UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2005 Commission file number 0-10661
- ------------------------------- ------------------------------
TRICO BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2792841
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
(Address of principal executive offices) (Zip code)
530-898-0300
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Class: Common stock, no par value
Outstanding shares as of July 26, 2005: 15,674,092
TABLE OF CONTENTS
Page
Forward Looking Statements 1
PART I - FINANCIAL INFORMATION 2
Item 1 - Financial Statements 2
Notes to Unaudited Condensed Consolidated Financial Statements 6
Financial Summary 15
Item 2 - Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 28
Item 4 - Controls and Procedures 29
PART II - OTHER INFORMATION 30
Item 1 - Legal Proceedings 30
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 4 - Submission of Matters to a Vote of Security Holders 30
Item 6 - Exhibits 31
Signatures 33
Exhibits 34
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. When you see any of the
words "believes", "expects", "anticipates", "estimates", or similar expressions,
mean making forward-looking statements. A number of factors, some of which are
beyond the Company's ability to predict or control, could cause future results
to differ materially from those contemplated. These factors include but are not
limited to:
- a 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.
The reader is directed to the Company's annual report on Form 10-K for the year
ended December 31, 2004, for further discussion of factors which could affect
the Company's business and cause actual results to differ materially from those
expressed in any forward-looking statement made in this report.
-1-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited)
At June 30, At December 31,
2005 2004 2004
------------------------------- -----------------
Assets:
Cash and due from banks $79,287 $65,512 $70,037
Federal funds sold 235 - -
------------------------------- -----------------
Cash and cash equivalents 79,522 65,512 70,037
Securities available for sale 288,902 302,341 286,013
Federal Home Loan Bank stock, at cost 7,440 6,642 6,781
Loans, net of allowance for loan losses
of $14,892, $14,613 and $14,525 1,235,160 1,063,851 1,158,442
Foreclosed assets, net of allowance for losses
of $180, $180 and $180 - 628 -
Premises and equipment, net 21,182 18,996 19,853
Cash value of life insurance 41,099 39,844 40,479
Accrued interest receivable 6,706 6,069 6,473
Goodwill 15,519 15,519 15,519
Other intangible assets 4,719 5,412 5,408
Other assets 20,394 21,275 18,501
------------------------------- -----------------
Total Assets $1,720,643 $1,546,089 $1,627,506
=============================== =================
Liabilities and Shareholders' Equity:
Liabilities:
Deposits:
Noninterest-bearing demand $332,887 $282,292 $311,275
Interest-bearing 1,067,290 985,060 1,037,558
------------------------------- -----------------
Total deposits 1,400,177 1,267,352 1,348,833
Federal funds purchased 83,000 66,000 46,400
Accrued interest payable 3,535 2,272 3,281
Reserve for unfunded commitments 1,671 916 1,532
Other liabilities 20,626 17,125 19,938
Other borrowings 27,628 22,866 28,152
Junior subordinated debt 41,238 41,238 41,238
------------------------------- -----------------
Total Liabilities 1,577,875 1,417,769 1,489,374
------------------------------- -----------------
Commitments and contingencies
Shareholders' Equity:
Common stock, no par value: 50,000,000 shares authorized;
issued and outstanding:
15,684,092 at June 30, 2005 70,855
15,639,897 at June 30, 2004 69,623
15,723,317 at December 31, 2004 70,699
Retained earnings 73,381 60,681 67,785
Accumulated other comprehensive loss, net (1,468) (1,984) (352)
------------------------------- -----------------
Total Shareholders' Equity 142,768 128,320 138,132
------------------------------- -----------------
Total Liabilities and Shareholders' Equity $1,720,643 $1,546,089 $1,627,506
=============================== =================
See accompanying notes to unaudited condensed consolidated financial statements.
-2-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data; unaudited)
Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
--------------------------------------------------------
Interest and dividend income:
Loans, including fees $20,701 $17,551 $40,228 $34,290
Debt securities:
Taxable 2,707 2,590 5,337 5,266
Tax exempt 414 438 829 880
Dividends 78 48 138 93
Federal funds sold 10 1 14 11
--------------------------------------------------------
Total interest income 23,910 20,628 46,546 40,540
--------------------------------------------------------
Interest expense:
Deposits 3,617 2,387 6,702 4,836
Federal funds purchased 249 150 421 184
Other borrowings 329 320 656 640
Junior subordinated debt 594 230 1,131 441
--------------------------------------------------------
Total interest expense 4,789 3,087 8,910 6,101
--------------------------------------------------------
Net interest income 19,121 17,541 37,636 34,439
--------------------------------------------------------
Provision for loan losses 561 1,305 661 1,918
--------------------------------------------------------
Net interest income after provision for
loan losses 18,560 16,236 36,975 32,521
--------------------------------------------------------
Noninterest income:
Service charges and fees 4,505 4,910 8,567 8,991
Gain on sale of loans 429 433 721 1,058
Commissions on sale of non-deposit
investment products 660 587 1,192 1,129
Increase in cash value of life insurance 400 432 620 864
Other 316 580 537 655
--------------------------------------------------------
Total noninterest income 6,310 6,942 11,637 12,697
--------------------------------------------------------
Noninterest expense:
Salaries and related benefits 8,408 8,440 16,777 16,607
Other 7,109 6,967 13,853 13,183
--------------------------------------------------------
Total noninterest expense 15,517 15,407 30,630 29,790
--------------------------------------------------------
Income before income taxes 9,353 7,771 17,982 15,428
Provision for income taxes 3,616 2,924 7,006 5,804
--------------------------------------------------------
Net income 5,737 4,847 10,976 9,624
--------------------------------------------------------
Other comprehensive (loss) income:
Change in unrealized (loss) gain on securities
available for sale, net 774 (4,410) (1,116) (3,798)
--------------------------------------------------------
Comprehensive income $6,511 $437 $9,860 $5,826
========================================================
Average shares outstanding 15,701,867 15,639,556 15,715,796 15,628,048
Diluted average shares outstanding 16,288,728 16,215,160 16,327,716 16,213,885
Per share data:
Basic earnings $0.37 $0.31 $0.70 $0.62
Diluted earnings $0.35 $0.30 $0.67 $0.59
Dividends paid $0.11 $0.11 $0.22 $0.21
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share data; unaudited)
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings (Loss) Income Total
-------------------------------------------------------------
Balance at December 31, 2003 15,668,248 $69,767 $56,379 $1,814 $127,960
Comprehensive income: ----------
Net income 9,624 9,624
Change in net unrealized gain on
Securities available for sale, net (3,798) (3,798)
----------
Total comprehensive income 5,826
Stock options exercised 139,249 576 576
Tax benefit of stock options exercised 26 26
Repurchase of common stock (167,600) (746) (2,047) (2,793)
Dividends paid ($0.21 per share) (3,275) (3,275)
-------------------------------------------------------------
Balance at June 30, 2004 15,639,897 $69,623 $60,681 ($1,984) $128,320
=============================================================
Balance at December 31, 2004 15,723,317 $70,699 $67,785 ($352) $138,132
Comprehensive income: ----------
Net income 10,976 10,976
Change in net unrealized gain on
Securities available for sale, net (1,116) (1,116)
----------
Total comprehensive income 9,860
Stock options exercised 79,275 511 511
Tax benefit of stock options exercised 178 178
Repurchase of common stock (118,500) (533) (1,918) (2,451)
Dividends paid ($0.22 per share) (3,462) (3,462)
-------------------------------------------------------------
Balance at June 30, 2005 15,684,092 $70,855 $73,381 ($1,468) $142,768
=============================================================
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
For the six months ended June 30,
2005 2004
------------------------------------
Operating activities:
Net income $10,976 $9,624
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment, and amortization 1,861 1,625
Amortization of intangible assets 689 673
Provision for loan losses 661 1,918
Amortization of investment securities premium, net 659 1,009
Originations of loans for resale (36,677) (55,376)
Proceeds from sale of loans originated for resale 36,986 55,929
Gain on sale of loans (721) (1,058)
Amortization of mortgage servicing rights 306 406
Recovery of mortgage servicing rights valuation allowance - (600)
Gain on sale of other real estate owned - (182)
Loss (gain) on sale of fixed assets 79 (12)
Increase in cash value of life insurance (620) (864)
Change in:
Interest receivable (233) (42)
Interest payable 254 (366)
Other assets and liabilities, net (271) (2,215)
------------------------------------
Net cash provided by operating activities 13,949 10,469
------------------------------------
Investing activities:
Proceeds from maturities of securities available-for-sale 29,064 41,225
Purchases of securities available-for-sale (34,538) (39,580)
Purchases of Federal Home Loan Bank stock (659) (1,858)
Loan originations and principal collections, net (77,379) (97,418)
Proceeds from sale of premises and equipment 23 539
Purchases of premises and equipment (2,993) (1,407)
Proceeds from sale of other real estate owned - 478
------------------------------------
Net cash used by investing activities (86,482) (98,021)
------------------------------------
Financing activities:
Net increase in deposits 51,344 30,529
Net increase in Federal funds purchased 36,600 26,500
Issuance of junior subordinated debt - 20,619
Payments of principal on long-term other borrowings (25) (21)
Net change in short-term other borrowings (499) -
Repurchase of common stock (2,451) (2,793)
Dividends paid (3,462) (3,275)
Exercise of stock options 511 576
------------------------------------
Net cash provided by financing activities 82,018 72,135
------------------------------------
Net change in cash and cash equivalents 9,485 (15,417)
------------------------------------
Cash and cash equivalents and beginning of period 70,037 80,929
------------------------------------
Cash and cash equivalents at end of period $79,522 $65,512
====================================
Supplemental disclosure of noncash activities:
Unrealized loss on securities available for sale ($1,926) ($6,477)
Supplemental disclosure of cash flow activity:
Cash paid for interest expense $8,656 $6,467
Cash paid for income taxes $6,880 $7,460
Income tax benefit from stock option exercises $178 $26
See accompanying notes to unaudited condensed consolidated financial statements
-5-
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: General Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. The interim results for the three and six month
periods ended June 30, 2005 and 2004 are not necessarily indicative of the
results expected for the full year. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes as well as other information
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004.
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 32 branch offices and 15 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 assets,
income taxes, and the valuation of mortgage servicing rights, are the only
accounting estimates that materially affect the Company's consolidated 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.
During the six months ended June 30, 2005, and throughout 2004, the Company did
not have any securities classified as either held-to-maturity or trading.
-6-
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 accumulated other comprehensive income
(loss) 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.
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 June 30, 2005 and 2004, and December 31, 2004, 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 impaired 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 and deposit related overdrafts 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 and leases, based on evaluations of the collectibility,
impairment and prior loss experience of loans and leases. 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, 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.
-7-
Reserve for Unfunded Commitments
The reserve for unfunded commitments is established through a provision for
losses - unfunded commitments charged to noninterest expense. The reserve for
unfunded commitments is an amount that Management believes will be adequate to
absorb probable losses inherent in existing commitments, including unused
portions of revolving lines of credits and other loans, standby letters of
credits, and unused deposit account overdraft privilege. The reserve for
unfunded commitments is based on evaluations of the collectibility, and prior
loss experience of unfunded commitments. The evaluations take into consideration
such factors as changes in the nature and size of the loan portfolio, overall
loan portfolio quality, loan concentrations, specific problem loans and related
unfunded commitments, and current economic conditions that may affect the
borrower's or depositor's ability to pay.
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.
The following table summarizes the Company's mortgage servicing rights recorded
in other assets as of June 30, 2005 and December 31, 2004.
December 31, June 30,
(Dollars in thousands) 2004 Additions Reductions 2005
-----------------------------------------------
Mortgage Servicing Rights $3,476 $412 ($306) $3,582
Valuation allowance - - - -
-----------------------------------------------
Mortgage servicing rights, net
of valuation allowance $3,476 $412 ($306) $3,582
===============================================
At June 30, 2005 and December 31, 2004, the Company serviced real estate
mortgage loans for others of $367 million and $368 million, respectively. At
June 30, 2005 and December 31, 2004, the fair value of the Company's mortgage
servicing rights assets was $3,582,000 and $3,568,000, respectively.
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, standby letters of credit, and deposit account overdraft
privilege. Such financial instruments are recorded when they are funded.
-8-
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 other 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 June
30, 2005 and December 31, 2004.
December 31, June 30,
(Dollar in Thousands) 2004 Additions Reductions 2005
----------------------------------------------
Core deposit intangibles $13,643 - - $13,643
Accumulated amortization (9,201) - ($689) (9,890)
----------------------------------------------
Core deposit intangibles, net $4,442 - ($689) $3,753
==============================================
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 from December 31, 2004:
Estimated Core Deposit
Intangible Amortization
Years Ended (Dollar in thousands)
----------- -----------------------
2005 $1,381
2006 1,395
2007 490
2008 523
2009 328
Thereafter 325
------
$4,442
======
-9-
The following table summarizes the Company's minimum pension liability
intangible as of June 30, 2005 and December 31, 2004.
December 31, June 30,
(Dollar in Thousands) 2004 Additions Reductions 2005
----------------------------------------------
Minimum pension liability
intangible $966 - - $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 June 30,
2005 and December 31, 2004.
December 31, June 30,
(Dollar in Thousands) 2004 Additions Reductions 2005
----------------------------------------------
Goodwill 15,519 - - 15,519
==============================================
Impairment of Long-Lived Assets and Goodwill
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. 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.
-10-
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 (see Recent Accounting Pronouncements).
Had compensation cost for the Company's option plans been determined in
accordance with SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except per share amounts) 2005 2004 2005 2004
---- ---- ---- ----
Net income As reported $5,737 $4,847 $10,976 $9,624
Pro forma $5,624 $4,762 $10,777 $9,457
Basic earnings per share As reported $0.37 $0.31 $0.70 $0.62
Pro forma $0.36 $0.30 $0.69 $0.61
Diluted earnings per share As reported $0.35 $0.30 $0.67 $0.59
Pro forma $0.35 $0.29 $0.66 $0.58
Stock-based employee compensation
cost, net of related tax effects,
included in net income As reported $0 $0 $0 $0
Pro forma $113 $85 $199 $167
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing.
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:
Three Months Six Months
Ended June 30, Ended June 30,
(in thousands) 2005 2004 2005 2004
------------------ ----------------
Net income $5,737 $4,847 $10,976 $9,624
Average number of common shares outstanding 15,702 15,640 15,716 15,628
Effect of dilutive stock options 587 575 612 586
------------------ ----------------
Average number of common shares outstanding
used to calculate diluted earnings per share 16,289 16,215 16,328 16,214
================== ================
-11-
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 (loss) and related tax effects are
as follows:
Three months ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
2005 2004 2005 2004
-------------------------- -------------------------
(in thousands)
Unrealized holding gains (losses) on
available-for-sale securities $1,307 ($7,508) ($1,926) ($6,47)
Tax effect (533) 3,098 810 2,679
-------------------------- -------------------------
Unrealized holding gains (losses) on
available-for-sale securities, net of tax $774 ($4,410) ($1,116) ($3,798)
========================== =========================
The components of accumulated other comprehensive loss, included in
shareholders' equity, are as follows:
June 30, December 31,
2005 2004
-----------------------------
(in thousands)
Net unrealized (losses) gains on available-for-sale securities ($919) $1,007
Tax effect 386 (424)
-----------------------------
Unrealized holding (losses) gains on
available-for-sale securities, net of tax ($533) 583
-----------------------------
Minimum pension liability (1,559) (1,559)
Tax effect 624 624
-----------------------------
Minimum pension liability, net of tax (935) (935)
-----------------------------
Accumulated other comprehensive loss ($1,468) ($352)
=============================
Retirement Plans
The Company has supplemental retirement plans covering 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 use the cash values of these policies to pay the
retirement obligations.
The following table sets forth the net periodic benefit cost recognized for the
plans:
Three Months Six Months
Ended June 30, Ended June 30,
(in thousands) 2005 2004 2005 2004
---- ---- ---- ----
Net pension cost included the following components:
Service cost-benefits earned during the period $105 $117 $209 $151
Interest cost on projected benefit obligation 135 144 268 248
Amortization of net obligation at transition 56 (3) 112 5
Amortization of prior service cost 24 34 48 54
Recognized net actuarial loss 1 18 2 55
-----------------------------------
Net periodic pension cost $321 $310 $639 $513
===================================
During the six months ended June 30, 2005 and 2004, the Company contributed and
paid out as benefits $269,000 and $265,000, respectively, to participants under
the plans. For the year ending December 31, 2005, the Company expects to
contribute and pay out as benefits $526,000 to participants under the plans.
-12-
Recent Accounting Pronouncements
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.
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.
SFAS 132 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 reporting period of the Company's fiscal year
beginning 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 January 1, 2006. 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 not 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 any impact on the Company's consolidated financial statements. there
were no loan committments requiring accounting under this standard as of June
30, 2005.
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
-13-
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 2004 financial statements have been
reclassified to conform to the 2005 presentation. Additionally, in the first
quarter of 2005, the Company reclassified the reserve for unfunded commitments
from the allowance for loan losses to other liabilities, and reclassified the
provision for unfunded commitments from the provision for loan losses to other
noninterest expense. These reclassifications did not affect previously reported
net income or total shareholders' equity. Share and per share data for all
periods have been adjusted to reflect the 2-for-1 stock split effected as a
stock dividend which was paid on April 30, 2004 to shareholders of record on
April 9, 2004.
-14-
TRICO BANCSHARES
Financial Summary
(dollars in thousands, except per share amounts; unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Net Interest Income (FTE) $19,361 $17,811 $38,117 $34,958
Provision for loan losses (561) (1,305) (661) (1,918)
Noninterest income 6,310 6,942 11,637 12,697
Noninterest expense (15,517) (15,407) (30,630) (29,790)
Provision for income taxes (FTE) (3,856) (3,194) (7,487) (6,323)
------------------------------------------------------------
Net income $5,737 $4,847 $10,976 $9,624
============================================================
Earnings per share2:
Basic $0.37 $0.31 $0.70 $0.62
Diluted $0.35 $0.30 $0.67 $0.59
Per share2:
Dividends paid $0.11 $0.11 $0.22 $0.21
Book value at period end $9.10 $8.20
Tangible book value at period end $7.81 $6.87
Average common shares outstanding2 15,702 15,640 15,716 15,628
Average diluted shares outstanding2 16,289 16,215 16,328 16,214
Shares outstanding at period end 15,684 15,640
At period end:
Loans, net $1,235,160 $1,063,851
Total assets 1,720,643 1,546,089
Total deposits 1,400,177 1,267,352
Other borrowings 27,628 22,866
Junior subordinated debt 41,238 41,238
Shareholders' equity $142,768 $128,320
Financial Ratios:
During the period (annualized):
Return on assets 1.37% 1.29% 1.33% 1.31%
Return on equity 16.03% 14.97% 15.43% 14.89%
Net interest margin1 5.12% 5.27% 5.12% 5.31%
Net loan charge-offs to average loans 0.08% 0.03% 0.05% 0.04%
Efficiency ratio1 60.45% 62.24% 61.56% 62.51%
At Period End:
Equity to assets 8.30% 8.30%
Total capital to risk assets 11.53% 12.40%
Allowance for losses to loans3 1.32% 1.44%
1 Fully taxable equivalent (FTE)
2 Share and per share data for all periods have been adjusted to reflect the
2-for-1 stock split paid on April 30, 2004.
3 Allowance for losses includes allowance for loan losses and reserve for
unfunded commitments.
-15-
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
As TriCo Bancshares (the "Company") has not commenced any business operations
independent of Tri Counties Bank (the "Bank"), the following discussion pertains
primarily to the Bank. Average balances, including such balances used in
calculating certain financial ratios, are generally comprised of average daily
balances for the Company. Within Management's Discussion and Analysis of
Financial Condition and Results of Operations, interest income and net interest
income are generally presented on a fully tax-equivalent (FTE) basis.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States 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 related to the adequacy of the allowance for loan
losses, intangible assets, and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. (See caption "Allowance for
Loan Losses" for a more detailed discussion).
Results of Operations
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Consolidated Financial Statements of the Company and the Notes thereto.
Following is a summary of the components of fully taxable equivalent ("FTE") net
income for the periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------------------------------
2005 2004 2005 2004
------------------------------------------------
Net Interest Income (FTE) $19,361 $17,811 $38,117 $34,958
Provision for loan losses (561) (1,305) (661) (1,918)
Noninterest income 6,310 6,942 11,637 12,697
Noninterest expense (15,517) (15,407) (30,630) (29,790)
Provision for income taxes (FTE) (3,856) (3,194) (7,487) (6,323)
------------------------------------------------
Net income $5,737 $4,847 $10,976 9,624
================================================
The Company had quarterly earnings of $5,737,000, or $0.35 per diluted share,
for the three months ended June 30, 2005. These results represent a 16.7%
increase from the $0.30 earnings per diluted share reported for the three months
ended June 30, 2004 on earnings of $4,847,000. The improvement in results from
the year-ago quarter was due to a $1,550,000 (8.7%) increase in fully
tax-equivalent net interest income to $19,361,000, and a $744,000 (57.0%)
decrease in provision for loan losses. These contributing factors were partially
offset by a $632,000 (9.1%) decrease in noninterest income to $6,310,000 and a
$110,000 (0.7%) increase in noninterest expense to $15,517,000 for the quarter
ended June 30, 2005.
The Company reported earnings of $10,976,000, or $0.67 per diluted share, for
the six months ended June 30, 2005. These results represent a 13.6% increase
from the $0.59 earnings per diluted share reported for the six months ended June
30, 2004 on earnings of $9,624,000. The improvement in results from the year-ago
period was due to a $3,159,000 (9.0%) increase in fully tax-equivalent net
interest income to $38,117,000, and a $1,257,000 (65.5%) decrease in provision
for loan losses to $661,000. These contributing factors were partially offset by
a $1,060,000 (8.3%) decrease in noninterest income to $11,637,000 and a $840,000
(2.8%) increase in noninterest expense to $30,630,000 for the six months ended
June 30, 2005.
-16-
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------
Interest income $23,910 $20,628 $46,546 $40,540
Interest expense (4,789) (3,087) (8,910) (6,101)
FTE adjustment 240 270 481 519
-------------------------------------------------------
Net interest income (FTE) $19,361 $17,811 $38,117 $34,958
=======================================================
Average interest-earning assets $1,511,668 $1,351,774 $1,487,848 $1,316,403
Net interest margin (FTE) 5.12% 5.27% 5.12% 5.31%
The Company's primary source of revenue is net interest income, or the
difference between interest income on interest-earning assets and interest
expense in interest-bearing liabilities. Net interest income (FTE) during the
second quarter of 2005 increased $1,550,000 (8.7%) from the same period in 2004
to $19,361,000. The increase in net interest income (FTE) was due to a
$159,894,000 (11.8%) increase in average balances of interest-earning assets to
$1,511,668,000 offset by a 0.15% decrease in net interest margin (FTE) to 5.12%.
Net interest income (FTE) during the first six months of 2005 increased
$3,159,000 (9.0%) from the same period in 2004 to $38,117,000. The increase in
net interest income (FTE) was due to a $171,445,000 (13.0%) increase in average
balances of interest-earning assets to $1,487,848,000 offset by a 0.19% decrease
in net interest margin (FTE) to 5.12%.
Interest and Fee Income
Interest and fee income (FTE) for the second quarter of 2005 increased
$3,252,000 (15.6%) from the second quarter of 2004. The increase was the net
effect of a $159,894,000 (11.8%) increase in average interest-earning assets to
$1,511,668,000 and a 0.21% increase in the yield on those average
interest-earning assets to 6.39%. The growth in interest-earning assets was due
to a $179,636,000 (17.5%) increase in average loan balances to $1,209,061,000
that was partially offset by a decrease of $20,790,000 (6.5%) in average
balances of investments to $301,135,000. The increase in the yield on average
interest-earning assets was mainly due to a 0.41% increase in yield on
investments to 4.57% as the yield on loans increased 0.03% to 6.85%. The
relative flatness in yield in loans from the year-ago quarter, despite a 2.25%
increase in the prime rate from June 30, 2004 to June 30, 2005, is due to
long-term rates having generally held steady or fallen over this period, and new
prime based loans such as home equity lines of credit being offered at spreads
to the prime rate that are lower than they were in the year-ago period. The
increase in yields on investments was mainly due to maturities of shorter-term,
lower yielding investments.
Interest and fee income (FTE) for the six months ended June 30, 2005 increased
$5,968,000 (14.5%) from the same period of 2004. The increase was the net effect
of a $171,445,000 (13.0%) increase in average interest-earning assets to
$1,487,848,000 and a 0.08% increase in the yield on those average
interest-earning assets to 6.32%. The growth in interest-earning assets was due
to a $187,941,000 (18.8%) increase in average loan balances to $1,188,050,000
that was partially offset by a decrease of $15,121,000 (4.8%) in average
balances of investments to $298,758,000. The increase in the yield on average
interest-earning assets was mainly due to a 0.23% increase in yield on
investments to 4.54% as the yield on loans decreased 0.09% to 6.77%. The
decrease in yield in loans from the year-ago period, despite a 2.25% increase in
the prime rate from June 30, 2004 to June 30, 2005, is due to long-term rates
having generally held steady or fallen over this period, and new prime based
loans such as home equity lines of credit being offered at spreads to the prime
rate that are lower than they were in the year-ago period. The increase in
yields on investments was mainly due to maturities of shorter-term, lower
yielding investments.
-17-
Interest Expense
Interest expense increased $1,702,000 (55.1%) to $4,789,000 in the second
quarter of 2005 compared to the year-ago quarter. The average balance of
interest-bearing liabilities increased $101,654,000 (9.4%) to $1,186,109,000 in
the second quarter compared to the year-ago quarter. The increase in the average
balance of interest-bearing liabilities was concentrated in time deposits (up
$101,015,000 or 37.4%), interest-bearing demand deposits (up $11,538,000 or
5.0%), and junior subordinated debt (up $18,557,000 or 81.8%). The average
balance of Federal funds purchased was down $23,221,000 (41.7%) from the
year-ago quarter. In addition, the average balance of noninterest-bearing
deposits increased $53,598,000 (19.9%) from the year-ago quarter. The average
rate paid on interest-bearing liabilities in the quarter ended June 30, 2005
increased 0.48% to 1.62% compared to the year-ago quarter. The average rate paid
for all categories of interest-bearing liabilities except other borrowings
increased from the average rate paid in the year-ago quarter as a result of
general market interest rate changes.
Interest expense increased $2,809,000 (46.0%) to $8,910,000 for the six months
ended June 30, 2005 compared to $6,101,000 in the year-ago period. The average
balance of interest-bearing liabilities increased $116,741,000 (11.1%) to
$1,168,057,000 for the six months ended June 30, 2005 compared to the year-ago
period. The increase in interest-bearing liabilities was concentrated in time
deposits (up $80,110,000 or 29.6%), and junior subordinated debt (up $19,588,000
or 90.5%). In addition, for the six months ended June 30, 2005, the average
balance of noninterest-bearing deposits increased $47,129,000 (17.5%) from the
year-ago period. The average rate paid on interest-bearing liabilities in the
six month period ended June 30, 2005 increased 0.37% to 1.53% compared to the
year-ago period as a result of general market interest rate changes.
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended Six months ended
June 30, June 30,
---------------------------------------------
2005 2004 2005 2004
---------------------------------------------
Yield on interest-earning assets 6.39% 6.18% 6.32% 6.24%
Rate paid on interest-bearing
Liabilities 1.62% 1.14% 1.53% 1.16%
---------------------------------------------
Net interest spread 4.77% 5.04% 4.79% 5.08%
Impact of all other net
noninterest-bearing funds 0.35% 0.23% 0.33% 0.23%
---------------------------------------------
Net interest margin 5.12% 5.27% 5.12% 5.31%
=============================================
Net interest margin in the second quarter of 2005 decreased 0.15% compared to
the second quarter of 2004. This decrease in net interest margin was mainly due
to essentially no increase in average yield on loans, a 0.41% increase in
average yield on investments, and 0.48% increase in the average rate paid on
interest-bearing liabilities. As a result, the average yield on total
interest-earning assets increased only 0.21%, while the average rate paid on
interest-bearing liabilities increased 0.48%.
Net interest margin for the six months ended June 30, 2005 decreased 0.19%
compared to the six months ended June 30, 2004. This decrease in net interest
margin was mainly due to a 0.09% decrease in average yield on loans, a 0.23%
increase in average yield on investments, and 0.37% increase in the average rate
paid on interest-bearing liabilities. As a result, the average yield on total
interest-earning assets increased only 0.08%, while the average rate paid on
interest-bearing liabilities increased 0.37%.
-18-
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average interest-earning assets and
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest income
includes proceeds from loans on nonaccrual loans only to the extent cash
payments have been received and applied to interest income. Yields on securities
and certain loans have been adjusted upward to reflect the effect of income
thereon exempt from federal income taxation at the current statutory tax rate
(dollars in thousands).
For the three months ended
----------------------------------------------------------------
June 30, 2005 June 30, 2004
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- -------------------------------
Assets:
Loans $1,209,061 $20,701 6.85% $1,029,425 $17,551 6.82%
Investment securities - taxable 268,213 2,785 4.15% 287,058 2,638 3.68%
Investment securities - nontaxable 32,922 654 7.95% 34,870 708 8.12%
Federal funds sold 1,472 10 2.72% 421 1 0.95%
----------------------------- -------------------------------
Total interest-earning assets 1,511,668 24,150 6.39% 1,351,774 20,898 6.18%
Other assets 167,985 -------- 153,487 --------
---------- ----------
Total assets $1,679,653 $1,505,261
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $241,416 121 0.20% $229,878 105 0.18%
Savings deposits 471,709 869 0.74% 482,796 857 0.71%
Time deposits 371,491 2,627 2.83% 270,476 1,425 2.11%
Federal funds purchased 32,553 249 3.06% 55,754 150 1.08%
Other borrowings 27,702 329 4.75% 22,870 320 5.60%
Junior subordinated debt 41,238 594 5.76% 22,681 230 4.06%
----------------------------- -------------------------------
Total interest-bearing liabilities 1,186,109 4,789 1.62% 1,084,455 3,087 1.14%
Noninterest-bearing deposits 322,920 -------- 269,322 --------
Other liabilities 27,428 22,003
Shareholders' equity 143,196 129,481
---------- ----------
Total liabilities and shareholders'
equity $1,679,653 $1,505,261
========== ==========
Net interest spread(1) 4.77% 5.04%
Net interest income and interest margin(2) $19,361 5.12% $17,811 5.27%
================= ====================
(1) Net interest spread represents the average yield earned on interest-earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of
interest-earning assets.
-19-
For the six months ended
----------------------------------------------------------------
June 30, 2005 June 30, 2004
----------------------------- -------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- -------------------------------
Assets:
Loans $1,188,050 $40,228 6.77% $1,000,109 $34,290 6.86%
Investment securities - taxable 266,114 5,475 4.11% 278,708 5,359 3.85%
Investment securities - nontaxable 32,644 1,310 8.03% 35,171 1,399 7.96%
Federal funds sold 1,040 14 2.69% 2,415 11 0.91%
----------------------------- -------------------------------
Total interest-earning assets 1,487,848 47,027 6.32% 1,316,403 41,059 6.24%
Other assets 166,392 -------- 156,704 --------
---------- ----------
0Total assets $1,654,240 $1,473,107
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $240,349 242 0.20% $226,193 205 0.18%
Savings deposits 477,085 1,739 0.73% 475,268 1,764 0.74%
Time deposits 350,917 4,721 2.69% 270,807 2,867 2.12%
Federal funds purchased 30,561 421 2.76% 34,523 184 1.07%
Other borrowings 27,907 656 4.70% 22,875 640 5.60%
Junior subordinated debt 41,238 1,131 5.49% 21,650 441 4.07%
----------------------------- -------------------------------
Total interest-bearing liabilities 1,168,057 8,910 1.53% 1,051,316 6,101 1.16%
Noninterest-bearing deposits 316,949 -------- 269,820 --------
Other liabilities 27,004 22,664
Shareholders' equity 142,230 129,307
---------- ----------
Total liabilities and shareholders'
equity $1,654,240 $1,473,107
========== ==========
Net interest spread(1) 4.79% 5.08%
Net interest income and interest margin(2) $38,117 5.12% $34,958 5.31%
================= ====================
(1) Net interest spread represents the average yield earned on interest-earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of
interest-earning assets.
-20-
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income (FTE)
and interest expense from changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in thousands).
Three months ended June 30, 2005
compared with three months
ended June 30, 2004
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $3,063 $87 $3,150
Investment securities (216) 309 93
Federal funds sold 2 7 9
---------------------------------
Total interest-earning assets 2,849 403 3,252
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 5 11 16
Savings deposits (20) 32 12
Time deposits 533 669 1,202
Federal funds purchased (63) 162 99
Other borrowings 68 (59) 9
Junior subordinated debt 188 176 364
---------------------------------
Total interest-bearing liabilities 711 991 1,702
---------------------------------
Increase (decrease) in Net Interest Income $2,138 ($588) $1,550
=================================
Six months ended June 30, 2005
compared with six months
ended June 30, 2004
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $6,446 ($508) $5,938
Investment securities (326) 353 27
Federal funds sold (6) 9 3
---------------------------------
Total interest-earning assets 6,114 (146) 5,968
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 13 24 37
Savings deposits 7 (32) (25)
Time deposits 849 1,005 1,854
Federal funds purchased (21) 258 237
Other borrowings 141 (125) 16
Junior subordinated debt 399 291 690
---------------------------------
Total interest-bearing liabilities 1,388 1,421 2,809
---------------------------------
Increase (decrease) in Net Interest Income $4,726 ($1,567) $3,159
=================================
-21-
Provision for Loan Losses
The Company provided $561,000 for loan losses in the second quarter of 2005
versus $1,305,000 in the second quarter of 2004. During the second quarter of
2005, the Company recorded $232,000 of net loan charge offs versus $69,000 of
net loan charge-offs in the year earlier quarter.
The Company provided $661,000 for loan losses during the six months ended June
30, 2005 versus $1,918,000 during the six months ended June 30, 2004. During the
six months ended June 30, 2005, the Company recorded $294,000 of net loan
charge-offs versus $194,000 of net loan charge-offs in the year earlier
six-month period.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------
Service charges on deposit accounts $3,342 $3,407 $6,376 $6,604
ATM fees and interchange 781 665 1,493 1,246
Other service fees 520 484 1,004 947
Amortization of mortgage servicing rights (138) (216) (306) (406)
Recovery of mortgage servicing
rights valuation allowance - 570 - 600
Gain on sale of loans 429 433 721 1,058
Commissions on sale of
nondeposit investment products 660 587 1,192 1,129
Gain on sale of other real estate - 182 - 182
Increase in cash value of life insurance 400 432 620 864
Other noninterest income 316 398 537 473
----------------------------------------------------
Total noninterest income $6,310 $6,942 $11,637 $12,697
====================================================
Noninterest income for the second quarter of 2005 decreased $632,000 (9.1%) to
$6,310,000 from $6,942,000 in the year-ago quarter. Included in the results for
the quarter ended June 30, 2004 was a $570,000 recovery of mortgage servicing
rights valuation allowance, and $182,000 from gain on sale of other real estate.
Excluding these items, noninterest income for the quarter ended June 30, 2004
would have been $6,190,000, and the $6,310,000 of noninterest income for the
quarter ended June 30, 2005 would have represented a $120,000 (1.9%) increase.
Noninterest income for the six months ended June 30, 2005 decreased $1,060,000
(8.4%) to $11,637,000 from $12,697,000 in the same period in 2004. Included in
the results for the six months ended June 30, 2004 was a $600,000 recovery of
mortgage servicing rights valuation allowance, and $182,000 from gain on sale of
other real estate. Excluding these items, noninterest income for the six months
ended June 30, 2004 would have been $11,915,000, and the $11,637,000 of
noninterest income for the six months ended June 30, 2005 would have represented
a $278,000 (2.3%) decrease. For the six months ended June 30, 2005, gain on sale
of loans decreased $337,000 (31.9%) to $721,000 compared to $1,058,000 in the
year-ago period.
-22-
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------
Salaries & benefits $8,408 $8,440 $16,777 $16,607
Equipment 1,076 913 2,069 1,850
Occupancy 1,006 1,004 1,986 1,947
Telecommunications 409 421 793 796
Data processing and software 409 400 783 783
ATM network charges 408 325 779 620
Intangible amortization 346 342 689 673
Advertising and marketing 335 234 677 425
Courier service 290 269 568 531
Professional fees 274 598 681 1,107
Postage 234 235 471 467
Assessments 77 73 153 145
Operational losses 46 112 72 152
Other 2,199 2,041 4,132 3,687
----------------------------------------------------
Total $15,517 $15,407 $30,630 $29,790
====================================================
Average full time equivalent staff 573 539 569 536
Noninterest expense to revenue (FTE) 60.45% 62.24% 61.56% 62.51%
Noninterest expense for the second quarter of 2005 increased $110,000 (0.7%) to
$15,517,000 from $15,407,000 in the second quarter of 2004. The increase in
noninterest expense was the result of a $32,000 (0.4%) decrease in salary and
benefit expense to $8,408,000 offset by a $142,000 net increase in other
noninterest expense categories. The decrease in salary and benefits expense was
the net result of annual salary increases, new employees from the opening of
de-novo branches in Woodland (November 2004), and Lincoln (February 2005),
offset by reduced incentive commissions, overtime, and workers compensation
expense. Included in the $142,000 net increase in other noninterest income
categories was a $101,000 increase in advertising expense, and a $324,000
decrease in professional fees. The decrease in professional fees was mainly due
to the expiration of consulting services related to the Company's overdraft
privilege product, the expiration of which is not expected to have an impact on
revenue from the overdraft privilege product.
Noninterest expense for the first six months of 2005 increased $840,000 (2.8%)
to $30,630,000 from $29,790,000 in the first six months of 2004. The increase in
noninterest expense was due to a $170,000 (1.0%) increase in salary and benefit
expense to $16,777,000 and a $670,000 net increase in other noninterest expense
categories. The increase in salary and benefits expense was the net result of
annual salary increases, and new employees from the opening of de-novo branches
in Woodland (November 2004), and Lincoln (February 2005) that was partially
offset by reduced incentive commissions, overtime, and workers compensation
expense. Included in the $670,000 net increase in other noninterest income
categories was a $252,000 increase in advertising expense, and a $426,000
decrease in professional fees. The decrease in professional fees was mainly due
to the expiration of consulting services related to the Company's overdraft
privilege product, the expiration of which is not expected to have an impact on
revenue from the overdraft privilege product.
Provision for Income Tax
The effective tax rate for the three months ended June 30, 2005 was 38.7% and
reflects an increase from 37.6% for the three months ended June 30, 2004. The
effective tax rate for the six months ended June 30, 2005 was 39.0% and reflects
an increase from 37.6% for the six months ended June 30, 2004. The provision for
income taxes for all periods presented is primarily attributable to the
respective level of earnings and the incidence of allowable deductions,
particularly from increase in cash value of life insurance, tax-exempt loans and
state and municipal securities.
-23-
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 June 30, 2005 At December 31, 2004
------------------------- ------------------------
Gross Guaranteed Net Gross Guaranteed Net
-----------------------------------------------------
Classified loans $13,849 $7,499 $6,350 $22,337 $9,436 $12,901
Other classified assets - - - - - -
-----------------------------------------------------
Total classified assets $13,849 $7,499 $6,350 $22,337 $9,436 $12,901
=====================================================
Allowance for losses/classified loans 260.8% 124.5%
Allowance for loan losses/classified loans 234.5% 112.6%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies at June 30, 2005, decreased
$6,551,000 (50.8%) to $6,350,000 from $12,901,000 at December 31, 2004.
Nonperforming Loans
Loans are reviewed on an individual basis for reclassification to nonaccrual
status when any one of the following occurs: the loan becomes 90 days past due
as to interest or principal, the full and timely collection of additional
interest or principal becomes uncertain, the loan is classified as doubtful by
internal credit review or bank regulatory agencies, a portion of the principal
balance has been charged off, or the Company takes possession of the collateral.
Loans that are placed on nonaccrual even though the borrowers continue to repay
the loans as scheduled are classified as "performing nonaccrual" and are
included in total nonperforming loans. The reclassification of loans as
nonaccrual does not necessarily reflect Management's judgment as to whether they
are collectible.
Interest income is not accrued on loans where Management has determined that the
borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual, any previously accrued but unpaid interest
is reversed. Income on such loans is then recognized only to the extent that
cash is received and where the future collection of principal is probable.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of
Management, the loans are estimated to be fully collectible as to both principal
and interest.
Interest income on nonaccrual loans, which would have been recognized during the
six months, ended June 30, 2005, if all such loans had been current in
accordance with their original terms, totaled $479,000. Interest income actually
recognized on these loans during the six months ended June 30, 2005 was
$385,000.
The Company's policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due Management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed 30
days. Loans where the collateral has been repossessed are classified as OREO or,
if the collateral is personal property, the loan is classified as other assets
on the Company's consolidated 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.
-24-
As shown in the following table, total nonperforming assets net of guarantees of
the U.S. Government, including its agencies and its government-sponsored
agencies, decreased $1,984,000 (40.4%) to $2,922,000 during the first six months
of 2005. Nonperforming assets net of guarantees represent 0.17% of total assets.
All nonaccrual loans are considered to be impaired when determining the need for
a specific valuation allowance. The Company continues to make a concerted effort
to work problem and potential problem loans to reduce risk of loss.
(dollars in thousands):
At June 30, 2005 At December 31, 2004
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $9,726 $7,170 $2,556 $11,043 $7,442 $3,601
Nonperforming, nonaccrual loans 432 68 364 1,418 174 1,244
------------------------------------------------------
Total nonaccrual loans 10,158 7,238 2,920 12,461 7,616 4,845
Loans 90 days past due and still accruing 2 2 61 - 61
------------------------------------------------------
Total nonperforming loans 10,160 7,238 2,922 12,522 7,616 4,906
Other real estate owned - - - - - -
------------------------------------------------------
Total nonperforming assets $10,160 $7,238 $2,922 $12,522 $7,616 $4,906
======================================================
Nonperforming loans/total loans 0.23% 0.42%
Nonperforming assets/total assets 0.17% 0.30%
Allowance for losses/nonperforming loans 567% 327%
Allowance for loan losses/nonperforming loans 510% 296%
Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, the Company
maintains an Allowance for Loan Losses to absorb losses inherent in the
Company's loan portfolio. This is maintained through periodic charges to
earnings. These charges are shown in the Consolidated Income Statements as
provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of
reasons, not all losses are immediately known to the Company and, of those that
are known, the full extent of the loss may not be quantifiable at that point in
time. The balance of the Company's Allowance for Loan Losses is meant to be an
estimate of these unknown but probable losses inherent in the portfolio. For
purposes of this discussion, "loans" shall include all loans and lease contracts
that are part of the Company's portfolio.
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan portfolio, and to a lesser extent the
Company's loan commitments. These assessments include the periodic re-grading of
credits based on changes in their individual credit characteristics including
delinquency, seasoning, recent financial performance of the borrower, economic
factors, changes in the interest rate environment, growth of the portfolio as a
whole or by segment, and other factors as warranted. Loans are initially graded
when originated. They are re-graded as they are renewed, when there is a new
loan to the same borrower, when identified facts demonstrate heightened risk of
nonpayment, or if they become delinquent. Re-grading of larger problem loans
occur at least quarterly. Confirmation of the quality of the grading process is
obtained by independent credit reviews conducted by consultants specifically
hired for this purpose and by various bank regulatory agencies.
The Company's method for assessing the appropriateness of the allowance for loan
losses and the reserve for unfunded commitments includes specific allowances for
identified problem loans and leases as determined by SFAS 114, formula allowance
factors for pools of credits, and allowances for changing environmental factors
(e.g., interest rates, growth, economic conditions, etc.). Allowance factors for
loan pools are based on the previous 5 years historical loss experience by
product type. Allowances for specific loans are based on SFAS 114 analysis of
individual credits. Allowances for changing environmental factors are
Management's best estimate of the probable impact these changes have had on the
loan portfolio as a whole. This process is explained in detail in the notes to
the Company's Consolidated Financial Statements in its Annual Report on Form
10-K for the year ended December 31, 2004.
-25-
Based on the current conditions of the loan portfolio, Management believes that
the allowance for loan losses and the reserve for unfunded commitments, which
collectively stand at $16,563,000 at June 30, 2005, are adequate to absorb
probable losses inherent in the Company's loan portfolio. No assurance can be
given, however, that adverse economic conditions or other circumstances will not
result in increased losses in the portfolio.
The following tables summarize the activity in the allowance for loan losses,
reserve for unfunded commitments, and allowance for losses (which is comprised
of the allowance for loan losses and the reserve for unfunded commitments) for
the periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
---------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------
Allowance for loan losses:
Balance at beginning of period $14,563 $13,377 $14,525 $12,890
Provision for loan losses 561 1,305 661 1,918
Loans charged off (513) (178) (808) (366)
Recoveries of previously
charged-off loans 281 109 514 171
---------------------------------------------------
Net charge-offs (232) (69) (294) (194)
---------------------------------------------------
Balance at end of period $14,892 $14,613 $14,892 $14,613
===================================================
Reserve for unfunded commitments:
Balance at beginning of period $1,632 $920 $1,532 $883
Provision for losses -
Unfunded commitments 39 (4) 139 33
---------------------------------------------------
Balance at end of period $1,671 $916 $1,671 $916
===================================================
Balance at end of period:
Allowance for loan losses $14,892 $14,613
Reserve for unfunded commitments 1,671 916
---------------------
Allowance for losses $16,563 $15,529
=====================
As a percentage of total loans:
Allowance for loan losses 1.19% 1.36%
Reserve for unfunded commitments 0.13% 0.08%
Allowance for losses 1.32% 1.44%
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management.
On March 11, 2004, the Company's Board of Directors 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.
Also at its meeting on March 11, 2004, the Board of Directors 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 June 30, 2005, the Company had repurchased 341,100
shares under this plan as adjusted for the 2-for-1 stock split paid on April 30,
2004, which left 158,900 shares available for repurchase under the plan.
The Company's primary capital resource is shareholders' equity, which was
$142,768,000 at June 30, 2005. This amount represents an increase of $4,636,000
from December 31, 2004, the net result of comprehensive income of $9,860,000 for
the period and $689,000 reflecting the issuance of common shares via the
exercise of stock options, partially offset by $2,451,000 to repurchase of
common stock and dividends paid of $3,462,000. The Company's ratio of equity to
total assets was 8.30%, 8.30%, and 8.49% as of June 30, 2005, June 30, 2004, and
December 31, 2004, respectively.
-26-
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At June 30, At Minimum
--------------- December 31, Regulatory
2005 2004 2004 Requirement
-------------------------------------------------
Tier I Capital 10.46% 10.93% 10.67% 4.00%
Total Capital 11.53% 12.40% 11.86% 8.00%
Leverage ratio 9.81% 9.73% 9.86% 4.00%
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases.
These commitments do not significantly impact operating results. As of June 30,
2005 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 $492,402,000 and $445,054,000 at June 30, 2005
and December 31, 2004, respectively, and represent 39.3% of the total loans
outstanding at June 30, 2005 versus 38.0% at December 31, 2004. Commitments
related to the Bank's deposit overdraft privilege product totaled $34,565,000
and $28,815,000 at June 30, 2005 and December 31, 2004, respectively.
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 plans(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.
-27-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Company has an Asset and Liability Management Committee (ALCO)
which establishes and monitors guidelines to control the sensitivity of earnings
to changes in interest rates.
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin, net income and market value of equity under changing interest
environments. Market value of equity is the net present value of estimated cash
flows from the Company's assets, liabilities and off-balance sheet items. The
Company uses simulation models to forecast net interest margin, net income and
market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Company is able to estimate
the potential impact of changing interest rates on net interest margin, net
income and market value of equity. A balance sheet forecast is prepared using
inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
- -300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
At June 30, 2005, the results of the simulations noted above 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.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
At June 30, 2005 and 2004, the Company had no derivative financial instruments.
-28-
Liquidity
The Company's principal source of asset liquidity is federal funds sold and
marketable investment securities available for sale. At June 30, 2005, federal
funds sold and investment securities available for sale totaled $289,137,000,
representing an increase of $3,124,000 (1.1%) from December 31, 2004, and a
decrease of $13,204,000 (4.4%) from June 30, 2004. In addition, the Company
generates additional liquidity from its operating activities. The Company's
profitability during the first six months of 2005 generated cash flows from
operations of $13,949,000 compared to $10,469,000 during the first six months of
2004. Additional cash flows may be provided by financing activities, primarily
the acceptance of deposits and borrowings from banks. Maturities of investment
securities produced cash inflows of $29,064,000 during the six months ended June
30, 2005 compared to $41,225,000 for the six months ended June 30, 2004. During
the six months ended June 30, 2005, the Company invested $34,538,000 and
$77,379,000 in securities and net loan growth, respectively, compared to
$39,580,000 and $97,418,000 in securities and net loan growth, respectively,
during the first six months of 2004. These changes in investment and loan
balances contributed to net cash used for investing activities of $86,482,000
during the six months ended June 30, 2005, compared to net cash used for
investing activities of $98,021,000 during the six months ended June 30, 2004.
Financing activities provided net cash of $82,018,000 during the six months
ended June 30, 2005, compared to net cash provided by financing activities of
$72,135,000 during the six months ended June 30, 2004. Increases in deposit
balances and Federal funds borrowed accounted for $51,344,000 and $36,600,000 of
financing sources of funds, respectively, during the six months ended June 30,
2005, compared to increases in deposit balances and Federal funds borrowed of
$30,529,000 and $26,500,000, respectively, during the six months ended June 30,
2004. The Company raised $20,619,000 through the issuance of junior subordinated
debt during the six months ended June 30, 2004. Dividends paid used $3,462,000
and $3,275,000 of cash during the six months ended June 30, 2005 and June 30,
2004, respectively. Repurchase of common stock used $2,451,000 and $2,793,000 of
cash during the six months ended June 30, 2005 and June 30, 2004, respectively.
Also, the Company's liquidity is dependent on dividends received from the Bank.
Dividends from the Bank are subject to certain regulatory restrictions.
Item 4. Controls and Procedures
The Chief Executive Officer, Richard Smith, and the Chief Financial Officer,
Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls
and procedures as of June 30, 2005 ("Evaluation Date"). Based on that
evaluation, they concluded that as of the Evaluation Date the Company's
disclosure controls and procedures are effective to allow timely communication
to them of information relating to the Company and the Bank required to be
disclosed in its filings with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934, as amended ("Exchange Act").
Disclosure controls and procedures are Company controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
No changes in the Company's internal control over financial reporting occurred
during the first six months of 2005 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
-29-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; all such actions are of a routine nature and arise in the normal
course of business of the Bank.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows information concerning the common stock repurchased by
the Company during the second quarter of 2005 pursuant to the Company's stock
repurchase plan originally announced on July 31, 2003, as amended effective
April 9, 2004, to conform with the Company's two-for-one stock split paid on
April 30, 2004, which is discussed in more detail under "Capital Resources" in
this report:
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
- -----------------------------------------------------------------------------------------------------------
April 1-30, 2005 57,000 $20.55 57,000 206,600
May 1-31, 2005 - - - 206,600
June 1-30, 2005 47,700 $20.81 47,700 158,900
- -----------------------------------------------------------------------------------------------------------
Total 104,700 $20.67 104,700 158,900
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on May 24, 2005.
(b) and (c) The following ten directors were elected at the meeting:
Votes For Votes Against/Withheld Abstentions
---------- ---------------------- -----------
William J. Casey 13,058,602 337,668 -
Donald J. Amaral 13,025,292 370,978 -
Craig S. Compton 13,042,413 353,857 -
John S.A. Hasbrook 13,027,409 368,861 -
Michael W. Koehnen 13,048,382 347,888 -
Donald E. Murphy 11,222,340 2,173,930 -
Steve G. Nettleton 13,062,037 334,233 -
Richard P. Smith 13,042,311 353,959 -
Carroll R. Taresh 12,731,369 664,901 -
Alex A. Vereschagin, Jr. 13,036,991 359,279 -
The shareholders approved an amendment to the Company's 2001 stock option plan
to (i) provide that annual grants of stock options to directors upon their
re-election or appointment as Board chairman or audit committee chairman may
continue to occur through 2008 and (ii) eliminate the mandatory vesting
schedules for options granted to directors and instead allow the compensation
and management succession committee to determine the vesting schedule. 9,570,188
shares were voted for approval, 998,085 shares were voted against and 357,254
shares abstained.
The shareholders ratified the appointment of KPMG LLP as independent public
accountants of the Company for 2005. 13,103,976 shares were voted for the
ratification, 63,213 shares were voted against and 229,081 shares abstained.
-30-
Item 6 - Exhibits
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
filed as Exhibit 10.11 to TriCo's Annual Report on Form 10-K for
the year ended December 31, 2004.
-31-
10.12* Amendments to Tri Counties Bank Deferred Compensation Plan for
Directors referenced at Exhibit 10.10, effective as of January 1,
2005 filed as Exhibit 10.12 to TriCo's Annual Report on Form 10-K
for the year ended December 31, 2004.
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.
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.
-32-
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
Date: July 26, 2005 /s/ Thomas J. Reddish
-----------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
-33-
Exhibit 10.7
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
(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.
(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.
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.
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.
(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 may receive Options for 20,000 Shares upon his or her election to the
Board. These Options shall become exercisable as determined by the Committee.
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 2008 annual meeting of the Company's shareholders, a Director who is
re-elected to the Board may receive Options for 4,000 Shares upon his or her
re-election to the Board. These Options shall become exercisable as determined
by the Committee.
7.3 Grants to Board Chairmen. Beginning with the 2001 annual meeting of the
Company's shareholders and continuing for each year through the 2008 annual
meeting of the Company's shareholders, each Director who is appointed as
Chairman of the Board or as Chairman of the Audit Committee may 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 as
determined by the Committee.
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.
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.
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.
Exhibit 31.1
Rule 13a-14/15d-14 Certification of CEO
I, Richard P. Smith, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) and internal control
over financial reporting (as defined in Exchange Act Rules 13-d-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 subsidiary, is made known
to us by others within those entities, particularly during the
period in which this quarterly 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 quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
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 data;
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: July 26, 2005 /s/ Richard P. Smith
----------------------------------------
Richard P. Smith
President and Chief Executive Officer
Exhibit 31.2
Rule 13a-14/15d-14 Certification of CFO
I, Thomas J. Reddish, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) and internal control
over financial reporting (as defined in Exchange Act Rules 13-d-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 subsidiary, is made known
to us by others within those entities, particularly during the
period in which this quarterly 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 quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
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 data;
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: July 26, 2005 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish
Executive Vice President and Chief
Financial Officer
Exhibit 32.1
Section 1350 Certification of CEO
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ended June 30, 2005 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
Section 1350 Certification of CFO
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ended June 30, 2005 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.