-----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, JjcCKAgvhEqg5pDRevlB36LWCpM4joJT9+QNnDBS09eTETfIQ8NHocJweAApEQ4e OLpdNKCa2/oxMBDBNEvMYw== 0000356171-05-000005.txt : 20050505 0000356171-05-000005.hdr.sgml : 20050505 20050504180332 ACCESSION NUMBER: 0000356171-05-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050505 DATE AS OF CHANGE: 20050504 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: 05800586 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 tcb10q1q05.txt TCBK 3/31/2005 - FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended March 31, 2005 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) 530-898-0300 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of Class: Common stock, no par value Outstanding shares as of May 4, 2005: 15,686,049 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 15 Item 2 - Management's Discussion and Analysis of Financial 16 Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures 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; - 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 and interest rate policies of the Federal Reserve Board; - 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; - asset/liability matching risks and liquidity risks; - changes in the level of nonperforming assets and charge-offs; - acts of war and political instability; - inflation, interest rate, securities market and monetary fluctuations; - changes in the financial performance or condition of the Company's borrowers; - changes in the competitive environment among financial holding companies; - changes in accounting policies as may be adopted by regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; and - changes in the Company's compensation and benefit plans. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2004, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. -1-
PART I - FINANCIAL INFORMATION Item 1. Financial Statements TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (In thousands, except share data; unaudited) At March 31, At December 31, 2005 2004 2004 ------------------------------- ----------------- Assets: Cash and due from banks $77,365 $55,568 $70,037 Federal funds sold 181 - - ------------------------------- ----------------- Cash and cash equivalents 77,546 55,568 70,037 Securities available for sale 293,730 307,647 286,013 Federal Home Loan Bank stock, at cost 6,781 4,830 6,781 Loans, net of allowance for loan losses of $14,563, $13,377 and $14,525 1,167,870 980,688 1,158,442 Foreclosed assets, net of allowance for losses of $180, $180 and $180 - 924 - Premises and equipment, net 20,599 19,288 19,853 Cash value of life insurance 40,699 39,412 40,479 Accrued interest receivable 6,446 5,806 6,473 Goodwill 15,519 15,519 15,519 Intangible assets 5,065 5,755 5,408 Other assets 21,357 15,926 18,501 ------------------------------- ----------------- Total Assets $1,655,612 $1,451,363 $1,627,506 =============================== ================= Liabilities: Deposits: Noninterest-bearing demand $312,739 $260,299 $311,275 Interest-bearing 1,086,010 979,640 1,037,558 ------------------------------- ----------------- Total deposits 1,398,749 1,239,939 1,348,833 Federal funds purchased 20,700 16,300 46,400 Accrued interest payable 3,384 2,507 3,281 Reserve for unfunded commitments 1,632 920 1,532 Other liabilities 22,099 18,687 19,938 Other borrowings 28,176 22,877 28,152 Junior subordinated debt 41,238 20,619 41,238 ------------------------------- ----------------- Total Liabilities 1,515,978 1,321,849 1,489,374 ------------------------------- ----------------- Commitments and contingencies Shareholders' Equity: Common stock, no par value: 50,000,000 shares authorized; issued and outstanding: 15,733,517 at March 31, 2005 70,808 15,635,522 at March 31, 2004 69,568 15,723,317 at December 31, 2004 70,699 Retained earnings 71,068 57,520 67,785 Accumulated other comprehensive (loss) income, net (2,242) 2,426 (352) ------------------------------- ----------------- Total Shareholders' Equity 139,634 129,514 138,132 ------------------------------- ----------------- Total Liabilities and Shareholders' Equity $1,655,612 $1,451,363 $1,627,506 ===================================================
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 (In thousands, except share data; unaudited) Three months ended March 31, 2005 2004 ---------------------------- Interest and dividend income: Loans, including fees $19,527 $16,739 Debt securities: Taxable 2,630 2,675 Tax exempt 415 442 Dividends 60 46 Federal funds sold 4 10 ---------------------------- Total interest income 22,636 19,912 ---------------------------- Interest Expense: Deposits 3,085 2,449 Federal funds purchased 172 34 Other borrowings 327 320 Junior subordinated debt 537 211 ---------------------------- Total interest expense 4,121 3,014 ---------------------------- Net Interest Income 18,515 16,898 ---------------------------- Provision for loan losses 100 613 ---------------------------- Net Interest Income After Provision for Loan Losses 18,415 16,285 ---------------------------- Noninterest Income: Service charges and fees 4,062 4,081 Gain on sale of loans 292 625 Commissions on sale of non-deposit investment products 532 542 Increase in cash value of life insurance 220 432 Other 221 75 ---------------------------- Total Noninterest Income 5,327 5,755 ---------------------------- Noninterest Expense: Salaries and related benefits 8,369 8,167 Other 6,744 6,216 ---------------------------- Total Noninterest Expense 15,113 14,383 ---------------------------- Income Before Income Taxes 8,629 7,657 ---------------------------- Provision for income taxes 3,390 2,880 ---------------------------- Net Income $5,239 $4,777 ============================ Average Shares Outstanding 15,729,725 15,616,540 Diluted Average Shares Outstanding 16,366,705 16,212,845 Per Share Data Basic Earnings $0.33 $0.31 Diluted Earnings $0.32 $0.29 Dividends Paid $0.11 $0.10 Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. See accompanying notes to unaudited condensed consolidated financial statements. -3-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data; unaudited) Accumulated Shares of Other Common Common Retained Comprehensive Stock Stock Earnings (Loss) Income Total ------------------------------------------------------------- Balance at December 31, 2003 15,668,248 $69,767 $56,379 $1,814 $127,960 Comprehensive income: ---------- Net income 4,777 4,777 Change in net unrealized gain on Securities available for sale, net 612 612 ---------- Total comprehensive income 5,389 Stock options exercised 134,874 540 540 Tax benefit of stock options exercised 7 7 Repurchase of common stock (167,600) (746) (2,047) (2,793) Dividends paid ($0.10 per share) (1,589) (1,589) ------------------------------------------------------------- Balance at March 31, 2004 15,635,522 $69,568 $57,520 $2,426 $129,514 ============================================================= Balance at December 31, 2004 15,723,317 $70,699 $67,785 ($352) $138,132 Comprehensive income: ---------- Net income 5,239 5,239 Change in net unrealized gain on Securities available for sale, net (1,890) (1,890) ---------- Total comprehensive income 3,349 Stock options exercised 24,000 158 158 Tax benefit of stock options exercised 13 13 Repurchase of common stock (13,800) (62) (224) (286) Dividends paid ($0.11 per share) (1,732) (1,732) ------------------------------------------------------------- Balance at March 31, 2005 15,733,517 $70,808 $71,068 ($2,242) $139,634 =============================================================
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. -4-
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands; unaudited) For the three months ended March 31, 2005 2004 ------------------------------------ Operating activities: Net income $5,239 $4,777 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment, and amortization 917 831 Amortization of intangible assets 343 331 Provision for loan losses 100 613 Amortization of investment securities premium, net 331 443 Originations of loans for resale (15,660) (31,981) Proceeds from sale of loans originated for resale 15,780 32,310 Gain on sale of loans (292) (625) Amortization of mortgage servicing rights 168 190 Recovery of mortgage servicing rights valuation allowance - (30) (Gain) loss on sale of fixed assets (6) 78 Increase in cash value of life insurance (220) (432) Change in: Interest receivable 27 221 Interest payable 103 (131) Other assets and liabilities, net 616 (89) ------------------------------------ Net cash provided by operating activities 7,446 6,506 ------------------------------------ Investing activities: Proceeds from maturities of securities available-for-sale 14,244 19,662 Purchases of securities available-for-sale (25,525) (15,249) Purchase of Federal Home Loan Bank stock - (46) Loan originations and principal collections, net (9,528) (11,731) Proceeds from sale of premises and equipment 5 12 Purchases of property and equipment (1,513) (579) ------------------------------------ Net cash used by investing activities (22,317) (7,931) ------------------------------------ Financing activities: Net increase in deposits 49,916 3,116 Net change in federal funds purchased (25,700) (23,200) Payments of principal on long-term other borrowings (13) (10) Net change in short-term other borrowings 37 - Repurchase of Common Stock (286) (2,793) Dividends paid (1,732) (1,589) Exercise of stock options 158 540 ------------------------------------ Net cash provided (used) by financing activities 22,380 (23,936) ------------------------------------ Net change in cash and cash equivalents 7,509 (25,361) ------------------------------------ Cash and cash equivalents and beginning of period 70,037 80,929 ------------------------------------ Cash and cash equivalents at end of period $77,546 $55,568 ==================================== Supplemental disclosure of noncash activities: Unrealized (loss) gain on securities available for sale ($3,233) $1,031 Supplemental disclosure of cash flow activity: Cash paid for interest expense $4,018 $3,145 Cash paid for income taxes $200 $1,745 Income tax benefit from stock option exercises $13 $7
See accompanying notes to unaudited condensed consolidated financial statements. -5- NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: General Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three months ended March 31, 2005 and 2004 are not necessarily indicative of the results expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company operates 32 branch offices and 15 in-store branch offices in the California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo and Yuba. The Company's operating policy since its inception has emphasized retail banking. Most of the Company's customers are retail customers and small to medium sized businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The allowance for loan losses, goodwill and other intangible assessments, income taxes, and the valuation of mortgage servicing rights, are the only accounting estimates that materially affect the Company's consolidated financial statements. Significant Group Concentration of Credit Risk The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio within the business segments located in this geographical area. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Investment Securities The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the three months ended March 31, 2005, and throughout 2004, the Company did not have any securities classified as either held-to-maturity or trading. -6- Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of other comprehensive income (loss) in shareholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that an other than temporary decline in value has occurred. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors of current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to income. At March 31, 2005 and 2004, and December 31, 2004 the Company had no loans held for sale. Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. Loans Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in Management's judgment are well secured and in the process of collection, they may be classified as accrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. All impaired loans are classified as nonaccrual loans. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans and leases, based on evaluations of the collectibility, impairment and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. -7- Reserve for Unfunded Commitments The reserve for unfunded commitments is established through a provision for losses - unfunded commitments charged to noninterest expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits, and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectibility, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower's or depositor's ability to pay. Servicing Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. The following table summarizes the Company's mortgage servicing rights recorded in other assets as of March 31, 2005 and December 31, 2004. December 31, March 31, (Dollars in thousands) 2004 Additions Reductions 2005 ----------------------------------------------- Mortgage Servicing Rights $3,476 $172 ($168) $3,480 Valuation allowance - - - - ----------------------------------------------- Mortgage servicing rights, net of valuation allowance $3,476 $172 ($168) $3,480 =============================================== At March 31, 2005 and December 31, 2004, the Company serviced real estate mortgage loans for others of $365 million and $368 million, respectively. At March 31, 2005 and December 31, 2004, the fair value of the Company's mortgage servicing rights assets was $4,161,000 and $3,568,000, respectively. Off-Balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, standby letters of credit, and deposit account overdraft privilege. Such financial instruments are recorded when they are funded. -8- Premises and Equipment Land is carried at cost. Buildings and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 years for land improvements and buildings. Foreclosed Assets Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Goodwill and Other Intangible Assets Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142), as of January 1, 2002. Pursuant to SFAS 142, goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement of Financial Accounting Standard No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144). As of the date of adoption, the Company had identifiable intangible assets consisting of core deposit premiums and minimum pension liability. Core deposit premiums are amortized using an accelerated method over a period of ten years. Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. The following table summarizes the Company's core deposit intangibles as of March 31, 2005 and December 31, 2004. December 31, March 31, (Dollar in Thousands) 2004 Additions Reductions 2005 ---------------------------------------------- Core deposit intangibles $13,643 - - $13,643 Accumulated amortization (9,201) - ($343) (9,544) ---------------------------------------------- Core deposit intangibles, net $4,442 - ($343) $4,099 ============================================== 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) ----------- ----------------------- 2005 $1,381 2006 $1,395 2007 $490 2008 $523 2009 $328 Thereafter $325 -9- The following table summarizes the Company's minimum pension liability intangible as of March 31, 2005 and December 31, 2004. December 31, March 31, (Dollar in Thousands) 2004 Additions Reductions 2005 ---------------------------------------------- Minimum pension liability intangible $966 - - $966 ============================================== Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. The following table summarizes the Company's goodwill intangible as of March 31, 2005 and December 31, 2004. December 31, March 31, (Dollar in Thousands) 2004 Additions Reductions 2005 ---------------------------------------------- Goodwill 15,519 - - 15,519 ============================================== Impairment of Long-Lived Assets and Goodwill Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. On December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. 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. -10- Stock-Based Compensation The Company uses the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Under this method, compensation expense is recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123) permits companies to continue using the intrinsic value method or to adopt a fair value based method to account for stock option plans. The fair value based method results in recognizing as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Company has elected to continue to use the intrinsic value method. Had compensation cost for the Company's option plans been determined in accordance with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Three months ended March 31, (in thousands, except per share amounts) 2005 2004 ---- ---- Net income As reported $5,239 $4,777 Pro forma $5,153 $4,695 Basic earnings per share As reported $0.33 $0.31 Pro forma $0.33 $0.30 Diluted earnings per share As reported $0.32 $0.29 Pro forma $0.31 $0.29 Stock-based employee compensation cost, net of related tax effects, included in net income As reported $0 $0 Pro forma $86 $82 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing. Earnings Per Share Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate solely from outstanding stock options, and are determined using the treasury stock method. Earnings per share have been computed based on the following: Three Months Ended March 31, 2005 2004 ---------------------------- (in thousands) Net income $5,239 $4,777 Average number of common shares outstanding 15,730 15,617 Effect of dilutive stock options 637 596 ---------------------------- Average number of common shares outstanding used to calculate diluted earnings per share 16,367 16,213 ============================ -11- Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss) and related tax effects are as follows: Three Months Ended March 31, ---------------------------- 2005 2004 ---------------------------- (in thousands) Unrealized holding (losses) gains on available-for-sale securities ($3,233) $1,031 Tax effect 1,343 (418) ---------------------------- Unrealized holding (losses) gains on available-for-sale securities, net of tax (1,890) 612 ============================ The components of accumulated other comprehensive loss, included in shareholders' equity, are as follows: March 31, December 31, 2005 2004 ---------------------------- (in thousands) Net unrealized gain (losses) on available-for-sale securities ($2,226) $1,007 Tax effect 919 (424) ---------------------------- Unrealized holding gains (losses) on available-for-sale securities, net of tax (1,307) 583 ---------------------------- Minimum pension liability (1,559) (1,559) Tax effect 624 624 ---------------------------- Minimum pension liability, net of tax (935) (935) ---------------------------- Accumulated other comprehensive loss ($2,242) ($352) ============================ Retirement Plans The Company has supplemental retirement plans for current and former directors and supplemental retirement plan covering current and former key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to use the cash values of these policies to pay the retirement obligations. The following table sets forth the net periodic benefit cost recognized for the plans: Three Months Ended March 31, 2005 2004 (in thousands) ---------------------------- Net pension cost included the following components: Service cost-benefits earned during the period $104 $35 Interest cost on projected benefit obligation 133 103 Amortization of net obligation at transition 56 8 Amortization of prior service cost 24 20 Recognized net actuarial loss 1 37 ---------------------------- Net periodic pension cost $318 $203 ============================ During the three months ended March 31, 2005 and 2004, the Company contributed and paid out as benefits $152,000 and $140,000, respectively, to participants under the plans. For the year ending December 31, 2005, the Company expects to contribute and pay out as benefits $535,000 to participants under the plans. -12- Recent Accounting Pronouncements In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (VIEs), which was issued in January 2003. The Company was required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the FIN 46R will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The Company currently does not have any VIEs that are within the scope of this Statement. In December 2003, FASB issued FASB Statement of Financial Accounting Standard No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS 132 revised), which prescribes employers' disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition of those plans. SFAS 132 retains and revises the disclosure requirements contained in the original SFAS 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The Statement generally is effective for fiscal years ending after December 15, 2003. Disclosures required by this standard are included in the notes to these consolidated financial statements. In December 2004, the FASB issued FASB Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim reporting period of the Company's fiscal year beginning after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R on January 1, 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will not have a material impact on the Company's consolidated results of operations and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123. -13- In March 2004, the United States Securities and Exchange Commission (SEC) issued SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105), which summarizes the views of the staff of the SEC regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. SAB 105 provides that the fair value of recorded loan commitments that are accounted for as derivatives under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, should not incorporate the expected future cash flows related to the associated servicing of the future loan. In addition, SAB 105 requires registrants to disclose their accounting policy for loan commitments. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of this accounting standard did not have a material impact on the Company's consolidated financial statements. In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), which addresses accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to loans and debt securities acquired individually, in pools or as part of a business combination and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 does not allow the excess of contractual cash flows over cash flows expected to be collected to be recognized as an adjustment of yield, loss accrual or valuation allowance, such as the allowance for possible loan losses. SOP 03-3 requires that increases in expected cash flows subsequent to the initial investment be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. In the case of loans acquired in a business combination where the loans show signs of credit deterioration, SOP 03-3 represents a significant change from current purchase accounting practice whereby the acquiree's allowance for loan losses is typically added to the acquirer's allowance for loan losses. SOP 03-3 is effective for loans and debt securities acquired by the Company beginning January 1, 2005. The adoption of this new standard is not expected to have a material impact on the Company's consolidated financial statements. Reclassifications Certain amounts previously reported in the 2004 financial statements have been reclassified to conform to the 2005 presentation. Additionally, in the first quarter of 2005, the Company reclassified the reserve for unfunded commitments from the allowance for loan losses to other liabilities, and reclassified the provision for unfunded commitments from the provision for loan losses to other noninterest expense. These reclassifications did not affect previously reported net income or total shareholders' equity. Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split effected as a stock dividend which was paid on April 30, 2004 to shareholders of record on April 9, 2004. -14- TRICO BANCSHARES Financial Summary (in thousands, except per share amounts) (Unaudited) Three months ended March 31, -------------------------------- 2005 2004 -------------------------------- Net Interest Income (FTE) $18,756 $17,147 Provision for loan losses (100) (613) Noninterest income 5,327 5,755 Noninterest expense (15,113) (14,383) Provision for income taxes (FTE) (3,631) (3,129) -------------------------------- Net income $5,239 $4,777 ================================ Earnings per share2: Basic $0.33 $0.31 Diluted $0.32 $0.29 Per share2: Dividends paid $0.11 $0.10 Book value at period end 8.88 8.28 Tangible book value at period end 7.57 6.92 Average common shares outstanding2 15,730 15,617 Average diluted common shares outstanding2 16,367 16,213 Shares outstanding at period end 15,734 15,636 At period end: Loans, net $1,167,870 $980,688 Total assets 1,655,612 1,451,363 Total deposits 1,398,749 1,239,939 Other borrowings 28,176 22,877 Junior subordinated debt 41,238 20,619 Shareholders' equity 139,634 129,514 Financial Ratios: During the period (annualized): Return on assets 1.29% 1.33% Return on equity 14.83% 14.80% Net interest margin1 5.12% 5.35% Net loan charge-offs to average loans 0.01% 0.05% Efficiency ratio1 62.75% 62.80% Average equity to average assets 8.67% 8.96% At period end: Equity to assets 8.43% 8.92% Total capital to risk-adjusted assets 11.91% 11.49% Allowance for losses to loans3 1.37% 1.44% 1 Fully taxable equivalent (FTE) 2 Share and per share data for all periods have been adjusted to reflect the 2-for-1 stock split paid on April 30, 2004. 3 Allowance for losses includes allowance for loan losses and reserve for unfunded commitments. -15- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management's Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, intangible assets, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See caption "Allowance for Loan Losses" for a more detailed discussion). Results of Operations The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report. The Company had quarterly earnings of $5,239,000, or $0.32 per diluted share, for the three months ended March 31, 2005. These results represent a 10.3% increase from the $0.29 earnings per diluted share reported for the three months ended March 31, 2004 on earnings of $4,777,000. The improvement in results from the year-ago quarter was due to a $1,609,000 (9.4%) increase in fully tax-equivalent net interest income to $18,756,000, and a $513,000 (83.7%) decrease in provision for loan losses to $100,000. These contributing factors were partially offset by a $428,000 (7.4%) decrease in noninterest income to $5,327,000 and a $730,000 (5.1%) increase in noninterest expense to $15,113,000 for the quarter ended March 31, 2005. Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands): Three months ended March 31, ------------------------- 2005 2004 ------------------------- Net Interest Income (FTE) $18,756 $17,147 Provision for loan losses (100) (613) Noninterest income 5,327 5,755 Noninterest expense (15,113) (14,383) Provision for income taxes (FTE) (3,631) (3,129) ------------------------- Net income $5,239 $4,777 ========================= -16- Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands): Three months ended March 31, -------------------------------- 2005 2004 -------------------------------- Interest income $22,636 $19,912 Interest expense (4,121) (3,014) FTE adjustment 241 249 -------------------------------- Net interest income (FTE) $18,756 $17,147 ================================ Average earning assets $1,464,028 $1,281,032 Net interest margin (FTE) 5.12% 5.35% The Company's primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense in interest-bearing liabilities. Net interest income (FTE) during the first quarter of 2005 increased $1,609,000 (9.4%) from the same period in 2004 to $18,756,000. The increase in net interest income (FTE) was due to a $182,996,000 (14.3%) increase in average balances of earning assets to $1,464,028,000 offset by a 23 basis point decrease in net interest margin (FTE) to 5.12%. Interest and Fee Income Interest and fee income (FTE) for the first quarter of 2005 increased $2,716,000 (13.5%) from the first quarter of 2004. The increase was the net effect of a $182,996,000 (14.3%) increase in average interest-earning assets to $1,464,028,000 that was partially offset by a 5 basis point decrease in the yield on those average earning assets to 6.25%. The growth in interest-earning assets was the result of a $196,246,000 (20.2%) increase in average loan balances to $1,167,039,000 that was offset by a $9,449,000 (3.1%) decrease in average balance of investments to $296,381,000 and a $3,801,000 (86.2%) decrease in average balance of Federal funds sold to $608,000. The average yield on the Company's earning assets decreased 5 basis points to 6.25% for the quarter ended March 31, 2005 from 6.30% for the quarter ended March 31, 2004. The average yield on the Company's loans was 6.69% in the quarter ended March 31, 2005 compared to 6.90% in the year-ago quarter. This 21 basis point decrease in average yield on loans is the result of continued low longer-term loan rates despite a 175 basis point increase in the prime lending rate between June 2004 and March 2005. As a result, longer-term loans continued to refinance into lower rate loans between March 2004 and March 2005. In addition, most of the Company's prime-based adjustable rate loans had rate floors in them that mitigated approximately the first 100 basis point of the 175 basis point increase in the prime rate. Furthermore, even with a prime rate of 5.75% at March 31, 2005, any new prime-based loan added to the Company's loan balances with a rate less than prime plus one percent (or 6.75%) will currently further reduce the Company's average yield on loans. Conversely, if the prime rate continues to increase, the yield on the Company's existing and new prime-based loans will increase accordingly. The average yield on the Company's combined taxable and nontaxable investment balances increased 6 basis points to 4.52% in the quarter ended March 31, 2005 compared to 4.46% in the year-ago quarter. The increase in the average yield on investment balances was primarily due to a decrease in the volume of mortgage refinancing in the quarter ended March 31, 2005 compared to the year-ago quarter. Increased volume of mortgage refinancing has the effect of decreasing the yields of the Companies mortgage-backed securities, which account for approximately seventy-five percent of the Company's investment balances. As the volume of mortgage refinancing began to decrease in the fall of 2003, the yield on the Company's mortgage-backed securities increased. The average yield on Federal funds sold decreased 172 basis points to 2.63% in the quarter ended March 31, 2005 from the year-ago quarter due to a 175 basis points increase in the Federal funds target rate that occurred between June 2004 and March 31, 2005. -17- Interest Expense Interest expense increased $1,107,000 (36.7%) in the first quarter of 2005 compared to the year-ago quarter. The increase was due to a 25 basis point increase in the average rate paid on interest-bearing liabilities from 1.18% in the first quarter of 2004 to 1.43% in the first quarter of 2005. The average balance of interest-bearing liabilities increased $131,828,000 (13.0%) in the first quarter of 2005 compared to the year-ago quarter. The average balance of all categories of interest-bearing liabilities increased from the year-ago quarter. The average balance of interest-bearing demand deposits, savings deposits, and time deposits were up $16,774,000 (7.5%), $14,721,000 (3.2%), and $59,205,000 (21.8%), respectively, from the year-ago quarter. In addition, the average balance of noninterest-bearing deposits increased $40,660,000 (15.0%) from the year-ago quarter. During the quarter ended March 31, 2005, the average balance of Federal funds purchased, other borrowings and junior subordinated debt were up $15,277,000 (114.9%), $5,232,000 (22.9%), and $20,619,000 (100.0%), respectively, from the year-ago quarter. The average rates paid for all categories of interest-bearing liabilities except for savings deposits and other borrowings were up due to increases in market rates. The average rate paid on interest-bearing demand deposits, time deposits, federal funds purchased, and junior subordinated debt increased 2, 41, 139, and 112 basis points respectively, to 0.20%, 2.54%, 2.41%, and 5.21%, respectively. The average rate paid on other borrowings decreased 94 basis points to 4.65% due to the addition of short-term other borrowings at significantly lower rates than what previously existed in that category. Net Interest Margin (FTE) The following table summarizes the components of the Company's net interest margin for the periods indicated: Three months ended March 31, ---------------------- 2005 2004 ---------------------- Yield on earning assets 6.25% 6.30% Rate paid on interest-bearing liabilities 1.42% 1.18% ---------------------- Net interest spread 4.82% 5.12% Impact of all other net noninterest-bearing funds 0.30% 0.23% ---------------------- Net interest margin 5.12% 5.35% ====================== Net interest margin in the first quarter of 2005 decreased 23 basis points compared to the first quarter of 2004. This decrease in net interest margin was mainly due to higher rates paid on liabilities, a change in the mix of interest-bearing liabilities towards the higher paying categories of time certificates, Federal funds, and junior subordinated debt, and lower yield on loans. During the quarter ended March 31, 2005, the ratio of loans to total interest-earning assets was 80% compared to 76% in the year-ago quarter. The increase in interest income due to the increase in loan volume more than offset the effect of the 21 basis point decrease in average loan yield. As a result, the average yield on total earning assets only decreased 5 basis points. The average rate paid on interest-bearing liabilities increased 25 basis points. -18- Summary of Average Balances, Yields/Rates and Interest Differential The following table presents, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended ---------------------------------------------------------------- March 31, 2005 March 31, 2004 ----------------------------- -------------------------------- Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- -------------------------------- Assets: Loans $1,167,039 $19,527 6.69% $970,793 $16,739 6.90% Investment securities - taxable 264,015 2,690 4.08% 270,358 2,721 4.03% Investment securities - nontaxable 32,366 656 8.11% 35,472 691 7.79% Federal funds sold 608 4 2.63% 4,409 10 0.91% ----------------------------- -------------------------------- Total earning assets 1,464,028 22,877 6.25% 1,281,032 20,161 6.30% Other assets 164,799 159,921 ---------- ---------- Total assets $1,628,827 $1,440,953 ========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $239,282 121 0.20% $222,508 100 0.18% Savings deposits 482,461 870 0.72% 467,740 907 0.78% Time deposits 330,343 2,094 2.54% 271,138 1,442 2.13% Federal funds purchased 28,569 172 2.41% 13,292 34 1.02% Other borrowings 28,112 327 4.65% 22,880 320 5.59% Junior subordinated debt 41,238 537 5.21% 20,619 211 4.09% ----------------------------- -------------------------------- Total interest-bearing liabilities 1,150,005 4,121 1.43% 1,018,177 3,014 1.18% Noninterest-bearing deposits 310,978 270,318 Other liabilities 26,580 23,325 Shareholders' equity 141,264 129,133 ---------- ---------- Total liabilities and shareholders' equity $1,628,827 $1,440,953 ========== ========== Net interest spread(1) 4.82% 5.12% Net interest income and interest margin(2) $18,756 5.12% $17,147 5.35% ================= =================
(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. -19- Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid The following table sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (dollars in thousands). Three months ended March 31, 2005 compared with three months ended March 31, 2004 --------------------------------- Volume Rate Total --------------------------------- Increase (decrease) in interest income: Loans $3,385 ($597) $2,788 Investment securities (105) 39 (66) Federal funds sold (9) 3 (6) --------------------------------- Total earning assets 3,271 (555) 2,716 --------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits 8 13 21 Savings deposits 29 (66) (37) Time deposits 315 337 652 Federal funds purchased 39 99 138 Other borrowings 73 (66) 7 Junior subordinated debt 211 115 326 --------------------------------- Total interest-bearing liabilities 675 432 1,107 --------------------------------- Increase (decrease) in Net Interest Income $2,596 ($987) $1,609 ================================= Provision for Loan Losses The Company provided $100,000 for loan losses in the first quarter of 2005 versus $613,000 in the first quarter of 2004. During the first quarter of 2005, the Company recorded $62,000 of net loan charge-offs versus $126,000 of net loan charge-offs in the year earlier quarter. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands). Three months ended March 31, ---------------------------- 2005 2004 ---------------------------- Service charges on deposit accounts $3,034 $3,197 ATM fees and interchange 712 581 Other service fees 484 463 Amortization of mortgage servicing rights (168) (190) Recovery of mortgage servicing rights valuation allowance - 30 Gain on sale of loans 292 625 Commissions on sale of nondeposit investment products 532 542 Increase in cash value of life insurance 220 432 Other noninterest income 221 75 ---------------------------- Total noninterest income $5,327 $5,755 ============================ Noninterest income for the first quarter of 2005 decreased $428,000 (7.4%) from the year-ago quarter. The decrease in noninterest income from the year-ago quarter was mainly due to a $333,000 (53.3%) decreases in gain on sale of loans to $292,000, and a $212,000 (49.1%) reduction in the increase in cash value of life insurance to $220,000. The decrease in gain on sale of loans was due to a continued slowdown in mortgage refinancing. The reduction in the increase in cash value of life insurance was due to lower earning rates on the related insurance policies. Service charges and fees, including those on deposit accounts, ATM usage, and other, on a combined basis were essentially flat at $4,230,000 in the quarter ended March 31, 2005 compared to $4,241,000 in the year-ago quarter. This flatness was mainly due to a decrease in rejected check charges. -20- Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands). Three months ended March 31, ---------------------------- 2005 2004 ---------------------------- Salaries & benefits $8,369 $8,167 Equipment 980 943 Occupancy 993 937 Professional fees 407 509 Telecommunications 384 375 Data processing and software 374 383 ATM network charges 371 295 Intangible amortization 343 331 Advertising and marketing 342 191 Courier service 278 262 Postage 237 232 Assessments 76 72 Operational losses 26 40 Other 1,933 1,646 ---------------------------- Total $15,113 $14,383 ============================ Average full time equivalent staff 565 532 Noninterest expense to revenue (FTE) 62.75% 62.80% Noninterest expense for the first quarter of 2005 increased $730,000 (5.1%) compared to the first quarter of 2004. Salaries and benefits expense increased $202,000 (2.5%) to $8,369,000. The increase in salaries and benefits expense was mainly due to annual salary increases, and new employees at the Company's recently opened branches in Turlock (April 2004), Woodland (November 2004), and Lincoln (February 2005). Other categories of noninterest expense such as equipment, occupancy, ATM network charges, and other also increased, in part, due to these newly opened branches. Advertising and marketing expense increased $151,000 (79%) to $342,000. Provision for Income Tax The effective tax rate for the three months ended March 31, 2005 was 39.3% and reflects an increase from 37.6% for the three months ended March 31, 2004. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, particularly from increase in cash value of life insurance, tax-exempt loans and state and municipal securities. -21- Classified Assets The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all nonperforming assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated (dollars in thousands): At March 31, 2005 At December 31, 2004 ------------------------- ------------------------ Gross Guaranteed Net Gross Guaranteed Net ----------------------------------------------------- Classified loans $15,859 $8,263 $7,596 $22,337 $9,436 $12,901 Other classified assets - - - - - - ----------------------------------------------------- Total classified assets $15,859 $8,263 $7,596 $22,337 $9,436 $12,901 ===================================================== Allowance for losses/classified loans 213.2% 124.5% Allowance for loan losses/classified loans 191.7% 112.6% Classified assets, net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies decreased $5,305,000 (41.1%) to $7,596,000 at March 31, 2005 from $12,901,000 at December 31, 2004. Nonperforming Loans Loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the following occurs: the loan becomes 90 days past due as to interest or principal, the full and timely collection of additional interest or principal becomes uncertain, the loan is classified as doubtful by internal credit review or bank regulatory agencies, a portion of the principal balance has been charged off, or the Company takes possession of the collateral. Loans that are placed on nonaccrual even though the borrowers continue to repay the loans as scheduled are classified as "performing nonaccrual" and are included in total nonperforming loans. The reclassification of loans as nonaccrual does not necessarily reflect Management's judgment as to whether they are collectible. Interest income is not accrued on loans where Management has determined that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, any previously accrued but unpaid interest is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Interest income on nonaccrual loans, which would have been recognized during the three months, ended March 31, 2005, if all such loans had been current in accordance with their original terms, totaled $408,000. Interest income actually recognized on these loans during the three months ended March 31, 2005 was $5,000. 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 $834,000 (17.0%) to $4,072,000 during the first three months of 2005. Nonperforming assets net of guarantees represent 0.25% of total assets. All nonaccrual loans are considered to be impaired when determining the need for a specific valuation allowance. The Company continues to make a concerted effort to work problem and potential problem loans to reduce risk of loss.
(dollars in thousands): At March 31, 2005 At December 31, 2004 ------------------------- ------------------------- Gross Guaranteed Net Gross Guaranteed Net ------------------------------------------------------ Performing nonaccrual loans $9,305 $7,347 $1,958 $11,043 $7,442 $3,601 Nonperforming, nonaccrual loans 2,288 174 2,114 1,418 174 1,244 ------------------------------------------------------ Total nonaccrual loans 11,593 7,521 4,072 12,461 7,616 4,845 Loans 90 days past due and still accruing - - - 61 - 61 ------------------------------------------------------ Total nonperforming loans 11,593 7,521 4,072 12,522 7,616 4,906 Other real estate owned - - - - - - ------------------------------------------------------ Total nonperforming assets $11,593 $7,521 $4,072 $12,522 $7,616 $4,906 ====================================================== Nonperforming loans/total loans 0.34% 0.42% Nonperforming assets/total assets 0.25% 0.30% Allowance for losses/nonperforming loans 398% 327% Allowance for loan losses/nonperforming loans 358% 296%
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. -23- The Company's method for assessing the appropriateness of the allowance for loan losses and the reserve for unfunded commitments includes specific allowances for identified problem loans and leases as determined by SFAS 114, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. Allowances for specific loans are based on SFAS 114 analysis of individual credits. Allowances for changing environmental factors are Management's best estimate of the probable impact these changes have had on the loan portfolio as a whole. This process is explained in detail in the notes to the Company's Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2004. Based on the current conditions of the loan portfolio, Management believes that the allowance for loan losses and the reserve for unfunded commitments, which collectively stand at $16,195,000 at March 31, 2005, are adequate to absorb probable losses inherent in the Company's loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. The following tables summarize the activity in the allowance for loan losses, reserve for unfunded commitments, and allowance for losses (which is comprised of the allowance for loan losses and the reserve for unfunded commitments) for the periods indicated (dollars in thousands): Three months ended March 31, ---------------------------- 2005 2004 ---------------------------- Allowance for loan losses: Balance at beginning of period $14,525 $12,890 Provision for loan losses 100 613 Loans charged off (295) (188) Recoveries of previously charged-off loans 233 62 ---------------------------- Net charge-offs (62) (126) ---------------------------- Balance at end of period $14,563 $13,377 ============================ Reserve for unfunded commitments: Balance at beginning of period $1,532 $883 Provision for losses - unfunded commitments 100 37 ---------------------------- Balance at end of period $1,632 $920 ============================ Balance at end of period: Allowance for loan losses $14,563 $13,377 Reserve for unfunded commitments 1,632 920 ---------------------------- Allowance for losses $16,195 $14,297 ============================ As a percentage of total loans: Allowance for loan losses 1.23% 1.35% Reserve for unfunded commitments 0.14% 0.09% ---------------------------- Allowance for losses 1.37% 1.44% ============================ -24- Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management. On March 11, 2004, the Company's Board of Directors approved a two-for-one stock split of its common stock. The stock split was effected in the form of a stock dividend that entitled each shareholder 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 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 March 31, 2005, the Company had repurchased 236,400 shares under this plan as adjusted for the 2-for-1 stock split paid on April 30, 2004, which left 263,600 shares available for repurchase under the plan. The Company's primary capital resource is shareholders' equity, which was $139,634,000 at March 31, 2005. This amount represents an increase of $1,502,000 from December 31, 2004, the net result of comprehensive income for the period ($3,349,000) and the issuance of common shares via the exercise of stock options ($171,000), partially offset by the repurchase of common stock ($286,000) and dividends paid ($1,732,000). The Company's ratio of equity to total assets was 8.43%, 8.92%, and 8.49% as of March 31, 2005, March 31, 2004, and December 31, 2004, respectively. The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated: At March 31, At Minimum ----------------- December 31, Regulatory 2005 2004 2004 Requirement ------------------------------------------------ Tier I Capital 10.81% 10.31% 10.67% 4.00% Total Capital 11.91% 11.49% 11.86% 8.00% Leverage ratio 9.95% 8.80% 9.86% 4.00% Off-Balance Sheet Items The Bank has certain ongoing commitments under operating and capital leases. These commitments do not significantly impact operating results. As of March 31, 2005 commitments to extend credit and commitments related to the Bank's deposit overdraft privilege product were the Bank's only financial instruments with off-balance sheet risk. The Bank has not entered into any contracts for financial derivative instruments such as futures, swaps, options, etc. Commitments to extend credit were $474,291,000 and $445,054,000 at March 31, 2005 and December 31, 2004, respectively, and represent 40.1% of the total loans outstanding at March 31, 2005 versus 38.0% at December 31, 2004. Commitments related to the Bank's deposit overdraft privilege product totaled $31,348,000 and $28,815,000 at March 31, 2005 and December 31, 2004, respectively. -25- Certain Contractual Obligations The following chart summarizes certain contractual obligations of the Company as of December 31, 2004:
Less than 1-3 3-5 More than (dollars in thousands) Total one year years years 5 years ------------------------------------------------------------------ Federal funds purchased $46,400 $46,400 - - - 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 344 - - 344 - Other collateralized borrowings, fixed rate of 0.91% payable on January 2, 2005 5,308 5,308 - - - Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a quarterly basis beginning October 7, 2008, matures October 7, 2033 20,619 - - - 20,619 Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.55%, callable in whole or in part by the Company on a quarterly basis beginning July 23, 2009, matures July 23, 2034 20,619 - - - 20,619 Operating lease obligations 6,806 1,327 $2,202 1,662 1,615 Deferred compensation plans(1) 1,544 262 462 427 393 Supplemental retirement plans(1) 4,996 488 956 926 2,626 Employment agreements 233 115 118 - - ------------------------------------------------------------------ Total contractual obligations $129,369 $53,900 $3,738 $25,859 $45,872 ==================================================================
(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. At March 31, 2005, the results of the simulations noted above indicate that given a "flat" balance sheet scenario, and if deposit rates track general interest rate changes by approximately 50%, the Company's balance sheet is slightly liability sensitive. "Liability sensitive" implies that earnings decrease when interest rates rise, and increase when interest rates decrease. The magnitude of all the simulation results noted above is within the Bank's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. At March 31, 2005 and 2004, the Company had no derivative financial instruments. -27- Liquidity The Company's principal source of asset liquidity is federal funds sold and marketable investment securities available for sale. At March 31, 2005, federal funds sold and investment securities available for sale totaled $293,911,000, representing an increase of $7,898,000 or 2.8% from December 31, 2004, and a decrease of $13,736,000 or 4.5% from March 31, 2004. In addition, the Company generates additional liquidity from its operating activities. The Company's profitability during the first three months of 2005 generated cash flows from operations of $7,446,000 compared to $6,506,000 during the first three months of 2004. 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 $14,244,000 during the three months ended March 31, 2005 compared to $19,662,000 for the three months ended March 31, 2004. During the three months ended March 31, 2005, the Company invested $25,525,000 and $9,528,000 in securities and net loan growth, respectively, compared to $15,249,000 and $11,731,000 invested in securities and net loan growth, respectively, during the first three months of 2004. These changes in investment and loan balances contributed to net cash used for investing activities of $22,317,000 during the three months ended March 31, 2005, compared to net cash used for investing activities of $7,931,000 during the three months ended March 31, 2004. Financing activities provided net cash of $22,380,000 during the three months ended March 31, 2005, compared to net cash used by financing activities of $23,936,000 during the three months ended March 31, 2004. Deposit balance increases and exercise of common stock options accounted for $49,916,000 and $158,000 of financing sources of funds, respectively, during the three months ended March 31, 2005, compared to deposit balance increases and exercise of common stock options that accounted for $3,116,000 and $540,000 of financing sources of funds, respectively, during the three months ended March 31, 2004. Dividends paid used $1,732,000 and $1,589,000 of cash during the three months ended March 31, 2005 and March 31, 2004, respectively. A decrease in Federal funds purchased and the repurchase of common stock used $25,700,000 and $286,000 of cash, respectively, during the quarter ended March 31, 2005. Also, the Company's liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions. Item 4. Controls and Procedures The Chief Executive Officer, Richard Smith, and the Chief Financial Officer, Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2005 ("Evaluation Date"). Based on that evaluation, they concluded that as of the Evaluation Date the Company's disclosure controls and procedures are effective to allow timely communication to them of information relating to the Company and the Bank required to be disclosed in its filings with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. No changes in the Company's internal control over financial reporting occurred during the first quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -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 first quarter of 2005 pursuant to the Company's stock repurchase plan originally announced on July 31, 2003, as amended on March 11, 2004, to conform with the Company's two-for-one stock split effective on April 9, 2004, which is discussed in more detail under "Capital Resources" in this report:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number of Shares purchased paid per share shares purchased as of shares that may yet part of publicly be purchased under the announced plans or plans or programs programs - ----------------------------------------------------------------------------------------------------------- Jan. 1-31, 2005 - - - 277,400 Feb. 1-28, 2005 - - - 277,400 Mar. 1-31, 2005 13,800 $20.78 13,800 263,600 - ----------------------------------------------------------------------------------------------------------- Total 13,800 $20.78 13,800 263,600
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). -29- 10.5* TriCo's Incentive Stock Option Plan filed as Exhibit 4.3 to TriCo's Form S-8 Registration Statement dated January 18, 1995 (No. 33-88704). 10.6* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated August 23, 1995 (No. 33-62063). 10.7* TriCo's 2001 Stock Option Plan as amended filed as Exhibit 10.7 to TriCo's Annual Report on Form 10-K for the year ended December 31, 2004. 10.8* Employment Agreement between TriCo and Richard Smith dated April 20, 2004 filed as Exhibit 10.8 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.9* Tri Counties Bank Executive Deferred Compensation Plan dated September 1, 1987, as restated April 1, 1992, and amended and restated effective as of January 1, 2004 filed as Exhibit 10.9 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.10* Tri Counties Bank Deferred Compensation Plan for Directors effective April 1, 1992, as amended and restated effective as of January 1, 2004 filed as Exhibit 10.10 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.11* Amendments to Tri Counties Bank Executive Deferred Compensation Plan referenced at Exhibit 10.9, effective as of January 1, 2005 filed as Exhibit 10.11 to TriCo's Annual Report on Form 10-K for the year ended December 31, 2004. 10.12* Amendments to Tri Counties Bank Deferred Compensation Plan for Directors referenced at Exhibit 10.10, effective as of January 1, 2005 filed as Exhibit 10.12 to TriCo's Annual Report on Form 10-K for the year ended December 31, 2004. 10.13* Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, and amended and restated January 1, 2004 filed as Exhibit 10.12 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.14* 2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 filed as Exhibit 10.13 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.15* Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January 1, 2004 filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.16* 2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January 1, 2004 filed as Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. -30- 10.17* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Andrew Mastorakis, Richard O'Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith, filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.18* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Wendell Lundberg, Donald Murphy, Carroll Taresh, and Alex Vereshagin, filed as Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.19* Form of Tri-Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Craig Carney, Andrew Mastorakis, Richard Miller, Richard O'Sullivan, and Thomas Reddish, filed as Exhibit 10.16 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.20* Form of Tri-Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Verischagin, filed as Exhibit 10.17 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.21* Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of the directors of TriCo Bancshares/Tri Counties Bank effective on the date that each director is first elected, filed as Exhibit 10.18 to TriCo'S Annual Report on Form 10-K for the year ended December 31, 2003. 10.22* Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of Craig Carney, W.R. Hagstrom, Andrew Mastorakis, Rick Miller, Richard O'Sullivan, Thomas Reddish, Ray Rios, and Richard Smith filed as Exhibit 10.21 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 21.1 Tri Counties Bank, a California banking corporation, TriCo Capital Trust I, a Delaware business trust, and TriCo Capital Trust II, a Delaware business trust, are the only subsidiaries of Registrant 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO 32.1 Section 1350 Certification of CEO 32.2 Section 1350 Certification of CFO * Previously filed and incorporated by reference. -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: May 4, 2005 /s/ Thomas J. Reddish ----------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer -32- EXHIBITS Exhibit 31.1 Rule 13a-14/15d-14 Certification of CEO I, Richard P. Smith, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 4, 2005 /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-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 4, 2005 /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 March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 Section 1350 Certification of CFO In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ended March 31, 2005 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-----