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 September 30, 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 November 6, 2007: 15,907,550
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 28
Item 4 - Controls and Procedures 29
PART II - OTHER INFORMATION 30
Item 1 - Legal Proceedings 30
Item 1A - Risk Factors 30
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 6 - Exhibits 31
Signatures 33
Exhibits 34
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief and include information concerning the Company's possible or assumed
future financial condition and results of operations. When you see any of the
words "believes", "expects", "anticipates", "estimates", or similar expressions,
it may mean making forward-looking statements. A number of factors, some of
which are beyond the Company's ability to predict or control, could cause future
results to differ materially from those contemplated. The reader is directed to
the Company's annual report on Form 10-K for the year ended December 31, 2006,
and Part II, Item 1A of this report for further discussion of factors which
could affect the Company's business and cause actual results to differ
materially from those expressed in any forward-looking statement made in this
report.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRICO BANCSHARES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited)
At September 30, At December 31,
2007 2006 2006
------------------------------- -----------------
Assets:
Cash and due from banks $70,791 $78,281 $102,220
Federal funds sold 488 1,387 794
------------------------------- -----------------
Cash and cash equivalents 71,279 79,668 103,014
Securities available-for-sale 239,242 209,886 198,361
Federal Home Loan Bank stock, at cost 8,652 8,206 8,320
Loans, net of allowance for loan losses
of $17,139, $16,993 and $16,914 1,517,937 1,490,166 1,492,965
Foreclosed assets, net of allowance for
losses of $180 187 - -
Premises and equipment, net 20,804 21,556 21,830
Cash value of life insurance 44,751 42,991 43,536
Accrued interest receivable 8,865 8,637 8,727
Goodwill 15,519 15,519 15,519
Other intangible assets, net 1,298 3,361 1,666
Other assets 24,989 24,014 26,028
------------------------------- -----------------
Total Assets $1,953,523 $1,904,004 $1,919,966
=============================== =================
Liabilities:
Deposits:
Noninterest-bearing demand $345,467 $357,754 $420,025
Interest-bearing 1,186,675 1,167,420 1,179,124
------------------------------- -----------------
Total deposits 1,532,142 1,525,174 1,599,149
Federal funds purchased 66,000 106,500 38,000
Accrued interest payable 6,899 7,341 7,548
Reserve for unfunded commitments 2,040 1,849 1,849
Other liabilities 22,483 20,913 22,835
Other borrowings 99,996 35,848 39,911
Junior subordinated debt 41,238 41,238 41,238
------------------------------- -----------------
Total Liabilities 1,770,798 1,738,863 1,750,530
------------------------------- -----------------
Commitments and contingencies
Shareholders' Equity:
Common stock, no par value: 50,000,000 shares
authorized; issued and outstanding:
15,891,300 at September 30, 2007 78,331
15,857,107 at September 30, 2006 73,545
15,857,207 at December 31, 2006 73,739
Retained earnings 108,022 95,203 100,218
Accumulated other comprehensive loss, net (3,628) (3,607) (4,521)
------------------------------- -----------------
Total Shareholders' Equity 182,725 165,141 169,436
------------------------------- -----------------
Total Liabilities and Shareholders' Equity $1,953,523 $1,904,004 $1,919,966
=============================== =================
See accompanying notes to unaudited condensed consolidated financial statements.
2
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data; unaudited)
Three months ended September 30, Nine months ended September 30,
2007 2006 2007 2006
-----------------------------------------------------------------
Interest and dividend income:
Loans, including fees $30,099 $28,901 $88,404 $80,525
Debt securities:
Taxable 1,874 1,938 5,216 6,548
Tax exempt 354 431 1,123 1,338
Dividends 109 144 332 322
Federal funds sold 6 7 14 45
-----------------------------------------------------------------
Total interest income 32,442 31,421 95,089 88,778
-----------------------------------------------------------------
Interest expense:
Deposits 8,078 6,844 23,016 17,707
Federal funds purchased 922 1,448 2,458 3,367
Other borrowings 768 442 1,764 1,186
Junior subordinated debt 834 842 2,475 2,364
----------------------------------------------------------------
Total interest expense 10,602 9,576 29,713 24,624
----------------------------------------------------------------
Net interest income 21,840 21,845 65,376 64,154
----------------------------------------------------------------
Provision for loan losses 700 235 1,682 1,289
----------------------------------------------------------------
Net interest income after provision 21,140 21,610 63,694 62,865
for loan losses ----------------------------------------------------------------
Noninterest income:
Service charges and fees 5,218 5,056 15,654 14,869
Gain on sale of loans 211 264 756 875
Commissions on sale of non-deposit 583 447 1,633 1,529
investment products
Increase in cash value of life insurance 405 420 1,215 1,223
Other 430 462 1,218 1,132
----------------------------------------------------------------
Total noninterest income 6,847 6,649 20,476 19,628
----------------------------------------------------------------
Noninterest expense:
Salaries and related benefits 8,975 9,276 28,336 27,050
Other 7,777 7,750 22,819 22,674
---------------------------------------------------------------
Total noninterest expense 16,752 17,026 51,155 49,724
----------------------------------------------------------------
Income before income taxes 11,235 11,233 33,015 32,769
Provision for income taxes 4,442 4,413 13,023 12,857
----------------------------------------------------------------
Net income $6,793 $6,820 $19,992 $19,912
================================================================
Average shares outstanding 15,889,061 15,855,933 15,894,768 15,797,014
Diluted average shares outstanding 16,310,631 16,365,858 16,396,615 16,378,796
Per share data:
Basic earnings $0.43 $0.43 $1.26 $1.26
Diluted earnings $0.42 $0.42 $1.22 $1.22
Dividends paid $0.13 $0.12 $0.39 $0.36
See accompanying notes to unaudited condensed consolidated financial
statements.
3
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data; unaudited)
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Loss Total
--------------------------------------------------------------
Balance at December 31, 2005 15,707,835 $71,412 $81,906 ($3,825) $149,493
Comprehensive income: --------
Net income 19,912 19,912
Change in net unrealized gain on
Securities available for sale, net 218 218
---------
Total comprehensive income 20,130
Stock option vesting 468 468
Stock options exercised 190,187 1,646 1,646
Tax benefit of stock options exercised 205 205
Repurchase of common stock (40,915) (186) (923) (1,109)
Dividends paid ($0.24 per share) (5,692) (5,692)
--------------------------------------------------------------
Balance at September 30, 2006 15,857,107 $73,545 $95,203 ($3,607) $165,141
==============================================================
Balance at December 31, 2006 15,857,207 $73,739 $100,218 ($4,521) $169,436
Comprehensive income: ---------
Net income 19,992 19,992
Change in net unrealized gain on
Securities available for sale, net 893 893
Total comprehensive income 20,885
Stock option vesting 579 579
Stock options exercised 362,100 3,863 3,863
Tax benefit of stock options exercised 1,707 1,707
Repurchase of common stock (328,007) (1,557) (5,987) (7,544)
Dividends paid ($0.26 per share) (6,201) (6,201)
--------------------------------------------------------------
Balance at September 30, 2007 15,891,300 $78,331 $108,022 ($3,628) $182,725
==============================================================
See accompanying notes to unaudited condensed consolidated financial statements.
4
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
For the nine months ended September 30,
2007 2006
--------------------------------------
Operating activities:
Net income $19,992 $19,912
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment, and amortization 2,829 2,816
Amortization of intangible assets 367 1,046
Provision for loan losses 1,682 1,289
Amortization of investment securities premium, net 528 689
Originations of loans for resale (48,628) (51,959)
Proceeds from sale of loans originated for resale 48,878 52,338
Gain on sale of loans (756) (875)
Change in market value of mortgage servicing rights 226 256
Gain on sale of investments - (12)
Loss on disposal of fixed assets 5 27
Increase in cash value of life insurance (1,215) (1,223)
Stock option vesting expense 579 468
Change in:
Interest receivable (138) (996)
Interest payable (649) 2,835
Other assets and liabilities, net 1,525 (1,392)
--------------------------------------
Net cash provided by operating activities 23,518 25,219
--------------------------------------
Investing activities:
Proceeds from maturities of securities available-for-sale 38,954 40,208
Proceeds from sales of securities available-for-sale - 10,780
Purchases of securities available-for-sale (78,822) (896)
Purchases of Federal Home Loan Bank stock (332) (604)
Loan originations and principal collections, net (26,841) (122,646)
Proceeds from sale of premises and equipment 11 3
Purchases of premises and equipment (2,610) (2,715)
--------------------------------------
Net cash used by investing activities (69,640) (75,870)
--------------------------------------
Financing activities:
Net (decrease) increase in deposits (67,007) 28,377
Net increase in Federal funds purchased 28,000 9,700
Payments of principal on long-term other borrowings (51) (44)
Proceeds from issuance of long-term other borrowings 50,000 -
Net change in short-term other borrowings 10,136 4,502
Repurchase of common stock (2,685) -
Dividends paid (6,201) (5,692)
Exercise of stock options 488 537
--------------------------------------
Net cash provided by financing activities 14,387 37,380
--------------------------------------
Net change in cash and cash equivalents (31,735) (13,271)
--------------------------------------
Cash and cash equivalents and beginning of period 103,014 92,939
--------------------------------------
Cash and cash equivalents at end of period $71,279 $79,668
======================================
Supplemental disclosure of noncash activities:
Unrealized gain on securities available for sale $1,541 $377
Income tax benefit from stock option exercises $1,707 $205
Value of common stock tendered, in lieu of cash,
to pay for exercise of stock options $4,859 $1,109
Supplemental disclosure of cash flow activity:
Cash paid for interest expense $30,362 $21,789
Cash paid for income taxes $12,300 $15,100
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 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 25 in-store branch offices in the
California counties of Butte, Contra Costa, Del Norte, Fresno, Glenn, Kern,
Lake, Lassen, Madera, Mendocino, Merced, Napa, 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 nine months ended September 30, 2007, and throughout 2006, the
Company did not have any securities classified as either held-to-maturity or
trading.
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses, net of the related tax effect, on available-for-sale securities are
reported as a separate component of other accumulated comprehensive loss in
shareholders' equity until realized.
6
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 September 30, 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 $19,179,000 at September 30, 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 Nine months ended
September 30, September 30,
------------------------------------------------------
2007 2006 2007 2006
------------------------------------------------------
Allowance for loan losses:
Balance at beginning of period $16,999 $16,893 $16,914 $16,226
Provision for loan losses 700 235 1,682 1,289
Loans charged off (843) (368) (2,333) (1,289)
Recoveries of previously
charged-off loans 283 233 876 767
------------------------------------------------------
Net charge-offs (560) (135) (1,457) (522)
------------------------------------------------------
Balance at end of period $17,139 $16,993 $17,139 $16,993
======================================================
Reserve for unfunded commitments:
Balance at beginning of period $2,040 $1,849 $1,849 $1,813
Provision for losses -
Unfunded commitments - - 191 36
------------------------------------------------------
Balance at end of period $2,040 $1,849 $2,040 $1,849
======================================================
Balance at end of period:
Allowance for loan losses $17,139 $16,993
Reserve for unfunded commitments 2,040 1,849
---------------------
Allowance for losses $19,179 $18,842
=====================
As a percentage of total loans:
Allowance for loan losses 1.12% 1.13%
Reserve for unfunded commitments 0.13% 0.12%
----------------------
Allowance for losses 1.25% 1.25%
======================
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):
Nine months ended September 30,
-------------------------------
2007 2006
-------------------------------
Mortgage servicing rights:
Balance at beginning of period $3,912 $3,638
Additions 506 496
Change in fair value (226) (256)
-------------------------------
Balance at end of period $4,192 $3,878
===============================
Servicing fees received $737 $712
Balance of loans serviced at:
Beginning of period $389,636 $373,163
End of period $402,806 $384,862
Weighted-average prepayment speed (CPR) 11.6% 12.1%
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.
The following table summarizes the Company's goodwill intangible as of September
30, 2007 and December 31, 2006.
December 31, September 30,
(Dollars in Thousands) 2006 Additions Reductions 2007
----------------------------------------------------
Goodwill $15,519 - - $15,519
====================================================
10
The following table summarizes the Company's core deposit intangibles as of
September 30, 2007 and December 31, 2006.
December 31, September 30,
(Dollars in Thousands) 2006 Additions Reductions 2007
----------------------------------------------------
Core deposit intangibles $13,643 - ($10,278) $3,365
Accumulated amortization (11,977) $10,278 (368) (2,067)
----------------------------------------------------
Core deposit intangibles, $1,666 $10,278 ($10,646) $1,298
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 (Dollars 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.
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.
11
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 nine months ended September 30, 2007 and
September 30, 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, and (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, and weighted average remaining contractual life, of options exercisable,
options not yet exercisable, and total options outstanding as of September 30,
2007:
Currently Currently Not Total
(dollars in thousands except exercise price) Exercisable Exercisable Outstanding
Number of options 1,044,077 322,354 1,366,431
Weighted average exercise price $12.46 $21.51 $14.59
Intrinsic value $10,245 $245 $10,490
Weighted average remaining contractual term (yrs.) 4.97 8.86 5.89
The options for 322,354 shares that are not currently exercisable as of
September 30, 2007 are expected to vest, on a weighted-average basis, over the
next 3.04 years, and the Company is expected to recognize $1,961,000 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.
In applying the treasury method, the Company uses the excess tax benefit that
would result from the assumed issuance.
Earnings per share have been computed based on the following:
Three Months Nine Months
Ended September 30, Ended September 30,
(in thousands) 2007 2006 2007 2006
------------------- --------------------
Net income $6,793 $6,820 $19,992 $19,912
Average number of common shares outstanding 15,889 15,856 15,895 15,797
Effect of dilutive stock options 422 510 502 582
------------------- --------------------
Average number of common shares outstanding
used to calculate diluted earnings per share 16,311 16,366 16,397 16,379
==================== ===================
There were 302,050 and 42,000 options excluded from the computation of diluted
earnings per share for the nine month periods ended September 30, 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 Nine Months
Ended September 30, Ended September 30,
(in thousands) 2007 2006 2007 2006
------------------- -------------------
Unrealized holding gains (losses) on
available-for-sale securities $1,987 $3,490 $1,541 $377
Tax effect (836) (1,468) (648) (159)
------------------- -------------------
Unrealized holding gains (losses) on
available-for-sale securities, net of tax $1,151 $2,022 $893 $218
=================== ====================
The components of accumulated other comprehensive loss, included in
shareholders' equity, are as follows:
September 30, December 31,
2007 2006
--------------------------
(in thousands)
Net unrealized losses on available-for-sale securities ($2,314) ($3,855)
Tax effect 973 1,621
--------------------------
Unrealized holding losses on
available-for-sale securities, net of tax (1,341) (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 ($3,628) ($4,521)
==========================
13
Retirement Plans
The Company has supplemental retirement plans covering directors and key
executives. These plans are non-qualified defined benefit plans and are
unsecured and unfunded. The Company has purchased insurance on the lives of the
participants and intends to use the cash values of these policies to pay the
retirement obligations. The following table sets forth the net periodic benefit
cost recognized for the plans:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------------
(in thousands) 2007 2006 2007 2006
---- ---- ---- ----
Net pension cost included the following components:
Service cost-benefits earned during the period $150 $139 $450 $417
Interest cost on projected benefit obligation 146 132 438 396
Amortization of net obligation at transition 1 1 1 2
Amortization of prior service cost 45 50 135 150
Recognized net actuarial loss 28 34 84 102
---------------------------------------
Net periodic pension cost $370 $356 $1,108 $1,067
=======================================
During the nine months ended September 30, 2007 and 2006, the Company
contributed and paid out as benefits $405,000 and $409,000, 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 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.
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.
14
TheCompany 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.
In September 2006, the Emerging Issues Task Force (EITF) of the FASB ratified
EITF Issue No. 06-4, Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Agreements, and EITF
Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the
Amount That Could Be Realized in Accordance with FASB Technical Bulletin No.
85-4, Accounting for Purchases of Life Insurance. EITF 06-4 provides that an
employer should recognize a liability for future benefits based on the
substantive agreement with the employee. The Issue should be applied to fiscal
years beginning after December 15, 2007, with earlier application permitted.
EITF 06-5 provides that in determining the amount recognized as an asset, a
policyholder should consider the cash surrender value as well as any additional
amounts included in the contractual terms of the policy that will be paid upon
surrender. The amount that could be realized should be calculated at the
individual policy level and consider any probable contractual limitations,
including the exclusion of any additional amounts paid for the surrender of an
entire group of policies. The Issue is effective for fiscal years beginning
after December 15, 2007. The Company has life insurance arrangements. The
Company is currently evaluating the impact of adoption of these rules 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
(dollars in thousands, except per share amounts; unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------------
Net Interest Income (FTE) 22,031 22,077 66,005 $64,903
Provision for loan losses 700 235 1,682 1,289
Noninterest income 6,847 6,649 20,476 19,628
Noninterest expense 16,752 17,026 51,155 49,724
Provision for income taxes (FTE) 4,633 4,645 13,652 13,606
----------------------------------------------------------
Net income $6,793 $6,820 $19,992 $19,912
==========================================================
Earnings per share:
Basic $0.43 $0.43 $1.26 $1.26
Diluted $0.42 $0.42 $1.22 $1.22
Per share:
Dividends paid $0.13 $0.12 $0.39 $0.36
Book value at period end $11.50 $10.41
Tangible book value at period end $10.44 $9.22
Average common shares outstanding 15,889 15,856 15,895 15,797
Average diluted shares outstanding 16,311 16,366 16,397 16,379
Shares outstanding at period end 15,891 15,857
At period end:
Loans, net $1,517,937 $1,490,166
Total assets 1,953,523 1,904,004
Total deposits 1,532,142 1,525,174
Other borrowings 99,996 35,848
Junior subordinated debt 41,238 41,238
Shareholders' equity 182,725 $165,141
Financial Ratios:
During the period (annualized):
Return on assets 1.44% 1.45% 1.42% 1.43%
Return on equity 14.92% 16.64% 14.94% 16.75%
Net interest margin(1) 5.12% 5.19% 5.16% 5.17%
Net loan charge-offs to average loans 0.15% 0.04% 0.13% 0.05%
Efficiency ratio(1) 58.01% 59.27% 59.15% 58.82%
At Period End:
Equity to assets 9.35% 8.67%
Total capital to risk assets 11.66% 11.08%
Allowance for losses to loans(2) 1.25% 1.25%
(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 Conditions and Results
of Operations
As TriCo Bancshares (the "Company") has not commenced any business operations
independent of Tri Counties Bank (the "Bank"), the following discussion pertains
primarily to the Bank. Average balances, including such balances used in
calculating certain financial ratios, are generally comprised of average daily
balances for the Company. Within Management's Discussion and Analysis of
Financial Condition and Results of Operations, interest income and net interest
income are generally presented on a fully tax-equivalent (FTE) basis. 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 throughout Part I - Financial Information 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 unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. 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 "Allowance for Loan Losses" in Part I, Item 1,
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 unaudited condensed consolidated financial statements of the Company
and the Notes thereto at Part I, Item 1, of this Form 10-Q.
Following is a summary of the components of fully taxable equivalent ("FTE") net
income for the periods indicated (dollars in thousands):
Three months ended Nine months ended
Spetember 30, September 30,
-----------------------------------------------
2007 2006 2007 2006
-----------------------------------------------
Net Interest Income (FTE) $22,031 $22,077 $66,005 $64,903
Provision for loan losses 700 235 1,682 1,289
Noninterest income 6,847 6,649 20,476 19,628
Noninterest expense 16,752 17,026 51,155 49,724
Provision for income taxes (FTE) 4,633 4,645 13,652 13,606
-----------------------------------------------
Net income $6,793 $6,820 $19,992 $19,912
===============================================
The Company had quarterly earnings of $6,793,000, or $0.42 per diluted share,
for the three months ended September 30, 2007. These results represent no change
from the $0.42 earnings per diluted share reported for the three months ended
September 30, 2006 on earnings of $6,820,000.
The Company reported earnings of $19,992,000, or $1.22 per diluted share, for
the nine months ended September 30, 2007. These results represent no change from
the $1.22 earnings per diluted share reported for the nine months ended
September 30, 2006 on earnings of $19,912,000.
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 Nine months ended
September 30, September 30,
------------------------------------------------
2007 2006 2007 2006
------------------------------------------------
Interest income $32,442 $31,421 $95,089 $88,778
Interest expense (10,602) (9,576) (29,713) (24,624)
FTE adjustment 191 232 629 749
------------------------------------------------
Net interest income (FTE) $22,031 $22,077 $66,005 $64,903
================================================
Average interest-earning $1,721,547 $1,701,166 $1,704,342 $1,675,027
assets
Net interest margin (FTE) 5.12% 5.19% 5.16% 5.17%
The Company's primary source of revenue is net interest income, or the
difference between interest income on interest-earning assets and interest
expense in interest-bearing liabilities.
Net interest income (FTE) during the third quarter of 2007 decreased $46,000
(0.2%) from the same period in 2006 to $22,031,000. The decrease in net interest
income (FTE) was due to a 0.07% decrease in net interest margin (FTE) to 5.12%
that was substantially offset by a $20,381,000 (1.2%) increase in average
balances of interest-earning assets to $1,721,547,000.
Net interest income (FTE) during the first nine months of 2007 increased
$1,102,000 (1.7%) from the same period in 2006 to $66,005,000. The increase in
net interest income (FTE) was due to a $29,315,000 (1.8%) increase in average
balances of interest-earning assets to $1,704,342,000 that was partially offset
by a 0.01% decrease in net interest margin (FTE) to 5.16%.
Interest and Fee Income
Interest and fee income (FTE) for the third quarter of 2007 increased $980,000
(3.1%) from the third quarter of 2006. The increase was due to a $20,381,000
(1.2%) increase in average interest-earning assets to $1,721,547,000 and a 0.14%
increase in the yield on those average interest-earning assets to 7.58%. The
growth in interest-earning assets was due to a $39,868,000 (2.7%) increase in
average loan balances to $1,517,419,000 that was partially offset by a decrease
of $19,358,000 (8.7%) in average balances of investments to $203,673,000. The
increase in the yield on average interest-earning assets was mainly due to a
0.11% increase in yield on loans to 7.93% and a change in the mix of earning
assets from lower-earning investments towards higher-earning loans.
Interest and fee income (FTE) for the nine months ended September 30, 2007
increased $6,191,000 (6.9%) from the same period of 2006. The increase was the
net effect of a $29,315,000 (1.8%) increase in average interest-earning assets
to $1,704,342,000 and a 0.36% increase in the yield on those average
interest-earning assets to 7.49%. The growth in interest-earning assets was due
to a $74,661,000 (5.2%) increase in average loan balances to $1,504,865,000 that
was partially offset by a decrease of $44,491,000 (18.3%) in average balances of
investments to $199,099,000. The increase in the yield on average
interest-earning assets was mainly due to a 0.32% increase in yield on loans to
7.83% and a change in the mix of earning assets from lower-earning investments
towards higher-earning loans.
18
Interest Expense
Interest expense increased $1,026,000 (10.7%) to $10,602,000 in the third
quarter of 2007 compared to the year-ago quarter. The average balance of
interest-bearing liabilities decreased $3,648,000 (0.3%) to $1,333,948,000 in
the third quarter compared to the year-ago quarter. The decrease in the average
balance of interest-bearing liabilities was concentrated in Federal funds
purchased (down $36,600,000 or 34.1%) and demand deposits (down $11,337,000 or
4.9%). In addition, the average balance of other borrowings and savings deposits
increased $28,655,000 (78.9%) and $10,969,000 (2.9%), respectively, from the
year-ago quarter. The average rate paid on interest-bearing liabilities in the
quarter ended September 30, 2007 increased 0.32% to 3.18% compared to the
year-ago quarter as a result of increases in market interest rates and changes
in the mix of interest-bearing liabilities towards higher paying liabilities.
Interest expense increased $5,089,000 (20.7%) to $29,713,000 for the nine months
ended September 30, 2007 compared to the year-ago nine month period. The average
balance of interest-bearing liabilities decreased $1,902,000 (0.1%) to
$1,313,548,000 for the nine months ended September 30, 2007 compared to the
year-ago period. The decrease in interest-bearing liabilities was concentrated
in Federal funds purchased (down $27,477,000 or 30.7%), savings deposits (down
$19,733,000 or 4.9%) and demand deposits (down $14,983,000 or 6.2%). In
addition, for the nine months ended September 30, 2007, the average balance of
time deposits and other borrowings increased $44,190,000 (8.7%) and $16,101,000
(48.0%), respectively, from the year-ago period. The average rate paid on
interest-bearing liabilities in the nine month period ended September 30, 2007
increased 0.52% to 3.02% compared to the year-ago period as a result of
increases in market interest rates and changes in the mix of interest-bearing
liabilities towards higher paying liabilities.
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------
2007 2006 2007 2006
-------------------------------------------
Yield on interest-earning assets 7.58% 7.44% 7.49% 7.13%
Rate paid on interest-bearing
Liabilities 3.18% 2.86% 3.02% 2.50%
-------------------------------------------
Net interest spread 4.40% 4.58% 4.47% 4.63%
Impact of all other net
noninterest-bearing funds 0.72% 0.61% 0.69% 0.54%
-------------------------------------------
Net interest margin 5.12% 5.19% 5.16% 5.17%
===========================================
Net interest margin for the three months ended September 30, 2007 decreased
0.07% compared to the three months ended September 30, 2006. This decrease in
net interest margin was mainly due to an 0.11% increase in the impact of net
noninterest-bearing funds to 0.72% from 0.61% in the year-ago three month period
that was more than offset by a 0.18% decrease in net interest spread as the
average yield on interest-earning assets increased 0.14% while the average rate
paid on interest-bearing liabilities increased 0.32% from the year-ago three
month period.
Net interest margin for the nine months ended September 30, 2007 decreased 0.01%
compared to the nine months ended September 30, 2006. This decrease in net
interest margin was mainly due to a 0.15% increase in the impact of net
noninterest-bearing funds to 0.69% from 0.54% in the year-ago nine month period
that was more than offset by a 0.16% decrease in net interest spread as the
average yield on interest-earning assets increased 0.36% while the average rate
paid on interest-bearing liabilities increased 0.52% from the year-ago three
month period.
19
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average interest-earning assets and
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest income
includes proceeds from loans on nonaccrual loans only to the extent cash
payments have been received and applied to interest income. Yields on securities
and certain loans have been adjusted upward to reflect the effect of income
thereon exempt from federal income taxation at the current statutory tax rate
(dollars in thousands).
For the three months ended
----------------------------------------------------------------
September 30, 2007 September 30, 2006
----------------------------- -------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- ------------------------------
Assets:
Loans $1,517,419 $30,099 7.93% $1,477,551 $28,901 7.82%
Investment securities - taxable 174,472 1,983 4.55% 188,021 2,082 4.43%
Investment securities - nontaxable 29,201 545 7.47% 35,010 663 7.58%
Federal funds sold 455 6 5.27% 584 7 4.79%
----------------------------- ------------------------------
Total interest-earning assets 1,721,547 32,633 7.58% 1,701,166 31,653 7.44%
------ ------
Other assets 170,445 178,863
------- -------
Total assets $1,891,992 $1,880,029
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $220,582 114 0.21% $231,919 118 0.20%
Savings deposits 388,315 1,761 1.81% 377,346 906 0.96%
Time deposits 548,229 6,203 4.53% 543,564 5,820 4.28%
Federal funds purchased 70,602 922 5.22% 107,202 1,448 5.40%
Other borrowings 64,982 768 4.73% 36,327 442 4.87%
Junior subordinated debt 41,238 834 8.09% 41,238 842 8.17%
----------------------------- ------------------------------
Total interest-bearing liabilities 1,333,948 10,602 3.18% 1,337,596 9,576 2.86%
------ ------
Noninterest-bearing deposits 342,667 348,801
Other liabilities 33,297 29,713
Shareholders' equity 182,080 163,919
------- -------
Total liabilities and shareholders' $1,891,992 $1,880,029
equity ========== ==========
Net interest spread(1) 4.40% 4.58%
Net interest income and interest margin(2) $22,031 5.12% $22,077 5.19%
================ =================
(1) Net interest spread represents the average yield earned on interest-earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of
interest-earning assets.
20
For the nine months ended
---------------------------------------------------------------
September 30, 2007 September 30, 2006
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- ------------------------------
Assets:
Loans $1,504,865 $88,404 7.83% $1,430,204 $80,525 7.51%
Investment securities - taxable 168,363 5,548 4.39% 208,667 6,870 4.39%
Investment securities - nontaxable 30,736 1,752 7.60% 34,923 2,087 7.97%
Federal funds sold 378 14 4.94% 1,233 45 4.87%
---------------------------- ------------------------------
Total interest-earning assets 1,704,342 95,718 7.49% 1,675,027 89,527 7.13%
------- -------
Other assets 171,978 176,118
------- -------
Total assets $1,876,320 $1,851,145
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $225,402 343 0.20% $240,385 362 0.20%
Savings deposits 384,366 4,418 1.53% 404,099 2,562 0.85%
Time deposits 550,783 18,255 4.42% 506,593 14,783 3.89%
Federal funds purchased 62,115 2,458 5.28% 89,592 3,367 5.01%
Other borrowings 49,644 1,764 4.74% 33,543 1,186 4.71%
Junior subordinated debt 41,238 2,475 8.00% 41,238 2,364 7.64%
---------------------------- -----------------------------
Total interest-bearing liabilities 1,313,548 29,713 3.02% 1,315,450 24,624 2.50%
------- -------
Noninterest-bearing deposits 351,050 348,278
Other liabilities 33,309 28,867
Shareholders' equity 178,413 158,550
---------- -----------
Total liabilities and shareholders' $1,876,320 $1,851,145
equity ========== ===========
Net interest spread(1) 4.47% 4.63%
Net interest income and interest margin(2) $66,005 5.16% 64,903 5.17%
================ =================
(1) Net interest spread represents the average yield earned on interest-earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of
interest-earning assets.
21
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset & Liability Balances and Yields Earned & Rates Paid
The following tables set forth a summary of the changes in interest income (FTE)
and interest expense from changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in thousands).
Three months ended September 30, 2007
compared with three months
ended September 30, 2006
-------------------------------------
Volume Rate Total
-------------------------------------
Increase (decrease) in interest income:
Loans $779 $419 $1,198
Investment securities (260) 43 (217)
Federal funds sold (2) 1 (1)
-------------------------------------
Total interest-earning assets 517 463 980
-------------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits (6) 2 (4)
Savings deposits 26 829 855
Time deposits 50 333 383
Federal funds purchased (494) (32) (526)
Other borrowings 349 (23) 326
Junior subordinated debt - (8) (8)
-------------------------------------
Total interest-bearing liabilities (75) 1,101 1,026
-------------------------------------
Increase in Net Interest Income $592 ($638) ($46)
=====================================
Nine months ended September 30, 2007
compared with nine months ended
September 30, 2006
--------------------------------------
Volume Rate Total
--------------------------------------
Increase (decrease) in interest income:
Loans $4,205 $3,674 $7,879
Investment securities (1,577) (80) (1,657)
Federal funds sold (31) - (31)
--------------------------------------
Total interest-earning assets 2,597 3,594 6,191
--------------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits (22) 3 (19)
Savings deposits (126) 1,982 1,856
Time deposits 1,289 2,183 3,472
Federal funds purchased (1,032) 123 (909)
Other borrowings 569 9 578
Junior subordinated debt - 111 111
--------------------------------------
Total interest-bearing liabilities 678 4,411 5,089
--------------------------------------
Increase in Net Interest Income $1,919 ($817) $1,102
======================================
22
Provision for Loan Losses
The Company provided $700,000 for loan losses in the third quarter of 2007
versus $235,000 in the third quarter of 2006. During the third quarter of 2007,
the Company recorded $560,000 of net loan charge-offs versus $135,000 of net
loan charge-offs in the year earlier quarter.
The Company provided $1,682,000 for loan losses during the nine months ended
September 30, 2007 versus $1,289,000 during the nine months ended September 30,
2006. During the nine months ended September 30, 2007, the Company recorded
$1,457,000 of net loan charge-offs versus $522,000 of net loan charge-offs in
the year earlier nine-month period.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------
Service charges on deposit accounts $3,819 $3,703 $11,236 $10,883
ATM fees and interchange 1,016 927 3,011 2,641
Other service fees 523 544 1,633 1,601
Change in value of mortgage servicing rights (141) (118) (226) (256)
Gain on sale of loans 211 264 756 875
Commissions on sale of
nondeposit investment products 583 447 1,633 1,529
Increase in cash value of life insurance 405 420 1,215 1,223
Gain on sale of investments - - - 12
Other noninterest income 431 462 1,218 1,120
----------------------------------------------------
Total noninterest income $6,847 $6,649 $20,476 $19,628
====================================================
Noninterest income for the third quarter of 2007 increased $198,000 (3.0%) from
the year-ago quarter. The increase in noninterest income from the year-ago
quarter was mainly due to a $136,000 (30.4%) increase in commissions on sale of
nondeposit investment products to $583,000, a $116,000 (3.1%) increase in
service charges on deposit accounts to $3,819,000, and an $89,000 (9.6%)
increase in ATM fees and interchange to $1,016,000, that were partially offset
by a $53,000 (20.1%) decrease in gain on sale of loans to $211,000. The increase
in commissions on sale of nondeposit investment products was primarily due to
improved market conditions and increased resources focused in this area. The
increase in service charges on deposit accounts was primarily due to growth in
customer count. The increase in ATM fees and interchange was due to growth in
customer count and expansion of ATM network as part of new branch openings. The
decrease in gain on sale of loans is due to a slowdown in residential mortgage
refinance activity.
Noninterest income for the nine months ended September 30, 2007 increased
$848,000 (4.3%) to $20,476,000 from the same period in 2006. The increase in
noninterest income from the year-ago nine months ended September 30, 2006 was
mainly due mainly due to a $104,000 (6.8%) increase in commissions on sale of
nondeposit investment products to $1,633,000, a $353,000 (3.2%) increase in
service charges on deposit accounts to $11,236,000, and a $370,000 (14.0%)
increase in ATM fees and interchange to $3,011,000, that were partially offset
by a $119,000 (13.6%) decrease in gain on sale of loans to $756,000. The
increase in commissions on sale of nondeposit investment products was primarily
due to improved market conditions and increased resources focused in this area.
The increase in service charges on deposit accounts was primarily due to growth
in customer count. The increase in ATM fees and interchange was due to growth in
customer count and expansion of ATM network as part of new branch openings. The
decrease in gain on sale of loans is due to a slowdown in residential mortgage
refinance activity.
23
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Salaries & benefits $8,975 $9,276 $28,336 $27,050
Occupancy 1,178 1,170 3,526 3,298
Equipment 1,052 1,018 3,222 3,187
Advertising and marketing 620 655 1,624 1,628
Data processing and software 564 453 1,482 1,259
ATM network charges 463 475 1,389 1,375
Telecommunications 412 380 1,240 1,165
Professional fees 408 375 1,217 1,265
Courier service 285 312 867 925
Postage 178 261 602 753
Operational losses 128 89 313 218
Intangible amortization 122 350 367 1,046
Assessments 82 83 247 243
Other 2,285 2,129 6,723 6,312
-----------------------------------------------------
Total $16,752 $17,026 $51,155 $49,724
=====================================================
Average full time equivalent staff 646 630 636 619
Noninterest expense to revenue (FTE) 58.01% 59.27% 59.12% 59.82%
Noninterest expense for the third quarter of 2007 decreased $274,000 (1.6%)
compared to the third quarter of 2006. Salaries and benefits expense decreased
$301,000 (3.2%) to $8,975,000. The decrease in salaries and benefits expense was
mainly due to reduced commission and incentive expense that was partially offset
by annual salary increases, and new employees at the Company's recently opened
branches. The reduced commission and incentive expense was due to the Company's
employees not earning certain bonus and incentive compensation which is tied to
the Company satisfying internal targeted performance goals. The Company did not
meet such goals for the third quarter of 2007 and thus did not incur the related
compensation expense. Intangible amortization decreased $228,000 (65%) to
$122,000 during the third 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.
Noninterest expense for the nine months ended September 30, 2007 increased
$1,431,000 (2.9%) compared to the nine months ended September 30, 2006. Salaries
and benefits expense increased $1,286,000 (4.8%) to $28,336,000. The increase in
salaries and benefits expense was mainly due to annual salary increases and new
employees at the Company's recently opened branches that were partially offset
by reduced commission and incentive expense. Intangible amortization decreased
$679,000 (65%) to $367,000 during the nine months ended September 30, 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 September 30, 2007 was 39.5%
compared to 39.3% for the three months ended September 30, 2006. The effective
tax rate for the nine months ended September 30, 2007 was 39.2% and reflects no
change from 39.2% for the nine months ended September 30, 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.
24
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention to ensure collection.
The following is a summary of classified assets on the dates indicated (dollars
in thousands):
At September 30, 2007 At December 31, 2006
------------------------- --------------------------
Gross Guaranteed Net Gross Guaranteed Net
------------------------- --------------------------
Classified loans $18,982 $6,114 $12,868 $13,116 $6,514 $6,602
Other classified assets 187 - 187 - - -
------------------------------------------------------
Total classified assets $19,169 $6,114 $13,055 $13,116 $6,514 $6,602
======================================================
Allowance for loan losses/classified loans 133.2% 256.2%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies at September 30, 2007, increased
$ 6,453,000 (97.7%) to $ 13,055,000 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
nine months, ended September 30, 2007, if all such loans had been current in
accordance with their original terms, totaled $1,112,000. Interest income
actually recognized on these loans during the nine months ended September 30,
2007 was $650,000.
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 consolidated financial statements.
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.
25
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 $3,182,000 (70.5%) to $7,694,000 during the first nine
months of 2007. Nonperforming assets net of guarantees represent 0.39% of total
assets. All nonaccrual loans are considered to be impaired when determining the
need for a specific valuation allowance. The Company continues to make a
concerted effort to work problem and potential problem loans to reduce risk of
loss.
(dollars in thousands):
At September 30, 2007 At December 31, 2006
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
Performing nonaccrual loans $9,521 $5,980 $3,541 $10,255 $6,372 $3,883
Nonperforming, nonaccrual loans 3,952 - 3,952 561 - 561
------------------------------------------------------
Total nonaccrual loans 13,473 5,980 7,493 10,816 6,372 4,444
Loans 90 days past due and still accruing 14 - 14 68 - 68
------------------------------------------------------
Total nonperforming loans 13,487 5,980 7,507 10,884 6,372 4,512
Other real estate owned 187 - 187 - - -
------------------------------------------------------
Total nonperforming assets $13,674 $5,980 $7,694 $10,884 $6,372 $4,512
======================================================
Nonperforming loans to total loans 0.49% 0.30%
Nonperforming assets to total assets 0.39% 0.24%
Allowance for loan losses to nonperforming loans 228% 375%
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management.
On August 21, 2007, the Company announced the completion of its stock repurchase
plan originally adopted on July 31, 2003 and amended on April 9, 2004. Under
this plan, the Company repurchased a total of 500,000 shares of its common stock
with the final 105,629 shares being repurchased during August 2007 at an average
price of $20.97 per share.
Also on August 21, 2007, the Board of Directors adopted a new plan to
repurchase, as conditions warrant, up to 500,000 shares of the Company's common
stock on the open market. The timing of purchases and the exact number of shares
to be purchased will depend on market conditions. The 500,000 shares authorized
for repurchase under this new stock repurchase plan represented approximately
3.2% of the Company's 15,814,662 outstanding common shares as of August 21,
2007. This new stock repurchase plan has no expiration date.
The Company's primary capital resource is shareholders' equity, which was
$182,725,000 at September 30, 2007. This amount represents an increase of
$13,289,000 from December 31, 2006, the net result of comprehensive income for
the period of $20,885,000, the issuance of common shares via the exercise of
stock options for proceeds of $3,863,000, the tax effects of stock option
exercises of $1,707,000, and the effect of stock option vesting of $579,000,
partially offset by the repurchase of common stock with an aggregate value of
$2,685,000, the retirement of common stock with an aggregate value of $4,859,000
tendered by employees, in lieu of cash, to exercise stock options, and dividends
paid of $6,201,000. The Company's ratio of equity to total assets was 9.35%,
8.67%, and 8.82% as of September 30, 2007, September 30, 2006, and December 31,
2006, respectively.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At September 30, At Minimum
----------------- December 31, Regulatory
2007 2006 2006 Requirement
-----------------------------------------------
Tier I Capital 10.68% 10.07% 10.44% 4.00%
Total Capital 11.66% 11.08% 11.44% 8.00%
Leverage ratio 11.28% 10.13% 10.49% 4.00%
The information presented under "Liquidity" at Item 3 of this Report is
incorporated herein by reference.
26
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 September
30, 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 $ 695,913,000 and $623,133,000 at September
30, 2007 and December 31, 2006, respectively, and represent 45.3% of the total
loans outstanding at September 30, 2007 versus 41.3% at December 31, 2006.
Commitments related to the Bank's deposit overdraft privilege product totaled
$33,596,000 and $33,290,000 at September 30, 2007 and December 31, 2006,
respectively.
27
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Company has an Asset and Liability Management Committee (ALCO)
which establishes and monitors guidelines to control the sensitivity of earnings
to changes in interest rates.
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin, net income and market value of equity under changing interest
environments. Market value of equity is the net present value of estimated cash
flows from the Company's assets, liabilities and off-balance sheet items. The
Company uses simulation models to forecast net interest margin, net income and
market value of equity.
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Company is able to estimate
the potential impact of changing interest rates on net interest margin, net
income and market value of equity. A balance sheet forecast is prepared using
inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
-300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
At September 30, 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 September 30, 2007 and 2006, the Company had no material derivative financial
instruments.
There have been no material changes from the information regarding market risk
disclosed under Market Risk Management" at Item 7 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2006.
28
Liquidity
The Company's principal source of asset liquidity is federal funds sold and
marketable investment securities available for sale. At September 30, 2007,
federal funds sold and investment securities available for sale totaled
$239,730,000, representing an increase of $40,575,000 (20.4%) from December 31,
2006, and an increase of $28,457,000 (13.5%) from September 30, 2006. In
addition, the Company generates additional liquidity from its operating
activities. The Company's profitability during the first nine months of 2007
generated cash flows from operations of $23,518,000 compared to $25,219,000
during the first nine months of 2006. Additional cash flows may be provided by
financing activities, primarily the acceptance of deposits and borrowings from
banks. Maturities and sales of investment securities produced cash inflows of
$38,954,000 and $0 respectively, during the nine months ended September 30, 2007
compared to $40,208,000 and $10,780, respectively, for the nine months ended
September 30, 2006. During the nine months ended September 30, 2007, the Company
invested $78,822,000 in securities and $26,841,000 in net loan growth, compared
to investing $896,000 and $122,648,000 in securities and net loan growth,
respectively, during the first nine months of 2006. These changes in investment
and loan balances contributed to net cash used by investing activities of
$69,640,000 and $75,870,000 during the nine months ended September 30, 2007 and
2006, respectively. Financing activities provided net cash of $14,387,000 and
$37,380 during the nine months ended September 30, 2007 and 2006, respectively.
A decrease in deposit balances accounted for a $67,007,000 use of financing
funds during the nine months ended September 30, 2007 compared to a $28,377,000
source of financing funds during the nine months ended September 30, 2006 from
an increase in deposit balances. Federal funds borrowed increased $28,000,000
and $9,700,000 in the first nine months of 2007 and 2006, respectively. The
issuance of long-term other borrowings provided $50,000,000 and $0 of cash
during the nine months ended September 30, 2007 and 2006, respectively.
Increases in short-term other borrowings provided $10,136,000 and $4,502,000 of
cash during the nine months ended September 30, 2007 and 2006, respectively.
Dividends paid used $6,201,000 and $5,692,000 of cash during the nine months
ended September 30, 2007 and 2006, respectively. Repurchase of common stock used
$2,685,000 and $0 of cash during the nine months ended September 30, 2007 and
2006, respectively. Also, the Company's liquidity is dependent on dividends
received from the Bank. Dividends from the Bank are subject to certain
regulatory restrictions.
Item 4. Controls and Procedures
The Chief Executive Officer, Richard Smith, and the Chief Financial Officer,
Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls
and procedures as of September 30, 2007 ("Evaluation Date"). Based on that
evaluation, they concluded that as of the Evaluation Date the Company's
disclosure controls and procedures are effective to allow timely communication
to them of information relating to the Company and the Bank required to be
disclosed in its filings with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934, as amended ("Exchange Act").
Disclosure controls and procedures are Company controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
No changes in the Company's internal control over financial reporting occurred
during the first nine months of 2007 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
29
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; all such actions are of a routine nature and arise in the normal
course of business of the Bank.
Item 1A - Risk Factors
There have been no material changes to the risk factors previously disclosed in
Item 1A to Part I of our Annual Report on Form 10-K for the year ended December
31, 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 third quarter of 2007 pursuant to (i) 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, and (ii) the Company's stock repurchase plan originally announced on
August 21, 2007 which are discussed in more detail under "Capital Resources" at
Part I, Item 2, of this report:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number
of Shares purchased paid per share shares purchased as of shares that may yet
part of publicly be purchased under the
announced plans or plans or programs
programs
-------------------------------------------------------------------------------------------------------
Jul. 1-31, 2007 - - - 105,629
Aug. 1-31, 2007 105,629 $20.97 105,629 500,000
Sep. 1-30, 2007 - - - 500,000
--------------------------------------------------------------------------------------------------------
Total 105,629 $20.97 105,629 500,000
During the quarter ended September 30, 2007, employees tendered 202,378 shares
of the Company's common stock with an aggregate value of $4,859,000, in lieu of
cash, to exercise stock options.
30
Item 6 - Exhibits
3.1* Restated Articles of Incorporation dated May 9, 2003, filed as Exhibit
3.1 to TriCo's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003.
3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to
TriCo's Form S-4 Registration Statement dated January 16, 2003 (No.
333-102546).
4* Certificate of Determination of Preferences of Series AA Junior
Participating Preferred Stock filed as Exhibit 3.3 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001.
10.1* Rights Agreement dated June 25, 2001, between TriCo and Mellon
Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated
July 25, 2001.
10.2* Form of Change of Control Agreement dated as of August 23, 2005,
between TriCo, Tri Counties Bank and each of Dan Bailey, Bruce Belton,
Craig Carney, Gary Coelho, W.R. Hagstrom, 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.
31
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.
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 Dan Bailey, 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.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
Date: November 6, 2007 /s/ Thomas J. Reddish
------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
33
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
information; 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: November 6, 2007 /s/ Richard P. Smith
-------------------------------------
Richard P. Smith
President and Chief Executive Officer
34
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
information; 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: November 6, 2007 /s/ Thomas J. Reddish
------------------------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
35
Exhibit 32.1
Section 1350 Certification of CEO
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ended September 30, 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 September 30, 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.
36