UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2007 Commission file number 0-10661
----------------------------------------- ------------------------------
TRICO BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2792841
------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (530) 898-0300
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Act (check one).
Large accelerated filer Accelerated filer X Non-accelerated filer
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Title of Class: Common stock, no par value
Outstanding shares as of April 20, 2007: 15,917,291
TABLE OF CONTENTS
Page
Forward-Looking Statements 1
PART I - FINANCIAL INFORMATION 2
Item 1 - Financial Statements 2
Notes to Unaudited Condensed Consolidated Financial Statements 6
Financial Summary 16
Item 2 - Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 25
Item 4 - Controls and Procedures 26
PART II - OTHER INFORMATION 27
Item 1 - Legal Proceedings 27
Item 1A - Risk Factors 27
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 6 - Exhibits 27
Signatures 30
Exhibits 31
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. When you see any of the
words "believes", "expects", "anticipates", "estimates", or similar expressions,
mean making forward-looking statements. A number of factors, some of which are
beyond the Company's ability to predict or control, could cause future results
to differ materially from those contemplated. The reader is directed to the
Company's annual report on Form 10-K for the year ended December 31, 2006, and
Part II, Item 1A of this report for further discussion of factors which could
affect the Company's business and cause actual results to differ materially from
those expressed in any forward-looking statement made in this report.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRICO BANCSHARES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited)
At March 31, At December 31,
2007 2006 2006
------------------------------- -----------------
Assets:
Cash and due from banks $75,263 $78,742 $102,220
------------------------------- -----------------
Federal funds sold - - 794
Cash and cash equivalents 75,263 78,742 103,014
Securities available-for-sale 188,478 244,441 198,361
Federal Home Loan Bank stock, at cost 8,442 7,691 8,320
Loans, net of allowance for loan losses
of $16,895, $16,644 and $16,914 1,478,719 1,383,464 1,492,965
Foreclosed assets, net of allowance for
losses of $180 187 - -
Premises and equipment, net 20,924 21,068 21,830
Cash value of life insurance 43,941 42,168 43,536
Accrued interest receivable 8,355 7,549 8,727
Goodwill 15,519 15,519 15,519
Other intangible assets, net 1,543 4,061 1,666
Other assets 24,950 24,823 26,028
------------------------------- -----------------
Total Assets $1,866,321 $1,829,526 $1,919,966
=============================== =================
Liabilities:
Deposits:
Noninterest-bearing demand $364,401 $354,514 $420,025
Interest-bearing 1,172,448 1,172,877 1,179,124
------------------------------- -----------------
Total deposits 1,536,849 1,527,391 1,599,149
Federal funds purchased 38,000 45,800 38,000
Accrued interest payable 7,602 5,263 7,548
Reserve for unfunded commitments 1,966 1,813 1,849
Other liabilities 24,922 23,783 22,835
Other borrowings 41,347 31,441 39,911
Junior subordinated debt 41,238 41,238 41,238
------------------------------- -----------------
Total Liabilities 1,691,924 1,676,729 1,750,530
------------------------------- -----------------
Commitments and contingencies
Shareholders' Equity:
Common stock, no par value: 50,000,000 shares
authorized; issued and outstanding:
15,910,291 at March 31, 2007 76,087
15,778,090 at March 31, 2006 72,255
15,857,207 at December 31, 2006 73,739
Retained earnings 102,298 85,872 100,218
Accumulated other comprehensive loss, net (3,988) (5,330) (4,521)
------------------------------- -----------------
Total Shareholders' Equity 174,397 152,797 169,436
------------------------------- -----------------
Total Liabilities and Shareholders' Equity $1,866,321 $1,829,526 $1,919,966
=============================== =================
See accompanying notes to unaudited condensed consolidated financial statements.
2
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data; unaudited)
Three months ended March 31,
2007 2006
----------------------------
Interest and dividend income:
Loans, including fees $28,423 $25,069
Debt securities:
Taxable 1,719 2,356
Tax exempt 394 462
Dividends 122 84
Federal funds sold 3 7
----------------------------
Total interest income 30,661 27,978
----------------------------
Interest Expense:
Deposits 7,388 4,942
Federal funds purchased 522 750
Other borrowings 490 348
Junior subordinated debt 816 733
----------------------------
Total interest expense 9,216 6,773
----------------------------
Net interest income 21,445 21,205
----------------------------
Provision for loan losses 482 500
----------------------------
Net interest income after provision for loan losses 20,963 20,705
----------------------------
Noninterest income:
Service charges and fees 5,061 4,857
Gain on sale of loans 266 298
Commissions on sale of non-deposit
investment products 500 558
Increase in cash value of life insurance 405 400
Other 368 335
----------------------------
Total noninterest income 6,600 6,448
----------------------------
Noninterest expense:
Salaries and related benefits 9,742 9,156
Other 7,218 7,266
----------------------------
Total noninterest expense 16,960 16,422
----------------------------
Income before income taxes 10,603 10,731
----------------------------
Provision for income taxes 4,159 4,196
----------------------------
Net income $6,444 $6,535
============================
Average shares outstanding 15,878,929 15,736,544
Diluted average shares outstanding 16,415,845 16,379,595
Per share data:
Basic earnings $0.41 $0.42
Diluted earnings $0.39 $0.40
Dividends paid $0.13 $0.12
See accompanying notes to unaudited condensed consolidated financial statements.
3
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data; unaudited)
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Loss Total
-------------------------------------------------------------
Balance at December 31, 2005 15,707,835 $71,412 $81,906 ($3,825) $149,493
Comprehensive income:
Net income 6,535 6,535
Change in net unrealized loss on
Securities available for sale, net (1,505) (1,505)
-------
Total comprehensive income 5,030
Stock option vesting 139 139
Stock options exercised 100,380 841 841
Repurchase of common stock (30,125) (137) (678) (815)
Dividends paid ($0.12 per share) (1,891) (1,891)
-------------------------------------------------------------
Balance at March 31, 2006 15,778,090 $72,255 $85,872 ($5,330) $152,797
=============================================================
Balance at December 31, 2006 15,857,207 $73,739 $100,218 ($4,521) $169,436
Comprehensive income:
Net income 6,444 6,444
Change in net unrealized loss on
Securities available for sale, net 533 533
------
Total comprehensive income 6,977
Stock option vesting 175 175
Stock options exercised 170,600 1,867 1,867
Tax benefit of stock option exercise 852 852
Repurchase of common stock (117,516) (546) (2,295) (2,841)
Dividends paid ($0.13 per share) (2,069) (2,069)
-------------------------------------------------------------
Balance at March 31, 2007 15,910,291 $76,087 $102,298 ($3,988) $174,397
=============================================================
See accompanying notes to unaudited condensed consolidated financial statements.
4
TRICO BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
For the three months ended March 31,
2007 2006
------------------------------------
Operating activities:
Net income $6,444 $6,535
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of premises and equipment, and amortization 930 981
Amortization of intangible assets 123 346
Provision for loan losses 482 500
Amortization of investment securities premium, net 200 242
Originations of loans for resale (18,666) (17,935)
Proceeds from sale of loans originated for resale 18,737 18,064
Gain on sale of loans (266) (298)
Change in fair value of mortgage servicing rights 12 (50)
Loss on sale of fixed assets 5 1
Increase in cash value of life insurance (405) (400)
Stock option expense 175 139
Change in:
Interest receivable 372 92
Interest payable 54 757
Other assets and liabilities, net 4,074 1,909
------------------------------------
Net cash provided by operating activities 12,271 10,883
------------------------------------
Investing activities:
Proceeds from maturities of securities available-for-sale 10,604 13,894
Purchases of securities available-for-sale - (896)
Purchase of Federal Home Loan Bank stock (122) (89)
Loan originations and principal collections, net 13,577 (15,155)
Proceeds from sale of premises and equipment 11 1
Purchases of premises and equipment (856) (615)
------------------------------------
Net cash provided (used) by investing activities 23,214 (2,860)
------------------------------------
Financing activities:
Net (decrease) increase in deposits (62,300) 30,594
Net change in federal funds purchased - (51,000)
Payments of principal on long-term other borrowings (18) (14)
Net change in short-term other borrowings 1,454 65
Repurchase of Common Stock (470) -
Dividends paid (2,069) (1,891)
Exercise of stock options 167 26
------------------------------------
Net cash used by financing activities (63,236) (22,220)
------------------------------------
Net change in cash and cash equivalents (27,751) (14,197)
------------------------------------
Cash and cash equivalents at beginning of period 103,014 92,939
------------------------------------
Cash and cash equivalents at end of period $75,263 $78,742
====================================
Supplemental disclosure of noncash activities:
Loans transferred to other real estate owned $187 -
Unrealized gain (loss) on securities available for sale $921 ($2,597)
Value of shares tendered in lieu of cash paid to
exercise stock options and to pay related tax withholding $2,371 $815
Supplemental disclosure of cash flow activity:
Cash paid for interest expense $9,162 $6,016
Cash paid for income taxes - $900
Income tax benefit from stock option exercises $852 -
See accompanying notes to unaudited condensed consolidated financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: General Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. The interim results for the three month periods
ended March 31, 2007 and 2006 are not necessarily indicative of the results
expected for the full year. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes as well as other information included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.
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 22 in-store branch offices in the
California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern,
Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer, Sacramento, Shasta,
Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo and Yuba. The Company's
operating policy since its inception has emphasized retail banking. Most of the
Company's customers are retail customers and small to medium sized businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, investments, intangible assets, income taxes and contingencies. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The allowance for loan losses, goodwill and other intangible
assessments, income taxes, and the valuation of mortgage servicing rights, are
the only accounting estimates that materially affect the Company's consolidated
financial statements.
Significant Group Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to
customers located throughout the northern San Joaquin Valley, the Sacramento
Valley and northern mountain regions of California. The Company has a
diversified loan portfolio within the business segments located in this
geographical area.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold.
Investment Securities
The Company classifies its debt and marketable equity securities into one of
three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling in the
near term. Held-to-maturity securities are those securities which the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
During the three months ended March 31, 2007, and throughout 2006, the Company
did not have any securities classified as either held-to-maturity or trading.
6
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses, net of the related tax effect, on available-for-sale securities are
reported as a separate component of other accumulated comprehensive loss in
shareholders' equity until realized.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses for securities are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
Unrealized losses due to fluctuations in fair value of securities held to
maturity or available for sale are recognized through earnings when it is
determined that an other than temporary decline in value has occurred.
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank of San Francisco ("FHLB"),
and as a condition of membership, it is required to purchase stock. The amount
of FHLB stock required to be purchased is based on the borrowing capacity
desired by the Bank. While technically these are considered equity securities,
there is no market for the FHLB stock. Therefore, the shares are considered as
restricted investment securities. Such investment is carried at cost.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or fair value, as determined by aggregate
outstanding commitments from investors of current investor yield requirements.
Net unrealized losses are recognized through a valuation allowance by charges to
income. At March 31, 2007 and 2006, and December 31, 2006, the Company's balance
of loans held for sale was immaterial.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Company. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold.
Loans
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over the estimated life
of the loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is generally
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. When loans are 90
days past due, but in Management's judgment are well secured and in the process
of collection, they may be classified as accrual. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
All impaired loans are classified as nonaccrual loans.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is established through a provision for
losses - unfunded commitments charged to noninterest expense. The reserve for
unfunded commitments is an amount that Management believes will be adequate to
absorb probable losses inherent in existing commitments, including unused
portions of revolving lines of credits and other loans, standby letters of
credits, and unused deposit account overdraft privilege. The reserve for
unfunded commitments is based on evaluations of the collectibility, and prior
loss experience of unfunded commitments. The evaluations take into consideration
such factors as changes in the nature and size of the loan portfolio, overall
loan portfolio quality, loan concentrations, specific problem loans and related
unfunded commitments, and current economic conditions that may affect the
borrower's or depositor's ability to pay.
7
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans and deposit related overdrafts are charged against the
allowance for loan losses when Management believes that the collectibility of
the principal is unlikely or, with respect to consumer installment loans,
according to an established delinquency schedule. The allowance is an amount
that Management believes will be adequate to absorb probable losses inherent in
existing loans and leases, based on evaluations of the collectibility,
impairment and prior loss experience of loans and leases. The evaluations take
into consideration such factors as changes in the nature and size of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, and current economic conditions that may affect the borrower's ability to
pay. The Company defines a loan as impaired when it is probable the Company will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance.
Credit risk is inherent in the business of lending. As a result, the Company
maintains an allowance for loan losses to absorb losses inherent in the
Company's loan portfolio. This is maintained through periodic charges to
earnings. These charges are shown in the Consolidated Income Statements as
provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of
reasons, not all losses are immediately known to the Company and, of those that
are known, the full extent of the loss may not be quantifiable at that point in
time. The balance of the Company's allowance for loan losses is meant to be an
estimate of these unknown but probable losses inherent in the portfolio. For
purposes of this discussion, "loans" shall include all loans and lease contracts
that are part of the Company's portfolio.
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan portfolio, and to a lesser extent the
Company's loan commitments. These assessments include the periodic re-grading of
credits based on changes in their individual credit characteristics including
delinquency, seasoning, recent financial performance of the borrower, economic
factors, changes in the interest rate environment, growth of the portfolio as a
whole or by segment, and other factors as warranted. Loans are initially graded
when originated. They are re-graded as they are renewed, when there is a new
loan to the same borrower, when identified facts demonstrate heightened risk of
nonpayment, or if they become delinquent. Re-grading of larger problem loans
occur at least quarterly. Confirmation of the quality of the grading process is
obtained by independent credit reviews conducted by consultants specifically
hired for this purpose and by various bank regulatory agencies.
The Company's method for assessing the appropriateness of the allowance for loan
losses and the reserve for unfunded commitments includes specific allowances for
identified problem loans and leases as determined by SFAS 114, formula allowance
factors for pools of credits, and allowances for changing environmental factors
(e.g., interest rates, growth, economic conditions, etc.). Allowance factors for
loan pools are based on the previous 5 years historical loss experience by
product type. Allowances for specific loans are based on SFAS 114 analysis of
individual credits. Allowances for changing environmental factors are
Management's best estimate of the probable impact these changes have had on the
loan portfolio as a whole. This process is explained in detail in the notes to
the Company's audited consolidated financial statements in its Annual Report on
Form 10-K for the year ended December 31, 2006.
Based on the current conditions of the loan portfolio, Management believes that
the allowance for loan losses and the reserve for unfunded commitments, which
collectively stand at $18,861,000 at March 31, 2007, are adequate to absorb
probable losses inherent in the Company's loan portfolio. No assurance can be
given, however, that adverse economic conditions or other circumstances will not
result in increased losses in the portfolio.
8
The following tables summarize the activity in the allowance for loan losses,
reserve for unfunded commitments, and allowance for losses (which is comprised
of the allowance for loan losses and the reserve for unfunded commitments) for
the periods indicated (dollars in thousands):
Three months ended March 31,
----------------------------
2007 2006
----------------------------
Allowance for loan losses:
Balance at beginning of period $16,914 $16,226
Provision for loan losses 482 500
Loans charged off (739) (357)
Recoveries of previously
charged-off loans 238 275
----------------------------
Net charge-offs (501) (82)
----------------------------
Balance at end of period $16,895 $16,644
============================
Reserve for unfunded commitments:
Balance at beginning of period $1,849 $1,813
Provision for losses -
unfunded commitments 117 -
----------------------------
Balance at end of period $1,966 $1,813
============================
Balance at end of period:
Allowance for loan losses $16,895 $16,644
Reserve for unfunded commitments 1,966 1,813
----------------------------
Allowance for losses $18,861 $18,457
============================
As a percentage of total loans:
Allowance for loan losses 1.13% 1.19%
Reserve for unfunded commitments 0.13% 0.13%
----------------------------
Allowance for losses 1.26% 1.32%
============================
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) represent the Company's right to a future
stream of cash flows based upon the contractual servicing fee associated with
servicing mortgage loans. Our MSRs arise from residential mortgage loans that we
originate and sell, but retain the right to service the loans. For sales of
residential mortgage loans, a portion of the cost of originating the loan is
allocated to the servicing right based on relative fair values of the loan and
the servicing right. The net gain from the retention of the servicing right is
included in gain on sale of loans in noninterest income when the loan is sold.
Fair value is based on market prices for comparable mortgage servicing
contracts, when available, or alternatively, is based on a valuation model that
calculates the present value of estimated future net servicing income. The
valuation model incorporates assumptions that market participants would use in
estimating future net servicing income, such as the cost to service, the
discount rate, the custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. MSRs are included in other
assets. Servicing fees are recorded in noninterest income when earned.
Effective with the Company's early adoption of SFAS 156, beginning as of January
1, 2006 MSRs are carried at fair value, with changes in fair value reported in
noninterest income in the period in which the change occurs. On or before
December 31, 2005, MSRs were carried at the lower of amortized cost or market
value. The cumulative effect related to the adoption of this change in
accounting from lower of amortized cost or market value to fair value on January
1, 2006 was immaterial.
The determination of fair value of our MSRs requires management judgment because
they are not actively traded. The determination of fair value for MSRs requires
valuation processes which combine the use of discounted cash flow models and
extensive analysis of current market data to arrive at an estimate of fair
value. The cash flow and prepayment assumptions used in our discounted cash flow
model are based on empirical data drawn from the historical performance of our
MSRs, which we believe are consistent with assumptions used by market
participants valuing similar MSRs, and from data obtained on the performance of
similar MSRs. The key assumptions used in the valuation of MSRs include mortgage
prepayment speeds and the discount rate. These variables can, and generally
will, change from quarter to quarter as market conditions and projected interest
rates change. The key risks inherent with MSRs are prepayment speed and changes
in interest rates.
9
The following tables summarize the activity in, and the main assumptions we used
to determine the fair value of mortgage servicing rights for the periods
indicated (dollars in thousands):
Three months ended March 31,
----------------------------
2007 2006
----------------------------
Mortgage servicing rights:
Balance at beginning of period $3,912 $3,638
Additions 195 169
Change in fair value (12) 50
----------------------------
Balance at end of period $4,095 $3,857
============================
Servicing fees received $243 $237
Balance of loans serviced at:
Beginning of period $389,636 $373,163
End of period $393,594 $376,988
Weighted-average prepayment speed (CPR) 11.2% 10.5%
Discount rate 10.0% 10.0%
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to
extend credit, including commitments under credit card arrangements, commercial
letters of credit, and standby letters of credit. Such financial instruments are
recorded when they are funded.
Premises and Equipment
Land is carried at cost. Buildings and equipment, including those acquired under
capital lease, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization expenses are computed using the
straight-line method over the estimated useful lives of the related assets or
lease terms. Asset lives range from 3-10 years for furniture and equipment and
15-40 years for land improvements and buildings.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, management periodically performs
valuations and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other noninterest expense.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. Goodwill and other intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually. Intangible assets with
estimable useful lives are amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment.
The Company has 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.
10
The following table summarizes the Company's goodwill intangible as of March 31,
2007 and December 31, 2006.
December 31, March 31,
(Dollar in Thousands) 2006 Additions Reductions 2007
----------------------------------------------------
Goodwill $15,519 - - $15,519
The following table summarizes the Company's core deposit intangibles as of
March 31, 2007 and December 31, 2006.
December 31, March 31,
(Dollar in Thousands) 2006 Additions Reductions 2007
---------------------------------------------------
Core deposit intangibles $13,643 - ($10,278) $3,365
Accumulated amortization (11,977) 10,278 (123) (1,822)
Core deposit intangibles, $1,666 $10,278 ($10,401) $1,543
net ===================================================
Core deposit intangibles are amortized over their expected useful lives. Such
lives are periodically reassessed to determine if any amortization period
adjustments are indicated.
The following table summarizes the Company's estimated core deposit intangible
amortization for each of the five succeeding years:
Estimated Core Deposit
Intangible Amortization
Years Ended (Dollar in thousands)
----------- ----------------------
2007 $490
2008 $523
2009 $328
2010 $260
2011 $65
Thereafter -
Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as premises and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
On December 31 of each year, goodwill is tested for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. This determination is made at
the reporting unit level and consists of two steps. First, the Company
determines the fair value of a reporting unit and compares it to its carrying
amount. Second, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any excess of the carrying amount of
the reporting unit's goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill.
11
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.
Stock-Based Compensation
On January 1, 2006 the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), using the
modified-prospective transition method. Under this transition method,
compensation cost recognized during the quarters ended March 31, 2007 and March
31, 2006 include: (a) compensation cost for all share-based awards granted prior
to, but not yet vested as of, January 1, 2007 and January 1, 2006, respectively,
based on the grant-date fair value and related service period estimates in
accordance with the original provisions of SFAS 123 and (b) compensation cost
for all share-based awards granted subsequent to January 1, 2007 and January 1,
2006, respectively, based on the grant-date fair value and related service
periods estimated in accordance with the provisions of SFAS 123R. Historically,
stock options are the only type of share-based award granted by the Company.
Prior to the adoption of SFAS 123R, the Company used the intrinsic value method
to account for its stock option plans (in accordance with the provisions of
Accounting Principles Board Opinion No. 25). Intrinsic value is the difference
between share fair market value and option exercise price. Under this method,
compensation expense was 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) was
greater than the amount the employee was required to pay to acquire the stock.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), permitted 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 would have resulted in the recognition, as
expense over the vesting period, of the fair value of all stock-based awards on
the date of grant.
SFAS 123R clarifies and expands the guidance in SFAS 123 in several areas,
including measuring fair value and attributing compensation cost to reporting
periods. SFAS 123R includes a requirement to: (a) estimate forfeitures of
share-based awards at the date of grant, (b) expense share-based awards granted
to retirement eligible employees and those employees with non-substantive
non-compete agreements immediately, (c) attribute compensation costs of
share-based award grants to the stated future vesting period, (d) recognize
compensation cost of all share-based awards based upon the grant-date fair value
(including pre-2006 options).
The following table shows the number, weighted-average exercise price, intrinsic
value, weighted average remaining contractual life, average remaining vesting
period, and remaining compensation cost to be recognized over the remaining
vesting period of options exercisable, options not yet exercisable, and total
options outstanding as of March 31, 2007:
Currently Currently Not Total
(dollars in thousands except exercise price) Exercisable Exercisable Outstanding
Number of options 1,125,577 217,304 1,342,881
Weighted average exercise price $11.49 $19.12 $12.73
Intrinsic value $13,708 $988 $14,696
Weighted average remaining contractual term (yrs.) 5.09 7.72 5.51
The options for 217,304 shares that are not currently exercisable as of March
31, 2007 are expected to vest, on a weighted-average basis, over the next 1.36
years, and the Company is expected to recognize $706,000 of compensation costs
related to these options as they vest.
12
Earnings Per Share
Basic earnings per share represents income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustments to income that would result from assumed issuance.
Potential common shares that may be issued by the Company relate solely from
outstanding stock options, and are determined using the treasury stock method.
Earnings per share have been computed based on the following:
Three months ended March 31,
2007 2006
-----------------------------
(in thousands)
Net income $6,444 $6,535
Average number of common shares outstanding 15,879 15,737
Effect of dilutive stock options 537 643
-----------------------------
Average number of common shares outstanding
used to calculate diluted earnings per share 16,416 16,380
=============================
There were 42,000 and 0 options excluded from the computation of diluted
earnings per share for the three month periods ended March 31, 2007 and 2006,
respectively, because the effect of these options was antidilutive.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income (loss) and related tax effects are
as follows:
Three months ended March 31,
2007 2006
----------------------------
(in thousands)
Unrealized holding gains (losses) on available-
for-sale securities $921 ($2,597)
Tax effect (388) 1,092
----------------------------
Unrealized holding gains (losses) on
available-for-sale securities, net of tax $533 ($1,505)
============================
The components of accumulated other comprehensive loss, included in
shareholders' equity, are as follows:
March 31, December 31,
2007 2006
-----------------------------
(in thousands)
Net unrealized losses on available-for-sale
securities ($2,934) ($3,855)
Tax effect 1,233 1,621
-----------------------------
Unrealized holding losses on
available-for-sale securities, net of tax (1,701) (2,234)
-----------------------------
Minimum pension liability (3,946) (3,946)
Tax effect 1,659 1,659
-----------------------------
Minimum pension liability, net of tax (2,287) (2,287)
-----------------------------
Accumulated other comprehensive loss ($3,988) ($4,521)
=============================
13
Retirement Plans
The Company has supplemental retirement plans for current and former directors
and key executives. These plans are non-qualified defined benefit plans and are
unsecured and unfunded. The Company has purchased insurance on the lives of the
participants and intends to use the cash values of these policies to pay the
retirement obligations.
The following table sets forth the net periodic benefit cost recognized for the
plans:
Three Months Ended March 31,
2007 2006
----------------------------
(in thousands)
Net pension cost included the following components:
Service cost-benefits earned during the period $150 $139
Interest cost on projected benefit obligation 146 132
Amortization of net obligation at transition - -
Amortization of prior service cost 45 50
Recognized net actuarial loss 28 34
----------------------------
Net periodic pension cost $369 $355
============================
During the three months ended March 31, 2007 and 2006, the Company contributed
and paid out as benefits $149,000 and $151,000, respectively, to participants
under the plans. For the year ending December 31, 2007, the Company expects to
contribute and pay out as benefits $528,000 to participants under the plans.
Recent Accounting Pronouncements
In February 2006, the FASB issued FASB Statement of Financial Accounting
Standards No. 155, Accounting for Certain Hybrid Financial Instruments an
amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 amends SFAS
133, Accounting for Derivative Instruments and Hedging Activities and SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS 155 (i) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, (ii) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS 133, (iii)
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation,
(iv) clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives, and (v) amends SFAS 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. The adoption of SFAS 155 on January 1, 2007 had
no impact the Company's consolidated financial statements.
In March 2006, the FASB issued FASB Statement of Financial Accounting Standards
No. 156, Accounting for Servicing of Financial Assets, (SFAS 156) an amendment
of FASB Statement No. 140. SFAS 156 requires all separately-recognized servicing
assets and liabilities to be initially measured at fair value, and permits
companies to elect, on a class-by-class basis, to account for servicing assets
and liabilities on either a lower of cost or market value basis or a fair value
measurement basis. The Company elected to early adopt SFAS 156 as of January 1,
2006 and to measure residential mortgage servicing rights (MSRs) at fair value.
At December 31, 2005, MSRs were accounted for at the lower of amortized cost or
market value basis. As a result of adopting SFAS 156, there was no adjustment to
opening retained earnings as of January 1, 2006, representing the effect of
remeasuring all MSRs that existed at December 31, 2005 from a lower of amortized
cost or market basis to a fair value basis, as this amount was immaterial.
In September 2006, the FASB issued FASB Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 is effective for the Company on January 1, 2008 and is not expected to
have a significant impact on the Company's consolidated financial statements.
14
In September 2006, the FASB issued FASB Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R)
(SFAS 158). SFAS 158 requires an employer to recognize the overfunded or
underfunded status of defined benefit postretirement plans as an asset or a
liability in its statement of financial position. The funded status is measured
as the difference between plan assets at fair value and the benefit obligation
(the projected benefit obligation for pension plans or the accumulated benefit
obligation for other postretirement benefit plans). An employer is also required
to measure the funded status of a plan as of the date of its year-end statement
of financial position with changes in the funded status recognized through
comprehensive income. SFAS 158 also requires certain disclosures regarding the
effects on net periodic benefit cost for the next fiscal year that arise from
delayed recognition of gains or losses, prior service costs or credits, and the
transition asset or obligation. The Company was required to recognize the funded
status of its defined benefit post-retirement benefit plans in its consolidated
financial statements for the year ended December 31, 2006. The Company had
previously recognized the funded status of its supplemental retirement plans for
directors and key executives in prior consolidated financial statements. The
Company has no other defined benefit post-retirement benefit plans. The
requirement to measure plan assets and benefit obligations as of the date of the
year-end statement of financial position is effective for the Company's
consolidated financial statements beginning with the fiscal year ended after
December 15, 2008. The Company currently uses December 31 as the measurement
date for its defined benefit post-retirement benefit plans.
In February 2007, the FASB issued FASB Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment to FASB Statement No. 115 (SFAS 159). SFAS
159 permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 is effective for
the Company on January 1, 2008 and is not expected to have a significant impact
on the Company's consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (FIN 48).
FIN 48 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Benefits from tax positions should be
recognized in the financial statements only when it is more likely than not that
the tax position will be sustained upon examination by the appropriate taxing
authority that would have full knowledge of all relevant information. A tax
position that meets the more-likely-than-not recognition threshold is measured
at the largest amount of benefit that is greater than fifty percent likely of
being realized upon ultimate settlement. Tax positions that previously failed to
meet the more-likely-than-not recognition threshold should be recognized in the
first subsequent financial reporting period in which that threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. FIN 48 also provides
guidance on the accounting for and disclosure of unrecognized tax benefits,
interest and penalties. FIN 48 was effective for the Company on January 1, 2007
and did not have a significant impact on the Company's consolidated financial
statements.
Reclassifications
Certain amounts previously reported in the 2006 financial statements have been
reclassified to conform to the 2007 presentation. These reclassifications did
not affect previously reported net income or total shareholders' equity.
15
TRICO BANCSHARES
Financial Summary
(in thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
----------------------------
2007 2006
----------------------------
Net Interest Income (FTE) $21,666 $21,468
Provision for loan losses (482) (500)
Noninterest income 6,600 6,448
Noninterest expense (16,960) (16,422)
Provision for income taxes (FTE) (4,380) (4,459)
---------------------------
Net income $6,444 $6,535
===========================
Earnings per share:
Basic $0.41 $0.42
Diluted $0.39 $0.40
Per share:
Dividends paid $0.13 $0.12
Book value at period end 10.96 9.68
Tangible book value at period end 9.89 8.44
Average common shares outstanding 15,879 15,737
Average diluted common shares outstanding 16,416 16,380
Shares outstanding at period end 15,910 15,778
At period end:
Loans, net $1,478,719 $1,383,464
Total assets 1,866,321 1,829,526
Total deposits 1,536,849 1,527,391
Other borrowings 41,347 31,441
Junior subordinated debt 41,238 41,238
Shareholders' equity 174,397 152,797
Financial Ratios:
During the period (annualized):
Return on assets 1.38% 1.43%
Return on equity 14.79% 16.93%
Net interest margin(1) 5.12% 5.21%
Net loan charge-offs to average loans 0.13% 0.01%
Efficiency ratio(1) 60.00% 58.83%
Average equity to average assets 9.34% 8.47%
At period end:
Equity to assets 9.34% 8.35%
Total capital to risk-adjusted assets 11.76% 11.09%
Allowance for losses to loans(2) 1.26% 1.32%
(1) Fully taxable equivalent (FTE)
(2) Allowance for losses includes allowance for loan losses and reserve for
unfunded commitments.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As TriCo Bancshares (the "Company") has not commenced any business operations
independent of Tri Counties Bank (the "Bank"), the following discussion pertains
primarily to the Bank. Average balances, including such balances used in
calculating certain financial ratios, are generally comprised of average daily
balances for the Company. Within Management's Discussion and Analysis of
Financial Condition and Results of Operations, interest income and net interest
income are generally presented on a fully tax-equivalent (FTE) basis. The
presentation of interest income and net interest income on a FTE basis is a
common practice within the banking industry. Interest income and net interest
income are shown on a non-FTE basis in the Part I - Financial Information
section of this Form 10-Q, and a reconciliation of the FTE and non-FTE
presentations is provided below in the discussion of net interest income.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, intangible assets, and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. (See caption "Allowance for
Loan Losses" for a more detailed discussion).
Results of Operations
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Condensed Consolidated Financial Statements of the Company and the
Notes thereto located at Item 1 of this report.
The Company had quarterly earnings of $6,444,000, or $0.39 per diluted share,
for the three months ended March 31, 2007. These results represent a 2.5%
decrease from the $0.40 earnings per diluted share reported for the three months
ended March 31, 2006 on earnings of $6,535,000. The decrease in results from the
year-ago quarter was primarily due to a $198,000 (0.9%) increase in fully
tax-equivalent net interest income to $21,666,000, and a $152,000 (2.4%)
increase in noninterest income, offset by a $538,000 (3.3%) increase in
noninterest expense to $16,960,000 for the quarter ended March 31, 2007.
Following is a summary of the components of fully taxable equivalent ("FTE") net
income for the periods indicated (dollars in thousands):
Three months ended
March 31,
---------------------------
2007 2006
---------------------------
Net Interest Income (FTE) $21,666 $21,468
Provision for loan losses (482) (500)
Noninterest income 6,600 6,448
Noninterest expense (16,960) (16,422)
Provision for income taxes (FTE) (4,380) (4,459)
---------------------------
Net income $6,444 $6,535
===========================
17
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended
March 31,
-----------------------
2007 2006
-----------------------
Interest income $30,661 $27,978
Interest expense (9,216) (6,773)
FTE adjustment 221 263
-----------------------
Net interest income (FTE) $21,666 $21,468
=======================
Average earning assets $1,692,574 $1,646,777
Net interest margin (FTE) 5.12% 5.21%
The Company's primary source of revenue is net interest income, or the
difference between interest income on earning assets and interest expense in
interest-bearing liabilities. Net interest income (FTE) during the first quarter
of 2007 increased $198,000 (0.9%) from the same period in 2006 to $21,666,000.
The increase in net interest income (FTE) was due to a $45,797,000 (2.8%)
increase in average balances of earning assets to $1,692,574,000 and a 0.09%
decrease in net interest margin (FTE) to 5.12%.
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2007 increased $2,641,000
(9.4%) from the first quarter of 2006. The increase was due to the $45,797,000
(2.8%) increase in average interest-earning assets and a 0.44% increase in the
yield on those average earning assets to 7.30%. The growth in interest-earning
assets was the result of a $105,514,000 (7.6%) increase in average loan balances
to $1,490,055,000 that was offset by a $56,092,000 (24.8%) decrease in average
balance of investments to $170,072,000.
Contributing to the 0.44% increase in average yield on interest-earning assets
was a 0.39% increase in average yield on loans to 7.63% in the quarter ended
March 31, 2007 compared to 7.24% in the year-ago quarter. This 0.39% increase in
average yield on loans is primarily the result of increases in short-term
lending rates including the prime rate of lending which increased steadily from
7.25% at December 31, 2005 to 8.25% at June 30, 2006. The average yield on the
Company's combined taxable and nontaxable investment balances was relatively
unchanged at 4.86% in the quarter ended March 31, 2007 compared to 4.84% in the
year-ago quarter.
Interest Expense
Interest expense increased $2,443,000 (36.1%) in the first quarter of 2007
compared to the year-ago quarter. The increase was primarily due to a 0.74%
increase in the average rate paid on interest-bearing liabilities from 2.11% in
the first quarter of 2006 to 2.85% in the first quarter of 2007.
The average balance of interest-bearing liabilities increased $10,488,000 (0.8%)
in the first quarter of 2007 compared to the year-ago quarter. The average
balance of noninterest-bearing deposits, time deposits, and other borrowings
were up $6,336,000 (1.8%), $97,029,000 (20.9%) and $9,578,000 (29.9%),
respectively, from the year-ago quarter. The average balance of interest-bearing
demand deposits, and savings deposits were down $17,394,000 (7.0%) and
$50,323,000 (11.6%), respectively, from the year-ago quarter. The average rates
paid for all categories of interest-bearing liabilities were up due to increases
in market rates. The average rate paid on interest-bearing demand deposits,
savings deposits, time deposits, federal funds purchased, other borrowings and
junior subordinated debt increased 0.01%, 0.09%, 1.14%, 0.86%, 0.36% and 0.81%,
respectively, to 0.21%, 0.83%, 4.61%, 5.28%, 4.71% and 7.92%, respectively.
18
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended
March 31,
-------------------
2007 2006
-------------------
Yield on earning assets 7.30% 6.86%
Rate paid on interest-bearing liabilities 2.85% 2.11%
-------------------
Net interest spread 4.45% 4.75%
Impact of all other net
noninterest-bearing funds 0.67% 0.46%
-------------------
Net interest margin 5.12% 5.21%
===================
Net interest margin in the first quarter of 2007 decreased 0.09% compared to the
first quarter of 2006. This decrease in net interest margin was due to a 0.30%
decrease in net interest spread that was partially offset by a 0.21% favorable
increase in the impact of all other net noninterest-bearing funds when compared
to the year-ago quarter.
Summary of Average Balances, Yields/Rates and Interest Differential
The following table presents, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average earning assets and resulting yields,
and the amount of interest expense paid on interest-bearing liabilities. Average
loan balances include nonperforming loans. Interest income includes proceeds
from loans on nonaccrual loans only to the extent cash payments have been
received and applied to interest income. Yields on securities and certain loans
have been adjusted upward to reflect the effect of income thereon exempt from
federal income taxation at the current statutory tax rate (dollars in
thousands).
For the three months ended
----------------------------------------------------------------
March 31, 2007 March 31, 2006
----------------------------- --------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- --------------------------------
Assets:
Loans $1,490,055 $28,423 7.63% $1,384,541 $25,069 7.24%
Investment securities - taxable 170,072 1,841 4.33% 226,164 2,440 4.32%
Investment securities - nontaxable 32,165 615 7.64% 35,403 725 8.20%
Federal funds sold 282 3 4.26% 669 7 4.19%
----------------------------- --------------------------------
Total earning assets 1,692,574 30,882 7.30% 1,646,777 28,241 6.86%
Other assets 172,874 175,664
---------- ----------
Total assets $1,865,448 $1,822,441
=========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $230,072 122 0.21% $247,466 122 0.20%
Savings deposits 381,883 797 0.83% 432,206 797 0.74%
Time deposits 560,913 6,469 4.61% 463,884 4,023 3.47%
Federal funds purchased 39,524 522 5.28% 67,926 750 4.42%
Other borrowings 41,584 490 4.71% 32,006 348 4.35%
Junior subordinated debt 41,238 816 7.92% 41,238 733 7.11%
----------------------------- -------------------------------
Total interest-bearing liabilities 1,295,214 9,216 2.85% 1,284,726 6,773 2.11%
Noninterest-bearing deposits 361,605 355,269
Other liabilities 34,367 28,036
Shareholders' equity 174,262 154,410
---------- ----------
Total liabilities and shareholders' $1,865,448 $1,822,441
equity ========== ==========
Net interest spread(1) 4.45% 4.75%
Net interest income and interest margin(2) $21,666 5.12% $21,468 5.21%
=============== ================
(1) Net interest spread represents the average yield earned on assets minus the
average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of earning
assets.
19
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth a summary of the changes in interest income and
interest expense from changes in average asset and liability balances (volume)
and changes in average interest rates for the periods indicated. Changes not
solely attributable to volume or rates have been allocated in proportion to the
respective volume and rate components (dollars in thousands).
Three months ended March 31, 2007
compared with three months
ended March 31, 2006
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $1,910 $1,444 $3,354
Investment securities (718) 8 (710)
Federal funds sold (4) - (4)
---------------------------------
Total earning assets 1,188 1,452 2,640
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits (9) 9 -
Savings deposits (93) 93 -
Time deposits 842 1,604 2,446
Federal funds purchased (314) 86 (228)
Other borrowings 104 38 142
Junior subordinated debt - 83 83
---------------------------------
Total interest-bearing liabilities 530 1,913 2,443
---------------------------------
Increase (decrease) in Net Interest Income $658 ($461) $197
=================================
Provision for Loan Losses
The Company provided $482,000 for loan losses in the first quarter of 2007
versus $500,000 in the first quarter of 2006. During the first quarter of 2007,
the Company recorded $501,000 of net loan charge-offs versus $82,000 of net loan
charge-offs in the year-ago quarter.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended March 31,
----------------------------
2007 2006
----------------------------
Service charges on deposit accounts $3,559 $3,474
ATM fees and interchange 949 818
Other service fees 565 515
Change in value of mortgage servicing rights (12) 50
Gain on sale of loans 266 298
Commissions on sale of
nondeposit investment products 500 558
Increase in cash value of life insurance 405 400
Other noninterest income 368 335
---------------------------
Total noninterest income $6,600 $6,448
===========================
Noninterest income for the first quarter of 2007 increased $152,000 (2.4%) from
the year-ago quarter. The increase in noninterest income from the year-ago
quarter was mainly due to a $131,000 (16.0%) increase in ATM fees and
interchange revenue to $949,000 and an $85,000 (2.4%) increase in service
charges on deposit accounts to $3,559,000. The increase in these areas is mainly
due to the expansion of the Company's ATM network and growth in number of
customers.
20
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended March 31,
----------------------------
2007 2006
----------------------------
Salaries & benefits $9,742 $9,156
Occupancy 1,170 1,022
Equipment 1,098 1,145
ATM network charges 428 434
Data processing and software 419 412
Telecommunications 409 370
Advertising and marketing 404 440
Professional fees 347 380
Courier service 298 297
Postage 221 244
Intangible amortization 123 346
Provision for losses - unfunded commitments 117 -
Assessments 81 80
Operational losses 60 44
Other 2,043 2,052
----------------------------
Total $16,960 $16,422
============================
Average full time equivalent staff 632 607
Noninterest expense to revenue (FTE) 60.00% 58.83%
Noninterest expense for the first quarter of 2007 increased $538,000 (3.3%)
compared to the first quarter of 2006. Salaries and benefits expense increased
$586,000 (6.4%) to $9,742,000. The increase in salaries and benefits expense was
mainly due to annual salary increases, and a 4.1% increase in average full time
equivalent staff made up primarily of new employees at the Company's recently
opened branches. Other categories of noninterest expense such as equipment,
occupancy and ATM network charges also increased, in part, due to these newly
opened branches. Intangible amortization decreased $223,000 (64%) to $123,000
during the first quarter of 2007 as the core deposit intangible related to the
purchase of several branches in 1997 became fully amortized in the fourth
quarter of 2006.
Provision for Income Tax
The effective tax rate for the three months ended March 31, 2007 was 39.2%
compared to 39.1% for the three months ended March 31, 2006. The provision for
income taxes for all periods presented is primarily attributable to the
respective level of earnings and the incidence of allowable deductions,
particularly from increase in cash value of life insurance, tax-exempt loans and
state and municipal securities.
21
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention to ensure collection.
The following is a summary of classified assets on the dates indicated (dollars
in thousands):
At March 31, 2007 At December 31, 2006
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
------------------------- -------------------------
Classified loans $22,554 $6,367 $16,187 $13,116 $6,514 $6,602
Other classified assets 187 - 187 - - -
-----------------------------------------------------
Total classified assets $22,741 $6,367 $16,374 $13,116 $6,514 $6,602
=====================================================
Allowance for loan losses/classified loans 104.4% 256.2%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies increased $9,772,000 (148.0%) to
$16,374,000 at March 31, 2007 from $6,602,000 at December 31, 2006.
Nonperforming Loans
Loans are reviewed on an individual basis for reclassification to nonaccrual
status when any one of the following occurs: the loan becomes 90 days past due
as to interest or principal, the full and timely collection of additional
interest or principal becomes uncertain, the loan is classified as doubtful by
internal credit review or bank regulatory agencies, a portion of the principal
balance has been charged off, or the Company takes possession of the collateral.
Loans that are placed on nonaccrual even though the borrowers continue to repay
the loans as scheduled are classified as "performing nonaccrual" and are
included in total nonperforming loans. The reclassification of loans as
nonaccrual does not necessarily reflect Management's judgment as to whether they
are collectible.
Interest income is not accrued on loans where Management has determined that the
borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual, any previously accrued but unpaid interest
is reversed. Income on such loans is then recognized only to the extent that
cash is received and where the future collection of principal is probable.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of
Management, the loans are estimated to be fully collectible as to both principal
and interest.
Interest income on nonaccrual loans, which would have been recognized during the
three months ended March 31, 2007, if all such loans had been current in
accordance with their original terms, totaled $397,000. Interest income actually
recognized on these loans during the three months ended March 31, 2007 was
$179,000.
The Company's policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due Management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed 30
days. Loans where the collateral has been repossessed are classified as OREO or,
if the collateral is personal property, the loan is classified as other assets
on the Company's financial statements.
22
Management considers both the adequacy of the collateral and the other resources
of the borrower in determining the steps to be taken to collect nonaccrual
loans. Alternatives that are considered are foreclosure, collecting on
guarantees, restructuring the loan or collection lawsuits.
As shown in the following table, total nonperforming assets net of guarantees of
the U.S. Government, including its agencies and its government-sponsored
agencies, increased $1,666,000 (36.9%) to $6,178,000 during the first three
months of 2007. Nonperforming assets net of guarantees represent 0.33% of total
assets. All nonaccrual loans are considered to be impaired when determining the
need for a specific valuation allowance. The Company continues to make a
concerted effort to work problem and potential problem loans to reduce risk of
loss.
At March 31, 2007 At December 31, 2006
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
(dollars in thousands): ------------------------------------------------------
Performing nonaccrual loans $11,724 $6,228 $5,496 $10,255 $6,372 $3,883
Nonperforming, nonaccrual loans 495 - 495 561 - 561
------------------------------------------------------
Total nonaccrual loans 12,219 6,228 5,991 10,816 6,372 4,444
Loans 90 days past due and still accruing - - - 68 - 68
------------------------------------------------------
Total nonperforming loans 12,219 6,228 5,991 10,884 6,372 4,512
Other real estate owned 187 - 187 - - -
------------------------------------------------------
Total nonperforming assets $12,406 $6,228 $6,178 $10,884 $6,372 $4,512
=====================================================
Nonperforming loans to total loans 0.40% 0.30%
Nonperforming assets to total assets 0.33% 0.24%
Allowance for loan losses to nonperforming loans 282% 375%
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management.
On March 11, 2004, the Board of Directors approved an increase in the maximum
number of shares to be repurchased under the Company's stock repurchase plan
originally announced on July 31, 2003 from 250,000 to 500,000 effective on April
9, 2004, solely to conform with the two-for-one stock split effective on April
9, 2004. The 250,000 shares originally authorized for repurchase under this plan
represented approximately 3.2% of the Company's approximately 7,852,000 common
shares outstanding as of July 31, 2003. This plan has no stated expiration date
for the repurchases, which may occur from time to time as market conditions
allow. As of March 31, 2007, the Company had repurchased 394,371 shares under
this plan as adjusted for the 2-for-1 stock split paid on April 30, 2004, which
left 105,629 shares available for repurchase under the plan.
The Company's primary capital resource is shareholders' equity, which was
$174,397,000 at March 31, 2007. This amount represents an increase of $4,961,000
from December 31, 2006, the net result of comprehensive income for the period of
$6,977,000, the issuance of common shares via the exercise of stock options of
$1,867,000, the tax effect of the exercise of stock options of $852,000, and the
effect of stock option vesting of $175,000, partially offset by the retirement
of common stock with value of $2,841,000 tendered by employees, in lieu of cash,
to exercise stock options, and dividends paid of $2,069,000. The Company's ratio
of equity to total assets was 9.34%, 8.35%, and 8.82% as of March 31, 2007,
March 31, 2006, and December 31, 2006, respectively.
23
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At March 31, At Minimum
------------------ December 31, Regulatory
2007 2006 2006 Requirement
------------------------------------------------
Tier I Capital 10.75% 10.04% 10.44% 4.00%
Total Capital 11.76% 11.09% 11.44% 8.00%
Leverage ratio 10.87% 9.82% 10.49% 4.00%
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases.
These commitments do not significantly impact operating results. As of March 31,
2007 commitments to extend credit and commitments related to the Bank's deposit
overdraft privilege product were the Bank's only financial instruments with
off-balance sheet risk. The Bank has not entered into any contracts for
financial derivative instruments such as futures, swaps, options, etc.
Commitments to extend credit were $663,958,000 and $623,133,000 at March 31,
2007 and December 31, 2006, respectively, and represent 44.4% of the total loans
outstanding at March 31, 2007 versus 41.3% at December 31, 2006. Commitments
related to the Bank's deposit overdraft privilege product totaled $33,526,000
and $33,290,000 at March 31, 2007 and December 31, 2006, respectively.
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as
of December 31, 2006:
Less than 1-3 3-5 More than
(dollars in thousands) Total one year years years 5 years
------------------------------------------------------------------
Less than 1-3 3-5 More than
(dollars in thousands) Total one year years years 5 years
Federal funds purchased $38,000 $38,000 - - -
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 235 - 235 - -
Other collateralized borrowings,
fixed rate of 3.82% payable on January 2, 2007 17,176 17,176 - - -
Junior subordinated debt, adjustable rate
of three-month LIBOR plus 3.05%,
callable in whole or in part by the
Company on a quarterly basis beginning
October 7, 2008, matures October 7, 2033 20,619 - - - 20,619
Junior subordinated debt, adjustable rate
of three-month LIBOR plus 2.55%,
callable in whole or in part by the
Company on a quarterly basis beginning
July 23, 2009, matures July 23, 2034 20,619 - - - 20,619
Operating lease obligations 6,727 1,755 2,900 1,474 598
Deferred compensation(1) 1,199 240 470 377 112
Supplemental retirement plans(1) 4,543 524 1,024 975 2,020
-----------------------------------------------------------------
Total contractual obligations $131,618 $57,695 $27,129 $2,826 $43,968
-================================================================
(1) These amounts represent known certain payments to participants under the
Company's deferred compensation and supplemental retirement plans. See
"Retirement Plans" at Part I, Item 1 of this report for additional
information related to the Company's deferred compensation and
supplemental retirement plan liabilities.
24
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Company has an Asset and Liability Management Committee (ALCO)
which establishes and monitors guidelines to control the sensitivity of earnings
to changes in interest rates.
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin, net income and market value of equity under changing interest
environments. Market value of equity is the net present value of estimated cash
flows from the Company's assets, liabilities and off-balance sheet items. The
Company uses simulation models to forecast net interest margin, net income and
market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Company is able to estimate
the potential impact of changing interest rates on net interest margin, net
income and market value of equity. A balance sheet forecast is prepared using
inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
-300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
At March 31, 2007, the results of the simulations noted above indicate that
given a "flat" balance sheet scenario, and if deposit rates track general
interest rate changes by approximately 50%, the Company's balance sheet is
slightly liability sensitive. "Liability sensitive" implies that earnings
decrease when interest rates rise, and increase when interest rates decrease.
The magnitude of all the simulation results noted above is within the Bank's
policy guidelines. The asset liability management policy limits aggregate market
risk, as measured in this fashion, to an acceptable level within the context of
risk-return trade-offs.
The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
At March 31, 2007 and 2006, the Company had no derivative financial instruments.
25
Liquidity
The Company's principal source of asset liquidity is federal funds sold and
marketable investment securities available for sale. At March 31, 2007, federal
funds sold and investment securities available for sale totaled $188,478,000,
representing a decrease of $10,677,000 (5.4%) from December 31, 2006, and a
decrease of $55,963,000 (22.9%) from March 31, 2006. In addition, the Company
generates additional liquidity from its operating activities. The Company's
profitability during the first three months of 2007 generated cash flows from
operations of $12,271,000 compared to $10,883,000 during the first three months
of 2006. Additional cash flows may be provided by financing activities,
primarily the acceptance of deposits and borrowings from banks. Sales and
maturities of investment securities produced cash inflows of $10,604,000 during
the three months ended March 31, 2007 compared to $13,894,000 for the three
months ended March 31, 2006. During the three months ended March 31, 2007, the
Company invested $122,000 in securities and received $13,577,000 of net loan
principal reductions, compared to $985,000 and $15,155,000 invested in
securities and net loan growth, respectively, during the first three months of
2006. These changes in investment and loan balances contributed to net cash
provided by investing activities of $23,214,000 during the three months ended
March 31, 2007, compared to net cash used for investing activities of $2,860,000
during the three months ended March 31, 2006. Financing activities used net cash
of $63,236,000 during the three months ended March 31, 2007, compared to net
cash used in financing activities of $22,220,000 during the three months ended
March 31, 2006. Deposit balance decreases accounted for $62,300,000 of financing
uses of funds during the three months ended March 31, 2007, compared to
$30,594,000 of funds provided by increases in deposits during the three months
ended March 31, 2006. Dividends paid used $2,069,000 and $1,891,000 of cash
during the three months ended March 31, 2007 and 2006, respectively. Decreases
in Federal funds purchased used $51,000,000 of cash during the quarter ended
March 31, 2006. Also, the Company's liquidity is dependent on dividends received
from the Bank. Dividends from the Bank are subject to certain regulatory
restrictions.
Item 4. Controls and Procedures
The Chief Executive Officer, Richard Smith, and the Chief Financial Officer,
Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls
and procedures as of March 31, 2007 ("Evaluation Date"). Based on that
evaluation, they each concluded that as of the Evaluation Date the Company's
disclosure controls and procedures are effective to ensure that the information
required to be disclosed by the Company in this Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms for Form 10-Q.
No changes in the Company's internal control over financial reporting occurred
during the first quarter of 2007 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
26
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; all such actions are of a routine nature and arise in the normal
course of business of the Bank.
Item 1A - Risk Factors
There have been no material changes to the risk factors previously disclosed in
Item 1A to Part I of our Annual Report on Form 10-K for the year ended December
31, 2006.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows information concerning the common stock repurchased by
the Company during the first quarter of 2007 pursuant to the Company's stock
repurchase plan originally announced on July 31, 2003, as amended on March 11,
2004, to conform with the Company's two-for-one stock split effective on April
9, 2004, which is discussed in more detail under "Capital Resources" in this
report:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number
of Shares purchased paid per share shares purchased as of shares that may yet
part of publicly be purchased under the
announced plans or plans or programs
programs
-----------------------------------------------------------------------------------------------------------
Jan. 1-31, 2007 - - - 125,629
Feb. 1-28, 2007 - - - 125,629
Mar. 1-31, 2007 20,000 23.50 20,000 105,629
-----------------------------------------------------------------------------------------------------------
Total 20,000 23.50 20,000 105,629
During the quarter ended March 31, 2007, employees tendered 97,516 shares of the
Company's common stock with an average market value of $24.32 per share in lieu
of cash to exercise options and pay related income tax withholding amounts as
permitted by the Company's shareholder-approved stock option plans. The tendered
shares were retired. The market value of tendered shares is the last market
trade price at closing on the day the option is exercised.
Item 6 - Exhibits
3.1* Restated Articles of Incorporation dated May 9, 2003, filed as Exhibit
3.1 to TriCo's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003.
3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to
TriCo's Form S-4 Registration Statement dated January 16, 2003 (No.
333-102546).
4* Certificate of Determination of Preferences of Series AA Junior
Participating Preferred Stock filed as Exhibit 3.3 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001.
10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon
Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated
July 25, 2001.
27
10.2 Form of Change of Control Agreement dated as of August 23, 2005,
between TriCo, Tri Counties Bank and each of Bruce Belton, Craig
Carney, Gary Coelho, W.R. Hagstrom, Andrew Mastorakis, Rick Miller,
Richard O'Sullivan, Thomas Reddish, and Ray Rios filed as Exhibit 10.2
to TriCo's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005.
10.3* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to
TriCo's Form S-8 Registration Statement dated August 23, 1995 (No.
33-62063).
10.4* TriCo's 2001 Stock Option Plan as amended filed as Exhibit 10.7 to
TriCo's Annual Report on Form 10-K for the year ended December 31,
2004.
10.5* Amended Employment Agreement between TriCo and Richard Smith dated
March 20, 2007 filed as Exhibit 10.1 to TriCo's Report on Form 8-K
dated March 20, 2007.
10.6* Tri Counties Bank Executive Deferred Compensation Plan dated September
1, 1987, as restated April 1, 1992, and amended and restated effective
as of January 1, 2004 filed as Exhibit 10.9 to TriCo's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2005.
10.7* Tri Counties Bank Deferred Compensation Plan for Directors effective
January 1, 2005 filed as Exhibit 10.10 to TriCo's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005.
10.8* 2005 Tri Counties Bank Deferred Compensation Plan for Executives and
Directors effective January 1, 2005 filed as Exhibit 10.11 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005.
10.9* Tri Counties Bank Supplemental Retirement Plan for Directors dated
September 1, 1987, as restated January 1, 2001, and amended and
restated January 1, 2004 filed as Exhibit 10.12 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
10.10* 2004 TriCo Bancshares Supplemental Retirement Plan for Directors
effective January 1, 2004 filed as Exhibit 10.13 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
10.11* Tri Counties Bank Supplemental Executive Retirement Plan effective
September 1, 1987, as amended and restated January 1, 2004 filed as
Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.
10.12* 2004 TriCo Bancshares Supplemental Executive Retirement Plan effective
January 1, 2004 filed as Exhibit 10.15 to TriCo's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004.
10.13* Form of Joint Beneficiary Agreement effective March 31, 2003 between
Tri Counties Bank and each of Craig Carney, Richard Miller, Richard
O'Sullivan, Thomas Reddish, and Richard Smith, filed as Exhibit 10.14
to TriCo's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.
28
10.14* Form of Joint Beneficiary Agreement effective March 31, 2003 between
Tri Counties Bank and each of Don Amaral, William Casey, Craig
Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll
Taresh, and Alex Vereshagin, filed as Exhibit 10.15 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003.
10.15* Form of Tri-Counties Bank Executive Long Term Care Agreement effective
June 10, 2003 between Tri Counties Bank and each of Craig Carney,
Richard Miller, Richard O'Sullivan and Thomas Reddish, filed as
Exhibit 10.16 to TriCo's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003.
10.16* Form of Tri-Counties Bank Director Long Term Care Agreement effective
June 10, 2003 between Tri Counties Bank and each of Don Amaral,
William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald
Murphy, Carroll Taresh, and Alex Verischagin, filed as Exhibit 10.17
to TriCo's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.
10.17* Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of the directors of TriCo Bancshares/Tri
Counties Bank effective on the date that each director is first
elected, filed as Exhibit 10.18 to TriCo'S Annual Report on Form 10-K
for the year ended December 31, 2003.
10.18* Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of W.R. Hagstrom, Craig Carney, Richard Miller,
Raymond Rios, Richard O'Sullivan, Thomas Reddish, and Richard Smith
filed as Exhibit 10.21 to TriCo's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004.
21.1 Tri Counties Bank, a California banking corporation, TriCo Capital
Trust I, a Delaware business trust, and TriCo Capital Trust II, a
Delaware business trust, are the only subsidiaries of Registrant
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
32.1 Section 1350 Certification of CEO
32.2 Section 1350 Certification of CFO
* Previously filed and incorporated by reference.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
/s/ Thomas J. Reddish
Date: May 7, 2007 ------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
30
EXHIBITS
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of CEO
I, Richard P. Smith, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiary, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors;
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2007 /s/ Richard P. Smith
----------------------------------------
Richard P. Smith
President and Chief Executive Officer
31
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of CFO
I, Thomas J. Reddish, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiary, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors;
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2007 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
32
Exhibit 32.1
Section 1350 Certification of CEO
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ended March 31, 2007 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Richard P. Smith
-------------------------------------
Richard P. Smith
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to TriCo Bancshares and will be retained by TriCo Bancshares and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Section 1350 Certification of CFO
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ended March 31, 2007 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish,
Executive Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Thomas J. Reddish
-------------------------------------
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to TriCo Bancshares and will be retained by TriCo Bancshares and
furnished to the Securities and Exchange Commission or its staff upon request.
33