10-Q 1 tcb10q3q03.txt TCBK - 9/30/2003 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended September 30, 2003 Commission file number 0-10661 ------------------------------------ ------------------------------ TRICO BANCSHARES (Exact name of registrant as specified in its charter) California 94-2792841 ------------------------------ ------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 63 Constitution Drive, Chico, California 95973 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 530/898-0300 -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of Class: Common stock, no par value Outstanding shares as of November 12, 2003: 7,848,524 TABLE OF CONTENTS Page Forward Looking Statements 1 PART I - FINANCIAL INFORMATION 2 Item 1 - Financial Statements 2 Notes to Unaudited Condensed Consolidated Financial Statements 6 Financial Summary 13 Item 2 - Management's Discussion and Analysis of Financial 14 Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosure about Market Risk 27 Item 4 - Controls and Procedures 28 PART II - OTHER INFORMATION 29 Item 1 - Legal Proceedings 29 Item 6 - Exhibits and Reports on Form 8-K 29 Signatures 31 Exhibits 32 FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the "Company") for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management's current knowledge and belief and include information concerning the Company's possible or assumed future financial condition and results of operations. When you see any of the words "believes", "expects", "anticipates", "estimates", or similar expressions, mean making forward-looking statements. A number of factors, some of which are beyond the Company's ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to: - a continued slowdown in the national and California economies; - increased economic uncertainty created by the recent war in Iraq; - the prospect of additional terrorist attacks in the United States and the uncertain effect of these events on the national and regional economies; - changes in the interest rate environment; - changes in the regulatory environment; - significantly increasing competitive pressure in the banking industry; - operational risks including data processing system failures or fraud; - volatility of rate sensitive deposits; and - asset/liability matching risks and liquidity risks. On April 4, 2003, the Company acquired North State National Bank, located in Chico, California. Many possible events or factors could affect the future financial results and performance of the Company after the merger including: - actual cost savings resulting from the merger are less than we expected, we are unable to realize those cost savings as soon as we expected or we incur additional or unexpected costs; - revenues after the merger are less than we expected; - competition among financial services companies increases; - we have more trouble integrating our businesses than we expected; - changes in the interest rate environment reduces our interest margins; - general economic conditions change or are worse than we expected; - legislative or regulatory changes adversely affect our business; - changes occur in business conditions and inflation; - personal or commercial customers' bankruptcies increase; - changes occur in the securities markets; and - technology-related changes are more difficult to make or more expensive than we expected. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2002, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. -1-
PART I - FINANCIAL INFORMATION Item 1. Financial Statements TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) (Unaudited) At September 30, At December 31, ------------------------------- ------------------ 2003 2002 2002 Assets: Cash and due from banks $66,747 $56,749 $67,170 Federal funds sold 1,900 23,400 8,100 ------------------------------- ------------------ Cash and cash equivalents 68,647 80,149 75,270 Investment securities available for sale 350,941 268,921 338,024 Loans Commercial 152,477 142,290 125,982 Consumer 297,186 191,601 201,858 Real estate mortgages 420,312 313,191 319,969 Real estate construction 60,066 36,472 39,713 ------------------------------- ------------------ Total loans 930,041 683,554 687,522 Allowance for loan losses (13,460) (14,382) (14,377) ------------------------------- ------------------ Loans, net of allowance for loan losses 916,581 669,172 673,145 Premises and equipment, net 19,787 16,583 17,224 Cash value of life insurance 38,644 15,045 15,208 Other real estate owned 1,545 - 932 Accrued interest receivable 6,152 5,552 5,644 Deferred income taxes 8,646 7,957 8,429 Intangible assets 21,992 4,387 4,043 Other assets 7,649 5,757 6,655 ------------------------------- ------------------ Total Assets $1,440,584 $1,073,523 $1,144,574 =============================== ================== Liabilities: Deposits: Noninterest-bearing demand $267,148 $202,895 $232,499 Interest-bearing demand 211,219 175,883 182,816 Savings 426,340 268,182 297,926 Time certificates, $100,000 and over 99,574 86,945 90,404 Other time certificates 191,571 203,990 201,592 ------------------------------- ------------------ Total deposits 1,195,852 937,895 1,005,237 Federal funds purchased 55,700 - - Accrued interest payable 2,556 2,608 2,927 Other Liabilities 18,756 13,667 14,472 Long-term debt and other borrowings 22,894 22,932 22,924 Trust preferred securities 20,000 - - ------------------------------- ------------------ Total Liabilities 1,315,758 977,102 1,045,560 ------------------------------- ------------------ Shareholders' Equity: Authorized - 20,000,000 shares of common stock Issued and outstanding: 7,846,001 at September 30, 2003 69,875 7,035,590 at September 30, 2002 50,188 7,060,965 at December 31, 2002 50,472 Retained earnings 53,728 43,900 46,239 Accumulated other comprehensive income, net 1,223 2,333 2,303 ------------------------------- ------------------ Total Shareholders' Equity 124,826 96,421 99,014 ------------------------------- ------------------ Total Liabilities and Shareholders' Equity $1,440,584 $1,073,523 $1,144,574 =============================== ==================
See accompanying notes to unaudited condensed consolidated financial statements -2-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data) (Unaudited) Three months ended September 30, Nine months ended September 30, 2003 2002 2003 2002 ------------------------------------------------------------------- Interest Income: Interest and fees on loans $16,228 $13,333 $43,930 $39,387 Interest on federal funds sold 25 143 127 476 Interest on investment securities available for sale Taxable 2,389 2,410 8,072 6,949 Tax exempt 463 549 1,486 1,656 ------------------------------------------------------------------- Total interest income 19,105 16,435 53,615 48,468 ------------------------------------------------------------------- Interest Expense: Interest on interest-bearing demand deposits 137 115 387 350 Interest on savings 893 656 2,519 2,011 Interest on time certificates of deposit 1,771 2,129 5,753 6,340 Interest on short-term borrowing 38 1 101 1 Interest on long-term debt 325 326 964 967 Interest on trust preferred securities 141 - 141 - ------------------------------------------------------------------- Total interest expense 3,305 3,227 9,865 9,669 ------------------------------------------------------------------- Net Interest Income 15,800 13,208 43,750 38,799 ------------------------------------------------------------------- Provision for loan losses 150 700 450 2,000 ------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 15,650 12,508 43,300 36,799 ------------------------------------------------------------------- Noninterest Income: Service charges and fees 3,117 3,521 10,602 7,635 Gain on sale of investments 97 - 197 - Gain on sale of loans 936 752 3,388 2,254 Commissions on sale of non-deposit investment products 432 712 1,341 1,989 Other 624 428 1,628 1,304 ------------------------------------------------------------------- Total Noninterest Income 5,206 5,413 17,156 13,182 ------------------------------------------------------------------- Noninterest Expense: Salaries and related benefits 7,460 6,344 21,973 17,856 Other 6,589 5,789 19,095 15,642 ------------------------------------------------------------------- Total Noninterest Expense 14,049 12,133 41,068 33,498 ------------------------------------------------------------------- Income Before Income Taxes 6,807 5,788 19,388 16,483 ------------------------------------------------------------------- Provision for income taxes 2,469 2,161 7,183 6,163 ------------------------------------------------------------------- Net Income $4,338 $3,627 $12,205 $10,320 ------------------------------------------------------------------- Comprehensive Income: Change in unrealized (loss) gain on securities available for sale, net (2,210) 940 (1,080) 2,988 ------------------------------------------------------------------- Comprehensive Income $2,128 $4,567 $11,125 $13,308 =================================================================== Average Shares Outstanding 7,850 7,026 7,572 7,010 Diluted Average Shares Outstanding 8,095 7,231 7,789 7,188 Per Share Data Basic Earnings $0.55 $0.52 $1.61 $1.47 Diluted Earnings $0.54 $0.50 $1.57 $1.44 Dividends Paid $0.20 $0.20 $0.60 $0.60
See accompanying notes to unaudited condensed consolidated financial statements -3- TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, unaudited) Accumulated Other Common Retained Comprehensive Stock Earnings Income (Loss), net Total ----------------------------------------------- Balance, December 31, 2001 $49,679 $37,909 ($655) $86,933 Net income for the period 10,320 10,320 Exercise of stock options, including tax benefits 579 579 Repurchase of common stock (70) (119) (189) Dividends (4,210) (4,210) Unrealized gain on securities available for sale, net 2,988 2,988 ----------------------------------------------- Balance September 30, 2002 $50,188 $43,900 $2,333 $96,421 =============================================== Balance, December 31, 2002 $50,472 $46,239 $2,303 $99,014 Net income for the period 12,205 12,205 Issuance of stock and options related to merger 18,459 18,459 Exercise of stock options, including tax benefits 1,016 1,016 Repurchase of common stock (72) (157) (229) Dividends (4,559) (4,559) Unrealized loss on securities available for sale, net (1,080) (1,080) ----------------------------------------------- Balance September 30, 2003 $69,875 $53,728 $1,223 $124,826 =============================================== See accompanying notes to unaudited condensed consolidated financial statements -4-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) For the nine months ended September 30, 2003 2002 ------------------------------- Operating Activities: Net income $12,205 $10,320 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 2,108 1,956 Amortization of intangible assets 877 683 Provision for loan losses 450 2,000 Amortization of investment securities premium, net 2,920 1,080 Deferred income taxes 58 (108) Investment security gains net (197) - Originations of loans for resale (147,602) (113,271) Proceeds from sale of loans originated for resale 149,355 114,227 Gain on sale of loans (3,388) (2,254) Amortization of mortgage servicing rights 1,042 498 Provision for mortgage servicing rights valuation 600 - (Gain) loss on sale of other real estate owned (60) (8) (Gain) loss on sale of fixed assets (3) 10 Change in assets and liabilities: Decrease (increase) in interest receivable 34 (30) Decrease in interest payable (445) (880) Increase in other assets and liabilities 1,698 2,547 ------------------------------- Net Cash Provided by Operating Activities 19,652 16,770 ------------------------------- Investing Activities: Net cash obtained in mergers and acquisitions 7,450 - Proceeds from maturities of securities available-for-sale 170,120 87,365 Proceeds from sale of securities available-for-sale 22,320 - Purchases of securities available-for-sale (169,113) (127,999) Net increase in loans (168,329) (25,498) Proceeds from sale of premises and equipment 15 16 Purchases of property and equipment (2,191) (1,902) Proceeds from sale of other real estate owned 60 79 Purchase of life insurance (22,475) - ------------------------------- Net Cash Used by Investing Activities (162,143) (67,939) ------------------------------- Financing Activities: Net increase in deposits 64,566 57,502 Net increase in Federal funds purchased 55,700 - Payments of principal on long-term debt agreements (30) (24) Issuance of trust preferred securities 19,850 - Repurchase of Common Stock (229) (189) Dividends paid (4,559) (4,210) Exercise of stock options/issuance of Common Stock 570 275 ------------------------------- Net Cash Provided by Financing Activities 135,868 53,354 ------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (6,623) 2,185 ------------------------------- Cash and Cash Equivalents and Beginning of Period 75,270 77,964 ------------------------------- Cash and Cash Equivalents at End of Period $68,647 $80,149 =============================== Supplemental Disclosure of Noncash Activities: Unrealized (loss) gain on securities available for sale ($1,930) $4,777 Loans transferred to other real estate owned $613 - Supplemental Disclosure of Cash Flow Activity: Cash paid for interest expense $10,236 $10,549 Cash paid for income taxes $4,810 $4,700 Income tax benefit from stock option exercises $446 $304 The acquisition of North State National Bank Involved the following: Common stock issued $18,459 Liabilities assumed $126,722 Fair value of assets acquired, other than cash and cash equivalents ($118,905) Core deposit intangible ($3,365) Goodwill ($15,461) Net cash and cash equivalents received $7,450
See accompanying notes to unaudited condensed consolidated financial statements -5- NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: General Summary of Significant Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The interim results for the three and nine month periods ended September 30, 2003 and 2002 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, Tri Counties Bank (the "Bank"), and TriCo Capital Trust I. All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company operates 33 branch offices and 10 in-store branch offices in the California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare and Yuba. The Company's operating policy since its inception has emphasized retail banking. Most of the Company's customers are retail customers and small to medium sized businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The one accounting estimate that materially affects the financial statements is the allowance for loan losses. Investment Securities The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities that the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the nine months ended September 30, 2003 and throughout 2002, the Company did not have any securities classified as either held-to-maturity or trading. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of other comprehensive income in shareholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that a permanent decline in value has occurred. -6- Loans Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in Management's judgment are well secured and in the process of collection, they may not be classified as nonaccrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans, leases and commitments to extend credit, based on evaluations of the collectibility, impairment and prior loss experience of loans, leases and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Mortgage Operations Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Retained interests (mortgage servicing rights) in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer. Fair values are estimated using discounted cash flows based on a current market interest rate. The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The Company sold substantially all of its conforming long-term residential mortgage loans originated during nine months ended September 30, 2003 for cash proceeds equal to the fair value of the loans. The recorded value of mortgage servicing rights is included in other assets, and is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum. -7- At September 30, 2003, the Company had no mortgage loans held for sale. At September 30, 2003 and December 31, 2002, the Company serviced real estate mortgage loans for others of $348 million and $307 million, respectively. The following table summarizes the Company's mortgage servicing rights assets as of September 30, 2003 and December 31, 2002. December 31, September 30, (Dollars in thousands) 2002 Additions Reductions 2003 ----------------------------------------------- Mortgage servicing rights $2,821 $1,635 ($1,042) $3,414 Valuation allowance - - (600) (600) ----------------------------------------------- Mortgage servicing rights, net of valuation allowance $2,821 $1,635 ($1,642) $2,814 =============================================== Intangible Assets The Company reviews for impairment of certain intangibles held, at the end of each calendar year or whenever events or changes indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair market value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Identifiable Intangible Assets Identifiable intangible assets consist of core deposit intangibles and minimum pension liability. The following table summarizes the Company's core deposit intangible as of September 30, 2003 and December 31, 2002. December 31, September 30, (Dollar in Thousands) 2002 Additions Reductions 2003 ----------------------------------------------- Core deposit intangibles $10,278 $3,365 - $13,643 Accumulated amortization (6,636) - ($877) (7,513) ----------------------------------------------- Core deposit intangibles, net $3,642 $3,365 ($877) $6,130 =============================================== Core deposit intangibles are amortized over their expected useful lives. Such lives are periodically reassessed to determine if any amortization period adjustments are indicated. The following table summarizes the Company's estimated core deposit intangible amortization for each of the five succeeding years: Estimated Core Deposit Intangible Amortization Years Ended (Dollar in thousands) ----------- ----------------------- 2003 $1,207 2004 $1,358 2005 $1,381 2006 $1,395 2007 $490 Thereafter $1,176 The following table summarizes the Company's minimum pension liability intangible as of September 30, 2003 and December 31, 2002. December 31, September 30, (Dollar in Thousands) 2002 Additions Reductions 2003 ----------------------------------------------- Minimum pension liability intangible $401 - - $401 =============================================== Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. -8- Goodwill The following table summarizes the Company's goodwill intangible as of September 30, 2003 and December 31, 2002. December 31, September 30, (Dollar in Thousands) 2002 Additions Reductions 2003 ----------------------------------------------- Goodwill - $15,461 - $15,461 =============================================== Trust Preferred Securities On July 31, 2003, TriCo completed an offering of 20,000 shares of cumulative trust preferred securities for cash in an aggregate amount of $20,000,000. The trust preferred securities are mandatorily redeemable upon maturity on October 7, 2033 with an interest rate that resets quarterly at three-month LIBOR plus 3.05%, or 4.16% for the first quarterly interest period. TriCo has the right to redeem the trust preferred securities on or after October 7, 2008. The trust preferred securities were issued through an underwriting syndicate to which the Company paid underwriting fees of $7.50 per trust preferred security or an aggregate of $150,000. The net proceeds of $19,850,000 will be used to finance the opening of new branches, improve bank services and technology, repurchase shares of the Company's common stock as described below and increase the Company's capital. The trust preferred securities have not been and will not be registered under the Securities Act of 1933, as amended, or applicable state securities laws and were sold pursuant to an exemption from registration under the Securities Act of 1933. The trust preferred securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933, as amended, and applicable state securities laws. The Company formed a subsidiary business trust, TriCo Capital Trust I, to issue the trust preferred securities. Concurrently with the issuance of the trust preferred securities, the trust issued 619 shares of common stock to the Company for $1,000 per share or an aggregate of $619,000. In addition, the Company issued a Junior Subordinated Debenture to the Trust in the amount of $20,619,000. The terms of the Junior Subordinated Debenture are materially consistent with the terms of the trust preferred securities issued by TriCo Capital Trust I. Income Taxes The Company's accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. -9- Stock-Based Compensation The Company uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Under this method, compensation expense is recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue using the intrinsic value method or to adopt a fair value based method to account for stock option plans. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method. Had compensation cost for the Company's option plans been determined in accordance with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except per share amounts) 2003 2002 2003 2002 ---- ---- ---- ---- Net income As reported $4,338 $3,627 $12,205 $10,320 Pro forma $4,271 $3,574 $12,030 $10,165 Basic earnings per share As reported $0.55 $0.52 $1.61 $1.47 Pro forma $0.54 $0.51 $1.59 $1.45 Diluted earnings per share As reported $0.54 $0.50 $1.57 $1.44 Pro forma $0.53 $0.49 $1.54 $1.41 Stock-based employee compensation cost, net of related tax effects, included in net income As reported $0 $0 $0 $0 Pro forma $67 $53 $175 $155
Comprehensive Income For the Company, comprehensive income includes net income reported on the statement of income, changes in the fair value of its available-for-sale investments, and changes in the minimum pension liability reported as a component of shareholders' equity. The changes in the components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2003 and 2002 are reported as follows: Nine Months Ended September 30, 2003 2002 ------------------------------- Unrealized Gain on Securities (in thousands) Beginning Balance $3,048 $117 Unrealized (loss) gain arising during the period, net of tax (1,080) 2,988 ------------------------------- Ending Balance $1,968 $3,105 ------------------------------- Minimum Pension Liability Beginning Balance ($745) ($772) Change in minimum pension liability, net of tax - - ------------------------------- Ending Balance ($745) ($772) ------------------------------- Total accumulated other comprehensive income (loss), net $1,223 $2,333 ------------------------------- Reclassifications Certain amounts previously reported in the 2002 financial statements have been reclassified to conform to the 2003 presentation. These reclassifications did not affect previously reported net income or total shareholders' equity. -10- Acquisition TriCo Bancshares (NASDAQ:TCBK), parent company of Tri Counties Bank, acquired North State National Bank, a national banking organization located in Chico, California, by the merger of North State into its wholly owned subsidiary, Tri Counties Bank, effective 5:01 pm on April 4, 2003. The acquisition and the related merger agreement dated October 3, 2002, was approved by the California Department of Financial Institutions, the Federal Deposit Insurance Corporation, and the shareholders of North State National Bank on March 4, March 7, and March 19, 2003, respectively. At the time of the acquisition, North State had total assets of $140 million, investment securities of $41 million, loans of $76 million, and deposits of $126 million. The acquisition was accounted for using the purchase method of accounting. The amount of goodwill recorded as of the merger date, which represented the excess of the total purchase price over the estimated fair value of net asset acquired, was approximately $15.5 million. The Company recorded a core deposit intangible, which represents the excess of the fair value of North State's deposits over their book value on the acquisition date, of approximately $3.4 million. This core deposit intangible is scheduled to be amortized over a seven-year average life. Under the terms of the merger agreement, TriCo paid $13,090,057 in cash, issued 723,512 shares of TriCo common stock, and issued options to purchase 79,587 shares of TriCo common stock at an average exercise price of $6.22 per share in exchange for all of the 1,234,375 common shares and options to purchase 79,937 common shares of North State National Bank outstanding as of April 4, 2003. The pro forma financial information in the following table illustrates the combined operating results of TriCo and North State National Bank for the nine months ended September 30, 2003 and 2002 as if the acquisition of North State National Bank had occurred as of January 1, 2002. The pro forma financial information is presented for informational purposes and is not necessarily indicative of the results of operations that would have occurred if TriCo and North State National Bank had constituted a single entity as of or January 1, 2002. The pro forma financial information is also not necessarily indicative of the future results of operations of the combined company. In particular, any opportunity to achieve certain cost savings as a result of the acquisition has not been included in the pro forma financial information. For the nine months ended September 30, 2003 2002 ---- ---- (in thousands except earnings per share) Net interest income $45,186 $43,168 Provision for loan losses 450 2,000 Noninterest income 17,347 13,603 Noninterest expense 42,224 35,936 Income tax expense 7,360 7,151 Net income $12,499 $11,684 Basic earnings per share $1.60 $1.51 Diluted earnings per share $1.55 $1.47 The only significant pro forma adjustment is the amortization expense relating to core deposit intangible, and the income tax benefit associated with the pro forma adjustment. -11- Impact of Recently Issued Financial Accounting Pronouncements In January 2003, the FASB issued FIN 46, which clarifies the application of Accounting Research Bulletin ("ARB") 51, consolidated financial statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after September 15, 2003. Given the nature of the Company's operations, management does not expect this Interpretation to have a significant impact on the consolidated financial statements. In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to provide clarification of certain terms and investment characteristics identified in Statement 133. Statement 149 is to be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. The Company does not expect the adoption of the Statement will have a material impact on the consolidated financial statements. In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The provisions of this Statement are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Given the nature of the Company's liability and equity instruments, management does not expect this Statement to have a material impact to the consolidated financial statements upon adoption of the Statement on July 1, 2003. -12-
TRICO BANCSHARES Financial Summary (dollars in thousands, except per share amounts) (Unaudited) (Unaudited) Three months ended Nine months ended September 30, September 30, -------------------------------------------------------------- 2003 2002 2003 2002 -------------------------------------------------------------- Net Interest Income (FTE) $16,069 $13,520 $44,612 $39,742 Provision for loan losses (150) (700) (450) (2,000) Noninterest income 5,206 5,413 17,156 13,182 Noninterest expense (14,049) (12,133) (41,068) (33,498) Provision for income taxes (FTE) (2,738) (2,473) (8,045) (7,106) -------------------------------------------------------------- Net income $4,338 $3,627 $12,205 $10,320 ============================================================== Average shares outstanding 7,850 7,026 7,572 7,010 Diluted average shares outstanding 8,095 7,231 7,789 7,188 Shares outstanding at period end 7,846 7,036 7,846 7,036 As Reported: Basic earnings per share $0.55 $0.52 $1.61 $1.47 Diluted earnings per share $0.54 $0.50 $1.57 $1.44 Return on assets 1.25% 1.39% 1.26% 1.36% Return on equity 14.09% 15.17% 14.07% 14.92% Net interest margin 5.24% 5.67% 5.14% 5.72% Net loan charge-offs (recoveries) to average loans 0.07% (0.04%) 0.39% 0.14% Efficiency ratio (FTE) 66.04% 64.08% 66.49% 63.29% Average Balances: Total assets $1,384,672 $1,044,518 $1,291,693 $1,015,068 Earning assets 1,226,453 954,611 1,156,837 926,386 Total loans 876,068 676,009 786,341 655,682 Total deposits 1,185,059 908,675 1,112,111 883,898 Shareholders' equity $123,168 $95,645 $115,666 $92,212 Balances at Period End: Total assets $1,440,584 $1,073,523 Earning assets 1,282,882 975,875 Total loans 930,041 683,554 Total deposits 1,195,852 937,895 Shareholders' equity $124,826 $96,421 Financial Ratios at Period End: Allowance for loan losses to loans 1.45% 2.10% Book value per share $15.91 $13.70 Equity to assets 8.66% 8.98% Total capital to risk assets 11.73% 11.89% Dividends Paid Per Share $0.20 $0.20 $0.60 $0.60 Dividend Payout Ratio 37.04% 38.75% 38.22% 40.80%
-13- Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management's Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, intangible assets, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See caption "Allowance for Loan Losses" for a more detailed discussion). Results of Operations The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. The Company had quarterly earnings of $4,338,000, or $0.54 per diluted share, for the three months ended September 30, 2003. These results represent an 8.0% increase from the $0.50 earnings per diluted share reported for the three months ended September 30, 2002 on earnings of $3,627,000. The improvement in results from the year-ago quarter was due to a $2,549,000 (18.9%) increase in fully tax-equivalent net interest income to $16,069,000, and a $550,000 (78.6%) decrease in provision for loan losses to $150,000. These contributing factors were offset by a $207,000 (3.8%) decrease in noninterest income to $5,206,000 and $1,916,000 (15.8%) increase in noninterest expense to $14,049,000 for the quarter ended September 30, 2003. The Company reported earnings of $12,205,000, or $1.57 per diluted share, for the nine months ended September 30, 2003. These results represent a 9.0% increase from the $1.44 earnings per diluted share reported for the nine months ended September 30, 2002 on earnings of $10,320,000. The improvement in results from the year-ago period was due to a $4,870,000 (12.3%) increase in fully tax-equivalent net interest income to $44,612,000, a $1,550,000 (77.5%) decrease in provision for loan losses to $450,000, and a $3,974,000 (30.1%) increase in noninterest income to $17,156,000. These contributing factors were offset by a $7,570,000 (22.6%) increase in noninterest expense to $41,068,000 for the nine months ended September 30, 2003. Included in the Company's results of operations for the three-month and nine-month periods ended September 30, 2003, are the effects of the acquisition of North State National Bank on April 4, 2003. -14- Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands): Three months ended Nine months ended September 30, September 30, --------------------------------------------- 2003 2002 2003 2002 --------------------------------------------- Net Interest Income (FTE) $16,069 $13,520 $44,612 $39,742 Provision for loan losses (150) (700) (450) (2,000) Noninterest income 5,206 5,413 17,156 13,182 Noninterest expense (14,049) (12,133) (41,068) (33,498) Provision for income taxes (FTE) (2,738) (2,473) (8,045) (7,106) --------------------------------------------- Net income $4,338 $3,627 $12,205 $10,320 ============================================= Net income for the third quarter of 2003 was $711,000 (19.6%) more than for the same quarter of 2002. An increase in fully taxable equivalent net interest income (up $2,549,000 or 18.9%), and a decrease in provision for loan losses (down $550,000 or 78.6%) more than offset a decrease in noninterest income (down $207,000 or 3.8%), and an increase in noninterest expenses (up $1,916,000 or 15.8%). The increase in net interest income (FTE) was due to an increase in average balance of interest-earning assets (up $272 million or 28.5%) that was partially offset by a 43 basis point decrease in net interest margin. The decrease in provision for loan losses was due to stable loan quality and the maintenance of adequate loss reserve levels. The decrease in noninterest income from the year-ago quarter was mainly due to decreases in mortgage banking activities (down $673,000 or 93.0%) and commissions on sale of nondeposit investment products (down $280,000 or 39.4%). Offsetting these decreases in noninterest income were increases in service charges on deposit accounts (up $321,000 or 11.1%), and increase in cash value of life insurance (up $327,000 or 275%). The increase in noninterest expense was mainly due to an increase in salary and benefit expense (up $1,116,000 or 17.6% to $7,460,000). The increase in salary and benefits expense was mainly due to annual salary increases, increased commission and incentive expense, and new employees at four new branches the Company opened during 2002 and from the merger with North State National Bank on April 4, 2003. Other noninterest expense also increased (up $800,000 or 13.8% to $6,589,000) due to the new branch openings in 2002 and the merger with North State. Net income for the nine months ended September 30, 2003 was $1,885,000 (18.3%) more than for the same period of 2002. An increase in fully taxable equivalent net interest income (up $4,870,000 or 12.3%), a decrease in provision for loan losses (down $1,550,000 or 77.5%), and an increase in noninterest income (up $3,974,000 or 30.1%), more than offset an increase in noninterest expenses (up $7,570,000 or 22.6%). The increase in net interest income (FTE) was due to an increase in average balance of interest-earning assets (up $230 million or 24.9%) that was partially offset by a 58 basis point decrease in net interest margin. The decrease in provision for loan losses (down $1,550,000 or 77.5%) was due to stable loan quality and the maintenance of adequate loss reserve levels. The increase in noninterest income from the year-ago period was mainly due to an increase in service charges and fee income on deposit products (up $3,340,000 or 56.4% to $9,258,000) due to the introduction of an overdraft privilege deposit product in July 2002 that has added a new stream of recurring noninterest income. The increase in noninterest expense was mainly due to an increase in salary and benefit expense (up $4,117,000 or 23.1% to $21,973,000). The increase in salary and benefits expense was mainly due to annual salary increases, increased commission and incentive expense, and new employees at four new branches the Company opened during 2002 and from the merger with North State National Bank on April 4, 2003. Other noninterest expense also increased (up $3,453,000 or 22.1% to $19,095,000) due to the new branch openings in 2002, and the merger with North State. -15- Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands): Three months ended Nine months ended September 30, September 30, ------------------------------------------------ 2003 2002 2003 2002 ------------------------------------------------ Interest income $19,105 $16,435 $53,615 $48,468 Interest expense (3,305) (3,227) (9,865) (9,669) FTE adjustment 269 312 862 943 ------------------------------------------------ Net interest income (FTE) $16,069 $13,520 $44,612 $39,742 ================================================ Average earning assets $1,226,453 $954,611 $1,156,837 $926,386 Net interest margin (FTE) 5.24% 5.67% 5.14% 5.72% The Company's primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense in interest-bearing liabilities. Net interest income (FTE) during the third quarter of 2003 increased $2,549,000 (18.9%) from the same period in 2002 to $16,069,000. The increase in net interest income (FTE) was due to the increased average balances of earning assets (up $271,842,000 or 28.5% to $1.23 billion) that was partially offset by a 43 basis point decrease in net interest margin (FTE). Net interest income (FTE) during the first nine months of 2003 increased $4,870,000 (12.3%) from the same period in 2002 to $44,612,000. The increase in net interest income (FTE) was due to the increased average balances of earning assets (up $230,450,000 or 24.9% to $1.16 billion) that was partially offset by a 58 basis point decrease in net interest margin (FTE). Interest and Fee Income Interest and fee income (FTE) for the third quarter of 2003 increased $2,627,000 (15.7%) from the second quarter of 2002. The increase was the net effect of higher average interest-earning assets (up $271,842,000 or 28.5% to $1.23 billion) that was partially offset by a 70 basis point decrease in the yield on those average earning assets to 6.32%. The growth in interest-earning assets was led by a $200.1 million (29.6%) increase in average loan balances to $876.1 million, and a $93.6 million (38.1%) increase in average investment balances. The average balance of federal funds sold decreased $21.8 million (66.2%) to $11.1 million. The average yield on the Company's earning assets decreased to 6.32% from 7.02% for the quarter ended September 30, 2002. This downward trend in yields was reflective of general interest rate markets during much of the twelve months ended September 30, 2003. Interest and fee income (FTE) for the nine months ended September 30, 2003 increased $5,066,000 (10.3%) from the same period of 2002. The increase was the net effect of higher average interest-earning assets (up $230,451,000 or 24.9% to $1.16 billion) that was partially offset by an 83 basis point decrease in the yield on those average earning assets to 6.28%. The growth in interest-earning assets was led by a $130.7 million (19.9%) increase in average loan balances to $786.3 million, and a $121.7 million (52.1%) increase in average investment balances to $355.3 million. The average balance of federal funds sold decreased $21.9 million (59.1%) to $15.2 million. The average yield on the Company's earning assets decreased to 6.28% for the nine-month period ended September 30, 2003 from 7.11% for the same period in 2002. This downward trend in yields was reflective of general interest rate markets during the twelve months ended September 30, 2003. -16- Interest Expense Interest expense increased $78,000 (2.4%) to $3,305,000 in the third quarter of 2003 compared to $3,227,000 in the year-ago quarter. The average balance of interest-bearing liabilities increased $223.5 million (29.9%) to $972.0 million in the third quarter of 2003 compared to $748.5 million in the year-ago quarter. The increase in interest-bearing liabilities was concentrated in the lower earning interest-bearing demand deposits (up $38.3 million or 21.8%), and savings deposits (up $143.8 million or 55.0%). The average balance of the higher earning time deposits was up $14.1 million (4.9%) from the year-ago quarter. In addition, the average balance of noninterest-bearing deposits increased $80.2 million (43.8%) from the year-ago quarter, and the average balance of Federal funds purchased was $13.8 million in the quarter ended September 30, 2003 compared to $0.2 million in the year-ago quarter. The average balance of trust preferred securities was $13.6 million in the quarter ended September 30, 2003 compared to $0 in the year-ago quarter. The average rate paid for all categories of interest-bearing liabilities decreased from the average rate paid in the year-ago quarter as a result of general market interest rate changes. Interest expense increased $196,000 (2.0%) to $9,865,000 for the nine months ended September 30, 2003 compared to $9,669,000 in the year-ago period. The average balance of interest-bearing liabilities increased $182.1 million (24.9%) to $914.7 million for the nine months ended September 30, 2003 compared to $732.7 million in the year-ago period. The increase in interest-bearing liabilities was concentrated in the lower earning interest-bearing demand deposits (up $30.5 million or 17.6%), and savings deposits (up $109.6 million or 42.6%). The average balance of the higher earning time deposits was up $26.4 million (9.5%) from the year-ago period. In addition, for the nine months ended September 30, 2003, the average balance of noninterest-bearing deposits increased $61.7 million (35.4%) from the year-ago period, and the average balance of Federal funds purchased was $11.1 million in the nine months ended September 30, 2003 compared to $0.1 million in the year-ago six month period. The average balance of trust preferred securities was $4.5 million in the nine-month period ended September 30, 2003 compared to $0 in the year-ago nine-month period. The average rate paid for all categories of interest-bearing liabilities decreased from the average rate paid in the year-ago quarter as a result of general market interest rate changes. Net Interest Margin (FTE) The following table summarizes the components of the Company's net interest margin for the periods indicated: Three months ended Nine months ended September 30, September 30, --------------------------------------------- 2003 2002 2003 2002 --------------------------------------------- Yield on earning assets 6.32% 7.02% 6.28% 7.11% Rate paid on interest-bearing Liabilities 1.36% 1.72% 1.44% 1.76% --------------------------------------------- Net interest spread 4.96% 5.30% 4.84% 5.35% Impact of all other net noninterest-bearing funds 0.28% 0.37% 0.30% 0.37% --------------------------------------------- Net interest margin 5.24% 5.67% 5.14% 5.72% ============================================= Net interest margin in the third quarter of 2003 decreased 43 basis points compared to the third quarter of 2002. Net interest margin for the nine months ended September 30, 2003 decreased 58 basis points compared to the nine months ended September 30, 2002. Throughout much of 2002, the Company was able to decrease the rates it paid on interest-bearing deposits approximately as fast as the rates on interest-earning assets decreased. By doing so, the Company was able to maintain a relatively high net interest margin throughout much of 2002. However, in the fourth quarter of 2002, it became increasingly difficult to reduce the rates paid on interest-bearing deposits. As a result, the Company's net interest margin began to decrease. Also, throughout much of 2002, the Company grew deposits faster than it grew loans. As a result, much of the available funds from these deposits were invested in securities rather than higher yielding loans, and this also contributed to a decrease in net interest margin. During the quarters ended September 30, 2003 and June 30, 2003, the Company's growth rate for loans exceeded its growth rate for deposits, and this faster loan growth rate helped to slow down the rate of decrease in the Company's net interest margin. -17- Summary of Average Balances, Yields/Rates and Interest Differential The following tables present, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended ---------------------------------------------------------------- September 30, 2003 September 30, 2002 ----------------------------- ------------------------------ Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- ------------------------------ Assets: Loans $876,068 $16,228 7.41% $676,009 $13,332 7.89% Investment securities - taxable 301,784 2,389 3.17% 201,982 2,411 4.77% Investment securities - nontaxable 37,468 732 7.81% 43,659 861 7.89% Federal funds sold 11,133 25 0.90% 32,961 143 1.74% Total earning assets 1,226,453 19,374 6.32% 954,611 16,747 7.02% Other assets 158,219 89,907 ---------- ---------- Total assets $1,384,672 $1,044,518 ========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $214,259 137 0.26% $175,964 115 0.26% Savings deposits 405,339 893 0.88% 261,510 656 1.00% Time deposits 302,121 1,771 2.34% 288,021 2,129 2.96% Federal funds purchased 13,826 38 1.10% 246 1 1.63% Other borrowings 22,898 325 5.68% 22,772 326 5.73% Trust preferred securities 13,560 141 4.16% - - - ----------------------------- ------------------------------ Total interest-bearing liabilities 972,003 3,305 1.36% 748,513 3,227 1.72% Noninterest-bearing deposits 263,340 183,180 Other liabilities 26,161 17,180 Shareholders' equity 123,168 95,645 ---------- ---------- Total liabilities and shareholders' equity $1,384,672 $1,044,518 ========== ========== Net interest spread(1) 4.96% 5.30% Net interest income and interest margin(2) $16,069 5.24% $13,520 5.67% ================== ==================== (1) Net interest spread represents the average yield earned on assets minus the average rate paid on interest-earning assets minus the average rate paid on interest-bearing liabilities (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of earning assets.
-18-
For the nine months ended ---------------------------------------------------------------- September 30, 2003 September 30, 2002 ----------------------------- ------------------------------ Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- ------------------------------ Assets: Loans $786,341 $43,930 7.45% $655,682 $39,386 8.01% Investment securities - taxable 316,219 8,072 3.40% 189,370 6,950 4.89% Investment securities - nontaxable 39,119 2,348 8.00% 44,245 2,599 7.83% Federal funds sold 15,158 127 1.12% 37,089 476 1.71% Total earning assets 1,156,837 54,477 6.28% 926,386 49,411 7.11% Other assets 134,856 88,682 ---------- ---------- Total assets $1,291,693 $1,015,068 ========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $204,334 387 0.25% $173,796 350 0.27% Savings deposits 366,725 2,519 0.92% 257,138 2,011 1.04% Time deposits 305,088 5,753 2.51% 278,690 6,340 3.03% Federal funds purchased 11,142 101 1.21% 83 1 1.61% Other borrowings 22,908 964 5.61% 22,943 967 5.62% Trust preferred securities 4,519 141 4.16% - - - ----------------------------- ------------------------------ Total interest-bearing liabilities 914,716 9,865 1.44% 732,650 9,669 1.76% Noninterest-bearing deposits 235,964 174,274 Other liabilities 25,347 15,932 Shareholders' equity 115,666 92,212 ---------- ---------- Total liabilities and shareholders' equity $1,291,693 $1,015,068 ========== ========== Net interest spread(1) 4.84% 5.35% Net interest income and interest margin(2) $44,612 5.14% $39,742 5.72% ================== ==================== (1) Net interest spread represents the average yield earned on assets minus the average rate paid on interest-earning assets minus the average rate paid on interest-bearing liabilities (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of earning assets.
-19- Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following tables set forth a summary of the changes in interest income (FTE) and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (dollars in thousands). Three months ended September 30, 2003 compared with three months ended September 30, 2002 ------------------------------------- Volume Rate Total ------------------------------------- Increase (decrease) in interest income: Loans $3,946 ($1,050) $2,896 Investments - taxable 1,190 (1,212) (22) Investments - nontaxable (122) (7) (129) Federal funds sold (95) (23) (118) ------------------------------------- Total earning assets 4,919 (2,292) 2,627 ------------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 25 (3) 22 Savings deposits 360 (123) 237 Time deposits 104 (462) (358) Federal funds purchased 55 (18) 37 Other borrowings 2 (3) (1) Trust preferred securities 141 - 141 ------------------------------------- Total interest-bearing liabilities 687 (609) 78 ------------------------------------- Increase (decrease) in Net Interest Income $4,232 ($1,683) $2,549 ===================================== Nine months ended September 30, 2003 compared with nine months ended September 30, 2002 ------------------------------------- Volume Rate Total ------------------------------------- Increase (decrease) in interest income: Loans $7,849 ($3,305) $4,544 Investments - taxable 4,652 (3,530) 1,122 Investments - nontaxable (301) 50 (251) Federal funds sold (281) (68) (349) ------------------------------------- Total earning assets 11,919 (6,853) 5,066 ------------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 62 (25) 37 Savings deposits 855 (347) 508 Time deposits 600 (1,187) (587) Federal funds purchased 134 (34) 100 Other borrowings (1) (2) (3) Trust preferred securities 141 - 141 ------------------------------------- Total interest-bearing liabilities 1,791 (1,595) 196 ------------------------------------- Increase (decrease) in Net Interest Income $10,128 ($5,258) $4,870 ===================================== -20- Provision for Loan Losses The Company provided $150,000 for loan losses in the third quarter of 2003 versus $700,000 in the third quarter of 2002. During the third quarter of 2003, the Company recorded $145,000 of net loan charge offs versus $69,000 of net loan recoveries in the year earlier quarter. The Company provided $450,000 for loan losses during the nine months ended September 30, 2003 versus $2,000,000 during the nine months ended September 30, 2002. During the nine months ended September 30, 2003, the Company recorded $2,295,000 of net loan charge offs versus $676,000 of net loan charge-offs in the year earlier nine-month period. The increase in charge-offs is primarily due to a $1,554,000 net charge-off related to two commercial real estate loans to a single entity collateralized by a single building. The Company had previously established a specific allowance for the two commercial real estate loans noted above in its allowance for loan losses. The collection was realized on July 31, 2003 via the Company's receipt of net proceeds of $11,474,000 from the sale of the building. The collection resulted in a recovery of $346,000 of the $1,900,000 charged-off on these loans during the quarter ended June 30, 2003. The $1,900,000 charge-off is reflected in the Company's results of operations for the quarter ended June 30, 2003. The $346,000 recovery is reflected in the Company's results of operations for the quarter ended September 30, 2003. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands). Three months ended Nine months ended September 30, September 30, -------------------------------------------- 2003 2002 2003 2002 -------------------------------------------- Service charges on deposit accounts $3,208 $2,887 $9,258 $5,918 ATM fees and interchange 566 488 1,683 1,299 Other service fees 228 174 693 489 Amortization of mortgage servicing rights, net of mortgage servicing fees (285) (28) (432) (71) Provision for mortgage servicing valuation allowance (600) - (600) - Gain on sale of loans 936 752 3,388 2,254 Commissions on sale of nondeposit investment products 432 712 1,341 1,989 Gain on sale of investments 97 - 197 - Increase in cash value of life insurance 446 119 961 443 Other noninterest income 178 309 667 861 Total noninterest income $5,206 $5,413 $17,156 $13,182 Noninterest income for the third quarter of 2003 decreased $207,000 (3.8%) to $5,206,000 from $5,413,000 in the year-ago quarter. The decrease in noninterest income from the year-ago quarter was due to an increase in amortization of mortgage servicing rights net of mortgage servicing fees (up $257,000 to $285,000), and a provision for mortgage servicing valuation allowance (of $600,000) taken in the quarter ended September 30, 2003. The increase in the amortization of mortgage servicing rights and the provision for mortgage servicing valuation allowance taken in the third quarter of 2003 are the result of the recent peak in mortgage refinance activity. While the Company benefits from increased gain on sale of loans during periods of high levels of mortgage refinance activity, it may also experience increased amortization and provisions for mortgage servicing valuations of mortgage servicing rights. (See Notes to Unaudited Condensed Consolidated Financial Statements for additional information concerning the Company's mortgage operations and valuation of mortgage servicing rights.) Overall, mortgage banking activities, net of amortization and valuation allowance, accounted for $51,000 of noninterest income in the third quarter of 2003 compared to $724,000 in the year-ago quarter. Excluding mortgage banking activities and gain on sale of investments, noninterest income was up $369,000 (7.9%) during the third quarter of 2003 versus the year-ago quarter. Service charges on deposit accounts were up $321,000 (11.1%) due primarily to new customers, and increase in cash value of life insurance was up $327,000 (275%) due to a 157% increase in banked-owned life insurance to $38.6 million at September 30, 2003 versus $15.0 million at September 30, 2002. Commission on sale of nondeposit investment products decreased $281,000 (39.4%) to $432,000 in the third quarter of 2003 compared to $713,000 in the year-ago quarter. -21- Noninterest income for the nine months ended September 30, 2003 increased $3,974,000 (30.1%) to $17,156,000 from $13,182,000 in the same period in 2002. Mortgage banking activities, net of amortization and valuation allowance, accounted for $2,356,000 of noninterest income during the nine months ended September 30, 2003 compared to $2,183,000 during the nine months ended September 30, 2002. Excluding mortgage banking activities and gain on sale of investments, noninterest income was up $3,604,000 (32.8%) during the nine months ended September 30, 2003 compared to during the nine months ended September 30, 2002. Service charges on deposit accounts were up $3,340,000 (56.4%) due primarily to new customers and the introduction of the Company's overdraft privilege product in July 2002. Increase in cash value of life insurance was up $518,000 (117%) due to a 157% increase in banked-owned life insurance to $38.6 million at September 30, 2003 versus $15.0 million at September 30, 2002. Commission on sale of nondeposit investment products decreased $648,000 (32.6%) to $1,341,000 during the nine months ended September 30, 2003 compared to $1,989,000 during the year-ago nine-month period. Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands). Three months ended Nine months ended September 30, September 30, ---------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------- Salaries $5,006 $4,225 $14,048 $11,616 Commissions and incentives 929 889 3,401 2,579 Employee benefits 1,525 1,230 4,524 3,661 Occupancy 922 752 2,604 2,157 Equipment 877 741 2,456 2,247 Professional fees 582 567 1,797 1,196 Telecommunications 384 363 1,167 1,034 Data processing and software 386 272 1,026 764 Advertising and marketing 226 468 868 934 Courier service 258 235 766 684 ATM network charges 255 205 742 611 Intangible amortization 325 228 877 683 Postage 202 212 630 543 Operational losses 240 192 546 295 Assessments 72 64 197 175 Other 1,860 1,490 5,419 4,319 ---------------------------------------------- Total $14,049 $12,133 $41,068 $33,498 ============================================== Average full time equivalent staff 516 437 499 427 Noninterest expense to revenue (FTE) 66.04% 64.08% 66.49% 63.29% Noninterest expense for the third quarter of 2003 increased $1,916,000 (15.8%) to $14,049,000 from $12,133,000 in the third quarter of 2002. The increase in noninterest expense was mainly due to a $1,116,000 (17.6%) increase in salary and benefit expense to $7,460,000. The increase in salary and benefits expense was mainly due to annual salary increases, increased commission and incentive expense, and new employees at the Company's four newly opened branches in 2002 and from the merger with North State National Bank on April 4, 2003. Noninterest expense excluding salaries and benefits also increased (up $800,000 or 13.8% to $6,589,000). Approximately $420,000 of this increase was related to occupancy, equipment, and data processing and software expenses. -22- Noninterest expense for the first nine months of 2003 increased $7,570,000 (22.6%) to $41,068,000 from $33,498,000 in the first nine months of 2002. The increase in noninterest expense was mainly due to a $4,117,000 (23.1%) increase in salary and benefit expense to $21,973,000. The increase in salary and benefits expense was mainly due to annual salary increases, increased commission and incentive expense, and new employees at the Company's four newly opened branches in 2002 and from the merger with North State National Bank on April 4, 2003. Noninterest expense excluding salaries and benefits also increased (up $3,453,000 or 22.1% to $19,095,000). Occupancy, equipment, and data processing and software expenses accounted for $918,000 of this increase. Operational losses accounted for $251,000 of the increase other noninterest expense. The increase in operational losses is mainly due to operational losses from the overdraft privilege product introduced in July 2002, and is more than offset by the increase in noninterest income from the overdraft privilege product. Provision for Income Tax The effective tax rate for the three months ended September 30, 2003 was 36.3% and reflects a decrease from 37.3% for the three months ended September 30, 2002. The effective tax rate for the nine months ended September 30, 2003 was 37.1% and reflects a decrease from 37.4% for the nine months ended September 30, 2002. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, particularly from tax-exempt loans, state and municipal securities, and bank owned life insurance. Classified Assets The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all nonperforming assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated (dollars in thousands): At September 30, 2003 At December 31, 2002 ------------------------- ------------------------ Gross Guaranteed Net Gross Guaranteed Net ----------------------------------------------------- Classified loans $34,234 $11,593 $22,641 $52,642 $12,280 $40,062 Other classified assets 1,545 - 1,545 932 - 932 ----------------------------------------------------- Total classified assets $35,779 $11,593 $24,186 $53,574 $12,280 $40,994 ----------------------------------------------------- Allowance for loan losses/ Classified loans 55.7% 35.1% Classified assets, net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies at September 30, 2003, decreased $16.7 million (40.8%) to $24.3 million from $41.0 million at December 31, 2002. Nonperforming Loans Loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the following occurs: the loan becomes 90 days past due as to interest or principal, the full and timely collection of additional interest or principal becomes uncertain, the loan is classified as doubtful by internal credit review or bank regulatory agencies, a portion of the principal balance has been charged off, or the Company takes possession of the collateral. Loans that are placed on nonaccrual even though the borrowers continue to repay the loans as scheduled are classified as "performing nonaccrual" and are included in total nonperforming loans. The reclassification of loans as nonaccrual does not necessarily reflect Management's judgment as to whether they are collectible. -23- Interest income is not accrued on loans where Management has determined that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, any previously accrued but unpaid interest is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Interest income on nonaccrual loans, which would have been recognized during the nine months, ended September 30, 2003, if all such loans had been current in accordance with their original terms, totaled $1,097,000. Interest income actually recognized on these loans during the nine months ended September 30, 2003 was $766,000. The Company's policy is to place loans 90 days or more past due on nonaccrual status. In some instances when a loan is 90 days past due Management does not place it on nonaccrual status because the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days. Loans where the collateral has been repossessed are classified as OREO or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements. Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits. As shown in the following table, total nonperforming assets net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies, decreased $1,495,000 (16.4%) to $7,617,000 during the first nine months of 2003. Nonperforming assets net of guarantees represent 0.53% of total assets. All nonaccrual loans are considered to be impaired when determining the need for a specific valuation allowance. The Company continues to make a concerted effort to work problem and potential problem loans to reduce risk of loss.
(dollars in thousands): At September 30, 2003 At December 31, 2002 ------------------------- ------------------------- Gross Guaranteed Net Gross Guaranteed Net ------------------------------------------------------ Performing nonaccrual loans $11,114 $8,048 $3,066 $13,199 $8,432 $4,767 Nonperforming, nonaccrual loans 4,502 1,566 2,936 4,091 718 3,373 ------------------------------------------------------ Total nonaccrual loans 15,616 9,614 6,002 17,290 9,150 8,140 Loans 90 days past due and still accruing 70 - 70 40 - 40 ------------------------------------------------------ Total nonperforming loans 15,686 9,614 6,072 17,330 9,150 8,180 Other real estate owned 1,545 - 1,545 932 - 932 ------------------------------------------------------ Total nonperforming assets $17,231 $9,614 $7,617 $18,262 $9,150 $9,112 ====================================================== Nonperforming loans to total loans 0.65% 1.19% Allowance for loan losses/nonperforming loans 222% 176% Nonperforming assets to total assets 0.53% 0.80% Allowance for loan losses to nonperforming assets 177% 158%
-24- Allowance for Loan Losses Credit risk is inherent in the business of lending. As a result, the Company maintains an Allowance for Loan Losses to absorb losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's Allowance for Loan Losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio. For purposes of this discussion, "loans" shall include all loans and lease contracts that are part of the Company's portfolio. The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan portfolio, and to a lesser extent the Company's loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occur at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies. The Company's method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans and leases as determined by SFAS 114, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. Allowances for specific loans are based on SFAS 114 analysis of individual credits. Allowances for changing environmental factors are Management's best estimate of the probable impact these changes have had on the loan portfolio as a whole. This process is explained in detail in the notes to the Company's Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2002. Based on the current conditions of the loan portfolio, Management believes that the $13,460,000 allowance for loan losses at September 30, 2003 is adequate to absorb probable losses inherent in the Company's loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. The following table summarizes the loan loss provision, net credit losses and allowance for loan losses for the periods indicated (dollars in thousands): Three months ended Nine months ended September 30, September 30, ----------------------------------------------- 2003 2002 2003 2002 ----------------------------------------------- Balance, beginning of period $13,455 $13,613 $14,377 $13,058 Addition through merger - - 928 - Loan loss provision 150 700 450 2,000 Loans charged off (551) (72 (2,894) (915) Recoveries of previously charged-off loans 406 141 599 239 ----------------------------------------------- Net (charge-offs) recoveries (145) 69 (2,295) (676) ----------------------------------------------- Balance, end of period $13,460 $14,382 $13,460 $14,382 =============================================== Allowance for loan losses/loans outstanding 1.45% 2.10% -25- Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management. On July 31, 2003, TriCo completed an offering of 20,000 shares of cumulative trust preferred securities for cash in an aggregate amount of $20,000,000. The trust preferred securities are mandatorily redeemable upon maturity on October 7, 2033 with an interest rate that resets quarterly at three-month LIBOR plus 3.05%, or 4.16% for the first quarterly interest period. TriCo has the right to redeem the trust preferred securities on or after October 7, 2008. The trust preferred securities were issued through an underwriting syndicate to which the Company paid underwriting fees of $7.50 per trust preferred security or an aggregate of $150,000. The net proceeds of $19,850,000 will be used to finance the opening of new branches, improve bank services and technology, repurchase shares of the Company's common stock as described below and increase the Company's capital. The trust preferred securities have not been and will not be registered under the Securities Act of 1933, as amended, or applicable state securities laws and were sold pursuant to an exemption from registration under the Securities Act of 1933. The trust preferred securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933, as amended, and applicable state securities laws. The Company formed a subsidiary business trust, TriCo Capital Trust I, to issue the trust preferred securities. Concurrently with the issuance of the trust preferred securities, the trust issued 619 shares of common stock to the Company for $1,000 per share or an aggregate of $619,000. In addition, the Company issued a Junior Subordinated Debenture to the Trust in the amount of $20,619,000. The terms of the Junior Subordinated Debenture are materially consistent with the terms of the trust preferred securities issued by TriCo Capital Trust I. Also on July 31, 2003, the Company announced the termination of its stock repurchase plan to repurchase 150,000 shares of common stock originally announced on October 19, 2001. There were 118,800 shares repurchased under the plan and the remaining 31,200 shares had not been repurchased. The Company has adopted a new stock repurchase plan for the repurchase of up to 250,000 shares of the Company's common stock from time to time as market conditions allow. The 250,000 shares authorized for repurchase under this plan represented approximately 3.2% of the Company's approximately 7,852,000 common shares outstanding as of July 31, 2003. This new plan has no stated expiration date for the repurchases. The Company repurchased 8,100 common shares under this new plan, all of which were repurchased during the quarter ended September 30, 2003. The Company's primary capital resource is shareholders' equity, which was $124.8 million at September 30, 2003. This amount represents an increase of $25.8 million from December 31, 2002, the net result of issuance of common stock and options related to the merger with North State National Bank ($18.5 million), comprehensive income for the period ($1.1 million), and the issuance of common shares via the exercise of stock options ($1.0 million), partially offset by dividends paid ($4.6 million) and the repurchase of common stock ($0.2 million). The Company's ratio of equity to total assets was 8.66%, 8.98%, and 8.65% as of September 30, 2003, September 30, 2002, and December 31, 2002, respectively. The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated:
To Be Well At September 30, At Minimum Capitalized Under ----------------- December 31, Regulatory Prompt Corrective 2003 2002 2002 Requirement Action Provisions ------------------------------------------------------------------ Tier I Capital 10.55% 10.63% 10.71% 4.00% 6.00% Total Capital 11.73% 11.89% 11.97% 8.00% 10.00% Leverage ratio 8.85% 8.53% 8.27% 4.00% 5.00%
-26- Item 3. Quantitative and Qualitative Disclosures about Market Risk Asset and Liability Management The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has overall responsibility for the Company's interest rate risk management policies. The Company has an Asset and Liability Management Committee (ALCO) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin, net income and market value of equity under changing interest environments. Market value of equity is the net present value of estimated cash flows from the Company's assets, liabilities and off-balance sheet items. The Company uses simulation models to forecast net interest margin, net income and market value of equity. Simulation of net interest margin, net income and market value of equity under various interest rate scenarios is the primary tool used to measure interest rate risk. Using computer-modeling techniques, the Company is able to estimate the potential impact of changing interest rates on net interest margin, net income and market value of equity. A balance sheet forecast is prepared using inputs of actual loan, securities and interest-bearing liability (i.e. deposits/borrowings) positions as the beginning base. In the simulation of net interest margin and net income under various interest rate scenarios, the forecast balance sheet is processed against seven interest rate scenarios. These seven interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and six additional rate ramp scenarios ranging from +300 to -300 basis points around the flat scenario in 100 basis point increments. These ramp scenarios assume that interest rates increase or decrease evenly (in a "ramp" fashion) over a twelve-month period and remain at the new levels beyond twelve months. In the simulation of market value of equity under various interest rate scenarios, the forecast balance sheet is processed against seven interest rate scenarios. These seven interest rate scenarios include the flat rate scenario described above, and six additional rate shock scenarios ranging from +300 to -300 basis points around the flat scenario in 100 basis point increments. These rate shock scenarios assume that interest rates increase or decrease immediately (in a "shock" fashion) and remain at the new level in the future. At September 30, 2003 and 2002, the results of the simulations noted above indicate that the balance sheet is slightly asset sensitive (earnings increase when interest rates rise). The magnitude of all the simulation results noted above is within the Company's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. At September 30, 2003 and 2002, the Company had no derivative financial instruments. -27- Liquidity The Company's principal source of asset liquidity is cash and amounts due from banks, federal funds sold, and marketable investment securities available for sale. At September 30, 2003, federal funds sold and investment securities available for sale totaled $353 million, representing an increase of $6.7 million or 1.9% from December 31, 2002, and an increase of $61 million or 20.7% from September 30, 2002. In addition, the Company generates additional liquidity from its operating activities. The Company's profitability during the first nine months of 2003 generated cash flows from operations of $19.7 million compared to $16.8 million during the first nine months of 2002. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. Sales and maturities of investment securities produced cash inflows of $192 million during the nine months ended September 30, 2003 compared to $87 million for the nine months ended September 30, 2002. During the nine months ended September 30, 2003, the Company invested $169 million, $168 million, and $22 million in securities, net loan growth, and life insurance policies, respectively, compared to $128 million and $25 million used to purchase investments and net loan growth, respectively, during the first nine months of 2002. These changes in investment, loan, and life insurance balances contributed to net cash used for investing activities of $162 million during the nine months ended September 30, 2003, compared to net cash used for investing activities of $68 million during the nine months ended September 30, 2002. Financing activities provided net cash of $136 million during the nine months ended September 30, 2003, compared to net cash provided by financing activities of $53 million during the nine months ended September 30, 2002. Increases in deposit balances, Federal funds borrowed and issuance of trust preferred securities accounted for $65 million, $56 million and $20 million of financing sources of funds, respectively, during the nine months ended September 30, 2003, compared to deposit balance increases that accounted for $58 million of financing sources of funds during the nine months ended September 30, 2002. Dividends paid used $4.6 million and $4.2 million of cash during the nine months ended September 30, 2003 and September 30, 2002, respectively. Also, the Company's liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions. Item 4. Controls and Procedures The Chief Executive Officer, Richard Smith, and the Chief Financial Officer, Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls and procedures as of September 30, 2003 ("Evaluation Date"). Based on that evaluation, they concluded that as of the Evaluation Date the Company's disclosure controls and procedures are effective to allow timely communication to them of information relating to the Company and the Bank required to be disclosed in its filings with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. -28- PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Bank. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.1* Restated Articles of Incorporation dated May 9, 2003, filed as Exhibit 3.1 to TriCo's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 4* Certificate of Determination of Preferences of Series AA Junior Participating Preferred Stock filed as Exhibit 3.3 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated July 25, 2001 10.2* Form of Change of Control Agreement between TriCo and each of Craig Carney (dated February 27, 2003), Richard O'Sullivan (date February 24, 2003), and Thomas Reddish (dated April 10, 2001), filed as Exhibit 10.9 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 10.3* TriCo's 1993 Non-Qualified Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704) 10.4* TriCo's Non-Qualified Stock Option Plan filed as Exhibit 4.2 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704) 10.5* TriCo's Incentive Stock Option Plan filed as Exhibit 4.3 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704) 10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated August 23, 1995 (No. 33-62063) 10.7* TriCo's 2001 Stock Option Plan filed as Exhibit 4 to TriCo's Form S-8 Registration Statement dated July 27, 2001 (No. 33-66064) 10.8* Employment Agreement between TriCo and Richard Smith dated April 10, 2001, filed as Exhibit 10.8 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) -29- 10.9* Tri Counties Bank Executive Deferred Compensation Plan dated September 1, 1987, as restated April 1, 1992, and amended November 12, 2002, filed as Exhibit 10.9 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.10* Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, filed as Exhibit 10.10 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.11* Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, filed as Exhibit 10.11 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.12* Tri Counties Bank Deferred Compensation Plan for Directors effective April 1, 1992, filed as Exhibit 10.12 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.13* Employment Agreement between TriCo and Richard O'Sullivan dated April 10, 2001, filed as Exhibit 10.13 to TriCo's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 10.14 Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Craig Carney, Andrew Mastorakis, Richard O'Sullivan, Thomas Reddish, and Richard Smith 10.15 Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Wendell Lundberg, Donald Murphy, Carroll Taresh, and Alex Vereshagin 10.16 Form of Tri-Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Andrew Mastorakis, Richard O'Sullivan, and Thomas Reddish 10.17 Form of Tri-Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Verischagin 11.1 Computation of earnings per share 21.1 Tri Counties Bank, a California banking corporation, and TriCo Capital Trust I, a Delaware business trust, are the only subsidiaries of Registrant 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO 32.1 Section 1350 Certification of CEO 32.2 Section 1350 Certification of CFO * Previously filed and incorporated by reference. -30- (b) Reports on Form 8-K During the quarter ended September 30, 2003 the Company filed the following Current Reports on Form 8-K: Description Date of Report ------------------------------------ -------------------- Quarterly results of operations. July 30, 2003 Declaration of $0.20 per common July 30, 2003 share dividend payable September 30, 2003 to holders of record on September 9, 2003; trust preferred issuance; cancellation of existing stock repurchase plan; approval of new stock repurchase plan; substantial reduction in nonperforming assets. Quarterly results of operations. October 23, 2003 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TRICO BANCSHARES (Registrant) Date: November 12, 2003 /s/ Thomas J. Reddish ---------------------------------------- Thomas J. Reddish Vice President and Chief Financial Officer -31- Exhibit 10.14 Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Craig Carney, Andrew Mastorakis, Richard O'Sullivan, Thomas Reddish, and Richard Smith JOINT BENEFICIARY AGREEMENT Insurer: Massachusetts Mutual Life Insurance Company Policy Number: Insurer: New York Life Insurance Company Policy Number: Insurer: Beneficial Life Insurance Company: Policy Number: Insurer: Northwestern Mutual Life Insurance Company Policy Number: Owner: Tri Counties Bank Insured: Effective Date: This Agreement is by and between Tri Counties Bank and___________________, an executive of the Company. I. DEFINITIONS -------------------- The term "Policy" shall refer to the above-cited policies as well any policies obtained, by means of 1035 exchange, to replace the above-cited policies. Policy definitions shall govern. II. POLICY TITLE AND OWNERSHIP ----------------------------------- The respective rights and duties of the Company and the Insured in the Policy shall be as follows: Title and ownership shall reside in the Company for its use and for the use of the Insured all in accordance with this Agreement. The Company alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values or to terminate the Policy. Where the Company and the Insured, mutually agree to exercise the right to increase coverage under the Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION --------------------------------- The Insured shall have the right and power to designate beneficiaries to receive his/her share of death proceeds, as provided in this Agreement. Likewise, the Insured shall have the right and power to elect and change a payment option for such beneficiaries. IV. PREMIUM PAYMENTS ------------------------- The Company shall pay premiums and the Insured shall not be responsible for any portion thereof. V. TAXABLE BENEFIT ------------------------ Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Company (or its administrator) will report to the Insured such imputed income on Form W-2 or its equivalent. -32- VI. DIVISION OF DEATH PROCEEDS ----------------------------------- The Company shall be entitled to the death proceeds of the Policy except that, subject to Paragraph VII herein, beneficiaries designated by the Insured in accordance with Paragraph III, shall be entitled to a split dollar share of the death proceeds. 1) If, at the time of his or her death, the Insured is employed by the Company, the Insured employee's beneficiary (ies), shall be entitled to an amount, as follows: (a) If the Insured employee has not yet attained the of age seventy (70), the lesser of $___________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds; Net At Risk Insurance portion of the proceeds is the aggregate total proceeds less the cash value of the Policies designated herein; (b) If the Insured employee is seventy (70), or older, but not yet age eighty (80), the lesser of $_________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds; (c) If the Insured employee dies after the attainment of age eighty (80), the lesser of $________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds. 2) If, at the time of his or her death, the Insured is no longer employed by the Company but, prior to death, was eligible to receive payments pursuant to the Tri Counties Supplemental Executive Retirement Plan (the SERP), the Insured's beneficiary (ies), shall be entitled to an amount, as follows. For purposes of this Paragraph VI, the term Applicable Percentage shall refer to the Applicable Percentage as defined in the SERP and in effect as of the Insured's last date of employment with the Company: (a) If the Insured has not yet attained the of age seventy (70), the Applicable Percentage times the lesser of $_________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds; (b) If the Insured is seventy (70) or older, but not yet age eighty (80), the Applicable Percentage times the lesser of $__________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds; (c) If the Insured dies after the attainment of age eighty (80), the Applicable Percentage times the lesser of $________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds. 3) If the Company no longer employs the Insured at the time of death and the Insured was not eligible to receive payments under the SERP prior to death, the beneficiaries' share of Policy proceeds shall be $50,000, provided the policy (ies) remain in force. 4) The Company and the Insured's beneficiaries shall share any interest due on death proceeds in the same pro rata ratio as applies to death proceeds, respectively. 5) In the event that the Policy is terminated other than as a result of a termination of this Agreement pursuant to paragraph X. hereunder, and the Insured is eligible to receive benefits pursuant to Paragraph IV (1) or (2) above, then the Bank shall pay to the Insured's beneficiary (ies) an amount which will provide a total after-tax death benefit equal to the benefit that the Insured would have received if the Policy had not been terminated. 6) Payment of the death benefit determined by the preceding paragraphs shall be made and distributed from the Policies in the following order, with resort to each succeeding policy only to the extent that the proceeds of each prior listed Policy are insufficient to satisfy the specified death benefit in full: : (a) Massachusetts Mutual Life Insurance Company Policy Number (b) Beneficial Life Insurance Company Policy Number BL (c) New York Life Insurance Company Policy Number (d) Northwestern Mutual Life Insurance Company Policy Number . -33- VII. DIVISION OF CASH SURRENDER VALUE ----------------------------------------- The Company shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Company and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER ----------------------- If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Company. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS ---------------------------------------------------------------------------- In the event the Policy involves an endowment or annuity element, the Company's right and interest in any endowment proceeds or annuity benefits shall be determined according to this Agreement, by regarding such endowment proceeds, or the commuted value of such annuity benefits, as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT --------------------------------- This Agreement shall terminate immediately upon the commission of any act by the Insured that results in the termination of the Policy by the Insurer. Except as provided above, this Agreement shall terminate upon distribution of death benefits in accordance with Paragraph VI above. XI. PROHIBITION ON ASSIGNMENT ---------------------------------- The Insured may not, without the prior written consent of the Company, assign to any individual, trust or other organization, any right, title or interest in the Policy or in any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES ------------------------------------------- This Agreement shall be binding upon the Insured and the Company, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR ----------------------------------------------- The Company is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Company shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY ----------------------- The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XV. CLAIM PROCEDURES ------------------------- Claims shall be directed to The Benefit Marketing Group, Inc. Atlanta, Georgia (770-952-1529). If a claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial as required by the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. -34- XVI. GENDER AND PLURAL VS SINGULAR -------------------------------------- Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. When applicable, nouns in the singular shall be read and construed as in the plural and visa versa. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT -------------------------------------------------------- The Insurer shall not be deemed a party to this Agreement, but will be served with an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. IN WITNESS WHEREOF, the Insured and duly authorized Company officer have signed this Agreement as of the above written date. TRI COUNTIES BANK INSURED -------------------------- -------------------------------- Richard Miller Senior Vice President -35- BENEFICIARY DESIGNATION FORM FOR THE JOINT BENEFICIARY DESIGNATION AGREEMENT I. PRIMARY DESIGNATION ------------------- (You may refer to the beneficiary designation information prior to completion of this form.) A. Person(s) as a Primary Designation: ----------------------------------- (Please indicate the percentage for each beneficiary.) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) B. Estate as a Primary Designation: -------------------------------- My Primary Beneficiary is The Estate of ______________________________________ as set forth in the last will and testament dated the _____ day of _____________, _____ and any codicils thereto. C. Trust as a Primary Designation: ------------------------------- Name of the Trust: ____________________________________________________________ Execution Date of the Trust: _____ / _____ / _________ Name of the Trustee: __________________________________________________________ Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary): ________________________________________________________________________________ ________________________________________________________________________________ Is this an Irrevocable Life Insurance Trust? ________ Yes ________ No (If yes and this designation is for a Split Dollar agreement, an Assignment of Rights form should be completed.) -36- II. SECONDARY (CONTINGENT) DESIGNATION A. Person(s) as a Secondary (Contingent) Designation: -------------------------------------------------- (Please indicate the percentage for each beneficiary.) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) B. Estate as a Secondary (Contingent) Designation: ------------------------------------------------ My Secondary Beneficiary is The Estate of _____________________________________ as set forth in my last will and testament dated the _____ day of ___________, _____ and any codicils thereto. C. Trust as a Secondary (Contingent) Designation: ----------------------------------------------- Name of the Trust: ____________________________________________________________ Execution Date of the Trust: _____ / _____ / _________ Name of the Trustee: __________________________________________________________ Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary): ________________________________________________________________________________ ________________________________________________________________________________ All sums payable under the Joint Beneficiary Designation Agreement by reason of my death shall be paid to the Primary Beneficiary(ies), if he or she survives me, and if no Primary Beneficiary(ies) shall survive me, then to the Secondary (Contingent) Beneficiary(ies). This beneficiary designation is valid until the participant notifies the bank in writing. ---------------------------------------------- ------------------ Insured Date -37- Exhibit 10.15 Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Wendell Lundberg, Donald Murphy, Carroll Taresh, and Alex Vereshagin JOINT BENEFICIARY AGREEMENT Insurer: Policy Number: Owner: Tri Counties Bank Insured: Effective Date This Agreement is by and between Tri Counties Bank and, _________________a Director of the Company. I. DEFINITIONS -------------------- The term "Policy" shall refer to the above-cited policies as well any policies obtained, by means of 1035 exchange, to replace the above-cited policies. Policy definitions shall govern. II. POLICY TITLE AND OWNERSHIP ----------------------------------- The respective rights and duties of the Company and the Insured in the Policy shall be as follows: Title and ownership shall reside in the Company for its use and for the use of the Insured all in accordance with this Agreement. The Company alone may, to the extent of its interest, exercise the right to borrow or withdraw the Policy cash values or to terminate the Policy. Where the Company and the Insured, mutually agree to exercise the right to increase coverage under the Policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement. III. BENEFICIARY DESIGNATION --------------------------------- The Insured shall have the right and power to designate beneficiaries to receive his/her share of death proceeds, as provided in this Agreement. Likewise, the Insured shall have the right and power to elect and change a payment option for such beneficiaries. IV. PREMIUM PAYMENTS ------------------------- The Company shall pay premiums and the Insured shall not be responsible for any portion thereof. V. TAXABLE BENEFIT ------------------------ Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Company (or its administrator) will report to the Insured such imputed income on Form W-2 or its equivalent. VI. DIVISION OF DEATH PROCEEDS ----------------------------------- The Company shall be entitled to the death proceeds of the Policy except that, subject to Paragraph VII herein, beneficiaries designated by the Insured in accordance with Paragraph III, shall be entitled to a split dollar share of the death proceeds. -38- 1. If, at the time of his or her death, the Insured is serving as a Director of the Company, the Insured employee's beneficiary (ies), shall be entitled to an amount, as follows: a. If the Insured has not yet attained the of age seventy (70), the lesser of $___________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds; Net At Risk Insurance portion of the proceeds is the aggregate total proceeds less the cash value of the Policies designated herein; b. If the Insured is seventy (70), or older, but not yet age eighty (80), the lesser of $_________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds; c. If the Insured dies after the attainment of age eighty (80), the lesser of $________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds. 2. If, at the time of his or her death, the Insured is no longer a Director of the Company but, prior to death, was eligible to receive payments pursuant to the Tri Counties Supplemental Retirement Plan for Directors (the SERP), the Insured's beneficiary (ies), shall be entitled to an amount, as follows. For purposes of this Paragraph VI, the term Applicable Percentage shall refer to the Applicable Percentage as defined in the SERP and in effect as of the Insured's last date of service as a Director of the Company: a. If the Insured has not yet attained the of age seventy (70), the Applicable Percentage times the lesser of $_________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds; b. If the Insured is seventy (70) or older, but not yet age eighty (80), the Applicable Percentage times the lesser of $__________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds; c. If the Insured dies after the attainment of age eighty (80), the Applicable Percentage times the lesser of $________, or one hundred percent (100%) of the Net At Risk Insurance portion of the proceeds. 3. If the Insured is not a Director of the Company at the time of death and the Insured was not eligible to receive payments under the SERP prior to death, the beneficiaries' share of Policy proceeds shall be $50,000, provided the policy (ies) remain in force. 4. The Company and the Insured's beneficiaries shall share any interest due on death proceeds in the same pro rata ratio as applies to death proceeds, respectively. 5. In the event that the Policy is terminated other than as a result of a termination of this Agreement pursuant to paragraph X. hereunder, and the Insured is eligible to receive benefits pursuant to Paragraph IV (1) or (2) above, then the Bank shall pay to the Insured's beneficiary (ies) an amount which will provide a total after-tax death benefit equal to the benefit that the Insured would have received if the Policy had not been terminated. 6. Payment of the death benefit determined by the preceding paragraphs shall be made and distributed from the Policies in the following order, with resort to each succeeding policy only to the extent that the proceeds of each prior listed Policy are insufficient to satisfy the specified death benefit in full: (a) John Hancock Life Insurance Company Policy Number (b) Security Life of Denver Policy Number (c) Massachusetts Mutual Life Insurance Company Policy Number (d) Beneficial Life Insurance Company Policy Number BL (e) New York Life Insurance Company Policy Number (f) Northwestern Mutual Life Insurance Company Policy Number . -39- VII. DIVISION OF CASH SURRENDER VALUE ----------------------------------------- The Company shall at all times be entitled to an amount equal to the Policy's cash value, as that term is defined in the Policy, less any Policy loans and unpaid interest or cash withdrawals previously incurred by the Company and any applicable Policy surrender charges. Such cash value shall be determined as of the date of surrender of the Policy or death of the Insured as the case may be. VIII. PREMIUM WAIVER ----------------------- If the Policy contains a premium waiver provision, any such waived amounts shall be considered for all purposes of this Agreement as having been paid by the Company. IX. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS ---------------------------------------------------------------------------- In the event the Policy involves an endowment or annuity element, the Company's right and interest in any endowment proceeds or annuity benefits shall be determined according to this Agreement, by regarding such endowment proceeds, or the commuted value of such annuity benefits, as the Policy's cash value. Such endowment proceeds or annuity benefits shall be treated like death proceeds for the purposes of division under this Agreement. X. TERMINATION OF AGREEMENT --------------------------------- This Agreement shall terminate immediately upon the commission of any act by the Insured that results in the termination of the Policy by the Insurer. Except as provided above, this Agreement shall terminate upon distribution of death benefits in accordance with Paragraph VI above. XI. PROHIBITION ON ASSIGNMENT ---------------------------------- The Insured may not, without the prior written consent of the Company, assign to any individual, trust or other organization, any right, title or interest in the Policy or in any rights, options, privileges or duties created under this Agreement. XII. AGREEMENT BINDING UPON THE PARTIES ------------------------------------------- This Agreement shall be binding upon the Insured and the Company, and their respective heirs, successors, personal representatives and assigns, as applicable. XIII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR ----------------------------------------------- The Company is hereby designated the "Named Fiduciary" until resignation or removal by its Board of Directors. As Named Fiduciary, the Company shall be responsible for the management, control, and administration of this Agreement as established herein. The Named Fiduciary may allocate to others certain aspects of the management and operations responsibilities of this Agreement, including the employment of advisors and the delegation of any ministerial duties to qualified individuals. XIV. FUNDING POLICY ----------------------- The funding Policy for this Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XV. CLAIM PROCEDURES ------------------------- Claims shall be directed to The Benefit Marketing Group, Inc. Atlanta, Georgia (770-952-1529). If a claim is payable, a benefit check will be issued to the Named Fiduciary. In the event that a claim is not eligible under the Policy, the Insurer will notify the Named Fiduciary of the denial as required by the Policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, it should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer's actions should be in writing and submitted to the office named above for transmittal to the Insurer. -40- XVI. GENDER AND PLURAL VS SINGULAR -------------------------------------- Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. When applicable, nouns in the singular shall be read and construed as in the plural and visa versa. XVII. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT -------------------------------------------------------- The Insurer shall not be deemed a party to this Agreement, but will be served with an executed copy of this Agreement. Payment or other performance in accordance with the Policy provisions shall fully discharge the Insurer from any and all liability. IN WITNESS WHEREOF, the Insured and duly authorized Company officer have signed this Agreement as of the above written date. TRI COUNTIES BANK INSURED -------------------------- -------------------------------- Richard Miller Senior Vice President -41- BENEFICIARY DESIGNATION FORM FOR THE JOINT BENEFICIARY DESIGNATION AGREEMENT I. PRIMARY DESIGNATION ------------------- (You may refer to the beneficiary designation information prior to completion of this form.) A. Person(s) as a Primary Designation: ----------------------------------- (Please indicate the percentage for each beneficiary.) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) B. Estate as a Primary Designation: -------------------------------- My Primary Beneficiary is The Estate of ______________________________________ as set forth in the last will and testament dated the _____ day of _____________, _____ and any codicils thereto. C. Trust as a Primary Designation: ------------------------------- Name of the Trust: ____________________________________________________________ Execution Date of the Trust: _____ / _____ / _________ Name of the Trustee: __________________________________________________________ Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary): ________________________________________________________________________________ ________________________________________________________________________________ Is this an Irrevocable Life Insurance Trust? ________ Yes ________ No (If yes and this designation is for a Split Dollar agreement, an Assignment of Rights form should be completed.) -42- II. SECONDARY (CONTINGENT) DESIGNATION A. Person(s) as a Secondary (Contingent) Designation: -------------------------------------------------- (Please indicate the percentage for each beneficiary.) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) Name________________________________ Relationship_________________ / _______% Address:________________________________________________________________________ (Street) (City) (State) (Zip) B. Estate as a Secondary (Contingent) Designation: ------------------------------------------------ My Secondary Beneficiary is The Estate of _____________________________________ as set forth in my last will and testament dated the _____ day of ___________, _____ and any codicils thereto. C. Trust as a Secondary (Contingent) Designation: ----------------------------------------------- Name of the Trust: ____________________________________________________________ Execution Date of the Trust: _____ / _____ / _________ Name of the Trustee: __________________________________________________________ Beneficiary(ies) of the Trust (please indicate the percentage for each beneficiary): ________________________________________________________________________________ ________________________________________________________________________________ All sums payable under the Joint Beneficiary Designation Agreement by reason of my death shall be paid to the Primary Beneficiary(ies), if he or she survives me, and if no Primary Beneficiary(ies) shall survive me, then to the Secondary (Contingent) Beneficiary(ies). This beneficiary designation is valid until the participant notifies the bank in writing. ---------------------------------------------- ------------------ Insured Date -43- Exhibit 10.16 Form of Tri-Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Andrew Mastorakis, Richard O'Sullivan, and Thomas Reddish TRI-COUNTIES BANK EXECUTIVE LONG TERM CARE AGREEMENT THIS AGREEMENT, effective ___________ is made and entered into, by and between Tri Counties Bank (collectively, the "Company"), and _______________________, an Executive of the Company (hereinafter, the "Participant"). WITNESSETH: WHEREAS, it is the consensus of the Board of Directors (hereinafter, the "Board") that the Participant's services to the Company are of exceptional merit and constitute an invaluable contribution to the general welfare of the Company; and WHEREAS, it is in the best interests of the Company to encourage the Participant's continued service to Company during the Participant's lifetime or until the age of retirement; and WHEREAS, it is the desire of the Company that the Participant's services be retained as herein provided; and WHEREAS, the Participant is willing to continue to serve the Company provided the Company agrees to pay the Participant certain benefits in accordance with the terms and conditions hereinafter set forth; ACCORDINGLY, it is the desire of the Company and the Participant to enter into this Agreement under which the Company will agree to make certain payments on behalf of the Participant pursuant to this Agreement; NOW, THEREFORE, in consideration of services performed in the past and to be performed in the future as well as of the mutual promises and covenants herein contained it is agreed as follows: I. LONG TERM CARE BENEFIT The Company hereby agrees: A. To pay the initial single premium for the Long Term Care policy described herein, on behalf of the Participant: Insurer: Policy Number: B. That, subject to Paragraph IV, the sole ownership of said policy shall reside with the Participant for the Participant's sole use and benefit. -44- II. REIMBURSEMENT OBLIGATION UPON TERMINATION OF SERVICE For purposes of this Agreement, the term service shall refer to Participant's service as an Executive of the Company and, except as follows, the phrase "years of service" shall be measured in full years from the date of this Agreement to the date of Participant's termination. If the Participant signs the Agreement at any time during 2003, then 2003 shall be counted as a full year of service. The following events of termination exempt the Participant from the reimbursement provisions of this Section III. 1. Termination for any reason following five years of service; 2. Death; 3. Disability; 4. Normal Retirement, as mandated by resolution of the Board of Directors; 5. Termination for any reason following a Change of Control. For purpose of this Agreement, the term Change of Control shall be as defined in employment agreements with the Chief Executive Officer of the Company; 6. If, upon execution of this Agreement, the Participant is a current member of the Board of Directors of the Company, termination of such membership, resulting from non-reelection to the Board. If the Participant's service terminates for any reason other than one of those listed immediately above, the Participant shall reimburse the Company the amount of premium expended by the Bank on the Participant's behalf for Long Term Care Insurance, multiplied times the percentage set forth in the schedule that follows: Years of Service Amount ---------------- -------------------------- One Year 80% of the Single Premium Two Years 60% of the Single Premium Three Years 40% of the Single Premium Four Years 20% of the Single Premium Five Years No Obligation to Reimburse The reimbursement amount shall be due and payable within thirty (30) days from the date of termination of service. To facilitate prompt reimbursement, the Company may off-set against any amounts it owes to a terminated Participant. III. MISCELLANEOUS A. Termination: This Agreement shall terminate on the later of the following dates: - The date of Participant's termination or - The date on which the Participant satisfies the reimbursement obligation described herein. B. Alienability and Assignment Prohibition: The Participant shall have no power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or the Participant's beneficiary(ies), nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event that the Participant or any beneficiary attempts assignment, commutation, hypothecation, transfer or disposal of the benefits hereunder, the Company's liabilities shall forthwith cease and terminate. -45- C. Taxable Benefit: For so long as the Participant remains in Service, and barring any adverse change in current tax law, the Participant will incur no taxable consequence as a result of the benefit described by this Agreement. If the Participant terminates Service, but is and remains a member of the Board of Directors of the Company, then annually the Insured will receive a taxable benefit equal to the Premium times that percentage by which his/her reimbursement obligation was reduced at the end of the year, as required by the Internal Revenue Service. The Company (or its administrator) will report to the Insured such imputed income on Form 1099 or its equivalent. D. Amendment or Revocation: This Plan may be amended or revoked at any time, in whole or in part, by the mutual written consent of the Participant and the Company. E. Gender: Whenever in this Participant Plan words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. F. Fringe Benefit Effect on Other Company Benefit Plans: The long term care benefits provided by this Agreement are granted by the Company as a fringe benefit to the Participant and are not part of any fee reduction plan or arrangement deferring fees or other compensation. The Participant does not have a right to any form of compensation instead of these long-term care benefits. Nothing contained in this Participant Plan shall affect the right of the Participant to receive any other benefit or compensation that constitutes a part of the Company's existing or future benefit or compensation structure. G. Headings: Headings and subheadings in this Agreement are for reference and convenience only and shall not be deemed a part of this Agreement. H. Applicable Law: The laws of the State of California shall govern the validity and interpretation of this Agreement. I. Partial Invalidity: If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant, or condition invalid, void, or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. J. Continuation as Participant: Neither this Agreement nor the payments of any benefits hereunder are to be construed as giving to the Participant any right to be retained as a director or an employee of the Company. -46- IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully read this Agreement and executed the original thereof on the first date set forth hereinabove, and that, upon execution, each has received a conforming copy. PARTICIPANT -------------------------------- Name (print) -------------------- Date of Execution: -------------- TRI COUNTIES BANK -------------------------------- Rick Miller, SVP Human Resources Date of Execution: -------------- -47- Exhibit 10.17 Form of Tri-Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Verischagin TRI-COUNTIES BANK DIRECTOR LONG TERM CARE AGREEMENT THIS AGREEMENT, effective ___________ is made and entered into, by and between Tri Counties Bank (collectively, the "Company"), and _______________________, a Director of the Company (hereinafter, the "Participant"). WITNESSETH: WHEREAS, it is the consensus of the Board of Directors (hereinafter, the "Board") that the Participant's services to the Company are of exceptional merit and constitute an invaluable contribution to the general welfare of the Company; and WHEREAS, it is in the best interests of the Company to encourage the Participant's continued service to Company during the Participant's lifetime or until the age of retirement; and WHEREAS, it is the desire of the Company that the Participant's services be retained as herein provided; and WHEREAS, the Participant is willing to continue to serve the Company provided the Company agrees to pay the Participant certain benefits in accordance with the terms and conditions hereinafter set forth; ACCORDINGLY, it is the desire of the Company and the Participant to enter into this Agreement under which the Company will agree to make certain payments on behalf of the Participant pursuant to this Agreement; NOW, THEREFORE, in consideration of services performed in the past and to be performed in the future as well as of the mutual promises and covenants herein contained it is agreed as follows: I. LONG TERM CARE BENEFIT The Company hereby agrees: A. To pay the initial single premium for the Long Term Care policy described herein, on behalf of the Participant: Insurer: Policy Number: B. That, subject to Paragraph IV, the sole ownership of said policy shall reside with the Participant for the Participant's sole use and benefit. -48- II. REIMBURSEMENT OBLIGATION UPON TERMINATION OF SERVICE For purposes of this Agreement, the term service shall refer to service as a Director of the Company and, except as follows, the phrase "years of service" shall be measured in full years from the date of this Agreement to the date of Participant's termination. If the Participant signs the Agreement at any time during 2003, then 2003 shall be counted as a full year of service. The following events of termination exempt the Director from the reimbursement provisions of this Section III. 1. Termination for any reason following five years of service; 2. Death; 3. Disability; 4. Normal Retirement, as mandated by resolution of the Board of Directors; 5. Termination for any reason following a Change of Control. For purpose of this Agreement, the term Change of Control shall be as defined in employment agreements with the Chief Executive Officer of the Company; 6. Termination resulting from non-reelection to the Board. If the Participant's service terminates for any reason other than one of those listed immediately above, the Participant shall reimburse the Company the amount of premium expended by the Bank on the Participant's behalf for Long Term Care Insurance, multiplied times the percentage set forth in the schedule that follows: Years of Service Amount ---------------- -------------------------- One Year 80% of the Single Premium Two Years 60% of the Single Premium Three Years 40% of the Single Premium Four Years 20% of the Single Premium Five Years No Obligation to Reimburse The reimbursement amount shall be due and payable within thirty (30) days from the date of termination of service. To facilitate prompt reimbursement, the Company may off-set against any amounts it owes to a terminated Director. III. MISCELLANEOUS A. Termination: This Agreement shall terminate on the later of the following dates: - The date of Director's termination or - The date on which the Director satisfies the reimbursement obligation described herein. B. Alienability and Assignment Prohibition: The Participant shall have no power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Participant or the Participant's beneficiary (ies), nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. In the event that the Participant or any beneficiary attempts assignment, commutation, hypothecation, transfer or disposal of the benefits hereunder, the Company's liabilities shall forthwith cease and terminate. -49- C. Taxable Benefit: Annually the Insured will receive a taxable benefit equal to the Premium times that percentage by which his/her reimbursement obligation was reduced at the end of the year, as required by the Internal Revenue Service. The Company (or its administrator) will report to the Insured such imputed income on Form 1099 or its equivalent. D. Amendment or Revocation: This Plan may be amended or revoked at any time, in whole or in part, by the mutual written consent of the Participant and the Company. E. Gender: Whenever in this Participant Plan words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. F. Fringe Benefit Effect on Other Company Benefit Plans: The long term care benefits provided by this Agreement are granted by the Company as a fringe benefit to the Participant and are not part of any fee reduction plan or arrangement deferring fees or other compensation. The Participant does not have a right to any form of compensation instead of these long-term care benefits. Nothing contained in this Participant Plan shall affect the right of the Participant to receive any other benefit or compensation that constitutes a part of the Company's existing or future benefit or compensation structure. G. Headings: Headings and subheadings in this Agreement are for reference and convenience only and shall not be deemed a part of this Agreement. H. Applicable Law: The laws of the State of California shall govern the validity and interpretation of this Agreement. I. Partial Invalidity: If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant, or condition invalid, void, or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity. J. Continuation as Participant: Neither this Agreement nor the payments of any benefits hereunder are to be construed as giving to the Participant any right to be retained as a director or an employee of the Company. -50- IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully read this Agreement and executed the original thereof on the first date set forth hereinabove, and that, upon execution, each has received a conforming copy. PARTICIPANT -------------------------------- Name (print) -------------------- Date of Execution: -------------- TRI COUNTIES BANK -------------------------------- Rick Miller, SVP Human Resources Date of Execution: -------------- -51- Exhibit 11.1 TRICO BANCSHARES Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution For the For the three months nine months ended September 30, ended September 30, (In thousands, except per share data) 2003 2002 2003 2002 ------------------------------------------- Weighted average number of common shares outstanding - basic 7,850 7,026 7,572 7,010 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 245 205 217 178 ------------------------------------------- Weighted average number of common shares outstanding - diluted 8,095 7,231 7,789 7,188 =========================================== Net income $4,338 $3,627 $12,205 $10,320 Basic earnings per share $0.55 $0.52 $1.61 $1.47 Diluted earnings per share $0.54 $0.50 $1.57 $1.44 -52- Exhibit 31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended I, Richard P. Smith, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have; a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer -53- Exhibit 31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended I, Thomas J. Reddish, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have; a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Thomas J. Reddish ------------------------------------- Thomas J. Reddish Vice President and Chief Financial Officer -54- Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350. In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350. In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas J. Reddish -------------------------------------- Thomas J. Reddish Vice President and Chief Financial Officer -55- A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request.