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| TCBK > SEC Filings for TCBK > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
The Company's discussion and analysis of its financial condition and results of operations is intended to provide a better understanding of the significant changes and trends relating to the Company's financial condition, results of operations, liquidity, interest rate sensitivity, off balance sheet arrangements and certain contractual obligations. The following discussion is based on the Company's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. Please read the Company's audited consolidated financial statements and the related notes included as Item 8 of this report.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States 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 that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans and intangible assets. 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 Company's policies related to estimates on the allowance for loan losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 to the Company's audited consolidated financial statements and the related notes included as Item 8 of this report.
As the Company has not commenced any business operations independent of the Bank, the following discussion pertains primarily to the Bank. Average balances, including 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, certain performance measures including interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (FTE) basis. The Company believes the use of these non-GAAP measures provides additional clarity in assessing its results.
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank's financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the consolidated financial statements of the Company and the related notes at Item 8 of this report.
Results of Operations
Net Income
Following is a summary of the Company's net income for the past three years
(dollars in thousands, except per share amounts):
Year ended December 31,
-----------------------------------------------------------------------------
Components of Net Income 2008 2007 2006
--------------------------------
Net interest income * $90,237 $87,529 $86,857
Provision for loan losses (20,950) (3,032) (1,289)
Noninterest income 27,087 27,590 26,255
Noninterest expense (68,738) (68,906) (66,726)
Taxes * (10,838) (17,488) (18,267)
--------------------------------
Net income $16,798 $25,693 $26,830
================================
Net income per average fully-diluted share $1.05 $1.57 $1.64
Net income as a percentage of average
shareholders' equity 8.70% 14.20% 16.61%
Net income as a percentage of average
total assets 0.85% 1.36% 1.44%
=============================================================================
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Earnings in 2008 decreased $8,895,000 (34.6%) from 2007. Net interest income (FTE) grew $2,708,000 (3.1%) due to a $94,575,000 (5.5%) increase in average earning assets while net interest margin (FTE) decreased 11 basis points to 4.96%. The provision for loan losses increased $17,918,000 in 2008 to $20,950,000 for the year ended December 31, 2008 from $3,032,000 for the year ended December 31, 2007. Noninterest income and noninterest expense decreased $503,000 (1.8%) and $168,000 (0.2%), respectively.
Earnings in 2007 decreased $1,137,000 (4.2%) from 2006. Net interest income (FTE) grew $672,000 (0.8%) due to a $35,511,000 (2.1%) increase in average earning assets while net interest margin decreased 0.07% to 5.07%. The loan loss provision increased $1,743,000 in 2007 from 2006, and noninterest income increased $1,335,000 (5.1%) while noninterest expense also increased $2,180,000 (3.3%).
The Company's return on average total assets was 0.85% in 2008 compared to 1.36% and 1.44% in 2007 and 2006, respectively. Return on average equity in 2008 was 8.70% compared to 14.20% and 16.61% in 2007 and 2006, respectively.
Net Interest Income
The Company's primary source of revenue is net interest income, which is the
difference between interest income on earning assets and interest expense on
interest-bearing liabilities. Net interest income (FTE) increased $2,708,000
(3.1%) to $90,237,000 from 2007 to 2008. Net interest income (FTE) increased
$672,000 (0.8%) to $87,529,000 from 2006 to 2007.
Following is a summary of the Company's net interest income for the past three
years (dollars in thousands):
Year ended December 31,
------------------------------------------------------------------------------
Components of Net Interest Income 2008 2007 2006
----------------------------------------
Interest income $121,112 $127,268 $120,323
Interest expense (31,552) (40,582) (34,445)
FTE adjustment 677 843 979
----------------------------------------
Net interest income (FTE) $90,237 $87,529 $86,857
==============================================================================
Net interest margin (FTE) 4.96% 5.07% 5.14%
==============================================================================
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Interest income (FTE) decreased $6,322,000 (4.9%) from 2007 to 2008, due to 73 basis point decrease in average yield on earning-asset that was partially offset by $94,575,000 increase in the average balance of earning-assets. The average yield on earning assets decreased from 7.43% in 2007 to 6.69% in 2008. The average yield on loans decreased 82 basis points to 6.97% during 2008. The decrease in average yield on interest-earning assets decreased interest income (FTE) by $11,938,000, while the increase in average balances of interest-earning assets added $5,916,000 to interest income (FTE) during 2008.
Interest expense decreased $9,030,000 (22.3%) in 2008 from 2007, due to an 80 basis point decrease in the average rate paid on interest-bearing liabilities to 2.26% that was partially offset by a $70,317,000 (5.3%) increase in the average balance of interest-bearing liabilities. The decrease in the average rate paid on interest-bearing liabilities decreased interest expense by $12,399,000 from 2007 to 2008, while the increase in average balances of interest-bearing liabilities increased interest expense by $3,369,000 in 2008.
Interest income (FTE) increased $6,809,000 (5.6%) from 2006 to 2007, the net effect of higher average balances of those assets and higher earning-asset yields. The total yield on earning assets increased from 7.18% in 2006 to 7.43% in 2007. The average yield on loans increased 19 basis points to 7.78% during 2007. The increase in average yield on interest-earning assets increased interest income (FTE) by $3,305,000, while the increase in average balances of interest-earning assets added $3,504,000 to interest income (FTE) during 2007.
Interest expense increased $6,137,000 (17.8%) in 2007 from 2006, due to a 0.44% increase in the average rate paid on interest-bearing liabilities to 3.05% and an $11,385,000 (0.9%) increase in the average balance of interest-bearing liabilities. The increase in the average rate paid on interest-bearing liabilities increased interest expense by $4,932,000 from 2006 to 2007, while the increase in average balances of interest-bearing liabilities increased interest expense by $1,205,000 in 2007.
Net Interest Margin
Following is a summary of the Company's net interest margin for the past three
years:
Year ended December 31,
-----------------------------------------------------------------------------
Components of Net Interest Margin 2008 2007 2006
--------------------------------
Yield on earning assets 6.69% 7.43% 7.18%
Rate paid on interest-bearing liabilities 2.26% 3.05% 2.61%
--------------------------------
Net interest spread 4.43% 4.38% 4.56%
Impact of all other net
noninterest-bearing funds 0.53% 0.69% 0.58%
--------------------------------
Net interest margin (FTE) 4.96% 5.07% 5.14%
==============================================================================
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During the first three quarters of 2007, the Company was able to maintain net interest margin when compared to 2006 as market interest rates remained relatively stable. However, during the fourth quarter of 2007, the Federal funds rate and the prime rate of lending began to decrease while competition for deposits prevented deposit rates from decreasing similarly. As a result, during the fourth quarter of 2007, the average yield the Company was able to earn on interest-earning assets decreased faster than the average rate it paid on interest-bearing liabilities causing the net interest margin (FTE) for all of 2007 to be reduced from 2006 levels. The rate environment throughout 2008 was much like it was in the fourth quarter of 2007, with the prime rate decreasing 400 basis points during 2008 to 3.25% and the Federal Funds target rate reaching an unprecedented 0%-.25% by the end of 2008. While market conditions for deposits in 2008 prevented the Company from lowering deposit rates in proportion to the decrease in the Federal Funds rate, rate floors in many of the Company's loans helped maintain the net interest margin in 2008 relatively close to the 2007 level.
Summary of Average Balances, Yields/Rates and Interest Differential
The following tables present, for the past three years, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average earning assets and resulting yields,
and the amount of interest expense paid on interest-bearing liabilities. Average
loan balances include nonperforming loans. Interest income includes proceeds
from loans on nonaccrual loans only to the extent cash payments have been
received and applied to interest income. Yields on securities and certain loans
have been adjusted upward to reflect the effect of income thereon exempt from
federal income taxation at the current statutory tax rate (dollars in
thousands):
Year ended December 31, 2008
-------------------------------------------
Average Interest Rates
balance income/expense earned/paid
-------------------------------------------
Assets
Loans $1,549,014 $107,896 6.97%
Investment securities - taxable 242,901 11,996 4.94%
Investment securities - nontaxable 24,983 1,863 7.46%
Cash at Federal Reserve and other banks 2,751 31 1.11%
Federal funds sold 144 3 2.08%
----------- --------
Total earning assets 1,819,793 121,789 6.69%
--------
Other assets 166,413
----------
Total assets $1,986,206
==========
Liabilities and shareholders' equity
Interest-bearing demand deposits $225,872 721 0.34%
Savings deposits 384,261 4,759 1.24%
Time deposits 574,910 18,931 3.29%
Federal funds purchased 83,792 1,999 2.39%
Other borrowings 88,879 2,512 2.83%
Junior subordinated debt 41,238 2,580 6.26%
---------- --------
Total interest-bearing 1,398,952 31,552 2.26%
liabilities --------
Noninterest-bearing demand 362,522
Other liabilities 31,613
Shareholders' equity 193,119
-----------
Total liabilities and shareholders' $1,986,206
equity ===========
Net interest spread (1) 4.43%
Net interest income and interest margin (2) $90,237 4.96%
========== ======
Year ended December 31, 2007
----------------------------------------------
Average Interest Rates
balance income/expense earned/paid
----------------------------------------------
Assets
Loans $1,511,331 $117,639 7.78%
Investment securities - taxable 183,493 8,158 4.45%
Investment securities - nontaxable 30,032 2,297 7.65%
Federal funds sold 362 17 4.70%
---------- --------
Total earning assets 1,725,218 128,111 7.43%
--------
Other assets 169,296
----------
Total assets $1,894,514
==========
Liabilities and shareholders' equity
Interest-bearing demand deposits $224,279 452 0.20%
Savings deposits 385,702 6,238 1.62%
Time deposits 558,247 24,733 4.43%
Federal funds purchased 55,334 2,880 5.20%
Other borrowings 63,835 2,983 4.67%
Junior subordinated debt 41,238 3,296 7.99%
---------- --------
Total interest-bearing liabilities 1,328,635 40,582 3.05%
--------
Noninterest-bearing demand 351,815
Other liabilities 33,066
Shareholders' equity 180,998
----------
Total liabilities and shareholders' $1,894,514
equity ==========
Net interest spread (1) 4.38%
Net interest income and interest margin (2) $87,529 5.07%
======= ======
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.
(2) Net interest margin is computed by dividing net interest income by
total average earning assets.
27
Year ended December 31, 2006
----------------------------------------------
Average Interest Rates
balance income/expense earned/paid
----------------------------------------------
Assets
Loans $1,447,163 $109,769 7.59%
Investment securities - taxable 206,989 8,749 4.23%
Investment securities - nontaxable 34,400 2,728 7.93%
Federal funds sold 1,155 56 4.85%
---------- ---------
Total earning assets 1,689,707 121,302 7.18%
---------
Other assets 171,343
----------
Total assets $1,861,050
===========
Liabilities and shareholders' equity
Interest-bearing demand deposits $236,881 477 0.20%
Savings deposits 395,744 3,556 0.90%
Time deposits 527,019 21,427 4.07%
Federal funds purchased 81,237 4,116 5.07%
Other borrowings 35,131 1,667 4.75%
Junior subordinated debt 41,238 3,202 7.76%
---------- --------- -
Total interest-bearing liabilities 1,317,250 34,445 2.61%
---------
Noninterest-bearing demand 352,617
Other liabilities 29,641
Shareholders' equity 161,542
----------
Total liabilities and shareholders' $1,861,050
equity ===========
Net interest spread (1) 4.56%
Net interest income and interest margin (2) $86,857 5.14%
========= ======
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.
(2) Net interest margin is computed by dividing net interest income by
total average earning assets.
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Summary of Changes in Interest Income and Expense due to Changes in Average
Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth a summary of the changes in the Company's
interest income and interest expense from changes in average asset and liability
balances (volume) and changes in average interest rates for the past three
years. The rate/volume variance has been included in the rate variance. Amounts
are calculated on a fully taxable equivalent basis:
2008 over 2007 2007 over 2006
-------------------------------------------------------------------------
Yield/ Yield/
Volume Rate Total Volume Rate Total
-------------------------------------------------------------------------
(dollars in thousands)
Increase (decrease) in
interest income:
Loans $2,933 ($12,676) ($9,743) $4,867 $3,003 $7,870
Investment securities 2,662 742 3,404 (1,325) 303 (1,022)
Cash at Federal Reserve and other banks 31 - 31 - - -
Federal funds sold (10) (4) (14) (38) (1) (39)
--------------------------------------------------------------------------
Total 5,616 (11,938) (6,322) 3,504 3,305 6,809
--------------------------------------------------------------------------
Increase (decrease) in
interest expense:
Demand deposits (interest-bearing) 3 316 319 (25) - (25)
Savings deposits (23) (1,456) (1,479) (90) 2,772 2,682
Time deposits 738 (6,540) (5,802) 1,270 2,036 3,306
Federal funds purchased 1,481 (2,362) (881) (1,312) 76 (1,236)
Junior subordinated debt - (716) (716) - 94 94
Other borrowings 1,170 (1,641) (471) 1,362 (46) 1,316
--------------------------------------------------------------------------
Total 3,369 (12,399) (9,030) 1,205 4,932 6,137
--------------------------------------------------------------------------
Increase (decrease) in
net interest income $2,247 $461 $2,708 $2,299 ($1,627) $672
==========================================================================
|
In 2008, the Bank provided $20,950,000 for loan losses compared to $3,032,000 in 2007. Net loan charge-offs increased $8,076,000 (309%) to $10,691,000 during 2008. The 2008 charge-offs represented 0.69% of average loans outstanding versus 0.17% in 2007. Nonperforming loans net of government agency guarantees as a percentage of total loans were 1.73% and 0.48% at December 31, 2008 and 2007, respectively. The ratio of allowance for loan losses to nonperforming loans was 100% at the end of 2008 versus 231% at the end of 2007.
In 2007, the Bank provided $3,032,000 for loan losses compared to $1,289,000 in 2006. Net loan charge-offs increased $2,014,000 (335%) to $2,615,000 during 2007. The 2007 charge-offs represented 0.17% of average loans outstanding versus 0.04% in 2006. Nonperforming loans net of government agency guarantees as a percentage of total loans were 0.48% and 0.30% at December 31, 2007 and 2006, respectively. The ratio of allowance for loan losses to nonperforming loans was 231% at the end of 2007 versus 375% at the end of 2006.
Noninterest Income
The following table summarizes the Company's noninterest income for the past
three years (dollars in thousands):
Year ended December 31,
-----------------------------------------------------------------------------
Components of Noninterest Income 2008 2007 2006
---------------------------------
Service charges on deposit accounts $15,744 $15,449 $14,461
ATM fees and interchange 4,515 4,068 3,581
Other service fees 2,156 2,173 2,167
Change in value of mortgage servicing rights (1,860) (490) (400)
Gain on sale of loans 1,127 994 1,224
Commissions on sale of
nondeposit investment products 2,069 2,331 1,946
Increase in cash value of life insurance 1,834 1,445 1,767
Other noninterest income 1,502 1,620 1,509
---------------------------------
Total noninterest income $27,087 $27,590 $26,255
==============================================================================
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Noninterest income decreased $503,000 (1.8%) to $27,087,000 in 2008. Service charges on deposit accounts were up $295,000 (1.9%) due to growth in number of customers. ATM fees and interchange was up $447,000 (11.0%) due to growth in number of customers and the introduction of the Company's Perfect Choice Checking product in 2008. Overall, mortgage banking activities, which includes amortization of mortgage servicing rights, mortgage servicing fees, change in value of mortgage servicing rights, and gain on sale of loans, accounted for . . .
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