UNITED STATES
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, 2004
TriCo Bancshares
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(Exact name of Registrant as specified in its charter)
California 94-2792841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(530) 898-0300
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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(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
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES X NO
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The aggregate market value of the voting common stock held by non-affiliates of
the Registrant, as of March 9, 2005, was approximately $232,175,000. This
computation excludes a total of 4,798,532 shares that 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 common stock, as of March 9,
2005, was 15,745,017 shares of common stock, without par value.
The following documents are incorporated herein by reference into the Part III
of this Form 10-K: Registrant's Proxy Statement for use in connection with its
2005 Annual Meeting of Shareholders. Except with respect to information
specifically incorporated by reference in the Form 10-K, the Proxy Statement is
not deemed to be filed as part hereof.
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.
TABLE OF CONTENTS
Page Number
PART I
Item 1 Business 2
Item 2 Properties 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 11
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 34
Item 8 Financial Statements and Supplementary Data 35
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 70
Item 9A Controls and Procedures 70
Item 9B Other Information 70
PART III
Item 10 Directors and Executive Officers of the Registrant 71
Item 11 Executive Compensation 71
Item 12 Security Ownership of Certain Beneficial Owners
and Management, and Related Stockholder Matters 71
Item 13 Certain Relationships and Related Transactions 71
Item 14 Principal Accountant Fees and Services 71
PART IV
Item 15 Exhibits and Financial Statement Schedules 71
Signatures 75
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K 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, these generally indicate
that we are 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 slowdown in the national and California economies;
- 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 and interest rate policies of
the Federal Reserve Board;
- 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;
- asset/liability matching risks and liquidity risks;
- changes in the level of nonperforming assets and charge-offs;
- acts of war and political instability;
- inflation, interest rate, securities market and monetary fluctuations;
- changes in the financial performance or condition of the Company's
borrowers;
- changes in the competitive environment among financial holding
companies;
- changes in accounting policies as may be adopted by regulatory
agencies, as well as the Public Company Accounting Oversight Board,
the Financial Accounting Standards Board and other accounting standard
setters; and
- changes in the Company's compensation and benefit plans.
PART I
ITEM 1. BUSINESS
Information About TriCo Bancshares' Business
TriCo Bancshares (the "Company" or "TriCo") was incorporated in 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, the shareholders of Tri Counties Bank became the
shareholders of TriCo and Tri Counties Bank became a wholly owned subsidiary of
TriCo. At that time, TriCo became a bank holding company subject to the
supervision of the Board of Governors of the Federal Reserve System ("FRB")
under the Bank Holding Company Act of 1956, as amended. Tri Counties Bank
remains subject to the supervision of the California Department of Financial
Institutions and the Federal Deposit Insurance Corporation ("FDIC"). On July 31,
2003, the Company formed a subsidiary business trust, TriCo Capital Trust I, to
issue trust preferred securities. On June 22, 2004, the Company formed a
subsidiary business trust, TriCo Capital Trust II, to issue trust preferred
securities. See Note 8 in the financial statements at Item 8 of this report for
a discussion about the Company's issuance of trust preferred securities. Tri
Counties Bank, TriCo Capital Trust I and TriCo Capital Trust II currently are
the only subsidiaries of TriCo and TriCo is not conducting any business
operations independent of Tri Counties Bank, TriCo Capital Trust I and TriCo
Capital Trust II.
For financial reporting purposes, the financial statements of the Bank are
consolidated into the financial statements of the Company. Historically, issuer
trusts, such as TriCo Capital Trust I and TriCo Capital Trust II, that issued
trust preferred securities have been consolidated by their parent companies and
trust preferred securities have been treated as eligible for Tier 1 capital
treatment by bank holding companies under FRB rules and regulations relating to
minority interests in equity accounts of consolidated subsidiaries. Applying the
provisions of the Financial Accounting Standards Board Revised Interpretation
No. 46 (FIN 46R), the Company is no longer permitted to consolidate such issuer
trusts beginning on December 31, 2003. Although the FRB has stated in its July
2, 2003 Supervisory Letter that trust preferred securities will be treated as
Tier 1 capital until notice is given to the contrary, the Supervisory Letter
also indicates that the FRB will review the regulatory implications of any
accounting treatment changes and will provide further guidance if necessary or
warranted.
On April 4, 2003, TriCo Bancshares acquired North State National Bank, a
national banking organization located in Chico, California ("North State"), by
the merger of North State into its wholly owned subsidiary, Tri Counties Bank.
The acquisition and the related merger agreement dated October 3, 2002, was
approved by the California Department of Financial Institutions, the FDIC, and
the shareholders of North State on March 4, March 7, and March 19, 2003,
respectively. At the time of the acquisition, North State had total assets of
$140 million, investment securities of $41 million, loans of $76 million, and
deposits of $126 million. The acquisition was accounted for using the purchase
method of accounting. The amount of goodwill recorded as of the merger date,
which represented the excess of the total purchase price over the estimated fair
value of net assets acquired, was approximately $15.5 million. The Company
recorded a core deposit intangible, which represents the excess of the fair
value of North State's deposits over their book value on the acquisition date,
of approximately $3.4 million. This core deposit intangible is scheduled to be
amortized over a seven-year average life.
Under the terms of the merger agreement, TriCo paid $13,090,057 in cash, issued
723,512 shares of TriCo common stock, and issued 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 outstanding as of April 4, 2003.
Additional information concerning the Company can be found on our website at
www.tcbk.com. Copies of our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports are
available free of charge through our website at Investor Information---"SEC
Filings" and "Annual Reports" as soon as reasonably practicable after the
Company files these reports to the Securities and Exchange Commission. The
information on our website is not incorporated into this annual report.
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Business of Tri Counties Bank
Tri Counties 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. Tri Counties Bank engages in the general commercial banking
business in the California counties of Butte, Contra Costa, Del Norte, Fresno,
Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer,
Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo and Yuba.
Tri Counties Bank currently operates from 33 traditional branches and 13
in-store branches.
General Banking Services
The Bank conducts a commercial banking business including accepting demand,
savings and time deposits and making commercial, real estate, and consumer
loans. It also offers installment note collection, issues cashier's checks and
money orders, sells travelers checks and provides safe deposit boxes and other
customary banking services. Brokerage services are provided at the Bank's
offices by the Bank's association with Raymond James Financial Services, Inc.,
an independent financial services provider and broker-dealer. The Bank does not
offer trust services or international banking services.
The Bank has emphasized retail banking since it opened. Most of the Bank's
customers are retail customers and small to medium-sized businesses. 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 northern and central California where its
branches are located. At December 31, 2004, the total of the Bank's consumer
installment loans net of deferred fees outstanding was $410,198,000 (35.0%), the
total of commercial loans outstanding was $140,332,000 (11.9%), and the total of
real estate loans including construction loans of $78,064,000 was $622,437,000
(53.1%). 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.
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. with some open until 8:00 p.m.
Monday through Saturday and 11:00 a.m. to 5:00 p.m. on Sunday.
The Bank offers 24-hour ATMs at almost all branch locations. The 58 ATMs are
linked to several national and regional networks such as CIRRUS and STAR. In
addition, banking by telephone on a 24-hour toll-free number is available to all
customers. This service allows a customer to obtain account balances and most
recent transactions, transfer moneys between accounts, make loan payments, and
obtain interest rate information.
In February 1998, the Bank became the first bank in the Northern Sacramento
Valley to offer banking services on the Internet. This banking service provides
customers one more tool for access to their accounts.
Other Activities
The Bank may in the future engage in other businesses either directly or
indirectly through subsidiaries acquired or formed by the Bank subject to
regulatory constraints. See "Regulation and Supervision."
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Employees
At December 31, 2004, the Company and the Bank employed 633 persons, including
five executive officers. Full time equivalent employees were 549. 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 of Northern and Central California specifically, is highly competitive with
respect to both loans and deposits. It is dominated by a relatively small number
of national and regional banks with many offices operating over a wide
geographic area. Among the advantages such major banks have over the Bank is
their ability to finance wide ranging advertising campaigns and to allocate
their investment assets to regions of high yield and demand. By virtue of their
greater total capitalization such institutions have substantially higher lending
limits than does the Bank.
In addition to competing with savings institutions, commercial banks compete
with other financial markets for funds as a result of the deregulation of the
financial services industry. Yields on corporate and government debt securities
and other commercial paper may be higher than on deposits, and therefore affect
the ability of commercial banks to attract and hold deposits. Commercial banks
also compete for available funds with money market instruments and mutual funds.
During past periods of high interest rates, money market funds have provided
substantial competition to banks for deposits and they may continue to do so in
the future. Mutual funds are also 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.
Regulation and Supervision
As a consequence of the extensive regulation of commercial banking activities in
California and the United States, the business of the Company and the Bank are
particularly susceptible to changes in state and federal legislation and
regulations, which may have the effect of increasing the cost of doing business,
limiting permissible activities or increasing competition. Following is a
summary of some of the laws and regulations which effect the business. This
summary should be read with the management's discussion and analysis of
financial condition and results of operations included at Item 7 of this report.
As a registered bank holding company under the Bank Holding Company Act of 1956
(the "BHC Act"), the Company is subject to the regulation and supervision of the
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 generally prohibited from engaging in, or acquiring direct or
indirect control of any company engaged in non-banking activities, unless the
FRB by order or regulation has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Notwithstanding this prohibition, under the Financial Services Modernization Act
of 1999, the Company may engage in any activity, and may acquire and retain the
shares of any company engaged in any activity, that the FRB, in coordination
with the Secretary of the Treasury, determines (by regulation or order) to be
financial in nature or incidental to such financial activities. Furthermore,
such law dictates several activities that are considered to be financial in
nature, and therefore are not subject to FRB approval.
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The Bank, as a state-chartered bank, is subject to regulation, supervision and
regular examination by the California Department of Financial Institutions
("DFI") and is also subject to the regulations of the FDIC. Federal and
California statutes and regulations relate to many aspects of the Bank's
operations, some of which are described below. The DFI regulates the number and
location of branch offices and may permit a bank to maintain branches only to
the extent allowable under state law for state banks. California law presently
permits a bank to locate a branch in any locality in California.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act was enacted in 1999 and became effective in 2000. The
act is a financial modernization law that is the result of a decade of debate in
the Congress regarding a fundamental reformation of the nation's financial
system. The law is subdivided into seven titles, by functional area. Title I
acts to facilitate affiliations among banks, insurance companies and securities
firms. Title II narrows the exemptions from the securities laws previously
enjoyed by banks, requires the FRB and the Securities and Exchange Commission
("SEC") to work together to draft rules governing certain securities activities
of banks and creates a new, voluntary investment bank holding company. Title III
restates the proposition that the states are the functional regulators for all
insurance activities, including the insurance activities by depository
institutions. The law encourages the states to develop uniform or reciprocal
rules for the licensing of insurance agents. Title IV prohibits the creation of
additional unitary thrift holding companies. Title V imposes significant
requirements on financial institutions related to the transfer of nonpublic
personal information. These provisions require each institution to develop and
distribute to accountholders an information disclosure policy, and requires that
the policy allow customers to, and for the institution to honor a customer's
request to, "opt-out" of the proposed transfer of specified nonpublic
information to third parties. Title VI reforms the Federal Home Loan Bank system
to allow broader access among depository institutions to the systems advance
programs, and to improve the corporate governance and capital maintenance
requirements for the system. Title VII addresses a multitude of issues including
disclosure of ATM surcharging practices, disclosure of agreements among
non-governmental entities and insured depository institutions which donate to
non-governmental entities regarding donations made in connection with the
Community Reinvestment Act and disclosure by the recipient non-governmental
entities of how such funds are used. Additionally, the law extends the period of
time between Community Reinvestment Act examinations of community banks.
The Company has undertaken efforts to comply with all provisions of the
Gramm-Leach-Bliley Act and all implementing regulations, including the
development of appropriate policies and procedures to meet their
responsibilities in connection with the privacy provisions of Title V of that
act.
Safety and Soundness Standards
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
implemented certain specific restrictions on transactions and required the
regulators to adopt overall safety and soundness standards for depository
institutions related to internal control, loan underwriting and documentation,
and asset growth. Among other things, FDICIA limits the interest rates paid on
deposits by undercapitalized institutions, the use of brokered deposits and the
aggregate extension of credit by a depository institution to an executive
officer, director, principal stockholder or related interest, and reduces
deposit insurance coverage for deposits offered by undercapitalized institutions
for deposits by certain employee benefits accounts.
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The federal financial institution agencies published a final rule effective on
August 9, 1995, implementing safety and soundness standards. The FDICIA added a
new Section 39 to the Federal Deposit Insurance Act which required the agencies
to establish safety and soundness standards for insured financial institutions
covering:
- internal controls, information systems and internal audit systems;
- loan documentation;
- credit underwriting;
- interest rate exposure;
- asset growth;
- compensation, fees and benefits;
- asset quality, earnings and stock valuation; and
- excessive compensation for executive officers, directors or principal
shareholders which could lead to material financial loss.
The agencies issued the final rule in the form of guidelines only for
operational, managerial and compensation standards and reissued for comment
proposed standards related to asset quality and earnings which are less
restrictive than the earlier proposal in November 1993. Unlike the earlier
proposal, the guidelines under the final rule do not apply to depository
institution holding companies and the stock valuation standard was eliminated.
If an agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial institution
to submit to the agency an acceptable plan to achieve compliance with the
standard. If the agency requires submission of a compliance plan and the
institution fails to timely submit an acceptable plan or to implement an
accepted plan, the agency must require the institution to correct the
deficiency. Under the final rule, an institution must file a compliance plan
within 30 days of a request to do so from the institution's primary federal
regulatory agency. The agencies may elect to initiate enforcement action in
certain cases rather than rely on an existing plan particularly where failure to
meet one or more of the standards could threaten the safe and sound operation of
the institution.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution such as
the Bank, to declare a cash dividend or other distribution with respect to
capital is subject to statutory and regulatory restrictions which limit the
amount available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions. FDICIA prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions, including dividends, if, after such transaction,
the institution would be undercapitalized. Additionally, under FDICIA, a bank
may not make any capital distribution, including the payment of dividends, if
after making such distribution the bank would be in any of the
"under-capitalized" categories under the FDIC's Prompt Corrective Action
regulations.
Under the Financial Institution's Supervisory Act, the FDIC also has the
authority to prohibit a bank from engaging in business practices that the FDIC
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of a bank and other factors that the FDIC could assert that the
payment of dividends or other payments in some circumstances might be such an
unsafe or unsound practice and thereby prohibit such payment.
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).
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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.
Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention on compliance with
consumer protection laws and their implementing regulations. Examination and
enforcement have become more intense in nature, and insured institutions have
been advised to monitor carefully compliance with such laws and regulations. The
Company is subject to many federal consumer protection statues and regulations,
some of which are discussed below.
The Community Reinvestment Act of 1977 is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. This act specifically directs the federal
regulatory agencies to assess a bank's record of helping meet the credit needs
of its entire community, including low- and moderate-income neighborhoods,
consistent with safe and sound practices. This act further requires the agencies
to take a financial institution's record of meeting its community credit needs
into account when evaluating applications for, among other things, domestic
branches, mergers or acquisitions, or holding company formations. The agencies
use the Community Reinvestment Act assessment factors in order to provide a
rating to the financial institution. The ratings range from a high of
"outstanding" to a low of "substantial noncompliance."
The Equal Credit Opportunity Act generally prohibits discrimination in any
credit transaction, whether for consumer or business purposes, on the basis of
race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act. The
Truth-in-Lending Act is designed to ensure that credit terms are disclosed in a
meaningful way so that consumers may compare credit terms more readily and
knowledgeably. As a result of the such act, all creditors must use the same
credit terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the total payments and
the payment schedule, among other things.
The Fair Housing Act regulates many practices, including making it unlawful for
any lender to discriminate in its housing-related lending activities against any
person because of race, color, religion, national origin, sex, handicap or
familial status. A number of lending practices have been found by the courts to
be, or may be considered, illegal under this Act, including some that are not
specifically mentioned in the Act itself. The Home Mortgage Disclosure Act grew
out of public concern over credit shortages in certain urban neighborhoods and
provides public information that will help show whether financial institutions
are serving the housing credit needs of the neighborhoods and communities in
which they are located. This act also includes a "fair lending" aspect that
requires the collection and disclosure of data about applicant and borrower
characteristics as a way of identifying possible discriminatory lending patterns
and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act requires lenders to provide
borrowers with disclosures regarding the nature and cost of real estate
settlements. Also, this act prohibits certain abusive practices, such as
kickbacks, and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursements and other
penalties. Due to heightened regulatory concern related to compliance with these
acts generally, the Company may incur additional compliance costs or be required
to expend additional funds for investments in their local community.
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USA Patriot Act of 2001
The USA Patriot Act was enacted in 2001 to combat money laundering and terrorist
financing. The impact of the Patriot Act on financial institutions is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and requires various regulations,
including:
- Due diligence requirements for financial institutions that administer,
maintain, or manage private bank accounts or correspondent accounts
for non-U.S. persons;
- Standards for verifying customer identification at account opening;
- Rules to promote cooperation among financial institutions, regulators,
and law enforcement entities to assist in the identification of
parties that may be involved in terrorism or money laundering;
- Reports to be filed by non-financial trades and business with the
Treasury Department's Financial Crimes Enforcement Network for
transactions exceeding $10,000; and
- The filing of suspicious activities reports by securities brokers and
dealers if they believe a customer may be violating U.S. laws and
regulations.
Capital Requirements
Federal regulation imposes upon all financial institutions a variable system of
risk-based capital guidelines designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to promote uniformity in the definition of bank
capital uniform nationally.
The Bank and the Company are subject to the minimum capital requirements of the
FDIC and the FRB, respectively. As a result of these requirements, the growth in
assets is limited by the amount of its capital accounts as defined by the
respective regulatory agency. Capital requirements may have an effect on
profitability and the payment of dividends on the common stock of the Bank and
the Company. If an entity 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.
The FRB, and the FDIC have adopted guidelines utilizing a risk-based capital
structure. Qualifying capital is divided into two tiers. Tier 1 capital consists
generally of common stockholders' equity, qualifying noncumulative perpetual
preferred stock, qualifying cumulative perpetual preferred stock (up to 25% 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% 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% 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. Under these risk-based capital
guidelines, the Bank and the Company are required to maintain capital equal to
at least 8% of its assets, of which at least 4% must be in the form of Tier 1
capital.
The guidelines also require the Company and the Bank to maintain a minimum
leverage ratio of 4% of Tier 1 capital to total assets (the "leverage ratio").
The leverage ratio is determined by dividing an institution's Tier 1 capital by
its quarterly average total assets, less goodwill and certain other intangible
assets. The leverage ratio constitutes a minimum requirement for the most
well-run banking organizations. See Note 19 in the financial statements at Item
8 of this report for a discussion about the Company's risk-based capital ratios.
Prompt Corrective Action
Prompt Corrective Action Regulations of the federal bank regulatory agencies
establish five capital categories in descending order (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized), assignment to which depends upon the institution's
total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage
ratio. Institutions classified in one of the three undercapitalized categories
are subject to certain mandatory and discretionary supervisory actions, which
include increased monitoring and review, implementation of capital restoration
plans, asset growth restrictions, limitations upon expansion and new business
activities, requirements to augment capital, restrictions upon deposit gathering
and interest rates, replacement of senior executive officers and directors, and
requiring divestiture or sale of the institution. The Bank has been classified
as well-capitalized since adoption of these regulations.
-8-
Impact of Monetary Policies
Banking is a business that depends on interest rate differentials. In general,
the difference between the interest paid by a bank on its deposits and other
borrowings, and the interest rate earned by banks on loans, securities and other
interest-earning assets comprises the major source of banks' earnings. Thus, the
earnings and growth of banks are subject to the influence of economic conditions
generally, both domestic and foreign, and also to the monetary and fiscal
policies of the United States and its agencies, particularly the FRB. The FRB
implements national monetary policy, such as seeking to curb inflation and
combat recession, by its open-market dealings in United States government
securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements and through adjustments to the
discount rate applicable to borrowings by banks which are members of the FRB.
The actions of the FRB in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates. The nature and timing
of any future changes in such policies and their impact on the Company cannot be
predicted. In addition, adverse economic conditions could make a higher
provision for loan losses a prudent course and could cause higher loan loss
charge-offs, thus adversely affecting the Company's net earnings.
Insurance of Deposits
The Bank's deposit accounts are insured up to a maximum of $100,000 per
depositor by the FDIC. The FDIC issues regulations and generally supervises the
operations of its insured banks. This supervision and regulation is intended
primarily for the protection of depositors, not shareholders.
As of December 31, 2004, the deposit insurance premium rate was $0.0144 per
$100.00 in deposits. In November 1990, federal legislation was passed which
removed the cap on the amount of deposit insurance premiums that can be charged
by the FDIC. Under this legislation, the FDIC is able to increase deposit
insurance premiums as it sees fit. This could result in a significant increase
in the cost of doing business for the Bank in the future. The FDIC now has
authority to adjust deposit insurance premiums paid by insured banks every six
months.
Securities Laws
The Company is subject to the periodic reporting requirements of the Securities
and Exchange Act of 1934, as amended, which include filing annual, quarterly and
other current reports with the Securities and Exchange Commission.
The Sarbanes-Oxley Act was enacted in 2002 to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to securities
laws. Among other things, this act:
- Prohibits a registered public accounting firm from performing
specified nonaudit services contemporaneously with a mandatory audit;
- Requires the chief executive officer and chief financial officer of an
issuer to certify each annual or quarterly report filed with the
Securities and Exchange Commission;
- Requires an issuer to disclose all material off-balance sheet
transactions that may have a material effect on an issuer's financial
status; and
- Prohibits insider transactions in an issuer's stock during lock-out
periods of an issuer's pension plans.
The Company is also required to comply with the rules and regulations of the
Nasdaq Stock Market, Inc., on which its stock is listed.
-9-
ITEM 2. PROPERTIES
The Company is engaged in the banking business through 46 offices in 22 counties
in Northern and Central California including nine offices in Butte County, eight
in Shasta County, three each in Sacramento and Siskiyou Counties, two each in
Glenn, Sutter, Lassen, Yuba, and Stanislaus Counties, and one each in Madera,
Merced, Lake, Mendocino, Del Norte, Tehama, Nevada, Contra Costa, Kern, Tulare,
Placer, Yolo and Fresno Counties. All offices are constructed and equipped to
meet prescribed security requirements.
The Company owns 17 branch office locations and one administrative building and
leases 29 branch office locations and 5 administrative facilities. Most of the
leases contain multiple renewal options and provisions for rental increases,
principally for changes in the cost of living index, property taxes and
maintenance.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries, are party to any material pending
legal proceeding, nor is their property the subject of any material pending
legal proceeding, except routine legal proceedings arising in the ordinary
course of their business. None of these proceedings is expected to have a
material adverse impact upon the Company's business, consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders during the fourth
quarter of 2004.
-10-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Market Prices and Dividends
The Company's common stock is traded on the NASDAQ National Market System
("NASDAQ") under the symbol "TCBK." The following table shows the high and the
low prices for the common stock, for each quarter in the past two years, as
reported by NASDAQ1:
=============================================
2004: High Low
---------------------------------------------
First quarter $18.69 $15.78
Second quarter $19.19 $16.76
Third quarter $20.99 $16.94
Fourth quarter $24.25 $20.43
2003:
First quarter $13.38 $12.15
Second quarter $13.00 $12.05
Third quarter $14.93 $12.60
Fourth quarter $17.09 $14.90
=============================================
1Stock prices adjusted to reflect 2-for-1 stock split effected April 30, 2004.
As of March 9, 2005 there were approximately 1,793 shareholders of record of the
Company's common stock.
Effective April 4, 2003, the Company (i) issued 1,447,024 shares of its common
stock pursuant to a registration statement on Form S-4, (ii) issued options to
purchase 159,174 shares of its common stock, and (iii) paid $13,090,057 in cash
to the former shareholders of North State National Bank. Additional information
concerning this acquisition is found under Item 1 of this report.
The Company has paid cash dividends on its common stock in every quarter since
March 1990, and it is currently the intention of the Board of Directors of the
Company to continue payment of cash dividends on a quarterly basis. There is no
assurance, however, that any dividends will be paid since they are dependent
upon earnings, financial condition and capital requirements of the Company and
the Bank. As of December 31, 2004, $41,363,000 was available for payment of
dividends by the Company to its shareholders, under applicable laws and
regulations. The Company paid cash dividends of $0.11 per common share in each
of the quarters ended June 30, September 30, and December 31, 2004 and $0.10 per
common share in the quarter ended March 31, 2004 and each of the quarters ended
March 31, June 30, September 30, and December 31, 2003.
Stock Based Compensation Plans
The following table shows shares reserved for issuance for outstanding options,
stock appreciation rights and warrants granted under our equity compensation
plans as of December 31, 2004. All of our equity compensation plans have been
approved by shareholders.
(a) (c) Number of securities
Number of securities (b) remaining available for
to be issued upon Weighted average issuance under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
- -----------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by shareholders - N/A -
Equity compensation plans
approved by shareholders 1,661,547 $10.52 613,940
-----------------------------------------------------------------------
Total 1,661,547 $10.52 613,940
-11-
Stock Repurchase Plan
The Company adopted a stock repurchase plan on July 31, 2003, which was amended
on March 11, 2004 for the repurchase of up to 500,000 shares of the Company's
common stock from time to time as market conditions allow. The 500,000 shares
authorized for repurchase under this plan represented approximately 3.2% of the
Company's approximately 15,704,000 common shares outstanding as of July 31,
2003. This plan has no stated expiration date for the repurchases. As of
December 31, 2004, the Company had purchased 222,600 shares under this plan as
adjusted for the 2-for-1 stock split in the form of a common stock dividend
effective April 30, 2004. The following table shows the repurchases made by the
Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the
Exchange Act) during the fourth quarter of 2004:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number
of Shares purchased paid per share shares purchased as of shares that may yet
part of publicly be purchased under the
announced plans or plans or programs
programs
- -----------------------------------------------------------------------------------------------------
Oct. 1-31, 2004 - - - 277,400
Nov. 1-30, 2004 - - - 277,400
Dec. 1-31, 2004 - - - 277,400
- -----------------------------------------------------------------------------------------------------
Total - - - 277,400
-12-
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
consolidated financial statements. This data should be read in connection with
our consolidated financial statements and the related notes located at Item 8 of
this report.
TRICO BANCSHARES
Financial Summary
(in thousands, except per share amounts)
=========================================================================================================
Year ended December 31, 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Interest income $84,932 $73,969 $64,696 $71,998 $76,327
Interest expense 13,363 13,089 12,914 23,486 28,543
- ---------------------------------------------------------------------------------------------------------
Net interest income 71,569 60,880 51,782 48,512 47,784
Provision for loan losses 3,550 1,250 2,800 4,400 5,000
Noninterest income 24,794 22,909 19,180 16,238 14,922
Noninterest expense 60,179 55,527 45,971 40,607 37,846
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 32,634 27,012 22,191 19,743 19,860
Provision for income taxes 12,452 10,124 8,122 7,324 7,237
- ---------------------------------------------------------------------------------------------------------
Net income $20,182 $16,888 $14,069 $12,419 $12,623
- ---------------------------------------------------------------------------------------------------------
Earnings per share2:
Basic $1.29 $1.11 $1.00 $0.88 $0.88
Diluted 1.24 1.07 0.98 0.86 0.86
Per share2:
Dividends paid $0.43 $0.40 $0.40 $0.40 $0.39
Book value at December 31 8.79 8.16 7.01 6.21 5.93
Tangible book value at December 31 7.45 6.79 6.72 5.84 5.55
Average common shares outstanding2 15,660 15,282 14,038 14,146 14,384
Average diluted common shares outstanding2 16,270 15,758 14,386 14,438 14,682
Shares outstanding at December 31 15,723 15,668 14,122 14,002 14,362
At December 31:
Loans, net $1,156,910 $968,687 $673,145 $645,674 $628,721
Total assets 1,625,974 1,468,755 1,144,574 1,005,447 972,071
Total deposits 1,348,833 1,236,823 1,005,237 880,393 837,832
Debt financing and notes payable 28,152 22,887 22,924 22,956 33,983
Junior subordinated debt 41,238 20,619 - - -
Shareholders' equity 138,132 127,960 99,014 86,933 85,233
Financial Ratios:
For the year:
Return on assets 1.33% 1.27% 1.35% 1.27% 1.35%
Return on equity 15.20% 14.24% 15.03% 14.19% 16.03%
Net interest margin1 5.32% 5.23% 5.61% 5.58% 5.70%
Net loan losses to average loans 0.12% 0.34% 0.22% 0.47% 0.70%
Efficiency ratio1 61.80% 65.39% 63.66% 61.62% 59.25%
Average equity to average assets 8.72% 8.91% 9.00% 8.94% 8.40%
At December 31:
Equity to assets 8.50% 8.71% 8.65% 8.65% 8.77%
Total capital to risk-adjusted assets 11.86% 11.56% 11.97% 11.68% 12.20%
Allowance for loan losses to loans 1.37% 1.40% 2.09% 1.98% 1.82%
1 Fully taxable equivalent
2 Per share figures retroactively adjusted to reflect 2-for-1 stock split in the
form of a stock dividend effective April 30, 2004
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's discussion and analysis of its financial condition and results of
operations is intended to provide a better understanding of the significant
changes and trends relating to the Company's financial condition, results of
operations, liquidity, interest rate sensitivity, off balance sheet arrangements
and certain contractual obligations. The following discussion is based on the
Company's consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Please read the Company's audited consolidated financial statements and
the related notes included as Item 8 of this report.
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 of America. 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 that materially affect the financial statements
and are related to the adequacy of the allowance for loan losses, investments,
mortgage servicing rights, and intangible assets. 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 Company's
policies related to estimates on the allowance for loan losses, other than
temporary impairment of investments and impairment of intangible assets, can be
found in Note 1 to the Company's audited consolidated financial statements and
the related notes included as Item 8 of this report.
As the Company has not commenced any business operations independent of the
Bank, the following discussion pertains primarily to the Bank. Average balances,
including 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.
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 related notes
at Item 8 of this report.
-14-
Results of Operations
Net Income
Following is a summary of the Company's net income for the past three years
(dollars in thousands, except per share amounts):
Components of Net Income
- -----------------------------------------------------------------------------
Year ended December 31, 2004 2003 2002
-------------------------------
Net interest income * $72,589 $62,005 $53,029
Provision for loan losses (3,550) (1,250) (2,800)
Noninterest income 24,794 22,909 19,180
Noninterest expense (60,179) (55,527) (45,971)
Taxes * (13,472) (11,249) (9,369)
-------------------------------
$20,182 $16,888 $14,069
===============================
Net income per average fully-diluted share $1.24 $1.07 $0.98
Net income as a percentage of average
shareholders' equity 15.20% 14.24% 15.03%
Net income as a percentage of average
total assets 1.33% 1.27% 1.35%
=============================================================================
* Fully tax-equivalent (FTE)
Earnings in 2004 increased $3,294,000 (19.5%) from 2003. Net interest income
(FTE) grew $10,584,000 (17.1%) due to a $180,193,000 (15.2%) increase in average
earning assets along with a net interest margin that rose 9 basis points. The
loan loss provision increased $2,300,000 in 2004 from 2003, and noninterest
income increased $1,885,000 (8.23%) while noninterest expense also increased
$4,652,000 (8.38%).
Earnings in 2003 increased $2,819,000 (20.0%) from 2002. Net interest income
(FTE) grew $8,976,000 (16.9%) due to a $239,069,000 (25.3%) increase in average
earning assets that was partially offset by a net interest margin that fell 38
basis points. The loan loss provision was reduced by $1,550,000 in 2003 from
2002, and noninterest income increased $3,729,000 (19.4%) while noninterest
expense also increased $9,556,000 (20.8%).
The Company's return on average total assets was 1.33% in 2004, compared to
1.27% and 1.35% in 2003 and 2002, respectively. Return on average equity in 2004
was 15.20%, compared to 14.24% in 2003 and 15.03% percent in 2002.
Net Interest Income
The Company's primary source of revenue is net interest income, which is the
difference between interest income on earning assets and interest expense on
interest-bearing liabilities. Net interest income (FTE) increased $10,584,000
(17.1%) to $72,589,000 from 2003 to 2004. Net interest income (FTE) increased
$8,976,000 (16.9%) from 2002 to $62,005,000 in 2003.
Following is a summary of the Company's net interest income for the past three
years (dollars in thousands):
Components of Net Interest Income
-----------------------------------------------------------------
Year ended December 31, 2004 2003 2002
-------------------------------
Interest income $84,932 $73,969 $64,696
Interest expense (13,363) (13,089) (12,914)
FTE adjustment 1,020 1,125 1,247
-------------------------------
Net interest income (FTE) $72,589 $62,005 $53,029
=================================================================
Net interest margin (FTE) 5.32% 5.23% 5.61%
=================================================================
-15-
Interest income (FTE) increased $10,858,000 (14.5%) from 2003 to 2004, the net
effect of higher average balances of those assets partially offset by lower
earning-asset yields. The total yield on earning assets dropped from 6.34% in
2003 to 6.30% in 2004, following the trend in overall interest markets in which
federal funds rates were reduced in mid-2003 from 1.25% to 1.00%, rose beginning
in mid-2004, and ended 2004 at 2.25%. The average yield on loans decreased 52
basis points to 6.85% during 2004. The decrease in average yield on
interest-earning assets reduced interest income (FTE) by $4,466,000, while a
$180,193,000 (15.2%) increase in average balances of interest-earning assets
added $15,324,000 to interest income (FTE) during 2004.
Interest expense increased $274,000 (2.1%) in 2004 from 2003, due to a higher
average balance of interest-bearing liabilities that was partially offset by
lower rates paid. The average rate paid on interest-bearing liabilities was
1.23% in 2004, 16 basis points lower than in 2003. The decrease in the average
rate paid on interest-bearing liabilities decreased interest expense by
$1,510,000 from 2003 to 2004, while a $142,598,000 (15.2%) increase in average
balances of interest-bearing liabilities increased interest expense by
$1,784,000 in 2004.
Interest income (FTE) increased $9,151,000 (13.9%) from 2002 to 2003, due to
increased volume of earning assets that was partially offset by lower yields on
earning assets. During 2003, the average balance of interest-earning assets
increased $239,069,000 (25.3%). The average yield on the Company's earning
assets decreased from 6.98% in 2002 to 6.34% in 2003. The decrease in average
yield on interest-earning assets reduced interest income (FTE) by $8,739,000,
while the increase in average balances of interest-earning assets added
$17,890,000 to interest income (FTE) during 2003.
Interest expense increased $175,000 (1.4%) in 2003 from 2002 due to a
$195,415,000 (26.2%) increase in average balance of interest-bearing liabilities
that was offset by a 34 basis point decrease in the average rate paid on
interest-bearing liabilities from 1.73% to 1.39%. The decrease in average yield
on interest-bearing liabilities reduced interest expense by $2,280,000, while
the increase in average balances of interest bearing liabilities added
$2,455,000 to interest expense during 2003.
Net Interest Margin
Following is a summary of the Company's net interest margin for the past three
years:
Components of Net Interest Margin
--------------------------------------------------------------------------
Year ended December 31, 2004 2003 2002
-----------------------------
Yield on earning assets 6.30% 6.34% 6.98%
Rate paid on interest-bearing liabilities 1.23% 1.39% 1.73%
-----------------------------
Net interest spread 5.07% 4.95% 5.24%
Impact of all other net
noninterest-bearing funds 0.25% 0.28% 0.37%
-----------------------------
Net interest margin (FTE) 5.32% 5.23% 5.61%
==========================================================================
During 2002, the Company was able to maintain a relatively stable net interest
margin by aggressively reducing rates paid on interest-bearing liabilities as
yields on earning assets decreased along with market interest rates. During
2003, it became increasingly difficult to decrease rates on interest-bearing
liabilities as market interest rates continued to decrease and hit a low in
mid-2003. In addition, the positive impact of all other net noninterest bearing
funds on net interest margin was reduced due to the lower market rates of
interest at which they could be invested. During 2004, the Company was able to
slightly improve its net interest margin by further decreasing rates paid on
interest-bearing deposits.
-16-
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the past three years, 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):
Year ended December 31, 2004
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $1,060,556 $72,637 6.85%
Investment securities - taxable 268,219 10,549 3.93%
Investment securities - nontaxable 34,282 2,748 8.02%
Federal funds sold 1,591 18 1.13%
------------ ---------
Total earning assets 1,364,648 85,952 6.30%
---------
Other assets 158,426
------------
Total assets $1,523,074
============
Liabilities and shareholders' equity
Interest-bearing demand deposits $230,637 423 0.18%
Savings deposits 475,796 3,444 0.72%
Time deposits 285,446 6,304 2.21%
Federal funds purchased 36,716 510 1.39%
Other borrowings 24,985 1,301 5.21%
Junior subordinated debt 30,500 1,381 4.53%
------------ ---------
Total interest-bearing liabilities 1,084,080 13,363 1.23%
---------
Noninterest-bearing demand 283,975
Other liabilities 22,265
Shareholders' equity 132,754
------------
Total liabilities and shareholders' equity $1,523,074
============
Net interest spread (1) 5.07%
Net interest income and interest margin (2) $72,589 5.32%
========= =======
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
-17-
Year ended December 31, 2003
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $827,673 $60,997 7.37%
Investment securities - taxable 306,647 10,903 3.56%
Investment securities - nontaxable 38,562 3,065 7.95%
Federal funds sold 11,573 129 1.11%
------------ ---------
Total earning assets 1,184,455 75,094 6.34%
---------
Other assets 146,099
------------
Total assets $1,330,554
============
Liabilities and shareholders' equity
Interest-bearing demand deposits $208,347 488 0.23%
Savings deposits 384,455 3,441 0.90%
Time deposits 299,799 7,328 2.44%
Federal funds purchased 17,645 189 1.07%
Other borrowings 22,903 1,288 5.62%
Junior subordinated debt 8,333 355 4.26%
------------ ---------
Total interest-bearing liabilities 941,482 13,089 1.39%
---------
Noninterest-bearing demand 245,538
Other liabilities 24,941
Shareholders' equity 118,593
------------
Total liabilities and shareholders' equity $1,330,554
============
Net interest spread (1) 4.95%
Net interest income and interest margin (2) $62,005 5.23%
========= =======
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
Year ended December 31, 2002
-----------------------------------------------
Interest Rates
Average income/ earned/
balance expense paid
-----------------------------------------------
Assets
Loans $660,668 $52,472 7.94%
Investment securities - taxable 204,155 9,430 4.62%
Investment securities - nontaxable 43,871 3,435 7.83%
Federal funds sold 36,692 606 1.65%
------------ ---------
Total earning assets 945,386 65,943 6.98%
---------
Other assets 94,080
------------
Total assets $1,039,466
============
Liabilities and shareholders' equity
Interest-bearing demand deposits $176,484 469 0.27%
Savings deposits 264,444 2,710 1.02%
Time deposits 282,084 8,441 2.99%
Federal funds purchased 116 2 1.47%
Other borrowings 22,939 1,292 5.63%
------------ ---------
Total interest-bearing liabilities 746,067 12,914 1.73%
---------
Noninterest-bearing demand 182,569
Other liabilities 17,250
Shareholders' equity 93,580
------------
Total liabilities and shareholders' equity $1,039,466
============
Net interest spread (1) 5.24%
Net interest income and interest margin (2) $53,029 5.61%
========= =======
(1) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by dividing net interest income by total
average earning assets.
-18-
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth a summary of the changes in the Company's
interest income and interest expense from changes in average asset and liability
balances (volume) and changes in average interest rates for the past three
years. The rate/volume variance has been included in the rate variance. Amounts
are calculated on a fully taxable equivalent basis:
2004 over 2003 2003 over 2002
-----------------------------------------------------------------------------
Yield/ Yield/
Volume Rate Total Volume Rate Total
-----------------------------------------------------------------------------
Increase (decrease) in (dollars in thousands)
interest income:
Loans $17,163 ($5,523) $11,640 $13,264 ($4,739) $8,525
Investment securities (1,728) 1,057 (671) 5,041 (3,938) 1,103
Federal funds sold (111) - (111) (415) (62) (477)
-----------------------------------------------------------------------------
Total 15,324 (4,466) 10,858 17,890 (8,739) 9,151
-----------------------------------------------------------------------------
Increase (decrease) in
interest expense:
Demand deposits (interest-bearing) 52 (117) (65) 85 (66) 19
Savings deposits 818 (815) 3 1,230 (499) 731
Time deposits (351) (673) (1,024) 530 (1,643) (1,113)
Federal funds purchased 204 117 321 257 (70) 187
Junior subordinated debt 944 82 1,026 355 - 355
Other borrowings 117 (104) 13 (2) (2) (4)
-----------------------------------------------------------------------------
Total 1,784 (1,510) 274 2,455 (2,280) 175
-----------------------------------------------------------------------------
Increase (decrease) in
net interest income $13,540 ($2,956) $10,584 $15,435 ($6,459) $8,976
=============================================================================
Provision for Loan Losses
In 2004, the Company provided $3,550,000 for loan losses compared to $1,250,000
in 2003. The increase in the loan loss provision in 2004 was mainly due to the
increase in loan balances. Net loan charge-offs decreased $1,516,000 (54%) to
$1,266,000 during 2004. The 2004 net charge-offs represented 0.12% of average
loans outstanding in 2004 versus 0.34% in 2003. Nonperforming loans net of
government agency guarantees were 0.42% of total loans at December 31, 2004
versus 0.45% at December 31, 2003. The ratio of allowance for loan losses to
nonperforming loans was 327% at the end of 2004 versus 313% at the end of 2003.
In 2003, the Bank provided $1,250,000 for loan losses compared to $2,800,000 in
2002. Net loan charge-offs increased $1,301,000 (88%) to $2,782,000 during 2003.
Included in the $2,782,000 of net loan charge-offs during 2003 is a net
charge-off of $1,600,000 related to two commercial real estate loans to a single
entity that was collateralized by a single building. The Company had previously
established a specific allowance for the two commercial real estate loans noted
above in its allowance for loan losses. Collection of the loan was realized on
July 31, 2003 through receipt of net proceeds of $11,500,000 from the sale of
the building. The collection resulted in a recovery of $300,000 of the
$1,900,000 charged-off on these loans during the quarter ended June 30, 2003.
Net charge-offs of consumer installment loans increased $191,000 (93%) from 2002
to 2003. Net charge-offs of commercial, financial and agricultural loans
increased $465,000 (99%) in 2003, while net charge-offs of real estate mortgage
loans increased $655,000 (81%). The 2003 charge-offs represented 0.34% of
average loans outstanding versus 0.22% in 2002. Nonperforming loans net of
government agency guarantees as a percentage of total loans were 0.45% and 1.19%
at December 31, 2003 and 2002, respectively. The ratio of allowance for loan
losses to nonperforming loans was 313% at the end of 2003 versus 176% at the end
of 2002.
-19-
Noninterest Income
The following table summarizes the Company's noninterest income for the past
three years (dollars in thousands):
Components of Noninterest Income
---------------------------------------------------------------------------
Year ended December 31, 2004 2003 2002
-----------------------------------
Service charges on deposit accounts $13,239 $12,495 $8,915
ATM fees and interchange 2,652 2,220 1,823
Other service fees 1,939 1,782 1,261
Amortization of mortgage servicing rights (739) (1,356) (713)
Recovery of (provision for) mortgage
servicing rights valuation allowance 600 (600) -
Gain on sale of loans 1,659 4,168 3,641
Commissions on sale of
nondeposit investment products 2,327 1,766 2,467
Gain on sale of investments - 197 -
Increase in cash value of life insurance 1,499 1,296 606
Other noninterest income 1,618 941 1,180
-----------------------------------
Total noninterest income $24,794 $22,909 $19,180
===========================================================================
Noninterest income increased $1,885,000 (8.2%) to $24,794,000 in 2004. Service
charges on deposit accounts was up $744,000 (6.0%) due to growth in number of
customers. ATM fees and interchange, and other service fees were up $432,000
(19.5%) and $157,000 (8.8%) due to expansion of the Company's ATM network and
customer base through de-novo branch expansion. Overall, mortgage banking
activities, which includes amortization of mortgage servicing rights, mortgage
servicing fees, provision for mortgage servicing valuation allowance, and gain
on sale of loans, accounted for $2,448,000 of noninterest income in the 2004
compared to $3,061,000 in 2003. The decrease in the amortization of mortgage
servicing rights and the recovery of mortgage servicing valuation allowance
taken in 2004 are the result of the recent slowdown in mortgage refinance
activity. While the Company benefits from decreased amortization and recovery of
mortgage servicing valuations of mortgage servicing rights during periods of low
levels of mortgage refinance activity, it may also experience decreased gain on
sale of loans. Commissions on sale of nondeposit investment products increased
$561,000 (31.8%) in 2004 due to higher demand for annuity products. Other
noninterest income increased $677,000 (71.9%) to $1,618,000 due to increases in
gain on sale of other real estate owned and lease brokerage income from $113,000
and $0, respectively, in 2003 to $566,000 and $227,000, respectively, in 2004.
Noninterest income increased $3,729,000 (19.4%) to $22,909,000 in 2003. Service
charges on deposit accounts was up $3,580,000 (40.2%) due to 2003 being the
first full year of the Company's overdraft privilege product that was introduced
in July 2002. ATM fees and interchange, and other service fees were up $397,000
(21.8%) and $521,000 (41.3%) due to expansion of the Company's ATM network and
customer base through de-novo branch expansion and the acquisition of North
State National Bank. Overall, mortgage banking activities, which includes
amortization of mortgage servicing rights, mortgage servicing fees, provision
for mortgage servicing valuation allowance, and gain on sale of loans, accounted
for $3,061,000 of noninterest income in 2003 compared to $3,547,000 in 2002. The
increase in the amortization of mortgage servicing rights and the provision for
mortgage servicing valuation allowance taken in 2003 are the result of the
recent peak in mortgage refinance activity. While the Company benefits from
increased gain on sale of loans during periods of high levels of mortgage
refinance activity, it may also experience increased amortization and provisions
for mortgage servicing valuations of mortgage servicing rights. Commissions on
sale of nondeposit investment products decreased $701,000 (28.4%) in 2003 due to
lower demand for annuity products. Income from increase in cash value of life
insurance increased $690,000 (114%) due to an increase in life insurance owned
by the Company from $15,208,000 at December 31, 2002 to $38,980,000 at December
31, 2003.
-20-
Securities Transactions
During 2004 the Bank had no sales of securities. Also during 2004, the Bank
received proceeds from maturities of securities totaling $79,442,000, and used
$59,091,000 to purchase securities.
During 2003 the Bank realized net gains of $197,000 on the sale of securities
with market values of $22,320,000. In addition, during 2003, the Bank received
proceeds from maturities of securities totaling $205,021,000, purchased
$168,953,000 of securities, and acquired $41,000,000 of securities through the
acquisition of North State National Bank.
Noninterest Expense
The following table summarizes the Company's other noninterest expense for the
past three years:
Components of Noninterest Expense (dollars in thousands)
----------------------------------------------------------------------------
Year ended December 31, 2004 2003 2002
--------------------------------------
Salaries and benefits $33,191 $29,714 $24,290
Equipment and data processing 5,315 4,947 4,095
Occupancy 3,926 3,493 2,954
Professional fees 2,481 2,315 1,696
Telecommunications 1,773 1,539 1,422
Advertising 1,026 1,062 1,263
Intangible amortization 1,358 1,207 911
ATM network charges 1,322 1,043 847
Postage 864 855 801
Courier service 814 795 720
Operational losses 428 657 534
Assessments 297 268 233
Net other real estate owned expense 11 124 26
Other 7,373 7,508 6,179
--------------------------------------
Total noninterest expense $60,179 $55,527 $45,971
============================================================================
Average full time equivalent staff 537 505 435
Noninterest expense to revenue (FTE) 61.80% 65.39% 63.66%
Salary and benefit expenses increased $3,477,000 (11.7%) to $33,191,000 in 2004
compared to 2003. Base salaries increased $1,867,000 (9.8%) to $20,939,000 in
2004. The increase in base salaries was mainly due to an 6.3% increase in
average full time equivalent employees from 505 during 2003 to 537 during 2004,
primarily due to the opening of branches in Folsom, Turlock and Woodland in
December 2003, April 2004, and November 2004, respectively. Incentive and
commission related salary expenses increased $65,000 (1.5%) to $4,519,000 in
2004. The small increase in incentive and commission related salary expense is
consistent with performance targets being reached to similar extents in 2004 and
2003. These results are consistent with the Bank's strategy of working more
efficiently with fewer employees who are compensated in part based on their
business unit's performance or on their ability to generate revenue. Benefits
expense, including retirement, medical and workers' compensation insurance, and
taxes, increased $1,545,000 (25.0%) to $7,733,000 during 2004.
Salary and benefit expenses increased $5,424,000 (22.3%) in 2003 compared to
2002. Base salaries and benefits increased $3,324,000 (21.1%) to $19,072,000 in
2003. The increase in base salaries was mainly due to a 16.1% increase in
average full time equivalent employees from 435 in 2002 to 505 in 2003, and
annual salary increases. Incentive and commission related salary expenses
increased $1,004,000 (29.1%) to $4,454,000 in 2003. The increase in incentive
and commission expenses was directly tied to significant loan, deposit, and
revenue growth during 2003. Benefits expense, including retirement, medical and
workers' compensation insurance, and taxes, increased $1,096,000 (21.5%) to
$6,188,000 during 2003.
Other noninterest expenses increased $1,175,000 (4.6%) to $26,988,000 in 2004.
Increases in the areas of equipment and data processing, occupancy,
telecommunications, and courier service from 2003 to 2004 were mainly due to the
opening of branches in Folsom, Turlock and Woodland in December 2003, April
2004, and November 2004, respectively.
-21-
Other noninterest expense increased $4,132,000 (19.1%) to $25,813,000 in 2003.
Increases in the areas of equipment and data processing, occupancy,
telecommunications, and ATM network charges were mainly due to the first full
year of operation of the Oroville, Brentwood, and Natomas branches, the opening
in 2003 of branches in Chico, Roseville and Folsom, the continued operation of
one branch added through the acquisition of North State National Bank in April
2003, and enhancements to data processing and ATM network equipment. One-time
merger expenses related to the North State acquisition were insignificant. All
expense reductions realized through the acquisition of North State were effected
immediately upon acquisition in April 2003. Increases in professional fees and
operational losses were related to the first full year operation of the
Company's overdraft privilege product introduced in July 2002, and were more
than offset by the large revenue that product is producing. The increase in
intangible amortization was due to the North State acquisition.
Provision for Taxes
The effective tax rate on income was 38.2%, 37.5%, and 36.6% in 2004, 2003, and
2002, respectively. The effective tax rate was greater than the federal
statutory tax rate due to state tax expense of $3,188,000, $2,636,000, and
$2,031,000, respectively, in these years. Tax-exempt income of $1,735,000,
$1,940,000, and $2,188,000, respectively, from investment securities, and
$1,499,000, $1,296,000, and $606,000, respectively, from increase in cash value
of life insurance in these years helped to reduce the effective tax rate.
Financial Ratios
The following table shows the Company's key financial ratios for the past three
years:
Year ended December 31, 2004 2003 2002
--------------------------------
Return on average total assets 1.33% 1.27% 1.35%
Return on average shareholders' equity 15.20% 14.24% 15.03%
Shareholders' equity to total assets 8.50% 8.71% 8.65%
Common shareholders' dividend payout ratio 33.34% 36.36% 39.95%
==============================================================================
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, 2004, these four categories
accounted for approximately 12%, 35%, 46%, and 7% of the Bank's loan portfolio,
respectively, as compared to 14%, 33%, 47%, and 6%, at December 31, 2003. The
shift in the percentages was primarily due to the Bank's ability to increase all
loan categories except commercial, financial and agricultural during 2004. The
shift in percentages is reflected in the Company's assessment of the adequacy of
the allowance for loan losses. The increase in consumer loans during 2004 was
mainly due to increases in home equity lines of credit and automobile loans. The
increase in real estate mortgage loans during 2004 was mainly due to increases
in commercial real estate 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, 2004 loans totaled $1,172,967,000 and was a 19.4% ($190,507,000)
increase over the balances at the end of 2003. Demand for home equity loans and
auto loans (both classified as consumer loans) were strong throughout 2004.
Commercial real estate mortgage loan activity was strong in 2004. Commercial and
agriculture related loan growth continued to be relatively weak in 2004, and
competition for such loans was high. The average loan-to-deposit ratio in 2004
was 83.1% compared to 72.2% in 2003.
-22-
At December 31, 2003 loans totaled $982,460,000 and was a 42.9% ($294,938,000)
increase over the balances at the end of 2002. Contributing to the increase in
loans was $76,000,000 of loans obtained through the acquisition of North State
National Bank on April 4, 2003. Demand for commercial and agriculture related
loans, commercial real estate mortgage loans, and real estate construction loans
improved in the Company's market areas in 2003. Demand for home equity and auto
loans remained strong throughout 2003. The average loan-to-deposit ratio in 2003
was 72.2% compared to 71.1% in 2002.
Loan Portfolio Composite
The following table shows the Company's loan balances for the past five years:
December 31,
(dollars in thousands) 2004 2003 2002 2001 2000
----------------------------------------------------------------------------
Commercial, financial and agricultural $140,332 $142,252 $125,982 $130,054 $148,135
Consumer installment 410,198 320,248 201,858 155,046 120,247
Real estate mortgage 544,373 458,369 319,969 326,897 334,010
Real estate construction 78,064 61,591 39,713 46,735 37,999
----------------------------------------------------------------------------
Total loans $1,172,967 $982,460 $687,522 $658,732 $640,391
============================================================================
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 December 31, 2004 At December 31, 2003
------------------------- ------------------------
Gross Guaranteed Net Gross Guaranteed Net
-----------------------------------------------------
Classified loans $22,337 $9,436 $12,901 $29,992 $11,209 $18,783
Other classified assets - - - 932 - 932
-----------------------------------------------------
Total classified assets $22,337 $9,436 $12,901 $30,924 $11,209 $19,715
=====================================================
Allowance for loan losses/
Classified loans 124.5% 69.9%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies at December 31, 2004, decreased
$6,814,000 (34.6%) to $12,901,000 from $19,715,000 at December 31, 2003.
Nonperforming Assets
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. The reclassification of
loans as nonaccrual does not necessarily reflect management's judgment as to
whether they are collectible.
Interest income on nonaccrual loans, which would have been recognized during the
year, ended December 31, 2004, if all such loans had been current in accordance
with their original terms, totaled $1,231,000. Interest income actually
recognized on these loans in 2004 was $965,000.
-23-
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 other
real estate owned ("OREO") or, if the collateral is personal property, the loan
is classified as other assets on the Company's financial statements.
Management considers both the adequacy of the collateral and the other resources
of the borrower in determining the steps to be taken to collect nonaccrual
loans. Alternatives that are considered are foreclosure, collecting on
guarantees, restructuring the loan or collection lawsuits.
The following tables set forth the amount of the Bank's nonperforming assets net
of guarantees of the U.S. government, including its agencies and its
government-sponsored agencies, as of the dates indicated:
December 31, 2004 December 31, 2003
------------------------- -------------------------
(dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $11,043 $7,442 $3,601 $10,997 $7,936 $3,061
Nonperforming, nonaccrual loans 1,418 174 1,244 2,551 1,252 1,299
------------------------------------------------------
Total nonaccrual loans 12,461 7,616 4,845 13,548 9,188 4,360
Loans 90 days past due and still accruing 61 61 34 - 34
------------------------------------------------------
Total nonperforming loans 12,522 7,616 4,906 13,582 9,188 4,394
Other real estate owned - - - 932 - 932
------------------------------------------------------
Total nonperforming loans and OREO $12,522 $7,616 $4,906 $14,514 $9,188 $5,326
======================================================
Nonperforming loans to total loans 0.42% 0.45%
Allowance for loan losses/nonperforming loans 327% 313%
Nonperforming assets to total assets 0.30% 0.36%
December 31, 2002 December 31, 2001
------------------------- -------------------------
(dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $13,199 $8,432 $4,767 $2,733 - $2,733
Nonperforming, nonaccrual loans 4,091 718 3,373 3,120 $387 2,733
------------------------------------------------------
Total nonaccrual loans 17,290 9,150 8,140 5,853 387 5,466
Loans 90 days past due and still accruing 40 - 40 584 - 584
------------------------------------------------------
Total nonperforming loans 17,330 9,150 8,180 6,437 387 6,050
Other real estate owned 932 - 932 71 - 71
------------------------------------------------------
Total nonperforming loans and OREO $18,262 9,150 $9,112 $6,508 $387 $6,121
======================================================
Nonperforming loans to total loans 1.19% 0.92%
Allowance for loan losses/nonperforming loans 176% 216%
Nonperforming assets to total assets 0.80% 0.61%
December 31, 2000
-------------------------
(dollars in thousands): Gross Guaranteed Net
-------------------------
Performing nonaccrual loans $4,331 $142 $4,189
Nonperforming, nonaccrual loans 8,161 88 8,073
-------------------------
Total nonaccrual loans 12,492 230 12,262
Loans 90 days past due and still accruing 965 - 965
-------------------------
Total nonperforming loans 13,457 230 13,227
Other real estate owned 1,441 - 1,441
-------------------------
Total nonperforming loans and OREO $14,898 $230 $14,668
=========================
Nonperforming loans to total loans 2.07%
Allowance for loan losses/nonperforming loans 88%
Nonperforming assets to total assets 1.51%
-24-
During 2004, nonperforming assets net of government guarantees decreased
$420,000 (7.9%) to a total of $4,906,000. Nonperforming loans net of government
guarantees increased $512,000 (11.7%) to $4,906,000, and other real estate owned
(OREO) decreased $932,000 to $0 during 2004. The ratio of nonperforming loans to
total loans at December 31, 2004 was 0.42% versus 0.45% at the end of 2003.
Classifications of nonperforming loans as a percent of total loans at the end of
2004 were as follows: secured by real estate, 75%; loans to farmers, 11%;
commercial loans, 8%; and consumer loans, 6%.
During 2003, nonperforming assets net of government guarantees decreased
$3,786,000 (41.6%) to $5,326,000. Nonperforming loans decreased $3,786,000
(46.3%) to $4,394,000. The ratio of nonperforming loans to total loans at
December 31, 2003 was 0.45% versus 1.19% at the end of 2002. Classifications of
nonperforming loans as a percent of the total at the end of 2003 were as
follows: secured by real estate, 66%; loans to farmers, 19%; commercial loans,
10%; and consumer loans, 5%.
Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, the Company
maintains an allowance for loan losses to absorb losses inherent in the
Company's loan and lease portfolio. This is maintained through periodic charges
to earnings. These charges are shown in the consolidated income statements as
provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of
reasons, not all losses are immediately known to the Company and, of those that
are known, the full extent of the loss may not be quantifiable at that point in
time. The balance of the Company's allowance for loan losses is meant to be an
estimate of these unknown but probable losses inherent in the portfolio.
For the remainder of this discussion, "loans" shall include all loans and lease
contracts, which are a part of the Bank's portfolio.
Assessment of the Adequacy of the Allowance for Loan Losses
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan and lease portfolio, and to a lesser
extent the Company's loan and lease commitments. These assessments include the
periodic re-grading of credits based on changes in their individual credit
characteristics including delinquency, seasoning, recent financial performance
of the borrower, economic factors, changes in the interest rate environment,
growth of the portfolio as a whole or by segment, and other factors as
warranted. Loans are initially graded when originated. They are re-graded as
they are renewed, when there is a new loan to the same borrower, when identified
facts demonstrate heightened risk of nonpayment, or if they become delinquent.
Re-grading of larger problem loans occurs at least quarterly. Confirmation of
the quality of the grading process is obtained by independent credit reviews
conducted by consultants specifically hired for this purpose and by various bank
regulatory agencies.
The Company's method for assessing the appropriateness of the allowance includes
specific allowances for identified problem loans and leases, formula allowance
factors for pools of credits, and allowances for changing environmental factors
(e.g., interest rates, growth, economic conditions, etc.). Allowances for
identified problem loans are based on specific analysis of individual credits.
Allowance factors for loan pools are based on the previous 5 years historical
loss experience by product type. Allowances for changing environmental factors
are management's best estimate of the probable impact these changes have had on
the loan portfolio as a whole.
The Components of the Allowance for Loan Losses
As noted above, the overall allowance consists of a specific allowance, a
formula allowance, and an allowance for environmental factors. The first
component, the specific allowance, results from the analysis of identified
credits that meet management's criteria for specific evaluation. These loans are
reviewed individually to determine if such loans are considered impaired.
Impaired loans are those where management has concluded that it is probable that
the borrower will be unable to pay all amounts due under the contractual terms.
Loans specifically reviewed, including those considered impaired, are evaluated
individually by management for loss potential by evaluating sources of
repayment, including collateral as applicable, and a specified allowance for
loan losses is established where necessary.
-25-
The second component, the formula allowance, is an estimate of the probable
losses that have occurred across the major loan categories in the Company's loan
portfolio. This analysis is based on loan grades by pool and the loss history of
these pools. This analysis covers the Company's entire loan portfolio including
unused commitments but excludes any loans, which were analyzed individually and
assigned a specific allowance as discussed above. The total amount allocated for
this component is determined by applying loss estimation factors to outstanding
loans and loan commitments. The loss factors are based primarily on the
Company's historical loss experience tracked over a five-year period and
adjusted as appropriate for the input of current trends and events. Because
historical loss experience varies for the different categories of loans, the
loss factors applied to each category also differ. In addition, there is a
greater chance that the Company has suffered a loss from a loan that was graded
less than satisfactory than if the loan was last graded satisfactory. Therefore,
for any given category, a larger loss estimation factor is applied to less than
satisfactory loans than to those that the Company last graded as satisfactory.
The resulting formula allowance is the sum of the allocations determined in this
manner.
The third component, the environmental factor allowance, is a component that is
not allocated to specific loans or groups of loans, but rather is intended to
absorb losses that may not be provided for by the other components.
There are several primary reasons that the other components discussed above
might not be sufficient to absorb the losses present in portfolios, and the
unallocated portion of the allowance is used to provide for the losses that have
occurred because of them.
The first reason is that there are limitations to any credit risk grading
process. The volume of loans makes it impractical to re-grade every loan every
quarter. Therefore, it is possible that some currently performing loans not
recently graded will not be as strong as their last grading and an insufficient
portion of the allowance will have been allocated to them. Grading and loan
review often must be done without knowing whether all relevant facts are at
hand. Troubled borrowers may deliberately or inadvertently omit important
information from reports or conversations with lending officers regarding their
financial condition and the diminished strength of repayment sources.
The second reason is that the loss estimation factors are based primarily on
historical loss totals. As such, the factors may not give sufficient weight to
such considerations as the current general economic and business conditions that
affect the Company's borrowers and specific industry conditions that affect
borrowers in that industry. The factors might also not give sufficient weight to
other environmental factors such as changing economic conditions and interest
rates, portfolio growth, entrance into new markets or products, and other
characteristics as may be determined by Management.
Specifically, in assessing how much environmental factor allowance needed to be
provided at December 31, 2004, management considered the following:
- with respect to loans to the agriculture industry, management
considered the effects on borrowers of weather conditions and overseas
market conditions for exported products as well as commodity prices in
general;
- with respect to changes in the interest rate environment management
considered the recent changes in interest rates and the resultant
economic impact it may have had on borrowers with high leverage and/or
low profitability; and
- with respect to loans to borrowers in new markets and growth in
general, management considered the relatively short seasoning of such
loans and the lack of experience with such borrowers.
Each of these considerations was assigned a factor and applied to a portion or
all of the loan portfolio. Since these factors are not derived from experience
and are applied to large non-homogeneous groups of loans, they are available for
use across the portfolio as a whole.
-26-
The following table sets forth the Bank's loan loss reserve as of the dates
indicated:
December 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------
(dollars in thousands)
Specific allowance $820 $1,003 $5,299 $5,672 $3,266
Formula allowance 8,547 6,989 5,603 4,685 5,502
Unallocated allowance 6,690 5,781 3,475 2,701 2,902
-------------------------------------------------------------
Total allowance $16,057 $13,773 $14,377 $13,058 $11,670
=============================================================
Allowance for loan losses
to loans 1.37% 1.40% 2.09% 1.98% 1.82%
Based on the current conditions of the loan portfolio, management believes that
the $16,057,000 allowance for loan losses at December 31, 2004 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,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------
(dollars in thousands)
Balance, beginning of year $13,773 $14,377 $13,058 $11,670 $11,037
Addition through merger - 928 - - -
Provision charged to operations 3,550 1,250 2,800 4,400 5,000
Loans charged off:
Commercial, financial and
agricultural (901) (1,142) (668) (2,861) (4,450)
Consumer installment (731) (475) (299) (134) (103)
Real estate mortgage - (2,136) (819) (218) (152)
-----------------------------------------------------------------
Total loans charged-off (1,632) (3,753) (1,786) (3,213) (4,705)
-----------------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 70 206 197 92 281
Consumer installment 175 79 94 34 54
Real estate mortgage 121 686 14 75 3
-----------------------------------------------------------------
Total recoveries 366 971 305 201 338
-----------------------------------------------------------------
Net loans charged-off (1,266) (2,782) (1,481) (3,012) (4,367)
-----------------------------------------------------------------
Balance, year end $16,057 $13,773 $14,377 $13,058 $11,670
=================================================================
Average total loans $1,060,556 $827,673 $660,668 $647,317 $624,717
Ratios:
Net charge-offs during period to
average loans outstanding during
period 0.12% 0.34% 0.22% 0.47% 0.70%
Provision for loan losses to
average loans outstanding 0.33% 0.15% 0.42% 0.68% 0.80%
Allowance to loans at year end 1.37% 1.40% 2.09% 1.98% 1.82%
-----------------------------------------------------------------
-27-
The following tables summarize the allocation of the allowance for loan losses
between loan types:
December 31, 2004 December 31, 2003 December 31, 2002
------------------------- ------------------------ ------------------------
(dollars in thousands) Percent of Percent of Percent of
loans in each loans in each loans in each
category to category to category to
Amount total loans Amount total loans Amount total loans
Balance at end of period applicable to:
Commercial, financial and agricultural $2,363 11.9% $2,762 14.5% $6,791 18.4%
Consumer installment 5,603 35.0% 4,233 32.5% 2,833 29.4%
Real estate mortgage 7,077 46.4% 5,976 46.7% 4,229 46.4%
Real estate construction 1,014 6.7% 802 6.3% 524 5.8%
--------- -------- --------- -------- --------- --------
$16,057 100.0% $13,773 100.0% $14,377 100.0%
========= ======== ========= ======== ========= ========
December 31, 2001 December 31, 2000
----------------------- -----------------------
(dollars in thousands) Percent of Percent of
loans in each loans in each
category to category to
Balance at end of period applicable to: Amount total loans Amount total loans
Commercial, financial and agricultural $6,929 19.8% $6,873 43.4%
Consumer installment 1,896 23.5% 1,373 15.9%
Real estate mortgage 3,709 49.6% 2,925 34.8%
Real estate construction 524 7.1% 499 5.9%
--------- -------- --------- --------
$13,058 100.0% $11,670 100.0%
========= ======== ========= ========
Other Real Estate Owned
The other real estate owned (OREO) balance was $0 and $932,000 at December 31,
2004 and 2003, respectively. The Bank disposed of properties with a value of
$932,000 in 2004. OREO properties consist of a mixture of land, single family
residences, and commercial buildings.
Intangible Assets
At December 31, 2004 and 2003, the Bank had intangible assets totaling
$20,927,000 and $21,604,000, respectively. The intangible assets resulted from
the Bank's 1997 acquisitions of certain Wells Fargo branches and Sutter Buttes
Savings Bank, the April 2003 acquisition of North State National Bank, and an
additional minimum pension liability related to the Company's supplemental
retirement plans. Intangible assets at December 31, 2004 and 2003 were comprised
of the following:
December 31,
2004 2003
--------------------------
(dollars in thousands)
Core-deposit intangible $4,442 $5,800
Additional minimum pension liability 966 285
Goodwill 15,519 15,519
--------------------------
Total intangible assets $20,927 $21,604
==========================
Amortization of core deposit intangible assets amounting to $1,358,000,
$1,207,000, and $911,000, was recorded in 2004, 2003, and 2002, respectively.
The minimum pension liability intangible asset is not amortized but adjusted
annually based upon actuarial estimates.
Deposits
Deposits at December 31, 2004 increased $112,010,000 (9.1%) over the 2003
year-end balances to $1,348,833,000. All categories of deposits increased in
2004. Included in the December 31, 2004 certificate of deposit balances is
$20,000,000 from the State of California. The Bank participates in a deposit
program offered by the State of California whereby the State may make deposits
at the Bank's request subject to collateral and credit worthiness constraints.
The negotiated rates on these State deposits are generally favorable to other
wholesale funding sources available to the Bank.
-28-
Deposits at December 31, 2003 increased $231,586,000 (23.0%) to $1,236,823,000
over 2002 year-end balances. All categories of deposits except certificates of
deposit increased in 2003. On April 4, 2003, the Company acquired North State
National Bank which at the time had deposits totaling $126,000,000. Included in
the December 31, 2003 certificate of deposit balance is $20,000,000 from the
State of California.
Long-Term Debt
During 2004, the Bank repaid $43,000 of long-term debt. In 2003, the Bank made
principal payments of $37,000 on long-term debt obligations. See Note 7 to the
consolidated financial statements at Item 8 of this report for a discussion
about the Company's other borrowings, including long-term debt.
Junior Subordinated Debt
See Note 8 to the consolidated financial statements at Item 8 of this report for
a discussion about the Company's issuance of junior subordinated debt during
2004 and 2003.
Equity
See Note 10 and Note 19 in the consolidated financial statements at Item 8 of
this report for a discussion of shareholders' equity and regulatory capital,
respectively. Management believes that the Company's capital is adequate to
support anticipated growth, meet the cash dividend requirements of the Company
and meet the future risk-based capital requirements of the Bank and the Company.
Market Risk Management
Overview. The goal for managing the assets and liabilities of the Bank is to
maximize shareholder value and earnings while maintaining a high quality balance
sheet without exposing the Bank to undue interest rate risk. The Board of
Directors has overall responsibility for the Company's interest rate risk
management policies. The Bank has an Asset and Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability management
include but are not limited to lending, accepting and placing deposits,
investing in securities and issuing debt. Interest rate risk is the primary
market risk associated with asset/liability management. Sensitivity of earnings
to interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin, net income and market value of equity
under changing interest environments. Market value of equity is the net present
value of estimated cash flows from the Bank's assets, liabilities and
off-balance sheet items. The Bank uses simulation models to forecast net
interest margin, net income and market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Bank is able to estimate the
potential impact of changing interest rates on net interest margin, net income
and market value of equity. A balance sheet forecast is prepared using inputs of
actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
-29-
The following table summarizes the effect on net interest income and net income
due to changing interest rates as measured against a flat rate (no interest rate
change) scenario. The simulation results shown below assume no changes in the
structure of the Company's balance sheet over the twelve months being measured
(a "flat" balance sheet scenario), and that deposit rates will track general
interest rate changes by approximately 50%:
Interest Rate Risk Simulation of Net Interest Income and Net Income as of
December 31, 2004
Estimated Change in Estimated Change in
Change in Interest Net Interest Income (NII) Net Income (NI)
Rates (Basis Points) (as % of "flat" NII) (as % of "flat" NI)
+300 (ramp) (0.80%) (1.54%)
+200 (ramp) (0.62%) (1.20%)
+100 (ramp) (0.42%) (0.80%)
+ 0 (flat) -- --
-100 (ramp) 0.53% 1.02%
-200 (ramp) 1.54% 2.96%
-300 (ramp) 1.80% 3.44%
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
- -300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
The following table summarizes the effect on market value of equity due to
changing interest rates as measured against a flat rate (no change) scenario:
Interest Rate Risk Simulation of Market Value of Equity as of December 31, 2004
Estimated Change in
Change in Interest Market Value of Equity (MVE)
Rates (Basis Points) (as % of "flat" MVE)
+300 (shock) (2.87%)
+200 (shock) (2.04%)
+100 (shock) (0.92%)
+ 0 (flat) --
-100 (shock) (0.30%)
-200 (shock) (3.57%)
-300 (shock) (4.52%)
These results indicate that given a "flat" balance sheet scenario, and if
deposit rates track general interest rate changes by approximately 50%, the
Company's balance sheet is slightly liability sensitive. "Liability sensitive"
implies that earnings decrease when interest rates rise, and increase when
interest rates decrease. The magnitude of all the simulation results noted above
is within the Bank's policy guidelines. The asset liability management policy
limits aggregate market risk, as measured in this fashion, to an acceptable
level within the context of risk-return trade-offs.
The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations. In
addition, the simulation results noted above contain various assumptions such as
a flat balance sheet, and the rate that deposit interest rates change as general
interest rates change. Therefore, they do not reflect likely actual results, but
serve as conservative estimates of interest rate risk.
-30-
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the preceding tables. For
example, although certain of the Bank's assets and liabilities may have similar
maturities or repricing time frames, they may react in different degrees to
changes in market interest rates. In addition, the interest rates on certain of
the Bank's asset and liability categories may precede, or lag behind, changes in
market interest rates. Also, the actual rates of prepayments on loans and
investments could vary significantly from the assumptions utilized in deriving
the results as presented in the preceding table. Further, a change in U.S.
Treasury rates accompanied by a change in the shape of the treasury yield curve
could result in different estimations from those presented herein. Accordingly,
the results in the preceding tables should not be relied upon as indicative of
actual results in the event of changing market interest rates. Additionally, the
resulting estimates of changes in market value of equity are not intended to
represent, and should not be construed to represent, estimates of changes in the
underlying value of the Bank.
Interest rate sensitivity is a function of the repricing characteristics of the
Bank's portfolio of assets and liabilities. One aspect of these repricing
characteristics is the time frame within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity. An analysis of the repricing time frames of
interest-bearing assets and liabilities is sometimes called a "gap" analysis
because it shows the gap between assets and liabilities repricing or maturing in
each of a number of periods. Another aspect of these repricing characteristics
is the relative magnitude of the repricing for each category of interest earning
asset and interest-bearing liability given various changes in market interest
rates. Gap analysis gives no indication of the relative magnitude of repricing
given various changes in interest rates. Interest rate sensitivity management
focuses on the maturity of assets and liabilities and their repricing during
periods of changes in market interest rates. Interest rate sensitivity gaps are
measured as the difference between the volumes of assets and liabilities in the
Bank's current portfolio that are subject to repricing at various time horizons.
The following interest rate sensitivity table shows the Bank's repricing gaps as
of December 31, 2004. In this table transaction deposits, which may be repriced
at will by the Bank, have been included in the less than 3-month category. The
inclusion of all of the transaction deposits in the less than 3-month repricing
category causes the Bank to appear liability sensitive. Because the Bank may
reprice its transaction deposits at will, transaction deposits may or may not
reprice immediately with changes in interest rates. In recent years of moderate
interest rate changes the Bank's earnings have reacted as though the gap
position is slightly asset sensitive mainly because the magnitude of
interest-bearing liability repricing has been less than the magnitude of
interest-earning asset repricing. This difference in the magnitude of asset and
liability repricing is mainly due to the Bank's strong core deposit base, which
although they may be repriced within three months, historically, the timing of
their repricing has been longer than three months and the magnitude of their
repricing has been minimal.
Due to the limitations of gap analysis, as described above, the Bank does not
actively use gap analysis in managing interest rate risk. Instead, the Bank
relies on the more sophisticated interest rate risk simulation model described
above as its primary tool in measuring and managing interest rate risk.
Interest Rate Sensitivity - December 31, 2004
Repricing within:
-------------------------------------------------------------------------------
(dollars in thousands) Less than 3 3 - 6 6 - 12 1 - 5 Over
months months months years 5 years
-------------------------------------------------------------------------------
Interest-earning assets:
Securities $33,156 $20,382 $38,869 $161,563 $32,043
Loans 479,887 44,385 78,604 407,061 146,973
-------------------------------------------------------------------------------
Total interest-earning assets $513,042 $64,767 $117,473 $568,624 $179,016
-------------------------------------------------------------------------------
Interest-bearing liabilities
Transaction deposits $1,015,237 $ --- $ --- $ --- $ ---
Time 116,175 50,092 62,178 105,013 138
Other borrowings 5,320 13 28 22,791 ---
Junior subordinated debt 41,238 --- --- --- ---
-------------------------------------------------------------------------------
Total interest-bearing liabilities $1,177,970 $50,105 $62,206 $127,803 $138
-------------------------------------------------------------------------------
Interest sensitivity gap ($664,928) $14,662 $55,267 $440,821 $178,872
Cumulative sensitivity gap ($664,928) ($650,266) ($594,999) ($154,178) $24,694
As a percentage of earning assets:
Interest sensitivity gap (46.08%) 1.02% 3.83% 30.55% 12.40%
Cumulative sensitivity gap (46.08%) (45.07%) (41.24%) (10.69%) 1.71%
-31-
Liquidity
Liquidity refers to the Bank's ability to provide funds at an acceptable cost to
meet loan demand and deposit withdrawals, as well as contingency plans to meet
unanticipated funding needs or loss of funding sources. These objectives can be
met from either the asset or liability side of the balance sheet. Asset
liquidity sources consist of the repayments and maturities of loans, selling of
loans, short-term money market investments, maturities of securities and sales
of securities from the available-for-sale portfolio. These activities are
generally summarized as investing activities in the Consolidated Statement of
Cash Flows. Net cash used by investing activities totaled approximately
$176,975,000 in 2004. Increased loan balances were responsible for the major use
of funds in this category.
Liquidity is generated from liabilities through deposit growth and short-term
borrowings. These activities are included under financing activities in the
Consolidated Statement of Cash Flows. In 2004, financing activities provided
funds totaling $136,620,000. Internal deposit growth provided funds amounting to
$112,010,000. The Bank also had available correspondent banking lines of credit
totaling $50,000,000 at year-end. In addition, at December 31, 2004, the Company
had loans and securities available to pledge towards future borrowings from the
Federal Home Loan Bank of up to $101,391,000. As of December 31, 2004, the
Company had $28,152,000 of long-term debt and other borrowings as described in
Note 7 of the consolidated financial statements of the Company and the related
notes at Item 8 of this report. While these sources are expected to continue to
provide significant amounts of funds in the future, their mix, as well as the
possible use of other sources, will depend on future economic and market
conditions. Liquidity is also provided or used through the results of operating
activities. In 2004, operating activities provided cash of $29,463,000.
The Bank classifies its entire investment portfolio as available for sale (AFS).
The AFS securities plus cash and cash equivalents in excess of reserve
requirements totaled $356,050,000 at December 31, 2004, which was 21.9% of total
assets at that time. This was down from $392,401,000 and 26.7% at the end of
2003.
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, 2004, 2003 and 2002, the
Bank had $20,000,000 of these State deposits.
Certificates of Deposit in Denominations of $100,000 or More
Amounts as of December 31,
-----------------------------------
(dollars in thousands) 2004 2003 2002
-----------------------------------
Time remaining until maturity:
Less than 3 months $57,500 $39,264 $32,932
3 months to 6 months 13,910 11,018 16,311
6 months to 12 months 17,581 9,413 12,455
More than 12 months 40,415 34,805 28,706
-----------------------------------
Total $129,406 $94,500 $90,404
===================================
-32-
Loan demand also affects the Bank's liquidity position. The following table
presents the maturities of loans, net of deferred loan costs, at December 31,
2004:
Loan Maturities - December 31, 2004
After
One But
Within Within After 5
One Year 5 Years Years Total
---------------------------------------------------------------
(dollars in thousands)
Loans with predetermined interest rates:
Commercial, financial and agricultural $17,008 $26,287 $3,419 $46,714
Consumer installment 35,435 92,399 81,377 209,211
Real estate mortgage 26,342 80,926 126,397 233,665
Real estate construction 24,811 814 3,015 28,640
---------------------------------------------------------------
$103,596 $200,426 $214,208 $518,230
---------------------------------------------------------------
Loans with floating interest rates:
Commercial, financial and agricultural $65,502 $26,477 $1,639 $93,618
Consumer installment 200,984 3 - 200,987
Real estate mortgage 27,183 70,211 213,314 310,708
Real estate construction 28,632 11,504 9,288 49,424
---------------------------------------------------------------
$322,301 $108,195 $224,241 $654,737
---------------------------------------------------------------
Total loans $425,897 $308,621 $438,449 $1,172,967
===============================================================
The maturity distribution and yields of the investment portfolio is presented in
the following table. The timing of the maturities indicated in the table below
is based on final contractual maturities. Most mortgage-backed securities return
principal throughout their contractual lives. As such, the weighted average life
of mortgage-backed securities based on outstanding principal balance is usually
significantly shorter than the final contractual maturity indicated below. At
December 31, 2004, the Bank had no held-to-maturity securities.
Securities Maturities and Weighted Average Tax Equivalent Yields - December 31,
2004
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
------------------------------------------------------------------------------------
Securities Available-for-Sale (dollars in thousands)
- ------------------------------
Obligations of US government
corporations and agencies $258 5.58% $6,015 5.39% $208,311 3.88% $24,311 5.90% $238,895 4.13%
Obligations of states and
political subdivisions 56 4.33% 1,353 6.35% 11,590 7.87% 21,908 7.69% 34,907 7.69%
Corporate bonds - - 2,105 7.65% - - 10,106 3.30% 12,211 4.05%
- --------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $314 5.36% $9,473 6.03% $219,901 4.09% $56,325 6.13% $286,013 4.56%
==========================================================================================================================
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. Dividends from the Bank are subject to certain regulatory
restrictions.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases. See
Note 9 of the financial statements at Item 8 of this report for the terms. These
commitments do not significantly impact operating results. As of December 31,
2004 commitments to extend credit and commitments related to the Bank's deposit
overdraft privilege product were the Bank's only financial instruments with
off-balance sheet risk. The Bank has not entered into any contracts for
financial derivative instruments such as futures, swaps, options, etc.
Commitments to extend credit were $445,054,000 and $332,932,000 at December 31,
2004 and 2003, respectively, and represent 38.0% of the total loans outstanding
at year-end 2004 versus 33.9% at December 31, 2003. Commitments related to the
Bank's deposit overdraft privilege product totaled $28,815,000 and $0 at
December 31, 2004 and 2003, respectively.
-33-
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as
of December 31, 2004:
Less than 1-3 3-5 More than
(dollars in thousands) Total one year years years 5 years
----------------------------------------------------------------
Federal funds purchased $46,400 $46,400 - - -
FHLB loan, fixed rate of 5.41%
payable on April 7, 2008, callable
in its entirety by FHLB on a quarterly
basis beginning April 7, 2003 20,000 - - $20,000 -
FHLB loan, fixed rate of 5.35%
payable on December 9, 2008 1,500 - - 1,500 -
FHLB loan, fixed rate of 5.77%
payable on February 23, 2009 1,000 - - $1,000 -
Capital lease obligation on premises,
effective rate of 13% payable
monthly in varying amounts
through December 1, 2009 344 - - 344 -
Other collateralized borrowings, fixed rate
of 0.91% payable on January 2, 2005 5,308 5,308 - - -
Junior subordinated debt, adjustable rate
of three-month LIBOR plus 3.05%,
callable in whole or in part by the
Company on a quarterly basis beginning
October 7, 2008, matures October 7, 2033 20,619 - - - 20,619
Junior subordinated debt, adjustable rate
of three-month LIBOR plus 2.55%,
callable in whole or in part by the
Company on a quarterly basis beginning
July 23, 2009, matures July 23, 2034 20,619 - - - 20,619
Operating lease obligations 6,806 1,327 $2,202 1,662 1,615
Deferred compensation(1) 1,544 262 462 427 393
Supplemental retirement plans(1) 4,996 488 956 926 2,626
Employment agreements 233 115 118 - -
----------------------------------------------------------------
Total contractual obligations $129,369 $53,900 $3,738 $25,859 $45,872
================================================================
(1) These amounts represent known certain payments to participants under
the Company's deferred compensation and supplemental retirement plans.
See Note 14 in the financial statements at Item 8 of this report for
additional information related to the Company's deferred compensation
and supplemental retirement plan liabilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk Management" under Item 7 of this report.
-34-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets as of December 31, 2004 and 2003 36
Consolidated Statements of Income for
the years ended December 31, 2004, 2003, and 2002 37
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2004, 2003, and 2002 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002 39
Notes to Consolidated Financial Statements 40
Management's Report of Internal Control over Financial Reporting 67
Independent Registered Public Accounting Firm's Reports 68
-35-
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
At December 31,
2004 2003
---------------------------------
(in thousands, except share data)
Assets
Cash and due from banks $70,037 $80,603
Federal funds sold - 326
---------------------------------
Cash and cash equivalents 70,037 80,929
Securities available for sale 286,013 311,472
Federal Home Loan Bank stock, at cost 6,781 4,784
Loans, net of allowance for loan losses
of $16,057 and $13,773 1,156,910 968,687
Foreclosed assets, net of allowance for
losses of $180 and $180 - 932
Premises and equipment, net 19,853 19,521
Cash value of life insurance 40,479 38,980
Accrued interest receivable 6,473 6,027
Goodwill 15,519 15,519
Intangible assets 5,408 6,085
Other assets 18,501 15,819
---------------------------------
Total assets $1,625,974 $1,468,755
=================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $311,275 $298,462
Interest-bearing 1,037,558 938,361
---------------------------------
Total deposits 1,348,833 1,236,823
Fed funds purchased 46,400 39,500
Accrued interest payable 3,281 2,638
Other liabilities 19,938 18,328
Other borrowings 28,152 22,887
Junior subordinated debt 41,238 20,619
---------------------------------
Total liabilities 1,487,842 1,340,795
---------------------------------
Commitments and contingencies (Notes 5, 9 and 16)
Shareholders' equity:
Common stock, no par value: 50,000,000
shares authorized; issued and outstanding:
15,723,317 at December 31, 2004 70,699
15,668,248 at December 31, 2003 69,767
Retained earnings 67,785 56,379
Accumulated other comprehensive (loss) income (352) 1,814
---------------------------------
Total shareholders' equity 138,132 127,960
---------------------------------
Total liabilities and shareholders'
equity $1,625,974 $1,468,755
=================================
Share data for all periods have been adjusted to reflect the 2-for-1 stock split
paid on April 30, 2004. The accompanying notes are an integral part of these
consolidated financial statements.
-36-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31,
------------------------------------------
2004 2003 2002
------------------------------------------
(in thousands, except per share data)
Interest and dividend income:
Loans, including fees $72,637 $60,997 $52,472
Debt securities:
Taxable 10,312 10,692 9,222
Tax exempt 1,728 1,940 2,188
Dividends 237 211 208
Federal funds sold 18 129 606
------------------------------------------
Total interest and dividend income 84,932 73,969 64,696
------------------------------------------
Interest expense:
Deposits 10,171 11,257 11,620
Federal funds purchased 510 189 2
Other borrowings 1,301 1,288 1,292
Junior subordinated debt 1,381 355 -
------------------------------------------
Total interest expense 13,363 13,089 12,914
------------------------------------------
Net interest income 71,569 60,880 51,782
Provision for loan losses 3,550 1,250 2,800
------------------------------------------
Net interest income, after provision for loan losses 68,019 59,630 48,982
==========================================
Noninterest income:
Service charges and fees 17,691 14,541 11,286
Gain on sale of investments - 197 -
Gain on sale of loans 1,659 4,168 3,641
Commissions on sale of non-deposit investment products 2,327 1,766 2,467
Increase in cash value of life insurance 1,499 1,296 606
Other 1,618 941 1,180
------------------------------------------
Total noninterest income 24,794 22,909 19,180
------------------------------------------
Noninterest expense:
Salaries and related benefits 33,191 29,714 24,290
Other 26,988 25,813 21,681
------------------------------------------
Total noninterest expense 60,179 55,527 45,971
------------------------------------------
Income before income taxes 32,634 27,012 22,191
------------------------------------------
Provision for income taxes 12,452 10,124 8,122
------------------------------------------
Net income $20,182 $16,888 $14,069
==========================================
Earnings per share:
Basic $1.29 $1.11 $1.00
Diluted $1.24 $1.07 $0.98
Per share data for all periods have been adjusted to reflect the 2-for-1 stock
split paid on April 30, 2004. The accompanying notes are an integral part of
these consolidated financial statements.
-37-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings (Loss) Income Total
------------------------------------------------------
(in thousands, except share data)
Balance, December 31, 2001 14,001,958 $49,679 $37,909 ($655) $86,933
Comprehensive income: ---------
Net income 14,069 14,069
Change in net unrealized gain on
Securities available for sale, net 2,931 2,931
Change in minimum pension liability, net 27 27
---------
Total comprehensive income 17,027
Stock options exercised 139,972 427 427
Tax benefit of stock options exercised 436 436
Repurchase of common stock (20,000) (70) (119) (189)
Dividends paid ($0.40 per share) (5,620) (5,620)
------------------------------------------------------
Balance, December 31, 2002 14,121,930 $50,472 $46,239 $2,303 $99,014
Comprehensive income: ---------
Net income 16,888 16,888
Change in net unrealized gain on
Securities available for sale, net (529) (529)
Change in minimum pension liability, net 40 40
---------
Total comprehensive income 16,399
Stock options exercised 154,294 717 717
Tax benefit of stock options exercised 440 440
Issuance of stock and options
related to merger 1,447,024 18,383 18,383
Repurchase of common stock (55,000) (245) (608) (853)
Dividends paid ($0.40 per share) (6,140) (6,140)
------------------------------------------------------
Balance, December 31, 2003 15,668,248 $69,767 $56,379 $1,814 $127,960
Comprehensive income: ---------
Net income 20,182 20,182
Change in net unrealized gain on
Securities available for sale, net (1,936) (1,936)
Change in minimum pension liability, net (230) (230)
---------
Total comprehensive income 18,016
Stock options exercised 222,669 1,348 1,348
Tax benefit of stock options exercised 330 330
Repurchase of common stock (167,600) (746) (2,047) (2,793)
Dividends paid ($0.43 per share) (6,729) (6,729)
------------------------------------------------------
Balance at December 31, 2004 15,723,317 $70,699 $67,785 ($352) $138,132
======================================================
Share and per share data for all periods have been adjusted to reflect the
2-for-1 stock split paid on April 30, 2004. The accompanying notes are an
integral part of these consolidated financial statements.
-38-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------------------
2004 2003 2002
----------------------------------------------------
(in thousands)
Operating activities:
Net income $20,182 $16,888 $14,069
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment, and amortization 3,402 3,059 2,608
Amortization of intangible assets 1,358 1,207 911
Provision for loan losses 3,550 1,250 2,800
Amortization of investment securities premium, net 1,845 3,514 1,841
Gain on sale of investments - (197) -
Originations of loans for resale (88,158) (175,640) (177,796)
Proceeds from sale of loans originated for resale 89,015 177,860 179,415
Gain on sale of loans (1,659) (4,168) (3,641)
Amortization of mortgage servicing rights 739 1,356 713
(Recovery of) provision for mortgage
servicing rights valuation allowance (600) 600 -
(Gain) loss on sale of fixed assets (23) 2 8
Gain on sale of foreclosed assets (566) (113) (8)
Increase in cash value of life insurance (1,499) (1,296) (606)
Deferred income tax benefit (1,130) (282) (1,247)
Change in:
Interest receivable (446) 159 (122)
Interest payable 643 (289) (561)
Other assets and liabilities, net 2,810 3,107 3,922
----------------------------------------------------
Net cash provided by operating activities 29,463 27,017 22,306
----------------------------------------------------
Investing activities:
Net cash obtained in mergers and acquisitions - 7,450 -
Proceeds from maturities of securities available-for-sale 79,442 205,021 131,592
Proceeds from sale of securities available-for-sale - 22,320 -
Purchases of securities available-for-sale (59,091) (168,953) (241,566)
Purchase of Federal Home Loan Bank stock (1,997) (210) (228)
Loan originations and principal collections, net (192,992) (221,235) (31,203)
Proceeds from sale of premises and equipment 545 20 17
Purchases of property and equipment (3,753) (2,746) (3,121)
Proceeds from sale of foreclosed assets 1,490 726 79
Investment in subsidiary (619) (619) -
Purchase of life insurance - (22,475) -
----------------------------------------------------
Net cash used by investing activities (176,975) (180,701) (144,430)
----------------------------------------------------
Financing activities:
Net increase in deposits 112,010 105,537 124,844
Net change in federal funds purchased 6,900 39,500 -
Payments of principal on long-term other borrowings (43) (37) (32)
Net change in short-term other borrowings 5,308 - -
Issuance of junior subordinated debt 20,619 20,619 -
Repurchase of Common Stock (2,793) (853) (189)
Dividends paid (6,729) (6,140) (5,620)
Exercise of stock options 1,348 717 427
----------------------------------------------------
Net cash provided by financing activities 136,620 159,343 119,430
----------------------------------------------------
Net change in cash and cash equivalents (10,892) 5,659 (2,694)
----------------------------------------------------
Cash and cash equivalents and beginning of period 80,929 75,270 77,964
----------------------------------------------------
Cash and cash equivalents at end of period $70,037 $80,929 $75,270
====================================================
Supplemental disclosure of noncash activities:
Unrealized (loss) gain on securities available for sale ($3,263) ($990) $5,073
Loans transferred to foreclosed assets - 613 932
Supplemental disclosure of cash flow activity:
Cash paid for interest expense 12,720 13,378 13,475
Cash paid for income taxes 14,630 8,160 7,900
Income tax benefit from stock option exercises 330 440 436
The acquisition of North State National Bank Involved the following:
Common stock issued 18,383
Liabilities assumed 126,648
Fair value of assets acquired, other than cash and cash equivalents (118,697)
Core deposit intangible (3,365)
Goodwill (15,519)
Net cash and cash equivalents received $7,450
The accompanying notes are an integral part of these consolidated financial
statements.
-39-
TRICO BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2003 and 2002
Note 1 - Summary of Significant Accounting Policies
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 13 in-store branch offices in the
California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern,
Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer, Sacramento, Shasta,
Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo 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 allowance for loan losses, goodwill and other intangible
assessments, income taxes, and the valuation of mortgage servicing rights, are
the only accounting estimates that materially affect the Company's financial
statements.
Significant Group Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to
customers located throughout the northern San Joaquin Valley, the Sacramento
Valley and northern mountain regions of California. The Company has a
diversified loan portfolio within the business segments located in this
geographical area.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold.
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 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
2004 and 2003, 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 an other than temporary decline in value has occurred.
-40-
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or fair value, as determined by aggregate
outstanding commitments from investors of current investor yield requirements.
Net unrealized losses are recognized through a valuation allowance by charges to
income. At December 31, 2004 and 2003, the Company had no loans held for sale.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Company. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold.
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 be classified as accrual. 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.
All imparied loans are classified as nonaccrual loans.
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.
Servicing
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Generally, purchased
servicing rights are capitalized at the cost to acquire the rights. For sales of
mortgage loans, a portion of the cost of originating the loan is allocated to
the servicing right based on relative fair value. Fair value is based on market
prices for comparable mortgage servicing contracts, when available, or
alternatively, is based on a valuation model that calculates the present value
of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net
servicing income, such as the cost to service, the discount rate, the custodial
earnings rate, an inflation rate, ancillary income, prepayment speeds and
default rates and losses. Capitalized servicing rights are reported in other
assets and are amortized into non-interest income in proportion to, and over the
period of, the estimated future servicing income of the underlying financial
assets.
Servicing assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights into tranches based on predominant risk characteristics, such as interest
rate, loan type and investor type. Impairment is recognized through a valuation
allowance for an individual tranche, to the extent that fair value is less than
the capitalized amount for the tranche. If the Company later determines that all
or a portion of the impairment no longer exists for a particular tranche, a
reduction of the allowance may be recorded as an increase to income.
Servicing fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal; or a fixed
amount per loan and are recorded as income when earned. The amortization of
mortgage servicing rights is netted against loan servicing fee income.
-41-
The following table summarizes the Company's mortgage servicing rights recorded
in other assets as of December 31, 2004 and 2003.
December 31, December 31,
(Dollars in thousands) 2003 Additions Reductions 2004
-------------------------------------------------
Mortgage Servicing Rights $3,413 $802 ($739) $3,476
Valuation allowance (600) - 600 -
-------------------------------------------------
Mortgage servicing rights, net
of valuation allowance $2,813 $802 ($139) $3,476
=================================================
At December 31, 2004 and 2003, the Company serviced real estate mortgage loans
for others of $368 million and $357 million, respectively. At December 31, 2004
and 2003, the fair value of the Company's mortgage servicing rights assets was
$3,568,000 and $2,813,000, respectively. The fair value of mortgage servicing
rights was determined using a discount rate of 10%, prepayment speeds ranging
from 11% to 25%, depending on stratification of the specific servicing right,
and a weighted average default rate of 0%. Based on conditions at December 31,
2004, estimated aggregate annual amortization expense related to mortgage
servicing rights is expected to be $670,000 in each of the next five years.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to
extend credit, including commitments under credit card arrangements, commercial
letters of credit, and standby letters of credit. Such financial instruments are
recorded when they are funded.
Premises and Equipment
Land is carried at cost. Buildings and equipment, including those acquired under
capital lease, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization expenses are computed using the
straight-line method over the estimated useful lives of the related assets or
lease terms. Asset lives range from 3-10 years for furniture and equipment and
15-40 years for land improvements and buildings.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, management periodically performs
valuations and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other noninterest expense.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assets (SFAS 142), as of January 1, 2002. Pursuant to SFAS 142,
goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the provisions of
SFAS 142. SFAS 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FASB
Statement of Financial Accounting Standard No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets (SFAS 144).
As of the date of adoption, the Company had identifiable intangible assets
consisting of core deposit premiums and minimum pension liability. Core deposit
premiums are amortized using an accelerated method over a period of ten years.
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates.
The following table summarizes the Company's core deposit intangibles as of
December 31, 2004 and 2003.
December 31, December 31,
(Dollar in Thousands) 2003 Additions Reductions 2004
-------------------------------------------------
Core deposit intangibles $13,643 - - $13,643
Accumulated amortization (7,843) - ($1,358) (9,201)
-------------------------------------------------
Core deposit intangibles, net $5,800 - ($1,358) $4,442
=================================================
-42-
Core deposit intangibles are amortized over their expected useful lives. Such
lives are periodically reassessed to determine if any amortization period
adjustments are indicated. The following table summarizes the Company's
estimated core deposit intangible amortization for each of the five succeeding
years:
Estimated Core Deposit
Intangible Amortization
Years Ended (Dollar in thousands)
------------- -------------------------
2005 $1,381
2006 $1,395
2007 $490
2008 $523
2009 $328
Thereafter $325
The following table summarizes the Company's minimum pension liability
intangible as of December 31, 2004 and 2003.
December 31, December 31,
(Dollar in Thousands) 2003 Additions Reductions 2004
--------------------------------------------
Minimum pension liability intangible $285 $681 - $966
============================================
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates.
The following table summarizes the Company's goodwill intangible as of December
31, 2004 and 2003.
December 31, December 31,
(Dollar in Thousands) 2003 Additions Reductions 2004
--------------------------------------------
Goodwill 15,519 - - 15,519
============================================
Impairment of Long-Lived Assets and Goodwill
The Company adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did
not affect the Company's consolidated financial statements. In accordance with
SFAS 144, long-lived assets, such as property, plant, and equipment, and
purchased intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposed group classified as held for sale would
be presented separately in the appropriate asset and liability sections of the
balance sheet.
On December 31 of each year, goodwill is tested for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. This determination is made at
the reporting unit level and consists of two steps. First, the Company
determines the fair value of a reporting unit and compares it to its carrying
amount. Second, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any excess of the carrying amount of
the reporting unit's goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation, in accordance
with FASB Statement of Financial Accounting Standards No. 141, Business
Combinations (SFAS 141). The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill.
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.
-43-
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:
(in thousands, except per share amounts) 2004 2003 2002
Net income As reported $20,182 $16,888 $14,069
Pro forma $19,710 $16,622 $13,857
Basic earnings per share As reported $1.29 $1.11 $1.00
Pro forma $1.26 $1.09 $0.98
Diluted earnings per share As reported $1.24 $1.07 $0.98
Pro forma $1.21 $1.05 $0.96
Stock-based employee compensation
cost, net of related tax effects,
included in net income As reported $0 $0 $0
Pro forma $472 $266 $212
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 2004, 2003, and 2002: risk-free interest rate of
3.39%, 2.87%, and 4.01%; expected dividend yield of 2.3%, 3.3% and 3.3%;
expected life of 6 years, 6 years and 6 years; expected volatility of 19%, 27%
and 27%, respectively. The weighted average grant date fair value of an option
to purchase one share of common stock granted in 2004, 2003, and 2002 was $3.15,
$4.29, and $2.69 respectively.
Earnings Per Share
Basic earnings per share represents income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustments to income that would result from assumed issuance.
Potential common shares that may be issued by the Company relate solely from
outstanding stock options, and are determined using the treasury stock method.
Earnings per share have been computed based on the following:
------------------------------
2004 2003 2002
------------------------------
(in thousands)
Net income $20,182 $16,888 $14,069
Average number of common shares outstanding 15,660 15,282 14,038
Effect of dilutive stock options 610 475 348
------------------------------
Average number of common shares outstanding
used to calculate diluted earnings per share 16,270 15,757 14,386
==============================
Excluded from the computation of diluted earnings per share were 0, 0, and
36,000 options for the years ended December 31, 2004, 2003, and 2002,
respectively, because the effect of these options was antidilutive.
-44-
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
-------------------------------------------
2004 2003 2002
-------------------------------------------
(in thousands)
Unrealized holding (losses) gains on available-for-sale securities ($3,263) ($990) $5,073
Tax effect 1,327 461 (2,142)
-------------------------------------------
Unrealized holding (losses) gains on available-for-sale securities, net of tax (1,936) (529) 2,931
-------------------------------------------
Change in minimum pension liability (385) 67 (45)
Tax effect 155 (27) 18
-------------------------------------------
Change in minimum pension liability, net of tax (230) 40 (27)
-------------------------------------------
($2,166) ($489) $2,904
===========================================
The components of accumulated other comprehensive income, included in
shareholders' equity, are as follows:
December 31,
---------------------------
2004 2003
---------------------------
(in thousands)
Net unrealized gain on available-for-sale securities $1,007 $4,270
Tax effect (424) (1,751)
---------------------------
Unrealized holding gains on available-for-sale securities, net of tax 583 2,519
---------------------------
Minimum pension liability (1,559) (1,174)
Tax effect 624 469
---------------------------
Minimum pension liability, net of tax (935) (705)
---------------------------
Accumulated other comprehensive (loss) income ($352) $1,814
===========================
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued FASB
Statement of Financial Accounting Standard No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150) which establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 also includes required disclosures for financial instruments
within its scope. For the Company, SFAS 150 was effective for instruments
entered into or modified after May 31, 2003 and otherwise will be effective as
of January 1, 2004, except for mandatorily redeemable financial instruments. For
certain mandatorily redeemable financial instruments, SFAS 150 will be effective
for the Company on January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatorily redeemable financial
instruments. The Company currently does not have any financial instruments that
are within the scope of this Statement.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (VIEs), which was issued in January
2003. The Company was required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the FIN 46R will be applied beginning on January 1, 2005. For
any VIEs that must be consolidated under FIN 46R that were created before
January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE
initially would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. The Company currently does not have any VIEs
that are within the scope of this Statement.
-45-
In December 2003, FASB issued FASB Statement of Financial Accounting Standard
No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits
(SFAS 132 revised), which prescribes employers' disclosures about pension plans
and other postretirement benefit plans; it does not change the measurement or
recognition of those plans. SFAS 132 retains and revises the disclosure
requirements contained in the original SFAS 132. It also requires additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other postretirement benefit plans.
The Statement generally is effective for fiscal years ending after December 15,
2003. Disclosures required by this standard are included in the notes to these
consolidated financial statements.
In December 2004, the FASB issued FASB Statement of Financial Accounting
Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces
SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supercedes
APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first interim or annual period after June 15, 2005, with
early adoption encouraged. The pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial statement recognition.
The Company is required to adopt SFAS 123R on July 1, 2005. Under SFAS 123R, the
Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options at the beginning of the first
quarter of adoption of SFAS 123R, while the retroactive methods would record
compensation expense for all unvested stock options and restricted stock
beginning with the first period restated. The Company is evaluating the
requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a
material impact on the Company's consolidated results of operations and earnings
per share. The Company has not yet determined the method of adoption or the
effect of adopting SFAS 123R, and it has not determined whether the adoption
will result in amounts that are similar to the current pro forma disclosures
under SFAS 123.
In March 2004, the United States Securities and Exchange Commission (SEC) issued
SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to
Loan Commitments (SAB 105), which summarizes the views of the staff of the SEC
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments. SAB 105 provides that the
fair value of recorded loan commitments that are accounted for as derivatives
under SFAS 133, Accounting for Derivative Instruments and Hedging Activities,
should not incorporate the expected future cash flows related to the associated
servicing of the future loan. In addition, SAB 105 requires registrants to
disclose their accounting policy for loan commitments. The provisions of SAB 105
must be applied to loan commitments accounted for as derivatives that are
entered into after March 31, 2004. The adoption of this accounting standard did
not have a material impact on the Company's consolidated financial statements.
In December 2003, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position No. 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (SOP 03-3), which addresses accounting for
differences between the contractual cash flows of certain loans and debt
securities and the cash flows expected to be collected when loans or debt
securities are acquired in a transfer and those cash flow differences are
attributable, at least in part, to credit quality. As such, SOP 03-3 applies to
loans and debt securities acquired individually, in pools or as part of a
business combination and does not apply to originated loans. The application of
SOP 03-3 limits the interest income, including accretion of purchase price
discounts, that may be recognized for certain loans and debt securities.
Additionally, SOP 03-3 does not allow the excess of contractual cash flows over
cash flows expected to be collected to be recognized as an adjustment of yield,
loss accrual or valuation allowance, such as the allowance for possible loan
losses. SOP 03-3 requires that increases in expected cash flows subsequent to
the initial investment be recognized prospectively through adjustment of the
yield on the loan or debt security over its remaining life. Decreases in
expected cash flows should be recognized as impairment. In the case of loans
acquired in a business combination where the loans show signs of credit
deterioration, SOP 03-3 represents a significant change from current purchase
accounting practice whereby the acquiree's allowance for loan losses is
typically added to the acquirer's allowance for loan losses. SOP 03-3 is
effective for loans and debt securities acquired by the Company beginning
January 1, 2005. The adoption of this new standard is not expected to have a
material impact on the Company's consolidated financial statements.
Reclassifications
Certain amounts previously reported in the 2003 and 2002 financial statements
have been reclassified to conform to the 2004 presentation. These
reclassifications did not affect previously reported net income or total
shareholders' equity.
-46-
Note 2 - Restricted Cash Balances
Reserves (in the form of deposits with the Federal Reserve Bank) of $500,000
were maintained to satisfy Federal regulatory requirements at December 31, 2004
and December 31, 2003. These reserves are included in cash and due from banks in
the accompanying balance sheets.
Note 3 - Investment Securities
The amortized cost and estimated fair values of investments in debt and equity
securities are summarized in the following tables:
December 31, 2004
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
Securities Available-for-Sale (in thousands)
Obligations of U.S. government corporations and agencies $238,865 $1,566 $(1,536) $238,895
Obligations of states and political subdivisions 32,380 2,527 -- 34,907
Corporate debt securities 13,761 108 (1,658) 12,211
------------------------------------------------------------
Total securities available-for-sale $285,006 $4,201 $(3,194) $286,013
============================================================
December 31, 2003
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
Securities Available-for-Sale (in thousands)
Obligations of U.S. government corporations and agencies $257,712 $3,466 $(377) $260,801
Obligations of states and political subdivision 35,736 2,610 -- 38,346
Corporate debt securities 13,754 210 (1,639) 12,325
------------------------------------------------------------
Total securities available-for-sale $307,202 $6,286 $(2,016) $311,472
============================================================
The amortized cost and estimated fair value of debt securities at December 31,
2004 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. At December 31, 2004,
obligations of U.S. government corporations and agencies with a cost basis
totaling $238,865,000 consist entirely of mortgage-backed securities whose
contractual maturity, or principal repayment, will follow the repayment of the
underlying mortgages. For purposes of the following table, the entire
outstanding balance of these mortgage-backed securities issued by U.S.
government corporations and agencies is categorized based on final maturity
date. At December 31, 2004, the Company estimates the average remaining life of
these mortgage-backed securities issued by U.S. government corporations and
agencies to be approximately 3.2 years. Average remaining life is defined as the
time span after which the principal balance has been reduced by half.
Estimated
Amortized Fair
Cost Value
---------------------------------
(in thousands)
Investment Securities
Due in one year $310 $314
Due after one year through five years 9,120 9,473
Due after five years through ten years 220,284 219,901
Due after ten years 55,292 56,325
---------------------------------
Totals $285,006 $286,013
=================================
-47-
Proceeds from sales of investment securities were as follows:
Gross Gross Gross
For the Year Proceeds Gains Losses
- ---------------------------------------------------------------------
(in thousands)
2004 -- -- --
2003 $22,320 $197 --
2002 -- -- --
Investment securities with an aggregate carrying value of $184,287,000 and
$162,942,000 at December 31, 2004 and 2003, respectively, were pledged as
collateral for specific borrowings, lines of credit and local agency deposits.
Gross unrealized losses on investment securities and the fair value of the
related securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2004, were as follows:
Less than 12 months 12 months or more Total
----------------------- --------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
-------------------------------------------------------------------
Securities Available-for-Sale: (in thousands)
Obligations of U.S. government
corporations and agencies $112,091 ($969) $39,024 ($567) $151,115 ($1,536)
Corporate debt securities -- -- 10,106 (1,658) 10,106 (1,658)
-------------------------------------------------------------------
Total securities available-for-sale $112,091 ($969) $49,130 ($2,225) $161,221 ($3,194)
===================================================================
Obligations of U.S. government corporations and agencies: The unrealized losses
on investments in obligations of U.S. government corporations and agencies were
caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by U.S. Government Sponsored Entities (principally
Fannie Mae and Freddie Mac). It is expected that the securities would not be
settled at a price less than the amortized cost of the investment. Because the
decline in fair value is attributable to changes in interest rates and not
credit quality, and because the Company has the ability and intent to hold these
investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired. At December 31, 2004, 29 debt
securities representing obligations of U.S. government corporations and agencies
had unrealized losses with aggregate depreciation of 1% from the Company's
amortized cost basis.
Corporate debt securities: The investments in corporate debt securities with
unrealized losses are comprised of variable-rate trust preferred bonds issued by
bank holding companies that mature in 2027 and 2028. The unrealized losses on
corporate debt securities were caused by interest rate increases. Two of the
bank holding companies representing $8,250,000 of the $10,106,000 of corporate
bonds with unrealized losses are rated investment grade by major outside credit
rating agencies, and their credit ratings have not diminished since the bonds
were purchased by the Company. The two bank holding companies representing the
remaining $1,856,000 of bonds are not rated by credit rating agencies. At least
annually, the Company performs its own analysis of the credit worthiness of each
of the corporate debt issuing companies in question. Nothing in those analyses
indicates that the unrealized losses are due to anything other than increases in
interest rates. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and because the Company has the intent
and ability to hold these investments until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired. At
December 31, 2004, 4 corporate debt securities had unrealized losses with
aggregate depreciation of 14% from the Company's amortized cost basis.
-48-
Note 4 - Loans
A summary of the balances of loans follows:
December 31,
---------------------------
2004 2003
---------------------------
(in thousands)
Mortgage loans on real estate:
Residential 1-4 family $94,296 $90,663
Commercial 453,157 370,259
---------------------------
Total mortgage loan on real estate 547,453 460,922
---------------------------
Consumer:
Home equity lines of credit 223,345 151,713
Home equity loans 86,092 82,659
Auto Indirect 80,668 62,178
Other 15,658 19,889
---------------------------
Total consumer loans 405,763 316,439
---------------------------
Commercial 140,446 142,311
---------------------------
Construction:
Residential 1-4 family 30,653 28,174
Other construction 48,073 33,805
---------------------------
Total construction 78,726 61,979
---------------------------
Total loans 1,172,388 981,651
---------------------------
Less: Allowance for loan losses (16,057) (13,773)
Net deferred loan costs 579 809
---------------------------
Total loans, net $1,156,910 $968,687
===========================
Loans with an aggregate carrying value of $70,930,000 and $46,538,000 at
December 31, 2004 and 2003, respectively, were pledged as collateral for
specific borrowings and lines of credit.
Activity in the allowance for loan losses was as follows:
Years Ended December 31,
------------------------------------
2004 2003 2002
------------------------------------
(in thousands)
Balance, beginning of year $13,773 $14,377 $13,058
Addition through merger - 928 -
Provision for loan losses 3,550 1,250 2,800
Loans charged off (1,632) (3,753) (1,786)
Recoveries of loans previously charged off 366 971 305
------------------------------------
Balance, end of year $16,057 $13,773 $14,377
====================================
Loans classified as nonaccrual, net of guarantees of the U.S. government,
including its agencies and its government-sponsored agencies, amounted to
approximately $4,845,000, $4,360,000 and $8,140,000 at December 31, 2004, 2003,
and 2002, respectively. These nonaccrual loans were classified as impaired and
are included in the recorded balance in impaired loans for the respective years
shown below. If interest on those loans had been accrued, such income would have
been approximately $1,231,000, $1,071,000 and $477,000 in 2004, 2003 and 2002,
respectively. Loans 90 days past due and still accruing, net of guarantees of
the U.S. government, including its agencies and its government-sponsored
agencies, amounted to approximately $61,000, $34,000 and $40,000 at December 31,
2004, 2003, and 2002, respectively.
-49-
As of December 31, the Company's recorded investment in impaired loans and the
related valuation allowance were as follows (in thousands):
2004
-------------------------------------
Recorded Valuation
Investment Allowance
-------------------------------------
Impaired loans -
Valuation allowance required $4,845 $543
No valuation allowance required -- --
-------------------------------------
Total impaired loans $4,845 $543
=====================================
2003
-------------------------------------
Recorded Valuation
Investment Allowance
-------------------------------------
Impaired loans -
Valuation allowance required $4,360 $369
No valuation allowance required -- --
-------------------------------------
Total impaired loans $4,360 $369
=====================================
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 $4,603,000, $6,270,000 and $7,115,000 for the years ended December 31, 2004,
2003 and 2002, respectively. The Company recognized interest income on impaired
loans of $965,000, $372,000 and $733,000 for the years ended December 31, 2004,
2003 and 2002, respectively.
Note 5 - Premises and Equipment
Premises and equipment were comprised of:
December 31,
---------------------------------
2004 2003
---------------------------------
(in thousands)
Premises $15,524 $15,254
Furniture and equipment 20,143 20,045
---------------------------------
35,667 35,299
Less: Accumulated depreciation (19,646) (19,841)
---------------------------------
16,021 15,458
Land and land improvements 3,832 4,063
---------------------------------
$19,853 $19,521
=================================
Depreciation of premises and equipment amounted to $2,899,000, $2,701,000, and
$2,329,000 in 2004, 2003, and 2002, respectively.
The Company leases one building for which the lease is accounted for as a
capital lease. The cost basis of the building under this capital lease is
$831,000 with accumulated depreciation of $690,000 and $662,000 at December 31,
2004 and 2003, respectively. The cost basis and accumulated depreciation of this
building under capital lease are recorded in the balance of premise and
equipment. Depreciation related to this building under capital lease is included
in the depreciation of premises and equipment noted above.
-50-
At December 31, 2004, 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)
2005 $92 $1,327
2006 93 1,162
2007 94 1,040
2008 95 932
2009 96 730
Thereafter - 1,615
----------------------------------
Future minimum lease payments 470 $6,806
Less amount representing interest 126 ============
------------
Present value of future lease payments $344
============
Rent expense under operating leases was $1,644,000 in 2004, $1,442,000 in 2003,
and $1,201,000 in 2002.
Note 6 - Deposits
A summary of the balances of deposits follows:
December 31,
---------------------------
2004 2003
---------------------------
(in thousands)
Noninterest-bearing demand $311,275 $298,462
Interest-bearing demand 230,763 220,875
Savings 474,414 441,461
Time certificates, $100,000 and over 129,406 94,500
Other time certificates 202,975 181,525
---------------------------
Total deposits $1,348,833 $1,236,823
===========================
Certificate of deposit balances of $20,000,000 from the State of California were
included in time certificates, $100,000 and over, at December 31, 2004 and 2003.
The Bank participates in a deposit program offered by the State of California
whereby the State may make deposits at the Bank's request subject to collateral
and credit worthiness constraints. The negotiated rates on these State deposits
are generally favorable to other wholesale funding sources available to the
Bank.
At December 31, 2004, $1,033,000 of overdrawn deposit balances was classified as
loans.
At December 31, 2004, the scheduled maturities of time deposits were as follows
(in thousands):
Scheduled
Maturities
--------------
2005 $227,230
2006 25,889
2007 55,851
2008 11,256
2009 12,017
Thereafter 138
--------------
Total $332,381
==============
-51-
Note 7 - Other Borrowings
A summary of the balances of other borrowings follows:
December 31,
2004 2003
-------------------------
(in thousands)
FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable
in its entirety by FHLB on a quarterly basis beginning April 7, 2003 $20,000 $20,000
FHLB loan, fixed rate of 5.35% payable on December 9, 2008 1,500 1,500
FHLB loan, fixed rate of 5.77% payable on February 23, 2009 1,000 1,000
Capital lease obligation on premises, effective rate of 13% payable
monthly in varying amounts through December 1, 2009 344 387
Other collateralized borrowings, fixed rate of 0.91% payable on January 2, 2005 5,308 --
-------------------------
Total other borrowings $28,152 $22,887
=========================
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,
2004, this line provided for maximum borrowings of $170,291,000 of which
$68,900,000 was outstanding, leaving $101,391,000 available. The total of
borrowings from the FHLB at December 31, 2004 consists of the $22,500,000
described in the table above, and $46,400,000 of borrowings that mature
overnight and are classified as federal funds purchased.
At December 31, 2004, the Company had $5,308,000 of other collateralized
borrowings. Other collateralized borrowings are generally overnight maturity
borrowings from non-financial institutions that are collateralized by securities
owned by the Company.
The maximum month-end outstanding balances of short term reverse repurchase
agreements were $0 in both 2004 and 2003.
The Company maintains a collateralized line of credit with the Federal Reserve
Bank of San Francisco. Based on the collateral pledged at December 31, 2004,
this line provided for maximum borrowings of $17,063,000 of which $0 was
outstanding, leaving $17,063,000 available.
The Company has available unused correspondent banking lines of credit from
commercial banks totaling $50,000,000 for federal funds transactions at December
31, 2004.
-52-
Note 8 - Junior Subordinated Debt
On July 31, 2003, the Company formed a subsidiary business trust, TriCo Capital
Trust I, to issue trust preferred securities. Concurrently with the issuance of
the trust preferred securities, the trust issued 619 shares of common stock to
the Company for $1,000 per share or an aggregate of $619,000. In addition, the
Company issued a Junior Subordinated Debenture to the Trust in the amount of
$20,619,000. The terms of the Junior Subordinated Debenture are materially
consistent with the terms of the trust preferred securities issued by TriCo
Capital Trust I. Also on July 31, 2003, TriCo Capital Trust I completed an
offering of 20,000 shares of cumulative trust preferred securities for cash in
an aggregate amount of $20,000,000. The trust preferred securities are
mandatorily redeemable upon maturity on October 7, 2033 with an interest rate
that resets quarterly at three-month LIBOR plus 3.05%, or 4.16% for the first
quarterly interest period. TriCo Capital Trust I has the right to redeem the
trust preferred securities on or after October 7, 2008. The trust preferred
securities were issued through an underwriting syndicate to which the Company
paid underwriting fees of $7.50 per trust preferred security or an aggregate of
$150,000. The net proceeds of $19,850,000 are being used to finance the opening
of new branches, improve bank services and technology, repurchase shares of the
Company's common stock under its repurchase plan and increase the Company's
capital. The trust preferred securities have not been and will not be registered
under the Securities Act of 1933, as amended, or applicable state securities
laws and were sold pursuant to an exemption from registration under the
Securities Act of 1933. The trust preferred securities may not be offered or
sold in the United States absent registration or an applicable exemption from
the registration requirements of the Securities Act of 1933, as amended, and
applicable state securities laws.
As a result of the adoption of FIN 46R, the Company deconsolidated TriCo Capital
Trust I as of and for year ended December 31, 2003. The $20,619,000 of junior
subordinated debentures issued by TriCo Capital Trust I were reflected as junior
subordinated debt in the consolidated balance sheet at December 31, 2004 and
December 31, 2003. The common stock issued by TriCo Capital Trust I was recorded
in other assets in the consolidated balance sheet at December 31, 2004 and
December 31, 2003.
Prior to December 31, 2003, TriCo Capital Trust I was a consolidated subsidiary
and was included in liabilities in the consolidated balance sheet, as "Trust
preferred securities." The common securities and debentures, along with the
related income effects were eliminated in the consolidated financial statements.
On June 22, 2004, the Company formed a second subsidiary business trust, TriCo
Capital Trust II, to issue trust preferred securities. Concurrently with the
issuance of the trust preferred securities, the trust issued 619 shares of
common stock to the Company for $1,000 per share or an aggregate of $619,000. In
addition, the Company issued a Junior Subordinated Debenture to the Trust in the
amount of $20,619,000. The terms of the Junior Subordinated Debenture are
materially consistent with the terms of the trust preferred securities issued by
TriCo Capital Trust II. Also on June 22, 2004, TriCo Capital Trust II completed
an offering of 20,000 shares of cumulative trust preferred securities for cash
in an aggregate amount of $20,000,000. The trust preferred securities are
mandatorily redeemable upon maturity on July 23, 2034 with an interest rate that
resets quarterly at three-month LIBOR plus 2.55%, or 4.10% for the first
quarterly interest period. TriCo Capital Trust II has the right to redeem the
trust preferred securities on or after July 23, 2009. The trust preferred
securities were issued through an underwriting syndicate to which the Company
paid underwriting fees of $2.50 per trust preferred security or an aggregate of
$50,000. The net proceeds of $19,950,000 are being used to finance the opening
of new branches, improve bank services and technology, repurchase shares of the
Company's common stock under its repurchase plan and increase the Company's
capital. The trust preferred securities have not been and will not be registered
under the Securities Act of 1933, as amended, or applicable state securities
laws and were sold pursuant to an exemption from registration under the
Securities Act of 1933. The trust preferred securities may not be offered or
sold in the United States absent registration or an applicable exemption from
the registration requirements of the Securities Act of 1933, as amended, and
applicable state securities laws.
The $20,619,000 of junior subordinated debentures issued by TriCo Capital Trust
II were reflected as junior subordinated debt in the consolidated balance sheet
at December 31, 2004. The common stock issued by TriCo Capital Trust II was
recorded in other assets in the consolidated balance sheet at December 31, 2004.
The debentures issued by TriCo Capital Trust I and TriCo Capital Trust II, less
the common securities of TriCo Capital Trust I and TriCo Capital Trust II,
continue to qualify as Tier 1 or Tier 2 capital under interim guidance issued by
the Board of Governors of the Federal Reserve System (Federal Reserve Board).
Note 9 - Commitments and Contingencies (See also Note 5 and 16)
The Company has entered into employment agreements or change of control
agreements with certain officers of the Company providing severance payments to
the officers in the event of a change in control of the Company and termination
for other than cause.
The Company is a defendant in legal actions arising from normal business
activities. Management believes, after consultation with legal counsel, that
these actions are without merit or that the ultimate liability, if any,
resulting from them will not materially affect the Company's consolidated
financial position or results from operations.
-53-
Note 10 - Shareholders' Equity
Stock Split
On March 11, 2004, the Board of Directors of TriCo Bancshares approved a
two-for-one stock split of its common stock. The stock split was effected in the
form of a stock dividend that entitled each shareholder of record at the close
of business on April 9, 2004 to receive one additional share for every share of
TriCo common stock held on that date. Shares resulting from the split were
distributed on April 30, 2004.
Dividends Paid
The Bank paid to the Company cash dividends in the aggregate amounts of
$3,075,000, $2,810,000 and $5,779,000 in 2004, 2003 and 2002, respectively. The
Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the
State of California Department of Financial Institutions. California banking
laws limit the Bank's ability to pay dividends to the lesser of (1) retained
earnings or (2) net income for the last three fiscal years, less cash
distributions paid during such period. Under this regulation, at December 31,
2004, the Bank may pay dividends of $41,363,000.
Shareholders' Rights Plan
On June 25, 2001, the Company announced that its Board of Directors adopted and
entered into a Shareholder Rights Plan designed to protect and maximize
shareholder value and to assist the Board of Directors in ensuring fair and
equitable benefit to all shareholders in the event of a hostile bid to acquire
the Company.
The Company adopted this Rights Plan to protect stockholders from coercive or
otherwise unfair takeover tactics. In general terms, the Rights Plan imposes a
significant penalty upon any person or group that acquires 15% or more of the
Company's outstanding common stock without approval of the Company's Board of
Directors. The Rights Plan was not adopted in response to any known attempt to
acquire control of the Company.
Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was
declared for each common share held of record as of the close of business on
July 10, 2001. No separate certificates evidencing the Rights will be issued
unless and until they become exercisable.
The Rights generally will not become exercisable unless an acquiring entity
accumulates or initiates a tender offer to purchase 15% or more of the Company's
common stock. In that event, each Right will entitle the holder, other than the
unapproved acquirer and its affiliates, to purchase either the Company's common
stock or shares in an acquiring entity at one-half of market value.
The Right's initial exercise price, which is subject to adjustment, is $49.00
per Right. The Company's Board of Directors generally will be entitled to redeem
the Rights at a redemption price of $.01 per Right until an acquiring entity
acquires a 15% position. The Rights expire on July 10, 2011.
Stock Repurchase Plan
On March 11, 2004, the Board of Directors of TriCo Bancshares approved an
increase in the maximum number of shares to be repurchased under the Company's
stock repurchase plan originally announced on July 31, 2003 from 250,000 to
500,000 effective on April 9, 2004, solely to conform with the two-for-one stock
split noted above. The 250,000 shares originally authorized for repurchase under
this plan represented approximately 3.2% of the Company's approximately
7,852,000 common shares outstanding as of July 31, 2003. This plan has no stated
expiration date for the repurchases, which may occur from time to time as market
conditions allow. As of December 31, 2004, the Company repurchased 222,600
shares under this plan as adjusted for the 2-for-1 stock split paid on April 30,
2004, which leaves 277,400 shares available for repurchase under the plan.
-54-
Note 11 - Stock Options
In May 2001, the Company adopted the TriCo Bancshares 2001 Stock Option Plan
(2001 Plan) covering officers, employees, directors of, and consultants to the
Company. Under the 2001 Plan, the option price cannot be less than the fair
market value of the Common Stock at the date of grant except in the case of
substitute options. Options for the 2001 Plan expire on the tenth anniversary of
the grant date. Vesting schedules under the 2001 Plan are determined
individually for each grant.
In May 1995, the Company adopted the TriCo Bancshares 1995 Incentive Stock
Option Plan (1995 Plan) covering key employees. Under the 1995 Plan, the option
price cannot be less than the fair market value of the Common Stock at the date
of grant. Options for the 1995 Plan expire on the tenth anniversary of the grant
date. Vesting schedules under the 1995 Plan are determined individually for each
grant.
The Company also has outstanding options under the TriCo Bancshares 1993
Nonqualified Stock Option Plan (1993 Plan). Options under the 1993 Plan were
granted at an exercise price less than the fair market value of the common stock
and vest over a six year period. Unexercised options for the 1993 Plan terminate
10 years from the date of the grant.
As of December 31, 2004, options for the purchase of 613,940, 0, and 0 common
shares remained available for grant under the 2001, 1995, and 1993 Plans,
respectively. 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, 2001 1,317,772 $2.62 to $9.13 $7.21
Options granted 81,000 11.72 to 12.38 11.94 $2.69
Options exercised (139,972) 2.62 to 9.13 3.05
Options forfeited (4,000) 12.13 to 12.38 12.13
Outstanding at
December 31, 2002 1,254,800 $2.62 to $12.38 7.96
Options granted 553,174 1.59 to 13.33 9.97 $4.29
Options exercised (154,294) 1.59 to 9.13 4.65
Options forfeited (4,984) 5.37 to 12.13 10.79
Outstanding at
December 31, 2003 1,648,696 $1.59 to $13.33 $8.94
Options granted 235,520 $17.38 to $17.40 $17.38 $3.15
Options exercised (222,669) $1.59 to $13.33 $6.06
Outstanding at
December 31, 2004 1,661,547 $2.62 to $17.4 $10.52
The following table shows the number, weighted-average exercise price, and the
weighted average remaining contractual life of options outstanding, and the
number and weighted-average exercise price of options exercisable as of December
31, 2004 by range of exercise price:
Outstanding Options Exercisable Options
------------------------------------------------ -----------------------------
Weighted-Average
Range of Weighted-Average Remaining Weighted-Average
Exercise Price Number Exercise Price Contractual Life Number Exercise Price
$2-$4 16,800 $2.62 0.44 years 16,800 $2.62
$4-$6 43,632 $4.96 2.33 43,632 $4.96
$6-$8 48,000 $6.48 1.68 48,000 $6.48
$8-$10 874,595 $8.26 5.81 752,415 $8.27
$10-$12 40,000 $11.72 7.94 16,000 $11.72
$12-$14 403,000 $12.70 8.39 183,000 $12.61
$16-$18 235,520 $17.38 9.17 38,304 $17.38
Of the stock options outstanding as of December 31, 2004, 2003 and 2002, options
on shares totaling 1,098,151, 985,136, and 666,568, respectively, were
exercisable at weighted average prices of $9.06, $7.75, and $7.35, respectively.
The Company has stock options outstanding under the three option plans described
above. The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized except for the options granted
under the 1993 plan. The Company recognized no expense for the 1993 Plan options
in 2004, 2003 and 2002, respectively.
-55-
Note 12 - Other Noninterest Income and Expenses
The components of other noninterest income were as follows:
Years Ended December 31,
2004 2003 2002
------------------------------
(in thousands)
Sale of customer checks $227 $229 $264
Gain on sale of foreclosed assets 566 113 8
Lease brokerage income 227 -- --
Other 598 599 908
------------------------------
Total other noninterest income $1,618 $941 $1,180
==============================
Mortgage loan servicing fees, net of amortization of mortgage loan servicing
rights, totaling $189,000, ($515,000), and ($115,000) were recorded in other
noninterest income for the years ended December 31, 2004, 2003, and 2002,
respectively.
The components of other noninterest expense were as follows:
Years Ended December 31,
2004 2003 2002
------------------------------
(in thousands)
Equipment and data processing $5,315 $4,947 $4,095
Occupancy 3,926 3,493 2,954
Professional fees 2,481 2,315 1,696
Telecommunications 1,773 1,539 1,422
Intangible amortization 1,358 1,207 911
ATM network charges 1,322 1,043 847
Advertising 1,026 1,062 1,263
Postage 864 855 801
Courier service 814 795 720
Operational losses 428 657 534
Assessments 297 268 233
Net foreclosed assets expense 11 124 26
Other 7,373 7,508 6,179
------------------------------
Total other noninterest expense $26,988 $25,813 $21,681
==============================
-56-
Note 13 - Income Taxes
The components of consolidated income tax expense are as follows:
------------------------------
2004 2003 2002
------------------------------
(in thousands)
Current tax expense
Federal $10,234 $7,686 $5,975
State 3,348 2,720 2,543
------------------------------
13,582 10,406 9,369
------------------------------
Deferred tax benefit
Federal (790) (198) (735)
State (340) (84) (512)
------------------------------
(1,130) (282) (1,247)
------------------------------
Total tax expense $12,452 $10,124 $8,122
==============================
A deferred tax asset or liability is recognized for the tax consequences of
temporary differences in the recognition of revenue and expense for financial
and tax reporting purposes. The net change during the year in the deferred tax
asset or liability results in a deferred tax expense or benefit.
Taxes recorded directly to shareholders' equity are not included in the
preceding table. These taxes (benefits) relating to changes in minimum pension
liability amounting to ($155,000) in 2004, $27,000 in 2003, and $18,000 in 2002,
unrealized gains and losses on available-for-sale investment securities
amounting to ($1,327,000) in 2004, ($461,000) in 2003, and $2,142,000 in 2002,
and benefits related to employee stock options of ($330,000) in 2004, ($440,000)
in 2003, and ($436,000) in 2002 were recorded directly to shareholders' equity.
The temporary differences, tax effected, which give rise to the Company's net
deferred tax asset recorded in other assets are as follows as of December 31,:
2004 2003
--------------------------
Deferred tax assets: (in thousands)
Loan losses $6,670 $5,678
Deferred compensation 2,653 2,271
Intangible amortization 1,152 1,066
State taxes 1,234 873
Accrued pension liability 2,012 1,787
Additional minimum pension liability 624 469
Nonaccrual interest 518 450
Fixed asset write down -- 232
OREO write downs 76 76
NOL carryforward -- 20
Other 8 8
--------------------------
Total deferred tax assets 14,947 12,930
--------------------------
Deferred tax liabilities:
Unrealized gain on securities (424) (1,751)
Core deposit premium (1,102) (1,290)
Depreciation (1,637) (511)
Securities income (660) (560)
Securities accretion (143) (389)
Merger related fixed asset valuations (379) (379)
Capital leases (85) (92)
Other, net (171) (224)
--------------------------
Total deferred tax liability (4,601) (5,196)
--------------------------
Net deferred tax asset $10,346 $7,734
==========================
The Company believes that a valuation allowance is not needed to reduce the
deferred tax assets as it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the deferred tax
assets.
-57-
The provisions for income taxes applicable to income before taxes for the years
ended December 31, 2004, 2003 and 2002 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,
-----------------------------
2004 2003 2002
-----------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 6.3 6.3 6.0
Tax-exempt interest on municipal obligations (1.8) (2.4) (3.3)
Increase in cash value of insurance policies (1.6) (1.7) (1.0)
Other 0.2 0.3 (0.1)
-----------------------------
Effective Tax Rate 38.2% 37.5% 36.6%
=============================
Note 14 - Retirement Plans
401(k) Plan
The Company sponsors a 401(k) Plan whereby substantially all employees age 21
and over with 90 days of service may participate. Participants may contribute a
portion of their compensation subject to certain limits based on federal tax
laws. The Company does not contribute to the 401(k) Plan. The Company did not
incur any expenses attributable to the 401(k) Plan during 2004, 2003 and 2002
Employee Stock Ownership Plan
Substantially all employees with at least one year of service are covered by a
discretionary employee stock ownership plan (ESOP). Contributions are made to
the plan at the discretion of the Board of Directors. Contributions to the plan
totaling $1,447,000 in 2004, $975,000 in 2003, and $955,000 in 2002 are included
in salary expense. Company shares owned by the ESOP are paid dividends and
included in the calculation of earnings per share exactly as other common shares
outstanding.
Deferred Compensation Plans
The Company has deferred compensation plans for directors and key executives,
which allow directors and key executives designated by the Board of Directors of
the Company to defer a portion of their compensation. During the quarter ended
June 30, 2004, the Company established the 2004 TriCo Bancshares Deferred
Compensation Plan ("2004 Deferred Comp Plan), and modified the existing 1987 Tri
Counties Bank Executive Deferred Compensation Plan ("1987 Plan") and the 1992
Tri Counties Bank Director Deferred Compensation Plan ("1992 Plan").
The June 30, 2004 modifications to the 1987 Plan and the 1992 Plan include the
following:
- A limitation on participant deferrals (not including accumulated
interest) not to exceed $250,000 through December 31, 2004. (Prior to
this modification there was no limitation on participant deferral
amounts.)
- A requirement that the account balance of any participant be
distributed on or before December 31, 2008, or, at the participant's
election, transferred as the participant's opening balance to the 2004
Deferred Comp Plan.
- Final termination on December 31, 2008.
In October 2004, the American Jobs Creation Act of 2004 was signed into law.
Certain provisions of this law pertain to deferred compensation plans, and
although final implementation instructions have not been issued by the United
States Treasury Department, the Company expects that it will further modify its
deferred compensation plans in light of the new law. In the meantime, effective
January 1, 2005, the Company terminated the 2004 Deferred Comp Plan (before any
deferrals were made under the plan), and further amended the 1987 Plan and the
1992 Plan as follows:
- Removed the plan termination date of December 31, 2008.
- Raised the maximum per individual life-time deferral amount from
$250,000 to $1,500,000.
- All deferrals will continue to earn interest at the Moody's Corporate
Bond Rate plus three percent until January 1, 2008 at which time all
deferred balances will earn interest at the Moody's Corporate Bond
Index plus one percent.
- Upon retirement, participant deferred balances will earn interest at
the Moody's Corporate Bond Index.
The Company has purchased insurance on the lives of the participants and intends
to hold these policies until death as a cost recovery of the Company's deferred
compensation obligations of $6,309,000 and $5,195,000 at December 31, 2004 and
2003, respectively.
-58-
Supplemental Retirement Plans
The Company has supplemental retirement plans for directors and 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 hold these policies until death as a cost recovery of the
Company's retirement obligations.
The cash values of the insurance policies purchased to fund the deferred
compensation obligations and the retirement obligations were $40,479,000 and
$38,980,000 at December 31, 2004 and 2003, respectively.
During the quarter ended June 30, 2004, the Company established the 2004 TriCo
Bancshares Supplemental Executive Retirement Plan ("2004 SERP"). The 2004 SERP
is designed to replace the 1987 Tri Counties Bank Supplemental Executive
Retirement Plan ("1987 SERP"). Participants who were eligible to receive
benefits in the 1987 SERP and were employed by the Company as of December 31,
2003 will have their benefits provided by the 2004 SERP. All eligible
participants who were no longer employed by the Company as of December 31, 2003
will continue to receive benefits pursuant to the provisions of the 1987 SERP.
During the quarter ended June 30, 2004, the Company established the 2004 TriCo
Bancshares Supplemental Retirement Plan for Directors ("2004 SRP for
Directors"). The 2004 SRP for Directors is designed to replace the 1987 Tri
Counties Bank Supplemental Retirement Plan for Directors ("1987 SRP for
Directors"). Participants who were eligible to receive benefits in the 1987 SRP
for Directors and were directors of by the Company as of December 31, 2003 will
have their benefits provided by the 2004 SRP for Directors. All eligible
participants who were no longer directors of the Company as of December 31, 2003
will continue to receive benefits pursuant to the provisions of the 1987 SRP for
Directors.
The Company recorded in other liabilities an additional minimum pension
liability of $2,525,000 related to the supplemental retirement plans as of
December 31, 2004. These amounts represent the amount by which the accumulated
benefit obligations for these retirement plans exceeded the fair value of plan
assets plus amounts previously accrued related to the plans. These additional
liabilities have been offset by an intangible asset to the extent of previously
unrecognized net transitional obligation and unrecognized prior service costs of
each plan. The amount in excess of previously unrecognized prior service cost
and unrecognized net transitional obligation is recorded as a reduction of
shareholders equity in the amount of $935,000, representing the after-tax
impact, at December 31, 2004. The accumulated benefit obligation is recorded in
other liabilities.
Information pertaining to the activity in the supplemental retirement plans,
using a measurement date of December 31, is as follows:
December 31,
2004 2003
--------------------
(in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $(6,846) $(6,681)
Service cost (326) (125)
Interest cost (449) (418)
Amendments (1,640) --
Actuarial loss (0) (112)
Benefits paid 490 490
--------------------
Benefit obligation at end of year $(8,771) $(6,846)
====================
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ --
--------------------
Fair value of plan assets at end of year $ -- $ --
====================
Funded status $(8,771) $(6,846)
Unrecognized net obligation existing at January 1, 1986 35 45
Unrecognized net actuarial loss 2,231 2,313
Unrecognized prior service cost 1,720 240
Intangible asset (966) (285)
Accumulated other comprehensive income (1,559) (1,174)
--------------------
Accrued benefit cost $(7,310) $(5,707)
====================
Accumulated benefit obligation $(7,310) $(5,707)
-59-
The following table sets forth the net periodic benefit cost recognized for the
supplemental retirement plans:
Years Ended December 31,
2004 2003 2002
----------------------------
(in thousands)
Net pension cost included the following components:
Service cost-benefits earned during the period $326 $125 $107
Interest cost on projected benefit obligation 449 418 428
Amortization of net obligation at transition 10 35 35
Amortization of prior service cost 160 81 81
Recognized net actuarial loss 81 153 87
----------------------------
Net periodic pension cost $1,026 $812 $738
============================
The following table sets forth assumptions used in accounting for the plans:
Years Ended December 31,
2004 2003 2002
------------------------
(in thousands)
Discount rate used to calculate benefit obligation 6.25% 6.25% 6.75%
Discount rate used to calculate net periodic pension cost 6.25% 6.50% 6.75%
Weighted-average annual increase in compensation 5.00% 5.00% 5.00%
The following table sets forth the expected benefit payments to participants and
estimated contributions made by the Company under the supplemental retirement
plans for the years indicated:
Expected Benefit Estimated
Payments to Company
Years Ended Participants Contributions
------------- -----------------------------------------
(in thousands)
2005 $535 $535
2006 $525 $525
2007 $519 $519
2008 $596 $596
2009 $690 $690
2010-2014 $3,959 $3,959
Note 15 - Related Party Transactions
Certain directors, officers, and companies with which they are associated were
customers of, and had banking transactions with, the Company or the Bank 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 2004:
Balance Balance
December 31, Advances/ Removed/ December 31,
2003 New Loans Payments 2004
----------------------------------------------------------------
(in thousands)
$4,661 $6,227 $1,913 $8,975
-60-
Note 16 - 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, standby
letters of credit, and deposit account overdraft privilege. Those instruments
involve, to varying degrees, elements of 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 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. The Company's exposure
to loss in the event of nonperformance by the other party to the financial
instrument for deposit account overdraft privilege is represented by the
overdraft privilege amount disclosed to the deposit account holder.
December 31,
--------------------------
2004 2003
(in thousands)
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans $99,377 $86,555
Consumer loans 247,710 172,704
Real estate mortgage loans 20,266 15,350
Real estate construction loans 66,789 46,741
Standby letters of credit 10,912 11,582
Deposit account overdraft privilege 28,815 -
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates of one year or less or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on Management's credit evaluation of the customer. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements. Most standby letters
of credit are issued for one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Collateral requirements vary, but in general follow the
requirements for other loan facilities.
Deposit account overdraft privilege amount represents the unused overdraft
privilege balance available to the Company's deposit account holders who have
deposit accounts covered by an overdraft privilege. The Company has established
an overdraft privilege for certain of its deposit account products whereby all
holders of such accounts who bring their accounts to a positive balance at least
once every thirty days receive the overdraft privilege. The overdraft privilege
allows depositors to overdraft their deposit account up to a predetermined
level. The predetermined overdraft limit is set by the Company based on account
type.
Note 17 - Disclosure of Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practical to estimate that
value. Cash and due from banks, fed funds purchased and sold, accrued interest
receivable and payable, and short-term borrowings are considered short-term
instruments. For these short-term instruments their carrying amount approximates
their fair value.
Securities
For all securities, fair values are based on quoted market prices or dealer
quotes. See Note 3 for further analysis.
-61-
Loans
The fair value of variable rate loans is the current carrying value. The
interest rates on these loans are regularly adjusted to market rates. The fair
value of other types of fixed rate loans is estimated by discounting the future
cash flows using current rates at which similar loans would be made to borrowers
with similar credit ratings for the same remaining maturities. The allowance for
loan losses is a reasonable estimate of the valuation allowance needed to adjust
computed fair values for credit quality of certain loans in the portfolio.
Deposit Liabilities and Long-Term Debt
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. These values do
not consider the estimated fair value of the Company's core deposit intangible,
which is a significant unrecognized asset of the Company. The fair value of time
deposits and debt is based on the discounted value of contractual cash flows.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation with the
counter parties at the reporting date.
Fair value for financial instruments are management's estimates of the values at
which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including, any mortgage banking
operations, deferred tax assets, and premises and equipment. Further, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on the fair value estimates and have not been
considered in any of these estimates. The estimated fair values of the Company's
financial instruments are as follows:
December 31, 2004 December 31, 2003
---------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------- -----------------------------
Financial assets: (in thousands) (in thousands)
Cash and due from banks $ 70,037 $ 70,037 $80,603 $80,603
Federal funds sold - - 326 326
Securities available-for-sale 286,013 286,013 311,472 311,472
Federal Home Loan Bank stock, at cost 6,781 6,781 4,784 4,784
Loans, net 1,156,910 1,146,740 967,468 928,243
Accrued interest receivable 6,473 6,473 6,027 6,027
Financial liabilities:
Deposits 1,348,833 1,265,358 1,236,823 1,185,923
Accrued interest payable 3,281 3,281 2,638 2,638
Federal funds purchased 46,400 46,400 39,500 39,500
Other borrowings 28,152 29,224 22,887 25,180
Junior subordinated debt $41,238 $41,238 $20,619 $20,619
Contract Fair Contract Fair
Off-balance sheet: Amount Value Amount Value
---------------------------- -----------------------------
Commitments $434,142 $4,341 $321,350 $3,212
Standby letters of credit $10,912 $109 $11,582 $116
Overdraft privilege commitments $28,815 $288 - -
-62-
Note 18 - TriCo Bancshares Financial Statements
TriCo Bancshares (Parent Only) Balance Sheets
December 31,
--------------------------
2004 2003
Assets --------------------------
(in thousands)
Cash and Cash equivalents $1,150 $6,187
Investment in Tri Counties Bank 177,062 139,834
Other assets 1,430 2,621
--------------------------
Total assets $179,642 $148,642
Liabilities and shareholders' equity ==========================
Other liabilities $272 $63
Junior subordinated debt 41,238 20,619
--------------------------
Total liabilities $41,510 $20,682
Shareholders' equity: --------------------------
Common stock, no par value: authorized 50,000,000
shares; issued and outstanding 15,723,317 and
15,668,248 shares, respectively $70,699 $69,767
Retained earnings 67,785 56,379
Accumulated other comprehensive income, net (352) 1,814
--------------------------
Total shareholders' equity 138,132 127,960
--------------------------
Total liabilities and shareholders' equity $179,642 $148,642
==========================
Statements of Income Years Ended December 31,
2004 2003 2002
----------------------------------
(in thousands)
Interest income $ 18 $ 18 $ 18
Interest expense (1,381) (355) --
Administration expense (617) (559) (416)
----------------------------------
Loss before equity in net income
of Tri Counties Bank (1,980) (896) (398)
Equity in net income of Tri Counties Bank:
Distributed 3,075 2,810 5,779
Undistributed 18,249 14,592 8,522
Income tax benefit (838) (382) (166)
----------------------------------
Net income $20,182 $16,888 $14,069
==================================
Statements of Cash Flows Years ended December 31,
-------------------------------------------
2004 2003 2002
-------------------------------------------
(in thousands)
Operating activities:
Net income $20,182 $16,888 $14,069
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed equity in Tri Counties Bank (18,249) (14,592) (8,522)
Net change in other assets and liabilities 204 (72) (167)
-------------------------------------------
Net cash provided by operating activities 2,137 2,224 5,380
Investing activities:
Investment in TriCo Capital Trust I -- (619) --
Investment in TriCo Capital Trust II (619) -- --
Capital contributed to Tri Counties Bank (19,000) (28,383) --
-------------------------------------------
Net cash used in investing activities (19,619) (29,002) --
-------------------------------------------
Financing activities:
Issuance of junior subordinated debt 20,619 20,619 --
Issuance of common stock related to acquisition -- 18,383 --
Issuance of common stock through option exercise 1,348 717 427
Repurchase of common stock (2,793) (853) (189)
Cash dividends paid -- common (6,729) (6,140) (5,620)
-------------------------------------------
Net cash provided by (used for) financing activities 12,445 32,726 (5,382)
-------------------------------------------
Increase (decrease) in cash and cash equivalents (5,037) 5,948 (2)
Cash and cash equivalents at beginning of year 6,187 239 241
-------------------------------------------
Cash and cash equivalents at end of year $1,150 $6,187 $239
===========================================
-63-
Note 19 - 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 consolidated 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 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 2004, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 2004, 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 1 risk-based and Tier 1 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.
Minimum
To Be Well
(Dollars in thousands) Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
As of December 31, 2004: (dollars in thousands)
Total Capital (to Risk Weighted Assets):
Consolidated $172,332 11.86% $116,217 8.0% N/A N/A
Tri Counties Bank $171,262 11.80% $116,102 8.0% $145,128 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $155,025 10.67% $58,108 4.0% N/A N/A
Tri Counties Bank $155,205 10.69% $58,051 4.0% $87,077 6.0%
Tier 1 Capital (to Average Assets):
Consolidated $155,025 9.86% $62,877 4.0% N/A N/A
Tri Counties Bank $155,205 9.88% $62,817 4.0% $78,521 5.0%
As of December 31, 2003:
Total Capital (to Risk Weighted Assets):
Consolidated $137,328 11.57% $94,991 8.0% N/A N/A
Tri Counties Bank $131,017 11.04% $94,926 8.0% $118,658 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $123,555 10.41% $47,496 4.0% N/A N/A
Tri Counties Bank $117,244 9.88% $47,463 4.0% $71,195 6.0%
Tier 1 Capital (to Average Assets):
Consolidated $123,555 8.68% $56,962 4.0% N/A N/A
Tri Counties Bank $117,244 8.24% $56,948 4.0% $71,185 5.0%
-64-
Note 20 - Summary of Quarterly Results of Operations (unaudited)
The following table sets forth the results of operations for the four quarters
of 2004 and 2003, 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.
2004 Quarters Ended
---------------------------------------------------------
December 31, September 30, June 30, March 31,
---------------------------------------------------------
(dollars in thousands, except per share data)
Interest income $22,441 $21,951 $20,628 $19,912
Interest expense 3,768 3,494 3,087 3,014
------- ------- ------- -------
Net interest income 18,673 18,457 17,541 16,898
Provision for loan losses 300 1,300 1,300 650
------- ------- ------- -------
Net interest income after
provision for loan losses 18,373 17,157 16,241 16,248
Noninterest income 5,736 6,361 6,942 5,755
Noninterest expense 15,332 15,089 15,412 14,346
------- ------- ------- -------
Income before income taxes 8,777 8,429 7,771 7,657
Income tax expense 3,422 3,226 2,924 2,880
------- ------- ------- -------
Net income $ 5,355 $ 5,203 $ 4,847 $ 4,777
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.33 $ 0.32 $ 0.30 $ 0.29
======= ======= ======= =======
Dividends $ 0.11 $ 0.11 $ 0.11 $ 0.10
======= ======= ======= =======
2003 Quarters Ended
---------------------------------------------------------
December 31, September 30, June 30, March 31,
---------------------------------------------------------
(dollars in thousands, except per share data)
Interest income $20,354 $19,105 $18,161 $16,349
Interest expense 3,224 3,305 3,445 3,115
------- ------- ------- -------
Net interest income 17,130 15,800 14,716 13,234
Provision for loan losses 800 150 150 150
------- ------- ------- -------
Net interest income after
provision for loan losses 16,330 15,650 14,566 13,084
Noninterest income 5,753 5,206 6,554 5,396
Noninterest expense 14,459 14,049 14,368 12,651
------- ------- ------- -------
Income before income taxes 7,624 6,807 6,752 5,829
Income tax expense 2,941 2,469 2,498 2,216
------- ------- ------- -------
Net income $ 4,683 $ 4,338 $ 4,254 $ 3,613
======= ======= ======= =======
Per common share:
Net income (diluted) $ 0.29 $ 0.27 $ 0.26 $ 0.25
======= ======= ======= =======
Dividends $ 0.10 $ 0.10 $ 0.10 $ 0.10
======= ======= ======= =======
Note 21 - Acquisition
The Company acquired North State National Bank 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 $140 million, investment securities of $41 million, loans of
$76 million, and deposits of $126 million. The acquisition was accounted for
using the purchase method of accounting. The amount of goodwill recorded as of
the merger date, which represented the excess of the total purchase price over
the estimated fair value of net assets acquired, was approximately $15.5
million. The Company recorded a core deposit intangible, which represents the
excess of the fair value of North State's deposits over their book value on the
acquisition date, of approximately $3.4 million. This core deposit intangible is
scheduled to be amortized over a seven-year average life.
On April 4, 2003, under the terms of the merger agreement, the Company paid
$13,090,057 in cash, issued 723,512 shares of common stock, and issued options
to purchase 79,587 shares of 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.
-65-
The pro forma financial information in the following table illustrates the
combined operating results of the Company and North State National Bank for the
years ended December 31, 2003 and 2002 as if the acquisition of North State
National Bank had occurred as of January 1, 2002. The pro forma financial
information is presented for informational purposes and is not necessarily
indicative of the results of operations that would have occurred if the Company
and North State National Bank had constituted a single entity as of or January
1, 2002. The pro forma financial information is also not necessarily indicative
of the future results of operations of the combined company. In particular, any
opportunity to achieve certain cost savings as a result of the acquisition has
not been included in the pro forma financial information.
For the year ended December 31,
2003 2002
---- ----
(in thousands except earnings per share)
Net interest income $62,316 $57,631
Provision for loan losses 1,250 2,800
Noninterest income 23,100 19,719
Noninterest expense 56,711 49,260
Income tax expense 10,331 9,424
Net income $17,124 $15,866
Basic earnings per share $1.10 $1.04
Diluted earnings per share $1.05 $1.00
Pro forma per share data for all periods in the preceding table have been
adjusted to reflect the 2-for-1 stock split paid on April 30, 2004.
The only significant pro forma adjustment is the amortization expense relating
to core deposit intangible, and the income tax benefit associated with the pro
forma adjustment.
-66-
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of TriCo Bancshares is responsible for establishing and maintaining
effective internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
Under the supervision and with the participation of management, including the
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation under the framework in Internal Control - Integrated
Framework, management of the Company has concluded the Company maintained
effective internal control over financial reporting, as such term is defined in
Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2004.
Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting can
also be circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of the
consolidated financial statements and other financial information contained in
this report. The accompanying consolidated financial statements were prepared in
conformity with U.S. generally accepted accounting principles and include, as
necessary, best estimates and judgments by management.
KPMG LLP, an independent registered public accounting firm, has audited the
Company's consolidated financial statements as of and for the year ended
December 31, 2004, and the Company s assertion as to the effectiveness of
internal control over financial reporting as of December 31, 2004, as stated in
their reports, which are included herein.
/s/ Richard P. Smith
Richard P. Smith
President and Chief Executive Officer
/s/ Thomas J. Reddish
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
March 9, 2005
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TriCo Bancshares:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that TriCo
Bancshares and subsidiaries (the Company) maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that TriCo Bancshares and subsidiaries
maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, TriCo Bancshares and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
TriCo Bancshares and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2004, and our report dated March 9, 2005 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
Sacramento, California
March 9, 2005
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TriCo Bancshares:
We have audited the accompanying consolidated balance sheets of TriCo Bancshares
and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TriCo Bancshares and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of TriCo
Bancshares' internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 9, 2005, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Sacramento, California
March 9, 2005
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ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During 2003 and 2004 there were no changes in the Company's accountants.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2004, the end of the period covered by this Annual Report on
Form 10-K, the management of TriCo Bancshares, including the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer each concluded that as of
December 31, 2004, the end of the period covered by this Annual Report on Form
10-K, the Company maintained effective disclosure controls and procedures.
The Company's management is responsible for establishing and maintaining
effective internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934). The Company's
internal control over financial reporting is under the general oversight of the
Board of Directors acting through the Audit Committee, which is composed
entirely of independent directors. KPMG LLP, the Company's independent
registered public accounting firm, has direct and unrestricted access to the
Audit Committee at all times, with no members of management present, to discuss
its audit and any other matters that have come to its attention that may affect
the Company's accounting, financial reporting or internal controls. The Audit
Committee meets periodically with management, internal auditors and KPMG LLP to
determine that each is fulfilling its responsibilities and to support actions to
identify, measure and control risk and augment internal control over financial
reporting. Internal control over financial reporting, however, cannot provide
absolute assurance of achieving financial reporting objectives because of its
inherent limitations.
Under the supervision and with the participation of management, including the
Company's Chief Executive Officer and Chief Financial Officer, TriCo Bancshares
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2004 based on the framework in "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based upon that evaluation, management
concluded that our internal control over financial reporting was effective as of
December 31, 2004. Management's report on internal control over financial
reporting is set forth on page 67 of this Annual Report of Form 10-K, and is
incorporated herein by reference. Management's assessment of the effectiveness
of the Company's internal control over financial reporting has been audited by
KPMG LLP, an independent, registered public accounting firm, as stated in its
report, which is set forth on page 68 of this Annual Report of Form 10-K, and is
incorporated herein by reference.
No change in the Company's internal control over financial reporting occurred
during the fourth quarter of the year ended December 31, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
All information required to be disclosed in a current report on Form 8-K during
the fourth quarter of 2004 was so disclosed.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers of the registrant
required by this Item 10 is incorporated herein by reference from the Company's
Proxy Statement for the annual meeting of shareholders to be held on May 24,
2005, which will be filed with the Commission pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference
from the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 24, 2005, which will be filed with the Commission pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated herein by reference
from the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 24, 2005, which will be filed with the Commission pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by reference
from the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 24, 2005, which will be filed with the Commission pursuant to
Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference
from the Company's Proxy Statement for the annual meeting of shareholders to be
held on May 24, 2005, which will be filed with the Commission pursuant to
Regulation 14A.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
1. All Financial Statements.
The consolidated financial statements of Registrant are included
beginning at page 36 of Item 8 of this report, and are incorporated
herein by reference.
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 at Item 8 of this
report.
3. Exhibits.
The following documents are included or incorporated by reference in
this annual report on Form 10-K, and this list includes the Exhibit
Index.
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Exhibit No. Exhibit Index
- ----------- -------------
3.1* Restated Articles of Incorporation dated May 9, 2003, filed as Exhibit
3.1 to TriCo's Quarterly Report on Form 10-Q for the quarter ended
March 31, 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 dated July 20, 2004, between TriCo
and each of Craig Carney, Gary Coelho, W.R. Hagstrom, Andrew
Mastorakis, Rick Miller, Richard O'Sullivan, Thomas Reddish, and Ray
Rios filed as Exhibit 10.2 to TriCo's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004.
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 as amended.
10.8* Employment Agreement between TriCo and Richard Smith dated April 20,
2004 filed as Exhibit 10.8 to TriCo's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004.
10.9* Tri Counties Bank Executive Deferred Compensation Plan dated September
1, 1987, as restated April 1, 1992, and amended and restated effective
as of January 1, 2004 filed as Exhibit 10.9 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
10.10* Tri Counties Bank Deferred Compensation Plan for Directors effective
April 1, 1992, as amended and restated effective as of January 1, 2004
filed as Exhibit 10.10 to TriCo's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004.
10.11 Amendments to Tri Counties Bank Executive Deferred Compensation Plan
referenced at Exhibit 10.9, effective as of January 1, 2005.
10.12 Amendments to Tri Counties Bank Deferred Compensation Plan for
Directors referenced at Exhibit 10.10, effective as of January 1,
2005.
10.13* Tri Counties Bank Supplemental Retirement Plan for Directors dated
September 1, 1987, as restated January 1, 2001, and amended and
restated January 1, 2004 filed as Exhibit 10.12 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
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10.14* 2004 TriCo Bancshares Supplemental Retirement Plan for Directors
effective January 1, 2004 filed as Exhibit 10.13 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
10.15* Tri Counties Bank Supplemental Executive Retirement Plan effective
September 1, 1987, as amended and restated January 1, 2004 filed as
Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.
10.16* 2004 TriCo Bancshares Supplemental Executive Retirement Plan effective
January 1, 2004 filed as Exhibit 10.15 to TriCo's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004.
10.17* Form of Joint Beneficiary Agreement effective March 31, 2003 between
Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig
Carney, Robert Elmore, Greg Gill, Richard Miller, Andrew Mastorakis,
Richard O'Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith,
filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003.
10.18* Form of Joint Beneficiary Agreement effective March 31, 2003 between
Tri Counties Bank and each of Don Amaral, William Casey, Craig
Compton, John Hasbrook, Michael Koehnen, Wendell Lundberg, Donald
Murphy, Carroll Taresh, and Alex Vereshagin, filed as Exhibit 10.15 to
TriCo's Quarterly Report on Form 10-Q for the quarter ended September
30, 2003.
10.19* Form of Tri-Counties Bank Executive Long Term Care Agreement effective
June 10, 2003 between Tri Counties Bank and each of Craig Carney,
Andrew Mastorakis, Richard Miller, Richard O'Sullivan, and Thomas
Reddish, filed as Exhibit 10.16 to TriCo's Quarterly Report on Form
10-Q for the quarter ended September 30, 2003.
10.20* Form of Tri-Counties Bank Director Long Term Care Agreement effective
June 10, 2003 between Tri Counties Bank and each of Don Amaral,
William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald
Murphy, Carroll Taresh, and Alex Verischagin, filed as Exhibit 10.17
to TriCo's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.
10.21* Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of the directors of TriCo Bancshares/Tri
Counties Bank effective on the date that each director is first
elected, filed as Exhibit 10.18 to TriCo'S Annual Report on Form 10-K
for the year ended December 31, 2003.
10.22* Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of Craig Carney, W.R. Hagstrom, Andrew
Mastorakis, Rick Miller, Richard O'Sullivan, Thomas Reddish, Ray Rios,
and Richard Smith filed as Exhibit 10.21 to TriCo's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004.
21.1 Tri Counties Bank, a California banking corporation, TriCo Capital
Trust I, a Delaware business trust, and TriCo Capital Trust II, a
Delaware business trust, are the only subsidiaries of Registrant
23.1 Independent Registered Public Accounting Firm's Consent
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
32.1 Section 1350 Certification of CEO
32.2 Section 1350 Certification of CFO
* Previously filed and incorporated by reference.
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(c) Exhibits filed:
See Exhibit Index under Item 15(a)(3) above for the list of exhibits
required to be filed by Item 601 of regulation S-K with this report.
(d) Financial statement schedules filed:
See Item 15(a)(2) above.
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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 9, 2005 TRICO BANCSHARES
By: /s/ Richard P. Smith
----------------------------------------
Richard P. Smith, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Date: March 9, 2005 /s/ Richard P. Smith
----------------------------------------
Richard P. Smith, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: March 9, 2005 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: March 9, 2005 /s/ Donald J. Amaral
----------------------------------------
Donald J. Amaral, Director
Date: March 9, 2005 /s/ William J. Casey
----------------------------------------
William J. Casey, Director and Chairman
of the Board
Date: March 9, 2005 /s/ Craig S. Compton
----------------------------------------
Craig S. Compton, Director
Date: March 9, 2005 /s/ John S.A. Hasbrook
----------------------------------------
John S.A. Hasbrook, Director
Date: March 9, 2005 /s/ Michael W. Koehnen
----------------------------------------
Michael W. Koehnen, Director
-75-
Date: March 9, 2005 /s/ Wendell J. Lundberg
----------------------------------------
Wendell J. Lundberg, Director
Date: March 9, 2005 /s/ Donald E. Murphy
----------------------------------------
Donald E. Murphy, Director and Vice
Chairman of the Board
Date: March 9, 2005 /s/ Steve G. Nettleton
----------------------------------------
Steve G. Nettleton, Director
Date: March 9, 2005 /s/ Carroll R. Taresh
----------------------------------------
Carroll R. Taresh, Director
Date: March 9, 2005 /s/ Alex A. Vereschagin
----------------------------------------
Alex A. Vereschagin, Jr., Director
-76-
Exhibit 10.7
TriCo's 2001 Stock Option Plan as amended.
TriCo Bancshares
2001 STOCK OPTION PLAN, AS AMENDED
SECTION 1. PURPOSE
This plan shall be known as the "TriCo BANCSHARES 2001 STOCK OPTION PLAN"
(the "Plan"). The purpose of the Plan is to promote the interests of TriCo
Bancshares and its Subsidiaries (the "Company") and the Company's stockholders
by (i) attracting and retaining key officers, employees and directors of, and
consultants to, the Company and any future Affiliates; (ii) motivating such
individuals by means of performance-related incentives to achieve long-range
performance goals, (iii) enabling such individuals to participate in the
long-term growth and financial success of the Company, (iv) encouraging
ownership of stock in the Company by such individuals, and (v) linking their
compensation to the long-term interests of the Company and its stockholders.
With respect to any Options granted under the Plan that are intended to comply
with the requirements of "performance-based compensation" under Section 162(m)
of the Code, the Plan shall be interpreted in a manner consistent with such
requirements.
SECTION 2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings set forth
below:
(a) "AFFILIATE" shall mean (i) any entity that, directly or indirectly, is
controlled by the Company, (ii) any entity in which the Company has a
significant equity interest, (iii) an affiliate of the Company, as defined
in Rule 12b-2 promulgated under Section 12 of the Exchange Act, and (iv)
any entity in which the Company has at least twenty percent (20%) of the
combined voting power of the entity's outstanding voting securities, in
each case as designated by the Board as being a participating employer in
the Plan.
(b) "BOARD" shall mean the board of directors of the Company.
(c) "CHANGE IN CONTROL" shall mean, unless otherwise defined in the
applicable Option Agreement, any of the following events:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any
"Person" (as the term Person is used for purposes of Section 13 (d) or
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of fifty percent (50%) or more of the combined voting
power of the then outstanding Voting Securities; provided, however,
that in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an acquisition which would
cause a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (i) an employee benefit plan (or a trust forming a part
thereof) maintained by (A) the Company or (B) any subsidiary or (ii)
the Company or any Subsidiary;
(ii) The individuals who, as of the date hereof, are members of the
Board (the "Incumbent Board"), cease for any reason to constitute at
least two-thirds of the Board; provided, however, that if the election
or nomination for election by the Company's stockholders of any new
director was approved by a vote of at least two-thirds of the
Incumbent Board, such new director shall, for purposes of this
Agreement, be considered as a member of the Incumbent Board; provided,
further, however, that no individual shall be considered a member of
the Incumbent Board if (1) such individual initially assumed office as
a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest or (2) such individual was designated by a
Person who has entered into an agreement with the Company to effect a
transaction described in clause (i) or (iii) of this paragraph; or
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(iii) Approval by stockholders of the Company of:
(A) A merger, consolidation or reorganization involving the
Company, unless,
(1) The stockholders of the Company immediately before such
merger, consolidation or reorganization, own, directly or
indirectly, immediately following such merger, consolidation
or reorganization, at least seventy-five percent (75%) of
the combined voting power of the outstanding Voting
Securities of the corporation (the "Surviving Corporation")
in substantially the same proportion as their ownership of
the Voting Securities immediately before such merger,
consolidation or reorganization;
(2) The individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board
of directors of the Surviving Corporation; and
(3) No Person (other than the Company, any Subsidiary, any
employee benefit plan (or any trust forming a part thereof)
maintained by the Company, the Surviving Corporation or any
Subsidiary, or any Person who, immediately prior to such
merger, consolidation or reorganization, had Beneficial
Ownership of fifty percent (50%) or more of the then
outstanding Voting Securities) has Beneficial Ownership of
fifty percent (50%) or more of the combined voting power of
the Surviving Corporation's then outstanding Voting
Securities.
(B) A complete liquidation or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person
(other than a transfer to a Subsidiary)
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company which, by
reducing the number of Voting Securities outstanding, increased the proportional
number of shares Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities Beneficially Owned by the Subject
Person, then a Change in Control shall occur.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(e) "COMMITTEE" shall mean a committee of the Board composed of not less
than two Non-Employee Directors, each of whom shall be a "Non-Employee
Director" for purposes of Exchange Act Section 16 and Rule 16b-3 thereunder
and an "outside director" for purposes of Section 162(m) and the
regulations promulgated under the Code.
(f) "CONSULTANT" shall mean any consultant to the Company or its
Subsidiaries or Affiliates.
(g) "DIRECTOR" shall mean a member of the Board.
(h) "DISABILITY" shall mean, unless otherwise defined in the applicable
Option Agreement, a disability that would qualify as a total and permanent
disability under the Company's then current long-term disability plan.
(i) "EMPLOYEE" shall mean a current or prospective officer or employee of
the Company or of any Subsidiary or Affiliate.
(j) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
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(k) "FAIR MARKET VALUE" with respect to the Shares, shall mean, for
purposes of a grant of an Option as of any date, (i) the closing sales
price of the Shares on any exchange on which the shares are traded, on such
date, or in the absence of reported sales on such date, the closing sales
price on the immediately preceding date on which sales were reported or
(ii) in the event there is no public market for the Shares on such date,
the fair market value as determined, in good faith, by the Committee in its
sole discretion, and for purposes of a sale of a Share as of any date, the
actual sales price on that date.
(l) "INCENTIVE STOCK OPTION" shall mean an option to purchase Shares from
the Company that is granted under Section 6 of the Plan and that is
intended to meet the requirements of Section 422 of the Code or any
successor provision thereto.
(o) "NON-QUALIFIED STOCK OPTION" shall mean an option to purchase Shares
from the Company that is granted under Section 6 of the Plan and is not
intended to be an Incentive Stock Option.
(p) "NON-EMPLOYEE DIRECTOR" shall mean a member of the Board who is not an
officer or employee of the Company or any Subsidiary or Affiliate.
(q) "OPTION" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
(r) "OPTION AGREEMENT" shall mean any written agreement, contract, or
other instrument or document evidencing any Option, which may, but need
not, be executed or acknowledged by a Participant.
(s) "OPTION PRICE" shall mean the purchase price payable to purchase one
Share upon the exercise of an Option.
(t) "OUTSIDE DIRECTOR" means, with respect to the grant of an Option, a
member of the Board then serving on the Committee.
(u) "PARTICIPANT" shall mean any Employee, Director, Consultant or other
person who receives an Option under the Plan.
(v) "PERSON" shall mean any individual, corporation, partnership, limited
liability company, associate, joint-stock company, trust, unincorporated
organization, government or political subdivision thereof or other entity.
(w) "RETIREMENT" shall mean, unless otherwise defined in the applicable
Option Agreement, retirement of a Participant from the employ or service of
the Company or any of its Subsidiaries or Affiliates in accordance with the
terms of the applicable Company retirement plan or, if a Participant is not
covered by any such plan, retirement on or after such Participant's 65th
birthday.
(x) "SEC' shall mean the Securities and Exchange Commission or any
successor thereto.
(y) "SECTION 16" shall mean Section 16 of the Exchange Act and the rules
promulgated thereunder and any successor provision thereto as in effect
from time to time.
(z) "SECTION 162 (M)" shall mean Section 162 (m) of the Code and the
regulations promulgated thereunder and any successor or provision thereto
as in effect from time to time.
(aa) "SHARES" shall mean shares of the Common Stock, no par value, of the
Company.
(bb) "SUBSIDIARY" shall mean any Person (other than the Company) of which a
majority of its voting power or its equity securities or equity interest is
owned directly or indirectly by the Company.
SECTION 3. ADMINISTRATION
3.1 Authority of Committee. The Plan shall be administered by the
Committee, which shall be appointed by and serve at the pleasure of the Board;
provided, however, with respect to Options to Outside Directors, all references
in the Plan to the Committee shall be deemed to be references to the Board.
Subject to the terms of the Plan and applicable law, and in addition to other
express powers and authorizations conferred on the Committee by the Plan, the
Committee shall have full power and authority in its discretion to: (i)
designate Participants; (ii) determine the type or types of Options to be
granted to a Participant; (iii) determine the number of Shares to be covered by,
or with respect to which payments, rights, or other matters are to be calculated
in connection with Options; (iv) determine the timing, terms, and conditions of
any Option; (v) accelerate the time at which all or any part of an Option may be
settled or exercised; (vi) determine whether, to what extent, and under what
circumstances Options may be settled or exercised in cash, Shares, other
securities, other Options or other property, or canceled, forfeited, or
suspended and the method or methods by which Options may be settled, exercised,
canceled, forfeited, or suspended; (vii) determine whether, to what extent, and
under what circumstances cash, Shares, other securities, other Options, other
property, and other amounts payable with respect to an Option shall be deferred
either automatically or at the election of the holder thereof or of the
Committee; (viii) interpret and administer the Plan and any instrument or
agreement relating to, or Option made under, the Plan; (ix) except to the extent
prohibited by Section 6.2, amend or modify the terms of any Option at or after
grant with the consent of the holder of the Option; (x) establish, amend,
suspend, or waive such rules and regulations and appoint such agents as it shall
deem appropriate for the proper administration of the Plan; and (xi) make any
other determination and take any other action that the Committee deems necessary
or desirable for the administration of the Plan, subject to the exclusive
authority of the Board under Section 10 hereunder to amend or terminate the
Plan.
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3.2 Committee Discretion Binding. Unless otherwise expressly provided in
the Plan, all designations, determinations, interpretations, and other decisions
under or with respect to the Plan or any Option shall be within the sole
discretion of the Committee, may be made at any time and shall be final,
conclusive, and binding upon all Persons, including the Company, any Subsidiary
or Affiliate, any Participant and any holder or beneficiary of any Option.
3.3 Action by the Committee. The Committee shall select one of its members
as its Chairperson and shall hold its meetings at such times and places and in
such manner as it may determine. A majority of its members shall constitute a
quorum. All determinations of the Committee shall be made by not less than a
majority of its members. Any decision or determination reduced to writing and
signed by all of the members of the Committee shall be fully effective as if it
had been made by a majority vote at a meeting duly called and held. The exercise
of an Option or receipt of an Option shall be effective only if an Option
Agreement shall have been duly executed and delivered on behalf of the Company
following the grant of the Option or other Option. The Committee may appoint a
Secretary and may make such rules and regulations for the conduct of its
business, as it shall deem advisable.
3.4 Delegation. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company or of
any Subsidiary or Affiliate, or to a Committee of such officers or managers, the
authority, subject to such terms and limitations as the Committee shall
determine, to grant Options to, or to cancel, modify or waive rights with
respect to, or to alter, discontinue, suspend, or terminate Options held by
Participants who are not officers or directors of the Company for purposes of
Section 16 or who are otherwise not subject to such Section.
3.5 No Liability. No member of the Board or Committee shall be liable for
any action taken or determination made in good faith with respect to the Plan or
any Option granted hereunder.
SECTION 4. SHARES AVAILABLE FOR OPTIONS
4.1 Shares Available. Subject to the provisions of Section 4.2 hereof, the
stock to be subject to Options under the Plan shall be the Shares of the Company
and the maximum number of Shares with respect to which Options may be granted
under the Plan shall be 2,124,650 (which includes 74,650 Shares with respect to
which awards under the Company's 1989 Non-Qualified Stock Option Plan, 1993
Stock Option Plan and 1995 Incentive Stock Option Plan (the "Old Plans") were
authorized but not granted). Notwithstanding the foregoing and subject to
adjustment as provided in Section 4.2, the maximum number of Shares with respect
to which Awards may be granted under the Plan shall be increased by the number
of Shares with respect to which Options or other Awards were granted under the
Old Plans, as of the effective date of this Plan, but which terminate, expire
unexercised, or are settled for cash, forfeited or canceled without the delivery
of Shares under the terms of such Old Plans after the effective date of this
Plan.
If, after the effective date of the Plan, any Shares covered by an Option
granted under this Plan, or to which such an Option relates, are forfeited, or
if such an Option is settled for cash or otherwise terminates, expires
unexercised, or is canceled without the delivery of Shares, then the Shares
covered by such Option, or to which such Option relates, or the number of Shares
otherwise counted against the aggregate number of Shares with respect to which
Options may be granted, to the extent of any such settlement, forfeiture,
termination, expiration, or cancellation, shall again become Shares with respect
to which Options may be granted. In the event that any Option or other Option
granted hereunder is exercised through the delivery of Shares or in the event
that withholding tax liabilities arising from such Option are satisfied by the
withholding of Shares by the Company, the number of Shares available for Options
under the Plan shall be increased by the number of Shares so surrendered or
withheld.
4.2 Adjustments. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee, in its sole discretion, to be
appropriate, then the Committee shall, in such manner as it may deem equitable
(and, with respect to Incentive Stock Options, in such manner as is consistent
with Section 422 of the Code and the regulations thereunder) : (i) adjust any or
all of (1) the aggregate number of Shares or other securities of the Company (or
number and kind of other securities or property) with respect to which Options
may be granted under the Plan; (2) the number of Shares or other securities of
the Company (or number and kind of other securities or property) subject to
outstanding Options under the Plan; and (3) the grant or exercise price with
respect to any Option under the Plan, provided that the number of shares subject
to any Option shall always be a whole number; (ii) if deemed appropriate,
provide for an equivalent Option in respect of securities of the surviving
entity of any merger, consolidation or other transaction or event having a
similar effect; or (iii) if deemed appropriate, make provision for a cash
payment to the holder of an outstanding Option.
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4.3 Substitute Options. Any Shares issued by the Company as Substitute
Options in connection with the assumption or substitution of outstanding grants
from any acquired corporation shall not reduce the Shares available for Options
under the Plan.
4.4 Sources of Shares Deliverable Under Options. Any Shares delivered
pursuant to an Option may consist, in whole or in part, of authorized and
unissued Shares or of issued Shares that have been reacquired by the Company.
SECTION 5. ELIGIBILITY
Any Employee, Director or Consultant shall be eligible to be designated a
Participant; provided, however, that Outside Directors shall only be eligible to
receive Options granted consistent with Section 7.
SECTION 6. STOCK OPTIONS
6.1 Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete authority to determine the Participants to whom Options shall
be granted, the number of Shares subject to each Option, the exercise price and
the conditions and limitations applicable to the exercise of each Option. The
Committee shall have the authority to grant Incentive Stock Options, or to grant
Non-Qualified Stock Options, or to grant both types of Options. In the case of
Incentive Stock Options, the terms and conditions of such grants shall be
subject to and comply with such rules as may be prescribed by Section 422 of the
Code, as from time to time amended, and any regulations implementing such
statute. A person who has been granted an Option under this Plan may be granted
additional Options under the Plan if the Committee shall so determine; provided,
however, that to the extent the aggregate Fair Market Value (determined at the
time the Incentive Stock Option related thereto is granted) of the Shares with
respect to which all Incentive Stock Options related to such Option are
exercisable for the first time by an Employee during any calendar year (under
all plans described in subsection (d) of Section 422 of the Code of the Company
and its Subsidiaries) exceeds $100,000 (or such higher amount as is permitted in
the future under Section 422(d) of the Code, such Options shall be treated as
Non-Qualified Stock Options.
6.2 Price. The Committee in its sole discretion shall establish the Option
Price at the time each Option is granted. Except in the case of Substitute
Options, the Option Price of an Option may not be less than 100% of the Fair
Market Value of the Shares with respect to which the Option is granted on the
date of grant of such Option. Notwithstanding the foregoing and except as
permitted by the provisions of Section 4.2 and Section 10 hereof, the Committee
shall not have the power to (i) amend the terms of previously granted Options to
reduce the Option Price of such Options, or (ii) cancel such Options and grant
substitute Options with a lower Option Price than the canceled Options.
6.3 Term. Subject to the Committee's authority under Section 3.1 and the
provisions of Section 6.5, each Option and all rights and obligations thereunder
shall expire on the date determined by the Committee and specified in the Option
Agreement. The Committee shall be under no duty to provide terms of like
duration for Options granted under the Plan. Notwithstanding the foregoing, no
Option shall be exercisable after the expiration of ten (10) years from the date
such Option was granted.
6.4 Exercise.
(a) Each Option shall be exercisable at such times and subject to such
terms and conditions as the Committee may, in its sole discretion, specify
in the applicable Option Agreement or thereafter. The Committee shall have
full and complete authority to determine, subject to Section 6.5 herein,
whether an Option will be exercisable in full at any time or from time to
time during the tern of the Option, or to provide for the exercise thereof
in such installments, upon the occurrence of such events and at such times
during the term of the Option as the Committee may determine.
(b) The Committee may impose such conditions with respect to the exercise
of Options, including without limitation, any relating to the application
of federal, state or foreign securities laws or the Code, as it may deem
necessary or advisable. The exercise of any Option granted hereunder shall
be effective only at such time as the sale of Shares pursuant to such
exercise will not violate any state or federal securities or other laws.
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(c) An Option may be exercised in whole or in part at any time, with
respect to whole Shares only, within the period permitted thereunder for
the exercise thereof, and shall be exercised by written notice of intent to
exercise the Option, delivered to the Company at its principal office, and
payment in full to the Company at the direction of the Committee of the
amount of the Option Price for the number of Shares with respect to which
the Option is then being exercised. The exercise of an Option shall result
in the termination of the other to the extent of the number of Shares with
respect to which the Option is exercised.
(d) The Option Price shall be immediately due upon exercise of the Option
and shall, subject to the provisions of the Option Agreement and the
applicable securities laws, be payable in one or more of the following
forms: (i) cash or check made payable to the Company; or (ii) shares held
for the requisite period necessary to avoid a charge to the Company's
earnings for financial reporting purposes and valued at the Fair Market
Value of such Shares on the date of exercise (or next date), together with
any applicable withholding taxes. Payment of the Option Price for the
purchased shares must be made on the Option exercise date. Until the
optionee has been issued Shares subject to such exercise, he or she shall
possess no rights as a stockholder with respect to such Shares.
6.5 Ten Percent Stock Rule. Notwithstanding any other provisions in the
Plan, if at the time an Option is otherwise to be granted pursuant to the Plan
the optionee or rights holder owns directly or indirectly (within the meaning of
Section 424(d) of the Code) Shares of the Company possessing more than ten
percent (10%) of the total combined voting power of all classes of Stock of the
Company or its parent or Subsidiary or Affiliate corporations (within the
meaning of Section 422 (b) (6) of the Code), then any Incentive Stock Option to
be granted to such optionee or rights holder pursuant to the Plan shall satisfy
the requirement of Section 422(c) (5) of the Code, and the Option Price shall be
not less than 110% of the Fair Market Value of the Shares of the Company, and
such Option by its terms shall not be exercisable after the expiration of five
(5) years from the date such Option is granted.
SECTION 7. DIRECTOR OPTIONS
7.1 Grant Upon Election of a New Director to the Board. A new Director to
the Board shall receive Options for 20,000 Shares upon his or her election to
the Board. These Options shall become exercisable in five equal installments of
4,000 Shares each beginning on the first anniversary of the date of grant.
7.2 Grant Upon Re-election of a Director to the Board. Beginning with the
2001 annual meeting of the Company's shareholders and continuing for each year
through the 2005 annual meeting of the Company's shareholders, a Director who is
re-elected to the Board shall receive Options for 4,000 Shares upon his or her
re-election to the Board. These Options shall become exercisable on the first
anniversary of the date of grant.
7.3 Grants to Board Chairmen. Beginning with the 2001 annual meeting of the
Company's shareholders and continuing for each year through the 2005 annual
meeting of the Company's shareholders, each Director who is appointed as
Chairman of the Board, Vice-Chairman of the Board or as Chairman of a Board
committee shall receive Options for 1,000 Shares upon his or her appointment, in
addition to any other Options granted pursuant to this Section 7. These Options
shall become exercisable on the first anniversary of the date of grant.
7.4 Option Price. The Option Price for all Options granted to Directors
pursuant to this Section 7 shall be the Fair Market Value on the date of grant.
7.5 Forfeiture of Options. Any Option granted to a Director pursuant to
this Section 7 that has not become exercisable when a Director ceases to serve
as a Director, or in the position for which such Option was granted, shall be
forfeited.
7.6 Other Options to Directors. The Board may also grant other Options to
Directors pursuant to the terms of the Plan. With respect to such Options, all
references in the Plan to the Committee shall be deemed to be references to the
Board.
SECTION 8. TERMINATION OF EMPLOYMENT
The Committee shall have the full power and authority to determine the
terms and conditions that shall apply to any Option upon a termination of
employment with the Company, its Subsidiaries and Affiliates, including a
termination by the Company with or without cause, by a Participant voluntarily,
or by reason of death, Disability or Retirement, and may provide such terms and
conditions in the Option Agreement or in such rules and regulations as it may
prescribe. All Options which are not exercised prior to 90 days after the date a
Participant ceases to serve as a Director, Employee or Consultant of the Company
shall be forfeited.
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SECTION 9. CHANGE IN CONTROL
Upon a Change in Control, all outstanding Options shall vest, become
immediately exercisable or payable and have all restrictions lifted.
SECTION 10. AMENDMENT AND TERMINATION
10.1 Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without stockholder approval if such approval is necessary to
comply with any tax or regulatory requirement for which or with which the Board
deems it necessary or desirable to comply.
10.2 Amendments to Options. Subject to the restrictions of Section 6.2, the
Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any Option theretofore
granted, prospectively or retroactively; provided that any such waiver,
amendment, alteration, suspension, discontinuance, cancellation or termination
that would adversely affect the rights of any Participant or any holder or
beneficiary of any Option theretofore granted shall not to that extent be
effective without the consent of the affected Participant, holder, or
beneficiary.
10.3 Adjustments of Options Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make adjustments in
the terms and conditions of, and the criteria included in, Options in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 4.2 hereof) affecting the Company, any
Subsidiary or Affiliate, or the financial statements of the Company or any
Subsidiary or Affiliate, or of changes in applicable laws, regulations, or
accounting principles, whenever the Committee determines that such adjustments
are appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan.
SECTION 11. GENERAL PROVISIONS
11.1 Limited Transferability of Options. Except as otherwise provided in
the Plan, no Option shall be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant, except by will or the laws
of descent and distribution and/or as may be provided by the Committee in its
discretion, at or after grant, in the Option Agreement. No transfer of an Option
by will or by laws of descent and distribution shall be effective to bind the
Company unless the Company shall have been furnished with written notice thereof
and an authenticated copy of the will and/or such other evidence as the
Committee may deem necessary or appropriate to establish the validity of the
transfer.
11.2 No Rights to Options. No Person shall have any claim to be granted any
Option, and there is no obligation for uniformity of treatment of Participants
or holders or beneficiaries of Options. The terms and conditions of Options need
not be the same with respect to each Participant.
11.4 Share Certificates. All certificates for Shares or other securities of
the Company or any Subsidiary or Affiliate delivered under the Plan pursuant to
any Option or the exercise thereof shall be subject to such stop transfer orders
and other restrictions as the Committee may deem advisable under the Plan or the
rules, regulations and other requirements of the SEC or any state securities
commission or regulatory authority, any stock exchange or other market upon
which such Shares or other securities are then listed, and any applicable
Federal or state laws, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate reference to such restrictions.
11.5 Withholding. A Participant may be required to pay to the Company or
any Subsidiary or Affiliate and the Company or any Subsidiary or Affiliate shall
have the right and is hereby authorized to withhold from any Option, from any
payment due or transfer made under any Option or under the Plan, or from any
compensation or other amount owing to a Participant the amount (in cash, Shares,
other securities, other Options or other property) of any applicable withholding
or other taxes in respect of an Option, its exercise, or any payment or transfer
under an Option or under the Plan and to take such other action as may be
necessary in the opinion of the Company to satisfy all obligations for the
payment of such taxes.
11.6 Option Agreements. Each Option hereunder shall be evidenced by an
Option Agreement that shall be delivered to the Participant and may specify the
terms and conditions of the Option and any rules applicable thereto. In the
event of a conflict between the terms of the Plan and any Option Agreement, the
terms of the Plan shall prevail.
11.7 No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Subsidiary or Affiliate from adopting or
continuing in effect other compensation arrangements, which may, but need not,
provide for the grant of Options.
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11.8 No Right to Employment. The grant of an Option shall not be construed
as giving a Participant the right to be retained in the employ of the Company or
any Subsidiary or Affiliate. Further, the Company or a Subsidiary or Affiliate
may at any time dismiss a Participant from employment, free from any liability
or any claim under the Plan, unless otherwise expressly provided in an Option
Agreement.
11.9 No Rights as Stockholder. Subject to the provisions of the Plan and
the applicable Option Agreement, no Participant or holder or beneficiary of any
Option shall have any rights as a stockholder with respect to any Shares to be
distributed under the Plan until such person has become a holder of such Shares.
11.10 Governing Law. The validity, construction and effect of the Plan and
any rules and regulations relating to the Plan and any Option Agreement shall be
determined in accordance with the laws of the State of California without giving
effect to conflicts of laws principles.
11.11 Severability. If any provision of the Plan or any Option Agreement
is, or becomes, or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Option, or would disqualify the Plan or any
Option under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to the applicable laws, or if it cannot
be construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Option, such provision shall
be stricken as to such jurisdiction, Person or Option and the remainder of the
Plan and any such Option shall remain in full force and effect.
11.12 Other Laws. The Committee may refuse to issue or transfer any Shares
or other consideration under an Option if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation (including
applicable non-U.S. laws or regulations) or entitle the Company to recover the
same under Exchange Act Section 16 (b), and any payment tendered to the Company
by a Participant, other holder or beneficiary in connection with the exercise of
such Option shall be promptly refunded to the relevant Participant, holder, or
beneficiary.
11.13 No Trust or Fund Created. Neither the Plan nor any Option shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Subsidiary or Affiliate and a
Participant or any other Person. To the extent that any Person acquires a right
to receive payments from the Company or any Subsidiary or Affiliate pursuant to
an Option, such right shall be no greater than the right of any unsecured
general creditor of the Company or any Subsidiary or Affiliate.
11.14 No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Option, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be canceled, terminated or otherwise eliminated.
11.15 Headings. Headings are given to the sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
SECTION 12. TERM OF THE PLAN
12.1 Effective Date. The Plan shall be effective as of February 13, 2001
provided it is approved and ratified by the Company's stockholders on or prior
to December 31, 2001.
12.2 Expiration Date. No new Options shall be granted under the Plan after
the tenth (10th) anniversary of the Effective Date. Unless otherwise expressly
provided in the Plan or in an applicable Option Agreement, any Option granted
hereunder may, and the authority of the Board or the Committee to amend, alter,
adjust, suspend, discontinue, or terminate any such Option or to waive any
conditions or rights under any such Option shall, continue after the tenth
(10th) anniversary of the Effective Date.
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Exhibit 10.11
Amendments to Tri Counties Bank Executive Deferred Compensation Plan referenced
at Exhibit 10.9, effective as of January 1, 2005.
Effective January 1, 2005, the Company amended the 1987 Tri Counties Bank
Supplemental Executive Retirement Plan ("1987 SERP") by replacing each of the
Articles noted below as follows:
2.16 Interest Rate
"Interest Rate" means, with respect to any calendar month until January 1,
2008, the monthly equivalent of three (3) percentage points greater than the
annual yield of the Moody's Average Corporate Bond Yield Index for the preceding
calendar month as published by Moody's Investor Service, Inc. (or any successor
thereto) or, if such index is no longer published, a substantially similar index
selected by the Board. With respect to any calendar month after January 1, 2008,
the "Interest Rate" means, the monthly equivalent of one (1) percentage point
greater than the annual yield of the Moody's Average Corporate Bond Yield Index
for the preceding calendar month. With respect to any calendar month succeeding
a participant's retirement or termination, the "Interest Rate" means, the
monthly equivalent of the annual yield of the Moody's Average Corporate Bond
Yield Index for the preceding calendar month.
3.1 Eligibility and Participation
(a) Eligibility. Eligibility to participate in the Plan shall be limited to
those key employees of the Employer who are designated, from time to time, by
the Board of TriCo Bancshares and who have not made prior deferrals to the Plan
in excess of $1,500,000.
3.3 Limitation on Deferral
A Participant may defer up to one hundred percent (100%) of the
Participant's Compensation subject to a limitation of one million five hundred
thousand dollars ($1,500,000) in cumulative deferred compensation. However, the
Committee may impose a different maximum deferral amount or increase the minimum
deferral amount under paragraph 3.2 from time to time by giving written notice
to all Participants, provided, however, that no such changes may affect a
Deferral Commitment made prior to the Committee's action.
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Exhibit 10.12
Amendments to Tri Counties Bank Deferred Compensation Plan for Directors
referenced at Exhibit 10.10, effective as of January 1, 2005.
Effective January 1, 2005, the Company amended the 1987 Tri Counties Bank
Supplemental Retirement Plan for Directors ("1987 SRP for Directors") by
replacing each of the Articles noted below as follows:
2.15 Interest Rate
"Interest Rate" means, with respect to any calendar month until January 1,
2008, the monthly equivalent of three (3) percentage points greater than the
annual yield of the Moody's Average Corporate Bond Yield Index for the preceding
calendar month as published by Moody's Investor Service, Inc. (or any successor
thereto) or, if such index is no longer published, a substantially similar index
selected by the Board. With respect to any calendar month after January 1, 2008,
the "Interest Rate" means, the monthly equivalent of one (1) percentage point
greater than the annual yield of the Moody's Average Corporate Bond Yield Index
for the preceding calendar month. With respect to any calendar month succeeding
a participant's retirement or termination, the "Interest Rate" means, the
monthly equivalent of the annual yield of the Moody's Average Corporate Bond
Yield Index for the preceding calendar month.
3.3 Limitation on Deferral
A Participant may defer up to one hundred percent (100%) of the
Participant's Compensation subject to a limitation of one million five hundred
thousand dollars ($1,500,000) in cumulative deferred compensation. However, the
Committee may impose a different maximum deferral amount or increase the minimum
deferral amount under paragraph 3.2 from time to time by giving written notice
to all Participants, provided, however, that no such changes may affect a
Deferral Commitment made prior to the Committee's action.
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Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
TriCo Bancshares and Subsidiaries:
We consent to the incorporation by reference in the registration statements
(Nos. 33-88702, 33-62063, and 33-66064) on Form S-8 of our reports dated
March 9, 2005, with respect to the consolidated balance sheets of TriCo
Bancshares and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2004,
management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2004, and the effectiveness of internal control
over financial reporting as of December 31, 2004, which reports appear in the
December 31, 2004, annual report on Form 10-K of TriCo Bancshares and
subsidiaries.
/s/ KPMG LLP
Sacramento, California
March 9, 2005
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Exhibit 31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as Amended
I, Richard P. Smith, certify that;
1. I have reviewed this annual report on Form 10-K of TriCo Bancshares;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have;
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's fourth quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 9, 2005 /s/ Richard P. Smith
----------------------------------------
Richard P. Smith
President and Chief Executive Officer
-88-
Exhibit 31.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as Amended
I, Thomas J. Reddish, certify that;
1. I have reviewed this annual report on Form 10-K of TriCo Bancshares;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have;
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's fourth quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 9, 2005 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
-89-
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350.
In connection with the Annual Report of TriCo Bancshares (the "Company") on Form
10-K for the year ending December 31, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Richard P. Smith
------------------------------------------
Richard P. Smith
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to TriCo Bancshares and will be retained by TriCo Bancshares and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350.
In connection with the Annual Report of TriCo Bancshares (the "Company") on Form
10-K for the year ending December 31, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish,
Vice President and Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Thomas J. Reddish
------------------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to TriCo Bancshares and will be retained by TriCo Bancshares and
furnished to the Securities and Exchange Commission or its staff upon request.
-90-