-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I9gKzXcXznterpjjI79yPGEc2DsIIwHFxgjXiBUEioSlumpcMm+/KywZflllBxEe sNfaJ8H5/EfqF9+hTUxL7A== 0000356171-04-000012.txt : 20041105 0000356171-04-000012.hdr.sgml : 20041105 20041104174016 ACCESSION NUMBER: 0000356171-04-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRICO BANCSHARES / CENTRAL INDEX KEY: 0000356171 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942792841 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10661 FILM NUMBER: 041120657 BUSINESS ADDRESS: STREET 1: TRICO BANCSHARES STREET 2: 63 CONSTITUTION DRIVE CITY: CHICO STATE: CA ZIP: 95973 BUSINESS PHONE: 5308980300 MAIL ADDRESS: STREET 1: TRICO BANCSHARES STREET 2: 63 CONSTITUTION DRIVE CITY: CHICO STATE: CA ZIP: 95973 10-Q 1 tcb10q3q04.txt TCBK 09/30/04 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended September 30, 2004 Commission file number 0-10661 - ------------------------------------ ------------------------------ TRICO BANCSHARES (Exact name of registrant as specified in its charter) California 94-2792841 - ------------------------------ ------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 63 Constitution Drive, Chico, California 95973 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 530/898-0300 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of Class: Common stock, no par value Outstanding shares as of October 26, 2004: 15,702,317 TABLE OF CONTENTS Page Forward Looking Statements 1 PART I - FINANCIAL INFORMATION 2 Item 1 - Financial Statements 2 Notes to Unaudited Condensed Consolidated Financial Statements 6 Financial Summary 12 Item 2 - Management's Discussion and Analysis of Financial 13 Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosure about Market Risk 27 Item 4 - Controls and Procedures 28 PART II - OTHER INFORMATION 29 Item 1 - Legal Proceedings 29 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 29 Item 6 - Exhibits 29 Signatures 32 Exhibits 33 FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the "Company") for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current knowledge and belief and include information concerning the Company's possible or assumed future financial condition and results of operations. When you see any of the words "believes", "expects", "anticipates", "estimates", or similar expressions, mean making forward-looking statements. A number of factors, some of which are beyond the Company's ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to: - a slowdown in the national and California economies; - increased economic uncertainty created by the terrorist attacks on the United States and the actions taken in response; - the prospect of additional terrorist attacks in the United States and the uncertain effect of these events on the national and regional economies; - changes in the interest rate environment; - changes in the regulatory environment; - significantly increasing competitive pressure in the banking industry; - operational risks including data processing system failures or fraud; - volatility of rate sensitive deposits; and - asset/liability matching risks and liquidity risks. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2003, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. -1-
PART I - FINANCIAL INFORMATION Item 1. Financial Statements TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) At September 30, At December 31, 2004 2003 2003 ------------------------------- ----------------- Assets: Cash and due from banks $64,318 $66,747 $80,603 Federal funds sold - 1,900 326 Cash and cash equivalents 64,318 68,647 80,929 ------------------------------- ----------------- Investment securities available for sale 292,966 350,941 316,436 Loans Commercial 151,998 152,477 142,252 Consumer 384,560 297,186 319,029 Real estate mortgages 527,808 420,312 458,369 Real estate construction 62,057 60,066 61,591 ------------------------------- ----------------- Total loans 1,126,423 930,041 981,241 Allowance for loan losses (16,216) (13,460) (13,773) ------------------------------- ----------------- Loans, net of allowance for loan losses 1,110,207 916,581 967,468 Premises and equipment, net 20,118 19,787 19,521 Cash value of life insurance 40,196 38,644 38,980 Other real estate owned - 1,545 932 Accrued interest receivable 6,177 6,152 6,027 Goodwill and other intangible assets 20,589 21,992 21,604 Other assets 18,926 16,914 16,858 ------------------------------- ----------------- Total Assets $1,573,497 $1,441,203 $1,468,755 =============================== ================= Liabilities: Deposits: Noninterest-bearing demand $298,319 $267,148 $298,462 Interest-bearing demand 224,619 211,219 220,875 Savings 474,345 426,340 441,461 Time certificates, $100,000 and over 106,305 99,574 94,500 Other time certificates 188,553 191,571 181,525 ------------------------------- ----------------- Total deposits 1,292,141 1,195,852 1,236,823 Federal funds purchased 57,300 55,700 39,500 Accrued interest payable 2,706 2,556 2,638 Other liabilities 17,265 18,756 18,328 Other borrowings 27,159 22,894 22,887 Junior subordinated debt 41,238 20,619 20,619 ------------------------------- ----------------- Total Liabilities 1,437,809 1,316,377 1,340,795 ------------------------------- ----------------- Shareholders' Equity: Authorized - 50,000,000 shares of common stock Issued and outstanding: 15,698,000 at September 30, 2004 70,375 15,692,000 at September 30, 2003 69,875 15,668,000 at December 31, 2003 69,767 Retained earnings 64,158 53,728 56,379 Accumulated other comprehensive income, net 1,155 1,223 1,814 ------------------------------- ----------------- Total Shareholders' Equity 135,688 124,826 127,960 ------------------------------- ----------------- Total Liabilities and Shareholders' Equity $1,573,497 $1,441,203 $1,468,755 =============================== =================
Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. See accompanying notes to unaudited condensed consolidated financial statements -2-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data) (Unaudited) Three months ended September 30,Nine months ended September 30, 2004 2003 2004 2003 -------------------------------------------------------- Interest Income: Interest and fees on loans $18,867 $16,228 $53,157 $43,930 Interest on federal funds sold 1 25 12 127 Interest on investment securities available for sale Taxable 2,651 2,389 8,010 8,072 Tax exempt 432 463 1,312 1,486 -------------------------------------------------------- Total interest income 21,951 19,105 62,491 53,615 -------------------------------------------------------- Interest Expense: Interest on interest-bearing demand deposits 107 137 312 387 Interest on savings 805 893 2,569 2,519 Interest on time certificates of deposit 1,585 1,771 4,452 5,753 Interest on Federal funds purchased 221 38 405 101 Interest on other borrowings 327 325 967 964 Interest on junior subordinated debt 449 141 890 141 -------------------------------------------------------- Total interest expense 3,494 3,305 9,595 9,865 -------------------------------------------------------- Net Interest Income 18,457 15,800 52,896 43,750 -------------------------------------------------------- Provision for loan losses 1,300 150 3,250 450 -------------------------------------------------------- Net Interest Income After Provision for Loan Losses 17,157 15,650 49,646 43,300 -------------------------------------------------------- Noninterest Income: Service charges and fees 4,434 3,118 13,427 10,602 Gain on sale of investments - 97 - 197 Gain on sale of loans 258 936 1,316 3,388 Commissions on sale of non-deposit investment products 578 396 1,707 1,305 Other 1,091 659 2,608 1,664 -------------------------------------------------------- Total Noninterest Income 6,361 5,206 19,058 17,156 -------------------------------------------------------- Noninterest Expense: Salaries and related benefits 8,319 7,460 24,926 21,973 Other 6,770 6,589 19,921 19,095 -------------------------------------------------------- Total Noninterest Expense 15,089 14,049 44,847 41,068 -------------------------------------------------------- Income Before Income Taxes 8,429 6,807 23,857 19,388 Provision for income taxes 3,226 2,469 9,030 7,183 -------------------------------------------------------- Net Income 5,203 4,338 14,827 12,205 -------------------------------------------------------- Comprehensive Income: Change in unrealized gain (loss) on securities available for sale, net 3,139 (2,210) (659) (1,080) -------------------------------------------------------- Comprehensive Income $8,342 $2,128 $14,168 $11,125 ======================================================== Average Shares Outstanding 15,672 15,700 15,643 15,144 Diluted Average Shares Outstanding 16,247 16,190 16,225 15,578 Per Share Data Basic Earnings $0.33 $0.28 $0.95 $0.81 Diluted Earnings $0.32 $0.27 $0.91 $0.78 Dividends Paid $0.11 $0.10 $0.32 $0.30
Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. See accompanying notes to unaudited condensed consolidated financial statements -3- TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, unaudited) Accumulated Other Common Retained Comprehensive Stock Earnings Income (Loss), net Total ----------------------------------------------- Balance, December 31, 2002 $50,472 $46,239 $2,303 $99,014 Net income for the period 12,205 12,205 Stock issued, including stock option tax benefits 18,459 18,459 Exercise of stock options, including tax benefits 1,016 1,016 Repurchase of common stock (72) (157) (229) Dividends (4,559) (4,559) Unrealized loss on securities available for sale, net (1,080) (1,080) ----------------------------------------------- Balance September 30, 2003 $69,875 $53,728 $1,223 $124,826 =============================================== Balance, December 31, 2003 $69,767 $56,379 $1,814 $127,960 Net income for the period 14,827 14,827 Exercise of stock options, including tax benefits 1,354 1,354 Repurchase of common stock (746) (2,047) (2,793) Dividends (5,001) (5,001) Unrealized loss on securities available for sale, net (659) (659) ----------------------------------------------- Balance September 30, 2004 $70,375 $64,158 $1,155 $135,688 =============================================== See accompanying notes to unaudited condensed consolidated financial statements -4-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited) For the nine months ended September 30, 2004 2003 ------------------------------- Operating Activities: Net income $14,827 $12,205 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 2,431 2,108 Amortization of intangible assets 1,016 877 Provision for loan losses 3,250 450 Amortization of investment securities premium, net 1,448 2,920 Investment security gains net - (197) Originations of loans for resale (70,670) (147,602) Proceeds from sale of loans originated for resale 71,352 149,355 Gain on sale of loans (1,316) (3,388) Amortization of mortgage servicing rights 562 1,042 (Reduction of) provision for mortgage servicing rights valuation allowance (600) 600 Gain on sale of other real estate owned (566) (60) Gain on sale of fixed assets (20) (3) Change in assets and liabilities: (Increase) decrease in interest receivable (150) 34 Increase (decrease) in interest payable 68 (445) (Increase) decrease in other assets and liabilities (3,384) 987 ------------------------------- Net Cash Provided by Operating Activities 18,248 18,883 ------------------------------- Investing Activities: Net cash obtained in mergers and acquisitions - 7,450 Proceeds from maturities of securities available-for-sale 62,476 170,120 Proceeds from sale of securities available-for-sale - 22,320 Purchases of securities available-for-sale (41,515) (169,113) Net increase in loans (145,989) (168,329) Proceeds from sale of premises and equipment 541 15 Purchases of property and equipment (3,210) (2,191) Proceeds from sale of other real estate owned 1,490 60 Purchase of life insurance - (22,475) ------------------------------- Net Cash Used by Investing Activities (126,207) (162,143) ------------------------------- Financing Activities: Net increase in deposits 55,318 64,566 Net increase in Federal funds purchased 17,800 55,700 Net increase (decrease) in other borrowings 4,272 (30) Issuance of junior subordinated debt 20,619 20,619 Repurchase of Common Stock (2,793) (229) Dividends paid (5,001) (4,559) Exercise of stock options/issuance of Common Stock 1,133 570 ------------------------------- Net Cash Provided by Financing Activities 91,348 136,637 ------------------------------- Net Decrease in Cash and Cash Equivalents (16,611) (6,623) ------------------------------- Cash and Cash Equivalents and Beginning of Period 80,929 75,270 ------------------------------- Cash and Cash Equivalents at End of Period $64,318 $68,647 =============================== Supplemental Disclosure of Noncash Activities: Unrealized loss on securities available for sale ($1,061) ($1,930) Loans transferred to other real estate owned - $613 Supplemental Disclosure of Cash Flow Activity: Cash paid for interest expense $9,527 $10,236 Cash paid for income taxes $11,030 $4,810 Income tax benefit from stock option exercises $221 $446 The acquisition of North State National Bank Involved the following: Common stock issued $18,459 Liabilities assumed $126,722 Fair value of assets acquired, other than cash and cash equivalents ($118,905) Core deposit intangible ($3,365) Goodwill ($15,461) Net cash and cash equivalents received $7,450
See accompanying notes to unaudited condensed consolidated financial statements -5- NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: General Summary of Significant Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The interim results for the three and nine month periods ended September 30, 2004 and 2003 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company operates 33 branch offices and 12 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 and Yuba. The Company's operating policy since its inception has emphasized retail banking. Most of the Company's customers are retail customers and small to medium sized businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The one accounting estimate that materially affects the financial statements is the allowance for loan losses. Investment Securities The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities that the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the nine months ended September 30, 2004 and throughout 2003, the Company did not have any securities classified as either held-to-maturity or trading. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of other comprehensive income in shareholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that an other than temporary decline in value has occurred. -6- Loans Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as nonaccrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that management believes will be adequate to absorb probable losses inherent in existing loans, leases and commitments to extend credit, based on evaluations of the collectibility, impairment and prior loss experience of loans, leases and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Mortgage Operations Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Retained interests (mortgage servicing rights) in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer. Fair values are estimated using discounted cash flows based on a current market interest rate. The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The Company sold substantially all of its conforming long-term residential mortgage loans originated during nine months ended September 30, 2004 for cash proceeds equal to the fair value of the loans. The following table summarizes the Company's mortgage servicing rights assets as of September 30, 2004 and December 31, 2003. December 31, Sept. 30, (Dollars in thousands) 2003 Additions Reductions 2004 ----------------------------------------------- Mortgage servicing rights $3,413 $634 ($562) $3,485 Valuation allowance (600) - 600 - ----------------------------------------------- Mortgage servicing rights, net of valuation allowance $2,813 $634 $38 $3,485 =============================================== -7- The recorded value of mortgage servicing rights is included in other assets, and is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum. At September 30, 2004, the Company had no mortgage loans held for sale. At September 30, 2004 and December 31, 2003, the Company serviced real estate mortgage loans for others of $371 million and $357 million, respectively. Premises and Equipment Premises and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 for land improvement and buildings. Other Real Estate Owned Real estate acquired by foreclosure is carried at the lower of the recorded investment in the property or its fair value less estimated disposition costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired less estimated disposition costs by a charge to the allowance for loan losses, when necessary. Any subsequent write-downs are recorded as a valuation allowance with a charge to other expenses in the income statement together with other expenses related to such properties, net of related income. Gains and losses on disposition of such property are included in other income or other expenses as applicable. Goodwill and Other Intangible Assets Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company applies the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). Pursuant to SFAS 142, goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. The following table summarizes the Company's goodwill intangible as of September 30, 2004 and December 31, 2003. December 31, Sept. 30, (Dollar in Thousands) 2003 Additions Reductions 2004 ---------------------------------------------- Goodwill $15,519 - - $15,519 ============================================== SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144). As of the date of adoption, the Company had identifiable intangible assets consisting of core deposit premiums and minimum pension liability. Core deposit premiums are amortized using an accelerated method over a period of ten years. The following table summarizes the Company's core deposit intangible as of September 30, 2004 and December 31, 2003. December 31, Sept. 30, (Dollar in Thousands) 2003 Additions Reductions 2004 ---------------------------------------------- Core deposit intangibles $13,643 - - $13,643 Accumulated amortization (7,843) ($1,016) - (8,859) Core deposit intangibles, net $5,800 ($1,016) - $4,784 -8- Core deposit intangibles are amortized over their expected useful lives. Such lives are periodically reassessed to determine if any amortization period adjustments are indicated. The following table summarizes the Company's estimated core deposit intangible amortization for each of the five succeeding years: Estimated Core Deposit Intangible Amortization Years Ended (Dollar in thousands) ----------- ----------------------- 2004 $1,358 2005 $1,381 2006 $1,395 2007 $490 2008 $523 Thereafter $653 The following table summarizes the Company's minimum pension liability intangible as of September 30, 2004 and December 31, 2003. December 31, Sept. 30, (Dollar in Thousands) 2003 Additions Reductions 2004 ---------------------------------------------- Minimum pension liability intangible $285 - - $285 ============================================== Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. Impairment of Long-Lived Assets and Goodwill The Company applies the provisions of SFAS 144. In accordance with SFAS 144, long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. On December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. -9- Income Taxes The Company's accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Stock-Based Compensation The Company uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Under this method, compensation expense is recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS 148) permit companies to continue using the intrinsic value method or to adopt a fair value based method to account for stock option plans. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method. Had compensation cost for the Company's option plans been determined in accordance with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, (in thousands, except per share amounts) 2004 2003 2004 2003 ---- ---- ---- ---- Net income As reported $5,203 $4,338 $14,827 $12,205 Pro forma $5,101 $4,271 $14,458 $12,030 Basic earnings per share As reported $0.33 $0.28 $0.95 $0.81 Pro forma $0.33 $0.27 $0.92 $0.79 Diluted earnings per share As reported $0.32 $0.27 $0.91 $0.78 Pro forma $0.31 $0.26 $0.89 $0.77 Stock-based employee compensation cost, net of related tax effects, included in net income As reported $0 $0 $0 $0 Pro forma $102 $67 $369 $175
Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. -10- Retirement Plans The Company has supplemental retirement plans covering directors and key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to use the cash values of these policies to pay the retirement obligations. The following table sets forth the net periodic benefit cost recognized for the plans:
Three Months Nine Months Ended September 30, Ended September 30, (in thousands) 2004 2003 2004 2003 ---- ---- ---- ---- Net pension cost included the following components: Service cost-benefits earned during the period $76 $31 $227 $94 Interest cost on projected benefit obligation 123 105 371 314 Amortization of net obligation at transition 3 9 8 27 Amortization of prior service cost 27 20 81 60 Recognized net actuarial loss 27 38 82 115 ----------------------------------- Net periodic pension cost $256 $203 $769 $610 ===================================
During the nine months ended September 30, 2004, the Company contributed and paid out as benefits $378,000 to participants under the plans. For the year ending December 31, 2004, the Company expects to contribute and pay out as benefits $490,000 to participants under the plans. Based on the current circumstances, and the establishment of the plans noted above, the Company currently estimates net periodic pension cost for the year ending December 31, 2004 will be approximately $1,026,000 compared to $812,000 and $738,000 that was recorded for the years ended December 31, 2003 and 2002, respectively. Comprehensive Income For the Company, comprehensive income includes net income reported on the statement of income and comprehensive income, changes in the fair value of its available-for-sale investments, and changes in the minimum pension liability reported as a component of shareholders' equity. The changes in the components of accumulated other comprehensive income for the nine months ended September 30, 2004 and 2003 are reported as follows: Nine Months Ended Sept. 30, 2004 2003 ----------------------------- Unrealized Gain on Securities (in thousands) Beginning Balance $2,519 $3,048 Unrealized loss arising during the period, net of tax (659) (1,080) ----------------------------- Ending Balance $1,860 $1,968 ============================= Minimum Pension Liability Beginning Balance ($705) ($745) Change in minimum pension liability, net of tax - - ----------------------------- Ending Balance ($705) ($745) ============================= Total accumulated other comprehensive income, net $1,155 $1,223 ============================= Reclassifications Certain amounts previously reported in the 2003 financial statements have been reclassified to conform to the 2004 presentation. These reclassifications did not affect previously reported net income or total shareholders' equity. -11-
TRICO BANCSHARES Financial Summary (dollars in thousands, except per share amounts) (Unaudited) (Unaudited) Three months ended Nine months ended Sept. 30, Sept. 30, ------------------------------------------------------------ 2004 2003 2004 2003 Net Interest Income (FTE) $18,712 $16,069 $53,670 $44,612 Provision for loan losses (1,300) (150) (3,250) (450) Noninterest income 6,361 5,206 19,058 17,156 Noninterest expense (15,089) (14,049) (44,847) (41,068) Provision for income taxes (FTE) (3,481) (2,738) (9,804) (8,045) Net income $5,203 $4,338 $14,827 $12,205 Average shares outstanding 15,672 15,700 15,643 15,144 Diluted average shares outstanding 16,247 16,190 16,225 15,578 Shares outstanding at period end 15,698 15,692 15,698 15,692 As Reported: Basic earnings per share $0.33 $0.28 $0.95 $0.81 Diluted earnings per share $0.32 $0.27 $0.91 $0.78 Return on assets 1.34% 1.25% 1.32% 1.26% Return on equity 15.57% 14.09% 15.12% 14.07% Net interest margin (FTE) 5.35% 5.24% 5.32% 5.14% Net loan charge-offs to average loans 0.22% 0.07% 0.10% 0.39% Efficiency ratio (FTE) 60.18% 66.04% 61.66% 66.49% Average Balances: Total assets $1,552,743 $1,384,672 $1,499,944 $1,291,693 Earning assets 1,399,342 1,226,453 1,344,353 1,156,837 Total loans 1,098,442 876,068 1,033,247 786,341 Total deposits 1,275,599 1,185,059 1,253,381 1,112,111 Shareholders' equity $133,628 $123,168 $130,763 $115,666 Balances at Period End: Total assets $1,573,497 $1,441,203 Earning assets 1,419,389 1,282,882 Total loans 1,126,423 930,041 Total deposits 1,292,141 1,195,852 Shareholders' equity $135,688 $124,826 Financial Ratios at Period End: Allowance for loan losses to loans 1.44% 1.45% Book value per share $8.64 $7.95 Tangible book value per share $7.33 $6.55 Equity to assets 8.62% 8.66% Total capital to risk assets 12.36% 11.73% Dividends Paid Per Share $0.11 $0.10 $0.32 $0.30 Dividend Payout Ratio 33.17% 37.04% 33.73% 38.22%
Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. -12- Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within management's Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, intangible assets, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See caption "Allowance for Loan Losses" for a more detailed discussion). Results of Operations The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. The Company had quarterly earnings of $5,203,000, or $0.32 per diluted share, for the three months ended September 30, 2004. These results represent an 18.5% increase from the $0.27 earnings per diluted share reported for the three months ended September 30, 2003 on earnings of $4,338,000. The improvement in results from the year-ago quarter was due to a $2,643,000 (16.4%) increase in fully tax-equivalent net interest income to $18,712,000, and a $1,155,000 (22.2%) increase in noninterest income to $6,361,000. These contributing factors were offset by a $1,150,000 increase in provision for loan losses to $1,300,000 and a $1,040,000 (7.4%) increase in noninterest expense to $15,089,000 for the quarter ended September 30, 2004. The Company reported earnings of $14,827,000, or $0.91 per diluted share, for the nine months ended September 30, 2004. These results represent a 16.7% increase from the $0.78 earnings per diluted share reported for the nine months ended September 30, 2003 on earnings of $12,205,000. The improvement in results from the year-ago period was due to a $9,058,000 (20.3%) increase in fully tax-equivalent net interest income to $53,670,000, and a $1,902,000 (11.1%) increase in noninterest income to $19,058,000. These contributing factors were offset by a $2,800,000 increase in provision for loan losses to $3,250,000 and a 3,779,000 (9.2%) increase in noninterest expense to $44,847,000 for the nine months ended September 30, 2004. -13- Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands): Three months ended Nine months ended Sept. 30, Sept. 30, ------------------------------------------------ 2004 2003 2004 2003 ------------------------------------------------ Net Interest Income (FTE) $18,712 $16,069 $53,670 $44,612 Provision for loan losses (1,300) (150) (3,250) (450) Noninterest income 6,361 5,206 19,058 17,156 Noninterest expense (15,089) (14,049) (44,847) (41,068) Provision for income taxes (FTE) (3,481) (2,738) (9,804) (8,045) ------------------------------------------------ Net income $5,203 $4,338 $14,827 $12,205 ================================================ Net income for the third quarter of 2004 was $865,000 (19.9%) more than for the same quarter of 2003. An increase in fully taxable equivalent net interest income (up $2,643,000 or 16.4%), and an increase in noninterest income (up $1,155,000 or 22.2%) more than offset an increase in the provision for loan losses (up $1,150,000) and an increase in noninterest expenses (up $1,040,000 or 7.4%). The increase in net interest income (FTE) was due to an increase in average balance of interest-earning assets (up $172,889,000 or 14.1%) and an 11 basis point increase in net interest margin. The increase in noninterest income was mainly due to an increase in service charges on deposit accounts (up $191,000 or 6.0%), the absence of a provision for mortgage servicing rights compared to a provision of $600,000 in the year-ago quarter, and a $384,000 gain on sale of other real estate owned in the most recent quarter; all of which were partially offset by a decrease in gain on sale of loans (down $678,000 or 72.4%). The increase in provision for loan losses was mainly due to loan growth as loan quality remains high and loan charge-offs were low to moderate in the most recent quarter. The increase in noninterest expense was mainly due to an increase in salary and benefit expense (up $859,000 or 11.5% to $8,319,000). The increase in salary and benefits expense was mainly due to the opening of de-novo branches in Roseville (November 2003), Folsom (December 2003), and Turlock (April 2004), and regular salary increases. Other noninterest expense also increased (up $181,000 or 2.7% to $6,770,000). The increase in other noninterest expense was to due to the new branches noted above, and general price increases. Net income for the nine months ended September 30, 2004 was $2,622,000 (21.5%) more than for the same period of 2003. An increase in fully taxable equivalent net interest income (up $9,058,000 or 20.3%), and an increase in noninterest income (up $1,902,000 or 11.1%), more than offset increases in the provision for loan losses (up $2,800,000) and noninterest expenses (up $3,779,000 or 9.2%). The increase in net interest income (FTE) was due to an increase in average balance of interest-earning assets (up $187,516,000 or 16.2%) and an 18 basis point increase in net interest margin (FTE). The increase in noninterest income was mainly due to an increase in service charges on deposit accounts (up $747,000 or 8.1%), a $600,000 recovery of a mortgage servicing valuation allowance compared to a provision of $600,000 in the year-ago period, and a $566,000 gain on sale of other real estate owned compared to $60,000 in the year-ago period; all of which were partially offset by a decrease in gain on sale of loans (down $2,072,000 or 61.2%). The increase in provision for loan losses was mainly due to loan growth as loan quality remains high and loan charge-offs were low to in the nine months ended September 30, 2004. The increase in noninterest expense was mainly due to an increase in salary and benefit expense (up $2,953,000 or 13.4% to $24,926,000). The increase in salary and benefits expense was mainly due to the opening of de-novo branches in Roseville (November 2003), Folsom (December 2003), and Turlock (April 2004), and regular salary increases. Other noninterest expense also increased (up $826,000 or 4.3% to $19,921,000). The increase in other noninterest expense was to due to the new branches noted above, and general price increases. -14- Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands):
Three months ended Nine months ended September 30, September 30, ------------------------------------------------------- 2004 2003 2004 2003 ------------------------------------------------------- Interest income $21,951 $19,105 $62,491 $53,615 Interest expense (3,494) (3,305) (9,595) (9,865) FTE adjustment 255 269 774 862 ------------------------------------------------------- Net interest income (FTE) $18,712 $16,069 $53,670 $44,612 ======================================================= Average earning assets $1,399,342 $1,226,453 $1,344,353 $1,156,837 Net interest margin (FTE) 5.35% 5.24% 5.32% 5.14%
The Company's primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) during the third quarter of 2004 increased $2,643,000 (16.4%) from the same period in 2003 to $18,712,000. The increase in net interest income (FTE) was due to an increase in average balance of earning assets (up $172,889,000 or 14.1% to $1,399,342,000) and an 11 basis point increase in net interest margin (FTE). Net interest income (FTE) during the first nine months of 2004 increased $9,058,000 (20.3%) from the same period in 2003 to $53,670,000. The increase in net interest income (FTE) was due to an increase in average balance of earning assets (up $187,516,000 or 16.2% to $1,344,353,000) and an 18 basis point increase in net interest margin (FTE). Interest Income Interest income (FTE) for the third quarter of 2004 increased $2,832,000 (14.6%) from the third quarter of 2003. The increase was the net effect of higher average interest-earning assets (up $172,889,000 or 14.1% to $1,399,342,000) and a 3 basis point increase in the yield on those average earning assets to 6.35%. The growth in interest-earning assets was the result of growth in average loan balances of $222,374,000 (25.4%) to $1,098,442,000 offset by a decrease in average investment and Federal funds balances totaling $49,485,000 (14.1%) to $300,900,000. The average yield on the Company's earning assets increased to 6.35% from 6.32% in the year-ago quarter. This increase in yield on total earning assets was the result of a 54 basis point decrease in loan yields (reflective of general interest rate markets during much of the twelve months ended September 30, 2004) that was offset by a change in mix of average earnings assets towards more loans and less investments and Federal funds sold. Interest income (FTE) for the nine months ended September 30, 2004 increased $8,788,000 (16.1%) from the same period of 2003. The increase was the net effect of higher average interest-earning assets (up $187,516,000 or 16.2% to $1,344,353,000) that was partially offset by a 1 basis point decrease in the yield on those average earning assets to 6.27%. The growth in interest-earning assets was the result of growth in average loan balances of $246,906,000 (31.4%) to $1,033,247,000 offset by a decrease in average investment and Federal funds balances totaling $59,390,000 (16.0%) to $311,106,000. The average yield on the Company's earning assets decreased to 6.27% from 6.28% for the nine months ended September 30, 2004. This decrease in yield on total earning assets was the result of a 59 basis point decrease in loan yields (reflective of general interest rate markets during much of the twelve months ended September 30, 2004) that was offset by a change in mix of average earnings assets towards more loans and less investments and Federal funds sold. -15- Interest Expense Interest expense increased $189,000 (5.7%) to $3,494,000 in the third quarter of 2004 compared to $3,305,000 in the year-ago quarter. The average balance of interest-bearing liabilities increased $143,669,000 (14.8%) to $1,115,672,000 in the third quarter of 2004 compared to $972,003,000 in the year-ago quarter. The increase in interest-bearing liabilities was concentrated in the lower earning interest-bearing demand deposits (up $17,655,000 or 8.2%), savings deposits (up $69,706,000 or 17.2%), and Federal funds purchased (up $43,484,000 or 315%). The average balance of the higher earning time deposits decreased $15,444,000 (5.1%) from the year-ago quarter. In addition, the average balance of noninterest-bearing deposits increased $18,623,000 (7.1%) from the year-ago quarter. The average balance of junior subordinated debt was $38,664,000 and $13,560,000 for the quarters ended September 30, 2004 and 2003, respectively. The average rate paid for all deposit categories of interest-bearing liabilities decreased from the average rate paid in the year-ago quarter as a result of deposit market interest rate decreases. Increases in the rates paid for Federal funds purchased and junior subordinated debt are due to recent increases in short-term borrowing rates. Overall, the average rate paid for interest-bearing liabilities decreased 11 basis points to 1.25% in the quarter ended September 30, 2004 compared to 1.36% in the quarter ended September 30, 2003. Interest expense decreased $270,000 (2.7%) to $9,595,000 for the nine months ended September 30, 2004 compared to $9,865,000 in the year-ago period. The average balance of interest-bearing liabilities increased $158,273 (17.3%) to $1,072,953,000 for the nine months ended September 30, 2004 compared to $914,716,000 in the year-ago period. The increase in interest-bearing liabilities was concentrated in the lower earning interest-bearing demand deposits (up $23,787,000 or 11.6%), and savings deposits (up $108,468,000 or 29.6%). The average balance of the higher earning time deposits was down $28,933,000 (9.5%) from the year-ago period. In addition, for the nine months ended September 30, 2004, the average balance of noninterest-bearing deposits increased $37,948,000 (16.1%) from the year-ago period, and the average balance of Federal funds purchased was $42,202,000 in the nine months ended September 30, 2004 compared to $11,142,000 in the year-ago nine month period. The average balance of junior subordinated debt was $27,333,000 in the nine-month period ended September 30, 2004 compared to $4,519,000 in the year-ago nine-month period. The average rate paid for all deposit categories of interest-bearing liabilities decreased from the average rate paid in the year-ago nine-month period as a result of deposit market interest rate decreases. Increases in the rates paid for Federal funds purchased and junior subordinated debt are due to recent increases in short-term borrowing rates. Overall, the average rate paid for interest-bearing liabilities decreased 25 basis points to 1.19% in the nine months ended September 30, 2004 compared to 1.44% in the nine months ended September 30, 2003. Net Interest Margin (FTE) The following table summarizes the components of the Company's net interest margin for the periods indicated: Three months ended Nine months ended Sept. 30, Sept. 30, --------------------------------------------- 2004 2003 2004 2003 --------------------------------------------- Yield on earning assets 6.35% 6.32% 6.27% 6.28% Rate paid on interest-bearing Liabilities 1.25% 1.36% 1.19% 1.44% --------------------------------------------- Net interest spread 5.10% 4.96% 5.08% 4.84% Impact of all other net noninterest-bearing funds 0.25% 0.28% 0.24% 0.30% --------------------------------------------- Net interest margin 5.35% 5.24% 5.32% 5.14% ============================================= -16- Net interest margin in the third quarter of 2004 increased 11 basis points compared to the third quarter of 2003. Net interest margin for the nine months ended September 30, 2004 increased 18 basis points compared to the nine months ended September 30, 2003. During the second half of 2003 and the first half of 2004, the Company was able to decrease the rates it paid on interest-bearing deposits and manage the mix of assets and liabilities to offset the effect of decreasing loan yields during this time, and maintain a relatively flat and high net interest margin. During the third quarter of 2004, short-term market interest rates began to rise which resulted in slight increases in both loan yields and rates paid on interest bearing liabilities, the net effect of which was a slight (8 basis point) increase in net interest margin when compared to the second quarter of 2004. Summary of Average Balances, Yields/Rates and Interest Differential The following tables present, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income (FTE) 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(FTE) includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities 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 ---------------------------------------------------------------- September 30, 2004 September 30, 2003 ----------------------------- ------------------------------ Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- ------------------------------ Assets: Loans $1,098,442 $18,867 6.87% $876,068 $16,228 7.41% Investment securities - taxable 266,714 2,651 3.98% 301,784 2,389 3.17% Investment securities - nontaxable 33,821 687 8.13% 37,468 732 7.81% Federal funds sold 365 1 1.10% 11,133 25 0.90% ----------------------------- ------------------------------- Total earning assets 1,399,342 22,206 6.35% 1,226,453 19,374 6.32% Other assets 153,401 -------- 158,219 -------- ---------- ---------- Total assets $1,552,743 $1,384,672 ========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $231,914 107 0.18% $214,259 137 0.26% Savings deposits 475,045 805 0.68% 405,339 893 0.88% Time deposits 286,677 1,585 2.21% 302,121 1,771 2.34% Federal funds purchased 57,310 221 1.54% 13,826 38 1.10% Other borrowings 26,062 327 5.02% 22,898 325 5.68% Junior subordinated debt 38,664 449 4.65% 13,560 141 4.16% ----------------------------- ------------------------------- Total interest-bearing liabilities 1,115,672 3,494 1.25% 972,003 3,305 1.36% Noninterest-bearing deposits 281,963 -------- 263,340 -------- Other liabilities 21,480 26,161 Shareholders' equity 133,628 123,168 ---------- ---------- Total liabilities and shareholders' equity $1,552,743 $1,384,672 ========== ========== Net interest spread(1) 5.10% 4.96% Net interest income and interest margin(2) $18,712 5.35% $16,069 5.24% ================= ====================
(1) Net interest spread represents the average yield earned on assets minus the average rate paid on interest-earning assets minus the average rate paid on interest-bearing liabilities (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of earning assets. -17-
For the nine months ended ---------------------------------------------------------------- September 30, 2004 September 30, 2003 ----------------------------- ------------------------------ Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- ------------------------------ Assets: Loans $1,033,247 $53,157 6.86% $786,341 $43,930 7.45% Investment securities - taxable 274,666 8,010 3.89% 316,219 8,072 3.40% Investment securities - nontaxable 34,716 2,086 8.01% 39,119 2,348 8.00% Federal funds sold 1,724 12 0.93% 15,158 127 1.12% ----------------------------- ------------------------------- Total earning assets 1,344,353 63,265 6.27% 1,156,837 54,477 6.28% Other assets 155,591 -------- 134,856 -------- ---------- ---------- Total assets $1,499,944 $1,291,693 ========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $228,121 312 0.18% $204,334 387 0.25% Savings deposits 475,193 2,569 0.72% 366,725 2,519 0.92% Time deposits 276,155 4,452 2.15% 305,088 5,753 2.51% Federal funds purchased 42,202 405 1.28% 11,142 101 1.21% Other borrowings 23,949 967 5.38% 22,908 964 5.61% Junior subordinated debt 27,333 890 4.34% 4,519 141 4.16% ----------------------------- ------------------------------ Total interest-bearing liabilities 1,072,953 9,595 1.19% 914,716 9,865 1.44% Noninterest-bearing deposits 273,912 -------- 235,964 -------- Other liabilities 22,316 25,347 Shareholders' equity 130,763 115,666 ---------- ---------- Total liabilities and shareholders' equity $1,499,944 $1,291,693 ========== ========== Net interest spread(1) 5.08% 4.84% Net interest income and interest margin(2) $53,670 5.32% $44,612 5.14% ================= ====================
(1) Net interest spread represents the average yield earned on assets minus the average rate paid on interest-earning assets minus the average rate paid on interest-bearing liabilities (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of earning assets. -18- Summary of Changes in Interest Income and Expense due to Changes in Average Asset & Liability Balances and Yields Earned & Rates Paid The following tables set forth a summary of the changes in interest income (FTE) 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 Sept. 30, 2004 compared with three months ended Sept. 30, 2003 --------------------------------- Volume Rate Total --------------------------------- Increase (decrease) in interest income: Loans $4,119 ($1,480) $2,639 Investments - taxable (278) 540 262 Investments - nontaxable (71) 26 (45) Federal funds sold (24) - (24) --------------------------------- Total earning assets 3,746 (914) 2,832 --------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 11 (41) (30) Savings deposits 153 (241) (88) Time deposits (90) (96) (186) Federal funds purchased 120 63 183 Other borrowings 45 (43) 2 Junior subordinated debt 261 47 308 --------------------------------- Total interest-bearing liabilities 500 (311) 189 --------------------------------- Increase (decrease) in Net Interest Income $3,246 ($603) $2,643 ================================= Nine months ended Sept. 30, 2004 compared with nine months ended Sept. 30, 2003 --------------------------------- Volume Rate Total --------------------------------- Increase (decrease) in interest income: Loans $13,796 ($4,569) $9,227 Investments - taxable (1,060) 998 (62) Investments - nontaxable (264) 2 (262) Federal funds sold (113) (2) (115) --------------------------------- Total earning assets 12,359 (3,571) 8,788 --------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 45 (120) (75) Savings deposits 748 (698) 50 Time deposits (545) (756) (1,301) Federal funds purchased 282 22 304 Other borrowings 44 (41) 3 Junior subordinated debt 712 37 749 --------------------------------- Total interest-bearing liabilities 1,286 (1,556) (270) --------------------------------- Increase (decrease) in Net Interest Income $11,073 ($2,015) $9,058 ================================= -19- Provision for Loan Losses The Company provided $1,300,000 for loan losses in the third quarter of 2004 versus $150,000 in the third quarter of 2003. During the third quarter of 2004, the Company recorded $613,000 of net loan charge offs versus $145,000 of net loan charge offs in the year earlier quarter. The Company provided $3,250,000 for loan losses during the nine months ended September 30, 2004 versus $450,000 during the nine months ended September 30, 2003. During the nine months ended September 30, 2004, the Company recorded $807,000 of net loan charge offs versus $2,295,000 of net loan charge-offs in the year earlier nine-month period. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands).
Three months ended Nine months ended Sept. 30, Sept. 30, ---------------------------------------------------- 2004 2003 2004 2003 ---------------------------------------------------- Service charges on deposit accounts $3,399 $3,208 $10,005 $9,258 ATM fees and interchange 693 566 1,939 1,683 Other service fees 342 (56) 883 261 Mortgage servicing valuation allowance (provision) recovery - (600) 600 (600) Gain on sale of loans 258 936 1,316 3,388 Commissions on sale of nondeposit investment products 578 396 1,707 1,305 Gain on sale of investments - 97 - 197 Gain on disposal of fixed assets 8 - 20 3 Gain on sale of other real estate owned 384 - 566 60 Increase in cash value of life insurance 352 446 1,216 961 Other noninterest income 347 213 806 640 ---------------------------------------------------- Total noninterest income $6,361 $5,206 $19,058 $17,156 ====================================================
Noninterest income for the third quarter of 2004 increased $1,155,000 (22.2%) to $6,361,000 from $5,206,000 in the year-ago quarter. The increase in noninterest income from the year-ago quarter was partially due to an increase in service charges on deposit accounts (up $191,000 or 6.0%), an increase in ATM fees and interchange (up $127,000 or 22.4%), and an increase in commission on sale of nondeposit investment products (up $182,000 or 46.0%). The increases in these areas were mainly due to continued growth in the Company's customer base in existing markets, and penetration of new markets through new branch openings. In the quarter ended September 30, 2004, the Company had a gain on sale of other real estate owned of $384,000. Other service fees (including mortgage servicing fees net of mortgage servicing asset amortization), mortgage servicing valuation allowance (provision) recovery, and gain on sale of loans were impacted by the recent increase in mortgage rates from their lows in 2003, and the resulting slowdown in mortgage refinance activity; on a combined basis, these three categories contributed $600,000 and $280,000 of noninterest income during the three months ended September 30, 2004 and 2003, respectively. While the Company benefits from increased gain on sale of loans during periods of high levels of mortgage refinance activity, it may also experience increased amortization and provisions for mortgage servicing valuations of mortgage servicing rights. (See Notes to Unaudited Condensed Consolidated Financial Statements for additional information concerning the Company's mortgage operations and valuation of mortgage servicing rights.) -20- Noninterest income for the nine months ended September 30, 2004 increased $1,902,000 (11.1%) to $19,058,000 from $17,156,000 in the same period in 2003. The increase in noninterest income from the year-ago nine-month period was partially due to an increase in service charges on deposit accounts (up $747,000 or 8.1%), an increase in ATM fees and interchange (up $256,000 or 15.2%), and an increase in commission on sale of nondeposit investment products (up $402,000 or 30.8%). The increases in these areas were mainly due to continued growth in the Company's customer base in existing markets, and penetration of new markets through new branch openings. During the nine months ended September 30, 2004, the Company recorded an increase in cash value of life insurance (up $255,000 or 26.5%), and a gain on sale of other real estate owned (up $506,000 to $566,000). Other service fees (including mortgage servicing fees net of mortgage servicing asset amortization), mortgage servicing valuation allowance (provision) recovery, and gain on sale of loans were impacted by the recent increase in mortgage rates from their lows in 2003, and the resulting slowdown in mortgage refinance activity; on a combined basis, these three categories contributed $2,799,000 and $3,049,000 of noninterest income during the nine months ended September 30, 2004 and 2003, respectively. Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands).
Three months ended Nine months ended Sept. 30, Sept. 30, ---------------------------------------------------- 2004 2003 2004 2003 ---------------------------------------------------- Salaries $5,289 $5,006 $15,572 $14,048 Commissions and incentives 1,062 929 3,522 3,401 Employee benefits 1,968 1,525 5,832 4,524 Occupancy 1,001 922 2,947 2,604 Equipment 913 877 2,763 2,456 Professional fees 695 582 1,802 1,797 Telecommunications 426 384 1,222 1,167 Data processing and software 413 386 1,196 1,026 Intangible amortization 343 325 1,016 877 ATM network charges 344 255 964 742 Courier service 255 258 786 766 Advertising and marketing 268 226 693 868 Postage 201 202 668 630 Operational losses 126 240 278 546 Assessments 76 72 221 197 Other 1,709 1,860 5,365 5,419 ---------------------------------------------------- Total $15,089 $14,049 $44,847 $41,068 ==================================================== Average full time equivalent staff 533 516 535 499 Noninterest expense to revenue (FTE) 60.18% 66.04% 61.66% 66.49%
Noninterest expense for the third quarter of 2004 increased $1,040,000 (7.4%) to $15,089,000 from $14,049,000 in the third quarter of 2003. The increase in noninterest expense was mainly due to an increase in salary and benefit expense (up $859,000 or 11.5% to $8,319,000). The increase in salary and benefits expense was mainly due to the opening of de-novo branches in Roseville (November 2003), Folsom (December 2003), and Turlock (April 2004), and regular salary increases. The other components noninterest expense also increased (up $181,000 or 2.7% to $6,770,000). Noninterest expense for the first nine months of 2003 increased $3,779,000 (9.2%) to $44,847,000 from $41,068,000 in the first nine months of 2003. The increase in noninterest expense was mainly due to an increase in salary and benefit expense (up $2,953,000 or 13.4% to $24,926,000). The increase in salary and benefits expense was mainly due to the opening of de-novo branches in Roseville (November 2003), Folsom (December 2003), and Turlock (April 2004), and regular salary increases. The other components of noninterest expense also increased (up $826,000 or 4.3% to $19,921,000). Provision for Income Tax The effective tax rate for the three months ended September 30, 2004 was 38.3% and reflects an increase from 36.3% for the three months ended September 30, 2003. The effective tax rate for the nine months ended September 30, 2004 was 37.9% and reflects a increase from 37.1% for the nine months ended September 30, 2003. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, particularly from tax-exempt loans, state and municipal securities, and bank owned life insurance. -21- Classified Assets The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all nonperforming assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated (dollars in thousands): At Sept. 30, 2004 At December 31, 2003 ------------------------- ------------------------ Gross Guaranteed Net Gross Guaranteed Net ----------------------------------------------------- Classified loans $24,592 $9,820 $14,772 $29,992 $11,209 $18,783 Other classified assets - - - 932 - 932 ----------------------------------------------------- Total classified assets $24,592 $9,820 $14,772 $30,924 $11,209 $19,715 ===================================================== Allowance for loan losses/ Classified loans 109.8% 73.3% Classified assets, net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies at September 30, 2004, decreased $4,943,000 (25.1%) to $14,772,000 from $19,715,000 at December 31, 2003. Nonperforming Loans Loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the following occurs: the loan becomes 90 days past due as to interest or principal, the full and timely collection of additional interest or principal becomes uncertain, the loan is classified as doubtful by internal credit review or bank regulatory agencies, a portion of the principal balance has been charged off, or the Company takes possession of the collateral. Loans that are placed on nonaccrual even though the borrowers continue to repay the loans as scheduled are classified as "performing nonaccrual" and are included in total nonperforming loans. The reclassification of loans as nonaccrual does not necessarily reflect management's judgment as to whether they are collectible. Interest income is not accrued on loans where management has determined that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, any previously accrued but unpaid interest is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Interest income on nonaccrual loans, which would have been recognized during the nine months, ended September 30, 2004, if all such loans had been current in accordance with their original terms, totaled $956,000. Interest income actually recognized on these loans during the nine months ended September 30, 2004 was $717,000. The Company's policy is to place loans 90 days or more past due on nonaccrual status. In some instances when a loan is 90 days past due management does not place it on nonaccrual status because the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days. Loans where the collateral has been repossessed are classified as OREO or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements. -22- Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits. As shown in the following table, total nonperforming assets net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies, decreased $395,000 (7.4%) to $4,931,000 during the first nine months of 2004. Nonperforming assets net of guarantees represent 0.31% 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 Sept. 30, 2004 At December 31, 2003 ------------------------- ------------------------- Gross Guaranteed Net Gross Guaranteed Net ------------------------------------------------------ Performing nonaccrual loans $10,433 $7,569 $2,864 $10,997 $7,936 $3,061 Nonperforming, nonaccrual loans 2,292 314 1,978 2,551 1,252 1,299 ------------------------------------------------------ Total nonaccrual loans 12,725 7,883 4,842 13,548 9,188 4,360 Loans 90 days past due and still accruing 89 - 89 34 - 34 ------------------------------------------------------ Total nonperforming loans 12,814 7,883 4,931 13,582 9,188 4,394 Other real estate owned - - - 932 - 932 ------------------------------------------------------ Total nonperforming assets $12,814 $7,883 $4,931 $14,514 $9,188 $5,326 ====================================================== Nonperforming loans to total loans 0.44% 0.45% Allowance for loan losses/nonperforming loans 329% 313% Nonperforming assets to total assets 0.31% 0.36%
Allowance for Loan Losses Credit risk is inherent in the business of lending. As a result, the Company maintains an Allowance for Loan Losses to absorb losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's Allowance for Loan Losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio. For purposes of this discussion, "loans" shall include all loans and lease contracts that are part of the Company's portfolio. The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan portfolio, and to a lesser extent the Company's loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occur at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies. The Company's method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans and leases as determined by SFAS 114, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. Allowances for specific loans are based on SFAS 114 analysis of individual credits. Allowances for changing environmental factors are management's best estimate of the probable impact these changes have had on the loan portfolio as a whole. This process is explained in detail in the notes to the Company's Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2003. -23- Based on the current conditions of the loan portfolio, management believes that the $16,216,000 allowance for loan losses at September 30, 2004 is adequate to absorb probable losses inherent in the Company's loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. The following table summarizes the loan loss provision, net credit losses and allowance for loan losses for the periods indicated (dollars in thousands): Three months ended Nine months ended Sept. 30, Sept. 30, ------------------------------------------------ 2004 2003 2004 2003 ------------------------------------------------ Balance, beginning of period $15,529 $13,455 $13,773 $14,377 Addition through merger - - - 928 Loan loss provision 1,300 150 3,250 450 Loans charged off (687) (551) (1,053) (2,894) Recoveries of previously charged-off loans 74 406 246 599 ------------------------------------------------ Net charge-offs (613) (145) (807) (2,295) ------------------------------------------------ Balance, end of period $16,216 $13,460 $16,216 $13,460 ================================================ Allowance for loan losses/loans outstanding 1.44% 1.45% Junior Subordinated Debt On July 31, 2003, the Company formed a subsidiary business trust, TriCo Capital Trust I, to issue trust preferred securities. Concurrently with the issuance of the trust preferred securities, the trust issued 619 shares of common stock to the Company for $1,000 per share or an aggregate of $619,000. In addition, the Company issued a Junior Subordinated Debenture to the Trust in the amount of $20,619,000. The terms of the Junior Subordinated Debenture are materially consistent with the terms of the trust preferred securities issued by TriCo Capital Trust I. Also on July 31, 2003, TriCo Capital Trust I completed an offering of 20,000 shares of cumulative trust preferred securities for cash in an aggregate amount of $20,000,000. The trust preferred securities are mandatorily redeemable upon maturity on October 7, 2033 with an interest rate that resets quarterly at three-month LIBOR plus 3.05%, or 4.16% for the first quarterly interest period. TriCo Capital Trust I has the right to redeem the trust preferred securities on or after October 7, 2008. The trust preferred securities were issued through an underwriting syndicate to which the Company paid underwriting fees of $7.50 per trust preferred security or an aggregate of $150,000. The net proceeds of $19,850,000 will be used to finance the opening of new branches, improve bank services and technology, repurchase shares of the Company's common stock under its repurchase plan and increase the Company's capital. The trust preferred securities have not been and will not be registered under the Securities Act of 1933, as amended, or applicable state securities laws and were sold pursuant to an exemption from registration under the Securities Act of 1933. The trust preferred securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933, as amended, and applicable state securities laws. As a result of the adoption of FIN 46R, the Company deconsolidated TriCo Capital Trust I as of and for year ended December 31, 2003. The $20,619,000 of junior subordinated debentures issued by TriCo Capital Trust I were reflected as junior subordinated debt in the consolidated balance sheet at September 30, 2004 and December 31, 2003. The common stock issued by TriCo Capital Trust I was recorded in other assets in the consolidated balance sheet at September 30, 2004 and December 31, 2003. -24- Prior to December 31, 2003, TriCo Capital Trust I was a consolidated subsidiary and was included in liabilities in the consolidated balance sheet, as "Trust preferred securities." The common securities and debentures, along with the related income effects were eliminated in the consolidated financial statements. On June 22, 2004, the Company formed a subsidiary business trust, TriCo Capital Trust II, to issue trust preferred securities. Concurrently with the issuance of the trust preferred securities, the trust issued 619 shares of common stock to the Company for $1,000 per share or an aggregate of $619,000. In addition, the Company issued a Junior Subordinated Debenture to the Trust in the amount of $20,619,000. The terms of the Junior Subordinated Debenture are materially consistent with the terms of the trust preferred securities issued by TriCo Capital Trust II. Also on June 22, 2004, TriCo Capital Trust II completed an offering of 20,000 shares of cumulative trust preferred securities for cash in an aggregate amount of $20,000,000. The trust preferred securities are mandatorily redeemable upon maturity on July 23, 2034 with an interest rate that resets quarterly at three-month LIBOR plus 2.55%, or 4.10% for the first quarterly interest period. TriCo Capital Trust II has the right to redeem the trust preferred securities on or after July 23, 2009. The trust preferred securities were issued through an underwriting syndicate to which the Company paid underwriting fees of $2.50 per trust preferred security or an aggregate of $50,000. The net proceeds of $19,950,000 are being used to finance the opening of new branches, improve bank services and technology, repurchase shares of the Company's common stock under its repurchase plan and increase the Company's capital. The trust preferred securities have not been and will not be registered under the Securities Act of 1933, as amended, or applicable state securities laws and were sold pursuant to an exemption from registration under the Securities Act of 1933. The trust preferred securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933, as amended, and applicable state securities laws. The $20,619,000 of junior subordinated debentures issued by TriCo Capital Trust II were reflected as junior subordinated debt in the consolidated balance sheet at September 30, 2004. The common stock issued by TriCo Capital Trust II was recorded in other assets in the consolidated balance sheet at September 30, 2004. The debentures issued by TriCo Capital Trust I and TriCo Capital Trust II, less the common securities of TriCo Capital Trust I and TriCo Capital Trust II, continue to qualify as Tier 1 or Tier 2 capital under interim guidance issued by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by management. As previously announced on March 11, 2004, the Board of Directors of TriCo Bancshares approved a two-for-one stock split of its common stock at its meeting held on March 11, 2004. The stock split was effected in the form of a stock dividend that entitle each stockholder of record at the close of business on April 9, 2004 to receive one additional share for every share of TriCo common stock held on that date. Shares resulting from the split were distributed on April 30, 2004. Also at its meeting on March 11, 2004, the Board of Directors of TriCo Bancshares approved an increase in the maximum number of shares to be repurchased under the Company's stock repurchase plan originally announced on July 31, 2003 from 250,000 to 500,000 effective on April 9, 2004, solely to conform with the two-for-one stock split noted above. The 250,000 shares originally authorized for repurchase under this plan represented approximately 3.2% of the Company's approximately 7,852,000 common shares outstanding as of July 31, 2003. This plan has no stated expiration date for the repurchases, which may occur from time to time as market conditions allow. As of October 26, 2004, the Company repurchased 222,600 shares under this plan as adjusted for the 2-for-1 stock split paid on April 30, 2004, which leaves 277,400 shares available for repurchase under the plan. The Company's primary capital resource is shareholders' equity, which was $135,688,000 at September 30, 2004. This amount represents an increase of $7,728,000 from December 31, 2003, the net result of comprehensive income for the period ($14,168,000) and the issuance of common shares via the exercise of stock options ($1,354,000), partially offset by the repurchase of common stock ($2,793,000) and dividends paid ($5,001,000). The Company's ratio of equity to total assets was 8.62%, 8.66%, and 8.71% as of September 30, 2004, September 30, 2003, and December 31, 2003, respectively. -25- The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated:
To Be Well At September 30, At Minimum Capitalized Under ---------------- December 31, Regulatory Prompt Corrective 2004 2003 2003 Requirement Action Provisions ------------------------------------------------------------------ Tier I Capital 11.00% 10.55% 10.41% 4.00% 6.00% Total Capital 12.36% 11.73% 11.57% 8.00% 10.00% Leverage ratio 9.81% 8.85% 8.68% 4.00% 5.00%
Off-Balance Sheet Arrangements The Company has certain ongoing commitments under operating and capital leases. These commitments do not significantly impact operating results. As of September 30, 2004 commitments to extend credit were the Company's only financial instruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options, etc. Loan commitments increased to $420 million at September 30, 2004 from $333 million at December 31, 2003. The commitments represent 37.3% of the total loans outstanding at September 30, 2004 versus 33.9% at December 31, 2003. Certain Contractual Obligations The following chart summarizes certain contractual obligations of the Company as of December 31, 2003:
Less than 1-3 3-5 More than (dollars in thousands) Total one year years years 5 years ------------------------------------------------------------------ Federal funds purchased $39,500 $39,500 - - - FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable in its entirety by FHLB on a quarterly basis beginning April 7, 2003 20,000 - - $20,000 - FHLB loan, fixed rate of 5.35% payable on December 9, 2008 1,500 - - 1,500 - FHLB loan, fixed rate of 5.77% payable on February 23, 2009 1,000 - - - $1,000 Capital lease obligation on premises, effective rate of 13% payable monthly in varying amounts through December 1, 2009 562 90 183 187 102 Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a quarterly basis beginning October 7, 2008, matures October 7, 2033 20,619 - - - 20,619 Operating lease obligations 6,254 1,172 1,835 1,428 1,819 Deferred compensation(1) 5,195 269 505 438 3,983 Supplemental retirement plans(1) 3,567 498 937 774 1,358 Employment agreements 253 253 - - - ------------------------------------------------------------------ Total contractual obligations $98,450 $41,782 $3,460 $24,327 $28,881 ==================================================================
(1) These amounts represent known certain payments to participants under the Company's deferred compensation and supplemental retirement plans. -26- 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. The results of the simulations noted above indicate that the balance sheet was relatively balanced (earnings do not significantly change when interest rates change) and slightly asset sensitive (earnings increase when interest rates rise) at September 30, 2004 and 2003, respectively. The magnitude of all the simulation results noted above is within the Company's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. At September 30, 2004 and 2003, the Company had no derivative financial instruments. -27- Liquidity The Company's principal source of asset liquidity is cash and amounts due from banks, federal funds sold, and marketable investment securities available for sale. At September 30, 2004, federal funds sold and investment securities available for sale totaled $292,966,000, representing a decrease of $23,796,000 or 7.5% from December 31, 2003, and a decrease of $59,875,000 or 17.0% from September 30, 2003. In addition, the Company generates additional liquidity from its operating activities. The Company's profitability during the first nine months of 2004 generated cash flows from operations of $18,248,000 compared to $18,883,000 during the first nine months of 2003. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. Sales and maturities of investment securities produced cash inflows of $62,476,000 during the nine months ended September 30, 2004 compared to $192,440,000 for the nine months ended September 30, 2003. During the nine months ended September 30, 2004, the Company invested $41,515,000, and $145,989,000 in securities, and net loan growth, respectively, compared to $169,113,000, $168,329,000, and $22,475,000 used to purchase investments, net loan growth, and life insurance policies, respectively, during the first nine months of 2003. These changes in investment, loan, and life insurance balances contributed to net cash used for investing activities of $126,207,000 during the nine months ended September 30, 2004, compared to net cash used for investing activities of $162,143,000 during the nine months ended September 30, 2003. Financing activities provided net cash of $91,348,000 during the nine months ended September 30, 2004, compared to net cash provided by financing activities of $136,637,000 during the nine months ended September 30, 2003. Increases in deposit balances, Federal funds borrowed and issuance of junior subordinated debt accounted for $55,318,000, $17,800,000 and $20,619,000 of financing sources of funds, respectively, during the nine months ended September 30, 2004, compared to deposit balance, Federal funds borrowed and issuance of junior subordinated debt accounted for $64,566,000, $55,700,000 and $20,619,000 of financing sources of funds, respectively, during the nine months ended September 30, 2003. Dividends paid used $5,001,000 and $4,559,000 of cash during the nine months ended September 30, 2004 and September 30, 2003, 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 September 30, 2004 ("Evaluation Date"). Based on that evaluation, they concluded that as of the Evaluation Date the Company's disclosure controls and procedures are effective to allow timely communication to them of information relating to the Company and the Bank required to be disclosed in its filings with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. -28- PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Bank. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds The following table shows information concerning the common stock repurchased by the Company during the third quarter of 2004 pursuant to the Company's stock repurchase plan originally announced on July 31, 2003, as amended effective April 9, 2004, to conform with the Company's two-for-one stock split paid on April 30, 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 - ----------------------------------------------------------------------------------------------------------- July 1-31, 2004 - - - 277,400 August 1-31, 2004 - - - 277,400 September 1-30, 2004 - - - 277,400 - ----------------------------------------------------------------------------------------------------------- Total - - - 277,400
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. 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). -29- 10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated August 23, 1995 (No. 33-62063). 10.7* TriCo's 2001 Stock Option Plan filed as Exhibit 4 to TriCo's Form S-8 Registration Statement dated July 27, 2001 (No. 33-66064). 10.8* Employment Agreement between TriCo and Richard Smith dated April 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 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 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* 2004 TriCo Bancshares Deferred Compensation Plan effective January 1, 2004 filed as Exhibit 10.11 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.12* 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. 10.13* 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. 10.14* Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January 1, 2004 filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.15* 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. 10.16* 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. -30- 10.17* 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. 10.18* 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. 10.19* 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. 10.20* 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. 10.21* 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. -31- 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: October 26, 2004 /s/ Thomas J. Reddish ----------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer -32- Exhibit 31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended I, Richard P. Smith, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 26, 2004 /s/ Richard P. Smith ---------------------------------------- Richard P. Smith President and Chief Executive Officer -33- 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-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 26, 2004 /s/ Thomas J. Reddish ---------------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer -34- 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 September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 Section 1350 Certification of CFO In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas J. Reddish ------------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. -35- -----END PRIVACY-ENHANCED MESSAGE-----