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| TCBK > SEC Filings for TCBK > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
General
As TriCo Bancshares (referred to in this report as "we", "our" or 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 of America. The preparation of these consolidated 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 consolidated financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans, acquired loans, indemnification asset 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 can be found in Note 1 in the consolidated financial statements at Item 1 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-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results.
On September 23, 2011, the California Department of Financial Institutions closed Citizens Bank of Northern California ("Citizens"), Nevada City, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Citizens from the FDIC under a whole bank purchase and assumption agreement without loss sharing. With this agreement, the Bank added seven traditional bank branches including two in Grass Valley, and one in each of Nevada City, Penn Valley, Lake of the Pines, Truckee, and Auburn, California. This acquisition is consistent with the Bank's community banking expansion strategy and provides further opportunity to fill in the Bank's market presence in the Northern California market. During the quarter ended March 31, 2012, the Bank consolidated the operations of Citizens' Auburn branch with the Bank's existing Auburn branch.
On May 28, 2010, the Office of the Comptroller of the Currency closed Granite Community Bank ("Granite"), Granite Bay, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Granite from the FDIC under a whole bank purchase and assumption agreement with loss sharing. Under the terms of the loss sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, other real estate owned (OREO)/foreclosed assets and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the covered assets acquired from Granite. The loss sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. With this agreement, the Bank added one traditional bank branch in each of Granite Bay and Auburn, California. This acquisition is consistent with the Bank's community banking expansion strategy and provides further opportunity to fill in the Bank's market presence in the greater Sacramento, California market.
The Company refers to loans and foreclosed assets that are covered by loss sharing agreements as "covered loans" and "covered foreclosed assets", respectively. In addition, the Company refers to loans purchased or obtained in a business combination as "purchased credit impaired" (PCI) loans, or "purchased non-credit impaired" (PNCI) loans. The Company refers to loans that it originates as "Originated" loans. Additional information regarding the Citizens and Granite Bank acquisitions can be found in Note 2 in the consolidated financial statements at Item 1 of this report. Additional information regarding the definitions and accounting for originated, PNCI and PCI loans can be found in Notes 1, 2, 4 and 5 in the consolidated financial statements at Item 1 of this report, and under the heading Asset Quality and Non-Performing Assets below.
Geographical Descriptions
For the purpose of describing the geographical location of the Company's loans, the Company has defined northern California as that area of California north of, and including, Stockton; central California as that area of the State south of Stockton, to and including, Bakersfield; and southern California as that area of the State south of Bakersfield.
Overview
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.
Following is a summary of the components of fully taxable equivalent ("FTE") net income for the periods indicated (dollars in thousands):
Three months ended Six months ended
June 30, June 30,
2012 2011 2012 2011
Net Interest Income (FTE) $ 25,998 $ 21,833 $ 51,099 $ 43,620
Provision for loan losses (3,371 ) (5,561 ) (7,367 ) (12,562 )
Noninterest income 10,577 8,251 18,842 17,601
Noninterest expense (24,367 ) (20,095 ) (47,282 ) (39,766 )
Provision for income taxes (FTE) (3,516 ) (1,657 ) (6,040 ) (3,322 )
Net income $ 5,321 $ 2,771 $ 9,252 $ 5,571
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Net Interest Income
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. Following is a summary of the
components of net interest income for the periods indicated (dollars in
thousands):
Three months ended Six month ended
June 30, June 30,
2012 2011 2012 2011
Interest income $ 27,944 $ 24,467 $ 55,108 $ 48,901
Interest expense (2,010 ) (2,714 ) (4,138 ) (5,444 )
FTE adjustment 64 80 129 163
Net interest income (FTE) $ 25,998 $ 21,833 $ 51,099 $ 43,620
Net interest margin (FTE) 4.46 % 4.31 % 4.38 % 4.31 %
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Net interest income (FTE) during the three months ended June 30, 2012 increased $4,165,000 (19.1%) from the same period in 2011 to $25,998,000. The increase in net interest income (FTE) was due to a $140,017,000 (10.4%) increase in average balance of loans and a 49 basis point increase in average yield on loans to 6.73%, both of which are primarily due to the Citizens acquisition in September 2011. The operations of Citizens from April 1, 2012 to June 30, 2012 added approximately $5,032,000 and $5,000 to interest income and interest expense, respectively. Included in the $5,032,000 of Citizens related interest income recorded during the three months ended June 30, 2012, is $2,278,000 of interest income from fair value discount accretion. For more information related to the increase in average yield on loans, see the details of loan interest income and purchase discount accretion at Note 30 to the consolidated financial statements at Part I, Item 1 of this report. Also contributing to the increase in net interest income during the three months ended June 30, 2012 was a 19 basis point decrease in the cost of deposits from 0.39% during the three months ended June 30, 2011 to 0.20% during the three months ended June 30, 2012.
Net interest income (FTE) during the six months ended June 30, 2012 increased $7,479,000 (17.2%) from the same period in 2011 to $51,099,000. The increase in net interest income (FTE) was due to a $135,611,000 (9.7%) increase in average balance of loans and a 40 basis point increase in average yield on loans to 6.63%, both of which are primarily due to the Citizens acquisition in September 2011. The operations of Citizens from January 1, 2012 to June 30, 2012 added approximately $9,616,000 and $13,000 to interest income and interest expense, respectively. Included in the $9,616,000 of Citizens related interest income recorded during the six months ended June 30, 2012, is $4,259,000 of interest income from fair value discount accretion. For more information related to the increase in average yield on loans, see the details of loan interest income and purchase discount accretion at Note 30 to the consolidated financial statements at Part I, Item 1 of this report. Also contributing to the increase in net interest income during the six months ended June 30, 2012 was a 18 basis point decrease in the cost of deposits from 0.39% during the six months ended June 30, 2011 to 0.21% during the six months ended June 30, 2012.
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 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
June 30, 2012 June 30, 2011
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense /Paid Balance Expense /Paid
Assets:
Loans $ 1,534,006 $ 25,792 6.73 % $ 1,393,989 $ 21,735 6.24 %
Investment securities-taxable 208,417 1,615 3.10 % 271,089 2,354 3.47 %
Investment securities-nontaxable
(FTE) 9,561 171 7.15 % 11,839 216 7.31 %
Cash at Federal Reserve and other
banks 579,164 430 0.30 % 351,512 242 0.28 %
Total interest-earning assets (FTE) 2,331,148 28,008 4.81 % 2,028,429 24,547 4.84 %
Other assets 177,951 164,222
Total assets $ 2,509,099 $ 2,192,651
Liabilities and shareholders' equity:
Interest-bearing demand deposits $ 473,124 197 0.17 % $ 408,109 358 0.35 %
Savings deposits 731,988 296 0.16 % 613,924 372 0.24 %
Time deposits 380,943 584 0.61 % 406,436 1,072 1.06 %
Other borrowings 62,300 601 3.86 % 59,139 600 4.06 %
Junior subordinated debt 41,238 332 3.22 % 41,238 312 3.03 %
Total interest-bearing liabilities 1,689,593 2,010 0.48 % 1,528,846 2,714 0.71 %
Noninterest-bearing deposits 562,909 424,331
Other liabilities 33,569 33,711
Shareholders' equity 223,028 205,763
Total liabilities and shareholders'
equity $ 2,509,099 $ 2,192,651
Net interest spread(1) (FTE) 4.33 % 4.13 %
Net interest income and interest
margin(2) (FTE) $ 25,998 4.46 % $ 21,833 4.31 %
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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 Average Balances, Yields/Rates and Interest Differential (continued)
For the six months ended
June 30, 2012 June 30, 2011
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense /Paid Balance Expense /Paid
Assets:
Loans $ 1,530,771 $ 50,721 6.63 % $ 1,395,160 $ 43,457 6.23 %
Investment securities-taxable 216,577 3,374 3.12 % 273,793 4,735 3.46 %
Investment securities-nontaxable
(FTE) 9,561 344 7.20 % 11,951 439 7.34 %
Cash at Federal Reserve and other
banks 576,086 798 0.28 % 345,453 433 0.25 %
Total interest-earning assets (FTE) 2,332,995 55,237 4.74 % 2,026,357 49,064 4.84 %
Other assets 178,825 164,650
Total assets $ 2,511,820 $ 2,191,007
Liabilities and shareholders' equity:
Interest-bearing demand deposits $ 456,455 414 0.18 % $ 405,188 707 0.35 %
Savings deposits 761,289 593 0.16 % 603,004 739 0.25 %
Time deposits 391,964 1,254 0.64 % 419,301 2,183 1.04 %
Other borrowings 66,202 1,207 3.65 % 59,181 1,193 4.03 %
Junior subordinated debt 41,238 670 3.25 % 41,238 622 3.02 %
Total interest-bearing liabilities 1,717,148 4,138 0.48 % 1,527,912 5,444 0.71 %
Noninterest-bearing deposits 539,380 424,710
Other liabilities 33,595 33,736
Shareholders' equity 221,697 204,649
Total liabilities and shareholders'
equity $ 2,511,820 $ 2,191,007
Net interest spread(1) (FTE) 4.26 % 4.13 %
Net interest income and interest
margin(2) (FTE) $ 51,099 4.38 % $ 43,620 4.31 %
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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 (in thousands).
Three months ended June 30, 2012
compared with three months ended
June 30, 2011
Volume Rate Total
Increase (decrease) in interest income:
Loans $ 2,184 $ 1,873 $ 4,057
Investment securities (FTE) (586 ) (198 ) (784 )
Cash at Federal Reserve and other banks 159 29 188
Total interest-earning assets (FTE) 1,757 1,704 3,461
Increase (decrease) in interest expense:
Interest-bearing demand deposits 57 (218 ) (161 )
Savings deposits 71 (147 ) (76 )
Time deposits (68 ) (420 ) (488 )
Other borrowings 32 (31 ) 1
Junior subordinated debt - 20 20
Total interest-bearing liabilities 92 (796 ) (704 )
Increase (decrease) in Net Interest Income (FTE) $ 1,665 $ 2,500 $ 4,165
Six months ended June 30, 2012
compared with six months
ended June 30, 2011
Volume Rate Total
Increase (decrease) in interest income:
Loans $ 4,224 $ 3,040 $ 7,264
Investment securities (FTE) (1,078 ) (378 ) (1,456 )
Cash at Federal Reserve and other banks 288 77 365
Total interest-earning assets (FTE) 3,434 2,739 6,173
Increase (decrease) in interest expense:
Interest-bearing demand deposits 90 (383 ) (293 )
Savings deposits 198 (344 ) (146 )
Time deposits (142 ) (787 ) (929 )
Other borrowings 141 (127 ) 14
Junior subordinated debt - 48 48
Total interest-bearing liabilities 287 (1,593 ) (1,306 )
Increase (decrease) in Net Interest Income (FTE) $ 3,147 $ 4,332 $ 7,479
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Provision for Loan Losses
The Company provided $3,371,000 for loan losses in the second quarter of 2012 versus $3,996,000 in the first quarter of 2012 and $7,367,000 in the second quarter of 2011. Included in the provision for loan losses during the quarter ended June 30, 2012, was $281,000 related to Citizens loans. The allowance for loan losses increased $397,000 from $45,452,000 at March 31, 2012 to $45,849,000 at June 30, 2012. The decrease in provision for loan losses during the second quarter of 2012 compared to the first quarter of 2012 was primarily the result of a decrease in nonperforming Originated loans and a decrease in net loan charge offs.
The Company provided $3,996,000 for loan losses in the first quarter of 2012 versus $5,429,000 in the fourth quarter of 2011 and $7,001,000 in the first quarter of 2011. In accordance with industry guidance, related to real estate 1-4 family junior lien mortgages, issued by bank regulators during the first quarter of 2012, $6,541,000 of performing junior liens were reclassified from a Pass rating to a rating of Special Mention due to concerns regarding the performance of the associated priority liens. This reclassification resulted in additional provisions for loan losses of $1,596,000. Also included in the provision for loan losses during the quarter ended March 31, 2012, was $1,467,000 related to Citizens loans. The allowance for loan losses decreased $462,000 from $45,914,000 at December 31, 2011 to $45,452,000 at March 31, 2012. The decreases in provision for loan losses and in the allowance for loan losses during the first quarter of 2012 were primarily the result of a decrease in nonperforming loans that was partially offset by the increased provision related to real estate 1-4 family junior lien mortgages and the provision related to Citizens loans noted above.
Management re-evaluates the loss ratios and assumptions of its Originated and PNCI loan portfolios and makes changes as appropriate based upon, among other things, changes in loss rates experienced, collateral support for underlying loans, changes and trends in the economy, and changes in the loan mix. Management also re-evaluates expected cash flows for its PCI loan portfolio quarterly and makes changes as appropriate based upon, among other things, changes in loan repayment experience, changes in loss rates experienced, and collateral support for underlying loans.
The provision for loan losses related to Originated and PNCI loans is based on management's evaluation of inherent risks in these loan portfolios and a corresponding analysis of the allowance for loan losses. The provision for loan losses related to PCI loan portfolio is based on changes in estimated cash flows expected to be collected on PCI loans. Additional discussion on loan quality, our procedures to measure loan impairment, and the allowance for loan losses is provided under the heading Asset Quality and Non-Performing Assets below.
Noninterest Income
The following table summarizes the Company's noninterest income for the periods
indicated (dollars in thousands):
Three months ended June 30, Six months ended June 30,
2012 2011 2012 2011
Service charges on deposit
accounts $ 3,644 $ 3,700 $ 7,171 $ 7,130
ATM and interchange fees 2,026 1,776 3,845 3,421
Other service fees 570 437 1,173 843
Mortgage banking service fees 379 370 751 731
Change in value of mortgage
servicing rights (464 ) (162 ) (833 ) (222 )
Total service charges and fees 6,155 6,121 12,107 11,903
Gain on sale of loans 1,237 495 2,887 1,220
Commissions on sale of
non-deposit investment products 842 648 1,661 1,008
Increase in cash value of life
insurance 450 450 900 900
Change in indemnification asset 662 144 309 1,836
Gain (loss) on sale of
foreclosed assets 304 185 (54 ) 385
Sale of customer checks 93 67 166 126
Lease brokerage income 90 95 148 128
. . .
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