SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year Commission File Number 0-10661 ended December 31, 2002 TriCo Bancshares ------------------------------------------------------ (Exact name of Registrant as specified in its charter) California 94-2792841 - -------------------------------------------------------------------------------- (State or other jurisdiction of (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 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value ------------------------------- (Title of Class) 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 periods 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 Exchange Act Rule 12b-2). YES NO X ----- ----- The aggregate market value of the voting common stock held by non-affiliates of the Registrant, as of March 18, 2003, was approximately $134,685,000. This computation excludes a total of 1,968,408 shares which are beneficially owned by the officers and directors of Registrant who may be deemed to be the affiliates of Registrant under applicable rules of the Securities and Exchange Commission. The number of shares outstanding of Registrant's common stock, as of March 18, 2003, was 7,073,795 shares of common stock, without par value. The following documents are incorporated herein by reference into the parts of Form 10-K indicated: Registrant's Proxy Statement for use in connection with its 2003 Annual Meeting of Shareholders, for Part III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. --- TABLE OF CONTENTS Page Number PART I Item 1 Business 2 Item 2 Properties 8 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A Qualitative and Qualitative Disclosures About Market Risk 31 Item 8 Financial Statements and Supplementary Data 31 Item 9 Changes in and Disagreements on Accounting and Financial Disclosure 61 PART III Item 10 Directors and Executive Officers of the Registrant 62 Item 11 Executive Compensation 62 Item 12 Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters 62 Item 13 Certain Relationships and Related Transactions 62 Item 14 Controls and Procedures 62 Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K 63 Item 16 Principal Accountant Fees and Services 65 FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K 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. In October 2002, the Company announced that it had entered into an agreement to acquire North State National Bank located in Chico, California. Many possible events or factors could affect the future financial results and performance of the Company or North State National Bank before the merger, or the Company after the merger, including: - actual cost savings resulting from the merger are less than we expected, we are unable to realize those cost savings as soon as we expected or we incur additional or unexpected costs; - revenues after the merger are less than we expected; - competition among financial services companies increases; - we have more trouble integrating our businesses than we expected; - changes in the interest rate environment reduces our interest margins; - general economic conditions change or are worse than we expected; - legislative or regulatory changes adversely affect our business; - changes occur in business conditions and inflation; - personal or commercial customers' bankruptcies increase; - changes occur in the securities markets; and - technology-related changes are more difficult to make or more expensive than we expected. -1- PART I ITEM 1. BUSINESS Information About TriCo Bancshares' Business TriCo Bancshares (the "Company") was incorporated in California on October 13, 1981. It was organized at the direction of the board of directors of Tri Counties Bank (the "Bank") for the purpose of forming a bank holding company. On September 7, 1982, the shareholders of Tri Counties Bank became the shareholders of TriCo and Tri Counties Bank became a wholly owned subsidiary of TriCo. At that time, TriCo became a bank holding company subject to the supervision of the Federal Reserve under the Bank Holding Company Act of 1956, as amended. Tri Counties Bank remains subject to the supervision of the California Department of Financial Institutions and the FDIC. Tri Counties Bank currently is the only subsidiary of TriCo and TriCo is not conducting any business operations independent of Tri Counties Bank. On October 7, 2002, TriCo Bancshares announced that on October 3, 2002 it signed a definitive agreement with Tri Counties Bank, its wholly owned subsidiary, and North State National Bank, pursuant to which TriCo Bancshares will acquire all of the outstanding stock of North State National Bank in exchange for cash of approximately $13 million, approximately 716,000 shares of TriCo Bancshares common stock and options to purchase approximately 92,450 shares of TriCo Bancshares common stock, subject to adjustments as set forth in the agreement. Based upon a closing price of $23.92 per share of TriCo Bancshares common stock on October 3, 2002, the transaction was valued at $31.8 million. On March 19, 2003, shareholders of North State National Bank approved the proposed merger. Business of Tri Counties Bank Tri Counties Bank was incorporated as a California banking corporation on June 26, 1974, and received its certificate of authority to begin banking operations on March 11, 1975. Tri Counties Bank engages in the general commercial banking business 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. Tri Counties Bank currently has 32 traditional branches and 10 in-store branches. General Banking Services The Bank conducts a commercial banking business including accepting demand, savings and time deposits and making commercial, real estate, and consumer loans. It also offers installment note collection, issues cashier's checks and money orders, sells travelers checks and provides safe deposit boxes and other customary banking services. Brokerage services are provided at the Bank's offices by the Bank's association with Raymond James Financial Services, Inc. The Bank does not offer trust services or international banking services. The Bank has emphasized retail banking since it opened. Most of the Bank's customers are retail customers and small to medium-sized businesses. The Bank emphasizes serving the needs of local businesses, farmers and ranchers, retired individuals and wage earners. The majority of the Bank's loans are direct loans made to individuals and businesses in the regions of California where its branches are located. At December 31, 2002, the total of the Bank's consumer installment loans outstanding was $201,858,000 (29.4%), the total of commercial loans outstanding was $125,982,000 (18.3%), and the total of real estate loans including construction loans of $39,713,000 was $359,682,000 (52.3%). The Bank takes real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery, equipment, inventory, accounts receivable and notes receivable secured by property as collateral for loans. Most of the Bank's deposits are attracted from individuals and business-related sources. No single person or group of persons provides a material portion of the Bank's deposits, the loss of any one or more of which would have a materially adverse effect on the business of the Bank, nor is a material portion of the Bank's loans concentrated within a single industry or group of related industries. -2- In order to attract loan and deposit business from individuals and small to medium-sized businesses, branches of the Bank set lobby hours to accommodate local demands. In general, lobby hours are from 9:00 a.m. to 5:00 p.m. Monday through Thursday, and from 9:00 a.m. to 6:00 p.m. on Friday. Certain branches with less activity open later and close earlier. Some Bank offices also utilize drive-up facilities operating from 9:00 a.m. to 7:00 p.m. The supermarket branches are open from 9:00 a.m. to 7:00 p.m. Monday through Saturday and 11:00 a.m. to 5:00 p.m. on Sunday. The Bank offers 24-hour ATMs at almost all branch locations. The ATMs are linked to several national and regional networks such as CIRRUS and STAR. In addition, banking by telephone on a 24-hour toll-free number is available to all customers. This service allows a customer to obtain account balances and most recent transactions, transfer moneys between accounts, make loan payments, and obtain interest rate information. In February 1998, the Bank became the first bank in the Northern Sacramento Valley to offer banking services on the Internet. This banking service provides customers one more tool for anywhere, anytime access to their accounts. Other Activities The Bank may in the future engage in other businesses either directly or indirectly through subsidiaries acquired or formed by the Bank subject to regulatory constraints. See "Regulation and Supervision." Employees At December 31, 2002, the Company and the Bank employed 550 persons, including five executive officers. Full time equivalent employees were 465. No employees of the Company or the Bank are presently represented by a union or covered under a collective bargaining agreement. Management believes that its employee relations are excellent. Competition The banking business in California generally, and in the Bank's primary service area specifically, is highly competitive with respect to both loans and deposits. It is dominated by a relatively small number of major banks with many offices operating over a wide geographic area. Among the advantages such major banks have over the Bank is their ability to finance wide ranging advertising campaigns and to allocate their investment assets to regions of high yield and demand. By virtue of their greater total capitalization such institutions have substantially higher lending limits than does the Bank. In addition to competing with savings institutions, commercial banks compete with other financial markets for funds. Yields on corporate and government debt securities and other commercial paper may be higher than on deposits, and therefore affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for available funds with money market instruments and mutual funds. During past periods of high interest rates, money market funds have provided substantial competition to banks for deposits and they may continue to do so in the future. Mutual funds are also a major source of competition for savings dollars. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company and its subsidiary are particularly susceptible to being affected by enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. The Bank relies substantially on local promotional activity, personal contacts by its officers, directors, employees and shareholders, extended hours, personalized service and its reputation in the communities it services to compete effectively. -3- Regulation and Supervision As a consequence of the extensive regulation of commercial banking activities in California and the United States, the business of the Company, and the Bank are particularly susceptible to changes in state and federal legislation and regulations, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition. Following is a summary of some of the laws and regulations which effect their business. This summary should be read with the management's discussion and analysis of financial condition and results of operation included at Item 7 of this report. As a registered bank holding company under the Bank Holding Company Act of 1956 (the "BHC Act"), the Company is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System ("FRB"). The BHC Act requires the Company to file reports with the FRB and provide additional information requested by the FRB. The Company must receive the approval of the FRB before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than 5 percent of the voting shares of such bank. The Company and any subsidiaries it may acquire or organize will be deemed to be affiliates of the Bank within the Federal Reserve Act. That Act establishes certain restrictions, which limit the extent to which the Bank can supply its funds to the Company and other affiliates. The Company is also subject to restrictions on the underwriting and the public sale and distribution of securities. It is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services. The Company is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in non-banking activities, unless the FRB by order or regulation has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Notwithstanding this prohibition, under the Financial Services Modernization Act of 1999, the Company may engage in any activity, and may acquire and retain the shares of any company engaged in any activity, that the FRB, in coordination with the Secretary of the Treasury, determines (by regulation or order) to be financial in nature or incidental to such financial activities. Furthermore, such law dictates several activities that are considered to be financial in nature, and therefore are not subject to FRB approval. Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, is the result of a decade of debate in the Congress regarding a fundamental reformation of the nation's financial system. The law is subdivided into seven titles, by functional area. Title I acts to facilitate affiliations among banks, insurance companies and securities firms. Title II narrows the exemptions from the securities laws previously enjoyed by banks, requires the Federal Reserve and the SEC to work together to draft rules governing certain securities activities of banks and creates a new, voluntary investment bank holding company. Title III restates the proposition that the states are the functional regulators for all insurance activities, including the insurance activities by depository institutions. The law encourages the states to develop uniform or reciprocal rules for the licensing of insurance agents. Title IV prohibits the creation of additional unitary thrift holding companies. Title V imposes significant requirements on financial institutions related to the transfer of nonpublic personal information. These provisions require each institution to develop and distribute to accountholders an information disclosure policy, and requires that the policy allow customers to, and for the institution to honor a customer's request to, "opt-out" of the proposed transfer of specified nonpublic information to third parties. Title VI reforms the Federal Home Loan Bank system to allow broader access among depository institutions to the systems advance programs, and to improve the corporate governance and capital maintenance requirements for the system. Title VII addresses a multitude of issues including disclosure of ATM surcharging practices, disclosure of agreements among non-governmental entities and insured depository institutions which donate to non-governmental entities regarding donations made in connection with the Community Reinvestment Act and disclosure by the recipient non-governmental entities of how such funds are used. Additionally, the law extends the period of time between Community Reinvestment Act examinations of community banks. -4- The Company has undertaken efforts to comply with all provisions of the Gramm-Leach-Bliley Act and all implementing regulations, including the development of appropriate policies and procedures to meet their responsibilities in connection with the privacy provisions of Title V of that act. Safety and Soundness Standards The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") implemented certain specific restrictions on transactions and required the regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, the use of brokered deposits and the aggregate extension of credit by a depository institution to an executive officer, director, principal stockholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal financial institution agencies published a final rule effective on August 9, 1995, implementing safety and soundness standards. The FDICIA added a new Section 39 to the Federal Deposit Insurance Act which required the agencies to establish safety and soundness standards for insured financial institutions covering: - internal controls, information systems and internal audit systems; - loan documentation; - credit underwriting; - interest rate exposure; - asset growth; - compensation, fees and benefits; - asset quality, earnings and stock valuation; and - excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. The agencies issued the final rule in the form of guidelines only for operational, managerial and compensation standards and reissued for comment proposed standards related to asset quality and earnings which are less restrictive than the earlier proposal in November 1993. Unlike the earlier proposal, the guidelines under the final rule do not apply to depository institution holding companies and the stock valuation standard was eliminated. If an agency determines that an institution fails to meet any standard established by the guidelines, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency. Under the final rule, an institution must file a compliance plan within 30 days of a request to do so from the institution's primary federal regulatory agency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution. Restrictions on Dividends and Other Distributions The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. Additionally, under FDICIA, a bank may not make any capital distribution, including the payment of dividends, if after making such distribution the bank would be in any of the "under-capitalized" categories under the FDIC's Prompt Corrective Action regulations. Under the Financial Institution's Supervisory Act, the FDIC also has the authority to prohibit a bank from engaging in business practices that the FDIC considers to be unsafe or unsound. It is possible, depending upon the financial condition of a bank and other factors that the FDIC could assert that the payment of dividends or other payments in some circumstances might be such an unsafe or unsound practice and thereby prohibit such payment. -5- Under California law, dividends and other distributions by the Company are subject to declaration by the board of directors at its discretion out of net assets. Dividends cannot be declared and paid when such payment would make the Company insolvent. Federal Reserve policy prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowings or other arrangements that might adversely affect the holding company's financial position. The policy further declares that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Other Federal Reserve policies forbid the payment by bank subsidiaries to their parent companies of management fees, which are unreasonable in amount or exceed a fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). In addition, the Federal Reserve has authority to prohibit banks that it regulates from engaging in practices, which in the opinion of the Federal Reserve are unsafe or unsound. Such practices may include the payment of dividends under some circumstances. Moreover, the payment of dividends may be inconsistent with capital adequacy guidelines. The Company may be subject to assessment to restore the capital of the Bank should it become impaired. Consumer Protection Laws and Regulations The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations. The Company is subject to many federal consumer protection statues and regulations, some of which are discussed below. The Community Reinvestment Act is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. This act specifically directs the federal regulatory agencies to assess a bank's record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound practices. This act further requires the agencies to take a financial institution's record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the Community Reinvestment Act assessment factors in order to provide a rating to the financial institution. The ratings range from a high of "outstanding" to a low of "substantial noncompliance." The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act. The Truth-in-Lending Act is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the such act, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total payments and the payment schedule, among other things. The Fair Housing Act regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under this Act, including some that are not specifically mentioned in the Act itself. The Home Mortgage Disclosure Act grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. This act also includes a "fair lending" aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. -6- Finally, the Real Estate Settlement Procedures Act requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, this act prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties. Due to heightened regulatory concern related to compliance with these acts generally, the Company may incur additional compliance costs or be required to expend additional funds for investments in their local community. USA Patriot Act of 2001 President Bush signed the USA Patriot Act of 2001 on October 26, 2001. This legislation was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement and the intelligence communities' ability to work together to combat terrorism on a variety of levels. The potential impact of the Patriot Act on financial institutions is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: - Due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; - Standards for verifying customer identification at account opening; - Rules to promote cooperation among financial institutions, regulators, and law enforcement entities to assist in the identification of parties that may be involved in terrorism or money laundering; - Reports to be filed by non-financial trades and business with the Treasury Department's Financial Crimes Enforcement Network for transactions exceeding $10,000; and - The filing of suspicious activities reports by securities brokers and dealers if they believe a customer may be violating U.S. laws and regulations. Capital Requirements Federal regulation imposes upon all financial institutions a variable system of risk-based capital guidelines designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to promote uniformity in the definition of bank capital uniform nationally. The Bank, and the Company are subject to the minimum capital requirements of the FDIC, and the Federal Reserve, respectively. As a result of these requirements, the growth in assets is limited by the amount of its capital accounts as defined by the respective regulatory agency. Capital requirements may have an effect on profitability and the payment of dividends on the common stock of the Bank, and the Company. If an entity is unable to increase its assets without violating the minimum capital requirements or is forced to reduce assets, its ability to generate earnings would be reduced. The Federal Reserve, and the FDIC have adopted guidelines utilizing a risk-based capital structure. Qualifying capital is divided into two tiers. Tier 1 capital consists generally of common stockholders' equity, qualifying noncumulative perpetual preferred stock, qualifying cumulative perpetual preferred stock (up to 25% of total Tier 1 capital) and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. Tier 2 capital consists of, among other things, allowance for loan and lease losses up to 1.25% of weighted risk assets, perpetual preferred stock, hybrid capital instruments, perpetual debt, mandatory convertible debt securities, subordinated debt and intermediate-term preferred stock. Tier 2 capital qualifies as part of total capital up to a maximum of 100% of Tier 1 capital. Amounts in excess of these limits may be issued but are not included in the calculation of risk-based capital ratios. Under these risk-based capital guidelines, the Bank and the Company are required to maintain capital equal to at least 8% of its assets, of which at least 4% must be in the form of Tier 1 capital. The guidelines also require the Company and the Bank to maintain a minimum leverage ratio of 4% of Tier 1 capital to total assets (the "leverage ratio"). The leverage ratio is determined by dividing an institution's Tier 1 capital by its quarterly average total assets, less goodwill and certain other intangible assets. The leverage ratio constitutes a minimum requirement for the most well-run banking organizations. -7- Prompt Corrective Action Prompt Corrective Action Regulations of the federal bank regulatory agencies establish five capital categories in descending order (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), assignment to which depends upon the institution's total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio. Institutions classified in one of the three undercapitalized categories are subject to certain mandatory and discretionary supervisory actions, which include increased monitoring and review, implementation of capital restoration plans, asset growth restrictions, limitations upon expansion and new business activities, requirements to augment capital, restrictions upon deposit gathering and interest rates, replacement of senior executive officers and directors, and requiring divestiture or sale of the institution. Both the Company and the Bank have been classified as a well-capitalized bank since adoption of these regulations. Impact of Monetary Policies Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and other borrowings, and the interest rate earned by banks on loans, securities and other interest-earning assets comprises the major source of banks' earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policy, such as seeking to curb inflation and combat recession, by its open-market dealings in United States government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements and through adjustments to the discount rate applicable to borrowings by banks which are members of the Federal Reserve. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates. The nature and timing of any future changes in such policies and their impact on the Company cannot be predicted. In addition, adverse economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan loss charge-offs, thus adversely affecting the Company's net earnings. Insurance of Deposits The Bank's deposit accounts are insured up to a maximum of $100,000 per depositor by the FDIC. The FDIC issues regulations and generally supervises the operations of its insured banks. This supervision and regulation is intended primarily for the protection of depositors, not shareholders. As of December 31, 2002, the deposit insurance premium rate was $0.0171 per $100.00 in deposits. In November 1990, federal legislation was passed which removed the cap on the amount of deposit insurance premiums that can be charged by the FDIC. Under this legislation, the FDIC is able to increase deposit insurance premiums as it sees fit. This could result in a significant increase in the cost of doing business for the Bank in the future. The FDIC now has authority to adjust deposit insurance premiums paid by insured banks every six months. ITEM 2. PROPERTIES The Company is engaged in the banking business through 42 offices in 20 counties in Northern and Central California including eight offices each in Butte and Shasta Counties, three in Siskiyou County, two each in Glenn, Sutter, Lassen, Yuba, Stanislaus and Sacramento Counties, and one each in Madera, Merced, Lake, Mendocino, Del Norte, Tehama, Nevada, Contra Costa, Kern, Tulare and Fresno Counties. All offices are constructed and equipped to meet prescribed security requirements. The Company owns 16 branch office locations and one administrative building and leases 26 branch office locations and 5 administrative facilities. Most of the leases contain multiple renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance. -8- ITEM 3. LEGAL PROCEEDINGS Neither the Company nor its subsidiary, the Bank, is a party to any material pending legal proceeding, nor is their property the subject of any material pending legal proceeding, except ordinary routine legal proceedings arising in the ordinary course of their business. None of these proceedings is expected to have a material adverse impact upon the Company's business, financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the shareholders during the fourth quarter of 2002. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Company's common stock is traded on the NASDAQ National Market System ("NASDAQ") under the symbol "TCBK." The following table shows the high and the low prices for the common stock, for each quarter in the past two years, as reported by NASDAQ: 2002: High Low First quarter $21.05 $18.05 Second quarter $27.40 $21.10 Third quarter $27.45 $21.60 Fourth quarter $25.25 $22.01 2001: First quarter $16.63 $14.88 Second quarter $17.33 $14.81 Third quarter $19.80 $16.75 Fourth quarter $19.74 $17.93 As of December 31, 2002, there were approximately 1,701 shareholders of record of the Company's common stock. On February 3, 2003, the Securities and Exchange Commission declared effective the Company's S-4 Registration Statement relating to the issuance of up to approximately 784,000 shares of the Company's common stock to shareholders of North State National Bank. In October 2002, the Company and the Bank entered into an agreement with North State National Bank to merge North State National Bank into the Bank. At completion of the merger, former shareholders of North State National Bank would receive Company common stock and/or cash with value ranging from approximately $23.52 to $28.17 for each share of North State stock outstanding, depending on the average closing price of the Company's common stock. On October 3, 2003, the total merger consideration would have been valued at $31.8 million. The merger remains subject to the approval of North State shareholders and bank regulatory agencies. The Company has paid cash dividends on its common stock in every quarter since March 1990, and it is currently the intention of the Board of Directors of the Company to continue payment of cash dividends on a quarterly basis. There is no assurance, however, that any dividends will be paid since they are dependent upon earnings, financial condition and capital requirements of the Company and the Bank. As of December 31, 2002, $15,390,000 was available for payment of dividends by the Company to its shareholders, under applicable laws and regulations. The Company paid cash dividends of $0.20 per common share in each of the quarters ended March 31, June 30, September 30, and December 31, 2002 and 2001. As discussed in Note 9 to the consolidated financial statements included as Item 8 of this report, in June 2001, the Company announced that its Board of Directors adopted and entered into a Shareholder Rights Plan designed to protect and maximize shareholder value and to assist the Board of Directors in ensuring fair and equitable benefit to all shareholders in the event of a hostile bid to acquire the Company. -9- ITEM 6. SELECTED FINANCIAL DATA TRICO BANCSHARES Financial Summary (in thousands, except per share amounts) ========================================================================================================= Year ended December 31, 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- Interest income $64,696 $71,998 $76,327 $67,808 $64,404 Interest expense 12,914 23,486 28,543 24,370 25,296 - --------------------------------------------------------------------------------------------------------- Net interest income 51,782 48,512 47,784 43,438 39,108 Provision for loan losses 2,800 4,400 5,000 3,550 4,200 Noninterest income 19,180 16,238 14,922 12,775 13,494 Noninterest expense 45,971 40,607 37,846 34,726 34,583 - --------------------------------------------------------------------------------------------------------- Income before income taxes 22,191 19,743 19,860 17,937 13,819 Provision for income taxes 8,122 7,324 7,237 6,534 5,049 - --------------------------------------------------------------------------------------------------------- Net income $14,069 $12,419 $12,623 $11,403 $8,770 - --------------------------------------------------------------------------------------------------------- Earnings per share1: Basic $2.00 $1.76 $1.76 $1.60 $1.25 Diluted 1.96 1.72 1.72 1.56 1.21 Per share: Dividends paid $0.80 $0.80 $0.79 $0.70 $0.49 Book value at December 31 14.02 12.42 11.87 10.22 10.22 Tangible book value at December 31 13.45 11.69 11.11 9.32 9.14 Average common shares outstanding 7,019 7,073 7,192 7,130 7,017 Average diluted common shares outstanding 7,193 7,219 7,341 7,319 7,277 Shares outstanding at December 31 7,061 7,001 7,181 7,152 7,051 At December 31: Loans, net $673,145 $645,674 $628,721 $576,942 $524,227 Total assets 1,144,574 1,005,447 972,071 924,796 904,599 Total deposits 1,005,237 880,393 837,832 794,110 769,173 Debt financing and notes payable 22,924 22,956 33,983 45,505 37,924 Shareholders' equity 99,014 86,933 85,233 73,123 72,029 Financial Ratios: For the year: Return on assets 1.35% 1.27% 1.35% 1.26% 1.03% Return on equity 15.03% 14.19% 16.03% 15.59% 12.80% Net interest margin2 5.61% 5.58% 5.70% 5.40% 5.19% Net loan losses to average loans 0.22% 0.47% 0.70% 0.13% 0.50% Efficiency ratio2 63.66% 61.62% 59.25% 60.53% 64.58% Average equity to average assets 9.00% 8.94% 8.40% 8.09% 8.07% At December 31: Equity to assets 8.65% 8.65% 8.77% 7.91% 7.96% Total capital to risk-adjusted assets 11.97% 11.68% 12.20% 11.77% 11.83% Allowance for loan losses to loans 2.09% 1.98% 1.82% 1.88% 1.54% 1 Retroactively adjusted to reflect 3-for-2 stock split effected in 1998 2 Fully taxable equivalent -10- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's discussion and analysis of its financial condition and results of operations is intended to provide a better understanding of the significant changes and trends relating to the Company's financial condition, results of operations, liquidity and interest rate sensitivity. The following discussion is based on the Company's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. Please read the Company's audited consolidated financial statements and the related notes included as Item 8 of this report. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, and intangible assets. 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. The Company's policies related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets can be found in Note 1 to the Company's audited consolidated financial statements and the related notes included as Item 8 of this report. As the Company has not commenced any business operations independent of the Bank, the following discussion pertains primarily to the Bank. Average balances, including 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. 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 related notes at Item 8 of this report. -11- Net Income Following is a summary of the Company's net income for the past three years (dollars in thousands, except per share amounts): Components of Net Income - ----------------------------------------------------------------------------- Year ended December 31, 2002 2001 2000 ------------------------------- Net interest income * $53,029 $49,666 $48,954 Provision for loan losses (2,800) (4,400) (5,000) Noninterest income 19,180 16,238 14,922 Noninterest expense (45,971) (40,607) (37,846) Taxes * (9,369) (8,478) (8,407) ------------------------------- $14,069 $12,419 $12,623 =============================== Net income per average fully-diluted share $1.96 $1.72 $1.72 Net income as a percentage of average shareholders' equity 15.03% 14.19% 16.03% Net income as a percentage of average total assets 1.35% 1.27% 1.35% ============================================================================= * Fully tax-equivalent (FTE) The Company achieved earnings of $14.1 million in 2002, representing a 13.3% increase from the $12.4 million earned in 2001, which was down 1.6% from 2000 earnings of $12.6 million. Net interest income on a fully tax-equivalent basis for 2002 increased $3.4 million (6.8%) compared to 2001. Higher average balances of interest earning assets added $4.4 million to net interest income on a fully tax-equivalent basis, while changes in interest rates reduced net interest income on a fully tax-equivalent basis by $1.0 million. The loan loss provision was reduced by $1.6 million (36.4%), and noninterest income grew $2.9 million (18.1%). Partially offsetting this higher revenue, noninterest expense expanded $5.4 million (13.2%). Earnings in 2001 decreased $204,000 or 1.6% from 2000. Net interest income (FTE) grew $712,000 (1.45%) due to a $31.0 million (3.61%) increase in average earning assets that was partially offset by a net interest margin that fell 11 basis points. The loan loss provision was reduced by $600,000 in 2001 from 2000, and noninterest income increased $1.3 million (8.82%) while noninterest expense also increased $2.8 million (7.30%). The Company's return on average total assets was 1.35% in 2002, compared to 1.27% and 1.35% in 2001 and 2000, respectively. Return on average equity in 2002 was 15.03%, compared to 14.19% in 2001 and 16.03% percent in 2000. Net Interest Income The Company's primary source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) increased $3.4 million (6.8%) from 2001 to $53.0 million in 2002. Comparing 2001 to 2000, net interest income (FTE) increased $712,000 or 1.45%. Following is a summary of the Company's net interest income for the past three years (dollars in thousands): Components of Net Interest Income ----------------------------------------------------------------- Year ended December 31, 2002 2001 2000 ------------------------------- Interest income $64,696 $71,998 $76,327 Interest expense (12,914) (23,486) (28,543) FTE adjustment 1,247 1,154 1,170 ------------------------------- Net interest income (FTE) $53,029 $49,666 $48,954 ================================================================= Net interest margin (FTE) 5.61% 5.58% 5.70% ================================================================= -12- Interest income (FTE) decreased $7.2 million (9.9%) from 2001 to 2002, the net effect of lower earning-asset yields partially offset by higher average balances of those assets. The total yield on earning assets dropped from 8.21% in 2001 to 6.98% in 2002, following the trend in overall interest markets in which federal funds rates were reduced to historical lows ending 2002 at 1.25%. The average yield on loans decreased 113 basis points to 7.94% during 2002. The decrease in average yield on interest-earning assets reduced interest income (FTE) by $11.1 million, while a $54.8 million (6.2%) increase in average balances of interest-earning assets added $3.9 million to interest income (FTE) during 2002. Interest expense decreased $10.6 million (45.0%) in 2002 from $23.5 million in 2001, principally due to lower rates paid. The average rate paid on interest-bearing liabilities was 1.73% in 2002, 155 basis points or 47% lower than in 2001. The most pronounced declines included rates paid on savings deposits (down from 2.11% to 1.02%) and time deposits (down from 5.07% to 2.99%). Rates paid on interest-bearing demand deposits decreased 68 basis points to 0.27%. The decrease in average rate paid on interest-bearing liabilities decreased interest expense by $10.1 million, and changes in the mix of average balances of interest-bearing liabilities decreased interest expense by $509,000 in 2002 despite an overall increase of $30.8 million (4.3%) in the average balance of interest-bearing liabilities. Interest income (FTE) decreased $4.4 million (5.6%) from 2000 to 2001, primarily due to lower yields on earning assets. Yields on loans fell to 9.07% in 2001 from 9.90% in 2000. Overall, the yield on the Company's earning assets decreased from 9.02% in 2000 to 8.21% in 2001. During 2001, the average balance of loans and federal funds sold grew $22.6 million and $30.5 million, respectively, while the average balance of investments declined $22.1 million. The decrease in average yield on interest-earning assets reduced interest income (FTE) by $7.0 million, while a net increase of $31.0 million (3.6%) in average balances of interest earning assets added $2.6 million to interest income (FTE) during 2001. Interest expense decreased $5.1 million (17.7%) in 2001 due to a 77 basis point decrease in the average rate paid on interest-bearing liabilities from 4.05% to 3.28%. The largest individual decrease was the rate paid on federal funds purchased which fell 431 basis points to 2.42% in 2001. The average rate paid on savings deposits also fell from 3.13% to 2.11%. Partially offsetting these decreases was an $11.2 million (1.59%) increase in average interest-bearing liabilities from 2000 to 2001. Net Interest Margin Following is a summary of the Company's net interest margin for the past three years: Components of Net Interest Margin -------------------------------------------------------------------------- Year ended December 31, 2002 2001 2000 ----------------------------- Yield on earning assets 6.98% 8.21% 9.02% Rate paid on interest-bearing liabilities 1.73% 3.28% 4.05% ----------------------------- Net interest spread 5.24% 4.93% 4.96% Impact of all other net noninterest-bearing funds 0.35% 0.65% 0.74% ----------------------------- Net interest margin (FTE) 5.61% 5.58% 5.70% ========================================================================== The Company's aggressive reaction to declining market rates throughout 2001 and 2002 has allowed it to maintain a relatively stable net interest margin. While the Company was able to reduce the average rate paid on interest bearing liabilities at approximately the same rate or faster than the average yield on interest earning assets, and thus maintain or increase its net interest spread, the positive impact of all other net noninterest bearing funds on net interest margin was reduced due to the lower market rates of interest at which they could be invested. In addition, while the Company has been able to maintain a relatively stable net interest margin throughout 2001 and 2002, it becomes increasingly more difficult to do so as interest rates are reduced further. -13- Summary of Average Balances, Yields/Rates and Interest Differential The following tables present, for the past three years, 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): Year ended December 31, 2002 ----------------------------------------------- Interest Rates Average income/ earned/ balance expense paid ----------------------------------------------- Assets Loans $660,668 $52,472 7.94% Investment securities - taxable 204,155 9,430 4.62% Investment securities - nontaxable 43,871 3,435 7.83% Federal funds sold 36,692 606 1.65% ---------- ---------- Total earning assets 945,386 65,943 6.98% ---------- Other assets 94,080 ---------- Total assets $1,039,466 ========== Liabilities and shareholders' equity Interest-bearing demand deposits $176,484 469 0.27% Savings deposits 264,444 2,710 1.02% Time deposits 282,084 8,441 2.99% Federal funds purchased 116 2 1.47% Long-term debt 22,939 1,292 5.63% ---------- ---------- Total interest-bearing liabilities 746,067 12,914 1.73% ---------- Noninterest-bearing demand 182,569 Other liabilities 17,250 Shareholders' equity 93,580 ---------- Total liabilities and shareholders' equity $1,039,466 ========== Net interest spread (1) 5.24% Net interest income and interest margin (2) $53,029 5.61% ========== ======== (1) Net interest spread represents the average yield earned on interest earning assets less the average rate paid on interest bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. -14- Year ended December 31, 2001 ----------------------------------------------- Interest Rates Average income/ earned/ balance expense paid ----------------------------------------------- Assets Loans $647,317 $58,730 9.07% Investment securities - taxable 159,465 9,543 5.98% Investment securities - nontaxable 44,615 3,373 7.56% Federal funds sold 39,204 1,506 3.84% ---------- ---------- Total earning assets 890,601 73,152 8.21% ---------- Other assets 87,941 ---------- Total assets $978,542 ========== Liabilities and shareholders' equity Interest-bearing demand deposits $156,629 1,487 0.95% Savings deposits 225,137 4,759 2.11 % Time deposits 301,023 15,261 5.07% Federal funds purchased 289 7 2.42% Long-term debt 32,133 1,972 6.14% ---------- ---------- Total interest-bearing liabilities 715,211 23,486 3.28% ---------- Noninterest-bearing demand 160,152 Other liabilities 15,660 Shareholders' equity 87,519 ---------- Total liabilities and shareholders' equity $978,542 ========== Net interest spread (1) 4.93% Net interest income and interest margin (2) $49,666 5.58% ========== ======== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. Year ended December 31, 2000 ----------------------------------------------- Interest Rates Average income/ earned/ balance expense paid ----------------------------------------------- Assets Loans $624,717 $61,835 9.90% Investment securities - taxable 181,316 11,704 6.46% Investment securities - nontaxable 44,847 3,420 7.63% Federal funds sold 8,696 538 6.19% ---------- ---------- Total earning assets 859,576 77,497 9.02% ---------- Other assets 78,214 ---------- Total assets $937,790 ========== Liabilities and shareholders' equity Interest-bearing demand deposits $149,412 2,360 1.58% Savings deposits 218,286 6,837 3.13% Time deposits 278,968 15,806 5.67% Federal funds purchased 9,261 623 6.73% Long-term debt 48,078 2,917 6.07% ---------- ---------- Total interest-bearing liabilities 704,005 28,543 4.05% ---------- Noninterest-bearing demand 141,767 Other liabilities 13,277 Shareholders' equity 78,741 ---------- Total liabilities and shareholders' equity $937,790 ========== Net interest spread (1) 4.96% Net interest income and interest margin (2) $48,954 5.70% ========== ======== (1) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by dividing net interest income by total average earning assets. -15- Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid The following table sets forth a summary of the changes in the Company's interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the past three years. The rate/volume variance has been included in the rate variance. Amounts are calculated on a fully taxable equivalent basis (dollars in thousands): 2002 over 2001 2001 over 2000 ----------------------------------------------------------------------------- Yield/ Yield/ Volume Rate Total Volume Rate Total ----------------------------------------------------------------------------- Increase (decrease) in (dollars in thousands) interest income: Loans $1,211 ($7,469) ($6,258) $2,237 ($5,342) ($3,105) Investment securities 2,781 (2,832) (51) (1,477) (731) (2,208) Federal funds sold (96) (804) (900) 1,887 (919) 968 ----------------------------------------------------------------------------- Total 3,896 (11,105) (7,209) 2,647 (6,992) (4,345) ----------------------------------------------------------------------------- Increase (decrease) in interest expense: Demand deposits (interest-bearing) 188 (1,206) (1,018) 114 (987) (873) Savings deposits 831 (2,880) (2,049) 215 (2,293) (2,078) Time deposits (960) (5,860) (6,820) 1,250 (1,795) (545) Federal funds purchased (4) (1) (5) (604) (12) (616) Long-term borrowings (564) (116) (680) (967) 22 (945) ----------------------------------------------------------------------------- Total (509) (10,063) (10,572) 8 (5,065) (5,057) ----------------------------------------------------------------------------- Increase (decrease) in net interest income $4,405 ($1,042) $3,363 $2,639 ($1,927) $712 ============================================================================= Provision for Loan Losses In 2002, the Bank provided $2.8 million for loan losses compared to $4.4 million in 2001. Net loan charge-offs decreased $1.5 million (51%) to $1.5 million during 2002. Net charge-offs of commercial, financial and agricultural loans decreased $2.3 million (83%) in 2002, while net charge-offs of real estate mortgage and consumer installment loans increased $662,000 (463%) and $105,000 (205%), respectively. The 2002 net charge-offs represented 0.22% of average loans outstanding versus 0.47% in 2001. Nonperforming loans were 1.19% of total loans at December 31, 2002 versus 0.92% at December 31, 2001. The ratio of allowance for loan losses to nonperforming loans was 176% at the end of 2002 versus 216% at the end of 2001. In 2001, the Bank provided $4.4 million for loan losses compared to $5 million in 2000. Net loan charge-offs decreased $1.4 million (31%) to $3 million during 2001. Included in the $3 million of net loan charge-offs during 2001 is $2 million of charge-offs on a group of agricultural related loans to one borrower. During the quarter ended March 31, 2001, the Company received proceeds of $6.1 million from the sale of this nonperforming agricultural-related loan relationship that was first reported as nonperforming in the quarter ended September 30, 2000. The Company recorded charge-offs related to this loan relationship of $2 million in 2001 and $3.8 million in 2000. This loan relationship was sold to a third party without recourse to the Company. As such, the Company is not subject to any future charge-offs related to this loan relationship. Net charge-offs of consumer installment loans increased $51,000 (104%). Net charge-offs of commercial, financial and agricultural loans decreased $1.4 million (34%) in 2001, while net charge-offs of real estate mortgage loans decreased $6,000 (4%). The 2001 charge-offs represented 0.47% of average loans outstanding versus 0.70% in 2000. Nonperforming loans as a percentage of total loans were 0.92% and 2.29% at December 31, 2001 and 2000, respectively. The ratio of allowance for loan losses to nonperforming loans was 216% at the end of 2001 versus 80% at the end of 2000. -16- Noninterest Income The following table summarizes the Company's noninterest income for the past three years (dollars in thousands): Components of Noninterest Income --------------------------------------------------------------------------- Year ended December 31, 2002 2001 2000 -------------------------------- Service charges on deposit accounts $8,915 $5,875 $5,421 ATM fees and interchange 1,823 1,423 1,250 Other service fees 548 797 813 Commissions on sale of nondeposit investment products 2,467 2,576 2,784 Gain on sale of loans 3,641 2,095 802 Increase in cash value of life insurance 606 476 657 Other noninterest income 1,180 1,204 1,685 Gain on sale of investments - 36 - Gain on sale of insurance company stock - 1,756 - Gain on receipt of insurance company stock - - 1,510 -------------------------------- Total noninterest income $19,180 $16,238 $14,922 =========================================================================== Noninterest income increased $2.9 million (18.1%) to $19.2 million in 2002. The increase was mainly due to a $3.0 million (52%) increase in service charges on deposit accounts to $8.9 million, and a $1.5 million (74%) increase in gain on sale of loans to $3.6 million during 2002. Except for a $1.8 million gain from sale of investments and insurance company stock in 2001, noninterest income would have increased $4.7 million (29.2%). The increase in service charges on deposit accounts was almost entirely due to the introduction of the Company's overdraft privilege product in July 2002. The increase in gain on sale of loans is due to continued and increased residential mortgage refinance activity during 2002. The Company originated and sold residential mortgages totaling $178 million, $126 million, and $50 million in 2002, 2001, and 2000, respectively. Noninterest income increased $1.3 million (8.8%) to $16.2 million in 2001. The increase was mainly due to a $1.3 million (161%) increase in gain on sale of loans to $2.1 million during 2001. During 2001, the Company sold its investment in insurance company stock and recognized a gain of $1,756,000. In 2000, the Company recognized a gain of $1,510,000 on the receipt of its investment in insurance company stock when the insurance company demutualized. Securities Transactions During 2002 the Bank had no sales of securities. Also during 2002, the Bank received proceeds from maturities of securities totaling $131.6 million, and used $241.8 million to purchase securities. During 2001 the Bank realized net gains of $36,000 on the sale of securities with market values of $10.8 million. Also, the Bank realized a gain of $1.8 million on the sale of its investment in an insurance company with a market value of $3.3 million. In addition, during 2001, the Bank received proceeds from maturities of securities totaling $85.6 million, and purchased $93.1 million of securities. -17- Noninterest Expense Salaries and Benefits Salary and benefit expenses increased $3.1 million (14.6%) to $24.3 million in 2002 compared to 2001. Base salaries increased $1.4 million (9.5%) to $15.7 million in 2002. The increase in base salaries was mainly due to an 8.2% increase in average full time equivalent employees from 402 during 2001 to 435 during 2002, primarily due to the opening of four branches in 2002. Incentive and commission related salary expenses increased $866,000 (33.5%) to $3.5 million in 2002. The increase in incentive and commission related salary expense was mainly due to increased commissions paid on origination of residential mortgage loans, and other functions that exhibited exceptional performance during 2002. These results are consistent with the Bank's strategy of working more efficiently with fewer employees who are compensated in part based on their business unit's performance or on their ability to generate revenue. Benefits expense, including retirement, medical and workers' compensation insurance, and taxes, increased $855,000 (20.2%) to $5.1 million during 2002. Salary and benefit expenses increased $1.3 million (6.7%) to $21.2 million in 2001 compared to 2000. Incentive and commission related salary expenses increased $310,000 (13.6%) to $2.6 million in 2001. Base salaries and benefits increased $744,000 (5.5%) to $14.2 million in 2001. The increase in base salaries was mainly due to a 2.6% increase in average full time equivalent employees from 392 during 2000 to 402 during 2001, and an average annual base salary increase of 2.9% during 2001. Other Noninterest Expenses The following table summarizes the Company's other noninterest expense for the past three years (dollars in thousands): Components of Noninterest Expense --------------------------------------------------------------------------- Year ended December 31, 2002 2001 2000 ------------------------------------- Equipment and data processing $4,095 $3,694 $3,376 Occupancy 2,954 2,806 2,587 Professional fees 1,696 1,087 1,005 Telecommunications 1,422 1,253 957 Advertising 1,263 1,132 1,336 Intangible amortization 911 911 965 ATM network charges 847 913 770 Postage 801 639 486 Courier service 720 661 608 Operational losses 534 227 807 Assessments 233 223 222 Net other real estate owned expense 26 175 127 Other 6,179 5,687 4,737 ------------------------------------- Total noninterest expense $21,681 $19,408 $17,983 ============================================================================ Other expenses increased $2.3 million (11.7%) to $21.7 million in 2002. Increases in the areas of equipment and data processing, occupancy, telecommunications, courier service, and other were mainly due to the opening of four branches in 2002. Increases in professional fees and operational losses were related to the overdraft privilege product introduced in July 2002, and were more than offset by the large revenue that product is producing. Other noninterest expense increased $1.4 million (7.9%) to $19.4 million in 2001. Increases in the areas of equipment and data processing, occupancy, telecommunications, and ATM network charges were mainly due to the first full year of operation of the Paradise branch, and enhancements to data processing and ATM network equipment. Also contributing to the increase in other expenses in 2001 was a $314,000 (34%) increase in various loan production expenses to $1.3 million. Helping to offset these increases in other expenses were reductions of $580,000 in operational losses and $204,000 in advertising during 2001. The decrease in operational losses was mainly due to a nonrecurring $434,000 customer fraud loss in 2000. -18- Provision for Taxes The effective tax rate on income was 36.6%, 37.1%, and 36.4%, in 2002, 2001, and 2000, respectively. The effective tax rate was greater than the federal statutory tax rate due to state tax expense of $2 million, $1.9 million, and $1.9 million, respectively, in these years. Tax-free income of $2.2 million, $2.2 million, and $2.3 million, respectively, from investment securities in these years helped to reduce the effective tax rate. Financial Ratios The following table shows the Company's key financial ratios for the past three years: Year ended December 31, 2002 2001 2000 -------------------------------- Return on average total assets 1.35% 1.27% 1.35% Return on average shareholders' equity 15.03% 14.19% 16.03% Shareholders' equity to total assets 8.65% 8.65% 8.77% Common shareholders' dividend payout ratio 39.95% 45.43% 45.00% ============================================================================= Loans The Bank concentrates its lending activities in four principal areas: commercial loans (including agricultural loans), consumer loans, real estate mortgage loans (residential and commercial loans and mortgage loans originated for sale), and real estate construction loans. At December 31, 2002, these four categories accounted for approximately 18%, 29%, 47%, and 6% of the Bank's loan portfolio, respectively, as compared to 20%, 23%, 50%, and 7%, at December 31, 2001. The shift in the percentages was primarily due to the Bank's ability to increase its consumer loan portfolio during 2002. The increase in consumer loans during 2002 was mainly due to increases in home equity lines of credit and automobile loans. The interest rates charged for the loans made by the Bank vary with the degree of risk, the size and maturity of the loans, the borrower's relationship with the Bank and prevailing money market rates indicative of the Bank's cost of funds. The majority of the Bank's loans are direct loans made to individuals, farmers and local businesses. The Bank relies substantially on local promotional activity, personal contacts by bank officers, directors and employees to compete with other financial institutions. The Bank makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment. At December 31, 2002 loans totaled $687.5 million and was a 4.4% ($28.8 million) increase over the balances at the end of 2001. Demand for home equity loans and auto loans (both classified as consumer loans) were strong throughout 2002. Residential mortgage loan activity was extremely strong in 2002, but the Company generally sells all such loans. Commercial and agriculture related loan growth continued to be relatively weak in 2002 as the economy continued to be weak, and competition for such loans was high. The average loan-to-deposit ratio in 2002 was 71.1% compared to 76.8% in 2001. At December 31, 2001 loans totaled $658.7 million and was a 2.9% ($18.3 million) increase over the balances at the end of 2000. Demand for commercial and agriculture related loans weakened as the economy weakened in 2001. Demand for home equity loans remained strong throughout 2001, while residential mortgage loans increased significantly throughout 2001. The average loan-to-deposit ratio in 2001 was 76.8% compared to 79.2% in 2000. -19- Loan Portfolio Composite The following table shows the Company's loan balances for the past three years: December 31, (dollars in thousands) 2002 2001 2000 1999 1998 -------------------------------------------------------------------------- Commercial, financial and agricultural $125,982 $130,054 $148,135 $138,313 $106,796 Consumer installment 201,858 155,046 120,247 79,273 71,634 Real estate mortgage 319,969 326,897 334,010 332,116 316,927 Real estate construction 39,713 46,735 37,999 38,277 37,076 -------------------------------------------------------------------------- Total loans $687,522 $658,732 $640,391 $587,979 $532,433 ========================================================================== Nonperforming Assets 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. The reclassification of loans as nonaccrual does not necessarily reflect management's judgment as to whether they are collectible. Interest income on nonaccrual loans, which would have been recognized during the year, ended December 31, 2002, if all such loans had been current in accordance with their original terms, totaled $1.2 million. Interest income actually recognized on these loans in 2002 was $733,000. The Bank'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 other real estate owned ("OREO") or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements. Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits. -20- The following tables set forth the amount of the Bank's nonperforming assets net of guarantees of the U.S. government, including its agencies and its government-sponsored agencies, as of the dates indicated: December 31, 2002 December 31, 2001 ------------------------- ------------------------- (dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net ------------------------------------------------------ Performing nonaccrual loans $13,199 $8,432 $4,767 $2,733 - $2,733 Nonperforming, nonaccrual loans 4,091 718 3,373 3,120 $387 2,733 ------------------------------------------------------ Total nonaccrual loans 17,290 9,150 8,140 5,853 387 5,466 Loans 90 days past due and still accruing 40 - 40 584 - 584 ------------------------------------------------------ Total nonperforming loans 17,330 9,150 8,180 6,437 387 6,050 Other real estate owned 932 - 932 71 - 71 ------------------------------------------------------ Total nonperforming loans and OREO $18,262 $9,150 $9,112 $6,508 $387 $6,121 ====================================================== Nonperforming loans to total loans 1.19% 0.92% Allowance for loan losses/nonperforming loans 176% 216% Nonperforming assets to total assets 0.80% 0.61% Allowance for loan losses to nonperforming assets 158% 213% December 31, 2000 December 31, 1999 ------------------------- ------------------------- (dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net ------------------------------------------------------ Performing nonaccrual loans $4,331 $142 $4,189 $666 $62 $604 Nonperforming, nonaccrual loans 8,161 88 8,073 1,662 508 1,154 ------------------------------------------------------ Total nonaccrual loans 12,492 230 12,262 2,328 570 1,758 Loans 90 days past due and still accruing 965 - 965 923 - 923 ------------------------------------------------------ Total nonperforming loans 13,457 230 13,227 3,251 570 2,681 Other real estate owned 1,441 - 1,441 760 - 760 ------------------------------------------------------ Total nonperforming loans and OREO $14,898 $230 $14,668 $4,011 $570 $3,441 ====================================================== Nonperforming loans to total loans 2.07% 0.46% Allowance for loan losses/nonperforming loans 88% 412% Nonperforming assets to total assets 1.51% 0.37% Allowance for loan losses to nonperforming assets 80% 321% December 31, 1998 --------------------------- (dollars in thousands): Gross Guaranteed Net --------------------------- Performing nonaccrual loans $344 - $344 Nonperforming, nonaccrual loans 733 $32 701 Total nonaccrual loans 1,077 32 1,045 Loans 90 days past due and still accruing 620 - 620 Total nonperforming loans 1,697 1,665 Other real estate owned 1,412 - 1,412 Total nonperforming loans and OREO $3,109 $32 $3,077 Nonperforming loans to total loans 0.31% Allowance for loan losses/nonperforming loans 493% Nonperforming assets to total assets 0.34% Allowance for loan losses to nonperforming assets 267% During 2002, nonperforming assets net of government guarantees increased $3 million (49%) to a total of $9.1 million. Nonperforming loans net of government guarantees increased $2.1 million (35%) to $8.2 million, and other real estate owned (OREO) increased $861,000 to $932,000 during 2002. The ratio of nonperforming loans to total loans at December 31, 2002 was 1.19% versus 0.92% at the end of 2001. Classifications of nonperforming loans as a percent of total loans at the end of 2002 were as follows: secured by real estate, 62%; loans to farmers, 27%; commercial loans, 10%; and consumer loans, 1%. -21- During 2001, nonperforming assets net of government guarantees decreased $8.5 million (58%) to $6.1 million. Nonperforming loans decreased $7.2 million (54%) to $6.1 million, and other real estate owned (OREO) decreased $1.4 million (95%) to $71,000 during 2001. The ratio of nonperforming loans to total loans at December 31, 2001 was 0.92% versus 2.07% at the end of 2000. The decrease in the ratio of nonperforming loans to total loans was due in part to the sale of one nonperforming loan relationship during 2001 that accounted for $8.4 million of nonperforming loan balances at December 31, 2000. During the quarter ended March 31, 2001, the Company received proceeds of $6.1 million from the sale of this nonperforming agricultural-related loan relationship that was first reported as nonperforming in the quarter ended September 30, 2000. The Company recorded charge-offs related to this loan relationship of $2 million in 2001 and $3.8 million in 2000. This loan relationship was sold to a third party without recourse to the Company. As such, the Company is not subject to any future charge-offs related to this loan relationship. Classifications of nonperforming loans as a percent of the total at the end of 2001 were as follows: secured by real estate, 65%; loans to farmers, 4%; commercial loans, 30%; and consumer loans, 1%. 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 and lease 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 the remainder of this discussion, "loans" shall include all loans and lease contracts, which are a part of the Bank's portfolio. Assessment of the Adequacy of the Allowance for Loan Losses 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 and lease portfolio, and to a lesser extent the Company's loan and lease 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 occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies. The Company's method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowances for identified problem loans are based on specific analysis of individual credits. Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. 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. The Components of the Allowance for Loan Losses As noted above, the overall allowance consists of a specific allowance, a formula allowance, and an allowance for environmental factors. The first component, the specific allowance, results from the analysis of identified credits that meet management's criteria for specific evaluation. These loans are reviewed individually to determine if such loans are considered impaired. Impaired loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due under the contractual terms. Loans specifically reviewed, including those considered impaired, are evaluated individually by management for loss potential by evaluating sources of repayment, including collateral as applicable, and a specified allowance for loan losses is established where necessary. -22- The second component, the formula allowance, is an estimate of the probable losses that have occurred across the major loan categories in the Company's loan portfolio. This analysis is based on loan grades by pool and the loss history of these pools. This analysis covers the Company's entire loan portfolio including unused commitments but excludes any loans, which were analyzed individually and assigned a specific allowance as discussed above. The total amount allocated for this component is determined by applying loss estimation factors to outstanding loans and loan commitments. The loss factors are based primarily on the Company's historical loss experience tracked over a five-year period and adjusted as appropriate for the input of current trends and events. Because historical loss experience varies for the different categories of loans, the loss factors applied to each category also differ. In addition, there is a greater chance that the Company has suffered a loss from a loan that was graded less than satisfactory than if the loan was last graded satisfactory. Therefore, for any given category, a larger loss estimation factor is applied to less than satisfactory loans than to those that the Company last graded as satisfactory. The resulting formula allowance is the sum of the allocations determined in this manner. The third or "unallocated" component of the allowance for credit losses is a component that is not allocated to specific loans or groups of loans, but rather is intended to absorb losses that may not be provided for by the other components. There are several primary reasons that the other components discussed above might not be sufficient to absorb the losses present in portfolios, and the unallocated portion of the allowance is used to provide for the losses that have occurred because of them. The first reason is that there are limitations to any credit risk grading process. The volume of loans makes it impractical to re-grade every loan every quarter. Therefore, it is possible that some currently performing loans not recently graded will not be as strong as their last grading and an insufficient portion of the allowance will have been allocated to them. Grading and loan review often must be done without knowing whether all relevant facts are at hand. Troubled borrowers may deliberately or inadvertently omit important information from reports or conversations with lending officers regarding their financial condition and the diminished strength of repayment sources. The second reason is that the loss estimation factors are based primarily on historical loss totals. As such, the factors may not give sufficient weight to such considerations as the current general economic and business conditions that affect the Company's borrowers and specific industry conditions that affect borrowers in that industry. The factors might also not give sufficient weight to other environmental factors such as changing economic conditions and interest rates, portfolio growth, entrance into new markets or products, and other characteristics as may be determined by Management. Specifically, in assessing how much unallocated allowance needed to be provided at December 31, 2002, management considered the following: - with respect to loans to the agriculture industry, management considered the effects on borrowers of weather conditions and overseas market conditions for exported products as well as commodity prices in general; - with respect to changes in the interest rate environment management considered the recent changes in interest rates and the resultant economic impact it may have had on borrowers with high leverage and/or low profitability; and - with respect to loans to borrowers in new markets and growth in general, management considered the relatively short seasoning of such loans and the lack of experience with such borrowers. -23- Each of these considerations was assigned a factor and applied to a portion or all of the loan portfolio. Since these factors are not derived from experience and are applied to large non-homogeneous groups of loans, they are considered unallocated and are available for use across the portfolio as a whole. The following table sets forth the Bank's loan loss reserve as of the dates indicated: December 31, ------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------------------------------------------------- (dollars in thousands) Specific allowance $5,299 $5,672 $3,266 $600 $253 Formula allowance 8,839 7,183 8,067 10,250 7,744 Unallocated allowance 239 203 337 187 209 ------------------------------------------------------------- Total allowance $14,377 $13,058 $11,670 $11,037 $8,206 ============================================================= The allowance for loan losses to total loans at December 31, 2002 was 2.09% versus 1.98% at the end of 2001. At December 31, 2000, the allowance for loan losses to total loans was 1.82%. Based on the current conditions of the loan portfolio, management believes that the $14.4 million allowance for loan losses at December 31, 2002 is adequate to absorb probable losses inherent in the Bank'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, for the years indicated, the activity in the allowance for loan losses: December 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------------------------------------------------------------- (dollars in thousands) Balance, beginning of year $13,058 $11,670 $11,037 $8,206 $6,459 Provision charged to operations 2,800 4,400 5,000 3,550 4,200 Loans charged off: Commercial, financial and agricultural (668) (2,861) (4,450) (865) (1,865) Consumer installment (299) (134) (103) (148) (702) Real estate mortgage (819) (218) (152) (69) (188) ---------------------------------------------------------------- Total loans charged-off (1,786) (3,213) (4,705) (1,082) (2,755) ---------------------------------------------------------------- Recoveries: Commercial, financial and agricultural 197 92 281 327 164 Consumer installment 94 34 54 36 130 Real estate mortgage 14 75 3 -- 8 ---------------------------------------------------------------- Total recoveries 305 201 338 363 302 ---------------------------------------------------------------- Net loans charged-off (1,481) (3,012) (4,367) (719) (2,453) ---------------------------------------------------------------- Balance, year end $14,377 $13,058 $11,670 $11,037 $8,206 ================================================================ Average total loans $660,668 $647,317 $624,717 $566,738 $487,598 ---------------------------------------------------------------- Ratios: Net charge-offs during period to average loans outstanding during period 0.22% 0.47% 0.70% 0.13% 0.50% Provision for loan losses to aver- age loans outstanding 0.42% 0.68% 0.80% 0.63% 0.86% Allowance to loans at year end 2.09% 1.98% 1.82% 1.88% 1.54% ---------------------------------------------------------------- -24- The following tables summarize the allocation of the allowance for loan losses between loan types at December 31, 2002 and 2001: December 31, 2002 December 31, 2001 December 31, 2000 ------------------------- ------------------------ ------------------------ (dollars in thousands) Percent of Percent of Percent of loans in each loans in each loans in each category to category to category to Amount total loans Amount total loans Amount total loans Balance at end of period applicable to: Commercial, financial and agricultural $6,791 18.4% $6,929 19.8% $6,873 43.4% Consumer installment 2,833 29.4% 1,896 23.5% 1,373 15.9% Real estate mortgage 4,229 46.4% 3,709 49.6% 2,925 34.8% Real estate construction 524 5.8% 524 7.1% 499 5.9% --------- -------- --------- -------- --------- -------- $14,377 100.0% $13,058 100.0% $11,670 100.0% ========= ======== ========= ======== ========= ======== December 31, 1999 December 31, 1998 ----------------------- ----------------------- (dollars in thousands) Percent of Percent of loans in each loans in each category to category to Balance at end of period applicable to: Amount total loans Amount total loans Commercial, financial and agricultural $5,224 44.7% $3,345 39.8% Consumer installment 1,464 13.6% 1,154 13.6% Real estate mortgage 3,671 35.2% 3,153 39.6% Real estate construction 678 6.5% 554 7.0% --------- -------- -------- -------- $11,037 100.0% $8,206 100.0% ========= ======== ======== ======== Other Real Estate Owned The December 31, 2002 balance of other real estate owned (OREO) was $932,000 versus $71,000 at December 31, 2001. The Bank disposed of properties with a value of $79,000 in 2002. OREO properties consist of a mixture of land, single family residences, and commercial buildings. Intangible Assets At December 31, 2002 and 2001, the Bank had intangible assets totaling $4 million and $5.1 million, respectively. The intangible assets resulted from the Bank's 1997 acquisitions of certain Wells Fargo branches and Sutter Buttes Savings Bank, and the recognition of an additional minimum pension liability in 2001. Intangible assets at December 31, 2002 and 2001 were comprised of the following: December 31, 2002 2001 -------------------------- (dollars in thousands) Core-deposit intangible $3,642 $4,553 Additional minimum pension liability 401 517 -------------------------- Total intangible assets $4,043 $5,070 ========================== Amortization of core deposit intangible assets amounting to $911,000, $911,000, and $965,000 was recorded in 2002, 2001, and 2000, respectively. The minimum pension liability intangible asset is not amortized but adjusted annually based upon actuarial estimates. Deposits Deposits at December 31, 2002 were up $124.8 million (14.2%) over the 2001 year-end balances to $1.0 billion. All categories of deposits increased in 2002. Included in the December 31, 2002 certificate of deposit balances is $20 million from the State of California. The Bank participates in a deposit program offered by the State of California whereby the State may make deposits at the Banks request subject to collateral and credit worthiness constraints. The negotiated rates on these State deposits are generally favorable to other wholesale funding sources available to the Bank. -25- Deposits at December 31, 2001 were up $42.6 million (5.1%) to $880.4 million over 2000 year-end balances. All categories of deposits except certificates of deposit increased in 2001. Included in the December 31, 2001 certificate of deposit balance is $20 million from the State of California, which represents a decrease of $20 million from the $40 million the State of California had on deposit at the Bank at December 31, 2000. During 2001, the Bank elected not to renew $20 million of the $40 million State certificates of deposit that were outstanding at December 31, 2000. Long-Term Debt During 2002, the Bank repaid $32,000 of long-term debt. In 2001, the Bank made principal payments of $11 million on long-term debt obligations. See Note 7 to the consolidated financial statements at Item 8 of this report. Equity See Note 9 and Note 20 in the financial statements at Item 8 of this report for a discussion of shareholder's equity and regulatory capital, respectively. Management believes that the Company's capital is adequate to support anticipated growth, meet the cash dividend requirements of the Company and meet the future risk-based capital requirements of the Bank and the Company. Market Risk Management Overview. The goal for managing the assets and liabilities of the Bank is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Bank to undue interest rate risk. The Board of Directors has overall responsibility for the Company's interest rate risk management policies. The Bank has an Asset and Liability Management Committee (ALCO) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. Asset/Liability Management. 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 Bank's assets, liabilities and off-balance sheet items. The Bank 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 Bank 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. -26- The following table summarizes the effect on net interest income and net income due to changing interest rates as measured against a flat rate (no change) scenario: Interest Rate Risk Simulation of Net Interest Income and Net Income as of December 31, 2002 Estimated Change in Estimated Change in Change in Interest Net Interest Income (NII) Net Income (NI) Rates (Basis Points) (as % of "flat" NII) (as % of "flat" NI) +300 (ramp) 1.27% 2.76% +200 (ramp) 0.56% 1.23% +100 (ramp) 0.03% 0.07% + 0 (flat) -- -- -100 (ramp) (0.93)% (2.01)% -200 (ramp) (1.91)% (4.12)% -300 (ramp) (3.75)% (8.07)% 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. The following table summarizes the effect on market value of equity due to changing interest rates as measured against a flat rate (no change) scenario: Interest Rate Risk Simulation of Market Value of Equity as of December 31, 2002 Estimated Change in Change in Interest Market Value of Equity (MVE) Rates (Basis Points) (as % of "flat" MVE) +300 (shock) 3.51% +200 (shock) 3.00% +100 (shock) 2.24% + 0 (flat) -- -100 (shock) (7.00)% -200 (shock) (10.03)% -300 (shock) (4.77)% These results indicate that the balance sheet is slightly asset sensitive since earnings increase when interest rates rise. The magnitude of all the simulation results noted above is within the Bank's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding tables. For example, although certain of the Bank's assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain of the Bank's asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in the preceding table. Further, a change in U.S. Treasury rates accompanied by a change in the shape of the treasury yield curve could result in different estimations from those presented herein. Accordingly, the results in the preceding tables should not be relied upon as indicative of actual results in the event of changing market interest rates. Additionally, the resulting estimates of changes in market value of equity are not intended to represent, and should not be construed to represent, estimates of changes in the underlying value of the Bank. -27- Interest rate sensitivity is a function of the repricing characteristics of the Bank's portfolio of assets and liabilities. One aspect of these repricing characteristics is the time frame within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. An analysis of the repricing time frames of interest-bearing assets and liabilities is sometimes called a "gap" analysis because it shows the gap between assets and liabilities repricing or maturing in each of a number of periods. Another aspect of these repricing characteristics is the relative magnitude of the repricing for each category of interest earning asset and interest-bearing liability given various changes in market interest rates. Gap analysis gives no indication of the relative magnitude of repricing given various changes in interest rates. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity gaps are measured as the difference between the volumes of assets and liabilities in the Bank's current portfolio that are subject to repricing at various time horizons. The following interest rate sensitivity table shows the Bank's repricing gaps as of December 31, 2002. In this table transaction deposits, which may be repriced at will by the Bank, have been included in the less than 3-month category. The inclusion of all of the transaction deposits in the less than 3-month repricing category causes the Bank to appear liability sensitive. Because the Bank may reprice its transaction deposits at will, transaction deposits may or may not reprice immediately with changes in interest rates. In recent years of moderate interest rate changes the Bank's earnings have reacted as though the gap position is slightly asset sensitive mainly because the magnitude of interest-bearing liability repricing has been less than the magnitude of interest-earning asset repricing. This difference in the magnitude of asset and liability repricing is mainly due to the Bank's strong core deposit base, which although they may be repriced within three months, historically, the timing of their repricing has been longer than three months and the magnitude of their repricing has been minimal. Due to the limitations of gap analysis, as described above, the Bank does not actively use gap analysis in managing interest rate risk. Instead, the Bank relies on the more sophisticated interest rate risk simulation model described above as its primary tool in measuring and managing interest rate risk. Interest Rate Sensitivity - December 31, 2002 Repricing within: ------------------------------------------------------------------------------- (dollars in thousands) Less than 3 3 - 6 6 - 12 1 - 5 Over months months months years 5 years ------------------------------------------------------------------------------- Interest-earning assets: Securities $47,661 $49,460 $59,805 $141,138 $38,387 Loans 344,356 31,624 47,189 205,256 39,920 ------------------------------------------------------------------------------- Total interest-earning assets $392,017 $81,084 $106,994 $346,394 $78,307 ------------------------------------------------------------------------------- Interest-bearing liabilities Transaction deposits $480,742 $ --- $ --- $ --- $ --- Time 84,209 65,410 61,137 81,121 119 Long-term borrowings 10 10 21 226 22,657 ------------------------------------------------------------------------------- Total interest-bearing liabilities $564,961 $65,420 $61,158 $81,347 $22,776 ------------------------------------------------------------------------------- Interest sensitivity gap ($172,944) $15,664 $45,836 $265,047 $55,530 Cumulative sensitivity gap ($172,944) ($157,280) ($111,444) $153,604 $209,134 As a percentage of earning assets: Interest sensitivity gap (17.21%) 1.56% 4.56% 26.38% 5.53% Cumulative sensitivity gap (17.21%) (15.65%) (11.09%) 15.29% 20.81% -28- Liquidity Liquidity refers to the Bank's ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Consolidated Statement of Cash Flows. Net cash used by investing activities totaled approximately $144.4 million in 2002. Increased investment balances were responsible for the major use of funds in this category. Liquidity is generated from liabilities through deposit growth and short-term borrowings. These activities are included under financing activities in the Consolidated Statement of Cash Flows. In 2002, financing activities provided funds totaling $119.4 million. Internal deposit growth provided funds amounting to $124.8 million. The Bank also had available correspondent banking lines of credit totaling $55.0 million at year-end. In addition, at December 31, 2002, the Company had loans and securities available to pledge towards future borrowings from the Federal Home Loan Bank of up to $197 million. As of December 31, 2002, the Company had $22.9 million of long-term debt and other borrowings as described in Note 7 of the consolidated financial statements of the Company and the related notes at Item 8 of this report. While these sources are expected to continue to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions. Liquidity is also provided or used through the results of operating activities. In 2002, operating activities provided cash of $22.3 million. The Bank classifies its entire investment portfolio as available for sale (AFS). The AFS securities plus cash and cash equivalents in excess of reserve requirements totaled $412.8 million at December 31, 2002, which was 36.1% of total assets at that time. This was up from $302.1 million and 30.0% at the end of 2001. The maturity distribution of certificates of deposit in denominations of $100,000 or more is set forth in the following table. These deposits are generally more rate sensitive than other deposits and, therefore, are more likely to be withdrawn to obtain higher yields elsewhere if available. The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank's option. At December 31, 2002 and 2001, the Bank had $20 million of these State deposits. Certificates of Deposit in Denominations of $100,000 or More Amounts as of December 31, ---------------------------------- (dollars in thousands) 2002 2001 2000 ---------------------------------- Time remaining until maturity: Less than 3 months $32,932 $38,114 $55,721 3 months to 6 months 16,311 10,431 14,002 6 months to 12 months 12,455 15,383 18,686 More than 12 months 28,706 6,374 4,933 ---------------------------------- Total $90,404 $70,302 $93,342 -29- Loan demand also affects the Bank's liquidity position. The following table presents the maturities of loans at December 31, 2002: Loan Maturities - December 31, 2002 After One But Within Within After 5 One Year 5 Years Years Total --------------------------------------------------------------- (dollars in thousands) Loans with predetermined interest rates: Commercial, financial and agricultural $18,573 $34,214 $8,137 $60,924 Consumer installment 25,106 47,707 21,582 94,395 Real estate mortgage 26,217 49,193 57,394 132,804 Real estate construction 10,388 2,151 2,003 14,542 --------------------------------------------------------------- $80,284 $133,265 $89,116 $302,665 --------------------------------------------------------------- Loans with floating interest rates: Commercial, financial and agricultural $47,382 $12,696 $4,980 $65,058 Consumer installment 107,462 - - 107,462 Real estate mortgage 28,205 48,281 110,680 187,166 Real estate construction 15,398 7,507 2,266 25,171 --------------------------------------------------------------- $198,447 $68,484 $117,926 $384,857 --------------------------------------------------------------- Total loans $278,731 $201,749 $207,042 $687,522 =============================================================== The maturity distribution and yields of the investment portfolio is presented in the following table. The timing of the maturities indicated in the table below is based on final contractual maturities. Most mortgage-backed securities return principal throughout their contractual lives. As such, the weighted average life of mortgage-backed securities based on outstanding principal balance is usually significantly shorter than the final contractual maturity indicated below. At December 31, 2002, the Bank had no held-to-maturity securities. Securities Maturities and Weighted Average Tax Equivalent Yields - December 31, 2002 After One Year After Five Years Within but Through but Through After Ten One Year Five Years Ten Years Years Total ------------------------------------------------------------------------------------ Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------------------------------------------------------------------------------------ Securities Available-for-Sale (dollars in thousands) US Treasury securities and obligations of US government corporations and agencies $10,146 3.06% $48,995 5.74% - 0.00% - 0.00% $59,141 5.28% Obligations of states and political subdivisions 2,003 5.67% 1,700 5.86% 5,143 7.10% 35,190 7.90% 44,036 7.63% Mortgage-backed securities - 0.00% 6,613 6.14% 81,982 4.47% 129,868 4.97% 218,463 4.82% Corporate bonds - 0.00% 2,255 7.65% - 0.00% 9,716 2.51% 11,971 3.47% - -------------------------------------------------------------------------------------------------------------------------- Total securities available-for-sale $12,149 3.49% $59,563 5.86% $87,125 4.62% $174,774 5.42% $333,611 5.22% Other securities 4,413 5.19% 4,413 5.19% ------------------------------------------------------------------------------------ Total investment securities $12,149 3.49% $59,563 5.86% $87,125 4.62% $179,187 5.42% $338,024 5.22% ========================================================================================================================== The principal cash requirements of the Company are dividends on common stock when declared. The Company is dependent upon the payment of cash dividends by the Bank to service its commitments. The Company expects that the cash dividends paid by the Bank to the Company will be sufficient to meet this payment schedule. Dividends from the Bank are subject to certain regulatory restrictions. -30- Off-Balance Sheet Items The Bank has certain ongoing commitments under operating and capital leases. See Note 8 of the financial statements at Item 8 of this report for the terms. These commitments do not significantly impact operating results. As of December 31, 2002 commitments to extend credit were the Bank's only financial instruments with off-balance sheet risk. The Bank has not entered into any contracts for financial derivative instruments such as futures, swaps, options, etc. Loan commitments increased to $227.2 million from $195.1 million at December 31, 2001. The commitments represent 33.0% of the total loans outstanding at year-end 2002 versus 29.6% at December 31, 2001. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Market Risk Management" under Item 7 of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets as of December 31, 2002 and 2001 32 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2002, 2001, and 2000 33 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001, and 2000 34 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 35 Notes to Consolidated Financial Statements 36 Independent Auditors' Report 58 Management's Letter of Financial Responsibility 60 -31- TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (In thousands) At December 31, 2002 2001 ------------------------------- Assets: Cash and due from banks $67,170 $59,264 Federal funds sold 8,100 18,700 ------------------------------- Cash and cash equivalents 75,270 77,964 Investment securities available for sale 338,024 224,590 Loans Commercial 125,982 130,054 Consumer 201,858 155,046 Real estate mortgages 319,969 326,897 Real estate construction 39,713 46,735 ------------------------------- 687,522 658,732 Allowance for loan losses (14,377) (13,058) ------------------------------- Loans, net of allowance for loan losses 673,145 645,674 Premises and equipment, net 17,224 16,457 Cash value of life insurance 15,208 14,602 Other real estate owned 932 71 Accrued interest receivable 5,644 5,522 Deferred income taxes 8,429 9,334 Intangible assets 4,043 5,070 Other assets 6,655 6,163 ------------------------------- Total Assets $1,144,574 $1,005,447 =============================== Liabilities: Deposits: Noninterest-bearing demand $232,499 $190,386 Interest-bearing demand 182,816 165,542 Savings 297,926 247,399 Time 291,996 277,066 ------------------------------- Total deposits 1,005,237 880,393 Accrued interest payable 2,927 3,488 Other Liabilities 14,472 11,677 Long-term debt and other borrowings 22,924 22,956 ------------------------------- Total Liabilities 1,045,560 918,514 ------------------------------- Shareholders' Equity: Common stock, no par value: Authorized 20,000,000 shares; Issued and outstanding: 7,060,965 at December 31, 2002 50,472 7,000,980 at December 31, 2001 49,679 Retained earnings 46,239 37,909 Accumulated other comprehensive income, net 2,303 (655) ------------------------------- Total Shareholders' Equity 99,014 86,933 ------------------------------- Total Liabilities and Shareholders' Equity $1,144,574 $1,005,447 =============================== See Notes to Consolidated Financial Statements -32- TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data) Years ended December 31, ------------------------------------------ 2002 2001 2000 ------------------------------------------ Interest Income: Interest and fees on loans $52,472 $58,730 $61,835 Interest on federal funds sold 606 1,506 538 Interest on investment securities available for sale Taxable 9,430 9,543 11,704 Tax exempt 2,188 2,219 2,250 ------------------------------------------ Total interest income 64,696 71,998 76,327 ------------------------------------------ Interest Expense: Interest on interest-bearing demand deposits 469 1,487 2,360 Interest on savings 2,710 4,759 6,837 Interest on time certificates of deposit 8,441 15,261 15,806 Interest on short-term borrowing 2 7 623 Interest on long-term debt 1,292 1,972 2,917 ------------------------------------------ Total interest expense 12,914 23,486 28,543 ------------------------------------------ Net Interest Income 51,782 48,512 47,784 ------------------------------------------ Provision for loan losses 2,800 4,400 5,000 ------------------------------------------ Net Interest Income After Provision for Loan Losses 48,982 44,112 42,784 ------------------------------------------ Noninterest Income: Service charges and fees 11,286 8,095 7,484 Commissions on sale of non-deposit investment products 2,467 2,576 2,784 Gain on sale of loans 3,641 2,095 802 Other 1,786 1,680 2,342 Gain on sale of investments - 36 - Gain on sale of insurance company stock - 1,756 - Gain on receipt of insurance company stock - - 1,510 ------------------------------------------ Total Noninterest Income 19,180 16,238 14,922 ------------------------------------------ Noninterest Expense: Salaries and related benefits 24,290 21,199 19,863 Other 21,681 19,408 17,983 ------------------------------------------ Total Noninterest Expense 45,971 40,607 37,846 ------------------------------------------ Income Before Income Taxes 22,191 19,743 19,860 ------------------------------------------ Provision for income taxes 8,122 7,324 7,237 ------------------------------------------ Net Income $14,069 $12,419 $12,623 ------------------------------------------ Comprehensive Income: Change in unrealized gain on securities available for sale, net 2,931 441 5,209 Net change in minimum pension liability 27 (772) - ------------------------------------------ Comprehensive Income $17,027 $12,088 $17,832 ========================================== Average Shares Outstanding 7,019 7,072 7,192 Diluted Average Shares Outstanding 7,193 7,219 7,341 Per Share Data Basic Earnings $2.00 $1.76 $1.76 Diluted Earnings $1.96 $1.72 $1.72 Dividends Paid $0.80 $0.80 $0.79 See Notes to Consolidated Financial Statements -33- TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) Accumulated Other Common Retained Comprehensive Stock Earnings Income, net Total ------------------------------------------------- Balance, December 31, 1999 $50,043 $28,613 ($5,533) $73,123 Net income for the period 12,623 12,623 Stock issued, including stock option tax benefits 665 665 Repurchase of common stock (349) (427) (776) Dividends (5,680) (5,680) Unrealized gain on securities available for sale, net 5,209 5,209 ------------------------------------------------- Balance, December 31, 2000 $50,428 $35,129 ($324) $85,233 Net income for the period 12,419 12,419 Stock issued, including stock option tax benefits 1,872 1,872 Repurchase of common stock (2,621) (3,997) (6,618) Dividends (5,642) (5,642) Unrealized gain on securities available for sale, net 441 441 Change in minimum pension liability, net (772) (772) ------------------------------------------------- Balance, December 31, 2001 $49,679 $37,909 ($655) $86,933 Net income for the period 14,069 14,069 Stock issued, including stock option tax benefits 863 863 Repurchase of common stock (70) (119) (189) Dividends (5,620) (5,620) Unrealized gain on securities available for sale, net 2,931 2,931 Change in minimum pension liability, net 27 27 ------------------------------------------------- Balance December 31, 2002 $50,472 $46,239 $2,303 $99,014 ================================================= See Notes to Consolidated Financial Statements -34- TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the year ended December 31, 2002 2001 2000 ---------------------------------------------------- Operating Activities: Net income $14,069 $12,419 $12,623 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment, and amortization 2,608 2,708 2,641 Amortization of intangible assets 911 911 965 Provision for loan losses 2,800 4,400 5,000 Amortization of investment securities premium, net 1,841 398 217 Deferred income taxes (1,247) (660) (650) Investment security gains, net - (1,792) (1,510) Originations of loans for resale (177,796) (125,675) (50,254) Proceeds from sale of loans originated for resale 179,415 126,961 50,798 Gain on sale of loans (3,641) (2,095) (802) Amortization of mortgage servicing rights 713 223 186 Amortization of stock options - - 69 Loss (gain) on sale of fixed assets 8 (9) 77 Gain on sale of other real estate owned, net (8) (80) (83) Provision for losses on other real estate owned - 18 25 Change in assets and liabilities: (Increase) decrease in interest receivable (122) 1,413 (859) (Decrease) increase in interest payable (561) (1,757) 1,052 Increase (decrease) in other assets and liabilities 3,316 (2,161) (132) ---------------------------------------------------- Net Cash Provided by Operating Activities 22,306 15,222 19,363 ---------------------------------------------------- Investing Activities: Proceeds from maturities of securities available-for-sale 131,592 85,619 39,663 Proceeds from sales of securities available-for-sale - 14,119 - Purchases of securities available-for-sale (241,794) (93,125) (27,567) Net increase in loans (31,203) (21,678) (58,330) Proceeds from sale of premises and equipment 17 32 40 Purchases of property and equipment (3,121) (1,951) (2,998) Proceeds from sale of other real estate owned 79 1,757 928 ---------------------------------------------------- Net Cash Used by Investing Activities (144,430) (15,227) (48,264) ---------------------------------------------------- Financing Activities: Net increase in deposits 124,844 42,561 43,722 Net (decrease) increase in federal funds purchased - (500) 500 Borrowings under long-term debt agreements - - 35,000 Payments of principal on long-term debt agreements (32) (11,027) (46,522) Repurchase of Common Stock (189) (6,618) (776) Dividends paid (5,620) (5,642) (5,680) Exercise of stock options/issuance of Common Stock 427 1,005 411 ---------------------------------------------------- Net Cash Provided by Financing Activities 119,430 19,779 26,655 ---------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (2,694) 19,774 (2,246) ---------------------------------------------------- Cash and Cash Equivalents and Beginning of Period 77,964 58,190 60,436 ---------------------------------------------------- Cash and Cash Equivalents at End of Period $75,270 $77,964 $58,190 ==================================================== Supplemental Disclosure of Noncash Activities: Loans transferred to other real estate owned 932 325 1,551 Supplemental Disclosure of Cash Flow Activity: Cash paid for interest expense 13,475 25,243 27,491 Cash paid for income taxes 7,900 9,089 7,573 Income tax benefit from stock option exercises $436 $867 $254 See Notes to Consolidated Financial Statements -35- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2002, 2001 and 2000 Note 1 - General Summary of Significant Accounting Policies The accounting and reporting policies of TriCo Bancshares (the "Company") conform to generally accepted accounting principles. The following are descriptions of the more significant accounting and reporting policies. Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company operates 32 branch offices and 10 in-store branch offices in the California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare and Yuba. The Company's operating policy since its inception has emphasized retail banking. Most of the Company's customers are retail customers and small to medium sized businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The one accounting estimate that materially affects the financial statements is the allowance for loan losses. Investment Securities The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. In 2002 and 2001, 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. 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. -36- 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 2002, 2001, and 2000 for cash proceeds equal to the fair value of the loans. The following table summarizes the Company's mortgage servicing rights assets as of December 31, 2002 and 2001. December 31, December 31, (Dollars in thousands) 2001 Additions Reductions 2002 ------------------------------------------------- Mortgage Servicing Rights $1,512 $2,022 ($713) $2,821 ================================================= 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 December 31, 2002, the Company had no mortgage loans held for sale. At December 31, 2002 and 2001, the Company serviced real estate mortgage loans for others of $307 million and $196 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. -37- Identifiable Intangible Assets Identifiable intangible assets consist of core deposit intangibles and minimum pension liability. The following table summarizes the Company's core deposit intangible as of December 31, 2002 and 2001. December 31, December 31, (Dollar in Thousands) 2001 Additions Reductions 2002 ------------------------------------------------- Core deposit intangibles $10,278 $10,278 Accumulated amortization (5,725) ($911) (6,636) ------------------------------------------------- Core deposit intangibles, net $4,553 ($911) $3,642 ================================================= Core deposit premiums are scheduled to amortize at a rate of $227,700 per quarter through the quarter ended December 31, 2006. Core deposit premiums are amortized using an accelerated method over a period of ten years. The Company reviews for impairment of certain intangibles held, whenever events or changes indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair market value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The following table summarizes the Company's minimum pension liability intangible as of December 31, 2002 and 2001. December 31, December 31, (Dollar in Thousands) 2001 Additions Reductions 2002 -------------------------------------------- Minimum pension liability intangible $517 ($116) $401 ============================================ Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. Income Taxes The Company's accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. 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: (in thousands, except per share amounts) 2002 2001 2000 Net income As reported $14,069 $12,419 $12,623 Pro forma $13,857 $12,253 $12,507 Basic earnings per share As reported $2.00 $1.76 $1.76 Pro forma $1.97 $1.73 $1.74 Diluted earnings per share As reported $1.96 $1.72 $1.72 Pro forma $1.93 $1.70 $1.70 Stock-based employee compensation cost, net of related tax effects, included in net income As reported $0 $0 $40 Pro forma $212 $166 $156 -38- The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2002, 2001 and 2000: risk-free interest rate of 4.01%, 4.80% and 6.65%; expected dividend yield of 3.3%, 4.9% and 4.7%; expected life of 6 years, 6 years and 6 years; expected volatility of 27%, 28% and 30%, respectively. The weighted average grant date fair value of an option to purchase one share of common stock was %5.37, $3.26, and $3.99, respectively. Comprehensive Income For the Company, comprehensive income includes net income reported on the statement of income, changes in the fair value of its available-for-sale investments, and changes in the minimum pension liability reported as a component of shareholders' equity. The changes in the components of accumulated other comprehensive income for the years ended December 31, 2002, 2001, and 2000 are reported as follows: 2002 2001 2000 ---------------------------------------- Unrealized Gain (Loss) on Securities (in thousands) Beginning Balance $117 ($324) ($5,533) Unrealized gain (loss) arising during the period, net of tax 2,931 (669) $5,209 Less: Reclassification adjustment for net realized gains on securities available for sale included in net income during the year, net of tax of $0, $681 and $0, respectively -- 1,110 -- ---------------------------------------- Ending Balance $3,048 $117 ($324) ======================================== Minimum Pension Liability Beginning Balance ($772) $ -- $ -- Change in minimum pension liability, net of tax of 18, ($517), and $0, respectively 27 ($772) -- ---------------------------------------- Ending Balance ($745) ($772) -- ======================================== Total accumulated other comprehensive income (loss), net $2,303 ($655) ($324) ======================================== Reclassifications Certain amounts previously reported in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 presentation. These reclassifications did not affect previously reported net income or total shareholders' equity. Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 141, "Business Combinations" (SFAS 141), and Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized after 2001, but instead be periodically evaluated for impairment. Intangible assets with definite useful lives are required to be amortized over their respective estimated useful lives to their estimated residual values, and also reviewed for impairment. Effective January 1, 2002, the Company was required to adopt the provisions of SFAS 142. Accordingly, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate accounting literature. The Company was also required to reassess the useful lives and residual values of all such intangible assets and make any necessary amortization period adjustments by March 31, 2002. No such adjustments were required to be made. 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 Company has no goodwill (unidentifiable intangible assets). -39- Note 2 - Restricted Cash Balances Reserves (in the form of deposits with the Federal Reserve Bank) of $500,000 were maintained to satisfy Federal regulatory requirements at December 31, 2002 and December 31, 2001. These reserves are included in cash and due from banks in the accompanying balance sheets. Note 3 - Investment Securities The amortized cost and estimated fair values of investments in debt and equity securities are summarized in the following tables. Also included in the following table are other securities that do not have readily determinable fair value because their ownership is restricted and they lack a market. These other securities are carried at cost and consist mainly of Federal Home Loan Bank stock with a cost of $4,228,000 and $4,000,000 at December 31, 2002 and 2001, respectively: December 31, 2002 ----------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------ Securities Available-for-Sale (in thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 58,823 $ 319 $ - $ 59,142 Obligations of states and political subdivisions 42,016 2,028 (8) 44,036 Mortgage-backed securities 213,770 4,693 - 218,463 Corporate debt securities 13,742 261 (2,033) 11,970 ------------------------------------------------------------ Total securities available-for-sale 328,351 7,301 (2,041) 333,611 Other securities 4,413 4,413 ------------------------------------------------------------ Totals $ 332,764 $ 7,301 $ (2,041) $ 338,024 ============================================================ December 31, 2001 ----------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------ Securities Available-for-Sale (in thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 29,991 $ 34 $ (142) $ 29,883 Obligations of states and political subdivisions 44,524 833 (124) 45,233 Mortgage-backed securities 131,972 1,246 (217) 133,001 Corporate debt securities 13,731 177 (1,620) 12,288 ------------------------------------------------------------ Total securities available-for-sale 220,218 2,290 (2,103) 220,405 Other securities 4,185 4,185 ------------------------------------------------------------ Totals investment securities $ 224,403 $ 2,290 $ (2,103) $ 224,590 ============================================================ The amortized cost and estimated fair value of debt securities at December 31, 2002 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. -40- Estimated Amortized Fair Cost Value ------------------------------ (in thousands) Investment Securities Due in one year $11,974 $12,149 Due after one year through five years 58,864 59,563 Due after five years through ten years 85,889 87,125 Due after ten years 171,624 174,774 No stated maturity 4,413 4,413 ------------------------------ Totals $332,764 $338,024 ============================== Proceeds from sales of investment securities were as follows: Gross Gross Gross For the Year Proceeds Gains Losses - ----------------------------------------------------------- (in thousands) 2002 -- -- -- 2001 $14,119 $1,796 $4 2000 -- -- -- Investment securities with an aggregate carrying value of $104,561,000 and $93,605,000 at December 31, 2002 and 2001, respectively, were pledged as collateral for specific borrowings, lines of credit and local agency deposits. Note 4 - Allowance for Loan Losses Activity in the allowance for loan losses was as follows: Years Ended December 31, 2002 2001 2000 -------------------------------- (in thousands) Balance, beginning of year $13,058 $11,670 $11,037 Provision for loan losses 2,800 4,400 5,000 Loans charged off (1,786) (3,213) (4,705) Recoveries of loans previously charged off 305 201 338 -------------------------------- Balance, end of year $14,377 $13,058 $11,670 ================================ Loans classified as nonaccrual amounted to approximately $8,140,000, $5,466,000 and $12,262,000 at December 31, 2002, 2001, and 2000, respectively. These nonaccrual loans were classified as impaired and are included in the recorded balance in impaired loans for the respective years shown below. If interest on those loans had been accrued, such income would have been approximately $477,000, $260,000 and $731,000 in 2002, 2001 and 2000, respectively. -41- As of December 31, the Company's recorded investment in impaired loans and the related valuation allowance were as follows (in thousands): 2002 ----------------------------- Recorded Valuation Investment Allowance ----------------------------- Impaired loans - Valuation allowance required $8,180 $881 No valuation allowance required -- -- ----------------------------- Total impaired loans $8,180 $881 ============================= 2001 ----------------------------- Recorded Valuation Investment Allowance ----------------------------- Impaired loans - Valuation allowance required $6,050 $881 No valuation allowance required -- -- ----------------------------- Total impaired loans $6,050 $881 ============================= This valuation allowance is included in the allowance for loan losses shown above for the respective year. The average recorded investment in impaired loans was $7,115,000, $9,639,000 and, $7,954,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The Company recognized interest income on impaired loans of $733,000, $441,000 and $1,171,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Note 5 - Premises and Equipment Premises and equipment were comprised of: December 31, 2002 2001 ------------------------- (in thousands) Premises $13,031 $12,269 Furniture and equipment 18,092 16,133 ------------------------- 31,123 28,402 Less: Accumulated depreciation and amortization (17,401) (15,466) ------------------------- 13,722 12,936 Land and land improvements 3,502 3,521 ------------------------- $17,224 $16,457 ========================= Depreciation and amortization of premises and equipment amounted to $2,329,000, $2,243,000 and $2,152,000 in 2002, 2001 and 2000, respectively. -42- Note 6 - Time Deposits At December 31, 2002, the scheduled maturities of time deposits were as follows (in thousands): Scheduled Maturities ---------- 2003 $210,757 2004 17,970 2005 8,577 2006 966 2007 and thereafter 53,726 ---------- Total $291,996 ========== Note 7 - Long-Term Debt and Other Borrowings Long-term debt is as follows: December 31, 2002 2001 -------------------------- (in thousands) 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 424 456 -------------------------- Total long-term debt $22,924 $22,956 ========================== The Company maintains a collateralized line of credit with the Federal Home Loan Bank of San Francisco. Based on the FHLB stock requirements at December 31, 2002, this line provided for maximum borrowings of $58,848,000 of which $22,500,000 was outstanding, leaving $36,348,000 available. The maximum month-end outstanding balances of short term reverse repurchase agreements in 2002 and 2001 were $0 and $0, respectively. The Company has available unused lines of credit totaling $52,500,000 for Federal funds transactions at December 31, 2002. Note 8 - Commitments and Contingencies (See also Note 16) At December 31, 2002, future minimum commitments under non-cancelable capital and operating leases with initial or remaining terms of one year or more are as follows: Capital Operating Leases Leases ------------------------------ (in thousands) 2003 $90 $1,115 2004 91 970 2005 92 828 2006 93 660 2007 94 604 Thereafter 192 2,102 ------------------------------ Future minimum lease payments 652 $6,279 Less amount representing interest 228 ========== ------- Present value of future lease payments $424 ======= Rent expense under operating leases was $1,201,000 in 2002, $1,241,000 in 2001 and $971,000 in 2000. -43- The Company is a defendant in legal actions arising from normal business activities. Management believes, after consultation with legal counsel, that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's financial position or results from operations. Note 9 - Shareholders' Equity Dividends Paid The Bank paid to the Company cash dividends in the aggregate amounts of $5,779,000, $12,187,000 and $7,118,000 in 2002, 2001 and 2000, respectively. The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC) and the State of California Department of Financial Institutions. California banking laws limit the Bank's ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period. Under this regulation, at December 31, 2002, the Bank may pay dividends of $15,390,000. Shareholders' Rights Plan On June 25, 2001, the Company announced that its Board of Directors adopted and entered into a Shareholder Rights Plan designed to protect and maximize shareholder value and to assist the Board of Directors in ensuring fair and equitable benefit to all shareholders in the event of a hostile bid to acquire the Company. The Company adopted this Rights Plan to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, the Rights Plan imposes a significant penalty upon any person or group that acquires 15% or more of the Company's outstanding common stock without approval of the Company's Board of Directors. The Rights Plan was not adopted in response to any known attempt to acquire control of the Company. Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was declared for each common share held of record as of the close of business on July 10, 2001. No separate certificates evidencing the Rights will be issued unless and until they become exercisable. The Rights generally will not become exercisable unless an acquiring entity accumulates or initiates a tender offer to purchase 15% or more of the Company's common stock. In that event, each Right will entitle the holder, other than the unapproved acquirer and its affiliates, to purchase either the Company's common stock or shares in an acquiring entity at one-half of market value. The Right's initial exercise price, which is subject to adjustment, is $49.00 per Right. The Company's Board of Directors generally will be entitled to redeem the Rights at a redemption price of $.01 per Right until an acquiring entity acquires a 15% position. The Rights expire on July 10, 2011. Stock Repurchase Plan On March 15, 2001, the Company announced the completion of its stock repurchase plan initially announced on July 20, 2000. Under this repurchase plan, the Company repurchased a total of 150,000 shares of which 110,000 shares were repurchased since December 31, 2000. On October 19, 2001, the Company announced the completion of its stock repurchase plan initially announced on March 15, 2001. Under this repurchase plan, the Company repurchased a total of 150,000 shares. Also on October 19, 2001, the Company announced that its Board of Directors approved a new plan to repurchase, as conditions warrant, up to 150,000 additional shares of the Company's stock on the open market or in privately negotiated transactions. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. The 150,000 shares covered by this repurchase plan represented approximately 2.2% of the Company's 6,992,080 then outstanding common shares. As of December 31, 2002, the Company had repurchased 118,800 shares under this new plan. Note 10 - Stock Options In May 2001, the Company adopted the TriCo Bancshares 2001 Stock Option Plan (2001 Plan) covering officers, employees, directors of, and consultants to the Company. Under the 2001 Plan, the option price cannot be less than the fair market value of the Common Stock at the date of grant except in the case of substitute options. Options for the 2001 Plan expire on the tenth anniversary of the grant date. Vesting schedules under the 2001 Plan are determined individually for each grant. In May 1995, the Company adopted the TriCo Bancshares 1995 Incentive Stock Option Plan (1995 Plan) covering key employees. Under the 1995 Plan, the option price cannot be less than the fair market value of the Common Stock at the date of grant. Options for the 1995 Plan expire on the tenth anniversary of the grant date. Vesting schedules under the 1995 Plan are determined individually for each grant. -44- The Company also has outstanding options under the TriCo Bancshares 1993 Nonqualified Stock Option Plan (1993 Plan). Options under the 1993 Plan were granted at an exercise price less than the fair market value of the common stock and vest over a six year period. Unexercised options for the 1993 Plan terminate 10 years from the date of the grant. Stock option activity is summarized in the following table: Weighted Weighted Average Average Number Option Price Exercise Fair Value Of Shares Per Share Price of Grants Outstanding at December 31, 1999 500,891 4.95 to 18.25 7.82 Options granted 118,900 16.13 to 16.13 16.13 $3.99 Options exercised (78,625) 5.24 to 5.24 5.24 Options forfeited (750) 18.25 to 18.25 18.25 Outstanding at December 31, 2000 540,416 4.95 to 18.25 10.01 Options granted 323,000 16.10 to 16.40 16.38 $3.26 Options exercised (192,530) 4.95 to 5.24 5.22 Options forfeited (12,000) 16.13 to 18.25 16.92 Outstanding at December 31, 2001 658,886 $5.24 to $18.25 $14.41 Options granted 40,500 23.44 to 24.76 23.88 $5.37 Options exercised (69,986) 5.24 to 18.25 6.10 Options forfeited (2,000) 24.25 to 24.25 24.25 Outstanding at December 31, 2002 627,400 $5.24 to $24.76 $15.92 -45- The following table shows the number, weighted-average exercise price, and the weighted average remaining contractual life of options outstanding, and the number and weighted-average exercise price of options exercisable as of December 31, 2002 by range of exercise price: Outstanding Options Exercisable Options ------------------------------------------------ ----------------------------- Weighted-Average Range of Weighted-Average Remaining Weighted-Average Exercise Price Number Exercise Price Contractual Life Number Exercise Price $4-$6 31,550 $5.24 0.92 years 31,550 $5.24 $8-$10 20,700 $8.93 2.44 20,700 $8.93 $12-$14 30,000 $12.25 3.48 30,000 $12.25 $14-$16 15,000 $14.17 4.01 15,000 $14.17 $16-$18 432,400 $16.32 8.11 176,284 $16.30 $18-$20 59,250 $18.25 4.78 59,250 $18.25 $22-$24 20,000 $23.44 9.94 - - $24-$26 18,500 $24.32 9.37 500 $24.76 Of the stock options outstanding as of December 31, 2002, 2001, and 2000, options on shares totaling 333,284, 330,046, and 426,902, respectively, were exercisable at weighted average prices of $14.70, $12.50, and $8.38, respectively. The Company has stock options outstanding under the three option plans described above. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized except for the options granted under the 1993 plan. The Company recognized expense of $0, $0, and $69,000 for the 1993 Plan options in 2002, 2001 and 2000, respectively. Note 11 - Other Noninterest Income and Expenses The components of other noninterest income were as follows: Years Ended December 31, 2002 2001 2000 ------------------------------ (in thousands) Increase in cash value of insurance policies $606 $476 $657 Sale of customer checks 264 283 286 Gain on sale of other real estate owned 7 80 83 Other 909 841 1,316 ------------------------------ Total other noninterest income $1,786 $1,680 $2,342 ============================== The components of other noninterest expenses were as follows: Years Ended December 31, 2002 2001 2000 ------------------------------ (in thousands) Equipment and data processing $4,095 $3,694 $3,376 Occupancy 2,954 2,806 2,587 Professional fees 1,696 1,087 1,005 Telecommunications 1,422 1,253 957 Advertising 1,263 1,132 1,336 Intangible amortization 911 911 965 ATM network charges 847 913 770 Postage 801 639 486 Courier service 720 661 608 Operational losses 534 227 807 Assessments 233 223 222 Net other real estate owned expense 26 175 127 Other 6,179 5,687 4,737 ------------------------------ Total other noninterest expenses $21,681 $19,408 $17,983 ============================== -46- Note 12 - Income Taxes The current and deferred components of the income tax provision were comprised of: Years Ended December 31, 2002 2001 2000 ------------------------------ (in thousands) Current Tax Provision: Federal $6,826 $5,975 $5,890 State 2,543 2,009 1,997 ------------------------------ Total current 9,369 7,984 7,887 Deferred Tax Benefit: Federal (735) (518) (511) State (512) (142) (139) ------------------------------ Total deferred (1,247) (660) (650) ------------------------------ Provision for income taxes $8,122 $7,324 $7,237 ============================== Taxes recorded directly to shareholders' equity are not included in the preceding table. These taxes (benefits) relating to changes in minimum pension liability amounting to ($19,000) in 2002, $541,000 in 2001 and $0 in 2000, unrealized gains and losses on available-for-sale investment securities amounting to $2,142 in 2002, $258,000 in 2001 and $2,996,000 in 2000, and benefits related to employee stock options of ($436,000) in 2002, ($867,000) in 2001 and ($254,000) in 2000 were recorded directly to shareholders' equity. The provisions for income taxes applicable to income before taxes for the years ended December 31, 2002, 2001 and 2000 differ from amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory federal income tax rate are reconciled as follows: Years Ended December 31, 2002 2001 2000 ---------------------------- Federal statutory income tax rate 35.0% 35.0% 34.0% State income taxes, net of federal tax benefit 6.0 6.5 6.2 Tax-exempt interest on municipal obligations (3.3) (3.9) (3.9) Other (1.1) (0.5) 0.1 ---------------------------- Effective Tax Rate 36.6% 37.1% 36.4% ============================ -47- The components of the net deferred tax asset of the Company as of December 31, were as follows: 2002 2001 -------------------------- (in thousands) Deferred Tax Assets: Loan losses $6,045 $5,223 Deferred compensation 3,523 3,061 Intangible amortization 980 895 State taxes 871 695 Pension liability 522 541 Fixed asset write down 232 220 Nonaccrual interest 201 109 OREO write downs 160 167 Stock option amortization 32 93 -------------------------- Total deferred tax assets 12,566 11,004 -------------------------- Deferred Tax Liabilities: Unrealized gain on securities (2,221) (79) Depreciation (645) (658) Securities income (419) (331) Securities accretion (418) (368) Capital leases (95) (98) Other, net (339) (136) -------------------------- Total deferred tax liability (4,137) (1,670) -------------------------- Net deferred tax asset $8,429 $9,334 ========================== Note 13 - Retirement Plans Substantially all employees with at least one year of service are covered by a discretionary employee stock ownership plan (ESOP). Contributions are made to the plan at the discretion of the Board of Directors. Contributions to the plan(s) totaling $955,000 in 2002, $850,000 in 2001 and $842,000 in 2000 are included in salary expense. The Company has an Executive Deferred Compensation Plan and a Director Deferred Compensation Plan, which allow directors and key executives designated by the Board of Directors of the Company to defer a portion of their compensation. The Company has purchased insurance on the lives of the participants and intends to use the cash values of these policies ($6,564,000 and $6,304,000 at December 31, 2002 and 2001, respectively) to pay the deferred compensation obligations of $4,451,000 and $3,609,000 at December 31, 2002 and 2001, respectively. 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 ($8,644,000 and $8,298,000 at December 31, 2002 and 2001, respectively) to pay the retirement obligations. In accordance with the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," the Bank recorded in Other Liabilities an additional minimum pension liability of $1,642,000 related to the supplemental retirement plan as of December 31, 2002. These amounts represent the amount by which the accumulated benefit obligations for this retirement plan exceeded the fair value of plan assets plus amounts previously accrued related to the plan. These additional liabilities have been offset by an intangible asset to the extent of previously unrecognized net transitional obligation and unrecognized prior service costs of each plan. The amount in excess of previously unrecognized prior service cost and unrecognized net transitional obligation is recorded as a reduction of shareholders' equity in the amount of $745,000, representing the after-tax impact, at December 31, 2002. -48- The following table sets forth the plans' status: December 31, 2002 2001 -------------------- (in thousands) Change in benefit obligation: Benefit obligation at beginning of year $(6,261) $(5,134) Service cost (107) (86) Interest cost (428) (372) Amendments -- (108) Actuarial gain (loss) (367) (862) Benefits paid 482 301 -------------------- Benefit obligation at end of year $(6,681) $(6,261) ==================== Change in plan assets: Fair value of plan assets at beginning of year $ -- $ -- -------------------- Fair value of plan assets at end of year $ -- $ -- ==================== Funded status $(6,681) $(6,261) Unrecognized net obligation existing at January 1, 1986 80 115 Unrecognized net actuarial loss 2,354 2,075 Unrecognized prior service cost 321 402 Intangible asset (401) (517) Accumulated other comprehensive income (1,243) (1,289) -------------------- Accrued benefit cost $(5,570) $(5,475) ==================== Years Ended December 31, 2002 2001 2000 ------------------------ (in thousands) Net pension cost included the following components: Service cost-benefits earned during the period $107 $ 86 $ 74 Interest cost on projected benefit obligation 428 372 317 Amortization of net obligation at transition 35 35 35 Amortization of prior service cost 81 39 13 Recognized net actuarial loss 87 53 41 ------------------------ Net periodic pension cost $738 $585 $480 ======================== The net periodic pension cost was determined using a discount rate assumption of 7.00% for 2002, 7.25% for 2001 and 7.25% for 2000, respectively. The rates of increase in compensation used in each year were 2.5% to 5%. -49- Note 14 - Earnings per Share The Company's basic and diluted earnings per share are as follows (in thousands except per share data): Year Ended December 31, 2002 Weighted Average Income Shares Per Share Amount Basic Earnings per Share Net income available to common shareholders $14,069 7,019,205 $2.00 Common stock options outstanding -- 173,809 ------- -------- Diluted Earnings per Share Net income available to common shareholders $14,069 7,193,014 $1.96 ======= ========= ===== Year Ended December 31, 2001 Weighted Average Income Shares Per Share Amount Basic Earnings per Share Net income available to common shareholders $12,419 7,072,588 $1.76 Common stock options outstanding -- 146,641 ------- --------- Diluted Earnings per Share Net income available to common shareholders $12,419 7,219,229 $1.72 ======= ========= ===== Year Ended December 31, 2000 Weighted Average Income Shares Per Share Amount Basic Earnings per Share Net income available to common shareholders $12,623 7,191,790 $1.76 Common stock options outstanding -- 148,939 ------- --------- Diluted Earnings per Share Net income available to common shareholders $12,623 7,340,729 $1.72 ======= ========= ===== Excluded from the computation of diluted earnings per share were 36,000, 0, and 184,150 options for the years ended December 31, 2002, 2001, and 2000, respectively, because the effect of these options was antidilutive. Note 15 - Related Party Transactions Certain directors, officers, and companies with which they are associated were customers of, and had banking transactions with, the Company or the Bank in the ordinary course of business. It is the Company's policy that all loans and commitments to lend to officers and directors be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers of the Bank. The following table summarizes the activity in these loans for 2002: Balance Balance December 31, Advances/ Removed/ December 31, 2001 New Loans Payments 2002 ------------------------------------------------------------------- (in thousands) $6,369 $1,291 $4,322 $3,338 Note 16 - Financial Instruments With Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. -50- The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Contractual Amount December 31, -------------------------- 2002 2001 (in thousands) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: Commercial loans $69,295 $72,646 Consumer loans 117,917 91,170 Real estate mortgage loans 6,028 2,932 Real estate construction loans 25,105 23,952 Standby letters of credit 8,818 4,391 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of one year or less or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on Management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most standby letters of credit are issued for one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral requirements vary, but in general follow the requirements for other loan facilities. Note 17 - Concentration of Credit Risk The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio within the business segments located in this geographical area. Note 18 - Disclosure of Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value. Cash and due from banks, fed funds purchased and sold, accrued interest receivable and payable, and short-term borrowings are considered short-term instruments. For these short-term instruments their carrying amount approximates their fair value. Securities For all securities, fair values are based on quoted market prices or dealer quotes. See Note 3 for further analysis. Loans The fair value of variable rate loans is the current carrying value. The interest rates on these loans are regularly adjusted to market rates. The fair value of other types of fixed rate loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The allowance for loan losses is a reasonable estimate of the valuation allowance needed to adjust computed fair values for credit quality of certain loans in the portfolio. Deposit Liabilities and Long-Term Debt The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. These values do not consider the estimated fair value of the Company's core deposit intangible, which is a significant unrecognized asset of the Company. The fair value of time deposits and debt is based on the discounted value of contractual cash flows. -51- Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counter parties at the reporting date. Fair value for financial instruments are management's estimates of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates. The estimated fair values of the Company's financial instruments are as follows: December 31, 2002 ----------------------------- Carrying Fair Amount Value ----------------------------- Financial assets: (in thousands) Cash and due from banks $67,170 $67,170 Federal funds sold 8,100 8,100 Securities: Available-for-sale 338,024 338,024 Loans, net 673,145 667,535 Accrued interest receivable 5,644 5,644 Financial liabilities: Deposits 1,005,237 972,323 Accrued interest payable 2,927 2,927 Long-term borrowings 22,924 25,347 Contract Amount ----------------------------- Off-balance sheet: Commitments 218,345 21,835 Standby letters of credit 8,818 88 December 31, 2001 ----------------------------- Carrying Fair Amount Value ----------------------------- Financial assets: (in thousands) Cash and due from banks $59,264 $59,264 Federal funds sold 18,700 18,700 Securities: Available-for-sale 224,590 224,590 Loans, net 645,674 637,000 Accrued interest receivable 5,522 5,522 Financial liabilities: Deposits 880,393 832,380 Accrued interest payable 3,488 3,488 Long-term borrowings 22,956 24,156 Contract Amount ----------------------------- Off-balance sheet: Commitments 108,700 10,870 Standby letters of credit 4,391 44 -52- Note 19 - TriCo Bancshares Financial Statements TriCo Bancshares (Parent Only) Balance Sheets December 31, Assets 2002 2001 -------------------------- (in thousands) Cash and Cash equivalents $239 $241 Securities available-for-sale 180 180 Investment in Tri Counties Bank 96,708 85,446 Other assets 1,887 1,066 -------------------------- Total assets $99,014 $86,933 ========================== Liabilities and shareholders' equity Total liabilities $ -- $ -- -------------------------- Shareholders' equity: Common stock, no par value: Authorized 20,000,000 shares; issued and outstanding 7,060,965 and 7,000,980 shares, respectively $50,472 $49,679 Retained earnings 46,239 37,909 Accumulated other comprehensive income (loss) 2,303 (655) -------------------------- Total shareholders' equity 99,014 86,933 -------------------------- Total liabilities and shareholders' equity $99,014 $86,933 ========================== Statements of Income Years Ended December 31, 2002 2001 2000 ------------------------------ (in thousands) Interest income $18 $17 $18 ------------------------------ Administration expense 416 980 980 ------------------------------ Loss before equity in net income of Tri Counties Bank (398) (963) (962) Equity in net income of Tri Counties Bank: Distributed 5,779 12,187 7,118 Undistributed 8,522 798 6,070 Income taxes 166 397 397 ------------------------------ Net income $14,069 $12,419 $12,623 ============================== -53- Statements of Cash Flows Years ended December 31, 2002 2001 2000 ------------------------------------------- (in thousands) Operating activities: Net income $14,069 $12,419 $12,623 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed equity in Tri Counties Bank (8,522) (798) (6,070) Deferred income taxes (167) (397) (397) ------------------------------------------- Net cash provided by operating activities 5,380 11,224 6,156 ------------------------------------------- Financing activities: Issuance of common stock 427 1,005 411 Repurchase of common stock (189) (6,618) (776) Cash dividends-- common (5,620) (5,642) (5,680) ------------------------------------------- Net cash used for financing activities (5,382) (11,255) (6,045) ------------------------------------------- (Decrease) increase in cash and cash equivalents (2) (31) 111 Cash and cash equivalents at beginning of year 241 272 161 ------------------------------------------- Cash and cash equivalents at end of year $239 $241 $272 =========================================== Note 20 - Regulatory Matters The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2002, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2002, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that Management believes have changed the institution's category. -54- The Bank's actual capital amounts and ratios are also presented in the table. To Be Well (Dollars in thousands) Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2002: Total Capital (to Risk Weighted Assets): Consolidated $102,378 11.97% =>$68,427 =>8.0% =>$85,534 =>10.0% Tri Counties Bank $ 100,046 11.73% =>$68,259 =>8.0% =>$85,324 =>10.0% Tier I Capital (to Risk Weighted Assets): Consolidated $91,641 10.71% =>$34,213 =>4.0% =>$51,320 => 6.0% Tri Counties Bank $89,335 10.47% =>$34,130 =>4.0% =>$51,195 => 6.0% Tier I Capital (to Average Assets): Consolidated $91,641 8.27% =>$44,304 =>4.0% =>$55,380 => 5.0% Tri Counties Bank $89,369 8.08% =>$44,222 =>4.0% =>$55,278 => 5.0% As of December 31, 2001: Total Capital (to Risk Weighted Assets): Consolidated $91,418 11.68% =>$62,620 =>8.0% =>$78,275 =>10.0% Tri Counties Bank $89,253 11.43% =>$62,466 =>8.0% =>$78,083 =>10.0% Tier I Capital (to Risk Weighted Assets): Consolidated $81,595 10.43% =>$31,310 =>4.0% =>$46,965 => 6.0% Tri Counties Bank $79,454 10.18% =>$31,233 =>4.0% =>$46,850 => 6.0% Tier I Capital (to Average Assets): Consolidated $81,595 8.17% =>$39,941 =>4.0% =>$49,926 => 5.0% Tri Counties Bank $79,454 7.97% =>$39,865 =>4.0% =>$49,832 => 5.0% Note 21 - Summary of Quarterly Results of Operations (unaudited) The following table sets forth the results of operations for the four quarters of 2002 and 2001, and is unaudited; however, in the opinion of Management, it reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the summarized results for such periods. 2002 Quarters Ended December 31, September 30, June 30, March 31, (Dollars in thousands, except per share data) Interest income $16,228 16,435 16,075 15,958 Interest expense 3,245 3,227 3,179 3,263 ------- ------- ------- ------- Net interest income 12,983 13,208 12,896 12,695 Provision for loan losses 800 700 500 800 ------- ------- ------- ------- Net interest income after provision for loan losses 12,183 12,508 12,396 11,895 Noninterest income 5,998 5,413 3,943 3,826 Noninterest expense 12,473 12,133 10,963 10,402 ------- ------- ------- ------- Income before income taxes 5,708 5,788 5,376 5,319 Income tax expense 1,960 2,161 2,011 1,990 ------- ------- ------- ------- Net income $ 3,748 $ 3,627 $ 3,365 $ 3,329 ======= ======= ======= ======= Per common share: Net income (diluted) $ 0.52 $ 0.50 $ 0.47 $ 0.47 ======= ======= ======= ======== Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.20 ======= ======= ======= ======= -55- 2001 Quarters Ended December 31, September 30, June 30, March 31, (Dollars in thousands, except per share data) Interest income $16,860 $18,259 $18,327 $18,552 Interest expense 4,356 5,612 6,323 7,195 ------- ------- ------- ------- Net interest income 12,504 12,647 12,004 11,357 Provision for loan losses 1,150 600 775 1,875 ------- ------- ------- ------- Net interest income after provision for loan losses 11,354 12,047 11,229 9,482 Noninterest income 3,920 3,713 3,577 5,028 Noninterest expense 10,170 10,465 10,233 9,739 ------- ------- ------- ------- Income before income taxes 5,104 5,295 4,573 4,771 Income tax expense 1,746 2,050 1,736 1,792 ------- ------- ------- ------- Net income $3,358 $ 3,245 $ 2,837 $ 2,979 ======= ======= ======= ======= Per common share: Net income (diluted) $ 0.47 $ 0.45 $ 0.39 $ 0.41 ======= ======= ======= ======= Dividends $ 0.20 $ 0.20 $ 0.20 $ 0.20 ======= ======= ======= ======= Note 22 - Business Segments The Company is principally engaged in traditional community banking activities provided through its 32 branches and 10 in-store branches located throughout Northern and Central California. Community banking activities include the Bank's commercial and retail lending, deposit gathering and investment and liquidity management activities. In addition to its community banking services, the Bank offers investment brokerage and leasing services. These activities are monitored and reported by Bank management as separate operating segments. The accounting policies of the segments are the same as those described in Note 1. The Company evaluates segment performance based on net interest income, or profit or loss from operations, before income taxes not including nonrecurring gains and losses. The results of the separate branches have been aggregated into a single reportable segment, Community Banking. The Company's leasing, investment brokerage and real estate segments do not meet aggregation or materiality criteria and therefore are reported as "Other" in the following table. Summarized financial information for the years ended December 31, 2002, 2001 and 2000 concerning the Bank's reportable segments is as follows (in thousands): Community Banking Other Total 2002 Net interest income $50,755 $1,027 $51,782 Noninterest income 16,243 2,937 19,180 Noninterest expense 43,904 2,067 45,971 Net income 12,864 1,205 14,069 Assets $1,128,148 $16,426 $1,144,574 2001 Net interest income $46,804 $1,708 $48,512 Noninterest income 13,331 2,907 16,238 Noninterest expense 38,654 1,953 40,607 Net income 10,729 1,690 12,419 Assets $990,279 $15,168 $1,005,447 2000 Net interest income $46,902 $882 $47,784 Noninterest income 11,783 3,139 14,922 Noninterest expense 35,864 1,982 37,846 Net income 11,328 1,295 12,623 Assets $956,447 $15,624 $972,071 -56- Note 23 - Acquisition On October 7, 2002, TriCo Bancshares announced that on October 3, 2002 it signed a definitive agreement with Tri Counties Bank, its wholly owned subsidiary, and North State National Bank, pursuant to which TriCo Bancshares will acquire all of the outstanding stock of North State National Bank in exchange for cash of approximately $13 million, approximately 716,000 shares of TriCo Bancshares common stock and options to purchase approximately 92,450 shares of TriCo Bancshares common stock, subject to adjustments as set forth in the agreement. Based upon a closing price of $23.92 per share of TriCo Bancshares common stock on October 3, 2002, the transaction was valued at $31.8 million. On March 19, 2003, shareholders of North State National Bank approved the proposed merger. -57- Independent Auditors' Report To the Board of Directors TriCo Bancshares and Subsidiary: We have audited the accompanying consolidated balance sheet of TriCo Bancshares and Subsidiary as of December 31, 2002, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of TriCo Bancshares as of December 31, 2001, and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 18, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of TriCo Bancshares and Subsidiary as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Sacramento, California January 17, 2003 -58- Independent Auditors' Report(1) To the Board of Directors and Shareholders of TriCo Bancshares and Subsidiary: We have audited the accompanying consolidated balance sheets of TriCo Bancshares (a California corporation) and Subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TriCo Bancshares and Subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP San Francisco, California January 18, 2002 (1) This report is a copy of a previously issued report and the predecessor auditor has not reissued the report. Revisions to prior-period financial statements are considered inconsequential. -59- MANAGEMENT'S LETTER OF FINANCIAL RESPONSIBILITY To Our Shareholders: The Management of TriCo Bancshares is responsible for the preparation, integrity, reliability and consistency of the information contained in this annual report. The consolidated financial statements, which necessarily include amounts based on judgments and estimates, were prepared in conformity with generally accepted accounting principles and prevailing practices in the banking industry. All other financial information appearing throughout this annual report is presented in a manner consistent with the consolidated financial statements. Management has established and maintains a system of internal controls that provides reasonable assurance that the underlying financial records are reliable for preparing the consolidated financial statements, and that assets are safeguarded from unauthorized use or loss. This system includes extensive written policies and operating procedures and a comprehensive internal audit function, and is supported by the careful selection and training of staff, an organizational structure providing for division of responsibility, and a Code of Ethics covering standards of personal and business conduct. Management believes that, as of December 31, 2002, the Company's internal control environment is adequate to provide reasonable assurance as to the integrity and reliability of the consolidated financial statements and related financial information contained in the annual report. However, there are limits inherent in all systems of internal accounting control and Management recognizes that errors or irregularities may occur. Based on the recognition that the costs of such systems should not exceed the benefits to be derived, Management believes the Company's system provides an appropriate cost/benefit balance. The system of internal controls is under the general oversight of the Board of Directors acting through its Audit Committee, which is comprised entirely of outside directors. The Audit Committee monitors the effectiveness of and compliance with internal controls through a continuous program of internal audit. This is accomplished through periodic meetings with Management, internal auditors and independent auditors to assure that each is carrying out their responsibilities. The Company's 2002 consolidated financial statements have been audited by KPMG LLP, independent certified public auditors elected by the shareholders. All financial records and related data, as well as the minutes of shareholders and directors meetings, have been made available to them. Management believes that all representations made to the independent auditors during their audit were valid and appropriate. Richard P. Smith President and Chief Executive Officer Thomas J. Reddish Vice President and Chief Financial Officer -60- ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 22, 2002, the Company decided not to renew the engagement of its independent public accountants, Arthur Andersen LLP ("Andersen"). This determination followed the Company's decision to seek proposals from other independent accountants to audit the Company's consolidated financial statements for the year ending December 31, 2002. The decision not to renew the engagement of Andersen was made by the Board of Directors based upon a recommendation of its Audit Committee. During the Company's the fiscal year ended December 31, 2001, and during the interim period from December 31, 2001 through March 22, 2002, there were no disagreements between the Company and Andersen on any matter of accounting principles, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused Andersen to make reference to the matter of the disagreement in connection with their reports. The audit reports of Andersen on the consolidated financial statements of the Company as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 did not contain any adverse opinion or disclaimer of opinion, nor were these opinions qualified or modified as to uncertainty, audit scope or accounting principles. The Company requested that Andersen furnish it with a letter, addressed to the commission stating whether or not it agrees with the above statements. The letter from Andersen is incorporated by reference from the Company's 8-K dated March 27, 2002. Effective March 22, 2002, the Board of Directors, based upon a recommendation of its Audit Committee, retained KPMG LLP ("KPMG") as its independent accountants to audit the Company's consolidated financial statements for the year ending December 31, 2002. The decision to retain KPMG was ratified by shareholders at the Annual Meeting of Shareholders in May 2002. During the Company's two fiscal years ended December 31, 2001, and during the interim period through March 22, 2002, there were no reportable events as defined in Item 301 (a)(1)(v) of Regulation S-K. During the Company's two fiscal years ended December 31, 2001, and during the interim period through March 22, 2002, the Company did not consult with KPMG regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of regulation S-K and related instruction to this Item) or a reportable event identified (as described in Item 304(a)(1)(v) of Regulation S-K and related instruction to this Item). -61- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors and executive officers of the registrant required by this Item 10 is incorporated herein by reference from the "Board of Directors", "Executive Officers" and "Ownership of Voting Securities" sections of the Company's Proxy Statement for the annual meeting of shareholders to be held on May 13, 2003, which will be filed with the commission pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated herein by reference from the "Compensation of Executive Officers" section of the Company's Proxy Statement for the annual meeting of shareholders to be held on May 13, 2003, which will be filed with the commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table shows Company common stock authorized for issuance under the Company's equity compensation plans as of December 31, 2002: # of securities Weighted # of securities remaining to be issued average available for future upon exercise exercise price issuance under equity of outstanding of outstanding compensation plans options, warrants options, warrants (excluding securities Plan category and rights (a) and rights (b) reflected in column (a)) (c) - ------------- ------------------------------------------------------------ Equity compensation plans approved by security holders 627,400 $15.92 475,825 Equity compensation plans not approved by security holders 0 -- 0 The information required by this Item 12 is incorporated herein by reference from the "Ownership of Voting Securities" section of the Company's Proxy Statement for the annual meeting of shareholders to be held on May 13, 2003, which will be filed with the commission pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is incorporated herein by reference from the "Committees and Meetings of the Board of Directors and Compensation of Directors" sections of the Company's Proxy Statement for the annual meeting of shareholders to be held on May 13, 2003, which will be filed with the commission pursuant to Regulation 14A. ITEM 14. CONTROLS AND PROCEDURES (a) The Chief Executive Officer, Richard Smith, and the Chief Financial Officer, Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days of the filing of this report ("Evaluation Date"). Based on that evaluation, they concluded that as of the Evaluation Date the Company's disclosure controls and procedures are effective to allow timely communication to them of information relating to the Company and the Bank required to be disclosed in its filings with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (a) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. -62- ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. All Financial Statements. The consolidated financial statements of Registrant are listed at page 32 of Item 8 of this report, and are incorporated herein by reference. 2. Financial statement schedules. Schedules have been omitted because they are not applicable or are not required under the instructions contained in Regulation S-X or because the information required to be set forth therein is included in the consolidated financial statements or notes thereto at Item 8 of this report. 3. Exhibits. The following documents are included or incorporated by reference in this annual report on Form 10-K, and this list includes the Exhibit Index. Exhibit No. Exhibit Index - ----------- ------------- 2* Acquisition Agreement and Plan of Merger dated October 3, 2002, by and among TriCo Bancshares, Tri Counties Bank and North State National Bank filed as Exhibit 2 to TriCo's Form S-2 Registration Statement dated January 16, 2003 (No. 333-102546) 3.1* Articles of Incorporation of TriCo Bancshares, as amended, filed as Exhibit 3.1 to TriCo's Report on Form 10-K for the year ended December 31, 1989. 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 1, 2001, between TriCo and each of Craig Carney, Richard O'Sullivan, Thomas Reddish, Ray Rios and Richard Smith, 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) -63- 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) 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) 11.1 Computation of earnings per share 21.1 Tri Counties Bank, a California banking corporation, is the sole subsidiary of Registrant 23.1 Consent of KPMG LLP 99.1 CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *Previously filed and incorporated herein by reference. (b) Reports on Form 8-K: During the quarter ended December 31, 2002 the Company filed the following Current Reports on Form 8-K: Description Date of Report ------------------------------------------- --------------- Acquisition agreement and plan of merger by October 3, 2002 and among TriCo Bancshares, Tri Counties Bank and North State National Bank (c) Exhibits filed: See Exhibit Index under Item 15(a)(3) above for the list of exhibits required to be filed by Item 601 of regulation S-K with this report. (d) Financial statement schedules filed: See Item 15(a)(2) above. -64- ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 16 is incorporated herein by reference from the "Independent Public Accountants" section of the Company's Proxy Statement for the annual meeting of shareholders to be held on May 13, 2003, which will be filed with the commission pursuant to Regulation 14A. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 18, 2003 TRICO BANCSHARES By: /s/ Richard P. Smith ---------------------------------------- Richard P. Smith, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Date: March 18, 2003 /s/ Richard P. Smith ---------------------------------------- Richard P. Smith, President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 18, 2003 /s/ Thomas J. Reddish ---------------------------------------- Thomas J. Reddish, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 18, 2003 /s/ Donald J. Amaral ---------------------------------------- Donald J. Amaral, Director Date: March 18, 2003 /s/ William J. Casey ---------------------------------------- William J. Casey, Director and Chairman of the Board Date: March 18, 2003 /s/ Craig S. Compton ---------------------------------------- Craig S. Compton, Director Date: March 20, 2003 /s/ Wendell J. Lundberg ---------------------------------------- Wendell J. Lundberg, Director Date: March 18, 2003 /s/ Donald E. Murphy ---------------------------------------- Donald E. Murphy, Director and Vice Chairman of the Board -65- Date: ---------------------------------------- Robert H. Steveson, Director and Vice Chairman of the Board Date: March 18, 2003 /s/ Carroll R. Taresh ---------------------------------------- Carroll R. Taresh, Director Date: March 18, 2003 /s/ Alex A. Vereschagin, Jr. ---------------------------------------- Alex A. Vereschagin, Jr., Director -66- CERTIFICATIONS I, Richard P. Smith, certify that; 1. I have reviewed this annual report on Form 10-K of TriCo Bancshares; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors: a. All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weakness in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 18, 2003 /s/ Richard P. Smith -------------------------------------- Richard P. Smith President and Chief Executive Officer (Principal Executive Officer) -67- I, Thomas J. Reddish, certify that; 1. I have reviewed this annual report on Form 10-K of TriCo Bancshares; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors: a. All significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weakness in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 18, 2003 /s/ Thomas J. Reddish --------------------------------------- Thomas J. Reddish Vice President and Chief Financial Officer (Principal Financial Officer) -68- EXHIBITS Exhibit 11.1 TRICO BANCSHARES Computation of Earnings Per Share on Common and Common Equivalent Shares and on Common Shares Assuming Full Dilution Years ended December 31 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Shares used in the computation of earnings per share1 Weighted daily average of shares outstanding 7,019,205 7,072,588 7,191,790 7,129,560 7,017,306 Shares used in the computation of diluted earnings per share 7,193,014 7,219,229 7,340,729 7,318,520 7,267,602 ========= ========= ========= ========= ========= Net income used in the computation of earnings per common stock $14,069 $12,419 $12,623 $11,403 $8,770 ======= ======= ======= ======= ====== Basic earnings per share $ 2.00 $ 1.76 $ 1.76 $ 1.60 $ 1.25 ======= ======= ======= ======= ======= Diluted earnings per share $ 1.96 $ 1.72 $ 1.72 $ 1.56 $ 1.21 ======= ======= ======= ======= ======= 1Retroactively adjusted for stock dividends and stock splits. -69- Exhibit 23.1 Independent Auditors' Consent To the Audit Committee of the Board of Directors TriCo Bancshares and Subsidiary: We consent to the incorporation by reference in the registration statements (Nos. 33-88702, 33-62063, and 33-66064) on Form S-8 of our report dated January 17, 2003, relating to the consolidated balance sheet of TriCo Bancshares and Subsidiary as of December 31, 2002 and the related consolidated statements of income and comprehensive income, and shareholders' equity and cash flows for the year ended December 31, 2002, which report appears in the December 31, 2002, annual report on Form 10-K of TriCo Bancshares and Subsidiary. Our report, dated January 17, 2003, contains an explanatory paragraph indicating that the consolidated balance sheet of TriCo Bancshares and Subsidiary as of December 31, 2001, and the related statements of income, stockholders' equity and comprehensive income, and cash flows for the two years then ended were audited by other auditors who have ceased operations. /s/ KPMG LLP Sacramento, California March 20, 2003 -70- Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. In connection with the Annual Report of TriCo Bancshares (the "Company") on Form 10-K for the period ending December 31, 2002 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 Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. In connection with the Annual Report of TriCo Bancshares (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas J. Reddish ------------------------------------------ Thomas J. Reddish Vice President and Chief Financial Officer -71-