UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly Period Ended March 31, 2007 Commission file number 0-10661 - ----------------------------------------- ------------------------------ TRICO BANCSHARES (Exact name of registrant as specified in its charter) California 94-2792841 - ------------------------------ ------------------- (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 63 Constitution Drive, Chico, California 95973 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (530) 898-0300 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Act (check one). Large accelerated filer Accelerated filer X Non-accelerated filer ----- ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of Class: Common stock, no par value Outstanding shares as of April 20, 2007: 15,917,291
TABLE OF CONTENTS Page Forward-Looking Statements 1 PART I - FINANCIAL INFORMATION 2 Item 1 - Financial Statements 2 Notes to Unaudited Condensed Consolidated Financial Statements 6 Financial Summary 16 Item 2 - Management's Discussion and Analysis of Financial 17 Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures about Market Risk 25 Item 4 - Controls and Procedures 26 PART II - OTHER INFORMATION 27 Item 1 - Legal Proceedings 27 Item 1A - Risk Factors 27 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 27 Item 6 - Exhibits 27 Signatures 30 Exhibits 31
FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the "Company") for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management's current knowledge and belief and include information concerning the Company's possible or assumed future financial condition and results of operations. When you see any of the words "believes", "expects", "anticipates", "estimates", or similar expressions, mean making forward-looking statements. A number of factors, some of which are beyond the Company's ability to predict or control, could cause future results to differ materially from those contemplated. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2006, and Part II, Item 1A of this report for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. 1
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Item 1. Financial Statements TRICO BANCSHARES CONSOLIDATED BALANCE SHEETS (In thousands, except share data; unaudited) At March 31, At December 31, 2007 2006 2006 ------------------------------- ----------------- <S> <C> <C> <C> Assets: Cash and due from banks $75,263 $78,742 $102,220 ------------------------------- ----------------- Federal funds sold - - 794 Cash and cash equivalents 75,263 78,742 103,014 Securities available-for-sale 188,478 244,441 198,361 Federal Home Loan Bank stock, at cost 8,442 7,691 8,320 Loans, net of allowance for loan losses of $16,895, $16,644 and $16,914 1,478,719 1,383,464 1,492,965 Foreclosed assets, net of allowance for losses of $180 187 - - Premises and equipment, net 20,924 21,068 21,830 Cash value of life insurance 43,941 42,168 43,536 Accrued interest receivable 8,355 7,549 8,727 Goodwill 15,519 15,519 15,519 Other intangible assets, net 1,543 4,061 1,666 Other assets 24,950 24,823 26,028 ------------------------------- ----------------- Total Assets $1,866,321 $1,829,526 $1,919,966 =============================== ================= Liabilities: Deposits: Noninterest-bearing demand $364,401 $354,514 $420,025 Interest-bearing 1,172,448 1,172,877 1,179,124 ------------------------------- ----------------- Total deposits 1,536,849 1,527,391 1,599,149 Federal funds purchased 38,000 45,800 38,000 Accrued interest payable 7,602 5,263 7,548 Reserve for unfunded commitments 1,966 1,813 1,849 Other liabilities 24,922 23,783 22,835 Other borrowings 41,347 31,441 39,911 Junior subordinated debt 41,238 41,238 41,238 ------------------------------- ----------------- Total Liabilities 1,691,924 1,676,729 1,750,530 ------------------------------- ----------------- Commitments and contingencies Shareholders' Equity: Common stock, no par value: 50,000,000 shares authorized; issued and outstanding: 15,910,291 at March 31, 2007 76,087 15,778,090 at March 31, 2006 72,255 15,857,207 at December 31, 2006 73,739 Retained earnings 102,298 85,872 100,218 Accumulated other comprehensive loss, net (3,988) (5,330) (4,521) ------------------------------- ----------------- Total Shareholders' Equity 174,397 152,797 169,436 ------------------------------- ----------------- Total Liabilities and Shareholders' Equity $1,866,321 $1,829,526 $1,919,966 =============================== ================= </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 2
TRICO BANCSHARES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data; unaudited) Three months ended March 31, 2007 2006 ---------------------------- Interest and dividend income: Loans, including fees $28,423 $25,069 Debt securities: Taxable 1,719 2,356 Tax exempt 394 462 Dividends 122 84 Federal funds sold 3 7 ---------------------------- Total interest income 30,661 27,978 ---------------------------- Interest Expense: Deposits 7,388 4,942 Federal funds purchased 522 750 Other borrowings 490 348 Junior subordinated debt 816 733 ---------------------------- Total interest expense 9,216 6,773 ---------------------------- Net interest income 21,445 21,205 ---------------------------- Provision for loan losses 482 500 ---------------------------- Net interest income after provision for loan losses 20,963 20,705 ---------------------------- Noninterest income: Service charges and fees 5,061 4,857 Gain on sale of loans 266 298 Commissions on sale of non-deposit investment products 500 558 Increase in cash value of life insurance 405 400 Other 368 335 ---------------------------- Total noninterest income 6,600 6,448 ---------------------------- Noninterest expense: Salaries and related benefits 9,742 9,156 Other 7,218 7,266 ---------------------------- Total noninterest expense 16,960 16,422 ---------------------------- Income before income taxes 10,603 10,731 ---------------------------- Provision for income taxes 4,159 4,196 ---------------------------- Net income $6,444 $6,535 ============================ Average shares outstanding 15,878,929 15,736,544 Diluted average shares outstanding 16,415,845 16,379,595 Per share data: Basic earnings $0.41 $0.42 Diluted earnings $0.39 $0.40 Dividends paid $0.13 $0.12 See accompanying notes to unaudited condensed consolidated financial statements. 3
<TABLE> <CAPTION> TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data; unaudited) Accumulated Shares of Other Common Common Retained Comprehensive Stock Stock Earnings Loss Total ------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at December 31, 2005 15,707,835 $71,412 $81,906 ($3,825) $149,493 Comprehensive income: Net income 6,535 6,535 Change in net unrealized loss on Securities available for sale, net (1,505) (1,505) ------- Total comprehensive income 5,030 Stock option vesting 139 139 Stock options exercised 100,380 841 841 Repurchase of common stock (30,125) (137) (678) (815) Dividends paid ($0.12 per share) (1,891) (1,891) ------------------------------------------------------------- Balance at March 31, 2006 15,778,090 $72,255 $85,872 ($5,330) $152,797 ============================================================= Balance at December 31, 2006 15,857,207 $73,739 $100,218 ($4,521) $169,436 Comprehensive income: Net income 6,444 6,444 Change in net unrealized loss on Securities available for sale, net 533 533 ------ Total comprehensive income 6,977 Stock option vesting 175 175 Stock options exercised 170,600 1,867 1,867 Tax benefit of stock option exercise 852 852 Repurchase of common stock (117,516) (546) (2,295) (2,841) Dividends paid ($0.13 per share) (2,069) (2,069) ------------------------------------------------------------- Balance at March 31, 2007 15,910,291 $76,087 $102,298 ($3,988) $174,397 ============================================================= </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 4
<TABLE> <CAPTION> TRICO BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands; unaudited) For the three months ended March 31, 2007 2006 ------------------------------------ <S> <C> <C> Operating activities: Net income $6,444 $6,535 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment, and amortization 930 981 Amortization of intangible assets 123 346 Provision for loan losses 482 500 Amortization of investment securities premium, net 200 242 Originations of loans for resale (18,666) (17,935) Proceeds from sale of loans originated for resale 18,737 18,064 Gain on sale of loans (266) (298) Change in fair value of mortgage servicing rights 12 (50) Loss on sale of fixed assets 5 1 Increase in cash value of life insurance (405) (400) Stock option expense 175 139 Change in: Interest receivable 372 92 Interest payable 54 757 Other assets and liabilities, net 4,074 1,909 ------------------------------------ Net cash provided by operating activities 12,271 10,883 ------------------------------------ Investing activities: Proceeds from maturities of securities available-for-sale 10,604 13,894 Purchases of securities available-for-sale - (896) Purchase of Federal Home Loan Bank stock (122) (89) Loan originations and principal collections, net 13,577 (15,155) Proceeds from sale of premises and equipment 11 1 Purchases of premises and equipment (856) (615) ------------------------------------ Net cash provided (used) by investing activities 23,214 (2,860) ------------------------------------ Financing activities: Net (decrease) increase in deposits (62,300) 30,594 Net change in federal funds purchased - (51,000) Payments of principal on long-term other borrowings (18) (14) Net change in short-term other borrowings 1,454 65 Repurchase of Common Stock (470) - Dividends paid (2,069) (1,891) Exercise of stock options 167 26 ------------------------------------ Net cash used by financing activities (63,236) (22,220) ------------------------------------ Net change in cash and cash equivalents (27,751) (14,197) ------------------------------------ Cash and cash equivalents at beginning of period 103,014 92,939 ------------------------------------ Cash and cash equivalents at end of period $75,263 $78,742 ==================================== Supplemental disclosure of noncash activities: Loans transferred to other real estate owned $187 - Unrealized gain (loss) on securities available for sale $921 ($2,597) Value of shares tendered in lieu of cash paid to exercise stock options and to pay related tax withholding $2,371 $815 Supplemental disclosure of cash flow activity: Cash paid for interest expense $9,162 $6,016 Cash paid for income taxes - $900 Income tax benefit from stock option exercises $852 - </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: General Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three month periods ended March 31, 2007 and 2006 are not necessarily indicative of the results expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006. Principles of Consolidation The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company operates 32 branch offices and 22 in-store branch offices in the California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Nevada, Placer, Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo and Yuba. The Company's operating policy since its inception has emphasized retail banking. Most of the Company's customers are retail customers and small to medium sized businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The allowance for loan losses, goodwill and other intangible assessments, income taxes, and the valuation of mortgage servicing rights, are the only accounting estimates that materially affect the Company's consolidated financial statements. Significant Group Concentration of Credit Risk The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio within the business segments located in this geographical area. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Investment Securities The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the three months ended March 31, 2007, and throughout 2006, the Company did not have any securities classified as either held-to-maturity or trading. 6
Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of other accumulated comprehensive loss in shareholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that an other than temporary decline in value has occurred. Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank of San Francisco ("FHLB"), and as a condition of membership, it is required to purchase stock. The amount of FHLB stock required to be purchased is based on the borrowing capacity desired by the Bank. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Such investment is carried at cost. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors of current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to income. At March 31, 2007 and 2006, and December 31, 2006, the Company's balance of loans held for sale was immaterial. Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. Loans Loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield over the estimated life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in Management's judgment are well secured and in the process of collection, they may be classified as accrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. All impaired loans are classified as nonaccrual loans. Reserve for Unfunded Commitments The reserve for unfunded commitments is established through a provision for losses - unfunded commitments charged to noninterest expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits, and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectibility, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower's or depositor's ability to pay. 7
Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans and leases, based on evaluations of the collectibility, impairment and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower's ability to pay. The Company defines a loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses inherent in the Company's loan portfolio. This is maintained through periodic charges to earnings. These charges are shown in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company's allowance for loan losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio. For purposes of this discussion, "loans" shall include all loans and lease contracts that are part of the Company's portfolio. The Company formally assesses the adequacy of the allowance on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding loan portfolio, and to a lesser extent the Company's loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occur at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies. The Company's method for assessing the appropriateness of the allowance for loan losses and the reserve for unfunded commitments includes specific allowances for identified problem loans and leases as determined by SFAS 114, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on the previous 5 years historical loss experience by product type. Allowances for specific loans are based on SFAS 114 analysis of individual credits. Allowances for changing environmental factors are Management's best estimate of the probable impact these changes have had on the loan portfolio as a whole. This process is explained in detail in the notes to the Company's audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2006. Based on the current conditions of the loan portfolio, Management believes that the allowance for loan losses and the reserve for unfunded commitments, which collectively stand at $18,861,000 at March 31, 2007, are adequate to absorb probable losses inherent in the Company's loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. 8
The following tables summarize the activity in the allowance for loan losses, reserve for unfunded commitments, and allowance for losses (which is comprised of the allowance for loan losses and the reserve for unfunded commitments) for the periods indicated (dollars in thousands): Three months ended March 31, ---------------------------- 2007 2006 ---------------------------- Allowance for loan losses: Balance at beginning of period $16,914 $16,226 Provision for loan losses 482 500 Loans charged off (739) (357) Recoveries of previously charged-off loans 238 275 ---------------------------- Net charge-offs (501) (82) ---------------------------- Balance at end of period $16,895 $16,644 ============================ Reserve for unfunded commitments: Balance at beginning of period $1,849 $1,813 Provision for losses - unfunded commitments 117 - ---------------------------- Balance at end of period $1,966 $1,813 ============================ Balance at end of period: Allowance for loan losses $16,895 $16,644 Reserve for unfunded commitments 1,966 1,813 ---------------------------- Allowance for losses $18,861 $18,457 ============================ As a percentage of total loans: Allowance for loan losses 1.13% 1.19% Reserve for unfunded commitments 0.13% 0.13% ---------------------------- Allowance for losses 1.26% 1.32% ============================ Mortgage Servicing Rights Mortgage servicing rights (MSRs) represent the Company's right to a future stream of cash flows based upon the contractual servicing fee associated with servicing mortgage loans. Our MSRs arise from residential mortgage loans that we originate and sell, but retain the right to service the loans. For sales of residential mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair values of the loan and the servicing right. The net gain from the retention of the servicing right is included in gain on sale of loans in noninterest income when the loan is sold. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. MSRs are included in other assets. Servicing fees are recorded in noninterest income when earned. Effective with the Company's early adoption of SFAS 156, beginning as of January 1, 2006 MSRs are carried at fair value, with changes in fair value reported in noninterest income in the period in which the change occurs. On or before December 31, 2005, MSRs were carried at the lower of amortized cost or market value. The cumulative effect related to the adoption of this change in accounting from lower of amortized cost or market value to fair value on January 1, 2006 was immaterial. The determination of fair value of our MSRs requires management judgment because they are not actively traded. The determination of fair value for MSRs requires valuation processes which combine the use of discounted cash flow models and extensive analysis of current market data to arrive at an estimate of fair value. The cash flow and prepayment assumptions used in our discounted cash flow model are based on empirical data drawn from the historical performance of our MSRs, which we believe are consistent with assumptions used by market participants valuing similar MSRs, and from data obtained on the performance of similar MSRs. The key assumptions used in the valuation of MSRs include mortgage prepayment speeds and the discount rate. These variables can, and generally will, change from quarter to quarter as market conditions and projected interest rates change. The key risks inherent with MSRs are prepayment speed and changes in interest rates. 9
The following tables summarize the activity in, and the main assumptions we used to determine the fair value of mortgage servicing rights for the periods indicated (dollars in thousands): Three months ended March 31, ---------------------------- 2007 2006 ---------------------------- Mortgage servicing rights: Balance at beginning of period $3,912 $3,638 Additions 195 169 Change in fair value (12) 50 ---------------------------- Balance at end of period $4,095 $3,857 ============================ Servicing fees received $243 $237 Balance of loans serviced at: Beginning of period $389,636 $373,163 End of period $393,594 $376,988 Weighted-average prepayment speed (CPR) 11.2% 10.5% Discount rate 10.0% 10.0% Off-Balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. Premises and Equipment Land is carried at cost. Buildings and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 years for land improvements and buildings. Foreclosed Assets Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Goodwill and Other Intangible Assets Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. The Company has identifiable intangible assets consisting of core deposit premiums and minimum pension liability. Core deposit premiums are amortized using an accelerated method over a period of ten years. Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates. 10
The following table summarizes the Company's goodwill intangible as of March 31, 2007 and December 31, 2006. December 31, March 31, (Dollar in Thousands) 2006 Additions Reductions 2007 ---------------------------------------------------- Goodwill $15,519 - - $15,519 The following table summarizes the Company's core deposit intangibles as of March 31, 2007 and December 31, 2006. December 31, March 31, (Dollar in Thousands) 2006 Additions Reductions 2007 --------------------------------------------------- Core deposit intangibles $13,643 - ($10,278) $3,365 Accumulated amortization (11,977) 10,278 (123) (1,822) Core deposit intangibles, $1,666 $10,278 ($10,401) $1,543 net =================================================== Core deposit intangibles are amortized over their expected useful lives. Such lives are periodically reassessed to determine if any amortization period adjustments are indicated. The following table summarizes the Company's estimated core deposit intangible amortization for each of the five succeeding years: Estimated Core Deposit Intangible Amortization Years Ended (Dollar in thousands) ----------- ---------------------- 2007 $490 2008 $523 2009 $328 2010 $260 2011 $65 Thereafter - Impairment of Long-Lived Assets and Goodwill Long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. On December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. 11
Income Taxes The Company's accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws. Stock-Based Compensation On January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), using the modified-prospective transition method. Under this transition method, compensation cost recognized during the quarters ended March 31, 2007 and March 31, 2006 include: (a) compensation cost for all share-based awards granted prior to, but not yet vested as of, January 1, 2007 and January 1, 2006, respectively, based on the grant-date fair value and related service period estimates in accordance with the original provisions of SFAS 123 and (b) compensation cost for all share-based awards granted subsequent to January 1, 2007 and January 1, 2006, respectively, based on the grant-date fair value and related service periods estimated in accordance with the provisions of SFAS 123R. Historically, stock options are the only type of share-based award granted by the Company. Prior to the adoption of SFAS 123R, the Company used the intrinsic value method to account for its stock option plans (in accordance with the provisions of Accounting Principles Board Opinion No. 25). Intrinsic value is the difference between share fair market value and option exercise price. Under this method, compensation expense was recognized for awards of options to purchase shares of common stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) was greater than the amount the employee was required to pay to acquire the stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), permitted companies to continue using the intrinsic value method or to adopt a fair value based method to account for stock option plans. The fair value based method would have resulted in the recognition, as expense over the vesting period, of the fair value of all stock-based awards on the date of grant. SFAS 123R clarifies and expands the guidance in SFAS 123 in several areas, including measuring fair value and attributing compensation cost to reporting periods. SFAS 123R includes a requirement to: (a) estimate forfeitures of share-based awards at the date of grant, (b) expense share-based awards granted to retirement eligible employees and those employees with non-substantive non-compete agreements immediately, (c) attribute compensation costs of share-based award grants to the stated future vesting period, (d) recognize compensation cost of all share-based awards based upon the grant-date fair value (including pre-2006 options). The following table shows the number, weighted-average exercise price, intrinsic value, weighted average remaining contractual life, average remaining vesting period, and remaining compensation cost to be recognized over the remaining vesting period of options exercisable, options not yet exercisable, and total options outstanding as of March 31, 2007: <TABLE> <CAPTION> Currently Currently Not Total (dollars in thousands except exercise price) Exercisable Exercisable Outstanding <S> <C> <C> <C> Number of options 1,125,577 217,304 1,342,881 Weighted average exercise price $11.49 $19.12 $12.73 Intrinsic value $13,708 $988 $14,696 Weighted average remaining contractual term (yrs.) 5.09 7.72 5.51 </TABLE> The options for 217,304 shares that are not currently exercisable as of March 31, 2007 are expected to vest, on a weighted-average basis, over the next 1.36 years, and the Company is expected to recognize $706,000 of compensation costs related to these options as they vest. 12
Earnings Per Share Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate solely from outstanding stock options, and are determined using the treasury stock method. Earnings per share have been computed based on the following: Three months ended March 31, 2007 2006 ----------------------------- (in thousands) Net income $6,444 $6,535 Average number of common shares outstanding 15,879 15,737 Effect of dilutive stock options 537 643 ----------------------------- Average number of common shares outstanding used to calculate diluted earnings per share 16,416 16,380 ============================= There were 42,000 and 0 options excluded from the computation of diluted earnings per share for the three month periods ended March 31, 2007 and 2006, respectively, because the effect of these options was antidilutive. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss) and related tax effects are as follows: Three months ended March 31, 2007 2006 ---------------------------- (in thousands) Unrealized holding gains (losses) on available- for-sale securities $921 ($2,597) Tax effect (388) 1,092 ---------------------------- Unrealized holding gains (losses) on available-for-sale securities, net of tax $533 ($1,505) ============================ The components of accumulated other comprehensive loss, included in shareholders' equity, are as follows: March 31, December 31, 2007 2006 ----------------------------- (in thousands) Net unrealized losses on available-for-sale securities ($2,934) ($3,855) Tax effect 1,233 1,621 ----------------------------- Unrealized holding losses on available-for-sale securities, net of tax (1,701) (2,234) ----------------------------- Minimum pension liability (3,946) (3,946) Tax effect 1,659 1,659 ----------------------------- Minimum pension liability, net of tax (2,287) (2,287) ----------------------------- Accumulated other comprehensive loss ($3,988) ($4,521) ============================= 13
Retirement Plans The Company has supplemental retirement plans for current and former directors and key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends to use the cash values of these policies to pay the retirement obligations. The following table sets forth the net periodic benefit cost recognized for the plans: Three Months Ended March 31, 2007 2006 ---------------------------- (in thousands) Net pension cost included the following components: Service cost-benefits earned during the period $150 $139 Interest cost on projected benefit obligation 146 132 Amortization of net obligation at transition - - Amortization of prior service cost 45 50 Recognized net actuarial loss 28 34 ---------------------------- Net periodic pension cost $369 $355 ============================ During the three months ended March 31, 2007 and 2006, the Company contributed and paid out as benefits $149,000 and $151,000, respectively, to participants under the plans. For the year ending December 31, 2007, the Company expects to contribute and pay out as benefits $528,000 to participants under the plans. Recent Accounting Pronouncements In February 2006, the FASB issued FASB Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS 155 on January 1, 2007 had no impact the Company's consolidated financial statements. In March 2006, the FASB issued FASB Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets, (SFAS 156) an amendment of FASB Statement No. 140. SFAS 156 requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value basis or a fair value measurement basis. The Company elected to early adopt SFAS 156 as of January 1, 2006 and to measure residential mortgage servicing rights (MSRs) at fair value. At December 31, 2005, MSRs were accounted for at the lower of amortized cost or market value basis. As a result of adopting SFAS 156, there was no adjustment to opening retained earnings as of January 1, 2006, representing the effect of remeasuring all MSRs that existed at December 31, 2005 from a lower of amortized cost or market basis to a fair value basis, as this amount was immaterial. In September 2006, the FASB issued FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company's consolidated financial statements. 14
In September 2006, the FASB issued FASB Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of defined benefit postretirement plans as an asset or a liability in its statement of financial position. The funded status is measured as the difference between plan assets at fair value and the benefit obligation (the projected benefit obligation for pension plans or the accumulated benefit obligation for other postretirement benefit plans). An employer is also required to measure the funded status of a plan as of the date of its year-end statement of financial position with changes in the funded status recognized through comprehensive income. SFAS 158 also requires certain disclosures regarding the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and the transition asset or obligation. The Company was required to recognize the funded status of its defined benefit post-retirement benefit plans in its consolidated financial statements for the year ended December 31, 2006. The Company had previously recognized the funded status of its supplemental retirement plans for directors and key executives in prior consolidated financial statements. The Company has no other defined benefit post-retirement benefit plans. The requirement to measure plan assets and benefit obligations as of the date of the year-end statement of financial position is effective for the Company's consolidated financial statements beginning with the fiscal year ended after December 15, 2008. The Company currently uses December 31 as the measurement date for its defined benefit post-retirement benefit plans. In February 2007, the FASB issued FASB Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment to FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company's consolidated financial statements. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. FIN 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. FIN 48 was effective for the Company on January 1, 2007 and did not have a significant impact on the Company's consolidated financial statements. Reclassifications Certain amounts previously reported in the 2006 financial statements have been reclassified to conform to the 2007 presentation. These reclassifications did not affect previously reported net income or total shareholders' equity. 15
TRICO BANCSHARES Financial Summary (in thousands, except per share amounts) (Unaudited) Three months ended March 31, ---------------------------- 2007 2006 ---------------------------- Net Interest Income (FTE) $21,666 $21,468 Provision for loan losses (482) (500) Noninterest income 6,600 6,448 Noninterest expense (16,960) (16,422) Provision for income taxes (FTE) (4,380) (4,459) --------------------------- Net income $6,444 $6,535 =========================== Earnings per share: Basic $0.41 $0.42 Diluted $0.39 $0.40 Per share: Dividends paid $0.13 $0.12 Book value at period end 10.96 9.68 Tangible book value at period end 9.89 8.44 Average common shares outstanding 15,879 15,737 Average diluted common shares outstanding 16,416 16,380 Shares outstanding at period end 15,910 15,778 At period end: Loans, net $1,478,719 $1,383,464 Total assets 1,866,321 1,829,526 Total deposits 1,536,849 1,527,391 Other borrowings 41,347 31,441 Junior subordinated debt 41,238 41,238 Shareholders' equity 174,397 152,797 Financial Ratios: During the period (annualized): Return on assets 1.38% 1.43% Return on equity 14.79% 16.93% Net interest margin(1) 5.12% 5.21% Net loan charge-offs to average loans 0.13% 0.01% Efficiency ratio(1) 60.00% 58.83% Average equity to average assets 9.34% 8.47% At period end: Equity to assets 9.34% 8.35% Total capital to risk-adjusted assets 11.76% 11.09% Allowance for losses to loans(2) 1.26% 1.32% (1) Fully taxable equivalent (FTE) (2) Allowance for losses includes allowance for loan losses and reserve for unfunded commitments. 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management's Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. The presentation of interest income and net interest income on a FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a non-FTE basis in the Part I - Financial Information section of this Form 10-Q, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, intangible assets, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See caption "Allowance for Loan Losses" for a more detailed discussion). Results of Operations The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report. The Company had quarterly earnings of $6,444,000, or $0.39 per diluted share, for the three months ended March 31, 2007. These results represent a 2.5% decrease from the $0.40 earnings per diluted share reported for the three months ended March 31, 2006 on earnings of $6,535,000. The decrease in results from the year-ago quarter was primarily due to a $198,000 (0.9%) increase in fully tax-equivalent net interest income to $21,666,000, and a $152,000 (2.4%) increase in noninterest income, offset by a $538,000 (3.3%) increase in noninterest expense to $16,960,000 for the quarter ended March 31, 2007. Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands): Three months ended March 31, --------------------------- 2007 2006 --------------------------- Net Interest Income (FTE) $21,666 $21,468 Provision for loan losses (482) (500) Noninterest income 6,600 6,448 Noninterest expense (16,960) (16,422) Provision for income taxes (FTE) (4,380) (4,459) --------------------------- Net income $6,444 $6,535 =========================== 17
Net Interest Income Following is a summary of the components of net interest income for the periods indicated (dollars in thousands): Three months ended March 31, ----------------------- 2007 2006 ----------------------- Interest income $30,661 $27,978 Interest expense (9,216) (6,773) FTE adjustment 221 263 ----------------------- Net interest income (FTE) $21,666 $21,468 ======================= Average earning assets $1,692,574 $1,646,777 Net interest margin (FTE) 5.12% 5.21% The Company's primary source of revenue is net interest income, or the difference between interest income on earning assets and interest expense in interest-bearing liabilities. Net interest income (FTE) during the first quarter of 2007 increased $198,000 (0.9%) from the same period in 2006 to $21,666,000. The increase in net interest income (FTE) was due to a $45,797,000 (2.8%) increase in average balances of earning assets to $1,692,574,000 and a 0.09% decrease in net interest margin (FTE) to 5.12%. Interest and Fee Income Interest and fee income (FTE) for the first quarter of 2007 increased $2,641,000 (9.4%) from the first quarter of 2006. The increase was due to the $45,797,000 (2.8%) increase in average interest-earning assets and a 0.44% increase in the yield on those average earning assets to 7.30%. The growth in interest-earning assets was the result of a $105,514,000 (7.6%) increase in average loan balances to $1,490,055,000 that was offset by a $56,092,000 (24.8%) decrease in average balance of investments to $170,072,000. Contributing to the 0.44% increase in average yield on interest-earning assets was a 0.39% increase in average yield on loans to 7.63% in the quarter ended March 31, 2007 compared to 7.24% in the year-ago quarter. This 0.39% increase in average yield on loans is primarily the result of increases in short-term lending rates including the prime rate of lending which increased steadily from 7.25% at December 31, 2005 to 8.25% at June 30, 2006. The average yield on the Company's combined taxable and nontaxable investment balances was relatively unchanged at 4.86% in the quarter ended March 31, 2007 compared to 4.84% in the year-ago quarter. Interest Expense Interest expense increased $2,443,000 (36.1%) in the first quarter of 2007 compared to the year-ago quarter. The increase was primarily due to a 0.74% increase in the average rate paid on interest-bearing liabilities from 2.11% in the first quarter of 2006 to 2.85% in the first quarter of 2007. The average balance of interest-bearing liabilities increased $10,488,000 (0.8%) in the first quarter of 2007 compared to the year-ago quarter. The average balance of noninterest-bearing deposits, time deposits, and other borrowings were up $6,336,000 (1.8%), $97,029,000 (20.9%) and $9,578,000 (29.9%), respectively, from the year-ago quarter. The average balance of interest-bearing demand deposits, and savings deposits were down $17,394,000 (7.0%) and $50,323,000 (11.6%), respectively, from the year-ago quarter. The average rates paid for all categories of interest-bearing liabilities were up due to increases in market rates. The average rate paid on interest-bearing demand deposits, savings deposits, time deposits, federal funds purchased, other borrowings and junior subordinated debt increased 0.01%, 0.09%, 1.14%, 0.86%, 0.36% and 0.81%, respectively, to 0.21%, 0.83%, 4.61%, 5.28%, 4.71% and 7.92%, respectively. 18
Net Interest Margin (FTE) The following table summarizes the components of the Company's net interest margin for the periods indicated: Three months ended March 31, ------------------- 2007 2006 ------------------- Yield on earning assets 7.30% 6.86% Rate paid on interest-bearing liabilities 2.85% 2.11% ------------------- Net interest spread 4.45% 4.75% Impact of all other net noninterest-bearing funds 0.67% 0.46% ------------------- Net interest margin 5.12% 5.21% =================== Net interest margin in the first quarter of 2007 decreased 0.09% compared to the first quarter of 2006. This decrease in net interest margin was due to a 0.30% decrease in net interest spread that was partially offset by a 0.21% favorable increase in the impact of all other net noninterest-bearing funds when compared to the year-ago quarter. Summary of Average Balances, Yields/Rates and Interest Differential The following table presents, for the periods indicated, information regarding the Company's consolidated average assets, liabilities and shareholders' equity, the amounts of interest income from average earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands). <TABLE> <CAPTION> For the three months ended ---------------------------------------------------------------- March 31, 2007 March 31, 2006 ----------------------------- -------------------------------- Interest Rates Interest Rates Average Income/ Earned Average Income/ Earned Balance Expense Paid Balance Expense Paid ----------------------------- -------------------------------- <S> <C> <C> <C> <C> <C> <C> Assets: Loans $1,490,055 $28,423 7.63% $1,384,541 $25,069 7.24% Investment securities - taxable 170,072 1,841 4.33% 226,164 2,440 4.32% Investment securities - nontaxable 32,165 615 7.64% 35,403 725 8.20% Federal funds sold 282 3 4.26% 669 7 4.19% ----------------------------- -------------------------------- Total earning assets 1,692,574 30,882 7.30% 1,646,777 28,241 6.86% Other assets 172,874 175,664 ---------- ---------- Total assets $1,865,448 $1,822,441 =========== ========== Liabilities and shareholders' equity: Interest-bearing demand deposits $230,072 122 0.21% $247,466 122 0.20% Savings deposits 381,883 797 0.83% 432,206 797 0.74% Time deposits 560,913 6,469 4.61% 463,884 4,023 3.47% Federal funds purchased 39,524 522 5.28% 67,926 750 4.42% Other borrowings 41,584 490 4.71% 32,006 348 4.35% Junior subordinated debt 41,238 816 7.92% 41,238 733 7.11% ----------------------------- ------------------------------- Total interest-bearing liabilities 1,295,214 9,216 2.85% 1,284,726 6,773 2.11% Noninterest-bearing deposits 361,605 355,269 Other liabilities 34,367 28,036 Shareholders' equity 174,262 154,410 ---------- ---------- Total liabilities and shareholders' $1,865,448 $1,822,441 equity ========== ========== Net interest spread(1) 4.45% 4.75% Net interest income and interest margin(2) $21,666 5.12% $21,468 5.21% =============== ================ </TABLE> (1) Net interest spread represents the average yield earned on assets minus the average rate paid on interest-bearing liabilities. (2) Net interest margin is computed by calculating the difference between interest income and expense, divided by the average balance of earning assets. 19
Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid The following table sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (dollars in thousands). Three months ended March 31, 2007 compared with three months ended March 31, 2006 --------------------------------- Volume Rate Total --------------------------------- Increase (decrease) in interest income: Loans $1,910 $1,444 $3,354 Investment securities (718) 8 (710) Federal funds sold (4) - (4) --------------------------------- Total earning assets 1,188 1,452 2,640 --------------------------------- Increase (decrease) in interest expense: Interest-bearing demand deposits (9) 9 - Savings deposits (93) 93 - Time deposits 842 1,604 2,446 Federal funds purchased (314) 86 (228) Other borrowings 104 38 142 Junior subordinated debt - 83 83 --------------------------------- Total interest-bearing liabilities 530 1,913 2,443 --------------------------------- Increase (decrease) in Net Interest Income $658 ($461) $197 ================================= Provision for Loan Losses The Company provided $482,000 for loan losses in the first quarter of 2007 versus $500,000 in the first quarter of 2006. During the first quarter of 2007, the Company recorded $501,000 of net loan charge-offs versus $82,000 of net loan charge-offs in the year-ago quarter. Noninterest Income The following table summarizes the components of noninterest income for the periods indicated (dollars in thousands). Three months ended March 31, ---------------------------- 2007 2006 ---------------------------- Service charges on deposit accounts $3,559 $3,474 ATM fees and interchange 949 818 Other service fees 565 515 Change in value of mortgage servicing rights (12) 50 Gain on sale of loans 266 298 Commissions on sale of nondeposit investment products 500 558 Increase in cash value of life insurance 405 400 Other noninterest income 368 335 --------------------------- Total noninterest income $6,600 $6,448 =========================== Noninterest income for the first quarter of 2007 increased $152,000 (2.4%) from the year-ago quarter. The increase in noninterest income from the year-ago quarter was mainly due to a $131,000 (16.0%) increase in ATM fees and interchange revenue to $949,000 and an $85,000 (2.4%) increase in service charges on deposit accounts to $3,559,000. The increase in these areas is mainly due to the expansion of the Company's ATM network and growth in number of customers. 20
Noninterest Expense The following table summarizes the components of noninterest expense for the periods indicated (dollars in thousands). Three months ended March 31, ---------------------------- 2007 2006 ---------------------------- Salaries & benefits $9,742 $9,156 Occupancy 1,170 1,022 Equipment 1,098 1,145 ATM network charges 428 434 Data processing and software 419 412 Telecommunications 409 370 Advertising and marketing 404 440 Professional fees 347 380 Courier service 298 297 Postage 221 244 Intangible amortization 123 346 Provision for losses - unfunded commitments 117 - Assessments 81 80 Operational losses 60 44 Other 2,043 2,052 ---------------------------- Total $16,960 $16,422 ============================ Average full time equivalent staff 632 607 Noninterest expense to revenue (FTE) 60.00% 58.83% Noninterest expense for the first quarter of 2007 increased $538,000 (3.3%) compared to the first quarter of 2006. Salaries and benefits expense increased $586,000 (6.4%) to $9,742,000. The increase in salaries and benefits expense was mainly due to annual salary increases, and a 4.1% increase in average full time equivalent staff made up primarily of new employees at the Company's recently opened branches. Other categories of noninterest expense such as equipment, occupancy and ATM network charges also increased, in part, due to these newly opened branches. Intangible amortization decreased $223,000 (64%) to $123,000 during the first quarter of 2007 as the core deposit intangible related to the purchase of several branches in 1997 became fully amortized in the fourth quarter of 2006. Provision for Income Tax The effective tax rate for the three months ended March 31, 2007 was 39.2% compared to 39.1% for the three months ended March 31, 2006. The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, particularly from increase in cash value of life insurance, tax-exempt loans and state and municipal securities. 21
Classified Assets The Company closely monitors the markets in which it conducts its lending operations and continues its strategy to control exposure to loans with high credit risk. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades fall under the "classified assets" category, which includes all nonperforming assets and potential problem loans, and receive an elevated level of attention to ensure collection. The following is a summary of classified assets on the dates indicated (dollars in thousands): At March 31, 2007 At December 31, 2006 ------------------------- ------------------------- Gross Guaranteed Net Gross Guaranteed Net ------------------------- ------------------------- Classified loans $22,554 $6,367 $16,187 $13,116 $6,514 $6,602 Other classified assets 187 - 187 - - - ----------------------------------------------------- Total classified assets $22,741 $6,367 $16,374 $13,116 $6,514 $6,602 ===================================================== Allowance for loan losses/classified loans 104.4% 256.2% Classified assets, net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies increased $9,772,000 (148.0%) to $16,374,000 at March 31, 2007 from $6,602,000 at December 31, 2006. Nonperforming Loans Loans are reviewed on an individual basis for reclassification to nonaccrual status when any one of the following occurs: the loan becomes 90 days past due as to interest or principal, the full and timely collection of additional interest or principal becomes uncertain, the loan is classified as doubtful by internal credit review or bank regulatory agencies, a portion of the principal balance has been charged off, or the Company takes possession of the collateral. Loans that are placed on nonaccrual even though the borrowers continue to repay the loans as scheduled are classified as "performing nonaccrual" and are included in total nonperforming loans. The reclassification of loans as nonaccrual does not necessarily reflect Management's judgment as to whether they are collectible. Interest income is not accrued on loans where Management has determined that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, any previously accrued but unpaid interest is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest. Interest income on nonaccrual loans, which would have been recognized during the three months ended March 31, 2007, if all such loans had been current in accordance with their original terms, totaled $397,000. Interest income actually recognized on these loans during the three months ended March 31, 2007 was $179,000. The Company's policy is to place loans 90 days or more past due on nonaccrual status. In some instances when a loan is 90 days past due Management does not place it on nonaccrual status because the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days. Loans where the collateral has been repossessed are classified as OREO or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements. 22
Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits. As shown in the following table, total nonperforming assets net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies, increased $1,666,000 (36.9%) to $6,178,000 during the first three months of 2007. Nonperforming assets net of guarantees represent 0.33% of total assets. All nonaccrual loans are considered to be impaired when determining the need for a specific valuation allowance. The Company continues to make a concerted effort to work problem and potential problem loans to reduce risk of loss. <TABLE> <CAPTION> At March 31, 2007 At December 31, 2006 ------------------------- ------------------------- Gross Guaranteed Net Gross Guaranteed Net (dollars in thousands): ------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Performing nonaccrual loans $11,724 $6,228 $5,496 $10,255 $6,372 $3,883 Nonperforming, nonaccrual loans 495 - 495 561 - 561 ------------------------------------------------------ Total nonaccrual loans 12,219 6,228 5,991 10,816 6,372 4,444 Loans 90 days past due and still accruing - - - 68 - 68 ------------------------------------------------------ Total nonperforming loans 12,219 6,228 5,991 10,884 6,372 4,512 Other real estate owned 187 - 187 - - - ------------------------------------------------------ Total nonperforming assets $12,406 $6,228 $6,178 $10,884 $6,372 $4,512 ===================================================== Nonperforming loans to total loans 0.40% 0.30% Nonperforming assets to total assets 0.33% 0.24% Allowance for loan losses to nonperforming loans 282% 375% </TABLE> Capital Resources The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management. On March 11, 2004, the Board of Directors approved an increase in the maximum number of shares to be repurchased under the Company's stock repurchase plan originally announced on July 31, 2003 from 250,000 to 500,000 effective on April 9, 2004, solely to conform with the two-for-one stock split effective on April 9, 2004. The 250,000 shares originally authorized for repurchase under this plan represented approximately 3.2% of the Company's approximately 7,852,000 common shares outstanding as of July 31, 2003. This plan has no stated expiration date for the repurchases, which may occur from time to time as market conditions allow. As of March 31, 2007, the Company had repurchased 394,371 shares under this plan as adjusted for the 2-for-1 stock split paid on April 30, 2004, which left 105,629 shares available for repurchase under the plan. The Company's primary capital resource is shareholders' equity, which was $174,397,000 at March 31, 2007. This amount represents an increase of $4,961,000 from December 31, 2006, the net result of comprehensive income for the period of $6,977,000, the issuance of common shares via the exercise of stock options of $1,867,000, the tax effect of the exercise of stock options of $852,000, and the effect of stock option vesting of $175,000, partially offset by the retirement of common stock with value of $2,841,000 tendered by employees, in lieu of cash, to exercise stock options, and dividends paid of $2,069,000. The Company's ratio of equity to total assets was 9.34%, 8.35%, and 8.82% as of March 31, 2007, March 31, 2006, and December 31, 2006, respectively. 23
The following summarizes the ratios of capital to risk-adjusted assets for the periods indicated: At March 31, At Minimum ------------------ December 31, Regulatory 2007 2006 2006 Requirement ------------------------------------------------ Tier I Capital 10.75% 10.04% 10.44% 4.00% Total Capital 11.76% 11.09% 11.44% 8.00% Leverage ratio 10.87% 9.82% 10.49% 4.00% Off-Balance Sheet Items The Bank has certain ongoing commitments under operating and capital leases. These commitments do not significantly impact operating results. As of March 31, 2007 commitments to extend credit and commitments related to the Bank's deposit overdraft privilege product were the Bank's only financial instruments with off-balance sheet risk. The Bank has not entered into any contracts for financial derivative instruments such as futures, swaps, options, etc. Commitments to extend credit were $663,958,000 and $623,133,000 at March 31, 2007 and December 31, 2006, respectively, and represent 44.4% of the total loans outstanding at March 31, 2007 versus 41.3% at December 31, 2006. Commitments related to the Bank's deposit overdraft privilege product totaled $33,526,000 and $33,290,000 at March 31, 2007 and December 31, 2006, respectively. Certain Contractual Obligations The following chart summarizes certain contractual obligations of the Company as of December 31, 2006: <TABLE> <CAPTION> Less than 1-3 3-5 More than (dollars in thousands) Total one year years years 5 years ------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Less than 1-3 3-5 More than (dollars in thousands) Total one year years years 5 years Federal funds purchased $38,000 $38,000 - - - FHLB loan, fixed rate of 5.41% payable on April 7, 2008, callable in its entirety by FHLB on a quarterly basis beginning April 7, 2003 20,000 - 20,000 - - FHLB loan, fixed rate of 5.35% payable on December 9, 2008 1,500 - 1,500 - - FHLB loan, fixed rate of 5.77% payable on February 23, 2009 1,000 - 1,000 - - Capital lease obligation on premises, effective rate of 13% payable monthly in varying amounts through December 1, 2009 235 - 235 - - Other collateralized borrowings, fixed rate of 3.82% payable on January 2, 2007 17,176 17,176 - - - Junior subordinated debt, adjustable rate of three-month LIBOR plus 3.05%, callable in whole or in part by the Company on a quarterly basis beginning October 7, 2008, matures October 7, 2033 20,619 - - - 20,619 Junior subordinated debt, adjustable rate of three-month LIBOR plus 2.55%, callable in whole or in part by the Company on a quarterly basis beginning July 23, 2009, matures July 23, 2034 20,619 - - - 20,619 Operating lease obligations 6,727 1,755 2,900 1,474 598 Deferred compensation(1) 1,199 240 470 377 112 Supplemental retirement plans(1) 4,543 524 1,024 975 2,020 ----------------------------------------------------------------- Total contractual obligations $131,618 $57,695 $27,129 $2,826 $43,968 -================================================================ </TABLE> (1) These amounts represent known certain payments to participants under the Company's deferred compensation and supplemental retirement plans. See "Retirement Plans" at Part I, Item 1 of this report for additional information related to the Company's deferred compensation and supplemental retirement plan liabilities. 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk Asset and Liability Management The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has overall responsibility for the Company's interest rate risk management policies. The Company has an Asset and Liability Management Committee (ALCO) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin, net income and market value of equity under changing interest environments. Market value of equity is the net present value of estimated cash flows from the Company's assets, liabilities and off-balance sheet items. The Company uses simulation models to forecast net interest margin, net income and market value of equity. Simulation of net interest margin, net income and market value of equity under various interest rate scenarios is the primary tool used to measure interest rate risk. Using computer-modeling techniques, the Company is able to estimate the potential impact of changing interest rates on net interest margin, net income and market value of equity. A balance sheet forecast is prepared using inputs of actual loan, securities and interest-bearing liability (i.e. deposits/borrowings) positions as the beginning base. In the simulation of net interest margin and net income under various interest rate scenarios, the forecast balance sheet is processed against seven interest rate scenarios. These seven interest rate scenarios include a flat rate scenario, which assumes interest rates are unchanged in the future, and six additional rate ramp scenarios ranging from +300 to -300 basis points around the flat scenario in 100 basis point increments. These ramp scenarios assume that interest rates increase or decrease evenly (in a "ramp" fashion) over a twelve-month period and remain at the new levels beyond twelve months. In the simulation of market value of equity under various interest rate scenarios, the forecast balance sheet is processed against seven interest rate scenarios. These seven interest rate scenarios include the flat rate scenario described above, and six additional rate shock scenarios ranging from +300 to - -300 basis points around the flat scenario in 100 basis point increments. These rate shock scenarios assume that interest rates increase or decrease immediately (in a "shock" fashion) and remain at the new level in the future. At March 31, 2007, the results of the simulations noted above indicate that given a "flat" balance sheet scenario, and if deposit rates track general interest rate changes by approximately 50%, the Company's balance sheet is slightly liability sensitive. "Liability sensitive" implies that earnings decrease when interest rates rise, and increase when interest rates decrease. The magnitude of all the simulation results noted above is within the Bank's policy guidelines. The asset liability management policy limits aggregate market risk, as measured in this fashion, to an acceptable level within the context of risk-return trade-offs. The simulation results noted above do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. At March 31, 2007 and 2006, the Company had no derivative financial instruments. 25
Liquidity The Company's principal source of asset liquidity is federal funds sold and marketable investment securities available for sale. At March 31, 2007, federal funds sold and investment securities available for sale totaled $188,478,000, representing a decrease of $10,677,000 (5.4%) from December 31, 2006, and a decrease of $55,963,000 (22.9%) from March 31, 2006. In addition, the Company generates additional liquidity from its operating activities. The Company's profitability during the first three months of 2007 generated cash flows from operations of $12,271,000 compared to $10,883,000 during the first three months of 2006. Additional cash flows may be provided by financing activities, primarily the acceptance of deposits and borrowings from banks. Sales and maturities of investment securities produced cash inflows of $10,604,000 during the three months ended March 31, 2007 compared to $13,894,000 for the three months ended March 31, 2006. During the three months ended March 31, 2007, the Company invested $122,000 in securities and received $13,577,000 of net loan principal reductions, compared to $985,000 and $15,155,000 invested in securities and net loan growth, respectively, during the first three months of 2006. These changes in investment and loan balances contributed to net cash provided by investing activities of $23,214,000 during the three months ended March 31, 2007, compared to net cash used for investing activities of $2,860,000 during the three months ended March 31, 2006. Financing activities used net cash of $63,236,000 during the three months ended March 31, 2007, compared to net cash used in financing activities of $22,220,000 during the three months ended March 31, 2006. Deposit balance decreases accounted for $62,300,000 of financing uses of funds during the three months ended March 31, 2007, compared to $30,594,000 of funds provided by increases in deposits during the three months ended March 31, 2006. Dividends paid used $2,069,000 and $1,891,000 of cash during the three months ended March 31, 2007 and 2006, respectively. Decreases in Federal funds purchased used $51,000,000 of cash during the quarter ended March 31, 2006. Also, the Company's liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions. Item 4. Controls and Procedures The Chief Executive Officer, Richard Smith, and the Chief Financial Officer, Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2007 ("Evaluation Date"). Based on that evaluation, they each concluded that as of the Evaluation Date the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms for Form 10-Q. No changes in the Company's internal control over financial reporting occurred during the first quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 26
PART II - OTHER INFORMATION Item 1 - Legal Proceedings Due to the nature of the banking business, the Bank is at times party to various legal actions; all such actions are of a routine nature and arise in the normal course of business of the Bank. Item 1A - Risk Factors There have been no material changes to the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the year ended December 31, 2006. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds The following table shows information concerning the common stock repurchased by the Company during the first quarter of 2007 pursuant to the Company's stock repurchase plan originally announced on July 31, 2003, as amended on March 11, 2004, to conform with the Company's two-for-one stock split effective on April 9, 2004, which is discussed in more detail under "Capital Resources" in this report: <TABLE> <CAPTION> 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 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Jan. 1-31, 2007 - - - 125,629 Feb. 1-28, 2007 - - - 125,629 Mar. 1-31, 2007 20,000 23.50 20,000 105,629 - ----------------------------------------------------------------------------------------------------------- Total 20,000 23.50 20,000 105,629 </TABLE> During the quarter ended March 31, 2007, employees tendered 97,516 shares of the Company's common stock with an average market value of $24.32 per share in lieu of cash to exercise options and pay related income tax withholding amounts as permitted by the Company's shareholder-approved stock option plans. The tendered shares were retired. The market value of tendered shares is the last market trade price at closing on the day the option is exercised. Item 6 - Exhibits 3.1* Restated Articles of Incorporation dated May 9, 2003, filed as Exhibit 3.1 to TriCo's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. 3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to TriCo's Form S-4 Registration Statement dated January 16, 2003 (No. 333-102546). 4* Certificate of Determination of Preferences of Series AA Junior Participating Preferred Stock filed as Exhibit 3.3 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated July 25, 2001. 27
10.2 Form of Change of Control Agreement dated as of August 23, 2005, between TriCo, Tri Counties Bank and each of Bruce Belton, Craig Carney, Gary Coelho, W.R. Hagstrom, Andrew Mastorakis, Rick Miller, Richard O'Sullivan, Thomas Reddish, and Ray Rios filed as Exhibit 10.2 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. 10.3* TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated August 23, 1995 (No. 33-62063). 10.4* TriCo's 2001 Stock Option Plan as amended filed as Exhibit 10.7 to TriCo's Annual Report on Form 10-K for the year ended December 31, 2004. 10.5* Amended Employment Agreement between TriCo and Richard Smith dated March 20, 2007 filed as Exhibit 10.1 to TriCo's Report on Form 8-K dated March 20, 2007. 10.6* Tri Counties Bank Executive Deferred Compensation Plan dated September 1, 1987, as restated April 1, 1992, and amended and restated effective as of January 1, 2004 filed as Exhibit 10.9 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. 10.7* Tri Counties Bank Deferred Compensation Plan for Directors effective January 1, 2005 filed as Exhibit 10.10 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. 10.8* 2005 Tri Counties Bank Deferred Compensation Plan for Executives and Directors effective January 1, 2005 filed as Exhibit 10.11 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. 10.9* Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, and amended and restated January 1, 2004 filed as Exhibit 10.12 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.10* 2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 filed as Exhibit 10.13 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.11* Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January 1, 2004 filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.12* 2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January 1, 2004 filed as Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 10.13* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Craig Carney, Richard Miller, Richard O'Sullivan, Thomas Reddish, and Richard Smith, filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 28
10.14* Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Vereshagin, filed as Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.15* Form of Tri-Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Craig Carney, Richard Miller, Richard O'Sullivan and Thomas Reddish, filed as Exhibit 10.16 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.16* Form of Tri-Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Verischagin, filed as Exhibit 10.17 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 10.17* Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of the directors of TriCo Bancshares/Tri Counties Bank effective on the date that each director is first elected, filed as Exhibit 10.18 to TriCo'S Annual Report on Form 10-K for the year ended December 31, 2003. 10.18* Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of W.R. Hagstrom, Craig Carney, Richard Miller, Raymond Rios, Richard O'Sullivan, Thomas Reddish, and Richard Smith filed as Exhibit 10.21 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. 21.1 Tri Counties Bank, a California banking corporation, TriCo Capital Trust I, a Delaware business trust, and TriCo Capital Trust II, a Delaware business trust, are the only subsidiaries of Registrant 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO 32.1 Section 1350 Certification of CEO 32.2 Section 1350 Certification of CFO * Previously filed and incorporated by reference. 29
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TRICO BANCSHARES (Registrant) /s/ Thomas J. Reddish Date: May 7, 2007 ------------------------------ Thomas J. Reddish Executive Vice President and Chief Financial Officer 30
EXHIBITS Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO I, Richard P. Smith, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2007 /s/ Richard P. Smith ---------------------------------------- Richard P. Smith President and Chief Executive Officer 31
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO I, Thomas J. Reddish, certify that; 1. I have reviewed this quarterly report on Form 10-Q of TriCo Bancshares; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors; a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2007 /s/ Thomas J. Reddish ---------------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer 32
Exhibit 32.1 Section 1350 Certification of CEO In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard P. Smith ------------------------------------- Richard P. Smith President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 Section 1350 Certification of CFO In connection with the Quarterly Report of TriCo Bancshares (the "Company") on Form 10-Q for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas J. Reddish ------------------------------------- Thomas J. Reddish Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to TriCo Bancshares and will be retained by TriCo Bancshares and furnished to the Securities and Exchange Commission or its staff upon request. 33