------------------
Investing Activities:
Proceeds from maturities of securities available-for-sale 36,864 28,682
Purchases of securities available-for-sale (53,010) (26,958)
Net (increase) decrease in loans (7,161) 21,003
Proceeds from sale of premises and equipment 2 3
Purchases of property and equipment (904) (303)
Purchase of life insurance (13,910) -
-------------------------------
Net Cash (Used) Provided by Investing Activities (38,119) 22,427
-------------------------------
Financing Activities:
Net increase (decrease) in deposits 27,415 (7,121)
Payments of principal on long-term debt agreements (9) (8)
Repurchase of Common Stock - (190)
Dividends paid (1,416) (1,399)
Exercise of stock options/issuance of Common Stock 242 -
-------------------------------
Net Cash Provided (Used) by Financing Activities 26,232 (8,718)
-------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (6,245) 19,883
-------------------------------
Cash and Cash Equivalents and Beginning of Period 75,270 77,964
-------------------------------
Cash and Cash Equivalents at End of Period $69,025 $97,847
===============================
Supplemental Disclosure of Noncash Activities:
Unrealized gain on securities available for sale $594 $69
Loans transferred to other real estate owned $676 -
Supplemental Disclosure of Cash Flow Activity:
Cash paid for interest expense $3,008 $3,934
Cash paid for income taxes $10 -
Income tax benefit from stock option exercises $54 -
-5-
TRICO BANCSHARES
Financial Summary
(dollars in thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
------------------------------
2003 2002
------------------------------
Net Interest Income (FTE) $13,543 $13,000
Provision for loan losses (150) (800)
Noninterest income 5,396 3,826
Noninterest expense (12,651) (10,402)
Provision for income taxes (FTE) (2,525) (2,295)
------------------------------
Net income $3,613 $3,329
==============================
Average shares outstanding 7,071 6,992
Diluted average shares outstanding 7,250 7,117
Shares outstanding at period end 7,080 6,991
As Reported:
Basic earnings per share $0.51 $0.48
Diluted earnings per share $0.50 $0.47
Return on assets 1.26% 1.34%
Return on equity 14.29% 14.88%
Net interest margin 5.17% 5.76%
Net loan charge-offs to average loans 0.14% 0.32%
Efficiency ratio (FTE) 66.80% 61.82%
Average Balances:
Total assets $1,149,759 $990,471
Earning assets 1,048,286 902,596
Total loans 679,975 642,082
Total deposits 1,003,853 863,029
Shareholders' equity $101,139 $89,505
Balances at Period End:
Total assets $1,176,503 $999,933
Earning assets 1,057,880 915,003
Total loans 693,773 637,209
Total deposits 1,032,652 873,272
Shareholders' equity $101,892 $88,717
Financial Ratios at Period End:
Allowance for loan losses to loans 2.06% 2.09%
Book value per share $14.39 $12.69
Equity to assets 8.66% 8.87%
Total capital to risk assets 11.63% 12.12%
Dividends Paid Per Share $0.20 $0.20
Dividend Payout Ratio 39.19% 42.02%
-6-
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: General Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim period presented. The interim results for the three months ended
March 31, 2003 and 2002 are not necessarily indicative of the results expected
for the full year. These unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
accompanying notes as well as other information included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Nature of Operations
The Company operates 33 branch offices and 10 in-store branch offices in the
California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern,
Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento, Shasta, Siskiyou,
Stanislaus, Sutter, Tehama, Tulare and Yuba. The Company's operating policy
since its inception has emphasized retail banking. Most of the Company's
customers are retail customers and small to medium sized businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, investments, intangible assets, income taxes and contingencies. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The one accounting estimate that materially affects the financial
statements is the allowance for loan losses.
Investment 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 that 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. During the
three months ended March 31, 2003 and throughout 2002, the Company did not have
any securities classified as either held-to-maturity or trading.
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses, net of the related tax effect, on available-for-sale securities are
reported as a separate component of other comprehensive income in shareholders'
equity until realized.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses for securities are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
Unrealized losses due to fluctuations in fair value of securities held to
maturity or available for sale are recognized through earnings when it is
determined that a permanent decline in value has occurred.
-7-
Loans
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over the estimated life
of the loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is generally
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. When loans are 90
days past due, but in Management's judgment are well secured and in the process
of collection, they may not be classified as nonaccrual. When a loan is placed
on nonaccrual status, all interest previously accrued but not collected is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
Management believes that the collectibility of the principal is unlikely or,
with respect to consumer installment loans, according to an established
delinquency schedule. The allowance is an amount that Management believes will
be adequate to absorb probable losses inherent in existing loans, leases and
commitments to extend credit, based on evaluations of the collectibility,
impairment and prior loss experience of loans, leases and commitments to extend
credit. The evaluations take into consideration such factors as changes in the
nature and size of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, commitments, and current economic
conditions that may affect the borrower's ability to pay. The Company defines a
loan as impaired when it is probable the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan's original effective interest rate. As a practical
expedient, impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
When the measure of the impaired loan is less than the recorded investment in
the loan, the impairment is recorded through a valuation allowance.
Mortgage Operations
Transfers and servicing of financial assets and extinguishments of liabilities
are accounted for and reported based on consistent application of a
financial-components approach that focuses on control. Transfers of financial
assets that are sales are distinguished from transfers that are secured
borrowings. Retained interests (mortgage servicing rights) in loans sold are
measured by allocating the previous carrying amount of the transferred assets
between the loans sold and retained interest, if any, based on their relative
fair value at the date of transfer. Fair values are estimated using discounted
cash flows based on a current market interest rate.
The Company recognizes a gain and a related asset for the fair value of the
rights to service loans for others when loans are sold. The Company sold
substantially all of its conforming long-term residential mortgage loans
originated during three months ended March 31, 2003 for cash proceeds equal to
the fair value of the loans.
The following table summarizes the Company's mortgage servicing rights assets as
of March 31, 2003 and December 31, 2002.
December 31, March 31,
(Dollars in thousands) 2002 Additions Reductions 2003
-----------------------------------------------
Mortgage Servicing Rights $2,821 $593 ($256) $3,158
===============================================
-8-
The recorded value of mortgage servicing rights is included in other assets, and
is amortized in proportion to, and over the period of, estimated net servicing
revenues. The Company assesses capitalized mortgage servicing rights for
impairment based upon the fair value of those rights at each reporting date. For
purposes of measuring impairment, the rights are stratified based upon the
product type, term and interest rates. Fair value is determined by discounting
estimated net future cash flows from mortgage servicing activities using
discount rates that approximate current market rates and estimated prepayment
rates, among other assumptions. The amount of impairment recognized, if any, is
the amount by which the capitalized mortgage servicing rights for a stratum
exceeds their fair value. Impairment, if any, is recognized through a valuation
allowance for each individual stratum.
At March 31, 2003, the Company had no mortgage loans held for sale. At March 31,
2003 and December 31, 2002, the Company serviced real estate mortgage loans for
others of $336 million and $307 million, respectively.
Identifiable Intangible Assets
Identifiable intangible assets consist of core deposit intangibles and minimum
pension liability.
The following table summarizes the Company's core deposit intangible as of March
31, 2003 and December 31, 2002.
December 31, March 31,
(Dollar in Thousands) 2002 Additions Reductions 2003
----------------------------------------------
Core deposit intangibles $10,278 $10,278
Accumulated amortization (6,636) ($228) (6,864)
----------------------------------------------
Core deposit intangibles, net $3,642 ($228) $3,414
==============================================
Core deposit premiums are scheduled to amortize at a rate of $227,700 per
quarter through the quarter ended December 31, 2006. Core deposit premiums are
amortized using an accelerated method over a period of ten years. The Company
reviews for impairment of certain intangibles held, whenever events or changes
indicate that the carrying amount of an asset may not be recoverable. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair market value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
The following table summarizes the Company's minimum pension liability
intangible as of March 31, 2003 and December 31, 2002.
December 31, March 31,
(Dollar in Thousands) 2002 Additions Reductions 2003
------------------------------------------
Minimum pension liability intangible $401 - - $401
==========================================
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates.
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.
-9-
Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock option
plans (in accordance with the provisions of Accounting Principles Board Opinion
No. 25). Under this method, compensation expense is recognized for awards of
options to purchase shares of common stock to employees under compensatory plans
only if the fair market value of the stock at the option grant date (or other
measurement date, if later) is greater than the amount the employee must pay to
acquire the stock. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue
using the intrinsic value method or to adopt a fair value based method to
account for stock option plans. The fair value based method results in
recognizing as expense over the vesting period the fair value of all stock-based
awards on the date of grant. The Company has elected to continue to use the
intrinsic value method.
Had compensation cost for the Company's option plans been determined in
accordance with SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
Three Months Ended March 31,
(in thousands, except per share amounts) 2003 2002
---- ----
Net income As reported $3,613 $3,329
Pro forma $3,561 $3,280
Basic earnings per share As reported $0.51 $0.48
Pro forma $0.50 $0.47
Diluted earnings per share As reported $0.50 $0.47
Pro forma $0.49 $0.46
Stock-based employee compensation
cost, net of related tax effects,
included in net income As reported $0 $0
Pro forma $52 $49
Comprehensive Income
For the Company, comprehensive income includes net income reported on the
statement of income, changes in the fair value of its available-for-sale
investments, and changes in the minimum pension liability reported as a
component of shareholders' equity.
The changes in the components of accumulated other comprehensive income (loss)
for the three months ended March 31, 2003 and 2002 are reported as follows:
Three Months Ended March 31,
2003 2002
----------------------------
Unrealized Gain on Securities (in thousands)
Beginning Balance $3,048 $117
Unrealized gain arising during the
period, net of tax 385 44
----------------------------
Ending Balance $3,433 $161
----------------------------
Minimum Pension Liability
Beginning Balance ($745) ($772)
Change in minimum pension liability,
net of tax - -
----------------------------
Ending Balance ($745) ($772)
----------------------------
Total accumulated other comprehensive
income (loss), net $2,688 ($611)
----------------------------
-10-
Reclassifications
Certain amounts previously reported in the 2002 financial statements have been
reclassified to conform to the 2003 presentation. These reclassifications did
not affect previously reported net income or total shareholders' equity.
Subsequent Events
TriCo Bancshares (NASDAQ:TCBK), parent company of Tri Counties Bank, acquired
North State National Bank, a national banking organization located in Chico,
California, by the merger of North State into its wholly owned subsidiary, Tri
Counties Bank, effective 5:01 pm on April 4, 2003. The acquisition and the
related merger agreement dated October 3, 2002, was approved by the California
Department of Financial Institutions, the Federal Deposit Insurance Corporation,
and the shareholders of North State National Bank on March 4, March 7, and March
19, 2003, respectively. At the time of the acquisition, North State had total
assets of $144 million. The acquisition was accounted for using the purchase
method of accounting.
Under the terms of the merger agreement, TriCo will issue $13,090,105 in cash,
723,511 shares of TriCo common stock, and options to purchase 79,587 shares of
TriCo common stock at an average exercise price of $6.22 per share in exchange
for all of the 1,234,375 common shares and options to purchase 79,937 common
shares of North State National Bank outstanding as of April 4, 2003. The shares
of TriCo common stock to be issued were registered on a Form S-4 Registration
Statement declared effective on February 3, 2003. At March 31, 2003, TriCo
Bancshares had 7,080,470 shares of common stock outstanding. Based upon TriCo's
closing stock price of $25.65 on April 4, 2003, the aggregate value of the cash
and the TriCo options and common stock to be issued in the merger would be
approximately $33,195,000.
On April 15, 2003, TriCo filed a current report on Form 8-K, which contains pro
forma financial information concerning the merger.
-11-
Item 2. Management's Discussion and Analysis of Financial Conditions 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. Within Management's Discussion and Analysis of
Financial Condition and Results of Operations, interest income and net interest
income are generally presented on a fully tax-equivalent (FTE) basis.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, intangible assets, and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. (See caption "Allowance for
Loan Losses" for a more detailed discussion).
Results of Operations
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Consolidated Financial Statements of the Company and the Notes thereto.
The Company had quarterly earnings of $3,613,000, or $0.50 per diluted share,
for the three months ended March 31, 2003. These results represent a 6.5%
increase from the $0.47 earnings per diluted share reported for the three months
ended March 31, 2002 on earnings of $3,329,000. The improvement in results from
the year-ago quarter was due to a $543,000 (4.2%) increase in fully
tax-equivalent net interest income to $13,543,000, a $650,000 (81.3%) decrease
in provision for loan losses to $150,000, and a $1,570,000 (41.0%) increase in
noninterest income to $5,396,000. These contributing factors where offset by a
$2,249,000 (21.6%) increase in noninterest expense to $12,651,000 for the
quarter ended March 31, 2003.
Following is a summary of the components of fully taxable equivalent ("FTE") net
income for the periods indicated (dollars in thousands):
Three months ended
March 31,
--------------------------
2003 2002
--------------------------
Net Interest Income (FTE) $13,543 $13,000
Provision for loan losses (150) (800)
Noninterest income 5,396 3,826
Noninterest expense (12,651) (10,402)
Provision for income taxes (FTE) (2,525) (2,295)
--------------------------
Net income $3,613 $3,329
==========================
-12-
Net income for the first quarter of 2003 was $284,000 (8.5%) more than for the
same quarter of 2002. A significant increase in noninterest income (up $1.57
million or 41.0%), a $650,000 (81.3%) decrease in provision for loan losses, and
a $543,000 (4.2%) increase in fully taxable equivalent net interest income more
than offset an increase in noninterest expenses (up $2.25 million or 21.6%). The
increase in noninterest income from the year-ago quarter was mainly due to an
increase in service charges and fee income on deposit products (up $1,527,000 or
77.4% to $3,500,000), and an increase in gain on sale of loans (up $170,000 or
17.7% to $1,133,000). The increase in service charges and fee income was mainly
due to the introduction of an overdraft privilege deposit product in July 2002
that has added a new stream of recurring noninterest income. The increase in
gain on sale of loans is due to the Company's ability to originate and sell an
increased volume of residential real estate mortgage loans in the current
environment of record mortgage refinance. The decrease in provision for loan
losses (down $650,000 or 81.3% to $150,000) was due to stable loan quality and
the maintenance of adequate loss reserve levels. The increase in net interest
income (FTE) was due to an increase in average balance of interest-earning
assets (up $145.7 million or 16.1%) that was partially offset by a 59 basis
point decrease in net interest margin. The increase in noninterest expense was
mainly due to an increase in salary and benefit expense (up $1,138,000 or 19.8%
to $6,877,000). The increase in salary and benefits expense was mainly due to
annual salary increases, increased commission and incentive expense, and new
employees at four new branches the Company opened during 2002. Other noninterest
expense also increased (up $1,111,000 or 23.8% to $5,774,000) due to the new
branch openings in 2002, and expenses related to increased mortgage banking
activity and a new deposit product introduced in July 2002.
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended
March 31,
--------------------------
2003 2002
--------------------------
Interest income $16,349 $15,958
Interest expense (3,115) (3,263)
FTE adjustment 309 305
--------------------------
Net interest income (FTE) $13,543 $13,000
==========================
Average earning assets $1,048,286 $902,596
Net interest margin (FTE) 5.17% 5.76%
The Company's primary source of revenue is net interest income, or the
difference between interest income on earning assets and interest expense in
interest-bearing liabilities. Net interest income (FTE) during the first quarter
of 2003 increased $543,000 (4.2%) from the same period in 2002 to $13,543,000.
The increase in net interest income (FTE) was due to the increased average
balances of earning assets (up $145.7 million or 16.1% to $1.048 billion) that
was partially offset by a 59 basis point decrease in net interest margin (FTE).
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2003 increased $391,000
(2.4%) from the first quarter of 2002. The increase was the net effect of higher
average interest-earning assets (up $145.7 million or 16.1% to $1.048 billion)
that was partially offset by an 85 basis point decrease in the yield on those
average earning assets to 6.36%. The growth in interest-earning assets was led
by a $119.1 million (53.9%) increase in average investment security balances to
$298.7 million, and a $37.9 million (5.9%) increase in average loan balances.
The average balance of federal funds sold decreased $11.3 million (28.4%) to
$28.4 million.
-13-
The average yield on the Company's earning assets decreased to 6.36% for the
quarter ended March 31, 2003 from 7.21% for the quarter ended March 31, 2002.
This downward trend in yields was reflective of general interest rate markets
during much of 2002. In addition, deposit growth outstripped loan growth during
the periods, which resulted in most of the growth in interest-earning assets
being in lower yielding investment securities instead of relatively higher
yielding loans.
Interest Expense
Interest expense decreased $148,000 (4.5%) in the first quarter of 2003 compared
to the year-ago quarter. The decrease was due to a decrease in the average rate
paid on interest-bearing liabilities from 1.82% in the first quarter of 2002 to
1.52% in the first quarter of 2003.
The average balance of interest-bearing liabilities increased $100.3 million
(14.0%) in the first quarter compared to the year-ago quarter. The increase in
interest-bearing liabilities was concentrated in the lower earning
interest-bearing demand deposit (up $15.4 million or 9.0%), and savings deposits
(up $62.7 million or 24.7%). The average balance of the higher earning time
deposits was up $22.2 million (8.2%) from the year-ago quarter. In addition, the
average balance of noninterest-bearing deposits increased $40.5 million (24.2%)
from the year-ago quarter. The average rate paid for all categories of
interest-bearing liabilities decreased from the average rate paid in the
year-ago quarter as a result of general market interest rate changes.
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended
March 31,
-------------------------
2003 2002
-------------------------
Yield on earning assets 6.36% 7.21%
Rate paid on interest-bearing
Liabilities 1.52% 1.82%
-------------------------
Net interest spread 4.84% 5.39%
Impact of all other net
noninterest-bearing funds 0.33% 0.37%
-------------------------
Net interest margin 5.17% 5.76%
=========================
Net interest margin in the first quarter of 2003 decreased 59 basis points
compared to the first quarter of 2002. Throughout much of 2002, the Company was
able to decrease the rates it paid on interest-bearing deposits approximately as
fast as the rates on interest-earning assets decreased. By doing so, the Company
was able to maintain a relatively high net interest margin throughout much of
2002. However, in the fourth quarter of 2002, it became increasingly difficult
to reduce the rates paid on interest-bearing deposits. As a result, the
Company's net interest margin began to decrease. Also, during this time, the
Company grew deposits faster than it grew loans. As a result, much of the
available funds from these deposits were invested in securities rather than
higher yielding loans, and this also contributed to a decrease in net interest
margin.
-14-
Summary of Average Balances, Yields/Rates and Interest Differential
The following table presents, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average earning assets and resulting yields,
and the amount of interest expense paid on interest-bearing liabilities. Average
loan balances include nonperforming loans. Interest income includes proceeds
from loans on nonaccrual loans only to the extent cash payments have been
received and applied to interest income. Yields on securities and certain loans
have been adjusted upward to reflect the effect of income thereon exempt from
federal income taxation at the current statutory tax rate (dollars in
thousands).
For the three months ended
----------------------------------------------------------------
March 31, 2003 March 31, 2002
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- ------------------------------
Assets:
Loans $679,975 $12,989 7.64% $642,082 $13,008 8.10%
Investment securities - taxable 298,737 2,744 3.67% 176,257 2,230 5.06%
Investment securities - nontaxable 41,136 841 8.17% 44,535 859 7.72%
Federal funds sold 28,438 84 1.18% 39,722 166 1.67%
Total earning assets 1,048,286 16,658 6.36% 902,596 16,263 7.21%
Other assets 101,473 87,875
---------- ---------
Total assets $1,149,759 $990,471
========== =========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $187,017 118 0.25% $171,606 122 0.28%
Savings deposits 316,366 720 0.91% 253,679 680 1.07%
Time deposits 292,924 1,959 2.68% 270,692 2,142 3.17%
Other borrowings 22,918 318 5.55% 22,951 319 5.56%
----------------------------- ------------------------------
Total interest-bearing liabilities 819,225 3,115 1.52% 718,928 3,263 1.82%
Noninterest-bearing deposits 207,546 167,052
Other liabilities 21,849 14,986
Shareholders' equity 101,139 89,505
---------- ---------
Total liabilities and
shareholders' equity $1,149,759 $990,471
========== =========
Net interest spread(1) 4.84% 5.39%
Net interest income and interest margin(2) $13,543 5.17% $13,000 5.76%
================== ====================
(1) Net interest spread represents the average yield earned on assets minus the
average rate paid on interest-earning assets minus the average rate paid on
interest-bearing liabilities
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of earning
assets.
-15-
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset & Liability Balances and Yields Earned & Rates Paid
The following table sets forth a summary of the changes in interest income and
interest expense from changes in average asset and liability balances (volume)
and changes in average interest rates for the periods indicated. Changes not
solely attributable to volume or rates have been allocated in proportion to the
respective volume and rate components (dollars in thousands).
Three months ended March 31, 2003
compared with three months
ended March 31, 2002
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $767 (786) (19)
Investment securities 1,666 (1,170) 496
Federal funds sold (47) (35) (82)
---------------------------------
Total earning assets 2,386 (1,991) 395
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 11 (14) (3)
Savings deposits 168 (128) 40
Time deposits 176 (360) (184)
Other borrowings - (1) (1)
---------------------------------
Total interest-bearing liabilities 355 (503) (148)
---------------------------------
Increase (decrease) in Net Interest Income $2,031 ($1,488) $543
=================================
Provision for Loan Losses
The Company provided $150,000 for loan losses in the first quarter of 2003
versus $800,000 in the first quarter of 2002. During the first quarter of 2003,
the Company recorded $234,000 of net loan charge offs versus $521,000 of net
loan charge-offs in the year earlier quarter.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended
March 31,
----------------------
2003 2002
----------------------
Service charges on deposit accounts $2,858 $1,465
ATM fees and interchange 520 373
Other service fees 122 135
Gain on sale of loans 1,133 963
Commissions on sale of
nondeposit investment products 448 538
Increase in cash value of life insurance 139 119
Other noninterest income 176 233
----------------------
Total noninterest income $5,396 $3,826
======================
-16-
Noninterest income for the first quarter of 2003 increased $1,570,000 (41.0%)
from the year-ago quarter. The increase in noninterest income from the year-ago
quarter was mainly due to an increase in service charges on deposit products (up
$1,393,000 or 95.1% to $2,858,000), and an increase in gain on sale of loans (up
$170,000 or 17.7% to $1,133,000). The increase in service charges income was
mainly due to the introduction of an overdraft privilege deposit product in July
2002 that has added a new stream of recurring noninterest income. The increase
in gain on sale of loans is due to the Company's ability to originate and sell
an increased volume of residential real estate mortgage loans in the current
environment of record mortgage refinance. ATM fees and interchange income
increased from the year-ago quarter (up $147,000 or 39.4% to $520,000) due to
expansion of Company's ATM network and increased debit card usage.
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended
March 31,
------------------------
2003 2002
------------------------
Salaries $4,250 $3,645
Commissions and incentives 1,111 851
Employee benefits 1,516 1,243
Equipment 791 688
Occupancy 747 730
Professional fees 574 233
Telecommunications 391 339
Data processing and software 291 238
Advertising and marketing 272 165
Courier service 248 220
ATM network charges 232 192
Intangible amortization 228 228
Postage 198 142
Operational losses 130 39
Assessments 60 56
Other 1,612 1,393
------------------------
Total $12,651 $10,402
========================
Average full time equivalent staff 467 417
Noninterest expense to revenue (FTE) 66.80% 61.82%
Noninterest expense for the first quarter of 2003 increased $2,249,000 (21.6%).
The increase in noninterest expense was mainly due to a $1,138,000 (19.8%)
increase in salary and benefit expense to $6,877,000. The increase in salary and
benefits expense was mainly due to annual salary increases, increased commission
and incentive expense, and new employees at the Company's four newly opened
branches in 2002. Noninterest expense excluding salaries and benefits also
increased (up $1,111,000 or 23.8% to $5,774,000). Approximately $206,000 of this
increase was expenses related to the overdraft privilege product introduced in
July 2002, and included in professional fees. Also related to the overdraft
privilege product introduced in July 2002, was a $75,000 increase in operational
losses from the year-ago quarter. Increased advertising expenses accounted for
$113,000 of the increase in other noninterest expense.
Provision for Income Tax
The effective tax rate for the three months ended March 31, 2003 was 38.0% and
reflects an increase from 37.4% for the three months ended March 31, 2002. The
provision for income taxes for all periods presented is primarily attributable
to the respective level of earnings and the incidence of allowable deductions,
particularly from tax-exempt loans and state and municipal securities.
-17-
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention to ensure collection.
The following is a summary of classified assets on the dates indicated (dollars
in thousands):
At March 31, 2003 At December 31, 2002
------------------------- ------------------------
Gross Guaranteed Net Gross Guaranteed Net
-----------------------------------------------------
Classified loans $49,510 $11,973 $37,537 $52,642 $12,280 $40,062
Other classified assets 1,608 - 1,608 932 - 932
-----------------------------------------------------
Total classified assets $51,118 $11,973 $39,145 $53,574 $12,280 $40,994
=====================================================
Allowance for loan losses/
Classified loans 36.5% 35.1%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies at March 31, 2003, decreased $1.8
million (4.5%) to $39.1 million from $41.0 million at December 31, 2002.
Nonperforming Loans
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 Company takes possession of the collateral.
Loans that are placed on nonaccrual even though the borrowers continue to repay
the loans as scheduled are classified as "performing nonaccrual" and are
included in total nonperforming loans. 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 the process of collection.
When a loan is placed on nonaccrual, any previously accrued but unpaid interest
is reversed. Income on such loans is then recognized only to the extent that
cash is received and where the future collection 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.
Interest income on nonaccrual loans, which would have been recognized during the
three months, ended March 31, 2003, if all such loans had been current in
accordance with their original terms, totaled $345,000. Interest income actually
recognized on these loans during the three months ended March 31, 2003 was
$14,500.
The Company'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.
-18-
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.
As shown in the following table, total nonperforming assets net of guarantees of
the U.S. Government, including its agencies and its government-sponsored
agencies, increased $13.1 million (144%) to $22.2 million during the first three
months of 2003. The increase in nonperforming assets is due to two commercial
real estate loans collateralized by a single building. Nonperforming assets net
of guarantees represent 1.89% of total assets. All nonaccrual loans are
considered to be impaired when determining the need for a specific valuation
allowance. The Company continues to make a concerted effort to work problem and
potential problem loans to reduce risk of loss.
(dollars in thousands):
At March 31, 2003 At December 31, 2002
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $12,943 $8,265 $4,678 $13,199 $8,432 $4,767
Nonperforming, nonaccrual loans 16,163 502 15,661 4,091 718 3,373
------------------------------------------------------
Total nonaccrual loans 29,106 8,767 20,339 17,290 9,150 8,140
Loans 90 days past due and still accruing 271 - 271 40 - 40
------------------------------------------------------
Total nonperforming loans 29,377 8,767 20,610 17,330 9,150 8,180
Other real estate owned 1,608 - 1,608 932 - 932
------------------------------------------------------
Total nonperforming assets $30,985 $8,767 $22,218 $18,262 $9,150 $9,112
======================================================
Nonperforming loans to total loans 2.97% 1.19%
Allowance for loan losses/nonperforming loans 69% 176%
Nonperforming assets to total assets 1.89% 0.80%
Allowance for loan losses to nonperforming assets 64% 158%
Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, the Company
maintains an Allowance for Loan Losses to absorb losses inherent in the
Company's loan portfolio. This is maintained through periodic charges to
earnings. These charges are shown in the Consolidated Income Statements as
provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of
reasons, not all losses are immediately known to the Company and, of those that
are known, the full extent of the loss may not be quantifiable at that point in
time. The balance of the Company's Allowance for Loan Losses is meant to be an
estimate of these unknown but probable losses inherent in the portfolio. For
purposes of this discussion, "loans" shall include all loans and lease contracts
that are part of the Company's portfolio.
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan portfolio, and to a lesser extent the
Company's loan commitments. These assessments include the periodic re-grading of
credits based on changes in their individual credit characteristics including
delinquency, seasoning, recent financial performance of the borrower, economic
factors, changes in the interest rate environment, growth of the portfolio as a
whole or by segment, and other factors as warranted. Loans are initially graded
when originated. They are re-graded as they are renewed, when there is a new
loan to the same borrower, when identified facts demonstrate heightened risk of
nonpayment, or if they become delinquent. Re-grading of larger problem loans
occur at least quarterly. Confirmation of the quality of the grading process is
obtained by independent credit reviews conducted by consultants specifically
hired for this purpose and by various bank regulatory agencies.
-19-
The Company's method for assessing the appropriateness of the allowance includes
specific allowances for identified problem loans and leases as determined by
SFAS 114, formula allowance factors for pools of credits, and allowances for
changing environmental factors (e.g., interest rates, growth, economic
conditions, etc.). Allowance factors for loan pools are based on the previous 5
years historical loss experience by product type. Allowances for specific loans
are based on SFAS 114 analysis of individual credits. Allowances for changing
environmental factors are Management's best estimate of the probable impact
these changes have had on the loan portfolio as a whole. This process is
explained in detail in the notes to the Company's Consolidated Financial
Statements in its Annual Report on Form 10-K for the year ended December 31,
2002.
Based on the current conditions of the loan portfolio, Management believes that
the $14,293,000 allowance for loan losses at March 31, 2003 is adequate to
absorb probable losses inherent in the Company'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 the loan loss provision, net credit losses and
allowance for loan losses for the periods indicated (dollars in thousands):
Three months ended
March 31,
------------------------
2003 2002
------------------------
Balance, beginning of period $14,377 $13,058
Loan loss provision 150 800
Loans charged off (280) (561)
Recoveries of previously
charged-off loans 46 41
------------------------
Net charge-offs (234) (520)
------------------------
Balance, end of period $14,293 $13,338
========================
Allowance for loan losses/loans outstanding 2.06% 2.09%
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management. As
previously announced on October 19, 2001, the Board of Directors approved a plan
to repurchase, as conditions warrant, up to 150,000 shares of the Company's
common stock on the open market or in privately negotiated transactions. The
timing of purchases and the exact number of shares to be purchased will depend
on market conditions. This repurchase plan represented approximately 2.2% of the
Company's 6,992,080 common shares outstanding on October 19, 2001, and is
open-ended. As of this date, the Company has repurchased 118,800 shares under
this plan.
The Company's primary capital resource is shareholders' equity, which was $101.9
million at March 31, 2003. This amount represents an increase of $2.9 million
from December 31, 2002, the net result of comprehensive income for the period
($4.0 million) and the issuance of common shares via the exercise of stock
options ($0.3 million), partially offset by dividends paid ($1.4 million). The
Company's ratio of equity to total assets was 8.66%, 8.87%, and 8.65% as of
March 31, 2003, March 31, 2002, and December 31, 2002, respectively.
-20-
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
To Be Well
At March 31, At Minimum Capitalized Under
---------------- December 31, Regulatory Prompt Corrective
2003 2002 2002 Requirement Action Provisions
------------------------------------------------------------------
Tier I Capital 10.38% 10.86% 10.71% 4.00% 6.00%
Total Capital 11.63% 12.12% 11.97% 8.00% 10.00%
Leverage ratio 8.23% 8.48% 8.27% 4.00% 5.00%
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Company has an Asset and Liability Management Committee (ALCO)
which establishes and monitors guidelines to control the sensitivity of earnings
to changes in interest rates.
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin, net income and market value of equity under changing interest
environments. Market value of equity is the net present value of estimated cash
flows from the Company's assets, liabilities and off-balance sheet items. The
Company uses simulation models to forecast net interest margin, net income and
market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Company is able to estimate
the potential impact of changing interest rates on net interest margin, net
income and market value of equity. A balance sheet forecast is prepared using
inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
- -300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
At March 31, 2003 and 2002, the results of the simulations noted above indicate
that the balance sheet is slightly asset sensitive (earnings increase when
interest rates rise). The magnitude of all the simulation results noted above is
within the Company's policy guidelines. The asset liability management policy
limits aggregate market risk, as measured in this fashion, to an acceptable
level within the context of risk-return trade-offs.
-21-
The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
At March 31, 2003 and 2002, the Company had no derivative financial instruments.
Liquidity
The Company's principal source of asset liquidity is federal funds sold and
marketable investment securities available for sale. At March 31, 2003, federal
funds sold and investment securities available for sale totaled $364 million,
representing an increase of $18 million or 5.2% from December 31, 2002, and an
increase of $86 million or 30.9% from March 31, 2002. In addition, the Company
generates additional liquidity from its operating activities. The Company's
profitability during the first three months of 2003 generated cash flows from
operations of $5.6 million compared to $6.2 million during the first three
months of 2002. Additional cash flows may be provided by financing activities,
primarily the acceptance of deposits and borrowings from banks. Sales and
maturities of investment securities produced cash inflows of $36.9 million
during the three months ended March 31, 2003 compared to $28.7 million for the
three months ended March 31, 2002. During the three months ended March 31, 2003,
the Company invested $53.0 million, $7.2 million, and $13.9 million in
securities, net loan growth, and life insurance policies, respectively, compared
to $27.0 million used to purchase investments and $21.0 million provided by a
net decrease in loan balances, respectively, during the first three months of
2002. These changes in investment, loan, and life insurance balances contributed
to net cash used for investing activities of $38.1 million during the three
months ended March 31, 2003, compared to net cash provided from investing
activities of $22.4 million during the three months ended March 31, 2002.
Financing activities provided net cash of $26.2 million during the three months
ended March 31, 2003, compared to net cash used by financing activities of $8.7
million during the three months ended March 31, 2002. Deposit balance increases
and exercise of common stock options accounted for $27.4 million and $242,000 of
financing sources of funds, respectively, during the three months ended March
31, 2003, compared to deposit balance decreases and repurchases of common stock
that accounted for $7.1 million and $190,000 financing uses of funds,
respectively, during the three months ended March 31, 2002. Dividends paid used
$1.4 million of cash during the three months ended both March 31, 2003 and March
31, 2002. Also, the Company's liquidity is dependent on dividends received from
the Bank. Dividends from the Bank are subject to certain regulatory
restrictions.
Item 4. Controls and Procedures
(a) The Chief Executive Officer, Richard Smith, and the Chief Financial
Officer, Thomas Reddish, evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date within 90 days of the
filing of this report ("Evaluation Date"). Based on that evaluation,
they concluded that as of the Evaluation Date the Company's disclosure
controls and procedures are effective to allow timely communication to
them of information relating to the Company and the Bank required to
be disclosed in its filings with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as
amended ("Exchange Act"). Disclosure controls and procedures are
Company controls and other procedures that are designed to ensure that
information required to be disclosed by the Company in the reports
that it files under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the Evaluation Date.
-22-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; all such actions are of a routine nature and arise in the normal
course of business of the Bank.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation dated May 9, 2003
3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to
TriCo's Form S-4 Registration Statement dated January 16, 2003
(No. 333-102546)
4* Certificate of Determination of Preferences of Series AA Junior
Participating Preferred Stock filed as Exhibit 3.3 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001
10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon
Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated
July 25, 2001
10.2* Form of Change of Control Agreement between TriCo and each of
Craig Carney (dated February 27, 2003), Richard O'Sullivan (date
February 24, 2003), and Thomas Reddish (dated April 10, 2001),
filed as Exhibit 10.9 to TriCo's Report on Form 10-Q for the
quarter ended September 30, 2001
10.3* TriCo's 1993 Non-Qualified Stock Option Plan filed as Exhibit 4.1
to TriCo's Form S-8 Registration Statement dated January 18, 1995
(No. 33-88704)
10.4* TriCo's Non-Qualified Stock Option Plan filed as Exhibit 4.2 to
TriCo's Form S-8 Registration Statement dated January 18, 1995
(No. 33-88704)
10.5* TriCo's Incentive Stock Option Plan filed as Exhibit 4.3 to
TriCo's Form S-8 Registration Statement dated January 18, 1995
(No. 33-88704)
10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to
TriCo's Form S-8 Registration Statement dated August 23, 1995
(No. 33-62063)
10.7* TriCo's 2001 Stock Option Plan filed as Exhibit 4 to TriCo's Form
S-8 Registration Statement dated July 27, 2001 (No. 33-66064)
10.8* Employment Agreement between TriCo and Richard Smith dated April
10, 2001, filed as Exhibit 10.8 to TriCo's Form S-4 Registration
Statement dated January 16, 2003 (No. 333-102546)
-23-
10.9* Tri Counties Bank Executive Deferred Compensation Plan dated
September 1, 1987, as restated April 1, 1992, and amended November
12, 2002, filed as Exhibit 10.9 to TriCo's Form S-4 Registration
Statement dated January 16, 2003 (No. 333-102546)
10.10* Tri Counties Bank Supplemental Retirement Plan for Directors dated
September 1, 1987, as restated January 1, 2001, filed as Exhibit
10.10 to TriCo's Form S-4 Registration Statement dated January 16,
2003 (No. 333-102546)
10.11* Tri Counties Bank Supplemental Executive Retirement Plan effective
September 1, 1987, filed as Exhibit 10.11 to TriCo's Form S-4
Registration Statement dated January 16, 2003 (No. 333-102546)
10.12* Tri Counties Bank Deferred Compensation Plan for Directors
effective April 1, 1992, filed as Exhibit 10.12 to TriCo's Form
S-4 Registration Statement dated January 16, 2003 (No. 333-102546)
10.13 Employment Agreement between TriCo and Richard O'Sullivan dated
April 10, 2001
11.1 Computation of earnings per share
21.1 Tri Counties Bank, a California banking corporation, is the sole
subsidiary of Registrant
99.1 CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Previously filed and incorporated by reference.
(b) Reports on Form 8-K
During the quarter ended March 31, 2003 the Company filed the following
Current Reports on Form 8-K:
Description Date of Report
---------------------------------- ---------------------
Closing of acquisition of North April 15, 2003
State National Bank by TriCo
Bancshares and Tri Counties Bank.
Quarterly results of operations. April 23, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
Date: May 12, 2003 /s/ Thomas J. Reddish
-----------------------------------
Thomas J. Reddish
Vice President and Chief Financial Officer
-24-
CERTIFICATIONS
I, Richard P. Smith, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors;
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Richard P. Smith
-------------------------------------
Richard P. Smith
President and Chief Executive Officer
-25-
I, Thomas J. Reddish, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have;
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors;
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Thomas J. Reddish
-------------------------------------
Thomas J. Reddish
Vice President and Chief Financial
Officer
-26-
EXHIBITS
Exhibit 3.1
Restated Articles of Incorporation dated May 9, 2003
CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION
OF
TRICO BANCSHARES
The undersigned certify that:
1. They are the president and the secretary, respectively, of TriCo
Bancshares, a California corporation.
2. The original Articles of Incorporation of this corporation were filed
by the Secretary of State on October 13, 1981.
3. The Articles of Incorporation of this corporation as amended to the
date of this Certificate are restated on the attached Exhibit which is
incorporated by reference as if fully set forth herein.
4. The foregoing Restated Articles of Incorporation have been duly
approved by the Board of Directors.
5. The Restated Articles of Incorporation shall be, and said Articles
are, amended through the date of the filing of this Certificate.
6. These Restated Articles of Incorporation do not alter or amend in any
respect the Articles of Incorporation of this corporation and,
pursuant to Section 910 of the California Corporations Code, these
Restated Articles may be approved by the Board of Directors alone and
do not require the approval of the outstanding shares.
7. We further declare, under penalty of perjury under the laws of the
State of California, that the matters set forth in this Certificate
are true and correct of our own knowledge.
Dated: May 9, 2003.
/s/ Richard P. Smith
---------------------------------------------
Richard P. Smith, President
/s/ Wendell J. Lundberg
---------------------------------------------
Wendell J. Lundberg, Secretary
-27-
EXHIBIT TO CERTIFICATE OF RESTATED ARTICLES
OF INCORPORATION OF TRICO BANCSHARES
RESTATED ARTICLES OF INCORPORATION
OF
TRICO BANCSHARES
First
The name of this Corporation is TriCo Bancshares.
Second
The purpose of this Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
Third
3.1 The Corporation is authorized to issue two classes of shares designated
"Preferred Stock" and "Common Stock," respectively. The number of shares of
Preferred Stock authorized to be issued is one million (1,000,000), and the
number of shares of Common Stock authorized to be issued is twenty million
(20,000,000).
3.2 The Preferred Stock may be divided into such number of series as the
Board of Directors may determine. The Board of Directors is authorized to
determine and alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock, and to fix the
number of shares of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any series subsequent to the issue of shares of that
series.
3.3 Series A Preferred Stock. The rights, preferences and privileges of the
Series A Preferred Stock of the Corporation are as set forth in this Section
3.3.
3.3.1 Designation and Amount. Thirty Thousand Six Hundred (30,600) of
the shares of the Preferred Stock of the Corporation are designated Series
A Preferred Stock (hereinafter referred to as "Series A Stock").
-28-
3.3.2 Dividends.
(a) The holders of shares of Series A Stock shall be entitled to
receive cash dividends, when and as declared by the Board of Directors out
of funds legally available for the purpose, from the date of issue of such
shares to and including August 31, 1985, and for each Dividend Period
commencing on the first day of each month in each year after August 31,
1985 and ending on and including the day next preceding the first day of
the next month (such period ending August 31, 1985 and each of such other
periods herein referred to in this Section 3.3 as a "Dividend Period"), at
an annual rate of $11.00 per share. The amount of dividend per share
payable for the portion of the Dividend Period from the date of original
issue of a share of Series A Stock to and including August 31, 1985 and for
any other Dividend Period more or less than a full Dividend Period shall be
computed on the basis of a 360-day year of twelve 30-day months and the
actual number of days elapsed in the period for which payable. The amount
of dividend per share payable for each full Dividend Period commencing
after August 31, 1985 shall be computed by dividing the annual dividend
rate for each Dividend Period by twelve. Dividends shall be payable when
and as declared by the Board of Directors, out of funds legally available
therefor, to holders of record on such respective dates not exceeding 15
days preceding the payment date thereof as may be determined by the Board
of Directors in advance of such payment date. Dividends on account of
arrears for any past Dividend Periods may be declared and paid at any time,
without reference to any regular dividend payment date, to holders of
record on such date not exceeding 15 days preceding the payment date
thereof as may be fixed by the Board of Directors. No dividends shall be
declared on any other series or class or classes of Preferred Stock ranking
on a parity (as that term is defined in Section 3.3.5(d)) with the Series A
Stock as to dividends in respect of any Dividend Period unless there shall
likewise be or have keen declared on all shares of Series A Stock at the
time outstanding like dividends for all Dividend Periods coinciding with or
ending before such Dividend Period, ratably in proportion to the respective
dividend rates fixed for all such other series or class or classes of
Preferred Stock and the Series A Stock. Dividends shall be cumulative and
will accrue on each share of Series A Stock from the date of original
issuance thereof. No interest, or sum of money in lieu of interest, shall
be payable in respect of any dividend payment or payments which may be in
arrears.
(b) If dividends at the rate per share set out in Section 3.3.2(a) for
any Dividend Period shall not have been declared and paid or set apart for
payment on all outstanding shares of Series A Stock for such Dividend
Period and all preceding Dividend Periods from and after the date of issue
thereof, then, until the aggregate deficiency shall be declared and fully
paid or set apart for payment, the Corporation shall not (i) declare or pay
or set apart for payment any dividends or make any other distribution on
the Common Stock of the Corporation or any other capital stock of the
Corporation ranking junior to the Series A Stock with respect to the
payment of dividends or distribution of assets on liquidation, dissolution
or winding up of the Corporation (which for all purposes shall mean any
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary) (the Common Stock and such other stock being
herein referred to in this Section 3.3 as "Junior Stock"), other than
dividends or distributions paid in shares of, or options, warrants or
rights to subscribe for or purchase shares of, Junior Stock, or (ii) make
any payment on account of the purchase, redemption or other retirement of
any Junior Stock.
3.3.3 Liquidation Preference. Upon the voluntary or involuntary
liquidation, winding up or dissolution of the Corporation, out of the
assets available for distribution to shareholders the holders of Series A
Stock shall be entitled to receive, in preference to any payment on the
Junior Stock, an amount equal to $100.00 per share plus cumulative
dividends as provided in Section 3.3.2 above accrued and unpaid to the date
payment is made available to the Series A Stock and no more. Subject to the
rights of the holders of shares of any series or class or classes of stock
ranking on a parity with or prior to the Series A Stock upon liquidation,
dissolution or winding up, after the full preferential liquidation amount
has been paid to, or determined and set apart for, the Series A Stock, the
remaining assets shall be paid to the Junior Stock. If upon any
liquidation, dissolution or winding up of the Corporation, the assets of
the Corporation, or proceeds thereof, distributable among the holders of
the shares of the Series A Stock shall be insufficient to pay in full the
preferential amount aforesaid and liquidating payments on any other
Preferred Stock ranking, as to liquidation, dissolution or winding up, on a
parity with the Series A Stock, then such assets, or the proceeds thereof,
shall be distributed among the shareholders of Series A Stock and any such
other Preferred Stock ratably in accordance with the respective amounts
which would be payable on such shares of Series A Stock and any such other
Preferred Stock if all amounts payable thereon were paid in full. A
reorganization shall not be considered to be a liquidation, winding up or
dissolution within the meaning of this Section 3.3.3 and in such event the
Series A Stock shall be entitled only to the rights provided in the plan of
reorganization and Chapters 12 and 13 of the California General Corporation
Law and elsewhere in the Corporation's Articles of Incorporation.
-29-
3.3.4 Redemption.
(a) The Series A Stock is subject to redemption, out of funds legally
available therefor, in whole, or from time to time in part, at the option
of the board of directors of the Corporation at or any time after July 1,
1988 or prior thereto upon the approval of at least a majority of the
outstanding shares of Series A Stock. If only a part of the Series A Stock
is to be redeemed, the redemption shall be carried out pro rata (as nearly
as may be). The redemption price shall be $100.00 per share plus cumulative
dividends as provided in Section 3.3.2 above accrued and unpaid to the date
fixed for redemption (herein called the "redemption price"). In the case of
a redemption of less than all of the Series A Stock at anytime outstanding,
no such shares may be redeemed until all dividends accrued and unpaid on
all Series A Stock then outstanding, other than the shares to be redeemed,
shall have been paid or declared and the full amount thereof set apart for
payment.
(b) The Corporation shall mail a notice of redemption to each holder
of record of shares to be redeemed addressed to the holder at the address
of such holder appearing on the books of the Corporation or given by the
holder to the Corporation for the purpose of notice, or if no such address
appears or is given at the place where the principal executive office of
the Corporation is located, not earlier than 60 nor later than 20 days
before the date fixed for redemption. The notice of redemption shall
include (i) the class of shares or the part of a class of shares to be
redeemed, (ii) the date fixed for redemption, (iii) the redemption price
and (iv) the place at which the shareholders may obtain payment of the
redemption price upon surrender of their share certificates. If funds are
available on the date fixed for the redemption, then whether or not the
share certificates are surrendered for payment of the redemption price, the
shares shall no longer be outstanding and the holders thereof shall cease
to be shareholders of the Corporation with respect to the shares redeemed
on and after the date fixed for redemption and shall be entitled only to
receive the redemption price without interest upon surrender of the share
certificate. If less than all the shares represen