UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 2009 Commission file number 0-10661
--------------------------------------------- ------------------------------
TRICO BANCSHARES
----------------
(Exact name of registrant as specified in its charter)
California 94-2792841
------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
63 Constitution Drive, Chico, California 95973
----------------------------------------------
(Address of principal executive offices) (Zip code)
(530) 898-0300
--------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- -----
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer or a smaller reporting company.
See definition of "large accelerated filer," accelerated filer" and "smaller
reporting companyu" in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer Accelerated filer X
---- ----
Non-accelerated filer Small reporting company
---- ----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Title of Class: Common stock, no par value
Outstanding shares as of October 31, 2009: 15,787,753
TABLE OF CONTENTS
Page
Forward Looking Statements 1
PART I - FINANCIAL INFORMATION 2
Item 1 - Financial Statements 2
Notes to Unaudited Condensed Consolidated Financial Statements 6
Financial Summary 22
Item 2 - Management's Discussion and Analysis of Financial 23
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 36
Item 4 - Controls and Procedures 38
PART II - OTHER INFORMATION 39
Item 1 - Legal Proceedings 39
Item 1A - Risk Factors 39
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 6 - Exhibits 39
Signatures 42
Exhibits 43
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about TriCo
Bancshares (the "Company") that are subject to the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on the current knowledge and belief
of the Company's management ("Management") and include information concerning
the Company's possible or assumed future financial condition and results of
operations. When you see any of the words "believes", "expects", "anticipates",
"estimates", or similar expressions, it may mean the Company is making
forward-looking statements. A number of factors, some of which are beyond the
Company's ability to predict or control, could cause future results to differ
materially from those contemplated. The reader is directed to the Company's
annual report on Form 10-K for the year ended December 31, 2008, and Part II,
Item 1A of this report for further discussion of factors which could affect the
Company's business and cause actual results to differ materially from those
suggested by any forward-looking statement made in this report. Such Form 10-K
and this report should be read to put any forward-looking statements in context
and to gain a more complete understanding of the risks and uncertainties
involved in the Company's business. Any forward-looking statement may turn out
to be wrong and cannot be guaranteed. The Company does not intend to update any
forward-looking statement after the date of this report.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRICO BANCSHARES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited)
At September 30, At December 31,
2009 2008 2008
---------------------------- ---------------
Assets:
Cash and due from banks $48,549 $67,300 $64,375
Cash at Federal Reserve and other banks 186,021 - 21,980
---------------------------- -------------
Cash and cash equivalents 234,570 67,300 86,355
Securities available-for-sale 230,962 241,900 266,561
Federal Home Loan Bank stock, at cost 9,274 9,147 9,235
Loans, net of allowance for loan losses
of $34,551, $24,588 and $27,590 1,496,661 1,538,648 1,563,259
Foreclosed assets, net of allowance for
losses of $206, $214 and $230 2,372 1,178 1,185
Premises and equipment, net 18,102 19,094 18,841
Cash value of life insurance 47,635 46,061 46,815
Accrued interest receivable 7,666 7,874 7,935
Goodwill 15,519 15,519 15,519
Other intangible assets, net 389 786 653
Other assets 32,516 28,960 26,832
---------------------------- -------------
Total Assets $2,095,666 $1,976,467 $2,043,190
============================ =============
Liabilities:
Deposits:
Noninterest-bearing demand $349,949 $334,015 $401,247
Interest-bearing 1,401,946 1,229,826 1,268,023
---------------------------- -------------
Total deposits 1,751,895 1,563,841 1,669,270
Federal funds purchased - 67,000 -
Accrued interest payable 4,136 5,217 6,146
Reserve for unfunded commitments 3,640 3,365 2,565
Other liabilities 26,623 24,831 24,034
Other borrowings 66,197 79,873 102,005
Junior subordinated debt 41,238 41,238 41,238
---------------------------- -------------
Total Liabilities 1,893,729 1,785,365 1,845,258
---------------------------- -------------
Commitments and contingencies
Shareholders' Equity
Common stock, no par value: 50,000,000 shares
authorized; issued and outstanding:
15,787,753 at September 30, 2009 79,400
15,744,881 at September 30, 2008 78,008
15,756,101 at December 31, 2008 78,246
Retained earnings 118,603 115,549 117,630
Accumulated other comprehensive income (loss), net 3,934 (2,455) 2,056
----------------------------- ----------
Total Shareholders' Equity 201,937 191,102 197,932
----------------------------- ------------
Total Liabilities and Shareholders' Equity $2,095,666 $1,976,467 $2,043,190
============================= ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data; unaudited)
Three months ended September 30, Nine months ended September 30,
2009 2008 2009 2008
-------------------------------------------------------------------
Interest and dividend income:
Loans, including fees $24,909 $26,790 $75,640 $81,531
Debt securities:
Taxable 2,616 2,756 8,595 8,607
Tax exempt 244 287 771 910
Dividends 19 138 19 382
Cash at Federal Reserve and other banks 101 - 178 3
------------------------------------------------------------------
Total interest income 27,889 29,971 85,203 91,433
------------------------------------------------------------------
Interest expense:
Deposits 4,186 5,776 14,166 18,603
Federal funds purchased - 430 - 1,953
Other borrowings 250 473 604 2,060
Junior subordinated debt 348 573 1,184 1,872
------------------------------------------------------------------
Total interest expense 4,784 7,252 15,954 24,488
------------------------------------------------------------------
Net interest income 23,105 22,719 69,249 66,945
------------------------------------------------------------------
Provision for loan losses 8,000 2,600 23,650 15,500
------------------------------------------------------------------
Net interest income after provision for loan losses 15,105 20,119 45,599 51,445
------------------------------------------------------------------
Noninterest income:
Service charges and fees 5,645 5,224 16,879 16,178
Gain on sale of loans 1,205 341 2,794 915
Commissions on sale of non-deposit investment products 380 594 1,361 1,539
Increase in cash value of life insurance 270 360 820 1,080
Other 293 273 550 1,210
------------------------------------------------------------------
Total noninterest income 7,793 6,792 22,404 20,922
------------------------------------------------------------------
Noninterest expense:
Salaries and related benefits 10,263 9,431 30,121 28,556
Other 9,114 7,158 25,801 23,450
------------------------------------------------------------------
Total noninterest expense 19,377 16,589 55,922 52,006
------------------------------------------------------------------
Income before income taxes 3,521 10,322 12,081 20,361
Provision for income taxes 1,266 4,087 4,432 7,804
------------------------------------------------------------------
Net income $2,255 $6,235 $7,649 $12,557
==================================================================
Average shares outstanding 15,787,264 15,744,881 15,781,547 15,777,282
Diluted average shares outstanding 16,015,952 15,951,668 16,010,959 16,021,886
Per share data:
Basic earnings $0.14 $0.40 $0.48 $0.80
Diluted earnings $0.14 $0.39 $0.48 $0.78
Dividends paid $0.13 $0.13 $0.39 $0.39
See accompanying notes to unaudited condensed consolidated financial
statements.
3
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share and per share data; unaudited)
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Loss Total
---------------------------------------------------------------
Balance at December 31, 2007 15,911,550 $78,775 $111,655 ($1,552) $188,878
Comprehensive income: --------
Net income 12,557 12,557
Change in net unrealized gain on
securities available for sale, net (903) (903)
---------
Total comprehensive income 11,654
Cumulative effect of change in
accounting principle, net of tax (522) (522)
Stock option vesting 502 502
Reversal of tax benefit from
exercise of stock options (444) (444)
Repurchase of common stock (166,669) (825) (1,996) (2,821)
Dividends paid ($0.39 per share) (6,145) (6,145)
--------------------------------------------------------------
Balance at September 30, 2008 15,744,881 $78,008 $115,549 ($2,455) $191,102
==============================================================
Balance at December 31, 2008 15,756,101 $78,246 $117,630 $2,056 $197,932
Comprehensive income:
Net income 7,649 7,649
Change in net unrealized loss on
Securities available for sale, net 1,878 1,878
--------
Total comprehensive income 9,527
Stock option vesting 369 369
Stock option exercise 58,213 887 887
Tax benefit of stock options exercised 30 30
Repurchase of common stock (26,561) (132) (520) (652)
Dividends paid ($0.39 per share) (6,156) (6,156)
--------------------------------------------------------------
Balance at September 30, 2009 15,787,753 $79,400 $118,603 $3,934 $201,937
==============================================================
See accompanying notes to unaudited condensed consolidated financial statements.
4
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
For the nine months ended September 30,
2009 2008
--------------------------------------
Operating activities:
Net income $7,649 $12,557
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment, and amortization 2,532 2,586
Amortization of intangible assets 264 389
Provision for loan losses 23,650 15,500
Amortization of investment securities premium, net 272 250
Originations of loans for resale (157,331) (61,109)
Proceeds from sale of loans originated for resale 158,747 61,403
Gain on sale of loans (2,794) (915)
Change in value of mortgage servicing rights 317 743
Provision for losses on other real estate owned 188 34
(Gain) loss on sale of other real estate owned (169) -
Loss on disposal of fixed assets 9 2
Increase in cash value of life insurance (820) (1,080)
Stock option vesting expense 369 502
Stock option tax benefits (30) 444
Change in:
Reserve for unfunded commitments 1,075 1,275
Interest receivable 269 680
Interest payable (2,010) (2,654)
Other assets and liabilities, net (3,746) (2,677)
-------------------------------
Net cash provided by operating activities 28,442 27,930
-------------------------------
Investing activities:
Proceeds from maturities of securities available-for-sale 67,963 38,938
Purchases of securities available-for-sale (29,396) (50,219)
Purchases of Federal Home Loan Bank stock (39) (381)
Loan originations and principal collections, net 40,043 (20,538)
Proceeds from sale of premises and equipment 1 2
Purchases of premises and equipment (1,423) (1,185)
Proceeds from sale of other real estate sold 1,698 -
------------------------------
Net cash provided (used) by investing activities 78,847 (33,383)
------------------------------
Financing activities:
Net increase in deposits 82,625 18,618
Net increase in Federal funds purchased - 11,000
Payments of principal on long-term other borrowings (67) (58)
Net change in short-term other borrowings (35,741) (36,195)
(Reversal of) stock option tax benefit 30 (444)
Repurchase of common stock - (2,821)
Dividends paid (6,156) (6,145)
Exercise of stock options 235 -
------------------------------
Net cash provided (used) by financing activities 40,926 (16,045)
------------------------------
Net change in cash and cash equivalents 148,215 (21,498)
------------------------------
Cash and cash equivalents and beginning of period 86,355 88,798
------------------------------
Cash and cash equivalents at end of period $234,570 $67,300
==============================
Supplemental disclosure of noncash activities:
Loans transferred to other real estate owned $2,905 $1,025
Unrealized gain (loss) on securities available for sale $3,240 ($1,558)
Income tax benefit (expense) from stock option exercises $30 ($444)
Market value of shares tendered by employees in-lieu of
cash to pay for exercise of options and/or related taxes $652 $0
Supplemental disclosure of cash flow activity:
Cash paid for interest expense $17,964 $27,142
Cash paid for income taxes $9,092 $10,350
See accompanying notes to unaudited condensed consolidated financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: General Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. The interim results are not necessarily
indicative of the results expected for the full year. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes as well as other
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2008.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary, Tri Counties Bank (the "Bank"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Nature of Operations
The Company operates 32 traditional branch offices and 26 in-store branch
offices in the California counties of Butte, Contra Costa, Del Norte, Fresno,
Glenn, Kern, Lake, Lassen, Madera, Mendocino, Merced, Napa, Nevada, Placer,
Sacramento, Shasta, Siskiyou, Stanislaus, Sutter, Tehama, Tulare, Yolo and Yuba.
The Company's operating policy since its inception has emphasized retail
banking. Most of the Company's customers are retail customers and small to
medium sized businesses.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, investments, intangible assets, income taxes and contingencies. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. The allowance for loan losses, goodwill and other intangible
assessments, income taxes, and the valuation of mortgage servicing rights are
the only accounting estimates that materially affect the Company's consolidated
financial statements.
Significant Group Concentration of Credit Risk
The Company grants agribusiness, commercial, consumer, and residential loans to
customers located throughout the northern San Joaquin Valley, the Sacramento
Valley and northern mountain regions of California. The Company has a
diversified loan portfolio within the business segments located in this
geographical area. The Company currently classifies all its operation into one
business segment that it denotes as community banking.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold.
Investment Securities
The Company classifies its debt and marketable equity securities into one of
three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling in the
near term. Held-to-maturity securities are those securities which the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
During the nine months ended September 30, 2009, and throughout 2008, the
Company did not have any securities classified as either held-to-maturity or
trading.
6
The amortized cost and estimated fair values of investments in debt and equity
securities are summarized in the following tables:
September 30, 2009
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------
Securities Available-for-Sale (in thousands)
Obligations of U.S. government corporations and agencies $201,472 $9,459 - $210,931
Obligations of states and political subdivisions 19,119 423 (46) 19,496
Corporate debt securities 1,000 - (465) 535
--------------------------------------------------------------
Total securities available-for-sale $221,591 $9,882 ($511) $230,962
==============================================================
December 31, 2009
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------
Securities Available-for-Sale (in thousands)
Obligations of U.S. government corporations and agencies $236,786 $6,193 ($2) $242,977
Obligations of states and political subdivision 22,644 293 (272) 22,665
Corporate debt securities 1,000 - (81) 919
--------------------------------------------------------------
Total securities available-for-sale $260,430 $6,486 ($355) $266,561
==============================================================
The amortized cost and estimated fair value of debt securities at September 30,
2009 by contractual maturity are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. At September 30, 2009,
obligations of U.S. government corporations and agencies with a cost basis
totaling $201,472,000 consist almost entirely of mortgage-backed securities
whose contractual maturity, or principal repayment, will follow the repayment of
the underlying mortgages. For purposes of the following table, the entire
outstanding balance of these mortgage-backed securities issued by U.S.
government corporations and agencies is categorized based on final maturity
date. At September 30, 2009, the Company estimates the average remaining life of
these mortgage-backed securities issued by U.S. government corporations and
agencies to be approximately 2.9 years. Average remaining life is defined as the
time span after which the principal balance has been reduced by half.
Estimated
Amortized Cost Fair Value
-------------------------------
Investment Securities: (in thousands)
Due in one year - -
Due after one year through five years $49,844 $51,035
Due after five years through ten years 25,400 26,340
Due after ten years 146,347 153,587
------------------------------
Totals $221,591 $230,962
==============================
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses, net of the related tax effect, on available-for-sale securities are
reported as a separate component of other accumulated comprehensive income
(loss) in shareholders' equity until realized. During the nine months ended
September 30, 2009, and throughout 2008, the Company did not sell any investment
securities.
Investment securities with an aggregate carrying value of $210,922,000 and
$231,056,000 at September 30, 2009 and December 31, 2008, respectively, were
pledged as collateral for specific borrowings, lines of credit and local agency
deposits. Gross unrealized losses on investment securities and the fair value of
the related securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position,
were as follows:
7
Less than 12 months 12 months or more Total
------------------- ------------------ -------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
September 30, 2009 ---------------------------------------------------------------
Securities Available-for-Sale: (in thousands)
Obligations of U.S. government
corporations and agencies $56 - - - $56 -
Obligations of states and political subdivisions - - 965 (46) 965 (46)
Corporate debt securities 535 (465) - - 535 (465)
---------------------------------------------------------------
Total securities available-for-sale $591 ($465) $965 ($46) $1,556 ($511)
===============================================================
Less than 12 months 12 months or more Total
---------------------------------------- -------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
December 31, 2008 ---------------------------------------------------------------
Securities Available-for-Sale: (in thousands)
Obligations of U.S. government
corporations and agencies $130 ($1) $18 ($1) $148 ($2)
Obligations of states and political subdivisions 6,882 (272) - - 6,882 (272)
Corporate debt securities 1,000 (81) - - 1,000 (81)
---------------------------------------------------------------
Total securities available-for-sale $8,012 ($354) $18 ($1) $8,030 ($355)
===============================================================
Obligations of U.S. government corporations and agencies: Unrealized losses on
investments in obligations of U.S. government corporations and agencies are
caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by U.S. Government Sponsored Entities (principally
Fannie Mae and Freddie Mac). It is expected that the securities would not be
settled at a price less than the amortized cost of the investment. Because the
decline in fair value is attributable to changes in interest rates and not
credit quality, and because the Company does not intend to sell and more likely
than not will not be required to sell, these investments are not considered
other-than-temporarily impaired. At September 30, 2009, one debt security
representing obligations of U.S. government corporations and agencies had an
unrealized loss with aggregate depreciation of 0.7% from the Company's amortized
cost basis.
Obligations of states and political subdivisions: The unrealized losses on
investments in obligations of states and political subdivisions were caused by
increases in required yields by investors in these types of securities. It is
expected that the securities would not be settled at a price less than the
amortized cost of the investment. Because the decline in fair value is
attributable to changes in interest rates and not credit quality, and because
the Company does not intend to sell and more likely than not will not be
required to sell, these investments are not considered other-than-temporarily
impaired. At September 30, 2009, two debt securities representing obligations of
states and political subdivisions had unrealized losses with aggregate
depreciation of 4.6% from the Company's amortized cost basis.
Obligations of corporation debt securities: The unrealized losses on investments
in corporate debt securities were caused by increases in required yields by
investors in these types of securities. It is expected that the securities would
not be settled at a price less than the amortized cost of the investment.
Because the decline in fair value is attributable to changes in interest rates
and not credit quality, and because the Company does not intend to sell and more
likely than not will not be required to sell, these investments are not
considered other-than-temporarily impaired. At September 30, 2009, one corporate
debt security had an unrealized loss with aggregate depreciation of 46.5% from
the Company's amortized cost basis.
8
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses for securities are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
Unrealized losses due to fluctuations in fair value of securities
held-to-maturity or available-for-sale are recognized through earnings when it
is determined that an other-than-temporary decline in value has occurred.
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank of San Francisco ("FHLB"),
and as a condition of membership, it is required to purchase stock. The amount
of FHLB stock required to be purchased is based on the borrowing capacity
desired by the Bank. While technically equity securities, there is no market for
the FHLB stock. Therefore, the shares are considered as restricted investment
securities. Such investment is carried at cost.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or fair value, as determined by aggregate
outstanding commitments from investors of current investor yield requirements.
Net unrealized losses are recognized through a valuation allowance by charges to
income. At September 30, 2009, September 30, 2008, and December 31, 2008, the
Company's balance of loans held for sale was immaterial.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Company. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on the sale of loans that are held for sale are recognized at the time
of the sale and determined by the difference between net sale proceeds and the
net book value of the loans less the estimated fair value of any retained
mortgage servicing rights.
Loans
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over the actual life of
the loan. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is generally
discontinued either when reasonable doubt exists as to the full, timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. When loans are 90
days past due, but in management's judgment are well secured and in the process
of collection, they may be classified as accrual. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed. Income on such loans is then recognized only to the extent that cash
is received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of Management, the
loans are estimated to be fully collectible as to both principal and interest.
All impaired loans are classified as nonaccrual loans. At September 30, 2009,
$8,427,000 of loans are classified as troubled debt restructured. The Company
had obligations to lend $793,000 of additional funds on the restructured loans
as of September 30, 2009.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is established through a provision for
losses - unfunded commitments charged to noninterest expense. The reserve for
unfunded commitments is an amount that Management believes will be adequate to
absorb probable losses inherent in existing commitments, including unused
portions of revolving lines of credits and other loans, standby letters of
credits, and unused deposit account overdraft privilege. The reserve for
unfunded commitments is based on evaluations of the collectibility, and prior
loss experience of unfunded commitments. The evaluations take into consideration
such factors as changes in the nature and size of the loan portfolio, overall
loan portfolio quality, loan concentrations, specific problem loans and related
unfunded commitments, and current economic conditions that may affect the
borrower's or depositor's ability to pay.
9
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans and deposit related overdrafts are charged against the
allowance for loan losses when Management believes that the collectibility of
the principal is unlikely or, with respect to consumer installment loans,
according to an established delinquency schedule. The allowance is an amount
that Management believes will be adequate to absorb probable losses inherent in
existing loans and leases, based on evaluations of the collectibility,
impairment and prior loss experience of loans and leases. The evaluations take
into consideration such factors as changes in the nature and size of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, and current economic conditions that may affect the borrower's ability to
pay. The Company defines a loan as impaired when it is probable the Company will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance.
Credit risk is inherent in the business of lending. As a result, the Company
maintains an allowance for loan losses to absorb losses inherent in the
Company's loan portfolio. This is maintained through periodic charges to
earnings. These charges are shown in the Consolidated Income Statements as
provision for loan losses. All specifically identifiable and quantifiable losses
are immediately charged off against the allowance. However, for a variety of
reasons, not all losses are immediately known to the Company and, of those that
are known, the full extent of the loss may not be quantifiable at that point in
time. The balance of the Company's allowance for loan losses is meant to be an
estimate of these unknown but probable losses inherent in the portfolio. For
purposes of this discussion, "loans" shall include all loans and lease contracts
that are part of the Company's portfolio.
The Company formally assesses the adequacy of the allowance on a quarterly
basis. Determination of the adequacy is based on ongoing assessments of the
probable risk in the outstanding loan portfolio, and to a lesser extent the
Company's loan commitments. These assessments include the periodic re-grading of
credits based on changes in their individual credit characteristics including
delinquency, seasoning, recent financial performance of the borrower, economic
factors, changes in the interest rate environment, growth of the portfolio as a
whole or by segment, and other factors as warranted. Loans are initially graded
when originated. They are re-graded as they are renewed, when there is a new
loan to the same borrower, when identified facts demonstrate heightened risk of
nonpayment, or if they become delinquent. Re-grading of larger problem loans
occurs at least quarterly. Confirmation of the quality of the grading process is
obtained by independent credit reviews conducted by consultants specifically
hired for this purpose and by various bank regulatory agencies.
The Company's method for assessing the appropriateness of the allowance for loan
losses includes specific allowances for identified problem loans and leases as
determined by SFAS 114, formula allowance factors for pools of credits, and
allowances for changing environmental factors (e.g., interest rates, growth,
economic conditions, etc.). Allowance factors for loan pools are based on the
previous 5 years historical loss experience by product type. Allowances for
specific loans are based on SFAS 114 analysis of individual credits. Allowances
for changing environmental factors are Management's best estimate of the
probable impact these changes have had on the loan portfolio as a whole. This
process is explained in detail in the notes to the Company's audited
consolidated financial statements in its Annual Report on Form 10-K for the year
ended December 31, 2008.
Based on the current conditions of the loan portfolio, Management believes that
the allowance for loan losses ($34,551,000) and the reserve for unfunded
commitments ($3,640,000), which collectively stand at $38,191,000 at September
30, 2009, are adequate to absorb probable losses inherent in the Company's loan
portfolio. No assurance can be given, however, that adverse economic conditions
or other circumstances will not result in increased losses in the portfolio.
10
The following tables summarize the activity in the allowance for loan losses,
reserve for unfunded commitments, and allowance for losses (which is comprised
of the allowance for loan losses and the reserve for unfunded commitments) for
the periods indicated (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------
Allowance for loan losses:
Balance at beginning of period $33,624 $24,281 $27,590 $17,331
Provision for loan losses 8,000 2,600 23,650 15,500
Loans charged off:
Real estate mortgage:
Residential - (140) (536) (361)
Commercial (305) - (450) (19)
Consumer:
Home equity lines (1,756) (1,004) (5,224) (1,952)
Home equity loans (339) (8) (562) (258)
Auto indirect (855) (1,014) (2,148) (2,186)
Other consumer (346) (239) (864) (818)
Commercial (1,488) (142) (2,546) (531)
Construction:
Residential (2,293) (31) (5,361) (3,014)
Commercial (89) - (89) -
-------------------------------------------------------
Total loans charged off (7,471) (2,578) (17,780) (9,139)
Recoveries of previously
charged-off loans:
Real estate mortgage:
Residential 3 - 3 -
Commercial 17 15 48 43
Consumer:
Home equity lines 87 12 96 12
Home equity loans - - - -
Auto indirect 107 104 367 295
Other consumer 170 146 521 520
Commercial 14 8 52 26
Construction:
Residential - - 4 -
Commercial - - - -
------------------------------------------------------
Total recoveries of
previously charged off loans 398 285 1,091 896
------------------------------------------------------
Net charge-offs (7,073) (2,293) (16,689) (8,243)
------------------------------------------------------
Balance at end of period $34,551 $24,588 $34,551 $24,588
======================================================
Reserve for unfunded commitments:
Balance at beginning of period $3,140 $3,465 $2,565 $2,090
Provision for losses -
unfunded commitments 500 (100) 1,075 1,275
------------------------------------------------------
Balance at end of period $3,640 $3,365 $3,640 $3,365
======================================================
Balance at end of period:
Allowance for loan losses $34,551 $24,588
Reserve for unfunded commitments 3,640 3,365
-----------------------
Allowance for losses $38,191 $27,953
=======================
As a percentage of total loans:
Allowance for loan losses 2.25% 1.57%
Reserve for unfunded commitments 0.24% 0.22%
----------------------
Allowance for losses 2.49% 1.79%
=====================
11
Loans classified as nonaccrual were classified as impaired and are included in
the recorded balance of impaired loans. The Company's recorded investment in
impaired loans was as follows (dollars in thousands):
September 30, December 31, September 30,
2009 2008 2008
------------------------------------------------
Impaired loans with no allocated allowance $31,526 $14,813 $12,526
Impaired loans with allocated allowance 14,273 12,525 4,141
------------------------------------------------
Total impaired loans $45,799 $27,338 $16,667
------------------------------------------------
Allowance for loan losses
allocated to impaired loans $5,086 $5,430 $1,738
================================================
The valuation allowance allocated to impaired loans is included in the allowance
for loan losses shown above. The average recorded investment in impaired loans
was $43.6 million and $36.6 million for the three and nine months ended
September 30, 2009 and $15.7 million and $12.1 million for the three and nine
months ended September 30, 2008. The Company recognized interest income on
impaired loans of $0.6 million and $1.2 million for the three and nine months
ended September 30, 2009 and $0.5 million and $0.9 million for the three and
nine months ended September 30, 2008.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) represent the Company's right to a future
stream of cash flows based upon the contractual servicing fee associated with
servicing mortgage loans. MSRs arise from residential mortgage loans that the
Company originates and sells, but retains the right to service. For sales of
residential mortgage loans, a portion of the cost of originating the loan is
allocated to the servicing right based on the fair values of the loan and the
servicing right. The net gain from the retention of the servicing right is
included in gain on sale of loans in noninterest income when the loan is sold.
Fair value is based on market prices for comparable mortgage servicing
contracts, when available, or alternatively, is based on a valuation model that
calculates the present value of estimated future net servicing income. The
valuation model incorporates assumptions that market participants would use in
estimating future net servicing income, such as the cost to service, the
discount rate, the custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. MSRs are included in other
assets. Servicing fees are recorded in noninterest income when earned.
The determination of fair value of our MSRs requires management judgment because
they are not actively traded. The determination of fair value for MSRs requires
valuation processes which combine the use of discounted cash flow models and
extensive analysis of current market data to arrive at an estimate of fair
value. The cash flow and prepayment assumptions used in our discounted cash flow
model are based on empirical data drawn from the historical performance of the
Company's MSRs, which management believes are consistent with assumptions used
by market participants valuing similar MSRs, and from data obtained on the
performance of similar MSRs. The key assumptions used in the valuation of MSRs
include mortgage prepayment speeds and the discount rate. These variables can,
and generally will, change from quarter to quarter as market conditions and
projected interest rates change. The key risks inherent with MSRs are prepayment
speed and changes in interest rates. The Company uses an independent third party
to determine fair value of MSRs.
12
The following tables summarize the activity in, and the main assumptions used to
determine the fair value of mortgage servicing rights for the periods indicated
(dollars in thousands):
Nine months ended September 30,
-------------------------------
2009 2008
-------------------------------
Mortgage servicing rights:
Balance at beginning of period $2,972 $4,088
Additions 1,378 621
Change in fair value (317) (743)
-------------------------------
Balance at end of period $4,033 $3,966
===============================
Servicing fees received $834 $767
Balance of loans serviced at:
Beginning of period $431,195 $406,743
End of period $492,830 $425,783
Weighted-average prepayment speed (CPR) 17.1% 11.2%
Discount rate 9.0% 13.0%
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to
extend credit, including commitments under credit card arrangements, commercial
letters of credit, and standby letters of credit. Such financial instruments are
recorded when they are funded.
Premises and Equipment
Land is carried at cost. Buildings and equipment, including those acquired under
capital lease, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization expenses are computed using the
straight-line method over the estimated useful lives of the related assets or
lease terms. Asset lives range from 3-10 years for furniture and equipment and
15-40 years for land improvements and buildings.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, management periodically performs
valuations and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other noninterest expense.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of net assets of
businesses acquired. Goodwill and other intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually. Intangible
assets with estimable useful lives are amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment.
The Company has identifiable intangible assets consisting of core deposit
premiums and minimum pension liability. Core deposit premiums are amortized
using an accelerated method over a period of ten years. Intangible assets
related to minimum pension liability are adjusted annually based upon actuarial
estimates.
The following table summarizes the Company's goodwill intangible as of September
30, 2009 and December 31, 2008.
December 31, September 30,
(Dollars in Thousands) 2008 Additions Reductions 2009
----------------------------------------------------
Goodwill $15,519 - - $15,519
====================================================
13
The following table summarizes the Company's core deposit intangibles as of
September 30, 2009 and December 31, 2008.
December 31, September 30,
(Dollars in Thousands) 2008 Additions Reductions 2009
--------------------------------------------------
Core deposit intangibles $3,365 - - $3,365
Accumulated amortization (2,712) - ($264) (2,976)
--------------------------------------------------
Core deposit intangibles, net $653 - ($264) $389
==================================================
Core deposit intangibles are amortized over their expected useful lives. Such
lives are periodically reassessed to determine if any amortization period
adjustments are indicated. The following table summarizes the Company's
estimated core deposit intangible amortization for each of the five succeeding
years:
Estimated Core Deposit
Intangible Amortization
Years Ended (dollars in thousands)
------------ ------------------------
2009 $328
2010 $260
2011 $65
Thereafter -
Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as premises and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
On December 31 of each year, goodwill is tested for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. This determination is made at
the reporting unit level and consists of two steps. First, the Company
determines the fair value of a reporting unit and compares it to its carrying
amount. Second, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any excess of the carrying amount of
the reporting unit's goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill. Currently, and historically, the Company is comprised of only one
reporting unit that operates within the business segment it has identified as
"community banking".
Income Taxes
The Company's accounting for income taxes is based on an asset and liability
approach. The Company recognizes the amount of taxes payable or refundable for
the current year, and deferred tax assets and liabilities for the future tax
consequences that have been recognized in its financial statements or tax
returns. The measurement of tax assets and liabilities is based on the
provisions of enacted tax laws. No valuation allowance was recorded against
deferred tax assets at September 30, 2009 as management believes that it is more
likely than not that all of the deferred tax assets will be realized because
they were supported by recoverable taxes paid in prior years.
14
Stock-Based Compensation
The following table shows the number, weighted-average exercise price, intrinsic
value, weighted average remaining contractual life, average remaining vesting
period, and remaining compensation cost to be recognized over the remaining
vesting period of options exercisable, options not yet exercisable, and total
options outstanding as of September 30, 2009:
Currently Currently Not Total
(dollars in thousands except exercise price) Exercisable Exercisable Outstanding
Number of options 1,180,438 186,150 1,366,588
Weighted average exercise price $13.89 $19.95 $14.71
Intrinsic value $2,964 $0 $2,964
Weighted average remaining contractual term (yrs.) 1.99 8.01 2.81
The options for 186,150 shares that are not currently exercisable as of
September 30, 2009 are expected to vest, on a weighted-average basis, over the
next 3.01 years, and the Company is expected to recognize $1,275,000 of
compensation costs related to these options as they vest.
Earnings Per Share
Basic earnings per share represent income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustments to income that would result from assumed issuance.
Potential common shares that may be issued by the Company relate solely from
outstanding stock options, and are determined using the treasury stock method.
Earnings per share have been computed based on the following:
Three months ended Nine months ended
September 30, September 30,
------------------------- -----------------------
2009 2008 2009 2008
------------------------- -----------------------
(in thousands)
Net income $2,255 $6,235 $7,649 $12,557
Average number of common shares outstanding 15,787 15,745 15,782 15,777
Effect of dilutive stock options 229 206 229 245
Average number of common shares outstanding ------------------------- ----------------------
used to calculate diluted earnings per share 16,016 15,951 16,011 16,022
========================= ======================
There were 552,870 and 603,080 options excluded from the computation of diluted
earnings per share for the three month periods ended September 30, 2009 and
2008, respectively, because the effect of these options was antidilutive.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. The components of other comprehensive income (loss) and
related tax effects are as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------
2009 2008 2009 2008
(in thousands) ---------------------- --------------------
Unrealized holding gains (losses) on
available-for-sale securities $2,781 $906 $3,240 ($1,558)
Tax effect (1,169) (381) (1,362) 655
--------------------- -------------------
Unrealized holding gains (losses) on
available-for-sale securities, net of tax $1,612 $525 $1,878 ($903)
===================== ===================
15
The components of accumulated other comprehensive income (loss), included in
shareholders' equity, are as follows:
September 30, December 31,
2009 2008
---------------------------
(in thousands)
Net unrealized gains on available-for-sale securities $9,371 $6,131
Tax effect (3,940) (2,578)
---------------------------
Unrealized holding gains on
available-for-sale securities, net of tax 5,431 3,553
---------------------------
Minimum pension liability (2,677) (2,677)
Tax effect 1,126 1,126
---------------------------
Minimum pension liability, net of tax (1,551) (1,551)
Joint beneficiary agreement liability 94 94
Tax effect (40) (40)
---------------------------
Joint beneficiary agreement liability,
net of tax 54 54
---------------------------
Accumulated other comprehensive income $3,934 $2,056
===========================
Retirement Plans
The Company has supplemental retirement plans for current and former directors
and key executives. These plans are non-qualified defined benefit plans and are
unsecured and unfunded. The Company has purchased insurance on the lives of the
participants and intends (but is not required) to use the cash values of these
policies to pay the retirement obligations. The following table sets forth the
net periodic benefit cost recognized for the plans:
Three months ended Nine months ended
September 30, September 30,
-------------------- ------------------
2009 2008 2009 2008
(in thousands) ------------------- ------------------
Net pension cost included the following components:
Service cost-benefits earned during the period $99 $138 $297 $416
Interest cost on projected benefit obligation 174 166 522 498
Amortization of net obligation at transition - 1 - 1
Amortization of prior service cost 38 45 114 135
Recognized net actuarial loss 25 37 75 111
---------------------------------------
Net periodic pension cost $336 $387 $1,008 $1,161
=======================================
During the nine months ended September 30, 2009 and 2008, the Company
contributed and paid out as benefits $562,000 and $453,000, respectively, to
participants under the plans. For the year ending December 31, 2009, the Company
expects to contribute and pay out as benefits $737,000 to participants under the
plans.
Fair Value Measurement
The Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Securities available-for-sale and mortgage servicing rights are recorded at fair
value on a recurring basis. Additionally, from time to time, the Company may be
required to record at fair value other assets on a nonrecurring basis, such as
loans held for sale, loans held for investment and certain other assets. These
nonrecurring fair value adjustments typically involve application of lower of
cost or market accounting or impairment write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based
on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments traded
in active markets
Level 2 - Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the market.
16
Level 3 - Valuation is generated from model-based techniques that use at least
one significant assumption not observable in the market. These
unobservable assumptions reflect estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation
techniques include use of option pricing models, discounted cash flow
models and similar techniques.
Securities available-for-sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing
models or other model-based valuation techniques such as the present value of
future cash flows, adjusted for the security's credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1
securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.
The Company does not record loans at fair value on a recurring basis. However,
from time to time, a loan is considered impaired and an allowance for loan
losses is established. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. The fair value of impaired loans is
estimated using one of several methods, including collateral value, market value
of similar debt, enterprise value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At September 30, 2009, substantially all of the total
impaired loans were evaluated based on the fair value of the collateral.
Impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy. When the fair
value of the collateral is based on an observable market price or a current
appraised value which uses substantially observable data, the Company records
the impaired loan as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value, or the appraised value contains a
significant assumption, and there is no observable market price, the Company
records the impaired loan as nonrecurring Level 3.
Mortgage servicing rights are carried at fair value. A valuation model, which
utilizes a discounted cash flow analysis using a discount rate and prepayment
speed assumptions is used in the completion of the fair value measurement. While
the prepayment speed assumption is currently quoted for comparable instruments,
the discount rate assumption currently requires a significant degree of
management judgment. As such, the Company classifies mortgage servicing rights
subjected to recurring fair value adjustments as Level 3.
Goodwill and identified intangible assets are subject to impairment testing. A
projected cash flow valuation method is used in the completion of impairment
testing. This valuation method requires a significant degree of management
judgment as there are unobservable inputs for these assets. In the event the
projected undiscounted net operating cash flows are less than the carrying
value, the asset is recorded at fair value as determined by the valuation model.
As such, the Company classifies goodwill and other intangible assets subjected
to nonrecurring fair value adjustments as Level 3.
The table below presents the recorded amount of assets and liabilities measured
at fair value on a recurring basis (in thousands):
Fair value at September 30, 2009 Total Level 1 Level 2 Level 3
Securities available-for-sale $230,962 - $230,962 -
Mortgage servicing rights 4,033 - - $4,033
-----------------------------------------
Total assets measured at fair value $234,995 - $230,962 $4,033
=========================================
The table below presents the recorded amount of assets and liabilities measured
at fair value on a nonrecurring basis (in thousands):
Fair value at September 30, 2009 Total Level 1 Level 2 Level 3
Impaired loans $45,865 - - $45,865
----------------------------------------
Total assets measured at fair value $45,865 - - $45,865
========================================
17
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practical to estimate that
value. Cash and due from banks, fed funds purchased and sold, accrued interest
receivable and payable, and short-term borrowings are considered short-term
instruments. For these short-term instruments their carrying amount approximates
their fair value.
Securities
For all securities, fair values are based on quoted market prices or dealer
quotes.
Loans
The fair value of variable rate loans is the current carrying value. The
interest rates on these loans are regularly adjusted to market rates. The fair
value of other types of fixed rate loans is estimated by discounting the future
cash flows using current rates at which similar loans would be made to borrowers
with similar credit ratings for the same remaining maturities. The allowance for
loan losses is a reasonable estimate of the valuation allowance needed to adjust
computed fair values for credit quality of certain loans in the portfolio.
Cash Value of Life Insurance
The fair values of insurance policies owned are based on the insurance
contract's cash surrender value.
Deposit Liabilities and Long-Term Debt
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. These values do
not consider the estimated fair value of the Company's core deposit intangible,
which is a significant unrecognized asset of the Company. The fair value of time
deposits and debt is based on the discounted value of contractual cash flows.
Securities Sold under Agreements to Repurchase and Federal Funds Purchased or
Sold
For short-term instruments, including securities sold under agreements to
repurchase and federal funds purchased or sold, the carrying amount is a
reasonable estimate of fair value.
Other Borrowings
The fair value of other borrowings is calculated based on the discounted value
of the contractual cash flows using current rates at which such borrowings can
currently be obtained.
Junior Subordinated Debentures
The fair value of junior subordinated debentures is estimated using a discounted
cash flow model. The future cash flows of these instruments are extended to the
next available redemption date or maturity date as appropriate based upon the
spreads of recent issuances or quotes from brokers for comparable bank holding
companies compared to the contractual spread of each junior subordinated
debenture measured at fair value.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter parties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation with the
counter parties at the reporting date.
18
Fair values for financial instruments are management's estimates of the values
at which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including, any mortgage banking
operations, deferred tax assets, and premises and equipment. Further, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on the fair value estimates and have not been
considered in any of these estimates. The estimated fair values of the Company's
financial instruments are as follows:
September 30, 2009 December 31, 2008
------------------------ --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands) ------------------------ ------------------------
Financial assets:
Cash and due from banks $48,549 $48,549 $64,375 $64,375
Cash at Federal Reserve and other banks 186,021 186,021 21,980 21,980
Securities available-for-sale 230,962 230,962 266,561 266,561
Federal Home Loan Bank stock, at cost 9,274 9,274 9,235 9,235
Loans, net 1,496,661 1,544,577 1,563,259 1,623,697
Cash value of life insurance 47,635 47,635 46,815 46,815
Accrued interest receivable 7,666 7,666 7,935 7,935
Financial liabilities:
Deposits 1,751,895 1,713,162 1,669,270 1,646,561
Accrued interest payable 4,136 4,136 6,146 6,146
Federal funds purchased - - - -
Other borrowings 66,197 71,292 102,005 101,681
Junior subordinated debt 41,238 16,083 41,238 21,856
Contract Fair Contract Fair
Off-balance sheet: Amount Value Amount Value
----------------------- -----------------------
Commitments $584,117 $5,841 $637,940 $6,379
Standby letters of credit 7,219 72 5,425 54
Overdraft privilege commitments 35,464 355 35,883 359
Subsequent Events
The Company has evaluated events subsequent to the balance sheet through
November 9, 2009, the date the financial statements were issued, and has
determined that there were no recognized or non-recognized subsequent events
that require recognition or disclosure in these financial statements.
Recent Accounting Pronouncements
The Financial Accounting Standards Board's (FASB) Accounting Standards
Codification (ASC) became effective on July 1, 2009. At that date, the ASC
became FASB's officially recognized source of authoritative U.S. generally
accepted accounting principles (GAAP) applicable to all public and non-public
non-governmental entities, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and
related literature. Rules and interpretive releases of the SEC under the
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the away companies refer to
U.S. GAAP in financial statements and accounting policies. Citing particular
content in the ASC involves specifying the unique numeric path to the content
through the Topic, Subtopic, Section and Paragraph structure.
FASB ASC Topic 260, "Earnings Per Share." On January 1, 2009, the Company
adopted new authoritative accounting guidance under FASB ASC Topic 260,
"Earnings Per Share," which provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. Adoption of
the new guidance did not significantly impact the Company's financial
statements.
FASB ASC Topic 320, "Investments - Debt and Equity Securities." New
authoritative accounting guidance under ASC Topic 320, "Investments - Debt and
Equity Securities," (i) changes existing guidance for determining whether an
impairment is other than temporary to debt securities and (ii) replaces the
existing requirement that the entity's management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis. Under ASC Topic 320, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive income.
The Company adopted the provisions of the new authoritative accounting guidance
under ASC Topic 320 during the first quarter of 2009. Adoption of the new
guidance did not significantly impact the Company's financial statements.
19
FASB ASC Topic 715, "Compensation - Retirement Benefits." New authoritative
accounting guidance under ASC Topic 715, "Compensation - Retirement Benefits,"
provides guidance related to an employer's disclosures about plan assets of
defined benefit pension or other post-retirement benefit plans. Under ASC Topic
715, disclosures should provide users of financial statements with an
understanding of how investment allocation decisions are made, the factors that
are pertinent to an understanding of investment policies and strategies, the
major categories of plan assets, the inputs and valuation techniques used to
measure the fair value of plan assets, the effect of fair value measurements
using significant unobservable inputs on changes in plan assets for the period
and significant concentrations of risk within plan assets. The disclosures
required by ASC Topic 715 will be included in the Company's financial statements
beginning with the financial statements for the year-ended December 31, 2009.
FASB ASC Topic 805, "Business Combinations." On January 1, 2009, new
authoritative accounting guidance under ASC Topic 805, "Business Combinations,"
became applicable to the Company's accounting for business combinations closing
on or after January 1, 2009. ASC Topic 805 applies to all transactions and other
events in which one entity obtains control over one or more other businesses.
ASC Topic 805 requires an acquirer, upon initially obtaining control of another
entity, to recognize the assets, liabilities and any non-controlling interest in
the acquiree at fair value as of the acquisition date. Contingent consideration
is required to be recognized and measured at fair value on the date of
acquisition rather than at a later date when the amount of that consideration
may be determinable beyond a reasonable doubt. This fair value approach replaces
the cost-allocation process required under previous accounting guidance whereby
the cost of an acquisition was allocated to the individual assets acquired and
liabilities assumed based on their estimated fair value. ASC Topic 805 requires
acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under prior accounting guidance. Assets acquired and
liabilities assumed in a business combination that arise from contingencies are
to be recognized at fair value if fair value can be reasonably estimated. If
fair value of such an asset or liability cannot be reasonably estimated, the
asset or liability would generally be recognized in accordance with ASC Topic
450, "Contingencies." Under ASC Topic 805, the requirements of ASC Topic 420,
"Exit or Disposal Cost Obligations," would have to be met in order to accrue for
a restructuring plan in purchase accounting. Pre-acquisition contingencies are
to be recognized at fair value, unless it is a non-contractual contingency that
is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and, instead, that contingency would be subject to the
probable and estimable recognition criteria of ASC Topic 450, "Contingencies."
FASB ASC Topic 810, "Consolidation." New authoritative accounting guidance under
ASC Topic 810, "Consolidation," amended prior guidance to establish accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary. Under ASC Topic 810, a non-controlling
interest in a subsidiary, which is sometimes referred to as minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, ASC Topic 810 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. The new
authoritative accounting guidance under ASC Topic 810 became effective for the
Company on January 1, 2009 and did not have a significant impact on the
Company's financial statements.
Further new authoritative accounting guidance under ASC Topic 810 amends prior
guidance to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity's
purpose and design and a company's ability to direct the activities of the
entity that most significantly impact the entity's economic performance. The new
authoritative accounting guidance requires additional disclosures about the
reporting entity's involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity's financial statements. The new authoritative accounting
guidance under ASC Topic 810 will be effective January 1, 2010 and is not
expected to have a significant impact on the Company's financial statements.
20
FASB ASC Topic 815, "Derivatives and Hedging." New authoritative accounting
guidance under ASC Topic 815, "Derivatives and Hedging," amends prior guidance
to amend and expand the disclosure requirements for derivatives and hedging
activities to provide greater transparency about (i) how and why an entity uses
derivative instruments, (ii) how derivative instruments and related hedge items
are accounted for under ASC Topic 815, and (iii) how derivative instruments and
related hedged items affect an entity's financial position, results of
operations and cash flows. To meet those objectives, the new authoritative
accounting guidance requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. The new
authoritative accounting guidance under ASC Topic 815 became effective for the
Company on January 1, 2009 and did not have a significant impact on the
Company's financial statements.
FASB ASC Topic 820, "Fair Value Measurements and Disclosures." New authoritative
accounting guidance under ASC Topic 820, "Fair Value Measurements and
Disclosures," affirms that the objective of fair value when the market for an
asset is not active is the price that would be received to sell the asset in an
orderly transaction, and clarifies and includes additional factors for
determining whether there has been a significant decrease in market activity for
an asset when the market for that asset is not active. ASC Topic 820 requires an
entity to base its conclusion about whether a transaction was not orderly on the
weight of the evidence. The new accounting guidance amended prior guidance to
expand certain disclosure requirements. The Company adopted the new
authoritative accounting guidance under ASC Topic 820 during the first quarter
of 2009. Adoption of the new guidance did not significantly impact the Company's
financial statements.
Further new authoritative accounting guidance (Accounting Standards Update No.
2009-5) under ASC Topic 820 provides guidance for measuring the fair value of a
liability in circumstances in which a quoted price in an active market for the
identical liability is not available. In such instances, a reporting entity is
required to measure fair value utilizing a valuation technique that uses (i) the
quoted price of the identical liability when traded as an asset, (ii) quoted
prices for similar liabilities or similar liabilities when traded as assets, or
(iii) another valuation technique that is consistent with the existing
principles of ASC Topic 820, such as an income approach or market approach. The
new authoritative accounting guidance also clarifies that when estimating the
fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. The forgoing new
authoritative accounting guidance under ASC Topic 820 will be effective for the
Company's financial statements beginning October 1, 2009 and is not expected to
have a significant impact on the Company's financial statements.
FASB ASC Topic 825 "Financial Instruments." New authoritative accounting
guidance under ASC Topic 825, "Financial Instruments," requires an entity to
provide disclosures about the fair value of financial instruments in interim
financial information and amends prior guidance to require those disclosures in
summarized financial information at interim reporting periods.
FASB ASC Topic 855, "Subsequent Events." New authoritative accounting guidance
under ASC Topic 855, "Subsequent Events," establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or available to be issued. ASC Topic
855 defines (i) the period after the balance sheet date during which a reporting
entity's management should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (ii) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and (iii)
the disclosures an entity should make about events or transactions that occurred
after the balance sheet date. The new authoritative accounting guidance under
ASC Topic 855 became effective for the Company's financial statements for
periods ending after June 15, 2009 and did not have a significant impact on the
Company's financial statements.
21
FASB ASC Topic 860, "Transfers and Servicing." New authoritative accounting
guidance under ASC Topic 860, "Transfers and Servicing," amends prior accounting
guidance to enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks
related to transferred financial assets. The new authoritative accounting
guidance eliminates the concept of a "qualifying special-purpose entity" and
changes the requirements for derecognizing financial assets. The new
authoritative accounting guidance also requires additional disclosures about all
continuing involvements with transferred financial assets including information
about gains and losses resulting from transfers during the period. The new
authoritative accounting guidance under ASC Topic 860 will be effective January
1, 2010 and is not expected to have a significant impact on the Company's
financial statements.
TRICO BANCSHARES
Financial Summary
(In thousands, except per share amounts; unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------
2009 2008 2009 2008
------------------------------------------------
Net Interest Income (FTE) $23,257 $22,889 $69,696 $67,464
Provision for loan losses 8,000 2,600 23,650 15,500
Noninterest income 7,793 6,792 22,404 20,922
Noninterest expense 19,377 16,589 55,922 52,006
Provision for income taxes (FTE) 1,418 4,257 4,879 8,323
------------------------------------------------
Net income $2,255 $6,235 $7,649 $12,557
===============================================
Earnings per share:
Basic $0.14 $0.40 $0.48 $0.80
Diluted $0.14 $0.39 $0.48 $0.78
Per share:
Dividends paid $0.13 $0.13 $0.39 $0.39
Book value at period end $12.79 $12.14
Tangible book value at period end $11.78 $11.10
Average common shares outstanding 15,787 15,745 15,782 15,777
Average diluted shares outstanding 16,016 15,952 16,011 16,022
Shares outstanding at period end 15,788 15,745
At period end:
Loans, net $1,496,661 $1,538,648
Total assets 2,095,666 1,976,467
Total deposits 1,751,895 1,563,841
Other borrowings 66,197 79,873
Junior subordinated debt 41,238 41,238
Shareholders' equity 201,937 191,102
Financial Ratios:
During the period (annualized):
Return on assets 0.43% 1.26% 0.49% 0.84%
Return on equity 4.43% 13.04% 5.02% 8.71%
Net interest margin(1) 4.72% 5.07% 4.81% 4.96%
Net loan charge-offs to average loans 1.84% 0.59% 1.43% 0.71%
Efficiency ratio(1) 62.41% 55.89% 60.72% 58.84%
At Period End:
Equity to assets 9.64% 9.67%
Total capital to risk assets 13.17% 12.38%
Allowance for losses to loans(2) 2.49% 1.79%
(1) Fully taxable equivalent (FTE)
(2) Allowance for losses includes allowance for loan losses and reserve for
unfunded commitments.
22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
As TriCo Bancshares (the "Company") has not commenced any business operations
independent of Tri Counties Bank (the "Bank"), the following discussion pertains
primarily to the Bank. Average balances, including such balances used in
calculating certain financial ratios, are generally comprised of average daily
balances for the Company. Within Management's Discussion and Analysis of
Financial Condition and Results of Operations, interest income and net interest
income are generally presented on a fully tax-equivalent (FTE) basis. The
presentation of interest income and net interest income on a FTE basis is a
common practice within the banking industry. Interest income and net interest
income are shown on a non-FTE basis in the Part I - Financial Information
section of this Form 10-Q, and a reconciliation of the FTE and non-FTE
presentations is provided below in the discussion of net interest income.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, intangible assets, and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. (See caption "Allowance for
Loan Losses" for a more detailed discussion).
Results of Operations
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Condensed Consolidated Financial Statements of the Company and the
Notes thereto located at Item 1 of this report.
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
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------
2009 2008 2009 2008
---------------------------------------------
Net Interest Income (FTE) $23,257 $22,889 $69,696 $67,464
Provision for loan losses 8,000 2,600 23,650 15,500
Noninterest income 7,793 6,792 22,404 20,922
Noninterest expense 19,377 16,589 55,922 52,006
Provision for income taxes (FTE) 1,418 4,257 4,879 8,323
--------------------------------------------
Net income $2,255 $6,235 $7,649 $12,557
============================================
The Company had quarterly earnings of $2,255,000, or $0.14 per diluted share,
for the three months ended September 30, 2009. This represents a decrease of
$3,980,000 (63.8%) when compared with earnings of $6,235,000 for the quarter
ended September 30, 2008. Diluted earnings per share for the quarter ended
September 30, 2009 decreased 64.1% to $0.14 compared to $0.39 for the quarter
ended September 30, 2008.
The Company reported earnings of $7,649,000, or $0.48 per diluted share, for the
nine months ended September 30, 2009. These results represent a decrease of
$4,908,000 (39.1%) when compared with earnings of $12,557,000 for the nine
months ended September 30, 2008. Diluted earnings per share for the nine months
ended September 30, 2009 decreased 38.5% to $0.48 compared to $0.78 for the nine
months ended September 30, 2008.
23
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 months ended
September 30, September 30,
-----------------------------------------------
2009 2008 2009 2008
-----------------------------------------------
Interest income $27,889 $29,971 $85,203 $91,433
Interest expense (4,784) (7,252) (15,954) (24,488)
FTE adjustment 152 170 447 519
-----------------------------------------------
Net interest income (FTE) $23,257 $22,889 $69,696 $67,464
===============================================
Average interest-earning assets $1,969,043 $1,806,010 $1,930,147 $1,814,103
Net interest margin (FTE) 4.72% 5.07% 4.81% 4.96%
Net interest income (FTE) during the third quarter of 2009 increased $368,000
(1.6%) from the same period in 2008 to $23,257,000. The increase in net interest
income (FTE) was due to a $163,033,000 (9.0%) increase in average balances of
interest-earning assets to $1,969,043,000 that was partially offset by a 0.35%
decrease in net interest margin (FTE) to 4.72% from the quarter ended September
30, 2008.
Net interest income (FTE) during the first nine months of 2009 increased
$2,232,000 (3.3%) from the same period in 2008 to $69,696,000. The increase in
net interest income (FTE) was due to a $116,044,000 (6.4%) increase in average
balances of interest-earning assets to $1,930,147,000 that was partially offset
by a 0.15% decrease in net interest margin (FTE) to 4.81% from the nine month
period ended September 30, 2008.
Interest and Fee Income
Interest and fee income (FTE) for the third quarter of 2009 decreased $2,100,000
(7.0%) from the third quarter of 2008. The decrease was due to a 0.98% decrease
in the yield on average interest-earning assets to 5.70% that was partially
offset by a $163,033,000 (9.0%) increase in average interest-earning assets to
$1,969,043,000. The growth in average interest-earning assets was mainly due to
a $161,347,000 increase in average balance of interest-earning cash at the
Federal Reserve and other banks. The decrease in the yield on average
interest-earning assets was mainly due to a 0.44% decrease in yield on loans to
6.48% and the large increase in interest-bearing cash balances that earned only
0.25% during the quarter.
Interest and fee income (FTE) for the nine months ended September 30, 2009
decreased $6,302,000 (6.9%) from the same period of 2008. The decrease was due
to a 0.84% decrease in the yield on average interest-earning assets to 5.92%
that was partially offset by a $116,044,000 (6.4%) increase in average
interest-earning assets to $1,930,147,000. The growth in interest-earning assets
was primarily due to a $105,817,000 increase in average balance of
interest-earning cash at the Federal Reserve and other banks. The decrease in
the yield on average interest-earning assets was mainly due to a 0.55% decrease
in yield on loans to 6.49% and the large increase in interest-bearing cash
balances that earned only 0.22% during the nine months ended September 30, 2009.
The decrease in loan yields from the nine months ended September 30, 2008 was
mainly due to a 4.00% decrease in the prime lending rate from 7.25% at December
31, 2007 to 3.25% at December 31, 2008.
24
Interest Expense
Interest expense decreased $2,468,000 (34.0%) to $4,784,000 in the third quarter
of 2009 compared to the third quarter of 2008. The average balance of
interest-bearing liabilities increased $99,474,000 (7.1%) to $1,507,797,000 in
the third quarter of 2009 compared to the third quarter of 2008. The increase in
the average balance of interest-bearing liabilities was due primarily to an
increase in interest-bearing deposits of $194,326,000 (16.2%) that was partially
offset by a decrease of $94,582,000 (57.2%) in the average balances of Federal
funds purchased and other borrowings from the third quarter of 2008. The average
rate paid on interest-bearing liabilities in the quarter ended September 30,
2009 decreased 0.79% to 1.27% compared to the quarter ended September 30, 2008
as a result of lower market rates for almost all types of interest-bearing
liabilities.
Interest expense decreased $8,534,000 (34.8%) to $15,954,000 for the nine months
ended September 30, 2009 compared to $24,488,000 for the nine months ended
September 30, 2008. The average balance of interest-bearing liabilities
increased $69,146,000 (4.9%) to $1,479,760,000 for the nine months ended
September 30, 2009 compared to the nine months ended September 30, 2008. The
increase in the average balance of interest-bearing liabilities was due
primarily to an increase in interest-bearing deposits of $191,146,000 (16.3%)
that was partially offset by a decrease of $122,000,000 (62.2%) in the average
balances of Federal funds purchased and other borrowings from the nine months
ended September 30, 2008. The average rate paid on interest-bearing liabilities
in the nine month period ended September 30, 2009 decreased 0.87% to 1.44%
compared to the nine months ended September 30, 2008 as a result of lower market
rates for almost all types of interest-bearing liabilities.
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------
2009 2008 2009 2008
----------------------------------------------
Yield on interest-earning assets 5.70% 6.68% 5.92% 6.76%
Rate paid on interest-bearing
Liabilities 1.27% 2.06% 1.44% 2.31%
----------------------------------------------
Net interest spread 4.43% 4.62% 4.48% 4.45%
Impact of all other net
noninterest-bearing funds 0.29% 0.45% 0.33% 0.51%
----------------------------------------------
Net interest margin 4.72% 5.07% 4.81% 4.96%
==============================================
Net interest margin for the three months ended September 30, 2009 decreased
0.35% compared to the three months ended September 30, 2008. This decrease in
net interest margin was mainly due to a 0.16% decrease in the impact of net
noninterest-bearing funds to 0.29% and a decrease of 0.19% in net interest
spread compared to the three months ended September 30, 2008. The average yield
on interest-earning assets decreased 0.98% while the average rate paid on
interest-bearing liabilities decreased 0.79% from the three months ended
September 30, 2008.
Net interest margin for the nine months ended September 30, 2009 decreased 0.15%
compared to the nine months ended September 30, 2008. This decrease in net
interest margin was mainly due to a 0.18% decrease in the impact of net
noninterest-bearing funds to 0.33% offset by an increase of 0.03% in net
interest spread compared to the nine months ended September 30, 2008. The
average yield on interest-earning assets decreased 0.84% while the average rate
paid on interest-bearing liabilities decreased 0.87% from the nine months ended
September 30, 2008.
25
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
-------------------------------------------------------------------
September 30, 2009 September 30, 2008
------------------------------- -----------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
------------------------------- ------------------------------
Assets:
Loans $1,538,239 $24,909 6.48% $1,549,009 $26,790 6.92%
Investment securities - taxable 249,254 2,635 4.23% 232,419 2,894 4.98%
Investment securities - nontaxable 20,128 396 7.87% 24,507 457 7.46%
Cash at Federal Reserve and other banks 161,422 101 0.25% 75 - 1.19%
------------------------------- --------------------------------
Total interest-earning assets 1,969,043 28,041 5.70% 1,806,010 30,141 6.68%
------- ------
Other assets 130,010 168,382
---------- ----------
Total assets $2,099,053 $1,974,392
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $305,767 $565 0.74% $226,843 $239 0.42%
Savings deposits 456,839 752 0.66% 376,594 1,041 1.11%
Time deposits 632,922 2,869 1.81% 597,765 4,496 3.01%
Federal funds purchased - - - 84,851 430 2.03%
Other borrowings 71,031 250 1.41% 81,032 473 2.33%
Junior subordinated debt 41,238 348 3.38% 41,238 573 5.56%
-------------------------------- ---------------------------------
Total interest-bearing liabilities 1,507,797 4,784 1.27% 1,408,323 7,252 2.06%
----- -----
Noninterest-bearing deposits 348,808 344,233
Other liabilities 38,995 30,625
Shareholders' equity 203,452 191,211
---------- -----------
Total liabilities and shareholders'equity $2,099,052 $1,974,392
========== ===========
Net interest spread(1) 4.43% 4.62%
Net interest income and interest margin(2) $23,257 4.72% $22,889 5.07%
=============== =================
(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 expense, divided by the average balance of
interest-earning assets.
26
For the nine months ended
-------------------------------------------------------------------
September 30, 2009 September 30, 2008
-------------------------------- -------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
-------------------------------- --------------------------------
Assets:
Loans $1,553,372 $75,640 6.49% $1,543,571 $81,531 7.04%
Investment securities - taxable 249,059 8,614 4.61% 244,833 8,989 4.90%
Investment securities - nontaxable 21,706 1,218 7.48% 25,506 1,429 7.47%
Cash at Federal Reserve and other banks 106,010 178 0.22% 193 3 2.07%
------------------------------- --------------------------------
Total interest-earning assets 1,930,147 85,650 5.92% 1,814,103 91,952 6.76%
------- -------
Other assets 149,003 169,092
---------- -----------
Total assets $2,079,150 $1,983,195
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $282,688 $1,351 0.64% $220,366 $460 0.28%
Savings deposits 430,594 2,404 0.74% 385,624 3,715 1.28%
Time deposits 650,943 10,411 2.13% 567,089 14,428 3.39%
Federal funds purchased - - - 106,109 1,953 2.45%
Other borrowings 74,297 604 1.08% 90,188 2,060 3.05%
Junior subordinated debt 41,238 1,184 3.83% 41,238 1,872 6.05%
------------------------------- --------------------------------
Total interest-bearing liabilities 1,479,760 15,954 1.44% 1,410,614 24,488 2.31%
------ ------
Noninterest-bearing deposits 358,718 348,483
Other liabilities 37,612 31,882
Shareholders' equity 203,060 192,216
---------- -----------
Total liabilities and shareholders' equity $2,079,150 $1,983,195
========== ===========
Net interest spread(1) 4.48% 4.45%
Net interest income and interest margin(2) $69,696 4.81% $67,464 4.96%
================ ===================
(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 expense, divided by the average balance of
interest-earning assets.
27
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 tables set forth a summary of the changes in interest income (FTE)
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 (dollars in thousands).
Three months ended September 30, 2009
compared with three months
ended September 30, 2008
-------------------------------------
Volume Rate Total
-------------------------------------
Increase (decrease) in interest income:
Loans ($186) ($1,695) ($1,881)
Investment securities 128 (448) (320)
Cash at Federal Reserve and other banks 480 (379) 101
-------------------------------------
Total interest-earning assets 422 (2,522) (2,100)
-------------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 83 243 326
Savings deposits 223 (512) (289)
Time deposits 265 (1,892) (1,627)
Federal funds purchased (431) 1 (430)
Other borrowings (58) (165) (223)
Junior subordinated debt - (225) (225)
-------------------------------------
Total interest-bearing liabilities 82 (2,550) (2,468)
-------------------------------------
Increase in Net Interest Income $340 $28 $368
=====================================
Nine months ended September 30, 2009
compared with nine months ended
September 30, 2008
-------------------------------------
Volume Rate Total
-------------------------------------
Increase (decrease) in interest income:
Loans $517 ($6,408) ($5,891)
Investment securities (58) (528) (586)
Cash at Federal Reserve and other banks 1,643 (1,468) 175
-------------------------------------
Total interest-earning assets 2,102 (8,404) (6,302)
-------------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 131 760 891
Savings deposits 432 (1,743) (1,311)
Time deposits 2,132 (6,149) (4,017)
Federal funds purchased (1,950) (3) (1,953)
Other borrowings (364) (1,092) (1,456)
Junior subordinated debt - (688) (688)
-------------------------------------
Total interest-bearing liabilities 381 (8,915) (8,534)
-------------------------------------
Increase in Net Interest Income $1,721 $511 $2,232
=====================================
Provision for Loan Losses
The Company provided $8,000,000 for loan losses in the third quarter of 2009
versus $7,850,000 in the second quarter of 2009 and $2,600,000 in the third
quarter of 2008. The allowance for loan losses increased $927,000 from the
second quarter of 2009. The provision for loan losses and increase in the
allowance for loan and lease losses during the third quarter of 2009 were
primarily the result of changes in the make-up of the loan portfolio and the
Bank's loss factors in reaction to increased losses in the Construction and
Commercial & Industrial (C&I) loan portfolios. Management re-evaluates its loss
ratios and assumptions quarterly 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.
28
In the third quarter of 2009, the Company recorded $7,471,000 in loan
charge-offs less $398,000 in recoveries resulting in $7,073,000 of net loan
charge-offs versus $2,293,000 of net loan charge-offs in the third quarter of
2008. Primary causes of the charges taken in the third quarter of 2009 were net
charge-offs of $2,382,000 in construction loans, $2,008,000, in home equity
lines and loans, $748,000 in auto indirect loans, and $1,474,000 in C&I loans.
The $2,382,000 in charge-offs in construction loans were primarily the result of
a $1,804,000 charge taken on a land acquisition and development loan in the San
Joaquin Valley of California, a $219,000 charge taken on a land development loan
in the Sacramento Valley of California, and a $200,000 charge on a condominium
construction loan in the Sacramento Valley. In addition, the Bank took charges
in its C&I portfolio of $300,000 on a line of credit to a real estate investor
in the San Joaquin Valley, $237,000 on a line of credit to a distributor in the
San Joaquin Valley, $207,000 to a contractor in the Sacramento Valley, and
$172,000 to a real estate investor in the Sacramento Valley. Generally losses
are triggered by non-performance by the borrower and calculated based on any
difference between the current loan amount and the current value of the
underlying collateral less any estimated costs associated with the disposition
of the collateral.
The Company provided $23,650,000 for loan losses during the nine months ended
September 30, 2009 versus $15,500,000 during the nine months ended September 30,
2008. In the nine months ended September 30, 2009, the Company recorded
$16,689,000 of net loan charge-offs versus $8,243,000 of net loan charge-offs in
the nine months ended September 30, 2008. A total net of $5,690,000 in home
equity lines and loans and $1,881,000 on auto indirect loans have been
charged-off during the nine months ended September 30, 2009. During the nine
months ended September 30, 2009, the Company increased its allowance for loan
losses by $6,961,000 from December 31, 2008 with such additional reserves
allocated primarily to consumer loans, residential real estate and construction
lending.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------
2009 2008 2009 2008
-----------------------------------------------
Service charges on deposit accounts $4,207 $4,080 $11,928 $11,881
ATM fees and interchange revenue 1,287 1,164 3,607 3,411
Other service fees 567 551 1,662 1,629
Change in value of mortgage servicing rights (416) (571) (318) (743)
Gain on sale of loans 1,205 341 2,794 915
Commissions on sale of
Non-deposit investment products 380 594 1,361 1,539
Increase in cash value of life insurance 270 360 820 1,080
Gain from VISA IPO - - - 396
Other noninterest income 293 273 550 814
----------------------------------------------
Total noninterest income $7,793 $6,792 $22,404 $20,922
==============================================
Noninterest income for the third quarter of 2009 increased $1,001,000 (14.7%)
from the third quarter of 2008, mainly due to a $864,000 (253%) increase in gain
on sale of loans to $1,205,000. Also contributing to the increase in noninterest
income was a $127,000 (3.1%) increase in service charges on deposit accounts to
$4,207,000, a $123,000 (10.6%) increase in ATM fees and interchange revenue to
$1,287,000, and a $155,000 (27.1%) increase in the change in value of mortgage
servicing rights to ($416,000). These increases were offset a decrease of
$214,000 (36.0%) in commission on sale of nondeposit investment products to
$380,000. The increases in service charges on deposit accounts and ATM fees and
interchange revenue were primarily due to increased numbers of customers. The
increase in gain on sale of loans is primarily due to increased refinancing
activity during the quarter.
Noninterest income for the nine months ended September 30, 2009 increased
$1,482,000 (7.1%) to $22,404,000 from the same period in 2008. The increase in
noninterest income from the nine months ended September 30, 2008 was mainly due
to a $1,879,000 (205%) increase in gain on sale of loans to $2,794,000 that was
partially offset by a decrease of $260,000 (24.1%) in the cash value of life
insurance to $820,000 and a decrease in the gain on VISA IPO of $396,000. The
increase in gain on sale of loans is primarily due to increased refinancing
activity in the low interest rate environment that existed for most of the nine
month period ended September 30, 2009.
29
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------
2009 2008 2009 2008
-----------------------------------------------
Base salaries, net of
deferred loan origination costs $6,826 $6,331 $20,079 $18,980
Incentive compensation 981 675 2,484 2,065
Benefits and other compensation costs 2,456 2,425 7,558 7,511
-----------------------------------------------
Total salaries and related benefits 10,263 9,431 30,121 28,556
===============================================
Occupancy 1,316 1,289 3,820 3,705
Equipment 953 1,017 2,775 2,997
Data processing and software 655 600 1,937 1,811
ATM network charges 642 506 1,747 1,529
Advertising and marketing 558 451 1,470 1,204
Telecommunications 428 402 1,193 1,629
Professional fees 478 300 1,212 1,302
Courier service 189 258 574 796
Postage 258 185 765 683
Intangible amortization 65 133 263 389
Assessments 697 118 2,286 283
Operational losses 97 81 224 286
Provisions for losses-unfunded commitments 500 (100) 1,075 1,275
Other 2,278 1,918 6,460 5,561
-----------------------------------------------
Total other noninterest expense 9,114 7,158 25,801 23,450
-----------------------------------------------
Total noninterest expense $19,377 $16,589 $55,922 $52,006
===============================================
Average full time equivalent staff 645 668 635 638
Noninterest expense to revenue (FTE) 62.41% 55.89% 60.72% 58.84%
Noninterest expense for the third quarter of 2009 increased $2,788,000 (16.8%)
compared to the third quarter of 2008. Salaries and benefits expense increased
$832,000 (8.8%) to $10,263,000 mainly due to annual salary increases and
increased incentive compensation expense related to increased production of sold
loans. Other noninterest expense increased $1,956,000 (27.3%) primarily due to a
$579,000 (491%) increase in assessments and a $600,000 increase in provision for
losses on unfunded commitments.
Noninterest expense for the nine months ended September 30, 2009 increased
$3,916,000 (7.5%) compared to the nine months ended September 30, 2008. Salaries
and benefits expense increased $1,565,000 (5.5%) to $30,121,000 mainly due to
annual salary increases and increased incentive compensation expense related to
increased production of sold loans. Other noninterest expense increased
$2,351,000 (10.0%) primarily due to assessments increasing $2,003,000 (708%) to
$2,286,000.
Provision for Income Tax
The effective tax rate for the three months ended September 30, 2009 was 36.0%
and reflects a decrease from 39.6% for the three months ended September 30,
2008. The effective tax rate for the nine months ended September 30, 2009 was
36.7% and reflects a decrease from 38.3% for the nine months ended September 30,
2008. The provision for income taxes for all periods presented is primarily
attributable to the respective level of earnings and the incidence of allowable
deductions, particularly from increase in cash value of life insurance,
tax-exempt loans and state and municipal securities.
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention regarding collection.
30
Consumer loans, whether unsecured or secured by real estate, automobiles, or
other personal property, are primarily susceptible to three primary risks;
non-payment due to income loss, over-extension of credit and, when the borrower
is unable to pay, shortfall in collateral value. Typically non-payment is due to
loss of job and will follow general economic trends in the marketplace driven
primarily by rises in the unemployment rate. Loss of collateral value can be due
to market demand shifts, damage to collateral itself or a combination of the
two.
Problem consumer loans are generally identified by payment history of the
borrower (delinquency). The Bank manages its consumer loan portfolios by
monitoring delinquency and contacting borrowers to encourage repayment, suggest
modifications if appropriate, and, when continued scheduled payments become
unrealistic, initiate repossession or foreclosure through appropriate channels.
Collateral values may be determined by appraisals obtained through Bank
approved, licensed appraisers, qualified independent third parties, public value
information (blue book values for autos), sales invoices, or other appropriate
means. Appropriate valuations are obtained at initiation of the credit and
periodically (every 3-12 months depending on collateral type) once repayment is
questionable and the loan has been classified.
Commercial real estate loans generally fall into two categories, owner-occupied
and non-owner occupied. Loans secured by owner occupied real estate are
primarily susceptible to changes in the business conditions of the related
business. This may be driven by, among other things, industry changes,
geographic business changes, changes in the individual fortunes of the business
owner, and general economic conditions and changes in business cycles. These
same risks apply to commercial loans whether secured by equipment or other
personal property or unsecured. Losses on loans secured by owner occupied real
estate, equipment, or other personal property generally are dictated by the
value of underlying collateral at the time of default and liquidation of the
collateral. When default is driven by issues related specifically to the
business owner, collateral values tend to provide better repayment support and
may result in little or no loss. Alternatively, when default is driven by more
general economic conditions, underlying collateral generally has devalued more
and results in larger losses due to default. Loans secured by non-owner occupied
real estate are primarily susceptible to risks associated with swings in
occupancy or vacancy and related shifts in lease rates, rental rates or room
rates. Most often these shifts are a result of changes in general economic or
market conditions or overbuilding and resultant over-supply. Losses are
dependent on value of underlying collateral at the time of default. Values are
generally driven by these same factors and influenced by interest rates and
required rates of return as well as changes in occupancy costs.
Construction loans, whether owner occupied or non-owner occupied commercial real
estate loans or residential development loans, are not only susceptible to the
related risks described above but the added risks of construction itself
including cost over-runs, mismanagement of the project, or lack of demand or
market changes experienced at time of completion. Again, losses are primarily
related to underlying collateral value and changes therein as described above.
Problem commercial loans are generally identified by periodic review of
financial information which may include financial statements, tax returns, rent
rolls and payment history of the borrower (delinquency). Based on this
information the Bank may decide to take any of several courses of action
including demand for repayment, additional collateral or guarantors, and, when
repayment becomes unlikely through Borrower's income and cash flow, repossession
or foreclosure of the underlying collateral.
Collateral values may be determined by appraisals obtained through Bank
approved, licensed appraisers, qualified independent third parties, public value
information (blue book values for autos), sales invoices, or other appropriate
means. Appropriate valuations are obtained at initiation of the credit and
periodically (every 3-12 months depending on collateral type) once repayment is
questionable and the loan has been classified.
Once a loan becomes delinquent and repayment becomes questionable, a Bank
collection officer will address collateral shortfalls with the borrower and
attempt to obtain additional collateral. If this is not forthcoming and payment
in full is unlikely, the Bank will estimate its probable loss, using a recent
valuation as appropriate to the underlying collateral less estimated costs of
sale, and charge the loan down to the estimated net realizable amount. Depending
on the length of time until ultimate collection, the Bank may revalue the
underlying collateral and take additional charge-offs as warranted. Revaluations
may occur as often as every 3-12 months depending on the underlying collateral
and volatility of values. Final charge-offs or recoveries are taken when
collateral is liquidated and actual loss is known. Unpaid balances on loans
after or during collection and liquidation may also be pursued through lawsuit
and attachment of wages or judgment liens on borrower's other assets.
31
The following is a summary of classified assets on the dates indicated:
At September 30, 2009 At June 30, 2008
-------------------------- ---------------------------
Gross Guaranteed Net Gross Guaranteed Net
--------------------------------------------------------
(dollars in thousands
Classified loans:
Real estate mortgage:
Residential $5,046 - $5,046 $4,036 - $4,036
Commercial 58,266 4,710 53,556 48,320 4,884 43,436
Consumer:
Home equity lines 10,455 - 10,455 9,845 - 9,845
Home equity loans 1,304 - 1,304 802 - 802
Auto indirect 4,527 - 4,527 4,685 - 4,685
Other consumer 448 - 448 258 - 258
Commercial 11,571 442 11,129 7,823 - 7,823
Construction:
Residential 1,205 - 1,205 1,123 - 1,123
Commercial 23,235 - 23,235 23,973 - 23,973
---------------------------------------------------------
Total classified loans $116,057 $5,152 $110,905 $100,865 $4,884 $95,981
Other classified assets 2,372 - 2,372 2,622 - 2,622
---------------------------------------------------------
Total classified assets $118,879 $5,152 $113,277 $103,487 $4,884 $98,603
=========================================================
Allowance for loan losses/classified loans 31.2% 35.0%
At March 31, 2009 At December 31, 2008
-------------------------- --------------------------
(dollars in thousands) Gross Guaranteed Net Gross Guaranteed Net
Classified loans: --------------------------------------------------------
Real estate mortgage:
Residential $4,590 - $4,590 $3,981 - $3,981
Commercial 41,938 5,055 36,883 27,426 5,225 22,201
Consumer:
Home equity lines 6,839 - 6,839 4,144 - 4,144
Home equity loans 759 - 759 377 - 377
Auto indirect 4,449 - 4,449 3,907 - 3,907
Other consumer 231 - 231 257 - 257
Commercial 4,379 - 4,379 4,505 154 4,351
Construction:
Residential 1,466 - 1,466 45 - 45
Commercial 20,112 - 20,112 19,208 - 19,208
--------------------------------------------------------
Total classified loans $84,763 $5,055 $79,708 $63,850 $5,379 $58,471
Other classified assets 2,407 - 2,407 1,185 - 1,185
--------------------------------------------------------
Total classified assets $87,170 $5,055 $82,115 $65,035 $5,379 $59,656
========================================================
Allowance for loan losses/classified loans 41.1% 47.2%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies, increased $53,621,000 (89.9%) to
$113,277,000 at September 30, 2009 from $59,656,000 at December 31, 2008. The
guarantees noted above are provided by various government agencies including the
United States Department of Agriculture, Small Business Administration, Bureau
of Indian Affairs, Statewide Health Planning Development, California Capital
Financial Development Corporation, and Safe Bidco. These guarantees range from
50% to 100% of the loan amount with the majority at 80% or higher. We consider
these guarantees when considering the adequacy of the loan loss allowance.
32
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies, increased $14,674,000 (14.9%) to
$113,277,000 at September 30, 2009 compared to $98,603,000 at June 30, 2009. The
$14,674,000 net increase in classified assets during the third quarter of 2009
was the result of new classified loans of $23,577,000, advances on existing
classified loans of $2,280,000, recoveries on existing classified loans of
$398,000, less charge-offs on existing classified loans of $7,471,000, less
reductions to existing classified loans of $3,860,000, and less reductions in
OREO of $250,000. The primary causes of the $23,577,000 in new classified loans
during the third quarter of 2009 were increases of $1,493,000 in residential
real estate, $10,163,000 in commercial real estate, $4,498,000 in home equity
lines and loans, $1,179,000 in auto loans, $431,000 in other consumer loans,
$5,217,000 in Commercial (C&I) loans, and a $594,000 increase in residential
construction loans.
The $10,163,000 in new classified commercial real estate loans were primarily
made up of a $2,885,000 loan on a commercial office building in the Sacramento
Valley, a $2,437,000 loan on a medical office building in the Sacramento Valley,
two loans to the same borrower totaling $1,576,000 on two commercial retail
buildings in the Sacramento Valley, a $735,000 loan on agricultural real estate
in the Sacramento Valley, a $1,007,000 loan on a mini-storage facility in
Northern California, a $499,000 loan on an office building in the Sacramento
Valley, and a $403,000 loan on a manufacturing facility in the Sacramento
Valley.
The $5,217,000 in new classified commercial (C&I) loans were primarily made up
of a $2,240,000 production loan to a dairy in the San Joaquin Valley, an
$807,000 loan to a contractor in the Sacramento Valley, a $557,000 production
loan to a dairy in the San Joaquin Valley, a $496,000 loan to a real estate
investor in the Sacramento Valley, and a $353,000 crop loan in the Sacramento
Valley.
The $594,000 in new classified residential construction loans were primarily
made up of two single family residential (SFR) construction loans in the
Sacramento Valley and two SFR construction loans in Northern California.
Nonperforming Loans
Loans are reviewed on an individual basis for reclassification to nonaccrual
status when any one of the following occurs: the loan becomes 90 days past due
as to interest or principal, the full and timely collection of additional
interest or principal becomes uncertain, the loan is classified as doubtful by
internal credit review or bank regulatory agencies, a portion of the principal
balance has been charged off, or the Company takes possession of the collateral.
Loans that are placed on nonaccrual even though the borrowers continue to repay
the loans as scheduled are classified as "performing nonaccrual" and are
included in total nonperforming loans. The reclassification of loans as
nonaccrual does not necessarily reflect Management's judgment as to whether they
are collectible.
Interest income is not accrued on loans where Management has determined that the
borrowers will be unable to meet contractual principal and/or interest
obligations, unless the loan is well secured and in the process of collection.
When a loan is placed on nonaccrual, any previously accrued but unpaid interest
is reversed. Income on such loans is then recognized only to the extent that
cash is received and where the future collection of principal is probable.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of
Management, the loans are estimated to be fully collectible as to both principal
and interest.
Interest income on nonaccrual loans, which would have been recognized during the
nine months ended September 30, 2009 and 2008, if all such loans had been
current in accordance with their original terms, totaled $3,674,000 and
$1,759,000, respectively. Interest income actually recognized on these loans
during the nine months ended September 30, 2009 and 2008 was $1,186,000 and
$882,000, respectively.
The Company's policy is to place loans 90 days or more past due on nonaccrual
status. In some instances when a loan is 90 days past due Management does not
place it on nonaccrual status because the loan is well secured and in the
process of collection. A loan is considered to be in the process of collection
if, based on a probable specific event, it is expected that the loan will be
repaid or brought current. Generally, this collection period would not exceed 30
days. Loans where the collateral has been repossessed are classified as OREO or,
if the collateral is personal property, the loan is classified as other assets
on the Company's financial statements.
33
Management considers both the adequacy of the collateral and the other resources
of the borrower in determining the steps to be taken to collect nonaccrual
loans. Alternatives that are considered are foreclosure, collecting on
guarantees, restructuring the loan or collection lawsuits.
As shown in the following table, total nonperforming assets net of guarantees of
the U.S. Government, including its agencies and its government-sponsored
agencies, increased $20,269,000 (70.6%) to $48,979,000 during the first nine
months of 2009. Nonperforming assets net of guarantees represent 2.34% of total
assets. All nonaccrual loans are considered to be impaired when determining the
need for a specific valuation allowance. The Company continues to make a
concerted effort to work problem and potential problem loans to reduce risk of
loss.
At September 30, 2009 At June 30, 2009
-------------------------- ---------------------------
Gross Guaranteed Net Gross Guaranteed Net
--------------------------------------------------------
(dollars in thousands)
Performing nonaccrual loans $24,824 $5,031 $19,793 $24,886 $4,884 $19,982
Nonperforming, nonaccrual loans 26,128 121 26,007 21,321 - 21,321
--------------------------------------------------------
Total nonaccrual loans 50,952 5,152 45,800 46,187 4,884 41,303
Loans 90 days past due and still accruing 807 - 807 2,070 - 2,070
--------------------------------------------------------
Total nonperforming loans 51,759 5,152 46,607 48,257 4,884 43,373
Other real estate owned 2,372 - 2,372 2,622 - 2,622
--------------------------------------------------------
Total nonperforming assets $54,131 $5,152 $48,979 $50,879 $4,884 $45,995
========================================================
Nonperforming loans to total loans 3.04% 2.79%
Nonperforming assets to total assets 2.34% 2.20%
Allowance for loan losses/nonperforming loans 74% 78%
At March 31, 2009 At December 31, 2008
-------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
(dollars in thousands) --------------------------------------------------------
Performing nonaccrual loans $23,467 $4,933 $18,534 $22,600 $5,102 $17,498
Nonperforming, nonaccrual loans 14,989 - 14,989 9,994 154 9,840
--------------------------------------------------------
Total nonaccrual loans 38,456 4,933 33,523 32,594 5,256 27,338
Loans 90 days past due and still accruing 837 - 837 187 - 187
--------------------------------------------------------
Total nonperforming loans 39,293 4,933 34,360 32,781 5,256 27,525
Other real estate owned 2,407 - 2,407 1,185 - 1,185
--------------------------------------------------------
Total nonperforming assets $41,700 $4,933 $36,767 $33,966 $5,256 $28,710
========================================================
Nonperforming loans to total loans 2.19% 1.73%
Nonperforming assets to total assets 1.77% 1.41%
Allowance for loan losses/nonperforming loans 95% 100%
34
Nonperforming assets categorized by type were as follows:
At September 30, 2009 At June 30, 2009
---------------------------- ---------------------------
Gross Guaranteed Net Gross Guaranteed Net
----------------------------------------------------------
(dollars in thousands):
Loans:
Real estate mortgage:
Residential $4,065 - $4,065 $2,964 - $2,964
Commercial 17,475 4,710 12,765 16,632 4,884 11,748
Consumer:
Home equity lines 7,627 - 7,627 6,715 - 6,715
Home equity loans 446 - 446 302 - 302
Auto indirect 2,492 - 2,492 2,731 - 2,731
Other consumer 136 - 136 119 - 119
Commercial 5,331 442 4,889 4,151 - 4,151
Construction:
Residential 13,045 - 13,045 13,691 - 13,691
Commercial 1,142 - 1,142 952 - 952
Other real estate owned 2,372 - 2,372 2,622 - 2,622
----------------------------------------------------------
Total nonperforming assets $54,131 $5,152 $48,979 $50,879 $4,884 $45,995
==========================================================
At March 31, 2009 At December 31, 2008
--------------------------- ---------------------------
(dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net
Loans: ----------------------------------------------------------
Real estate mortgage:
Residential $3,410 - $3,410 $3,189 - $3,189
Commercial 9,678 4,933 4,745 9,668 5,102 4,566
Consumer:
Home equity lines 4,679 - 4,679 2,318 - 2,318
Home equity loans 107 - 107 122 - 122
Auto indirect 2,762 - 2,762 2,233 - 2,233
Other consumer 82 - 82 123 - 123
Commercial 1,879 - 1,879 2,221 154 2,067
Construction:
Residential 16,286 - 16,286 12,483 - 12,483
Commercial 410 - 410 424 - 424
Other real estate owned 2,407 - 2,407 1,185 - 1,185
----------------------------------------------------------
Total nonperforming assets $41,700 $4,933 $36,767 $33,966 $5,256 $28,710
==========================================================
Nonperforming assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies, increased $2,984,000 (6.5%) to
$48,979,000 at September 30, 2009 compared to $45,995,000 at June 30, 2009. The
$2,984,000 increase in nonperforming assets during the third quarter of 2009 was
the result new nonperforming loans of $13,250,000, advances on existing
nonperforming loans of $1,161,000, recoveries on existing nonperforming loans of
$398,000, less charge-offs of $7,471,000, less reductions to existing
nonperforming loans of $4,104,000, and less reductions in OREO of $250,000. The
primary causes of the $13,250,000 in new nonperforming loans during the third
quarter of 2009 were increases of $1,165,000 in residential real estate,
$2,101,000 in commercial real estate, $4,413,000 in home equity lines and loans,
$959,000 in auto loans, $247,000 in other consumer loans, $3,241,000 in
Commercial (C&I) loans, and a $1,125,000 increase in residential construction
loans.
The $2,101,000 in new nonperforming commercial real estate loans were primarily
made up of a $1,520,000 loan on a construction products manufacturing facility
in the Sacramento Valley.
The $3,241,000 in new nonperforming commercial (C&I) loans were primarily made
up of a $2,240,000 production loan to a dairy in the San Joaquin Valley, a
$557,000 production loan to a dairy in the San Joaquin Valley, a $300,000 loan
to a real estate investor in the San Joaquin Valley.
The $1,125,000 in new nonperforming residential construction loans were
primarily made up of a $770,000 SFR construction loan in the Sacramento Valley.
35
Capital Resources
The current and projected capital position of the Company and the impact of
capital plans and long-term strategies are reviewed regularly by Management.
The Company adopted and announced a stock repurchase plan on August 21, 2007 for
the repurchase of up to 500,000 shares of the Company's common stock from time
to time as market conditions allow. The 500,000 shares authorized for repurchase
under this plan represented approximately 3.2% of the Company's approximately
15,815,000 common shares outstanding as of August 21, 2007. The Company did not
repurchase any shares during the three months ended September 30, 2009. This
plan has no stated expiration date for the repurchases. As of September 30,
2009, the Company had repurchased 166,600 shares under this plan, which left
333,400 shares available for repurchase under the plan.
The Company's primary capital resource is shareholders' equity, which was
$201,937,000 at September 30, 2009. This amount represents an increase of
$4,005,000 from December 31, 2008, the net result of comprehensive income for
the period of $9,527,000, the effect of stock option vesting of $369,000, the
exercise of stock options for $887,000 and the tax benefit from the exercise of
stock options of $30,000 that were partially offset by the repurchase of common
stock with value of $652,000, and dividends paid of $6,156,000. The Company's
ratio of equity to total assets was 9.64%, 9.67% and 9.69% as of September 30,
2009, September 30, 2008, and December 31, 2008, respectively.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At September 30, At Minimum
-------------------- December 31, Regulatory
2009 2008 2008 Requirement
---------------------------------------------------
Tier I Capital 11.91% 11.13% 11.17% 4.00%
Total Capital 13.17% 12.38% 12.42% 8.00%
Leverage ratio 10.64% 11.08% 11.09% 4.00%
Liquidity
The discussion of "Liquidity" under Item 3 of this report is incorporated herein
by reference.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases.
These commitments do not significantly impact operating results. As of September
30, 2009 commitments to extend credit and commitments related to the Bank's
deposit overdraft privilege product were the Bank's only financial instruments
with off-balance sheet risk. The Bank has not entered into any contracts for
financial derivative instruments such as futures, swaps, options, etc.
Commitments to extend credit were $591,336,000 and $643,365,000 at September 30,
2009 and December 31, 2008, respectively, and represented 38.6% and 40.4% of the
total loans outstanding at September 30, 2009 and December 31, 2008,
respectively. Commitments related to the Bank's deposit overdraft privilege
product totaled $35,464,000 and $35,883,000 at September 30, 2009 and December
31, 2008, respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset and Liability Management
The goal for managing the assets and liabilities of the Company is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Company to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Company has an Asset and Liability Management Committee (ALCO)
which establishes and monitors guidelines to control the sensitivity of earnings
to changes in interest rates.
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin, net income and market value of equity under changing interest
environments. Market value of equity is the net present value of estimated cash
flows from the Company's assets, liabilities and off-balance sheet items. The
Company uses simulation models to forecast net interest margin, net income and
market value of equity.
36
Simulation of net interest margin, net income and market value of equity under
various interest rate scenarios is the primary tool used to measure interest
rate risk. Using computer-modeling techniques, the Company is able to estimate
the potential impact of changing interest rates on net interest margin, net
income and market value of equity. A balance sheet forecast is prepared using
inputs of actual loan, securities and interest-bearing liability (i.e.
deposits/borrowings) positions as the beginning base.
In the simulation of net interest margin and net income under various interest
rate scenarios, the forecast balance sheet is processed against seven interest
rate scenarios. These seven interest rate scenarios include a flat rate
scenario, which assumes interest rates are unchanged in the future, and six
additional rate ramp scenarios ranging from +300 to -300 basis points around the
flat scenario in 100 basis point increments. These ramp scenarios assume that
interest rates increase or decrease evenly (in a "ramp" fashion) over a
twelve-month period and remain at the new levels beyond twelve months.
In the simulation of market value of equity under various interest rate
scenarios, the forecast balance sheet is processed against seven interest rate
scenarios. These seven interest rate scenarios include the flat rate scenario
described above, and six additional rate shock scenarios ranging from +300 to
-300 basis points around the flat scenario in 100 basis point increments. These
rate shock scenarios assume that interest rates increase or decrease immediately
(in a "shock" fashion) and remain at the new level in the future.
At September 30, 2009, the results of the simulations noted above indicate that
given a "flat" balance sheet scenario, and if deposit rates track general
interest rate changes by approximately 50%, the Company's balance sheet is
slightly liability sensitive. "Liability sensitive" implies that earnings
decrease when interest rates rise, and increase when interest rates decrease.
The magnitude of all the simulation results noted above is within the Bank's
policy guidelines. The asset liability management policy limits aggregate market
risk, as measured in this fashion, to an acceptable level within the context of
risk-return trade-offs.
The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
At September 30, 2009 and 2008, the Company had no material derivative financial
instruments.
Liquidity
The Company's principal source of asset liquidity is cash at Federal Reserve and
other banks and marketable investment securities available for sale. At
September 30, 2009, cash at Federal Reserve and other banks and investment
securities available for sale totaled $416,983,000, representing an increase of
$128,442,000 (44.5%) from December 31, 2008, and an increase of $175,083,000
(72.4%) from September 30, 2008. In addition, the Company generates additional
liquidity from its operating activities. The Company's profitability during the
first nine months of 2009 generated cash flows from operations of $28,442,000
compared to $27,930,000 during the first nine months of 2008. Maturities of
investment securities produced cash inflows of $67,963,000 during the nine
months ended September 30, 2009 compared to $38,938,000 for the nine months
ended September 30, 2008. During the nine months ended September 30, 2009, the
Company invested $29,396,000 in securities and received $40,043,000 of net loan
principal reductions, compared to $50,219,000 invested in securities and
$20,538,000 invested in net loan principal increases, respectively, during the
first nine months of 2009. These changes in investment and loan balances
contributed to net cash provided by investing activities of $78,847,000 during
the nine months ended September 30, 2009, compared to net cash used in investing
activities of $33,383,000 during the nine months ended September 30, 2008.
Financing activities provided net cash of $40,926,000 during the nine months
ended September 30, 2009, compared to net cash used in financing activities of
$16,045,000 during the nine months ended September 30, 2008. Deposit balance
increases accounted for $82,625,000 and $18,618,000 of financing sources of
funds during the nine months ended September 30, 2009 and 2008, respectively.
Net decrease in short-term other borrowings accounted for $35,741,000 and
$36,195,000 of financing uses of funds during the nine months ended September
30, 2009 and 2008, respectively. Dividends paid used $6,156,000 and $6,145,000
of cash during the nine months ended September 30, 2009 and 2008, respectively.
Federal funds purchased did not use or provide cash during the nine months ended
September 30, 2009 compared to an increase of Federal funds purchased providing
$11,000,000 of cash during the nine months ended September 30, 2008. Also, the
Company's liquidity is dependent on dividends received from the Bank. Dividends
from the Bank are subject to certain regulatory restrictions.
37
Item 4. Controls and Procedures
The Chief Executive Officer, Richard Smith, and the Chief Financial Officer,
Thomas Reddish, evaluated the effectiveness of the Company's disclosure controls
and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act
as of September 30, 2009 ("Evaluation Date"). Based on that evaluation, they
each concluded that as of the Evaluation Date the Company's disclosure controls
and procedures are effective to ensure that the information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act was recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and accumulated and communicated
to the Company's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. No changes in the Company's internal control over financial
reporting were identified in connection with the evaluation required by
paragraph (d) of Rule 13a-15 or 15d-15(e) under the Exchange Act during the
second quarter of 2009 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
38
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Due to the nature of the banking business, the Bank is at times party to various
legal actions; all such actions are of a routine nature and arise in the normal
course of business of the Bank.
Item 1A - Risk Factors
There have been no material changes to the risk factors previously disclosed in
Item 1A to Part I of our Annual Report on Form 10-K for the year ended December
31, 2008.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows information concerning the common stock repurchased by
the Company during the third quarter of 2009 pursuant to the Company's stock
repurchase plan adopted on August 21, 2007, which is discussed in more detail
under "Capital Resources" in this report and is incorporated herein by
reference:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number
of shares purchased paid per share shares purchased as of shares that may yet
part of publicly be purchased under the
announced plans or plans or programs
programs
----------------------------------------------------------------------------------------------------------
July 1-31, 2009 - - - 333,400
Aug. 1-31, 2009 - - - 333,400
Sep. 1-30, 2009 - - - 333,400
----------------------------------------------------------------------------------------------------------
Total - - - 333,400
Item 6 - Exhibits
3.1* Restated Articles of Incorporation, filed as Exhibit 3.1 to TriCo's
Form 8-K dated March 10, 2009.
3.2* Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.2 to
TriCo's Form 8-K dated March 10, 2009.
10.1*Rights Agreement dated June 25, 2001, between TriCo and Mellon
Investor Services LLC filed as Exhibit 1 to TriCo's Form 8-A dated
July 25, 2001.
10.2*Form of Change of Control Agreement dated as of August 23, 2005,
between TriCo, Tri Counties Bank and each of Dan Bailey, Bruce Belton,
Craig Carney, Gary Coelho, Rick Miller, Richard O'Sullivan, Thomas
Reddish, and Ray Rios filed as Exhibit 10.2 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2005.
10.5*TriCo's 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to
TriCo's Form S-8 Registration Statement dated August 23, 1995 (No.
33-62063).
10.6*TriCo's 2001 Stock Option Plan, as amended, filed as Exhibit 10.7 to
TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30,
2005.
39
10.7*TriCo's 2009 Equity Incentive plan, included as Appendix A to TriCo's
definitive proxy statement filed on April 4, 2009.
10.8*Amended Employment Agreement between TriCo and Richard Smith dated as
of August 23, 2005 filed as Exhibit 10.8 to TriCo's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2005.
10.9*Tri Counties Bank Executive Deferred Compensation Plan restated April
1, 1992, and January 1, 2005 filed as Exhibit 10.9 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005.
10.10*Tri Counties Bank Deferred Compensation Plan for Directors effective
January 1, 2005 filed as Exhibit 10.10 to TriCo's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005.
10.11*2005 Tri Counties Bank Deferred Compensation Plan for Executives and
Directors effective January 1, 2005 filed as Exhibit 10.11 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2005.
10.13*Tri Counties Bank Supplemental Retirement Plan for Directors dated
September 1, 1987, as restated January 1, 2001, and amended and
restated January 1, 2004 filed as Exhibit 10.12 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
10.14*2004 TriCo Bancshares Supplemental Retirement Plan for Directors
effective January 1, 2004 filed as Exhibit 10.13 to TriCo's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
10.15*Tri Counties Bank Supplemental Executive Retirement Plan effective
September 1, 1987, as amended and restated January 1, 2004 filed as
Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004.
10.16*2004 TriCo Bancshares Supplemental Executive Retirement Plan effective
January 1, 2004 filed as Exhibit 10.15 to TriCo's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004.
10.17*Form of Joint Beneficiary Agreement effective March 31, 2003 between
Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig
Carney, Robert Elmore, Greg Gill, Richard Miller, Richard O'Sullivan,
Thomas Reddish, Jerald Sax, and Richard Smith, filed as Exhibit 10.14
to TriCo's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.
10.18*Form of Joint Beneficiary Agreement effective March 31, 2003 between
Tri Counties Bank and each of Don Amaral, William Casey, Craig
Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll
Taresh, and Alex Vereschagin, filed as Exhibit 10.15 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003.
10.19*Form of Tri-Counties Bank Executive Long Term Care Agreement effective
June 10, 2003 between Tri Counties Bank and each of Craig Carney,
Richard Miller, Richard O'Sullivan, and Thomas Reddish, filed as
Exhibit 10.16 to TriCo's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003.
40
10.20*Form of Tri-Counties Bank Director Long Term Care Agreement effective
June 10, 2003 between Tri Counties Bank and each of Don Amaral,
William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald
Murphy, Carroll Taresh, and Alex Vereschagin, filed as Exhibit 10.17
to TriCo's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.
10.21*Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of the directors of TriCo Bancshares/Tri
Counties Bank effective on the date that each director is first
elected, filed as Exhibit 10.18 to TriCo'S Annual Report on Form 10-K
for the year ended December 31, 2003.
10.22*Form of Indemnification Agreement between TriCo Bancshares/Tri
Counties Bank and each of Dan Bailey, Craig Carney, W.R. Hagstrom,
Rick Miller, Richard O'Sullivan, Thomas Reddish, Ray Rios, and Richard
Smith filed as Exhibit 10.21 to TriCo's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004.
21.1 Tri Counties Bank, a California banking corporation, TriCo Capital
Trust I, a Delaware business trust, and TriCo Capital Trust II, a
Delaware business trust, are the only subsidiaries of Registrant
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.1 Rule 13a-14(a)/15d-14(a) Certification of CFO
32.1 Section 1350 Certification of CEO
32.2 Section 1350 Certification of CFO
* Previously filed and incorporated by reference.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
Date: November 9, 2009 /s/Thomas J. Reddish
---------------------
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
(Duly authorized officer and Principal financial
officer)
42
EXHIBITS
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of CEO
I, Richard P. Smith, certify that;
1. I have reviewed this report on Form 10-Q of TriCo Bancshares;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiary, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2009 /s/Richard P. Smith
-------------------
Richard P. Smith
President and Chief Executive Officer
43
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of CFO
I, Thomas J. Reddish, certify that;
1. I have reviewed this report on Form 10-Q of TriCo Bancshares;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiary, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2009 /s/Thomas J. Reddish
--------------------
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
44
Exhibit 32.1
Section 1350 Certification of CEO
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ended June 30, 2009 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Richard P. Smith,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/Richard P. Smith
-------------------
Richard P. Smith
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to TriCo Bancshares and will be retained by TriCo Bancshares and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Section 1350 Certification of CFO
In connection with the Quarterly Report of TriCo Bancshares (the "Company") on
Form 10-Q for the period ended June 30, 2009 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas J. Reddish,
Executive Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/Thomas J. Reddish
--------------------
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to TriCo Bancshares and will be retained by TriCo Bancshares and
furnished to the Securities and Exchange Commission or its staff upon request.
45