10-Q 1 tcb10q1q04.txt TCBK 3/31/2004 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, 2004 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 X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of Class: Common stock, no par value Outstanding shares as of May 4, 2004: 15,639,522 TABLE OF CONTENTS Page Forward Looking Statements 1 PART I - FINANCIAL INFORMATION 2 Item 1 - Financial Statements 2 Notes to Unaudited Condensed Consolidated Financial Statements 6 Financial Summary 12 Item 2 - Management's Discussion and Analysis of Financial 13 Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures about Market Risk 23 Item 4 - Controls and Procedures 24 PART II - OTHER INFORMATION 25 Item 1 - Legal Proceedings 25 Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 25 Item 4 - Submission of Matters to a Vote of Security Holders 25 Item 6 - Exhibits and Reports on Form 8-K 25 Signatures 28 Exhibits 29 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. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2003, 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, 2004 2003 2003 ------------------------------- ----------------- Assets: Cash and due from banks $55,568 $58,925 $80,603 Federal funds sold - 10,100 326 ------------------------------- ----------------- Cash and cash equivalents 55,568 69,025 80,929 Investment securities available for sale 312,657 354,007 316,436 Loans: Commercial 131,759 117,329 142,252 Consumer 334,221 210,633 319,029 Real estate mortgages 465,429 330,001 458,369 Real estate construction 62,656 35,810 61,591 ------------------------------- ----------------- 994,065 693,773 981,241 Allowance for loan losses (14,297) (14,293) (13,773) ------------------------------- ----------------- Loans, net of allowance for loan losses 979,768 679,480 967,468 Premises and equipment, net 19,288 17,542 19,521 Cash value of life insurance 39,412 29,257 38,980 Other real estate owned 924 1,608 932 Accrued interest receivable 5,806 5,891 6,027 Goodwill and other intangible assets 21,274 3,815 21,604 Other assets 15,746 15,878 16,858 ------------------------------- ----------------- Total Assets $1,450,443 $1,176,503 $1,468,755 =============================== ================= Liabilities: Deposits: Noninterest-bearing demand $260,299 $226,373 $298,462 Interest-bearing demand 222,986 188,575 220,875 Savings 488,915 324,584 441,461 Time certificates, $100,000 and over 91,038 94,089 94,500 Other time certificates 176,701 199,031 181,525 ------------------------------- ----------------- Total deposits 1,239,939 1,032,652 1,236,823 Federal funds purchased 16,300 - 39,500 Accrued interest payable 2,507 3,034 2,638 Other Liabilities 18,687 16,010 18,328 Long-term debt and other borrowings 22,877 22,915 22,887 Junior subordinated debt 20,619 - 20,619 ------------------------------- ----------------- Total Liabilities 1,320,929 1,074,611 1,340,795 =============================== ================= Shareholders' Equity: Authorized - 20,000 shares of common stock Issued and outstanding: 15,636 at March 31, 2004 69,568 14,161 at March 31, 2003 50,768 15,668 at December 31, 2003 69,767 Retained earnings 57,520 48,436 56,379 Accumulated other comprehensive income, net 2,426 2,688 1,814 ------------------------------- ----------------- Total Shareholders' Equity 129,514 101,892 127,960 ------------------------------- ----------------- Total Liabilities and Shareholders' Equity $1,450,443 $1,176,503 $1,468,755 ===================================================
Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. See accompanying notes to unaudited condensed consolidated financial statements. -2- TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data) (Unaudited) Three months ended March 31, 2004 2003 ---------------------------- Interest Income: Interest and fees on loans $16,739 $12,989 Interest on federal funds sold 10 84 Interest on investment securities available for sale: Taxable 2,721 2,744 Tax exempt 442 532 ---------------------------- Total interest income 19,912 16,349 ---------------------------- Interest Expense: Interest on interest-bearing demand deposits 100 118 Interest on savings 907 720 Interest on time certificates of deposit 1,442 1,959 Interest on short-term borrowing 34 - Interest on long-term debt 320 318 Interest on junior subordinated debt 211 - ---------------------------- Total interest expense 3,014 3,115 ---------------------------- Net Interest Income 16,898 13,234 ---------------------------- Provision for loan losses 650 150 ---------------------------- Net Interest Income After Provision for Loan Losses 16,248 13,084 ---------------------------- Noninterest Income: Service charges and fees 4,081 3,500 Gain on sale of loans 625 1,133 Commissions on sale of non-deposit investment products 542 448 Other 507 315 ---------------------------- Total Noninterest Income 5,755 5,396 ---------------------------- Noninterest Expense: Salaries and related benefits 8,167 6,877 Other 6,179 5,774 ---------------------------- Total Noninterest Expense 14,346 12,651 ---------------------------- Income Before Income Taxes 7,657 5,829 ---------------------------- Provision for income taxes 2,880 2,216 ---------------------------- Net Income $4,777 $3,613 ---------------------------- Comprehensive Income: Change in unrealized gain on securities available for sale, net 612 385 ---------------------------- Comprehensive Income $5,389 $3,998 ============================ Average Shares Outstanding 15,616,540 14,141,402 Diluted Average Shares Outstanding 16,212,845 14,500,356 Per Share Data Basic Earnings $0.31 $0.26 Diluted Earnings $0.29 $0.25 Dividends Paid $0.10 $0.10 Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. See accompanying notes to unaudited condensed consolidated financial statements. -3- TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, unaudited) Accumulated Other Common Retained Comprehensive Stock Earnings Income (Loss), net Total ----------------------------------------------- Balance, December 31, 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 =============================================== Balance, December 31, 2003 $69,767 $56,379 $1,814 $127,960 Net income for the period 4,777 4,777 Stock issued, including stock option tax benefits 547 547 Repurchase of common stock (746) (2,047) (2,793) Dividends (1,589) (1,589) Unrealized gain on securities available for sale, net 612 612 ----------------------------------------------- Balance March 31, 2004 $69,568 $57,520 $2,426 $129,514 =============================================== See accompanying notes to unaudited condensed consolidated financial statements. -4-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) For the three months ended March 31, 2004 2003 ------------------------------- Operating Activities: Net income $4,777 $3,613 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 831 653 Amortization of intangible assets 331 228 Provision for loan losses 650 150 Amortization of investment securities premium, net 443 757 Originations of loans for resale (31,981) (53,210) Proceeds from sale of loans originated for resale 32,310 53,750 Gain on sale of loans (625) (1,133) Amortization of mortgage servicing rights 190 256 Reduction of mortgage servicing rights valuation allowance (30) - Loss (gain) on sale of fixed assets 78 (2) Change in assets and liabilities: Decrease (increase) in interest receivable 221 (247) (Decrease) increase in interest payable (131) 107 Decrease in other assets and liabilities 661 720 ------------------------------- Net Cash Provided by Operating Activities 7,725 5,642 ------------------------------- Investing Activities: Proceeds from maturities of securities available-for-sale 19,662 36,864 Purchases of securities available-for-sale (15,295) (53,010) Net increase in loans (12,950) (7,161) Proceeds from sale of premises and equipment 12 2 Purchases of property and equipment (579) (904) Purchase of life insurance - (13,910) ------------------------------- Net Cash Used by Investing Activities (9,150) (38,119) ------------------------------- Financing Activities: Net increase in deposits 3,116 27,415 Net decrease in Federal funds purchased (23,200) - Payments of principal on long-term debt agreements (10) (9) Repurchase of Common Stock (2,793) - Dividends paid (1,589) (1,416) Exercise of stock options/issuance of Common Stock 540 242 ------------------------------- Net Cash (Used) Provided by Financing Activities (23,936) 26,232 ------------------------------- Net Decrease in Cash and Cash Equivalents (25,361) (6,245) ------------------------------- Cash and Cash Equivalents and Beginning of Period 80,929 75,270 ------------------------------- Cash and Cash Equivalents at End of Period $55,568 $69,025 =============================== Supplemental Disclosure of Noncash Activities: Unrealized gain on securities available for sale $1,031 $594 Loans transferred to other real estate owned - $676 Income tax benefit from stock option exercises $7 $54 Supplemental Disclosure of Cash Flow Activities: Cash paid for interest expense $3,145 $3,008 Cash paid for income taxes $1,745 $10
See accompanying notes to unaudited condensed consolidated financial statements. -5- NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: General Summary of Significant Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three months ended March 31, 2004 and 2003 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, 2003. 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 consolidated 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, 2004 and throughout 2003, the Company did not have any securities classified as either held-to-maturity or trading. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of other comprehensive income in shareholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that a permanent decline in value has occurred. -6- Loans Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in Management's judgment are well secured and in the process of collection, they may not be classified as nonaccrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans, leases and commitments to extend credit, based on evaluations of the collectibility, impairment and prior loss experience of loans, leases and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Mortgage Operations Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Retained interests (mortgage servicing rights) in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer. Fair values are estimated using discounted cash flows based on a current market interest rate. The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The Company sold substantially all of its conforming long-term residential mortgage loans originated during three months ended March 31, 2004 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, 2004 and December 31, 2003. December 31, March 31, (Dollars in thousands) 2003 Additions Reductions 2004 ----------------------------------------------- Mortgage Servicing Rights $3,413 $296 ($190) $3,519 Valuation allowance (600) - 30 (570) ----------------------------------------------- Mortgage servicing rights, net of valuation allowance $2,813 $296 ($160) $2,949 -7- 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, 2004, the Company had no mortgage loans held for sale. At March 31, 2004 and December 31, 2003, the Company serviced real estate mortgage loans for others of $371 million and $357 million, respectively. Premises and Equipment Premises and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 years for land improvements and buildings. Other Real Estate Owned Real estate acquired by foreclosure is carried at the lower of the recorded investment in the property or its fair value less estimated disposition costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired less estimated disposition costs by a charge to the allowance for loan losses, when necessary. Any subsequent write-downs are recorded as a valuation allowance with a charge to other expenses in the income statement together with other expenses related to such properties, net of related income. Gains and losses on disposition of such property are included in other income or other expenses as applicable. Goodwill and Other Intangible Assets Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company applies the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142). Pursuant to SFAS 142, goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement of Financial Accounting Standard No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144). As of the date of adoption, the Company had identifiable intangible assets consisting of core deposit premiums and minimum pension liability. Core deposit premiums are amortized using an accelerated method over a period of ten years. Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. The following table summarizes the Company's core deposit intangibles as of March 31, 2004 and December 31, 2003. December 31, March 31, (Dollar in Thousands) 2003 Additions Reductions 2004 ---------------------------------------------- Core deposit intangibles $13,643 - - $13,643 Accumulated amortization (7,843) ($331) - (8,174) ---------------------------------------------- Core deposit intangibles, net $5,800 ($331) - $5,469 ============================================== -8- Core deposit intangibles are amortized over their expected useful lives. Such lives are periodically reassessed to determine if any amortization period adjustments are indicated. The following table summarizes the Company's estimated core deposit intangible amortization for each of the five succeeding years: Estimated Core Deposit Intangible Amortization Years Ended (Dollar in thousands) ----------- ----------------------- 2004 $1,358 2005 $1,381 2006 $1,395 2007 $490 2008 $523 Thereafter $653 The following table summarizes the Company's minimum pension liability intangible as of March 31, 2004 and December 31, 2003. December 31, March 31, (Dollar in Thousands) 2003 Additions Reductions 2004 ---------------------------------------------- Minimum pension liability intangible $285 - - $285 ============================================== Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. The following table summarizes the Company's goodwill intangible as of March 31, 2004 and December 31, 2003. December 31, March 31, (Dollar in Thousands) 2003 Additions Reductions 2004 ---------------------------------------------- Goodwill $15,519 - - $15,519 ============================================== Impairment of Long-Lived Assets and Goodwill The Company applies the provisions of SFAS 144. In accordance with SFAS 144, long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. On December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. -9- 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 consolidated financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. 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) 2004 2003 ---- ---- Net income As reported $4,777 $3,613 Pro forma $4,695 $3,561 Basic earnings per share As reported $0.31 $0.26 Pro forma $0.30 $0.25 Diluted earnings per share As reported $0.29 $0.25 Pro forma $0.29 $0.25 Stock-based employee compensation cost, net of related tax effects, included in net income As reported $0 $0 Pro forma $82 $52 Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. -10- Retirement Plans The Company has a supplemental retirement plan for directors and a supplemental executive retirement plan covering key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to use the cash values of these policies to pay the retirement obligations. The following table sets forth the net periodic benefit cost recognized for the plans: Three Months Ended March 31, 2004 2003 (in thousands) ---------------------------- Net pension cost included the following components: Service cost-benefits earned during the period $35 $31 Interest cost on projected benefit obligation 103 105 Amortization of net obligation at transition 8 9 Amortization of prior service cost 20 20 Recognized net actuarial loss 37 38 ---------------------------- Net periodic pension cost $203 $203 ============================ During the three months ended March 31, 2004, the Company contributed and paid out as benefits $140,000 to participants under the plans. For the year ending December 31, 2004, the Company expects to contribute and pay out as benefits $490,000 to participants under the plans. Comprehensive Income For the Company, comprehensive income includes net income reported on the statement of income and comprehensive 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 for the three months ended March 31, 2004 and 2003 are reported as follows: Three Months Ended March 31, 2004 2003 ---------------------------- Unrealized Gain on Securities (in thousands) Beginning Balance $2,519 $3,048 Unrealized gain arising during the period, net of tax 612 385 ---------------------------- Ending Balance $3,131 $3,433 ---------------------------- Minimum Pension Liability Beginning Balance ($705) ($745) Change in minimum pension liability, net of tax - - ---------------------------- Ending Balance ($705) ($745) ---------------------------- Total accumulated other comprehensive income, net $2,426 $2,688 ---------------------------- Reclassifications Certain amounts previously reported in the 2003 financial statements have been reclassified to conform to the 2004 presentation. These reclassifications did not affect previously reported net income or total shareholders' equity. Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split effected as a stock dividend which was paid on April 30, 2004 to shareholders of record on April 9, 2004. -11- TRICO BANCSHARES Financial Summary (dollars in thousands, except per share amounts) (Unaudited) Three months ended March 31, -------------------------------- 2004 2003 -------------------------------- Net Interest Income (FTE) $17,147 $13,543 Provision for loan losses (650) (150) Noninterest income 5,755 5,396 Noninterest expense (14,346) (12,651) Provision for income taxes (FTE) (3,129) (2,525) -------------------------------- Net income $4,777 $3,613 ================================ Average shares outstanding 15,617 14,141 Diluted average shares outstanding 16,213 14,500 Shares outstanding at period end 15,636 14,161 As Reported: Basic earnings per share $0.31 $0.26 Diluted earnings per share $0.29 $0.25 Return on assets 1.33% 1.26% Return on equity 14.80% 14.29% Net interest margin 5.35% 5.17% Net loan charge-offs to average loans 0.05% 0.14% Efficiency ratio (FTE) 62.64% 66.80% Average Balances: Total assets $1,440,953 $1,149,759 Earning assets 1,281,032 1,048,286 Total loans 970,793 679,975 Total deposits 1,231,704 1,003,853 Shareholders' equity $129,133 $101,139 Balances at Period End: Total assets $1,450,443 $1,176,503 Earning assets 1,306,722 1,057,880 Total loans 994,065 693,773 Total deposits 1,239,939 1,032,652 Shareholders' equity $129,514 $101,892 Financial Ratios at Period End: Allowance for loan losses to loans 1.44% 2.06% Book value per share $8.28 $7.20 Equity to assets 8.93% 8.66% Total capital to risk assets 11.49% 11.63% Dividends Paid Per Share $0.10 $0.10 Dividend Payout Ratio 33.26% 39.19% Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. -12- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management's Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, intangible assets, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See caption "Allowance for Loan Losses" for a more detailed discussion). Results of Operations The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. The Company had quarterly earnings of $4,777,000, or $0.29 per diluted share, for the three months ended March 31, 2004. These results represent a 16.0% increase from the $0.25 earnings per diluted share reported for the three months ended March 31, 2003 on earnings of $3,613,000. The improvement in results from the year-ago quarter was due to a $3,604,000 (26.6%) increase in fully tax-equivalent net interest income to $17,147,000, and a $359,000 (6.7%) increase in noninterest income to $5,755,000. These contributing factors where partially offset by a $500,000 (333%) increase in provision for loan losses to $650,000 and a $1,695,000 (13.4%) increase in noninterest expense to $14,346,000 for the quarter ended March 31, 2004. Included in the results for the quarter ended March 31, 2004 was the effect of the Company's acquisition of North State National Bank on April 4, 2003. On April 4, 2003, North State National Bank had assets of $140 million, loans totaling $77 million, and deposits totaling $126 million. The Company issued $13,090,057 in cash, 723,512 shares of TriCo common stock, and options to purchase 79,587 TriCo common shares 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. -13- 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, -------------------------------- 2004 2003 -------------------------------- Net Interest Income (FTE) $17,147 $13,543 Provision for loan losses (650) (150) Noninterest income 5,755 5,396 Noninterest expense (14,346) (12,651) Provision for income taxes (FTE) (3,129) (2,525) -------------------------------- Net income $4,777 $3,613 ================================ 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, -------------------------------- 2004 2003 -------------------------------- Interest income $19,912 $16,349 Interest expense (3,014) (3,115) FTE adjustment 249 309 -------------------------------- Net interest income (FTE) $17,147 $13,543 ================================ Average earning assets $1,281,032 $1,048,286 Net interest margin (FTE) 5.35% 5.17% 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 2004 increased $3,604,000 (26.6%) from the same period in 2003 to $17,147,000. The increase in net interest income (FTE) was due to increased average balances of earning assets (up $232.7 million or 22.2% to $1.281billion) and an 18 basis point increase in net interest margin (FTE) to 5.35%. Interest and Fee Income Interest and fee income (FTE) for the first quarter of 2004 increased $3,503,000 (21.0%) from the first quarter of 2003. The increase was the net effect of higher average interest-earning assets (up $232.7 million or 22.2% to $1.281billion) that was partially offset by a 6 basis point decrease in the yield on those average earning assets to 6.30%. The growth in interest-earning assets was the result of a $290.8 million (42.8%) increase in average loan balances to $970.8 million that was offset by decreases in average balance of investments of $34.0 (10.0%) to $305.8 million and average balance of Federal funds sold of $24.0 million (84.5%) to $4.4 million. The average yield on the Company's earning assets decreased to 6.30% for the quarter ended March 31, 2004 from 6.36% for the quarter ended March 31, 2003. The average yield on the Company's loans was 6.90% in the quarter ended March 31, 2004 compared to 7.64% in the year-ago quarter. This 74 basis point decrease in average yield on loans is the result of the trend in general interest rates throughout much of 2002 and 2003 towards lower rates. The average yield on the Company's investment balances increased 24 basis points to 4.46% in the quarter ended March 31, 2004 compared to 4.22% in the year-ago quarter. The increase in the average yield on investment balances was primarily due to a decrease in the volume of mortgage refinancing in the quarter ended March 31, 2004 compared to the year-ago quarter. Increased volume of mortgage refinancing has the effect of decreasing the yields of the Companies mortgage-backed securities, which account for approximately seventy-five percent of the Company's investment balances. As the volume of mortgage refinancing began to decrease in the fall of 2003, the yield on the Company's mortgage-backed securities increased. The average yield on Federal funds sold decreased 27 basis points to 0.91% in the quarter ended March 31, 2004 from the year-ago quarter due to a 25 basis points decrease in the Federal funds target rate that occurred in June 2003. -14- Interest Expense Interest expense decreased $101,000 (3.2%) in the first quarter of 2004 compared to the year-ago quarter. The decrease was due to a decrease in the average rate paid on interest-bearing liabilities from 1.52% in the first quarter of 2003 to 1.18% in the first quarter of 2004. The average balance of interest-bearing liabilities increased $199.0 million (24.3%) in the first quarter of 2004 compared to the year-ago quarter. The increase in interest-bearing liabilities was concentrated in the lower earning interest-bearing demand deposit (up $35.5 million or 19.0%), and savings deposits (up $151.4 million or 47.9%). The average balance of the higher earning time deposits was down $21.8 million (7.4%) from the year-ago quarter. In addition, the average balance of noninterest-bearing deposits increased $62.8 million (30.2%) from the year-ago quarter. During the quarter ended March 31, 2004, average balance of Federal funds purchased and junior subordinated debt were $13.3 million and $20.6 million, respectively, compared to none of each in the year-ago quarter. The average rate paid for all categories of interest-bearing liabilities, except for other borrowings, 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, --------------------- 2004 2003 --------------------- Yield on earning assets 6.30% 6.36% Rate paid on interest-bearing Liabilities 1.18% 1.52% --------------------- Net interest spread 5.12% 4.84% Impact of all other net noninterest-bearing funds 0.23% 0.33% --------------------- Net interest margin 5.35% 5.17% ===================== Net interest margin in the first quarter of 2004 increased 18 basis points compared to the first quarter of 2003. This increase in net interest margin was mainly due to lower rates paid on liabilities, and a change in the ratio of loans to total interest earning assets. During the quarter ended March 31, 2004, the ratio of loans to total interest earnings assets was 76% compared to 66% in the year-ago quarter. The increase in interest income due to the increase in loan volume more than offset the effect of the 74 basis point decrease in average loan yield. As a result, the average yield on total earning assets only decreased 6 basis points, while the average rate paid on interest-bearing liabilities decreased 34 basis points. -15- 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, 2004 March 31, 2003 ----------------------------- ------------------------------ Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- ------------------------------ Assets: Loans $970,793 $16,739 6.90% $679,975 $12,989 7.64% Investment securities - taxable 270,358 2,721 4.03% 298,737 2,744 3.67% Investment securities - nontaxable 35,472 691 7.79% 41,136 841 8.17% Federal funds sold 4,409 10 0.91% 28,438 84 1.18% ----------------------------- ------------------------------ Total earning assets 1,281,032 20,161 6.30% 1,048,286 16,658 6.36% Other assets 159,921 101,473 ---------- ---------- Total assets $1,440,953 $1,149,759 ========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $222,508 100 0.18% $187,017 118 0.25% Savings deposits 467,740 907 0.78% 316,366 720 0.91% Time deposits 271,138 1,442 2.13% 292,924 1,959 2.68% Federal funds purchased 13,292 34 1.02% - - Other borrowings 22,880 320 5.59% 22,918 318 5.55% Junior subordinated debt 20,619 211 4.09% - - ----------------------------- ------------------------------ Total interest-bearing liabilities 1,018,177 3,014 1.18% 819,225 3,115 1.52% Noninterest-bearing deposits 270,318 207,546 Other liabilities 23,325 21,849 Shareholders' equity 129,133 101,139 ---------- ---------- Total liabilities and shareholders' equity $1,440,953 $1,149,759 ========== ========== Net interest spread(1) 5.12% 4.84% Net interest income and interest margin(2) $17,147 5.35% $13,543 5.17% ================ =================
(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. -16- 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, 2004 compared with three months ended March 31, 2003 --------------------------------- Volume Rate Total --------------------------------- Increase (decrease) in interest income: Loans $5,555 ($1,805) $3,750 Investment securities (359) 186 (173) Federal funds sold (71) (3) (74) --------------------------------- Total earning assets 5,125 (1,622) 3,503 --------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 22 (40) (18) Savings deposits 344 (157) 187 Time deposits (146) (371) (517) Federal funds purchased 34 - 34 Other borrowings (1) 3 2 Junior subordinated debt 211 - 211 --------------------------------- Total interest-bearing liabilities 464 (565) (101) --------------------------------- Increase (decrease) in Net Interest Income $4,661 ($1,057) $3,604 ================================= Provision for Loan Losses The Company provided $650,000 for loan losses in the first quarter of 2004 versus $150,000 in the first quarter of 2003. During the first quarter of 2004, the Company recorded $126,000 of net loan charge offs versus $234,000 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, --------------------- 2004 2003 --------------------- Service charges on deposit accounts $3,197 $2,858 ATM fees and interchange 581 520 Other service fees 303 122 Gain on sale of loans 625 1,133 Commissions on sale of nondeposit investment products 514 448 Increase in cash value of life insurance 432 139 Other noninterest income 103 176 --------------------- Total noninterest income $5,755 $5,396 ===================== -17- Noninterest income for the first quarter of 2004 increased $359,000 (6.7%) from the year-ago quarter. The increase in noninterest income from the year-ago quarter was mainly due to increases in service charges on deposit products (up $339 or 11.9% to $3,197,000), cash value of life insurance (up $293,000 or 211% to $432,000), and other servicing fees (up $181,000 or 148% to $303,000) that were partially offset by a decrease in gain on sale of loans (down $508,000 or 44.8% to $625,000). The increase in service charges income was mainly due to increased number of customers. The higher amount of increase in cash value of life insurance is due to approximately $22.5 million of life insurance that was purchased in the spring of 2003. The increase in other service fees is due to increased mortgage servicing fees net of mortgage servicing premium amortization. The decrease in gain on sale of loans was due to the slowdown in the residential mortgage refinance market that started during the second half of 2003. Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands). Three months ended March 31, ---------------------- 2004 2003 ---------------------- Salaries $5,094 $4,250 Commissions and incentives 1,077 1,111 Employee benefits 1,996 1,516 Equipment 943 791 Occupancy 937 747 Professional fees 509 574 Data processing and software 383 291 Telecommunications 375 391 Intangible amortization 331 228 ATM network charges 295 232 Courier service 262 248 Postage 232 198 Advertising and marketing 191 272 Assessments 72 60 Operational losses 40 130 Other 1,609 1,612 ---------------------- Total $14,346 $12,651 ====================== Average full time equivalent staff 532 467 Noninterest expense to revenue (FTE) 62.64% 66.80% Noninterest expense for the first quarter of 2004 increased $1,695,000 (13.4%). The increase in noninterest expense was mainly due to a $1,290,000 (18.8%) increase in salary and benefit expense to $8,167,000. 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 2003. Noninterest expense excluding salaries and benefits also increased (up $405,000 or 7.0% to $6,179,000). Approximately $342,000 of this increase was expenses related to equipment and facilities depreciation and maintenance. Provision for Income Tax The effective tax rate for the three months ended March 31, 2004 was 37.6% and reflects a decrease from 38.0% for the three months ended March 31, 2003. 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. -18- 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, 2004 At December 31, 2003 ------------------------- ------------------------ Gross Guaranteed Net Gross Guaranteed Net ----------------------------------------------------- Classified loans $27,946 $10,476 $17,470 $29,992 $11,209 $18,783 Other classified assets 924 - 924 932 - 932 ----------------------------------------------------- Total classified assets $28,870 $10,476 $18,394 $30,924 $11,209 $19,715 ===================================================== Allowance for loan losses/ Classified loans 77.7% 73.3% Classified assets, net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies at March 31, 2004, decreased $1.3 million (6.7%) to $18.4 million from $19.7 million at December 31, 2003. 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, 2004, if all such loans had been current in accordance with their original terms, totaled $348,000. Interest income actually recognized on these loans during the three months ended March 31, 2004 was $226,000. The Company's policy is to place loans 90 days or more past due on nonaccrual status. In some instances when a loan is 90 days past due Management does not place it on nonaccrual status because the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days. Loans where the collateral has been repossessed are classified as OREO or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements. -19- 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 $863,000 (16.2%) to $6,189,000 during the first three months of 2004. Nonperforming assets net of guarantees represent 0.43% 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, 2004 At December 31, 2003 ------------------------- ------------------------- Gross Guaranteed Net Gross Guaranteed Net ------------------------------------------------------ Performing nonaccrual loans $10,450 $7,816 $2,634 $10,997 $7,936 $3,061 Nonperforming, nonaccrual loans 3,349 1,061 2,288 2,551 1,252 1,299 ------------------------------------------------------ Total nonaccrual loans 13,799 8,877 4,922 13,548 9,188 4,360 Loans 90 days past due and still accruing 343 - 343 34 - 34 ------------------------------------------------------ Total nonperforming loans 14,142 8,877 5,265 13,582 9,188 4,394 Other real estate owned 924 - 924 932 - 932 ------------------------------------------------------ Total nonperforming assets $15,066 $8,877 $6,189 $14,514 $9,188 $5,326 ====================================================== Nonperforming loans to total loans 0.53% 0.45% Allowance for loan losses/nonperforming loans 272% 313% Nonperforming assets to total assets 0.43% 0.36%
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. -20- 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, 2003. Based on the current conditions of the loan portfolio, Management believes that the $14,297,000 allowance for loan losses at March 31, 2004 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, ------------------------ 2004 2003 ------------------------ Balance, beginning of period $13,773 $14,377 Loan loss provision 650 150 Loans charged off (188) (280) Recoveries of previously charged-off loans 62 46 ------------------------ Net charge-offs (126) (234) ------------------------ Balance, end of period $14,297 $14,293 ======================== Allowance for loan losses/loans outstanding 1.44% 2.06% 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 March 11, 2004, the Board of Directors of TriCo Bancshares approved a two-for-one stock split of its common stock at its meeting held on March 11, 2004. The stock split will be effected in the form of a stock dividend and will entitle each stockholder of record at the close of business on April 9, 2004 to receive one additional share for every share of TriCo common stock held on that date. Shares resulting from the split will be distributed on April 30, 2004. As of March 11, 2004, the Company had 7,817,761 common shares outstanding. Also at its meeting on March 11, 2004, the Board of Directors of TriCo Bancshares approved an increase in the maximum number of shares to be repurchased under the Company's stock repurchase plan originally announced on July 31, 2003 from 250,000 to 500,000 to be effective on April 9, 2004, solely to conform with the two-for-one stock split noted above. The 250,000 shares originally authorized for repurchase under this plan represented approximately 3.2% of the Company's approximately 7,852,000 common shares outstanding as of July 31, 2003. This plan has no stated expiration date for the repurchases, which may occur from time to time as market conditions allow. As of May 4, 2004, the Company repurchased 222,600 shares under this plan as adjusted for the 2-for-1 stock split paid on April 30, 2004, which leaves 277,400 shares available for repurchase under the plan. -21- The Company's primary capital resource is shareholders' equity, which was $129.5 million at March 31, 2004. This amount represents an increase of $1.6 million from December 31, 2003, the net result of comprehensive income for the period ($5.4 million) and the issuance of common shares via the exercise of stock options ($0.5 million), partially offset by the repurchase of common stock ($2.8 million) and dividends paid ($1.5 million). The Company's ratio of equity to total assets was 8.93%, 8.66%, and 8.71% as of March 31, 2004, March 31, 2003, and December 31, 2003, respectively. 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 2004 2003 2003 Requirement Action Provisions ------------------------------------------------------------------ Tier I Capital 10.31% 10.38% 10.41% 4.00% 6.00% Total Capital 11.49% 11.63% 11.57% 8.00% 10.00% Leverage ratio 8.80% 8.23% 8.68% 4.00% 5.00%
Off-Balance Sheet Arrangements The Bank has certain ongoing commitments under operating and capital leases. These commitments do not significantly impact operating results. As of March 31, 2004 commitments to extend credit were the Company's only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options, etc. Loan commitments increased to $362.5 million from $332.9 million at December 31, 2003. The commitments represent 36.5% of the total loans outstanding at year-end 2003 versus 33.9% at December 31, 2003. Certain Contractual Obligations The following chart summarizes certain contractual obligations of the Company as of December 31, 2003:
Less than 1-3 3-5 More than (dollars in thousands) Total one year years years 5 years ------------------------------------------------------------------ Federal funds purchased $39,500 $39,500 - - - FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable in its entirety by FHLB on a quarterly basis beginning April 7, 2003 20,000 - - $20,000 - FHLB loan, fixed rate of 5.35% payable on December 9, 2008 1,500 - - 1,500 - FHLB loan, fixed rate of 5.77% payable on February 23, 2009 1,000 - - - $1,000 Capital lease obligation on premises, effective rate of 13% payable monthly in varying amounts through December 1, 2009 562 90 183 187 102 Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a quarterly basis beginning October 7, 2008, matures October 7, 2033 20,619 - - - 20,619 Operating lease obligations 6,254 1,172 1,835 1,428 1,819 Deferred compensation(1) 5,195 269 505 438 3,983 Supplemental retirement plans(1) 3,567 498 937 774 1,358 Employment agreements 253 253 - - - ------------------------------------------------------------------ Total contractual obligations $98,450 $41,782 $3,460 $24,327 $28,881 ==================================================================
(1) These amounts represent known certain payments to participants under the Company's deferred compensation and supplemental retirement plans. -22- 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, 2004 and 2003, the results of the simulations noted above indicate that the balance sheet is slightly asset sensitive (earnings increase when interest rates rise). The magnitude of all the simulation results noted above is within the Company's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. At March 31, 2004 and 2003, the Company had no derivative financial instruments. -23- Liquidity The Company's principal source of asset liquidity is federal funds sold and marketable investment securities available for sale. At March 31, 2004, federal funds sold and investment securities available for sale totaled $313 million, representing a decrease of $4 million or 0.1% from December 31, 2003, and a decrease of $51 million or 14% from March 31, 2003. In addition, the Company generates additional liquidity from its operating activities. The Company's profitability during the first three months of 2004 generated cash flows from operations of $7.7 million compared to $5.6 million during the first three months of 2003. 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 $19.7 million during the three months ended March 31, 2004 compared to $36.9 million for the three months ended March 31, 2003. During the three months ended March 31, 2004, the Company invested $15.3 million and $13.0 million in securities and net loan growth, respectively, compared to $53.0 million, $7.2 million, and $13.9 million invested in securities, net loan growth, and life insurance policies, respectively, during the first three months of 2003. These changes in investment, loan, and life insurance balances contributed to net cash used for investing activities of $9.2 million during the three months ended March 31, 2004, compared to net cash used for investing activities of $38.1 million during the three months ended March 31, 2003. Financing activities used net cash of $23.9 million during the three months ended March 31, 2004, compared to net cash provided by financing activities of $26.2 million during the three months ended March 31, 2003. Deposit balance increases and exercise of common stock options accounted for $3.1 million and $540,000 of financing sources of funds, respectively, during the three months ended March 31, 2004, compared to deposit balance increases and exercise of common stock options that accounted for $27.4 million and $242,000 of financing sources of funds, respectively, during the three months ended March 31, 2003. Dividends paid used $1.5 million and $1.4 million of cash during the three months ended March 31, 2004 and March 31, 2003, respectively. A decrease in Federal funds purchased and the repurchase of common stock used $23.2 million and $2.8 million of cash, respectively, during the quarter ended arch 31, 2004. Also, the Company's liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions. Item 4. Controls and Procedures The Chief Executive Officer, Richard Smith, and the Chief Financial Officer, Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2004 ("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. -24- PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Bank. Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table shows information concerning the common stock repurchased by the Company during the first quarter of 2004 pursuant to the Company's stock repurchase plan originally announced on July 31, 2003, as amended on March 11, 2004, to conform with the Company's two-for-one stock split effective on April 9, 2004, which is discussed in more detail under "Capital Resources" in this report:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number of Shares purchased paid per share shares purchased as of shares that may yet part of publicly be purchased under the announced plans or plans or programs programs ----------------------------------------------------------------------------------------------------------- Jan. 1-31, 2004 93,600 $16.40 93,600 351,400 Feb. 1-29, 2004 74,000 $17.00 74,000 277,400 Mar. 1-31, 2004 - - - 277,400 ----------------------------------------------------------------------------------------------------------- Total 167,600 $16.66 167,600 277,400
Item 4 - Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on May 4, 2004. (b) and (c) The following vote results are based on the number of shares outstanding prior to the 2-for-1 stock split paid on April 30, 2004. The following eleven directors were elected at the meeting: Votes For Votes Against/Withheld Abstentions William J. Casey 6,211,353 272,395 - Donald J. Amaral 6,165,571 318,177 - Craig S. Compton 6,226,680 257,068 - John S.A. Hasbrook 6,283,846 199,902 - Michael W. Koehnen 6,289,696 194,052 - Wendell J. Lundberg 6,202,532 281,216 - Donald E. Murphy 6,213,445 270,303 - Steve G. Nettleton 6,284,518 199,230 - Richard P. Smith 6,283,513 200,235 - Carroll R. Taresh 5,673,757 809,991 - Alex A. Vereschagin, Jr. 6,271,636 212,112 - The shareholders approved an amendment to the Company's articles of incorporation to increase the authorized shares of common stock from 20,000,000 to 50,000,000. 5,801,690 shares were voted for approval, 627,114 shares were voted against and 53,771 shares abstained. The shareholders approved an amendment to the Company's 2001 stock option plan to increase by 450,000 the number of shares which may be granted under the plan. 4,178,658 shares were voted for approval, 926,004 shares were voted against and 108,449 shares abstained. -25- The shareholders ratified the appointment of KPMG LLP as independent public accountants of the Company for 2004. 6,378,503 shares were voted for the ratification, 23,539 shares were voted against and 81,706 shares abstained. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.1* Restated Articles of Incorporation dated May 9, 2003, filed as Exhibit 3.1 to TriCo's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 4* Certificate of Determination of Preferences of Series AA Junior Participating Preferred Stock filed as Exhibit 3.3 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated July 25, 2001 10.2* Form of Change of Control Agreement dated April 10, 2001, between TriCo and each of Richard O'Sullivan, Thomas Reddish, Ray Rios and Richard Smith, and dated February 27, 2003, between TriCo and Craig Carney 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) 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) -26- 10.10* Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, filed as Exhibit 10.10 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.11* Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, filed as Exhibit 10.11 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.12* Tri Counties Bank Deferred Compensation Plan for Directors effective April 1, 1992, filed as Exhibit 10.12 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546) 10.13* Employment Agreement between TriCo and Richard O'Sullivan dated April 10, 2001, filed as Exhibit 10.13 to TriCo's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 10.14* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Andrew Mastorakis, Richard O'Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith, filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 10.15* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Wendell Lundberg, Donald Murphy, Carroll Taresh, and Alex Vereshagin, filed as Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 10.16* Form of Tri-Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Craig Carney, Andrew Mastorakis, Richard Miller, Richard O'Sullivan, and Thomas Reddish, filed as Exhibit 10.16 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 10.17* Form of Tri-Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Verischagin, filed as Exhibit 10.17 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 10.18* Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of the directors of TriCo Bancshares/Tri Counties Bank effective on the date that each director is first elected, filed as Exhibit 10.18 to TriCo'S Annual Report on Form 10-K for the year ended December 31, 2003. -27- 11.1 Computation of earnings per share 21.1 Tri Counties Bank, a California banking corporation, and TriCo Capital Trust I, a Delaware business trust, are the only subsidiaries of Registrant 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO 32.1 Section 1350 Certification of CEO 32.2 Section 1350 Certification of CFO * Previously filed and incorporated by reference. (b) Reports on Form 8-K During the quarter ended March 31, 2004 the Company filed the following Current Reports on Form 8-K: Description Date of Report ---------------------------------- --------------------- TriCo Bancshares Announces 2-for-1 March 11, 2004 Stock Split Quarterly results of operations April 21, 2004 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 4, 2004 /s/ Thomas J. Reddish ----------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer -28- EXHIBITS 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) 2004 2003 ---------------------- Weighted average number of common shares outstanding - basic 15,617 14,141 Add exercise of options reduced by the number of shares that could have been purchased with the proceeds of such exercise 596 359 ---------------------- Weighted average number of common shares outstanding - diluted 16,213 14,500 ====================== Net income $4,777 $3,613 Basic earnings per share $0.31 $0.26 Diluted earnings per share $0.29 $0.25 -29- Exhibit 31.1 Rule 13a-14/15d-14 Certification of CEO I, Richard P. Smith, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 4, 2004 /s/ Richard P. Smith ---------------------------------------- Richard P. Smith President and Chief Executive Officer -30- Exhibit 31.2 Rule 13a-14/15d-14 Certification of CFO I, Thomas J. Reddish, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 4, 2004 /s/ Thomas J. Reddish ---------------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer -31- Exhibit 32.1 Section 1350 Certification of CEO In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 Section 1350 Certification of CFO In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas J. Reddish ------------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. -32-