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TCBK > SEC Filings for TCBK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for TRICO BANCSHARES /


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.


Table of Contents

Results of Operations

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            Nine months ended
                                          September 30,                 September 30,
                                       2012           2011           2012           2011

  Net Interest Income (FTE)          $  25,696      $  22,086      $  76,795      $  65,706
  Provision for loan losses               (532 )       (5,069 )       (7,899 )      (17,631 )
  Noninterest income                     9,127         14,723         27,969         32,324
  Noninterest expense                  (25,590 )      (20,873 )      (72,872 )      (60,639 )
  Provision for income taxes (FTE)      (3,681 )       (4,397 )       (9,721 )       (7,719 )

  Net income                         $   5,020      $   6,470      $  14,272      $  12,041

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            Nine month ended
                                        September 30,               September 30,
                                     2012           2011          2012          2011
       Interest income             $  27,465      $ 24,472      $ 82,573      $ 73,373
       Interest expense               (1,834 )      (2,465 )      (5,972 )      (7,909 )
       FTE adjustment                     65            79           194           242

       Net interest income (FTE)   $  25,696      $ 22,086      $ 76,795      $ 65,706

       Net interest margin (FTE)        4.37 %        4.34 %        4.38 %        4.32 %

Net interest income (FTE) during the three months ended September 30, 2012 increased $3,610,000 (16.3%) from the same period in 2011 to $25,696,000. The increase in net interest income (FTE) was primarily due to a $163,665,000 (11.6%) increase in average balance of loans and a 25 basis point increase in average yield on loans to 6.49%, both of which are primarily due to the Citizens acquisition in September 2011. The operations of Citizens from July 1, 2012 to September 30, 2012 added approximately $4,130,000 and $79,000 to interest income and interest expense, respectively. Included in the $4,130,000 of Citizens related interest income recorded during the three months ended September 30, 2012, is $1,658,000 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.

Net interest income (FTE) during the nine months ended September 30, 2012 increased $11,089,000 (16.9%) from the same period in 2011 to $76,795,000. The increase in net interest income (FTE) was primarily due to a $145,065,000 (10.4%) increase in average balance of loans and a 35 basis point increase in average yield on loans to 6.58%, both of which are primarily due to the Citizens acquisition in September 2011. The operations of Citizens from January 1, 2012 to September 30, 2012 added approximately $13,746,000 and $92,000 to interest income and interest expense, respectively. Included in the $13,746,000 of Citizens related interest income recorded during the nine months ended September 30, 2012, is $5,908,000 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.


Table of Contents

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
                                               September 30, 2012                         September 30, 2011
                                                      Interest       Rates                       Interest       Rates
                                        Average        Income/      Earned         Average        Income/      Earned
                                        Balance        Expense       Paid          Balance        Expense       Paid
Assets:
Loans                                 $ 1,573,816     $  25,530        6.49 %    $ 1,410,151     $  21,987        6.24 %
Investment securities - taxable           195,951         1,455        2.97 %        256,149         2,138        3.34 %
Investment securities - nontaxable          9,561           173        7.24 %         11,586           213        7.36 %
Cash at Federal Reserve and other
banks                                     571,836           372        0.26 %        359,462           213        0.24 %

Total interest-earning assets           2,351,164        27,530        4.68 %      2,037,348        24,551        4.82 %

Other assets                              168,095                                    170,452

Total assets                          $ 2,519,259                                $ 2,207,800

Liabilities and shareholders'
equity:
Interest-bearing demand deposits      $   479,565           196        0.16 %    $   408,954           275        0.27 %
Savings deposits                          757,491           314        0.17 %        639,476           331        0.21 %
Time deposits                             359,507           596        0.66 %        389,161           937        0.96 %
Other borrowings                           41,851           395        3.78 %         60,849           610        4.01 %
Junior subordinated debt                   41,238           333        3.23 %         41,238           312        3.03 %

Total interest-bearing liabilities      1,679,652         1,834        0.44 %      1,539,678         2,465        0.64 %

Noninterest-bearing deposits              577,523                                    427,808
Other liabilities                          35,227                                     31,754
Shareholders' equity                      226,857                                    208,560

Total liabilities and shareholders'
equity                                $ 2,519,259                                $ 2,207,800

Net interest spread(1)                                                 4.24 %                                     4.18 %
Net interest income and interest
margin(2)                                             $  25,696        4.37 %                    $  22,086        4.34 %

(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.


Table of Contents

Summary of Average Balances, Yields/Rates and Interest Differential (continued)



                                                                 For the nine months ended
                                               September 30, 2012                         September 30, 2011
                                                      Interest       Rates                       Interest       Rates
                                        Average        Income/      Earned         Average        Income/      Earned
                                        Balance        Expense       Paid          Balance        Expense       Paid
Assets:
Loans                                 $ 1,545,277     $  76,251        6.58 %    $ 1,400,212     $  65,444        6.23 %
Investment securities - taxable           209,626         4,829        3.07 %        267,847         6,873        3.42 %
Investment securities - nontaxable          9,561           517        7.21 %         11,828           652        7.35 %
Cash at Federal Reserve and other
banks                                     574,654         1,170        0.27 %        350,174           646        0.25 %

Total interest-earning assets           2,339,118        82,767        4.72 %      2,030,061        73,615        4.83 %

Other assets                              175,209                                    166,605

Total assets                          $ 2,514,327                                $ 2,196,666


Liabilities and shareholders'
equity:
Interest-bearing demand deposits      $   464,243           610        0.18 %    $   406,457           982        0.32 %
Savings deposits                          760,009           907        0.16 %        615,295         1,070        0.23 %
Time deposits                             381,026         1,850        0.65 %        409,144         3,120        1.02 %
Other borrowings                           57,996         1,602        3.68 %         59,743         1,803        4.02 %
Junior subordinated debt                   41,238         1,003        3.24 %         41,238           934        3.02 %

Total interest-bearing liabilities      1,704,512         5,972        0.47 %      1,531,877         7,909        0.69 %

Noninterest-bearing deposits              552,234                                    425,754
Other liabilities                          34,145                                     33,068
Shareholders' equity                      223,436                                    205,967

Total liabilities and shareholders'
equity                                $ 2,514,327                                $ 2,196,666

Net interest spread(1)                                                 4.25 %                                     4.14 %
Net interest income and interest
margin(2)                                             $  76,795        4.38 %                    $  65,706        4.32 %

(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.


Table of Contents

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 September 30, 2012
                                                              compared with three months
                                                               ended September 30, 2011
                                                      Volume               Rate              Total
Increase (decrease) in interest income:
Loans                                               $     2,553         $       990         $ 3,543
Investment securities (FTE)                                (540 )              (183 )          (723 )
Cash at Federal Reserve and other banks                     127                  32             159

Total interest-earning assets (FTE)                       2,140                 839           2,979

Increase (decrease) in interest expense:
Interest-bearing demand deposits                             48                (127 )           (79 )
Savings deposits                                             62                 (79 )           (17 )
Time deposits                                               (71 )              (270 )          (341 )
Other borrowings                                           (190 )               (25 )          (215 )
Junior subordinated debt                                     -                   21              21

Total interest-bearing liabilities                         (151 )              (480 )          (631 )

Increase (decrease) in Net Interest Income (FTE)    $     2,291         $     1,319         $ 3,610

                                                           Nine months ended September 30, 2012
                                                                compared with nine months
                                                                 ended September 30, 2011
                                                       Volume               Rate              Total
Increase (decrease) in interest income:
Loans                                                $     6,778         $     4,029         $ 10,807
Investment securities (FTE)                               (1,618 )              (561 )         (2,179 )
Cash at Federal Reserve and other banks                      421                 103              524

Total interest-earning assets (FTE)                        5,581               3,571            9,152

Increase (decrease) in interest expense:
Interest-bearing demand deposits                             139                (511 )           (372 )
Savings deposits                                             250                (413 )           (163 )
Time deposits                                               (215 )            (1,055 )         (1,270 )
Other borrowings                                             (53 )              (148 )           (201 )
Junior subordinated debt                                      -                   69               69

Total interest-bearing liabilities                           121              (2,058 )         (1,937 )

Increase (decrease) in Net Interest Income (FTE)     $     5,460         $     5,629         $ 11,089

Provision for Loan Losses

The Company provided $532,000 for loan losses in the third quarter of 2012 versus $3,371,000 in the second quarter of 2012 and $5,069,000 in the third quarter of 2011. Included in the provision for loan losses during the quarter ended September 30, 2012, was $529,000 related to Citizens loans. The allowance for loan losses decreased $1,154,000 from $45,849,000 at June 30, 2012 to $44,146,000 at September 30, 2012. The decrease in provision for loan losses during the third quarter of 2012 compared to the second quarter of 2012 was primarily the result of improvement in collateral values and estimated cash flows related to nonperforming and purchased credit impaired loans that resulted in a reduction in the allowance for loan losses for those loans. This reduction in allowance for loan losses due to improved collateral values and estimated cash flows, combined with an overall reduction in nonperforming loans, led to a decrease in the quarterly provision for loan losses to its lowest level since the second quarter of 2007. See Note 5 to the consolidated financial statements at Item 1 of this report, and the discussion of asset quality and nonperforming assets below, for more information about the Company's provision for loan losses and the allowance 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.


Table of Contents

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             Nine months ended
                                                      September 30,                  September 30,
                                                   2012            2011           2012           2011
Service charges on deposit accounts              $   3,617       $  3,769       $ 10,788       $ 10,899
ATM and interchange fees                             1,877          1,780          5,722          5,201
Other service fees                                     567            460          1,740          1,303
Mortgage banking service fees                          403            375          1,154          1,106
Change in value of mortgage servicing rights          (681 )         (800 )       (1,514 )       (1,022 )

Total service charges and fees                       5,783          5,584         17,890         17,487


Gain on sale of loans                                1,430            598          4,317          1,818
Commissions on sale of non-deposit investment
. . .
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