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| TCBK > SEC Filings for TCBK > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
As TriCo Bancshares (the "Company") has not commenced any business operations independent of Tri Counties Bank (the "Bank"), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management's Discussion and Analysis of Financial Condition and Results of Operations, interest income and net interest income are generally presented on a fully tax-equivalent (FTE) basis. The presentation of interest income and net interest income on a FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a non-FTE basis in the Part I - Financial Information section of this Form 10-Q, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income.
Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, intangible assets, and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. (See caption "Allowance for Loan Losses" for a more detailed discussion).
Results of Operations
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Condensed Consolidated Financial Statements of the Company and the
Notes thereto located at Item 1 of this report.
The Company had quarterly earnings of $2,882,000 for the three months ended March 31, 2009. This represents a decrease of $1,166,000 (28.8%) when compared with earnings of $4,048,000 for the quarter ended March 31, 2008. Diluted earnings per share for the quarter ended March 31, 2009 decreased 28.0% to $0.18 compared to $0.25 for the quarter ended March 31, 2008. The decrease in earnings from the prior year quarter was primarily due to a $3,700,000 (90%) increase in the provision for loan losses to $7,800,000 from $4,100,000, that was partially offset by a $1,605,000 (7.5%) increase in fully taxable equivalent net interest income to $23,151,000 in the quarter ended March 31, 2009 from $21,546,000 in the quarter ended March 31, 2008.
Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands):
Three months ended
March 31,
----------------------
2009 2008
----------------------
Net Interest Income (FTE) $23,151 $21,546
Provision for loan losses (7,800) (4,100)
Noninterest income 6,615 6,850
Noninterest expense (17,201) (17,573)
Provision for income taxes (FTE) (1,883) (2,675)
----------------------
Net income $2,882 $4,048
======================
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Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended
March 31,
-------------------------
2009 2008
-------------------------
Interest income $28,882 $31,130
Interest expense (5,884) (9,765)
FTE adjustment 153 181
-------------------------
Net interest income (FTE) $23,151 $21,546
=========================
Average interest-earning assets $1,887,121 $1,817,212
Net interest margin (FTE) 4.91% 4.74%
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The Company's primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income (FTE) during the first quarter of 2009 increased $1,605,000 (7.5%) from the same period in 2008 to $23,151,000. The increase in net interest income (FTE) was due to a 0.17% increase in net interest margin (FTE) to 4.91% and a $69,909,000 (3.9%) increase in average balances of interest-earning assets to $1,887,121,000.
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2009 decreased $2,248,000
(7.2%) from the first quarter of 2008. The decrease was due to a 0.74% decrease
in the average yield on those interest-earning assets to 6.15% that was
partially offset by a $69,909,000 (3.9%) increase in average balances of
interest-earning assets to $1,887,121,000. The growth in interest-earning assets
was the result of a $45,379,000 increase in average balance of interest-earning
cash at Federal Reserve and other bank and a $30,993,000 (2.0%) increase in
average loan balances to $1,566,350 from the year-ago quarter. The decrease in
the average yield on interest-earning assets was primarily due to a 4.00%
decrease in the prime rate of lending from 7.25% at December 31, 2007 to 3.25%
at December 31, 2008. Interest rate floors in most of the Company's variable
rate loans mitigated the effect of the decrease in the prime rate of lending and
other variable rate indices during this period.
Interest Expense
Interest expense decreased $3,881,000 (39.7%) in the first quarter of 2009
compared to the prior year quarter. The decrease was primarily due to a 1.15%
decrease in the average rate paid on interest-bearing liabilities from 2.78% in
the first quarter of 2008 to 1.63% in the first quarter of 2009. The average
balance of interest-bearing liabilities was up $34,623,000 (2.5%) to
$1,441,816,000 in the quarter ended March 31, 2009 from the year-ago quarter.
The average rates paid for all categories of interest-bearing liabilities were
down except for the average rate paid on interest-bearing demand deposits.
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended
March 31,
-------------------
2009 2008
-------------------
Yield on interest-earning assets 6.15% 6.89%
Rate paid on interest-bearing liabilities 1.63% 2.78%
-------------------
Net interest spread 4.52% 4.11%
Impact of all other net
noninterest-bearing funds 0.39% 0.63%
-------------------
Net interest margin 4.91% 4.74%
===================
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Net interest margin in the first quarter of 2009 increased 0.17% compared to the first quarter of 2008. This increase in net interest margin was due to a 0.41% increase in net interest spread that was partially offset by a 0.24% decrease in the impact of all other net noninterest-bearing funds when compared to the prior year quarter. The increase in net interest margin was mainly due to rate floors on most of the Company's adjustable rate loans that caused decreases in rates paid for interest-bearing liabilities to exceed decreases in rates earned on interest-earning assets.
Summary of Average Balances, Yields/Rates and Interest Differential
The following table presents, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average 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
---------------------------------------------------------------
March 31, 2009 March 31, 2008
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
------------------------------ ------------------------------
Assets:
Loans $1,566,350 $25,513 6.52% $1,535,357 $27,726 7.22%
Investment securities - taxable 252,431 3,083 4.89% 254,778 3,078 4.83%
Investment securities - nontaxable 22,609 417 7.38% 26,725 505 7.57%
Cash at Federal Reserve and other banks 45,731 22 0.19% 352 2 2.27%
------------------------------ -----------------------------
Total interest-earning assets 1,887,121 29,035 6.15% 1,817,212 31,311 6.89%
Other assets 162,072 171,454
---------- ---------
Total assets 2,049,193 1,988,666
========== =========
Liabilities and shareholders' equity:
Interest-bearing demand deposits 258,137 342 0.53% 218,487 87 0.16%
Savings deposits 408,749 893 0.87% 387,490 1,502 1.55%
Time deposits 655,343 3,967 2.42% 551,420 5,588 4.05%
Federal funds purchased - - - 103,565 812 3.14%
Other borrowings 78,349 242 1.24% 104,993 1,063 4.05%
Junior subordinated debt 41,238 440 4.27% 41,238 713 6.92%
---------------------------- -----------------------------
Total interest-bearing liabilities 1,441,816 5,884 1.63% 1,407,193 9,765 2.78%
Noninterest-bearing deposits 366,475 354,207
Other liabilities 38,776 33,817
Shareholders' equity 202,126 193,449
Total liabilities and shareholders' equity $2,049,193 $1,988,666
========== ==========
Net interest spread(1) 4.52% 4.11%
Net interest income and interest margin(2) $23,151 4.91% $21,546 4.74%
================ ==================
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(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 interest expense, divided by the average balance of
interest-earning assets.
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth a summary of the changes in interest income and
interest expense from changes in average asset and liability balances (volume)
and changes in average interest rates for the periods indicated. Changes not
solely attributable to volume or rates have been allocated in proportion to the
respective volume and rate components (n thousands).
Three months ended March 31, 2009
compared with three months
ended March 31, 2008
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $559 ($2,772) ($2,213)
Investment securities (82) (2) (84)
Cash at Federal Reserve and other banks 258 (238) 20
---------------------------------
Total interest-earning assets 735 (3,012) (2,277)
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 16 239 255
Savings deposits 82 (691) (609)
Time deposits 1,052 (2,673) (1,621)
Federal funds purchased (813) 1 (812)
Other borrowings (270) (551) (821)
Junior subordinated debt - (273) (273)
---------------------------------
Total interest-bearing liabilities 67 (3,948) (3,881)
---------------------------------
Increase (decrease) in Net Interest Income $668 $936 $1,604
=================================
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Provision for Loan Losses
The provision for loan losses increased $3,700,000 (90.2%) to $7,800,000 in the
first quarter of 2009 from $4,100,000 in the first quarter of 2008. The increase
in the provision for loan losses was primarily due to higher net loan
charge-offs, increased nonperforming loans, and downgrades in loan
classifications during the first quarter of 2009 compared to the first quarter
of 2008. During the first quarter of 2009, the Company recorded $2,616,000 of
net loan charge-offs versus $2,048,000 of net loan charge-offs in the first
quarter of 2008. The $568,000 (27.7%) increase in net loan charge-offs was
principally related to home equity lines of credit and small business loans that
were partially offset by reduced net charge-offs of residential construction
loans when compared to the year-ago quarter.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (in thousands).
Three months ended March 31,
----------------------------
2009 2008
----------------------------
Service charges on deposit accounts $3,585 $3,838
ATM fees and interchange 1,098 1,079
Other service fees 542 551
Change in value of mortgage servicing rights (173) (340)
Gain on sale of loans 641 258
Commissions on sale of
nondeposit investment products 489 420
Increase in cash value of life insurance 280 360
Gain from VISA IPO - 396
Other noninterest income 153 288
---------------------------
Total noninterest income $6,615 $6,850
===========================
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Noninterest income for the first quarter of 2009 decreased $235,000 (3.4%) from the first quarter of 2008 due primarily to a $396,000 gain from the Company's membership in VISA, Inc. and VISA's initial public offering (IPO) in March 2008, a $253,000 (6.6%) decrease in service charges on deposit accounts to $3,585,000 that were partially offset by a $383,000 (148%) increase in gain on sale of loans and a $167,000 improvement in change in value of mortgage servicing rights over the year-ago quarter. The decrease in service charges on deposit accounts is due to reduced non-sufficient funds as customers reduce their buying due to current economic conditions. These same economic conditions have resulted in lower mortgage rates that have increased refinance activity and improved gain on sale of loans for the Company.
Noninterest Expense
The components of noninterest expense were as follows (dollars in thousands):
Three months ended March 31,
----------------------------
2009 2008
----------------------------
Base salaries, net of
deferred loan origination costs $6,576 $6,333
Incentive compensation 588 560
Benefits and other compensation costs 2,625 2,587
----------------------------
Total salaries and benefits expense 9,789 9,480
----------------------------
Occupancy 1,235 1,188
Equipment 917 982
Provision for losses - unfunded commitments 175 825
Data processing and software 618 615
Telecommunications 332 597
ATM network charges 516 494
Professional fees 311 493
Advertising and marketing 398 319
Postage 279 282
Courier service 173 263
Intangible amortization 134 123
Operational losses 37 113
Provision for OREO losses 162 -
Assessments 302 82
Other 1,823 1,717
--------------------------
Total other noninterest expense 7,412 8,093
--------------------------
Total noninterest expense $17,201 $17,573
==========================
Average full time equivalent staff 621 626
Noninterest expense to revenue (FTE) 57.79% 61.89%
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Noninterest expense for the first quarter of 2009 decreased $372,000 (2.1%) compared to the first quarter of 2008. Salaries and benefits expense increased $309,000 (3.3%) to $9,789,000. The increase in salaries and benefits expense was mainly due to annual salary increases. Provision for losses - unfunded commitments decreased $650,000 (79%) to $175,000 for the quarter ended March 31, 2009 due primarily to estimated losses related to home equity lines of credit and construction loans that were recognized in the first quarter of 2008.
Provision for Income Tax
The effective tax rate for the three months ended March 31, 2009 was 37.5%
compared to 38.1% for the three months ended March 31, 2008. 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.
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention to ensure collection.
The following is a summary of classified assets on the dates indicated (dollars in thousands):
At March 31, 2009 At December 31, 2008
------------------------ -----------------------
Gross Guaranteed Net Gross Guaranteed Net
----------------------------------------------------
Classified loans $84,763 $5,055 $79,708 63,850 $5,379 $58,471
Other classified assets 2,407 2,407 1,185 1,185
----------------------------------------------------
Total classified assets $87,170 $5,055 $82,115 $65,035 $5,379 $59,656
====================================================
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Classified assets, net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies, increased $22,459,000 (37.6%) to $82,115,000 at March 31, 2009 from $59,656,000 at December 31, 2008.
Nonperforming Loans
Loans are reviewed on an individual basis for reclassification to nonaccrual
status when any one of the following occurs: the loan becomes 90 days past due
as to interest or principal, the full and timely collection of additional
interest or principal becomes uncertain, the loan is classified as doubtful by
internal credit review or bank regulatory agencies, a portion of the principal
balance has been charged off, or the Company takes possession of the collateral.
Loans that are placed on nonaccrual even though the borrowers continue to repay
the loans as scheduled are classified as "performing nonaccrual" and are
included in total nonperforming loans. The reclassification of loans as
nonaccrual does not necessarily reflect Management's judgment as to whether they
are collectible.
Interest income is not accrued on loans where Management has determined that the borrowers will be unable to meet contractual principal and/or interest obligations, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, any previously accrued but unpaid interest is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loans are estimated to be fully collectible as to both principal and interest.
Interest income on nonaccrual loans, which would have been recognized during the three months ended March 31, 2009 and 2008, if all such loans had been current in accordance with their original terms, totaled $889,000 and $445,000, respectively. Interest income actually recognized on these loans during the three months ended March 31, 2009 and 2008 was $146,000 and $155,000, respectively.
The Company's policy is to place loans 90 days or more past due on nonaccrual status. In some instances when a loan is 90 days past due Management does not place it on nonaccrual status because the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 30 days. Loans where the collateral has been repossessed are classified as OREO or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements.
Management considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits.
As shown in the following table, total nonperforming assets net of guarantees of the U.S. Government, including its agencies and its government-sponsored agencies, increased $8,057,000 (28%) to $36,767,000 during the first three months of 2009. Nonperforming assets net of guarantees represent 1.77% 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. At March 31, 2009 At December 31, 2008
At September 30, 2008 At December 31, 2007
------------------------- -------------------------
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