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TCBK > SEC Filings for TCBK > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for TRICO BANCSHARES /


9-Aug-2013

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, 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, and the presentation of these measures 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

There have been no changes to the Company's critical accounting policies during the six months ended June 30, 2013, except for the changes in the Company's accounting policies related to its allowance for loan losses noted under the heading Loans and Allowance for Loan Losses" in Note 1 in Item 1 of Part I of this report.

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 in Item 1 of Part I of this report.

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.

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.

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 Item 1 of Part I 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 Item 1 of Part I 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

                                TRICO BANCSHARES

                               Financial Summary

          (dollars in thousands, except per share amounts; unaudited)



                                                 Three months ended               Six months ended
                                                      June 30,                        June 30,
                                               2013             2012            2013           2012

Net Interest Income (FTE)                   $    24,679      $    25,998      $  49,309      $  51,099
(Provision for) benefit from loan losses           (614 )         (3,371 )          494         (7,367 )
Noninterest income                               10,131           10,577         20,349         18,842
Noninterest expense                             (23,509 )        (24,367 )      (45,110 )      (47,282 )
Provision for income taxes (FTE)                 (4,362 )         (3,516 )      (10,240 )       (6,040 )

Net income                                  $     6,325      $     5,321      $  14,802      $   9,252


Earnings per share:
Basic                                       $      0.39      $      0.33      $    0.92      $    0.58
Diluted                                     $      0.39      $      0.33      $    0.92      $    0.58
Per share:
Dividends paid                              $      0.11      $      0.09      $    0.20      $    0.18
Book value at period end                    $     14.90      $     13.96
Tangible book value at period end           $     13.87      $     12.91

Average common shares outstanding                16,028           15,986         16,015         15,982
Average diluted common shares outstanding        16,135           16,047         16,113         16,045
Shares outstanding at period end                 16,065           15,993
At period end:
Loans, net                                  $ 1,612,441      $ 1,506,633
Total assets                                $ 2,587,931      $ 2,525,616
Total deposits                              $ 2,266,702      $ 2,165,777
Other borrowings                            $     6,575      $    60,831
Junior subordinated debt                    $    41,238      $    41,238
Shareholders' equity                        $   239,326      $   223,229

Financial Ratios:
During the period (annualized):
Return on assets                                   0.98 %           0.85 %         1.14 %         0.74 %
Return on equity                                  10.54 %           9.54 %        12.50 %         8.35 %
Net interest margin1                               4.07 %           4.46 %         4.06 %         4.38 %
Net loan charge-offs to average loans              0.22 %           0.78 %         0.32 %         0.97 %
Efficiency ratio1                                  67.5 %           66.6 %         64.8 %         67.6 %
Average equity to average assets                   9.28 %           8.89 %         9.12 %         8.83 %
At period end:
Equity to assets                                   9.25 %           8.84 %
Total capital to risk-adjusted assets             14.73 %          14.31 %

1 Fully taxable equivalent (FTE)


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 Part I 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,
                                              2013            2012            2013            2012

Net Interest Income (FTE)                   $  24,679       $  25,998       $  49,309       $  51,099
(Provision for) benefit from loan losses         (614 )        (3,371 )           494          (7,367 )
Noninterest income                             10,131          10,577          20,349          18,842
Noninterest expense                           (23,509 )       (24,367 )       (45,110 )       (47,282 )
Provision for income taxes (FTE)               (4,362 )        (3,516 )       (10,240 )        (6,040 )

Net income                                  $   6,325       $   5,321       $  14,802       $   9,252

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,
                                     2013           2012          2013          2012
       Interest income             $  25,756      $ 27,944      $ 51,562      $ 55,108
       Interest expense               (1,167 )      (2,010 )      (2,404 )      (4,138 )
       FTE adjustment                     90            64           151           129

       Net interest income (FTE)   $  24,679      $ 25,998      $ 49,309      $ 51,099

       Net interest margin (FTE)        4.07 %        4.46 %        4.06 %        4.38 %

Net interest income (FTE) during the second quarter of 2013 decreased $1,319,000 (5.1%) from the same period in 2012 to $24,679,000. The decrease in net interest income (FTE) was due primarily to a 79 basis point decrease in average yield on loans that was partially offset by a $74,505,000 increase in the average balance of loans, and a $54,704,000 decrease in the average balance of other borrowings. The 79 basis point decrease in average loan yields reduced net interest income by $3,163,000 from the year ago period. The increase in average loan balances added $1,254,000 to net interest income, and the decrease in average other borrowings added $528,000 to net interest income when compared to the year ago period. Accretion of loan purchase discounts totaling $1,676,000 and $2,385,000 are included in net interest income for the three months ended June, 2013 and 2012, respectively. For more information related to the loan interest income and loan purchase discount accretion, see Note 30 to the consolidated financial statements at Part I, Item 1 of this report.

Net interest income (FTE) during the six months ended June 30, 2013 decreased $1,790,000 (3.5%) from the same period in 2012 to $49,309,000. The decrease in net interest income (FTE) was due primarily to a 55 basis point decrease in average yield on loans that was partially offset by a $47,767,000 increase in the average balance of loans, and a $58,310,000 decrease in the average balance of other borrowings. The 55 basis point decrease in average loan yields reduced net interest income by $4,349,000 from the year ago period. The increase in average loan balances added $1,583,000 to net interest income, and the decrease in average other borrowings added $1,064,000 to net interest income when compared to the year ago period. Accretion of loan purchase discounts totaling $3,206,000 and $4,465,000 are included in net interest income for the six months ended June, 2013 and 2012, respectively. For more information related to the loan interest income and loan purchase discount accretion, see 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
                                                  June 30, 2013                              June 30, 2012
                                                      Interest       Rates                       Interest       Rates
                                        Average        Income/      Earned         Average        Income/      Earned
                                        Balance        Expense       /Paid         Balance        Expense       /Paid
Assets:
Loans                                 $ 1,608,511     $  23,883        5.94 %    $ 1,534,006     $  25,792        6.73 %
Investment securities - taxable           164,907         1,229        2.98 %        208,417         1,615        3.10 %
Investment securities - nontaxable
(FTE)                                      17,108           240        5.61 %          9,561           171        7.15 %
Cash at Federal Reserve and other
banks                                     632,292           494        0.31 %        579,164           430        0.30 %

Total interest-earning assets (FTE)     2,422,818        25,846        4.27 %      2,331,148        28,008        4.81 %
Other assets                              161,916                                    177,951

Total assets                          $ 2,584,734                                $ 2,509,099


Liabilities and shareholders'
equity:
Interest-bearing demand deposits      $   518,961           125        0.10 %    $   473,124           197        0.17 %
Savings deposits                          782,339           246        0.13 %        731,988           296        0.16 %
Time deposits                             322,668           484        0.60 %        380,943           584        0.61 %
Other borrowings                            7,596             1        0.05 %         62,300           601        3.86 %
Junior subordinated debt                   41,238           311        3.02 %         41,238           332        3.22 %

Total interest-bearing liabilities      1,672,802         1,167        0.28 %      1,689,593         2,010        0.48 %
Noninterest-bearing deposits              635,503                                    562,909
Other liabilities                          36,444                                     33,569
Shareholders' equity                      239,985                                    223,028

Total liabilities and shareholders'
equity                                $ 2,584,734                                $ 2,509,099

Net interest spread(1) (FTE)                                           3.99 %                                     4.33 %
Net interest income and interest
margin(2) (FTE)                                       $  24,679        4.07 %                    $  25,998        4.46 %

(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 six months ended
                                                  June 30, 2013                              June 30, 2012
                                                      Interest       Rates                       Interest       Rates
                                        Average        Income/      Earned         Average        Income/      Earned
                                        Balance        Expense       /Paid         Balance        Expense       /Paid
Assets:
Loans                                 $ 1,578,538     $  47,955        6.08 %    $ 1,530,771     $  50,721        6.63 %
Investment securities - taxable           160,482         2,416        3.01 %        216,577         3,374        3.12 %
Investment securities - nontaxable
(FTE)                                      12,996           402        6.19 %          9,561           344        7.20 %
Cash at Federal Reserve and other
banks (FTE)                               676,858           940        0.28 %        576,086           798        0.28 %

Total interest-earning assets           2,428,874        51,713        4.26 %      2,332,995        55,237        4.74 %
Other assets                              168,390                                    178,825

Total assets                          $ 2,597,264                                $ 2,511,820


Liabilities and shareholders'
equity:
Interest-bearing demand deposits      $   519,734           266        0.10 %    $   456,455           414        0.18 %
Savings deposits                          782,256           517        0.13 %        761,289           593        0.16 %
Time deposits                             328,112           997        0.61 %        391,964         1,254        0.64 %
Other borrowings                            7,892             2        0.05 %         66,202         1,207        3.65 %
Junior subordinated debt                   41,238           622        3.02 %         41,238           670        3.25 %

Total interest-bearing liabilities      1,679,232         2,404        0.29 %      1,717,148         4,138        0.48 %
Noninterest-bearing deposits              643,403                                    539,380
Other liabilities                          37,797                                     33,595
Shareholders' equity                      236,832                                    221,697

Total liabilities and shareholders'
equity                                $ 2,597,264                                $ 2,511,820

Net interest spread(1) (FTE)                                           3.97 %                                     4.26 %
Net interest income and interest
margin(2) (FTE)                                       $  49,309        4.06 %                    $  51,099        4.38 %

(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 June 30, 2013
                                                                compared with three months
                                                                   ended June 30, 2012
                                                         Volume             Rate            Total
Increase (decrease) in interest income:
Loans                                                  $    1,254         $  (3,163 )      $ (1,909 )
Investment securities (FTE)                                  (202 )            (115 )          (317 )
Cash at Federal Reserve and other banks                        40                24              64

Total interest-earning assets (FTE)                         1,092            (3,254 )        (2,162 )

Increase (decrease) in interest expense:
Interest-bearing demand deposits                               19               (91 )           (72 )
Savings deposits                                               20               (70 )           (50 )
Time deposits                                                 (89 )             (11 )          (100 )
Other borrowings                                             (528 )             (72 )          (600 )
Junior subordinated debt                                       -                (21 )           (21 )

Total interest-bearing liabilities                           (578 )            (265 )          (843 )

Increase (decrease) in Net Interest Income (FTE)       $    1,670         $  (2,989 )      $ (1,319 )

                                                         Six months ended June 30, 2013
                                                            compared with six months
                                                               ended June 30, 2012
                                                      Volume            Rate          Total
Increase (decrease) in interest income:
Loans                                               $    1,583        $ (4,349 )     $ (2,766 )
Investment securities (FTE)                               (751 )          (149 )         (900 )
Cash at Federal Reserve and other banks                    141               1            142

Total interest-earning assets (FTE)                        973          (4,497 )       (3,524 )

Increase (decrease) in interest expense:
Interest-bearing demand deposits                            57            (205 )         (148 )
Savings deposits                                            17             (93 )          (76 )
Time deposits                                             (204 )           (53 )         (257 )
Other borrowings                                        (1,064 )          (141 )       (1,205 )
Junior subordinated debt                                    -              (48 )          (48 )

Total interest-bearing liabilities                      (1,194 )          (540 )       (1,734 )

Increase (decrease) in Net Interest Income (FTE)    $    2,167        $ (3,957 )     $ (1,790 )


Table of Contents

Provision for Loan Losses

The provision for loan losses during any period is simply the sum of the allowance for loan losses required at the end of the period and any loan charge offs during the period, less the allowance for loan losses required at the beginning of the period, and less any loan recoveries during the period. See the Tables labeled "Allowance for loan losses - As of the three months ended, and the six months ended, June 30, 2013 and 2012" at Note 5 in Item 1 of Part I of this report for the components that make up the provision for loan losses for the three and six month periods ended June 30, 2013 and 2012.

The Company provided $614,000 for loan losses in the second quarter of 2013 versus a benefit of $1,108,000 in the first quarter of 2013, and a $3,371,000 provision for loan losses in the second quarter of 2012. As shown in the Table labeled "Allowance for loan losses - three months ended June 30, 2013" at Note 5 of Item 1 of this report, all categories of loans except commercial real estate mortgage and C&I experienced a reversal of provision for loan losses during the three months ended June 30, 2013. The level of provision, or reversal of provision, for loan losses of each loan category during the second quarter of 2013 were due primarily to a decrease in the required allowance for loan losses as of June 30, 2013 when compared to the required allowance for loan losses as of March 31, 2013 less net charge-offs during the three months ended June 30, 2013, and the effect of the change in the allowance methodology during the three months ended June 30, 2013 as described under the heading "Loans and Allowance for Loan Losses" at Note 1 in Item 1 of Part I of this report. The decrease in the required allowance for loan losses during the quarter ended June 30, 2013 was due primarily to reduced impaired loans, improvements in estimated cash flows and collateral values for the remaining and new impaired loans, and reductions in historical loss factors that, in part, determine the required loan loss allowance for performing loans in accordance with the Company's allowance for loan losses methodology as described under the heading "Loans and Allowance for Loan Losses" at Note 1 in Item 1 of Part I of this report. These same factors were also present, to some extent, for commercial real estate mortgage and C&I loans. For details of the change in nonperforming loans during the three months ended June 30, 2013 see the Table labeled "Changes in nonperforming assets during the three months ended June 30, 2013" under the heading "Asset Quality and Non-Performing Assets" below. Excluding the effect of the change in allowance methodology during the three months ended June 30, 2013, the provision for loan losses during the three months ended June 30, 2013 would have been a benefit of $700,000.

The Company benefited from a $494,000 reversal of provision for loan losses in the six months ended June 30, 2013 versus a provision for loan losses of . . .

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