10-Q 1 tcb10q2q05.txt TCBK FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 2005 Commission file number 0-10661 ------------------------------- ------------------------------ TRICO BANCSHARES (Exact name of registrant as specified in its charter) California 94-2792841 ------------------------------ ------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 63 Constitution Drive, Chico, California 95973 (Address of principal executive offices) (Zip code) 530-898-0300 (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of Class: Common stock, no par value Outstanding shares as of July 26, 2005: 15,674,092 TABLE OF CONTENTS Page Forward Looking Statements 1 PART I - FINANCIAL INFORMATION 2 Item 1 - Financial Statements 2 Notes to Unaudited Condensed Consolidated Financial Statements 6 Financial Summary 15 Item 2 - Management's Discussion and Analysis of Financial 16 Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures about Market Risk 28 Item 4 - Controls and Procedures 29 PART II - OTHER INFORMATION 30 Item 1 - Legal Proceedings 30 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 30 Item 4 - Submission of Matters to a Vote of Security Holders 30 Item 6 - Exhibits 31 Signatures 33 Exhibits 34 FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the "Company") for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management's current knowledge and belief and include information concerning the Company's possible or assumed future financial condition and results of operations. When you see any of the words "believes", "expects", "anticipates", "estimates", or similar expressions, mean making forward-looking statements. A number of factors, some of which are beyond the Company's ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to: - a slowdown in the national and California economies; - the prospect of additional terrorist attacks in the United States and the uncertain effect of these events on the national and regional economies; - changes in the interest rate environment and interest rate policies of the Federal Reserve Board; - changes in the regulatory environment; - significantly increasing competitive pressure in the banking industry; - operational risks including data processing system failures or fraud; - volatility of rate sensitive deposits; - asset/liability matching risks and liquidity risks; - changes in the level of nonperforming assets and charge-offs; - acts of war and political instability; - inflation, interest rate, securities market and monetary fluctuations; - changes in the financial performance or condition of the Company's borrowers; - changes in the competitive environment among financial holding companies; - changes in accounting policies as may be adopted by regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; and - changes in the Company's compensation and benefit plans. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2004, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. -1-
PART I - FINANCIAL INFORMATION Item 1. Financial Statements TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (In thousands, except share data; unaudited) At June 30, At December 31, 2005 2004 2004 ------------------------------- ----------------- Assets: Cash and due from banks $79,287 $65,512 $70,037 Federal funds sold 235 - - ------------------------------- ----------------- Cash and cash equivalents 79,522 65,512 70,037 Securities available for sale 288,902 302,341 286,013 Federal Home Loan Bank stock, at cost 7,440 6,642 6,781 Loans, net of allowance for loan losses of $14,892, $14,613 and $14,525 1,235,160 1,063,851 1,158,442 Foreclosed assets, net of allowance for losses of $180, $180 and $180 - 628 - Premises and equipment, net 21,182 18,996 19,853 Cash value of life insurance 41,099 39,844 40,479 Accrued interest receivable 6,706 6,069 6,473 Goodwill 15,519 15,519 15,519 Other intangible assets 4,719 5,412 5,408 Other assets 20,394 21,275 18,501 ------------------------------- ----------------- Total Assets $1,720,643 $1,546,089 $1,627,506 =============================== ================= Liabilities and Shareholders' Equity: Liabilities: Deposits: Noninterest-bearing demand $332,887 $282,292 $311,275 Interest-bearing 1,067,290 985,060 1,037,558 ------------------------------- ----------------- Total deposits 1,400,177 1,267,352 1,348,833 Federal funds purchased 83,000 66,000 46,400 Accrued interest payable 3,535 2,272 3,281 Reserve for unfunded commitments 1,671 916 1,532 Other liabilities 20,626 17,125 19,938 Other borrowings 27,628 22,866 28,152 Junior subordinated debt 41,238 41,238 41,238 ------------------------------- ----------------- Total Liabilities 1,577,875 1,417,769 1,489,374 ------------------------------- ----------------- Commitments and contingencies Shareholders' Equity: Common stock, no par value: 50,000,000 shares authorized; issued and outstanding: 15,684,092 at June 30, 2005 70,855 15,639,897 at June 30, 2004 69,623 15,723,317 at December 31, 2004 70,699 Retained earnings 73,381 60,681 67,785 Accumulated other comprehensive loss, net (1,468) (1,984) (352) ------------------------------- ----------------- Total Shareholders' Equity 142,768 128,320 138,132 ------------------------------- ----------------- Total Liabilities and Shareholders' Equity $1,720,643 $1,546,089 $1,627,506 =============================== =================
See accompanying notes to unaudited condensed consolidated financial statements. -2-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data; unaudited) Three months ended June 30, Six months ended June 30, 2005 2004 2005 2004 -------------------------------------------------------- Interest and dividend income: Loans, including fees $20,701 $17,551 $40,228 $34,290 Debt securities: Taxable 2,707 2,590 5,337 5,266 Tax exempt 414 438 829 880 Dividends 78 48 138 93 Federal funds sold 10 1 14 11 -------------------------------------------------------- Total interest income 23,910 20,628 46,546 40,540 -------------------------------------------------------- Interest expense: Deposits 3,617 2,387 6,702 4,836 Federal funds purchased 249 150 421 184 Other borrowings 329 320 656 640 Junior subordinated debt 594 230 1,131 441 -------------------------------------------------------- Total interest expense 4,789 3,087 8,910 6,101 -------------------------------------------------------- Net interest income 19,121 17,541 37,636 34,439 -------------------------------------------------------- Provision for loan losses 561 1,305 661 1,918 -------------------------------------------------------- Net interest income after provision for loan losses 18,560 16,236 36,975 32,521 -------------------------------------------------------- Noninterest income: Service charges and fees 4,505 4,910 8,567 8,991 Gain on sale of loans 429 433 721 1,058 Commissions on sale of non-deposit investment products 660 587 1,192 1,129 Increase in cash value of life insurance 400 432 620 864 Other 316 580 537 655 -------------------------------------------------------- Total noninterest income 6,310 6,942 11,637 12,697 -------------------------------------------------------- Noninterest expense: Salaries and related benefits 8,408 8,440 16,777 16,607 Other 7,109 6,967 13,853 13,183 -------------------------------------------------------- Total noninterest expense 15,517 15,407 30,630 29,790 -------------------------------------------------------- Income before income taxes 9,353 7,771 17,982 15,428 Provision for income taxes 3,616 2,924 7,006 5,804 -------------------------------------------------------- Net income 5,737 4,847 10,976 9,624 -------------------------------------------------------- Other comprehensive (loss) income: Change in unrealized (loss) gain on securities available for sale, net 774 (4,410) (1,116) (3,798) -------------------------------------------------------- Comprehensive income $6,511 $437 $9,860 $5,826 ======================================================== Average shares outstanding 15,701,867 15,639,556 15,715,796 15,628,048 Diluted average shares outstanding 16,288,728 16,215,160 16,327,716 16,213,885 Per share data: Basic earnings $0.37 $0.31 $0.70 $0.62 Diluted earnings $0.35 $0.30 $0.67 $0.59 Dividends paid $0.11 $0.11 $0.22 $0.21
See accompanying notes to unaudited condensed consolidated financial statements. -3-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except per share data; unaudited) Accumulated Shares of Other Common Common Retained Comprehensive Stock Stock Earnings (Loss) Income Total ------------------------------------------------------------- Balance at December 31, 2003 15,668,248 $69,767 $56,379 $1,814 $127,960 Comprehensive income: ---------- Net income 9,624 9,624 Change in net unrealized gain on Securities available for sale, net (3,798) (3,798) ---------- Total comprehensive income 5,826 Stock options exercised 139,249 576 576 Tax benefit of stock options exercised 26 26 Repurchase of common stock (167,600) (746) (2,047) (2,793) Dividends paid ($0.21 per share) (3,275) (3,275) ------------------------------------------------------------- Balance at June 30, 2004 15,639,897 $69,623 $60,681 ($1,984) $128,320 ============================================================= Balance at December 31, 2004 15,723,317 $70,699 $67,785 ($352) $138,132 Comprehensive income: ---------- Net income 10,976 10,976 Change in net unrealized gain on Securities available for sale, net (1,116) (1,116) ---------- Total comprehensive income 9,860 Stock options exercised 79,275 511 511 Tax benefit of stock options exercised 178 178 Repurchase of common stock (118,500) (533) (1,918) (2,451) Dividends paid ($0.22 per share) (3,462) (3,462) ------------------------------------------------------------- Balance at June 30, 2005 15,684,092 $70,855 $73,381 ($1,468) $142,768 =============================================================
See accompanying notes to unaudited condensed consolidated financial statements. -4-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands; unaudited) For the six months ended June 30, 2005 2004 ------------------------------------ Operating activities: Net income $10,976 $9,624 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment, and amortization 1,861 1,625 Amortization of intangible assets 689 673 Provision for loan losses 661 1,918 Amortization of investment securities premium, net 659 1,009 Originations of loans for resale (36,677) (55,376) Proceeds from sale of loans originated for resale 36,986 55,929 Gain on sale of loans (721) (1,058) Amortization of mortgage servicing rights 306 406 Recovery of mortgage servicing rights valuation allowance - (600) Gain on sale of other real estate owned - (182) Loss (gain) on sale of fixed assets 79 (12) Increase in cash value of life insurance (620) (864) Change in: Interest receivable (233) (42) Interest payable 254 (366) Other assets and liabilities, net (271) (2,215) ------------------------------------ Net cash provided by operating activities 13,949 10,469 ------------------------------------ Investing activities: Proceeds from maturities of securities available-for-sale 29,064 41,225 Purchases of securities available-for-sale (34,538) (39,580) Purchases of Federal Home Loan Bank stock (659) (1,858) Loan originations and principal collections, net (77,379) (97,418) Proceeds from sale of premises and equipment 23 539 Purchases of premises and equipment (2,993) (1,407) Proceeds from sale of other real estate owned - 478 ------------------------------------ Net cash used by investing activities (86,482) (98,021) ------------------------------------ Financing activities: Net increase in deposits 51,344 30,529 Net increase in Federal funds purchased 36,600 26,500 Issuance of junior subordinated debt - 20,619 Payments of principal on long-term other borrowings (25) (21) Net change in short-term other borrowings (499) - Repurchase of common stock (2,451) (2,793) Dividends paid (3,462) (3,275) Exercise of stock options 511 576 ------------------------------------ Net cash provided by financing activities 82,018 72,135 ------------------------------------ Net change in cash and cash equivalents 9,485 (15,417) ------------------------------------ Cash and cash equivalents and beginning of period 70,037 80,929 ------------------------------------ Cash and cash equivalents at end of period $79,522 $65,512 ==================================== Supplemental disclosure of noncash activities: Unrealized loss on securities available for sale ($1,926) ($6,477) Supplemental disclosure of cash flow activity: Cash paid for interest expense $8,656 $6,467 Cash paid for income taxes $6,880 $7,460 Income tax benefit from stock option exercises $178 $26
See accompanying notes to unaudited condensed consolidated financial statements -5- NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: General Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and six month periods ended June 30, 2005 and 2004 are not necessarily indicative of the results expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company operates 32 branch offices and 15 in-store branch offices in the California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo and Yuba. The Company's operating policy since its inception has emphasized retail banking. Most of the Company's customers are retail customers and small to medium sized businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The allowance for loan losses, goodwill and other intangible assets, income taxes, and the valuation of mortgage servicing rights, are the only accounting estimates that materially affect the Company's consolidated financial statements. Significant Group Concentration of Credit Risk The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio within the business segments located in this geographical area. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Investment Securities The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the six months ended June 30, 2005, and throughout 2004, the Company did not have any securities classified as either held-to-maturity or trading. -6- Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of accumulated other comprehensive income (loss) in shareholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that an other than temporary decline in value has occurred. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors of current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to income. At June 30, 2005 and 2004, and December 31, 2004, the Company had no loans held for sale. Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. Loans Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in Management's judgment are well secured and in the process of collection, they may be classified as accrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. All impaired loans are classified as nonaccrual loans. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans and leases, based on evaluations of the collectibility, impairment and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. -7- Reserve for Unfunded Commitments The reserve for unfunded commitments is established through a provision for losses - unfunded commitments charged to noninterest expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits, and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectibility, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower's or depositor's ability to pay. Servicing Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. The following table summarizes the Company's mortgage servicing rights recorded in other assets as of June 30, 2005 and December 31, 2004. December 31, June 30, (Dollars in thousands) 2004 Additions Reductions 2005 ----------------------------------------------- Mortgage Servicing Rights $3,476 $412 ($306) $3,582 Valuation allowance - - - - ----------------------------------------------- Mortgage servicing rights, net of valuation allowance $3,476 $412 ($306) $3,582 =============================================== At June 30, 2005 and December 31, 2004, the Company serviced real estate mortgage loans for others of $367 million and $368 million, respectively. At June 30, 2005 and December 31, 2004, the fair value of the Company's mortgage servicing rights assets was $3,582,000 and $3,568,000, respectively. Off-Balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, standby letters of credit, and deposit account overdraft privilege. Such financial instruments are recorded when they are funded. -8- Premises and Equipment Land is carried at cost. Buildings and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 years for land improvements and buildings. Foreclosed Assets Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Goodwill and Other Intangible Assets Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142), as of January 1, 2002. Pursuant to SFAS 142, goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement of Financial Accounting Standard No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144). As of the date of adoption, the Company had identifiable intangible assets consisting of core deposit premiums and minimum pension liability. Core deposit premiums are amortized using an accelerated method over a period of ten years. Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. The following table summarizes the Company's core deposit intangibles as of June 30, 2005 and December 31, 2004. December 31, June 30, (Dollar in Thousands) 2004 Additions Reductions 2005 ---------------------------------------------- Core deposit intangibles $13,643 - - $13,643 Accumulated amortization (9,201) - ($689) (9,890) ---------------------------------------------- Core deposit intangibles, net $4,442 - ($689) $3,753 ============================================== Core deposit intangibles are amortized over their expected useful lives. Such lives are periodically reassessed to determine if any amortization period adjustments are indicated. The following table summarizes the Company's estimated core deposit intangible amortization for each of the five succeeding years from December 31, 2004: Estimated Core Deposit Intangible Amortization Years Ended (Dollar in thousands) ----------- ----------------------- 2005 $1,381 2006 1,395 2007 490 2008 523 2009 328 Thereafter 325 ------ $4,442 ====== -9- The following table summarizes the Company's minimum pension liability intangible as of June 30, 2005 and December 31, 2004. December 31, June 30, (Dollar in Thousands) 2004 Additions Reductions 2005 ---------------------------------------------- Minimum pension liability intangible $966 - - $966 ============================================== Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. The following table summarizes the Company's goodwill intangible as of June 30, 2005 and December 31, 2004. December 31, June 30, (Dollar in Thousands) 2004 Additions Reductions 2005 ---------------------------------------------- Goodwill 15,519 - - 15,519 ============================================== Impairment of Long-Lived Assets and Goodwill Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. On December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Income Taxes The Company's accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. -10- Stock-Based Compensation The Company uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Under this method, compensation expense is recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue using the intrinsic value method or to adopt a fair value based method to account for stock option plans. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method (see Recent Accounting Pronouncements). Had compensation cost for the Company's option plans been determined in accordance with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2005 2004 2005 2004 ---- ---- ---- ---- Net income As reported $5,737 $4,847 $10,976 $9,624 Pro forma $5,624 $4,762 $10,777 $9,457 Basic earnings per share As reported $0.37 $0.31 $0.70 $0.62 Pro forma $0.36 $0.30 $0.69 $0.61 Diluted earnings per share As reported $0.35 $0.30 $0.67 $0.59 Pro forma $0.35 $0.29 $0.66 $0.58 Stock-based employee compensation cost, net of related tax effects, included in net income As reported $0 $0 $0 $0 Pro forma $113 $85 $199 $167
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing. Earnings Per Share Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate solely from outstanding stock options, and are determined using the treasury stock method. Earnings per share have been computed based on the following:
Three Months Six Months Ended June 30, Ended June 30, (in thousands) 2005 2004 2005 2004 ------------------ ---------------- Net income $5,737 $4,847 $10,976 $9,624 Average number of common shares outstanding 15,702 15,640 15,716 15,628 Effect of dilutive stock options 587 575 612 586 ------------------ ---------------- Average number of common shares outstanding used to calculate diluted earnings per share 16,289 16,215 16,328 16,214 ================== ================
-11- Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss) and related tax effects are as follows:
Three months ended June 30, Six Months Ended June 30, -------------------------- ------------------------- 2005 2004 2005 2004 -------------------------- ------------------------- (in thousands) Unrealized holding gains (losses) on available-for-sale securities $1,307 ($7,508) ($1,926) ($6,47) Tax effect (533) 3,098 810 2,679 -------------------------- ------------------------- Unrealized holding gains (losses) on available-for-sale securities, net of tax $774 ($4,410) ($1,116) ($3,798) ========================== =========================
The components of accumulated other comprehensive loss, included in shareholders' equity, are as follows:
June 30, December 31, 2005 2004 ----------------------------- (in thousands) Net unrealized (losses) gains on available-for-sale securities ($919) $1,007 Tax effect 386 (424) ----------------------------- Unrealized holding (losses) gains on available-for-sale securities, net of tax ($533) 583 ----------------------------- Minimum pension liability (1,559) (1,559) Tax effect 624 624 ----------------------------- Minimum pension liability, net of tax (935) (935) ----------------------------- Accumulated other comprehensive loss ($1,468) ($352) =============================
Retirement Plans The Company has supplemental retirement plans covering directors and key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to use the cash values of these policies to pay the retirement obligations. The following table sets forth the net periodic benefit cost recognized for the plans:
Three Months Six Months Ended June 30, Ended June 30, (in thousands) 2005 2004 2005 2004 ---- ---- ---- ---- Net pension cost included the following components: Service cost-benefits earned during the period $105 $117 $209 $151 Interest cost on projected benefit obligation 135 144 268 248 Amortization of net obligation at transition 56 (3) 112 5 Amortization of prior service cost 24 34 48 54 Recognized net actuarial loss 1 18 2 55 ----------------------------------- Net periodic pension cost $321 $310 $639 $513 ===================================
During the six months ended June 30, 2005 and 2004, the Company contributed and paid out as benefits $269,000 and $265,000, respectively, to participants under the plans. For the year ending December 31, 2005, the Company expects to contribute and pay out as benefits $526,000 to participants under the plans. -12- Recent Accounting Pronouncements In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (VIEs), which was issued in January 2003. The Company was required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the FIN 46R will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company currently does not have any VIEs that are within the scope of this Statement. In December 2003, FASB issued FASB Statement of Financial Accounting Standard No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS 132 revised), which prescribes employers' disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition of those plans. SFAS 132 retains and revises the disclosure requirements contained in the original SFAS 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS 132 generally is effective for fiscal years ending after December 15, 2003. Disclosures required by this standard are included in the notes to these consolidated financial statements. In December 2004, the FASB issued FASB Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim reporting period of the Company's fiscal year beginning after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R on January 1, 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will not have a material impact on the Company's consolidated results of operations and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123. In March 2004, the United States Securities and Exchange Commission (SEC) issued SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105), which summarizes the views of the staff of the SEC regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. SAB 105 provides that the fair value of recorded loan commitments that are accounted for as derivatives under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, should not incorporate the expected future cash flows related to the associated servicing of the future loan. In addition, SAB 105 requires registrants to disclose their accounting policy for loan commitments. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of this accounting standard did not have any impact on the Company's consolidated financial statements. there were no loan committments requiring accounting under this standard as of June 30, 2005. In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), which addresses accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to loans and debt securities acquired individually, in pools or as part of a business combination and does not apply to originated loans. The application of -13- SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 does not allow the excess of contractual cash flows over cash flows expected to be collected to be recognized as an adjustment of yield, loss accrual or valuation allowance, such as the allowance for possible loan losses. SOP 03-3 requires that increases in expected cash flows subsequent to the initial investment be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. In the case of loans acquired in a business combination where the loans show signs of credit deterioration, SOP 03-3 represents a significant change from current purchase accounting practice whereby the acquiree's allowance for loan losses is typically added to the acquirer's allowance for loan losses. SOP 03-3 is effective for loans and debt securities acquired by the Company beginning January 1, 2005. The adoption of this new standard is not expected to have a material impact on the Company's consolidated financial statements. Reclassifications Certain amounts previously reported in the 2004 financial statements have been reclassified to conform to the 2005 presentation. Additionally, in the first quarter of 2005, the Company reclassified the reserve for unfunded commitments from the allowance for loan losses to other liabilities, and reclassified the provision for unfunded commitments from the provision for loan losses to other noninterest expense. These reclassifications did not affect previously reported net income or total shareholders' equity. Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split effected as a stock dividend which was paid on April 30, 2004 to shareholders of record on April 9, 2004. -14- TRICO BANCSHARES Financial Summary (dollars in thousands, except per share amounts; unaudited)
Three months ended Six months ended June 30, June 30, ------------------------------------------------------------ 2005 2004 2005 2004 ------------------------------------------------------------ Net Interest Income (FTE) $19,361 $17,811 $38,117 $34,958 Provision for loan losses (561) (1,305) (661) (1,918) Noninterest income 6,310 6,942 11,637 12,697 Noninterest expense (15,517) (15,407) (30,630) (29,790) Provision for income taxes (FTE) (3,856) (3,194) (7,487) (6,323) ------------------------------------------------------------ Net income $5,737 $4,847 $10,976 $9,624 ============================================================ Earnings per share2: Basic $0.37 $0.31 $0.70 $0.62 Diluted $0.35 $0.30 $0.67 $0.59 Per share2: Dividends paid $0.11 $0.11 $0.22 $0.21 Book value at period end $9.10 $8.20 Tangible book value at period end $7.81 $6.87 Average common shares outstanding2 15,702 15,640 15,716 15,628 Average diluted shares outstanding2 16,289 16,215 16,328 16,214 Shares outstanding at period end 15,684 15,640 At period end: Loans, net $1,235,160 $1,063,851 Total assets 1,720,643 1,546,089 Total deposits 1,400,177 1,267,352 Other borrowings 27,628 22,866 Junior subordinated debt 41,238 41,238 Shareholders' equity $142,768 $128,320 Financial Ratios: During the period (annualized): Return on assets 1.37% 1.29% 1.33% 1.31% Return on equity 16.03% 14.97% 15.43% 14.89% Net interest margin1 5.12% 5.27% 5.12% 5.31% Net loan charge-offs to average loans 0.08% 0.03% 0.05% 0.04% Efficiency ratio1 60.45% 62.24% 61.56% 62.51% At Period End: Equity to assets 8.30% 8.30% Total capital to risk assets 11.53% 12.40% Allowance for losses to loans3 1.32% 1.44%
1 Fully taxable equivalent (FTE) 2 Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. 3 Allowance for losses includes allowance for loan losses and reserve for unfunded commitments. -15- Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management's Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, intangible assets, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See caption "Allowance for Loan Losses" for a more detailed discussion). Results of Operations The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands): Three months ended Six months ended June 30, June 30, ------------------------------------------------ 2005 2004 2005 2004 ------------------------------------------------ Net Interest Income (FTE) $19,361 $17,811 $38,117 $34,958 Provision for loan losses (561) (1,305) (661) (1,918) Noninterest income 6,310 6,942 11,637 12,697 Noninterest expense (15,517) (15,407) (30,630) (29,790) Provision for income taxes (FTE) (3,856) (3,194) (7,487) (6,323) ------------------------------------------------ Net income $5,737 $4,847 $10,976 9,624 ================================================ The Company had quarterly earnings of $5,737,000, or $0.35 per diluted share, for the three months ended June 30, 2005. These results represent a 16.7% increase from the $0.30 earnings per diluted share reported for the three months ended June 30, 2004 on earnings of $4,847,000. The improvement in results from the year-ago quarter was due to a $1,550,000 (8.7%) increase in fully tax-equivalent net interest income to $19,361,000, and a $744,000 (57.0%) decrease in provision for loan losses. These contributing factors were partially offset by a $632,000 (9.1%) decrease in noninterest income to $6,310,000 and a $110,000 (0.7%) increase in noninterest expense to $15,517,000 for the quarter ended June 30, 2005. The Company reported earnings of $10,976,000, or $0.67 per diluted share, for the six months ended June 30, 2005. These results represent a 13.6% increase from the $0.59 earnings per diluted share reported for the six months ended June 30, 2004 on earnings of $9,624,000. The improvement in results from the year-ago period was due to a $3,159,000 (9.0%) increase in fully tax-equivalent net interest income to $38,117,000, and a $1,257,000 (65.5%) decrease in provision for loan losses to $661,000. These contributing factors were partially offset by a $1,060,000 (8.3%) decrease in noninterest income to $11,637,000 and a $840,000 (2.8%) increase in noninterest expense to $30,630,000 for the six months ended June 30, 2005. -16- Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
Three months ended Six months ended June 30, June 30, ------------------------------------------------------- 2005 2004 2005 2004 ------------------------------------------------------- Interest income $23,910 $20,628 $46,546 $40,540 Interest expense (4,789) (3,087) (8,910) (6,101) FTE adjustment 240 270 481 519 ------------------------------------------------------- Net interest income (FTE) $19,361 $17,811 $38,117 $34,958 ======================================================= Average interest-earning assets $1,511,668 $1,351,774 $1,487,848 $1,316,403 Net interest margin (FTE) 5.12% 5.27% 5.12% 5.31%
The Company's primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense in interest-bearing liabilities. Net interest income (FTE) during the second quarter of 2005 increased $1,550,000 (8.7%) from the same period in 2004 to $19,361,000. The increase in net interest income (FTE) was due to a $159,894,000 (11.8%) increase in average balances of interest-earning assets to $1,511,668,000 offset by a 0.15% decrease in net interest margin (FTE) to 5.12%. Net interest income (FTE) during the first six months of 2005 increased $3,159,000 (9.0%) from the same period in 2004 to $38,117,000. The increase in net interest income (FTE) was due to a $171,445,000 (13.0%) increase in average balances of interest-earning assets to $1,487,848,000 offset by a 0.19% decrease in net interest margin (FTE) to 5.12%. Interest and Fee Income Interest and fee income (FTE) for the second quarter of 2005 increased $3,252,000 (15.6%) from the second quarter of 2004. The increase was the net effect of a $159,894,000 (11.8%) increase in average interest-earning assets to $1,511,668,000 and a 0.21% increase in the yield on those average interest-earning assets to 6.39%. The growth in interest-earning assets was due to a $179,636,000 (17.5%) increase in average loan balances to $1,209,061,000 that was partially offset by a decrease of $20,790,000 (6.5%) in average balances of investments to $301,135,000. The increase in the yield on average interest-earning assets was mainly due to a 0.41% increase in yield on investments to 4.57% as the yield on loans increased 0.03% to 6.85%. The relative flatness in yield in loans from the year-ago quarter, despite a 2.25% increase in the prime rate from June 30, 2004 to June 30, 2005, is due to long-term rates having generally held steady or fallen over this period, and new prime based loans such as home equity lines of credit being offered at spreads to the prime rate that are lower than they were in the year-ago period. The increase in yields on investments was mainly due to maturities of shorter-term, lower yielding investments. Interest and fee income (FTE) for the six months ended June 30, 2005 increased $5,968,000 (14.5%) from the same period of 2004. The increase was the net effect of a $171,445,000 (13.0%) increase in average interest-earning assets to $1,487,848,000 and a 0.08% increase in the yield on those average interest-earning assets to 6.32%. The growth in interest-earning assets was due to a $187,941,000 (18.8%) increase in average loan balances to $1,188,050,000 that was partially offset by a decrease of $15,121,000 (4.8%) in average balances of investments to $298,758,000. The increase in the yield on average interest-earning assets was mainly due to a 0.23% increase in yield on investments to 4.54% as the yield on loans decreased 0.09% to 6.77%. The decrease in yield in loans from the year-ago period, despite a 2.25% increase in the prime rate from June 30, 2004 to June 30, 2005, is due to long-term rates having generally held steady or fallen over this period, and new prime based loans such as home equity lines of credit being offered at spreads to the prime rate that are lower than they were in the year-ago period. The increase in yields on investments was mainly due to maturities of shorter-term, lower yielding investments. -17- Interest Expense Interest expense increased $1,702,000 (55.1%) to $4,789,000 in the second quarter of 2005 compared to the year-ago quarter. The average balance of interest-bearing liabilities increased $101,654,000 (9.4%) to $1,186,109,000 in the second quarter compared to the year-ago quarter. The increase in the average balance of interest-bearing liabilities was concentrated in time deposits (up $101,015,000 or 37.4%), interest-bearing demand deposits (up $11,538,000 or 5.0%), and junior subordinated debt (up $18,557,000 or 81.8%). The average balance of Federal funds purchased was down $23,221,000 (41.7%) from the year-ago quarter. In addition, the average balance of noninterest-bearing deposits increased $53,598,000 (19.9%) from the year-ago quarter. The average rate paid on interest-bearing liabilities in the quarter ended June 30, 2005 increased 0.48% to 1.62% compared to the year-ago quarter. The average rate paid for all categories of interest-bearing liabilities except other borrowings increased from the average rate paid in the year-ago quarter as a result of general market interest rate changes. Interest expense increased $2,809,000 (46.0%) to $8,910,000 for the six months ended June 30, 2005 compared to $6,101,000 in the year-ago period. The average balance of interest-bearing liabilities increased $116,741,000 (11.1%) to $1,168,057,000 for the six months ended June 30, 2005 compared to the year-ago period. The increase in interest-bearing liabilities was concentrated in time deposits (up $80,110,000 or 29.6%), and junior subordinated debt (up $19,588,000 or 90.5%). In addition, for the six months ended June 30, 2005, the average balance of noninterest-bearing deposits increased $47,129,000 (17.5%) from the year-ago period. The average rate paid on interest-bearing liabilities in the six month period ended June 30, 2005 increased 0.37% to 1.53% compared to the year-ago period as a result of general market interest rate changes. Net Interest Margin (FTE) The following table summarizes the components of the Company's net interest margin for the periods indicated: Three months ended Six months ended June 30, June 30, --------------------------------------------- 2005 2004 2005 2004 --------------------------------------------- Yield on interest-earning assets 6.39% 6.18% 6.32% 6.24% Rate paid on interest-bearing Liabilities 1.62% 1.14% 1.53% 1.16% --------------------------------------------- Net interest spread 4.77% 5.04% 4.79% 5.08% Impact of all other net noninterest-bearing funds 0.35% 0.23% 0.33% 0.23% --------------------------------------------- Net interest margin 5.12% 5.27% 5.12% 5.31% ============================================= Net interest margin in the second quarter of 2005 decreased 0.15% compared to the second quarter of 2004. This decrease in net interest margin was mainly due to essentially no increase in average yield on loans, a 0.41% increase in average yield on investments, and 0.48% increase in the average rate paid on interest-bearing liabilities. As a result, the average yield on total interest-earning assets increased only 0.21%, while the average rate paid on interest-bearing liabilities increased 0.48%. Net interest margin for the six months ended June 30, 2005 decreased 0.19% compared to the six months ended June 30, 2004. This decrease in net interest margin was mainly due to a 0.09% decrease in average yield on loans, a 0.23% increase in average yield on investments, and 0.37% increase in the average rate paid on interest-bearing liabilities. As a result, the average yield on total interest-earning assets increased only 0.08%, while the average rate paid on interest-bearing liabilities increased 0.37%. -18- Summary of Average Balances, Yields/Rates and Interest Differential The following tables present, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended ---------------------------------------------------------------- June 30, 2005 June 30, 2004 ----------------------------- ------------------------------ Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- ------------------------------- Assets: Loans $1,209,061 $20,701 6.85% $1,029,425 $17,551 6.82% Investment securities - taxable 268,213 2,785 4.15% 287,058 2,638 3.68% Investment securities - nontaxable 32,922 654 7.95% 34,870 708 8.12% Federal funds sold 1,472 10 2.72% 421 1 0.95% ----------------------------- ------------------------------- Total interest-earning assets 1,511,668 24,150 6.39% 1,351,774 20,898 6.18% Other assets 167,985 -------- 153,487 -------- ---------- ---------- Total assets $1,679,653 $1,505,261 ========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $241,416 121 0.20% $229,878 105 0.18% Savings deposits 471,709 869 0.74% 482,796 857 0.71% Time deposits 371,491 2,627 2.83% 270,476 1,425 2.11% Federal funds purchased 32,553 249 3.06% 55,754 150 1.08% Other borrowings 27,702 329 4.75% 22,870 320 5.60% Junior subordinated debt 41,238 594 5.76% 22,681 230 4.06% ----------------------------- ------------------------------- Total interest-bearing liabilities 1,186,109 4,789 1.62% 1,084,455 3,087 1.14% Noninterest-bearing deposits 322,920 -------- 269,322 -------- Other liabilities 27,428 22,003 Shareholders' equity 143,196 129,481 ---------- ---------- Total liabilities and shareholders' equity $1,679,653 $1,505,261 ========== ========== Net interest spread(1) 4.77% 5.04% Net interest income and interest margin(2) $19,361 5.12% $17,811 5.27% ================= ====================
(1) Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. -19-
For the six months ended ---------------------------------------------------------------- June 30, 2005 June 30, 2004 ----------------------------- ------------------------------- Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- ------------------------------- Assets: Loans $1,188,050 $40,228 6.77% $1,000,109 $34,290 6.86% Investment securities - taxable 266,114 5,475 4.11% 278,708 5,359 3.85% Investment securities - nontaxable 32,644 1,310 8.03% 35,171 1,399 7.96% Federal funds sold 1,040 14 2.69% 2,415 11 0.91% ----------------------------- ------------------------------- Total interest-earning assets 1,487,848 47,027 6.32% 1,316,403 41,059 6.24% Other assets 166,392 -------- 156,704 -------- ---------- ---------- 0Total assets $1,654,240 $1,473,107 ========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $240,349 242 0.20% $226,193 205 0.18% Savings deposits 477,085 1,739 0.73% 475,268 1,764 0.74% Time deposits 350,917 4,721 2.69% 270,807 2,867 2.12% Federal funds purchased 30,561 421 2.76% 34,523 184 1.07% Other borrowings 27,907 656 4.70% 22,875 640 5.60% Junior subordinated debt 41,238 1,131 5.49% 21,650 441 4.07% ----------------------------- ------------------------------- Total interest-bearing liabilities 1,168,057 8,910 1.53% 1,051,316 6,101 1.16% Noninterest-bearing deposits 316,949 -------- 269,820 -------- Other liabilities 27,004 22,664 Shareholders' equity 142,230 129,307 ---------- ---------- Total liabilities and shareholders' equity $1,654,240 $1,473,107 ========== ========== Net interest spread(1) 4.79% 5.08% Net interest income and interest margin(2) $38,117 5.12% $34,958 5.31% ================= ====================
(1) Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of interest-earning assets. -20- Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following tables set forth a summary of the changes in interest income (FTE) and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (dollars in thousands). Three months ended June 30, 2005 compared with three months ended June 30, 2004 --------------------------------- Volume Rate Total --------------------------------- Increase (decrease) in interest income: Loans $3,063 $87 $3,150 Investment securities (216) 309 93 Federal funds sold 2 7 9 --------------------------------- Total interest-earning assets 2,849 403 3,252 --------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 5 11 16 Savings deposits (20) 32 12 Time deposits 533 669 1,202 Federal funds purchased (63) 162 99 Other borrowings 68 (59) 9 Junior subordinated debt 188 176 364 --------------------------------- Total interest-bearing liabilities 711 991 1,702 --------------------------------- Increase (decrease) in Net Interest Income $2,138 ($588) $1,550 ================================= Six months ended June 30, 2005 compared with six months ended June 30, 2004 --------------------------------- Volume Rate Total --------------------------------- Increase (decrease) in interest income: Loans $6,446 ($508) $5,938 Investment securities (326) 353 27 Federal funds sold (6) 9 3 --------------------------------- Total interest-earning assets 6,114 (146) 5,968 --------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 13 24 37 Savings deposits 7 (32) (25) Time deposits 849 1,005 1,854 Federal funds purchased (21) 258 237 Other borrowings 141 (125) 16 Junior subordinated debt 399 291 690 --------------------------------- Total interest-bearing liabilities 1,388 1,421 2,809 --------------------------------- Increase (decrease) in Net Interest Income $4,726 ($1,567) $3,159 ================================= -21- Provision for Loan Losses The Company provided $561,000 for loan losses in the second quarter of 2005 versus $1,305,000 in the second quarter of 2004. During the second quarter of 2005, the Company recorded $232,000 of net loan charge offs versus $69,000 of net loan charge-offs in the year earlier quarter. The Company provided $661,000 for loan losses during the six months ended June 30, 2005 versus $1,918,000 during the six months ended June 30, 2004. During the six months ended June 30, 2005, the Company recorded $294,000 of net loan charge-offs versus $194,000 of net loan charge-offs in the year earlier six-month period. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands).
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- Service charges on deposit accounts $3,342 $3,407 $6,376 $6,604 ATM fees and interchange 781 665 1,493 1,246 Other service fees 520 484 1,004 947 Amortization of mortgage servicing rights (138) (216) (306) (406) Recovery of mortgage servicing rights valuation allowance - 570 - 600 Gain on sale of loans 429 433 721 1,058 Commissions on sale of nondeposit investment products 660 587 1,192 1,129 Gain on sale of other real estate - 182 - 182 Increase in cash value of life insurance 400 432 620 864 Other noninterest income 316 398 537 473 ---------------------------------------------------- Total noninterest income $6,310 $6,942 $11,637 $12,697 ====================================================
Noninterest income for the second quarter of 2005 decreased $632,000 (9.1%) to $6,310,000 from $6,942,000 in the year-ago quarter. Included in the results for the quarter ended June 30, 2004 was a $570,000 recovery of mortgage servicing rights valuation allowance, and $182,000 from gain on sale of other real estate. Excluding these items, noninterest income for the quarter ended June 30, 2004 would have been $6,190,000, and the $6,310,000 of noninterest income for the quarter ended June 30, 2005 would have represented a $120,000 (1.9%) increase. Noninterest income for the six months ended June 30, 2005 decreased $1,060,000 (8.4%) to $11,637,000 from $12,697,000 in the same period in 2004. Included in the results for the six months ended June 30, 2004 was a $600,000 recovery of mortgage servicing rights valuation allowance, and $182,000 from gain on sale of other real estate. Excluding these items, noninterest income for the six months ended June 30, 2004 would have been $11,915,000, and the $11,637,000 of noninterest income for the six months ended June 30, 2005 would have represented a $278,000 (2.3%) decrease. For the six months ended June 30, 2005, gain on sale of loans decreased $337,000 (31.9%) to $721,000 compared to $1,058,000 in the year-ago period. -22- Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands).
Three months ended Six months ended June 30, June 30, ---------------------------------------------------- 2005 2004 2005 2004 ---------------------------------------------------- Salaries & benefits $8,408 $8,440 $16,777 $16,607 Equipment 1,076 913 2,069 1,850 Occupancy 1,006 1,004 1,986 1,947 Telecommunications 409 421 793 796 Data processing and software 409 400 783 783 ATM network charges 408 325 779 620 Intangible amortization 346 342 689 673 Advertising and marketing 335 234 677 425 Courier service 290 269 568 531 Professional fees 274 598 681 1,107 Postage 234 235 471 467 Assessments 77 73 153 145 Operational losses 46 112 72 152 Other 2,199 2,041 4,132 3,687 ---------------------------------------------------- Total $15,517 $15,407 $30,630 $29,790 ==================================================== Average full time equivalent staff 573 539 569 536 Noninterest expense to revenue (FTE) 60.45% 62.24% 61.56% 62.51%
Noninterest expense for the second quarter of 2005 increased $110,000 (0.7%) to $15,517,000 from $15,407,000 in the second quarter of 2004. The increase in noninterest expense was the result of a $32,000 (0.4%) decrease in salary and benefit expense to $8,408,000 offset by a $142,000 net increase in other noninterest expense categories. The decrease in salary and benefits expense was the net result of annual salary increases, new employees from the opening of de-novo branches in Woodland (November 2004), and Lincoln (February 2005), offset by reduced incentive commissions, overtime, and workers compensation expense. Included in the $142,000 net increase in other noninterest income categories was a $101,000 increase in advertising expense, and a $324,000 decrease in professional fees. The decrease in professional fees was mainly due to the expiration of consulting services related to the Company's overdraft privilege product, the expiration of which is not expected to have an impact on revenue from the overdraft privilege product. Noninterest expense for the first six months of 2005 increased $840,000 (2.8%) to $30,630,000 from $29,790,000 in the first six months of 2004. The increase in noninterest expense was due to a $170,000 (1.0%) increase in salary and benefit expense to $16,777,000 and a $670,000 net increase in other noninterest expense categories. The increase in salary and benefits expense was the net result of annual salary increases, and new employees from the opening of de-novo branches in Woodland (November 2004), and Lincoln (February 2005) that was partially offset by reduced incentive commissions, overtime, and workers compensation expense. Included in the $670,000 net increase in other noninterest income categories was a $252,000 increase in advertising expense, and a $426,000 decrease in professional fees. The decrease in professional fees was mainly due to the expiration of consulting services related to the Company's overdraft privilege product, the expiration of which is not expected to have an impact on revenue from the overdraft privilege product. Provision for Income Tax The effective tax rate for the three months ended June 30, 2005 was 38.7% and reflects an increase from 37.6% for the three months ended June 30, 2004. The effective tax rate for the six months ended June 30, 2005 was 39.0% and reflects an increase from 37.6% for the six months ended June 30, 2004. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, particularly from increase in cash value of life insurance, tax-exempt loans and state and municipal securities. -23- Classified Assets The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all nonperforming assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated (dollars in thousands): At June 30, 2005 At December 31, 2004 ------------------------- ------------------------ Gross Guaranteed Net Gross Guaranteed Net ----------------------------------------------------- Classified loans $13,849 $7,499 $6,350 $22,337 $9,436 $12,901 Other classified assets - - - - - - ----------------------------------------------------- Total classified assets $13,849 $7,499 $6,350 $22,337 $9,436 $12,901 ===================================================== Allowance for losses/classified loans 260.8% 124.5% Allowance for loan losses/classified loans 234.5% 112.6% Classified assets, net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies at June 30, 2005, decreased $6,551,000 (50.8%) to $6,350,000 from $12,901,000 at December 31, 2004. Nonperforming Loans Loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the following occurs: the loan becomes 90 days past due as to interest or principal, the full and timely collection of additional interest or principal becomes uncertain, the loan is classified as doubtful by internal credit review or bank regulatory agencies, a portion of the principal balance has been charged off, or the Company takes possession of the collateral. Loans that are placed on nonaccrual even though the borrowers continue to repay the loans as scheduled are classified as "performing nonaccrual" and are included in total nonperforming loans. The reclassification of loans as nonaccrual does not necessarily reflect Management's judgment as to whether they are collectible. Interest income is not accrued on loans where Management has determined that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, any previously accrued but unpaid interest is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Interest income on nonaccrual loans, which would have been recognized during the six months, ended June 30, 2005, if all such loans had been current in accordance with their original terms, totaled $479,000. Interest income actually recognized on these loans during the six months ended June 30, 2005 was $385,000. The Company's policy is to place loans 90 days or more past due on nonaccrual status. In some instances when a loan is 90 days past due Management does not place it on nonaccrual status because the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days. Loans where the collateral has been repossessed are classified as OREO or, if the collateral is personal property, the loan is classified as other assets on the Company's consolidated financial statements. Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits. -24- As shown in the following table, total nonperforming assets net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies, decreased $1,984,000 (40.4%) to $2,922,000 during the first six months of 2005. Nonperforming assets net of guarantees represent 0.17% of total assets. All nonaccrual loans are considered to be impaired when determining the need for a specific valuation allowance. The Company continues to make a concerted effort to work problem and potential problem loans to reduce risk of loss.
(dollars in thousands): At June 30, 2005 At December 31, 2004 ------------------------- ------------------------- Gross Guaranteed Net Gross Guaranteed Net ------------------------------------------------------ Performing nonaccrual loans $9,726 $7,170 $2,556 $11,043 $7,442 $3,601 Nonperforming, nonaccrual loans 432 68 364 1,418 174 1,244 ------------------------------------------------------ Total nonaccrual loans 10,158 7,238 2,920 12,461 7,616 4,845 Loans 90 days past due and still accruing 2 2 61 - 61 ------------------------------------------------------ Total nonperforming loans 10,160 7,238 2,922 12,522 7,616 4,906 Other real estate owned - - - - - - ------------------------------------------------------ Total nonperforming assets $10,160 $7,238 $2,922 $12,522 $7,616 $4,906 ====================================================== Nonperforming loans/total loans 0.23% 0.42% Nonperforming assets/total assets 0.17% 0.30% Allowance for losses/nonperforming loans 567% 327% Allowance for loan losses/nonperforming loans 510% 296%
Allowance for Loan Losses Credit risk is inherent in the business of lending. As a result, the Company maintains an Allowance for Loan Losses to absorb losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's Allowance for Loan Losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio. For purposes of this discussion, "loans" shall include all loans and lease contracts that are part of the Company's portfolio. The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan portfolio, and to a lesser extent the Company's loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occur at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies. The Company's method for assessing the appropriateness of the allowance for loan losses and the reserve for unfunded commitments includes specific allowances for identified problem loans and leases as determined by SFAS 114, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. Allowances for specific loans are based on SFAS 114 analysis of individual credits. Allowances for changing environmental factors are Management's best estimate of the probable impact these changes have had on the loan portfolio as a whole. This process is explained in detail in the notes to the Company's Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2004. -25- Based on the current conditions of the loan portfolio, Management believes that the allowance for loan losses and the reserve for unfunded commitments, which collectively stand at $16,563,000 at June 30, 2005, are adequate to absorb probable losses inherent in the Company's loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. The following tables summarize the activity in the allowance for loan losses, reserve for unfunded commitments, and allowance for losses (which is comprised of the allowance for loan losses and the reserve for unfunded commitments) for the periods indicated (dollars in thousands):
Three months ended Six months ended June 30, June 30, --------------------------------------------------- 2005 2004 2005 2004 --------------------------------------------------- Allowance for loan losses: Balance at beginning of period $14,563 $13,377 $14,525 $12,890 Provision for loan losses 561 1,305 661 1,918 Loans charged off (513) (178) (808) (366) Recoveries of previously charged-off loans 281 109 514 171 --------------------------------------------------- Net charge-offs (232) (69) (294) (194) --------------------------------------------------- Balance at end of period $14,892 $14,613 $14,892 $14,613 =================================================== Reserve for unfunded commitments: Balance at beginning of period $1,632 $920 $1,532 $883 Provision for losses - Unfunded commitments 39 (4) 139 33 --------------------------------------------------- Balance at end of period $1,671 $916 $1,671 $916 =================================================== Balance at end of period: Allowance for loan losses $14,892 $14,613 Reserve for unfunded commitments 1,671 916 --------------------- Allowance for losses $16,563 $15,529 ===================== As a percentage of total loans: Allowance for loan losses 1.19% 1.36% Reserve for unfunded commitments 0.13% 0.08% Allowance for losses 1.32% 1.44%
Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management. On March 11, 2004, the Company's Board of Directors approved a two-for-one stock split of its common stock. The stock split was effected in the form of a stock dividend that entitled each shareholder of record at the close of business on April 9, 2004 to receive one additional share for every share of TriCo common stock held on that date. Shares resulting from the split were distributed on April 30, 2004. Also at its meeting on March 11, 2004, the Board of Directors approved an increase in the maximum number of shares to be repurchased under the Company's stock repurchase plan originally announced on July 31, 2003 from 250,000 to 500,000 effective on April 9, 2004, solely to conform with the two-for-one stock split noted above. The 250,000 shares originally authorized for repurchase under this plan represented approximately 3.2% of the Company's approximately 7,852,000 common shares outstanding as of July 31, 2003. This plan has no stated expiration date for the repurchases, which may occur from time to time as market conditions allow. As of June 30, 2005, the Company had repurchased 341,100 shares under this plan as adjusted for the 2-for-1 stock split paid on April 30, 2004, which left 158,900 shares available for repurchase under the plan. The Company's primary capital resource is shareholders' equity, which was $142,768,000 at June 30, 2005. This amount represents an increase of $4,636,000 from December 31, 2004, the net result of comprehensive income of $9,860,000 for the period and $689,000 reflecting the issuance of common shares via the exercise of stock options, partially offset by $2,451,000 to repurchase of common stock and dividends paid of $3,462,000. The Company's ratio of equity to total assets was 8.30%, 8.30%, and 8.49% as of June 30, 2005, June 30, 2004, and December 31, 2004, respectively. -26- The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated: At June 30, At Minimum --------------- December 31, Regulatory 2005 2004 2004 Requirement ------------------------------------------------- Tier I Capital 10.46% 10.93% 10.67% 4.00% Total Capital 11.53% 12.40% 11.86% 8.00% Leverage ratio 9.81% 9.73% 9.86% 4.00% Off-Balance Sheet Items The Bank has certain ongoing commitments under operating and capital leases. These commitments do not significantly impact operating results. As of June 30, 2005 commitments to extend credit and commitments related to the Bank's deposit overdraft privilege product were the Bank's only financial instruments with off-balance sheet risk. The Bank has not entered into any contracts for financial derivative instruments such as futures, swaps, options, etc. Commitments to extend credit were $492,402,000 and $445,054,000 at June 30, 2005 and December 31, 2004, respectively, and represent 39.3% of the total loans outstanding at June 30, 2005 versus 38.0% at December 31, 2004. Commitments related to the Bank's deposit overdraft privilege product totaled $34,565,000 and $28,815,000 at June 30, 2005 and December 31, 2004, respectively. Certain Contractual Obligations The following chart summarizes certain contractual obligations of the Company as of December 31, 2004:
Less than 1-3 3-5 More than (dollars in thousands) Total one year years years 5 years ------------------------------------------------------------ Federal funds purchased $46,400 $46,400 - - - FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable in its entirety by FHLB on a quarterly basis beginning April 7, 2003 20,000 - - $20,000 - FHLB loan, fixed rate of 5.35% payable on December 9, 2008 1,500 - - 1,500 - FHLB loan, fixed rate of 5.77% payable on February 23, 2009 1,000 - - $1,000 - Capital lease obligation on premises, effective rate of 13% payable monthly in varying amounts through December 1, 2009 344 - - 344 - Other collateralized borrowings, fixed rate of 0.91% payable on January 2, 2005 5,308 5,308 - - - Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a quarterly basis beginning October 7, 2008, matures October 7, 2033 20,619 - - - $20,619 Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.55%, callable in whole or in part by the Company on a quarterly basis beginning July 23, 2009, matures July 23, 2034 20,619 - - - 20,619 Operating lease obligations 6,806 1,327 $2,202 1,662 1,615 Deferred compensation plans(1) 1,544 262 462 427 393 Supplemental retirement plans(1) 4,996 488 956 926 2,626 Employment agreements 233 115 118 - - ------------------------------------------------------------ Total contractual obligations $129,369 $53,900 $3,738 $25,859 $45,872 ============================================================
(1)These amounts represent known certain payments to participants under the Company's deferred compensation and supplemental retirement plans. -27- Item 3. Quantitative and Qualitative Disclosures about Market Risk Asset and Liability Management The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has overall responsibility for the Company's interest rate risk management policies. The Company has an Asset and Liability Management Committee (ALCO) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin, net income and market value of equity under changing interest environments. Market value of equity is the net present value of estimated cash flows from the Company's assets, liabilities and off-balance sheet items. The Company uses simulation models to forecast net interest margin, net income and market value of equity. Simulation of net interest margin, net income and market value of equity under various interest rate scenarios is the primary tool used to measure interest rate risk. Using computer-modeling techniques, the Company is able to estimate the potential impact of changing interest rates on net interest margin, net income and market value of equity. A balance sheet forecast is prepared using inputs of actual loan, securities and interest-bearing liability (i.e. deposits/borrowings) positions as the beginning base. In the simulation of net interest margin and net income under various interest rate scenarios, the forecast balance sheet is processed against seven interest rate scenarios. These seven interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and six additional rate ramp scenarios ranging from +300 to -300 basis points around the flat scenario in 100 basis point increments. These ramp scenarios assume that interest rates increase or decrease evenly (in a "ramp" fashion) over a twelve-month period and remain at the new levels beyond twelve months. In the simulation of market value of equity under various interest rate scenarios, the forecast balance sheet is processed against seven interest rate scenarios. These seven interest rate scenarios include the flat rate scenario described above, and six additional rate shock scenarios ranging from +300 to -300 basis points around the flat scenario in 100 basis point increments. These rate shock scenarios assume that interest rates increase or decrease immediately (in a "shock" fashion) and remain at the new level in the future. At June 30, 2005, the results of the simulations noted above indicate that given a "flat" balance sheet scenario, and if deposit rates track general interest rate changes by approximately 50%, the Company's balance sheet is slightly liability sensitive. "Liability sensitive" implies that earnings decrease when interest rates rise, and increase when interest rates decrease. The magnitude of all the simulation results noted above is within the Bank's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. At June 30, 2005 and 2004, the Company had no derivative financial instruments. -28- Liquidity The Company's principal source of asset liquidity is federal funds sold and marketable investment securities available for sale. At June 30, 2005, federal funds sold and investment securities available for sale totaled $289,137,000, representing an increase of $3,124,000 (1.1%) from December 31, 2004, and a decrease of $13,204,000 (4.4%) from June 30, 2004. In addition, the Company generates additional liquidity from its operating activities. The Company's profitability during the first six months of 2005 generated cash flows from operations of $13,949,000 compared to $10,469,000 during the first six months of 2004. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. Maturities of investment securities produced cash inflows of $29,064,000 during the six months ended June 30, 2005 compared to $41,225,000 for the six months ended June 30, 2004. During the six months ended June 30, 2005, the Company invested $34,538,000 and $77,379,000 in securities and net loan growth, respectively, compared to $39,580,000 and $97,418,000 in securities and net loan growth, respectively, during the first six months of 2004. These changes in investment and loan balances contributed to net cash used for investing activities of $86,482,000 during the six months ended June 30, 2005, compared to net cash used for investing activities of $98,021,000 during the six months ended June 30, 2004. Financing activities provided net cash of $82,018,000 during the six months ended June 30, 2005, compared to net cash provided by financing activities of $72,135,000 during the six months ended June 30, 2004. Increases in deposit balances and Federal funds borrowed accounted for $51,344,000 and $36,600,000 of financing sources of funds, respectively, during the six months ended June 30, 2005, compared to increases in deposit balances and Federal funds borrowed of $30,529,000 and $26,500,000, respectively, during the six months ended June 30, 2004. The Company raised $20,619,000 through the issuance of junior subordinated debt during the six months ended June 30, 2004. Dividends paid used $3,462,000 and $3,275,000 of cash during the six months ended June 30, 2005 and June 30, 2004, respectively. Repurchase of common stock used $2,451,000 and $2,793,000 of cash during the six months ended June 30, 2005 and June 30, 2004, respectively. Also, the Company's liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions. Item 4. Controls and Procedures The Chief Executive Officer, Richard Smith, and the Chief Financial Officer, Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 2005 ("Evaluation Date"). Based on that evaluation, they concluded that as of the Evaluation Date the Company's disclosure controls and procedures are effective to allow timely communication to them of information relating to the Company and the Bank required to be disclosed in its filings with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. No changes in the Company's internal control over financial reporting occurred during the first six months of 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -29- PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Bank. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds The following table shows information concerning the common stock repurchased by the Company during the second quarter of 2005 pursuant to the Company's stock repurchase plan originally announced on July 31, 2003, as amended effective April 9, 2004, to conform with the Company's two-for-one stock split paid on April 30, 2004, which is discussed in more detail under "Capital Resources" in this report:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number of Shares purchased paid per share shares purchased as of shares that may yet part of publicly be purchased under the announced plans or plans or programs programs ----------------------------------------------------------------------------------------------------------- April 1-30, 2005 57,000 $20.55 57,000 206,600 May 1-31, 2005 - - - 206,600 June 1-30, 2005 47,700 $20.81 47,700 158,900 ----------------------------------------------------------------------------------------------------------- Total 104,700 $20.67 104,700 158,900
Item 4 - Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on May 24, 2005. (b) and (c) The following ten directors were elected at the meeting: Votes For Votes Against/Withheld Abstentions ---------- ---------------------- ----------- William J. Casey 13,058,602 337,668 - Donald J. Amaral 13,025,292 370,978 - Craig S. Compton 13,042,413 353,857 - John S.A. Hasbrook 13,027,409 368,861 - Michael W. Koehnen 13,048,382 347,888 - Donald E. Murphy 11,222,340 2,173,930 - Steve G. Nettleton 13,062,037 334,233 - Richard P. Smith 13,042,311 353,959 - Carroll R. Taresh 12,731,369 664,901 - Alex A. Vereschagin, Jr. 13,036,991 359,279 - The shareholders approved an amendment to the Company's 2001 stock option plan to (i) provide that annual grants of stock options to directors upon their re-election or appointment as Board chairman or audit committee chairman may continue to occur through 2008 and (ii) eliminate the mandatory vesting schedules for options granted to directors and instead allow the compensation and management succession committee to determine the vesting schedule. 9,570,188 shares were voted for approval, 998,085 shares were voted against and 357,254 shares abstained. The shareholders ratified the appointment of KPMG LLP as independent public accountants of the Company for 2005. 13,103,976 shares were voted for the ratification, 63,213 shares were voted against and 229,081 shares abstained. -30- Item 6 - Exhibits 3.1* Restated Articles of Incorporation dated May 9, 2003, filed as Exhibit 3.1 to TriCo's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. 3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546). 4* Certificate of Determination of Preferences of Series AA Junior Participating Preferred Stock filed as Exhibit 3.3 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated July 25, 2001. 10.2* Form of Change of Control Agreement dated July 20, 2004, between TriCo and each of Craig Carney, Gary Coelho, W.R. Hagstrom, Andrew Mastorakis, Rick Miller, Richard O'Sullivan, Thomas Reddish, and Ray Rios filed as Exhibit 10.2 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.3* TriCo's 1993 Non-Qualified Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704). 10.4* TriCo's Non-Qualified Stock Option Plan filed as Exhibit 4.2 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704). 10.5* TriCo's Incentive Stock Option Plan filed as Exhibit 4.3 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704). 10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated August 23, 1995 (No. 33-62063). 10.7 TriCo's 2001 Stock Option Plan, as amended. 10.8* Employment Agreement between TriCo and Richard Smith dated April 20, 2004 filed as Exhibit 10.8 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.9* Tri Counties Bank Executive Deferred Compensation Plan dated September 1, 1987, as restated April 1, 1992, and amended and restated effective as of January 1, 2004 filed as Exhibit 10.9 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.10* Tri Counties Bank Deferred Compensation Plan for Directors effective April 1, 1992, as amended and restated effective as of January 1, 2004 filed as Exhibit 10.10 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.11* Amendments to Tri Counties Bank Executive Deferred Compensation Plan referenced at Exhibit 10.9, effective as of January 1, 2005 filed as Exhibit 10.11 to TriCo's Annual Report on Form 10-K for the year ended December 31, 2004. -31- 10.12* Amendments to Tri Counties Bank Deferred Compensation Plan for Directors referenced at Exhibit 10.10, effective as of January 1, 2005 filed as Exhibit 10.12 to TriCo's Annual Report on Form 10-K for the year ended December 31, 2004. 10.13* Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, and amended and restated January 1, 2004 filed as Exhibit 10.12 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.14* 2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 filed as Exhibit 10.13 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.15* Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January 1, 2004 filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.16* 2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January 1, 2004 filed as Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.17* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Andrew Mastorakis, Richard O'Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith, filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.18* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Wendell Lundberg, Donald Murphy, Carroll Taresh, and Alex Vereshagin, filed as Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.19* Form of Tri-Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Craig Carney, Andrew Mastorakis, Richard Miller, Richard O'Sullivan, and Thomas Reddish, filed as Exhibit 10.16 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.20* Form of Tri-Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Verischagin, filed as Exhibit 10.17 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.21* Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of the directors of TriCo Bancshares/Tri Counties Bank effective on the date that each director is first elected, filed as Exhibit 10.18 to TriCo'S Annual Report on Form 10-K for the year ended December 31, 2003. 10.22* Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of Craig Carney, W.R. Hagstrom, Andrew Mastorakis, Rick Miller, Richard O'Sullivan, Thomas Reddish, Ray Rios, and Richard Smith filed as Exhibit 10.21 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. -32- 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO 32.1 Section 1350 Certification of CEO 32.2 Section 1350 Certification of CFO * Previously filed and incorporated by reference. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TRICO BANCSHARES (Registrant) Date: July 26, 2005 /s/ Thomas J. Reddish ----------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer -33- Exhibit 10.7 TRICO BANCSHARES 2001 STOCK OPTION PLAN, AS AMENDED SECTION 1. PURPOSE This plan shall be known as the "TriCo BANCSHARES 2001 STOCK OPTION PLAN" (the "Plan"). The purpose of the Plan is to promote the interests of TriCo Bancshares and its Subsidiaries (the "Company") and the Company's stockholders by (i) attracting and retaining key officers, employees and directors of, and consultants to, the Company and any future Affiliates; (ii) motivating such individuals by means of performance-related incentives to achieve long-range performance goals, (iii) enabling such individuals to participate in the long-term growth and financial success of the Company, (iv) encouraging ownership of stock in the Company by such individuals, and (v) linking their compensation to the long-term interests of the Company and its stockholders. With respect to any Options granted under the Plan that are intended to comply with the requirements of "performance-based compensation" under Section 162(m) of the Code, the Plan shall be interpreted in a manner consistent with such requirements. SECTION 2. DEFINITIONS As used in the Plan, the following terms shall have the meanings set forth below: (a) "AFFILIATE" shall mean (i) any entity that, directly or indirectly, is controlled by the Company, (ii) any entity in which the Company has a significant equity interest, (iii) an affiliate of the Company, as defined in Rule 12b-2 promulgated under Section 12 of the Exchange Act, and (iv) any entity in which the Company has at least twenty percent (20%) of the combined voting power of the entity's outstanding voting securities, in each case as designated by the Board as being a participating employer in the Plan. (b) "BOARD" shall mean the board of directors of the Company. (c) "CHANGE IN CONTROL" shall mean, unless otherwise defined in the applicable Option Agreement, any of the following events: (i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term Person is used for purposes of Section 13 (d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any subsidiary or (ii) the Company or any Subsidiary; (ii) The individuals who, as of the date hereof, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election or nomination for election by the Company's stockholders of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if (1) such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest or (2) such individual was designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this paragraph; or (iii) Approval by stockholders of the Company of: (A) A merger, consolidation or reorganization involving the Company, unless, (1) The stockholders of the Company immediately before such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least seventy-five percent (75%) of the combined voting power of the outstanding Voting Securities of the corporation (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (2) The individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation; and (3) No Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization, had Beneficial Ownership of fifty percent (50%) or more of the then outstanding Voting Securities) has Beneficial Ownership of fifty percent (50%) or more of the combined voting power of the Surviving Corporation's then outstanding Voting Securities. (B) A complete liquidation or dissolution of the Company; or (C) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary) Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increased the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "COMMITTEE" shall mean a committee of the Board composed of not less than two Non-Employee Directors, each of whom shall be a "Non-Employee Director" for purposes of Exchange Act Section 16 and Rule 16b-3 thereunder and an "outside director" for purposes of Section 162(m) and the regulations promulgated under the Code. (f) "CONSULTANT" shall mean any consultant to the Company or its Subsidiaries or Affiliates. (g) "DIRECTOR" shall mean a member of the Board. (h) "DISABILITY" shall mean, unless otherwise defined in the applicable Option Agreement, a disability that would qualify as a total and permanent disability under the Company's then current long-term disability plan. (i) "EMPLOYEE" shall mean a current or prospective officer or employee of the Company or of any Subsidiary or Affiliate. (j) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. (k) "FAIR MARKET VALUE" with respect to the Shares, shall mean, for purposes of a grant of an Option as of any date, (i) the closing sales price of the Shares on any exchange on which the shares are traded, on such date, or in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported or (ii) in the event there is no public market for the Shares on such date, the fair market value as determined, in good faith, by the Committee in its sole discretion, and for purposes of a sale of a Share as of any date, the actual sales price on that date. (l) "INCENTIVE STOCK OPTION" shall mean an option to purchase Shares from the Company that is granted under Section 6 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (o) "NON-QUALIFIED STOCK OPTION" shall mean an option to purchase Shares from the Company that is granted under Section 6 of the Plan and is not intended to be an Incentive Stock Option. (p) "NON-EMPLOYEE DIRECTOR" shall mean a member of the Board who is not an officer or employee of the Company or any Subsidiary or Affiliate. (q) "OPTION" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. (r) "OPTION AGREEMENT" shall mean any written agreement, contract, or other instrument or document evidencing any Option, which may, but need not, be executed or acknowledged by a Participant. (s) "OPTION PRICE" shall mean the purchase price payable to purchase one Share upon the exercise of an Option. (t) "OUTSIDE DIRECTOR" means, with respect to the grant of an Option, a member of the Board then serving on the Committee. (u) "PARTICIPANT" shall mean any Employee, Director, Consultant or other person who receives an Option under the Plan. (v) "PERSON" shall mean any individual, corporation, partnership, limited liability company, associate, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. (w) "RETIREMENT" shall mean, unless otherwise defined in the applicable Option Agreement, retirement of a Participant from the employ or service of the Company or any of its Subsidiaries or Affiliates in accordance with the terms of the applicable Company retirement plan or, if a Participant is not covered by any such plan, retirement on or after such Participant's 65th birthday. (x) "SEC' shall mean the Securities and Exchange Commission or any successor thereto. (y) "SECTION 16" shall mean Section 16 of the Exchange Act and the rules promulgated thereunder and any successor provision thereto as in effect from time to time. (z) "SECTION 162 (M)" shall mean Section 162 (m) of the Code and the regulations promulgated thereunder and any successor or provision thereto as in effect from time to time. (aa) "SHARES" shall mean shares of the Common Stock, no par value, of the Company. (bb) "SUBSIDIARY" shall mean any Person (other than the Company) of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company. SECTION 3. ADMINISTRATION 3.1 Authority of Committee. The Plan shall be administered by the Committee, which shall be appointed by and serve at the pleasure of the Board; provided, however, with respect to Options to Outside Directors, all references in the Plan to the Committee shall be deemed to be references to the Board. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority in its discretion to: (i) designate Participants; (ii) determine the type or types of Options to be granted to a Participant; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with Options; (iv) determine the timing, terms, and conditions of any Option; (v) accelerate the time at which all or any part of an Option may be settled or exercised; (vi) determine whether, to what extent, and under what circumstances Options may be settled or exercised in cash, Shares, other securities, other Options or other property, or canceled, forfeited, or suspended and the method or methods by which Options may be settled, exercised, canceled, forfeited, or suspended; (vii) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Options, other property, and other amounts payable with respect to an Option shall be deferred either automatically or at the election of the holder thereof or of the Committee; (viii) interpret and administer the Plan and any instrument or agreement relating to, or Option made under, the Plan; (ix) except to the extent prohibited by Section 6.2, amend or modify the terms of any Option at or after grant with the consent of the holder of the Option; (x) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (xi) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan, subject to the exclusive authority of the Board under Section 10 hereunder to amend or terminate the Plan. 3.2 Committee Discretion Binding. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Option shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Subsidiary or Affiliate, any Participant and any holder or beneficiary of any Option. 3.3 Action by the Committee. The Committee shall select one of its members as its Chairperson and shall hold its meetings at such times and places and in such manner as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority vote at a meeting duly called and held. The exercise of an Option or receipt of an Option shall be effective only if an Option Agreement shall have been duly executed and delivered on behalf of the Company following the grant of the Option or other Option. The Committee may appoint a Secretary and may make such rules and regulations for the conduct of its business, as it shall deem advisable. 3.4 Delegation. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or managers of the Company or of any Subsidiary or Affiliate, or to a Committee of such officers or managers, the authority, subject to such terms and limitations as the Committee shall determine, to grant Options to, or to cancel, modify or waive rights with respect to, or to alter, discontinue, suspend, or terminate Options held by Participants who are not officers or directors of the Company for purposes of Section 16 or who are otherwise not subject to such Section. 3.5 No Liability. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. SECTION 4. SHARES AVAILABLE FOR OPTIONS 4.1 Shares Available. Subject to the provisions of Section 4.2 hereof, the stock to be subject to Options under the Plan shall be the Shares of the Company and the maximum number of Shares with respect to which Options may be granted under the Plan shall be 2,124,650 (which includes 74,650 Shares with respect to which awards under the Company's 1989 Non-Qualified Stock Option Plan, 1993 Stock Option Plan and 1995 Incentive Stock Option Plan (the "Old Plans") were authorized but not granted). Notwithstanding the foregoing and subject to adjustment as provided in Section 4.2, the maximum number of Shares with respect to which Awards may be granted under the Plan shall be increased by the number of Shares with respect to which Options or other Awards were granted under the Old Plans, as of the effective date of this Plan, but which terminate, expire unexercised, or are settled for cash, forfeited or canceled without the delivery of Shares under the terms of such Old Plans after the effective date of this Plan. If, after the effective date of the Plan, any Shares covered by an Option granted under this Plan, or to which such an Option relates, are forfeited, or if such an Option is settled for cash or otherwise terminates, expires unexercised, or is canceled without the delivery of Shares, then the Shares covered by such Option, or to which such Option relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Options may be granted, to the extent of any such settlement, forfeiture, termination, expiration, or cancellation, shall again become Shares with respect to which Options may be granted. In the event that any Option or other Option granted hereunder is exercised through the delivery of Shares or in the event that withholding tax liabilities arising from such Option are satisfied by the withholding of Shares by the Company, the number of Shares available for Options under the Plan shall be increased by the number of Shares so surrendered or withheld. 4.2 Adjustments. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee, in its sole discretion, to be appropriate, then the Committee shall, in such manner as it may deem equitable (and, with respect to Incentive Stock Options, in such manner as is consistent with Section 422 of the Code and the regulations thereunder) : (i) adjust any or all of (1) the aggregate number of Shares or other securities of the Company (or number and kind of other securities or property) with respect to which Options may be granted under the Plan; (2) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Options under the Plan; and (3) the grant or exercise price with respect to any Option under the Plan, provided that the number of shares subject to any Option shall always be a whole number; (ii) if deemed appropriate, provide for an equivalent Option in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect; or (iii) if deemed appropriate, make provision for a cash payment to the holder of an outstanding Option. 4.3 Substitute Options. Any Shares issued by the Company as Substitute Options in connection with the assumption or substitution of outstanding grants from any acquired corporation shall not reduce the Shares available for Options under the Plan. 4.4 Sources of Shares Deliverable Under Options. Any Shares delivered pursuant to an Option may consist, in whole or in part, of authorized and unissued Shares or of issued Shares that have been reacquired by the Company. SECTION 5. ELIGIBILITY Any Employee, Director or Consultant shall be eligible to be designated a Participant; provided, however, that Outside Directors shall only be eligible to receive Options granted consistent with Section 7. SECTION 6. STOCK OPTIONS 6.1 Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Participants to whom Options shall be granted, the number of Shares subject to each Option, the exercise price and the conditions and limitations applicable to the exercise of each Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of Options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing such statute. A person who has been granted an Option under this Plan may be granted additional Options under the Plan if the Committee shall so determine; provided, however, that to the extent the aggregate Fair Market Value (determined at the time the Incentive Stock Option related thereto is granted) of the Shares with respect to which all Incentive Stock Options related to such Option are exercisable for the first time by an Employee during any calendar year (under all plans described in subsection (d) of Section 422 of the Code of the Company and its Subsidiaries) exceeds $100,000 (or such higher amount as is permitted in the future under Section 422(d) of the Code, such Options shall be treated as Non-Qualified Stock Options. 6.2 Price. The Committee in its sole discretion shall establish the Option Price at the time each Option is granted. Except in the case of Substitute Options, the Option Price of an Option may not be less than 100% of the Fair Market Value of the Shares with respect to which the Option is granted on the date of grant of such Option. Notwithstanding the foregoing and except as permitted by the provisions of Section 4.2 and Section 10 hereof, the Committee shall not have the power to (i) amend the terms of previously granted Options to reduce the Option Price of such Options, or (ii) cancel such Options and grant substitute Options with a lower Option Price than the canceled Options. 6.3 Term. Subject to the Committee's authority under Section 3.1 and the provisions of Section 6.5, each Option and all rights and obligations thereunder shall expire on the date determined by the Committee and specified in the Option Agreement. The Committee shall be under no duty to provide terms of like duration for Options granted under the Plan. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of ten (10) years from the date such Option was granted. 6.4 Exercise. (a) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Option Agreement or thereafter. The Committee shall have full and complete authority to determine, subject to Section 6.5 herein, whether an Option will be exercisable in full at any time or from time to time during the tern of the Option, or to provide for the exercise thereof in such installments, upon the occurrence of such events and at such times during the term of the Option as the Committee may determine. (b) The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal, state or foreign securities laws or the Code, as it may deem necessary or advisable. The exercise of any Option granted hereunder shall be effective only at such time as the sale of Shares pursuant to such exercise will not violate any state or federal securities or other laws. (c) An Option may be exercised in whole or in part at any time, with respect to whole Shares only, within the period permitted thereunder for the exercise thereof, and shall be exercised by written notice of intent to exercise the Option, delivered to the Company at its principal office, and payment in full to the Company at the direction of the Committee of the amount of the Option Price for the number of Shares with respect to which the Option is then being exercised. The exercise of an Option shall result in the termination of the other to the extent of the number of Shares with respect to which the Option is exercised. (d) The Option Price shall be immediately due upon exercise of the Option and shall, subject to the provisions of the Option Agreement and the applicable securities laws, be payable in one or more of the following forms: (i) cash or check made payable to the Company; or (ii) shares held for the requisite period necessary to avoid a charge to the Company's earnings for financial reporting purposes and valued at the Fair Market Value of such Shares on the date of exercise (or next date), together with any applicable withholding taxes. Payment of the Option Price for the purchased shares must be made on the Option exercise date. Until the optionee has been issued Shares subject to such exercise, he or she shall possess no rights as a stockholder with respect to such Shares. 6.5 Ten Percent Stock Rule. Notwithstanding any other provisions in the Plan, if at the time an Option is otherwise to be granted pursuant to the Plan the optionee or rights holder owns directly or indirectly (within the meaning of Section 424(d) of the Code) Shares of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Company or its parent or Subsidiary or Affiliate corporations (within the meaning of Section 422 (b) (6) of the Code), then any Incentive Stock Option to be granted to such optionee or rights holder pursuant to the Plan shall satisfy the requirement of Section 422(c) (5) of the Code, and the Option Price shall be not less than 110% of the Fair Market Value of the Shares of the Company, and such Option by its terms shall not be exercisable after the expiration of five (5) years from the date such Option is granted. SECTION 7. DIRECTOR OPTIONS 7.1 Grant Upon Election of a New Director to the Board. A new Director to the Board may receive Options for 20,000 Shares upon his or her election to the Board. These Options shall become exercisable as determined by the Committee. 7.2 Grant Upon Re-election of a Director to the Board. Beginning with the 2001 annual meeting of the Company's shareholders and continuing for each year through the 2008 annual meeting of the Company's shareholders, a Director who is re-elected to the Board may receive Options for 4,000 Shares upon his or her re-election to the Board. These Options shall become exercisable as determined by the Committee. 7.3 Grants to Board Chairmen. Beginning with the 2001 annual meeting of the Company's shareholders and continuing for each year through the 2008 annual meeting of the Company's shareholders, each Director who is appointed as Chairman of the Board or as Chairman of the Audit Committee may receive Options for 1,000 Shares upon his or her appointment, in addition to any other Options granted pursuant to this Section 7. These Options shall become exercisable as determined by the Committee. 7.4 Option Price. The Option Price for all Options granted to Directors pursuant to this Section 7 shall be the Fair Market Value on the date of grant. 7.5 Forfeiture of Options. Any Option granted to a Director pursuant to this Section 7 that has not become exercisable when a Director ceases to serve as a Director, or in the position for which such Option was granted, shall be forfeited. 7.6 Other Options to Directors. The Board may also grant other Options to Directors pursuant to the terms of the Plan. With respect to such Options, all references in the Plan to the Committee shall be deemed to be references to the Board. SECTION 8. TERMINATION OF EMPLOYMENT The Committee shall have the full power and authority to determine the terms and conditions that shall apply to any Option upon a termination of employment with the Company, its Subsidiaries and Affiliates, including a termination by the Company with or without cause, by a Participant voluntarily, or by reason of death, Disability or Retirement, and may provide such terms and conditions in the Option Agreement or in such rules and regulations as it may prescribe. All Options which are not exercised prior to 90 days after the date a Participant ceases to serve as a Director, Employee or Consultant of the Company shall be forfeited. SECTION 9. CHANGE IN CONTROL Upon a Change in Control, all outstanding Options shall vest, become immediately exercisable or payable and have all restrictions lifted. SECTION 10. AMENDMENT AND TERMINATION 10.1 Amendments to the Plan. The Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement for which or with which the Board deems it necessary or desirable to comply. 10.2 Amendments to Options. Subject to the restrictions of Section 6.2, the Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Option theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would adversely affect the rights of any Participant or any holder or beneficiary of any Option theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder, or beneficiary. 10.3 Adjustments of Options Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Options in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.2 hereof) affecting the Company, any Subsidiary or Affiliate, or the financial statements of the Company or any Subsidiary or Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. SECTION 11. GENERAL PROVISIONS 11.1 Limited Transferability of Options. Except as otherwise provided in the Plan, no Option shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution and/or as may be provided by the Committee in its discretion, at or after grant, in the Option Agreement. No transfer of an Option by will or by laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and an authenticated copy of the will and/or such other evidence as the Committee may deem necessary or appropriate to establish the validity of the transfer. 11.2 No Rights to Options. No Person shall have any claim to be granted any Option, and there is no obligation for uniformity of treatment of Participants or holders or beneficiaries of Options. The terms and conditions of Options need not be the same with respect to each Participant. 11.4 Share Certificates. All certificates for Shares or other securities of the Company or any Subsidiary or Affiliate delivered under the Plan pursuant to any Option or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the SEC or any state securities commission or regulatory authority, any stock exchange or other market upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 11.5 Withholding. A Participant may be required to pay to the Company or any Subsidiary or Affiliate and the Company or any Subsidiary or Affiliate shall have the right and is hereby authorized to withhold from any Option, from any payment due or transfer made under any Option or under the Plan, or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Options or other property) of any applicable withholding or other taxes in respect of an Option, its exercise, or any payment or transfer under an Option or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. 11.6 Option Agreements. Each Option hereunder shall be evidenced by an Option Agreement that shall be delivered to the Participant and may specify the terms and conditions of the Option and any rules applicable thereto. In the event of a conflict between the terms of the Plan and any Option Agreement, the terms of the Plan shall prevail. 11.7 No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Subsidiary or Affiliate from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of Options. 11.8 No Right to Employment. The grant of an Option shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Subsidiary or Affiliate. Further, the Company or a Subsidiary or Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in an Option Agreement. 11.9 No Rights as Stockholder. Subject to the provisions of the Plan and the applicable Option Agreement, no Participant or holder or beneficiary of any Option shall have any rights as a stockholder with respect to any Shares to be distributed under the Plan until such person has become a holder of such Shares. 11.10 Governing Law. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan and any Option Agreement shall be determined in accordance with the laws of the State of California without giving effect to conflicts of laws principles. 11.11 Severability. If any provision of the Plan or any Option Agreement is, or becomes, or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Option, or would disqualify the Plan or any Option under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Option, such provision shall be stricken as to such jurisdiction, Person or Option and the remainder of the Plan and any such Option shall remain in full force and effect. 11.12 Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Option if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation (including applicable non-U.S. laws or regulations) or entitle the Company to recover the same under Exchange Act Section 16 (b), and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Option shall be promptly refunded to the relevant Participant, holder, or beneficiary. 11.13 No Trust or Fund Created. Neither the Plan nor any Option shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Subsidiary or Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Subsidiary or Affiliate pursuant to an Option, such right shall be no greater than the right of any unsecured general creditor of the Company or any Subsidiary or Affiliate. 11.14 No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Option, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated. 11.15 Headings. Headings are given to the sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 12. TERM OF THE PLAN 12.1 Effective Date. The Plan shall be effective as of February 13, 2001 provided it is approved and ratified by the Company's stockholders on or prior to December 31, 2001. 12.2 Expiration Date. No new Options shall be granted under the Plan after the tenth (10th) anniversary of the Effective Date. Unless otherwise expressly provided in the Plan or in an applicable Option Agreement, any Option granted hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Option or to waive any conditions or rights under any such Option shall, continue after the tenth (10th) anniversary of the Effective Date. Exhibit 31.1 Rule 13a-14/15d-14 Certification of CEO I, Richard P. Smith, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13-d-15(f) and 15d-15(f)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 26, 2005 /s/ Richard P. Smith ---------------------------------------- Richard P. Smith President and Chief Executive Officer Exhibit 31.2 Rule 13a-14/15d-14 Certification of CFO I, Thomas J. Reddish, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13-d-15(f) and 15d-15(f)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 26, 2005 /s/ Thomas J. Reddish ---------------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer Exhibit 32.1 Section 1350 Certification of CEO In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 Section 1350 Certification of CFO In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas J. Reddish ------------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request.