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TCBK > SEC Filings for TCBK > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for TRICO BANCSHARES /

Form 10-Q for TRICO BANCSHARES /


8-Aug-2014

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, 2014, 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, N.A. ("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,
                                               2014             2013            2014           2013
Net Interest Income (FTE)                   $    27,413      $    24,679      $  53,567      $  49,309
(Provision for) benefit from loan losses         (1,708 )           (614 )         (353 )          494
Noninterest income                                7,877           10,131         16,172         20,349
Noninterest expense                             (25,116 )        (23,509 )      (48,433 )      (45,110 )
Provision for income taxes (FTE)                 (3,607 )         (4,362 )       (8,729 )      (10,240 )

Net income                                  $     4,859      $     6,325      $  12,224      $  14,802

Earnings per share:
Basic                                       $      0.30      $      0.39      $    0.76      $    0.92
Diluted                                     $      0.30      $      0.39      $    0.75      $    0.92
Per share:
Dividends paid                              $      0.11      $      0.11      $    0.22      $    0.20
Book value at period end                    $     16.17      $     14.90
Average common shares outstanding                16,129           16,028         16,113         16,015
Average diluted common shares outstanding        16,310           16,135         16,316         16,113
Shares outstanding at period end                 16,133           16,065
At period end:
Loans, net                                  $ 1,698,618      $ 1,612,441
Total assets                                $ 2,724,481      $ 2,587,931
Total deposits                              $ 2,385,196      $ 2,266,702
Other borrowings                            $     6,075      $     6,575
Junior subordinated debt                    $    41,238      $    41,238
Shareholders' equity                        $   260,943      $   239,326
Financial Ratios:
During the period (annualized):
Return on assets                                   0.71 %           0.98 %         0.89 %         1.14 %
Return on equity                                   7.45 %          10.54 %         9.48 %        12.50 %
Net interest margin1                               4.28 %           4.07 %         4.19 %         4.06 %
Efficiency ratio1                                  71.7 %           67.5 %         69.5 %         64.8 %
Average equity to average assets                   9.53 %           9.28 %         9.42 %         9.12 %
At period end:
Equity to assets                                   9.58 %           9.25 %
Total capital to risk-adjusted assets             14.64 %          14.73 %

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 this report.

Following is a summary of the components of FTE net income for the periods indicated (dollars in thousands):

                                               Three months ended               Six months ended
                                                    June 30,                        June 30,
                                              2014            2013            2014            2013
Net Interest Income (FTE)                   $  27,413       $  24,679       $  53,567       $  49,309
(Provision for) benefit from loan losses       (1,708 )          (614 )          (353 )           494
Noninterest income                              7,877          10,131          16,172          20,349
Noninterest expense                           (25,116 )       (23,509 )       (48,433 )       (45,110 )
Provision for income taxes (FTE)               (3,607 )        (4,362 )        (8,729 )       (10,240 )

Net income                                  $   4,859       $   6,325       $  12,224       $  14,802

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,
                                     2014           2013          2014          2013
       Interest income             $  28,418      $ 25,756      $ 55,577      $ 51,562
       Interest expense               (1,075 )      (1,167 )      (2,162 )      (2,404 )
       FTE adjustment                     70            90           152           151

       Net interest income (FTE)   $  27,413      $ 24,679      $ 53,567      $ 49,309

       Net interest margin (FTE)        4.28 %        4.07 %        4.19 %        4.06 %

Net interest income (FTE) during the second quarter of 2014 increased $2,734,000 (11.1%) from the same period in 2013 to $27,413,000. The increase in net interest income (FTE) was due primarily to a $312,991,000 (172%) increase in the average balance of investments to $495,006,000, and a $105,550,000 (6.6%) increase in the average balance of loans to $1,714,061,000 that were partially offset by a 24 basis point decrease in the average yield on loans from 5.94% during the three months ended June 30, 2013 to 5.70% during the three months ended June 30, 2014. During much of 2013 and the six months ended June 30, 2014, the Company used a portion of its Fed funds sold to buy investments. The increase in average loan balances was due to organic loan growth and the purchase of $62,698,000 of single family residential real estate loans during the second quarter of 2013, and the purchase of $19,690,000 of single family residential real estate loans during the second quarter of 2014. The decrease in average loan yields is due primarily to declines in market yields on new and renewed loans compared to yields on repricing, maturing, and paid off loans. The increases in average investment and loan balances added $2,325,000 and $1,567,000 to net interest income (FTE) while the decrease in average loan yields reduced net interest income (FTE) by $1,017,000 when compared to the year-ago quarter. For more information related to loan interest income, including loan purchase discount accretion, see Note 30 to the consolidated financial statements at Part I, Item 1 of this report. As noted above, during much of 2013 and the six months ended June 30, 2014, the Company deployed some of its excess cash previously held as Federal funds sold into some higher yielding investments while maintaining an appropriate level of interest rate risk. In addition, during the three and six months ended June 30, 2014 and some of 2013, the Company noted some increase in loan demand albeit at lower yields than existing loans.

Net interest income (FTE) during the six months ended June 30, 2014 increased $4,258,000 (8.6%) from the same period in 2013 to $53,567,000. The increase in net interest income (FTE) was due primarily to a $277,949,000 (160%) increase in the average balance of investments to $451,427,000, and a $114,108,000 (7.2%) increase in the average balance of loans to $1,692,646,000 that were partially offset by a 39 basis point decrease in the average yield on loans from 6.08% during the six months ended June 30, 2013 to 5.69% during the six months ended June 30, 2014. During much of 2013 and the six months ended June 30, 2014, the Company used a portion of its Fed funds sold to buy investments. The increase in average loan balances was due to organic loan growth and the purchase of $62,698,000 of single family residential real estate loans during the second quarter of 2013, and the purchase of $19,690,000 of single family residential real estate loans during the second quarter of 2014. The decrease in average loan yields is due primarily to declines in market yields on new and renewed loans compared to yields on repricing, maturing, and paid off loans. The increases in average investment and loan balances added $4,245,000 and $3,469,000 to net interest income (FTE) while the decrease in average loan yields reduced net interest income (FTE) by $3,253,000 when compared to the six months ended June 30, 2013. For more information related to loan interest income, including loan purchase discount accretion, see Note 30 to the consolidated financial statements at Part I, Item 1 of this report. As noted above, during much of 2013 and the six months ended June 30, 2014, the Company deployed some of its excess cash previously held as Federal funds sold into some higher yielding investments while maintaining an appropriate level of interest rate risk. In addition, during the three and six months ended June 30, 2014 and some of 2013, the Company noted some increase in loan demand albeit at lower yields than existing loans.


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 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
                                                         June 30, 2014                              June 30, 2013
                                                             Interest       Rates                       Interest       Rates
                                               Average        Income/      Earned         Average        Income/      Earned
                                               Balance        Expense       /Paid         Balance        Expense       /Paid
Assets:
Loans                                        $ 1,714,061     $  24,433        5.70 %    $ 1,608,511     $  23,883        5.94 %
Investment securities-taxable                    478,904         3,594        3.00 %        164,907         1,229        2.98 %
Investment securities-nontaxable                  16,102           187        4.65 %         17,108           240        5.61 %
Cash at Federal Reserve and other banks          350,229           274        0.31 %        632,292           494        0.31 %

Total interest-earning assets                  2,559,296        28,488        4.45 %      2,422,818        25,846        4.27 %
Other assets                                     178,338                                    161,916

Total assets                                 $ 2,737,634                                $ 2,584,734

Liabilities and shareholders' equity:
Interest-bearing demand deposits             $   550,372           115        0.08 %    $   518,961           125        0.10 %
Savings deposits                                 853,643           263        0.12 %        782,339           246        0.13 %
Time deposits                                    268,352           390        0.58 %        322,668           484        0.60 %
Other borrowings                                   6,217             1        0.06 %          7,596             1        0.05 %
Junior subordinated debt                          41,238           306        2.97 %         41,238           311        3.02 %

Total interest-bearing liabilities             1,719,822         1,075        0.25 %      1,672,802         1,167        0.28 %
Noninterest-bearing deposits                     722,779                                    635,503
Other liabilities                                 34,216                                     36,444
Shareholders' equity                             260,817                                    239,985

Total liabilities and shareholders' equity   $ 2,737,634                                $ 2,584,734

Net interest spread(1)                                                        4.20 %                                     3.99 %
Net interest income and interest margin(2)                   $  27,413        4.28 %                    $  24,679        4.07 %


                                                                         For the six months ended
                                                         June 30, 2014                              June 30, 2013
                                                             Interest       Rates                       Interest       Rates
                                               Average        Income/      Earned         Average        Income/      Earned
                                               Balance        Expense       /Paid         Balance        Expense       /Paid
Assets:
Loans                                        $ 1,692,646     $  48,171        5.69 %    $ 1,578,538     $  47,955        6.08 %
Investment securities-taxable                    434,567         6,570        3.02 %        160,482         2,416        3.01 %
Investment securities-nontaxable                  16,860           405        4.80 %         12,996           402        6.19 %
Cash at Federal Reserve and other banks          412,031           583        0.28 %        676,858           940        0.28 %

Total interest-earning assets                  2,556,104        55,729        4.36 %      2,428,874        51,713        4.26 %
Other assets                                     181,595                                    168,390

Total assets                                 $ 2,737,699                                $ 2,597,264

Liabilities and shareholders' equity:
Interest-bearing demand deposits             $   548,685           236        0.09 %    $   519,734           266        0.10 %
Savings deposits                                 846,932           520        0.12 %        782,256           517        0.13 %
Time deposits                                    274,660           794        0.58 %        328,112           997        0.61 %
Other borrowings                                   6,339             2        0.06 %          7,892             2        0.05 %
Junior subordinated debt                          41,238           610        2.96 %         41,238           622        3.02 %

Total interest-bearing liabilities             1,717,854         2,162        0.25 %      1,679,232         2,404        0.29 %
Noninterest-bearing deposits                     727,255                                    643,403
Other liabilities                                 34,739                                     37,797
Shareholders' equity                             257,851                                    236,832

Total liabilities and shareholders' equity   $ 2,737,699                                $ 2,597,264

Net interest spread(1)                                                        4.11 %                                     3.97 %
Net interest income and interest margin(2)                   $  53,567        4.19 %                    $  49,309        4.06 %

(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, 2014
                                                      compared with three months
                                                         ended June 30, 2013
                                                Volume             Rate           Total
 Increase (decrease) in interest income:
 Loans                                        $    1,567        $    (1,017 )    $   550
 Investment securities                             2,325                (13 )      2,312
 Cash at Federal Reserve and other banks            (219 )               (1 )       (220 )

 Total interest-earning assets                     3,673             (1,031 )      2,642

 Increase (decrease) in interest expense:
 Interest-bearing demand deposits                      8                (18 )        (10 )
 Savings deposits                                     23                 (6 )         17
 Time deposits                                       (81 )              (13 )        (94 )
 Other borrowings                                     -                  -            -
 Junior subordinated debt                             -                  (5 )         (5 )

 Total interest-bearing liabilities                  (50 )              (42 )        (92 )

 Increase (decrease) in Net Interest Income   $    3,723        $      (989 )    $ 2,734


                                                    Six months ended June 30, 2014
                                                       compared with six months
                                                         ended June 30, 2013
                                                Volume             Rate           Total
 Increase (decrease) in interest income:
 Loans                                        $    3,469        $    (3,253 )    $   216
 Investment securities                             4,245                (88 )      4,157
 Cash at Federal Reserve and other banks            (371 )               14         (357 )

 Total interest-earning assets                     7,343             (3,327 )      4,016

 Increase (decrease) in interest expense:
 Interest-bearing demand deposits                     14                (44 )        (30 )
 Savings deposits                                     42                (39 )          3
 Time deposits                                      (163 )              (40 )       (203 )
 Other borrowings                                     -                  -            -
 Junior subordinated debt                             -                 (12 )        (12 )

 Total interest-bearing liabilities                 (107 )             (135 )       (242 )

 Increase (decrease) in Net Interest Income   $    7,450        $    (3,192 )    $ 4,258


Table of Contents

Provision for Loan Losses

The provision for loan losses during any period is 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 - three and six months ended June 30, 2014 and 2013" 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 months ended June 30, 2014 and 2013.

The Company provided $1,708,000 for loan losses during the three months ended June 30, 2014 versus a provision of $614,000 during the three months ended June 30, 2013. As shown in the Table labeled "Allowance for Loan Losses- three months ended June 30, 2014" at Note 5 in Item 1 of Part I of this report, home equity lines of credit, home equity loans and C&I loans experienced a provision for loan losses during the three months ended June 30, 2014. All other categories of loans experienced a reversal of provision for loan losses during the three months ended June 30, 2014. The level of provision, or reversal of provision, for loan losses of each loan category during the three months ended June 30, 2014 was due primarily to a decrease in the required allowance for loan losses as of June 30, 2014 when compared to the required allowance for loan losses as of March 31, 2014 plus net recoveries during the three months ended June 30, 2014, and the effect of the refinement in the allowance methodology during the three months ended June 30, 2014 as described under the heading "Loans and Allowance for Loan Losses" at Note 1 in Item 1 of Part I of this report. All categories of loans except home equity lines of credit, home equity loans, C&I loans, and residential construction loans experienced a decrease in the required allowance for loan losses during the three months ended June 30, 2014. These decreases in required allowance for loan losses were due primarily to reduced impaired loans, improvements in estimated cash flows and collateral values for the remaining and newly impaired loans, and reductions in historical loss factors that, in part, determine the required loan loss allowance for . . .

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