-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HBjZkmV0z1C7zy/VoIvJghD9WhbJprgpSNpa+wwd9VOZhCoCoKuFKJX3jVYj6agR I1UKP/+mqh16wr+6NNHGbg== 0000356171-96-000003.txt : 19960725 0000356171-96-000003.hdr.sgml : 19960725 ACCESSION NUMBER: 0000356171-96-000003 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19960723 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRICO BANCSHARES / CENTRAL INDEX KEY: 0000356171 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942792841 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-08655 FILM NUMBER: 96597970 BUSINESS ADDRESS: STREET 1: TRI COUNTIES BANK ADMINISTRATION STREET 2: 40 PHILADELPHIA DRIVE CITY: CHICO STATE: CA ZIP: 95973 BUSINESS PHONE: 9168980300 MAIL ADDRESS: STREET 1: TRI COUNTIES BANK ADMINISTRATION STREET 2: 40 PHILADELPHIA DRIVE CITY: CHICO STATE: CA ZIP: 95973 S-4 1 TRICO - SUTTER BUTTES S-4 As filed with the Securities and Exchange Commission on July 23, 1996. Registration No. ________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TRICO BANCSHARES (Exact name of registrant as specified in charter) CALIFORNIA 94-2792841 6022 - -------------------- ------------------- ----------------- (State or other (I.R.S. Employer (Primary Standard Industrial jurisdiction of Identification No.) Classification Code Number) incorporation or organization) 15 Independence Circle Chico, CA 95973 (916) 898-0300 (Address including ZIP Code, and telephone number, including area code, of registrant's principal executive offices) Robert H. Steveson Copies To: Copies to: President and CEO Herbert H. Davis III, Esq. James E. Topinka, Esq. TriCo Bancshares Rothgerber, Appel, Powers & Graham & James 15 Independence Circle Johnson LLP One Maritime Plaza Chico, California 95973 1200 17th Street, #3000 San Francisco, California (916) 898-0300 Denver, Colorado 80202 94111 (Name and address of (303) 623-9000 (415) 954-0200 agent for service) Approximate date of commencement of proposed sale of the securities to the public: The exchange of shares is to take place contemporaneously with the merger of Sutter Buttes Savings Bank, F.S.B., Yuba City, California with and into TriCo Bancshares, Chico, California, which date will be after approval of the merger is received from the appropriate bank regulatory authorities. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ================================================================================ CALCULATION OF REGISTRATION FEE Proposed Proposed Maximum Maximum Title of Each Amount Offering Aggregate Amount of Class of Securities Being Price Offering Registration Being Registered Registered Per Share(1) Price(1) Fee Common Stock no par value 125,000 shs. $15.90 $1,987,164 $685.23 ================================================================================ (1) Calculated in accordance with Rule 457(f)(2)(3) on the basis of the June 30, 1996, book value of the shares of Sutter Buttes Stock being exchanged. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a) may determine. This Registration Statement, including Exhibits, contains ______ pages. The Exhibit Index appears on page ______ of the sequentially numbered pages of this Registration Statement. TRICO BANCSHARES FORM S-4 CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K BETWEEN REGISTRATION STATEMENT (FORM S-4) AND FORM OF PROSPECTUS Item Number and Caption....................................Caption in Form S-4 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus..........Facing page of Registration Statement; Cross Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.............................Table of Contents; Available Information; Incorporation of Certain Documents by Reference; Accompanying Documents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information...................Summary of Prospectus 4. Terms of The Transaction (a)(l), (2), (5), and (6).......................Proposed Merger (a)(3) and (4)..................................Certain Considerations; Proposed Merger; Capital Stock (b).............................................Proposed Merger (c).............................................Proposed Merger 5. Pro Forma Financial Information.................Summary of Prospectus 6. Material Contacts with the Company Being Acquired........................................Proposed Merger 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters..............................Not Applicable 8. Interests of Named Experts and Counsel..........Legal Opinions 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.....................................Indemnification 10. Information with Respect to S-3 Registrants Not Applicable 11. Incorporation of Certain Information by Reference.......................................Not Applicable 12. Information with Respect to S-2 or S-3 Registrants.....................................Incorporation of Certain Documents by Reference; Accompanying Documents 13. Incorporation of Certain Information by Reference.......................................Incorporation of Certain Documents by Reference; Accompanying Documents 14. Information with Respect to Registrants Other Than S-3 or S-2 Registrants...............Not Applicable 15. Information with Respect to S-3 Companies.......Not Applicable 16. Information with Respect to S-2 or S-3 Companies.......................................Incorporation of Certain Documents by Reference; Accompanying Documents 17. Information with Respect to Companies Other Than S-3 or S-2 Companies.................Not Applicable 18. Information if Proxies, Consents or Authorizations are to be Solicited (a)(l), (2), and (4)............................The Meeting of Shareholders (a)(3)..........................................Proposed Merger (a)(5), (6), and (7)............................Summary of Prospectus; Certain Considerations; The Meeting of Shareholders; Beneficial Ownership of Sutter Buttes Common and Preferred (b).............................................Summary of Prospectus 19. Information if Proxies, Consents, Authorizations are not to be Solicited or in an Exchange Offer.........................Not Applicable - ii - SUTTER BUTTES SAVINGS BANK, F.S.B., YUBA CITY, CALIFORNIA 700 Plumas Street, Yuba City, California 95991 (916) 673-7283 TO OUR STOCKHOLDERS: You are cordially invited to attend a Special Meeting of Shareholders of Sutter Buttes Savings Bank, F.S.B., Yuba City, California ("Sutter Buttes"), to be held on the ____ day of September, 1996, at 7:30 p.m., local time, at the offices of Sutter Buttes at 700 Plumas Street, Yuba City, California 95991. At the Meeting, Sutter Buttes shareholders will be asked to consider and vote upon a proposal to adopt and approve an Acquisition Agreement and Plan of Merger dated June 15, 1996 (the "Acquisition Agreement"), between and among TriCo Bancshares ("TriCo"), Tri Counties Bank ("Tri Counties"), and Sutter Buttes, whereby Sutter Buttes will merge with and into Tri Counties with Tri Counties as the surviving bank (the "Merger"). The Acquisition Agreement is attached as Exhibit A to the accompanying Prospectus/Proxy Statement. Tri Counties is a commercial bank organized under the laws of the State of California and operating as a wholly owned subsidiary of TriCo, which is a registered bank holding company. Upon consummation of the Merger, holders of the common stock of Sutter Buttes ("Sutter Buttes Common Stock") will receive, in exchange for their shares of Sutter Buttes Common Stock, shares of TriCo common stock ("TriCo Stock") and/or cash with a value of approximately $2.99 per share of Sutter Buttes Common Stock, subject to adjustment as described in the attached Prospectus/Proxy Statement. In addition, holders of the preferred stock of Sutter Buttes ("Sutter Buttes Preferred Stock") who do not convert their shares to Sutter Buttes Common Stock will receive their liquidation preference of $5.00 per share. Holders of Sutter Buttes Common and Preferred Stock who dissent from the Merger and properly perfect their appraisal rights will receive the value of their shares in cash. No fractional shares of TriCo Stock will be issued in the Merger, and fractional share values will be paid in cash. As is explained in detail in the enclosed Prospectus/Proxy Statement, if the Merger is approved, holders of shares of Sutter Buttes Common Stock who do not exercise dissenters' rights may request payment for their shares either in cash or in TriCo Stock. Enclosed with this Prospectus/Proxy Statement is a Consideration Request Form. Please specify the form of payment you wish to receive by marking the appropriate box, and sign the Form. Enclose the marked and signed Form with your completed and signed proxy and mail them in the enclosed postage-paid envelope no later than __________. If you intend to be at the Meeting in person and not to send a proxy, you may send only the Consideration Request Form in the enclosed envelope or bring it to the Meeting. Please note that because fifty-one percent (51%) of the consideration to be paid by TriCo must be in the form of TriCo Stock, shareholders who do not request payment in TriCo Stock may nevertheless be assigned TriCo Stock if requests for TriCo Stock total less than 51% of the total consideration. In the event that requests for TriCo Stock total less than 51% of the total consideration, TriCo Stock will be allocated first, on a pro rata basis, to those shareholders who fail to request a form of payment through the Consideration Request Form and next, if necessary, on a pro rata basis, to those shareholders who request cash. Conversely, shareholders who do not request payment in cash may nevertheless be assigned cash if requests for TriCo Stock total more than 51% of the total consideration. Also at the Meeting, Sutter Buttes shareholders will be asked to consider and vote upon a proposal to grant special stock options to CEO W. R. Hagstrom and Chairman of the Board Lee Colby in recognition of their contributions to Sutter Buttes. Mr. Hagstrom would receive a special option to purchase 24,000 shares under the Executive Officer Special Stock Option and Mr. Colby would receive a special option to purchase 15,000 shares under the Director Special Stock Option, each for $1.00 per share. No business other than the foregoing is expected to be transacted at the Meeting, except matters incidental to the conduct of the Meeting. The approval and adoption of the Acquisition Agreement requires the affirmative vote of the holders of two-thirds of the outstanding shares of Sutter Buttes Common and Preferred Stock voting together as one class. The - iii - proposed Merger is also subject to certain regulatory approvals and satisfaction of the conditions contained in the Acquisition Agreement. The approval and adoption of the Executive Officer Special Stock Option and the Director Special Stock Option requires the affirmative vote of the holders of a majority of the outstanding shares of Sutter Buttes Common and Preferred Stock voting together as one class. THE BOARD OF DIRECTORS OF SUTTER BUTTES HAS UNANIMOUSLY APPROVED THE MERGER AND THE EXECUTIVE OFFICER AND DIRECTOR SPECIAL STOCK OPTIONS. THE BOARD RECOMMENDS VOTING FOR EACH OF THE PROPOSALS. The accompanying Notice and Prospectus/Proxy Statement describe the matters to be acted upon at the Special Meeting, including matters incidental to the conduct of the Special Meeting. Shareholders are urged to review carefully the attached Prospectus/Proxy Statement, including the Exhibits, which together describe the Merger and its terms and conditions in detail. Very truly yours, Sutter Buttes Savings Bank, F.S.B. Date: , 1996 W. R. Hagstrom, President and CEO - iv - SUTTER BUTTES SAVINGS BANK, F.S.B., YUBA CITY, CALIFORNIA 700 Plumas Street Yuba City, California 95991 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS to be held September ____, 1996 Notice is hereby given that pursuant to the call of its Board of Directors, a Special Meeting of Shareholders of Sutter Buttes Savings Bank, F.S.B., Yuba City, California ("Sutter Buttes") will be held on September ____, 1996, at 7:30 p.m., local time, at the offices of Sutter Buttes at 700 Plumas Street, Yuba City, California 95991, for the following purposes, all of which are more fully described in the accompanying Prospectus/Proxy Statement. (1) To approve a merger (the "Merger") pursuant to an Acquisition Agreement and Plan of Merger dated as of June 15, 1996 (the "Acquisition Agreement"), by and among TriCo Bancshares ("TriCo"), Tri Counties Bank, a wholly owned subsidiary of TriCo ("Tri Counties"), and Sutter Buttes. Pursuant to the Acquisition Agreement, a copy of which is attached as Exhibit A to the accompanying Prospectus/Proxy Statement, Sutter Buttes will merge with and into Tri Counties and Tri Counties will be the surviving bank and will operate under its current name and Articles of Incorporation. (2) To approve the Executive Officer Special Stock Option, by which a special option to purchase 24,000 shares of the common stock of Sutter Buttes ("Sutter Buttes Common Stock") will be granted to W. R. Hagstrom, CEO of Sutter Buttes, for $1.00 per share. (3) To approve the Director Special Stock Option, by which an option to purchase 15,000 shares of Sutter Buttes Common Stock will be granted to Lee Colby, Chairman of the Board of Sutter Buttes, for $1.00 per share. No other business will be transacted at the Meeting other than matters incidental to the conduct of the Meeting. Only shareholders of record at the close of business on July 26, 1996, will be entitled to vote at the meeting. You may revoke your proxy at any time prior to its exercise. Approval of the Merger requires the affirmative vote of the holders of two-thirds of the outstanding shares of Sutter Buttes Common and Preferred Stock voting together as one class. Approval of the Executive Officer Special Stock Option and the Director Special Stock Option require the affirmative vote of the holders of a majority of the outstanding shares of Sutter Buttes Common and Preferred Stock voting together as one class. Each shareholder, even though he or she may not plan to attend the Meeting in person, is requested to sign, date, and return the enclosed Proxy without delay in the enclosed postage-paid envelope. You may revoke your Proxy at any time prior to its exercise. By Order of the Board of Directors Date: __________ ____, 1996 ___________________________________ Barbara J. Thilo, Secretary PLEASE DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE - v - PROSPECTUS The Date of this Prospectus/Proxy Statement is ______________, 1996 TRICO BANCSHARES 125,000 Shares COMMON STOCK (No Par Value) THIS DOCUMENT SERVES AS A PROSPECTUS FOR SHARES OF COMMON STOCK OF TRICO BANCSHARES AND ALSO AS A PROXY STATEMENT FOR THE SPECIAL MEETING OF THE SHAREHOLDERS OF SUTTER BUTTES SAVINGS BANK, F.S.B., YUBA CITY, CALIFORNIA. This Prospectus/Proxy Statement covers up to 125,000 shares of common stock (no par value) of TriCo Bancshares, a California corporation ("TriCo"), to be issued in connection with the merger of Sutter Buttes Savings Bank, F.S.B., Yuba City, California ("Sutter Buttes") with and into Tri Counties Bank ("Tri Counties"), a wholly owned subsidiary of TriCo (the "Merger"). Tri Counties will be the continuing entity as described elsewhere in this Prospectus/Proxy Statement. Shareholders of Sutter Buttes who do not dissent from the Merger and perfect their rights of appraisal under applicable provisions of the Regulations of the Office of Thrift Supervision (the "OTS") will have the right to receive, in exchange for their shares of common stock of Sutter Buttes ("Sutter Buttes Common Stock"), shares of common stock of TriCo ("TriCo Stock") and/or cash with a value of approximately $2.99 per share of Sutter Buttes Common Stock, subject to adjustment as described below. No fractional shares of TriCo Stock will be issued, and fractional share values will be paid in cash. The approximate per share price is based on the total price provided in the Acquisition Agreement of $3,896,400 before adjustments provided therein, and 1,301,976 shares of Sutter Buttes Common Stock outstanding on a fully-diluted basis assuming the conversion of all outstanding shares of preferred stock of Sutter Buttes ("Sutter Buttes Preferred Stock"), and the exercise of all proposed special stock options, all outstanding in-the-money stock options with an exercise price of $2.99 or less, and all outstanding warrants. The total price will be adjusted by 1.1 times after-tax earnings or after-tax losses of Sutter Buttes, as the case may be, from April 1, 1996 through the date the Merger is consummated. Such after-tax earnings or after-tax losses will include any expenses incurred by Sutter Buttes in connection with the Merger in excess of $70,000 and the accrual and booking of provisions to the loan and lease loss reserve agreed upon among the parties, but not the accrual and booking of any charges or expenses associated with the transfer of deposit insurance from one institution to the other. Consummation of the Merger is conditioned upon its approval by holders of two-thirds of the outstanding shares of both Sutter Buttes Common and Preferred Stock, approval of the Merger by the Federal Deposit Insurance Corporation ("FDIC"), and various other conditions as described in this Prospectus/Proxy Statement. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, OR THE FDIC, NOR HAVE ANY OF THEM PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER STATE OR FEDERAL GOVERNMENT AGENCY. - vi - PROXY STATEMENT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD SEPTEMBER ____, 1996 This Prospectus/Proxy Statement is furnished in connection with the solicitation by the Board of Directors of Sutter Buttes Savings Bank, F.S.B., Yuba City, California ("Sutter Buttes") of proxies for use at the Special Meeting of Shareholders of Sutter Buttes to be held September ____, 1996. Only shareholders of record as of the close of business on July 26, 1996 will be entitled to notice of, and to vote at, the Special Meeting. Each share is entitled to one vote on the matters to be voted on at this Special Meeting. There were 647,956 shares of Sutter Buttes Common Stock and 232,200 shares of Sutter Buttes Preferred Stock outstanding as of June 30, 1996. The expenses related to the solicitation of proxies will be borne by Sutter Buttes. In addition to use of the mails, proxies may be solicited personally or by telephone or telegraph by officers and directors who will not be specially compensated for such solicitation. This Prospectus/Proxy Statement and enclosed proxy were first mailed to Sutter Buttes' shareholders on or about August ____, 1996. Any shareholder giving a proxy has the right to revoke it at any time before it is exercised, and, therefore, execution of the proxy will not in any way affect the shareholder's right to attend the meeting in person. Revocation may be made prior to the meeting by written revocation or a duly executed proxy bearing a later date sent to Sutter Buttes, Attention: Barbara J. Thilo, Corporate Secretary, 700 Plumas Street, Yuba City, California 95991, or it may be done personally upon oral or written request at the Special Meeting. In the absence of specific instructions to the contrary, proxies received by the Board of Directors will be voted in favor of the proposals described herein. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, OR THE FDIC, NOR HAVE ANY OF THEM PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER STATE OR FEDERAL GOVERNMENT AGENCY. IMPORTANT--PLEASE MAIL YOUR PROXY PROMPTLY In order that there may be proper representation at the meeting, you are urged to sign and return the enclosed proxy in the envelope provided no later than ____ __.m., ___________. If you attend the meeting, you may withdraw your proxy and vote in person. That number of shares of Sutter Buttes Common Stock represented by proxies which are returned unmarked will be voted in favor of the Plan of Merger. - vii -
TABLE OF CONTENTS Page AVAILABLE INFORMATION.............................................................................................1 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................................................2 ACCOMPANYING DOCUMENTS............................................................................................2 SUMMARY OF PROSPECTUS/PROXY STATEMENT.............................................................................3 CERTAIN DEFINITIONS.........................................................................................3 PURPOSE OF THE MEETING OF SHAREHOLDERS......................................................................4 INFORMATION ABOUT TRICO AND SUTTER BUTTES...................................................................4 THE PROPOSED MERGER.........................................................................................6 Terms of the Merger...................................................................................6 Reasons for Merger; Fairness..........................................................................7 Procedures for Exchange of Shares.....................................................................8 Management After the Merger...........................................................................8 Tax Consequences......................................................................................8 Vote Required.........................................................................................9 Dissenters' Rights....................................................................................9 Conditions; Regulatory Approvals......................................................................9 Amendment and Termination............................................................................10 Accounting Treatment.................................................................................10 INTERESTS OF CERTAIN PERSONS IN THE MERGER.................................................................10 DIFFERENCES BETWEEN TRICO STOCK AND SUTTER BUTTES COMMON STOCK.............................................11 MARKET PRICE; ABSENCE OF MARKET FOR SHARES.................................................................11 POSSIBLE RESTRICTIONS ON RESALE............................................................................12 SELECTED FINANCIAL DATA....................................................................................12 PRO FORMA (UNAUDITED) FINANCIAL INFORMATION................................................................14 THE MEETING OF SHAREHOLDERS......................................................................................22 PURPOSE OF THE MEETING OF SHAREHOLDERS.....................................................................22 RECORD DATE AND VOTING RIGHTS..............................................................................22 CONSIDERATION REQUEST FORM.................................................................................23 INTERESTS OF CERTAIN PERSONS IN THE MERGER.................................................................23 PROXIES....................................................................................................24 CERTAIN CONSIDERATIONS...........................................................................................25 ADDITIONAL INFORMATION CONCERNING TRICO....................................................................25 SHARES ELIGIBLE FOR FUTURE SALE; DILUTION..................................................................25 INTERESTS OF DIRECTORS AND OFFICERS OF SUTTER BUTTES IN THE MERGER.........................................26 REAL ESTATE LENDING ACTIVITIES; NONACCRUAL LOANS...........................................................27 LEGISLATIVE AND REGULATORY ENVIRONMENT.....................................................................27 ANTITAKEOVER PROVISIONS....................................................................................28 PROPOSED MERGER..................................................................................................29 BACKGROUND AND REASONS FOR THE MERGER......................................................................29 Fairness.............................................................................................29 Potential Litigation.................................................................................30 MATERIAL CONTACTS..........................................................................................30 EFFECT OF THE MERGER.......................................................................................31 TERMS OF THE MERGER........................................................................................31 Consideration for Shares of Sutter Buttes Common Stock...............................................31 Covenants in the Acquisition Agreement...............................................................33 Conditions of the Acquisition Agreement..............................................................34 Termination/Amendment................................................................................35 OPERATION OF TRI COUNTIES AFTER THE MERGER.................................................................35 FEDERAL TAX CONSEQUENCES OF THE MERGER.....................................................................36 RIGHTS OF DISSENTING SHAREHOLDERS..........................................................................37 - viii - ACCOUNTING TREATMENT.......................................................................................38 RESALES BY AFFILIATES......................................................................................39 EXCHANGE PROCEDURES........................................................................................40 INDEMNIFICATION............................................................................................41 CAPITAL STOCK....................................................................................................41 DESCRIPTION OF TRICO STOCK.................................................................................41 Antitakeover Provisions..............................................................................42 Shares Eligible for Future Sale......................................................................43 COMPARISON BETWEEN TRICO STOCK AND SUTTER BUTTES COMMON STOCK..............................................43 Dividend Rights......................................................................................43 Voting Rights........................................................................................44 Preemptive Rights....................................................................................45 Liquidation Rights...................................................................................45 Redemption Rights; Conversion Rights; Sinking Funds..................................................45 Assessment...........................................................................................45 BENEFICIAL OWNERSHIP OF SUTTER BUTTES COMMON AND PREFERRED.......................................................45 OWNERSHIP OF SUTTER BUTTES COMMON STOCK....................................................................45 OWNERSHIP OF SUTTER BUTTES PREFERRED STOCK.................................................................46 OWNERSHIP OF SHARES BY OFFICERS AND DIRECTORS OF SUTTER BUTTES.............................................48 SPECIAL STOCK OPTIONS............................................................................................49 NEW PLAN BENEFITS..........................................................................................49 EXECUTIVE COMPENSATION.....................................................................................49 OTHER MATTERS....................................................................................................51 LEGAL OPINIONS...................................................................................................51 EXPERTS..........................................................................................................51 ADDITIONAL INFORMATION...........................................................................................51
- ix - NO PERSON IS AUTHORIZED BY TRICO OR SUTTER BUTTES TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN ANY INFORMATION OR REPRESENTATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE SOLICITATION AND THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES IN ANY JURISDICTION IN WHICH A SOLICITATION OR OFFERING MAY NOT LAWFULLY BE MADE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF TRICO OR SUTTER BUTTES SINCE THE DATE HEREOF. AVAILABLE INFORMATION TriCo is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, TriCo files reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by TriCo with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C., at the Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, and at the New York Regional Office, Seven World Trade Center, 13th Floor, New York, New York. Copies of such material also can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Sutter Buttes is subject to the informational requirements of the Exchange Act as administered by the Office of Thrift Supervision (the "OTS"). In accordance therewith, Sutter Buttes files reports, proxy statements, and other information with the OTS. Such reports, proxy statements, and other information can be inspected at, and copies obtained from, the Business Transactions Division of the OTS, 1700 G Street N.W., Washington, D.C. 20552, at prescribed rates. TriCo has filed with the Commission a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"), relating to the shares of TriCo Stock to be issued in connection with the Merger (together with any amendments thereto, the "Registration Statement"). The Registration Statement includes certain reports and other information of Sutter Buttes previously filed with the OTS, so that the same are now available from the Commission at the above address. Although to TriCo's knowledge information concerning Sutter Buttes included in the Registration Statement is accurate, TriCo has not verified either its accuracy or its completeness. This Prospectus/Proxy Statement also constitutes the Prospectus of TriCo filed as part of the Registration Statement and does not contain all of the information set forth in the Registration Statement and exhibits thereto. The Registration Statement and the exhibits thereto may be inspected and copied, at prescribed rates, at the public reference facilities maintained by the Commission at the addresses set forth above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE THIS PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE BY TRICO (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON REQUEST FROM THE CORPORATE SECRETARY, TRICO BANCSHARES, 15 INDEPENDENCE CIRCLE, CHICO, CALIFORNIA 95973 (TELEPHONE (916) 898-0300). THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE BY SUTTER BUTTES (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON REQUEST FROM THE CORPORATE SECRETARY, SUTTER BUTTES SAVINGS BANK, F.S.B., 700 PLUMAS STREET, YUBA CITY, CALIFORNIA 95991 (TELEPHONE (916) 673-7283). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE MEETING TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES, ANY REQUEST SHOULD BE MADE BY SEPTEMBER ___, 1996. The following documents of TriCo are hereby incorporated by reference in this Prospectus/Proxy Statement and shall be deemed to be a part hereof from the date of filing of those documents: TriCo's Annual Report on Form 10-K for the fiscal year ended December 31, 1995; TriCo's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996; TriCo's Proxy Statement related to the 1996 Annual Meeting of Shareholders, dated April 24, 1996; and all other reports and documents filed by TriCo pursuant to Section 13(a), 13(c), 14, or 15(d) of the Exchange Act subsequent to the date of this Prospectus/Proxy Statement and prior to the termination of the offering of TriCo Stock to which this Prospectus/Proxy Statement relates. Also, the following portions of TriCo's Annual Report to Shareholders for the year ended December 31, 1995 are hereby incorporated by reference in this Prospectus/Proxy Statement: TriCo Bancshares, page 1 of the Annual Report; Common Stock Information, page 26 of the Annual Report; Selected Financial Data, pages 3 and 4 of the Annual Report; and Management's Discussion and Analysis of Financial Condition and Results of Operations, pages 27 to 42 of the Annual Report. The following documents of Sutter Buttes are hereby incorporated by reference in this Prospectus/Proxy Statement and shall be deemed to be part hereof: Sutter Buttes' Annual Report on Form 10-K for the fiscal year ended December 31, 1995; Sutter Buttes' Quarterly Report on Form 10-Q for the quarter ended March 31, 1996; Sutter Buttes' Proxy Statement related to the 1995 Annual Meeting of Shareholders, dated April 6, 1995; and all other reports and documents filed by Sutter Buttes pursuant to Section 13(a), 13(c), 14, or 15(d) of the Exchange Act subsequent to the date of this Prospectus/Proxy Statement and prior to the termination of the offering of TriCo Stock to which this Prospectus/Proxy Statement relates. Also, the following portions of Sutter Buttes' Annual Report to Security Holders for the year ended December 31, 1995 are hereby incorporated by reference in this Prospectus/Proxy Statement: Description of Business, page 3 of the Annual Report; Market for the Bank's Common and Preferred Stock, page 44 of the Annual Report; Selected Financial Data, page 6 of the Annual Report; and Management's Discussion and Analysis of Financial Condition and Results of Operation, pages 7 to 22 of the Annual Report. ACCOMPANYING DOCUMENTS This Prospectus/Proxy Statement is accompanied by a copy of TriCo's Annual Report to Security Holders for the year ended December 31, 1995 and Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. This Prospectus/Proxy Statement is also accompanied by a copy of Sutter Buttes' Annual Report to Security Holders for the year ended December 31, 1995 and Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. - 2 - PROSPECTUS AND PROXY STATEMENT SUMMARY OF PROSPECTUS/PROXY STATEMENT The following is a summary of certain information set forth in the Prospectus/Proxy Statement. This summary does not purport to be complete and should be read in conjunction with the Prospectus/Proxy Statement as a whole. Shareholders are urged to read carefully this Prospectus/Proxy Statement and the attached Exhibits in their entirety. CERTAIN DEFINITIONS "TriCo" shall mean TriCo Bancshares, 15 Independence Circle, Chico, California 95973, telephone number (916) 898-0300, a California corporation and registered bank holding company, of which shares of common stock are being offered hereby in connection with the Merger. "Tri Counties" shall mean Tri Counties Bank, 15 Independence Circle, Chico, California 95973, a commercial bank chartered under the laws of the State of California and a wholly owned subsidiary of TriCo. "Sutter Buttes" shall mean Sutter Buttes Savings Bank, F.S.B., 700 Plumas Street, Yuba City, California 95991, telephone number (916) 673-7283, a savings bank chartered under the laws of the United States. "TriCo Stock" shall mean the no par value common stock of TriCo. "Sutter Buttes Common Stock" shall mean the $0.01 par value common stock of Sutter Buttes. "Sutter Buttes Preferred Stock" shall mean the $5.00 par value Preferred Stock, Series A of Sutter Buttes. "Sutter Buttes Common and Preferred" shall mean Sutter Buttes Common Stock and Sutter Buttes Preferred Stock. "Effective Time" shall mean the time of the filing with the Superintendent of Banks of the State of California of a duly executed counterpart of the Merger Agreement certified by the California Secretary of State and Officer Certificates prescribed by Section 1103 of the California General Corporation Law. "Closing Date" shall mean the last business day of the month in which the conditions specified in Article III of the Acquisition Agreement have all been satisfied or such other date as is mutually agreed by the parties. "Acquisition Agreement" shall mean that certain Acquisition Agreement and Plan of Merger by and among TriCo, Sutter Buttes, and Tri Counties dated June 15, 1996, attached as Exhibit A and further described herein. "Merger" shall mean the merger of Sutter Buttes with and into Tri Counties, as contemplated by and in the Acquisition Agreement. "Merger Agreement" shall mean that certain Merger Agreement specified in the Acquisition Agreement and executed by TriCo, Sutter Buttes, and Tri Counties for the purpose of filing with the Superintendent of Banks of the State of California to make the Merger effective under California law. - 3 - "Prospectus/Proxy Statement" shall mean this Prospectus and Proxy Statement. "Surviving Bank" shall mean Tri Counties at and after the Effective Time. "Special Stock Options" shall mean special options to purchase a total of 39,000 shares of Sutter Buttes Common Stock that are proposed to be granted to Sutter Buttes' CEO W. R. Hagstrom and Chairman Lee Colby. "In-the-money" stock options shall mean options to purchase shares of Sutter Buttes Common Stock with an exercise price less than or equal to $2.99, the approximate per share Total Consideration before adjustments. PURPOSE OF THE MEETING OF SHAREHOLDERS The Special Meeting (including any adjournments or postponements thereof) (the "Meeting") will be held at 700 Plumas Street, Yuba City, California, on September ____, 1996, at 7:30 p.m., local time. At the Meeting, holders of Sutter Buttes Common and Preferred will consider and vote upon a proposal to adopt and approve the Acquisition Agreement and the Merger contemplated thereby. Only holders of record of Sutter Buttes Common and Preferred at the close of business on July 26, 1996 (the "Record Date"), will be entitled to notice of, and to vote at, the Meeting. See "THE MEETING OF SHAREHOLDERS." The approval of the Merger by the Sutter Buttes shareholders will constitute approval and adoption of the Acquisition Agreement and the Merger contemplated thereby, as more fully described herein. The affirmative vote of the holders of two-thirds of the outstanding shares of Sutter Buttes Common and Preferred entitled to vote at the Meeting (voting together as one class) is required to adopt and approve the Acquisition Agreement and the Merger. Such approval is a condition to and is required for consummation of the Merger. See "THE MEETING OF SHAREHOLDERS" and "PROPOSED MERGER." Also at the Meeting, Sutter Buttes shareholders will be asked to consider and vote upon a proposal to grant Special Stock Options to CEO W. R. Hagstrom and Chairman of the Board Lee Colby in recognition of their contributions to Sutter Buttes. Mr. Hagstrom would receive an option to purchase 24,000 shares under the Executive Officer Special Stock Option and Mr. Colby would receive an option to purchase 15,000 shares under the Director Special Stock Option, each for $1.00 per share. See "SPECIAL STOCK OPTIONS." INFORMATION ABOUT TRICO AND SUTTER BUTTES TriCo, headquartered in Chico, California and incorporated under the laws of the State of California, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Through its wholly owned banking subsidiary, Tri Counties, TriCo has 14 traditional banking offices and 7 in-store branches located in the counties of Butte, Glenn, Lassen, Nevada, Shasta, Siskiyou, Sutter and Tehama in Northern California. Tri Counties commenced business in 1975 and provides traditional deposit, lending, mortgage, and commercial products and services to business and retail customers throughout its primary market area. In October, 1995, Tri Counties opened a regional lending office in Bakersfield, California, to promote primarily agricultural lending activities in that area. In February, 1996, Tri Counties opened a regional lending office in Sacramento, California, to promote primarily commercial and consumer lending activities in that area. - 4 - Tri Counties emphasizes retail banking with its client base being predominately individuals and small to medium-sized businesses. The majority of Tri Counties' loans are geographically concentrated in its primary market area as defined above. Tri Counties relies substantially on local promotional activity including the personal relationships of its directors, officers, employees, and shareholders, in addition to personalized service in its community banking orientation, as means to compete with larger statewide financial institutions. Additional information regarding TriCo, including its management, management's compensation, directors, principal holders of voting securities, and certain relationships and related transactions, is included in TriCo's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, incorporated herein by this reference. See "ACCOMPANYING DOCUMENTS" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Sutter Buttes was incorporated under the laws of the State of California as a savings and loan association in 1982 and commenced operation in 1983. In 1993, Sutter Buttes converted to a federal savings bank charter. Sutter Buttes operates out of two offices in Yuba City, California, and serves a primary market area consisting of the cities of Yuba City and Marysville. Sutter Buttes' principal business is accepting checking and savings deposits and making residential real estate and home improvement loans secured by first and second mortgages. Sutter Buttes also engages in wholesale mortgage banking by originating mortgage loans and then selling them to third parties. Sutter Buttes retains the right to service some of the mortgage loans it sells for a fee. Sutter Buttes also offers safe deposit, night depository, wire transfer, and other customary bank services to its customers. Additional information regarding Sutter Buttes, including its management, management's compensation, directors, and certain relationships and transactions, is included in Sutter Buttes' Annual Report on Form 10-K for the fiscal year ended December 31, 1995, incorporated herein by this reference. See "ACCOMPANYING DOCUMENTS" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Material Changes in TriCo's Affairs Between March 31, 1996 and June 30, 1996, Tri Counties has realized loan growth of $43,351,000 (13.2%) to $372,926,000. Tri Counties made a concerted effort to increase its outstanding loans by hiring new loan officers, looking to new commercial customers as well as promoting consumer products. The loan portfolio growth accounted for all of the $38.5 million growth in total assets during this period. Tri Counties moved from being a net seller of $8.2 million in Federal Funds at the end of March 1996 to being a net buyer of $30.0 million in Federal Funds at June 30th. Material Changes in Sutter Buttes' Affairs There have been no material changes in Sutter Buttes' affairs since March 31, 1996. - 5 - THE PROPOSED MERGER Pursuant to the Acquisition Agreement, Sutter Buttes will merge with and into Tri Counties which will, as the Surviving Bank, succeed to the business of Sutter Buttes and will continue the operations of Sutter Buttes under Tri Counties' current name, Articles of Incorporation, and Bylaws. See "PROPOSED MERGER--EFFECT OF THE MERGER." Terms of the Merger In exchange for their shares of Sutter Buttes Common Stock, the holders of Sutter Buttes Common Stock shall receive the "Total Consideration," which shall consist of cash and/or TriCo Stock. The Total Consideration, subject to adjustments described below, is $3,896,400, or approximately $2.99 per share, on a fully-diluted basis assuming conversion of all shares of Sutter Buttes Preferred Stock to Sutter Buttes Common Stock, and the exercise of all proposed Special Stock Options, all outstanding in-the-money stock options, and all warrants. There are several possible adjustments to the Total Consideration. The Total Consideration will be increased or reduced, as the case may be, by 1.1 times after-tax earnings or after-tax losses of Sutter Buttes from April 1, 1996, through the Closing Date. Such after-tax earnings or after-tax losses will include any expenses incurred by Sutter Buttes in connection with the Merger in excess of $70,000 and the accrual and booking of provisions to the loan and lease loss reserve agreed upon among the parties, but not the accrual and booking of any charges or expenses associated with the transfer of deposit insurance from one institution to the other. The holders of Sutter Buttes Preferred Stock who, as of the Closing Date, have not converted their shares of Sutter Buttes Preferred Stock to Sutter Buttes Common Stock will receive the Sutter Buttes Preferred Stock liquidation preference of $5.00 per share plus any declared and unpaid cash dividends (or warrants in lieu thereof) attributable to Sutter Buttes Preferred Stock. Because each share of Sutter Buttes Preferred Stock converts into 1.98 shares of Sutter Buttes Common Stock, it is expected that all Sutter Buttes Preferred Stock will be converted. Holders of Sutter Buttes Common and Preferred who choose to exercise and perfect their dissenters' rights of appraisal will receive a fair value of their shares in cash. See "RIGHTS OF DISSENTING SHAREHOLDERS." The amounts paid, if any, to holders of Sutter Buttes Preferred Stock who do not convert and to Dissenting Shareholders will be deducted from the Total Consideration paid to holders of Sutter Buttes Common Stock. Outstanding warrants convertible into 65,024 shares of Sutter Buttes Common Stock have been issued to holders of Sutter Buttes Preferred Stock in lieu of cash dividends, and will be treated as if exercised at the Effective Time. The holders thereof will be entitled to receive an appropriate portion of the Total Consideration. Holders of stock options and Special Stock Options will be entitled to exercise their options on or before the Closing Date in any one of three ways: (i) in exchange for Sutter Buttes Common Stock with a value equal to the per share value of Sutter Buttes Common Stock, less the per share exercise price of the options, times the options; (ii) for cash in the amount just described; or (iii) by paying the exercise price for the number of shares underlying the options. There are currently outstanding options to purchase 92,740 shares of Sutter Buttes Common Stock, however, options to purchase 2,500 shares have exercise prices in excess of the estimated Total Consideration per share, and therefore are not considered to be in-the-money and are not likely to be exercised. Holders of stock options and Special Stock Options who exercise for Sutter Buttes Common Stock will be entitled to receive an appropriate portion of the Total Consideration. Of the Total Consideration paid, 51% shall be in the form of TriCo Stock, and TriCo reserves the right to assure that 51% of the Total Consideration will be in the form of TriCo Stock. In assuring that 51% of the Total Consideration will be in the form of TriCo Stock, TriCo shall deduct the amount of cash - 6 - payments for fractional shares and potential cash payments for the holders of Sutter Buttes Preferred Stock not converting such stock, for holders of stock options or Special Stock Options exercising for cash, and for Dissenting Shares. The value of TriCo Stock will be based on the average closing sale price (or mean between the closing bid and asked price if there is no closing sale price on any day) of TriCo Stock on the ten trading days preceding the Closing Date. Enclosed with this Prospectus/Proxy Statement is a Consideration Request Form. Please specify the form of payment you wish to receive by marking the appropriate box. Then sign the Form, enclose it with your completed and signed proxy, and mail them in the enclosed postage-paid envelope no later than ________. If you intend to be at the Meeting in person and not send a proxy, you may send only the Consideration Request Form in the enclosed envelope or bring it to the Meeting. Please note that because fifty-one percent (51%) of the Total Consideration to be paid by TriCo must be in the form of TriCo Stock, shareholders who do not request payment in TriCo Stock may nevertheless be assigned TriCo Stock if requests for TriCo Stock total less than 51% of the Total Consideration. In the event that requests for TriCo Stock total less than 51% of the Total Consideration, then TriCo Stock will be allocated first, on a pro rata basis, to those shareholders who fail to request a form of payment through the Consideration Request Form and next, if necessary, on a pro rata basis, to those shareholders who request cash. Conversely, shareholders who do not request payment in cash may nevertheless be assigned cash if requests for TriCo Stock total more than 51% of the Total Consideration. To the extent possible, TriCo will cause cash to be paid to those holders of Sutter Buttes Common Stock requesting cash payment, and will cause TriCo Stock to be delivered to those holders of Sutter Buttes Common Stock requesting TriCo Stock. However, to guarantee that 51% of the Total Consideration is in the form of TriCo Stock, TriCo reserves the right to allocate TriCo Stock and cash, as necessary, among the holders of Sutter Buttes Common Stock. TriCo's determination to allocate cash and TriCo Stock on a pro rata basis to guarantee that 51% of the Total Consideration is TriCo Stock according to the terms of this paragraph shall be at TriCo's sole determination and shall not be subject to review or question by Sutter Buttes or its shareholders. Any special assessments imposed on Sutter Buttes deposits by the FDIC or the Savings Association Insurance Fund (the "SAIF"), other than regular insurance premiums will not reduce the Total Consideration to Sutter Buttes shareholders and will be paid directly by Tri Counties, subject to consummation of the Merger. No fractional shares of TriCo Stock will be issued, and any fractional share values will be paid in cash based on the average closing sale price (or mean between the closing bid and asked price if there is no closing sale price on any day) of TriCo Stock on the ten trading days preceding the Closing Date. See "PROPOSED MERGER--TERMS OF THE MERGER" for sample payment scenarios. Reasons for Merger; Fairness In order to minimize costs associated with this transaction, the Board of Directors of Sutter Buttes did not engage the services of an investment banking or other firm to review the financial aspects of the Merger and to render a fairness opinion with respect thereto. Based on its review and analysis of this transaction, similar transactions, and Sutter Buttes' difficulty in competing because of its size and limited capital structure, it is the opinion of Sutter Buttes' Board of Directors that this transaction is in the best interests of Sutter Buttes and its shareholders, and that an investment banking or other firm would come to the same conclusion. See "PROPOSED MERGER--BACKGROUND AND REASONS FOR THE MERGER." - 7 - Procedures for Exchange of Shares As of the Effective Time each share of Sutter Buttes Common Stock will be converted into, and each certificate thereof shall represent a right to receive, a pro rata share of the adjusted Total Consideration. As soon as practicable after the Effective Time, a paying agent will send to each record holder of former shares of Sutter Buttes Common Stock a notice of consummation of the Merger and a transmittal form detailing the procedure for surrendering the certificates in exchange for a pro rata portion of the Total Consideration. Such record holders will then submit their certificates to the paying agent, either directly or through one of the Sutter Buttes branches, and in return will receive a check and/or shares of TriCo Stock in the appropriate amounts. TriCo will attempt to pay those requesting cash in cash and those requesting stock in stock, subject to TriCo's right to pay 51% of the Total Consideration in TriCo Stock. Payment for the shares exchanged will be made as soon as the Total Consideration can be determined, which may be delayed substantially to allow for the determination of amounts due to any Dissenting Shareholders. Any former holder of Sutter Buttes Common Stock who does not submit his or her certificates to the paying agent within 120 days after the Effective Time must submit such certificates to TriCo in exchange for a pro rata portion of the Total Consideration. See "PROPOSED MERGER--EXCHANGE PROCEDURES." These procedures do not apply to shareholders who exercise their dissenters' rights, as described below. Any holders of Sutter Buttes Preferred Stock who do not convert their shares into shares of Sutter Buttes Common Stock prior to the Effective Time will receive, as soon as possible after the Effective Time, the liquidation preference of $5.00 per share of Sutter Buttes Preferred Stock plus any declared and unpaid cash dividends (or warrants in lieu thereof) attributable to the Sutter Buttes Preferred Stock. The amounts paid, if any, to holders of Sutter Buttes Preferred Stock who do not convert will be deducted from the Total Consideration paid to holders of Sutter Buttes Common Stock. Management After the Merger At the Effective Time, the separate corporate existence of Sutter Buttes will cease and Tri Counties will operate as the Surviving Bank under its current Articles of Incorporation and Bylaws. Management of Tri Counties as in existence immediately prior to the Merger will continue after the Merger, and Sutter Buttes' operations will be assumed by Tri Counties' Yuba City branches. Tax Consequences It is anticipated that the principal federal income tax consequences of the Merger will be as follows: (a) the Merger will be part of a reorganization within the meaning of section 368(a) of the Internal Revenue Code of 1986, as amended; (b) no gain or loss will be recognized by the shareholders of Sutter Buttes to the extent TriCo Stock is received in exchange for their Sutter Buttes Common Stock; and (c) the holding period and basis of the shares of TriCo Stock received by the shareholders of Sutter Buttes will be the same as the tax basis of their exchanged Sutter Buttes Common Stock. For a detailed discussion of the income tax consequences of the Merger, see "PROPOSED MERGER--FEDERAL TAX CONSEQUENCES OF THE MERGER." Sutter Buttes shareholders should consult their personal tax advisors as to the consequences of the Merger to them under federal, state, or local law, or applicable foreign tax laws. - 8 - Vote Required As of the Record Date, the directors and officers of Sutter Buttes and their respective affiliates as a group held an aggregate of ____________ shares, or approximately ________%, of the then outstanding shares of Sutter Buttes Common Stock and ___________ shares, or approximately ________%, of the then outstanding shares of Sutter Buttes Preferred Stock. These shares, together with options and warrants held by such directors and officers and their afiliates, represent approximately _______% of the 1,262,976 shares of Sutter Buttes Stock outstanding on a fully-diluted basis, assuming the conversion of all Sutter Buttes Preferred Stock to Sutter Buttes Common Stock, and the exercise of all outstanding warrants and in-the-money stock options, but not assuming approval of the Special Stock Options, as those shares will not be entitled to vote at the Meeting. Each Sutter Buttes director and officer intends to vote all of the shares of Sutter Buttes Common and Preferred over which such director or officer has sole or shared voting power for approval and adoption of the Acquisition Agreement and the Merger pursuant thereto. Accordingly, approval and adoption of the Acquisition Agreement and the Merger at the Meeting is expected to require the affirmative vote of an additional ___________ shares of Sutter Buttes Common and Preferred, based on the shares of Sutter Buttes Common and Preferred outstanding as of the Record Date, or ________-__ shares of Sutter Buttes Common Stock, on a fully-diluted basis as described above, voted by the remaining shareholders of Sutter Buttes. See "THE MEETING OF SHAREHOLDERS--RECORD DATE AND VOTING RIGHTS." Dissenters' Rights Under the Regulations of the OTS, found at 12 C.F.R. 552.14 and attached hereto as Exhibit B, a shareholder of Sutter Buttes who wishes to assert dissenters' rights with respect to the Merger must deliver to Sutter Buttes, prior to the Meeting, a written objection identifying himself or herself and stating his or her intention thereby to demand appraisal of and payment for his or her shares. In addition, in order to dissent, the shareholder must not vote in favor of the Merger. The demand for appraisal and payment must be in addition to and separate from any proxy or vote against the Merger by the shareholder. See "PROPOSED MERGER--RIGHTS OF DISSENTING SHAREHOLDERS." Conditions; Regulatory Approvals Consummation of the Merger is subject to satisfaction or waiver of various conditions, including compliance with certain covenants and confirmation of certain representations and warranties, the approval of shareholders of Sutter Buttes, the receipt of all necessary regulatory approvals, the registration under applicable federal securities laws of TriCo Stock to be issued pursuant to the Acquisition Agreement, and the absence of any litigation or regulatory proceeding presenting significant risk of material damages against Sutter Buttes, Tri Counties, TriCo, or their shareholders, or a significant risk that the Merger will not be consummated. In order for the Merger to be completed, approval must be obtained from the FDIC and the Superintendent of Banks of the State of California (the "Superintendent"). Applications for these regulatory approvals were filed on __________. See "PROPOSED MERGER--TERMS OF THE MERGER." - 9 - Amendment and Termination The Acquisition Agreement may be amended by mutual written consent of Tri Counties, TriCo, and Sutter Buttes, if so directed by their respective Boards of Directors, at any time prior to the Effective Time without the approval of the shareholders of TriCo or the shareholders of Sutter Buttes with respect to any of its terms except the terms relating to the form or amount of consideration to be delivered to the Sutter Buttes shareholders in the Merger. The Acquisition Agreement may be terminated by the mutual consent of the Boards of Directors of both TriCo and Sutter Buttes at any time prior to the consummation of the Merger. The Acquisition Agreement also provides that the parties may terminate the Acquisition Agreement if the Merger is not consummated on or before December 31, 1996. See "PROPOSED MERGER--TERMS OF THE MERGER." Accounting Treatment The Merger is expected to be accounted for according to the purchase method of accounting. See "PROPOSED MERGER--ACCOUNTING TREATMENT." INTERESTS OF CERTAIN PERSONS IN THE MERGER If the shareholders of Sutter Buttes approve, and if the Merger is consummated, CEO W. R. Hagstrom will receive a special option to purchase 24,000 shares of Sutter Buttes Common Stock for $1.00 per share, and Chairman of the Board Lee Colby will receive a special option to purchase 15,000 shares of Sutter Buttes Common Stock for $1.00 per share. In addition, Mr. Hagstrom and Chief Financial Officer Philip Safran are parties to employment agreements with Sutter Buttes which provide that Sutter Buttes shall be obligated to pay $20,000 to Mr. Hagstrom in the event he is terminated without cause, and $15,900 to Mr. Safran in the event he is terminated without cause. TriCo has agreed to assume Sutter Buttes' obligations under these contracts. Otherwise, no officers, directors, and principal shareholders of Sutter Buttes will receive any consideration in the Merger other than their pro rata portion of the Total Consideration, on the same terms described herein for all shareholders, for the shares that they own. Certain officers and directors of Sutter Buttes have outstanding options to acquire shares of Sutter Buttes Common Stock that may be exercised in full on or before the Closing Date, which would increase their pro rata portion of the Total Consideration. To TriCo's knowledge, as of the Record Date, directors and executive officers of TriCo did not beneficially own any shares of Sutter Buttes Common and Preferred. As of June 30, 1996, there were 4,482,712 shares of TriCo Stock outstanding, of which 782,640 shares of TriCo Stock were beneficially owned by officers and directors of TriCo and their affiliates. See "THE MEETING OF SHAREHOLDERS--INTERESTS OF CERTAIN PERSONS IN THE MERGER." - 10 - DIFFERENCES BETWEEN TRICO STOCK AND SUTTER BUTTES COMMON STOCK Holders of shares of Sutter Buttes Common Stock are entitled to dividends as and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend preference of the Sutter Buttes Preferred Stock; to one vote for each share held on matters properly coming before a meeting of the shareholders, except the election of the Board of Directors, where cumulative voting is permitted; and, in the event of liquidation, to the net assets remaining after satisfaction of all liabilities and of the liquidation preferences of the Sutter Buttes Preferred Stock. Sutter Buttes shareholders do not have the preemptive right to purchase newly issued shares of Sutter Buttes Common Stock. The holders of TriCo Stock are also entitled to dividends as and when declared by the Board of Directors out of funds legally available therefor; to one vote for each share held on matters properly coming before a meeting of the shareholders, except the election of the Board of Directors, where cumulative voting is permitted; and, in the event of liquidation, to the net assets remain- ing after satisfaction of all liabilities. There are currently no classes of capital stock in TriCo outstanding other than the TriCo Stock, however, TriCo has authorized 1 million shares of preferred stock, none of which is currently outstanding. If shares of preferred stock are issued in the future, dividends on and liquidation of shares of TriCo Stock would be subject to the dividend and liquidation preferences of the shares of preferred stock. TriCo shareholders do not have the preemptive right to purchase newly issued shares of TriCo Stock. See "COMPARISON BETWEEN TRICO STOCK AND SUTTER BUTTES COMMON STOCK." MARKET PRICE; ABSENCE OF MARKET FOR SHARES TriCo Stock is listed and traded on the National Market System of the National Association of Securities Dealers ("Nasdaq NMS") under the symbol "TCBK." The shares of Sutter Buttes Common Stock are not traded or listed on any exchange or market quotation system, nor are there any formal market makers in the shares. The infrequent trades that occur are individually negotiated between the buyer and the seller. The following table sets forth the last reported trade of Sutter Buttes Common Stock known to Sutter Buttes officials, which occurred on April 12, 1995. The table also shows the last reported sales price of TriCo Stock on the Nasdaq NMS on June 18, 1996, the trading date prior to the public announcement of the Merger, and on ______________, 1996, the latest practicable trading day before the printing of this Prospectus/Proxy Statement. Historical Market Value Per Share Sutter Buttes TriCo Last Trade: June 18, 1996 n/a $18.25 August xx, 1996 n/a $xx.xx April 12, 1995 $1.86 $18.00 - ------------------------ Following the Merger, no shares of Sutter Buttes Common Stock will be outstanding, and TriCo Stock will continue to be traded on the Nasdaq NMS. - 11 - POSSIBLE RESTRICTIONS ON RESALE Public resale of TriCo Stock by certain persons deemed to be affiliates (control persons) of Sutter Buttes, such as certain directors and executive officers of Sutter Buttes, will be restricted pursuant to certain provisions of Rule 145 promulgated under the Securities Act, and the certificates for TriCo Stock received by such persons will bear legends to that effect. No resales will be made pursuant to this Prospectus/Proxy Statement or the Registration Statement in which it was filed under Federal securities laws. See "PROPOSED MERGER- RESALES BY AFFILIATES." SELECTED FINANCIAL DATA The following tables set forth certain selected historical consolidated financial information for TriCo and Sutter Buttes, and comparative historical and pro forma per share data. The tables should be read in conjunction with the audited consolidated financial statements, unaudited interim consolidated financial statements, and unaudited pro forma consolidated financial information and the notes to each, which are included elsewhere in this Prospectus/Proxy Statement or incorporated by reference herein. - 12 - TRICO Selected Historical Financial Information (unaudited)
At or for the Three Months Ended March 31 At or for the Year Ended December 31, (in thousands) (amounts in thousands) 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- Income Statement Data: Interest income $ 11,605 $ 11,301 $ 46,011 $ 43,240 $ 40,947 $ 40,272 $ 40,451 Interest expense 4,535 4,373 17,988 15,680 13,996 15,600 18,988 Net Interest income 7,070 6,928 28,023 27,560 26,951 24,672 21,463 Provision for loan losses 40 40 335 316 1,858 2,101 1,531 Net interest income after provision for loan losses 7,030 6,888 27,688 27,244 25,093 22,571 19,932 Noninterest income 1,466 1,432 5,933 5,025 6,726 5,572 4,965 Noninterest expense 5,505 5,556 21,661 22,058 20,225 18,031 17,045 Provision for income taxes 1,247 1,134 4,915 4,350 4,779 4,112 3,031 Net income 1,744 1,630 7,045 5,861 6,815 6,000 4,821 Preferred dividends - 105 245 420 630 797 944 Income available for common shareholders $ 1,744 $ 1,525 $ 6,800 $ 5,441 $ 6,185 $ 5,203 $ 3,877 Balance Sheet Data: Net loans $ 323,869 $ 291,115 $ 313,186 $301,495 $299,929 $312,720 $ 312,241 Total assets 578,606 564,399 603,554 593,834 575,897 492,404 439,358 Total deposits 491,008 489,704 516,193 491,172 515,999 451,346 400,479 Other borrowed funds 24,289 16,488 26,292 48,956 7,144 907 1,027 Preferred stock -- 3,899 -- 3,899 3,899 6,086 8,630 Common shareholders' equity 54,243 46,911 53,213 44,332 43,169 30,459 26,192 Total shareholders' equity $ 54,243 $ 50,810 $ 53,213 $ 48,231 47,068 36,545 34,822 Performance Ratios:(1) Return on average assets 1.18% 1.12% 1.22% 0.99% 1.25% 1.25% 1.15% Return on average common equity(2) 12.92% 13.17% 13.95% 12.42% 15.81% 19.48% 15.69% Leverage ratio(3) 9.52% 9.43% 8.92% 8.75% 8.18% 7.39% 7.97% Total risk-based capital ratio 15.15% 15.52% 15.17% 14.65% 14.02% 11.94% 11.49% Common Share Data:(4) Primary earnings per share $ 0.38 $ 0.33 $ 1.46 $ 1.18 $ 1.42 $ 1.46 $ 1.10 Fully diluted earnings per share 0.37 0.33 1.45 1.18 1.40 1.46 1.10 Cash dividends per share 0.13 0.08 0.37 0.32 0.31 0.28 0.24 Tangible book value per share 12.14 11.55 11.92 10.10 10.05 8.46 7.25 Number of common shares: Weighted average primary 4,646,490 4,598,305 4,656,893 4,641,383 4,338,255 3,556,836 3,515,270 Weighted average fully diluted 4,668,500 4,611,876 4,693,188 4,642,197 4,416,135 3,556,836 3,528,091 (1) Quarter return ratios have been annualized. (2) Income available for common shareholders divided by average common equity. (3) Ending Tier 1 capital divided by period end total assets. (4) Adjusted to reflect 5-for-4 stock split in 1995, and 12%, 15% and 15% stock dividends declared in 1993, 1992, and 1991, respectively.
- 13 - SUTTER BUTTES Selected Historical Financial Information (unaudited)
At or for the Three Months Ended March 31 At or for the Year Ended December 31, (in thousands) (amounts in thousands) 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- Income Statement Data: Interest income $ 1,232 $ 1,057 $ 4,573 $ 3,927 $ 3,610 $ 3,946 $ 4,645 Interest expense 784 727 3,139 2,271 1,908 2,231 3,152 Net Interest income 448 330 1,434 1,656 1,702 1,715 1,493 Provision for loan losses - - (1) (11) (107) (125) (206) Net interest income after provision for loan losses 448 330 1,435 1,667 1,809 1,840 1,699 Noninterest income 70 49 489 213 289 171 138 Noninterest expense 407 373 1,552 1,696 1,616 1,601 1,802 Provision for income taxes 46 3 21 76 3 43 13 Net income 65 3 351 108 479 367 22 Preferred dividends - - - - - - - Income available for common shareholders $ 65 $ 3 $ 351 $ 108 $ 479 $ 367 $ 22 Balance Sheet Data: Net loans $ 57,899 $ 58,403 $ 59,904 $ 58,360 $ 47,085 $ 45,075 $ 40,202 Total assets 66,921 62,784 64,630 63,462 51,641 49,991 45,060 Total deposits 59,106 55,672 57,406 49,747 43,973 43,738 41,443 Other borrowed funds 3,900 3,725 3,400 10,375 4,475 3,500 1,300 Preferred stock 1,161 1,161 1,161 1,161 1,161 1,161 1,161 Common shareholders' equity 2,453 2,040 2,388 2,037 1,928 1,449 1,082 Total shareholders' equity $ 3,614 $ 3,201 $ 3,549 $ 3,198 3,089 2,610 2,243 Performance Ratios:(1) Return on average assets 0.40% 0.00% 0.55% 0.18% 0.95% 0.80% 0.08% Return on average common equity(2) 7.41% 0.41% 10.71% 3.45% 16.91% 14.93% 2.08% Leverage ratio(3) 5.40% 5.10% 5.49% 5.04% 5.98% 5.22% n/a Total risk-based capital ratio 10.01% 9.27% 10.20% 9.19% 9.90% 8.44% n/a Common Share Data:(4) Primary earnings per share $ 0.06 $ - $ 0.31 $ 0.10 $ 0.45 $ .37 $ 0.06 Fully diluted earnings per share Cash dividends per share - - - - - - - Tangible book value per share 3.06 2.80 3.11 2.90 2.91 2.63 3.64 Number of common shares: Weighted average primary 1,181,618 1,141,819 1,142,725 1,103,096 1,062,019 992,512 616,638 Weighted average fully diluted (1) Quarter return ratios have been annualized. (2) Income available for common shareholders divided by average common equity. (3) Ending Tier 1 capital divided by period end total assets.
PRO FORMA (UNAUDITED) FINANCIAL INFORMATION At the Effective Time, Sutter Buttes will merge with and into Tri Counties and the separate existence of Sutter Buttes will cease. All assets and liabilities of Sutter Buttes will become assets and liabilities of Tri Counties. In addition, the number of shares of TriCo Stock outstanding will be increased by the number of shares of TriCo Stock issued to holders of Sutter Buttes Common Stock in the Merger. - 14 - The following tables show unaudited pro forma financial information for TriCo and Sutter Buttes. The unaudited pro forma income statement assumes that the Merger had already taken place at the beginning of each year for which the information is shown. For example, 1995 unaudited pro forma financial information shows what the financial statements of a merged entity would have been had the Merger taken place at the beginning of 1995. Unaudited pro forma balance sheets are shown for December 31, 1995 and March 31, 1996, and unaudited pro forma income statements are shown for the calendar year 1995 and the three months ended March 31, 1996. Also presented for TriCo is primary and fully-diluted income from continuing operations per share data, in each case on an historical and pro forma basis. TriCo does not expect any material pro forma adjustment to the historical information to result from the Merger. Selected Pro Forma Combined Financial Information of TRICO and SUTTER BUTTES (unaudited)
Three Months Ended March 31, 1996 Year Ended December 31, 1995 --------------------------------- ---------------------------- Historical Historical Pro Forma Historical Historical Pro Forma TRICO SUTTER COMBINED TRICO SUTTER COMBINED Pro Forma Consolidated Summary of Operations: Interest income $ 11,605 $ 1,232 $ 12,812 $ 46,011 $ 4,573 $ 50,484 Interest expense 4,535 784 5,319 17,988 3,139 21,127 ------ ----- ------ ------ ----- ------ Net interest income 7,070 448 7,493 28,023 1,434 29,357 Provision for loan losses 40 - 40 335 (1) 334 ------ ----- ------ ------ ------ ------ Net interest income after provision for loan losses 7,030 448 7,453 27,688 1,435 29,023 Other income 1,466 70 1,536 5,933 489 6,422 Other expenses 5,505 407 5,942 21,661 1,552 23,332 ------ ----- ------ ------ ----- ------ Income before income taxes 2,991 111 3,047 11,960 372 12.113 Income taxes 1,247 46 1,270 4,915 21 4,846 ------ ----- ------ ------ ----- ------ Net income 1,744 65 1,777 7,045 351 7,267 ====== ===== ====== ====== ===== ====== Selected balance sheet information: Total Assets $ 578,606 $ 66,921 $ 644,185 $ 603,554 $ 64,630 $ 666,753 Long-term debt $ 24,289 - $ 24,289 $ 26,292 - $ 26,292 Earnings per share: Primary $ 0.38 - $ 0.37 $ 1.46 - $ 1.47 Fully diluted $ 0.37 - $ 0.37 $ 1.45 - $ 1.46 Cash dividends paid per share $ 0.13 - $ 0.13 $ 0.37 - $ 0.37 Book value per common share $ 12.14 - $ 12.26 $ 11.92 - $ 12.01 Weighted average shares outstanding: Primary 4,646,490 113,543 4,760,033 4,656,893 113,543 4,770,436 Fully diluted 4,668,500 113,543 4,782,043 4,693,188 113,543 4,806,731
- 15 - TRICO BANCSHARES AND SUTTER BUTTES SAVINGS BANK PRO FORMA COMBINED CONDENSED BALANCE SHEET (Unaudited) MARCH 31, 1996 (IN THOUSANDS)
Pro Forma Pro Forma TRICO SUTTER Adjustments Combined Total Assets: Cash and due from banks $ 28,761 $ 1,769 $ 30,530 Fed funds sold 8,200 -- $ (1,909) 6,291 Certificates of deposit -- 1,373 1,373 Securities available for sale 72,198 -- 72,198 Securities held for investment 112,874 400 113,274 Mortgage loans held for sale -- 3,851 3,851 Total loans, net 323,869 57,899 381,768 Premises and equipment 13,785 539 14,324 Other assets 18,919 1,090 567 20,576 ------- ------ ------ ------- Total assets $578,606 $66,921 $ (1,342) $644,185 ======= ====== ======= ======= Liabilities: Deposits $491,008 $59,105 $550,113 Short-term borrowings -- 3,900 3,900 Other liabilities 9,066 302 317 9,685 Long-term debt 24,289 -- 24,289 ------- ------ --- ------- Total liabilities 524,363 63,307 317 587,987 Stockholders' equity: Preferred stock -- 1,161 (1,161) -- Common stock 44,408 1,620 367 46,395 Surplus -- 450 (450) -- Retained earnings 10,697 383 (415) 10,665 Securities unrealized holding loss (862) (862) ------- ------ ------- ------- Total stockholders' equity 54,243 3,614 (1,659) 56,198 ------- ------ ------- ------- Total liabilities and stockholders' equity $578,606 $66,921 $ (1,342) $644,185 ======= ====== ======== =======
See notes to pro forma combined condensed financial statements. - 16 - TRICO BANCSHARES AND SUTTER BUTTES SAVINGS BANK PRO FORMA COMBINED CONDENSED INCOME STATEMENT (Unaudited) THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro Forma Pro Forma TRICO SUTTER Adjustments Combined Total Interest income $ 11,605 $ 1,232 $ (25) $ 12,812 Interest expense 4,535 784 5,319 ------ ----- --- ------ Net interest income 7,070 448 (25) 7,493 Provision for loan losses 40 -- 40 ------ --- ------ Net interest income after provision for loan losses 7,030 448 (25) 7,453 Other income 1,466 70 1,536 Other expenses 5,505 407 30 5,942 ------ ----- --- ------ Income before income taxes 2,991 111 (55) 3,047 Income taxes 1,247 46 (23) 1,270 ------ ----- --- ------ Net income $ 1,744 $ 65 $ (32) $ 1,777 ====== ===== === ====== Earnings per share: Primary $ 0.38 $ 0.37 Fully diluted $ 0.37 $ 0.37 Weighted average shares outstanding: Primary 4,646,490 113,543 4,760,033 Fully diluted 4,668,500 113,543 4,782,043
See notes to pro forma combined condensed financial statements. - 17 - TRICO BANCSHARES AND SUTTER BUTTES SAVINGS BANK PRO FORMA COMBINED CONDENSED INCOME STATEMENT (Unaudited) YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro Forma Pro Forma Combined TRICO SUTTER Adjustments Total Interest income $ 46,011 $ 4,573 $ (100) $ 50,484 Interest expense 17,988 3,139 21,127 ------ ----- ---- ------ Net interest income 28,023 1,434 (100) 29,357 Provision for loan losses 335 (1) 334 ------ ----- ---- ------ Net interest income after provision for loan losses 27,688 1,435 (100) 29,023 Other income 5,933 489 6,422 Other expenses 21,661 1,552 119 23,332 ------ ----- ---- ------ Income before income taxes 11,960 372 (219) 12,113 Income taxes 4,915 21 (90) 4,846 ---- ------ Net income $ 7,045 351 (129) 7,267 ====== ===== ==== ====== Earnings per share: Primary $ 1.46 $ 1.47 Fully diluted $ 1.45 $ 1.46 Weighted average shares outstanding: Primary 4,656,893 113,543 4,770,436 Fully diluted 4,693,188 113,543 4,806,731
See notes to pro forma combined condensed financial statements. NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (unaudited) NOTE A - BASIS OF PRESENTATION UNAUDITED PRO FORMA COMBINATION. The unaudited Pro Forma Condensed Combined Balance Sheet is based on the unaudited consolidated balance sheets of TriCo and Sutter Buttes as of March 31, 1996. The unaudited Pro Forma Condensed Combined Statement of Income is based on the supplemental consolidated statements of income of TriCo and the statements of income of Sutter Buttes for the three months ended March 31, 1996, and the year ended December 31, 1995. TOTAL CONSIDERATION. Pursuant to the Acquisition Agreement, the shareholders of Sutter Buttes will receive as Total Consideration cash and/or TriCo Stock having a value equal to $3,896,400 plus or less 1.1 times any after-tax earnings or after-tax losses, as recorded in accordance with generally accepted accounting principles, of Sutter Buttes from April 1, 1996, through the Closing Date. The following summarizes the calculation of the shares of TriCo Stock to be issued as of March 31, 1996: - 18 - (Dollars in Thousands Except per Share Data) Total Consideration $3,896 ====== Cash (49% of total $1,909 TriCo common stock (51% of total) $1,987 TriCo average common stock price during ten days preceding March 31, 1996 $17.50 Estimated number of TriCo common shares issued 113,543 ======= METHOD OF ACCOUNTING. The Merger will be accounted for by TriCo under the purchase method of accounting in accordance with APB No. 16. Under this method of accounting, the purchase price is allocated to assets acquired and liabilities assumed based on their estimated fair values at the Effective Time. The fair values of Sutter Buttes' assets and liabilities are preliminary and will likely be revised as updated information becomes available prior to the Effective Time. COST SAVINGS. The positive effects of potential cost savings and revenue enhancements which may be achieved subsequent to the Merger have not been reflected in the unaudited pro forma combined condensed financial statements. NOTE B - CALCULATION OF PER SHARE VALUE OF SUTTER BUTTES COMMON STOCK Total Consideration per Acquisition Agreement $3,896,400 ========== June 30, 1996 outstanding shares of Sutter Buttes Common Stock 647,956 Conversion of 232,200 shares of Sutter Buttes Preferred Stock 459,756 Exercise of warrants 65,024 Exercise of outstanding in-the-money stock options 90,240 Exercise of Special Stock Options 39,000 ---------- Estimated shares of Sutter Buttes Common Stock outstanding at consummation of the Merger, on a fully-diluted basis $1,301,976 ========== Estimated per share value of Sutter Buttes Common Stock on a fully-diluted basis $ 2.993 ========== In accordance with the Acquisition Agreement, the Total Consideration is subject to increase or decrease for the after-tax earnings or after-tax losses, as the case may be, of Sutter Buttes from April 1, 1996, through the Closing Date. The above calculation assumes the conversion of all shares of outstanding Sutter Buttes Preferred Stock, the approval and exercise of all proposed Special Stock Options, and the exercise of all outstanding warrants and outstanding stock options except those options having an exercise price in excess of the fully-diluted per share value of Sutter Buttes Common Stock. Exercise of these options may trigger adjustments to the Total Consideration via charges to income and equity which are impossible to determine at this time. NOTE C - ALLOCATION OF PURCHASE PRICE The purchase price has been allocated as described in the table below: - 19 - (In Thousands) Purchase price allocation: Total Consideration due to Sutter Buttes stockholders $3,896 Estimated cost of branch closings 100 Estimated severance expense 90 Estimated legal and accounting fees 125 ------ Total purchase price $4,211 Sutter Buttes equity 3,614 ------ Intangibles acquired--core deposits $ 597 ====== As previously stated, the purchase method of accounting requires that the purchase price be allocated to assets acquired and liabilities assumed based upon their fair values. Based upon a preliminary assessment, and except for the value of Sutter Buttes' core deposits as indicated above, the book values of Sutter Buttes' assets and liabilities approximate their fair values as of March 31, 1996. The estimated fair values are subject to change as additional information becomes available and preliminary Merger plans are finalized prior to the Closing Date. Each of the allocations in the table above is described in more detail in the following Notes to Pro Forma Combined Financial Statements. NOTE D - OTHER ASSETS The pro forma adjustment to other assets is comprised of the following: (In Thousands) Pro Forma Adjustment: Core deposit intangible related to the Sutter Buttes acquisition $597 Accumulated amortization of core deposit intangible (30) ---- $567 ==== The pro forma adjustment to Sutter Buttes' assets has resulted in the following adjustments to "Other Expenses" at March 31, 1996 and December 31, 1995: Three Months Ended Year Ended arch 31, 1996 December 31, 1995 (in thousands) Pro Forma Adjustments: Amortization of intangible assets $30 $119 === ==== - 20 - NOTE E - OTHER LIABILITIES Other liabilities have been adjusted as described in the table below. (In Thousands) Pro Forma adjustment: Accrual of Merger-related restructuring costs $190 Accrual of estimated legal and accounting costs 125 Offset to Pro Forma income statement adjustments less accumulated amortization of core deposit intangible reflected in adjustments to other assets 2 ---- $317 ==== A liability for Merger-related costs of $315,000 has been recorded in the unaudited Pro Forma Condensed Combined Balance Sheet reflecting management's estimate of merger and restructuring costs including separation and benefit costs related to Sutter Buttes' employees to be terminated, premises expected to be vacated, and other Merger-related costs. This estimated liability is based on current plans which are subject to change as final plans are formulated prior to the Closing Date. NOTE F - STOCKHOLDERS' EQUITY As part of the purchase accounting adjustments, Sutter Buttes shareholders' equity balances have been eliminated. Pursuant to the Merger Agreement, the shareholders of Sutter Buttes will receive as Total Consideration cash and TriCo Stock having a value of $3,896,400 plus or less 1.1 times any after-tax earnings or after-tax losses, as recorded in accordance with generally accepted accounting principles, of Sutter Buttes from April 1, 1996, through the Closing Date. Pursuant to the Acquisition Agreement, the cash part of the Total Consideration will not exceed 49% of the Total Consideration. It is anticipated that the cash part of the Total Consideration will consist of cash which would otherwise be invested in federal funds sold. The unaudited Pro Forma Condensed Combined Statements of Income include an adjustment to reflect the reduction in interest income due to the use of cash which would otherwise be invested in federal funds sold. Pursuant to the Merger Agreement, the remaining part of the Total Consideration will consist of TriCo Stock. The number of TriCo shares to be issued will be based on the value of the remaining part of the Total Consideration divided by the average TriCo Stock price during the ten-day period preceding the Closing. The unaudited Pro Forma Condensed Combined Statements of Income and the unaudited Pro Forma Condensed Combined Balance Sheet include adjustments for the estimated value and number of TriCo Stock to be issued. NOTE G - INCOME TAX PROVISION The income tax provisions for adjustments related to the Sutter Buttes acquisition reflected in the unaudited Pro Forma Condensed Combined Statements of Income have been computed at TriCo's effective combined federal and state marginal tax rate. - 21 - THE MEETING OF SHAREHOLDERS This Prospectus and Proxy Statement is being furnished to the holders of Sutter Buttes Common and Preferred in connection with the solicitation of proxies by the Board of Directors of Sutter Buttes for use at the Special Meeting of shareholders of Sutter Buttes, and at any adjournment or adjournments thereof. The Meeting will be held on September ____, 1996, at 7:30 p.m. local time at 700 Plumas Street, Yuba City, California 95991. PURPOSE OF THE MEETING OF SHAREHOLDERS At the Meeting, the holders of Sutter Buttes Common and Preferred will vote on the approval of the Merger pursuant to the Acquisition Agreement. Other matters to be considered at the meeting include Special Stock Options for Lee Colby, Chairman of the Board, and W. R. Hagstrom, President and CEO. These Special Stock Options are more fully discussed under "THE MEETING OF SHAREHOLDERS--INTERESTS OF CERTAIN PERSONS IN THE MERGER" and "SPECIAL STOCK OPTIONS." RECORD DATE AND VOTING RIGHTS The Board of Directors of Sutter Buttes has fixed the close of business on July 26, 1996, as the Record Date for determination of shareholders entitled to notice of and to vote at the Meeting and any adjournment thereof. As of the Record Date, Sutter Buttes had outstanding and entitled to vote ________ shares of Sutter Buttes Common Stock and ____________ shares of Sutter Buttes Preferred Stock. Each share of Sutter Buttes Common and Preferred is entitled to one vote. A quorum consisting of a majority of the outstanding shares of Sutter Buttes Common and Preferred, represented in person or by proxy, must be present in order to hold the Meeting. The Acquisition Agreement must be approved by the holders of two-thirds of the outstanding shares of Sutter Buttes Common and Preferred voting together as one class. Each share of Sutter Buttes Common and Preferred for which an abstention from voting or a broker non- vote is recorded will be counted as a share entitled to vote that was not voted in favor of the Acquisition Agreement and, therefore, will have the same effect as a vote against approval. As of the Record Date, the directors of Sutter Buttes and their respective affiliates as a group held an aggregate of ___________ shares, or approximately _______%, of the then outstanding shares of Sutter Buttes Common Stock, and __________ shares, or approximately ________%, of the then outstanding shares of Sutter Buttes Preferred Stock. These shares, together with options and warrants held by such directors and officers and their affiliates, represent approximately _______% of the 1,262,976 shares of Sutter Buttes Common Stock outstanding on a fully-diluted basis assuming conversion of all Sutter Buttes Preferred Stock to Sutter Buttes Common Stock, and exercise of all outstanding warrants and in-the-money stock options for Sutter Buttes Common Stock, but not assuming approval of the Special Stock Options, as such shares will not be entitled to vote at the Meeting. Each Sutter Buttes director intends to vote all of the shares of Sutter Buttes Common and Preferred over which such director has sole or shared voting power for approval and adoption of the Acquisition Agreement and the Merger pursuant thereto. Accordingly, approval and adoption of the Acquisition Agreement and the Merger at the Meeting is expected to require the affirmative vote of an additional __________ shares of Sutter Buttes Common and Preferred, based on the shares of Sutter Buttes - 22 - Common and Preferred outstanding as of the Record Date, or ___________ shares of Sutter Buttes Common Stock, on a fully diluted basis as described above, voted by the remaining shareholders of Sutter Buttes. CONSIDERATION REQUEST FORM As is described below in detail, holders of shares of Sutter Buttes Common Stock who participate in the Merger may request payment for their shares either in cash or in TriCo Stock. Enclosed with this Prospectus/Proxy Statement is a Consideration Request Form. Please request payment in either cash or TriCo Stock by marking the appropriate box. Then sign the Form, enclose it with your completed and signed proxy, and mail them in the enclosed postage-paid envelope no later than __________. If you intend to be at the Meeting in person and not to send a proxy, you may send only the Consideration Request Form in the enclosed envelope or bring it to the Meeting. Please note that because fifty-one percent (51%) of the consideration to be paid by TriCo must be in the form of TriCo Stock, shareholders who do not request payment in TriCo Stock may nevertheless be assigned TriCo Stock if requests for TriCo Stock total less than 51% of the Total Consideration. In the event that requests for TriCo Stock total less than 51% of the Total Consideration, TriCo Stock will be allocated first, on a pro rata basis, to those shareholders who fail to request a form of payment through the Consideration Request Form and next, if necessary, on a pro rata basis, to those shareholders who request cash. Conversely, shareholders who do not request payment in cash may nevertheless be assigned cash if requests for TriCo Stock total more than 51% of the total consideration. INTERESTS OF CERTAIN PERSONS IN THE MERGER Sutter Buttes' President and Chief Executive Officer, W. R. Hagstrom, and Senior Vice President and Chief Financial Officer, Philip Safran, are parties to employment agreements with Sutter Buttes dated as of June 20, 1996, and June 1, 1996, respectively. Under the terms of the employment agreements, in the event that either Mr. Hagstrom or Mr. Safran is terminated without cause, Sutter Buttes will be obligated to pay an amount equal to all accrued but unused paid vacation through the date of such termination any unreimbursed expenses, and the equivalent of three months' salary ($20,000 for Mr. Hagstrom and $15,900 for Mr. Safran). Tri Counties is assuming these obligations in the Merger. In addition, Sutter Buttes' officers and directors have options to purchase, in the aggregate, 92,740 shares of Sutter Buttes Common Stock, exercisable at prices between $2.42 and $3.04 per share. The options were granted under Sutter Buttes' 1992 Stock Option Plan and Directors Stock Option Plan (the "Stock Option Plans") and were evidenced by stock option agreements. Under the terms of the Stock Option Plans, the Stock Option Committee of the Sutter Buttes Board of Directors (the "Committee") has the power to accelerate the option vesting schedule with the consent of the optionee. The Committee exercised its discretion under the Stock Option Plans to fully vest any unvested options as of August 31, 1996, so that such options may be exercised in full on the Closing Date. Because options to purchase 2,500 shares have exercise prices in excess of the estimated Total Consideration per share of approximately $2.99, - 23 - such options are not considered to be in-the-money and therefore are not likely to be exercised. Holders of stock options will be entitled to exercise their options before the Closing Date in any one of three ways: (i) in exchange for Sutter Buttes Common Stock with a value equal to the per share value of Sutter Buttes Common Stock, less the per share exercise price of the options, times the number of shares underlying the options; (ii) for cash in the amount just described; or (iii) by paying the exercise price for the number of shares underlying the options. Holders of stock options who exercise for Sutter Buttes Common Stock will be entitled to receive an appropriate portion of the Total Consideration. When Mr. Hagstrom was hired in June of 1994 as Chief Executive Officer, the Board of Directors negotiated his compensation at a level significantly below the Board's estimate of prevailing market rates for a comparable position. At that time, the Board agreed to review his performance in the future and recognize any substantial contributions and achievements through an incentive or bonus payment. The Board of Directors believes Mr. Hagstrom has performed in a superior manner and that his contributions have materially improved the financial performance of Sutter Buttes over what it would have been without his efforts. His efforts were also instrumental in negotiating the Acquisition Agreement. The Board is recommending that the shareholders approve the Executive Officer Special Stock Option, which is a special option to purchase 24,000 shares of Sutter Buttes Common Stock for $1.00 per share, or $24,000. Assuming conversion of the shares to a pro rata portion of unadjusted Total Consideration, the pre-tax value of this special option is approximately $47,760 to Mr. Hagstrom. It is the Board's opinion that this Special Stock Option, in addition to the stock options recently granted to Mr. Hagstrom, will appropriately recognize and reward his past contributions. Lee Colby was singularly responsible for bringing TriCo to Sutter Buttes as a potential acquiror. The Board believes it is appropriate to recognize and reward these efforts, and is recommending that the shareholders approve the Director Special Stock Option, which is a special option to purchase 15,000 shares of Sutter Buttes Common Stock for $1.00 per share, or $15,000. Assuming conversion of the shares to a pro rata portion of unadjusted Total Consideration, the pre-tax value of this Special Stock Option is approximately $29,850 to Mr. Colby. Mr. Hagstrom's and Mr. Colby's Special Stock Options may instead be exercised for cash. If the proposed grants of the Director Special Stock Option and the Executive Officer Special Stock Option are not approved by the shareholders of Sutter Buttes, the Board of Directors of Sutter Buttes may consider providing Messrs. Hagstrom and Colby bonus payments in amounts approximately equal to the respective values of the Special Stock Options. PROXIES A proxy for use at the Meeting accompanies this Prospectus/Proxy Statement. A shareholder may use a proxy whether or not he intends to attend the Meeting in person. The proxy may be revoked in writing by the person giving it at any time before the Meeting by notice to Barbara J. Thilo, Corporate Secretary of Sutter Buttes, at 700 Plumas Street, Yuba City, California 95991, or by submitting a proxy having a later date, or by such person appearing at the Meeting and electing to vote in person. All proxies validly submitted and not revoked will be voted in the manner specified therein. IF NO SPECIFICATION IS MADE, THE - 24 - PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER PURSUANT TO THE ACQUISITION AGREEMENT AND FOR APPROVAL OF THE SPECIAL OPTIONS FOR MR. HAGSTROM AND MR. COLBY. The Board of Sutter Buttes is not aware of any other matters which may be presented for action at the Meeting, but if other matters do properly come before the Meeting it is intended that the shares represented by the accompanying proxy will be voted by the persons named in the proxy in accordance with their best judgment. The shares represented by the accompanying proxy may not be voted to adjourn the Meeting for the purpose of soliciting additional votes to approve the Merger. Proxies are being solicited by Sutter Buttes. Solicitation of proxies will be carried out in person, by mail, or by telephone or telegraph by directors, officers and employees of Sutter Buttes and/or TriCo, for which no additional compensation will be paid. CERTAIN CONSIDERATIONS In deciding whether to approve the Merger, Sutter Buttes shareholders should carefully consider the following factors, in addition to the other matters set forth or incorporated by reference herein. ADDITIONAL INFORMATION CONCERNING TRICO Pursuant to the Exchange Act, TriCo files reports and proxy statements with the Commission which include, but are not limited to, an Annual Report on Form 10-K and a Quarterly Report on Form 10-Q. The TriCo Form 10-K for the year ended December 31, 1995, and TriCo Form 10-Q for the quarter ended March 31, 1996, contain certain information which Sutter Buttes' shareholders may desire to review, including Management's Discussion and Analysis of TriCo's Financial Condition and Results of Operations. Copies of the foregoing reports may be inspected and copied at public reference facilities maintained by the Commission at the addresses set forth above under the section entitled "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." TriCo and Sutter Buttes will also provide copies of such reports and other information incorporated herein by reference, at no charge, to any Sutter Buttes shareholder upon request. Any shareholder may contact TriCo or Sutter Buttes at the telephone numbers set forth herein under the section entitled "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." TriCo also has filed with the Commission its Annual Report on Form 10-K for the year ended December 31, 1995 on or about March 12, 1996 and has prepared and has available an Annual Report to Shareholders for the year ended December 31, 1995. A copy of the TriCo Annual Report to Shareholders is enclosed with this Prospectus/Proxy Statement. SHARES ELIGIBLE FOR FUTURE SALE; DILUTION Shares of TriCo Stock eligible for future sale could have a dilutive effect on the market for TriCo Stock and could adversely affect the market price. The Articles of Incorporation of TriCo authorize the issuance of 20,000,000 shares of TriCo Stock and 1,000,000 shares of preferred stock of TriCo. As of June 30, 1996, 4,482,712 shares of TriCo Stock, and options for an additional 492,000 shares were outstanding. Such options have exercise prices of between $7.43 and $13.20 per share. Sales of substantial amounts of TriCo Stock in the public market following the Merger could adversely affect the market price of TriCo Stock. There are no restrictions in the Agreement preventing TriCo from issuing additional shares. - 25 - INTERESTS OF DIRECTORS AND OFFICERS OF SUTTER BUTTES IN THE MERGER Sutter Buttes' President and Chief Executive Officer, W. R. Hagstrom, and Senior Vice President and Chief Financial Officer, Philip Safran, are parties to employment agreements with Sutter Buttes dated as of June 20, 1996, and June 1, 1996, respectively. Under the terms of the employment agreements, in the event that either Mr. Hagstrom or Mr. Safran is terminated without cause, Sutter Buttes will be obligated to pay an amount equal to all accrued but unused paid vacation through the date of such termination, any unreimbursed expenses, and the equivalent of three months' salary ($20,000 for Mr. Hagstrom and $15,900 for Mr. Safran). Tri Counties is assuming these obligations in the Merger. In addition, Sutter Buttes officers and directors have options to purchase, in the aggregate, 92,740 shares of Sutter Buttes Common Stock, exercisable at prices between $2.42 and $3.04 per share. The options were granted under the Stock Option Plans and were evidenced by stock option agreements. Under the terms of the Stock Option Plans, the Committee has the power to accelerate the option vesting schedule with the consent of the optionee. The Committee exercised its discretion under the Stock Option Plans to fully vest any unvested options as of August 31, 1996, so that such options may be exercised in full on the Closing Date. Because options to purchase 2,500 shares have exercise prices in excess of the estimated Total Consideration per share of approximately $2.99, such options are not considered to be in-the-money and therefore are not likely to be exercised. Holders of stock options will be entitled to exercise their options before the Closing Date in any one of three ways: (i) in exchange for Sutter Buttes Common Stock with a value equal to the per share value of Sutter Buttes Common Stock, less the per share exercise price of the options, times the number of shares underlying the options; (ii) for cash in the amount just described; or (iii) by paying the exercise price for the number of shares underlying the options. Holders of stock options who exercise for Sutter Buttes Common Stock will be entitled to receive an appropriate portion of the Total Consideration. When Mr. Hagstrom was hired in June of 1994 as Chief Executive Officer, the Board of Directors negotiated his compensation at a level significantly below the Board's estimate of prevailing market rates for a comparable position. At that time, the Board agreed to review his performance in the future and recognize any substantial contributions and achievements through an incentive or bonus payment. The Board of Directors believes Mr. Hagstrom has performed in a superior manner and that his contributions have materially improved the financial performance of Sutter Buttes over what it would have been without his efforts. His efforts were also instrumental in negotiating the Acquisition Agreement. The Board is recommending that the shareholders approve the Executive Officer Special Stock Option, which is a special option to purchase 24,000 shares of Sutter Buttes Common Stock for $1.00 per share, or $24,000. Assuming conversion of the shares to a pro rata portion of unadjusted Total Consideration, the pre-tax value of this Special Stock Option is approximately $47,760 to Mr. Hagstrom. It is the Board's opinion that this Special Stock Option, in addition to the stock options recently granted to Mr. Hagstrom, will appropriately recognize and reward his past contributions. Lee Colby was singularly responsible for bringing TriCo to Sutter Buttes as a potential acquiror. The Board believes it is appropriate to recognize and reward these efforts, and is recommending that the shareholders approve the Director Special Stock Option, which is a special option to purchase 15,000 - 26 - shares of Sutter Buttes Common Stock for $1.00 per share, or $15,000. Assuming conversion of the shares to a pro rata portion of unadjusted Total Consideration, the pre-tax value of this Special Stock Option is approximately $29,850 to Mr. Colby. Mr. Hagstrom's and Mr. Colby's Special Stock Options may instead be exercised for cash. If the proposed grants of the Director Special Stock Option and the Executive Officer Special Stock Option are not approved by the shareholders of Sutter Buttes, the Board of Directors of Sutter Buttes may consider providing Messrs. Hagstrom and Colby bonus payments in amounts approximately equal to the respective values of the Special Stock Options. REAL ESTATE LENDING ACTIVITIES; NONACCRUAL LOANS The loan portfolios of TriCo and Sutter Buttes are dependent on real estate. At March 31, 1996, real estate served as the principal source of collateral with respect to approximately 99.8% of Sutter Buttes' loan portfolio and 32.5% of TriCo's loan portfolio. A worsening of current economic conditions and rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans as well as TriCo's financial condition in general and the market value for TriCo Stock. Acts of nature, including earthquakes, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact TriCo's financial condition. Sutter Buttes' nonaccrual loans were $532,253 or .79% of total assets at March 31, 1996, as compared to $436,979 or .68% of total assets at December 31, 1995, $113,300 or .17% of total assets at December 31, 1994, and no loans on nonaccrual at December 31, 1993. TriCo's nonaccrual loans were $2.7 million or 0.47% of total assets at March 31, 1996, as compared to $2.2 million or 0.37% of total assets at December 31, 1995, $1.1 million or 0.19% of total assets at December 31, 1994, and $1.6 million or 0.28% of total assets at December 31, 1993. There are no assurances that nonaccrual loans will not increase and adversely affect the financial condition of Sutter Buttes and/or TriCo. The Acquisition Agreement provides that a mutual condition to TriCo's and Sutter Buttes' obligation to consummate the Merger is that there not occur any material adverse change in Sutter Buttes' or Tri Counties' loan portfolios. LEGISLATIVE AND REGULATORY ENVIRONMENT The banking and financial services businesses in which TriCo and Sutter Buttes engage are highly regulated. The laws and regulations affecting such businesses are under constant review by Congress and applicable regulatory agencies and may be changed dramatically in the future. Such changes could affect the business of bank holding companies and banks. For example, in September 1994, the President signed legislation amending the BHC Act and the Federal Deposit Insurance Act to provide for interstate banking and branching. Such changes may affect the competitive environment in which Tri Counties and Sutter Buttes operate and may affect the amount of capital that banks and bank holding companies are required to maintain, the premiums paid for or the availability of deposit insurance or other matters directly affecting earnings. It is not certain what changes will occur or the effect that any such changes would have on the profitability of the combined company, its ability to achieve certain cost savings or compete effectively or its ability to take advantage of new opportunities after the Merger. - 27 - Under Federal law, the Savings Association Insurance Fund (the "SAIF"), which is the fund created for the insurance of the deposits of savings institutions, including Sutter Buttes, is required to maintain minimum capital of 1.25% of the total deposits insured by the SAIF. The SAIF has never met this minimum capital requirement. In the fall of 1995 and again in the spring of 1996, Congress introduced bills proposing the imposition of a special assessment on all SAIF-insured deposits in order to bring the SAIF's capital up to its minimum required level. If one of the bills had been passed into law, institutions with SAIF-insured deposits would have borne substantial liability for the special assessment. It is possible that Congress will raise this issue again in the near future and that a special assessment will be imposed on all SAIF-insured deposits. If the Merger is consummated, Sutter Buttes' former deposits will remain insured by the SAIF, and TriCo may bear the liability of any such special assessment. TriCo is organized under the corporate law of California while Sutter Buttes is organized under the Home Owners' Loan Act of 1933, as amended ("HOLA"). While similarities in rights exist for shareholders of TriCo and Sutter Buttes, there are significant differences in the laws applicable to each company and in their respective charter documents. The primary difference is that TriCo is a bank holding company which principally operates within the framework of the BHC Act and is regulated by the Federal Reserve Board while Sutter Buttes is a federal savings bank which operates within the framework of HOLA. Sutter Buttes' primary regulatory is the Office of Thrift Supervision. ANTITAKEOVER PROVISIONS TriCo's Articles of Incorporation and Bylaws contain certain provisions that may be deemed to be antitakeover in nature. One of the provisions is the authorization of 20,000,000 shares of common stock of TriCo and 1,000,000 shares of preferred stock of TriCo, described herein, combined with the denial of preemptive rights. The additional shares of common and preferred stock were authorized for the purpose of providing the Board of Directors of TriCo with as much flexibility as possible to issue additional shares, without further shareholder approval, for proper corporate purposes including financing, acquisitions, stock dividends, stock splits, employee incentive plans, and other similar purposes. These additional shares, however, may also be used by the Board of Directors (if consistent with its fiduciary responsibilities) to deter future attempts to gain control over TriCo. Since shareholders do not have preemptive rights, management could offer additional stock to friendly parties without having to offer stock to the bidder. A provision of TriCo's Articles of Incorporation specifies certain actions that TriCo and its Board of Directors shall or may take in the event that a third party makes a tender or exchange offer for TriCo's stock, or an offer to merge or consolidate with TriCo or any subsidiary, or to acquire all or substantially all of the properties or assets of TriCo or any subsidiary. In evaluating such an offer, the Board of Directors is required to consider not just the economic benefit to TriCo shareholders, but all relevant factors in determining whether it is in the best interest of TriCo and its shareholders. Such factors include, but are not limited to the financial condition of TriCo and its future prospects; whether a more favorable offer could be obtained; the effects of the proposed transaction on TriCo's employees, customers, and the community it serves; the business practices and reputation of the offeror; the value of any securities being offered in exchange; and the legal and regulatory issues raised by the offer. If the Board of Directors determines that the offer should be rejected, it may take any lawful action to defeat the offer including, but not limited to, advising TriCo's shareholders not to accept the offer; instituting litigation - 28 - against the offeror; filing complaints with governmental authorities; having TriCo acquire its own stock; selling or issuing authorized but unissued stock of TriCo; acquiring a company which creates regulatory problems; or obtaining an offer from another entity. The effect of these provisions may be to deter a future tender offer which might include a substantial premium over the market price of TriCo's stock at that time. In addition, these provisions may enable management to retain its position and allow it to resist changes that some TriCo shareholders may deem desirable. PROPOSED MERGER The following description of the material features of the Merger is qualified in its entirety by reference to the Acquisition Agreement which is attached as Exhibit A, and incorporated herein by this reference. BACKGROUND AND REASONS FOR THE MERGER Due to the persistent illiquidity of Sutter Buttes Common Stock and difficulty competing with larger institutions, the Sutter Buttes Board of Directors requested in 1994 that Mr. Hagstrom explore possible merger candidates for Sutter Buttes. At various times during 1995, Mr. Hagstrom met with numerous local institutions to discuss the feasibility of their acquiring or combining with Sutter Buttes. The intent was that Sutter Buttes become part of a larger institution with a larger shareholder base and stronger competitive ability in order to create shareholder value and stock liquidity. None of these meetings was successful. In late 1995 Lee Colby, Chairman of the Board, met with Mr. Robert Steveson, President and Chief Executive Officer of TriCo, to inquire about interest TriCo had expressed in acquiring Sutter Buttes in earlier years. As a result of that meeting and subsequent meetings with Mr. Hagstrom, TriCo submitted a letter of interest to Sutter Buttes. After reviewing the letter, the Sutter Buttes Board of Directors requested that Mr. Colby and Mr. Hagstrom commence negotiations with TriCo. A final agreement was reached on terms acceptable to both Boards in June of 1996. Fairness The Sutter Buttes Board of Directors believes that the Merger is fair and in the best interests of the shareholders of Sutter Buttes. In reaching its conclusion, the Sutter Buttes Board of Directors considered numerous factors, including the following: (1) The overall lack of institutions interested in acquiring Sutter Buttes; (2) The amount of consideration to be paid by TriCo, which is, in the opinion of the Board, favorable; (3) The acceptability of the terms and conditions of the Merger, which are summarized below, upon review of them with Sutter Buttes' legal counsel; (4) The structure of the Merger as partially tax-free to the holders of Sutter Buttes Common Stock; (5) The market liquidity and dividend history of TriCo Stock, which is, in the opinion of the Board, favorable; - 29 - (6) The market illiquidity of Sutter Buttes Common Stock and Sutter Buttes' lack of ability to pay cash dividends on stock, which are, in the opinion of the Board, unfavorable; and (7) The current and projected financial condition of Sutter Buttes as an independent institution, which are, in the opinion of the Board, unfavorable. In order to minimize costs associated with the merger, the Board of Directors of Sutter Buttes did not engage the services of an investment banking or other firm to review the financial aspects of the Merger and to render a fairness opinion. It is the Board's opinion, based on its business judgment after review and analysis of this transaction, similar transactions, and Sutter Buttes' difficulty in competing because of its size and limited capital structure, that this transaction is in the best interests of Sutter Buttes and its shareholders, and that an investment banking or other firm would come to the same conclusion. Potential Litigation In view of Sutter Buttes' determination not to obtain a fairness opinion in connection with the Merger, the Acquisition Agreement allocates the cost of potential litigation related thereto among Tri Counties, TriCo, and Sutter Buttes. Tri Counties has agreed to bear the cost of defending any claim or action asserting or alleging that the directors of Sutter Buttes failed to exercise due care or were otherwise deficient in determining the fairness of the Merger. Sutter Buttes agreed to acquire a three-year extension to its existing directors' and officers' liability insurance policy which will provide coverage for such judgment and the costs of defending any such claim or action. MATERIAL CONTACTS In 1994, Robert H. Steveson, President of TriCo, and Lee Colby, Chairman of the Board of Sutter Buttes, informally discussed the possibility of a merger. The discussions were preliminary in nature, and after reaching no general agreement as to structure, form, or price, the matter was dropped. - 30 - EFFECT OF THE MERGER At and after the Effective Time, the separate existence of Sutter Buttes will cease and Tri Counties will succeed, without other transfer, to all the rights and property of Sutter Buttes and will be subject to all the debts and liabilities of each in the same manner as if Tri Counties had itself incurred them. All rights of creditors and all liens upon the property of Sutter Buttes and Tri Counties shall be preserved unimpaired, except that such liens on the property of Sutter Buttes will be limited to the property affected thereby immediately prior to the Effective Time. Any action or proceeding pending by or against Sutter Buttes may be prosecuted to judgment, which shall bind Tri Counties, or Tri Counties may be proceeded against or substituted in Sutter Buttes' place. TERMS OF THE MERGER Although the parties have not adopted any formal timetable, it is presently anticipated that the Merger will be consummated on or prior to September 27, 1996, assuming all the conditions set forth in the Acquisition Agreement are theretofore satisfied or waived; however, it is possible that the Closing Date may extend beyond such date. Consideration for Shares of Sutter Buttes Common Stock In exchange for their shares of Sutter Buttes Common Stock, the holders of Sutter Buttes Common Stock shall receive the Total Consideration, which shall consist of cash and/or TriCo Stock. The Total Consideration, subject to adjustments described below, is $3,896,400, or approximately $2.99 per share, on a fully-diluted basis assuming conversion of all outstanding shares of Sutter Buttes Preferred Stock into shares of Sutter Buttes Common Stock, the exercise of all outstanding warrants and in-the-money options to purchase Sutter Buttes Common Stock, and shareholder approval of the Special Stock Options and the exercise thereof. There are several possible adjustments to the Total Consideration. The Total Consideration will be increased or reduced, as the case may be, by 1.1 times after-tax earnings or after-tax losses of Sutter Buttes from April 1, 1996, through the Closing Date. After-tax earnings or losses, as the case may be, shall include the accrual and booking of provisions to the loan and lease loss reserve agreed upon among the parties, and shall not include any expense associated with the transfer of Federal Deposit Insurance from Sutter Buttes to Tri Counties or the payment of any special assessments imposed on Sutter Buttes' deposits by the FDIC or the SAIF, other than normal deposit insurance premiums. Such earnings or losses will also include any expenses incurred by Sutter Buttes in connection with the Merger in excess of $70,000. TriCo will bear its own expenses in connection with the Merger, as well as Sutter Buttes' expenses up to $70,000, but Sutter Buttes will bear the cost of soliciting proxies for the Meeting and distributing this Prospectus/Proxy Statement. Sutter Buttes' expenses associated with the Merger include legal and accounting fees and the cost of purchasing a three-year extension of Sutter Buttes' directors' and officers' liability insurance policy. The holders of Sutter Buttes Preferred Stock who, as of the Closing Date, have not converted their shares of Sutter Buttes Preferred Stock to Sutter Buttes Common Stock will receive the Sutter Buttes Preferred Stock liquidation preference of $5.00 per share plus any declared and unpaid cash dividends (or warrants in lieu thereof) attributable to the Sutter Buttes Preferred Stock. Because each share of Sutter Buttes Preferred Stock converts into 1.98 shares of Sutter Buttes Common Stock, it is expected that all Sutter Buttes Preferred Stock will be converted. Holders of Sutter Buttes Common and Preferred who choose to exercise and perfect their dissenters' rights of appraisal will receive a fair value of their shares in cash. See "RIGHTS OF DISSENTING SHAREHOLDERS." The amounts paid, if any, to holders of Sutter Buttes Preferred Stock who do not convert and to Dissenting Shareholders will be deducted from the Total Consideration paid to holders of Sutter Buttes Common Stock. Outstanding warrants issued to holders of Sutter Buttes Preferred Stock in lieu of cash dividends will be treated as if exercised at the Effective Time, and the holders thereof will be entitled to receive an appropriate portion of the Total Consideration. Holders of stock options and Special Stock Options will be entitled to exercise their options before the Closing Date in any one of three ways: (i) in exchange for Sutter Buttes Common Stock with a value equal to the per share value of Sutter Buttes Common Stock, less the per share exercise price - 31 - of the options, times the number of shares underlying the options; (ii) for cash in the amount just described; or (iii) by paying the exercise price for the number of shares underlying the options. Holders of stock options and Special Stock Options who exercise for Sutter Buttes Common Stock will be entitled to receive an appropriate portion of the Total Consideration. Of the Total Consideration paid, 51% shall be in the form of TriCo Stock, and TriCo reserves the right to assure that 51% of the Total Consideration will be in the form of TriCo Stock. In assuring that 51% of the consideration will be in the form of TriCo Stock, TriCo shall deduct the amount of cash payments for fractional shares and potential cash payments for the holders of Sutter Buttes Preferred Stock not converting such stock, for holders of stock options or Special Stock Options exercising for cash, and for Dissenting Shares. The value of TriCo Stock will be based on the average closing sale price (or mean between the closing bid and asked prices if there is no closing sale price on any day) of TriCo Stock on the ten trading days preceding the Closing Date. Enclosed with this Prospectus/Proxy Statement is a Consideration Request Form. Please request payment in either cash or TriCo Stock by marking the appropriate box. Then sign the Form, enclose it with your completed and signed proxy, and mail them in the enclosed postage-paid envelope. If you intend to be at the Meeting in person and not to send a proxy, you may send only the Consideration Request Form or bring it to the Meeting. To the extent possible, TriCo will cause cash to be paid to those holders of Sutter Buttes Common Stock requesting cash payment and to cause TriCo Stock to be delivered to those holders of Sutter Buttes Common Stock requesting TriCo Stock. However, to guarantee that 51% of the Total Consideration is in the form of TriCo Stock, TriCo reserves the right to allocate TriCo Stock and cash, as necessary, among the holders of Sutter Buttes Common Stock. In the event that requests for shares total less than 51%, the remaining shareholders not requesting stock shall be assigned stock to bring the total stock issued to 51% of the Total Consideration; stock will be allocated first to those failing to request stock or cash, and next, if necessary, to those requesting cash. In the event that requests for TriCo Stock exceed 51%, the remaining shareholders not requesting cash shall be assigned cash to bring the total stock issued to 51% of the Total Consideration; cash will be allocated first to those failing to request stock or cash, and next, if necessary, to those requesting stock. TriCo's determination to allocate cash and TriCo Stock on a pro rata basis to guarantee that 51% of the Total Consideration is TriCo Stock according to the terms of this paragraph shall be at TriCo's sole determination and shall not be subject to review or question by Sutter Buttes or its shareholders. No fractional shares of TriCo Stock will be issued, and any fractional share values will be paid in cash based on the average closing sale price (or mean between the closing bid and asked price if there is no closing sale price for any day) of TriCo Stock on the ten trading days preceding the Closing Date. As of June 30, 1996, there were 647,956 shares of Sutter Buttes Common Stock outstanding. There may be additional shares outstanding as of the Closing Date due to the conversion of Sutter Buttes Preferred Stock or warrants or the exercise of stock options or Special Stock Options. Each of the 232,200 shares of Sutter Buttes Preferred Stock outstanding may be converted into 1.98 shares of Sutter Buttes Common Stock. In addition, warrants for 65,024 shares of Sutter Buttes Common Stock, which were issued in lieu of cash dividends on Sutter Buttes Preferred Stock, will be treated as if exercised and converted at the Effective Time to Sutter Buttes Common Stock. Furthermore, each person holding options to purchase shares of Sutter Buttes Common Stock pursuant to the Stock Option Plans will be entitled to exercise their options at or immediately prior to the Closing - 32 - Date. As of June 30, 1996, options to purchase 92,740 shares of Sutter Buttes Common Stock were outstanding, however, options to purchase 2,500 shares have exercise prices in excess of the estimated Total Consideration per share, and therefore are not considered to be in-the-money and are not likely to be exercised. Exercise of stock options for cash or shares of Sutter Buttes Common Stock will be permitted. Finally, Special Stock Options to purchase a total of 39,000 shares of Sutter Buttes Common Stock will be issued to CEO W. R. Hagstrom and Chairman Lee Colby if the shareholders approve the Special Stock Options. Below are three stock/cash allocation examples: 1. Assume that 30% of the holders of Sutter Buttes Common Stock request stock, 40% request cash, and 30% fail to make a request. All of those requesting stock will receive stock and all of those requesting cash will receive cash. Those failing to make a request will receive 21/30 of their consideration in stock and 9/30 of their consideration in cash. 2. Assume that 60% of the holders of Sutter Buttes Common Stock request stock, 20% request cash, and 20% fail to make a request. Those requesting stock will receive 51/60 of their consideration in stock and 9/60 of their consideration in cash. Those requesting cash and those failing to make a request will all receive cash. 3. Assume that 25% of the holders of Sutter Buttes Common Stock request stock, 65% request cash, and 10% fail to make a request. All of those requesting stock and all of those failing to make a request will receive stock. Those requesting cash will receive 49/65 of their consideration in cash and 16/65 of their consideration in stock. Covenants in the Acquisition Agreement The Acquisition Agreement contains covenants of Sutter Buttes, TriCo, and Tri Counties ensuring that the parties proceed toward and do not hinder consummation of the Merger. These covenants include that Sutter Buttes will provide TriCo and Tri Counties access to Sutter Buttes' records and other internal information, that all parties will not disclose certain confidential information, and that, subject to the Board's fiduciary duties to Sutter Buttes and its shareholders, Sutter Buttes will not agree to transfer its business to another entity, acquire any of its own stock, acquire the capital stock or assets of any other entity outside the ordinary course of business, or commence any proceedings for winding up and dissolution. In addition, neither Sutter Buttes nor its agents will solicit or encourage any discussions or proposals for entering into any agreement providing for a transfer of the business or disclose any non-public information regarding Sutter Buttes to any person or business entity. Nevertheless, if the Board of Directors receives a bona fide offer for a transfer of the business, the Board will take any action on such offer that may be required to fulfill its fiduciary duties to Sutter Buttes and its shareholders. Other such covenants include that Sutter Buttes will provide information to TriCo for any required regulatory applications and for the Registration Statement of which this Prospectus/Proxy Statement is a part, that TriCo will file such required regulatory applications and the Registration Statement of which this Prospectus/Proxy Statement is a part, and that Sutter Buttes take all reasonable action necessary to convene the Meeting. The Acquisition Agreement also contains covenants of Sutter Buttes regarding how it will conduct its business between the date of the Acquisition Agreement and the Closing Date. These covenants include that business will be conducted only in its ordinary course; that, subject to certain exceptions, Sutter Buttes' charter and bylaws will not be changed; that, subject to certain - 33 - exceptions, Sutter Buttes' capitalization will not be changed; that Sutter Buttes will not enter certain contracts that extend for more than one year or that involve payment by Sutter Buttes of more than $10,000; that, subject to certain exceptions, Sutter Buttes will not enter new arrangements with employees or materially increase salaries or benefits; that Sutter Buttes will use its best efforts to retain its customers; that Sutter Buttes will comply with all applicable laws; and that Sutter Buttes will not pay any dividend or distribution without the approval of TriCo. Conditions of the Acquisition Agreement Consummation of the Merger is subject to satisfaction or waiver of various conditions, including compliance with respective covenants, confirmation of certain representations and warranties, and the absence of any litigation or regulatory proceeding presenting significant risk of material damages against Sutter Buttes, Tri Counties, TriCo, or their shareholders, or a significant risk that the Merger will not be consummated. Following are descriptions of some of the major conditions of consummation of the Merger. The Merger is conditioned on there being no material adverse change in the respective businesses of TriCo and Sutter Buttes between the date of the Acquisition Agreement and the Closing Date. The Merger is also conditioned on Sutter Buttes' termination of all employees which Tri Counties does not wish to retain on a date prior to the Closing Date. Tri Counties will be solely responsible for any termination expenses it chooses to incur. The affirmative vote of the holders of two-thirds of the shares of Sutter Buttes Common Stock and Sutter Buttes Preferred Stock is required for approval of the Merger. The Merger must also receive the final approval of the FDIC and the Superintendent of Banks. Applications to the FDIC and the Superintendent of Banks were filed on _________, 1996, and action is expected on each during the _____ quarter of 1996. The registration pursuant to the Securities Act of TriCo Stock which is to be issued under the Acquisition Agreement is also a condition to the consummation of the Merger. The registration of TriCo Stock has been effected by the filing of the Registration Statement of which this Prospectus/Proxy Statement is a part, according to the applicable provisions of and Rules under the Securities Act. The receipt by Sutter Buttes of a Federal tax opinion is a condition of the Merger. The opinion of the law firm of Rothgerber, Appel, Powers & Johnson LLP regarding the Federal tax consequences of the Merger is set forth as Exhibit C to this Prospectus/Proxy Statement, incorporated herein by this reference, and is summarized under "FEDERAL TAX CONSEQUENCES OF THE MERGER." - 34 - Termination/Amendment The Agreement may be terminated and the Merger abandoned (either before or after receiving the approval of the shareholders of Sutter Buttes and without seeking further shareholder approval) at any time prior to the Effective Time only in one of the following manners: (i) By mutual written consent of the parties authorized by their respective Boards of Directors; (ii) By written notice from Sutter Buttes to TriCo or from TriCo to Sutter Buttes, if the Closing Date shall not have occurred on or before December 31, 1996; (iii) By written notice from TriCo to Sutter Buttes or from Sutter Buttes to TriCo, in the event of a material breach by the other party hereto of any representation, warranty, covenant, or other agreement contained in the Acquisition Agreement, which breach is not cured after thirty (30) days' written notice is given to the party committing the breach by the other party; (iv) By written notice from TriCo to Sutter Buttes if an environmental report indicates the presence of Hazardous Materials on any of Sutter Buttes' property or properties and if the costs for any remediation indicated by such reports are deemed material by TriCo; (vi) By TriCo if a pre-closing audit or review determines that the condition of Sutter Buttes has undergone material adverse change from the date of the Acquisition Agreement; and (vii) By Sutter Buttes if it receives an offer which the Board of Directors, on the advice of counsel, believes that it is legally required to accept. If either party terminates the Acquisition Agreement other than in one of the preceding circumstances, that party will be liable to the other party for $50,000 in liquidated damages. OPERATION OF TRI COUNTIES AFTER THE MERGER Upon the consummation of the Merger, the separate corporate existence of Sutter Buttes will cease and Sutter Buttes will be merged with and into Tri Counties. TriCo anticipates that after the Effective Time, the Sutter Buttes Yuba City deposit and loan activities will be absorbed by the existing Tri Counties branches in Yuba City. The branch in Marysville may continue operations depending on further review of the deposit and customer base. Mortgage origination activities will continue. There are no assurances that Sutter Buttes' customers will not move their banking relationships to other financial institutions. As the Surviving Bank, Tri Counties will operate under its current Articles of Incorporation and Bylaws until altered, amended, or repealed pursuant to their terms or applicable law. The current directors and officers of Tri Counties shall be directors and officers of Tri Counties as the Surviving Bank. No changes in the officers or directors of Tri Counties will result from the Merger. Tri Counties' deposits are insured up to $100,000 per depositor by the Bank Insurance Fund ("BIF") through the FDIC, whereas Sutter Buttes' deposits are insured up to $100,000 per depositor by the SAIF through the FDIC. If the Merger is consummated, Tri Counties will continue to pay annual assessments to SAIF of approximately $149,500 for insurance of Sutter Buttes' former deposits. - 35 - FEDERAL TAX CONSEQUENCES OF THE MERGER The following is a summary of certain material U.S. Federal income tax consequences of the Merger, including certain consequences to holders of Sutter Buttes Common Stock and who are citizens or residents of the United States and who hold their shares as capital assets. It does not discuss all tax consequences that may be relevant to Sutter Buttes shareholders subject to special Federal income tax treatment (such as insurance companies, dealers in securities, certain retirement plans, financial institutions, tax exempt organizations or foreign persons), or to Sutter Buttes shareholders who acquired their shares of Sutter Buttes Common Stock pursuant to the exercise of employee stock options or otherwise as compensation. The summary does not address the state, local or foreign tax consequences of the Merger, if any. TriCo has asked the firm of Rothgerber, Appel, Powers & Johnson LLP, special counsel to TriCo, for its opinion regarding certain federal income tax aspects of the reorganization. Rothgerber, Appel, Powers & Johnson LLP has provided TriCo with a draft of such an opinion, found at Exhibit C, which is summarized below. The final opinion is intended to be rendered upon the closing of the transaction in substantially the form presented in Exhibit C, assuming no changes in the facts or the law upon which the draft opinion is based and subject to the receipt, review and approval of final documents. This summary covers only the principal terms of the opinion and is qualified in its entirety by the full text of that opinion, including certain facts, representations and assumptions outlined therein. It should not be relied upon without first consulting the full text. It is the opinion of special counsel that the proposed transaction will meet the requirements of Section 368(a)(1)(A). The Acquisition Agreement will qualify as a "plan of reorganization." The proposed Merger will also qualify as a "reorganization." TriCo, Tri Counties and Sutter Buttes will all be "parties to the reorganization." Special counsel further believes that the proposed transaction will meet the requirements of Section 368(a)(2)(D). At least 51 percent of the total consideration received by the Sutter Buttes shareholders will be TriCo Stock and no stock of Tri Counties will be issued in the transaction. Lastly, in addition to meeting the statutory requirements of Section 368, special counsel believes that the doctrines of "business purpose," continuity of business enterprise and "continuity of interest" will be met in the proposed transaction. Section 354(a)(1) provides that no gain or loss shall be recognized by a shareholder exchanging, pursuant to a plan of reorganization, stock of one corporation which is a party to the reorganization solely for stock of a second corporation which is also a party to the reorganization. Thus, Sutter Buttes shareholders who receive only TriCo Stock in the merger will recognize no gain or loss. Dissenting shareholders who receive cash will not qualify for nonrecognition. Those shareholders will be deemed to have received a distribution in redemption of their shares, which will be taxed as a sale or exchange (generally capital gain or loss) to shareholders qualifying under Section 302(b), and as a dividend (ordinary income to the extent of earnings and profits) to those who do not so qualify. Section 267 may disallow loss recognition to any shareholder who owns (directly or indirectly) 50 percent of Sutter Buttes. The tests under Section 302(b) are applied in light of all the facts and circumstances surrounding each individual shareholder. Since those facts may vary from shareholder to shareholder, each shareholder is urged to consult his or her own tax counsel before acting on the proposed transaction. The basis for the TriCo Stock will be the same as the basis of the Common Stock of Sutter Buttes exchanged therefor for those shareholders receiving only TriCo Stock. Section 358(a). The holding period of such stock will include the - 36 - period for which the shareholders held the Sutter Buttes Common Stock exchanged therefor for shareholders who held the Sutter Buttes Common Stock as a capital asset. Section 1223(1). Sutter Buttes will receive nonrecognition treatment under Section 1032; similar treatment will be afforded TriCo by Section 354 and Tri Counties by Section 361. THE INCOME TAX DISCUSSION AS SET FORTH ABOVE IS BASED ON THE INTERNAL REVENUE CODE (AND AUTHORITIES THEREUNDER) AS IN EFFECT ON THE DATE OF THIS PROSPECTUS, WITHOUT CONSIDERATION OF THE PARTICULAR FACTS OR CIRCUMSTANCES OF ANY SHAREHOLDER. THE ABOVE DISCUSSION MAY NOT BE APPLICABLE WITH RESPECT TO SHARES ACQUIRED PURSUANT TO THE EXERCISE OF SPECIAL STOCK OPTIONS. SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR SITUATIONS, AS WELL AS CONSEQUENCES UNDER ANY APPLICABLE STATE, LOCAL OR FOREIGN TAX LAWS. RIGHTS OF DISSENTING SHAREHOLDERS Under the OTS Regulations, found at 12 C.F.R. 552.14 and attached hereto as Exhibit B, a shareholder of Sutter Buttes who wishes to assert dissenters' rights with respect to the Merger must deliver to Sutter Buttes, prior to the Meeting, a written objection identifying himself or herself and stating his or her intention thereby to demand appraisal of and payment for his or her shares. In addition, in order to dissent, the shareholder must not vote in favor of the Merger. The demand for appraisal and payment must be in addition to and separate under any proxy or vote against the Merger by the shareholder. Shareholders who follow this procedure are referred to as "Dissenting Shareholders," and their shares are "Dissenting Shares." Within ten (10) days after the Effective Time, Tri Counties must: (I) mail written notice thereof to each Dissenting Shareholder; (ii) make a written offer to each Dissenting Shareholder to pay for his or her shares at a specified price deemed by Tri Counties it to be the fair value thereof; and (iii) inform such Dissenting Shareholders that within sixty (60) days of the Effective Time, the offer must be agreed to or formally rejected or the terms of the Merger will be deemed accepted. The notice and offer must be accompanied by a balance sheet and statement of income of Sutter Buttes for the fiscal year ended December 31, 1995, with the latest available interim financial statements. If the Dissenting Shareholder and Tri Counties agree upon a fair value within sixty (60) days, then payment must be made within ninety (90) days of the Effective Time. If within sixty (60) days of the Effective Time the Dissenting Shareholder and Tri Counties do not agree, then the Dissenting Shareholder may file a petition with the OTS, with a copy by registered or certified mail to Tri Counties, demanding a determination of the fair market value of the shares of all Dissenting Shareholders. A Dissenting Shareholder who fails to file such petition within sixty (60) days of the Effective Time will be deemed to have accepted the terms offered under the Merger. Within sixty (60) days of the Effective Time, each Dissenting Shareholder demanding appraisal and payment must submit to the transfer agent his or her stock certificates for notation thereon that an appraisal and payment have been demanded with respect to such shares and that appraisal proceedings are pending. Any shareholder who fails to submit his or her stock certificates for such notation will no longer be entitled to appraisal rights under the OTS Regulations and will be deemed to have accepted the terms offered under the Merger. - 37 - If a Dissenting Shareholder property files a petition with the OTS, the OTS will make its determination of fair value in accordance with the OTS Regulations. The OTS will also apportion costs and expenses related to the appraisal in its own discretion. At any time within sixty (60) days after the Effective Time any shareholder has the right to withdraw his or her demand for appraisal and to accept the terms of the Merger. The above summary of rights of shareholders to dissent and demand payment for their shares does not purport to be a complete statement of the OTS Regulations and is qualified by reference to the provisions of 12 C.F.R. ss. 552.14 which have been set forth in full as Exhibit B to this older should consult with his or her own legal counsel concerning the specific procedures and available remedies. ANY FAILURE TO FOLLOW STRICTLY THE DETAILED PROCEDURES SET FORTH IN THE OTS REGULATIONS REGARDING DISSENTERS' RIGHTS MAY RESULT IN A SHAREHOLDER LOSING ANY RIGHT HE OR SHE MAY HAVE TO CLAIM FAIR VALUE FOR HIS OR HER SHARES. IF A SHAREHOLDER FAILS TO PERFECT HIS OR HER DISSENTERS' RIGHTS, HIS OR HER SUTTER BUTTES SHARES WILL BE CONVERTED IN THE MERGER INTO A RIGHT TO RECEIVE TRICO STOCK AND CASH AS DESCRIBED HEREIN. ACCOUNTING TREATMENT The merger will be accounted for by TriCo under the purchase method of accounting in accordance with APB No. 16. Under this method of accounting, the purchase price is allocated to assets acquired and liabilities assumed based on their estimated fair values at the Effective Time. - 38 - RESALES BY AFFILIATES The shares of TriCo Stock issuable to shareholders of Sutter Buttes upon consummation of the Merger have been registered under the Securities Act, but such registration does not cover resales by affiliates of Sutter Buttes ("Affiliates"). TriCo Stock received and beneficially owned by those shareholders of Sutter Buttes who are deemed to be Affiliates may be resold without registration as provided for by Rule 145 under the Securities Act, or as otherwise permitted. The term Affiliate is defined to include any person who, directly or indirectly, controls, or is controlled by, or is under common control with Sutter Buttes at the time the Acquisition Agreement is submitted for approval by a vote of the shareholders of Sutter Buttes. Each Affiliate who desires to resell TriCo Stock received in the Merger must sell such TriCo Stock either (I) pursuant to an effective registration statement under the Securities Act, (ii) in accordance with the applicable provisions of Rule 145 under the Securities Act or (iii) in a transaction which, in the opinion of counsel for such Affiliate or as described in a "no-action" or interpretive letter from the Staff of the Commission, in each case reasonably satisfactory in form and substance to TriCo, is exempt from the registration requirements of the Securities Act. Rule 145(d) requires that persons deemed to be Affiliates resell their TriCo Stock pursuant to certain of the requirements of Rule 144 under the Securities Act if such TriCo Stock is sold within the first two years after the receipt thereof. After two years, persons no longer Affiliates of TriCo may resell their TriCo Stock subject to there being current periodic reports filed with the Commission as required by the Exchange Act. After three years from the issuance of the TriCo Stock, if such person is not at the time of sale, and has not been for at least three months prior to such sale, an Affiliate of TriCo, such person may freely resell such TriCo Stock without limitation. Those who remain Affiliates of TriCo remain subject to the requirements of Rule 144. Sutter Buttes will use its best efforts to cause each Affiliate to deliver to TriCo prior to the Effective Time a written agreement to the effect that no sale will be made of any shares of TriCo Stock received in the Merger by an Affiliate except (I) in accordance with the Securities Act and (ii) until such time as TriCo shall have been subject to the periodic reporting requirements of the Exchange Act for a period of at least 90 days and, as it expects to do, TriCo has filed all reports required by the Exchange Act during such period. Such persons shall be entitled to rely upon a statement in the most recent quarterly or annual report of TriCo, as the case may be, required to be filed pursuant to the Exchange Act, that TriCo has filed all reports required by the Exchange Act and has been subject to such filings requirements for the past 90 days, unless such person knows or has reason to believe that TriCo has not complied with such requirements. The certificates of TriCo Stock issued to Affiliates of Sutter Buttes in the Merger may contain an appropriate restrictive legend, and appropriate stop transfer orders may be given to the transfer agent for such certificates. TriCo is a reporting company under the Exchange Act. TriCo will continue to produce audited year-end financial statements and distribute them to shareholders. In addition, TriCo files its annual and quarterly financial statements with the Commission, and to file statements concerning significant corporate events as they occur. Finally, the proxy statements are distributed to shareholders in connection with annual or special meetings of the shareholders which meet certain SEC specifications regarding form and content. This Prospectus and Proxy Statement has been prepared in accordance with such Commission specifications. - 39 - EXCHANGE PROCEDURES As of the Effective Time each share of Sutter Buttes Common Stock will be converted into, and each certificate thereof shall represent a right to receive, a pro rata share of the adjusted Total Consideration. As soon as practicable after the Effective Time, a paying agent will send to each record holder of former shares of Sutter Buttes Common Stock a notice of consummation of the Merger and a transmittal form detailing the procedure for surrendering the certificates in exchange for a pro rata portion of the Total Consideration. Such record holders will then submit their certificates to the paying agent, either directly or through one of the Sutter Buttes branches, and in return will receive a check and/or shares of TriCo Stock in the appropriate amounts. TriCo will attempt to pay those requesting cash in cash and those requesting stock in stock, subject to TriCo's right to pay 51% of the Total Consideration in TriCo Stock. Shareholders who do not request payment in stock may nevertheless be assigned stock if requests for TriCo Stock total less than 51% of the Total Consideration. Conversely, shareholders who do not request payment in cash may nevertheless be assigned cash if requests for TriCo Stock total more than 51% of the Total Consideration. Payment for the shares exchanged will be made as soon as the Total Consideration can be determined, which may be delayed substantially to allow for the determination of amounts due to any Dissenting Shareholders. TriCo will distribute as much of the Total Consideration as possible while withholding such amount that may be reasonably necessary to pay Dissenting Shareholders. The paying agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of TriCo Stock held by it from time to time, except that it shall receive and hold all dividends or other distributions paid with respect to such shares for the account of the persons entitled thereto. Any former holder of Sutter Buttes Common Stock who does not submit his or her certificates to the paying agent within 120 days after the Effective Time must submit such certificates to TriCo in exchange for a pro rata portion of the Total Consideration. If any holder of Sutter Buttes Common Stock is unable to surrender his or her certificates because the certificates have been lost or destroyed, the holder may deliver an indemnity bond in lieu thereof, provided that the bond and surety are satisfactory to TriCo. No transfer taxes shall be payable by any holder of record of Sutter Buttes Common Stock at the Effective Time in respect to the exchange of certificates for the Total Consideration. If a portion of the Total Consideration is to be delivered to any person other than the registered holder of Sutter Buttes Common Stock surrendered for exchange, the amount of any stock-transfer or similar taxes payable on account of the transfer to such person shall be paid to the paying agent by such person. The paying agent may refuse to make such exchange unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. Any holders of Sutter Buttes Preferred Stock who do not convert their shares into shares of Sutter Buttes Common Stock prior to the Effective Time will receive, as soon as possible after the Effective Time, the liquidation preference of $5.00 per share of Sutter Buttes Preferred Stock plus any declared and unpaid cash dividends (or warrants in lieu thereof) attributable to the Sutter Buttes Preferred Stock. - 40 - INDEMNIFICATION The bylaws of TriCo provide that TriCo shall indemnify the directors and officers of vice president level or above of both TriCo and Tri Counties against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that such person is or was an agent of TriCo. If the officer or director initiates a proceeding, indemnification is available only if the proceeding was authorized by TriCo's Board of Directors. Further, the bylaws provide that any agent of TriCo may be indemnified pursuant to a duly adopted resolution of the Board of Directors, agreement or otherwise, to the fullest extent permitted with respect to the indemnification of directors and officers of vice president level or above of TriCo. TriCo shall indemnify an agent against expenses actually and reasonably incurred by the agent, to the extent the agent has been successful on the merits in the defense of any proceeding arising by reason of the fact that the person is or was an agent of TriCo. The circumstances under which the bylaws provide for indemnification may include liability arising under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling TriCo pursuant to the bylaws, TriCo has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. CAPITAL STOCK DESCRIPTION OF TRICO STOCK The Articles of Incorporation of TriCo authorize the issuance of 20,000,000 shares of TriCo Stock. Holders of TriCo Stock are entitled to one vote for each share held, except that in the election of directors each shareholder has cumulative voting rights, that is, he or she is entitled to as many votes as shall equal the number of shares held by him or her multiplied by the number of directors to be elected, and he or she may cast all of his or her votes for a single candidate or distribute his or her votes among any or all of the candidates he or she chooses. However, no shareholder shall be entitled to cumulate votes unless such candidate or candidates' names have been properly placed in nomination prior to the voting and such shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate his or her votes. If any shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. Holders of a majority of the shares of TriCo Stock outstanding may authorize a merger, consolidation, plan of exchange, a dissolution of TriCo, the sale of substantially all TriCo's assets or an amendment of TriCo's Articles of Incorporation. Holders of TriCo Stock do not have preemptive rights to acquire unissued or treasury shares. Therefore, holders of TriCo Stock may have their percentage holdings reduced when TriCo Stock is issued by TriCo. Holders of TriCo Stock are entitled to receive such dividends as may be paid on the TriCo Stock from time to time by the Board of Directors out of funds legally available therefor. In the event of liquidation, holders of TriCo Stock are entitled to share pro rata in any distribution of TriCo's assets to holders of TriCo Stock after payment of liabilities and payment to holders of preferred stock (if any) of their liquidation preference and all accrued and unpaid dividends. There are no conversion, redemption, sinking fund or similar provisions regarding the TriCo Stock. All outstanding shares are, and the shares being offered by TriCo pursuant to the Merger when issued and paid for pursuant to the Merger will be, fully paid and nonassessable. Banking laws and regulations require that under certain circumstances before stock of TriCo is acquired, approvals of the Board of Governors of the Federal Reserve (the "FRB") and California State Banking Department must be obtained. No bank holding company can acquire 5% or more of any class of voting securities of TriCo without obtaining the prior approval of the FRB under the BHC Act. No corporation, association or other entity may acquire 25% or more of any class of voting securities of TriCo (or lesser amount if control is obtained) without the prior approval of the FRB under the BHC Act. No person or entity may acquire 10% or more of any class of voting securities of TriCo without filing a Change of Control Notice with the FRB under the Change of Bank Control Act and complying with applicable Financial Code change of control provisions. These requirements act as a deterrent to a takeover of TriCo or a tender offer for its stock. Such requirements do not prohibit individual shareholders or management from soliciting proxies but may have the effect of deterring corporations, associations or other entities from soliciting proxies to attempt to exercise control over TriCo because of the possibility of being deemed to be bank holding companies by the FRB. Any entity deemed t be a bank holding company must either cease all activities not closely related to banking a permitted by the FRB or divest itself of its bank or bank holding company stock. Under TriCo's Articles of Incorporation, its Board of Directors has the right to issue preferred stock of TriCo from time to time in series and to designate the terms, rights and preferences of each series. As of June 30, 1996, there were no shares of preferred stock outstanding. - 41 - Antitakeover Provisions TriCo's Articles of Incorporation and Bylaws contain certain provisions that may be deemed to be antitakeover in nature. One of the provisions is the authorization of 20,000,000 shares of common stock of TriCo and 1,000,000 shares of preferred stock of TriCo, described herein, combined with the denial of preemptive rights. The additional shares of common and preferred stock were authorized for the purpose of providing the Board of Directors of TriCo with as much flexibility as possible to issue additional shares, without further shareholder approval, for proper corporate purposes including financing, acquisitions, stock dividends, stock splits, employee incentive plans, and other similar purposes. These additional shares, however, may also be used by the Board of Directors (if consistent with its fiduciary responsibilities) to deter future attempts to gain control over TriCo. Since shareholders do not have preemptive rights, management could offer additional stock to friendly parties without having to offer stock to the bidder. A provision of TriCo's Articles of Incorporation specifies certain actions that TriCo and its Board of Directors shall or may take in the event that a third party makes a tender or exchange offer for TriCo's stock, or an offer to merge or consolidate with TriCo or any subsidiary, or to acquire all or substantially all of the properties or assets of TriCo or any subsidiary. In evaluating such an offer, the Board of Directors is required to consider not just the economic benefit to TriCo shareholders, but all relevant factors in determining whether it is in the best interest of TriCo and its shareholders. Such factors include, but are not limited to the financial condition of TriCo and its future prospects; whether a more favorable offer could be obtained; the effects of the proposed transaction on TriCo's employees, customers and the community it serves; the business practices and reputation of the offeror; the value of any securities being offered in exchange; and the legal and regulatory issues raised by the offer. If the Board of Directors determines that the offer should be rejected, it may take any lawful action to defeat the offer including, but not limited to, advising TriCo's shareholders not to accept the offer; instituting litigation against the offeror; filing complaints with governmental authorities; having TriCo acquire its own stock; selling or issuing authorized but unissued stock of TriCo; acquiring a company which creates regulatory problems; or obtaining an offer from another entity. The effect of these provisions may be to deter a future tender offer which might include a substantial premium over the market price of TriCo's stock at that time. In addition, these provisions may enable management to retain its position and allow it to resist changes that some TriCo shareholders may deem desirable. - 42 - Shares Eligible for Future Sale Shares of stock in TriCo that are eligible for future sale could have a dilutive effect on the market for TriCo Stock and could adversely affect its market price. The Articles of Incorporation of TriCo authorize the issuance of 20,000,000 shares of common stock and 1,000,000 shares of preferred stock. As of June 30, 1996, there were 4,482,712 shares of common stock outstanding, with options for an additional 492,000 shares granted but unexercised. As approximately 113,543 shares are being offered pursuant to the Merger, TriCo will have 15,403,745 shares of common stock eligible for future issuance. Also as of June 30, 1996, TriCo had no shares of preferred stock outstanding, leaving all 1,000,000 shares of preferred stock available for future issuance. There are no restrictions in the Acquisition Agreement preventing TriCo from issuing additional shares. COMPARISON BETWEEN TRICO STOCK AND SUTTER BUTTES COMMON STOCK The rights of shareholders of Sutter Buttes are governed by HOLA and the Regulations of the OTS. The rights of shareholders of TriCo are governed by the California General Corporation Law and the BHC Act. Sutter Buttes' Charter authorize the issuance of 5,000,000 shares of Sutter Buttes Common Stock, $0.01 par value, and 5,000,000 shares of Sutter Buttes Preferred Stock, $5.00 par value. As of June 30, 1996, 647,956 shares of Sutter Buttes Common Stock were outstanding, and 232,200 shares of Sutter Buttes Preferred Stock were outstanding. TriCo's Articles of Incorporation authorize the issuance of up to 20,000,000 shares of common stock, no par value, and 1,000,000 shares of preferred stock, no par value. As of June 30, 1996, there were 4,482,712 shares of common stock outstanding and no shares of preferred stock outstanding. Dividend Rights The holders of TriCo Common Stock are entitled to receive cash dividends when, as, and if declared by the Board of Directors, out of funds legally available therefor, subject to the dividend rights of holders of TriCo's preferred stock, which may be issued in the future. TriCo has paid a quarterly dividend on its common stock since March of 1990. Sutter Buttes has a dividend policy that permits payment of cash dividends on Sutter Buttes Common Stock out of funds legally available therefor, conditioned on adequate profits and capital and subject to the dividend rights of holders of Sutter Buttes Preferred Stock. Sutter Buttes has never paid a dividend on Sutter Buttes Common Stock. Holders of Sutter Buttes Preferred Stock have the right to receive annually, if and as declared by the Board of Sutter Buttes out of funds legally available therefor, a cash dividend equal to 12% of the $5.00 par value of the shares. Dividends may not be paid on Sutter Buttes Common Stock in a given year unless they are paid on Sutter Buttes Preferred Stock during that year. This dividend preference is non-cumulative, meaning that unpaid cash dividends in any year do not accrue and are not payable in subsequent years. Instead, unpaid dividends are replaced by warrants to purchase shares of Sutter Buttes Common Stock having a book value equal to the cash value of the unpaid dividends. - 43 - Voting Rights Holders of TriCo Stock are entitled to one vote for each share held except that in the election of directors each shareholder has cumulative voting rights. However, no shareholder shall be entitled to cumulate votes unless such candidate or candidates' names have been properly placed in nomination prior to the voting and such shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate his or her votes. If any shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. Holders of a majority of the outstanding shares of TriCo Stock outstanding may authorize a merger, consolidation, plan of exchange, a dissolution of TriCo, the sale of substantially all TriCo's assets or an amendment of TriCo's Articles of Incorporation. Each share of Sutter Buttes Common Stock and each share of Sutter Buttes Preferred Stock is entitled to one vote per share on each matter presented for a vote of the shareholders. However, all such holders have the right to cumulative voting in the election of directors. Holders of a majority of the outstanding shares of Sutter Buttes Common and Preferred may authorize an amendment of Sutter Buttes' Charter. TriCo's bylaws provide for the election of all directors annually. Sutter Buttes' Charter provide for "staggered" Board terms, with roughly one-third of the directors being elected each year, and each director being subject to election every three years. The California General Corporation Law provides that dissenting holders of TriCo Stock have appraisal rights with respect to mergers and consolidations, and other extraordinary transactions. The Regulations of the OTS also provide that dissenting holders of Sutter Buttes Common Stock or Sutter Buttes Preferred Stock have appraisal rights with respect to mergers and consolidations, and other extraordinary transactions. - 44 - Preemptive Rights Holders of TriCo Stock do not have the preemptive right to purchase unissued shares. Holders of Sutter Buttes Common Stock also do not have the preemptive right to purchase unissued shares. Liquidation Rights In the event of liquidation, holders of TriCo Stock are entitled to share pro rata in any distribution of TriCo's assets to holders of TriCo Stock, after payment of liabilities and payment to holders of preferred stock (if any) of their liquidation preference and all accrued and unpaid dividends. In the event of liquidation, holders of Sutter Buttes Common Stock are entitled to share pro rata in any distribution of Sutter Buttes' assets to holders of Sutter Buttes Common Stock, after payment of liabilities and payment to holders of Sutter Buttes Preferred Stock of their $5.00 per share liquidation preference and conversion of unpaid warrants. Redemption Rights; Conversion Rights; Sinking Funds HOLA prohibits the repurchase or redemption by a federal savings bank of its common shares, except in limited circumstances. Therefore, Sutter Buttes generally may not redeem or repurchase Sutter Buttes Common Stock. TriCo is permitted under California law to redeem or repurchase its shares, provided that doing so would not cause TriCo to become insolvent. Under the BHC Act, TriCo's repurchase or redemption of its shares is limited to 10% of its total capital, annually. Repurchased or redeemed shares may be subsequently reissued without a vote of TriCo's shareholders. There are no conversion, sinking fund, or similar provisions regarding TriCo Stock or Sutter Buttes Common Stock. Assessment The shares of TriCo Stock, including, when issued, those to be issued pursuant to the Merger, and the shares of Sutter Buttes Common and Preferred are fully paid and nonassessable. BENEFICIAL OWNERSHIP OF SUTTER BUTTES COMMON AND PREFERRED OWNERSHIP OF SUTTER BUTTES COMMON STOCK As of the June 30, 1996, no person or group known to Sutter Buttes owned beneficially more than five percent (5%) of the outstanding shares of its Common Stock, except as described below: - 45 - Percentage of Name of Number of Shares Outstanding Beneficial Owner Beneficially Owned Common Stock Lee 'B' Colby 70,958 (1) 10.60% 72 Fairway Drive Chico, CA 95973 Rodney P. Beard 51,867 (2)(3) 7.57% P.O. Box 700 Empire, CA 95319 James L. Harrison (4) 32,969 5.09% 1707 Hastings Way Yuba City, CA 95991 - ------------------------ (1) Includes 3,360 shares held of record in the name of Mr. Colby's children and 1440 shares held of record in the name of Mr. Colby's grandchildren, over which Mr. Colby has voting power pursuant to a power of attorney, and 21,740 shares issuable upon exercise of options granted pursuant to Sutter Buttes' Directors' Stock Option Plan (the "Directors' Plan"). (2) Includes 10,762 shares and 3,497 shares held in the names of Environmental Filtration Trust and Tulelake Environmental Trust, respectively, of which Mr. Beard is sole trustee. (3) Includes 37,608 shares issuable upon exercise of Warrants. (4) Held jointly with his wife, Patricia J. Harrison. OWNERSHIP OF SUTTER BUTTES PREFERRED STOCK As of the June 30, 1996, no person or group known to Sutter Buttes owned beneficially more than 5% of the outstanding shares of its Preferred Stock, except as follows: - 46 - Percentage Name of Number of Shares of Outstanding Beneficial Owner Beneficially Owned Preferred Stock Jon Beard 20,000 8.61% Jill Schaefer P.O. Box 280 Meridian, CA 95957 Rodney P. Beard 53,000 (1) 22.83% P.O. Box 700 Empire, CA 95319 The Allen J. & Pauline B. 12,000 (2) 5.17% Clause Family Trust 72-377 Magnesia Falls Rd. Rancho Mirage, CA 92270 James L. Harrison (3) 23,980 10.33% 1707 Hastings Way Yuba City, CA 95991 George Murray 20,000 (4) 8.61% 3433 Lessey Drive Yuba City, CA 95993 M.B. Consultants Inc. 20,000 (5) 8.61% Profit-Sharing Trust 1787 Tribute Rd., Ste. J Sacramento, CA 95815 - ------------------------ (1) Includes 40,000 shares and 13,000 shares held in the names of Environmental Filtration Trust and Tulelake Environmental Trust, respectively, of which Mr. Beard is sole trustee. Does not include eight (8) immediately-exercisable Warrants to purchase 37,608 shares of Sutter Buttes Common Stock. (2) Does not include three (3) immediately-exercisable Warrants to purchase 5,979 shares of Sutter Buttes Common Stock. (3) Held with his wife, Patricia J. Harrison. (4) Includes 2,000 shares held with his wife, Shirley Murray, 2,000 shares held by Mr. Murray's son and 16,000 shares held by the George Murray Inc. Money Purchase Pension and Profit Sharing Plan. (5) Does not include one (1) immediately-exercisable Warrant to purchase a total of 3,149 shares of Sutter Buttes Common Stock. - 47 - OWNERSHIP OF SHARES BY OFFICERS AND DIRECTORS OF SUTTER BUTTES
Shares of Preferred Stock Shares of Common Stock Beneficially Owned as of Beneficially Owned as of June 30, 1996 June 30, 1996(1) Directors and Positions and Offices Percent Percent Nominees Held with Sutter Amount of Class Amount of Class - ------------- --------------------- ----------------- ----------------------- Lee 'B' Colby Chairman of the 10,000 4.31% 70,958(2) 10.60%(2) Board of Directors W. R. Hagstrom President, Chief -0- -0- 25,400(3) 3.77%(3) Executive Officer and Director James L. Harrison Director 23,980(4) 10.33%(4) 32,969(5) 5.09%(5) George Murray Director 20,000(6) 8.61%(6) 22,305(7) 3.43%(7) Lonny L. Renfrow Director 4,000 1.72% 26,252(8) 3.97%(8) Don J. Strachan(9) Director 6,200 2.67% 14,602(10) 2.23%(10) Jon Beard Director 20,000 8.61% 12,513(11) 1.93%(11) All directors and executive officers of Sutter Buttes as a group (9 in number) 84,980 36.60% 221,779(12) 30.12%(12) ====== ===== ======= ===== - ------------------------------ (1) Includes shares of Sutter Buttes Common Stock issuable upon exercise of Warrants and presently exercisable and nonexercisable options outstanding under Sutter Buttes' 1992 Employee Stock Option Plan (the "Employee Plan") and the Directors' Plan. (2) See Note 1 to "OWNERSHIP OF SUTTER BUTTES COMMON STOCK." (3) Includes 25,000 shares of Sutter Buttes Common Stock issuable upon exercise of options granted pursuant to the Employee Plan. (4) See Note 3 to "OWNERSHIP OF SUTTER BUTTES PREFERRED STOCK." (5) Includes 2,740 shares of Sutter Buttes Common Stock issuable upon exercise of options granted pursuant to the Directors' Plan. Also includes Warrants to purchase a total of 3,776 shares of Sutter Buttes Common Stock. (6) See Note 4 to "OWNERSHIP OF SUTTER BUTTES PREFERRED STOCK." (7) Includes 2,740 shares of Sutter Buttes Common Stock issuable upon exercise of options granted pursuant to the Directors' Plan. (8) Includes 12,740 shares subject to options granted pursuant to the Directors' Plan. (9) Held in the name of Strachan Apiaries, Inc., of which Mr. Strachan is President. (10) Includes 5,540 shares of Sutter Buttes Common Stock issuable upon exercise of options granted pursuant to the Directors' Plan. (11) Includes 1740 shares subject to options granted pursuant to the Directors' Plan. (12) Includes 47,240 shares of Sutter Buttes Common Stock issuable upon exercise of options granted pursuant to the Directors' Plan, 41,000 shares of Sutter Buttes Common Stock issuable upon exercise of options granted pursuant to the Employee Plan.
- 48 - SPECIAL STOCK OPTIONS The Board is recommending that the shareholders approve the Executive Officer Special Stock Option and the Director Special Stock Option (the "Special Options"), which are options for CEO W. R. Hagstrom and Chairman of the Board Lee Colby to purchase shares of Sutter Buttes Common Stock for $1.00 per share. Mr. Hagstrom would receive a Special Option to purchase 24,000 shares and Mr. Colby would receive a Special Option to purchase 15,000 shares. The purpose of the Special Options is to recognize and reward Mr. Hagstrom for his past contributions to Sutter Buttes, and to reward Mr. Colby for his role in negotiating the Merger. It is the opinion of the Board that Mr. Hagstrom has been undercompensated for the entirety of his tenure. NEW PLAN BENEFITS Executive Officer Director Special Stock Option Special Stock Option Number Number Name and Position Dollar Value of Units Dollar Value of Units W. R. Hagstrom, CEO $47,760 24,000 $ 0 0 Lee Colby, Chairman 0 0 29,850 15,000 EXECUTIVE COMPENSATION Sutter Buttes is complying with the disclosure requirements for a Small Business Issuer in accordance with SEC Regulation S-B. Summary of Compensation The following table sets forth a summary of the compensation paid during Sutter Buttes' past fiscal year for services rendered in all capacities to W. R. Hagstrom, the Chief Executive of Sutter Buttes, from June 20, 1994, through December 31, 1995. There are no other officers or directors of Sutter Buttes who received more than $100,000 in compensation for services to Sutter Buttes. - 49 - SUMMARY COMPENSATION TABLE
Long-term Annual Compensation Compensation/ Other Awards/Securities Annual Underlying All Other Name and Principal Position Year Salary Bonus Compensation Options Compensation W. R. Hagstrom, CEO 1995 $75,000 $0 $0 25,000(1) $18,750(2) 1994 $39,821(3) $0 $0 0 $18,750(4) - --------------------------------- (1) See "Option Grants and Exercises" herein. (2) In the event that Mr. Hagstrom was terminated other than for cause during 1995, he was entitled to receive 3 months' compensation under the terms of his employment agreement. See "Employment Contracts" herein. (3) Represents a partial year of service with Sutter Buttes, which began June 20, 1994. (4) In the event that Mr. Hagstrom was terminated other than for cause during 1994, he was entitled to receive 3 months' compensation under the terms of his employment agreement. See "Employment Contracts" herein.
Option Grants and Exercises Sutter Buttes has established the 1992 Employee Stock Option Plan, in which Mr. Hagstrom and other employees of Sutter Buttes participate. On February 7, 1996, the Board of Directors granted Mr. Hagstrom 25,000 options which are exercisable on August 31, 1996. Mr. Hagstrom has received no other grants of stock options. Director Compensation The Chairman of the Board receives monthly compensation of $500, plus $75 for each meeting of the Board of Directors that he attends. All other directors receive monthly compensation of $300, plus $75 for each meeting of the Board of Directors attended. The chairman of any committee of the Board of Directors receives $100 per committee meeting attended. All other members of any committee of the Board of Directors receives $75 for each committee meeting attended. Employment Contracts On June 20, 1994, Sutter Buttes entered into a one-year employment agreement with W. R. Hagstrom as President, Chief Executive Officer, Chief Operating Officer, and Chief Loan Officer of Sutter Buttes. Pursuant to the agreement, Mr. Hagstrom's beginning salary is $75,000. In addition, the employment agreement provides that in the event Mr. Hagstrom is terminated other than for cause, Sutter Buttes will continue to pay Mr. Hagstrom's salary for a period of three months. Medical, dental, and life insurance benefits may be paid for a period of up to three months, subject to Mr. Hagstrom's finding alternate employment. Mr. Hagstrom also receives certain benefits provided to other Sutter Buttes employees. On June 20, 1995, Sutter Buttes entered into Amendment No. 1 of Mr. Hagstrom's employment agreement granting Mr. Hagstrom a car allowance of $225.00 per month. - 50 - OTHER MATTERS The Meeting is called for the purpose set forth in the notice. Management does not know of any matter for action by shareholders at the Meeting other than the matters described in the notice. However, the enclosed Proxy will confer discretionary authority with respect to matters which are not known to management at the time of the printing hereof and which may properly come before the Meeting. It is the intention of the persons named in the Proxy to vote in pursuance of the Proxy in accordance with the recommendations of management. LEGAL OPINIONS The legality of the TriCo Stock to be issued pursuant to the Acquisition Agreement will be passed upon for TriCo by the law firm of Rothgerber, Appel, Powers & Johnson LLP. The law firm of Rothgerber, Appel, Powers & Johnson LLP, One Tabor Center, Suite 3000, 1200 17th Street, Denver, Colorado 80202, has served as counsel to TriCo in the preparation of the registration statement relating to the proposed Merger. Further, the firm of Rothgerber, Appel, Powers & Johnson LLP has rendered its opinion regarding the tax consequences of the proposed Merger. No members of that firm own shares of TriCo Stock. The law firm is not employed on a contingent basis. EXPERTS The consolidated financial statements of TriCo as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, incorporated in this Prospectus by reference have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the report of said firm and upon the authority of said firm as experts in accounting and auditing. The financial statements of Sutter Buttes as of December 31, 1995 and December 31, 1994, and for each of the three years in the three-year period ended December 31, 1995, incorporated in this Prospectus by reference have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report with respect thereto and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION TriCo has filed with the Commission a Registration Statement on Form S-4 with respect to the TriCo Stock offered hereby. This Prospectus/Proxy Statement, filed as part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to TriCo and the TriCo Stock offered hereby, reference is made to the Registration Statement and to the Exhibits and schedules thereto. Statements made in the Prospectus/Proxy Statement as to the contents of any contract, agreement or document referred to are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, and each such statement is qualified in its entirety by such reference. The Registration - 51 - Statement, such reports and other information may be inspected by anyone without charge at the public reference facilities maintained by the Commission at its principal office located at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C., 20549. Copies of all such material may be obtained from the Public Reference Section of the Commission upon payment of prescribed fees. - 52 - EXHIBIT A ACQUISITION AGREEMENT AND PLAN OF MERGER Among TRICO BANCSHARES TRI COUNTIES BANK and SUTTER BUTTES SAVINGS BANK As of June 15, 1996 TABLE OF CONTENTS
Page ARTICLE I - PRINCIPAL TERMS OF THE MERGER......................................... 1 1.1 The Plan of Merger................................................... 1 ------------------ 1.2 Closing Date......................................................... 4 ------------ 1.3 The Surviving Bank................................................... 4 ------------------ ARTICLE II - DISTRIBUTIONS TO SUTTER BUTTES SHAREHOLDERS........................... 5 2.1 Delivery of Consideration............................................ 5 ------------------------- 2.2 Stock Options........................................................ 6 ------------- 2.3 Dissenting Shareholders.............................................. 6 ----------------------- ARTICLE III - CONDITIONS........................................................... 6 3.1 Mutual Conditions.................................................... 6 ----------------- a. No Litigation................................................. 6 ------------- b. Shareholder Approval.......................................... 6 -------------------- c. Approvals..................................................... 6 --------- d. Effective Registration Statement.............................. 7 -------------------------------- 3.2 Conditions in Favor of Sutter Buttes................................. 7 ------------------------------------ a. Representations, Warranties and Agreements.................... 7 ------------------------------------------ b. Officers' Certificate......................................... 7 --------------------- c. Authorization of Merger....................................... 7 ----------------------- d. Secretary's Certificate....................................... 7 ----------------------- e. Legal Opinion................................................. 7 ------------- f. Material Adverse Change....................................... 8 ----------------------- g. Proper Actions and Documentation.............................. 8 -------------------------------- h. Federal Tax Opinion........................................... 8 ------------------- 3.3 Conditions in Favor of TriCo and Tri Counties........................ 9 --------------------------------------------- a. Material Adverse Change....................................... 9 ----------------------- b. Representations, Warranties and Agreements.................... 9 ------------------------------------------ c. Officer's Certificate......................................... 9 --------------------- d. Legal Opinion................................................. 9 ------------- e. Proper Actions and Documentation.............................. 10 -------------------------------- f. Employee Terminations......................................... 10 --------------------- g. Environmental Report.......................................... 11 -------------------- ARTICLE IV - REPRESENTATION AND WARRANTIES......................................... 11 4.1 Representations and Warranties of Sutter Buttes...................... 11 a. Organization of Sutter Buttes................................. 11 b. Subsidiaries and Assets....................................... 12 c. Financial Statements.......................................... 12 d. Absence of Undisclosed Liabilities............................ 12 e. Absence of Certain Changes or Events.......................... 12 f. Tax Matters................................................... 13 g. Title to Properties; Absence of Liens and Encumbrances, Leases Enforceable.......................................................... 13 h. Litigation.................................................... 14 i. Authority Relative to This Agreement.......................... 14 EXHIBIT A - i - j. Information Furnished to TriCo and Tri Counties............... 14 ----------------------------------------------- k. Compliance with Laws.......................................... 15 -------------------- l. Employee Benefit Plans........................................ 15 ---------------------- m. Insurance..................................................... 16 --------- n. Environmental Protection...................................... 16 ------------------------ o. Employee Relations............................................ 17 ------------------ p. Material Contract Defaults.................................... 17 -------------------------- q. Agreements with Regulatory Authorities........................ 17 -------------------------------------- r. Reports....................................................... 17 ------- s. Loan Documentation............................................ 17 ------------------ t. Accounting, Tax and Regulatory Matters........................ 17 -------------------------------------- u. Brokers and Finders........................................... 18 ------------------- 4.2 Representations and Warranties of TriCo and Tri Counties............. 18 -------------------------------------------------------- a. Organization.................................................. 18 ------------ b. Authority Relative to Agreement............................... 18 ------------------------------- c. Legal Proceedings............................................. 18 ----------------- d. Applications to Regulators.................................... 19 -------------------------- e. Information Furnished to Sutter Buttes........................ 19 -------------------------------------- f. Absence of Undisclosed Liabilities............................ 19 ---------------------------------- g. Registration Statement........................................ 19 ---------------------- h. TriCo Capital Stock........................................... 19 ------------------- ARTICLE V - COVENANTS.............................................................. 20 5.1 Covenants of Sutter Buttes........................................... 20 a. Access to Information Concerning Properties and Records....... 20 ------------------------------------------------------- b. Conduct of Business........................................... 20 ------------------- c. Confidentiality............................................... 21 --------------- d. No Merger or Solicitation..................................... 21 ------------------------- e. Information for Applications and Statements................... 22 ------------------------------------------- f. Shareholder Meeting........................................... 22 ------------------- g. Affiliate's Letter............................................ 22 ------------------ h. Due Diligence................................................. 22 ------------- 5.2 Covenants of TriCo and Tri Counties.................................. 22 ----------------------------------- a. Approvals of Regulatory Authorities........................... 22 ----------------------------------- b. Confidentiality............................................... 23 --------------- c. Registration of TriCo Stock................................... 23 --------------------------- d. Due Diligence................................................. 23 ------------- e. Status Reports................................................ 23 -------------- ARTICLE VI - MISCELLANEOUS......................................................... 23 6.1 Termination.......................................................... 23 a. Mutual Agreement.............................................. 23 ---------------- b. Expiration of Time............................................ 24 ------------------ c. Breach........................................................ 24 ------ d. Environmental Report.......................................... 24 -------------------- e. Review of Sutter Buttes Disclosure Letter..................... 24 ----------------------------------------- f. Material Adverse Change....................................... 24 ----------------------- g. Fiduciary Duty................................................ 24 -------------- 6.2 Expenses and Damages................................................. 24 -------------------- 6.3 No Liability Upon Proper Termination................................. 24 ------------------------------------ 6.4 Press Releases and Public Statements................................. 25 ------------------------------------ 6.5 Maximum Expenses..................................................... 25 ---------------- EXHIBIT A - ii - 6.6 Knowledge............................................................ 25 --------- 6.7 Desirable Amendments................................................. 25 -------------------- 6.8 Benefits of this Agreement........................................... 25 -------------------------- 6.9 Notices.............................................................. 25 ------- 6.10 Potential Litigation re Fairness of the Transaction.................. 26 --------------------------------------------------- 6.11 Entire Agreement..................................................... 26 ---------------- 6.12 Waiver or Modification............................................... 26 ---------------------- 6.13 Controlling Law...................................................... 27 --------------- 6.14 Counterparts......................................................... 27 ------------ Exhibit A Disclosure Letter to be provided by Sutter Buttes to be agreed upon Exhibit B Form of Letter from Affiliates of Sutter Buttes to Tri-Co to be agreed upon
EXHIBIT A - iii - ACQUISITION AGREEMENT AND PLAN OF MERGER This amended and restated Acquisition Agreement and Plan of Merger ("Agreement") is entered into this ____ day of July, 1996, by and among TriCo Bancshares ("TriCo"), Tri Counties Bank ("Tri Counties"), and Sutter Buttes Savings Bank ("Sutter Buttes") and amends and restates the Acquisition Agreement and Plan of Merger entered into by the parties June 15, 1996. This amended and restated agreement is effective as of June 15, 1996. RECITALS: A. TriCo is a California corporation and bank holding company registered under the Bank Holding Company Act of 1936, as amended ( the "BHC Act") having its principal office at 15 Independence Circle, Chico, California 95973. B. Tri Counties is a commercial bank organized and existing under the laws of the State of California, having its principal office at 15 Independence Circle, Chico, California 95973. All of the outstanding capital stock of Tri Counties is owned by TriCo. C. Sutter Buttes is a savings bank organized under the laws of the United States having its principal offices at 700 Plumas Street, Yuba City, California 95991. D. The respective Boards of Directors of TriCo, Tri Counties and Sutter Buttes have by the necessary vote determined that it is in the best interest and to the advantage of their respective banks and their respective shareholders that TriCo acquire 100% of the capital stock of Sutter Buttes by a merger of Sutter Buttes with and into Tri Counties on the terms and conditions hereinafter set forth. E. The respective Boards of Directors of TriCo, Tri Counties and Sutter Buttes have, by resolution approved and authorized the execution and delivery of this Agreement on the terms and conditions set forth herein. THEREFORE, in consideration of the mutual covenants, promises, agreements and provisions contained herein and subject to the satisfaction of the terms and conditions set forth herein, and intending to be legally bound hereby, TriCo, Tri Counties and Sutter Buttes agree as follows: ARTICLE I - PRINCIPAL TERMS OF THE MERGER 1.1 The Plan of Merger. Subject to the terms and conditions of this Agreement, including the receipts of all requisite governmental and shareholder approvals, the acquisition of Sutter Buttes by TriCo (the "Merger") will be carried out in the following manner: a. Sutter Buttes will cooperate in the preparation and filing by TriCo and Tri Counties of such applications to regulatory authorities as may be necessary to obtain all approvals requisite to the consummation of the Merger, and Sutter Buttes will cooperate in the registration of the no par value TriCo common stock, ("TriCo Stock"), to be issued to Sutter Buttes' shareholders pursuant to a Registration Statement on Form S-4 (the "Registration Statement") with the U.S. Securities and Exchange Commission, (the "SEC"), pursuant to the Securities Act of 1933, as amended (the "1933 Act"). EXHIBIT A - 1 - b. TriCo, Tri Counties and Sutter Buttes will each cooperate and use their respective best efforts to consummate the transactions contemplated by this Agreement. c. Sutter Buttes shall call a meeting of its shareholders to approve the Merger and shall solicit proxies in favor of the Merger. d. Subject to the provisions of this Agreement and consistent with this Agreement, the parties shall execute an Agreement of Merger in a form agreed to by the parties ("the Merger Agreement") on or before the Closing Date. The Merger shall become effective upon the filing with the Superintendent of Banks of the State of California ("Superintendent") of a duly executed counterpart of the Merger Agreement certified by the California Secretary of State and Officer Certificates prescribed by Section 1103 of the California General Corporation Law (the "Effective Time"). e. At the Effective Time, Sutter Buttes shall merge with and into Tri Counties, the separate existence of Sutter Buttes shall cease, and Tri Counties shall continue as the surviving corporation. (Tri Counties, in its capacity as the corporation surviving the Merger, is hereinafter sometimes referred to as the "Surviving Corporation"). f. In exchange for their shares of common stock of Sutter Buttes, the shareholders of Sutter Buttes shall receive as total consideration, the ("Total Consideration"), cash and TriCo Stock having a value equal to $3,896,400 plus or less 1.1 times after-tax earnings or after-tax losses as the case may be of Sutter Buttes from April 1,1996 through the Closing Date. Earnings or losses of Sutter Buttes from April 1, 1996 through the Closing Date shall be accrued and booked in accordance with generally accepted accounting principles or regulatory requirements and shall have included the accrual of expenses associated with unused vacations and other employee termination liabilities [excluding termination pay and other contracted termination expenses for which provision is made in the following paragraphs of this agreement]. After-tax earnings or losses as the case may be, of Sutter Buttes from April 1, 1996 shall also include the accrual and booking of provisions to the loan and lease loss reserves agreed upon among the parties, and shall not include the accrual or booking of any charges or expenses associated with the transfer of the deposit insurance from one institution to another. Any special assessments, other than normal deposit insurance premiums, imposed on Sutter Buttes deposits by the Federal Deposit Insurance Corporation, (the "FDIC") or the Savings Association Insurance Fund ("the SAIF"), will not reduce the Total Consideration to Sutter Buttes shareholders and will be paid directly by Tri Counties subject to the Closing of the Merger. Expenses associated with this transaction include legal and accounting fees and the cost of the purchase of a three year extension of Sutter Buttes directors and officers liability insurance policy ("tail insurance") shall be borne by TriCo up to the limit of $70,000.00. Sutter Buttes agrees to pay any fees associated with this transaction over the $70,000.00 limit which excess will be included in the calculation of earnings and losses from April 1, 1996 through to Closing Date. Sutter Buttes will provide any information available regarding expenses and will attempt to limit expenses by using "in house" resources where ever possible. From the Total Consideration, the holders of $5.00 par value Preferred Stock, Series A of Sutter Buttes Preferred Stock who, as of the Closing Date, have not converted their shares of Preferred Stock to common stock of Sutter Buttes shall receive the Preferred Stock of Sutter Buttes liquidation preference of $5.00 per share plus any declared and unpaid cash dividends (or warrants in lieu thereof) attributable to the Preferred Stock ("the Preferred Stock Liquidation"). EXHIBIT A - 2 - Warrants issued in lieu of cash dividends on the Preferred Stock shall be treated as if exercised on the Effective Date and converted at the Effective Date to common stock of Sutter Buttes, and the holders thereof shall be entitled to receive an appropriate portion of the Total Consideration of cash and TriCo Stock. The holders of the common stock of Sutter Buttes (the "Sutter Buttes Stock") as of the Closing Date, including Sutter Buttes Stock resulting from conversion of Preferred Stock, and Sutter Buttes Stock issued pursuant to exercise of options or warrants, shall receive the remaining Total Consideration. For each outstanding share of Sutter Buttes Stock held immediately prior to the Closing Date, including Sutter Buttes Stock held as a result of Preferred Stock conversion or the exercise of stock option rights, and excepting for those shareholders effectively exercising their dissenters' rights (as described in Section 2.3 below), the holders thereof shall receive consideration having a value equal to the Total Consideration, as adjusted, less the amount of the Preferred Stock Liquidation and the amount due to holders of Dissenting Shares (as defined below), divided by the total number of shares of Sutter Buttes Stock after Preferred Stock conversion and the exercise of options and warrants, less Dissenting Shares. Cash payment shall be made for Dissenting Shares. Cashless exercise of stock options will be permitted. Each person holding one or more options to purchase Sutter Buttes Stock shall be entitled to exercise vested options at or immediately prior to the Closing Date by receiving, at their election, Sutter Buttes Stock or cash equal in value to the difference between the option price and the value of Sutter Buttes Stock at Closing and pursuant to this Agreement, or shall be allowed to exercise the options by the payment of the option price and the receipt of Sutter Buttes stock so long as the exercise is pursuant to this Agreement and made on or before the Closing Date. The parties shall cooperate in effecting appropriate exercise of the options under the Sutter Buttes 1992 Stock Option Plan and the Sutter Buttes Directors Stock Option Plans so long as such treatment is consistent with generally accepted accounting principles. i. Of the Total Consideration paid pursuant to this Agreement, 51% shall be in the form of TriCo Stock, and TriCo reserves the right to assure that 51% of the Total Consideration will be in the form of TriCo Stock. In assuring that 51% of the consideration will be in the form of TriCo Stock, TriCo shall consider cash payments for fractional shares and potential cash payments for Preferred Stock Liquidations, to holders of options to purchase Sutter Buttes Stock and Dissenting Shares. ii. To the extent possible, TriCo will cause cash to be paid to those shareholders of Sutter Buttes requesting cash payment, and to cause TriCo Stock to be delivered to those shareholders of Sutter Buttes requesting TriCo Stock, prior to the meeting of shareholders at which the Merger is approved. However, to guarantee that 51% of Total Consideration is in the form of TriCo Stock, TriCo reserves the right to allocate TriCo Stock and cash, as necessary, to shareholders of Sutter Buttes. In the event that the request for shares does not equal 51%, the remaining shareholders not requesting TriCo Stock shall be assigned stock to bring the total TriCo Stock issued to 51% of the Total Consideration. In this situation, stock will be allocated first to those failing to request stock or cash prior to the meeting of shareholders at which the Merger is approved and next, if necessary, to those request cash on a pro rata basis. In the event that the request for shares exceeds 51%, the shareholders requesting TriCo Stock will have the number of shares to be received reduced on a pro rata basis until the total TriCo Stock transferred equals 51% of the total consideration with the balance of the price for the shares being paid in cash on a pro rata basis. TriCo's determination to allocate cash and TriCo Stock on a pro rata basis to guarantee EXHIBIT A - 3 - that 51% of the Total Consideration is TriCo Stock according to the terms of this paragraph shall be at TriCo's sole determination and shall not be subject to review or question by other parties to this Agreement or shareholders of Sutter Buttes. iii. TriCo Stock to be issued under the terms of this Agreement shall be registered under the 1933 Act under a Registration Statement on Form S-4, and shall be issued in compliance with any applicable state securities laws. iv. No fractional shares of TriCo Stock will be issued in the Merger, and in lieu thereof cash in the amount of the Fair Market Value of a share of TriCo Stock times the faction of a share that would otherwise be issued shall be paid. The "Fair Market Value" of a share of TriCo Stock shall be the average closing sale price (or if there is no closing sale price for a trading day, the mean between the closing bid and ask price for such day) for the TriCo Stock for the ten trading days preceding the Closing Date. v. The number of shares of TriCo Stock to be issued for delivery to the shareholders of Sutter Buttes shall be that number of shares which, when multiplied by the Fair Market Value of a Share of TriCo Stock, equals at least 51% of the Total Consideration. g. At the Effective Time, each certificate theretofore representing shares of Sutter Buttes Stock shall be converted into and represent a right to receive a pro rata portion of the Total Consideration. 1.2 Closing Date. The "Closing Date" of the transaction shall be the last business day of the month in which the conditions specified in Article III of this Agreement have all been satisfied, or such other date as is mutually agreed by the parties. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of TriCo on the Closing Date or at such other place as the parties may agree. At the Closing, the parties shall exchange the various agreements, certificates, instruments and documents to be delivered pursuant to the terms of this Agreement. 1.3 The Surviving Bank. At the Effective Time, Sutter Buttes shall cease to exist and Tri Counties will be the "Surviving Bank." The articles of incorporation and bylaws of Tri Counties as in effect immediately prior to the Effective Time will remain the articles of incorporation and bylaws of Tri Counties as the Surviving Bank after the Effective Time until amended or repealed in accordance with their provisions and applicable law. The directors and officers of Tri Counties immediately prior to the Effective Time shall be the directors and officers of Tri Counties after the Effective Time until their successors have been elected or qualified or until their resignation or removal according to law and the bylaws of Tri Counties. At and after the Effective Time, all rights, privileges, powers and franchises and all property and assets of every kind and description of Tri Counties and Sutter Buttes shall be vested in and be held and enjoyed by the Surviving Bank, without further act or deed, and all the estates and interests of every kind of Tri Counties and Sutter Buttes, including all debts owed to either of them, shall be as effectively the property of the Surviving Bank as they were of Tri Counties and Sutter Buttes, and the title to any real estate vested by deed or otherwise in either Tri Counties or Sutter Buttes shall not revert or be in any way impaired by reason of the Merger. All rights of creditors and liens upon any property of Tri Counties or Sutter Buttes shall be preserved unimpaired and all debts, liabilities and duties of Tri Counties and Sutter Buttes shall be debts, liabilities and duties of the Surviving Bank and may be enforced against it to the same extent as if said debts, liabilities, and duties had been incurred or contracted by it. EXHIBIT A - 4 - ARTICLE II - DISTRIBUTIONS TO SUTTER BUTTES SHAREHOLDERS 2.1 Delivery of Consideration. At least sixty (60) prior to the Closing Date, Sutter Buttes shall appoint a paying agent (the "Paying Agent") whom TriCo shall pay its fee. Such Paying Agent shall be responsible for receiving certificates representing Sutter Buttes Stock and paying the total consideration as soon as reasonably possible and in conformance with this agreement. On the Closing Date, TriCo shall deliver to the Paying Agent the Total Consideration. Any interest earned on any cash while in the hands of the Paying Agent shall be the property of Tri Counties. The Paying Agent subsequently shall deliver to the holders of certificates formerly evidencing ownership of Sutter Buttes Stock, immediately upon the later of the receipt of such certificates from the holders thereof, duly executed and in proper form for transfer, and the date the amount of the Total Consideration is determined, the Consideration to which they are entitled pursuant to the following provisions: a. As soon as practical after the Effective Time, but not later than three (3) business days after the Closing Date, the Paying Agent shall send notice and a transmittal form to each record holder of a certificate evidencing Sutter Buttes Stock, advising such holder of the Merger and the procedure for surrendering to the Paying Agent such certificate in exchange for a pro rata portion of the Total Consideration. Each holder of such certificate, upon surrender of the same to the Paying Agent in accordance with such transmittal form, shall be entitled to receive a pro rata portion of the Total Consideration. The transmittal form shall permit holders of Sutter Buttes Stock to submit their certificates and accompanying documentation to the paying Agent through either of the Sutter Buttes branches. b. No transfer taxes shall be payable by any holder of record of Sutter Buttes Stock at the Effective Time in respect of the exchange of certificates for the Consideration. If the Total Consideration for the Sutter Buttes Stock provided for herein is to be delivered to any person other than the registered holder of the Sutter Buttes Stock surrendered for exchange, the amount of any stock-transfer or similar taxes (whether imposed on the holder of record or such person) payable on account of the transfer to such person shall be paid to the Paying Agent by such person. The Paying Agent may refuse to make such exchange unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. c. After the Effective Time, each outstanding certificate which theretofore represented Sutter Buttes Stock shall until surrendered for exchange in accordance with this section 2.1 be deemed for all purposes to evidence only the right to receive the a pro rata portion of Total Consideration. After the Effective Time, there shall be no further registration or transfer of Sutter Butte Stock. d. Any portion of the Total Consideration deposited with the Paying Agent that remains unclaimed by a former holder of Sutter Buttes Stock one hundred and twenty (120) days after the Effective Time shall be repaid or returned to TriCo upon demand, and holders of Sutter Buttes Stock who have not theretofore complied with this Section 2.1 hereof shall thereafter look only to TriCo for payment of their claim. e. Notwithstanding anything to the contrary set forth herein, if any, holder of Sutter Buttes Stock shall be unable to surrender his or her certificates because such certificates have been lost or destroyed, such holder may deliver in lieu thereof an indemnity bond in form and substance and with a surety satisfactory to TriCo or such other undertaking as may be approved by TriCo. EXHIBIT A - 5 - f. The Paying Agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of TriCo Stock held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such shares of TriCo Stock for the account of the persons entitled thereto. g. Distributions of the Total Consideration shall not be made until the amount due dissenting shares, if any, under Section 2.3 hereof has been determined or an appropriate amount has been reserved therefore. In the event that there are Dissenting Shares, it is the intent of the parties hereto to distribute as much of the Total Consideration as possible while withholding such amount that may be reasonably necessary to pay the Dissenting Shares. 2.2 Stock Options. All options and warrants for Sutter Buttes Stock will be either exercised or surrendered for cancellation prior to the Closing Date. Such options and warrants are listed in Sutter Butte's Disclosure Letter attached as Exhibit A. 2.3 Dissenting Shareholders. Any shares of Sutter Buttes Stock held by persons who have complied with 12 C.F.R. Section 552.14 regarding dissenter and appraisal rights ("Dissenters' Rights"), and have not effectively withdrawn or lost such Dissenters' Rights (such shares being referred to as "Dissenting Shares") shall not be converted pursuant to this Agreement, but the holders thereof shall be entitled only to such Dissenters' Rights. Each dissenting shareholder who is entitled to payment for his or her shares of Sutter Buttes Stock pursuant to such Dissenters' Rights shall receive payment from Tri Counties in an amount as determined pursuant to such Dissenters' Rights. ARTICLE III - CONDITIONS 3.1 Mutual Conditions. The obligations of Sutter Buttes, TriCo and Tri Counties under this Agreement are subject to and conditioned upon the satisfaction of, prior to and on the Closing Date, each of the following conditions except as each of Sutter Buttes, TriCo and Tri Counties may waive in writing: a. No Litigation. Except for litigation described in the Disclosure Letter attached hereto as Exhibit C, no suit, action, claim or other proceeding having been threatened or pending before any court, administrative or governmental agency which, in the reasonable opinion of Sutter Buttes or TriCo, presents a significant risk of restraint or prohibition of the transaction contemplated hereby or the attainment of material damages or other relief against Sutter Buttes or its shareholders, or TriCo or its shareholders or Tri Counties in connection therewith. b. Shareholder Approval. Approval of the Merger by the holders of two-thirds of the outstanding shares of Sutter Buttes Common Stock and Sutter Buttes Preferred Stock; c. Approvals. Receipt of all authorizations, approvals, and/or consents as well as the expiration of applicable waiting periods, of any third parties, including federal or state governmental and/or regulatory bodies and officials, necessary for the consummation of this agreement and for the continuation in all material respects of the business of Tri Counties and Sutter Buttes by the Surviving Bank without interruption after the Effective Time, in substantially the manner in which such business is now conducted, and no such authorizations or approvals shall contain any conditions or restrictions that TriCo reasonably believes will materially restrict or limit the business or activities of the Surviving Bank or have a material adverse effect on business, operations or financial condition taken as a whole. EXHIBIT A - 6 - d. Effective Registration Statement. A Registration Statement registering the shares of TriCo Stock to be issued as Consideration shall have been declared effective and shall not be subject to a stop order of the Securities and Exchange Commission (the "SEC") and all applicable state blue sky laws shall have been complied with. 3.2 Conditions in Favor of Sutter Buttes. All obligations of Sutter Buttes under this Agreement are subject to and conditioned upon the satisfaction of, prior to and on the Closing Date, each of the following conditions except as Sutter Buttes may waive in writing: a. Representations, Warranties and Agreements. All of the representations and warranties of TriCo and Tri Counties contained in this Agreement or in any written statement, including without limitation, financial statements, exhibits, certificates, schedules or other documents delivered pursuant hereto or in connection with the transactions contemplated hereby, being true in all material respects at the date hereof, and at the Closing Date true and correct and that TriCo and Tri Counties have performed the covenants, obligations and agreements undertaken by them herein. b. Officers' Certificate. Receipt by Sutter Buttes of a certificate in form and content satisfactory to Sutter Buttes from the President and the Chief Financial Officer of TriCo, dated the Closing Date, to the effect that the representations and warranties made herein by TriCo and Tri Counties were on the date hereof and are on the Closing Date true and correct and that TriCo and Tri Counties have performed the covenants obligations and agreements undertaken by them herein. c. Authorization of Merger. All actions necessary to authorize the execution, delivery and performance of this Agreement by TriCo and Tri Counties and the consummation of the transactions contemplated hereby having been duly and validly taken by the Boards of Directors of TriCo and Tri Counties, and Tri Counties shall have full power and right to merge with Sutter Buttes pursuant to this Agreement and the Merger Agreement. d. Secretary's Certificate. Receipt by Sutter Buttes of, in form and content satisfactory to it, certificate of the Secretary or an Assistant Secretary of TriCo to the effect that all necessary approvals of the Merger by the Boards of Directors of TriCo and Tri Counties and by TriCo as the sole shareholder of Tri Counties were obtained at meetings duly called for such purposes and as to the incumbency of all corporate officers of Tri Counties at all relevant times. e. Legal Opinion. Receipt by Sutter Buttes of an opinion of legal counsel for TriCo as of the Closing Date to the effect that: i. TriCo and Tri Counties are duly organized, validly existing and in good standing under the laws of California and TriCo is a bank holding company registered under the BHC Act. TriCo and Tri Counties have the requisite corporate power and authority, and possess all governmental, regulatory and other permits, licenses and other authorizations, necessary to carry out their businesses as now being conducted, to enter into this Agreement and to perform their obligations thereunder; ii. all requisite actions of the Board of Directors of TriCo and the Board of Directors and shareholders of Tri Counties to duly authorize and approve this Agreement and the Merger have been taken and this Agreement has duly been executed and delivered by TriCo and Tri Counties; EXHIBIT A - 7 - iii. all regulatory and other third-party approvals required to be obtained by TriCo and Tri Counties for the consummation of the transactions contemplated hereby have been obtained; iv. assuming the due execution and delivery of this Agreement by Sutter Buttes, this Agreement constitutes a legal, valid and binding obligation of TriCo and Tri Counties enforceable against them in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights in general or by general principles of equity; and v. consummation of the transactions contemplated hereby will not in any material respect conflict with, violate or result in a material breach of or default in any of the terms, conditions or provisions of the articles of incorporation or bylaws of TriCo or Tri Counties, or, to the best of counsel's knowledge based on an opinion of Rothgerber, Appel, Powers, & Johnson LLP, any applicable law, rule, regulation or order of any court or governmental agency, or any material agreement, not, lease, mortgage, contract, instrument or commitment of any kind, oral or written, formal or informal, to which TriCo or Tri Counties is a party or by which either of them or their respective properties may be bound. vi. at the effective time, TriCo stock issued pursuant to the Merger will be duly authorized, validly issued fully paid and nonassessable. f. Material Adverse Change. Since the date of this Agreement, there have been no material adverse changes, occurrences or developments in the business of TriCo and Tri Counties that have, or would be expected to have, a material adverse effect on the business, operations or financial condition of TriCo and Tri Counties; and Sutter Buttes shall not have discovered any fact or circumstance not disclosed by TriCo or Tri Counties prior to the date of this Agreement that has resulted in, or could reasonably be expected to result in, a material adverse effect on the business, operations or financial condition of TriCo and Tri Counties. A "material adverse change" shall not include changes caused by general economic conditions or changes in prevailing interest rates. g. Proper Actions and Documentation. All actions to be taken by TriCo and Tri Counties in connection with the transactions contemplated by this Agreement having been taken, all documents incidental thereto being in a form and substance reasonably satisfactory to Sutter Buttes and its legal counsel, and Sutter Buttes having received copies of all documents that it may have reasonably requested in connection with such transactions. h. Federal Tax Opinion. An opinion of Rothgerber, Appel & Johnson LLP shall have been received by Sutter Buttes to the effect that for federal income tax purposes: i. the Merger qualifies as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); ii. no gain or loss need be recognized by Sutter Buttes shareholders to the extent TriCo Stock is received in exchange for their Sutter Buttes Stock; iii. the holding period and basis of the TriCo Stock received in exchange for Sutter Buttes Stock will be the same as the holding period and basis of the Sutter Buttes Stock exchanged therefor; and EXHIBIT A - 8 - iv. cash received in exchange of Sutter Buttes Stock will be treated as a distribution in full payment for such Sutter Buttes Stock exchanged and will qualify for capital gain or loss treatment assuming the Sutter Buttes Stock exchanged was a capital asset in the hands of the Sutter Buttes shareholder at the Closing Date. 3.3 Conditions in Favor of TriCo and Tri Counties. All obligations of TriCo and Tri Counties under this Agreement are subject to and shall be conditioned upon the satisfaction of, prior to and on the Closing Date, each of the following conditions except as TriCo and Tri Counties may waive such conditions in writing: a. Material Adverse Change. Since the date of this Agreement, there having been no material adverse changes, occurrences or developments in the business of Sutter Buttes that have, or would be expected to have, a material adverse effect on the business, operations or financial condition of Sutter Buttes; and TriCo and Tri Counties shall not have discovered any fact or circumstance not disclosed by Sutter Buttes prior to the date of this Agreement that has resulted in, or could reasonably be expected to result in, a material adverse effect on the business, operations or financial condition of Sutter Buttes. A "material adverse change" shall not include changes caused by general economic conditions or prevailing interest rates or an actual or impending FDIC, SAIF assessment. b. Representations, Warranties and Agreements. All of the representations and warranties of Sutter Buttes contained in this Agreement, in any attachment or exhibit hereto, or in any written statement, including, without limitation, financial statements, disclosure letters, deeds, exhibits, certificates, schedules or other documents delivered pursuant hereto or in connection with the transactions contemplated hereby, being true in all material respects at the date hereof, and at the Closing Date as if then made and Sutter Buttes having performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date. c. Officer's Certificate. Receipt by TriCo and Tri Counties of a certificate in form and content satisfactory to TriCo and Tri Counties, from the President and Chief Financial Officer of Sutter Buttes, dated the Closing Date, to the effect that the representations and warranties made herein by Sutter Buttes and, except as otherwise indicated in the certificate, in any other written statement delivered in connection with the transaction contemplated hereby, were on the date hereof, and are on the Closing Date, true and correct in all material respects and that Sutter Buttes has performed the covenants, obligations and agreements undertaken by it herein. d. Legal Opinion. Receipt by TriCo and Tri Counties of an opinion of Sutter Buttes' legal counsel as of the Closing Date, to the effect that: i. Sutter Buttes is a savings bank validly existing and operating as a SAIF- insured financial institution under the laws of the United States and has full corporate power and authority, and possesses all governmental, regulatory and other permits, licenses and authorizations, necessary to carry out it business as now conducted, to own and operate the properties and assets it owns or operates, to enter into the Agreement and to perform its obligations thereunder; ii. all requisite actions of the board of Directors and shareholders of Sutter Buttes to duly authorize and approve this agreement and the Merger have been taken and this Agreement has been duly executed and delivered by Sutter Buttes; EXHIBIT A - 9 - iii. assuming the due execution and delivery of this Agreement by Tri Counties, this Agreement constitutes a legal, valid and binding obligation of Sutter Buttes enforceable against Sutter Buttes in accordance with its terms, except as endorsement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights in general or by general principles of equity; iv. consummation of the transactions contemplated hereby will not in any material respect conflict with, violate, or result in a material breach of or default in any of the terms, conditions or provisions of the charter or bylaws of Sutter Buttes, or to the best of counsel's knowledge after reasonable investigation, any applicable law, rule, regulation, order of any court or governmental agency, or any material agreement, note, lease, mortgage, contract, instrument or commitment of any kind, oral or written, formal or informal, to which Sutter Buttes is a party or by which it or its respective properties may be bound; v. except as disclosed to Tri Counties in writing, to the best of counsel's knowledge without inquiry, there are no claims, actions, suits, proceedings or investigations pending, or threatened by or against, or otherwise affecting Sutter Buttes or its properties or business, or the transactions contemplated by this Agreement or its directors, officers or employees in actions against them in such capacity at law or in equity, or before or by any federal, municipal or other governmental department, commission, board, agency, instrumentality or authority; vi. the authorized capital stock of Sutter Buttes consists solely of 5,000,000 of $.01 par value common stock with 625,438 shares issued and outstanding, and 5,000,000 shares of preferred Stock with a liquidation preference of $5.00. As of the date of this Agreement, there are 232,200 shares of Preferred Stock issued and outstanding. vii. to the best of counsel's knowledge, excepting as shown on Exhibit A, there are no outstanding options, warrants, calls, rights, commitments, securities or agreements of any character to which Sutter Buttes is a party or by which it is bound, obligating Sutter Buttes to issue, deliver or sell, or cause to be issued, delivered or sold additional shares of capital stock of Sutter Buttes or obligating Sutter Buttes to grant, extend or enter into any such option, warrant, call, right, commitment, or agreement. e. Proper Actions and Documentation. All actions to be taken by Sutter Buttes in connection with the transactions contemplated by this Agreement have been taken, all documents incidental thereto being in a form and substance reasonably satisfactory to TriCo and its legal counsel, and TriCo has received copies of all documents that it may have reasonably requested in connection with such transactions. f. Employee Terminations. As directed by Tri Counties, Sutter Buttes shall have terminated all employees which Tri Counties Bank does not wish to retain on a date prior to the Closing Date. The decision to retain or eliminate certain functions undertaken by Sutter Buttes and the decision to retain or eliminate employees performing these functions and decision to terminate any other employee will be made prior to the Closing Date. Should Tri Counties choose to offer termination benefits to encourage any employee to remain until closing or, in the case of termination payments pursuant to employee contracts, the resulting expense shall not be a charge against or a deduction from Sutter Buttes earnings. Tri Counties will be solely responsible for the payment of the termination expense it chooses to incur and will pay the termination benefits set forth in the existing employment contracts. EXHIBIT A - 10 - g. Environmental Report. Tri Counties shall have the right, in its discretion and at it sole expense, to arrange with an environmental consultant to prepare an environmental report based on the consultant's inspection of the surface of the properties owned or leased by Sutter Buttes and based on investigation of records relating to such properties in the files of Sutter Buttes or any government agency. Such inspections, investigations and reports shall be concluded no later than thirty (30) days after the date of this Agreement. If such reports indicate an absence of Hazardous Materials (as defined in Section 4.1.n. hereof) on such properties, or other properties where such Hazardous Materials endanger the Sutter Buttes properties, this Section 3.3h shall be deemed satisfied. If, however, such reports indicate the presence of Hazardous Materials on such properties, Tri Counties shall have the right to investigate those properties further, and Tri Counties shall have the right to negotiate with Sutter Buttes concerning the appropriate allocation of costs for any remediation indicated by such reports, prior to the Closing Date. ARTICLE IV - REPRESENTATION AND WARRANTIES 4.1 Representations and Warranties of Sutter Buttes. Except as set forth in its Disclosure Letter or the Sutter Buttes Statements, as hereinafter defined, attached hereto as Exhibit A and incorporated herein by reference, Sutter Buttes hereby represents and warrants to Tri Counties as of the date hereof and up to and including the Closing Date as follows: a. Organization of Sutter Buttes. i. Sutter Buttes is a savings bank duly organized, validly existing and operating as a SAIF-insured financial institution under the laws of the United States, and it has full corporate power and authority, and possesses all governmental, regulatory and other permits, licenses and authorizations, necessary to carry on its business as now conducted and to own and operate the properties and assets it owns or operates, to enter into this Agreement and to perform its obligations hereunder. ii. Sutter Buttes' authorized capital stock consists of 5,000,000 of $.01 par value common stock with 625,428 shares outstanding, and 5,000,000 shares of Preferred Stock with a liquidation preference of $5.00. As of the date of this Agreement, there are 232,200 shares of Preferred Stock issued and outstanding. iii. Except for the Preferred Stock and the unexercised options and warrants listed in Exhibit A, Sutter Buttes has no outstanding securities convertible into shares of capital stock or existing options, warrants, calls commitments or other rights of any character granted or entered into by Sutter Buttes relating to its authorized or issued stock and no such rights will be granted or entered into. iv. There are no outstanding or unsatisfied preemptive rights or rights of first refusal with respect to Sutter Buttes' capital stock. v. Except pursuant to outstanding options and warrants, no shares of Sutter Buttes' capital stock have been or will be issued between the date hereof and the Effective Date. b. Subsidiaries and Assets. Sutter Buttes does not have any direct or indirect subsidiaries and does not have any interest in any partnership, firm, association, corporation, or joint venture other than investment securities purchased and loans made in the regular and usual course of its business. EXHIBIT A - 11 - c. Financial Statements. Attached hereto are copies of the following financial statements for Sutter Buttes ("Sutter Buttes Statements"), all of which are accurate and complete in all material respects, are in accordance with the books and records of Sutter Buttes, have been prepared in accordance with generally accepted accounting principles or regulatory requirements consistently applied throughout for the periods indicated and present fairly the financial position of Sutter Buttes and the consolidated results of Sutter Buttes' operations for the periods ended on the dates indicated: Statements of Condition, as of December 31, 1994 and 1995, and Statements of Income, Statements of Changes in Stockholders' Equity, and Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995 certified by Deloitte & Touche LLP and an unaudited Statement of Condition as of March 31, 1996, and unaudited Statement of Income for the 3-month period ended March 31, 1996. d. Absence of Undisclosed Liabilities. Except as and to the extent reflected or reserved against in the Sutter Buttes' Statements, Sutter Buttes has no material liabilities or obligations, except those incurred in the ordinary course of their business, whether accrued, absolute, contingent or otherwise, including, governmental charges or lawsuits, or any tax liabilities due or to become due whether (i) incurred in respect of or measured by the consolidated income of Sutter Buttes for any period up to the close of business on the respective dates of the Sutter Buttes' Statements, or (ii) arising out of transactions entered into, or any statement of facts existing, prior thereof. e. Absence of Certain Changes or Events. Since the date of the Sutter Buttes' Statements, there has not been: i. any material adverse change in the condition (financial or otherwise), assets, liabilities, or business of Sutter Buttes as determined by a pre-closing review or audit of Sutter Buttes conducted by Tri Counties and its agent; ii. any material adverse change in the character of the assets or liabilities of Sutter Buttes; iii. any capital improvements, except for ordinary maintenance and repairs, by Sutter Buttes or any purchase of property by Sutter Buttes at a cost in excess of $10,000 other than supplies in the ordinary course of business; iv. any physical damage, destruction or loss not covered by insurance exceeding $10,000 in value or affecting in a material and adverse way the property, assets, business or prospects of Sutter Buttes; v. any material change in the accounting methods or practices of Sutter Buttes unless required by regulation or generally accepted accounting principles: vi. any material change in the capital structure of Sutter Buttes; EXHIBIT A - 12 - vii. any loss incurred or determined to probable for Sutter Buttes as a result of environmental problems which have, or would be expected to have, a material adverse effect on the financial position of Sutter Buttes; or viii. any material increase in the compensation payable, or to become payable, by Sutter Buttes to any officers or employees, or any bonus, percentage compensation, service award or other like benefit, granted, made or accrued to, or to the credit of, any officers or employees, or any pension, retirement, deferred compensation or similar payment or arrangement made or agreed to by Sutter Buttes other than in accordance with pre-existing plans. f. Tax Matters. i. Sutter Buttes has filed all federal, state, municipal and local income, excise, property, special district, sales, transfer and other tax returns and reports of information statements which are required to be filed up to and including the date hereof and has paid all taxes which have become due pursuant to such returns or pursuant to any assessment which has become due pursuant to such returns or pursuant to any assessment which has become payable. Sutter Buttes will hereafter file such returns as are required to be filed by it prior to the Effective Date and will pay all taxes which become due pursuant to such returns or pursuant to any assessments. ii. The returns filed and to be filed by Sutter Buttes have been and will be accurately and properly prepared. iii. To the extent that any tax liability or assessment has accrued as of the date of the Sutter Buttes' Statements, but has not yet become payable or has been proposed for assessment or determination as of the date of the Sutter Buttes' Statements, but remains unpaid, the same has been reflected as a liability on the date of the Sutter Buttes Statements subject to normal year-end adjustments. Since the date of the Sutter Buttes' Statements, Sutter Buttes has not incurred any liability with respect to any such taxes except for normal taxes incurred in the ordinary and regular course of its business, all of which will be fully accrued as a liability on the books of Sutter Buttes at the Effective Date. iv. Sutter Buttes has not executed or filed with the Internal Revenue Service or any other taxing authority any agreement extending the period for assessment or collection of any income taxes. As of the date of this Agreement, there are no examinations, reviews, audits or investigations of any tax return or report of Sutter Buttes which are presently pending or, to the best of Sutter Buttes' knowledge threatened, and Sutter Buttes is not party to any pending action or proceeding by any governmental authority for assessment or collection of income taxes. g. Title to Properties; Absence of Liens and Encumbrances, Leases Enforceable. i. Sutter Buttes has good and marketable title to their assets, real and personal (including those reflected in the Sutter Buttes' Statements, except as thereafter sold or otherwise disposed of in the ordinary course of business and for adequate consideration), free and clear of all mortgages, pledges, liens, charges and encumbrances, except (A) investment securities which are pledged to secure the deposit of public monies or monies under the control of any court, (B) the lien of taxes not yet due and payable or being contested in good faith by appropriate proceedings, and (C) such imperfections of title and encumbrances, if any, and such liens, if any, incidental to the conduct of their businesses or the ownership of their assets as are not material in amount and do not affect the value of, or interfere with the present use of, their assets or otherwise materially impair their operations. EXHIBIT A - 13 - ii. The structures and equipment owned or used by Sutter Buttes comply with all applicable laws, regulations and ordinances and are in good operating condition, subject to ordinary wear and tear. iii. The real property, if any, leased by Sutter Buttes is held under valid and enforceable leases. Sutter Buttes is not in default under any such leases. All rentals due and payable have been paid. h. Litigation. There are no material claims, actions, suits, proceedings or investigations pending, or, to the best of Sutter Buttes' knowledge, threatened, by or against, or otherwise materially affecting Sutter Buttes, or its assets, business or properties, or the transactions contemplated by this Agreement, or its directors, officers or employees in reference to actions taken by them in such capacity at law or in equity, or before or by any federal, state, municipal or other government department, commission, board, agency, instrumentality or authority, nor, to Sutter Buttes' knowledge, is there any valid basis for any such action, proceeding or investigation, other than (i) claims by Sutter Buttes in the ordinary course of its business for the recovery of loans or protection of its interest as a secured or unsecured creditor, and (ii) claims fully covered by insurance. i. Authority Relative to This Agreement. i. Sutter Buttes has the requisite corporate power and authority to enter into this Agreement and perform its obligations hereunder. ii. The execution, delivery and performance of this Agreement by Sutter Buttes has been duly and effectively authorized and approved by the Board of Directors of Sutter Buttes, subject to the required vote of its shareholders, and subject to obtaining the regulatory approvals and other consents contemplated by this Agreement. iii. This Agreement has been duly executed and delivered by Sutter Buttes and constitutes a valid and binding obligation of Sutter Buttes enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); iv. The consummation of the transactions contemplated by this Agreement will not in any material respect conflict with, violate or result in a material breach of or material default of in (a) any term, condition or provision of the charter of bylaws of Sutter Buttes; (b) any applicable law, rule, regulation or order of any court of governmental agency; or (C) any material agreement, lease, mortgage, note, contract or commitment of any kind, oral or written, formal or informal, to which Sutter Buttes is a party or by which it or its properties may be bound. j. Information Furnished to TriCo and Tri Counties. The documents furnished by Sutter Buttes to TriCo and Tri Counties (the "Sutter Buttes Documents"), including but not limited to Sutter Buttes' Disclosure Letter and the Sutter Buttes Statements, are true and complete copies of such documents and do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. To the best of its EXHIBIT A - 14 - knowledge, there is no fact which Sutter Buttes has not disclosed in the Sutter Buttes Documents, which materially and adversely affects the properties, business, prospects, profits or condition (financial or otherwise) of Sutter Buttes or the ability of Sutter Buttes to perform this Agreement, except that Sutter Buttes makes no representation or warranty as to the effect of general economic conditions, the condition of the financial markets, future legislation or future regulatory action. The information relating to Sutter Buttes included in the Registration Statement that is furnished by Sutter Buttes to Tri Counties will be accurate and complete in all material respects, will not omit to state any material fact required to be stated therein or necessary to prevent such information from being misleading, and will comply in all material respects with the requirements of federal law at the date of first mailing of the Prospectus/Proxy Statement to the shareholders of Sutter Buttes. k. Compliance with Laws. i. Sutter Buttes has all permits licenses, authorizations, orders and approvals of, and has made all filings, applications and registrations with, federal, state, local or foreign governmental or regulatory bodies that are required in order to permit it to own or lease its properties and assets and to carry on its business as presently conducted and that are material to its business; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the best knowledge of Sutter Buttes, no suspension or cancellation of any of them is threatened; and all such filings, applications and registrations are current. ii. The conduct by Sutter Buttes of its business and the condition and use of its properties does not violate or infringe, in any respect material to any such, any applicable domestic (federal, state or local) or foreign law, statute, ordinance, license or regulation. iii. Sutter Buttes is not in default under any order, license, regulation or demand of any federal, state, municipal or other governmental agency or with respect to any order, writ, injunction or decree of any court. iv. Except for statutory or regulatory restrictions of general application, no federal, state, municipal or other governmental authority has placed any restriction on the business or properties of Sutter Buttes which reasonably could be expected to have a material adverse effect on the business or properties of Sutter Buttes taken as a whole. l. Employee Benefit Plans. i. True, accurate and complete copies of all pension plans, retirement plans, profit-sharing plans, deferred compensation agreements, collective bargaining agreements, insurance plans or any other similar employee benefit plans, agreements or arrangements of Sutter Buttes (the "Plans") have been furnished to TriCo and Tri Counties. ii. Each Plan which is intended to provide tax-deferred benefits under any provision of the Internal Revenue Code of 1996, as amended, (the "Code"), meets all requirements that must be met in order for such tax-deferred benefits to be available. There has been no change in any of the documents delivered to TriCo and Tri Counties under which each Plan is maintained and no change, since each Plan's most recent valuation date, in the operations of the Plan which could be expected to adversely affect or alter the tax status of, or materially increase the cost of maintaining, any such Plan. iii. The reporting and disclosure requirements of the Employee Retirement Income Security Act of 1974 ("ERISA") and the Code, as applicable, and the group EXHIBIT A - 15 - health plan continuation coverage requirements of the Code and ERISA have been fulfilled in all material respects. Sutter Buttes has furnished to TriCo and Tri Counties copies of all filings, if any, with the Internal Revenue Service and the Department of Labor or other applicable authority for each Plan's most recent plan year. iv. Neither Sutter Buttes, any of the Plans, any of the trusts created under any Plan nor any trustee, administrator or other fiduciary of a Plan has, to Sutter Buttes' best knowledge, engaged in a "prohibited transaction," as such term is defined in the applicable provisions of the Code or of ERISA, or otherwise taken or omitted any action which could subject the Plans, Sutter Buttes, any of the trusts created under a Plan or any trustee or administrator thereof, or any party dealing with such Plans or trusts, to a material tax or penalty on prohibited transactions imposed by ERISA or the Code or otherwise, and neither Sutter Buttes, any Plan, any trust created under a Plan nor any other fiduciary of any Plan or its attendant trust has breached its fiduciary duties under ERISA in a manner which could result in a direct or indirect material liability to Sutter Buttes, or the trustee or administrator of any Plan. v. The Pension Benefit Guaranty Corporation has not instituted proceedings to terminate (or appoint a trustee to administer) any Plan, and no event has occurred or condition exists which might constitute grounds under ERISA for the termination of (or the appointment of a trustee to administer) any Plan. vi. The minimum funding requirements under the Code and ERISA have been satisfied with respect to each Plan. m. Insurance. The properties of Sutter Buttes are insured as disclosed in Sutter Buttes' Disclosure Letter. n. Environmental Protection. i. To the best of Sutter Buttes' knowledge, none of the assets of Sutter Buttes (defined for purposes of this subsection as the real property and tangible personal property owned or leased by Sutter Buttes) contain any hazardous materials (defined as any substance whose nature and/or quantity or existence, use, manufacture or effect render it subject to federal, state or local regulation as potentially injurious to public health or welfare, including, without limitation, friable asbestos or PCBs ("Hazardous materials")), other than in such quantities which are incidental and customary for the maintenance and operation of such assets (e.g., cleaning fluids) ("Incidental Quantities"). ii. To the best of Sutter Buttes' knowledge, no notice or other communication has been made or issued by any governmental agency having jurisdiction over Sutter Buttes, or any other person, with respect to any alleged violation of any federal, state or local laws, rules, regulations, ordinances and codes governing Hazardous Materials and which are applicable to the asses of Sutter Buttes. iii. To the best of Sutter Buttes' knowledge all Hazardous Materials which have been remediated from any assets of Sutter Buttes' prior to or during their ownership by Sutter Buttes have been handled in compliance with all applicable laws. iv. To the best of Sutter Buttes' knowledge, no collateral securing any loan made by Sutter Buttes, contains any Hazardous Materials, other than in Incidental Quantities. EXHIBIT A - 16 - o. Employee Relations. Copies of all employment agreements between Sutter Buttes and its employees have been delivered to Tri Counties. To the best of Sutter Buttes' knowledge, Sutter Buttes has complied with all Federal, state and local laws or regulations applicable to it relating to the employment of labor and the provisions of such laws or regulations relating to wages, nondiscriminatory hiring and employment practices and procedures the violation of which would have a materially adverse effect on the financial condition, pertains or prospects of Sutter Buttes. No claim has been made nor any proceeding commenced against Sutter Buttes for any wages, penalties or other liabilities for failure to comply with any such laws or regulations. Sutter Buttes is not subject to any collective bargaining agreement with its employees. p. Material Contract Defaults. Sutter Buttes is not in default in any material respect under the terms of any outstanding contract, agreement, lease or other commitment, which is material to the business, operations, properties, assets, or the condition, financial or otherwise, of Sutter Buttes, or under the charter, articles of incorporation or bylaws thereof, and no event has occurred which, with notice or lapse of time, or both, may be or become an event of default under any such contract, agreement, lease or other commitment or under the charter or bylaws of Sutter Buttes. q. Agreements with Regulatory Authorities. Sutter Buttes is not a party to any written agreement or memorandum of understanding with any federal or state administrative agency or commission or other governmental authority or instrumentality charged with supervision or regulation of savings banks or engaged in the insurance of deposits which restricts materially the conduct of its business or in any manner relates to its capital adequacy, its credit policies or its management. r. Reports. For the last three years, Sutter Buttes has filed all reports, registrations and statements, together with any required amendments thereto and has paid all fees and assessments due and payable therewith, that it was required to file with any federal and state securities, banking, insurance and other governmental or regulatory authorities (collectively, the "Regulatory Authorities"). All such reports and statements required to be filed with any such Regulatory Authority are collectively referred to herein as the "Reports." As of its respective date, each Report complied in all material respects with all the rules and regulations promulgated by the applicable Regulatory Authority and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. s. Loan Documentation. The documentation relating to each loan made by Sutter Buttes, including as to security interests, mortgagees and other liens with respect to the collateral for such loans, is adequate for the enforcement of the loan except for inadequacies that will not in the aggregate have a material adverse effect on the financial conditional of Sutter Buttes taken as a whole. t. Accounting, Tax and Regulatory Matters. Sutter Buttes has no knowledge of any fact or circumstance that would (i) prevent the transaction contemplated hereby from qualifying as a tax-free reorganization under the Code, or (ii) materially impede or delay receipt of any required regulatory approval referred to in Section 3.1.c. u. Brokers and Finders. Neither Sutter Buttes nor any officer, director or employee of Sutter Buttes has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder's fees, and no broker or finder has acted directly or indirectly for Sutter Buttes in connection with this Agreement or the transactions contemplated thereby. EXHIBIT A - 17 - 4.2 Representations and Warranties of TriCo and Tri Counties. TriCo and Tri Counties hereby represent and warrant to Sutter Buttes as of the date hereto and up to and including the Closing Date as follows: a. Organization. TriCo and Tri Counties are duly organized, validly existing and operating under the laws of California, and TriCo is a bank holding company registered under the BHC Act. TriCo and Tri Counties have the requisite corporate power and authority, and possess all material governmental, regulatory and other permits, licenses and other authorization, necessary to carry on their respective business as now conducted. b. Authority Relative to Agreement. i. The execution, delivery and performance of this Agreement by TriCo and Tri Counties has been duly and effectively authorized and approved by the respective Boards of Directors of TriCo and Tri Counties subject to obtaining the regulatory approvals and other consents contemplated by this Agreement. ii. The approval of TriCo's shareholders is not required for consummation of the transactions contemplated by this Agreement. iii. This Agreement has been duly executed and delivered by Tri Counties and constitutes a valid and binding obligation of TriCo and Tri Counties enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting creditors' rights generally and principles of equity (regardless of whether such enforceability is considered in a proceeds in equity or at law). iv. The consummation of the transactions contemplated by this Agreement will not in any material respect conflict with, violate or result in a material breach of or material default in (A) any term, condition or provision of the articles of incorporation, charter or bylaws of TriCo and Tri Counties; (B) any applicable law, rule, regulation or order of any court or governmental agency; or (C) any material agreement, lease, mortgage, note, contract or commitment of any kind, oral or written, formal or informal, to which either TriCo or Tri Counties is a party or by which they or their properties may be bound. c. Legal Proceedings. There are no legal proceedings pending against, affecting, or to the knowledge of TriCo or Tri Counties, threatened against TriCo or Tri Counties which would prevent or enjoin TriCo or Tri Counties from carrying out their obligations under this Agreement; and TriCo and Tri Counties are not in default or in violation in any material way with respect to (i) any order, writ, injunction or decree of any court, or (ii) any instrument, statute, rule, order or regulation of any government, governmental department, commission, board, bureau, agency or instrumentality, and the consummation of the transactions contemplated by this Agreement will not constitute such a default. d. Applications to Regulators. All of the representations contained in the applications filed by TriCo and Tri Counties with regulators with or on behalf of Sutter Buttes, will be at the time the same were made accurate in all material respects, except TriCo and Tri Counties makes no representation as to matter contained therein that are based on information provided by Sutter Buttes to TriCo and Tri Counties. EXHIBIT A - 18 - e. Information Furnished to Sutter Buttes. The documents furnished by TriCo and Tri Counties to Sutter Buttes (the "TriCo Documents") are true and complete copies of such documents and do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. To the best of its knowledge, there is no fact which TriCo or Tri Counties has not disclosed in the TriCo documents, which materially and adversely affects the properties, business, prospects, profits or condition (financial or otherwise) of TriCo or Tri Counties or the ability of TriCo or Tri Counties to perform this Agreement, except that TriCo and Tri Counties make no representation or warranty as to the effect of general economic conditions, the condition of the financial markets, future legislation or future regulatory action. f. Absence of Undisclosed Liabilities. Except as and to the extent reflected or reserved against in the financial statements (the "TriCo Statements") furnished to Sutter Buttes or contained in filings made or to be made by TriCo under the reporting provisions of the Securities Exchange Act of 1934, as amended, which comply in all material respects with applicable requirements thereunder (the "TriCo Reports") or disclosed by TriCo or Tri Counties to Sutter Buttes in writing, TriCo and Tri Counties have no material liabilities or obligations whether accrued, absolute, contingent or otherwise, including governmental charges or lawsuits, or any tax liabilities due or to become due and whether (i) incurred in respect of or measured by the income of TriCo and Tri Counties for any period up to the close of business on the respective dates of the TriCo Statements, or (ii) arising out of transactions entered into, or any state of facts existing, prior thereto. to the best knowledge of TriCo and Tri Counties, TriCo and Tri Counties do not have any liabilities or obligations, either accrued or contingent, which are material to TriCo and Tri Counties and which have not been either (I) reflected or disclosed in the TriCo Statements, or (ii) incurred subsequent to the date of the TriCo Statements in the ordinary course of business. g. Registration Statement. Except for information provided by Sutter Buttes, the information included in the Registration Statement or the Prospectus/Proxy Statement or incorporated therein by reference, as of the date the Prospectus/Proxy Statement is first mailed to the Sutter Buttes stockholders, and at all times subsequent thereto, up to and including the date of the Sutter Buttes Stockholders Meeting and the Closing Date will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances when made, not misleading. h. TriCo Capital Stock. As of May 6, 1996, the authorized capital stock of TriCo is 20,000,000 shares of common stock and 1,000,000 shares of Preferred Stock of which 4,460,543 shares of common stock and -0- shares of Preferred Stock are currently issued and outstanding. The TriCo Stock issued in the Merger will be, when issued, duly authorized, validly issued, fully paid and nonassessable. EXHIBIT A - 19 - ARTICLE V - COVENANTS 5.1 Covenants of Sutter Buttes. Sutter Buttes covenants with TriCo and Tri Counties as an inducement to Tri Counties to enter into this Agreement that: a. Access to Information Concerning Properties and Records. Sutter Buttes will give to TriCo and Tri Counties and to their counsel, accountants and other representatives ("advisers"), upon reasonable notice, during normal business hours throughout the period prior to the Closing Date, full access to the books, records, customer and loan files, contracts, and commitments of Sutter Buttes, except for documents as to which there exists an attorney-client privilege or except as otherwise restricted by law. For the period to the Effective Time, Sutter Buttes shall deliver to Tri Counties such statements, schedules and reports concerning the business, operations and financial condition of Sutter Buttes as are regularly provided to its Board of Directors at such times as they are regularly supplied to its Board of Directors. Sutter Buttes shall give notice to TriCo and Tri Counties of all board of directors and committee meetings of Sutter Buttes. Tri Counties shall be entitled, at its expense, to have a representative attend any such meeting to observe and participate in discussion but not to vote on any matter. b. Conduct of Business. Until the Effective Time or the earlier termination of this Agreement, and except as contemplated by this Agreement or disclosed in the Disclosure Letter or as consented to or otherwise approved by TriCo and Tri Counties in writing: i. the business of Sutter Buttes shall be conducted only in the ordinary course which, without limitation, shall include using their best efforts to maintain in force the insurance policies now in effect, or insurance policies providing substantially the same coverage to the extent such coverage remains available to Sutter Buttes with acceptable limitations and at a reasonable cost; ii. excepting for bylaw changes providing for shareholder meetings, no change shall be made in the charter or bylaws of Sutter Buttes; iii. no change shall be made in the number of shares of capital stock of Sutter Buttes issued and outstanding, nor shall any option, warrant, call, convertible security, commitment or other right be granted or made by Sutter Buttes relating to its authorized or issued capital stock; iv. no purchase order, contract or commitment (other than deposits, loans loan commitments and investments or the sale of other real estate owned in the ordinary course of business of Sutter Buttes) shall be entered into by or on behalf of Sutter Buttes extending for more than one year or involving payment by Sutter Buttes of more the $10,000 in any one contract or related series of contracts or otherwise materially affecting its business; v. except as agreed by the parties or provided herein, no employment agreement or other agreement shall be entered into with any employee of Sutter Buttes and no salary or benefits of any employee of Sutter Buttes shall be materially increased; vi. Sutter Buttes shall use it best efforts, consistent with conducting its business in accordance with its own business judgment, to retain its depositors and customers and to preserve its business in its present form and to preserve the good will of the depositors, customers and others having business relations with Sutter Buttes; EXHIBIT A - 20 - vii. Sutter Buttes shall duly comply in all material respects with all applicable laws, the failure to comply with which would have a material adverse effect upon its business or financial condition; viii. no dividend or distribution with respect to Sutter Buttes stock shall be paid without the prior approval of TriCo, and it is understood and agreed that any such dividend or distribution will constitute a reduction in Sutter Buttes' equity and therefore a reduction in Total Consideration as provided in Section 1.1 of this Agreement. ix. Except in the case of the wholesale mortgage activities where there is a commitment in hand to acquire a loan which is being considered for funding, no loans in excess of $50,000 will be made and no security will be purchased or sold by Sutter Buttes without providing TriCo and Tri Counties with a reasonable opportunity to review such transaction and indicate approval or disapproval. If representations of TriCo and Tri Counties register disapproval and the loan is made or the security is purchased, the shareholder of Sutter Buttes shall, at the option of TriCo and Tri Counties, purchase the disapproved loans or securities from Sutter Buttes at par value or market value, whichever is higher, prior to the Closing Date; c. Confidentiality. Until the Merger is consummated, Sutter Buttes shall not, without the prior written consent of TriCo or Tri Counties, disclose to third parties, and shall use care to assure that its directors, officers, employees, advisers do not disclose to third parties, any confidential information concerning TriCo and Tri Counties, which shall include all information received from TriCo and Tri Counties in the course of discussing, investigating, negotiating and performing the transactions contemplated by this Agreement, whether such information has been obtained before or after the date of execution of this Agreement. The term "confidential information" does not include information which (i) was known to Sutter Buttes, its directors, officers, employees, or advisers prior to the time of its disclosure by TriCo or Tri Counties; (ii) is or becomes publicly known or available; or (iii) is independently developed or discovered by Sutter Buttes or its directors, officers, employees, or advisers outside of the discussions, investigations, negotiations and performance contemplated by this Agreement. "Third parties" does not include the directors, officers, employees, or advisors of TriCo and Tri Counties. In the event that the Merger is not consummated, or this Agreement is otherwise terminated, Sutter Buttes shall promptly return to TriCo and Tri Counties all such confidential information (and all copies thereof), without retaining any copies, or to the extent agreed by TriCo or Tri Counties, shall destroy information and documents not to be returned, including all electronic images, and confirm such destruction in writing to TriCo and Tri Counties; and thereafter all such information shall continue not to be disclosed by Sutter Buttes, and its directors, officers, employees, agents and advisers to third parties without the written consent of TriCo and Tri Counties. d. No Merger or Solicitation. Subject to the continuing fiduciary duties of the Board of Directors of Sutter Buttes to the shareholders of Sutter Buttes, prior to the Effective Time, Sutter Buttes shall not effect or agree to effect any transfer of the business, agree to acquire or acquire any of its own capital stock or the capital stock or assets (except in the ordinary course of business) of any other entity, or commence any proceedings for winding up and dissolution affecting either of them. Subject to the continuing fiduciary duties of the Board of Directors of Sutter Buttes to the shareholders of Sutter Buttes, prior to the Effective Date, neither Sutter Buttes, nor any officer, director or affiliate of Sutter Buttes , nor any investment banker, attorney, accountant or other agent, advisor or EXHIBIT A - 21 - representative retained by Sutter Buttes shall (A) solicit or encourage, directly or indirectly, make any inquiries, discussions or proposals for entering into any agreement providing for a transfer of the business or (B) disclose, directly or indirectly, any nonpublic information to any corporation, partnership, or person or afford any such party access to any books or records of Sutter Buttes or furnish any information concerning the business, financial condition, operations, or properties of Sutter Buttes. Sutter Buttes shall notify Tri Counties of the details of any indication of interest of any person, partnership, or corporation to acquire by any means a controlling interest in Sutter Buttes within two (2) business days of any such indication of interest. In the event the Board of Directors of Sutter Buttes receives a bona fide offer for a purchase or transfer of an interest in Sutter Buttes and reasonably determines, on the advice of counsel, that as a result of such offer, any duty to act or to refrain from doing any act pursuant to this agreement is inconsistent with the continuing fiduciary duties of the Board of Directors to the shareholders of Sutter Buttes, such failure to act or refrain from doing any act shall not constitute any breach of this Agreement and neither Sutter Buttes nor its officers, directors or agents shall have any further liability with regard thereto for any failure to act or omission of any act pursuant to this subsection. e. Information for Applications and Statements. Sutter Buttes shall furnish to TriCo and Tri Counties in a timely manner all information concerning Sutter Buttes required for inclusion in all regulatory applications to be filed, in any other notices or statements to be made by TriCo and Tri Counties to any governmental or regulatory body required to consummate the Merger. f. Shareholder Meeting. Sutter Buttes shall take all reasonable action necessary in accordance with applicable law and its charter and bylaws to convene a meeting of shareholders to vote upon this Agreement and the Merger. In connection therewith, Sutter Buttes shall mail to all shareholders of record entitled to vote at such meeting the Prospectus/Proxy Statement which shall indicate that the Board of Directors of Sutter Buttes has, by resolution, approved the Merger on the terms and subject to the conditions set forth in this Agreement. Subject to applicable laws, Sutter Buttes shall use reasonable efforts to solicit from its shareholders proxies in favor of such adoption and approval and shall take all other reasonable action necessary or helpful to secure a vote of its shareholders in favor of the Merger. g. Affiliate's Letter. Sutter Buttes shall use its best efforts to obtain and deliver to TriCo prior to the filing of the Registration Statement a signed letter in the form attached as Exhibit B from each Sutter Buttes Shareholder who may be deemed an "affiliate" of Sutter Buttes with the meaning of such term as used in Rule 145 under the Securities Act of 1933. h. Due Diligence. Sutter Buttes shall use its best efforts to deliver by the Closing Date all opinions, certificates and other documents required to be delivered by it and to cause all conditions to Closing being satisfied in a timely manner. 5.2 Covenants of TriCo and Tri Counties. TriCo and Tri Counties as an inducement to Sutter Buttes to enter into this agreement covenant that: a. Approvals of Regulatory Authorities. As soon as practicable, TriCo and Tri Counties shall file applications with the proper regulatory authorities for approval of the Merger and the acquisition of Sutter Buttes shall thereafter take all action with due diligence to obtain the approval of such regulatory authorities. To the extent permitted by law, all filings, requests for approval EXHIBIT A - 22 - or other submissions for any regulatory approval shall be made available for review by Sutter Buttes prior to filing. b. Confidentiality. Until the Merger is consummated, TriCo and Tri Counties shall not, without the prior written consent of Sutter Buttes, disclose to third parties, and shall use care to assure that their directors, officers, employees, and advisers do not disclose to third parties, any confidential information concerning Sutter Buttes, which shall include all information received from Sutter Buttes in the course of discussing, investigating, negotiating and performing the transactions contemplated b this Agreement, whether such information has bee obtained before or after the date of execution of this Agreement. The term "confidential information" does not include information which (i) is known to either TriCo or Tri Counties, or their directors, officers, employees, or advisers, prior to its disclosure by Sutter Buttes, (ii) is or become publicly known or available; or (iii) is independently developed or discovered by TriCo or Tri Counties, or their directors, officers, employees, or advisers outside of the discussions, investigations, negotiations and performance contemplated by this Agreement. "Third parties" do not include directors, officers, employees, or advisors of Sutter Buttes. In the event that the Merger is not consummated, or this Agreement is otherwise terminated, TriCo and Tri Counties shall promptly return to Sutter Buttes all such confidential information (and all copies thereof), without retaining any copies, or to the extent agreed by Sutter Buttes, shall destroy information and documents not to be returned, including all electronic images, and confirm such destruction in writing to Sutter Buttes; and thereafter all such information shall continue not to be disclosed by TriCo and Tri Counties and their directors, officers, employees, or advisors to third parties without Sutter Buttes' written consent. c. Registration of TriCo Stock. TriCo shall promptly prepare and file the Registration Statement with the SEC and shall make all applicable state securities filings, shall provide Sutter Buttes and its legal counsel with an opportunity to review and comment on the Registration Statement and state securities filings, and shall take all reasonable steps necessary to cause the Registration Statement and state filings to be declared effective. d. Due Diligence. TriCo and Tri Counties shall use their best efforts to deliver by the Closing Date all opinions, certificates and other documents required to be delivered by it and to cause all conditions to Closing be satisfied in a timely manner. e. Status Reports. TriCo and Tri Counties shall advise Sutter Buttes from time to time regarding TriCo's and Tri Counties' applications for regulatory approval of the Merger and provide Sutter Buttes copies of all applications, comments, correspondence and approvals to or from regulators in connection with the applications and give Sutter Buttes copies of all regulatory approvals referred to in this Agreement. ARTICLE VI - MISCELLANEOUS 6.1 Termination. This Agreement may be terminated and the Merger abandoned (either before or after approvals and authorizations by the shareholders of Sutter Buttes contemplated hereby and without seeking further shareholder approval) at any time prior to the Effective Time only in one of the following manners: a. Mutual Agreement. By mutual written consent of the parties authorized by their respective Boards of Directors at any time prior to the Effective Time. EXHIBIT A - 23 - b. Expiration of Time. By written notice from Sutter Buttes to TriCo or from TriCo to Sutter Buttes, if the Closing Date shall not have occurred on or before December 31, 1996. c. Breach. By written notice from TriCo to Sutter Buttes or from Sutter Buttes to TriCo, in the event of a material breach by the other party hereto of any representation, warranty, covenant or other agreement contained in this Agreement, which breach is not cured after thirty (30) days' written notice thereof is given to the party committing such breach by the other party. d. Environmental Report. TriCo shall have the right, in its discretion and at its sole expense, to arrange with an environmental consultant to prepare an environmental report on any property owned or leased by Sutter Buttes. If such report indicates the presence of Hazardous Materials on any such property or properties and if the costs for any remediation indicated by such reports are deemed material by TriCo, TriCo shall have the right to terminate this Agreement written notice to Sutter Buttes. e. Review of Sutter Buttes Disclosure Letter. By TriCo within five (5) calendar days of receipt by TriCo of the Sutter Buttes Disclosure Letter. f. Material Adverse Change. Within thirty (30) days prior to the Closing, TriCo shall be entitled to conduct a pre-closing audit or review of Sutter Buttes and the financial condition of Sutter Buttes, and this Agreement may be terminated by TriCo if that audit or review determines that the condition of Sutter Buttes has undergone material adverse change from the date of this Agreement. g. Fiduciary Duty. Sutter Buttes shall have the right to terminate this Agreement if it receives an offer as set forth in Section 5.1 above which the Board of Directors of Sutter Buttes on the advice of counsel, believes that it is legally required to accept. 6.2 Expenses and Damages. Except as otherwise provided in this agreement, each party shall pay its own expenses in connection with the Agreement and the Merger. Nothing contained in this Section 6.2 shall be deemed to preclude either from seeking to recover damages which it incurs as a result of breach by the other party of this Agreement or to obtain other legal or equitable relief (including specific performance). In the event of the termination of this Agreement or the abandonment of the Merger by TriCo otherwise than as allowed to TriCo under the provisions of Section 6.1, then TriCo shall pay Sutter Buttes $50,000 plus actual expenses incurred in this transaction, which amount the parties agree is reasonable and full liquidated damage and reasonable compensation to Sutter Buttes for its involvement in the transactions contemplated by this Agreement and is not a penalty or forfeiture. In the event of the termination of this Agreement or the abandonment of the Merger by Sutter Buttes otherwise than as allowed to Sutter Buttes under the provisions of Section 6.1, then Sutter Buttes shall pay TriCo $50,000, which amount the parties agree is reasonable and full liquidated damage and reasonable compensation to TriCo for its involvement in the transactions contemplated by this Agreement and is not a penalty or forfeiture. 6.3 No Liability Upon Proper Termination. Upon proper termination by written notice as provided in Section 6.1 of this Agreement, this Agreement shall be void and of no further effect, except as set forth in Section 6.2, and there shall be no liability by reason of this Agreement or the termination thereof on the part of either TriCo, Tri Counties or Sutter Buttes or their directors, officers, employees, agents or shareholders, and all such parties shall be released from all such liability. EXHIBIT A - 24 - 6.4 Press Releases and Public Statements. No press release or public statement will be issued relating to the transactions contemplated by this Agreement without prior approval of TriCo and Sutter Buttes. However, notwithstanding the confidentiality provisions of this Agreement, either TriCo or Sutter Buttes may issue at any time any press release or other public statements it believes, on the written advice of its counsel, it is obligated to issue to avoid liability under applicable law relating to disclosures, but the party issuing such press release or public statement shall make every reasonable effort to give the other party prior notice and an opportunity to participate in such release or statement. 6.5 Maximum Expenses. Sutter Buttes' expenses attributable to the negotiation and consummation of this Agreement and the transactions contemplated hereby, including the cost of the purchase of directors and officers liabilities tail insurance as provided in Section 1.1 hereof, shall not exceed $70,000.00, and any amount paid or accrued in excess thereof shall result in a reduction of the Consideration in the amount of such excess. 6.6 Knowledge. Whenever the term "knowledge," "best knowledge" or similar expression is used is this Agreement, it shall mean knowledge of a party's respective directors and officers. 6.7 Desirable Amendments. Subject to the performance of the respective fiduciary obligations of each party, if at any time after the date hereof it shall appear that any change or changes in the structure of the transactions contemplated hereby shall be necessary or desirable or comply with applicable law, or to comply with the requirements of regulatory authorities having jurisdiction over the transactions so as to enable the transactions contemplated hereby to be consummated, the parties hereto agree to use their best efforts to effect such changes in this Agreement and the other documents contemplated hereby in taking such other actions as may be required to effect such changes, provided that neither party hereto shall be required to agree to any change in the amount or form of consideration set forth herein. 6.8 Benefits of this Agreement. This Agreement and the rights and obligations of TriCo and Tri Counties and Sutter Buttes hereunder shall not be assigned by any party to any third party, except with the prior written consent of the other. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any person, other than the parties hereto, the shareholders of Sutter Buttes, and their respective permitted successors and assigns, any rights or remedies under or by reason of this Agreement and there are not third-party beneficiaries of this Agreement. 6.9 Notices. Any notice, request, instruction, legal process, or other instrument to be given or served hereunder by any party to another, shall be deemed given or served if in writing and delivered personally or sent by registered or certified mail, postage prepaid, to the respective party or parties at the following addresses: If to TriCo and/or Tri Counties: Robert H. Steveson Chief Executive Officer Tri Counties Bank 15 Independence Circle Chico, California 95973 EXHIBIT A - 25 - With copies to: Rothgerber, Appel, Powers & Johnson LLP Attention: William P. Johnson, Esq. 1200 - 17th Street, Suite 3000 Denver, Colorado 80202 If to Sutter Buttes: W. R. Hagstrom President & Chief Executive Officer Sutter Buttes Savings Bank, F.S.B. 700 Plumas Street Yuba City, California 95991 With copies to: Graham & James, LLP Attention: James E. Topinka, Esq. One Maritime Plaza San Francisco, California 94111 and to such other person or address or addresses as either party may designate to the other by like notice as set forth above. 6.10 Potential Litigation re Fairness of the Transaction. The Board of Directors of Sutter Buttes has reviewed and analyzed this agreement and the transactions contemplated thereby and determined it to be fair and in the best interests of the shareholders of Sutter Buttes. In view of this determination and since it is deemed an unnecessary expense, the parties have decided not to purchase a fairness opinion regarding this transaction. If a claim is made or an action commenced asserting or alleging that the directors of Sutter Buttes failed to exercise due care or were otherwise deficient in determining the fairness of this transaction, Tri Counties shall defend any and all such claims or actions at its sole expense including all attorney fees and costs associated therewith. If a court enters a final judgment that holds that the transaction is unfair, any damages resulting therefrom shall be the responsibilities of Sutter Buttes and not of TriCo or Tri Counties. Sutter Buttes shall acquire a three (3) year extension to its existing directors and officers liability insurance policy which will provide coverage for such judgment and the costs of defending any such claim or action. 6.11 Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated hereby and thereby supersedes all prior and contemporaneous agreements, understandings, negotiations and discussion, whether oral or written, of the parties, and there are no warranties, representations, covenants or other agreements between the parties in connection with the subject matter hereof except as specifically set forth herein. 6.12 Waiver or Modification. Any party to this Agreement may, at any time prior to the Effective Time, by action taken by its Board of Directors or officers thereunto duly authorized, waive any of the terms or conditions of this Agreement or agree to an amendment or modifications to this Agreement by an agreement in writing executed in the same manner (but not necessarily by the same persons) as this Agreement. No amendment, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound EXHIBIT A - 26 - thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall any waiver constitute a continuing waiver unless so expressly provided. Sutter Buttes' Board of Directors may authorize the amendment or supplementation of this agreement or waiver of any provision hereof or thereof, either before or after the approval of Sutter Buttes' shareholders (and without seeking further shareholder approval), so long as such amendment, supplement or waiver does not result in the reduction of the consideration given or result in an adverse tax or other effect to Sutter Buttes' shareholders. 6.13 Controlling Law. This Agreement shall be construed in accordance with the laws of the State of California, except to the extent that federal law is applicable. 6.14 Counterparts. This Agreement may be executed in any number of copies, each of which shall be deemed an original, and all of which together shall be deemed one and the same instrument. IN WITNESS WHEREOF, pursuant to authority duly given by the respective Boards of Directors of TriCo, Tri Counties and Sutter Buttes, this Agreement has been signed on behalf of said corporations by their respective Chairmen of the Boards, Presidents or Vice Presidents, as the case may be, under their respective corporate seals, and attested by their respective Secretaries or Assistant Secretaries, as the case may be, all on the date, month and year first written above. The signature of a Secretary or Assistant Secretary is intended not only as an execution hereof, but also is a certification that such parties' Board of Directors has duly authorized the execution and delivery of this Agreement. TriCo Bancshares By: /s/ Robert H. Steveson Tri Counties Bank By: /s/ Robert H. Steveson Sutter Buttes Savings Bank By: /s/ Lee B. Colby EXHIBIT A - 27 - EXHIBIT B Section 552.14 Dissenter and appraisal rights. (a) Right to demand payment of fair or appraised value. Except as provided in paragraph (b) of this section, any stockholder of a Federal stock association combining in accordance with ss. 552.13 of this part shall have the right to demand payment of the fair or appraised value of his stock: Provided, That such stockholder has not voted in favor of the combination and complies with the provisions of paragraph (c) of this section. (b) Exceptions. No stockholder required to accept only qualified consideration for his or her stock shall have the right under this section to demand payment of the stock's fair or appraised value, if such stock was listed on a national securities exchange or quoted on the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the meeting at which the combination was acted upon or stockholder action is not required for a combination made pursuant to ss. 552.13(h)(2) of this part. "Qualified consideration" means cash, shares of stock of any association or corporation which at the effective date of the combination will be listed on a national securities exchange or quoted on NASDAQ, or any combination of such shares of stock and cash. (c) Procedure--(1) Notice. Each constituent Federal stock association shall notify all stockholders entitled to rights under this section, not less than twenty days prior to the meeting at which the combination agreement is to be submitted for stockholder approval, of the right to demand payment of appraised value of shares, and shall include in such notice a copy of this section. Such written notice shall be mailed to stockholders of record and may be part of management's proxy solicitation for such meeting. (2) Demand for appraisal and payment. Each stockholder electing to make a demand under this section shall deliver to the Federal stock association, before voting on the combination, a writing identifying himself or herself and stating his or her intention thereby to demand appraisal of and payment for his or her shares. Such demand must be in addition to and separate from any proxy or vote against the combination by the stockholder. (3) Notification of effective date and written offer. Within ten days after the effective date of the combination, the resulting association shall: (i) Give written notice by mail to stockholders of constituent Federal stock associations who have complied with the provisions of paragraph (c)(2) of this section and have not voted in favor of the combination, of the effective date of the combination; (ii) Make a written offer to each stockholder to pay for dissenting shares at a specified price deemed by the resulting association to be the fair value thereof; and (iii) Inform them that, within sixty days of such date, the respective requirements of paragraphs (c)(5) and (c)(6) of this section (set out in the notice) must be satisfied. The notice and offer shall be accompanied by a balance sheet and statement of income of the association the shares of which the dissenting stockholder holds, for a fiscal year ending not more than sixteen month If within sixty days of the effective date of the combination the fair value is agreed upon between the resulting association and any stockholder who has complied with the provisions of paragraph (c)(2) of this section, payment therefor shall be made within ninety days of the effective date of the combination. (5) Petition to be filed if offer not accepted. If within sixty days of the effective date of the combination the resulting association and any stockholder who has complied with the provisions of paragraph (c)(2) of this section do not agree as to the fair value, then any such stockholder may file a petition with the Office, with a copy by registered or certified mail to the resulting association, demanding a determination of the fair market value of the stock of all such stockholders. A stockholder entitled to file a petition under this section who fails to file such petition within sixty days of the effective date of the combination shall be deemed to have accepted the terms offered under the combination. (6) Stock certificates to be noted. Within sixty days of the effective date of the combination, each stockholder demanding appraisal and payment under this section shall submit to the transfer agent his certificates of stock for notation thereon that an appraisal and payment have been demanded with respect to such stock and that appraisal proceedings are pending. Any stockholder who fails to submit his or her stock certificates for such notation shall no longer be entitled to appraisal rights under this section and shall be deemed to have accepted the terms offered under the combination. (7) Withdrawal of demand. Notwithstanding the foregoing, at any time within sixty days after the effective date of the combination, any stockholder shall have the right to withdraw his or her demand for appraisal and to accept the terms offered upon the combination. (8) Valuation and payment. The Director shall, as he or she may elect, either appoint one or more independent persons or direct appropriate staff of the Office to appraise the shares to determine their fair market value, as of the effective date of the combination, exclusive of any element of value arising from the accomplishment or expectation of the combination. Appropriate staff of the Office shall review and provide an opinion on appraisals prepared by independent persons as to the suitability of the appraisal methodology and the adequacy of the analysis and supportive data. The Director after consideration of the appraisal report and the advice of the appropriate staff shall, if he or she concurs in the valuation of the shares, direct payment by the resulting association of the appraised fair market value of the shares, upon surrender of the certificates representing such stock. Payment shall be made, together with interest from the effective date of the combination, at a rate deemed equitable by the Director. (9) Costs and expenses. The costs and expenses of any proceeding under this section may be apportioned and assessed by the Director as he or she may deem equitable against all or some of the parties. In making this determination the Director shall consider whether any party has acted arbitrarily, vexatiously, or not in good faith in respect to the rights provided by this section. (10) Voting and distribution. Any stockholder who has demanded appraisal rights as provided in paragraph (c)(2) of this section shall thereafter neither be entitled to vote such stock for any purpose nor be entitled to the payment of dividends or other distributions on the stock (except dividends or other distribution payable to or a vote to be taken by stockholders of record at a date which is on or prior to, the effective date of the combination): Provided, That if any stockholder becomes unentitled to appraisal and payment of appraised value with respect to such stock and accepts or is deemed to have accepted the terms offered upon the combination, such stockholder shall thereupon be entitled to vote and receive the distributions described above. (11) Status. Shares of the resulting association into which shares of the stockholders demanding appraisal rights would have been converted or exchanged, had they assented to the combination, shall have the status of authorized and unissued shares of the resulting association. EXHIBIT B 2 EXHIBIT C OPINION OF ROTHGERBER, APPEL, POWERS & JOHNSON LLP AS TO FEDERAL INCOME TAX CONSEQUENCES EXHIBIT C July __, 1996 THE FOLLOWING OPINION IS INTENDED TO BE RENDERED UPON THE CLOSING OF THE TRANSACTION DESCRIBED HEREIN IN SUBSTANTIALLY THE FORM PRESENTED, ASSUMING NO CHANGES IN THE FACTS OR THE LAW UPON WHICH SUCH OPINION IS BASED, AND SUBJECT TO THE RECEIPT, REVIEW AND APPROVAL OF FINAL DOCUMENTS. W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. 700 Plumas Street Yuba City, CA 95991 Re: Federal Income Tax Aspects of Acquisition of Sutter Buttes Savings Bank, F.S.B. by TriCo Bancshares Dear Mr. Hagstrom: You have requested our opinion concerning certain federal income tax aspects of the acquisition by TriCo Bancshares ("Holding Company") of all of the outstanding shares of Sutter Buttes Savings Bank, F.S.B. ("Sutter Buttes" or "Bank"). We have reviewed the Prospectus/Proxy Statement prepared in connection with the offering of Holding Company shares, the exhibits attached thereto, and such other information, materials and matters of law as we believe appropriate. In addition, we have relied upon certain representations made to us by the management of Bank and Holding Company ("Management"). Although we have made no independent investigation of those representations, we have no reason to believe they are untrue. Statutory references herein are to the Internal Revenue Code of 1986, as amended, except as otherwise indicated. Background Facts TriCo is incorporated under the laws of the State of California, and headquartered in Chico, California. TriCo, through its wholly owned banking subsidiary, Tri Counties ("Tri Counties"), has 14 traditional banking offices and 7 in-store branches located in the counties of Butte, Glenn, Lassen, Nevada, Shasta, Siskiyou, Sutter and Tehama in Northern California. Tri Counties commenced business in 1975 and provides traditional deposit, lending, mortgage, and W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. July __, 1996 Page 2 EXHIBIT C commercial products and services to business and retail customers throughout its primary market area. In October, 1995, Tri Counties opened a regional lending office in Bakersfield, California, to promote primarily agricultural lending activities in that area. In February, 1996, Tri Counties opened a regional lending office in Sacramento, California, to promote primarily commercial and consumer lending activities in that area. Tri Counties emphasizes retail banking with its client base being predominately individuals and small to medium-sized businesses. The majority of Tri Counties' loans are geographically concentrated in its primary market area as defined above. Tri Counties relies substantially on local promotional activity including the personal relationships of its directors, officers, employees, and shareholders, in addition to personalized service in its community banking orientation, as means to compete with larger statewide financial institutions. Sutter Buttes was incorporated under the laws of the State of California as a savings and loan association in 1982 and commenced operation in 1983. In 1993, Sutter Buttes converted to a federal savings bank charter. Sutter Buttes' principal business is accepting checking and savings deposits and making residential real estate and home improvement loans secured by first and second mortgages. Sutter Buttes also engages in wholesale mortgage banking by originating mortgage loans and then selling them to third parties. Sutter Buttes retains the right to service some of the mortgage loans it sells for a fee. Sutter Buttes also offers safe deposit, night depository, wire transfer, and other customary bank services to its customers. Business Purpose Due to the persistent illiquidity of Sutter Buttes Common Stock and difficulty competing with larger institutions, the Sutter Buttes has explored possible merger candidates. TriCo submitted a letter of interest to Sutter Buttes. After reviewing the letter, the Sutter Buttes Board of Directors requested that Mr. Colby and Mr. Hagstrom commence negotiations with TriCo. A final agreement was reached on terms acceptable to both TriCo and Sutter Buttes in June of 1996. The Sutter Buttes Board of Directors believes that the Merger is fair and in the best interests of the shareholders of Sutter Buttes. In reaching its conclusion, the Sutter Buttes Board of Directors considered numerous factors, including the following: (1) The overall lack of institutions interested in acquiring Sutter Buttes; W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. July __, 1996 Page 3 EXHIBIT C (2) The amount of consideration to be paid by TriCo, which is, in the opinion of the Board, favorable; (3) The acceptability of the terms and conditions of the Merger, which are set summarized below, upon review of them with Sutter Buttes' accountants and legal counsel; (4) The structure of the Merger as partially tax-free to the holders of Sutter Buttes Common Stock; (5) The market liquidity and dividend history of TriCo Stock, which is, in the opinion of the Board, favorable; and (6) The current and projected financial condition of Sutter Buttes as an independent institution, which are, in the opinion of the Board, unfavorable. Description of the Transaction Pursuant to the Acquisition Agreement, Sutter Buttes will merge with and into Tri Counties which will, as the Surviving Bank, succeed to the business of Sutter Buttes and will continue the operations of Sutter Buttes under Tri Counties' current name, Articles of Incorporation, and Bylaws. In exchange for their shares of Sutter Buttes Common Stock, the holders of Sutter Buttes Common Stock shall receive the "Total Consideration," which shall consist of cash and/or TriCo Stock. The Total Consideration, subject to substantial adjustments described below, is $3,843,000, or $2.95 per share, assuming conversion of all Sutter Buttes Preferred Stock to Sutter Buttes Common Stock, the exercise of all outstanding stock options, the conversion of all outstanding warrants, and the approval of the Special Stock Bonuses. The holders of Sutter Buttes Preferred Stock who, as of the Closing Date, have not converted their shares of Sutter Buttes Preferred Stock to Sutter Buttes Common Stock will receive the Sutter Buttes Preferred Stock liquidation preference of $5.00 per share plus any declared and unpaid cash dividends. Because each share of Sutter Buttes Preferred Stock converts into 1.98 shares of Sutter Buttes Common Stock, it is expected that all Sutter Buttes Preferred Stock will be converted. Holders of Sutter Buttes Common and Preferred who choose to exercise and perfect their dissenters' rights of appraisal will receive a fair value of their shares in cash. The amounts paid, if any, to holders of Sutter Buttes Preferred Stock who do not convert and to Dissenting Shareholders will be deducted from the Total Consideration paid to holders of Sutter Buttes Common Stock. W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. July __, 1996 Page 4 EXHIBIT C Warrants outstanding in lieu of cash dividends on Sutter Buttes Preferred Stock will be treated as if exercised, and the holders thereof will be entitled to receive an appropriate portion of the Total Consideration. Holders of stock options will be entitled to exercise their options on or before the Closing Date in any one of three ways: in exchange for Sutter Buttes Common Stock with a value equal to the per share value of Sutter Buttes Common Stock, less the per share exercise price of the options, times the number of shares underlying the options; or for cash in the amount just described; or by paying the exercise price for the number of shares underlying the options. The amounts paid, if any, to holders of stock options who exercise for cash will be deducted from the Total Consideration. Holders of stock options whom Stock will be entitled to receive an appropriate portion of the Total Consideration. Of the Total Consideration paid, 51% shall be in the form of TriCo Stock, and TriCo reserves the right to assure that 51% of the Total Consideration will be in the form of TriCo Stock. In assuring that 51% of the consideration will be in the form of TriCo Stock, TriCo shall deduct the amount of cash payments for fractional shares and potential cash payments for the holders of Sutter Buttes Preferred Stock not converting such stock, for holders of stock options exercising for cash, and for payment of any amounts to Sutter Buttes shareholders who exercise their dissenters' rights. The value of TriCo Stock will be based on the average closing sale price (or mean between the closing bid and asked price if there is no closing sale price on any day) of TriCo Stock on the ten trading days preceding the Closing Date. To the extent possible, TriCo will cause cash to be paid to those holders of Sutter Buttes Common Stock requesting cash payment, and will cause TriCo Stock to be delivered to those holders of Sutter Buttes Common Stock requesting TriCo Stock. However, to guarantee that 51% of the Total Consideration is in the form of TriCo Stock, TriCo reserves the right to allocate TriCo Stock and cash, as necessary, among the holders of Sutter Buttes Common Stock. In the event that requests for TriCo Stock total less than 51%, the remaining shareholders not requesting stock shall be assigned stock to bring the total stock issued to 51% of the Total Consideration. In this situation, stock will be allocated first to those failing to request stock or cash, and next, if necessary, to those requesting cash. In the event that requests for TriCo Stock exceed 51%, those requesting stock will receive fewer shares until the total stock transferred equals 51% of the Total Consideration, and will receive the balance in cash. TriCo's determination to allocate cash and TriCo Stock on a pro rata basis to guarantee that 51% of the Total Consideration is TriCo Stock shall be at TriCo's sole determination. Additional Representations 1. The "Background Facts," "Business Purpose" and "Description of the Transaction" as set forth in this letter are accurately stated, and there are no material omissions of information necessary to prevent such statements from being misleading. W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. July __, 1996 Page 5 EXHIBIT C 2. The fair market value of Holding Company stock to be received by the shareholders of Bank will in each instance be approximately equal to the fair market value of the Bank stock surrendered in exchange therefor. 3. The fair market value of the assets of Bank to be transferred to Tri Counties will equal or exceed the sum of the liabilities to be assumed, plus the amount of liabilities to which the transferred assets are subject. 4. The liabilities of Bank to be assumed by Tri Counties and the liabilities, if any, to which the transferred assets of the Bank are subject were incurred in the ordinary course of business. 5. In the proposed transaction, Tri Counties will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by Bank immediately prior to the transaction. For purposes of this representation, amounts paid by Bank to dissenters, amounts paid by Bank for its reorganization expenses, and all redemptions and distributions (except for regular, normal distributions) made by Bank immediately prior to the transaction will be included as assets of Bank held immediately prior to the transaction. 6. Prior to the proposed transaction, Holding Company will be in control of Tri Counties within the meaning of Section 368(c)of the Code. 7. Holding Company has not plan or intention to liquidate Tri Counties merge Tri Counties with any other corporation, to sell or otherwise dispose of the stock of Tri Counties or to cause Tri Counties to sell or dispose of any of the assets of Bank to be acquired, except for dispositions made in the ordinary course of business. 8. There is no plan or intention by the shareholders of Bank who own 1 percent or more of the Bank stock, and to the best of the knowledge of the management of Bank, there is no plan or intention on the part of the remaining shareholders of Bank to sell, exchange or otherwise dispose of a number of shares of Holding Company stock to be received in the proposed transaction which would reduce such shareholders' holding to a number of shares having, in the aggregate, a value less than 50 percent of the total value of all of the formerly outstanding stock of Bank as of the transaction date. For purposes of this representation, stock surrendered by dissenters will be treated as outstanding Bank stock otherwise sold, redeemed, or disposed of prior to the proposed transaction will be considered in making this representation. W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. July __, 1996 Page 6 EXHIBIT C 9. Following the proposed transaction, Tri Counties will not issue additional shares of its stock which would result in Holding Company losing control of Tri Counties within the meaning of Section 368(c) of the Code. 10. Holding Company will pay the expenses of itself, Tri Counties and Bank incurred in the proposed transaction. Furthermore, the shareholders of Bank will each pay their own expenses, if any, incurred in the transaction. 11. Holding Company has no plan or intention to redeem or otherwise reacquire any of its stock to be issued in the proposed transaction. 12. No stock of Tri Counties will be issued as consideration in the proposed transaction. 13. Following the proposed transaction, Holding Company and Tri Counties will continue the business of Bank in a substantially unchanged manner. 14. No two parties to this transaction are investment companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. 15. There is no intercorporate debt issued or to be settled at a discount between Holding Company and Tri Counties or Tri Counties and Bank. 16. No corporation, a party to be the proposed reorganization, is under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 17. None of the compensation received by any shareholder-employee of Bank will be separate consideration for, or allocable to, any of their shares of Bank stock; none of the shares of Holding Company stock received by any shareholder-employee will be separate consideration for, or allocable to, any employment agreement; and the compensation paid to any shareholder- employee will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. Tax Opinions Based on the foregoing, it is our opinion that, for purposes of the federal income tax (excluding any possible application of the alternative minimum tax): W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. July __, 1996 Page 7 EXHIBIT C 1. Provided that the proposed merger of Bank with and into Tri Counties qualifies as a merger under California law, the acquisition by Tri Counties of substantially all of the properties of Bank in exchange for shares of Holding Company common stock, and the assumption by Tri Counties of the liabilities of Bank, will constitute a reorganization within the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(D) of the Code. For purposes of this ruling, "Substantially all" means 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by Bank immediately prior to the proposed transaction. Holding Company, Tri Counties and Bank will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code. 2. No gain or loss will be recognized by Bank on the transfer of substantially all of its assets and assumption by Tri Counties or Bank's liabilities in the transaction. Sections 361(a) and 357(a). 3. No gain or loss will be recognized by Holding Company or Tri Counties on the receipt by Tri Counties of substantially all of the assets of Bank in exchange for Holding Company stock and the assumption by Tri Counties of Bank liabilities in the transaction. Rev. Rul. 57-278, 1957-1 C.B. 124. 4. The basis of the assets of Bank to be received by Tri Counties will be the same as the basis of those assets in the hands of Bank immediately before the transfer. Section 362(b). 5. The basis of the Tri Counties stock in the hands of Holding Company will be increased by an amount equal to the basis of the assets of Bank transferred to Tri Counties, and decreased by the sum of the liabilities of Bank assumed by Tri Counties and the amount of the liabilities, if any, to which the transferred assets of Bank are subject. 6. The holding period of the assets of Bank in the hands of Tri Counties will include the period during which those assets were held by Bank. Section 1223(2). 7. No gain or loss will be recognized by Bank shareholders on the exchange of their Bank common stock for Holding Company common stock. Section 354(a)(1). 8. The basis of the shares of Holding Company common stock to be received by Bank shareholders will be the same as the basis of the shares of Bank common stock surrendered. Section 358(a)(1). 9. The holding period of the Holding Company common stock to be received by Bank shareholders will include the holding period of Bank common stock surrendered in the W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. July __, 1996 Page 8 EXHIBIT C exchange, provided Bank common stock is held as a capital asset on the day of the exchange (Section 1221(1)). 10. Where a dissenter to the proposed merger receives cash, in exchange for Bank common stock, such cash will be treated as received by that shareholder as a distribution in redemption of his/her Bank common stock subject to the conditions and limitation of Section 302 of the Code. Where, as a result of such distribution, a shareholder neither owns any stock of Holding Company directly, nor is deemed to own any such stock under the constructive ownership rules of Section 318(a), the redemption will be a complete termination of interest within the meaning of Section 302(b)(3), and will be treated as a distribution in full payment in exchange for the stock redeemed as provided in Section 302(a). As provided in Section 1001, gain or (subject to the limitations of Section 267) loss will be realized and recognized to such shareholders measured by the difference between the redemption price and the adjusted basis of the Bank shares surrendered as determined under Section 1011. Rev. Rul. 74-515, 1974-2 C.B. 118. Provided Section 341 (relating to collapsible corporations) is inapplicable and the Bank stock is a capital asset in the hands of such shareholders, the gain, if any, generally will constitute capital gain. 11. As provided in Section 381(a) of the Code, Tri Counties will succeed to and take into account the tax attributes of Bank as of the dates of the transfer described under Section 381(c). These items will be taken into account by Tri Counties subject to the provisions and limitations specified in Section 381, 382, 383 and 384 of the Code and the regulations thereunder. 12. As provided by Section 381(c)(2) of the Code and Section 1.381(c)(2)-1 of the Income Tax Regulations, Tri Counties will succeed to and take into account the earnings and profits or deficit in earnings and Profits of Bank as of the date or dates of transfer. * * * These opinions are based upon existing statutes, regulations, proposed regulations, Internal Revenue Service Rulings and Revenue Procedures, judicial and administrative decisions and other matters of record. An opinion of counsel, unlike a tax ruling, has no official status of any kind; no guarantee can be given that the IRS will not challenge or prevail on any issue. In addition, the law upon which the opinions are based is subject to change and no assurance can be given that any such change will not be applied retroactively. Application for a tax ruling has not been made. W. R. Hagstrom, President Sutter Buttes Savings Bank, F.S.B. July __, 1996 Page 9 EXHIBIT C Neither this letter nor copies hereof may be distributed or otherwise made available to anyone other than Bank, Holding Company, their employees, directors and shareholders, without our prior written consent, except that we consent to the inclusion of this letter as an exhibit to the Prospectus/Proxy Statement. Very truly yours, /s/ ROTHGERBER, APPEL, POWERS & JOHNSON LLP PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 317 of the California General Corporation Law contains detailed provisions on indemnification of directors and officers of a California corporation against expenses, judgments, fines and amounts paid in settlement, actually and reasonably incurred in connection with litigation, subject to the limits set forth in Section 204 of the General Corporation Law with respect to actions for breach of duty to the corporation and its shareholders. The Articles of Incorporation of TriCo Bancshares authorize the indemnification of directors and officers to the full extent permitted or allowed by the laws of the State of California, through bylaw provisions, agreements with such agents, votes of shareholders or disinterested directors or otherwise, or any combination of the foregoing, in excess of the indemnification otherwise permitted by Section 317 of the General Corporation Law, subject only to the limits set forth in Section 204 of the General Corporation Law. The bylaws of TriCo Bancshares provide that the Company shall indemnify the directors and officers of vice president level or above of both the Company and of the Bank against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that such person is or was an agent of the Company. If the officer or director initiates a proceeding, indemnification is available only if the proceeding was authorized by the board of directors of the Company. Further, the bylaws provide that any agent of the Company may be indemnified pursuant to a duly adopted resolution of the Board of Directors, agreement or otherwise, to the fullest extent permitted with respect to the indemnification of directors and officers of vice president level or above of the Company. The Company shall indemnify an agent against expenses actually and reasonably incurred by the agent, to the extent the agent has been successful on the merits in the defense of any proceeding arising by reason of the fact that the person is or was an agent of the Company. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. (2) Acquisition Agreement and Plan of Merger dated June 15, 1996 (Exhibit A to the Prospectus and Proxy Statement forming Part I hereof). (5) Opinion of Rothgerber, Appel, Powers & Johnson LLP as to legality. (8) Opinion of Rothgerber, Appel, Powers & Johnson LLP as to Federal Income Tax Consequences (Exhibit C to the Prospectus and Proxy Statement forming Part I hereof). (10.1) Lease for Park Plaza Branch premises entered into as of September 29, 1978, by and between Park Plaza Limited Partnership as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.9 to TriCo's Registration Statement on Form S-14 (Registration No. 2-74796) (Incorporated herein by reference). II - 1 (10.2) Lease for Administration Headquarters premises entered into as of April 25, 1986, by and between Fortress-Independence Partnership (A California Limited Partnership) as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.6 to TriCo's Report on Form 10-K for the year ended December 31, 1986 (Incorporated herein by reference). (10.3) Lease for Data Processing premises entered into as of April 25, 1986, by and between Fortress-Independence Partnership (A California Limited Partnership) as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.7 to TriCo's Report on Form 10-K for the year ended December 31, 1986 (Incorporated herein by reference). (10.4) Lease for Chico Mall premises entered into as of March 11, 1988, by and between Chico Mall Associates as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.4 to TriCo's Report on Form 10-K for the year ended December 31, 1988 (Incorporated herein by reference). (10.5) First Amendment to lease for Chico Mall premises entered into as of May 31, 1988, by and between Chico Mall Associates as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.5 to TriCo's Report on Form 10-K for the year ended December 31, 1988 (Incorporated herein by reference). (10.6) Employment Agreement of Robert H. Steveson, dated December 12, 1989 between Tri Counties Bank and Robert H. Steveson, filed as Exhibit 10.9 to TriCo's Report on Form 10-K for the year ended December 31, 1989 (Incorporated herein by reference). (10.7) Lease for Purchasing and Printing Department premises entered into as of February 1, 1990, by and between Dennis M. Casagrande as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.11 to TriCo's Report on Form 10-K for the year ended December 31, 1991 (Incorporated herein by reference). (10.8) Addendum to Employment Agreement of Robert H. Steveson, dated April 9, 1991 between Tri Counties Bank and Robert H. Steveson, filed as Exhibit 10.12 to TriCo's Report on Form 10-K for the year ended December 31, 1991 (Incorporated herein by reference). (13.1) TriCo's Annual Report to Shareholders for the fiscal year ended December 31, 1995 (Incorporated herein by reference to TriCo's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). (13.2) TriCo's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (Incorporated herein by reference). (23.1) Consent of Arthur Andersen LLP. (23.2) Consent of Rothgerber, Appel, Powers & Johnson LLP. (23.3) Consent of Deloitte & Touche LLP. (23.4) Consent of Rothgerber, Appel, Powers & Johnson LLP re: Legality Opinion. (99.1) Proxy Card for Solicitation of Proxies by Sutter Buttes' Board for Special Meeting of Shareholders. II - 2 (99.2) Consideration Request Form. (99.3) Sutter Buttes' Annual Report to Shareholders for the fiscal year ended December 31, 1995. (99.4) Sutter Buttes' Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (99.5) Sutter Buttes' Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (99.6) Sutter Buttes' Proxy Statement related to the 1995 Annual Meeting of Shareholders, dated April 6, 1995. ITEM 22. UNDERTAKINGS. (a) Item 512 Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement. (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;" (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (g)(1) The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, II - 3 by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (g)(2) The Registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be refiled as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II - 4 Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chico, State of California, on July ____, 1996. TRICO BANCSHARES By: /s/ Robert H. Steveson Robert H. Steveson, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Robert H. Steveson _________________________________ President, Chief July 22, 1996 Robert H. Steveson Executive Officer, and Director /s/ Joan Jones _________________________________ Executive Vice July 22, 1996 Joan Jones President /s/ Robert M. Stanberry _________________________________ Vice President and July 22, 1996 Robert M. Stanberry Chief Financial Officer /s/ Everett B. Beich _________________________________ Director and Vice July 22, 1996 Everett B. Beich Chairman of the Board /s/ William J. Casey _________________________________ Director July 22, 1996 William J. Casey /s/ Craig S. Compton _________________________________ Director July 22, 1996 Craig S. Compton /s/ Richard C. Guiton _________________________________ Director July 22, 1996 Richard C. Guiton /s/ Douglas F. Hignell _________________________________ Secretary and July 22, 1996 Douglas F. Hignell Director /s/ Brian D. Leidig _________________________________ Director July 22, 1996 Brian D. Leidig II - 5 /s/ Wendell J. Lundberg _________________________________ Director July 22, 1996 Wendell J. Lundberg /s/ Donald E. Murphy _________________________________ Director July 22, 1996 Donald E. Murphy /s/ Rodney W. Peterson _________________________________ Director July 22, 1996 Rodney W. Peterson /s/ Alex A. Vereschagin, Jr. _________________________________ Chairman of the July 22, 1996 Alex A. Vereschagin, Jr. Board and Director II - 6 EXHIBIT INDEX
Exhibit No. Description Page (2) Acquisition Agreement and Plan of Merger dated June 15, 1996 (Exhibit A to the Prospectus and Proxy Statement forming Part I hereof). (5) Opinion of Rothgerber, Appel, Powers & Johnson LLP as to legality. (8) Opinion of Rothgerber, Appel, Powers & Johnson LLP as to Federal Income Tax Consequences (Exhibit C to the Prospectus and Proxy Statement forming Part I hereof). (10.1) Lease for Park Plaza Branch premises entered into as of * September 29, 1978, by and between Park Plaza Limited Partnership as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.9 to TriCo's Registration Statement on Form S-14 (Registration No. 2-74796) (Incorporated herein by reference). (10.2) Lease for Administration Headquarters premises entered into as * of April 25, 1986, by and between Fortress-Independence Partnership (A California Limited Partnership) as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.6 to TriCo's Report on Form 10-K for the year ended December 31, 1986 (Incorporated herein by reference). (10.3) Lease for Data Processing premises entered into as of April * 25, 1986, by and between Fortress-Independence Partnership (A California Limited Partnership) as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.7 to TriCo's Report on Form 10-K for the year ended December 31, 1986 (Incorporated herein by reference). (10.4) Lease for Chico Mall premises entered into as of March 11, * 1988, by and between Chico Mall Associates as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.4 to TriCo's Report on Form 10-K for the year ended December 31, 1988 (Incorporated herein by reference). (10.5) First Amendment to lease for Chico Mall premises entered into * as of May 31, 1988, by and between Chico Mall Associates as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.5 to TriCo's Report on Form 10-K for the year ended December 31, 1988 (Incorporated herein by reference). (10.6) Employment Agreement of Robert H. Steveson, dated December 12, * 1989 between Tri Counties Bank and Robert H. Steveson, filed as Exhibit 10.9 to TriCo's Report on Form 10-K for the year ended December 31, 1989 (Incorporated herein by reference). (10.7) Lease for Purchasing and Printing Department premises entered * into as of February 1, 1990, by and between Dennis M. Casagrande as lessor and Tri Counties Bank as lessee, filed as Exhibit 10.11 to TriCo's Report on Form 10-K for the year ended December 31, 1991 (Incorporated herein by reference). (10.8) Addendum to Employment Agreement of Robert H. Steveson, dated * April 9, 1991 between Tri Counties Bank and Robert H. Steveson, filed as Exhibit 10.12 to TriCo's Report on Form 10-K for the year ended December 31, 1991 (Incorporated herein by reference). (13.1) TriCo's Annual Report to Shareholders for the fiscal year * ended December 31, 1995 (Incorporated herein by reference to TriCo's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). (13.2) TriCo's Quarterly Report on Form 10-Q for the quarter ended * March 31, 1996 (Incorporated herein by reference). (23.1) Consent of Arthur Andersen LLP. (23.2) Consent of Rothgerber, Appel, Powers & Johnson LLP. (23.3) Consent of Deloitte & Touche LLP. (23.4) Consent of Rothgerber, Appel, Powers & Johnson LLP re: Legality Opinion. (99.1) Proxy Card for Solicitation of Proxies by Sutter Buttes' Board for Special Meeting of Shareholders. (99.2) Consideration Request Form. (99.3) Sutter Buttes' Annual Report to Shareholders for the fiscal year ended December 31, 1995. (99.4) Sutter Buttes' Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (99.5) Sutter Buttes' Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (99.6) Sutter Buttes' Proxy Statement related to the 1995 Annual Meeting of Shareholders, dated April 6, 1995. ------------------------- *Previously filed.
EX-2 2 ACQUISITION AGREEMENT AND PLAN OF MERGER EXHIBIT 2 [Exhibit A to the Prospectus and Proxy Statement forming Part I hereof] EX-5 3 OPINION OF ROTHGERBER,....AS TO LEGALITY EXHIBIT 5 OPINION OF ROTHGERBER, APPEL, POWERS & JOHNSON LLP AS TO LEGALITY EXHIBIT 5 July 22, 1996 TriCo Bancshares 15 Independence Circle Chico, CA 95926 Ladies and Gentlemen: You have requested our opinion in connection with the Registration Statement on Form S-4 (the "Registration Statement") which is expected to be filed by TriCo Bancshares (the "Corporation") on or about July 16, 1996, with respect to the offer and sale of 125,000 shares of a single class of common stock, without par value, issuable pursuant to the merger of Sutter Buttes Savings Bank, F.S.B. with and into Tri Counties Bank, as set forth in that certain Acquisition Agreement and Plan of Merger entered into as of June 15, 1996 by and among TriCo Bancshares, Tri Counties Bank, and Sutter Buttes Savings Bank, F.S.B., as described in the Registration Statement. We have reviewed such corporate documents and have made such investigation of California law as we have deemed necessary under the circumstances. Based on that review and investigation, it is our opinion that when the shares referred to above are registered under the Securities Act of 1933, as amended, and issued as provided in the Registration Statement, said shares will be authorized, fully paid and nonassessable. Sincerely yours, /s/ROTHGERBER, APPEL, POWERS & JOHNSON LLP ------------------------------------------- ROTHGERBER, APPEL, POWERS & JOHNSON LLP EX-8 4 OPINION OF ROTHGERBER,...AS TO FEDERAL TAXES EXHIBIT 8 [Exhibit C to the Prospectus and Proxy Statement forming Part I hereof] EX-23.1 5 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS FOR THE REGISTRANT CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our report dated January 23, 1996, incorporated by reference in TriCo Bancshares' Form 10-K for the year ended December 31, 1995, and to all references to our firm included in this registration statement. /s/ ARTHUR ANDERSEN LLP San Francisco, California July 19, 1996 EX-23.2 6 CONSENT OF ROTHGERBER, APPEL, POWERS & JOHNSON LLP EXHIBIT 23.2 CONSENT OF ROTHGERBER, APPEL, POWERS & JOHNSON LLP EXHIBIT 23.2 July 22, 1996 CONSENT OF LEGAL COUNSEL TriCo Bancshares 15 Independence Circle Chico, CA 95926 Dear Sirs: We consent to the use in the Form S-4 Registration Statement of TriCo Bancshares (the "Corporation"), to be filed on or about July 16, 1996, relating to the registration of shares to be issued pursuant to the merger of Sutter Buttes Savings Bank, F.S.B. with and into Tri Counties Bank pursuant to that certain Acquisition Agreement and Plan of Merger entered into as of June 15, 1996 by and among the Corporation, Tri Counties Bank, and Sutter Buttes Savings Bank, F.S.B., of our name and the statement with respect to our firm under the heading of "Legal Opinions." Sincerely yours, /s/ROTHGERBER, APPEL, POWERS & JOHNSON LLP EX-23.3 7 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.3 CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS FOR SUTTER BUTTES INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of TriCo Bancshares on Form S-4 of our report on the financial statements of Sutter Buttes, FSB as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 dated March 13, 1996, included in the Prospectus by reference, which is part of this Registration Statement. /s/ DELOITTE & TOUCHE LLP Sacramento, California July 23, 1996 EX-23.4 8 CONSENT OF ROTHGERBER,...RE: LEGALITY OPINION EXHIBIT 23.4 CONSENT OF ROTHGERBER, APPEL, POWERS & JOHNSON LLP RE: LEGALITY OPINION EXHIBIT 23.4 July 22, 1996 CONSENT OF LEGAL COUNSEL TriCo Bancshares 15 Independence Circle Chico, CA 95926 Dear Sirs: We consent to the use in the Form S-4 Registration Statement of TriCo Bancshares (the "Corporation"), to be filed on or about July 16, 1996, relating to the registration of shares of common stock in the Corporation (the "Shares") to be issued in the merger of Sutter Buttes Savings Bank, F.S.B. with and into Tri Counties Bank pursuant to that certain Acquisition Agreement and Plan of Merger entered into as of June 15, 1996 by and among the Corporation, Tri Counties Bank, and Sutter Buttes Savings Bank, F.S.B., of our opinion as to the legality of the Shares as set forth in Exhibit 5 to the Registration Statement. Sincerely yours, /s/ROTHGERBER, APPEL, POWERS & JOHNSON LLP EX-99.1 9 PROXY CARD EXHIBIT 99.1 PROXY CARD FOR SOLICITATION OF PROXIES BY SUTTER BUTTES' BOARD EXHIBIT 99.1 PROXY SUTTER BUTTES SAVINGS BANK, F.S.B. Solicited by the Board of Directors for Special Meeting of Shareholders, September __, 1996 The undersigned holder of common and/or preferred stock of Sutter Buttes Savings Bank, F.S.B. ("Sutter Buttes"), acknowledges receipt of a copy of the Notice of Special Meeting of Shareholders and the accompanying Prospectus/Proxy Statement dated __________, 1996, and, revoking any proxy heretofore given, hereby appoints W.R. Hagstrom and Lee Colby, and each of them, with full power to each of substitution as attorneys and proxies to appear and vote all shares of common and/or preferred stock of Sutter Buttes registered in the name(s) of the undersigned and held by the undersigned of record as of July 26, 1996, at the Special Meeting of Shareholders of Sutter Buttes to be held at Sutter Buttes' main office, 700 Plumas Street, Yuba City, California 95991 on September __, 1996, at 7:30 p.m., and at any postponements and adjournments thereof, upon the following items as set forth in the Notice of Special Meeting and Prospectus/Proxy Statement and to vote according to their discretion on all other matters which may be properly presented for action at the meeting. All properly executed proxies will be voted as indicated. UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE FOLLOWING ITEMS: (1) To approve a merger pursuant to an Acquisition Agreement and Plan of Merger dated as of June 15, 1996, by and among TriCo Bancshares, Tri Counties Bank, a wholly-owned subsidiary of TriCo Bancshares, and Sutter Buttes, by which Sutter Buttes will merge with and into Tri Counties Bank, as more fully described in the Prospectus/Proxy Statement. ____ FOR approval of the Merger. ____ AGAINST approval of the Merger. ____ ABSTAIN from voting in regard to the Merger. (2) To approve the Executive Officer Special Stock Option, which is an option for W. R. Hagstrom, CEO of Sutter Buttes, to purchase 24,000 shares of Sutter Buttes Common Stock for $1.00 per share, as more fully described in the Prospectus/Proxy Statement. ____ FOR approval of the Option. ____ AGAINST approval of the Option. ____ ABSTAIN from voting in regard to the Option. (3) To approve the Director Special Stock Option, which is an option for Lee Colby, Chairman of the Board of Sutter Buttes, to purchase 15,000 shares of Sutter Buttes Common Stock for $1.00 per share, as more fully described in the Prospectus/Proxy Statement. ____ FOR approval of the Option. ____ AGAINST approval of the Option. ____ ABSTAIN from voting in regard to the Option. THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, AND 3. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE IT WILL BE VOTED "FOR" PROPOSALS 1, 2, AND 3. SEE REVERSE REVERSE SIDE OF PROXY WITNESS my hand this day of , 1996. - --------------------------------------- | Name and Address of | (Please sign exactly as name | Sutter Buttes Shareholder(s) | appears hereon. When signing | | as attorney, executor, ad- | | ministrator, trustee or | | guardian, give full title as | | such. If a corporation, please | | affix corporate seal. If a | | partnership, please sign in | | partnership name by authorized | | persons. If joint tenants, | | each joint tenant should sign.) - --------------------------------------- [Signature of Shareholder(s)] WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY BY USING THE ENCLOSED POSTAGE-PAID ENVELOPE. WE DO ____ DO NOT ___ EXPECT TO ATTEND THIS MEETING. EX-99.2 10 CONSIDERATION REQUEST FORM EXHIBIT 99.2 CONSIDERATION REQUEST FORM EXHIBIT 99.2 CONSIDERATION REQUEST FORM I am a holder of shares of stock in Sutter Buttes Savings Bank, F.S.B. ("Sutter Buttes"), and I do not intend to exercise dissenter's rights in the proposed merger of Sutter Buttes with and into Tri Counties Bank, a California commercial bank. I understand that, when the proposed merger takes place, some shareholders of Sutter Buttes will receive cash in exchange for their shares, and others will receive common stock of TriCo Bancshares in exchange for their shares. I request to receive payment as set forth below: |_| Please pay me cash in exchange for my shares of common stock in Sutter Buttes. |_| Please pay me common stock of TriCo Bancshares in exchange for my shares of common stock in Sutter Buttes. I understand that there is no guarantee that I will receive payment according to this request. Date________________ __________________________________________ Name __________________________________________ Name (Please type or print name(s) exactly as it appears on your stock certificate(s).) __________________________________________ Signature __________________________________________ Signature (Please sign name(s) exactly as it appears on your stock certificate(s).) In the event that requests for TriCo Stock equal less than 51% of the total consideration, TriCo Stock will be allocated first, on a pro rata basis, to those shareholderrs who fail to request a form of payment through this Consideration Request Form and next, if necessary, on a pro rata basis, to those shareholders who request cash. In the event that requests for TriCo Stock equal more than 51% of the total consideration, cash will be allocated first, on a pro rata basis, to those shareholderrs who fail to request a form of payment through this EX-99.3 11 SUTTER BUTTES' DECEMBER 31, 1995 ANNUAL REPORT EXHIBIT 99.3 SUTTER BUTTES SAVINGS BANK, F.S.B. Financial Statements as of December 31, 1995 and 1994 and for each of the Three Years in the Period Ended December 31, 1995 and Independent Auditors' Report - 2 - INDEPENDENT AUDITORS' REPORT Sutter Buttes Savings Bank, F.S.B.: We have audited the accompanying balance sheets of Sutter Buttes Savings Bank, F.S.B. (Bank) as of December 31, 1995 and 1994, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial condition of Sutter Buttes Savings Bank, F.S.B. at December 31, 1995 and 1994, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP March 13, 1996
SUTTER BUTTES SAVINGS BANK, F.S.B. BALANCE SHEETS DECEMBER 31, 1995 AND 1994 - ----------------------------------------------------------------------------------------------------- ASSETS NOTES 1995 1994 Cash and cash equivalents 1,2 $ 1,260,414 $ 1,416,969 Certificates of deposit 1,386,000 1,386,000 Held to maturity securities 1,3 399,862 399,678 Loans, net of allowance for loan losses of $415,000 and $467,967 in 1995 and 1994 1,4-5,13 57,724,860 58,359,570 Mortgage loans held for sale, at the lower of cost or market 1 2,178,779 Interest receivable 1 389,171 308,609 Premises and equipment - net 1,6 556,912 944,157 Federal Home Loan Bank stock 7 480,148 556,313 Other real estate owned 1 104,768 Prepaid expenses and other assets 148,825 91,201 ----------- ----------- TOTAL $64,629,739 $63,462,497 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Customer deposits 8 $57,405,955 $49,746,571 Advances from Federal Home Loan Bank 9 3,400,000 10,375,000 Other liabilities 275,072 143,243 ----------- ----------- Total liabilities 61,081,027 60,264,814 ----------- ----------- STOCKHOLDERS' EQUITY: Preferred stock, $5.00 par; liquidation preference of $5.00; 5,000,000 shares authorized; 232,200 shares issued and outstanding 10 1,161,000 l,161,000 Common stock, $.01 par: 5,000,000 shares authorized; 625,438 and 581,193 shares issued and outstanding 1,619,750 1,619,750 Additional paid-in capital 450,498 381,194 Retained earnings 317,464 35,739 ----------- ----------- Total stockholders' equity 3,548,712 3,197,683 ----------- ----------- TOTAL $64,629,739 $63,462,497 =========== ===========
See notes to financial statements.
SUTTER BUTTES SAVINGS BANK, F.S.B. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ----------------------------------------------------------------------------------------------------- NOTES 1995 1994 1993 INTEREST INCOME: Loans $4,417,657 $ 3,828,861 $ 3,518,661 Investments 155,803 98,791 91,479 ---------- ----------- ----------- Total 4,573,460 3,927,652 3,610,140 ---------- ----------- ----------- INTEREST EXPENSE: Customer deposits 2,904,420 1,896,545 1,818,124 FHLB advances 234,285 374,917 90,012 ---------- ----------- ----------- Total 3,138,705 2,271,462 1,908,136 ---------- ----------- ----------- NET INTEREST INCOME 1,434,755 1,656,190 1,702,004 CREDIT TO ALLOWANCE FOR LOAN LOSSES 4 972 10,867 106,548 ---------- ----------- ----------- NET INTEREST INCOME AFTER CREDIT TO ALLOWANCE FOR LOAN LOSSES 1,435,727 1,667,057 1,808,552 NONINTEREST INCOME: Fees, service charges, and dividends 171,873 176,474 142,790 Gain on sale of loans and servicing rights 285,813 36,583 122,062 Gain on sale of real estate owned 31,293 11,998 Real estate owned operations - net 1 12,417 ---------- ----------- ----------- INCOME BEFORE GENERAL AND ADMINISTRATIVE EXPENSES 1,924,706 1,880,114 2,097,819 GENERAL AND ADMINISTRATIVE EXPENSES 12 1,552,508 1,695,676 1,615,540 ---------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 372,198 184,438 482,279 PROVISION FOR INCOME TAXES 14 21,169 76,099 3,424 ---------- ----------- ----------- NET INCOME $ 351,029 $ 108,339 $ 478,855 ========== =========== =========== EARNINGS PER SHARE $.31 $.10 $.45 ==== ==== ==== Weighted average number of shares used in computation 1,142,725 1,103,096 1,062,019 ========= ========= =========
See notes to financial statements.
- ----------------------------------------------------------------------------------------------------------------------------------- SUTTER BUTTES SAVINGS BANK, F.S.B. - ----------------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Additional Retained Preferred Stock Common Stock Paid-in Earnings Shares Amount Shares Amount Capital (Deficit) Total Balance, January 1, 1993 232,200 $1,161,000 511,238 $ 1,619,750 $ 207,261 $(377,522) $2,610,489 Net income 478,855 478,855 Exercise of warrants 35,467 Balance, December 31, 1993 232,200 1,161,000 546,705 1,619,750 207,261 101,333 3,089,344 ------- ---------- ------- ----------- --------- --------- ---------- Net income 108,339 108,339 Declaration of warrants 173,933 (173,933) Exercise of warrants 34,488 Balance, December 31, 1994 232,200 1,161,000 581,193 1,619,750 381,194 35,739 3,197,683 Net income 351,029 351,029 Declaration of warrants 69,304 (69,304) Exercise of warrants 44,245 Balance, December 31, 1995 232,200 $1,161,000 625,438 $ 1,619,750 $ 450,498 $ 317,464 $3,548,712 ======= ========== ======= =========== ========= ========= ==========
See notes to financial statements.
- ---------------------------------------------------------------------------------------------------------------------------------- SUTTER BUTTES SAVINGS BANK, F.S.B. - ---------------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ---------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 OPERATING ACTIVITIES: Net income $ 351,029 $ 108,339 $ 478,855 Reconciliation to net cash provided by operating activities: Provision for loan and real estate losses including recoveries (972) (11,538) Depreciation and amortization 96,222 114,575 83,362 Gain on sale of loans and servicing rights (285,813) (36,583) (122,062) Gain on sale of real estate owned (31,293) (11,998) Gain on sale of premises (54) Loans originated for sale (20,311,648) (4,303,690) (14,512,238) Proceeds from sale of loans 18,418,682 4,340,273 14,634,300 Changes in: Federal Home Loan Bank stock 76,165 (99,513) (16,100) Interest receivable (80,562) (79,298) 48,168 Prepaid expenses and other assets (57,624) 401,315 (276,909) Deferred loan fees (18,797) (10,313) (36,852) Other liabilities 131,829 39,857 (39,043) ---------- ---------- ---------- Net cash (used) provided by operating activities (1,712,836) 474,962 217,945 ---------- ---------- ---------- INVESTING ACTIVITIES: Purchase of investments held to maturity (399,632) Change in deposits with other banks 188,954 Decrease in investments 194,000 Sales of real estate acquired in settlement of loan 179,722 Net change in loans 581,004 (11,263,847) (1,961,941) Proceeds from sale of premises 298,604 Purchase of equipment (7,711) (112,694) (205,347) ---------- ---------- ---------- Net cash provided (used) by investing activities 871,897 (11,587,219) (1,793,566) ---------- ----------- ---------- FINANCING ACTIVITIES: Net increase in customer deposits 7,659,384 5,773,637 228,710 Net proceeds (repayments) - Federal Home Loan Bank borrowings (6,975,000) 5,900,000 975,000 ---------- ---------- ---------- Net cash provided by financing activities 684,384 11,673,637 1,203,710 ---------- ---------- ---------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (156,555) 561,380 (371,911) CASH AND CASH EQUIVALENTS: Beginning of Year 1,416,969 855,589 1,227,500 ---------- ---------- ---------- End of Year $1,260,414 $1,416,969 $ 855,589 ========== ========== ========== OTHER CASH FLOW INFORMATION: Cash payments for: Interest $3,136,196 $2,278,734 $1,893,207 Income taxes 800 800 31,266 NONCASH INVESTING AND FINANCING ACTIVITIES: Transfer of foreclosed loans from loans receivable to real estate owned $239,439 Sales of other real estate owned financed by the Bank $134,671 ========
See notes to financial statements. SUTTER BUTTES SAVINGS BANK, F.S.B. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - ------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES General - The accounting and reporting policies of Sutter Buttes Savings Bank, F.S.B. (the Bank) conform to generally accepted accounting principles and to prevailing practices within the savings and loan industry. Nature of Operations - The Bank operates two branches in Sutter and Yuba Counties in Northern California. The Bank's primary source of revenue is through providing loans to customers, who are predominately small and middle market businesses and middle income individuals. The Bank also operates a wholesale mortgage banking division in San Diego, California, in which mortgage loans are originated by third parties and sold to the secondary market. Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant accounting and reporting policies are discussed below. Cash and Cash Equivalents - For the purposes of the statements of cash flows, cash and cash equivalents have been defined as cash, demand deposits with correspondent banks, federal funds sold, and highly liquid investments purchased with an original maturity, at date of purchase, of three months or less, excluding certificates of deposit and treasury securities. Generally, federal funds are sold for one-day periods. Investment Securities - The Bank accounts for investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Bank's policy with regard to investments is as follows: Held-to-Maturity Securities are carried at cost adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. The Bank's policy of carrying such investment securities at amortized cost is based upon its ability and management's intent to hold such securities to maturity. Loans Receivable - Loans are reported at the principal amount outstanding, net of deferred loan fees or costs or unamortized premiums or discounts on purchased loans, and the allowance for loan losses. Interest on loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and 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 a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. 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 when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Deferred Loan Fees - Loan fees and certain related direct costs to originate loans are deferred and amortized to income by a method that approximates a level yield over the contractual life of the underlying loans. Allowance for Loan Losses - The Bank provides for specific loan losses and for a general loan loss allowance. Allowances for specific loan losses are maintained in amounts that management deems adequate to cover identifiable estimated losses on loans receivable. Provisions for the general loan loss allowance are based on management's analysis that incorporates a number of factors, including past loan experience, the Bank's underwriting practices, current and anticipated economic conditions that may affect the borrower's ability to repay the obligation, and management's ongoing assessment of credit risk inherent in the portfolio. Actual results could differ from those estimates. The Bank adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of Loan - Income Recognition and Disclosures, effective January 1, 1995. Under the new standards, a loan is considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In management's opinion the adoption of SFAS No. 114 and SFAS No. 118 did not have a material effect on the Bank's financial position and results of operations. Mortgage Banking Activities - The Bank originates and sells residential mortgage loans to a variety of secondary market investors, including the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA) and others. Gains or losses on the sale of mortgage loans are recognized upon delivery based on the difference between the selling price and the carrying value of the related mortgage loans sold. Deferred origination fees and expenses are recognized at the time of sale in the determination of the gain or loss. The Bank may retain the servicing on such loans or it may also sell the servicing for such loans to either the purchaser of the loans or to a third party. The Bank recognizes the gain or loss on servicing sold when all risks and rewards of ownership have transferred. Mortgage loans held for sale are stated at the lower of cost or market value as determined by outstanding commitments from investors. Valuation adjustments are charged against the gain or loss on sale of loans. The Bank adopted SFAS No. 122, Accounting for Mortgage Servicing Rights, during fiscal year 1995. Under the new standard the Bank recognizes as separate assets rights to service mortgage loans for others, whether those servicing rights are originated or purchased. Previously, only purchased servicing rights were capitalizable as an asset whereas internally originated rights were expensed. The bank assesses capitalized servicing rights for impairment based on fair value, rather than an estimate of undiscounted future cash flows. The effect of adoption of this standard was not material. Derivative Financial Instruments - The Bank utilizes forward sales commitments on mortgage loans as part of its interest rate risk management strategy. These commitments may be optional or mandatory. Under optional commitments the Bank is not at risk of loss if it does not fulfill the commitment. Mandatory commitments may entail possible financial risk to the Bank if it does not deliver sufficient mortgage loans to fulfill the commitment. The Bank does not hold any derivative financial instruments for trading purposes. Other Real Estate Owned - Real estate acquired by foreclosure is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell (net realizable value). Immediately upon foreclosure, the value of the underlying loan is written down to the fair value of the real estate acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are recorded as a valuation allowance and charged against operating expenses. Operating expenses of such properties, net of related income are included in other expenses and gains and losses on their disposition are included in other income and other expenses. Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation, which is computed principally on the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the respective leases. Estimated useful lives of various classes of assets are as follows: Buildings and improvements 5-30 years Furniture, fixtures and equipment 1-7 years Income Taxes - The Bank accounts for income taxes in compliance with the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109) Accounting for Income Taxes. SFAS 109 applies the asset and liability method of accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities are calculated by applying applicable tax laws to the differences between the financial statement basis and tax basis of assets and liabilities currently recognized in the financial statements. Deferred taxes are provided in the statement of operations in the amount of the net change during the year of the deferred tax balances in the statement of financial condition. Under SFAS 109, deferred tax benefits are reduced, by a valuation allowance for any benefits that, more likely than not in the opinion of management, are not expected to be realized. Earnings Per Share is calculated by dividing net income by the weighted average number of common and common equivalent shares (convertible preferred stock, warrants and stock options) outstanding during the period. The calculation of fully diluted earnings per share does not differ materially from primary earnings per share and is not presented. Accounting for Stock-Based Compensation - In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. The new standard defines a fair value method of accounting for stock options and other equity instruments, such as stock purchase plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period, which is usually the vesting period. This standard will be effective for the Bank beginning in 1996, and requires measurement of awards made beginning in 1995. The new standard permits the Bank to account for equity transactions with employees under existing accounting rules, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share as if the Bank had applied the new method of accounting. The Bank has determined that the effect of adopting these disclosure requirements will not be material and adoption of the new standard will not impact reported earnings or earnings per share, and will have no effect on the Bank's cash flows. Reclassifications - Certain reclassifications have been made to the 1993 and 1994 financial statements to conform with the 1995 presentation. 2. RESTRICTED CASH BALANCES At December 31, 1995 and 1994, reserves of $37,000 and $41,000 in the form of vault cash and deposits with the Federal Reserve Board were required to satisfy federal regulatory requirements. Under regulations of the Office of Thrift Supervision, the Bank is required to maintain cash, United States government securities and other qualifying securities in an amount equal to at least 5% of savings accounts and other obligations due within one year. The Bank satisfied such requirements at December 31, 1995 and 1994. 3. HELD-TO-MATURITY SECURITIES At December 31, the amortized cost of investment securities and their fair value were as follows:
Carrying Gross Gross Amount Unrealized Unrealized Fair (Amortized Cost) Gains Losses Value Held-to-Maturity Securities: December 31, 1995 U.S. Treasuries $ 399,862 $3,888 $403,750 December 31, 1994 U.S. Treasuries $ 399,678 $(7,053) $392,625
At December 31, 1995, all held-to-maturity securities are due in one year or less. 4. LOANS RECEIVABLE The Bank originates loans for business and real estate activities. Such loans are concentrated in Sutter and Yuba Counties and neighboring communities. Substantially all loans are collateralized. Generally real estate loans are secured by real property. Commercial and other loans are secured by bank deposits or business or personal assets. The Bank's policy for requiring collateral is through analysis of the borrower, the borrower's industry and the economic environment in which the loan would be granted. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrower. Management believes that there were no industry or borrower group concentrations at December 31, 1995. Major classification of loans at December 31, 1995 and 1994 are summarized as follows:
1995 1994 Real estate loans secured by: One to four family residences $32,441,349 $ 31,492,668 Multifamily properties 12,661,111 12,835,601 Improved commercial properties 12,410,827 13,261,914 Construction - net 595,554 1,359,037 Land 89,104 29,464 ----------- ------------ Total real estate loans 58,197,945 58,978,684 Commercial loans 29,687 23,229 Loans on savings accounts 118,224 50,397 ----------- ------------ Total loans receivable 58,345,856 59,052,310 Deferred loan fees (205,996) (224,773) Allowance for loan losses (415,000) (467,967) ----------- ------------ Total loans receivable - net $57,724,860 $ 58,359,570 =========== ============
As determined under the capital standards provisions of FIRREA, a savings bank's aggregate commercial real estate loans may not exceed 400% of its capital. The Bank is subject to this limitation. At December 31, 1995, the Bank had total investments in commercial real estate loans which were $3,444,021 less than the maximum allowed under FIRREA. At December 31, 1995 and 1994, the Bank serviced residential real estate loans which it had sold to the secondary market amounting to approximately $7,867,000 and $21,613,000. A summary of the activity in the allowance for loan losses is as follows:
1995 1994 1993 Balance at beginning of year $ 467,967 $ 365,000 $ 376,538 Provision credited to expense (972) (10,867) (106,548) Recoveries 1,470 113,834 95,010 Losses charged against allowance (53,465) --------- Balance at end of year $ 415,000 $ 467,967 $ 365,000 ========= ========= =========
At December 31, 1995, 1994 and 1993, $415,000, $365,000, and $365,000, respectively of the allowance for loan losses is considered to be a general loss allowance for regulatory capital calculation purposes. During the year ended December 31, 1994, $113,300 of the Bank's recoveries resulted from a judicial settlement. 5. IMPAIRED AND NONPERFORMING LOANS At December 31, 1995, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 was approximately $436,979. All of which has a related valuation allowance of $37,430. For the year ended December 31, 1995, the average recorded investment in loans for which impairment has been recognized was approximately $503,000. During the portion of the year that the loans were impaired the Bank recognized no interest income. Nonaccrual and nonperforming loans at December 31, 1995 were $436,979. There were no loans on nonaccrual status at December 31, 1994. Interest income foregone on nonaccrual loans approximated $11,972 in 1995, $9,064 in 1994 and $0 in 1993. No cash collections of interest on nonaccrual loans for the same periods were recorded. At December 31, 1995, there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual. 6. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31:
1995 1994 Land $ 160,000 $ 225,568 Buildings and improvements 450,666 735,217 Furniture, fixtures and equipment 476,481 496,485 ---------- ---------- Total 1,087,147 1,457,270 Less accumulated depreciation (530,235) (513,113) ---------- ---------- $ 556,912 $ 944,157 ========== ==========
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was $95,642, $114,093, and $77,938, respectively. 7. FEDERAL HOME LOAN BANK STOCK The Bank is a member of the Federal Home Loan Bank System and as such is required to maintain an investment in capital stock of the Federal Home Loan Bank of San Francisco. At December 31, 1995 and 1994 the Bank owned 4,801 and 5,563 shares, respectively, of its $100 par value capital stock. The amount of stock owned satisfies the latest annual determination made by the Federal Home Loan Bank of San Francisco. 8. CUSTOMER DEPOSITS Customer deposits by interest rate at December 31 are as follows:
1995 1994 Certificate accounts: Less than 4% $ 163,488 $ 3,905,468 4.00% to 6.00% 20,821,305 25,599,646 6.01% to 8.00% 20,978,178 6,798,019 ----------- ------------ Total 41,962,971 36,303,133 NOW and money market accounts 7,724,793 7,633,719 Passbook accounts 7,718,191 5,809,719 ----------- ------------ Total $57,405,955 $ 49,746,571 =========== ============ Weighted average interest rate 5.30% 4.43% ==== ====
The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100,000 was approximately $5,592,008 and $5,989,986 at December 31, 1995 and 1994, respectively. A summary of certificate accounts by maturity at December 31 is as follows:
1995 1994 Maturity within one year $24,465,245 $ 29,154,039 Balance thereafter 17,497,726 7,149,094 ----------- ------------ Total $41,962,971 $ 36,303,133 =========== ============
Interest expense on deposits for the years ended December 31 is summarized as follows:
1995 1994 1993 Certificates of Deposit $ 2,522,661 $1,522,963 $ 1,502,709 Passbook Savings 245,044 209,232 47,749 NOW and Money Market 136,715 164,350 267,666 ----------- ---------- ----------- $ 2,904,420 $1,896,545 $ 1,818,124 =========== ========== ===========
9. ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank of San Francisco are collateralized by certain first mortgage loans and the Bank's investment in Federal Home Loan Bank stock. Mortgage loans receivable pledged to the Federal Home Loan Bank of San Francisco totaled approximately $24,405,455 and $23,034,466 at December 31, 1995 and 1994, respectively. Weighted average interest rates on advances at December 31, 1995 and 1994 of $3,400,000 and $10,375,000 were 6.32% and 6.19%, respectively. All advances from the Federal Home Loan Bank are less than one year in term. 10. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL Preferred stock is immediately convertible into common stock at any time at the option of the holders of the preferred stock, on the basis of 1.98 shares of the common stock of the Bank for each share of the preferred stock converted. At the discretion of the Board of Directors, the preferred stockholders are eligible to receive a cash dividend equal to $0.60 per share or 12% of the par value per share per year. Preferred stock dividends have priority over common stock dividends. Dividends are nonparticipating and non cumulative. If, in any year a cash dividend is not declared and paid, preferred stockholders shall earn the right to receive immediately exercisable warrants to purchase a number of shares of common stock equal to the cash dividend per share based on the per share book value of the underlying common stock at the end of the year in which the preferred stock dividend is earned. The warrants are not transferable, have a five-year term and can be exercised for $0.01 per share for each share of common stock. The difference between the exercise price of the warrants and their estimated fair market value is reclassified from retained earnings to additional paid-in-capital when the preferred stockholders earn the right to receive the warrants. Prior to 1994, management estimated that the fair value of the warrants approximated zero. During 1994, management revised its estimate of the fair value of the warrants earned by preferred stockholders during the years ended December 31, 1994, 1993 and 1992. As a result, the cumulative differences of $173,933 between the revised fair values of the warrants and their exercise price has been recorded as a reclassification between retained earnings and additional paid-in capital for the year ended December 31, 1994. As of December 31, 1995, 227,055 warrants were earned, 190,533 were issued and 139,513 were exercised. During the years ended December 31, 1995, 1994, and 1993 preferred stockholders earned 36,522, 39,658, and 39,410 warrants, respectively. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Capital adequacy guidelines and the regulatory framework for prompt corrective action require that the Bank meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and a leverage ratio of Tier 1 capital (as defined in the regulations) to adjusted assets (as defined), and a minimum ratio of Tier 1 and total capital (as defined) to risk-weighted assets (as defined). In addition, the Bank is subject to a minimum tangible capital ratio. Management believes, as of December 31, 1995, that the Bank meets all capital adequacy requirements to which it is subject. The following table shows the Bank's capital ratios at December 31, as well as the minimum capital ratios required to be deemed "well capitalized" under the regulatory framework:
Minimum Well Capitalized 1995 1994 Ratios Total risk-based capital ratio 10.20% 9.19% 10.00% Tier 1 capital to risk-weighted assets 9.14% 8.25% 6.00% Leverage ratio 5.49% 5.04% 6.00% Tangible capital 5.49% 5.04% 3.00%
Legislation is currently pending in Congress which would recapitalize the Savings Association Insurance Fund (SAIF) in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund (BIF). The legislation would require an assessment of all SAIF-insured institutions of approximately 0.80% of their March 31, 1995, customer balances. If such legislation had been passed by December 31, 1995, the Bank would have been assessed approximately $325,000, on an after tax basis. After paying the one-time assessment, it is expected that the Bank would pay significantly reduced insurance premiums on its customer deposits. There is no certainty that such legislation will become law. 11. STOCK OPTIONS On April 21, 1992 the Board of Directors adopted the Employee Stock Option Plan (Employee Plan) for full-time salaried officers and employees of the Bank and the Directors' Stock Option Plan (Directors' Plan) for all nonemployee directors of the Bank. The Employee and Directors' Plans were approved by the Bank shareholders on June 10, 1992. Employee options vest over three to five years and at exercise prices per share of $2.42 to $3.04. Director options vest six months after issuance at $2.42 per share. The following is a summary of stock option activity for the employee plan for the years ended December 31, 1995, 1994 and 1993:
Options Options Outstanding Available Number Price For Grant of Shares Per Share Balance, January 1, 1993: 102,084 15,000 $2.42 Options granted (2,500) 2,500 3.04 Options terminated 6,000 (6,000) 2.42 --------- ------- Balance, December 31, 1993: 105,584 11,500 2.42-3.04 Options granted (10,500) 10,500 2.82 Options terminated 9,500 (9,500) 2.42-2.82 -------- ------- ---------- Balance, December 31, 1994 and 1995 104,584 12,500 $2.42-3.04 ======= ====== ==========
At December 31, 1995, 7,500 options were exercisable. Under the Directors' Plan, 39,028 options were reserved for issuance. During 1992, 36,800 options were granted. No options issued under the Directors' Plan have been exercised or terminated. At December 31, 1995, 36,800 options were exercisable and 2,228 options were available for grant. 12. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the years ended December 31 consisted of the following:
1995 1994 1993 Compensation and benefits $ 736,085 $ 821,587 $ 692,807 Occupancy and equipment 206,676 211,128 162,508 Insurance 174,982 175,863 202,375 Office operating expenses 118,087 108,769 100,105 Data processing 88,018 85,190 117,089 Bank processing charges 76,706 66,692 71,497 Professional services 65,304 85,972 134,605 Assessments and fees 22,045 19,604 27,484 Advertising 19,718 55,836 52,699 Loan department expenses 3,909 12,432 19,793 Other 40,978 52,603 34,578 ----------- ---------- ----------- Total $ 1,552,508 $1,695,676 $ 1,615,540 =========== ========== ===========
13. COMMITMENTS AND CONTINGENT LIABILITIES The Bank enters into commitments to fund residential mortgage loans, provided the borrower meets certain credit and financial criteria. The Bank's total commitments to fund loans as of December 31, 1995 totaled $2,402,041. In addition the Bank is committed to fund $3,746 for undisbursed portions of residential construction loans in accordance with the specified terms and conditions of such loans. Both types of commitments entail possible credit risk to the Bank, which is controlled through loan underwriting, construction inspection procedures, and management's ongoing assessment of the credit risk inherent in such loans. Management believes that the credit risk inherent in these commitments is similar to the credit risk inherent in its existing loan portfolio. The Bank is involved in various additional claims and legal action arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Bank's financial condition. 14. INCOME TAXES The components of the provision for income taxes for 1995, 1994 and 1993 are as follows:
1995 1994 1993 Current: Federal State $(29,626) $ 800 $ 800 -------- -------- -------- (29,626) 800 800 -------- -------- -------- Deferred: Federal 183,520 13,155 State (132,726) 62,144 2,624 -------- -------- -------- 50,794 75,299 2,624 -------- -------- -------- Total $ 21,168 $ 76,099 $ 3,424 ======== ======== ========
A reconciliation of the income tax expense computed at the federal statutory rate of 35% to the Bank's actual tax expense is as follows:
1995 1994 1993 Federal income tax expense at statutory rate $131,127 $ 64,553 $168,798 State franchise taxes (net of federal income tax benefit) 11,055 13,962 35,968 Benefit of amending prior year California returns and changing California method of accounting for bad debts (107,394) Reduction of valuation allowance relating to recognition of NOL carryforwards (8,831) (2,913) (204,684) Other (4,788) 497 3,342 -------- -------- -------- Total $ 21,169 $ 76,099 $ 3,424 ======== ======== ========
In 1995, the Bank amended prior year California returns to claim the enterprise zone net interest deduction. The Bank also received permission to change its method of accounting for bad debts for California purposes in 1995. This resulted in the recapture of the entire California bad debt reserve of $1,388,275, and the utilization of $1,087,143 of net operating losses that would otherwise have expired in 1995. The net tax benefit of these events is $107,394. Deferred income taxes reflect the tax effect of temporary differences existing between financial statement basis and tax basis of assets and liabilities recognized in the financial statements. Under SFAS 109, deferred tax benefits are reduced, by a valuation allowance for any benefits that, more likely than not in the opinion of management, are not expected to be realized. The tax effect of the principle temporary items creating the Bank's deferred tax benefits at December 31, 1995 and 1994 are:
1995 1994 Net operating loss carryforward $ 356,845 $ 491,676 Bad debt reserves (373,822) (462,764) FHLB dividends (83,688) (90,122) Other (22,949) (2,778) ---------- --------- Net deferred tax asset (liability) (123,614) (63,988) Valuation allowance (18,079) (26,910) ---------- --------- $ (141,693) $ (90,898) ========== =========
At December 31, 1995, the valuation allowance of $18,079 relates to California state NOLs which in management's opinion it is more likely than not that a portion of such NOLs may expire before utilization. Under SFAS No. 109, a deferred tax liability is recognized for temporary differences arising from bad debt reserves for tax purposes of U.S. savings and loan associations that originated in tax years beginning after December 31, 1987. For tax bad debt reserves existing as of December 31, 1987 (the base year tax bad debt reserve) a qualifying savings and loan association is not required to provide deferred income taxes on the amount of such reserves unless it becomes apparent that such temporary differences will reverse in the foreseeable future. Retained earnings at December 31, 1995 include approximately $212,000 representing such cumulative bad debt deductions for which no deferred income taxes have been provided. The reduction in valuation allowance of $8,831, $2,913, and $204,685 for the years ended December 31, 1995, 1994 and 1993 relates to changes in the valuation allowance established as of December 31, 1991 for the Bank's NOLs. At December 31, 1995, the Bank had a NOLs of $930,564 for federal tax purposes and $542,412 for state tax purposes that can be used to offset future taxable income. The federal NOLs begin expiring in 2004, and the state NOLs expire as follows: Year Amount 1997 $403,975 1998 49,695 1999 88,742 Utilization of the NOLs in future years may be limited by the provisions of Internal Revenue Code Section 382, which reduces the amount of NOL carryforwards that can be utilized in the event of a change in stock ownership. 15. INTEREST RATE RISK The Bank is engaged principally in providing first mortgage loans to individuals and commercial enterprises. At December 31, 1995, the Bank's assets consisted primarily of assets that earned interest at adjustable interest rates. Those assets were funded primarily with short-term liabilities that have interest rates that vary with market rates over time. At December 31, 1995, the Bank had interest earning assets of $63,271,500 having a weighted average effective yield of 7.68% and a weighted average term to adjustment of 9 months, and interest bearing liabilities of $60,805,955 having a weighted average effective interest rate of 5.35% and a weighted average maturity of 6 months. The Bank originates and purchases both adjustable and fixed interest rate loans. At December 31, 1995, the loan portfolio was composed of fixed rate loans (4.3%) and adjustable rate loans (95.7%) as follows: Next Repricing Opportunity Fixed Rate Adjustable Rate or Contractual Maturity Book Value Book Value 1 month - 1 year $ $55,829,413 =========== 3 years- 5 years 276,533 Over 20 years 2,239,910 ----------- $ 2,516,443 The adjustable rate loans have interest rate adjustment limitations and are generally indexed to the Federal Home Loan Banks 11th District Cost of Funds index rate. Future market factors may affect the correlation of the interest rate adjustment with the rates the Bank pays on the short-term deposits that have been primarily utilized to fund these loans. 16. RELATED PARTY TRANSACTIONS At December 31, 1995 and 1994, certain officers and directors were indebted to the Bank for loans made in the ordinary course of business. The activity for such related party loans and advances for 1995 and 1994 is summarized as follows:
1995 1994 Beginning of year $ 196,807 $ 216,494 Borrowings 138,000 Repayments (21,808) (19,687) --------- ---------- End of year $ 312,999 $ 196,807 ========= =========
On February 6, 1995 the Bank sold its administrative premises to a company owned by a director. In conjunction with the sale, the Bank leased back a portion of the premises from the buyer. The lease is at a rate of $870 per month and is for a term of one year. The sales price approximated book value. 17. FAIR VALUE OF FINANCIAL STATEMENTS The Bank adopted SFAS No. 107, Disclosures About Fair Value of Financial Instruments (SFAS 107) during fiscal year 1995 which requires that the Bank disclose the fair value of financial instruments for which it is practicable to estimate that value. Although management uses its best judgment in assessing fair value, there are inherent weaknesses in any estimating technique that may be reflected in the fair values disclosed. The fair value estimates are made at a discrete point in time based on relevant market data, information about the financial instruments, and other factors. Estimates of fair value of instruments without quoted market prices are subjective in nature and involve various assumptions and estimates that are matters of judgment. Changes in the assumptions used could significantly affect these estimates. Fair value has not been adjusted to reflect changes in market conditions subsequent to December 31, 1995, therefore, estimates presented herein are not necessarily indicative of amounts which could be realized in a current transaction. The following estimates and assumptions were used as of December 31, 1995 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. (a) Cash and Cash Equivalents - The carrying amount represents a reasonable estimate of fair value. (b) Investment Securities - Held-to-maturity securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. (c) Loans Receivable - Commercial loans, residential mortgages, and construction loans are segmented by fixed and adjustable rate interest terms, by remaining maturity, and by performing and nonperforming categories. The fair value of performing loans is estimated by discounting contractual cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Assumptions regarding credit risk, cash flow, and discount rates are judgmentally determined using available market information. The fair value of nonperforming loans and loans delinquent more than 30 days is estimated by discounting estimated future cash flows using current interest rates with an additional risk adjustment reflecting the individual characteristics of the loans. (d) Deposit Liabilities - Noninterest bearing and interest bearing demand deposits and savings accounts are payable on demand and book value approximates fair value. The fair value of time deposits are based on the discounted value of contractual cash flows based on rates currently offered for deposits of similar size and remaining maturities. (e) Commitments to Fund Loans/Standby Letters of Credit - Commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The differences between the carrying value of commitments to fund loans or standby letters of credit and their fair value is not significant and therefore not included in the following table. The estimated fair values of the Bank's financial instruments as of December 31, are as follows (in thousands):
1995 Carrying Fair Amount Value FINANCIAL ASSETS: Cash and cash equivalents $ 1,260,414 $ 1,260,414 Certificates of deposits 1,386,000 1,386,000 Investments held to maturity 399,862 403,750 Loans receivable 59,903,639 60,399,000 FINANCIAL LIABILITIES: Deposits 57,405,955 57,728,000 FHLB advances 3,400,000 3,402,000
* * * * * * EX-99.4 12 SUTTER BUTTES' DECEMBER 31, 1995 FORM 10 - KSB EXHIBIT 99.4 OFFICE OF THRIFT SUPERVISION WASHINGTON, D.C. 20552 FORM 10 - KSB (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended: December 31, 1995 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) OTS Docket Number: 7931 SUTTER BUTTES SAVINGS BANK, F.S.B. (Exact name of registrant as specified in its charter) United States 94-2793476 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 Plumas Street, Yuba City, California 95991 (Address of principal executive offices) (Zip Code) (916) 673-7283 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.01 per Share ("Common Stock") (Title of Class) Series A Preferred Stock, Par Value $5.00 per Share ("Preferred Stock") (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 at least the past 90 days. Yes X No Issuer's revenues for its most recent fiscal year: $5,062,439 Aggregate market value of Common Stock held by nonaffiliates of Sutter Buttes Savings Bank at March 26, 1996: $1,496,653. Aggregate market value of Preferred Stock held by nonaffiliates of Sutter Buttes Savings Bank at March 26, 1996: $741,100. There were 626,743 shares of Common Stock and 232,200 shares of the Series A Preferred Stock of the Registrant outstanding as of March 26, 1996. Documents incorporated by reference: Definitive Proxy Statement for the 1996 Annual Meeting of Shareholders (the "Proxy Statement"). (See Part III, Items 9, 10, 11 and 12). Transitional Small Business Disclosure Format: Yes No X This report includes a total of 91 pages. Exhibit Index is on page 56-58. TABLE OF CONTENTS PART I Page Item 1. Business....................................... 3 Item 2. Properties..................................... 31 Item 3. Legal Proceedings.............................. 31 Item 4. Submission of Matters to a Vote of Security Holders........................................ 31 PART II Item 5. Market for the Common Equity and Related Stockholder Matters............................ 32 Item 6. Selected Financial Data........................ 36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 37 Item 8. Financial Statements and Supplementary Data.... 55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 55 PART III Item 10. Directors and Executive Officers............... 55 Item 11. Executive Compensation......................... 55 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 55 Item 13. Certain Relationships and Transactions......... 55 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 56 Signatures............................................... 60 2 ITEM 1. BUSINESS The Bank Sutter Buttes Savings Bank, F.S.B. ("Bank") was originally chartered as a California state savings and loan association by the Department of Savings and Loan ("DSL") in 1982 and began operations on May 23, 1983. The Bank conducts its business at three locations. The main savings branch and executive office is located at 700 Plumas Street, Yuba City, California 95991. The Bank also operates a branch facility located at 729 "E" Street, Marysville, California 95901. In addition, on March 1, 1995 the Bank opened a wholesale mortgage banking division located at 5355 Avenida Encinas, Carlsbad, California 92008. The business of the Bank consists primarily of attracting deposits from the general public and using those deposits, together with borrowings and other funds, in the origination and servicing of loans secured by real estate and, to a lesser extent, various types of consumer and commercial loans. Currently, the Bank invests in short-term certificates of deposit, federal funds and U. S. Treasury Securities. The Bank's lending is focused primarily on the origination of mortgage or construction loans for one-to-four unit residential real estate. To a lesser extent, loans are also originated on five or more unit residential real estate and non-residential real estate. The principal sources of funds for the Bank's lending activities are deposit accounts, repayments of existing loans, the sale of loans and advances from the Federal Home Loan Bank ("FHLB") of San Francisco. The Bank's principal sources of income are interest on loans and fees earned from the origination and sale of real estate loans. Its principal expenses are interest paid on deposit accounts, borrowings and expenses of its day-to-day operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and until June 1, 1993, the DSL (See "Conversion"). It is also a member of the FHLB of San Francisco, which is one of the 12 regional banks making up the Federal Home Loan Bank System. The Bank is further subject to regulations of the Board of Governors of the Federal Reserve System (the "FRB") governing reserves required to be maintained against deposits and certain other matters. See "SUPERVISION AND REGULATION." Conversion The Bank converted from a state-chartered savings and loan association to a federally-chartered savings bank effective June 1, 3 1993. Shareholder approval of the conversion was obtained at the Annual Meeting of Shareholders on April 27, 1993, and OTS approval was obtained on May 14, 1993. Stock Offerings General Between June 26, 1991 and January 31, 1992, the Bank conducted a public offering (the "Offering") pursuant to which it sold 152,200 shares (the "Shares") of Series A Preferred Stock (the "Preferred Stock") at a price of $5.00 per Share. In April 1991, a Private Offering of 80,000 Shares of Series A Preferred Stock was made to certain directors, officers and key new investors in the Bank, on substantially the same terms as the Shares were offered in the Offering. The Bank received $400,000 from the sale of Shares in the Private Offering which was used by the Bank to satisfy its regulatory core and tangible capital requirements. The Bank used the net proceeds from the Offering to support its deposit gathering and lending activities. The Preferred Stock The Preferred Stock is entitled to an annual, noncumulative 12% Cash Dividend ($0.60) per Share, if and as declared by the Board of Directors in its sole discretion, out of funds legally available therefor. In the event that the 12% Cash Dividend is unpaid in any year, the holders of the Preferred Stock shall receive one (1) immediately exercisable five (5) year Warrant representing the right to purchase a number of shares of Common Stock, determined pursuant to a formula. See "The Warrants," herein. The Preferred Stock is entitled to a liquidation preference of $5.00 per Share plus any declared and unpaid cash dividends and is senior to all other existing equity securities of the Bank with respect to dividends and rights to payment on liquidation. The Preferred Stock is immediately convertible into Common Stock at the option of the holders at the rate of 1.98 shares of Common Stock per Share of Preferred Stock. No fractional shares of Common Stock will be issued upon conversion of the Preferred Stock. The Preferred Stock has one (1) vote per Share and the right to cumulate votes in the election of directors of the Bank. The Preferred Stock is redeemable at the option of the Bank (subject to regulatory approval or notice) for cash at a redemption price of the par value of the Preferred Stock, per Share, plus any unpaid cash dividend without interest thereon, less any Warrants previously exercised. Additionally, upon redemption of the Preferred Stock, the Warrants are also redeemable, at the option of the Board of Directors, at a redemption price of $0.01 per each share of Common Stock issuable upon exercise of the Warrant. 4 The Warrants In the event that the Bank does not declare a Cash Dividend in any year, the holders of Preferred Stock receive an immediately exercisable, non-transferable Warrant representing the right to purchase a number of shares of Common Stock determined by dividing the cash value of the 12% Cash Dividend ($0.60) by the book value of the underlying Common Stock, per share, as of the end of the year in which the 12% Cash Dividend was earned. No fractional shares of Common Stock will be issued; alternatively, the number of shares for which a Warrant is issued in any year is rounded down to the next whole number of shares of Common Stock. Each Warrant when issued has a term of five (5) years. The exercise price of the Warrants are $0.01 per Share for each share of Common Stock issuable upon exercise. The Warrants do not confer on the holders thereof any rights as shareholders of the Bank until the Warrant is exercised by payment of the purchase price and submission of a Warrant exercise form. At any time and from time to time the rights of the holders of Warrants to exercise the Warrants may be suspended in order for the Bank to comply with State and Federal securities laws and regulations affecting the exercise of the Warrants. Upon redemption of the Preferred Stock, the Warrants are redeemable at any time during their term at a redemption price of $0.01 per Share issuable upon exercise of the Warrant. Upon issuance, the Warrants are subject to the terms of the respective Warrant Agreements dated February 25, 1992, February 23, 1993, February 15, 1994, February 21, 1995, and February 27, 1996. Due to the capital requirements applicable to the Bank and the Bank's present desire to retain earnings to support growth and future operations, it was not anticipated that the 12% Cash Dividend to which the Preferred Stock is entitled would be distributed in cash during at least the first five (5) years following the Offering. Accordingly, for fiscal years 1991, 1992, 1993, 1994 and 1995 the 12% cash dividend was paid and distributed in the form of Warrants, and it is anticipated that this will continue. Capital Compliance The following table sets forth information concerning the Bank's capital compliance using the minimum regulatory capital requirements and the Bank's actual regulatory capital levels through December 31, 1995:
Excess of Capital Required Actual required Standard Required % Actual % Amount Amount Amount (dollars in thousands) Core capital(1) 4.00% 5.49% $2,587 $3,549 $ 962 Tangible capital 1.50% 5.49% $ 970 $3,549 $2,579 Risk-based capital 8.00% 10.20% $3,107 $3,964 $ 857 - ----------------- (1) Leverage limit.
5 Lending Activities General The Bank has adopted a policy of making real estate loans for its own portfolio principally in the form of adjustable rate mortgage loans. As a part of its asset/liability management strategy, the Bank's lending activity includes short-term and interest rate sensitive loans. The Bank has general authority to lend anywhere in the United States; however, the Bank's primary service area is Yuba and Sutter Counties in California. The Bank's secondary market area is made up of Butte, Sacramento, Yolo, Colusa, Placer and Nevada Counties, and, to a lesser degree, surrounding counties in Northern California. On March 1, 1995, the Bank opened a wholesale mortgage banking division in San Diego, California. This division originates loans throughout California, with a concentration in the San Diego area. The wholesale division originates loans for sale to the secondary market. In 1995 the majority of loans originated through the Bank were from the wholesale division. Real Estate Lending At year end 1995 the real estate loans, including portfolio loans and loans held for sale, had increased to $59.9 million from $58.4 million at year end 1994. The Bank's primary lending activity consists of originating residential loans for the purpose of enabling borrowers to purchase, hold or refinance residential real property secured by first liens on such property. The Bank has established criteria with respect to documentation and credit standards that are applied equally to all real estate lending. Origination, Purchase and Sale of Loans The Bank primarily originates loans for its own portfolio and for sale in the secondary market. In an effort to reduce the interest rate risk in its loan portfolio, the Bank offers loan products with adjustable interest rates. At December 31, 1995, adjustable rate mortgages represented approximately 95.7% of the Bank's loan portfolio. The Bank's current policy is to limit its origination of fixed rate residential real estate loans to loans in conformance with the standards of secondary market conduits to which the Bank sells. The sale of fixed rate loans in the secondary market generates non-interest income, the excess of the sales price over the cost of origination of fixed rate loans. Loans are originated by loan officers and commissioned loan agents or referred by loan brokers, which have been approved by the Board of Directors. Loans may be approved by management up to limits prescribed in the Bank's loan policy or by the Bank's Loan Committee. The Bank's loan products require significant documentation, and careful effort is maintained to insure quality 6 control. All processing, servicing, underwriting and funding are subject to review by the Board of Directors. As part of the loan process, qualified independent appraisers inspect and appraise the secured property, while loan personnel gather and analyze information concerning the income, financial condition, employment and credit history of the applicant. When analysis and appraisal are complete, the transaction is either declined or forwarded to the Loan Committee for approval. The Loan Committee is comprised of the President, a Loan Manager and four non-management directors. The President and the Loan Manager have the authority to approve 1-4 family loans, originated for sale to the secondary market up to the maximum secondary marketing limits. Any two members of Loan Committee may approve salable loan products authorized by the Board and portfolio loans, including construction loans, up to $250,000. The Bank's loan policy requires title insurance insuring the priority of the Bank's lien on all of its loans secured by real property and requires that fire and extended coverage casualty insurance be maintained in amounts at least equal to the amounts of the loans on all properties standing as security for its loans. The Bank sells its fixed rate whole loans and participations in loans to institutional investors and is approved as a seller-servicer by FHLMC and FNMA and several other buyers of loans in the secondary markets. At December 31, 1995, the Bank was servicing $7,867,413 in loans for FHLMC, FNMA and private institutional loan buyers. During 1995 the Bank sold $17,368,895 of its servicing portfolio to a mortgage banking company. Management does not believe there is any additional risk inherent in the sale and servicing of loans because the underwriting involved is the same as origination for portfolio. Interest Rates, Terms and Fees Interest rates charged on the Bank's loans are affected primarily by the demand for such loans, the availability to the Bank of funds for lending purposes and yields available to the Bank from alternative investment opportunities. These factors are in turn affected by general economic conditions and such other factors as monetary policies of the federal government, the general supply of money in the economy, legislative tax policies and governmental budgetary matters. Interest rates charged by the Bank in California are not subject to the state's constitutional usury limitations because lending activities of savings institutions are exempt from California usury laws, but the Bank is subject to federal usury laws. The Bank's single-family residential loan contracts provide for repayment of principal over 30 years or less. Because borrowers may refinance or prepay their loans, however, such loans 7 normally remain outstanding for a substantially shorter period of time. In addition to interest earned on loans, the Bank receives fees in connection with the origination of loans. The Bank earns additional income from fees for loan modifications, servicing sold loans, late payments, changes of property ownership and for miscellaneous related services. Customer Deposits and Other Sources of Funds General Savings and other types of deposits are the principal source of the Bank's funds for use in lending and for other general business purposes. In addition to deposit accounts, the Bank derives funds from loan repayments and prepayments, whole loan and loan participation sales, borrowings and retained earnings. The availability of funds from loan sales is influenced by general interest rates and other market conditions. Loan repayments and prepayments have been a relatively stable source of funds, while savings accounts inflows and outflows vary widely. Borrowings have been limited to FHLB of San Francisco advances. Deposit Accounts The Bank attracts both short-term and long-term savings deposits from the general public by providing a wide assortment of accounts and rates. These deposit programs include regular passbook accounts and interest-bearing checking accounts, money market savings accounts, and certificates of deposit with varying maturities and rates. Included among these savings programs are Individual Retirement Accounts and Keogh accounts. The Bank does not use brokerage firms to obtain negotiable certificate of deposit accounts. The Bank's savings deposits are obtained principally from residents of its primary market area. Subject to applicable regulatory requirements, interest rates, minimum balance requirements, service fees, penalties and other terms and conditions of accounts are established by management and reviewed by the Board of Directors. Deposits represent liabilities of the Bank and, therefore, account holders would be entitled to full payment of their accounts prior to any payment to shareholders in the event of liquidation of the Bank. The Bank's accounts are insured by the Savings Association Insurance Fund ("SAIF") up to applicable limits (currently $100,000 per depositor in most cases). See "SUPERVISION AND REGULATION." 8 Employees At December 31, 1995, the Bank had a total of twenty-six (26) full-time equivalent employees, including seven (7) part-time employees. The Bank provides its employees with a comprehensive program of benefits, including basic major medical insurance, dental insurance, life insurance, accident death and dismemberment insurance, and long-term disability coverage, a 401 (k) Plan and an Internal Revenue Service Section 125 - Cafeteria Plan. The employees are not represented by a collective bargaining group. The Bank's management considers its employee relations to be excellent. Competition The Bank experiences substantial competition in both attracting and retaining deposits, as well as in making new loans. Most of the Bank's competition for deposits and loans comes from other financial institutions operating in its primary service area, comprising Sutter and Yuba Counties, California, and, to a lesser extent, other nearby areas of Northern California. The Bank also faces competition for deposits from various investment vehicles sold by securities dealers and competition for loans from mortgage bank/brokerage operations. As of December 31, 1995, management estimates that there were approximately 10 other financial institutions with offices in the Bank's primary service area. The Bank's asset size of $64,629,739 at December 31, 1995 is modest compared with several of the large institutions (with assets well in excess of $1 billion) which have offices in the Bank's market area. The Bank's primary deposit market is considered to be the retail consumer area, particularly individual money market accounts, certificates of deposit and low volume NOW accounts and checking accounts. The Bank has attracted new deposits by paying competitive rates on certificates of deposit and money market accounts and by providing convenient personal service. The Bank's competition for loan originations is principally from other financial institutions, mortgage banking companies, insurance companies and other institutional lenders. The Bank attracts loan applicants primarily through competitive interest rates and loan origination fees, professional quality of services and prompt local loan application review and closing procedures. SUPERVISION AND REGULATION General As a federally chartered savings bank, the Bank is subject to regulation, supervision and periodic examination by the OTS and the FDIC. The regulations of these agencies govern most aspects of the 9 Bank's business and operations. Until its conversion to a federal charter in June 1993, the Bank also was regulated by the California Department of Savings and Loan. The Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF") which is administered by the FDIC to the maximum amount permitted by law, which is currently $100,000 per depositor in most cases. As administrator of the SAIF, the FDIC may prohibit any activity found to pose a serious risk of loss to the insurance fund or restrict the amount of an activity engaged in by a state-chartered thrift or its subsidiaries where it exceeds authority available to federal savings institutions. The OTS has authority to issue regulations, conduct examinations and supervise the operations of savings institutions. The OTS regulatory scheme is comprehensive, governing, among other things, capital requirements, equity investments, affordable housing, liquidity, securities issuances, the form of savings instruments issued by savings institutions, certain aspects of a savings bank's lending activities, including appraisal requirements, maximum loan amounts, private mortgage insurance coverage, lending authority and nondiscriminatory lending practices. OTS regulations also restrict transactions between savings institutions and affiliated parties which are deemed to be a conflict of interest under the regulations. In addition, the OTS' consent is required prior to any major corporate reorganization, including a merger or bulk purchase or disposition of assets. The Federal Home Loan Bank System Stock Ownership All savings institutions that make long-term home mortgage loans or insured depository institutions which maintain at least 10% of their total assets in residential mortgages are required to be members of the regional Federal Home Loan Banks (the "FHLBs"), which are in turn overseen by the Federal Housing Finance Board. The Bank, as a member of the Federal Home Loan Bank System, is required, at a minimum, to acquire and hold shares of capital stock in the FHLB of San Francisco in an amount equal to 1% of the Bank's aggregate unpaid loan principal, but not less than $500. The Bank earned dividends totalling $23,415 and $25,094 during the years ended December 31, 1995 and 1994, respectively. Advances The Bank is authorized to apply for advances from the FHLB of San Francisco for residential housing finance, provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different credit programs, each having its own interest rate and range of maturities. Amounts an institution may borrow decrease if the institution fails to meet the Qualified 10 Thrift Lender ("QTL") test. See "Federal Deposit Insurance Corporation Improvement Act of 1991 - Qualified Thrift Lender Test." The FHLB prescribes the acceptable uses for advances as well as limitations on the size of advances. Additionally, at the time of origination or renewal of a loan or advance, FHLBs must obtain a security interest in collateral in the form of the following low-risk assets: whole loans, United States Government or mortgage-backed securities, FHLB deposits, and certain other real estate. At December 31, 1995, the Bank had $3,400,000 in advances from the FHLB of San Francisco. Federal Reserve System The Board of Governors of the Federal Reserve System ("FRB") adopted regulations that require savings banks to maintain reserves against their transaction accounts (primarily NOW accounts) and non-personal time deposits. FRB regulations generally exempt from reserve requirements the first $4.3 million in net transaction accounts. Reserves of 3% (subject to adjustment by the FRB) must be maintained against net transaction accounts from $4.3 to $52.0 million, and a reserve of $1,560,000 plus 10% against that portion of total transaction accounts in excess of $52.0 million must be maintained. The FRB regulations do not presently require reserves to be maintained on time deposits and savings accounts. The balances on deposit to meet the reserve requirements imposed by the FRB may also be used to satisfy the liquidity requirements that are imposed by the OTS. See "Liquidity Requirements". As of December 31, 1995 the Bank had net transaction accounts totalling $5,533,000 and therefore no reserve requirement beyond what is met through vault cash. Capital Adequacy Requirements The Bank is subject to the OTS's regulations governing capital adequacy, which include an interest rate risk component as of January 1994. OTS regulations set total capital requirements and define capital in terms of "core capital elements," or Tier 1 capital1 and "supplemental capital elements," or Tier 2 - -------- 1 Tier 1 capital is generally defined as the sum of the core capital elements less a percentage of goodwill and certain intangibles. The following items are defined as core capital elements: (i) common stockholders' equity; (ii) noncumulative perpetual preferred stock and related surplus; and (iii) minority interests in the equity accounts of consolidated subsidiaries. Qualifying supervisory goodwill was limited to 0.375% of total assets during 1994 and must be phased out as a component of core capital by January 1, 1995. 11 capital.2 The maximum amount of supplemental capital elements which qualifies as Tier 2 capital is limited to one-hundred percent (100%) of Tier 1 capital. OTS regulations require the Bank to maintain leverage capital at a minimum of 3% of adjusted total assets, risk-based capital at a minimum of 8% of risk weighted assets and tangible capital at a minimum of 1.5% of adjusted total assets. Tangible capital includes core capital less qualifying supervisory goodwill and other intangible assets, plus purchased mortgage servicing rights. Risk-weighted assets equal total assets plus consolidated off-balance sheet items where each asset or item is multiplied by a risk weight assigned by the OTS. Off-balance sheet items are converted to on-balance sheet credit equivalents and then assigned a risk weight. The OTS adopted rules, effective January 1, 1994, setting forth a method of incorporating an interest rate risk component into the current risk-based capital rules, with the goal of ensuring that institutions with high levels of interest rate risk have sufficient capital to cover their exposures. The principal objectives in adopting an interest rate risk component are to make capital requirements sensitive to differences in interest rate exposures among savings banks, discourage savings banks from taking excessive interest rate risk, and to protect the deposit insurance fund. The regulation requires only institutions with an "above normal" level of interest rate risk exposure to maintain additional capital over the 8% risk-based capital requirement. Generally, institutions whose measured interest rate risk is less than or equal to 2% will not be required to maintain additional capital for interest rate risk. Those whose measured interest rate risk exceeds 2%, (i.e., those that would suffer a loss of market value portfolio equity exceeding 2% of the estimated market value of their assets under a 200 basis point rate shock) will be required to hold additional capital. The regulation became effective January 1, 1994, with implementation deferred to June 30, 1995. Recently adopted regulations by the federal banking agencies have revised the risk-based capital standards to take adequate account of concentrations of credit and the risk of non-traditional activities. Concentrations of credit refers to situations where a lender has a relatively large proportion of loans involving one borrower, industry, location, collateral or loan type. Nontraditional activities are considered those that have not customarily been part of the banking business but that start to be conducted as a result of developments in, for example, technology - -------- 2 Supplementary capital elements include: (i) allowance for loan and lease losses (which cannot exceed 1.25% of an institution's risk weighted assets); (ii) cumulative perpetual preferred stock and other qualifying perpetual preferred stock; and (iii) hybrid capital instruments, perpetual debt and mandatory convertible debt instruments. 12 or financial markets. The regulations require institutions with high or inordinate levels of risk to operate with higher minimum capital standards. The federal banking agencies also are authorized to review an institution's management of concentrations of credit risk for adequacy and consistency with safety and soundness standards regarding internal controls, credit underwriting or other operational and managerial areas. The Bank has applied the OTS proforma model to the Bank's loans portfolio and has found no material impact on the Bank. Higher individual capital requirements may be imposed by the OTS on savings banks on a case-by-case basis if the OTS determines it to be necessary or appropriate, pursuant to the regulations and guidelines issued by the OTS for this purpose. Set forth below are the Bank's risk based and leverage capital ratios as of December 31, 1995:
==================================================================================== RISK BASED CAPITAL RATIO AS OF DECEMBER 31, 1995 ------------------------------------------------------ Amount Ratio ====================================================== - ------------------------------------------------------------------------------------ Tier 1 Capital $3,549,000 9.14% - ------------------------------------------------------------------------------------ Tier 1 Capital Minimum Requirement 1,554,000 4.00% - ------------------------------------------------------------------------------------ Excess 1,995,000 5.14% - ------------------------------------------------------------------------------------ Total Capital 3,964,000 10.20% - ------------------------------------------------------------------------------------ Total Capital Minimum Requirement 3,107,000 8.00% - ------------------------------------------------------------------------------------ Excess 857,000 2.20% - ------------------------------------------------------------------------------------ Risk-Adjusted Assets 38,838,000 - ------------------------------------------------------------------------------------
LEVERAGE RATIO AS OF DECEMBER 31, 1995 ----------------------------------------------- Amount Ratio =============================================== - ------------------------------------------------------------------------------------- Tier 1 Capital to Average Total Assets (Leverage Ratio) $3,549,000 5.49% - ------------------------------------------------------------------------------------- Minimum Leverage 2,584,000 to Requirement 3,230,000 4.00% to 5.00% - ------------------------------------------------------------------------------------- 252,000 to Excess 898,000 .49% to 1.49% - ------------------------------------------------------------------------------------- Average Total Assets 63,801,541 =====================================================================================
13 Failure to Meet Capital Requirements A bank which does not meet its capital ratio requirements is required to submit a capital plan to the OTS. The capital plan has to be acceptable to the OTS in order for an institution to obtain exemptions from the capital standards and exemptions from sanctions for failure to meet capital requirements. If the plan submitted is not approved by the OTS, the bank immediately cannot increase its assets beyond the amount held on the day it received the notice of disapproval, and immediately must comply with any restrictions or limitations set forth in the written notice of disapproval. The OTS must prohibit any asset growth by savings banks not in compliance with capital standards, except for specific growth expressly approved according to certain guidelines. A bank not in compliance either with the capital regulations, individual minimum leverage ratio requirements or requirements included as part of an agreement between the bank and the OTS, further may be subject to a capital directive or to such other enforcement actions as the OTS deems necessary for the safety and soundness of the bank. Failure to satisfy an individual capital ratio constitutes a legal basis for a capital directive against a bank, which capital directive may contain those restrictions the OTS deems appropriate. A savings bank may apply for an exemption from the provisions of a capital directive, which must be accompanied by a capital plan acceptable to the OTS. The OTS District Director will treat as an unsafe and unsound practice any material failure by a savings bank to comply with any plan, regulation, or written agreement undertaken to comply with these requirements. In addition to the OTS minimum regulatory capital requirements, FDICIA has created capital categories for the purpose of determining when supervisory or other corrective action is appropriate. See "Federal Deposit Insurance Corporation Improvement Act of 1991 - Prompt Corrective Action" herein. Regulatory Proceedings Prior to February 20, 1992, the Bank was subject to various regulatory orders, including a Cease and Desist Order and a supervisory directive requiring the submission of a Capital Plan. The Bank met the regulatory capital requirements at December 31, 1991 and, as a result, the OTS waived the Bank's Capital Plan requirement on February 20, 1992. The Bank continues to meet all minimum regulatory capital requirements as of December 31, 1995. Liquidity Requirements The OTS requires savings institutions to maintain for each calendar month an average daily balance of "liquid assets" (cash, certain time deposits, bankers' acceptances, certain corporate obligations and specified United States Government, State or Federal agency obligations) of not less than 5% of the average daily balance of the institution's "liquidity base" (net 14 withdrawable savings deposits plus short-term borrowings) during the preceding calendar month. In addition, savings banks must maintain an average daily balance of short-term liquid assets of not less than 1% of the average daily balance of its liquidity base during the preceding calendar month. The OTS may impose monetary penalties if an institution fails to meet liquidity requirements. At December 31, 1995, the Bank's ratio was 5.08%, and the Bank was in compliance with all such liquidity requirements. Investment and Lending Restrictions Investments Under the Home Owner's Loan Act of 1933, as amended, the Bank is subject to limitations on the nature and amount of some types of investments and loans it may make. Under the regulations of the OTS, a savings banks is permitted to invest, without limitation as a percentage of assets, in U.S. government securities and accounts of insured depositor institutions among other things. Loan Limitations The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") imposes on savings banks the following loans-to-one-borrower limitations. FIRREA states a general rule allowing savings banks to lend up to 15% of the savings bank's unimpaired capital and unimpaired surplus to a single borrower, plus an additional 10% of unimpaired capital and unimpaired surplus for loans fully secured by readily marketable collateral. Readily marketable collateral does not include real estate. Notwithstanding these limits, FIRREA provides three exceptions which allow a savings institution to: (1) loan up to $500,000 to one borrower, regardless of the percentage of capital accounts that this amount represents, (2) develop domestic residential housing units up to the lesser of $30,000,000 or 30% of the savings institution's unimpaired capital and unimpaired surplus if, among other conditions, the loans made to all borrowers in the aggregate under this provision do not exceed 150% of the savings institution's unimpaired capital and unimpaired surplus, and (3) loan up to 50% of its unimpaired capital and surplus to one borrower in making a loan to finance the sale of real property acquired in satisfaction of debts previously contracted in good faith. OTS regulations allow a savings bank to make consumer loans up to 35% of the savings bank's assets, and commercial loans not in excess of 10% of the savings bank's assets. A savings bank authorized to make loans in excess of 90% of value on the security of real estate comprising single-family 15 dwellings or dwelling units for four or fewer families may do so only if such loans are insured or guaranteed by various governmental agencies or if such loans comply with real estate lending standards as set forth in written policies adopted and maintained by the Bank. The policies must establish appropriate limits and standards for extensions of credit that are secured by liens on or interests in real estate, or that are made for the purpose of financing permanent improvements to real estate. This does not apply to loans to facilitate the sale of REO as a result of foreclosure, or acquired by deed in lieu of foreclosure. Real estate lending policies adopted by a savings bank must, among other things, reflect safe and sound banking practices, be appropriate to the size and the nature and scope of the operations of the institution, and be reviewed and approved by the board of directors at least annually. The policies must establish loan portfolio diversification standards, prudent underwriting standards, loan administration procedures, and documentation, approval and reporting requirements to adequately monitor compliance. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 In September 1994, President Clinton signed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle- Neal"), which amends the Bank Holding Company Act and the Federal Deposit Insurance Act to provide for interstate banking, branching and mergers. Subject to the provisions of certain state laws and other requirements, one year after the date of its enactment, Riegle-Neal will allow a bank holding company that is adequately capitalized and adequately managed to acquire a commercial bank located in a state other than the holding company's home state. Similarly, beginning on June 1, 1997, the federal banking agencies may approve interstate merger transactions, subject to applicable restrictions and state laws. Further, a state may elect to allow out of state commercial banks to open de novo branches in that state. Riegle-Neal also includes several other provisions which may have an impact on the business of commercial banks nationally. The provisions include, among other things, a mandate for review of regulations to equalized competitive opportunities between U.S. and foreign banks, and evaluation on a bank-wide, state-wide and, if applicable, metropolitan area basis of the Community Reinvestment Act compliance of banks with interstate branches. With respect to both banks and savings institutions, Riegle-Neal includes provisions allowing the FDIC, when appointed as conservator or receiver of a financial institution, to revive otherwise expired causes of action for fraud and intentional misconduct resulting in unjust enrichment or substantial loss to a bank or savings institution. 16 California has adopted the Caldera, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 ("IBBA"), which became effective on October 2, 1995. The IBBA is concerned with the supervision of state chartered banks which operate across state lines, and covers such areas as branching, applications for new facilities and mergers, consolidations and conversions, among other things. The IBBA allows a California state bank to have agency relationships with affiliated and unaffiliated insured depository institutions and allows a bank subsidiary of a bank holding company to act as an agent to receive deposits, renew time deposits, service loans and receive payments for a depository institution affiliate. In addition, pursuant to the IBBA, California "opts in early" to the Riegle-Neal provisions regarding interstate branching, allowing a state bank chartered in a state other than California to acquire by merger or purchase, at any time after effectiveness of the IBBA, a California bank or industrial loan company which is at least five (5) years old and thereby establish one or more California branch offices. However, the IBBA prohibits a state bank chartered in a state other than California from entering California by purchasing a California branch office of a California Bank or industrial loan company without purchasing the entire entity or by establishing a de novo California branch office. The changes effected by Riegle-Neal and the IBBA may increase the competitive environment in which the Bank operates in the event that out of state financial institutions directly or indirectly enter the Bank's market area. It is expected that Riegle-Neal will accelerate the consolidation of the banking industry as a number of the largest bank holding companies attempt to expand into different parts of the country that were previously restricted. However, at this time, it is not possible to predict what specific impact, if any, Riegle-Neal and the IBBA will have on the Bank, the competitive environment in which the Bank operates, or the impact on the Bank of any regulations to be proposed under Riegle-Neal and the IBBA. Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") General FDICIA primarily addresses the safety and soundness of the deposit insurance funds, supervision of and accounting by insured depository institutions and prompt corrective action by the federal bank regulatory agencies with respect to troubled institutions. FDICIA gives the FDIC, in its capacity as federal insurer of deposits, broad authority to promulgate regulations to assure the viability of the deposit insurance funds. FDICIA also places restrictions on institutions failing to meet minimum capital standards and provides enhanced enforcement authority for the 17 federal banking agencies. FDICIA also strengthened Federal Reserve Board regulations regarding insider transactions. Prompt Corrective Action FDICIA amended the FDIA to establish a format for closer monitoring of insured depository institutions and to enable prompt corrective action by regulators when an institution begins to experience difficulty. The general thrust of these provisions is to impose greater scrutiny and more restrictions on institutions as they descend the capitalization ladder. FDICIA establishes five capital categories for insured depository institutions: (a) Well Capitalized3; (b) Adequately Capitalized4; (c) Undercapitalized5; (d) Significantly Undercapitalized6; and (e) Critically Undercapitalized7. Undercapitalized institutions are subject to the following mandatory supervisory actions: (1) increased monitoring and periodic review of the institution's efforts to restore its capital; (2) requirements that the institution submit a capital restoration plan; (3) restrictions on growth of the institution's total assets; and (4) limitations on the institution's ability to - -------- 3 Well Capitalized means a financial institution with a total risk-based ratio of 10% or more, a Tier 1 risk-based ratio of 6% or more and a leverage ratio of 5% or more, so long as the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. 4 Adequately Capitalized means a financial institution with a total risk-based ratio of 8% or more, a Tier 1 risk-based ratio of 4% or more and a leverage ratio of 4% or more (3% or more if the institution has received the highest corporate rating in its most recent report of examination) and does not meet the definition of a Well Capitalized institution. 5 Undercapitalized means a financial institution with a total risk-based ratio of less than 8%, a Tier 1 risk-based ratio of less than 4% or a leverage ratio of less than 4%. 6 Significantly Undercapitalized means a financial institution with a total risk-based ratio of less than 6%, a Tier 1 risk- based ratio of less than 3% or a leverage ratio of less than 3%. 7 Critically Undercapitalized means a financial institution with a ratio of tangible equity to total assets that is equal to or less than 2%. 18 make any acquisition, open any new branch offices or engage in any new line of business. Significantly Undercapitalized institutions and Undercapitalized institutions that fail to submit and implement adequate capital restoration plans are subject to the four mandatory provisions applicable to Undercapitalized institutions and, in addition, may be required to: (1) sell enough additional capital, including voting shares, to bring the institution to an Adequately Capitalized level; (2) restrict transactions with affiliates; (3) restrict interest rates paid on deposits to the prevailing rates in the region where the institution is located; (4) restrict asset growth or reduce total assets; (5) terminate, reduce or alter any activity (including any activity conducted by a subsidiary of the institution) determined by the bank regulatory agency to pose an excessive risk to the institution; (6) hold a new election for the institution's board of directors; (7) dismiss directors or senior officers and/or employ new officers, subject to agency approval; (8) cease accepting deposits from correspondent depository institutions; (9) divest or liquidate certain subsidiaries and/or (10) take any other action that the regulatory agency determines to be appropriates. In addition, Significantly Undercapitalized institutions are prohibited from paying any bonus or raise to a senior executive officer without prior agency approval. No such approval will be granted to an institution which is required to but has failed to submit an acceptable capital restoration plan. A Critically Undercapitalized institution faces even more severe restrictions. In addition to those steps that can be taken with respect to Significantly Undercapitalized institutions, a Critically Undercapitalized institution must be placed in conservatorship or receivership within 90 days of becoming Critically Undercapitalized, unless the appropriate federal banking agency determines, with FDIC concurrence, that other action would better achieve the purposes of the FDIA. Beginning December 19, 1993, no advances from a Federal Reserve Bank to any Undercapitalized depository institution may be outstanding for more than sixty (60) days in any given 120-day period, unless the head of the appropriate federal banking agency certifies to the Federal Reserve Bank that the institution is viable, or if the FRB Chairman so certifies to the Federal Reserve Bank. In either case, a grace period for the next sixty (60) days may be provided. There are more stringent restrictions on advances to Critically Undercapitalized institutions. Federal Reserve Banks shall have no obligation to make, increase, renew, or extend any advance or discount to any depository institution. The FRB is given the prerogative of examining any depository institution or affiliate in connection with any Federal Reserve System transaction. 19 FDICIA also provides that if an institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice, its capital category may be downgraded to achieve a higher level of regulatory scrutiny. The Bank's capital ratios meet the test to be considered "Well Capitalized" as of December 31, 1995 according to these regulations. Brokered Deposits FDICIA restricts the solicitation and acceptance of and interest rates payable on brokered deposits by insured depository institutions that are not Well Capitalized. An Undercapitalized institution is not allowed to solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution's normal market areas or in the market areas in which such deposits would otherwise be accepted. Under FDIC regulations, Well Capitalized institutions may accept brokered deposits without restriction and Adequately Capitalized institutions may accept brokered deposits with a waiver from the FDIC (subject to certain restrictions imposed on payment of rates), while Undercapitalized institutions may not accept brokered deposits. Risk-Based Assessment System FDICIA amended the FDIA to require the FDIC to establish a risk-based assessment system for calculating a depository institution's semiannual deposit insurance premium. Under regulations adopted by the FDIC, the risk which each insured depository institution poses to its insurance fund is determined on the basis of capital and supervisory evaluations. The regulations became effective November 2, 1992 and applied to the first semiannual calendar period of 1993. With respect to capital, insured institutions are divided into three main capital groups: well-capitalized (those institutions considered "well-capitalized" for prompt corrective action purposes); adequately capitalized (those institutions considered "adequately capitalized" for prompt corrective action purposes, except that the leverage capital ratio may not be less than 4%); and undercapitalized (all other institutions). Each of the three capital categories are further subdivided by three supervisory subgroups designated "A" (financially sound institutions with only a few minor weaknesses), "B" (institutions having weaknesses which, if not corrected, could result in significant deterioration and increased risk of loss to the appropriate insurance fund) and "C" (institutions which pose a substantial probability of loss to the appropriate insurance fund if corrective action is not taken), resulting in a total of nine categories for risk assessment purposes. The nine-category rate schedule is expressed in terms of basis points, resulting in an assessment range from .23% for well- 20 capitalized institutions in subgroup "A" to .31% per annum for undercapitalized institutions in subgroup "C." During 1995, the Bank's assessment rate was .26% of insured deposits. For the first half of 1996 the Bank will pay an assessment rate of .29%. One purpose of the risk-based assessment system is the recapitalization of the two insurance subfunds maintained by the FDIC, the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"), to 1.25% of estimated insured deposits. During 1995 the BIF reached the 1.25% reserve ratio. As a result BIF premiums were reduced substantially. BIF members that were well-capitalized generally paid .03% in premiums. During the year there were several proposals that would require the SAIF members to pay a one time premium large enough to bring the SAIF up to the 1.25% reserve ratio. At that time SAIF premiums would be dropped to levels approximating BIF premiums. The 1995 budget dispute kept these proposals from being enacted into law. It was anticipated that the one time assessment would be charged to savings institutions in the first quarter of 1996. At this time it is not known when such legislation might be enacted into law. Qualified Thrift Lender ("QTL") Test Subtitle G of FDICIA contains the Qualified Thrift Lender Reform Act of 1991, which amends provisions of the Home Owner's Loan Act relating to the QTL Test. Beginning January 1, 1992, a savings bank that was not subject to penalties for failure to maintain QTL status as of June 30, 1991, under the QTL regulations then in effect, was deemed to be a qualified thrift lender and will continue as one so long as the bank's actual thrift investment percentage ("ATIP") in at least nine months out of each twelve month period after January 1, 1992 continues to equal or exceed 65%. Qualified thrift investments include, among others, loans that were made to purchase, refinance, or construct domestic residential housing or manufactured housing, home equity loans and securities backed by or representing an interest in mortgages on domestic residential housing or manufactured housing. Other Provisions of FDICIA FDICIA required the federal banking agencies to adopt regulations or guidelines with respect to safety and soundness standards. The agencies have adopted uniform Guidelines which are used, primarily in connection with examinations, to identify and address problems at insured depository institutions before capital becomes impaired. The federal bank regulatory agencies recently proposed asset quality and earnings standards which would be added to the safety and soundness Guidelines. FDICIA restricts the acceptance of brokered deposits by insured depository institutions that are not well capitalized. It also places restrictions on the interest rate payable on brokered deposits and the solicitation of such deposits. An 21 undercapitalized institution will not be allowed to solicit brokered deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution's normal market areas or in the market area in which such deposits would otherwise be accepted. In addition to these restrictions on acceptance of brokered deposits, FDICIA provides that no pass-through deposit insurance will be provided to employee benefit plan deposits accepted by an institution which is ineligible to accept brokered deposits under applicable law and regulations. FDICIA also adds grounds to the previously existing list of reasons for appointing a conservator or receiver for an insured depository institution. FDICIA also places restrictions on insured state bank activities and equity investments, interbank liabilities and extensions of credit of insiders and transactions with affiliates. Finally, the federal banking agencies recently have proposed regulations establishing new capital requirements for general market risk and specific risk as they pertain to the trading activities of a banking organization and to the organization's other foreign exchange and commodities activities. Because these and other proposed regulations are subject to change before they are adopted in final form, their ultimate impact on the Bank cannot yet be determined. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 Some of the important provisions and major changes made by FIRREA are discussed below. Enhanced Authority of Regulatory Agencies Any savings bank which does not operate in accordance with or conform to the OTS regulations, policies and directives may be sanctioned for noncompliance. FIRREA gave the OTS the power to (1) institute cease-and-desist proceedings; (2) order restitution or indemnification; (3) remove an officer or director and impose an industry-wide prohibition; and (4) enforce these powers by injunction and civil money penalties. Cease-and-desist proceedings may be initiated against an institution if the OTS is of the opinion that the institution has engaged, is engaging, or will engage in an unsafe or unsound practice or violate any law, rule, regulation or condition imposed by the OTS. The OTS further has the power to enforce any effective and outstanding notice or order and may seek civil money penalties for the violation of laws, regulations, orders, or other conditions imposed on the bank. FIRREA significantly expands the grounds upon which a receiver or conservator may be appointed for a savings bank. Included in the new grounds are "having substantially insufficient capital," 22 incurrence or likely incurrence of losses that will deplete all or substantially all of a bank's capital with no reasonable prospect for that capital to be replenished without Federal assistance, or a violation of law or regulation which is likely to weaken the condition of the institution. Acquisition of Control FIRREA amended the Home Owner's Loan Act to establish new provisions governing savings and loan holding companies. A savings and loan holding company is defined as any company which directly or indirectly controls a savings bank or controls another company which is a savings and loan holding company. Under FIRREA, "control" exists where a person (a) directly or indirectly, or acting in concert with one or more other persons or through one or more subsidiaries, owns, controls or holds the power to vote (or holds proxies representing) more than 25% of the voting shares of a savings bank, (b) controls in any manner the election of a majority of the directors of the savings bank or (c) directly or indirectly exercises a controlling influence over the management or policies of the savings bank. Once control of a savings bank has been established, various provisions of FIRREA govern the activities of savings and loan holding companies. OTS regulations prohibit companies from acquiring control of a savings bank without the prior written approval of the OTS. Persons acquiring control of a savings bank must provide written notice to the OTS, which the OTS may disapprove or allow to take effect after the expiration of a certain waiting period. Certain types of acquisitions by companies or persons are exempt from the OTS application or notice requirements. The OTS is empowered to disapprove an acquisition of control upon a consideration of, among other things, the following factors: (i) whether the acquisition would result in or tend to result in a monopoly or would substantially lessen competition, (ii) whether the financial and managerial resources and future prospects of the acquiror and bank involved would be detrimental to the bank or the insurance risk of the SAIF or BIF, and (iii) the convenience and needs of the community to be served. Transactions with Affiliated Persons and Conflicts of Interest OTS regulations impose a number of restrictions on transactions and dealings between the Bank and affiliated persons. As used in applicable statutes and regulations the definition of "affiliated person" includes the Bank's directors and officers and their spouses and certain members of their immediate families. Also included as affiliated persons are certain persons, corporations and other organizations who possess certain relationships with the Bank as set out in the regulations. 23 FIRREA requires savings institutions to comply with the laws and regulations of the FRB (Sections 22(h) (as recently amended by FDICIA), 23A and 23B of the Federal Reserve Act and Regulation O) concerning conflicts of interest and loans to affiliates in the same manner and to the same extent as if the savings institution were a member bank of the Federal Reserve System. These laws and regulations limit loans or extensions of credit to: executive officers, directors and principal shareholders (i.e., in most cases those persons who own, control or have power to vote more than 10% of any class of voting securities); companies controlled by such executive officer, director or shareholder who directly or indirectly or acting through or in concert with one or more other person owns, controls or has the power to vote 25% or more of any class of voting securities, controls the election of a majority of directors, or has the power to exercise controlling influence over management or policies; or political or campaign committee funds which will benefit executive officers, directors or principal shareholders. Loans extended to any of the above persons must comply with the loan-to-one-borrower limits, require full board approval when aggregate extensions of credit to such person exceed specified amounts, must be granted on substantially the same terms, including interest rates and collateral as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with non-affiliated persons, and must not involve more than the normal risk of repayment or present other unfavorable features. Finally, the Bank is prohibited from paying an overdraft on an account of an executive officer or director, except pursuant to a written preauthorized interest-bearing extension of credit specifying a method of prepayment. FDICIA also resulted in an amendment to Regulation O which provides that the aggregate limit on extensions of credit to all insiders of a financial institution as a group cannot exceed the institution's unimpaired capital and unimpaired surplus. An exception to this limitation is provided for financial institutions with deposits of less than $100,000,000 which may, by resolution of its Board of Directors, increase the general limit referenced herein to a level not to exceed two times the savings bank's unimpaired capital and unimpaired surplus, if: the Board of Directors determines that a higher limit is consistent with prudent, safe and sound banking practices and is necessary to avoid restricting credit or to attract or retain facts and reasoning on which the Board of Directors bases its determination; the savings bank is in satisfactory overall condition as determined in the most recent report of examination of the savings bank; and the savings bank meets or exceeds all applicable capital requirements. Other Transactions with Affiliated Persons The Bank may not deposit funds with any affiliated person or in any financial institution of which an affiliated person is a director, without the prior written approval of the Regional 24 Director of the OTS. No affiliated person may receive, directly or indirectly, from the Bank or any other source, any fee or compensation of any kind in connection with the procurement of any loan from the Bank. The Bank may not, directly or indirectly, purchase or lease from, jointly own with, or sell to, an affiliated person any interest in real property unless the transaction is determined by the Regional Director of the OTS to be fair to, and in the best interest of, the Bank. The regulations also restrict loans to third persons secured by collateral of an affiliated person or guaranteed by an affiliated person, the investment in the securities of an affiliated person, and the purchase of securities from an affiliated person under a repurchase agreement. The Bank may not permit any salaried officer or employee to work for an affiliated person during the employee's hours of employment by the Bank unless the affiliated person compensates the Bank for the time involved. The Bank may not grant any loan subject to the prior condition, agreement or understanding that the borrower will contract with any specific person or organization for insurance services, building materials or construction services, legal services, services of a real estate agent or broker, or real estate or property management services. The composition of the Board of Directors of the Bank must comply with the following requirements: (a) a majority of the directors must not be salaried officers or employees of the Bank; (b) not more than 2 of the directors may be members of the same immediate family; and (c) not more than one director may be an attorney with a particular law firm. Other legislation which has been or may be proposed to the United States Congress and regulations which may be proposed by the OTS, the FDIC and the FRB may affect the business of the Bank. It cannot be predicted whether any pending or proposed legislation or regulations will be adopted or the effect such legislation or regulations may have upon the business of the Bank. Income Taxation Bad Debt Reserve Generally, a savings bank is taxed in the same manner as other corporations. Unlike other corporations, however, a savings bank meeting certain definitional tests prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), is eligible for a deduction from taxable income for a reasonable annual addition to its bad debt reserve. To qualify for the deduction, at least 60% of the assets of the bank must consist of cash, federal government obligations, taxable state and local government obligations, loans secured by deposits or by interests in residential real property, educational loans, property used by the institution in the conduct of its business, and certain other assets. As of December 31, 1994, the Bank held in excess of 60% of its assets in qualifying property and anticipates continuing to do so. 25 For purposes of computing the bad debt reserve deduction, the Bank's loans are separated into "qualifying real property loans" (generally, those loans secured by interests in improved real property) and "nonqualifying loans" (all other loans). The reasonable addition to the bad debt reserve for each of the two categories of loans is determined and these two amounts are combined to determine the addition for the year to the bad debt reserve. The addition to the bad debt reserve for nonqualifying loans is determined using the "experience" method. The addition to the bad debt reserve for qualifying real property loans may be based on either the experience method or the "percentage of taxable income" method. The percentage of taxable income method permits an addition to the bad debt reserve equal to as much as 8% of a bank's taxable income for that taxable year. There are several limits, however, on the use of the percentage of taxable income method. First, the amount is reduced by the addition to the bad debt reserve for nonqualifying loans. Second, the addition to the bad debt reserve for qualifying real property loans cannot result in a reserve for such loans greater than 6% of such loans outstanding at the end of the tax year. In addition, the reserve for qualifying real property loans is limited to the greater of (a) the amount determined under the experience method or (b) the amount which, when added to the addition to bad debt reserve for nonqualifying loans, equals the amount by which 12% of deposits or withdrawable accounts of depositors at the close of the tax year exceeds the sum of the bank's surplus, undivided profits and reserves at the beginning of that year. In 1993, 1994 and 1995 the Bank used the percentage of taxable income method. Subject to the provisions of Code Section 593(e) and the Treasury Regulations thereunder, if a savings bank distributes cash or property to its shareholders, and the distribution is treated as being from its accumulated bad debt reserves, the distribution may cause the bank to have additional gross income. Numerous detailed and complicated rules govern the calculations under Code Section 593(e). Generally, however, the distributions potentially subject to Code Section 593(e) include all distributions to shareholders with respect to their stock including certain redemptions and liquidations. Distributions not in redemption or liquidation of a shareholder's stock which a savings bank makes from its current or accumulated earnings and profits are not treated as distributions made from the accumulated bad debt reserves. The amount of additional gross income is equal to the lesser of: (a) the amount of the bad debt reserves, or (b) the gross amount of the deemed distribution (i.e., the amount which after reduction for the income tax attributable to the amount is equal to the actual distribution). In 1995 the Bank applied for and received permission from the State of California to change its method of accounting for bad debts for California purposes in 1995. The Bank will only deduct 26 from income loans specifically charged off for California Income Tax purposes. The following are other more significant federal and California income tax provisions affecting savings banks. Corporate Tax Rates The federal corporate tax rate is 34% for up to $10 million of taxable income, and 35% for taxable income over $10 million. The 1% differential is phased out between $15 million and approximately $18.3 million so that corporations with over approximately $18.3 million of taxable income are taxed at a flat rate of 35%. Corporate Alternative Minimum Tax Generally, a corporation will be subject to an alternative minimum tax ("AMT") to the extent the tentative minimum tax exceeds the corporation's regular tax liability. The tentative minimum tax is equal to (a) 20 percent of the excess of a corporation's "alternative minimum taxable income" ("AMTI") over an exemption amount, less (b) the alternative minimum foreign tax credit. AMTI is defined as taxable income computed with special adjustments and increased by the amount of tax preference items for a tax year. An important adjustment is made for "adjusted current earnings," which generally measures the difference between corporate earnings and profits (as adjusted) and taxable income. Finally, a corporation's net operating loss (computed for AMT purposes), if any, can be utilized only up to 90% of AMTI, with the result that a corporation with current year taxable income will pay some tax. Interest incurred for tax-exempt obligations Generally, taxpayers are not allowed to deduct interest on indebtedness incurred to purchase or carry tax-exempt obligations. This rule applies to a bank, to the extent of its interest expense that is allocable to tax-exempt obligations acquired after August 7, 1986. A special exception applies, however, to a "qualified tax-exempt obligation," which includes any tax-exempt obligation that (a) is not a private activity bond and (b) is issued after August, 7, 1986 by an issuer that reasonably anticipates it will issue not more than $10 million of tax-exempt obligations (other than certain private activity bonds) during the calendar year. Interest expense on qualified tax-exempt obligations is deductible, although it is subject to a 20 percent disallowance under special rules applicable to financial institutions. Net operating losses Generally, a bank is permitted to carry a net operating loss ("NOL") back to the prior three tax years and forward to the succeeding fifteen tax years. If the NOL of a commercial bank is attributable to a bad debt deduction taken under the specific 27 charge-off method after December 31, 1986 and before January 1, 1994, however, such portion of the NOL may be carried back ten years and carried forward five years. The 1990 Act clarified that a commercial bank's bad debt loss is treated as a separate NOL to be taken into account after the remaining portion of the NOL for the year. Amortization of intangible assets including bank deposit base Prior to the Revenue Reconciliation Act of 1993 (the "1993 Act"), there was considerable controversy regarding the amortization (depreciation) of certain intangible assets, such as customer lists and similar items. Generally, the issue involved whether the intangible asset represented nonamortizable goodwill or a separate and distinct asset which could be amortized over its useful life. The 1993 Act provides that certain intangible property acquired by a taxpayer must be amortized over a 15 year period. For this purpose, acquired assets required to be amortized include goodwill and the deposit base or any similar asset acquired by a financial institution (such as checking and savings accounts, escrow accounts and similar items). The 15 year amortization rule generally applies to property acquired after August 10, 1993. Mark-to-market rules The 1993 Act introduced certain "mark-to-market" tax accounting rules for "dealers in securities." Under these rules, certain "securities" held at the close of a taxable year must be marked to fair market value, and the unrealized gain or loss inherent in the security must be recognized in that year for federal income tax purposes. Under the definition of a "dealer," a bank or financial institution that regularly purchases or sells loans may be subject to the new rules. The rules generally are effective for tax years ending on or after December 31, 1993. Certain securities are excepted from the mark-to-market rules provided the taxpayer timely complies with specified identification rules. The principal exceptions affecting banks are for (1) any security held for investment and (2) any note, bond, or other evidence of indebtedness acquired or originated in the ordinary course of business and which is not held for sale. If a taxpayer timely and properly identifies loans and securities as being excepted from the mark-to-market rules, these loans and securities will not be subject to these rules. Generally, a financial institution may make the identification of an excepted debt obligation in accordance with normal accounting practices, but no later than 30 days after acquisition. 28 California tax laws A commercial bank is subject to the California franchise tax at a special bank tax rate based on the general corporate (non financial) rate plus 2%. The rate for calendar income year 1995 was 11.3%. The applicable tax rate is higher than that applied to general corporations because it includes an amount "in lieu" of many other state and local taxes and license fees payable by such corporations but generally not payable by banks and financial corporations. California has adopted substantially the federal AMT, subject to certain modifications. Generally, a bank is subject to California AMT in an amount equal to the sum of (a) seven percent of AMTI (computed for California purposes) over an exemption amount and (b) the excess of the bank tax rate over the general corporation tax rate applied against net income for the taxable year, unless the bank's regular tax liability is greater. California permits a bank to compute its deduction for bad debt losses under either the specific charge-off method or according to the amount of a reasonable addition to a bad debt reserve. California has incorporated the federal NOL provisions, subject to significant modifications for most corporations. First, NOLs arising in income years beginning before 1987 are disregarded. Second, no carryback is permitted, and for most corporations NOLs may be carried forward only five years. Third, in most cases, only fifty percent of the NOL for any income year may be carried forward. Fourth, NOL carryover deductions are suspended for income years beginning in calendar years 1991 and 1992, although the carryover period is extended by one year for losses sustained in income years beginning in 1991 and by two years for losses sustained in income years beginning before 1991. Finally, the special federal NOL rules regarding bad debt losses of commercial banks do not apply for California purposes. Finally, in 1994, California enacted legislation conforming to the federal tax treatment of amortization of intangibles and goodwill, with certain modifications. No deduction is allowed under this provision for any income year beginning prior to 1994. The various laws discussed herein contain other changes that could have a significant impact on the banking industry. The effect of these changes is uncertain and varied, and it is unclear to what extent any of these changes may influence the Bank's operations or the banking industry generally. In addition, there are several tax bills currently pending before Congress which could have a significant impact on the banking industry. As of March 18, 1996, it is uncertain whether 29 these bills will be enacted and what impact these bills will have on the Bank. Recent Accounting Pronouncements The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments' (SFAS 107) during fiscal year 1995, which requires that the Bank disclose the fair value of financial instruments for which it is practicable to estimate that value. Although management uses its best judgement in assessing fair value, there are inherent weaknesses in any estimating technique that may be reflected in the fair values disclosed. The fair value estimates are made at a discrete point in time based on relevant market data, information about the financial instruments, and other factors. Estimates of fair value of instruments without quoted market prices are subjective in nature and involve various assumptions and estimates that are matters of judgement. Changes in the assumptions used could significantly affect these estimates. Fair value has not been adjusted to reflect changes in market conditions subsequent to December 31, 1995, therefore, estimates presented herein are not necessarily indicative of amounts which could be realized in a current transaction. The effect of adoption of this standard was not material. In 1995, the Bank adopted SFAS No. 122, "Accounting by Mortgage Servicing Rights". Under the new standard the Bank recognizes as separate assets rights to service mortgage loans for others, whether those servicing rights are originated or purchased. Previously, only purchased servicing rights were capitalizable as an asset whereas internally originated rights were expensed. The Bank assesses capitalized servicing rights for impairment based on fair value, rather than an estimate of undiscounted future cash flows. The effect of adoption of this standard was not material. 30 ITEM 2. PROPERTIES At December 31, 1995, the Bank conducted its business through three (3) offices. The Bank's loan origination and loan servicing departments as well as the accounting and compliance departments are maintained in the 508 Forbes facility adjacent to the Bank's main office. The Bank opened its first full service branch located at 729 E Street, Marysville, California 95901, on March 14, 1994 and on March 11, 1995 opened a mortgage wholesale division located at 5355 Avenida Encinas, Suite 206, Carlsbad, CA 92008. Further information concerning its main office and other office properties and equipment is set forth in Note 5 of the "Notes to Financial Statements" included elsewhere in this Form 10-KSB. The following is a list of properties owned by the Bank at December 31, 1995 and the net book value of each property: Location Net Book Value 700 Plumas Street $409,483 Yuba City, CA The Bank sold its premises at 508 Forbes Street in early 1995. The sale was made to an affiliated party, Valley Fair Realty which is owned by George Murray, a director of Sutter Buttes Savings Bank. The terms of the deal were all cash. The Bank leased back a portion of this building at a rate of $870 per month for a term of one (1) year beginning February 1, 1995. The Bank agreed to renew the lease for another one (1) year term beginning February 1, 1996. The Board of Directors determined that the terms of the sale and lease were no less favorable than those which could have been obtained from unaffiliated third parties. ITEM 3. LEGAL PROCEEDINGS In the normal course of business, the Bank is occasionally made a party to actions seeking to recover damages from the Bank. The Bank is involved in various claims and legal action arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Bank's financial condition. Additionally, no director, officer, affiliate, or more than 5% shareholder of the Bank is a party adverse to the Bank or has a material interest adverse to the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1995, no matters were submitted to a vote of security holders, through solicitation of proxies or otherwise. 31 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information and Trading History Common Stock The Bank's Common Stock is not listed on any exchange nor is it quoted on NASDAQ. Historically, there has been no trading market for the Common Stock and it is not expected that one is likely to develop. The Common Stock is not the subject of regular quotations by brokers or dealers, but shares are traded from time to time in private transactions. Based upon information available to the Bank from the Bank's transfer agent and registrar, 5,381 shares of common stock were sold in 1995 at a price of $1.86 per share. 1,400 shares of common stock were sold in 1994 at a price of $2.75 per share. 4,000 shares of Common Stock were sold in 1993 with prices ranging from $2.70 per share to $3.04 per share. In 1992, 240 shares of common stock were sold at a price of $2.50 per share. As of December 31, 1995, the fully diluted book value per share of the Bank's Common Stock was $3.10. The computation was based on stockholders' equity at December 31, 1995 divided by the total number of common stock equivalents outstanding as of December 31, 1995. Common stock equivalents include common stock, convertible preferred stock, warrants issued and outstanding, and stock options issued and outstanding. At March 26, 1996, there were approximately 347 holders of record of the 626,743 issued and outstanding shares of Common Stock. Preferred Stock The Preferred Stock is not listed on any exchange nor is it quoted on NASDAQ. It is not expected that there will be any trading market established for the Preferred Stock. It is not anticipated that the Preferred Stock will be listed or quoted on an exchange or market. As of March 26, 1996, there were approximately 73 holders of record of the 232,200 issued and outstanding shares of Preferred Stock. Based upon information available to the Bank from the Bank's transfer agent and registrar, 20,000 shares of preferred stock, including two (2) years' of outstanding warrants associated with such shares, were sold in 1994 at a price of $5.00 per share. No shares were sold in 1995. 32 Warrants The Warrants are not listed on any exchange nor are they quoted on NASDAQ. As the Warrants are nontransferable, no trading market can be established for the Warrants, nor will they be listed or quoted on any exchange or market. See "Dividends" herein. Options On April 21, 1992, the Board of Directors adopted the Employee Stock Option plan for full-time salaried officers and employees of the Bank and the Directors' Stock Option Plan for all non-employee directors of the Bank. The Employee and Directors' Plans were approved by the Bank shareholders on June 10, 1992. Outstanding employee options vest over three to five years and at exercise prices per share of $2.42 to $3.04. Outstanding director options vest six months after issuance at $2.42 per share. No options have been exercised. At December 31, 1995, the plans contained: Employee Plan Directors' Plan Shares reserved 117,084 39,028 Options granted 12,500 36,800 Options vested 11,500 36,800 Dividends The Bank has never paid dividends on the Common Stock but has adopted a Dividend Policy that would allow the Bank to declare a cash dividend on Common Stock subject to adequate profitability and maintenance of the well capitalized status according to the prompt corrective action provisions of FDICIA. The Preferred Stock has the right to receive annually, if and as declared by the Board of Directors in its sole discretion, out of funds legally available therefor, a cash dividend equal to 12% ($0.60) of the par value of the Preferred Stock, per Share (the "12% Cash Dividend"). The Preferred Stock has priority over the Common Stock in the payment of dividends. This dividend right is non-participating and non-cumulative, meaning that unpaid cash dividends in any year do not accrue and are not payable in subsequent years. Rather, if in any year a cash dividend is not declared and paid by the Bank's Board of Directors, holders of the Preferred Stock shall receive immediately exercisable Warrants representing the right to purchase a number of shares of Common Stock determined by dividing the cash value of the 12% Cash Dividend ($0.60) by the book value of the underlying Common Stock, per share, at the end of the year in which the Preferred Stock dividend is earned. The Warrants will be exercisable according to their terms, are not transferable and will be outstanding for a period of five (5) years from the date of issuance. See "The Warrants," herein. 33 OTS regulations impose limitations on the ability of savings banks to make various capital distributions. Capital distributions include dividends, stock repurchases or redemptions or other transactions requiring the payout of capital by a bank. A stock dividend is not considered a capital distribution under the regulations. OTS regulations establish a three-tiered system governing capital distributions. An institution that has "capital" (as defined) at least equal to its fully phased-in capital requirement in effect as of January 1, 1994 is a "Tier 1" capital institution. An institution that has capital at least equal to the risk-based capital standard in effect as of January 1, 1993, but less than its fully phased-in capital requirement, is a "Tier 2" institution. An institution having capital that is less than the risk-based capital standard in effect as of January 1, 1993 is a "Tier 3" institution. A Tier 1 institution may, following notice to the OTS, make capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess over its fully phased-in capital requirement) at the beginning of the calendar year; or 75% of its net income over the most recent four-quarter period. Any additional amount of capital distribution by a Tier 1 institution requires prior regulatory approval. An institution that meets the Tier 1 capital criteria but has been notified that it requires more than normal regulatory supervision is treated as a Tier 2 or Tier 3 savings bank (see below) unless the OTS determines that such treatment is not necessary to ensure the savings bank's safe and sound operation. A savings bank that meets the Tier 2 criteria is able to make capital distributions from 25% to 75% of its net income during its most recent four-quarter period, less any capital distributions previously made over the same period, depending upon whether the bank meets its fully phased-in capital requirement. Notice must be given to the OTS. Any additional amount of capital distribution by a Tier 2 institution requires prior regulatory approval. A Tier 3 institution generally is not authorized under the regulation to make any capital distributions without prior regulatory approval, but may make such distributions in accordance with an approved capital plan. Based upon the regulatory requirements discussed above and the Bank's retained earnings of $317,464 at December 31, 1995, the Bank can pay cash dividends on the Common Stock or the Preferred Stock within regulatory guidelines. Even if the Bank may, in the future, pay the 12% Cash Dividend, no assurance can be given that the 12% Cash Dividend will be declared or paid by the Bank. Rather, in lieu of the 12% Cash Dividend, the Bank anticipates the distribution of Warrants to purchase Common Stock. Such a distribution of Warrants is not subject to the capital distribution regulations. 34 In the event that the 12% Cash Dividend on the Preferred Stock has not been declared and paid or set apart during any fiscal year of the Bank, the holders of the Series A Preferred Stock will be entitled to receive one (1) immediately exercisable, non-transferable Warrant representing the right to purchase a number of shares of Common Stock determined by dividing the cash value of the 12% Cash Dividend ($0.60) by the book value of the underlying Common Stock, per share, as of the end of the year in which the 12% Dividend was earned. The exercise price of the Warrants shall be $0.01 per share for each share of Common Stock issuable upon exercise of the Warrant. The term of each Warrant shall be five (5) years, commencing on the date the Warrant is issued. No fractional shares of Common Stock will be issued; alternatively, the number of shares for which a Warrant may be issued in any year will be rounded down to the next whole number of shares of Common Stock. Although the Warrant is immediately exercisable and, therefore, the holder thereof may elect to exercise the Warrant at any time during its five (5) year term, the right of the holder to exercise the Warrant may nonetheless be suspended, at any time and from time to time, in the event counsel to the Bank determines that such suspension is required for the Bank to comply with any federal or state law or regulation pertaining to the regulation of Warrants and the other securities of the Bank. The Board of Directors may declare the 12% Cash Dividend on the Preferred Stock at any time. If the 12% Cash Dividend is paid in the form of Warrants, the Bank will issue such Warrants within forty-five (45) days after the record date set by the Board of Directors for the 12% Cash Dividend, or if the Board of Directors is unable to determine the book value of the Common Stock as of the record date, the Warrants will be issued as soon thereafter as said book value is determined. Once issued, the Warrants will not confer on the holders thereof any right to vote on matters affecting the Bank, any right to receive dividends, any preemptive rights, any right to share in the Bank's assets in the event of any liquidation, dissolution or winding up or any other rights as a shareholder of the Bank, until such time as a Warrant is exercised by payment of the exercise price and execution of a form of election to exercise the Warrant. See "Stock Offerings - The Warrants" herein). As of March 26, 1996, the Preferred Shareholders had earned 227,055 Warrants of which 190,533 have been issued and 140,548 have been exercised. 35 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below has been derived from the financial statements of the Bank. The information contained herein should be read in conjunction with the audited financial statements and notes thereto contained elsewhere in this Form 10-KSB.
Years Ended December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- OPERATING DATA: TOTAL INTEREST INCOME $4,573,460 $3,927,652 $3,610,140 $3,946,498 $4,644,683 TOTAL INTEREST EXPENSE 3,138,705 2,271,462 1,908,136 2,231,683 3,152,142 --------- ---------- ---------- ---------- ---------- NET INTEREST INCOME 1,434,755 1,656,190 1,702,004 1,714,815 1,492,541 CREDIT TO ALLOWANCE FOR LOAN LOSSES 972 10,867 106,548 125,507 206,134 --------- ---------- --------- ---------- ---------- NET INTEREST INCOME AFTER CREDIT TO ALLOWANCE FOR LOAN LOSSES 1,435,727 1,667,057 1,808,552 1,840,322 1,698,675 NON-INTEREST INCOME 488,979 213,057 289,267 170,999 137,746 GENERAL AND ADMINISTRATIVE EXPENSES 1,552,508 1,695,676 1,615,540 1,600,714 1,801,712 ---------- ---------- ---------- ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES 372,198 184,438 482,279 410,607 34,709 PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM 21,169 76,099 3,424 43,385 12,287 ---------- ---------- ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 351,029 108,339 478,855 367,222 22,422 EXTRAORDINARY ITEM 0 0 0 0 12,287 ----------- ----------- ----------- ----------- ---------- NET INCOME $351,029 $108,339 $478,855 $367,222 $ 34,709 ========== ========== ======== ======== ======== EARNINGS PER SHARE $.31 $.10 $.45 $.36 $.056 ==== ==== ==== ==== ===== WEIGHTED AVERAGE NUMBER OF SHARES 1,142,725 1,103,096 1,062,019 1,008,122 616,638 FINANCIAL CONDITION DATA: TOTAL ASSETS $64,629,739 $63,462,497 $51,640,664 $49,997,142 $45,059,940 LOANS, NET 59,903,639 58,359,570 47,085,410 45,075,079 40,201,640 REAL ESTATE OWNED, NET 104,768 0 0 167,724 0 CUSTOMER DEPOSITS 57,405,955 49,746,571 43,972,934 43,744,224 41,442,895 STOCKHOLDERS' EQUITY 3,548,712 3,197,683 3,089,344 2,610,489 2,243,267 SELECTED STATISTICAL DATA: EQUITY-TO-ASSETS RATIO 5.14% 5.16% 5.98% 5.22% 4.98% RETURN ON AVERAGE EQUITY 10.71% 3.45% 16.91% 14.93% 2.08% RETURN ON AVERAGE ASSETS .55% .18% .95% .80% .08% - ------------------------
36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparative Results and Other Data for Fiscal Years Ended December 31, 1995, 1994 and 1993 Certain comparative information related to the Bank's results of operations for the years ended December 31, 1995, 1994 and 1993 and its financial condition at December 31, 1995 and 1994 is set forth below. General The business of the Bank consists primarily of attracting deposits from the general public and using these deposits, together with borrowings and other funds, for the origination and servicing of loans secured by real estate and, to a lesser extent, various types of consumer and commercial loans. The Bank's principal sources of income are interest income from real estate loans, income from loan origination fees on loans sold, and gain on sale of real estate loans. In 1993 credits to estimated loan losses, arising largely from the recovery of previously charged off loans, were a substantial source of income. Income is also earned from interest on the investment of liquid assets as well as fees earned in connection with checking accounts and other banking services. The Bank's principal expenses are interest paid on deposits and borrowings and, to a lesser extent, administrative and other operating expenses. The Bank's sources of funds are loan sales and repayments, increases in deposits and FHLB of San Francisco advances. Generally, the Bank's primary use of funds during the reported period was the origination and acquisition of real estate loans. Significant influences on the Bank's operations, and on the operations of savings institutions generally, include general economic conditions, the related monetary and fiscal policies of the federal government and the policies of the various regulatory authorities. The Bank's results of operations depend largely upon net interest income - the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Deposit flows and loss of funds are influenced by interest rates on competing investments and general market rates of interest. The demand for real estate and other types of loans, along with the cost and availability of funds, affect lending activities. The results of operations for each of the three years in the period ended December 31, 1995 reflect management's effort to improve asset quality and improve capital ratios. The Bank's operating activities produced positive cash flow of $1,710,892, $474,962 and $217,945, in 1995, 1994 and 1993, respectively. Management's strategy to improve profit and cash flow from 37 operating activities includes origination activities and deposit growth within the guidelines of its business plan, reducing litigation and regulatory expenses and controlling other general and administrative expenses. Results of Operations The Bank's net income for the year ended December 31, 1995 amounted to $351,029 or $.31 per share. This compares with net income of $108,339 or $.10 per share in 1994 and a net income of $478,855 or $.45 per share in 1993. The increase in net income in 1995 compared to 1994 resulted from lower general and administrative expenses in 1995 compared to 1994 as well as higher non-interest income in 1995, and a lower effective income tax rate in 1995. The Bank's net income for the year ended December 31, 1994 amounted to $108,339 or $.10 per share. This compares with net income of $478,855 or $.45 per share in 1993. The decrease in net income in 1994 compared to 1993 was the result of reduced net interest income, reduced gains on sales of loans, a reduction in credits to the provision for loan losses, an increase in general and administrative expenses along with an increase in income tax expense. The following table sets forth certain ratios concerning the Bank's operations:
Years Ended December 31, 1995 1994 1993 Return on average assets(1) .55% .18% .95% Return on average equity(2) 10.71% 3.45% 16.91% Average equity to assets(3) 5.14% 5.16% 5.60%
(1) Net income divided by average total assets. (2) Net income divided by average shareholders' equity. (3) Average shareholders' equity divided by average total assets. Net and Total Interest Income Net interest income is affected primarily by the correlation of repricing frequencies between interest-earning assets and interest-bearing liabilities, the yield earned and rates paid, and the level of interest earning assets and interest bearing liabilities. Net interest income for 1995 was $1,434,755 which was a decrease of $221,435 or 13.4% from the $1,656,190 level for 1994. Net interest income decreased by $45,814 or 2.69% in 1994 compared to 1993, or from a level of $1,702,004 to $1,656,190. 38 Total interest income increased from $3,927,652 to $4,573,460 in 1995. This represented an increase of $645,808 or 16.4%. The increase was due to higher market interest rates on loans receivable in 1995 compared to 1994 as well as higher average balances for loans receivable in 1995 compared to 1994. Total interest income increased to $3,927,652 in 1994 compared to $3,610,140 in 1993. This represents an increase of $317,512 or 8.80%. This increase was a result of higher loans receivable balances in 1994 compared to 1993. Total interest expense increased to $3,138,705 in 1995 compared to $2,271,462 in 1994. This represents an increase of $867,243 or 38.2%. The increase was due to the increase in deposits and borrowings outstanding in 1995 compared to 1994, as well as higher rates paid on deposits and borrowings in 1995 compared to 1994. Total interest expense increased from $1,908,136 in 1993 to $2,271,462 in 1994. This represented an increase of $363,326 or 19.0%. The increase was due to the increase in levels of deposits and borrowings in 1994 compared to 1993. The Bank's net spread (measured as the difference between the average yield on combined interest earning assets and the average rates paid on interest bearing liabilities) fell from 2.71% in 1994 to 2.06% in 1995. The average yield on earning assets rose in 1995 compared to 1994 as did the average rate paid on interest bearing liabilities. However, the increase in the rate paid on liabilities rose at a higher rate. The decrease in 1994 from 3.47% in 1993 resulted from a greater decrease in rate of return on interest-earning assets versus the decrease in the cost of funds on deposits and borrowed funds. The following table sets forth the average yield on the interest-earning assets and the average rate paid on interest-bearing liabilities for the periods indicated.
Year Ended December 31, 1995 1994 1993 Average yield on interest earning assets 7.37% 6.66% 7.47% Average rate paid on interest bearing liabilities 5.31 3.95 4.00 ---- ----- ---- Spread 2.06% 2.71% 3.47% ===== ===== =====
Credit to Allowance for Loan Losses The credit to the allowance for loan losses for 1995 amounted to $972. This represented a decrease of $9,895 or 91.1% from the credit of $10,867 in 1994. The credit to the allowance for loan losses in 1995 represented a recovery of a previously charged off loan. This recovery was largely offset by an increase in the general loan loss allowance in 1995. The credit to the allowance 39 for loan losses for 1994 amounted to $10,867 as compared to a credit of $106,548 for 1993, a decrease of $95,681 or 89.8%. Other Income Other income in 1995 amounted to $488,979. This represented an increase of $275,922 or 129.5% over the 1994 level of $213,057. The increase is largely due to an increase in gain on sale of loans in 1995 compared to 1994. The increase in gain on sale of loans is the result of the establishment of a wholesale mortgage banking division by the Bank in March 1995. The Bank also had a gain on the sale of real estate owned in 1995. No gains on sale of real estate owned were recorded in 1994. Other income in 1994 amounted to $213,057. This represented a decrease of $76,210 or 26.35% from 1993. The major reason for the decrease in other income was a result of a decrease in gain on sale of loans. This resulted from a decrease in loans originated for sale in the secondary market in 1994 compared to 1993. In 1994 loans originated for sale totalled $4,303,690 compared to $14,512,238 in 1993. Income from the operation of real estate owned declined from $24,415 to $0 as the Bank held no real estate owned in 1994. General and Administrative Expense In 1995 general and administrative expenses decreased by $143,168 or 8.4% from $1,695,676 in 1994 to $1,552,508 in 1995. Compensation expense decreased by $85,502 or 10.4% in 1995. Advertising expense decreased by $36,118 or 64.7%. Professional services expense decreased by $20,668 or 24.0%. All of these reductions were part of a general effort to control expense levels. General and administrative expenses increased by $80,136 or 4.96% from $1,615,540 in 1993 to $1,695,676 in 1994. Compensation expense in 1994 increased by $128,781 compared to 1993. This was due largely to the opening of a savings branch in Marysville, California, as well as the severance paid to the former President of the Bank who resigned on June 15, 1994. In 1994 data processing expense decreased as the Bank had a full year of service with its new data processing service bureau under the terms of a long term contract, compared to the premiums paid to the prior servicing bureau in 1993 under the short term contract that was in effect at the time. Occupancy expense increased largely as a result of the opening of the branch office. 40 A comparison of general and administrative expense for 1995, 1994 and 1993 is provided below:
General and Administrative Expenses Years Ended December 31, % Change % Change 1995 1995/1994 1994 1994/1993 1993 -------- --------- ---------- --------- ------- Compensation and Benefits $ 736,085 (10.41)% $ 821,587 18.59% $ 692,807 Insurance 174,982 (0.01)% 175,863 (13.10)% 202,375 Occupancy and Equipment 206,676 (2.11)% 211,128 29.92% 162,508 Professional Services 65,304 (24.0)% 85,972 (36.13)% 134,605 Data Processing 88,018 3.32% 85,190 (27.24)% 117,089 Office Operating Expenses 118,087 8.57% 108,769 8.65% 100,105 Bank Processing Charges 76,706 15.02% 66,692 (6.72)% 71,497 Advertising 19,718 (64.69)% 55,836 5.95% 52,699 Federal and State Assessment and Fees 22,045 12.45% 19,604 (28.67)% 27,484 Loan Department Expenses 3,909 (68.56)% 12,432 (37.19)% 19,793 Other 40,978 (22.10)% 52,603 52.13% 34,578 --------- --------- ---------- Total General and Administrative Expenses $1,552,508 (8.44)% $1,695,676 4.96% $1,615,540 ========== ======= ========== ====== ==========
Income Taxes and Extraordinary Items SFAS 109 applies the asset and liability method in accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities are calculated applying applicable tax laws to the differences between the financial statement basis and tax basis of assets and liabilities currently recognized in the financial statements. Deferred taxes are provided in the statement of operations in the amount of the net change during the year of the deferred tax balances in the statement of financial condition. At December 31, 1995 the Bank had federal net operating loss carryforwards (NOLs) of $930,564 for federal tax purposes. These NOLs begin expiring in 2004. The Bank had $542,412 of State NOLs for State Income Tax purposes. These NOLs begin expiring in 1997 and are not expected to be fully utilized. The Bank has partially reserved these NOLs in order to account for the likelihood of the NOLs expiring partially unused. Utilization of the NOLs in future years may be limited by the provisions of IRS Section 382, which reduces the amount of NOL carryforwards that can be utilized in the event of a change in stock ownership. Income tax expense in 1995 was $54,930 lower than in 1994. The effective tax rate was substantially lower in 1995, as a percentage of net income before income taxes than in 1994. This was a result of the filing of amended tax returns for 1990, 1991, 1992 and 1993 in order to take advantage of Enterprise Zone deductions for state income tax purposes. In addition the Bank changed its method of accounting for bad debts in 1995 for state tax purposes which resulted in the utilization of expiring California NOLs. The net tax benefit of these events is $107,394. In 1994 income tax expense increased by $72,675 as the Bank was unable to earn income free of tax expense to the degree it had in 1993. This was because the asset from NOLs was offset by the 41 tax liability due to the excess of tax bad debt reserve over the bad debt reserve recognized for financial reporting. Financial Condition at December 31, 1995 and 1994 Total assets at December 31, 1995 amounted to $64,629,739, representing a 1.84% or $1,167,242 increase from the $63,462,497 reported at year end 1994. The increase in assets was fully attributable to an increase in loans receivable in 1995 compared to 1994. Total loans receivable, including loans held for sale, increased by $1,544,069 to $59,903,639 at December 31, 1995 compared to $58,359,570 at December 31, 1994. Total savings deposits increased by $7,659,384 from December 31, 1994 to December 31, 1995. Advances from Federal Home Loan Bank decreased from $10,375,000 at December 31, 1994 to $3,400,000 at December 31, 1995. Impact of Changing Prices The impact of changing prices on a financial institution differs significantly from that exerted on an industrial concern primarily because a financial institution's assets and liabilities consist largely of monetary items. The most direct effect of changing prices is changing interest rates. However, the Bank's earnings are affected by the spread between the yield on interest-earning assets and the rates paid on interest-bearing liabilities rather than the absolute level of interest rates. The effects of inflation on premises and equipment and on non-interest expense have not been significant. Liquidity and Capital Resources Liquidity represents the ability of the Bank to meet the requirements of customers for loans and deposit withdrawals in a timely and cost-effective manner. Liquidity management focuses on the ability to obtain funds with varying terms in the market place and to maintain assets which may be immediately converted into cash at a minimal cost. Funds are provided primarily by deposits which include checking accounts, passbook savings, money market accounts and certificates of deposit. Deposits were $57,405,955 and $49,746,751 at December 31, 1995 and 1994, respectively. Liquid assets (cash and cash equivalents, certificates of deposits and investments held to maturity) at December 31, 1995 and 1994 amounted to $3,046,276 and $3,202,647, respectively. The minimum regulatory level for liquidity is currently set by OTS regulations at 5% of average deposits and advances. The regulatory liquidity ratio of the Bank was 5.08% and 5.18% at December 31, 1995 and 1994, respectively. In addition, funds available for liquidity are provided by both short-and long-term borrowing. To a degree, the Bank has used 42 borrowings from the Federal Home Loan Bank of San Francisco to supplement its other sources of liquidity. At December 31, 1995 such borrowings amounted to $3,400,000 as compared to $10,375,000 at December 31, 1994. Shareholders' equity increased $351,029 or 10.98% from year end 1994 due to net income during the twelve months ended December 31, 1995. Yields Earned and Rates Paid The Bank's results of operations depend primarily upon the spread between the income it receives from loans, its investment portfolio and other interest-earning assets, and its cost of funds, consisting of the interest paid by it on deposits, borrowings and other interest-bearing liabilities. Fluctuations in income from investment securities are dependent upon the amount invested during the period and interest rate levels on such securities. Competition generally dictates the rates received on loans and the rates paid on deposits. The loan portfolio yield changes principally as a result of the repricing of adjustable rate loans, which constitute a majority of the Bank's total loans outstanding and, to a lesser degree, existing mortgage loan repayments as well as the rates and volume of mortgage loans originated. The Bank's lending activities are and will be concentrated in the origination of adjustable rate residential loans for its own portfolio and the origination of fixed rate loans for sale in the secondary market. See "BUSINESS - - Lending Activities," herein. As a result of this emphasis, the ratio of loans adjusting to market rates to total loans receivable was 95.7% as of December 31, 1995. A substantial portion of the Bank's loan portfolio is tied to an index that will tend to change more slowly than market interest rates. Many of the adjustable rate loans have limits on the amount that their interest rates may change every six months as well as limits on the amount that their interest rates may change during the life of the loan. During much of 1995, the Bank experienced a substantial reduction in net interest income as loans repriced much more slowly than deposits as a result of the lagging index on most of the Bank's adjustable rate loans as well as the limits on changes. The spread increased later in the year as interest rates paid for deposits and borrowings declined at the same time that loan interest rates increased due to the lag effect of the adjustable rate loans. 43 The following table presents an interest rate repricing analysis as of December 31, 1995. Amounts are stated as repricing based upon contractual terms, other than the expected impact of loan repayments, which are estimates of anticipated prepayments of long-term real estate loans.
Interest Rate Repricing Analysis As of December 31, 1995 (dollars in thousands) Maturity/Repricing Interval Within 1-3 4-5 6-10 Over 10 Balance One Year Years Years Years Years Interest Earning Assets Real estate loans (1) .......... $59,941 57,276 $ 110 $ 315 $ 0 $ 2,240 Other Loans ............................ 30 30 0 0 0 0 Investments ............................ 2,747 2,747 0 0 0 0 ------- ------- ------- ------- ------- ------- 62,718 60,053 110 315 0 2,240 Expected impact of loan repayments ........................ 0 2,375 (25) (110) 0 (2,240) ------- ------- ------- ------- ------- ------- 62,718 62,428 85 205 0 0 ------- ------- ------- ------- ------- ------- Interest Bearing Liabilities Deposits ............................... 56,196 47,454 5,706 3,036 0 0 Federal Home Loan Bank advances .......................... 3,400 3,400 0 0 0 0 ------- ------- ------- ------- ------- ------- 59,596 50,854 5,706 3,036 0 0 ------- ------- ------- ------- ------- ------- Repricing Gap .............................. $ 3,122 $11,574 ($5,621) $(2,831) $ 0 $ 0 ======= ======= ======= ======= ======= ======= Cumulative Gap ............................. $11,574 $ 5,953 $ 3,122 $ 3,122 $ 3,122 ======= ======= ======= ======= ======= Cumulative Gap as a percentage of Total Assets ............... 18.5% 9.5% 5.0% 5.0% 5.0% ======= ======= ======= ======= =======
(1) Total principal balance less non-accrual loans. The preceding table does not necessarily indicate the impact of general interest rate movements on the Bank's net interest income because the repricing of various assets and liabilities can be discretionary and is subject to competition and other pressures. As a result, assets and liabilities indicated as repricing within the same period may in fact reprice at different times and different rate levels. 44 The following table sets forth the Bank's average balances; weighted average yield on loans and investments; interest rates paid on deposits and borrowings and the spread between yields earned and rates paid by the Bank at and for the periods indicated. Month-end balances were used in computing weighted averages.
AVERAGE BALANCES, YIELDS AND RATES (Dollars in Thousands) Year Ended December 31, 1995 1994 1993 Yield/ Yield/ Yield/ Volume Interest Cost Volume Interest Cost Volume Interest Cost Assets Interest-earning assets Time deposits, Fed Funds and interest earning bank deposits $ 2,881 $ 156 5.41% $ 2,661 $ 99 3.71% $ 2,817 $ 91 3.23% ------ ----- ------ ----- ------ ----- Loans: Real estate 60,052 4,406 7.34 56,289 3,818 6.78 45,278 3,499 7.73 Commercial and other 129 12 9.30 136 11 7.99 260 20 7.66 ----- ------ ------ ----- ------ ----- Total loans 60,181 4,418 7.34 56,425 3,829 6.79 45,538 3,519 7.73 ------ ------ ------ ----- ------ ------ Total earning assets 63,062 4,574 7.25 59,086 $3,928 6.65 48,355 $3,610 7.47 ===== ===== Cash and equivalents 324 291 130 Premises and equipment 634 977 862 Other assets 362 197 1,220 ---- ------ ----- TOTAL ASSETS $64,382 $60,551 $50,567 ====== ====== ====== Liabilities and Stockholders' Equity Interest-bearing liabilities: Customer deposits: Transaction accounts $13,965 382 2.74 $14,869 $ 374 2.51% $11,679 $ 315 2.70% Time accounts 42,769 2,523 5.90 34,442 1,530 4.42 33,080 1,503 4.54 ------ ----- ------ ----- ------ ----- Total customer deposits 56,734 2,905 5.12 49,311 1,904 3.85 44,759 1,818 4.06 Borrowings and FHLB advances 3,566 234 6.56 7,641 367 4.91 2,900 90 3.10 ------ --- ---- ------ ----- ------ ----- Total interest-bearing liabilities 60,300 3,139 5.21 56,952 2,271 3.99 47,659 1,908 4.00 ----- ----- Other liabilities 789 460 58 Stockholders' equity 3,293 3,139 2,850 ------ ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $64,382 $60,551 $50,567 ====== ====== ====== Net interest income/interest rate rate spread $1,435 2.04% $1,656 2.66% $1,702 3.47% ===== ===== ===== Net yield on average interest- earning assets 2.28% 2.80% 3.52%
Net interest income decreased substantially in 1995 compared to 1994 as a result of the decrease in interest rate spread in 1995 compared to 1994. While net interest income showed a substantial increase due to higher volume this was more than offset by the decline due to rate change. Net interest income decreased substantially in 1994 compared to 1993 as a result of the decrease in interest rate spread in 1994 compared to 1993. The decline in interest rate spread more than offset the 45 substantial increase in interest earning assets in 1994 compared to 1993. The following table presents a rate/volume analysis of interest income and expense on interest-earning assets and interest-bearing liabilities.
Years Ended December 31, 1995 vs. 1994 1994 vs. 1993 Increase (Decrease) Increase (Decrease) Due to: Due to: Volume Rate Total Volume Rate Total (dollars in thousands) Interest income(1) Time deposits with banks $ 8 $ 49 $ 57 $ (5) $ 12 $ 7 ------ ------ ------ ------- ------- ------- Loans: Real estate 255 333 588 851 (533) 318 Commercial and other 0 1 1 (9) 1 (8) ------ ------ ------ ------ ------- ------- Total loans 255 334 589 842 (532) 310 ------ ------ ------ ------ ------- ------- Total interest- earning assets $263 $383 $646 $837 $(520) $317 ====== ====== ====== ====== ======= ======= Interest expense Customer deposits: Savings, Now, Money Market $(23) $31 $8 $ 86 $ (28) $ 58 Time 491 502 993 62 (42) 20 ---- ----- ----- ------ ------ ------ Total customer deposits 468 533 1,001 148 (70) 78 FHLB of San Francisco and other borrowings (267) 134 (133) 147 138 285 ----- ----- ----- ------ ------- ------ Total interest bearing liabilities 201 667 868 295 68 363 ----- ----- ----- ------ ------- ------ Net interest income before provision for losses 62 (284) (222) $ 542 $ (588) $ (46) ===== ===== ====== ====== ======= ====== - --------------- (1) The volume-rate combined variances have been allocated to the volume variance.
46 Loan Portfolio Analysis In 1993 the Bank funded $25,631,490 in residential loans of which $14,512,238 were fixed rate loans that were sold in the secondary market and $11,119,252 of adjustable rate loans that were retained by the Bank. In 1994 the Bank funded $20,359,778 of residential real estate loans of which $4,303,690 were sold in the secondary market. In 1995 the Bank funded $24,445,935 in real estate loans of which $20,311,648 were sold in the secondary market. The following table shows at the dates indicated the dollar amount and percentage of the Bank's portfolio and loans held for sale by type of loan and by type of security.
At December 31, 1995 1994 Amount Percentage Amount Percentage Type of Loan REAL ESTATE LOANS SECURED BY: One to four family residences $34,620,128 57.8% $31,492,668 54.0% More than four family residences 12,661,111 21.1% 12,835,601 22.0% Improved commercial properties 12,410,827 20.7% 13,261,914 22.7% Construction - net 601,046 1.0% 1,888,769 3.3% Land 89,104 0.2% 29,464 0.0% ----------- ----- ----------- ----- Total real estate loans 60,382,216 100.8% 59,508,416 102.0% Allowance for estimated losses- real estate loans (414,109) (0.7)% (467,270) (0.8)% ------------ ------ ------------ ------ Total real estate loans - net of allowance 59,968,107 100.1% 59,041,146 101.2% ----------- ------ ----------- ------ Commercial loans: Secured 13,430 0.0% 23,229 0.0% Unsecured 16,257 0.0% 0 0.0% Loans on savings accounts 118,224 0.2% 50,398 0.1% ----------- ----- ----------- ----- Total commercial and other loans 147,911 0.2% 73,627 0.1% Allowance for estimated losses - commercial and other loans (891) (0.0)% (697) (0.0)% ------------ ------ ------------ ------ Total commercial and other loans net of allowance 147,020 0.2% 72,930 .1% ------------ ----- ----------- ----- Undisbursed loan funds 3,746 (529,732) (0.9)% Deferred loan fees (207,742) (0.3)% (224,774) (0.4)% ------------ ------ ------------ ------ Total loans receivable - net $59,903,639 100.0% $58,359,570 100.0% ============ ====== ============ ======
Contractual Maturities of Loans The following table presents information regarding loan maturities and contractual principal repayments by categories of loans during the periods indicated.
COMMERCIAL REAL ESTATE AND YEAR ENDING MORTGAGE OTHER DECEMBER 31, 1995 LOANS LOANS TOTAL - ----------------- ----------- ----------- -------- Within One Year $ 597,300 $ 92,024 $ 689,324 One to Five Years 2,048,802 39,632 2,088,434 Over Five Years 57,730,622 16,256 57,746,878 ----------- ----------- ----------- TOTAL $60,376,724 $ 147,912 $60,524,636 =========== =========== =========== LOANS DUE AFTER ONE YEAR: ADJUSTABLE RATE $57,937,562 $ 29,687 $57,967,249 FIXED RATE 1,841,862 26,201 1,868,063 ----------- ----------- ----------- TOTAL $59,779,424 $ 55,888 $59,835,312 =========== =========== ===========
47 Contractual maturities of loans do not reflect the actual life of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which gives the Bank the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. Most of the Bank's loan portfolio consists of adjustable rate real estate loans. The risk of adverse interest rate movements for adjustable rate loans is determined by the repricing characteristics rather than their contractual maturities. Summary of Loan Loss Experience OTS regulations require all insured institutions to review their asset portfolios, classify all or portions of problem assets as "substandard," "doubtful," "loss" or "special mention," depending on the presence of certain characteristics, and to set aside appropriate valuation allowances or reserves on the basis of such self-classification. "Substandard" assets are defined as those which have a well-defined weakness or weaknesses and are inadequately protected by the obligor's current net worth and paying capacity or by the pledged collateral. "Doubtful" assets are defined as those having all the weaknesses inherent in "substandard" assets, with the added characteristic that, given the surrounding circumstances, the weaknesses make collection or liquidation in full highly questionable and improbable. Assets classified "loss" are those considered uncollectible. Finally, assets deserving "special mention" are those not currently presenting a degree of risk warranting one of the above classifications but possessing credit deficiencies or potential weaknesses deserving management's close attention. Under OTS regulations, general valuation allowances or reserves are required to be established for assets classified as "substandard" or "doubtful." Assets classified as "loss" may either be charged off or reserves of 100% of loan balance must be established for them. An institution's determination as to the classification of its assets and the amount of valuation allowance are subject to review by the institution's examiner or the Regional Director of the OTS, who could require the establishment of additional general loss allowances. The effect of establishing specific valuation allowances for problem assets classified as "doubtful" and "loss" is to reduce the Bank's regulatory capital by the amount of such specific valuation allowances. The Bank regularly reviews the problem loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations. 48 A summary of activity in the allowance for loan losses for the Bank is as follows:
For the Year Ended December 31, 1995 1994 - ------------------------------- ---- ---- Balance at beginning of period $467,967 $365,000 Charge-offs (53,465) 0 Recoveries 1,470 113,834 -------- -------- Net Recoveries 415,972 478,834 Provision credited to expense (972) (10,867) -------- ------- Balance at End of Period $415,000 $467,967 ======== ======== Loans outstanding at end of period (net of deferred loan fees and undisbursed loan funds) $60,318,639 $58,826,840 =========== =========== Average loans outstanding $59,971,500 $55,696,615 =========== =========== Ratio of the Allowance to Loans at end of period 0.69% 0.80% Ratio of Net Recoveries to Average Loans 0.00% 0.02%
The Bank's Board of Directors has established an internal asset review policy that, among other things, establishes procedures for management to evaluate the risk in the Bank's loan portfolio, to provide for adequate reserves and to provide for timely charge off of loans and other real estate owned. The Internal Asset Review Committee of the Board of Directors may review all loans funded to determine that all necessary and proper credit rating procedures were utilized in the processing of the loan. All loans past due 30 days or more are reviewed by management and the Board of Directors monthly. Once a loan becomes past due as to principal and interest for a period of 60 days (90 days for 1-4 unit residential loans), the loans may be submitted to the Internal Asset Review Committee and may be assigned a new "Borrower Risk Rating" based on the credit worthiness of the borrower. In addition to the payment performance of a loan, the Internal Asset Review Committee reviews the classification of loans with respect to past-due property taxes, deferred maintenance of collateral or other material information which may come to the attention of the Bank. The Internal Asset Review Committee may also select at random certain loans for review and inspection as a matter of course. Loans are classified according to the risk rating assigned. 49 At December 31, 1995 and 1994, the Bank established specific reserves of $0 and $102,967, respectively, for various loans, based on an asset-by-asset review of its internally classified assets. In addition, in 1995 and 1994, the Bank established a general valuation allowance in the amount of $415,000 and $365,000, respectively, based upon percentages of different types of assets in the Bank's portfolio. The reserve for loan losses is maintained at an amount management deems adequate to cover estimated losses. In determining the level to be maintained, management evaluates many factors, including current economic trends, industry experience, historical loss experience, industry loan concentrations, the borrower's ability to repay and repayment performance, estimated collateral values and information provided through regulatory examinations. In the opinion of management, the present reserve is adequate to absorb reasonably foreseeable loan losses. At December 31, 1995 the Bank had $427,369 in assets internally classified and $537,350 at December 31, 1994. The decrease was the result of the foreclosure and subsequent sale of the collateral for one loan. The following table sets forth the allocation of the allowance for loan losses at December 31, 1995 and 1994. The allocation table should not be interpreted as an indication of the specific amounts or the relative proportion of future changes to the allowance. The allocation amounts are based upon specific reserves for certain internally classified loans and a percentage of remaining loans.
Allocation of the Allowance for Loan Losses 1995 1994 Percent of Percent of loans in each loans in each category to category to Amount Total Loans Amount Total Loans Balance at end of period applicable to: Real estate $414,109 99.8% $467,270 99.9% Commercial and other 891 0.2% 697 0.1% ------- ----- -------- ------ $415,000 100.0% $467,967 100.0% ======== ====== ======== ======
Non-Accrual Loans The Bank's policy on non-accrual loans is that only loans regarded collectible as to both principal and interest accrue interest. Management will review monthly all past-due loans. All loans 90 days past due, unless fully secured and in the process of collection, are placed on non-accrual status. After a decision has been made to place a loan on non-accrual, management will immediately charge all accrued interest on that loan against current earnings. From that point on, all interest collected will be applied to current income on a cash basis. At December 31, 1994 one loan in the amount of $113,300 was on non-accrual status. At 50 December 31, 1995 two loans in the amount of $436,978 were on non-accrual status. Real Estate Owned During 1995 two loans in the amount of $216,147 were foreclosed on. An allowance for loss was set up in the amount of $53,465. This allowance was removed upon the sale of the property. The Bank earned $31,293 on the sale of the property. At December 31, 1995 the Bank held $104,768 in Real Estate Owned. No valuation allowance is held against this property because it is the opinion of management that full recovery of the asset value is expected upon sale of the property. Investments in Securities and Certificates of Deposit Income from interest on fed funds, bank balances, treasury securities and certificates of deposit was $155,803 and $98,791 during the years ended December 31, 1995 and 1994, respectively. The Bank is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and is also permitted to make certain other securities investments. The Bank's investment practices allow for investment in certificates of deposit insured by the FDIC. Investment decisions are made by authorized officers of the Bank under guidelines established by the Board of Directors. At both December 31, 1995 and 1994, the Bank had $1,368,000 of certificates of deposit issued by various savings institutions whose deposits are insured by FDIC. At December 31, 1995 and 1994 the Bank held $400,000 of Treasury notes. See "Notes to Consolidated Financial Statements" for the book value, maturities and weighted average yield on the Bank's investment portfolio. Deposit Analysis The distribution of maturities on time certificate accounts and other liabilities is an indicator of the relative stability of a savings bank's supply of lendable funds. The Bank's strategy is to extend the maturities of its time certificate accounts to more adequately match the maturities or rate adjustment dates of its loans. The following table sets forth the amounts of time deposits by categories of interest rates at the dates indicated.
At December 31, Interest Rate 1995 1994 - ------------- ---- ---- Less than 4% $ 163,488 $ 3,905,468 4.00% to 6.00% 20,821,305 25,599,646 6.01% to 8.00% 20,978,178 6,798,019 8.01% and above 0 0 ----------- ----------- Total $41,962,971 $36,303,133 =========== ===========
51 The following table shows the maturity distribution of the Bank's time certificates of deposit in amounts of $100,000 or more at December 31, 1995 Maturity Schedule Amount Less than 3 months $1,798,309 3 months to 6 months 1,547,824 6 months to 12 months 1,157,910 over 12 months 1,087,965 ---------- Total $5,592,008 Borrowings A traditional thrift industry source of borrowings is advances from the Federal Home Loan Bank System. Such borrowings may be made by the Bank pursuant to several different credit programs offered from time to time by the FHLB of San Francisco. Each credit program has its own interest rates and range of maturities, and the FHLB of San Francisco prescribes the acceptable uses to which the advances pursuant to each program may be put as well as limitations on the size of the advances. Depending upon the credit program used, the FHLB of San Francisco advances bear interest at fixed rates or at rates that vary with market conditions. Under FIRREA, the ability of savings banks, including the Bank, to secure advances from the Federal Home Loan Bank System is subject to stricter regulation. See "SUPERVISION AND REGULATION - Federal Home Loan Bank System." The following table sets forth information concerning the Bank's borrowings from the FHLB at the dates indicated. For the Year Ended December 31, 1995 1994 FHLB Borrowings Amount outstanding at end of period $ 3,400,000 $10,375,000 Average balance outstanding $ 3,600,000 $ 8,500,000 Maximum amount outstanding at any month-end $ 6,850,000 $10,475,000 Weighted average interest rate on amounts outstanding at end of period 6.12% 6.19% Weighted average interest rate (1) 6.51% 4.41% - ---------------------- (1) Weighted average interest rate is equal to total interest accrued during the respective period divided by total borrowings during the respective period. 52 Regulatory Capital As of December 31, 1992, OTS regulations set the minimum risk- based capital requirement at 8% of risk weighted assets, the minimum leverage capital requirement at 3% of adjusted total assets and the minimum tangible capital requirement at 1.5% of adjusted total assets. In addition, the OTS has adopted rules, effective January 1994, which require savings institutions to incorporate an interest-rate risk component into the OTS's risk-based capital rules. At December 31, 1995, the Bank had the following minimum regulatory capital requirements and regulatory capital positions. Capital Requirement Actual Required Excess Tangible capital $3,549,000 $ 970,000 $2,579,000 Tangible capital ratio 5.49% 1.50% 3.99% Core capital $3,549,000 $1,939,000 $1,610,000 Core capital ratio 5.49% 3.00% 2.49% Risk-based capital $3,964,000 $3,107,000 $ 857,000 % of risk-weighted assets 10.20% 8.00% 2.20% In addition to the OTS minimum regulatory capital requirements, FDICIA has created categories for the purpose of determining when supervisory or other corrective action is appropriate. See "BUSINESS - SUPERVISION AND REGULATION - Federal Deposit Insurance Corporation Improvement Act of 1991 - Prompt Corrective Action." The five capital categories are well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The rules provide that a savings association is "adequately capitalized" if its total risk-based capital ratio is 8% or greater, its Tier 1 risk-based capital ratio is 4% or greater, its leverage ratio is 4% or greater, and the institution is not subject to a capital directive. As used herein, total risk-based capital ratio means the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and leverage ratio means the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. 53 At December 31, 1995 the Bank had the following regulatory capital calculated in accordance with FDICIA's capital standards using "adequately capitalized" guidelines: Actual Required Leverage $3,549,000 $2,586,000 Leverage ratio 5.49% 4.00% Tier 1 risk-based 3,549,000 l,551,000 Tier 1 risk-based ratio 9.14% 6.00% Total risk-based 3,964,000 3,107,000 Total risk-based ratio 10.21% 8.00% Recently Issued Accounting Standards to be Adopted In October 1995, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". The new standard defines a fair value method of accounting for stock options and other equity instruments, such as stock purchase plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period, which is usually the vesting period. This standard will be effective for the Bank beginning in 1996, and requires measurement of awards made beginning in 1995. 54 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For a list of financial statements of the Bank filed with this report, see "Item 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K" herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements between the Bank and its accountants on accounting and financial disclosures. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) EXHIBIT INDEX Sequentially Exhibit No. Exhibit Numbered Page 2 Not applicable 3.1 Federal Stock Charter (3) 3.2 Bylaws of the Bank (4) 4 Warrant Agreement and Form of Warrant (2) 9 Not Applicable 10.1 Employment Agreement by and between the Bank and Philip E. Safran, Senior Vice President and Chief Financial Officer of the Bank dated June 1, 1993 (5) 10.2 Employment Agreement by and between the Bank and Gregory A. Pater, Vice President/Wholesale Mortgage Banking Division of the Bank dated March 1, 1995 82 10.3 Form of Escrow Agreement by and between the Bank and First Interstate Bank, Ltd. (1) 10.4 Employment Agreement by and between the Bank and W. R. Hagstrom, President and Chief Executive and Loan Officer of the Bank dated June 20, 1994 (6) 10.5 Amendment No. 1 to Employment Agreement by and between Philip E. Safran, Senior Vice President and Chief Financial Officer of the Bank dated June 1, 1994 (11) 10.6 Amendment No. 1 to Employment Agreement by and between W. R. Hagstrom, President and Chief Executive Officer and Loan Officer of the Bank dated June 20, 1995 90 10.7 Employee Stock Option Plan (7) 10.8 Directors' Stock Option Plan (8) 55 10.9 Employee Stock Option Agreement (9) 10.10 Directors' Stock Option Agreement (10) 10.11 Amendment No. 2 to Employment Agreement by and between Philip E. Safran, Senior Vice President and Chief Financial Officer of the Bank dated June 1, 1995 91 11 Not Applicable 12 Not Applicable 13 Not Applicable 16 Not Applicable 18 Not Applicable 21 Not Applicable 22 Not Applicable 23 Not Applicable 24 Not Applicable 27 Not Applicable 28 Not Applicable 99 Not Applicable (1) Filed as Exhibit 10.3 to the Bank's Preliminary Offering Circular on Form OC, which is incorporated by reference. (2) Filed as Appendix B to the Bank's Preliminary Offering Circular on Form OC, which is incorporated by reference. (3) Filed as Exhibit 3.1 to the Bank's Annual Report on Form 10-KSB dated December 31, 1993. (4) Filed as Exhibit 3.2 to the Bank's Annual Report on Form 10-KSB dated December 31, 1993. (5) Filed as Exhibit 10.1 to the Bank's Annual Report on Form 10-KSB dated December 31, 1993. (6) Filed as Exhibit 10.4 to the Bank's Annual Report on Form 10-KSB dated December 31, 1994. (7) Filed as Exhibit 10.6 to the Bank's Annual Report on Form 10-KSB dated December 31, 1993. (8) Filed as Exhibit 10.7 to the Bank's Annual Report on Form 10-KSB dated December 31, 1993. 56 (9) Filed as Exhibit 10.8 to the Bank's Annual Report on Form 10-KSB dated December 31, 1993. (10) Filed as Exhibit 10.9 to the Bank's Annual Report on Form 10-KSB dated December 31, 1993. (11) Filed as Exhibit 10.5 to the Bank's Annual Report on Form 10-KSB date December 31, 1994. (b) No reports on Form 8-K were filed during the fourth quarter of 1995. 57 FINANCIAL STATEMENTS INDEX Page Independent Auditors' Report F-1 Balance Sheets F-2 Statements of Income F-3 Statements of Stockholders' Equity F-4 Statements of Cash Flows F-5 Notes to Financial Statements F-6 In accordance with Regulation S-X, the financial statement schedules have been omitted because (a) they are not applicable to or required of the Bank; or (b) the information required is included in the financial statements or notes thereto. 58 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 26, 1996 SUTTER BUTTES SAVINGS BANK, F.S.B. By: /s/ W. R. Hagstrom W. R. Hagstrom President, Chief Executive Officer and Chief Loan Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Lee 'B' Colby Director and March 26, 1996 - ------------------------- Chairman of the Board /s/ W. R. Hagstrom President, Chief March 26, 1996 - ------------------------- Executive Officer and Chief Lending Officer and Director /s/ Philip E. Safran Senior Vice President - ------------------------- and Chief Financial Officer (Principal Financial Officer) March 26, 1996 /s/ Jon Beard Director March 26, 1996 - ------------------------- /s/ James L. Harrison Director March 26, 1996 - ------------------------- /s/ George Murray Director March 26, 1996 - ------------------------- /s/ Lonny L. Renfrow Director March 26, 1996 - ------------------------- /s/ Don J. Strachan Director March 26, 1996 - ------------------------- 59 Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Exchange Act by Non-reporting Issuers (a) (1) The Bank's 1995 Annual Report to Shareholders will be sent to shareholders on or about April 30, 1996, along with the Bank's 1996 Proxy Materials. At that time, four (4) copies of the Bank's Annual Report to Shareholders will be submitted to the Office of Thrift Supervision ("OTS") for the information only of the OTS. Such information will not be deemed to be "filed" or subject to the liabilities of Section 18 of the Exchange Act. 60 EX-99.5 13 SUTTER BUTTES' MARCH 31, 1996 FORM 10 - QSB EXHIBIT 99.5 DEPARTMENT OF THE TREASURY OFFICE OF THRIFT SUPERVISION OFFICE OF THE CHIEF COUNSEL CORPORATE AND SECURITIES DIVISION 1700 "G" STREET, N.W. WASHINGTON, D.C. 20552 FORM 10 - QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: March 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OTS Docket Number: 7931 SUTTER BUTTES SAVINGS BANK, F.S.B. (Exact name of small business issuer as specified in its charter) United States 94-2793476 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 Plumas Street, Yuba City, California 95991 (Address of principal executive offices) (Zip Code) (916) 673-7283 (Issuer's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 There were 635,580 shares of Common Stock and 232,200 shares of the Series A Preferred Stock of the registrant outstanding as of May 13, 1996. Transitional Small Business Disclosure Format: Yes No X This report includes a total of 13 pages. Exhibit Index is on page 12. 1 PART 1. ITEM 1. FINANCIAL STATEMENTS SUTTER BUTTES SAVINGS BANK, F.S.B. BALANCE SHEETS
March 31, 1996 December 31, 1995 -------------- ----------------- (Unaudited) ASSETS Cash and cash equivalents $ 1,769,083 $1,260,414 Certificates of deposit 1,373,000 1,386,000 Held to maturity securities 399,908 399,862 Loans, net of allowance for loan losses of $415,000 57,898,522 57,724,860 Mortgage loans held for sale, at the lower of cost or market 3,851,128 2,178,779 Interest receivable 392,665 389,171 Premises and equipment - net 539,285 556,912 Federal Home Loan Bank stock 478,800 480,148 Other real estate owned 104,768 104,768 Prepaid expenses and other assets 114,312 148,825 ------------- ------------- TOTAL $66,921,471 $64,629,739 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Customer deposits $59,105,776 $57,405,955 Advances from Federal Home Loan Bank 3,900,000 3,400,000 Other liabilities 301,507 275,072 ------------ ------------ Total liabilities 63,307,283 61,081,027 ----------- ----------- STOCKHOLDERS' EQUITY: Preferred stock, $5.00 par; liquidation preference of $5.00; 5,000,000 shares authorized; 232,200 shares issued and outstanding 1,161,000 1,161,000 Common stock, $.01 par: 5,000,000 shares authorized; 626,743 and 625,438 shares issued and outstanding 1,619,750 1,619,750 Additional paid-in capital 450,498 450,498 Retained earnings 382,940 317,464 ------------- ------------- Total stockholders' equity 3,614,188 3,548,712 ------------ ------------ TOTAL $66,921,471 $64,629,739 =========== ===========
See notes to financial statements. 2 SUTTER BUTTES SAVINGS BANK, F.S.B. STATEMENTS OF INCOME
Three Months Ended March 31, 1996 March 31, 1995 (Unaudited) INTEREST INCOME: Loans $1,197,588 $1,020,975 Investments 34,586 36,604 ----------- ----------- Total 1,232,174 1,057,579 ---------- ---------- INTEREST EXPENSE: Customer deposits 739,175 607,018 FHLB advances 44,974 120,424 ---------- ---------- Total 784,149 727,442 ---------- ---------- NET INTEREST INCOME 448,025 330,137 CREDIT TO ALLOWANCE FOR LOAN LOSSES 0 294 ---------- ---------- NET INTEREST INCOME AFTER CREDIT TO ALLOWANCE FOR LOAN LOSSES 448,025 330,431 NON-INTEREST INCOME: Fees, service charges, and dividends 37,937 46,155 Gain on sale of loans 32,624 2,423 ---------- ---------- INCOME BEFORE GENERAL AND ADMINISTRATIVE EXPENSES 518,586 379,009 GENERAL AND ADMINISTRATIVE EXPENSES 407,121 373,385 ---------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES 111,465 5,624 PROVISION FOR INCOME TAXES 45,989 2,321 ---------- --------- NET INCOME $ 65,476 $ 3,303 ======== ======== EARNINGS PER SHARE $.06 $ .00 ==== ===== Weighted average number of shares used in computation 1,181,618 1,141,819
See notes to financial statements. 3 SUTTER BUTTES SAVINGS BANK, F.S.B. STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Additional Preferred Stock Common Stock Paid-in Retained Shares Amount Shares Amount Capital Earnings Total ------ ------ ------ ------ ---------- ------------ ----- Balance, December 31, 1995 232,200 $1,161,000 625,438 $1,619,750 $450,498 $317,464 $3,548,712 Net income 65,476 65,476 Exercise of Warrants 1,305 Balance, March 31, 1996 232,200 $1,161,000 626,743 $1,619,750 $450,498 $382,940 $3,614,188 ======= ========== ======= ========== ======== ======== ==========
See accompanying notes to financial statements. 4 SUTTER BUTTES SAVINGS BANK, F.S.B. STATEMENTS OF CASH FLOWS ENDED MARCH 31,
1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 65,476 $ 3,303 Reconciliation to net cash provided by operating activities: Depreciation and amortization 21,788 28,196 Gain on sale of real estate loans (32,624) (2,423) Loans originated for sale (9,998,950) (517,950) Proceeds from sale of loans 8,359,225 520,373 Changes in: Interest receivable (3,494) (12,024) Federal Home Loan Bank stock dividend (23,415) (5,600) Prepaid expenses and other assets 59,276 (248,464) Deferred loan fees 16,195 3,895 Other liabilities 26,435 43,303 ---------- ----------- Net cash provided (used) by operating activities (1,510,088) (187,391) ----------- ----------- INVESTING ACTIVITIES: Purchase of investments held to maturity Maturities of investments held to maturity Decrease (increase) in investments 12,954 (46) Loans originated net of principal collections (189,857) (47,691) Retirements (purchase) of equipment (4,161) 290,796 --------- ---------- Net cash provided (used) by investing activities (181,064) 243,059 ---------- ---------- FINANCING ACTIVITIES: Net increase in customer deposits 1,699,821 5,925,001 Net proceeds from (payments of) bank borrowings 500,000 (6,650,000) --------- ----------- Net cash provided (used) by financing activities 2,199,821 (724,999) --------- ----------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS 508,669 (669,331) CASH AND EQUIVALENTS: Beginning of Year 1,260,414 1,416,969 --------- ---------- 1,769,083 $ 747,638 ========= ========== OTHER CASH FLOW INFORMATION: Cash payments for: Interest $784,149 $724,919
See accompanying notes to financial statements. 5 - ---------------------------------------------------------------- Notes to Financial Statements (Unaudited) - ----------------------------------------------------------------- 1) The accompanying interim financial statements have been prepared by the bank in accordance with Generally Accepted Accounting Principles (GAAP). All adjustments (consisting of only normal, recurring adjustments)which, in the opinion of management, are necessary to present fairly the Bank's financial position as of March 31, 1996 and December 31, 1995 and the results of its operations, cash flows and statement of stockholders' equity for the interim periods ended March 31, 1996 and 1995 have been recorded. The accompanying interim financial statements do not contain all disclosures required by GAAP for complete financial statements. It is suggested that these financial statements be read in conjunction with the audited financial statements and the related notes included in Form 10-KSB for the year ended December 31, 1995. Operating results for interim periods are not necessarily indicative of those expected for the full year. 2) Primary earnings per share is computed using the weighted average number of common shares outstanding from the beginning of the period or date of issuance, including preferred shares at a 1.98 to 1 common share equivalent and the effect of weighted average unexercised warrants issued and outstanding during the respective periods. Options to acquire common shares are included in the earnings per share calculations. 3) The provision for income taxes for the periods presented is computed using statutory Federal and State tax rates adjusted by recoveries of previously charged off loans and by utilization of net operating losses for federal purposes where applicable. 4) Certain reclassifications have been made in the 1995 financial statements to conform with the 1996 presentation. 6 - ----------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------------------------------- THE BANK General The Bank was originally chartered as a California state savings and loan association by the Department of Savings and Loan ("DSL") in 1982 and began operations on May 23, 1983. The Bank converted from a state chartered savings and loan association to a federally chartered savings bank effective June 1, 1993. The Bank conducts its business at three locations. The main savings branch and executive office is located at 700 Plumas Street, Yuba City, California 95991, a branch facility is located at 729 "E" Street, Marysville, California 95901 and a wholesale mortgage banking division is located at 5355 Avenida Encinas, Carlsbad, California 92008. The business of the Bank consists primarily of attracting deposits from the general public and using those deposits, together with borrowings and other funds, in the origination and servicing of loans secured by real estate and, to a lesser extent, various types of consumer and commercial loans. The Bank invests in short-term certificates of deposit, short term treasury securities and federal funds. Sutter Buttes' lending is focused primarily on existing or proposed construction of one-to-four unit residential real estate. To a lesser extent, loans are also originated on five or more unit residential real estate. Beginning in 1995, the Bank began to originate non-residential real estate loans. The principal sources of funds for the Bank's lending activities are deposit accounts, repayments of existing loans and capital. The Bank obtains additional funds through sales of loans and advances from the Federal Home Loan Bank ("FHLB") of San Francisco. The Bank's principal source of income is interest on loans. Its principal expenses are interest paid on savings accounts, borrowings and expenses of its day-to-day operations. The Bank is subject to examination and comprehensive regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). The Bank is also a member of the FHLB of San Francisco, which is one of the 12 regional banks making up the Federal Home Loan Bank System. The Bank is further subject to regulations of the Board of Governors of the Federal Reserve System ("FRS") governing reserves required to be maintained against deposits and certain other matters. 7 The Offering On January 31, 1992, the Bank completed an offering of a total of 232,200 shares or $1,161,000 of its Series A Preferred Stock at a price of $5.00 per share. The Preferred Stock is entitled to an annual, noncumulative 12% cash dividend ($0.60) per share of Preferred Stock, if and as declared by the Board of Directors. Warrants In the event that the Bank does not declare a Cash Dividend on the Preferred Stock in any year, the holders of Preferred Stock receive an immediately exercisable, non-transferable Warrant representing the right to purchase a number of shares of Common Stock determined by dividing the cash value of the 12% Cash Dividend ($0.60) by the book value of the underlying Common Stock, per share, as of the end of the year in which the 12% Cash Dividend was earned. The terms of the Warrants are governed by the Bank's Charter and the respective Warrant Agreements. The Warrants have a term of five (5) years and an exercise price of $0.01 per share for each share of Common Stock subject thereto. As of March 31, 1996, the Bank had declared and issued 190,533 Warrants of which 49,715 remain unexercised. An additional 36,522 Warrants were earned as of December 31, 1995. These Warrants were issued April 12, 1996. Stock Option Plans On April 21, 1992, the Board of Directors of the Bank adopted the Sutter Buttes Savings Bank's 1992 Employee Stock Option Plan for key, full-time salaried officers and employees of the Bank and the 1992 Directors' Stock Option Plan for all non-employee directors of the Bank. There are presently reserved for issuance pursuant to options under the Employee Plan a total of 141,781 shares and under the Directors' Plan a total of 47,260 shares. Options to purchase 45,500 shares have been granted under the Employee Stock Option Plan and 47,240 shares have been granted under the Directors' Stock Option Plan. The options are exercisable at varying dates beginning October 31, 1992 for a ten year term. No granted options have been exercised. 8 Results of Operations Three months ended March 31, 1996 and 1995 The following analysis pertains to the interim financial condition and results of operations of Sutter Buttes Savings Bank at and for the quarter ended March 31, 1996 and 1995. The Bank's net income for the quarter ended March 31, 1996, was $65,476, or $.06 per share, as compared to $3,303 or $.00 per share for the quarter ended March 31, 1995. The increase of $62,173, or 1882.32% was primarily attributable to an increase in net interest income as well as an increase in gain on sale of real estate loans. For the quarter ended March 31, 1996 and 1995, the Bank's return on average assets was 0.40% and 0.02%, respectively; its return on average equity was 7.41% and 0.41%, respectively. The Bank's average equity to average assets ratio was 5.42% and 5.11%, respectively. Net Interest Income Gross interest income increased $174,595 or 16.51% to $1,232,174 for the quarter ended March 31, 1996 from $1,057,579 for the three month period ended March 31, 1995. The increase was principally due to an increase in loans receivable in 1996 compared to 1995. Gross interest expense increased $56,707 or 7.80% to $784,149 in the period ending March 31, 1996 from $727,442 in the period ended March 31, 1995. The increase was principally due to an increase in deposits and borrowings outstanding in 1996 compared to 1995 . The increase in deposits and borrowings was partially offset by a decrease in interest rates on these liabilities. Consequently, net interest income increased $117,888, or 35.71%, to $448,025 in the three month period ended March 31, 1996 from $330,137 for the same period ending March 31, 1995. The Bank's net interest margin as a percent of average earning assets was 2.77% and 2.16%, for the three months ended March 31, 1996 and 1995, respectively. Provision for Loan and Real Estate Losses The credit to the allowance for loan losses for the quarter ended March 31, 1996 and 1995 was $0 and $294, respectively. These credit provisions were primarily comprised of non-recurring recoveries of previously charged off loans. The Bank's allowance for estimated loan losses as a percentage of total loans at March 31, 1996 and December 31, 1995 was 0.67% and 0.71%, respectively. 9 Non-Interest Income For the three months ended March 31, 1996, non-interest income increased $21,983 or 45.26% as compared to the three months ended March 31, 1995. The change is due to an increase in the gain on sale of real estate loans as a result of higher levels of loan originations generated by the Bank's mortgage banking division in the quarter ended March 31, 1996 compared to the absence of such activity during the same period in 1995. General and Administrative Expense General and administrative expenses were $407,121 for the first quarter of 1996 compared to $373,385 for the first three months of 1995. This represents an increase of $33,736 or 9.04%. The major component of the increase is an increase in compensation of $17,189 or 9.62%. This increase is largely the result of the establishment of the Wholesale Mortgage Banking Division. The Division did not become active until the second quarter of 1995. Therefore its expenses during the first quarter of 1995 were not significant. Office expense increased by $10,557 or 32.27%. This was also attributable to the Wholesale Mortgage Banking Division. Income Taxes For the three months ended March 31, 1996 and 1995, income taxes as a percentage of income before taxes were 41.26% and 41.26%, respectively. While the Bank is not currently paying income taxes, state and federal deferred income taxes are being accrued for a future date when such taxes will be required to be paid. Financial Condition Total assets at March 31, 1996 amounted to $66,921,471, representing a $2,291,732 or 3.55% increase from $64,629,739 reported at year end 1995. Most of the increase was represented by an increase of $1,672,349 in mortgage loans held for sale. There were also increases in cash and equivalents as well as portfolio loans held by the Bank. Liquidity Liquidity at March 31, 1995 amounted to $3,541,991, representing an increase of $495,715 or 16.27% from $3,046,276, reported at year end 1995. Liquidity for the savings and loan industry is measured as the ratio of cash and eligible investments to the average sum of net withdrawable savings and borrowings due within one year. The minimum regulatory level is currently set by OTS regulations at 5%. The average regulatory liquidity ratio of the Bank was 5.07% and 5.08% at March 31, 1996 and December 31, 1995, respectively. 10 Capital Resources Shareholders' equity increased $65,476 during the three months ended March 31, 1996 solely due to net income earned during the period. The capital ratios for the Bank have increased since December 31, 1995 and are summarized below for the period ended March 31, 1996. CAPITAL REQUIREMENTS As Of March 31, 1996 (Amounts in 000's)
Requirements Actual Excess Dollars % Dollars % Dollars Tangible Capital $1,000 1.5% $3,614 5.40% $2,614 Core Capital 2,677 4.0 3,614 5.40% 937 Risk-based Capital 3,220 8.0 4,029 10.01% 809
Note: Tangible and core capital requirements are based on the percentage of tangible assets of $66,921,471. Risk-based capital requirements are based on the percentage of risk-adjusted assets of $40,250,000. Note: The shares of the Bank's Series A Preferred Stock, 232,200 shares of which are issued and outstanding, are subject to redemption at any time by the Bank, subject to OTS regulations and thirty days' written notice to the holders thereof. The redemption price of the Series A Preferred Stock shall be the par value per share plus any unpaid cash dividend, without interest, less warrants previously exercised, and with the cancellation (redemption) of any outstanding Warrants. The Bank's core capital ratio of equity to assets decreased to 5.40% at March 31, 1996 from 5.49% at December 31, 1995 as the result of first quarter asset growth. The Bank's risk-based capital ratio of equity to risk-based assets, decreased to 10.01% at March 31, 1996 from 10.21% at December 31, 1995, also the result of asset growth. The addition of commercial real estate loans was an additional factor. As of March 31, 1996 the fully diluted book value per share of common stock was $3.06. Book value per share is not necessarily indicative of the market value of the Bank's stock. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the normal course of business, the Bank is occasionally made a party to actions seeking to recover damages from the Bank. Any such actions are not expected to have a material impact on the Bank's financial condition. ITEM 2. CHANGES IN SECURITIES No changes were made in the quarter ending March 31, 1996. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Item is inapplicable. The Bank has no such indebtedness. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS There was no submission of matters to a vote of security holders during the first quarter ended March 31, 1996. ITEM 5. OTHER INFORMATION The Savings Association Insurance Fund (SAIF) recapitalization issue still has not been resolved. It is management's belief that the FDIC assessment to be imposed on the Bank will approximate 75 to 80 basis points of deposits. The Bank will continue to meet all minimum regulatory capital requirements even after the assessment has been paid. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K a. None b. There were no reports filed on Form 8-K during the quarter ending March 31, 1996. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUTTER BUTTES SAVINGS BANK, F.S.B. Date: May 13, 1996 By: /s/ W. R. Hagstrom ------------------ W. R. Hagstrom President and Chief Executive Officer (Principal Executive Officer) Date: May 13, 1996 By: /s/ Philip E. Safran -------------------- Philip E. Safran Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 13 EX-99.6 14 SUTTER BUTTES' 1995 ANNUAL MEETING PROXY EXHIBIT 99.6 SUTTER BUTTES' PROXY STATEMENT RELATED TO THE 1995 ANNUAL MEETING OF SHAREHOLDERS, DATED APRIL 6, 1995. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS APRIL 25, 1995 - 5:30 P.M. TO THE SHAREHOLDERS: The 1995 Annual Meeting of Shareholders (the "Annual Meeting") of Sutter Buttes Savings Bank, F.S.B., a federally chartered savings bank (the "Bank"), will be held at Sutter Buttes Savings Bank, F.S.B., 700 Plumas Street, Yuba City, California, on Tuesday, April 25, 1995 at 5:30 p.m. for the following purposes: 1. To elect Directors; 2. To ratify the appointment of Deloitte & Touche as the Bank's independent public accountants for the 1995 fiscal year; and 3. To transact such other business as may properly come before the Annual Meeting. The names of the Board of Directors' nominees to be Directors of the Bank are set forth in the accompanying Proxy Statement and are herein incorporated by reference. The Bylaws of the Bank provide for the nomination of directors in the following manner: "The Board of Directors shall act as a nominating committee for selecting management's nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the Secretary at least twenty (20) days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Savings Bank. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the Secretary of the Savings Bank at least twenty (20) days prior to the date of the annual meeting, or, if the notice of annual meeting and proxy statement shall be mailed to shareholders thirty (30) or fewer days prior to the annual meeting, then nominations by shareholders may be made in writing and delivered to the Secretary of the Savings Bank at least ten (10) days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Savings Bank. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least twenty (20) days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon." NOMINATIONS NOT MADE IN ACCORDANCE HEREWITH MAY, IN THE DISCRETION OF THE CHAIRPERSON OF THE MEETING, BE DISREGARDED AND UPON THE CHAIRPERSON'S INSTRUCTIONS, THE INSPECTOR OF ELECTION CAN DISREGARD ALL VOTES CAST FOR EACH SUCH NOMINEE. Any notice submitted in accordance with the above procedure should be sent to Sutter Buttes Savings Bank, F.S.B., 700 Plumas St., Yuba City, CA 95991. Only shareholders of record at the close of business on March 22, 1995 are entitled to notice of and to vote at this Annual Meeting and any adjournments thereof. Whether or not you plan to attend the Annual Meeting, you may vote by promptly completing, signing and returning the enclosed proxy. You may revoke your proxy at any time prior to the voting at the Annual Meeting. By Order of the Board of Directors, Barbara J. Thilo, Secretary Yuba City, California April 6, 1995 Mailed to shareholders on or about April 6, 1995 PROXY STATEMENT OF SUTTER BUTTES SAVINGS BANK, F.S.B. 700 Plumas Street Yuba City, California 95991 (916) 673-7283 INFORMATION CONCERNING THE SOLICITATION This Proxy Statement is furnished in connection with the solicitation of the enclosed proxy by, and on behalf of, the Board of Directors of Sutter Buttes Savings Bank, F.S.B. (the "Bank"), for use only at the 1995 Annual Meeting of Shareholders of the Bank (the "Annual Meeting") to be held at Sutter Buttes Savings Bank, F.S.B., 700 Plumas Street, Yuba City, California, at 5:30 p.m. on Tuesday, April 25, 1995 and at all adjournments thereof. Only shareholders of record on March 22, 1995 (the "Record Date") will be entitled to notice of and to vote at the Annual Meeting. At the close of business on the Record Date, the Bank had outstanding 581,193 shares of its $.01 par value Common Stock (the "Common Stock"), 232,200 shares of its $5.00 par value Series A Preferred Stock (the "Preferred Stock") and 175 Warrants to purchase a total of 95,265 shares of Bank Common Stock. Shareholders of the Bank's Preferred and Common Stock are entitled to one vote for each share held except that in the election of directors each shareholder has cumulative voting rights and is entitled to as many votes as shall equal the number of shares held by such shareholder multiplied by the number of directors to be elected and such shareholder may cast all his or her votes for a single candidate or distribute such votes among any or all of the candidates he or she chooses. An opportunity will be given at the Annual Meeting prior to the voting for any shareholder who desires to do so to announce his or her intention to cumulate his or her votes. The proxy holders are given discretionary authority, under the terms of the proxy, to cumulate votes represented by shares for which they are named in the proxy. Any person giving a proxy in the form accompanying this Proxy Statement has the power to revoke it prior to its exercise. It is revocable prior to the Annual Meeting by an instrument revoking it or by a duly executed proxy bearing a later date delivered to the Secretary of the Bank. Such proxy is also revoked if the shareholder is present at the Annual Meeting and elects to vote in person. First Interstate Bank of California will assist the Bank in tabulation of votes for the Annual Meeting. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the conduct of business but are not counted for purposes of determining whether a proposal has been approved. Unless otherwise noted herein, each of the Bank's proposals described in this Proxy Statement requires the affirmative vote of the holders of a majority of the shares of the Bank represented and voting at the Annual Meeting, assuming a quorum is present, with the Preferred and Common Stock each entitled to one vote per share and voting collectively. Unless otherwise instructed, each valid returned proxy which is not revoked will be voted in the election of directors "FOR" the nominees of the Board of Directors and "FOR" Proposal No. 2, as described in this Proxy Statement and, at the proxy holders' discretion, on such other matters, if any, which may properly come before the Annual Meeting (including any proposal to adjourn the Annual Meeting). The Bank will bear the entire cost of preparing, assembling, printing and mailing proxy materials furnished by the Board of Directors to shareholders. Copies of proxy materials will be furnished to brokerage houses, fiduciaries and custodians to be forwarded to the beneficial owners of the Preferred and Common Stock. In addition to the solicitation of proxies by use of the mail, some of the officers, directors and regular employees of the Bank may (without additional compensation) solicit proxies, on behalf of the Board of Directors of the Bank, by telephone or personal interview, the costs of which the Bank will bear. PRINCIPAL SHAREHOLDERS Common Stock As of the Record Date, no person or group known to the Bank owned beneficially more than five percent (5%) of the outstanding shares of its Common Stock, except as described below: Percentage of Name of Beneficial Number of Shares Outstanding Owner Beneficially Owned Common Stock Lee 'B' Colby 67,644 (1) 11.22% 72 Fairway Drive Chico, CA 95926 Woodland Tractor and 30,000 (2) 5.16% Equipment Co., Inc. Profit-Sharing Plan P.O. Box 65 Woodland, CA 95695 - ----------------------------------- (1) Includes 3,360 shares held of record in the name of Mr. Colby's children and 1440 shares held of record in the name of Mr. Colby's grandchildren, over which Mr. Colby has voting power pursuant to a power of attorney, 1,709 shares issuable upon exercise of a Warrant and 20,000 shares issuable upon exercise of options granted pursuant to the Bank's Directors' Stock Option Plan (the "Directors' Plan"). (2) Jeffrey A. Huckins is one of three trustees of the Woodland Tractor and Equipment Co., Inc. Profit-Sharing Plan; additionally, Mr. Huckins owns 6,000 shares of Common Stock for his own account. Preferred Stock As of the Record Date, no person or group known to the Bank owned beneficially more than five percent (5%) of the outstanding shares of its Preferred Stock, except as follows: Percentage Name of Number of Shares of Outstanding Beneficial Owner Beneficially Owned Preferred Stock Jon Beard 20,000 (1) 8.61% Jill Schaefer P. O. Box 280 Meridian, CA 95957 Rodney P. Beard 53,000 (2) 22.83% P.O. Box 700 Empire, CA 95319 The Allen J. & 12,000 (3) 5.17% Pauline B. Clause Family Trust 72-377 Magnesia Falls Rd. Rancho Mirage, CA 92270 James L. Harrison 23,980 (4) 10.33% 875 Murray Court Yuba City, CA 95991 2 George Murray 20,000 (5)(6) 8.61% 3433 Lessey Drive Yuba City, CA 95993 M.B. Consultants Inc. 20,000 (7) 8.61% Profit-Sharing Trust 1787 Tribute Rd., Ste. J Sacramento, CA 95815 - ----------------------------------- (1) Does not include one (1) immediately-exercisable Warrant to purchase 3,418 shares of Common Stock. (2) Includes 40,000 shares and 13,000 shares held in the names of Environmental Filtration Trust and Tulelake Environmental Trust, respectively, of which Mr. Beard is sole trustee. Does not include six (6) immediately-exercisable Warrants to purchase 29,262 shares of Common Stock. (3) Does not include two (2) immediately-exercisable Warrants to purchase 4,090 shares of Common Stock. (4) Held with his wife, Patricia J. Harrison. Does not include one (1) immediately-exercisable Warrant to purchase 4,099 shares of Common Stock. (5) Includes 2,000 shares held with his wife, Shirley Murray, 2,000 shares held by Mr. Murray's son and 16,000 shares held by the George Murray Inc. Money Purchase Pension and Profit Sharing Plan. (6) Does not include three (3) immediately-exercisable Warrants to purchase a total of 3,417 shares of Common Stock. (7) Does not include four(4)immediately-exercisable Warrants to purchase a total of 16,423 shares of Common Stock. Each share of Preferred Stock is entitled to receive annually a cash dividend in the amount of 12% of the par value of the Preferred Stock, or $.60 (the "12% Cash Dividend"). Alternatively, the 12% Cash Dividend may be paid in the form of immediately-exercisable non-transferable five (5)-year warrants to purchase a number of shares of Bank Common Stock determined by dividing the cash value of the 12% Cash Dividend by the book value of the underlying Common Stock per share as of the end of the year in which the 12% Cash Dividend was earned (the "Warrants"). At December 31, 1994, the book value of the Common Stock was $3.51 per share for determining the Warrants. Accordingly, on February 15, 1995, the Board of Directors of the Bank declared a dividend in Warrants to purchase a total of 39,658 shares of Common Stock to shareholders of record on March 15, 1995. The Warrants will be issued on April 7, 1995 to the holders of the Preferred Stock. 3 PROPOSAL NO. 1 ELECTION OF DIRECTORS OF THE BANK The Bylaws of the Bank provide a procedure for nomination for election of members of the Board of Directors, which procedure is printed in full in the Notice of Annual Meeting of Shareholders accompanying this Proxy Statement. NOMINATIONS NOT MADE IN ACCORDANCE THEREWITH MAY BE DISREGARDED BY THE CHAIRMAN OF THE MEETING AND, UPON HIS INSTRUCTION, THE INSPECTOR OF ELECTION SHALL DISREGARD ALL VOTES CAST FOR SUCH NOMINEE(S). The number of directors to be elected at the Annual Meeting is four (4). In accordance with applicable law, the directors of the Bank are elected for a three-year term on a staggered basis. Thus, at each annual meeting, one class of directors is elected for a term of three years. The term of the Class B directors to be elected expires at the Annual Meeting, and, if elected, the directors will serve for a term expiring in 1998 and until their successors are elected and qualified. The nominees for Class B directors are James L. Harrison, George Murray and Lonny L. Renfrow. In addition, directors appointed to the Board of Directors since the last Annual Meeting also must be elected. Accordingly, W. R. Hagstrom, a Class A director, has been nominated for election at the Annual Meeting. All proxies will be voted "FOR" the election of the nominees recommended by the Board of Directors, unless authority to vote for the election of such directors is withheld. If a nominee should unexpectedly decline or be unable to act as a director, the proxies may be voted for a substitute nominee to be designated by the Board of Directors. Any substitute or additional nominee will be designated to the class accorded the original nominee and any such nominee elected as a director shall hold office for the term accorded such class. The Board of Directors has no reason to believe that any nominee will become unavailable and has no present intention to nominate persons in addition to or in lieu of the persons named below. The following table sets forth certain information with respect to the persons nominated by the Board of Directors for election as directors, the two (2) other directors continuing in office, as well as all directors and officers of the Bank as a group. All of the shares shown in the following table are owned both of record and beneficially and the person named possesses sole voting power, except as otherwise noted in the table. 4
ELECTION OF DIRECTORS Shares of Preferred Stock Shares of Common Stock Beneficially Owned as of Beneficially Owned as of March 22, 1995 March 22, 1995(1) ------------------------- --------------------- Directors and Positions and Offices Percent Percent Nominees Held with the Bank Amount of Class Amount of Class Lee 'B' Colby Chairman of the 10,000 4.31% 67,644(2) 11.22%(2) (Class A) Board of Directors W. R. Hagstrom President, Chief -0- -0- 400 .07% (Nominee Class A) Executive Officer and Director James L. Harrison Director 23,980 10.33% 22,072(3) 3.76%(3) (Nominee Class B) George Murray Director 20,000(4) 8.61%(4) 17,418(5) 2.97%(5) (Nominee Class B) Lonny L. Renfrow Director 4,000 1.72% 23,883(6) 4.02%(6) (Nominee Class B) Don J. Strachan(7) Director 6,200 2.67% 11,887(8) 2.01%(8) (Class C) All directors, nominees and executive officers of the Bank as a group (8 in number) 64,980 27.98% 153,459(9) 23.85%(9) ====== ===== ======= =====
- ------------------------- (1) Includes shares of Common Stock issuable upon exercise of Warrants and presently exercisable options outstanding under the Bank's 1992 Employee Stock Option Plan (the "Employee Plan") and the Directors' Plan. (2) See Note 1 to "Principal Shareholders - Common Stock." (3) Includes 1,000 shares of Common Stock issuable upon exercise of options granted pursuant to the Directors' Plan. Also includes Warrants to purchase a total of 4,099 shares of Common Stock. See Note 3 to "Principal Shareholders - Preferred Stock." (4) See Note 5 to "Principal Shareholders - Preferred Stock." (5) Includes 1,000 shares of Common Stock issuable upon exercise of options granted pursuant to the Directors' Plan and Warrants to purchase a total of 3,417 shares of Common Stock. See Note 6 to "Principal Shareholders - Preferred Stock." (6) Includes 11,000 shares subject to options granted pursuant to the Directors' Plan and one Warrant to purchase 1,362 shares. (7) Held in the name of Strachan Apiaries, Inc., of which Mr. Strachan is President. (8) Includes 3,800 shares of Common Stock issuable upon exercise of options granted pursuant to the Directors' Plan and Warrants to purchase a total of 5,087 shares. (9) Includes 36,800 shares of Common Stock issuable upon exercise of options granted pursuant to the Directors' Plan, 9,500 shares of Common Stock issuable upon exercise of options granted pursuant to the Employee Plan and Warrants to purchase 15,810 shares of Common Stock. 5 Mr. W. R. Hagstrom, Mr. Philip E. Safran and Ms. Barbara J. Thilo are the sole executive officers of the Bank. Executive officers of the Bank serve on an annual basis and are selected each year by the Board of Directors pursuant to the Bylaws of the Bank. The following information with respect to the principal occupation and employment of each director, executive officer and nominee as director and executive officer, the name and principal business of the corporation or other organization in which such occupation and employment is carried on, and in regard to other affiliations and business experience during the past five (5) years, has been furnished to the Bank by the respective directors, nominees for director and executive officers. None of the corporations or organizations discussed below is an affiliate of the Bank. LEE 'B' COLBY, 72, has been a director of the Bank since 1982 and is the Chairman of the Board of Directors of the Bank. Mr. Colby has over forty years' experience as a residential and commercial land developer and construction contractor. He presently also serves as President and Chief Executive Officer of Wynoka Homes, Inc. W. R. HAGSTROM, 49, was appointed President and CEO and a director of the Bank on June 20, 1994. He has over thirty years' experience in the savings and loan business. Prior to becoming President of the Bank, Mr. Hagstrom was Chairman, President and CEO of Oklahoma Appraisal and Real Estate Services Co, Inc from 1989 to 1994. From 1977 to 1989 Mr. Hagstrom was with a large savings and loan in Oklahoma in various executive capacities. JAMES L. HARRISON, 55, is the owner-operator of Hal's Grubstake. From 1964 to 1990, he was a traffic officer with the California Highway Patrol. From 1981 to 1989, Mr. Harrison was the President, owner and pilot for James L. Harrison, Inc., an aircraft crop dusting service. Mr. Harrison has been a director of the Bank since January 1992. GEORGE MURRAY, 60, has had over thirty years' experience in the real estate business. He is the President of Valley Fair Realty Corporation, a general brokerage business. From April 1984 to present, Mr. Murray has been the Chairman of the Board for North State Title Company. He is a licensed Real Estate Broker and CCIM. Mr. Murray has been a director of the Bank since January 1992. LONNY L. RENFROW, 65, is a certified public accountant with thirty-eight years' experience. He is presently a partner in the firm of Chipman and Renfrow Accounting Corporation. He is a member of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants and the National Society of Accountants for Cooperatives. Mr. Renfrow has served on the Board of Directors since 1982. DON J. STRACHAN, 69, is the President and owner of Strachan Apiaries, Inc., which raises bee hives, sells package bees and queen bees and produces honey. Mr. Strachan has over forty years' experience in beekeeping. Prior to his present tenure on the Board of Directors which began upon his election at the Bank's 1991 Annual Meeting, Mr. Strachan previously was a member of the Bank's Board, serving as a director from the Bank's founding until May 1989 and again in September and October of 1989. PHILIP E. SAFRAN, 39, was appointed Senior Vice President and Chief Financial Officer of the Bank on April 27, 1993. Prior to his employment with the Bank, Mr. Safran was Vice President and Chief Financial Officer at American Liberty Bank. From 1988 to 1990, Mr. Safran was Vice President and Chief Financial Officer at Global Savings Bank. BARBARA J. THILO, 34, was appointed Senior Vice President and Chie Administrative Officer of the Bank on February 23, 1993. Ms. Thilo continues to serve as the Bank's Corporate Secretary. Prior to her employment with the Bank, which commenced in August 1987, Ms. Thilo worked for the American Pop Corn Company, Sioux City, Iowa. 6 No director or executive officer of the Bank has any family relationship with any other director or executive officer. No director of the Bank is a director of any other company with a class of securities registered pursuant to section 12 or subject to the requirements of section 15 (d) of the Securities Exchange Act of 1934, as amended, or of any company registered as an investment company under the Investment Company Act of 1940, as amended. Committees of the Board of Directors The Board of Directors has established a standing Audit Committee, which met twice during 1994. The functions of the Audit Committee are to recommend the appointment of and oversee a firm of independent public accountants whose duty is to audit the books and records of the Bank for the fiscal year for which they are appointed, to monitor and analyze the results of internal and regulatory examinations and to monitor the Bank's financial and accounting organization and financial reporting. The members of the Audit Committee are: Lonny L. Renfrow (Chairman), Lee 'B' Colby and James L. Harrison. The Bank's Loan Committee met on an as-needed basis during 1994. The functions of the Loan Committee are to supervise and monitor the Bank's lending activities, to provide prior loan approval and review in accordance with the Bank's Loan Policy and to recommend specific loan policies to the Board of Directors. The members of the Loan Committee are: George Murray (Chairman), W. R. Hagstrom, Don J. Strachan, Lonny L. Renfrow, James L. Harrison and Lana McBride, Assistant Vice President - Loan Manager. The Bank's Internal Asset Review Committee met four times during 1994. The function of this committee is to implement procedures to evaluate the risk in the Bank's loan portfolio, review past due loans, review internal classification of loans and review and inspect certain loans at random as a matter of course. The members of the Internal Asset Review Committee are: George Murray (Chairman), Lee 'B' Colby, W. R. Hagstrom, Lonny L. Renfrow, Don J. Strachan and Joanne Smith, Assistant Vice President - Loan Service Manager. The Bank's Compliance Committee met three times during 1994. The function of this committee is to monitor the Bank's compliance issues. The members of the Compliance Committee are: Lonny L. Renfrow (Chairman), Lee 'B' Colby, W. R. Hagstrom, James L. Harrison and Linda Bradfield, Vice President- Compliance Officer. The Executive Committee of the Board performs the functions of the Bank's compensation committee and meets on an as-needed basis. During 1993, the Bank also formed the Organizational/Research Committee, which meets on an as-needed basis. The Bank does not have a standing nominating committee. The Board of Directors performs the function of this committee. The Bylaws provide for the nomination of directors by the Board of Directors and by shareholders, which procedure is set forth in the Notice of Annual Meeting of Shareholders accompanying this Proxy Statement. The full Board of Directors met thirteen (13) times during 1994. All directors of the Bank attended at least 75% of the meetings of the Board of Directors and the committees on which they served. 7 EXECUTIVE COMPENSATION The Bank is complying with the disclosure requirements for a Small Business Issuer in accordance with SEC Regulation S-B. Summary of Compensation The following table sets forth a summary of the compensation paid during the Bank's past fiscal year for services rendered in all capacities to Theodore W. Lundquist, the Chief Executive Officer of the Bank during 1993 and until June 15, 1994 and W. R. Hagstrom, the Chief Executive of the Bank, from June 20, 1994 through December 31, 1994.
Summary Compensation Table ================================================================================================================= Annual compensation ------------------------------------------- Salary ($) Bonus ($) Other Long term All annual compensation/ other Name and principal position Year compensa- Awards/ compen- tion ($) Securities sation ($) Underlying Options (#) - ----------------------------------------------------------------------------------------------------------------- 1994 $49,582 $0 $0 6,000(1)(2) $32,305 3) - ----------------------------------------------------------------------------------------------------------------- Theodore W. Lundquist, C.E.O. 1993 $93,375 $0 $0 $23,625(4) - ----------------------------------------------------------------------------------------------------------------- W. R. Hagstrom, C.E.O. 1994 $39,821(5) $0 $0 0 $18,750(6) =================================================================================================================
(1) See "Option Grants and Exercises" herein. (2) Said options expired unexercised September 15, 1994. (3) Consists of four (4) months' compensation received by Mr. Lundquist upon his resignation on June 15, 1994. (4) In the event that Mr. Lundquist was terminated other than for cause during 1993, he was entitled to receive three (3) months' compensation under the terms of his employment agreement. See "Employment Contracts," herein. (5) Represents a partial year of service with the Bank, which began June 20, 1994. (6) In the event that Mr. Hagstrom is terminated other than for cause during 1995, he would be entitled to receive three (3) months compensation under the terms of his employment agreement. See "Employment Contracts," herein. Option Grants and Exercises The Bank has established the 1992 Employee Stock Option Plan (the "Employee Plan"), in which the Chief Executive Officer and other employees of the Bank participate. As of the time of his resignation, Mr. Lundquist had been granted an option to purchase 6,000 shares of Common Stock of which 4,000 shares of Common Stock were exercisable. Mr. Lundquist had three (3) months from the date of his resignation to exercise his option for the shares that were exercisable. Mr. Lundquist did not choose to exercise his option. At this time no options have been granted to Mr. Hagstrom. Employment Contracts Effective March 16, 1994, the Bank extended for a three (3) year term its employment agreement with Mr. Lundquist as President, Chief Executive Officer, Chief Operating Officer and Chief Lending Officer of the Bank. Pursuant to the agreement, Mr. Lundquist's beginning base salary was $94,500, which was subject to a cost of living increase every year during the three (3) year term. In addition, the employment agreement provided that in the event that Mr. Lundquist was terminated other than for cause, the Bank would continue to pay Mr. Lundquist's salary for a period of three (3) months. On June 15, 1994, the Board of Directors 8 accepted the resignation of Mr. Lundquist, at which time he received four (4) months' compensation along with the payment of his medical, dental and life insurance benefits. Mr. Lundquist's insurance benefits were terminated on August 31, 1994, at which time he had secured other employment. On June 20, 1994, the Bank entered into a one (1) year employment agreement with W. R. Hagstrom as President, Chief Executive Officer, Chief Operating Officer and Chief Loan Officer of the Bank. Pursuant to the agreement, Mr. Hagstrom's beginning salary is $75,000. In addition, the employment agreement provides that in the event Mr. Hagstrom is terminated other than for cause, the Bank will continue to pay Mr. Hagstrom's salary for a period of three (3) months. Medical, dental and life insurance benefits may be paid for a period of up to three (3) months, subject to Mr. Hagstrom finding alternate employment. Mr. Hagstrom also receives certain benefits provided to other Bank employees. Director Compensation Non-employee directors of the Bank receive a monthly retainer of $300. The Chairman of the Board receives a monthly retainer of $500. Additionally, directors receive $75 for each Board meeting or committee meeting attended. The Chairman of a committee receives $100 per meeting attended. A director is allowed to miss two meetings within a calendar year without loss of the monthly retainer. If a third meeting within a calendar year is missed, except for illness, no monthly retainer will be paid for the month in which the third meeting was missed. During 1994, an aggregate of $34,550 was paid as directors' fees. Certain Relationships and Related Transactions There have been no transactions since January 1, 1994, nor are there any currently proposed transactions, to which the Bank was or is to be a party, in which the amount involved exceeds $60,000 and in which any director, executive officer, nominee to be a director, principal shareholder, or any member of the immediate family of any of the foregoing persons had, or will have, a direct or indirect material interest. Indebtedness of Management Some of the directors, executive officers and employees of the Bank and their immediate families and the companies with which they are associated have been customers of and have had banking transactions with the Bank since January 1, 1994, and may have such banking transactions with the Bank in the future. Any loans and commitments to loan included in such transactions are and will be made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of collectibility or present other unfavorable features. 9 PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS The firm of Deloitte & Touche LLP was selected and served the Bank as independent public accountants for the 1994 fiscal year and has also been selected by the Board of Directors of the Bank to be its independent public accountants for the 1995 fiscal year. The Board of Directors recommends a vote "FOR" ratification of the selection of Deloitte & Touche LLP as the Bank's independent public accountants for the 1995 fiscal year. All proxies will be voted "FOR" ratification of such selection unless authority to vote for the ratification of such selection is withheld or an abstention is noted. If the nominee should unexpectedly for any reason decline or be unable to act as independent public accountants, the proxies may be voted for a substitute nominee to be designated by the Board of Directors. Representatives from the accounting firm of Deloitte & Touche LLP will be present at the Annual Meeting, will be afforded the opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions. ANNUAL REPORT A copy of the 1994 Annual Report of the Bank for the fiscal year ended December 31, 1994 accompanies this Proxy Statement. Additional copies of the Annual Report are available upon request of Barbara J. Thilo, Secretary of the Bank. The Bank's Annual Report to the Office of Thrift Supervision on Form 10-KSB may be obtained by any shareholder of the Bank, without charge, by writing to Barbara J. Thilo, Chief Administrative Officer, Sutter Buttes Savings Bank, F.S.B., 700 Plumas Street, Yuba City, California 95991. SHAREHOLDER PROPOSALS Next year's Annual Meeting of Shareholders will be held on or about April 23, 1996. The deadline for shareholders to submit proposals for inclusion in the proxy statement and form of Proxy for the 1996 Annual Meeting of Shareholders is December 28, 1995. Shareholder proposals should be directed to Mr. W. R. Hagstrom, President, at the principal office of the Bank. OTHER MATTERS The Board of Directors is not aware of any other business which will come before the Annual Meeting, but if any such matters are properly presented, proxies solicited hereby will be voted in accordance with the best judgment of the persons holding the proxies. All shares represented by duly executed proxies will be voted at the Annual Meeting. SUTTER BUTTES SAVINGS BANK, F.S.B. Yuba City, California April 6, 1995 10 -----END PRIVACY-ENHANCED MESSAGE-----