-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DD0n8q0K2ax0fpGD15lebxspKgYe3nq00yd7y/W44Pe5Mg7yPY2ecHuwsDUktrUA dLZ5SU6WBBm4u+MudRutog== 0000356171-03-000004.txt : 20030515 0000356171-03-000004.hdr.sgml : 20030515 20030514173941 ACCESSION NUMBER: 0000356171-03-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRICO BANCSHARES / CENTRAL INDEX KEY: 0000356171 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942792841 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10661 FILM NUMBER: 03700404 BUSINESS ADDRESS: STREET 1: TRICO BANCSHARES STREET 2: 63 CONSTITUTION DRIVE CITY: CHICO STATE: CA ZIP: 95973 BUSINESS PHONE: 5308980300 MAIL ADDRESS: STREET 1: TRICO BANCSHARES STREET 2: 63 CONSTITUTION DRIVE CITY: CHICO STATE: CA ZIP: 95973 10-Q 1 tcb10q1q03.txt TCBK - 3/31/03 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended March 31, 2003 Commission file number 0-10661 - -------------------------------- ------------------------------ TRICO BANCSHARES (Exact name of registrant as specified in its charter) California 94-2792841 - ------------------------------ ------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 63 Constitution Drive, Chico, California 95973 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 530/898-0300 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of Class: Common stock, no par value Outstanding shares as of May 12, 2003: 7,825,060 TABLE OF CONTENTS Page Forward Looking Statements 1 PART I - FINANCIAL INFORMATION 2 Item 1 - Financial Statements 2 Financial Summary 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial 12 Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosure about Market Risk 21 Item 4 - Controls and Procedures 22 PART II - OTHER INFORMATION 23 Item 1 - Legal Proceedings 23 Item 6 - Exhibits and Reports on Form 8-K 23 Signatures 24 Certifications 25 Exhibits 27 FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the "Company") for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management's current knowledge and belief and include information concerning the Company's possible or assumed future financial condition and results of operations. When you see any of the words "believes", "expects", "anticipates", "estimates", or similar expressions, mean making forward-looking statements. A number of factors, some of which are beyond the Company's ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to: - a continued slowdown in the national and California economies; - increased economic uncertainty created by the recent terrorist attacks on the United States and the actions taken in response; - the prospect of additional terrorist attacks in the United States and the uncertain effect of these events on the national and regional economies; - changes in the interest rate environment; - changes in the regulatory environment; - significantly increasing competitive pressure in the banking industry; - operational risks including data processing system failures or fraud; - volatility of rate sensitive deposits; and - asset/liability matching risks and liquidity risks. On April 4, 2003, the Company acquired North State National Bank, located in Chico, California. Many possible events or factors could affect the future financial results and performance of the Company after the merger including: - actual cost savings resulting from the merger are less than we expected, we are unable to realize those cost savings as soon as we expected or we incur additional or unexpected costs; - revenues after the merger are less than we expected; - competition among financial services companies increases; - we have more trouble integrating our businesses than we expected; - changes in the interest rate environment reduces our interest margins; - general economic conditions change or are worse than we expected; - legislative or regulatory changes adversely affect our business; - changes occur in business conditions and inflation; - personal or commercial customers' bankruptcies increase; - changes occur in the securities markets; and - technology-related changes are more difficult to make or more expensive than we expected. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2002, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. -1-
PART I - FINANCIAL INFORMATION Item 1. Financial Statements TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) (Unaudited) At March 31, At December 31, 2003 2002 2002 ------------------------------- ----------------- Assets: Cash and due from banks $58,925 $42,647 $67,170 Federal funds sold 10,100 55,200 8,100 ------------------------------- ----------------- Cash and cash equivalents 69,025 97,847 75,270 Investment securities available for sale 354,007 222,594 338,024 Loans Commercial 117,329 123,026 125,982 Consumer 210,633 157,428 201,858 Real estate mortgages 330,001 315,591 319,969 Real estate construction 35,810 41,164 39,713 ------------------------------- ----------------- 693,773 637,209 687,522 Allowance for loan losses (14,293) (13,338) (14,377) ------------------------------- ----------------- Loans, net of allowance for loan losses 679,480 623,871 673,145 Premises and equipment, net 17,542 16,136 17,224 Cash value of life insurance 29,257 14,722 15,208 Other real estate owned 1,608 71 932 Accrued interest receivable 5,891 5,480 5,644 Deferred income taxes 8,316 9,337 8,429 Intangible assets 3,815 4,842 4,043 Other assets 7,562 5,033 6,655 ------------------------------- ----------------- Total Assets $1,176,503 $999,933 $1,144,574 =============================== ================= Liabilities: Deposits: Noninterest-bearing demand $226,373 $172,087 $232,499 Interest-bearing demand 188,575 174,852 182,816 Savings 324,584 256,845 297,926 Time certificates, $100,000 and over 94,089 73,134 90,404 Other time certificates 199,031 196,354 201,592 ------------------------------- ----------------- Total deposits 1,032,652 873,272 1,005,237 Accrued interest payable 3,034 2,817 2,927 Other Liabilities 16,010 12,179 14,472 Long-term debt and other borrowings 22,915 22,948 22,924 ------------------------------- ----------------- Total Liabilities 1,074,611 911,216 1,045,560 ------------------------------- ----------------- Shareholders' Equity: Authorized - 20,000,000 shares of common stock Issued and outstanding: 7,080,470 at March 31, 2003 50,768 6,990,980 at March 31, 2002 49,608 7,060,965 at December 31, 2002 50,472 Retained earnings 48,436 39,720 46,239 Accumulated other comprehensive income (loss), net 2,688 (611) 2,303 ------------------------------- ----------------- Total Shareholders' Equity 101,892 88,717 99,014 ------------------------------- ----------------- Total Liabilities and Shareholders' Equity $1,176,503 $999,933 $1,144,574 =============================== ================= -2-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except earnings per share data) (Unaudited) Three months ended March 31, 2003 2002 ---------------------------- Interest Income: Interest and fees on loans $12,989 $13,008 Interest on federal funds sold 84 166 Interest on investment securities available for sale Taxable 2,744 2,230 Tax exempt 532 554 ---------------------------- Total interest income 16,349 15,958 ---------------------------- Interest Expense: Interest on interest-bearing demand deposits 118 122 Interest on savings 720 680 Interest on time certificates of deposit 1,959 2,142 Interest on long-term debt 318 319 ---------------------------- Total interest expense 3,115 3,263 ---------------------------- Net Interest Income 13,234 12,695 ---------------------------- Provision for loan losses 150 800 ---------------------------- Net Interest Income After Provision for Loan Losses 13,084 11,895 ---------------------------- Noninterest Income: Service charges and fees 3,500 1,973 Gain on sale of loans 1,133 963 Commissions on sale of non-deposit investment products 448 538 Other 315 352 ---------------------------- Total Noninterest Income 5,396 3,826 ---------------------------- Noninterest Expense: Salaries and related benefits 6,877 5,739 Other 5,774 4,663 ---------------------------- Total Noninterest Expense 12,651 10,402 ---------------------------- Income Before Income Taxes 5,829 5,319 ---------------------------- Provision for income taxes 2,216 1,990 ---------------------------- Net Income $3,613 $3,329 Comprehensive Income: Change in unrealized gain on securities available for sale, net 385 44 ---------------------------- Comprehensive Income $3,998 $3,373 ============================ Average Shares Outstanding 7,071 6,992 Diluted Average Shares Outstanding 7,250 7,117 Per Share Data Basic Earnings $0.51 $0.48 Diluted Earnings $0.50 $0.47 Dividends Paid $0.20 $0.20 -3- TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, unaudited) Accumulated Other Common Retained Comprehensive Stock Earnings Income (Loss), net Total ----------------------------------------------- Balance, December 31, 2001 $49,679 $37,909 ($655) $86,933 Net income for the period 3,329 3,329 Repurchase of common stock (71) (119) (190) Dividends (1,399) (1,399) Unrealized gain on securities available for sale, net 44 44 ----------------------------------------------- Balance March 31, 2002 $49,608 $39,720 ($611) $88,717 =============================================== Balance, December 31, 2002 $50,472 $46,239 $2,303 $99,014 Net income for the period 3,613 3,613 Stock issued, including stock option tax benefits 296 296 Dividends (1,416) (1,416) Unrealized gain on securities available for sale, net 385 385 ----------------------------------------------- Balance March 31, 2003 $50,768 $48,436 $2,688 $101,892 =============================================== -4-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) For the three months ended March 31, 2003 2002 ------------------------------- Operating Activities: Net income $3,613 $3,329 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 653 668 Amortization of intangible assets 228 228 Provision for loan losses 150 800 Amortization of investment securities premium, net 757 341 Deferred income taxes (42) (28) Originations of loans for resale (53,210) (46,947) Proceeds from sale of loans originated for resale 53,750 47,333 Gain on sale of loans (1,133) (963) Amortization of mortgage servicing rights 256 143 (Gain) loss on sale of fixed assets (2) 20 Change in assets and liabilities: (Increase) decrease in interest receivable (247) 42 Increase (decrease) in interest payable 107 (671) Decrease in other assets and liabilities 762 1,879 ------------------------------- Net Cash Provided by Operating Activities 5,642 6,174 ------------------------------- Investing Activities: Proceeds from maturities of securities available-for-sale 36,864 28,682 Purchases of securities available-for-sale (53,010) (26,958) Net (increase) decrease in loans (7,161) 21,003 Proceeds from sale of premises and equipment 2 3 Purchases of property and equipment (904) (303) Purchase of life insurance (13,910) - ------------------------------- Net Cash (Used) Provided by Investing Activities (38,119) 22,427 ------------------------------- Financing Activities: Net increase (decrease) in deposits 27,415 (7,121) Payments of principal on long-term debt agreements (9) (8) Repurchase of Common Stock - (190) Dividends paid (1,416) (1,399) Exercise of stock options/issuance of Common Stock 242 - ------------------------------- Net Cash Provided (Used) by Financing Activities 26,232 (8,718) ------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (6,245) 19,883 ------------------------------- Cash and Cash Equivalents and Beginning of Period 75,270 77,964 ------------------------------- Cash and Cash Equivalents at End of Period $69,025 $97,847 =============================== Supplemental Disclosure of Noncash Activities: Unrealized gain on securities available for sale $594 $69 Loans transferred to other real estate owned $676 - Supplemental Disclosure of Cash Flow Activity: Cash paid for interest expense $3,008 $3,934 Cash paid for income taxes $10 - Income tax benefit from stock option exercises $54 - -5-
TRICO BANCSHARES Financial Summary (dollars in thousands, except per share amounts) (Unaudited) Three months ended March 31, ------------------------------ 2003 2002 ------------------------------ Net Interest Income (FTE) $13,543 $13,000 Provision for loan losses (150) (800) Noninterest income 5,396 3,826 Noninterest expense (12,651) (10,402) Provision for income taxes (FTE) (2,525) (2,295) ------------------------------ Net income $3,613 $3,329 ============================== Average shares outstanding 7,071 6,992 Diluted average shares outstanding 7,250 7,117 Shares outstanding at period end 7,080 6,991 As Reported: Basic earnings per share $0.51 $0.48 Diluted earnings per share $0.50 $0.47 Return on assets 1.26% 1.34% Return on equity 14.29% 14.88% Net interest margin 5.17% 5.76% Net loan charge-offs to average loans 0.14% 0.32% Efficiency ratio (FTE) 66.80% 61.82% Average Balances: Total assets $1,149,759 $990,471 Earning assets 1,048,286 902,596 Total loans 679,975 642,082 Total deposits 1,003,853 863,029 Shareholders' equity $101,139 $89,505 Balances at Period End: Total assets $1,176,503 $999,933 Earning assets 1,057,880 915,003 Total loans 693,773 637,209 Total deposits 1,032,652 873,272 Shareholders' equity $101,892 $88,717 Financial Ratios at Period End: Allowance for loan losses to loans 2.06% 2.09% Book value per share $14.39 $12.69 Equity to assets 8.66% 8.87% Total capital to risk assets 11.63% 12.12% Dividends Paid Per Share $0.20 $0.20 Dividend Payout Ratio 39.19% 42.02% -6- NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: General Summary of Significant Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The interim results for the three months ended March 31, 2003 and 2002 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company operates 33 branch offices and 10 in-store branch offices in the California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare and Yuba. The Company's operating policy since its inception has emphasized retail banking. Most of the Company's customers are retail customers and small to medium sized businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The one accounting estimate that materially affects the financial statements is the allowance for loan losses. Investment Securities The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities that the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the three months ended March 31, 2003 and throughout 2002, the Company did not have any securities classified as either held-to-maturity or trading. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of other comprehensive income in shareholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that a permanent decline in value has occurred. -7- Loans Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in Management's judgment are well secured and in the process of collection, they may not be classified as nonaccrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans, leases and commitments to extend credit, based on evaluations of the collectibility, impairment and prior loss experience of loans, leases and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Mortgage Operations Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Retained interests (mortgage servicing rights) in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer. Fair values are estimated using discounted cash flows based on a current market interest rate. The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The Company sold substantially all of its conforming long-term residential mortgage loans originated during three months ended March 31, 2003 for cash proceeds equal to the fair value of the loans. The following table summarizes the Company's mortgage servicing rights assets as of March 31, 2003 and December 31, 2002. December 31, March 31, (Dollars in thousands) 2002 Additions Reductions 2003 ----------------------------------------------- Mortgage Servicing Rights $2,821 $593 ($256) $3,158 =============================================== -8- The recorded value of mortgage servicing rights is included in other assets, and is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum. At March 31, 2003, the Company had no mortgage loans held for sale. At March 31, 2003 and December 31, 2002, the Company serviced real estate mortgage loans for others of $336 million and $307 million, respectively. Identifiable Intangible Assets Identifiable intangible assets consist of core deposit intangibles and minimum pension liability. The following table summarizes the Company's core deposit intangible as of March 31, 2003 and December 31, 2002. December 31, March 31, (Dollar in Thousands) 2002 Additions Reductions 2003 ---------------------------------------------- Core deposit intangibles $10,278 $10,278 Accumulated amortization (6,636) ($228) (6,864) ---------------------------------------------- Core deposit intangibles, net $3,642 ($228) $3,414 ============================================== Core deposit premiums are scheduled to amortize at a rate of $227,700 per quarter through the quarter ended December 31, 2006. Core deposit premiums are amortized using an accelerated method over a period of ten years. The Company reviews for impairment of certain intangibles held, whenever events or changes indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair market value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The following table summarizes the Company's minimum pension liability intangible as of March 31, 2003 and December 31, 2002. December 31, March 31, (Dollar in Thousands) 2002 Additions Reductions 2003 ------------------------------------------ Minimum pension liability intangible $401 - - $401 ========================================== Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. Income Taxes The Company's accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. -9- Stock-Based Compensation The Company uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Under this method, compensation expense is recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue using the intrinsic value method or to adopt a fair value based method to account for stock option plans. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method. Had compensation cost for the Company's option plans been determined in accordance with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Three Months Ended March 31, (in thousands, except per share amounts) 2003 2002 ---- ---- Net income As reported $3,613 $3,329 Pro forma $3,561 $3,280 Basic earnings per share As reported $0.51 $0.48 Pro forma $0.50 $0.47 Diluted earnings per share As reported $0.50 $0.47 Pro forma $0.49 $0.46 Stock-based employee compensation cost, net of related tax effects, included in net income As reported $0 $0 Pro forma $52 $49 Comprehensive Income For the Company, comprehensive income includes net income reported on the statement of income, changes in the fair value of its available-for-sale investments, and changes in the minimum pension liability reported as a component of shareholders' equity. The changes in the components of accumulated other comprehensive income (loss) for the three months ended March 31, 2003 and 2002 are reported as follows: Three Months Ended March 31, 2003 2002 ---------------------------- Unrealized Gain on Securities (in thousands) Beginning Balance $3,048 $117 Unrealized gain arising during the period, net of tax 385 44 ---------------------------- Ending Balance $3,433 $161 ---------------------------- Minimum Pension Liability Beginning Balance ($745) ($772) Change in minimum pension liability, net of tax - - ---------------------------- Ending Balance ($745) ($772) ---------------------------- Total accumulated other comprehensive income (loss), net $2,688 ($611) ---------------------------- -10- Reclassifications Certain amounts previously reported in the 2002 financial statements have been reclassified to conform to the 2003 presentation. These reclassifications did not affect previously reported net income or total shareholders' equity. Subsequent Events TriCo Bancshares (NASDAQ:TCBK), parent company of Tri Counties Bank, acquired North State National Bank, a national banking organization located in Chico, California, by the merger of North State into its wholly owned subsidiary, Tri Counties Bank, effective 5:01 pm on April 4, 2003. The acquisition and the related merger agreement dated October 3, 2002, was approved by the California Department of Financial Institutions, the Federal Deposit Insurance Corporation, and the shareholders of North State National Bank on March 4, March 7, and March 19, 2003, respectively. At the time of the acquisition, North State had total assets of $144 million. The acquisition was accounted for using the purchase method of accounting. Under the terms of the merger agreement, TriCo will issue $13,090,105 in cash, 723,511 shares of TriCo common stock, and options to purchase 79,587 shares of TriCo common stock at an average exercise price of $6.22 per share in exchange for all of the 1,234,375 common shares and options to purchase 79,937 common shares of North State National Bank outstanding as of April 4, 2003. The shares of TriCo common stock to be issued were registered on a Form S-4 Registration Statement declared effective on February 3, 2003. At March 31, 2003, TriCo Bancshares had 7,080,470 shares of common stock outstanding. Based upon TriCo's closing stock price of $25.65 on April 4, 2003, the aggregate value of the cash and the TriCo options and common stock to be issued in the merger would be approximately $33,195,000. On April 15, 2003, TriCo filed a current report on Form 8-K, which contains pro forma financial information concerning the merger. -11- Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management's Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, intangible assets, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See caption "Allowance for Loan Losses" for a more detailed discussion). Results of Operations The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. The Company had quarterly earnings of $3,613,000, or $0.50 per diluted share, for the three months ended March 31, 2003. These results represent a 6.5% increase from the $0.47 earnings per diluted share reported for the three months ended March 31, 2002 on earnings of $3,329,000. The improvement in results from the year-ago quarter was due to a $543,000 (4.2%) increase in fully tax-equivalent net interest income to $13,543,000, a $650,000 (81.3%) decrease in provision for loan losses to $150,000, and a $1,570,000 (41.0%) increase in noninterest income to $5,396,000. These contributing factors where offset by a $2,249,000 (21.6%) increase in noninterest expense to $12,651,000 for the quarter ended March 31, 2003. Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands): Three months ended March 31, -------------------------- 2003 2002 -------------------------- Net Interest Income (FTE) $13,543 $13,000 Provision for loan losses (150) (800) Noninterest income 5,396 3,826 Noninterest expense (12,651) (10,402) Provision for income taxes (FTE) (2,525) (2,295) -------------------------- Net income $3,613 $3,329 ========================== -12- Net income for the first quarter of 2003 was $284,000 (8.5%) more than for the same quarter of 2002. A significant increase in noninterest income (up $1.57 million or 41.0%), a $650,000 (81.3%) decrease in provision for loan losses, and a $543,000 (4.2%) increase in fully taxable equivalent net interest income more than offset an increase in noninterest expenses (up $2.25 million or 21.6%). The increase in noninterest income from the year-ago quarter was mainly due to an increase in service charges and fee income on deposit products (up $1,527,000 or 77.4% to $3,500,000), and an increase in gain on sale of loans (up $170,000 or 17.7% to $1,133,000). The increase in service charges and fee income was mainly due to the introduction of an overdraft privilege deposit product in July 2002 that has added a new stream of recurring noninterest income. The increase in gain on sale of loans is due to the Company's ability to originate and sell an increased volume of residential real estate mortgage loans in the current environment of record mortgage refinance. The decrease in provision for loan losses (down $650,000 or 81.3% to $150,000) was due to stable loan quality and the maintenance of adequate loss reserve levels. The increase in net interest income (FTE) was due to an increase in average balance of interest-earning assets (up $145.7 million or 16.1%) that was partially offset by a 59 basis point decrease in net interest margin. The increase in noninterest expense was mainly due to an increase in salary and benefit expense (up $1,138,000 or 19.8% to $6,877,000). The increase in salary and benefits expense was mainly due to annual salary increases, increased commission and incentive expense, and new employees at four new branches the Company opened during 2002. Other noninterest expense also increased (up $1,111,000 or 23.8% to $5,774,000) due to the new branch openings in 2002, and expenses related to increased mortgage banking activity and a new deposit product introduced in July 2002. Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands): Three months ended March 31, -------------------------- 2003 2002 -------------------------- Interest income $16,349 $15,958 Interest expense (3,115) (3,263) FTE adjustment 309 305 -------------------------- Net interest income (FTE) $13,543 $13,000 ========================== Average earning assets $1,048,286 $902,596 Net interest margin (FTE) 5.17% 5.76% The Company's primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense in interest-bearing liabilities. Net interest income (FTE) during the first quarter of 2003 increased $543,000 (4.2%) from the same period in 2002 to $13,543,000. The increase in net interest income (FTE) was due to the increased average balances of earning assets (up $145.7 million or 16.1% to $1.048 billion) that was partially offset by a 59 basis point decrease in net interest margin (FTE). Interest and Fee Income Interest and fee income (FTE) for the first quarter of 2003 increased $391,000 (2.4%) from the first quarter of 2002. The increase was the net effect of higher average interest-earning assets (up $145.7 million or 16.1% to $1.048 billion) that was partially offset by an 85 basis point decrease in the yield on those average earning assets to 6.36%. The growth in interest-earning assets was led by a $119.1 million (53.9%) increase in average investment security balances to $298.7 million, and a $37.9 million (5.9%) increase in average loan balances. The average balance of federal funds sold decreased $11.3 million (28.4%) to $28.4 million. -13- The average yield on the Company's earning assets decreased to 6.36% for the quarter ended March 31, 2003 from 7.21% for the quarter ended March 31, 2002. This downward trend in yields was reflective of general interest rate markets during much of 2002. In addition, deposit growth outstripped loan growth during the periods, which resulted in most of the growth in interest-earning assets being in lower yielding investment securities instead of relatively higher yielding loans. Interest Expense Interest expense decreased $148,000 (4.5%) in the first quarter of 2003 compared to the year-ago quarter. The decrease was due to a decrease in the average rate paid on interest-bearing liabilities from 1.82% in the first quarter of 2002 to 1.52% in the first quarter of 2003. The average balance of interest-bearing liabilities increased $100.3 million (14.0%) in the first quarter compared to the year-ago quarter. The increase in interest-bearing liabilities was concentrated in the lower earning interest-bearing demand deposit (up $15.4 million or 9.0%), and savings deposits (up $62.7 million or 24.7%). The average balance of the higher earning time deposits was up $22.2 million (8.2%) from the year-ago quarter. In addition, the average balance of noninterest-bearing deposits increased $40.5 million (24.2%) from the year-ago quarter. The average rate paid for all categories of interest-bearing liabilities decreased from the average rate paid in the year-ago quarter as a result of general market interest rate changes. Net Interest Margin (FTE) The following table summarizes the components of the Company's net interest margin for the periods indicated: Three months ended March 31, ------------------------- 2003 2002 ------------------------- Yield on earning assets 6.36% 7.21% Rate paid on interest-bearing Liabilities 1.52% 1.82% ------------------------- Net interest spread 4.84% 5.39% Impact of all other net noninterest-bearing funds 0.33% 0.37% ------------------------- Net interest margin 5.17% 5.76% ========================= Net interest margin in the first quarter of 2003 decreased 59 basis points compared to the first quarter of 2002. Throughout much of 2002, the Company was able to decrease the rates it paid on interest-bearing deposits approximately as fast as the rates on interest-earning assets decreased. By doing so, the Company was able to maintain a relatively high net interest margin throughout much of 2002. However, in the fourth quarter of 2002, it became increasingly difficult to reduce the rates paid on interest-bearing deposits. As a result, the Company's net interest margin began to decrease. Also, during this time, the Company grew deposits faster than it grew loans. As a result, much of the available funds from these deposits were invested in securities rather than higher yielding loans, and this also contributed to a decrease in net interest margin. -14- Summary of Average Balances, Yields/Rates and Interest Differential The following table presents, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended ---------------------------------------------------------------- March 31, 2003 March 31, 2002 ----------------------------- ------------------------------ Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- ------------------------------ Assets: Loans $679,975 $12,989 7.64% $642,082 $13,008 8.10% Investment securities - taxable 298,737 2,744 3.67% 176,257 2,230 5.06% Investment securities - nontaxable 41,136 841 8.17% 44,535 859 7.72% Federal funds sold 28,438 84 1.18% 39,722 166 1.67% Total earning assets 1,048,286 16,658 6.36% 902,596 16,263 7.21% Other assets 101,473 87,875 ---------- --------- Total assets $1,149,759 $990,471 ========== ========= Liabilities and shareholders' equity: Interest-bearing demand deposits $187,017 118 0.25% $171,606 122 0.28% Savings deposits 316,366 720 0.91% 253,679 680 1.07% Time deposits 292,924 1,959 2.68% 270,692 2,142 3.17% Other borrowings 22,918 318 5.55% 22,951 319 5.56% ----------------------------- ------------------------------ Total interest-bearing liabilities 819,225 3,115 1.52% 718,928 3,263 1.82% Noninterest-bearing deposits 207,546 167,052 Other liabilities 21,849 14,986 Shareholders' equity 101,139 89,505 ---------- --------- Total liabilities and shareholders' equity $1,149,759 $990,471 ========== ========= Net interest spread(1) 4.84% 5.39% Net interest income and interest margin(2) $13,543 5.17% $13,000 5.76% ================== ==================== (1) Net interest spread represents the average yield earned on assets minus the average rate paid on interest-earning assets minus the average rate paid on interest-bearing liabilities (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of earning assets.
-15- Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following table sets forth a summary of the changes in interest income 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 March 31, 2003 compared with three months ended March 31, 2002 --------------------------------- Volume Rate Total --------------------------------- Increase (decrease) in interest income: Loans $767 (786) (19) Investment securities 1,666 (1,170) 496 Federal funds sold (47) (35) (82) --------------------------------- Total earning assets 2,386 (1,991) 395 --------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 11 (14) (3) Savings deposits 168 (128) 40 Time deposits 176 (360) (184) Other borrowings - (1) (1) --------------------------------- Total interest-bearing liabilities 355 (503) (148) --------------------------------- Increase (decrease) in Net Interest Income $2,031 ($1,488) $543 ================================= Provision for Loan Losses The Company provided $150,000 for loan losses in the first quarter of 2003 versus $800,000 in the first quarter of 2002. During the first quarter of 2003, the Company recorded $234,000 of net loan charge offs versus $521,000 of net loan charge-offs in the year earlier quarter. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands). Three months ended March 31, ---------------------- 2003 2002 ---------------------- Service charges on deposit accounts $2,858 $1,465 ATM fees and interchange 520 373 Other service fees 122 135 Gain on sale of loans 1,133 963 Commissions on sale of nondeposit investment products 448 538 Increase in cash value of life insurance 139 119 Other noninterest income 176 233 ---------------------- Total noninterest income $5,396 $3,826 ====================== -16- Noninterest income for the first quarter of 2003 increased $1,570,000 (41.0%) from the year-ago quarter. The increase in noninterest income from the year-ago quarter was mainly due to an increase in service charges on deposit products (up $1,393,000 or 95.1% to $2,858,000), and an increase in gain on sale of loans (up $170,000 or 17.7% to $1,133,000). The increase in service charges income was mainly due to the introduction of an overdraft privilege deposit product in July 2002 that has added a new stream of recurring noninterest income. The increase in gain on sale of loans is due to the Company's ability to originate and sell an increased volume of residential real estate mortgage loans in the current environment of record mortgage refinance. ATM fees and interchange income increased from the year-ago quarter (up $147,000 or 39.4% to $520,000) due to expansion of Company's ATM network and increased debit card usage. Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands). Three months ended March 31, ------------------------ 2003 2002 ------------------------ Salaries $4,250 $3,645 Commissions and incentives 1,111 851 Employee benefits 1,516 1,243 Equipment 791 688 Occupancy 747 730 Professional fees 574 233 Telecommunications 391 339 Data processing and software 291 238 Advertising and marketing 272 165 Courier service 248 220 ATM network charges 232 192 Intangible amortization 228 228 Postage 198 142 Operational losses 130 39 Assessments 60 56 Other 1,612 1,393 ------------------------ Total $12,651 $10,402 ======================== Average full time equivalent staff 467 417 Noninterest expense to revenue (FTE) 66.80% 61.82% Noninterest expense for the first quarter of 2003 increased $2,249,000 (21.6%). The increase in noninterest expense was mainly due to a $1,138,000 (19.8%) increase in salary and benefit expense to $6,877,000. The increase in salary and benefits expense was mainly due to annual salary increases, increased commission and incentive expense, and new employees at the Company's four newly opened branches in 2002. Noninterest expense excluding salaries and benefits also increased (up $1,111,000 or 23.8% to $5,774,000). Approximately $206,000 of this increase was expenses related to the overdraft privilege product introduced in July 2002, and included in professional fees. Also related to the overdraft privilege product introduced in July 2002, was a $75,000 increase in operational losses from the year-ago quarter. Increased advertising expenses accounted for $113,000 of the increase in other noninterest expense. Provision for Income Tax The effective tax rate for the three months ended March 31, 2003 was 38.0% and reflects an increase from 37.4% for the three months ended March 31, 2002. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, particularly from tax-exempt loans and state and municipal securities. -17- 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 March 31, 2003 At December 31, 2002 ------------------------- ------------------------ Gross Guaranteed Net Gross Guaranteed Net ----------------------------------------------------- Classified loans $49,510 $11,973 $37,537 $52,642 $12,280 $40,062 Other classified assets 1,608 - 1,608 932 - 932 ----------------------------------------------------- Total classified assets $51,118 $11,973 $39,145 $53,574 $12,280 $40,994 ===================================================== Allowance for loan losses/ Classified loans 36.5% 35.1% Classified assets, net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies at March 31, 2003, decreased $1.8 million (4.5%) to $39.1 million from $41.0 million at December 31, 2002. Nonperforming Loans Loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the following occurs: the loan becomes 90 days past due as to interest or principal, the full and timely collection of additional interest or principal becomes uncertain, the loan is classified as doubtful by internal credit review or bank regulatory agencies, a portion of the principal balance has been charged off, or the Company takes possession of the collateral. Loans that are placed on nonaccrual even though the borrowers continue to repay the loans as scheduled are classified as "performing nonaccrual" and are included in total nonperforming loans. The reclassification of loans as nonaccrual does not necessarily reflect Management's judgment as to whether they are collectible. 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 three months, ended March 31, 2003, if all such loans had been current in accordance with their original terms, totaled $345,000. Interest income actually recognized on these loans during the three months ended March 31, 2003 was $14,500. The Company's policy is to place loans 90 days or more past due on nonaccrual status. In some instances when a loan is 90 days past due Management does not place it on nonaccrual status because the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days. Loans where the collateral has been repossessed are classified as OREO or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements. -18- Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits. As shown in the following table, total nonperforming assets net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies, increased $13.1 million (144%) to $22.2 million during the first three months of 2003. The increase in nonperforming assets is due to two commercial real estate loans collateralized by a single building. Nonperforming assets net of guarantees represent 1.89% 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 March 31, 2003 At December 31, 2002 ------------------------- ------------------------- Gross Guaranteed Net Gross Guaranteed Net ------------------------------------------------------ Performing nonaccrual loans $12,943 $8,265 $4,678 $13,199 $8,432 $4,767 Nonperforming, nonaccrual loans 16,163 502 15,661 4,091 718 3,373 ------------------------------------------------------ Total nonaccrual loans 29,106 8,767 20,339 17,290 9,150 8,140 Loans 90 days past due and still accruing 271 - 271 40 - 40 ------------------------------------------------------ Total nonperforming loans 29,377 8,767 20,610 17,330 9,150 8,180 Other real estate owned 1,608 - 1,608 932 - 932 ------------------------------------------------------ Total nonperforming assets $30,985 $8,767 $22,218 $18,262 $9,150 $9,112 ====================================================== Nonperforming loans to total loans 2.97% 1.19% Allowance for loan losses/nonperforming loans 69% 176% Nonperforming assets to total assets 1.89% 0.80% Allowance for loan losses to nonperforming assets 64% 158%
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. -19- The Company's method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans and leases as determined by SFAS 114, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. Allowances for specific loans are based on SFAS 114 analysis of individual credits. Allowances for changing environmental factors are Management's best estimate of the probable impact these changes have had on the loan portfolio as a whole. This process is explained in detail in the notes to the Company's Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2002. Based on the current conditions of the loan portfolio, Management believes that the $14,293,000 allowance for loan losses at March 31, 2003 is adequate to absorb probable losses inherent in the Company's loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. The following table summarizes the loan loss provision, net credit losses and allowance for loan losses for the periods indicated (dollars in thousands): Three months ended March 31, ------------------------ 2003 2002 ------------------------ Balance, beginning of period $14,377 $13,058 Loan loss provision 150 800 Loans charged off (280) (561) Recoveries of previously charged-off loans 46 41 ------------------------ Net charge-offs (234) (520) ------------------------ Balance, end of period $14,293 $13,338 ======================== Allowance for loan losses/loans outstanding 2.06% 2.09% 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. As previously announced on October 19, 2001, the Board of Directors approved a plan to repurchase, as conditions warrant, up to 150,000 shares of the Company's common stock on the open market or in privately negotiated transactions. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. This repurchase plan represented approximately 2.2% of the Company's 6,992,080 common shares outstanding on October 19, 2001, and is open-ended. As of this date, the Company has repurchased 118,800 shares under this plan. The Company's primary capital resource is shareholders' equity, which was $101.9 million at March 31, 2003. This amount represents an increase of $2.9 million from December 31, 2002, the net result of comprehensive income for the period ($4.0 million) and the issuance of common shares via the exercise of stock options ($0.3 million), partially offset by dividends paid ($1.4 million). The Company's ratio of equity to total assets was 8.66%, 8.87%, and 8.65% as of March 31, 2003, March 31, 2002, and December 31, 2002, respectively. -20-
The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated: To Be Well At March 31, At Minimum Capitalized Under ---------------- December 31, Regulatory Prompt Corrective 2003 2002 2002 Requirement Action Provisions ------------------------------------------------------------------ Tier I Capital 10.38% 10.86% 10.71% 4.00% 6.00% Total Capital 11.63% 12.12% 11.97% 8.00% 10.00% Leverage ratio 8.23% 8.48% 8.27% 4.00% 5.00%
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 March 31, 2003 and 2002, the results of the simulations noted above indicate that the balance sheet is slightly asset sensitive (earnings increase when interest rates rise). The magnitude of all the simulation results noted above is within the Company's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. -21- 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 March 31, 2003 and 2002, the Company had no derivative financial instruments. Liquidity The Company's principal source of asset liquidity is federal funds sold and marketable investment securities available for sale. At March 31, 2003, federal funds sold and investment securities available for sale totaled $364 million, representing an increase of $18 million or 5.2% from December 31, 2002, and an increase of $86 million or 30.9% from March 31, 2002. In addition, the Company generates additional liquidity from its operating activities. The Company's profitability during the first three months of 2003 generated cash flows from operations of $5.6 million compared to $6.2 million during the first three months of 2002. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. Sales and maturities of investment securities produced cash inflows of $36.9 million during the three months ended March 31, 2003 compared to $28.7 million for the three months ended March 31, 2002. During the three months ended March 31, 2003, the Company invested $53.0 million, $7.2 million, and $13.9 million in securities, net loan growth, and life insurance policies, respectively, compared to $27.0 million used to purchase investments and $21.0 million provided by a net decrease in loan balances, respectively, during the first three months of 2002. These changes in investment, loan, and life insurance balances contributed to net cash used for investing activities of $38.1 million during the three months ended March 31, 2003, compared to net cash provided from investing activities of $22.4 million during the three months ended March 31, 2002. Financing activities provided net cash of $26.2 million during the three months ended March 31, 2003, compared to net cash used by financing activities of $8.7 million during the three months ended March 31, 2002. Deposit balance increases and exercise of common stock options accounted for $27.4 million and $242,000 of financing sources of funds, respectively, during the three months ended March 31, 2003, compared to deposit balance decreases and repurchases of common stock that accounted for $7.1 million and $190,000 financing uses of funds, respectively, during the three months ended March 31, 2002. Dividends paid used $1.4 million of cash during the three months ended both March 31, 2003 and March 31, 2002. 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 (a) 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 a date within 90 days of the filing of this report ("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. (b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. -22- PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Bank. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Restated Articles of Incorporation dated May 9, 2003 3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 4* Certificate of Determination of Preferences of Series AA Junior Participating Preferred Stock filed as Exhibit 3.3 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated July 25, 2001 10.2* Form of Change of Control Agreement between TriCo and each of Craig Carney (dated February 27, 2003), Richard O'Sullivan (date February 24, 2003), and Thomas Reddish (dated April 10, 2001), filed as Exhibit 10.9 to TriCo's Report on Form 10-Q for the quarter ended September 30, 2001 10.3* TriCo's 1993 Non-Qualified Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704) 10.4* TriCo's Non-Qualified Stock Option Plan filed as Exhibit 4.2 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704) 10.5* TriCo's Incentive Stock Option Plan filed as Exhibit 4.3 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704) 10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated August 23, 1995 (No. 33-62063) 10.7* TriCo's 2001 Stock Option Plan filed as Exhibit 4 to TriCo's Form S-8 Registration Statement dated July 27, 2001 (No. 33-66064) 10.8* Employment Agreement between TriCo and Richard Smith dated April 10, 2001, filed as Exhibit 10.8 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) -23- 10.9* Tri Counties Bank Executive Deferred Compensation Plan dated September 1, 1987, as restated April 1, 1992, and amended November 12, 2002, filed as Exhibit 10.9 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.10* Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, filed as Exhibit 10.10 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.11* Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, filed as Exhibit 10.11 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.12* Tri Counties Bank Deferred Compensation Plan for Directors effective April 1, 1992, filed as Exhibit 10.12 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.13 Employment Agreement between TriCo and Richard O'Sullivan dated April 10, 2001 11.1 Computation of earnings per share 21.1 Tri Counties Bank, a California banking corporation, is the sole subsidiary of Registrant 99.1 CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Previously filed and incorporated by reference. (b) Reports on Form 8-K During the quarter ended March 31, 2003 the Company filed the following Current Reports on Form 8-K: Description Date of Report ---------------------------------- --------------------- Closing of acquisition of North April 15, 2003 State National Bank by TriCo Bancshares and Tri Counties Bank. Quarterly results of operations. April 23, 2003 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TRICO BANCSHARES (Registrant) Date: May 12, 2003 /s/ Thomas J. Reddish ----------------------------------- Thomas J. Reddish Vice President and Chief Financial Officer -24- CERTIFICATIONS 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) for the registrant and we have; a. Designed such disclosure controls and procedures 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. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer -25- 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) for the registrant and we have; a. Designed such disclosure controls and procedures 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. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 /s/ Thomas J. Reddish ------------------------------------- Thomas J. Reddish Vice President and Chief Financial Officer -26- EXHIBITS Exhibit 3.1 Restated Articles of Incorporation dated May 9, 2003 CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION OF TRICO BANCSHARES The undersigned certify that: 1. They are the president and the secretary, respectively, of TriCo Bancshares, a California corporation. 2. The original Articles of Incorporation of this corporation were filed by the Secretary of State on October 13, 1981. 3. The Articles of Incorporation of this corporation as amended to the date of this Certificate are restated on the attached Exhibit which is incorporated by reference as if fully set forth herein. 4. The foregoing Restated Articles of Incorporation have been duly approved by the Board of Directors. 5. The Restated Articles of Incorporation shall be, and said Articles are, amended through the date of the filing of this Certificate. 6. These Restated Articles of Incorporation do not alter or amend in any respect the Articles of Incorporation of this corporation and, pursuant to Section 910 of the California Corporations Code, these Restated Articles may be approved by the Board of Directors alone and do not require the approval of the outstanding shares. 7. We further declare, under penalty of perjury under the laws of the State of California, that the matters set forth in this Certificate are true and correct of our own knowledge. Dated: May 9, 2003. /s/ Richard P. Smith --------------------------------------------- Richard P. Smith, President /s/ Wendell J. Lundberg --------------------------------------------- Wendell J. Lundberg, Secretary -27- EXHIBIT TO CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION OF TRICO BANCSHARES RESTATED ARTICLES OF INCORPORATION OF TRICO BANCSHARES First The name of this Corporation is TriCo Bancshares. Second The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. Third 3.1 The Corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," respectively. The number of shares of Preferred Stock authorized to be issued is one million (1,000,000), and the number of shares of Common Stock authorized to be issued is twenty million (20,000,000). 3.2 The Preferred Stock may be divided into such number of series as the Board of Directors may determine. The Board of Directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. 3.3 Series A Preferred Stock. The rights, preferences and privileges of the Series A Preferred Stock of the Corporation are as set forth in this Section 3.3. 3.3.1 Designation and Amount. Thirty Thousand Six Hundred (30,600) of the shares of the Preferred Stock of the Corporation are designated Series A Preferred Stock (hereinafter referred to as "Series A Stock"). -28- 3.3.2 Dividends. (a) The holders of shares of Series A Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors out of funds legally available for the purpose, from the date of issue of such shares to and including August 31, 1985, and for each Dividend Period commencing on the first day of each month in each year after August 31, 1985 and ending on and including the day next preceding the first day of the next month (such period ending August 31, 1985 and each of such other periods herein referred to in this Section 3.3 as a "Dividend Period"), at an annual rate of $11.00 per share. The amount of dividend per share payable for the portion of the Dividend Period from the date of original issue of a share of Series A Stock to and including August 31, 1985 and for any other Dividend Period more or less than a full Dividend Period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which payable. The amount of dividend per share payable for each full Dividend Period commencing after August 31, 1985 shall be computed by dividing the annual dividend rate for each Dividend Period by twelve. Dividends shall be payable when and as declared by the Board of Directors, out of funds legally available therefor, to holders of record on such respective dates not exceeding 15 days preceding the payment date thereof as may be determined by the Board of Directors in advance of such payment date. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date not exceeding 15 days preceding the payment date thereof as may be fixed by the Board of Directors. No dividends shall be declared on any other series or class or classes of Preferred Stock ranking on a parity (as that term is defined in Section 3.3.5(d)) with the Series A Stock as to dividends in respect of any Dividend Period unless there shall likewise be or have keen declared on all shares of Series A Stock at the time outstanding like dividends for all Dividend Periods coinciding with or ending before such Dividend Period, ratably in proportion to the respective dividend rates fixed for all such other series or class or classes of Preferred Stock and the Series A Stock. Dividends shall be cumulative and will accrue on each share of Series A Stock from the date of original issuance thereof. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments which may be in arrears. (b) If dividends at the rate per share set out in Section 3.3.2(a) for any Dividend Period shall not have been declared and paid or set apart for payment on all outstanding shares of Series A Stock for such Dividend Period and all preceding Dividend Periods from and after the date of issue thereof, then, until the aggregate deficiency shall be declared and fully paid or set apart for payment, the Corporation shall not (i) declare or pay or set apart for payment any dividends or make any other distribution on the Common Stock of the Corporation or any other capital stock of the Corporation ranking junior to the Series A Stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation (which for all purposes shall mean any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary) (the Common Stock and such other stock being herein referred to in this Section 3.3 as "Junior Stock"), other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Stock, or (ii) make any payment on account of the purchase, redemption or other retirement of any Junior Stock. 3.3.3 Liquidation Preference. Upon the voluntary or involuntary liquidation, winding up or dissolution of the Corporation, out of the assets available for distribution to shareholders the holders of Series A Stock shall be entitled to receive, in preference to any payment on the Junior Stock, an amount equal to $100.00 per share plus cumulative dividends as provided in Section 3.3.2 above accrued and unpaid to the date payment is made available to the Series A Stock and no more. Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or prior to the Series A Stock upon liquidation, dissolution or winding up, after the full preferential liquidation amount has been paid to, or determined and set apart for, the Series A Stock, the remaining assets shall be paid to the Junior Stock. If upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the shares of the Series A Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other Preferred Stock ranking, as to liquidation, dissolution or winding up, on a parity with the Series A Stock, then such assets, or the proceeds thereof, shall be distributed among the shareholders of Series A Stock and any such other Preferred Stock ratably in accordance with the respective amounts which would be payable on such shares of Series A Stock and any such other Preferred Stock if all amounts payable thereon were paid in full. A reorganization shall not be considered to be a liquidation, winding up or dissolution within the meaning of this Section 3.3.3 and in such event the Series A Stock shall be entitled only to the rights provided in the plan of reorganization and Chapters 12 and 13 of the California General Corporation Law and elsewhere in the Corporation's Articles of Incorporation. -29- 3.3.4 Redemption. (a) The Series A Stock is subject to redemption, out of funds legally available therefor, in whole, or from time to time in part, at the option of the board of directors of the Corporation at or any time after July 1, 1988 or prior thereto upon the approval of at least a majority of the outstanding shares of Series A Stock. If only a part of the Series A Stock is to be redeemed, the redemption shall be carried out pro rata (as nearly as may be). The redemption price shall be $100.00 per share plus cumulative dividends as provided in Section 3.3.2 above accrued and unpaid to the date fixed for redemption (herein called the "redemption price"). In the case of a redemption of less than all of the Series A Stock at anytime outstanding, no such shares may be redeemed until all dividends accrued and unpaid on all Series A Stock then outstanding, other than the shares to be redeemed, shall have been paid or declared and the full amount thereof set apart for payment. (b) The Corporation shall mail a notice of redemption to each holder of record of shares to be redeemed addressed to the holder at the address of such holder appearing on the books of the Corporation or given by the holder to the Corporation for the purpose of notice, or if no such address appears or is given at the place where the principal executive office of the Corporation is located, not earlier than 60 nor later than 20 days before the date fixed for redemption. The notice of redemption shall include (i) the class of shares or the part of a class of shares to be redeemed, (ii) the date fixed for redemption, (iii) the redemption price and (iv) the place at which the shareholders may obtain payment of the redemption price upon surrender of their share certificates. If funds are available on the date fixed for the redemption, then whether or not the share certificates are surrendered for payment of the redemption price, the shares shall no longer be outstanding and the holders thereof shall cease to be shareholders of the Corporation with respect to the shares redeemed on and after the date fixed for redemption and shall be entitled only to receive the redemption price without interest upon surrender of the share certificate. If less than all the shares represented by one share certificate are to be redeemed, the Corporation shall issue a new share certificate for the shares not redeemed. (c) The Corporation shall also cause a copy of the notice of redemption to be published in a newspaper of general circulation in the county in which the principal executive office of the Corporation is located at least once a week for two successive weeks, in each instance on any day of the week, commencing not earlier than 60 nor later than 20 days before the date fixed for redemption. If the Corporation publishes the notice of redemption as provided in this paragraph (c), the failure of the Corporation to comply with the provision for mailing of notice of redemption in paragraph (b) shall not invalidate the redemption of the shares. (d) If, on or prior to any date fixed for redemption, the Corporation deposits with any bank or trust company in this state (which may be an affiliate of the Corporation) as a trust fund a sum sufficient to redeem, on the date fixed for redemption thereof, the shares called for redemption, with irrevocable instructions and authority to the bank or trust company to publish the notice of redemption thereof (or to complete such publication if theretofore commenced) and to pay, on and after the date fixed for redemption or prior thereto, the redemption price of the shares to their respective holders upon surrender of their share certificates, then from and after the date of the deposit (although prior to the date fixed for redemption) the shares so called shall be redeemed and dividends on those shares shall cease to accrue after the date fixed for redemption. The deposit shall constitute full payment of the shares to their holders and from and after the date of the deposit the shares shall no longer be outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the redemption price of the shares without interest, upon surrender of their certificates therefor. Any interest accrued on such funds shall be paid to the Corporation from time to time. If less than all the shares represented by one share certificate are to be redeemed, the Corporation shall issue a new share certificate for the shares not redeemed. After two years, the bank or trust company shall return to the Corporation funds deposited and not claimed and thereafter the holder of a share certificate for shares redeemed shall look to the Corporation for payment. -30- 3.3.5 Voting Rights. (a) Except as hereinafter in this Section 3.3.5 expressly provided for and as otherwise required by the laws of the State of California, the Series A Stock shall have no voting rights. If there is a default in whole or in part in the payment of 24 or more cumulative monthly dividends, whether or not consecutive, on the Series A Stock as provided for in Section 3.3.2 above, the holders of the outstanding Series A Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the Series A Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, to elect two of the authorized number of members of the Board of Directors of the Corporation at the Corporation's next annual meeting of shareholders. At elections for such directors, each holder of Series A Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity and having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). The right of the holders of Series A Stock, voting separately as a class, to elect (either alone or together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and having like voting rights) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on the Series A Stock shall have been fully paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of the Series A Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the Series A Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause, and any vacancy thereby created may be filled, only by the affirmative vote of the holders of Series A Stock voting separately as a class (either alone or together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and having like voting rights). If the office of any director elected by the holders of Series A Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (b) So long as any shares of Series A Stock remain outstanding, the consent of the holders of at least a majority of the shares of Series A Stock outstanding at the time (voting separately as a class together with all other series of Preferred Stock ranking on a parity with the Series A Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable) shall be necessary to permit, effect or validate any one or more of the following: (i) the authorization, creation or issuance of a new class or series of shares having rights, preferences or privileges prior (as that term is defined in Section 3.3.5(d)) to the shares of the Series A Stock, or any increase in the number of authorized shares of any class or series having rights, preferences or privileges prior to the shares of Series A Stock; or -31- (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Articles of Incorporation of the Corporation which would materially and adversely affect any right, preference, privilege or voting power of the Series A Stock or of the holders thereof, provided, however that any increase in the amount of authorized Common Stock or authorized Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the Series A Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series A Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (d) Any class or classes of stock of the Corporation shall be deemed to rank: (i) prior to the Series A Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series A Stock; and (ii) on a parity with the Series A Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof are different from those of the Series A Stock if the holders of such class of stock and of the Series A Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority one over the other. 3.4 Series B Preferred Stock. The rights, preferences and privileges of the Series B Preferred Stock of the Corporation are as set forth in this Section 3.4. 3.4.1 Designation and Amount. Eight Thousand (8,000) of the shares of the Preferred Stock of the Corporation are designated Series B Preferred Stock (hereinafter referred to as "Series B Stock"). -32- 3.4.2 Dividends. (a) The holders of shares of Series B Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors out of funds legally available for the purpose, from the date of issue of such shares to and including November 30, 1988, and for each Dividend Period commencing on the first day of each month in each year after November 30, 1988 and ending on and including the day next preceding the first day of the next month (such period ending November 30, 1988 and each of such other periods herein referred to in this Section 3.4 as a "Dividend Period"), at an annual rate of $52.50 per share. The amount of dividend per share payable for the portion of the Dividend Period from the date of original issue of a share of Series B Stock to and including November 30, 1988 and for any other Dividend Period more or less than a full Dividend Period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which payable. The amount of dividend per share payable for each full Dividend Period commencing after November 30, 1988 shall be computed by dividing the annual dividend rate for each Dividend Period by twelve. Dividends shall be payable when and as declared by the Board of Directors, out of funds legally available therefor, to holders of record on such respective dates not exceeding 15 days preceding the payment date thereof as may be determined by the Board of Directors in advance of such payment date. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date not exceeding 15 days preceding the payment date thereof as may be fixed by the Board of Directors. No dividends shall be declared on any other series or class or classes of Preferred Stock ranking on a parity (as that term is defined in Section 3.4.5(d)) with the Series B Stock as to dividends in respect of any Dividend Period unless there shall likewise be or have been declared on all shares of Series B Stock at the time outstanding like dividends for all Dividend Periods coinciding with or ending before such Dividend Period, ratably in proportion to the respective dividend rates fixed for all such other series or class or classes of Preferred Stock and the Series B Stock. Dividends shall be cumulative and will accrue on each share of Series B Stock from the date of original issuance thereof. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments which may be in arrears. (b) If dividends at the rate per share set out in Section 3.4.2(a) for any Dividend Period shall not have been declared and paid or set apart for payment on all outstanding shares of Series B Stock for such Dividend Period and all preceding Dividend Periods from and after the date of issue thereof, then, until the aggregate deficiency shall be declared and fully paid or set apart for payment, the Corporation shall not (i) declare or pay or set apart for payment any dividends or make any other distribution on the Common Stock of the Corporation or any other capital stock of the Corporation ranking junior to the Series B Stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation (which for all purposes shall mean any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary) (the Common Stock and such other stock being herein referred to in this Section 3.4 as "Junior Stock"), other than dividend or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Stock, or (ii) make any payment on account of the purchase, redemption or other retirement of any Junior Stock. 3.4.3 Liquidation Preference. Upon the voluntary or involuntary liquidation, winding up or dissolution of the Corporation, out of the assets available for distribution to shareholders the holders of Series B Stock shall be entitled to receive, in preference to any payment on the Junior Stock, an amount equal to $500.00 per share plus cumulative dividends as provided in Section 3.4.2 above accrued and unpaid to the date payment is made available to the Series B Stock and no more. Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or prior to the Series B Stock upon liquidation, dissolution or winding up, after the full preferential liquidation amount has been paid to, or determined and set apart for, the Series B Stock, the remaining assets shall be paid to the Junior Stock. If upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the shares of the Series B Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other Preferred Stock ranking, as to liquidation, dissolution or winding up, on a parity with the Series B Stock, then such assets, or the proceeds thereof, shall be distributed among the shareholders of Series B Stock and any such other Preferred Stock ratably in accordance with the respective amounts which would be payable on such shares of Series B Stock and any such other Preferred Stock if all amounts payable thereon were paid in full. A reorganization shall not be considered to be a liquidation, winding up or dissolution within the meaning of this Section 3.4.3 and in such event the Series B Stock shall be entitled only to the rights provided in the plan of reorganization and Chapters 12 and 13 of the California General Corporation Law and elsewhere in the Corporation's Articles of Incorporation. -33- 3.4.4 Redemption. (a) The Series B Stock is subject to redemption, out of funds legally available therefor, in whole, or from time to time in part, at the option of the board of directors of the Corporation at or any time after August 1, 1995 or prior thereto upon the approval of at least a majority of the outstanding shares of Series B Stock. If only a part of the Series B Stock is to be redeemed, the redemption shall be carried out pro rata (as nearly as may be). The redemption price shall be $500.00 per share plus cumulative dividends as provided in Section 3.4.2 above accrued and unpaid to the date fixed for redemption (herein called the "redemption price"). In the case of a redemption of less than all of the Series B Stock at anytime outstanding, no such shares may be redeemed until all dividends accrued and unpaid on all Series B Stock then outstanding, other than the shares to be redeemed, shall have been paid or declared and the full amount thereof set apart for payment. (b) The Corporation shall mail a notice of redemption to each holder of record of shares to be redeemed addressed to the holder at the address of such holder appearing on the books of the Corporation or given by the holder to the Corporation for the purpose of notice, or if no such address appears or is given at the place where the principal executive office of the Corporation is located, not earlier than 60 nor later than 20 days before the date fixed for redemption. The notice of redemption shall include (i) the class of shares or the part of a class of shares to be redeemed, (ii) the date fixed for redemption, (iii) the redemption price and (iv) the place at which the shareholders may obtain payment of the redemption price upon surrender of their share certificates. If funds are available on the date fixed for the redemption, then whether or not the share certificates are surrendered for payment of the redemption price, the shares shall no longer be outstanding and the holders thereof shall cease to be shareholders of the Corporation with respect to the shares redeemed on and after the date fixed for redemption and shall be entitled only to receive the redemption price without interest upon surrender of the share certificate. If less than all the shares represented by one share certificate are to be redeemed, the Corporation shall issue a new share certificate for the shares not redeemed. (c) The Corporation shall also cause a copy of the notice of redemption to be published in a newspaper of general circulation in the county in which the principal executive office of the Corporation is located at least once a week for two successive weeks, in each instance on any day of the week, commencing not earlier than 60 nor later than 20 days before the date fixed for redemption. If the Corporation publishes the notice of redemption as provided in this paragraph (c), the failure of the Corporation to comply with the provision for mailing of notice of redemption in paragraph (b) shall not invalidate the redemption of the shares. (d) If, on or prior to any date fixed for redemption, the Corporation deposits with any bank or trust company in this state (which may be an affiliate of the Corporation) as a trust fund a sum sufficient to redeem, on the date fixed for redemption thereof, the shares called for redemption, with irrevocable instructions and authority to the bank or trust company to publish the notice of redemption thereof (or to complete such publication if theretofore commenced) and to pay, on and after the date fixed for redemption or prior thereto, the redemption price of the shares to their respective holders upon surrender of their share certificates, then from and after the date of the deposit (although prior to the date fixed for redemption) the shares so called shall be redeemed and dividends on those shares shall cease to accrue after the date fixed for redemption. The deposit shall constitute full payment of the shares to their holders and from and after the date of the deposit the shares shall no longer be outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the redemption price of the shares without interest, upon surrender of their certificates therefor. Any interest accrued on such funds shall be paid to the Corporation from time to time. If less than all the shares represented by one share certificate are to be redeemed, the Corporation shall issue a new share certificate for the shares not redeemed. After two years, the bank or trust company shall return to the Corporation funds deposited and not claimed and thereafter the holder of a share certificate for shares redeemed shall look to the Corporation for payment. -34- 3.4.5 Voting Rights. (a) Except as hereinafter in this Section 3.4.5 expressly provided for and as otherwise required by the laws of the State of California, the Series B Stock shall have no voting rights. If there is a default in whole or in part in the payment of 24 or more cumulative monthly dividends, whether or not consecutive, on the Series B Stock as provided for in Section 3.4.2 above, the holders of the outstanding Series B Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the Series B Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable, to elect two of the authorized number of members of the Board of Directors of the Corporation at the Corporation's next annual meeting of shareholders. At elections for such directors, each holder of Series B Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity and having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). The right of the holders of Series B Stock, voting separately as a class, to elect (either alone or together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and having like voting rights) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on the Series B Stock shall have been fully paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of the Series B Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the Series B Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause, and any vacancy thereby created may be filled, only by the affirmative vote of the holders of Series B Stock voting separately as a class (either alone or together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and having like voting rights). If the office of any director elected by the holders of Series B Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (b) So long as any shares of Series B Stock remain outstanding, the consent of the holders of at least a majority of the shares of Series B Stock outstanding at the time (voting separately as a class together with all other series of Preferred Stock ranking on a parity with the Series B Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable) shall be necessary to permit, effect or validate any one or more of the following: (i) the authorization, creation or issuance of a new class or series of shares having rights, preferences or privileges prior (as that term is defined in Section 3.4.5(d)) to the shares of the Series B Stock, or any increase in the number of authorized shares of any class or series having rights, preferences or privileges prior to the shares of Series B Stock; or -35- (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Articles of Incorporation of the Corporation which would materially and adversely affect any right, preference, privilege or voting power of the Series B Stock or of the holders thereof, provided, however that any increase in the amount of authorized Common Stock or authorized Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the Series B Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series B Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (d) Any class or classes of stock of the Corporation shall be deemed to rank: (i) prior to the Series B Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series B Stock; and (ii) on a parity with the Series B Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof are different from those of the Series B Stock, if the holders of such class of stock and of the Series B Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority one over the other. 3.4.6 Series A Preferred Stock. For purposes of the foregoing provisions, the Series A Preferred Stock of the Corporation shall be deemed to rank on a parity with the Series B Stock for purposes of Sections 3.4.2, 3.4.3 and 3.4.5 hereof. 3.5 Series C Preferred Stock. The rights, preferences and privileges of the Series C Preferred Stock of the Corporation are as set forth in this Section 3.5. 3.5.1 Designation and Amount. Seventeen Thousand (17,000) of the shares of the Preferred Stock of the Corporation are designated Series C Preferred Stock (hereinafter referred to as "Series C Stock"). -36- 3.5.2 Dividends. (a) The holders of shares of Series C Stock shall be entitled to receive cash dividends, when and as declared by the Board of Directors out of funds legally available for the purpose, from the date of issue of such shares to and including the last day of the month following the month in which such issuance occurred (the "Initial Dividend Period"), and for each whole month thereafter (such Initial Dividend Period and each whole, month thereafter shall be herein referred to in this Section 3.5 as a "Dividend Period"), at an annual rate of $13.50 per share. The amount of dividend per share payable for the Initial Dividend Period and for any other Dividend Period more or less than a full month shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which payable. The amount of dividend per share payable for each full Dividend Period commencing after the Initial Dividend Period, shall be computed by dividing the annual dividend rate for each Dividend Period by twelve. Dividends shall be payable when and as declared by the Board of Directors, out of funds legally available therefor, to holders of record on such respective dates not exceeding 15 days preceding the payment date thereof as may be determined by the Board of Directors in advance of such payment date. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date not exceeding 15 days preceding the payment date thereof as may be fixed by the Board of Directors. No dividends shall be declared on any other series or class or classes of Preferred Stock on a parity (as that term is defined in Section 3.5.5(d)) with the Series C Stock as to dividends in respect of any Dividend Period unless there shall likewise be or have been declared on all shares of Series C Stock at the time outstanding like dividends for all Dividend Periods coinciding with or ending before such Dividend Period, ratably in proportion to the respective dividend rates fixed for all such other series or class or classes of Preferred Stock and the Series C Stock. Dividends shall be cumulative and will accrue on each share of Series C Stock from the date of original issuance thereof. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments which may be in arrears. (b) If dividends at the rate per share set out in Section 3.5.2(a) for any Dividend Period shall not have been declared and paid or set apart for payment on all outstanding shares of Series C Stock for such Dividend Period and all preceding Dividend Periods from and after the date of issue thereof, then, until the aggregate deficiency shall be declared and fully paid or set apart for payment, the Corporation shall not (i) declare or pay or set apart for payment any dividends or make any other distribution on the Common Stock of the Corporation or any other capital stock of the Corporation ranking junior to the series C Stock with respect to the payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Corporation (which for all purposes shall mean any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary) (the Common Stock and such other stock being herein referred to in this Section 3.5 as "Junior Stock"), other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Stock, or (ii) make any payment on account of the purchase, redemption or other retirement of any Junior Stock. 3.5.3 Liquidation Preference. Upon the voluntary or involuntary liquidation, winding up or dissolution of the Corporation, out of the assets available for distribution to shareholders the holders of Series C Stock shall be entitled to receive, in preference to any payment on the Junior Stock, an amount equal to $135.00 per share plus cumulative dividends as provided in Section 3.5.2 above accrued and unpaid to the date payment is made available to the Series C Stock and no more. Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or prior to the Series C Stock upon liquidation, dissolution or winding up, after the full preferential liquidation amount has been paid to, or determined and set apart for, the Series C Stock, the remaining assets shall be paid to the Junior Stock. If upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the shares of the Series C Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other Preferred Stock ranking, as to liquidation, dissolution or winding up, on a parity with the Series C Stock, then such assets, or the proceeds thereof, shall be distributed among the shareholders of Series C Stock and any such other Preferred Stock ratably in accordance with the respective amounts which would be payable on such shares of Series C Stock and any such other Preferred Stock if all amounts payable thereon were paid in full. A reorganization shall not be considered to be a liquidation, winding up or dissolution within the meaning of this Section 3.5.3 and in such event the Series C Stock shall be entitled only to the rights provided in the plan of reorganization and Chapters 12 and 13 of the California General Corporation Law and elsewhere in the Corporation's Articles of Incorporation. -37- 3.5.4 Redemption. (a) The Series C Stock is subject to redemption, out of funds legally available therefor, in whole, or from time to time in part, at the option of the board of directors of the Corporation at or any time after four years from the date such Series C Stock is issued, or prior thereto upon the approval of at least a majority of the outstanding shares of Series C Stock. If only a part of the Series C Stock is to be redeemed, the redemption shall be carried out pro rata (as nearly as may be). The redemption price shall be $135.00 per share plus cumulative dividends as provided in Section 3.5.2 above accrued and unpaid to the date fixed for redemption (herein called the "redemption price"). In the case of a redemption of less than all of the Series C Stock at anytime outstanding, no such shares may be redeemed until all dividends accrued and unpaid on all Series C Stock then outstanding, other than the shares to be redeemed, shall have been paid or declared and the full amount thereof set apart for payment. (b) The Corporation shall mail a notice of redemption to each holder of record of shares to be redeemed addressed to the holder at the address of such holder appearing on the books of the Corporation or given by the holder to the Corporation for the purpose of notice, or if no such address appears or is given at the place when the principal executive office of the Corporation is located, not earlier than 60 nor later than 20 days before the date fixed for redemption. The notice of redemption shall include (i) the class of shares or the part of a class of shares to be redeemed, (ii) the date fixed for redemption, (iii) the redemption price and (iv) the place at which the shareholders may obtain payment of the redemption price upon surrender of their share certificates. If funds are available on the date fixed for the redemption, then whether or not the share certificates are surrendered for payment of the redemption price, the shares shall no longer be outstanding and the holders thereof shall cease to be shareholders of the Corporation with respect to the shares redeemed on and after the date fixed for redemption and shall be entitled only to receive the redemption price without interest upon surrender of the share certificates. If less than all the shares represented by one share certificate are to be redeemed, the Corporation shall issue a new share certificate for the shares not redeemed. (c) The Corporation shall also cause a copy of the notice of redemption to be published in a newspaper of general circulation in the county in which the principal executive office of the Corporation is located at least once a week for two successive weeks, in each instance on any day of the week, commencing not earlier than 60 nor later than 20 days before the date fixed for redemption. If the Corporation publishes the notice of redemption as provided in this paragraph (c), the failure of the Corporation to comply with the provision for mailing of notice of redemption in paragraph (b) shall not invalidate the redemption of the shares. (d) If, on or prior to any date fixed for redemption, the Corporation deposits with any bank or trust company in this state (which may be an affiliate of the Corporation) as a trust fund a sum sufficient to redeem, on the date fixed for redemption thereof, the shares called for redemption, with irrevocable instructions and authority to the bank or trust company to publish the notice of redemption thereof (or to complete such publication if theretofore commenced) and to pay, on and after the date fixed for redemption or prior thereto, the redemption price of the shares to their respective holders upon surrender of their share certificates, then from and after the date of the deposit (although prior to the date fixed for redemption) the shares so called shall be redeemed and dividends on those shares shall cease to accrue after the date fixed for redemption. The deposit shall constitute full payment of the shares to their holders and from and after the date of the deposit the shares shall no longer be outstanding and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the redemption price of the shares without interest, upon surrender of their certificates therefor. Any interest accrued on such funds shall be paid to the Corporation from time to time. If less than all the shares represented by one share certificate are to be redeemed, the Corporation shall issue a new share certificate for the shares not redeemed. After two years, the bank or trust company shall return to the Corporation funds deposited and not claimed and thereafter the holder of a share certificate for shares redeemed shall look to the Corporation for payment. -38- 3.5.5 Voting Rights. (a) Except as hereinafter in this Section 3.5.5 expressly provided for and as otherwise required by the laws of the State of California, the Series C Stock shall have no voting rights. If there is a default in whole or in part in the payment of 24 or more cumulative monthly dividends, whether or not consecutive, on the Series C Stock as provided for in Section 3.5.2 above, the holders of the outstanding Series C Stock shall have the right, voting separately as a class with holders of shares of any one or more other series of Preferred Stock ranking on a parity with the Series C Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been, conferred and are exercisable, to elect a majority of the Board of Directors of the Corporation at the Corporation's next annual meeting of shareholders. At elections for such directors, each holder of Series C Stock shall be entitled to one vote for each share held (the holders of shares of any other series of Preferred Stock ranking on such a parity and having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). The right of the holders of Series C Stock, voting separately as a class, to elect (either alone or together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and having like voting rights) members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on the Series C Stock shall have been fully paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to reverting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of the Series C Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the Series C Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause, and any vacancy thereby created may be filled, only by the affirmative vote of the holders of Series C Stock voting separately as a class (either alone or together with the holders of shares of any one or more other series of Preferred Stock ranking on such a parity and having like voting rights). If the office of any director elected by the holders of Series C Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (b) So long as any shares of Series C Stock remain outstanding, the consent of the holders of at least a majority of the shares of Series C Stock outstanding at the time (voting separately as a class together with all other series of Preferred Stock ranking on a parity with the Series C Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which like voting rights have been conferred and are exercisable) shall be necessary to permit, effect or validate any one or more of the following: (i) the authorization, creation or issuance of a new class or series of shares having rights, preferences or privileges prior (as that term is defined in Section 3.5.5(d)) to the shares of the Series C Stock, or any increase in the number of authorized shares of any class or series having rights, preferences or privileges prior to the shares of Series C Stock; or -39- (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Articles of Incorporation of the Corporation which would materially and adversely affect any right, preference, privilege or voting power of the Series C Stock or of the holders thereof, provided, however that any increase in the amount of authorized Common Stock or authorized Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the Series C Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series C Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (d) Any class or classes of stock of the Corporation shall be deemed to rank: (i) prior to the Series C Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series C Stock; and (ii) on a parity with the Series C Stock as to dividends or as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof are different from those of the Series C Stock, if the holders of such class of stock and of the Series C Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority one over the other. 3.5.6 Series A Preferred Stock and Series B Preferred Stock. For purposes of the foregoing provisions, the Series A Preferred Stock and the Series B Preferred Stock of the Corporation shall be deemed to rank on a parity with the Series C Stock for purposes of Sections 3.5.2, 3.5.3 and 3.5.5 hereof. 3.6 Series AA Preferred Stock. The rights, preferences and privileges of the Series AA Preferred Stock of the Corporation are as set forth in this Section 3.6. 3.6.1 Designation and Amount. One Hundred Fifty Thousand (150,000) of the shares of the Preferred Stock of the Corporation are designated as Series AA Junior Participating Preferred Stock (the "Series AA Preferred Stock"). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series AA Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series AA Preferred Stock. -40- 3.6.2 Dividends and Distributions. (a) Subject to the rights of the holders of any shares of any series of Series AA Preferred stock (or any similar stock) ranking prior and superior to the Series AA Preferred Stock with respect to dividends, the holders of shares of Series AA Preferred Stock, in preference to the holders of shares of Common Stock, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on any regular quarterly dividend payment date as shall be established by the Board of Directors (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series AA Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series AA Preferred Stock. In the event the Corporation shall at any time after July 10, 2001 (the "Rights Declaration Date"), declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series AA Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series AA Preferred Stock as provided in Section 3.6.2(d) immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series AA Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series AA Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series AA Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series AA Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may, in accordance with applicable law, fix a record date for the determination of holders of shares of Series AA Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than such number of days prior to the date fixed for the payment thereof as may be allowed by applicable law. -41- 3.6.3 Voting Rights. The holders of shares of Series AA Preferred Stock shall have the following voting rights: (a) Each share of Series AA Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. (b) Except as otherwise provided in the Corporation's Articles of Incorporation, or by law, the holders of shares of Series AA Preferred Stock, the holders of shares of Common Stock, and the holders of shares of any other capital stock of the Corporation having general voting rights, shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as set forth in the Corporation's Articles of Incorporation, and except as otherwise provided by law, holders of Series AA Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 3.6.4 Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series AA Preferred Stock as provided in Section 3.6.2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series AA Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series AA Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series AA Preferred Stock, except dividends paid ratably on the Series AA Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series AA Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series AA Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series AA Preferred Stock, or any shares of stock ranking on a parity with the Series AA Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Section 3.6.4(a), purchase or otherwise acquire such shares at such time and in such manner. -42- 3.6.5 Reacquired Shares. Any shares of Series AA Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall become authorized but unissued shares of Series AA Preferred Stock and may be reissued as part of a new series of Series AA Preferred Stock subject to the conditions and restrictions on issuance set forth in the Corporation's Articles of Incorporation, and by any subsequent amendments, or as otherwise required by law. 3.6.6 Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series AA Preferred Stock unless, prior thereto, the holders of shares of Series AA Preferred Stock shall have received $100.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series AA Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series AA Preferred Stock, except distributions made ratably on the Series AA Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series AA Preferred Stock were entitled immediately prior to such event under the provision in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 3.6.7 Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, statutory share exchange, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series AA Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series AA Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. 3.6.8 No Redemption. The shares of Series AA Preferred Stock shall not be redeemable. 3.6.9 Rank. The Series AA Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. -43- 3.6.10 Amendment. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series AA Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series AA Preferred Stock, voting together as a single class. 3.6.11 Fractional Shares. Series AA Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series AA Preferred Stock. Fourth The number of directors of this Corporation shall be set forth in the Bylaws of the Corporation as adopted and amended from time to time in the manner authorized by law. Fifth The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. No amendment or repeal of this Article FIFTH by the shareholders of this Corporation shall adversely affect any right or protection of a director of this Corporation existing at the time of such amendment or repeal. Sixth This Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with such agents, votes of shareholders or disinterested directors or otherwise, or any combination of the foregoing, in excess of the indemnification otherwise permitted by Section 317 of the Corporation Code, subject only to the limits set forth in Section 204 of the Corporations Code with respect to actions for breach of duty to the Corporation and its shareholders. No amendment or repeal of this Article SIXTH by the Shareholders of this Corporation shall adversely affect any Corporation existing at the time of such amendment or repeal. Seventh 7.1 The Board of Directors, when evaluating any offer of another party to (a) make a tender or exchange offer for the equity securities of the Corporation or any subsidiary, (b) merge or consolidate the Corporation or any subsidiary with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties or assets of the Corporation, or of any subsidiary, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its stockholders, give due consideration to all relevant factors, including by way of illustration, but not limitation, any or all of the following: 7.1.1 Whether the offer is acceptable based on historical operating results and the financial condition of the Corporation and its subsidiaries, and its future prospects; 7.1.2 Whether a more favorable offer could be obtained for the Corporation's or its subsidiaries, securities or assets in the foreseeable future; 7.1.3 The social, economic or any other material impact which an acquisition of the equity securities of the Corporation or substantially all of its assets would have upon the employees and customers of the Corporation and its subsidiaries and the community which they serve; 7.1.4 The reputation and business practices of the offeror and its management and affiliates as they would affect the employees and customers of the Corporation and its subsidiaries and the future value of the Corporation's stock; -44- 7.1.5 The value of the securities, if any, which the offeror is offering in exchange for the Corporation's or its subsidiaries' securities or assets based on an analysis of the worth of the Corporation or of its subsidiaries as compared to the offeror corporation or other entity whose securities are being offered; and 7.1.6 Any antitrust or other legal or regulatory issues raised by the offer. 7.2 If the Board of Directors determines an offer should be rejected, it may take any lawful action to accomplish its purpose including, but not limited to, any or all of the following: 7.2.1 Advising shareholders not to accept the offer; 7.2.2 Litigation against the offeror; 7.2.3 Filing complaints with any governmental and regulatory authorities; 7.2.4 Acquiring the Corporation's securities; 7.2.5 Selling or otherwise issuing authorized but unissued securities or treasury stock or granting options with respect thereto; 7.2.6 Acquiring a company to create an antitrust or other regulatory problem for the offeror; 7.2.7 Obtaining a more favorable offer from another individual or entity. 7.3 Notwithstanding the fact that by law or by agreement with a national securities exchange or otherwise, no vote, or lesser vote, of shareholders may be specified or permitted, the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock of the Corporation shall be required to approve any offer described in Section 7.1. The provisions of Sections 7.1, 7.2 and 7.3 of these Articles of Incorporation may be amended only by the affirmative vote of two-thirds of the outstanding shares of Common Stock of the Corporation, and by the affirmative vote of two-thirds of the outstanding shares of Preferred Stock of the Corporation, if any. -45- Exhibit 10.13 Employment Agreement between TriCo and Richard O'Sullivan dated April 10, 2001 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is entered into as of April 10, 2001 between TRI COUNTIES BANK ("EMPLOYER"), having its principal place of business at 63 Constitution Drive, Chico, California 95973 and Richard O'Sullivan ("Employee"). WITNESSETH WHEREAS, EMPLOYER desires to employ Employee pursuant to the terms of this Agreement and Employee is desirous of and wishes to enter into such an employment arrangement, on the terms and conditions hereinafter set forth NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. EMPLOYMENT EMPLOYER hereby employs Employee, and Employee hereby accepts appointment, as Executive Vice-President. Employee shall report to and be under the supervision of the Board of Directors of EMPLOYER and Employee hereby agrees to devote his full and exclusive time and attention to the business of EMPLOYER, to faithfully perform the duties assigned to him by the Board of Directors consistent with his office, and to conduct himself in such a way as shall best serve the interests of EMPLOYER. 2. TERM OF AGREEMENT Unless sooner terminated by EMPLOYER or the Employee pursuant to the provisions of Sections 4 or 6 hereof, the employment provisions of this Agreement shall terminate on the second (2nd) anniversary of the date of this Agreement. This Agreement shall automatically extended for an additional year on the first anniversary of this Agreement and each anniversary thereafter unless a party notifies the other party to the contrary in writing within 30 days of and anniversary. 3. COMPENSATION For and in consideration of the performance by the Employee of the services, terms, conditions, covenants and promises herein recited, EMPLOYER agrees and promises to pay to the Employee at the times and in the manner herein stated, the following: 3.1 Salary. As the compensation for the services to be performed by the Employee hereunder during the employment period, the Employee shall receive, as gross salary before any withholding of whatever sort, the sum of $173,250.00 per year, payable in the manner in which EMPLOYER's payroll is customarily handled. Additionally, Employee will be eligible for such annual increases in salary as EMPLOYER's Board of Directors shall from time to time decide. 3.2 Bonus/Incentive Plan. Employee shall participate in a bonus/incentive plan to be agreed upon between Employee and EMPLOYER and approved by the Board of Directors of EMPLOYER. It is contemplated that the incentive bonus/plan will allow for an annual bonus of up to 40% of annual salary based upon the meeting of certain criteria specified therein and that the first year's minimum incentive annual bonus will be guaranteed at $25,000.00. -46- 3.3 Stock Options. Employee will be granted options to purchase ______ shares of TRICO BANCSHARES ("TRICO") common stock pursuant to and under the terms of TRICO's Employee Stock Option Plan 3.4 Employee Benefits. In addition to the above, EMPLOYER shall provide the Employee with the following: (a) participation for the Employee and his dependents, in any present or future disability, health, dental or other insurance plan generally available to all employees of the Company, such participation to be on the same basis as such other executives/employees, except that the 90 day waiting period for inclusion shall be waived; (b) participation for the Employee in any present or future employee savings plans, including, but not limited to EMPLOYER's 401(k) Savings Plan; Employee Stock Ownership Plan; and Executive Deferred Compensation Plan; (c) twenty (20) paid vacation days annually; and (d) a car allowance of $850.00 per month and reimbursement of other reasonable out-of-pocket expenses, including $0.30 per mile, incurred by the Employee in the performance of the duties hereunder in accordance with the policies of EMPLOYER. 4. EARLY TERMINATION OF EMPLOYMENT 4.1 Termination For Cause. EMPLOYER may at any time, in its sole discretion, terminate the employment provisions of this Agreement for "cause," effective immediately upon providing the Employee with notice of his dismissal. The only occurrences which shall constitute "cause" within the meaning of this paragraph shall be the following: (a) the conviction of the Employee by a court of competent jurisdiction of a crime involving moral turpitude (or the entering of a no-contest or nolo contendere plea by Employee in regard to such crime); (b) the commission by the Employee of an act of fraud or bad faith upon EMPLOYER; (c) the willful misappropriation of any funds or property of EMPLOYER by the Employee; (d) the willful, continued and unreasonable failure by the Employee to perform his duties or obligations under this Agreement; or (e) the breach of any material provisions hereof or the engagement by the Employee, without the prior written approval of EMPLOYER, in any activity which would violate the provisions of Section 7 of this Agreement. 4.2 Termination Without Cause. EMPLOYER may at any time, in its sole discretion, terminate the employment provisions of this Agreement without "cause," which term is defined in Section 4.1 hereof. 4.3 Voluntary Termination. The employment provisions of this Agreement shall also terminate upon: -47- (a) the death or permanent physical or mental disability of the Employee; (b) the voluntary retirement of the Employee; or (c) the voluntary resignation of the Employee. For purposes hereof, permanent physical or mental disability shall be deemed to have occurred when Employee has been unable, with reasonable accommodation, to perform the essential functions of his job (i) for a period of six (6) consecutive months or (ii) on 80% or more of the normal working days during any nine (9) consecutive months. 5. RIGHTS UPON EARLY TERMINATION OF EMPLOYMENT 5.1 Termination Pursuant to Section 4.1 or 4.3. If Employee's employment is terminated pursuant to paragraph 4.1 or 4.3 hereof, then EMPLOYER will have no obligation to pay any amount to the Employee other than amounts earned or accrued pursuant to the provisions of Section 3, but which have not yet been paid as of the date of the termination of the Employee, and the Employee shall have no further claims against EMPLOYER or EMPLOYER Entities with respect to this Agreement (except with respect to payments due and payable under this paragraph 5.1. 5.2 Termination Pursuant to Section 4.2. If Employee's employment is terminated pursuant to paragraph 4.2 hereof, then EMPLOYER shall pay to the Employee all amounts earned or accrued pursuant to the provisions of Section 3 hereof, but which have not yet been paid as of the date of the termination of the Employee. In addition, EMPLOYER shall pay Employee a prorated amount of Employee's minimum guaranteed annual bonus (as set forth in Section 3.3) through the date of termination. In addition, EMPLOYER shall pay through the then remaining term of this Agreement, the amount of salary that would be payable pursuant to paragraph 3.1 if the Employee's employment had not been terminated, at such times and in such amounts that would have been paid if Employee's employment had not been terminated. 6. CHANGE IN CONTROL 6.1 Benefits. In the event of a "Change in Control" of EMPLOYER as defined herein, and in the event that, within ninety days of the Change of Control, either: (i) Employee's employment is terminated; or (ii) Employee gives written notice that he is terminating his employment and invoking the provisions of this Section 6, subject to the provisions of paragraph 6.3, Employee shall be entitled to receive his salary at the rate then in effect for a period of twenty -four (24) months following the termination of Employee's employment, as well as an amount equal to 200% of the annual bonuses earned by the Employee for the last complete calendar year or year of employment, whichever is greater, provided, however, that the present value of said payments shall not be more than two hundred ninety-nine percent (299%) of Employee's compensation as defined by Section 280G of the Internal Revenue Code of 1954, as amended. EMPLOYER shall be relieved of its obligation to make payments under this Section if, at the time it is to make such payment, it is insolvent, in conservatorship or receivership, is in a troubled condition, is operating under a supervisory agreement with any regulatory agency having jurisdiction, has been given a financial soundness rating of "4" or "5", or is subject to a proceeding to terminate or suspend federal deposit insurance. 6.2 Defined. For purposes of this Section 6, a "Change in Control" of EMPLOYER shall occur: (a) upon EMPLOYER's knowledge that any person (as such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) is or becomes "the beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of shares representing 40% or more of the combined voting power of the then outstanding securities of EMPLOYER's Parent; or -48- (b) upon the first purchase of the common stock of EMPLOYER's Parent pursuant to a tender or exchange offer (other than a tender or exchange offer made by EMPLOYER's Parent); or (c) upon the approval by the stockholders of EMPLOYER's Parent of a merger or consolidation (other than a merger of consolidation in which EMPLOYER's Parent is the surviving corporation and which does not result in any reclassification or reorganization of EMPLOYER's Parent's then outstanding securities), a sale or disposition of all or substantially all of EMPLOYER's Parent assets or a plan of liquidation or dissolution of EMPLOYER's Parent; or (d) if, during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of EMPLOYER's Parent cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the stockholders of EMPLOYER's Parent of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 6.3 Limitations. Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under Section 6.1 hereof, the certified public accountants of EMPLOYER immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of EMPLOYER whether any payment or distribution by EMPLOYER to or for the benefit of Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by EMPLOYER for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of EMPLOYER pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by EMPLOYER because of said Section 280G of the Code. If under this Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by EMPLOYER because of Section 280G of the Code, EMPLOYER shall promptly give Employee notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Employee may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the EMPLOYER in writing of his election within 20 business days of his receipt of notice. If no such election is made by Employee within such 20-day period, EMPLOYER may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Employee promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon EMPLOYER and Employee and the payment to Employee shall be made within 20 days of sale of EMPLOYER. EMPLOYER may suspend for a period of up to 30 days after the sale of EMPLOYER the Payment and any other payments or benefits due to Employee until the Certified Public Accountants finish the determination and Employee (or EMPLOYER, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, EMPLOYER shall pay to or distribute to or for the benefit of Employee such amounts as are then due to Employee under this Agreement. -49- As a result of the uncertainty in the application of Section 280G of the Code, it is possible that Contract Payments may have been made by EMPLOYER which should not have been made ("Overpayment"), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Certified Public Accountants, based upon the assertion of a deficiency by the Internal Revenue Service against EMPLOYER or Employee which said Certified Public Accountants believe has a high probability of success, determines that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to Employee which Employee shall repay to EMPLOYER together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code; provided, however, that no amount shall be payable by Employee to EMPLOYER in and to the extent such payment would not reduce the amount which is subject to taxation under Section 4999 of the Code. In the event that the Certified Public Accountants, based upon controlling precedent, determine that an Underpayment has occurred, any such Underpayment shall be promptly paid by EMPLOYER to or for the benefit of Employee together with interest at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 6.4 Continuing Obligations. The triggering of this Section 6 shall not relieve Employee or EMPLOYER of their obligations pursuant to the provisions of Section 7 hereof, such Section containing independent agreements and obligations. 7. COVENANTS 7.1 Non-disturbance with Employees. Employee hereby agrees that (a) during the term of his employment with EMPLOYER and for a period of twelve (12) months following the termination of his employment, he will not directly or indirectly solicit, cause any other person to solicit or assist any other person with soliciting, the employment of any person who is, at the time of such solicitation, or who was within 30 days of such solicitation, an employee of EMPLOYER or its subsidiaries or employees. Employment for purposes of this Section shall include consulting, performing services for commissions or otherwise performing services for cash or other compensation. 7.2 Confidential Information. The parties hereto recognize that the services performed and to be performed by Employee are special and unique and that by reason of this employment Employee has acquired and will continue to acquire information regarding the strategic plans, business plans, policies, finances and customers and trade secrets of that EMPLOYER in the course of its business takes steps to keep confidential ("Confidential Information"). Employee hereby agrees not to divulge to anyone, either during or after his employment with EMPLOYER or for a period of three (3) years following the termination of his employment any such Confidential Information. Employee further agrees that all memoranda, notes, records, reports, letters, and other documents made, compiled, received, held, or used by Employee while employed by EMPLOYER concerning any phase of the business of EMPLOYER shall be EMPLOYER's property and shall be delivered by Employee to EMPLOYER on the termination of his employment, or at any earlier time on the request of the Board of Directors. 7.3 Non-use of Confidential Information. Employee hereby agrees that (a) during the term of his employment with EMPLOYER; and (b) for a period of one year following the termination of his employment, he will not use any Confidential Information, and especially information concerning EMPLOYER'S customers to directly or indirectly solicit, cause any other person to solicit or assist any other person with soliciting any customer, depositor or borrower of EMPLOYER or its subsidiaries or affiliates to become a customer, depositor or borrower of another bank, savings and loan, or financial institution. 7.4 Enforcement. The agreement of Employee contained in this Section 7 shall be enforceable both at law and in equity, by injunction and otherwise; and the rights and remedies of EMPLOYER hereunder with respect thereto shall be cumulative and not alternative and shall not be exhausted by any one or more uses thereof. 8. ENTIRE AGREEMENT: WAIVERS AND AMENDMENTS This Agreement sets forth the entire agreement between the parties with respect to the terms and conditions of the relationship between Employee and EMPLOYER and any and all matters related thereto, and any and all prior agreements with respect to any thereof, whether oral or written, are superseded hereby. Neither this Agreement nor any term or condition hereof, including without limitation, the terms and conditions of this Section, any be waived or modified in whole or in part as against EMPLOYER or Employee, as the case may be, except by written instrument signed by an authorized officer of EMPLOYER and by Employee, expressly stating that it is intended to operate as a waiver or modification of this Agreement, and any such written waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach hereof. -50- 9. NOTICE Any notices, consents or other communication required to be sent or given hereunder by any of the parties shall in every case be in writing and shall be deemed properly served if (a) delivered personally, (b) sent by registered or certified mail, in all such cases with first class postage prepaid, return receipt requested, or (c) delivered by a recognized overnight courier service, if to EMPLOYER at the address of its main office to the attention of its President and, if to Employee, at his last address on the personnel records of EMPLOYER or at such other addresses as may be furnished by a party in writing according to the provisions of this Section 9, except that either party may from time to time, in writing by certified mail, designate another address which shall thereupon become his or its effective address for the purposes of this Section. 10. SEVERABILITY If any term or provision of this Agreement or the application thereof to any person, property or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons, property or circumstances other than those as to which it is invalid or unenforceable, shall not be effected thereby, and each term provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. 11. NO RESTRICTIONS Employee hereby represents and warrants that he is not now and will not be subject to any agreement, restriction, lien, encumbrance, or right, title or interest in any one, limiting in any way the scope of this Agreement or in any way inconsistent with this Agreement. 12. NO ASSIGNMENT: BINDING EFFECT This Agreement shall be binding upon and inure to the benefit of EMPLOYER, its successors or assigns. Except as to the obligation of Employee to render personal services which shall be non-assignable, this Agreement shall be binding upon and inure to the heirs, executors, administrators, and assigns of Employee. 13. ARBITRATION EXCEPT AS TO ANY ACTION BROUGHT TO ENFORCE THE PROVISIONS OF SECTION 7 ABOVE, ANY CONTROVERSY, DISPUTE OR CLAIM ARISING OUT OF OR RELATING TO THE TERMINATION OF THE EMPLOYEE'S EMPLOYMENT, AND THE INTERPRETATION OF THIS AGREEMENT, AND ANY AND ALL CLAIMS INCLUDING ANY STATUTORY CLAIMS OF DISCRIMINATION, SHALL BE RESOLVED BY BINDING ARBITRATION UNDER THE EMPLOYMENT DISPUTE RESOLUTION RULES OF THE AMERICAN ARBITRATION ASSOCIATION PROVISIONS OF THE FEDERAL UNIFORM ARBITRATION ACT. The parties agree that arbitration shall be the exclusive forum to resolve any and all claims between the parties, their agents and employees regarding the termination of employment, or of this Agreement, including any claims of discrimination under any state or federal statute, wrongful discharge theory, or any other claim whether based on specific state or federal statute or common law. ANY CLAIM MADE UNDER THIS PROVISION MAY BE SUBMITTED IN WRITING WITHIN 60 DAYS AFTER THE TERMINATION OF EMPLOYMENT OR THIS AGREEMENT. THE WRITTEN CLAIM MUST DETAIL THE FACTS WHICH SUPPORT THE CLAIM ALONG WITH ANY LEGAL THEORIES OR STATUS UPON WHICH THE CLAIM IS BASED. -51- The parties agree to abide by any determination of the arbitrator as to which party is to be responsible for the costs and attorneys' fees in any such proceeding. It is agreed that the arbitrator shall be empowered to hear all legal and equitable claims, including claims for discrimination. The arbitrator shall be governed by the law applicable to any claims based upon any state or federal statute, and will also be empowered to award any remedies appropriate under any such statues. This provision shall survive the termination of Employee's employment and this Agreement. 14. HEADINGS The captions and headings contained herein have been inserted for convenience or reference only and shall not affect the meaning or interpretation of this Agreement. 15. GOVERNING LAW AND CHOICE OF FORUM This Agreement shall be construed and enforced in accordance with the laws of the State of California and shall be enforced in the State or Federal Courts sitting in California. EMPLOYEE /s/ Richard O'Sullivan Richard O'Sullivan ATTEST: /s/ Kathleen Richardson - ----------------------- TRI COUNTIES BANK ATTEST: BY: /s/ Richard P. Smith President and Chief Executive Officer /s/ Kathleen Richardson - ----------------------- -52- Exhibit 11.1 TRICO BANCSHARES Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution For the three months ended March 31, (In thousands, except per share data) 2003 2002 ---------------------- Weighted average number of common shares outstanding - basic 7,071 6,992 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 179 125 ---------------------- Weighted average number of common shares outstanding - diluted 7,250 7,117 ====================== Net income $3,613 $3,329 Basic earnings per share $0.51 $0.48 Diluted earnings per share $0.50 $0.47 -53- Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas J. Reddish ------------------------------------- Thomas J. Reddish Vice President and Chief Financial Officer 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. -54- -----END PRIVACY-ENHANCED MESSAGE-----