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, 2006 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 May 2, 2006: 15,778,190
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 18
Item 2 - Management's Discussion and Analysis of Financial 19
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 28
Item 4 - Controls and Procedures 29
PART II - OTHER INFORMATION 30
Item 1 - Legal Proceedings 30
Item 1A - Risk Factors 30
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 6 - Exhibits 30
Signatures 33
Exhibits 34
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. When you see any of the
words "believes", "expects", "anticipates", "estimates", or similar expressions,
mean making forward-looking statements. A number of factors, some of which are
beyond the Company's ability to predict or control, could cause future results
to differ materially from those contemplated. The reader is directed to the
Company's annual report on Form 10-K for the year ended December 31, 2005, 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,
2006 2005 2005
------------------------------- -----------------
Assets:
Cash and due from banks $78,742 $77,365 $90,562
Federal funds sold - 181 2,377
------------------------------- -----------------
Cash and cash equivalents 78,742 77,546 92,939
Securities available-for-sale 244,441 293,730 260,278
Federal Home Loan Bank stock, at cost 7,691 6,781 7,602
Loans, net of allowance for loan losses
of $16,644, $14,563 and $16,226 1,383,464 1,167,870 1,368,809
Foreclosed assets, net of allowance for
losses of $180, $180 and $180 - - -
Premises and equipment, net 21,068 20,599 21,291
Cash value of life insurance 42,168 40,699 41,768
Accrued interest receivable 7,549 6,446 7,641
Goodwill 15,519 15,519 15,519
Other intangible assets, net 4,061 5,065 4,407
Other assets 24,823 21,357 21,021
------------------------------- -----------------
Total Assets $1,829,526 $1,655,612 $1,841,275
=============================== =================
Liabilities:
Deposits:
Noninterest-bearing demand $354,514 $312,739 $368,412
Interest-bearing 1,172,877 1,086,010 1,128,385
------------------------------- -----------------
Total deposits 1,527,391 1,398,749 1,496,797
Federal funds purchased 45,800 20,700 96,800
Accrued interest payable 5,263 3,384 4,506
Reserve for unfunded commitments 1,813 1,632 1,813
Other liabilities 23,783 22,099 19,238
Other borrowings 31,441 28,176 31,390
Junior subordinated debt 41,238 41,238 41,238
------------------------------- -----------------
Total Liabilities 1,676,729 1,515,978 1,691,782
------------------------------- -----------------
Commitments and contingencies
Shareholders' Equity:
Common stock, no par value: 50,000,000 shares authorized;
issued and outstanding:
15,778,090 at March 31, 2006 72,255
15,733,517 at March 31, 2005 70,808
15,707,835 at December 31, 2005 71,412
Retained earnings 85,872 71,068 81,906
Accumulated other comprehensive loss, net (5,330) (2,242) (3,825)
------------------------------- -----------------
Total Shareholders' Equity 152,797 139,634 149,493
------------------------------- -----------------
Total Liabilities and Shareholders' Equity $1,829,526 $1,655,612 $1,841,275
=============================== =================
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,
2006 2005
----------------------------
Interest and dividend income:
Loans, including fees $25,069 $19,527
Debt securities:
Taxable 2,356 2,630
Tax exempt 462 415
Dividends 84 60
Federal funds sold 7 4
----------------------------
Total interest income 27,978 22,636
----------------------------
Interest Expense:
Deposits 4,942 3,085
Federal funds purchased 750 172
Other borrowings 348 327
Junior subordinated debt 733 537
----------------------------
Total interest expense 6,773 4,121
----------------------------
Net interest income 21,205 18,515
----------------------------
Provision for loan losses 500 100
----------------------------
Net interest income after provision for loan losses 20,705 18,415
----------------------------
Noninterest income:
Service charges and fees 4,857 4,062
Gain on sale of loans 298 292
Commissions on sale of non-deposit investment products 558 532
Increase in cash value of life insurance 400 220
Other 335 221
----------------------------
Total noninterest income 6,448 5,327
----------------------------
Noninterest expense:
Salaries and related benefits 9,156 8,369
Other 7,266 6,744
----------------------------
Total noninterest expense 16,422 15,113
----------------------------
Income before income taxes 10,731 8,629
----------------------------
Provision for income taxes 4,196 3,390
----------------------------
Net income $6,535 $5,239
============================
Average shares outstanding 15,736,544 15,729,725
Diluted average shares outstanding 16,379,595 16,366,705
Per share data:
Basic earnings $0.42 $0.33
Diluted earnings $0.40 $0.32
Dividends paid $0.12 $0.11
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, 2004 15,723,317 $70,699 $67,785 ($352) $138,132
Comprehensive income: ----------
Net income 5,239 5,239
Change in net unrealized loss on
Securities available for sale, net (1,890) (1,890)
----------
Total comprehensive income 3,349
Stock options exercised 24,000 158 158
Tax benefit of stock options exercised 13 13
Repurchase of common stock (13,800) (62) (224) (286)
Dividends paid ($0.11 per share) (1,732) (1,732)
-------------------------------------------------------------
Balance at March 31, 2005 15,733,517 $70,808 $71,068 ($2,242) $139,634
=============================================================
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
=============================================================
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,
2006 2005
------------------------------------
Operating activities:
Net income $6,535 $5,239
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of premises and equipment, and amortization 981 917
Amortization of intangible assets 346 343
Provision for loan losses 500 100
Amortization of investment securities premium, net 242 331
Originations of loans for resale (17,935) (15,660)
Proceeds from sale of loans originated for resale 18,064 15,780
Gain on sale of loans (298) (292)
Amortization of mortgage servicing rights - 168
Change in fair value of mortgage servicing rights (50) -
Loss (gain) on sale of fixed assets 1 (6)
Increase in cash value of life insurance (400) (220)
Stock option expense 139 -
Change in:
Interest receivable 92 27
Interest payable 757 103
Other assets and liabilities, net 1,909 616
------------------------------------
Net cash provided by operating activities 10,883 7,446
------------------------------------
Investing activities:
Proceeds from maturities of securities available-for-sale 13,894 14,244
Purchases of securities available-for-sale (896) (25,525)
Purchase of Federal Home Loan Bank stock (89) -
Loan originations and principal collections, net (15,155) (9,528)
Proceeds from sale of premises and equipment 1 5
Purchases of premises and equipment (615) (1,513)
------------------------------------
Net cash used by investing activities (2,860) (22,317)
------------------------------------
Financing activities:
Net increase in deposits 30,594 49,916
Net change in federal funds purchased (51,000) (25,700)
Payments of principal on long-term other borrowings (14) (13)
Net change in short-term other borrowings 65 37
Repurchase of Common Stock - (286)
Dividends paid (1,891) (1,732)
Exercise of stock options 26 158
------------------------------------
Net cash (used) provided by financing activities (22,220) 22,380
------------------------------------
Net change in cash and cash equivalents (14,197) 7,509
------------------------------------
Cash and cash equivalents and beginning of period 92,939 70,037
------------------------------------
Cash and cash equivalents at end of period $78,742 $77,546
====================================
Supplemental disclosure of noncash activities:
Unrealized loss on securities available for sale ($2,597) ($3,233)
Value of shares tendered in lieu of cash paid to
exercise stock options $815 -
Supplemental disclosure of cash flow activity:
Cash paid for interest expense $6,016 $4,018
Cash paid for income taxes $900 $200
Income tax benefit from stock option exercises - $13
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, 2006 and 2005 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, 2005.
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 19 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, 2006, and throughout 2005, 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, 2006 and 2005, and December 31, 2005, the Company had no
loans held for sale.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Company. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold.
Loans
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over the estimated life
of the loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is generally
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. When loans are 90
days past due, but in Management's judgment are well secured and in the process
of collection, they may be classified as accrual. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
All impaired loans are classified as nonaccrual loans.
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 Consolidated Financial Statements in its Annual Report on Form
10-K for the year ended December 31, 2005.
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 $18,457,000 at March 31, 2006, 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,
----------------------------
2006 2005
----------------------------
Allowance for loan losses:
Balance at beginning of period $16,226 $14,525
Provision for loan losses 500 100
Loans charged off (357) (295)
Recoveries of previously
charged-off loans 275 233
----------------------------
Net charge-offs (82) (62)
----------------------------
Balance at end of period $16,644 $14,563
============================
Reserve for unfunded commitments:
Balance at beginning of period $1,813 $1,532
Provision for losses -
unfunded commitments - 100
----------------------------
Balance at end of period $1,813 $1,632
============================
Balance at end of period:
Allowance for loan losses $16,644 $14,563
Reserve for unfunded commitments 1,813 1,632
----------------------------
Allowance for losses $18,457 $16,195
============================
As a percentage of total loans:
Allowance for loan losses 1.19% 1.23%
Reserve for unfunded commitments 0.13% 0.14%
----------------------------
Allowance for losses 1.32% 1.37%
============================
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,
----------------------------
2006 2005
Mortgage servicing rights:
Balance at beginning of period $3,638 $3,476
Additions 169 172
Amortization - (168)
Change in fair value 50 -
----------------------------
Balance at end of period $3,857 $3,480
============================
Servicing fees received $237 $231
Balance of loans serviced at:
Beginning of period $373,163 $368,435
End of period $376,988 $365,156
Weighted-average prepayment speed (CPR) 10.5% 11.7%
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 core deposit intangibles as of
March 31, 2006 and December 31, 2005.
December 31, March 31,
(Dollar in Thousands) 2005 Additions Reductions 2006
----------------------------------------------
Core deposit intangibles $13,643 - - $13,643
Accumulated amortization (10,582) - ($346) (10,928)
----------------------------------------------
Core deposit intangibles, net $3,061 - ($346) $2,715
==============================================
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)
----------- -----------------------
2006 $1,395
2007 $490
2008 $523
2009 $328
2010 $260
Thereafter $65
The following table summarizes the Company's minimum pension liability
intangible as of March 31, 2006 and December 31, 2005.
December 31, March 31,
(Dollar in Thousands) 2005 Additions Reductions 2006
----------------------------------------------
Minimum pension liability
intangible $1,346 - - $1,346
==============================================
Intangible assets related to minimum pension liability are adjusted annually
based upon actuarial estimates.
The following table summarizes the Company's goodwill intangible as of March 31,
2006 and December 31, 2005.
December 31, March 31,
(Dollar in Thousands) 2005 Additions Reductions 2006
----------------------------------------------
Goodwill $15,519 - - $15,519
==============================================
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.
-11-
On December 31 of each year, goodwill is tested for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. This determination is made at
the reporting unit level and consists of two steps. First, the Company
determines the fair value of a reporting unit and compares it to its carrying
amount. Second, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any excess of the carrying amount of
the reporting unit's goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill.
Income Taxes
The Company's accounting for income taxes is based on an asset and liability
approach. The Company recognizes the amount of taxes payable or refundable for
the current year, and deferred tax assets and liabilities for the future tax
consequences that have been recognized in its financial statements or tax
returns. The measurement of tax assets and liabilities is based on the
provisions of enacted tax laws.
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 quarter ended March 31, 2006 includes:
(a) compensation cost for all share-based awards granted prior to, but not yet
vested as of, January 1, 2006, 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, 2006, based on the grant-date fair value and related service periods
estimated in accordance with the provisions of SFAS 123R. Under the provisions
of the modified-prospective transition method, results for the three months
ended March 31, 2005 have not been restated. 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 inseveral 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 Company did not recognize any gain or loss resulting from the cumulative
effect of a change in accounting principle upon adoption of SFAS 123R on January
1, 2006. Based on the stock-based compensation awards outstanding as of December
31, 2005, for which the requisite service was not fully rendered prior to
January 1, 2006, and any subsequent option grants as of March 31, 2006, the
Company expects to recognize total pre-tax compensation cost of approximately
$869,000 related to outstanding stock option grants, of which $139,000 was
recognized in the first quarter of 2006, in accordance with the accounting
requirements of SFAS 123R. The after-tax effect of adopting SFAS 123R was a
reduction of net income of $100,000 and $0, and a reduction in diluted earnings
per share of $0.006 and $0, for the first quarters of 2006 and 2005,
respectively. Future levels of compensation cost recognized related to
stock-based compensation awards may be impacted by new awards and/or
modifications, repurchases and cancellations of existing awards before and after
the adoption SFAS 123R.
-12-
For the three months ended March 31, 2005, had compensation costfor the
Company's option plans been determined using the fair-value method of SFAS 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
(in thousands, except per share amounts)
Net income As reported $5,239
Pro forma $5,153
Basic earnings per share As reported $0.33
Pro forma $0.33
Diluted earnings per share As reported $0.32
Pro forma $0.31
Stock-based employee compensation
cost, net of related tax effects, As reported $0
included in net income Pro forma $86
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model.
In May 2001, the Company adopted the TriCo Bancshares 2001 Stock Option Plan
(2001 Plan) covering officers, employees, directors of, and consultants to the
Company. Under the 2001 Plan, the option price cannot be less than the fair
market value of the Common Stock at the date of grant except in the case of
substitute options. Options for the 2001 Plan expire on the tenth anniversary of
the grant date. Vesting schedules under the 2001 Plan are determined
individually for each grant.
In May 1995, the Company adopted the TriCo Bancshares 1995 Incentive Stock
Option Plan (1995 Plan) covering key employees. Under the 1995 Plan, the option
price cannot be less than the fair market value of the Common Stock at the date
of grant. Options for the 1995 Plan expire on the tenth anniversary of the grant
date. Vesting schedules under the 1995 Plan are determined individually for each
grant.
As of March 31, 2006, options for the purchase of 502,436 and 0 common shares
remained available for grant under the 2001 and 1995 Plans, respectively. Shares
issued under the Company's option plans are "new issue" shares rather than
treasury shares.
Stock option activity for the three months ended March 31, 2006 and 2005 is
summarized in the following tables:
Weighted Weighted
Average Average
Number Option Price Exercise Fair Value
Of Shares Per Share Price of Grants
Outstanding at
December 31, 2005 1,636,762 $5.65 to $20.58 $11.44
Options granted - - to - - -
Options exercised (100,380) $7.08 to $9.13 $8.37
Options forfeited - - to - -
Outstanding at -----------------------------------------------
March 31, 2006 1,536,382 $5.65 to $20.58 $11.64
===============================================
Outstanding at
December 31, 2004 1,661,547 $2.62 to $17.40 $10.52
Options granted 65,000 $19.35 to $19.35 $19.35 $4.56
Options exercised (24,000) $5.37 to $12.60 $6.57
Options forfeited (496) $5.65 to $5.65 $5.65
Outstanding at -----------------------------------------------
March 31, 2005 1,702,051 $2.62 to $19.35 $10.91
===============================================
-13-
During the three months ended March 31, 2006, the intrinsic value of options
exercised and the fair value of options that vested were $1,879,000 and
$139,000, respectively. No options were granted during the three months ended
March 31, 2006.
During the three months ended March 31, 2005, the intrinsic value of options
exercised and the fair value of options that vested were $353,000 and $169,000,
respectively. The fair value of options granted during the three months ended
March 31, 2005 was based on the following expectations: term of 8 years,
volatility of 20.5%, annual rate of quarterly dividends of 2.27%, and a discount
rate of 4.00%.
The total intrinsic value of stock options exercised during the quarter ended
March 31, 2006 was $1,879,000 for which no compensation costs were previously
recognized nor tax benefits recognized in equity upon issuance. Cash received
from the exercise of stock options during the three months ended March 31, 2006
totaled $26,000. In addition, 30,125 shares of the Company's common stock with
market value of $815,000 were tendered by optionees and repurchased at market
value by the Company, in lieu of cash, to exercise options during the three
months ended March 31, 2006 as permitted by the Company's option plans.
The following table shows the number, weighted-average exercise price, and the
weighted average remaining contractual life of options outstanding, and the
number and weighted-average exercise price of options exercisable as of March
31, 2006 by range of exercise price:
Outstanding Options Exercisable Options
-------------------------------------------------------- -----------------------------
Weighted-Average
Range of Weighted-Average Remaining Weighted-Average
Exercise Price Number Exercise Price Contractual Term (yrs.) Number Exercise Price
$4-$6 1,442 $5.82 3.83 1,442 $5.82
$6-$8 30,000 $6.13 0.23 30,000 $6.13
$8-$10 734,420 $8.24 4.76 734,420 $8.24
$10-$12 40,000 $11.72 6.69 26,666 $11.72
$12-$14 387,000 $12.71 7.17 293,666 $12.69
$16-$18 231,520 $17.38 7.92 158,105 $17.38
$18-$20 65,000 $19.35 8.90 27,084 $19.35
$20-$22 47,000 $20.58 9.15 36,831 $20.58
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, total
options outstanding as of March 31, 2006:
Currently Currently Not Total
(dollars in thousands except exercise price) Exercisable Exercisable Outstanding
Number of options 1,308,214 228,168 1,536,382
Weighted average exercise price $10.94 $15.65 $11.64
Intrinsic value $22,737 $2,891 $25,628
Weighted average remaining contractual term (yrs.) 5.82 7.77 6.11
The 228,168 options that are not currently exercisable as of March 31, 2006 are
expected to vest, on a weighted-average basis, over the next 1.80 years, and the
Company is expected to recognize $730,000 of compensation costs related to these
options as they vest.
-14-
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.
In applying the treasury method, the Company uses the entire tax benefit that
would result from the assumed issuance.
Earnings per share have been computed based on the following:
Three Months Ended March 31,
2006 2005
----------------------------
(in thousands)
Net income $6,535 $5,239
Average number of common shares outstanding 15,737 15,730
Effect of dilutive stock options 643 637
----------------------------
Average number of common shares outstanding
used to calculate diluted earnings per share 16,380 16,367
============================
There were no options excluded from the computation of diluted earnings per
share for the three month periods ended March 31, 2006 and 2005, 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 loss and related tax effects are as
follows:
Three Months Ended March 31,
2006 2005
----------------------------
(in thousands)
Unrealized holding losses on
available-for-sale securities ($2,597) ($3,233)
Tax effect 1,092 1,343
----------------------------
Unrealized holding losses on
available-for-sale securities,
net of tax ($1,505) ($1,890)
============================
The components of accumulated other comprehensive loss, included in
shareholders' equity, are as follows:
March 31, December 31,
2006 2005
----------------------------
(in thousands)
Net unrealized losses on
available-for-sale securities ($7,347) ($4,750)
Tax effect 3,089 1,997
----------------------------
Unrealized holding losses on
available-for-sale securities,
net of tax (4,258) (2,753)
----------------------------
Minimum pension liability (1,851) (1,851)
Tax effect 779 779
----------------------------
Minimum pension liability, net of tax (1,072) (1,072)
----------------------------
Accumulated other comprehensive loss ($5,330) ($3,825)
============================
-15-
Retirement Plans
The Company has supplemental retirement plans for current and former directors
and supplemental retirement plan covering current and former 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,
2006 2005
(in thousands)
----------------------------
Net pension cost included the following components:
Service cost-benefits earned during the period $139 $104
Interest cost on projected benefit obligation 132 133
Amortization of net obligation at transition - 56
Amortization of prior service cost 50 24
Recognized net actuarial loss 34 1
----------------------------
Net periodic pension cost $355 $318
============================
During the three months ended March 31, 2006 and 2005, the Company contributed
and paid out as benefits $151,000 and $152,000, respectively, to participants
under the plans. For the year ending December 31, 2006, the Company expects to
contribute and pay out as benefits $530,000 to participants under the plans.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first interim reporting
period of the Company's fiscal year beginning after June 15, 2005, with early
adoption encouraged. The pro forma disclosures previously permitted under SFAS
123 no longer will be an alternative to financial statement recognition. The
Company adopted SFAS 123R on January 1, 2006 using a modified version of
prospective application ("modified prospective application"). Under modified
prospective application, as it is applicable to the Company, SFAS 123R applies
to new grants and to grants modified, repurchased, or cancelled after January 1,
2006. Additionally, compensation cost for the portion of grants for which the
requisite service has not been rendered (generally referring to non-vested
grants) that are outstanding as of January 1, 2006 must be recognized as the
remaining requisite service is rendered during the period of and/or the periods
after the adoption of SFAS 123R. The attribution of compensation cost for those
earlier grants will be based on the same method and on the same grant-date fair
values previously determined for the pro forma disclosures required for
companies that did not adopt the fair value accounting method for stock-based
employee compensation.
The Company did not recognize any gain or loss resulting from the cumulative
effect of a change in accounting principle upon adoption of SFAS 123R on January
1, 2006. Based on the stock-based compensation awards outstanding as of December
31, 2005, for which the requisite service was not fully rendered prior to
January 1, 2006, and any subsequent option grants as of March 31, 2006, the
Company expects to recognize total pre-tax compensation cost of approximately
$869,000 related to outstanding stock option grants, of which $139,000 was
recognized in the first quarter of 2006, in accordance with the accounting
requirements of SFAS 123R. The after-tax effect of adopting SFAS 123R was a
reduction of net income of $100,000 and $0, and a reduction in diluted earnings
per share of $0.006 and $0, for the first quarters of 2006 and 2005,
respectively. Future levels of compensation cost recognized related to
stock-based compensation awards may be impacted by new awards and/or
modifications, repurchases and cancellations of existing awards before and after
the adoption SFAS 123R.
-16-
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, the Company' s 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, was immaterial.
Reclassifications
Certain amounts previously reported in the 2005 financial statements have been
reclassified to conform to the 2006 presentation. These reclassifications did
not affect previously reported net income or total shareholders' equity.
-17-
TRICO BANCSHARES
Financial Summary
(in thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
--------------------------------
2006 2005
--------------------------------
Net Interest Income (FTE) $21,468 $18,756
Provision for loan losses (500) (100)
Noninterest income 6,448 5,327
Noninterest expense (16,422) (15,113)
Provision for income taxes (FTE) (4,459) (3,631)
--------------------------------
Net income $6,535 $5,239
================================
Earnings per share:
Basic $0.42 $0.33
Diluted $0.40 $0.32
Per share:
Dividends paid $0.12 $0.11
Book value at period end 9.68 8.88
Tangible book value at period end 8.44 7.57
Average common shares outstanding 15,737 15,730
Average diluted common shares outstanding 16,380 16,367
Shares outstanding at period end 15,778 15,734
At period end:
Loans, net $1,383,464 $1,167,870
Total assets 1,829,526 1,655,612
Total deposits 1,527,391 1,398,749
Other borrowings 31,441 28,176
Junior subordinated debt 41,238 41,238
Shareholders' equity 152,797 139,634
Financial Ratios:
During the period (annualized):
Return on assets 1.43% 1.29%
Return on equity 16.93% 14.83%
Net interest margin(1) 5.21% 5.12%
Net loan charge-offs to average loans 0.01% 0.01%
Efficiency ratio(1) 58.83% 62.75%
Average equity to average assets 8.47% 8.67%
At period end:
Equity to assets 8.35% 8.43%
Total capital to risk-adjusted assets 11.09% 11.91%
Allowance for losses to loans(2) 1.32% 1.37%
(1) Fully taxable equivalent (FTE)
(2) Allowance for losses includes allowance for loan losses and reserve for
unfunded commitments.
-18-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As TriCo Bancshares (the "Company") has not commenced any business operations
independent of Tri Counties Bank (the "Bank"), the following discussion pertains
primarily to the Bank. Average balances, including such balances used in
calculating certain financial ratios, are generally comprised of average daily
balances for the Company. Within Management's Discussion and Analysis of
Financial Condition and Results of Operations, interest income and net interest
income are generally presented on a fully tax-equivalent (FTE) basis.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, intangible assets, and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. (See caption "Allowance for
Loan Losses" for a more detailed discussion).
Results of Operations
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Condensed Consolidated Financial Statements of the Company and the
Notes thereto located at Item 1 of this report.
The Company had quarterly earnings of $6,535,000, or $0.40 per diluted share,
for the three months ended March 31, 2006. These results represent a 25.0%
increase from the $0.32 earnings per diluted share reported for the three months
ended March 31, 2005 on earnings of $5,239,000. The improvement in results from
the year-ago quarter was due to a $2,712,000 (14.5%) increase in fully
tax-equivalent net interest income to $21,468,000, and a $1,121,000 (21.0%)
increase in noninterest income. These contributing factors were partially offset
by a $400,000 (400%) increase in provision for loan losses to $500,000 and a
$1,309,000 (8.7%) increase in noninterest expense to $16,422,000 for the quarter
ended March 31, 2006.
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,
-------------------------
2006 2005
-------------------------
Net Interest Income (FTE) $21,468 $18,756
Provision for loan losses (500) (100)
Noninterest income 6,448 5,327
Noninterest expense (16,422) (15,113)
Provision for income taxes (FTE) (4,459) (3,631)
-------------------------
Net income $6,535 $5,239
=========================
-19-
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,
--------------------------------
2006 2005
--------------------------------
Interest income $27,978 $22,636
Interest expense (6,773) (4,121)
FTE adjustment 263 241
--------------------------------
Net interest income (FTE) $21,468 $18,756
================================
Average earning assets $1,646,777 $1,464,028
Net interest margin (FTE) 5.21% 5.12%
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 2006 increased $2,712,000 (14.5%) from the same period in 2005 to
$21,468,000. The increase in net interest income (FTE) was due to a $182,749,000
(12.5%) increase in average balances of earning assets to $1,646,777,000 and a
0.09% increase in net interest margin (FTE) to 5.21%.
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2006 increased $5,364,000
(23.4%) from the first quarter of 2005. The increase was due to the $182,749,000
(12.5%) increase in average interest-earning assets and a 0.61% increase in the
yield on those average earning assets to 6.86%. The growth in interest-earning
assets was the result of a $217,502,000 (18.6%) increase in average loan
balances to $1,384,541,000 that was offset by a $34,813,000 (11.7%) decrease in
average balance of investments to $261,568,000.
Contributing to the 0.61% increase in average yield on interest-earning assets
was a 0.55% increase in average yield on loans to 7.24% in the quarter ended
March 31, 2006 compared to 6.69% in the year-ago quarter. This 0.55% 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
5.25% at December 31, 2004 to 7.75% at March 31, 2006. The average yield on the
Company's combined taxable and nontaxable investment balances increased 0.32% to
4.84% in the quarter ended March 31, 2006 compared to 4.52% in the year-ago
quarter. The increase in the average yield on investment balances was primarily
due to maturity of lower yielding fixed rate mortgage backed securities.
-20-
Interest Expense
Interest expense increased $2,652,000 (64.4%) in the first quarter of 2006
compared to the year-ago quarter. The increase was due to a 0.68% increase in
the average rate paid on interest-bearing liabilities from 1.43% in the first
quarter of 2005 to 2.11% in the first quarter of 2006.
The average balance of interest-bearing liabilities increased $134,721,000
(11.7%) in the first quarter of 2006 compared to the year-ago quarter. The
average balance of interest-bearing demand deposits, time deposits, and Federal
funds purchased were up $8,184,000 (3.4%), $133,541,000 (40.4%), and $39,357,000
(138%), respectively, from the year-ago quarter. In addition, the average
balance of noninterest-bearing deposits increased $44,291,000 (14.2%) from the
year-ago quarter. The average balance of savings deposits was down $50,255,000
(10.4%) from the year-ago quarter. The average rates paid for all categories of
interest-bearing liabilities except interest-bearing demand deposits and other
borrowings were up due to increases in market rates. The average rate paid on
savings deposits, time deposits, federal funds purchased, and junior
subordinated debt increased 0.02%, 0.93%, 2.01%, and 1.90%, respectively, to
0.74%, 3.47%, 4.42%, and 7.11%, respectively. The average rate paid on
interest-bearing demand deposits was unchanged at 0.20% while the average rate
paid on other borrowings decreased 0.30% basis points to 4.35% due to the
addition of short-term other borrowings at significantly lower rates than what
previously existed in that category.
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,
----------------------
2006 2005
----------------------
Yield on earning assets 6.86% 6.25%
Rate paid on interest-bearing
liabilities 2.11% 1.42%
----------------------
Net interest spread 4.75% 4.82%
Impact of all other net
noninterest-bearing funds 0.46% 0.30%
----------------------
Net interest margin 5.21% 5.12%
======================
Net interest margin in the first quarter of 2006 increased 0.09% compared to the
first quarter of 2005. This increase in net interest margin was mainly due to a
larger favorable impact of all other net noninterest-bearing funds, principally
noninterest-bearing demand deposits, offset by a slightly reduced net interest
spread when compared to the year-ago quarter.
-21-
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, 2006 March 31, 2005
----------------------------- --------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- --------------------------------
Assets:
Loans $1,384,541 $25,069 7.24% $1,167,039 $19,527 6.69%
Investment securities - taxable 226,164 2,440 4.32% 264,015 2,690 4.08%
Investment securities - nontaxable 35,403 725 8.20% 32,366 656 8.11%
Federal funds sold 669 7 4.19% 608 4 2.63%
----------------------------- --------------------------------
Total earning assets 1,646,777 28,241 6.86% 1,464,028 22,877 6.25%
Other assets 175,664 164,799
----------- ------------
Total assets $1,822,441 $1,628,827
Liabilities and shareholders' equity:
Interest-bearing demand deposits $247,466 122 0.20% $239,282 121 0.20%
Savings deposits 432,206 797 0.74% 482,461 870 0.72%
Time deposits 463,884 4,023 3.47% 330,343 2,094 2.54%
Federal funds purchased 67,926 750 4.42% 28,569 172 2.41%
Other borrowings 32,006 348 4.35% 28,112 327 4.65%
Junior subordinated debt 41,238 733 7.11% 41,238 537 5.21%
----------------------------- --------------------------------
Total interest-bearing liabilities 1,284,726 6,773 2.11% 1,150,005 4,121 1.43%
Noninterest-bearing deposits 355,269 310,978
Other liabilities 28,036 26,580
Shareholders' equity 154,410 141,264
----------- ------------
Total liabilities and shareholders'
equity $1,822,441 $1,628,827
=========== ============
Net interest spread(1) 4.75% 4.82%
Net interest income and interest margin(2) $21,468 5.21% $18,756 5.12%
================== ==================
(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.
-22-
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, 2006
compared with three months
ended March 31, 2005
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $3,638 $1,904 $5,542
Investment securities (393) 212 (181)
Federal funds sold - 3 3
---------------------------------
Total earning assets 3,245 2,119 5,364
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 4 (3) 1
Savings deposits (90) 17 (73)
Time deposits 848 1,081 1,929
Federal funds purchased 237 341 578
Other borrowings 45 (24) 21
Junior subordinated debt - 196 196
---------------------------------
Total interest-bearing liabilities 1,044 1,608 2,652
---------------------------------
Increase (decrease) in Net Interest Income $2,201 $511 $2,712
=================================
Provision for Loan Losses
The Company provided $500,000 for loan losses in the first quarter of 2006
versus $100,000 in the first quarter of 2005. During the first quarter of 2006,
the Company recorded $82,000 of net loan charge-offs versus $62,000 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,
----------------------------
2006 2005
----------------------------
Service charges on deposit accounts $3,474 $3,034
ATM fees and interchange 818 712
Other service fees 515 484
Amortization of mortgage servicing rights - (168)
Change in value of mortgage servicing rights 50 -
Gain on sale of loans 298 292
Commissions on sale of
nondeposit investment products 558 532
Increase in cash value of life insurance 400 220
Other noninterest income 335 221
----------------------------
Total noninterest income $6,448 $5,327
============================
Noninterest income for the first quarter of 2006 increased $1,121,000 (21.0%)
from the year-ago quarter. The increase in noninterest income from the year-ago
quarter was mainly due to a $440,000 (14.5%) increase in service charges on
deposit accounts to $3,474,000, a $180,000 (81.8%) gain in the increase in cash
value of life insurance, and a $218,000 increase related to the change in value
of mortgage servicing rights. The increase in service charges on deposit
accounts was primarily due to the introduction of a business overdraft privilege
product in March 2005 and growth in customer count. The gain in the increase in
cash value of life insurance was due to higher earning rates on the related
insurance policies. The increased related to the change in value of mortgage
servicing rights is due to the adoption of market value accounting for mortgage
servicing rights effective January 1, 2006 and the related change in market
value from January 1, 2006 to March 31, 2006.
-23-
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended March 31,
----------------------------
2006 2005
----------------------------
Salaries & benefits $9,156 $8,369
Equipment 1,145 993
Occupancy 1,022 980
Advertising and marketing 440 342
ATM network charges 434 371
Data processing and software 412 374
Professional fees 380 407
Telecommunications 370 384
Intangible amortization 346 343
Courier service 297 278
Postage 244 237
Assessments 80 76
Operational losses 44 26
Other 2,052 1,933
----------------------------
Total $16,422 $15,113
============================
Average full time equivalent staff 607 565
Noninterest expense to revenue (FTE) 58.83% 62.75%
Noninterest expense for the first quarter of 2006 increased $1,309,000 (8.7%)
compared to the first quarter of 2005. Salaries and benefits expense increased
$787,000 (9.4%) to $9,156,000. The increase in salaries and benefits expense was
mainly due to annual salary increases, and new employees at the Company's
recently opened branches in Lincoln (February 2005), Folsom-East Bidwell (March
2005), Roseville-Pleasant Grove (November 2005), Yuba City-Marketplace (January
2006), and Folsom-Empire Ranch (March 2006). Other categories of noninterest
expense such as equipment, occupancy, ATM network charges, and other also
increased, in part, due to these newly opened branches. Advertising and
marketing expense increased $98,000 (28.7%) to $440,000.
Provision for Income Tax
The effective tax rate for the three months ended March 31, 2006 was 39.1% and
reflects a decrease from 39.3% for the three months ended March 31, 2005. 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.
-24-
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, 2006 At December 31, 2005
------------------------- ------------------------
Gross Guaranteed Net Gross Guaranteed Net
-----------------------------------------------------
Classified loans $13,936 $7,257 $6,679 $13,086 $7,110 $5,976
Other classified assets - - - - - -
-----------------------------------------------------
Total classified assets $13,936 $7,257 $6,679 $13,086 $7,110 $5,976
=====================================================
Allowance for loan losses/classified loans 249.2% 271.5%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies increased $703,000 (11.8%) to
$6,679,000 at March 31, 2006 from $5,976,000 at December 31, 2005.
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, 2006, if all such loans had been current in
accordance with their original terms, totaled $357,000. Interest income actually
recognized on these loans during the three months ended March 31, 2006 was
$249,000.
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.
-25-
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 $1,087,000 (36.7%) to $4,048,000 during the first three
months of 2006. Nonperforming assets net of guarantees represent 0.22% of total
assets. All nonaccrual loans are considered to be impaired when determining the
need for a specific valuation allowance. The Company continues to make a
concerted effort to work problem and potential problem loans to reduce risk of
loss.
(dollars in thousands):
At March 31, 2006 At December 31, 2005
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $9,871 $6,826 $3,045 $9,315 $6,933 $2,382
Nonperforming, nonaccrual loans 1,286 283 1,003 579 - 579
------------------------------------------------------
Total nonaccrual loans 11,157 7,109 4,048 9,894 6,933 2,961
Loans 90 days past due and still accruing - - - - - -
------------------------------------------------------
Total nonperforming loans 11,157 7,109 4,048 9,894 6,933 2,961
Other real estate owned - - - - - -
------------------------------------------------------
Total nonperforming assets $11,157 $7,109 $4,048 $9,894 $6,933 $2,961
======================================================
Nonperforming loans to total loans 0.29% 0.21%
Nonperforming assets to total assets 0.22% 0.16%
Allowance for loan losses to nonperforming loans 411% 548%
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, 2006, the Company had repurchased 374,371 shares under
this plan as adjusted for the 2-for-1 stock split paid on April 30, 2004, which
left 125,629 shares available for repurchase under the plan.
The Company's primary capital resource is shareholders' equity, which was
$152,797,000 at March 31, 2006. This amount represents an increase of $3,304,000
from December 31, 2005, the net result of comprehensive income for the period of
$5,030,000, the issuance of common shares via the exercise of stock options of
$841,000, and the effect of stock option vesting of $139,000, partially offset
by the retirement of common stock with value of $815,000 tendered by employees,
in lieu of cash, to exercise stock options, and dividends paid of $1,891,000.
The Company's ratio of equity to total assets was 8.35%, 8.43%, and 8.12% as of
March 31, 2006, March 31, 2005, and December 31, 2005, respectively.
-26-
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At March 31, At Minimum
----------------- December 31, Regulatory
2006 2005 2005 Requirement
------------------------------------------------
Tier I Capital 10.04% 10.81% 9.76% 4.00%
Total Capital 11.09% 11.91% 10.79% 8.00%
Leverage ratio 9.82% 9.95% 9.72% 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,
2006 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 $606,542,000 and $626,490,000 at March 31,
2006 and December 31, 2005, respectively, and represent 43.3% of the total loans
outstanding at March 31, 2006 versus 45.2% at December 31, 2005. Commitments
related to the Bank's deposit overdraft privilege product totaled $35,890,000
and $35,002,000 at March 31, 2006 and December 31, 2005, respectively.
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the Company as
of December 31, 2005:
Less than 1-3 3-5 More than
(dollars in thousands) Total one year years years 5 years
------------------------------------------------------------------
Federal funds purchased $96,800 $96,800 - - -
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 293 - - 293 -
Other collateralized borrowings,
fixed rate of 1.44% payable on January 3, 2006 8,597 8,597 - - -
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 7,095 1,522 2,600 1,888 1,085
Deferred compensation(1) 1,464 264 481 454 265
Supplemental retirement plans(1) 4,528 477 938 926 2,187
Employment agreements 119 119 - - -
------------------------------------------------------------------
Total contractual obligations $182,634 $107,779 $25,519 $4,561 $44,775
==================================================================
(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.
-27-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Company has an Asset and Liability Management Committee (ALCO)
which establishes and monitors guidelines to control the sensitivity of earnings
to changes in interest rates.
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin, net income and market value of equity under changing interest
environments. Market value of equity is the net present value of estimated cash
flows from the Company's assets, liabilities and off-balance sheet items. The
Company uses simulation models to forecast net interest margin, net income and
market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Company is able to estimate
the potential impact of changing interest rates on net interest margin, net
income and market value of equity. A balance sheet forecast is prepared using
inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
-300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
At March 31, 2006, 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, 2006 and 2005, the Company had no derivative financial instruments.
-28-
Liquidity
The Company's principal source of asset liquidity is federal funds sold and
marketable investment securities available for sale. At March 31, 2006, federal
funds sold and investment securities available for sale totaled $244,441,000,
representing a decrease of $18,214,000 (6.9%) from December 31, 2005, and a
decrease of $49,470,000 (16.8%) from March 31, 2005. In addition, the Company
generates additional liquidity from its operating activities. The Company's
profitability during the first three months of 2006 generated cash flows from
operations of $10,833,000 compared to $7,446,000 during the first three months
of 2005. 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 $13,894,000 during
the three months ended March 31, 2005 compared to $14,244,000 for the three
months ended March 31, 2005. During the three months ended March 31, 2006, the
Company invested $985,000 and $15,155,000 in securities and net loan growth,
respectively, compared to $25,525,000 and $9,528,000 invested in securities and
net loan growth, respectively, during the first three months of 2005. These
changes in investment and loan balances contributed to net cash used for
investing activities of $2,860,000 during the three months ended March 31, 2006,
compared to net cash used for investing activities of $22,317,000 during the
three months ended March 31, 2005. Financing activities used net cash of
$22,220,000 during the three months ended March 31, 2006, compared to net cash
provided by financing activities of $22,380,000 during the three months ended
March 31, 2005. Deposit balance increases accounted for $30,594,000 of financing
sources of funds during the three months ended March 31, 2006, compared to
$49,916,000 during the three months ended March 31, 2005. Dividends paid used
$1,891,000 and $1,732,000 of cash during the three months ended March 31, 2006
and 2005, respectively. Decreases in Federal funds purchased used $51,000,000
and $25,700,000 of cash, respectively, during the quarters ended March 31, 2006
and 2005, respectively. Also, the Company's liquidity is dependent on dividends
received from the Bank. Dividends from the Bank are subject to certain
regulatory restrictions.
Item 4. Controls and Procedures
The Chief Executive Officer, Richard Smith, and the Chief Financial Officer,
Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls
and procedures as of March 31, 2006 ("Evaluation Date"). Based on that
evaluation, they concluded that as of the Evaluation Date the Company's
disclosure controls and procedures are effective to allow timely communication
to them of information relating to the Company and the Bank required to be
disclosed in its filings with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934, as amended ("Exchange Act").
Disclosure controls and procedures are Company controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
No changes in the Company's internal control over financial reporting occurred
during the first quarter of 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
-29-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; all such actions are of a routine nature and arise in the normal
course of business of the Bank.
Item 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, 2005.
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 2006 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, 2006 - - - 125,629
Feb. 1-28, 2006 - - - 125,629
Mar. 1-31, 2006 - - - 125,629
-----------------------------------------------------------------------------------------------------------
Total - - - 125,629
During the quarter ended March 31, 2006, Employees tendered 30,125 shares of the
Company's common stock with an average market value of $27.05 per share in lieu
of cash to exercise options 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 of option
exercise.
Item 6 - Exhibits
3.1* Restated Articles of Incorporation dated May 9, 2003, filed as
Exhibit 3.1 to TriCo's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003.
3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to
TriCo's Form S-4 Registration Statement dated January 16, 2003
(No. 333-102546).
4* Certificate of Determination of Preferences of Series AA Junior
Participating Preferred Stock filed as Exhibit 3.3 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001.
10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon
Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A
dated July 25, 2001.
10.2* Form of Change of Control Agreement dated July 20, 2004, between
TriCo and each of Craig Carney, Gary Coelho, W.R. Hagstrom,
Andrew Mastorakis, Rick Miller, Richard O'Sullivan, Thomas
Reddish, and Ray Rios filed as Exhibit 10.2 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
-30-
10.3* TriCo's 1993 Non-Qualified Stock Option Plan filed as Exhibit 4.1
to TriCo's Form S-8 Registration Statement dated January 18, 1995
(No. 33-88704).
10.4* TriCo's Non-Qualified Stock Option Plan filed as Exhibit 4.2 to
TriCo's Form S-8 Registration Statement dated January 18, 1995
(No. 33-88704).
10.5* TriCo's Incentive Stock Option Plan filed as Exhibit 4.3 to
TriCo's Form S-8 Registration Statement dated January 18, 1995
(No. 33-88704).
10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to
TriCo's Form S-8 Registration Statement dated August 23, 1995
(No. 33-62063).
10.7* TriCo's 2001 Stock Option Plan as amended filed as Exhibit 10.7
to TriCo's Annual Report on Form 10-K for the year ended December
31, 2004.
10.8* Employment Agreement between TriCo and Richard Smith dated April
20, 2004 filed as Exhibit 10.8 to TriCo's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004.
10.9* Tri Counties Bank Executive Deferred Compensation Plan dated
September 1, 1987, as restated April 1, 1992, and amended and
restated effective as of January 1, 2004 filed as Exhibit 10.9 to
TriCo's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004.
10.10* Tri Counties Bank Deferred Compensation Plan for Directors
effective April 1, 1992, as amended and restated effective as of
January 1, 2004 filed as Exhibit 10.10 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
10.11* Amendments to Tri Counties Bank Executive Deferred Compensation
Plan referenced at Exhibit 10.9, effective as of January 1, 2005
filed as Exhibit 10.11 to TriCo's Annual Report on Form 10-K for
the year ended December 31, 2004.
10.12* Amendments to Tri Counties Bank Deferred Compensation Plan for
Directors referenced at Exhibit 10.10, effective as of January 1,
2005 filed as Exhibit 10.12 to TriCo's Annual Report on Form 10-K
for the year ended December 31, 2004.
10.13* Tri Counties Bank Supplemental Retirement Plan for Directors
dated September 1, 1987, as restated January 1, 2001, and amended
and restated January 1, 2004 filed as Exhibit 10.12 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2004.
10.14* 2004 TriCo Bancshares Supplemental Retirement Plan for Directors
effective January 1, 2004 filed as Exhibit 10.13 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2004.
10.15* Tri Counties Bank Supplemental Executive Retirement Plan
effective September 1, 1987, as amended and restated January 1,
2004 filed as Exhibit 10.14 to TriCo's Quarterly Report on Form
10-Q for the quarter ended June 30, 2004.
-31-
10.16* 2004 TriCo Bancshares Supplemental Executive Retirement Plan
effective January 1, 2004 filed as Exhibit 10.15 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2004.
10.17* Form of Joint Beneficiary Agreement effective March 31, 2003
between Tri Counties Bank and each of George Barstow, Dan Bay,
Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller,
Andrew Mastorakis, Richard O'Sullivan, Thomas Reddish, Jerald
Sax, and Richard Smith, filed as Exhibit 10.14 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003.
10.18* Form of Joint Beneficiary Agreement effective March 31, 2003
between Tri Counties Bank and each of Don Amaral, William Casey,
Craig Compton, John Hasbrook, Michael Koehnen, Wendell Lundberg,
Donald Murphy, Carroll Taresh, and Alex Vereshagin, filed as
Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003.
10.19* Form of Tri-Counties Bank Executive Long Term Care Agreement
effective June 10, 2003 between Tri Counties Bank and each of
Craig Carney, Andrew Mastorakis, Richard Miller, Richard
O'Sullivan, and Thomas Reddish, filed as Exhibit 10.16 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003.
10.20* Form of Tri-Counties Bank Director Long Term Care Agreement
effective June 10, 2003 between Tri Counties Bank and each of Don
Amaral, William Casey, Craig Compton, John Hasbrook, Michael
Koehnen, Donald Murphy, Carroll Taresh, and Alex Verischagin,
filed as Exhibit 10.17 to TriCo's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003.
10.21* Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of the directors of TriCo Bancshares/Tri
Counties Bank effective on the date that each director is first
elected, filed as Exhibit 10.18 to TriCo'S Annual Report on Form
10-K for the year ended December 31, 2003.
10.22* Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of Craig Carney, W.R. Hagstrom, Andrew
Mastorakis, Rick Miller, Richard O'Sullivan, Thomas Reddish, Ray
Rios, and Richard Smith filed as Exhibit 10.21 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2004.
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.
-32-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
Date: May 2, 2005 /s/ Thomas J. Reddish
-----------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
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EXHIBITS
Exhibit 31.1
Rule 13a-14/15d-14 Certification of CEO
I, Richard P. Smith, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) and internal control
over financial reporting (as defined in Exchange Act Rules 13-d-15(f)
and 15d-15(f)) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiary, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors;
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 2, 2006 /s/ Richard P. Smith
----------------------------------------
Richard P. Smith
President and Chief Executive Officer
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Exhibit 31.2
Rule 13a-14/15d-14 Certification of CFO
I, Thomas J. Reddish, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) and internal control
over financial reporting (as defined in Exchange Act Rules 13-d-15(f)
and 15d-15(f)) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiary, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors;
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 2, 2006 /s/ Thomas J. Reddish
----------------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
-35-
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, 2006 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, 2006 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.
-36-