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 March 31, 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)
Registrant's telephone number, including area code: (530) 898-0300
--------------------------------------------------------------------------------
(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. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the 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 March 31, 2009: 15,782,753
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 18
Item 2 - Management's Discussion and Analysis of Financial 19
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 27
Item 4 - Controls and Procedures 28
PART II - OTHER INFORMATION 29
Item 1 - Legal Proceedings 29
Item 1A - Risk Factors 29
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 6 - Exhibits 30
Signatures 33
Exhibits 34
36
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements about TriCo
Bancshares (the "Company") for which it claims the protection of the safe harbor
provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Management's current knowledge and
belief 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 March 31, At December 31,
2009 2008 2008
-------------------------- ---------------
Assets:
Cash and due from banks $137,241 $74,713 $86,355
--------------------------- --------------
Cash and cash equivalents 137,241 74,713 86,355
Securities available-for-sale 279,122 272,276 266,561
Federal Home Loan Bank stock, at cost 9,235 8,885 9,235
Loans, net of allowance for loan losses
of $32,774, $19,383 and $27,590 1,534,182 1,528,561 1,563,259
Foreclosed assets, net of allowance for
losses of $392, $180 and $230 2,407 836 1,185
Premises and equipment, net 18,537 20,069 18,841
Cash value of life insurance 47,095 45,341 46,815
Accrued interest receivable 7,970 8,096 7,935
Goodwill 15,519 15,519 15,519
Other intangible assets, net 519 1,053 653
Other assets 26,525 24,001 26,832
--------------------------- -------------
Total Assets $2,078,352 $1,999,350 $2,043,190
=========================== =============
Liabilities:
Deposits:
Noninterest-bearing demand $371,639 $358,684 $401,247
Interest-bearing 1,355,067 1,169,791 1,268,023
-------------------------- -------------
Total deposits 1,726,706 1,528,475 1,669,270
Federal funds purchased - 102,300 -
Accrued interest payable 5,769 6,201 6,146
Reserve for unfunded commitments 2,740 2,915 2,565
Other liabilities 25,272 25,154 24,034
Other borrowings 76,081 103,767 102,005
Junior subordinated debt 41,238 41,238 41,238
-------------------------- -------------
Total Liabilities 1,877,806 1,810,050 1,845,258
-------------------------- -------------
Commitments and contingencies
Shareholders' Equity:
Common stock, no par value: 50,000,000 shares
authorized; issued and outstanding:
15,782,753 at March 31, 2009 79,132
15,744,950 at March 31, 2008 78,142
15,756,101 at December 31, 2008 78,246
Retained earnings 117,940 111,133 117,630
Accumulated other comprehensive income, net 3,474 25 2,056
-------------------------- ------------
Total Shareholders' Equity 200,546 189,300 197,932
-------------------------- ------------
Total Liabilities and Shareholders' Equity $2,078,352 $1,999,350 $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 March 31,
2009 2008
----------------------------
Interest and dividend income:
Loans, including fees $25,513 $27,726
Debt securities:
Taxable 3,083 2,959
Tax exempt 264 324
Dividends - 119
Cash at Federal Reserve and other banks 22 2
-------------------------
Total interest income 28,882 31,130
-------------------------
Interest Expense:
Deposits 5,202 7,177
Federal funds purchased - 812
Other borrowings 242 1,063
Junior subordinated debt 440 713
-------------------------
Total interest expense 5,884 9,765
-------------------------
Net interest income 22,998 21,365
-------------------------
Provision for loan losses 7,800 4,100
-------------------------
Net interest income after provision for loan losses 15,198 17,265
-------------------------
Noninterest income:
Service charges and fees 5,052 5,128
Gain on sale of loans 641 258
Commissions on sale of non-deposit investment products 489 420
Increase in cash value of life insurance 280 360
Other 153 684
-------------------------
Total noninterest income 6,615 6,850
-------------------------
Noninterest expense:
Salaries and related benefits 9,789 9,480
Other 7,412 8,093
-------------------------
Total noninterest expense 17,201 17,573
-------------------------
Income before income taxes 4,612 6,542
Provision for income taxes 1,730 2,494
-------------------------
Net income $2,882 $4,048
=========================
Average shares outstanding 15,774,624 15,842,085
Diluted average shares outstanding 16,019,488 16,081,722
Per share data:
Basic earnings $0.18 $0.26
Diluted earnings $0.18 $0.25
Dividends paid $0.13 $0.13
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 4,048 4,048
Change in net unrealized loss on
Securities available for sale, net 1,577 1,577
-------
Total comprehensive income 5,625
Cumulative effect of change in
accounting principle, net of tax (522) (522)
Stock option vesting 192 192
Repurchase of common stock (166,600) (825) (1,996) (2,821)
Dividends paid ($0.13 per share) (2,052) (2,052)
----------------------------------------------------------------
Balance at March 31, 2008 15,744,950 $78,142 $111,133 $25 $189,300
================================================================
Balance at December 31, 2008 15,756,101 $78,246 $117,630 $2,056 $197,932
Comprehensive income:
Net income 2,882 2,882
Change in net unrealized loss on
Securities available for sale, net 1,418 1,418
---------
Total comprehensive income 4,300
Stock option vesting 137 137
Stock option exercise 53,213 828 828
Tax benefit of stock options exercised 53 53
Repurchase of common stock (26,561) (132) (520) (652)
Dividends paid ($0.13 per share) (2,052) (2,052)
Balance at March 31, 2009 15,782,753 $79,132 $117,940 $3,474 $200,546
================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
4
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
For the three months ended
March 31,
2009 2008
Operating activities: -------------------------
Net income $2,882 $4,048
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of premises and equipment, and amortization 834 869
Amortization of intangible assets 134 123
Provision for loan losses 7,800 4,100
Amortization of investment securities premium, net 77 84
Originations of loans for resale (45,142) (17,403)
Proceeds from sale of loans originated for resale 45,401 17,484
Gain on sale of loans (641) (258)
Change in fair value of mortgage servicing rights 173 340
Provision for losses on other real estate owned 162 -
Loss on sale of fixed assets 5 2
Increase in cash value of life insurance (280) (360)
Stock option vesting expense 137 192
Stock option excess tax benefits (53) -
Change in reserve for unfunded commitments 175 825
Change in:
Interest receivable (35) 458
Interest payable (377) (1,670)
Other assets and liabilities, net 575 1,990
---------------------
Net cash provided by operating activities 11,827 10,824
---------------------
Investing activities:
Proceeds from maturities of securities available-for-sale 19,205 13,007
Purchases of securities available-for-sale (29,396) (50,219)
Purchase of Federal Home Loan Bank stock - (119)
Loan originations and principal collections, net 19,893 1,325
Proceeds from sale of premises and equipment - 1
Purchases of premises and equipment (332) (1,224)
---------------------
Net cash (used) provided by investing activities 9,370 (37,229)
---------------------
Financing activities:
Net (decrease) increase in deposits 57,436 (16,748)
Net increase in federal funds purchased - 46,300
Payments of principal on long-term other borrowings (22) (20)
Net decrease in short-term other borrowings (25,902) (12,339)
Stock option excess tax benefits 53 -
Repurchase of Common Stock - (2,821)
Dividends paid (2,052) (2,052)
Exercise of stock options 176 -
---------------------
Net cash provided (used) by financing activities 29,689 12,320
---------------------
Net decrease in cash and cash equivalents 50,886 (14,085)
---------------------
Cash and cash equivalents at beginning of period 86,355 88,798
---------------------
Cash and cash equivalents at end of period $137,241 $74,713
=====================
Supplemental disclosure of noncash activities:
Loans transferred to other real estate owned $1,384 $649
Unrealized net gain on securities available for sale $2,447 $2,721
Market value of shares tendered by employees in-lieu of
cash to pay for exercise options and/or related taxes $652 -
Supplemental disclosure of cash flow activity:
Cash paid for interest expense $6,261 $11,435
Cash paid for income taxes $192 -
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 for the three month periods
ended March 31, 2009 and 2008 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 branch offices and 25 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 three months ended March 31, 2009 and March 31, 2008, and the year
ended December 31, 2008, the Company did not have any securities classified as
either held-to-maturity or trading.
6
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.
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 these are considered 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 March 31, 2009, March 31, 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.
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.
7
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
occur 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 ($32,774,000) and the reserve for unfunded
commitments ($2,740,000), which collectively stand at $35,514,000 at March 31,
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.
8
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 March 31,
----------------------------
Allowance for loan losses: 2009 2008
----------------------------
Balance at beginning of period $27,590 $17,331
Provision for loan losses 7,800 4,100
Loans charged off:
Real estate mortgage:
Residential (90) (54)
Commercial (42) (19)
Consumer:
Home equity lines (1,305) (159)
Home equity loans (105) (89)
Auto indirect (665) (549)
Other consumer (315) (302)
Commercial (479) (135)
Construction:
Residential - (1,078)
Commercial - -
-------------------------
Total loans charged off (3,001) (2,385)
Recoveries of previously
charged-off loans:
Real estate mortgage:
Residential - -
Commercial 15 14
Consumer:
Home equity lines 2 -
Home equity loans - -
Auto indirect 136 122
Other consumer 196 193
Commercial 32 8
Construction:
Residential 4 -
Commercial - -
------------------------
Total recoveries of
previously charged off loans 385 337
------------------------
Net charge-offs (2,616) (2,048)
------------------------
Balance at end of period $32,774 $19,383
========================
Reserve for unfunded commitments:
Balance at beginning of period $2,565 $2,090
Provision for losses -
unfunded commitments 175 825
------------------------
Balance at end of period $2,740 $2,915
========================
Balance at end of period:
Allowance for loan losses $32,774 $19,383
Reserve for unfunded commitments 2,740 2,915
------------------------
Allowance for losses $35,514 $22,298
========================
As a percentage of total loans:
Allowance for loan losses 2.09% 1.25%
Reserve for unfunded commitments 0.18% 0.19%
------------------------
Allowance for losses 2.27% 1.44%
========================
9
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. Our MSRs arise from residential mortgage loans that we
originate and sell, but retain the right to service the loans. 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 our
MSRs, which we believe 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.
The following tables summarize the activity in, and the main assumptions we used
to determine the fair value of mortgage servicing rights for the periods
indicated (dollars in thousands):
Three months ended March 31,
----------------------------
2009 2008
----------------------------
Mortgage servicing rights:
Balance at beginning of period $2,972 $4,088
Additions 382 177
Change in fair value (173) (340)
--------------------------
Balance at end of period $3,181 $3,925
==========================
Servicing fees received $269 $253
Balance of loans serviced at:
Beginning of period $431,195 $406,743
End of period $450,955 $407,246
Weighted-average prepayment speed (CPR) 22.0% 14.1%
Discount rate 9.0% 10.0%
10
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 March 31,
2009 and December 31, 2008.
December 31, March 31,
(Dollars in Thousands) 2008 Additions Reductions 2009
----------------------------------------------------
Goodwill $15,519 - - $15,519
====================================================
The following table summarizes the Company's core deposit intangibles as of
March 31, 2009 and December 31, 2008.
December 31, March 31,
(Dollars in Thousands) 2008 Additions Reductions 2009
-------------------------------------------------
Core deposit intangibles $3,365 - - $3,365
Accumulated amortization (2,712) - ($134) (2,846)
-------------------------------------------------
Core deposit intangibles, net $653 - ($134) $519
=================================================
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 (Dollar in thousands)
------------ -----------------------
2009 $328
2010 $260
2011 $65
Thereafter -
11
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.
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 March 31, 2009:
Currently Currently Not Total
(dollars in thousands except exercise price) Exercisable Exercisable Outstanding
Number of options 1,112,408 259,180 1,371,588
Weighted average exercise price $13.50 $19.88 $14.70
Intrinsic value $4,951 $167 $5,118
Weighted average remaining contractual term (yrs.) 1.98 8.49 3.21
The options for 259,180 shares that are not currently exercisable as of March
31, 2009 are expected to vest, on a weighted-average basis, over the next 2.51
years, and the Company is expected to recognize $1,400,000 of compensation costs
related to these options as they vest.
12
Earnings Per Share
Basic earnings per share represents income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects 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 March 31,
2009 2008
-----------------------------
(in thousands)
Net income $2,882 $4,048
Average number of common shares outstanding 15,775 15,842
Effect of dilutive stock options 244 240
---------------------------
Average number of common shares outstanding
used to calculate diluted earnings per share 16,019 16,082
===========================
There were 552,870 and 424,050 options excluded from the computation of diluted
earnings per share for the three month periods ended March 31, 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 March 31,
2009 2008
----------------------------
(in thousands)
Unrealized holding gains on available-for-sale securities $2,447 $2,721
Tax effect (1,029) (1,144)
----------------------
Unrealized holding gains on
available-for-sale securities, net of tax $1,418 $1,577
======================
The components of accumulated other comprehensive loss, included in
shareholders' equity, are as follows:
March 31, December 31,
2009 2008
-----------------------
(in thousands)
Net unrealized gains on available-for-sale securities $8,578 $6,131
Tax effect (3,607) (2,578)
----------------------
Unrealized holding gains on
available-for-sale securities, net of tax 4,971 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 loss $3,474 $2,056
======================
13
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 March 31,
2009 2008
----------------------------
(in thousands)
Net pension cost included the following components:
Service cost-benefits earned during the period $99 $139
Interest cost on projected benefit obligation 174 166
Amortization of net obligation at transition - -
Amortization of prior service cost 38 45
Recognized net actuarial loss 25 37
------------------------
Net periodic pension cost $336 $387
========================
During the three months ended March 31, 2009 and 2008, the Company contributed
and paid out as benefits $155,000 and $161,000, respectively, to participants
under the plans. For the year ending December 31, 2009, the Company expects to
contribute and pay out as benefits $587,000 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.
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. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
114, Accounting by Creditors for Impairment of a Loan (SFAS 114). 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
14
represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. At December 31, 2008,
substantially all of the total impaired loans were evaluated based on the fair
value of the collateral. In accordance with SFAS 157, 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 March 31, 2009 Total Level 1 Level 2 Level 3
Securities available-for-sale $279,122 - $279,122 -
Mortgage servicing rights 3,181 - - $3,181
------------------------------------------
Total assets measured at fair value $282,303 - $279,122 $3,181
==========================================
The table below presents the recorded amount of assets and liabilities measured
at fair value on a nonrecurring basis (in thousands):
Fair value at March 31, 2009 Total Level 1 Level 2 Level 3
Impaired loans $29,377 - - $29,377
-----------------------------------------
Total assets measured at fair value $29,377 - - $29,377
Recent Accounting Pronouncements
FASB Emerging Issues Task Force ("EITF") Issue No. 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life
Insurance Arrangements. EITF 06-4 requires the recognition of a liability and
related compensation expense for bank owned life insurance policies with joint
beneficiary agreements that provide a benefit to an employee that extends to
post-retirement periods. Under EITF 06-4, life insurance policies purchased for
the purpose of providing such benefits do not effectively settle an entity's
obligation to the employee. Accordingly, the entity must recognize a liability
and related compensation expense during the employee's active service period
based on the future cost of insurance to be incurred during the employee's
retirement. If the entity has agreed to provide the employee with a death
benefit, then the liability for the future death benefit should be recognized by
following the guidance in SFAS 106, Employer's Accounting for Postretirement
Benefits Other Than Pensions. The Company adopted EITF 06-4 effective as of
January 1, 2008 as a change in accounting principle through a cumulative-effect
adjustment to retained earnings of $522,000 net of tax.
In November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings (SAB 109). SAB 109 provides
guidance on the accounting for written loan commitments recorded at fair value
under generally accepted accounting principles (GAAP). Specifically, the SAB
revises the Staff's views on incorporating expected net future cash flows
related to loan servicing activities in the fair value measurement of a written
loan commitment. SAB 109, which supersedes SAB 105, Application of Accounting
Principles to Loan Commitments, requires the expected net future cash flows
related to the associated servicing of the loan be included in the measurement
of all written loan commitments that are accounted for at fair value through
earnings. SAB 109 was effective on January 1, 2008 for the Company. Adoption of
SAB 109 did not a material impact on the Company's financial statements.
15
In December 2007, the FASB issued FASB Statement of Financial Accounting
Standards No. 141 (revised), Business Combinations (SFAS 141R). SFAS 141R
replaces SFAS 141. SFAS 141R retains the fundamental requirements in SFAS 141
that the acquisition method of accounting (which SFAS 141 called the purchase
method) be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R also retains the guidance in
SFAS 141 for identifying and recognizing intangible assets separately from
goodwill. SFAS 141R requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the Statement. SFAS 141R replaces the cost-allocation
process of SFAS 141, which required the cost of an acquisition to be allocated
to the individual assets acquired and liabilities assumed based on their
estimated fair values. SFAS 141 required the acquirer to include the costs
incurred to effect the acquisition (acquisition-related costs) in the cost of
the acquisition that was allocated to the assets acquired and the liabilities
assumed. SFAS 141R requires those costs to be recognized separately from the
acquisition. In addition, in accordance with SFAS 141, restructuring costs that
the acquirer expected but was not obligated to incur were recognized as if they
were a liability assumed at the acquisition date. SFAS 141R requires the
acquirer to recognize those costs separately from the business combination. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The impact of SFAS 141R on the Company's
financial statements will be contingent on the terms and conditions of future
business combinations.
In February 2008, the FASB issued Financial Accounting Standards Board Staff
Position FAS SFAS157-2 (FSP 157-2), Effective Date of FASB Statement No. 157.
FSP SFAS 157-2 delayed the Company's January 1, 2008, effective date of FAS 157
for all nonfinancial assets and nonfinancial liabilities, except those
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until January 1, 2009. Implementation of this
standard did not have a material effect on the Company's financial statements.
In March 2008, the FASB issued FASB Statement of Financial Accounting Standards
No. 161, Disclosures About Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 amends SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, to amend and
expand the disclosure requirements of SFAS 133 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 SFAS 133 and its
related interpretations, 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, SFAS 161 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. SFAS 161
is effective for the Company on January 1, 2009 and is not expected to have a
significant impact on the Company's financial statements.
In May 2008, the FASB issued FASB Statement of Financial Accounting Standards
No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162).
SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
The hierarchical guidance provided by SFAS 162 did not have a significant impact
on the Company's financial statements.
In April 2009, the FASB issued Financial Accounting Standards Board Staff
Position FAS SFAS 157-4 (FSP SFAS 157-4), Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. FSP SFAS 157-4 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. FSP SFAS 157-4 requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence. FSP
SFAS 157-4 also amended SFAS 157, Fair Value Measurements, to expand certain
disclosure requirements. The Company adopted the provisions of FSP SFAS 157-4
during the first quarter of 2009. Adoption of FSP SFAS 157-4 did not
significantly impact the Company's financial statements.
16
In April 2009, the FASB issued Financial Accounting Standards Board Staff
Position FAS SFAS 115-2 and SFAS 124-2 (FSP SFAS 115-2 and SFAS 124-2),
Recognition and Presentation of Other-Than-Temporary Impairments. FSP SFAS 115-2
and SFAS 124-2 (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 FSP SFAS 115-2 and SFAS 124-2, 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 FSP SFAS 115-2 and SFAS 124-2
during the first quarter of 2009. Adoption of FSP SFAS 115-2 and SFAS 124-2 did
not significantly impact the Company's financial statements.
In April 2009, the FASB issued Financial Accounting Standards Board Staff
Position FAS SFAS 107-1 and APB 28-1 (FSP SFAS 107-1 and APB 28-1), Interim
Disclosures about Fair Value of Financial Instruments. FSP SFAS 107-1 and APB
28-1 amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to
require an entity to provide disclosures about fair value of financial
instruments in interim financial information and amends Accounting Principles
Board (APB) Opinion No. 28, Interim Financial Reporting, to require those
disclosures in summarized financial information at interim reporting periods.
Under FSP SFAS 107-1 and APB 28-1, a publicly traded company shall include
disclosures about the fair value of its financial instruments whenever it issues
summarized financial information for interim reporting periods. In addition,
entities must disclose, in the body or in the accompanying notes of its
summarized financial information for interim reporting periods and in its
financial statements for annual reporting periods, the fair value of all
financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial position, as
required by SFAS 107. The new interim disclosures required by FSP SFAS 107-1 and
APB 28-1 will be included in the Company's interim financial statements
beginning with the second quarter of 2009.
17
TRICO BANCSHARES
Financial Summary
(dollars in thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
--------------------------
2009 2008
--------------------------
Net Interest Income (FTE) $23,151 $21,546
Provision for loan losses (7,800) (4,100)
Noninterest income 6,615 6,850
Noninterest expense (17,201) (17,573)
Provision for income taxes (FTE) (1,883) (2,675)
-------------------------
Net income $2,882 $4,048
=========================
Earnings per share:
Basic $0.18 $0.26
Diluted $0.18 $0.25
Per share:
Dividends paid $0.13 $0.13
Book value at period end $12.71 $12.02
Tangible book value at period end $11.69 $10.97
Average common shares outstanding 15,775 15,842
Average diluted common shares outstanding 16,019 16,082
Shares outstanding at period end 15,783 15,745
At period end:
Loans, net $1,534,182 $1,528,561
Total assets 2,078,352 1,999,350
Total deposits 1,726,706 1,528,475
Federal funds purchased - 102,300
Other borrowings 76,081 103,767
Junior subordinated debt 41,238 41,238
Shareholders' equity 200,546 189,300
Financial Ratios:
During the period (annualized):
Return on assets 0.56% 0.81%
Return on equity 5.70% 8.37%
Net interest margin(1) 4.91% 4.74%
Net loan charge-offs to average loans 0.67% 0.53%
Efficiency ratio(1) 57.79% 61.89%
Average equity to average assets 9.86% 9.73%
At period end:
Equity to assets 9.65% 9.47%
Total capital to risk-adjusted assets 12.68% 12.02%
Allowance for losses to loans(2) 2.27% 1.44%
(1) Fully taxable equivalent (FTE)
(2) Allowance for losses includes allowance for loan losses and reserve for
unfunded commitments.
18
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.
The Company had quarterly earnings of $2,882,000 for the three months ended
March 31, 2009. This represents a decrease of $1,166,000 (28.8%) when compared
with earnings of $4,048,000 for the quarter ended March 31, 2008. Diluted
earnings per share for the quarter ended March 31, 2009 decreased 28.0% to $0.18
compared to $0.25 for the quarter ended March 31, 2008. The decrease in earnings
from the prior year quarter was primarily due to a $3,700,000 (90%) increase in
the provision for loan losses to $7,800,000 from $4,100,000, that was partially
offset by a $1,605,000 (7.5%) increase in fully taxable equivalent net interest
income to $23,151,000 in the quarter ended March 31, 2009 from $21,546,000 in
the quarter ended March 31, 2008.
Following is a summary of the components of fully taxable equivalent ("FTE") net
income for the periods indicated (dollars in thousands):
Three months ended
March 31,
----------------------
2009 2008
----------------------
Net Interest Income (FTE) $23,151 $21,546
Provision for loan losses (7,800) (4,100)
Noninterest income 6,615 6,850
Noninterest expense (17,201) (17,573)
Provision for income taxes (FTE) (1,883) (2,675)
----------------------
Net income $2,882 $4,048
======================
19
Net Interest Income
Following is a summary of the components of net interest income for the periods
indicated (dollars in thousands):
Three months ended
March 31,
-------------------------
2009 2008
-------------------------
Interest income $28,882 $31,130
Interest expense (5,884) (9,765)
FTE adjustment 153 181
-------------------------
Net interest income (FTE) $23,151 $21,546
=========================
Average interest-earning assets $1,887,121 $1,817,212
Net interest margin (FTE) 4.91% 4.74%
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. Net interest income (FTE) during the
first quarter of 2009 increased $1,605,000 (7.5%) from the same period in 2008
to $23,151,000. The increase in net interest income (FTE) was due to a 0.17%
increase in net interest margin (FTE) to 4.91% and a $69,909,000 (3.9%) increase
in average balances of interest-earning assets to $1,887,121,000.
Interest and Fee Income
Interest and fee income (FTE) for the first quarter of 2009 decreased $2,248,000
(7.2%) from the first quarter of 2008. The decrease was due to a 0.74% decrease
in the average yield on those interest-earning assets to 6.15% that was
partially offset by a $69,909,000 (3.9%) increase in average balances of
interest-earning assets to $1,887,121,000. The growth in interest-earning assets
was the result of a $45,379,000 increase in average balance of interest-earning
cash at Federal Reserve and other bank and a $30,993,000 (2.0%) increase in
average loan balances to $1,566,350 from the year-ago quarter. The decrease in
the average yield on interest-earning assets was primarily due to a 4.00%
decrease in the prime rate of lending from 7.25% at December 31, 2007 to 3.25%
at December 31, 2008. Interest rate floors in most of the Company's variable
rate loans mitigated the effect of the decrease in the prime rate of lending and
other variable rate indices during this period.
Interest Expense
Interest expense decreased $3,881,000 (39.7%) in the first quarter of 2009
compared to the prior year quarter. The decrease was primarily due to a 1.15%
decrease in the average rate paid on interest-bearing liabilities from 2.78% in
the first quarter of 2008 to 1.63% in the first quarter of 2009. The average
balance of interest-bearing liabilities was up $34,623,000 (2.5%) to
$1,441,816,000 in the quarter ended March 31, 2009 from the year-ago quarter.
The average rates paid for all categories of interest-bearing liabilities were
down except for the average rate paid on interest-bearing demand deposits.
20
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended
March 31,
-------------------
2009 2008
-------------------
Yield on interest-earning assets 6.15% 6.89%
Rate paid on interest-bearing liabilities 1.63% 2.78%
-------------------
Net interest spread 4.52% 4.11%
Impact of all other net
noninterest-bearing funds 0.39% 0.63%
-------------------
Net interest margin 4.91% 4.74%
===================
Net interest margin in the first quarter of 2009 increased 0.17% compared to the
first quarter of 2008. This increase in net interest margin was due to a 0.41%
increase in net interest spread that was partially offset by a 0.24% decrease in
the impact of all other net noninterest-bearing funds when compared to the prior
year quarter. The increase in net interest margin was mainly due to rate floors
on most of the Company's adjustable rate loans that caused decreases in rates
paid for interest-bearing liabilities to exceed decreases in rates earned on
interest-earning assets.
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
---------------------------------------------------------------
March 31, 2009 March 31, 2008
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
------------------------------ ------------------------------
Assets:
Loans $1,566,350 $25,513 6.52% $1,535,357 $27,726 7.22%
Investment securities - taxable 252,431 3,083 4.89% 254,778 3,078 4.83%
Investment securities - nontaxable 22,609 417 7.38% 26,725 505 7.57%
Cash at Federal Reserve and other banks 45,731 22 0.19% 352 2 2.27%
------------------------------ -----------------------------
Total interest-earning assets 1,887,121 29,035 6.15% 1,817,212 31,311 6.89%
Other assets 162,072 171,454
---------- ---------
Total assets 2,049,193 1,988,666
========== =========
Liabilities and shareholders' equity:
Interest-bearing demand deposits 258,137 342 0.53% 218,487 87 0.16%
Savings deposits 408,749 893 0.87% 387,490 1,502 1.55%
Time deposits 655,343 3,967 2.42% 551,420 5,588 4.05%
Federal funds purchased - - - 103,565 812 3.14%
Other borrowings 78,349 242 1.24% 104,993 1,063 4.05%
Junior subordinated debt 41,238 440 4.27% 41,238 713 6.92%
---------------------------- -----------------------------
Total interest-bearing liabilities 1,441,816 5,884 1.63% 1,407,193 9,765 2.78%
Noninterest-bearing deposits 366,475 354,207
Other liabilities 38,776 33,817
Shareholders' equity 202,126 193,449
Total liabilities and shareholders' equity $2,049,193 $1,988,666
========== ==========
Net interest spread(1) 4.52% 4.11%
Net interest income and interest margin(2) $23,151 4.91% $21,546 4.74%
================ ==================
(1) Net interest spread represents the average yield earned on interest-earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and interest expense, divided by the average balance of
interest-earning assets.
21
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth a summary of the changes in interest income and
interest expense from changes in average asset and liability balances (volume)
and changes in average interest rates for the periods indicated. Changes not
solely attributable to volume or rates have been allocated in proportion to the
respective volume and rate components (n thousands).
Three months ended March 31, 2009
compared with three months
ended March 31, 2008
---------------------------------
Volume Rate Total
---------------------------------
Increase (decrease) in interest income:
Loans $559 ($2,772) ($2,213)
Investment securities (82) (2) (84)
Cash at Federal Reserve and other banks 258 (238) 20
---------------------------------
Total interest-earning assets 735 (3,012) (2,277)
---------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 16 239 255
Savings deposits 82 (691) (609)
Time deposits 1,052 (2,673) (1,621)
Federal funds purchased (813) 1 (812)
Other borrowings (270) (551) (821)
Junior subordinated debt - (273) (273)
---------------------------------
Total interest-bearing liabilities 67 (3,948) (3,881)
---------------------------------
Increase (decrease) in Net Interest Income $668 $936 $1,604
=================================
Provision for Loan Losses
The provision for loan losses increased $3,700,000 (90.2%) to $7,800,000 in the
first quarter of 2009 from $4,100,000 in the first quarter of 2008. The increase
in the provision for loan losses was primarily due to higher net loan
charge-offs, increased nonperforming loans, and downgrades in loan
classifications during the first quarter of 2009 compared to the first quarter
of 2008. During the first quarter of 2009, the Company recorded $2,616,000 of
net loan charge-offs versus $2,048,000 of net loan charge-offs in the first
quarter of 2008. The $568,000 (27.7%) increase in net loan charge-offs was
principally related to home equity lines of credit and small business loans that
were partially offset by reduced net charge-offs of residential construction
loans when compared to the year-ago quarter.
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (in thousands).
Three months ended March 31,
----------------------------
2009 2008
----------------------------
Service charges on deposit accounts $3,585 $3,838
ATM fees and interchange 1,098 1,079
Other service fees 542 551
Change in value of mortgage servicing rights (173) (340)
Gain on sale of loans 641 258
Commissions on sale of
nondeposit investment products 489 420
Increase in cash value of life insurance 280 360
Gain from VISA IPO - 396
Other noninterest income 153 288
---------------------------
Total noninterest income $6,615 $6,850
===========================
Noninterest income for the first quarter of 2009 decreased $235,000 (3.4%) from
the first quarter of 2008 due primarily to a $396,000 gain from the Company's
membership in VISA, Inc. and VISA's initial public offering (IPO) in March 2008,
a $253,000 (6.6%) decrease in service charges on deposit accounts to $3,585,000
that were partially offset by a $383,000 (148%) increase in gain on sale of
loans and a $167,000 improvement in change in value of mortgage servicing rights
over the year-ago quarter. The decrease in service charges on deposit accounts
is due to reduced non-sufficient funds as customers reduce their buying due to
current economic conditions. These same economic conditions have resulted in
lower mortgage rates that have increased refinance activity and improved gain on
sale of loans for the Company.
22
Noninterest Expense
The components of noninterest expense were as follows (dollars in thousands):
Three months ended March 31,
----------------------------
2009 2008
----------------------------
Base salaries, net of
deferred loan origination costs $6,576 $6,333
Incentive compensation 588 560
Benefits and other compensation costs 2,625 2,587
----------------------------
Total salaries and benefits expense 9,789 9,480
----------------------------
Occupancy 1,235 1,188
Equipment 917 982
Provision for losses - unfunded commitments 175 825
Data processing and software 618 615
Telecommunications 332 597
ATM network charges 516 494
Professional fees 311 493
Advertising and marketing 398 319
Postage 279 282
Courier service 173 263
Intangible amortization 134 123
Operational losses 37 113
Provision for OREO losses 162 -
Assessments 302 82
Other 1,823 1,717
--------------------------
Total other noninterest expense 7,412 8,093
--------------------------
Total noninterest expense $17,201 $17,573
==========================
Average full time equivalent staff 621 626
Noninterest expense to revenue (FTE) 57.79% 61.89%
Noninterest expense for the first quarter of 2009 decreased $372,000 (2.1%)
compared to the first quarter of 2008. Salaries and benefits expense increased
$309,000 (3.3%) to $9,789,000. The increase in salaries and benefits expense was
mainly due to annual salary increases. Provision for losses - unfunded
commitments decreased $650,000 (79%) to $175,000 for the quarter ended March 31,
2009 due primarily to estimated losses related to home equity lines of credit
and construction loans that were recognized in the first quarter of 2008.
Provision for Income Tax
The effective tax rate for the three months ended March 31, 2009 was 37.5%
compared to 38.1% for the three months ended March 31, 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.
23
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 to ensure collection.
The following is a summary of classified assets on the dates indicated (dollars
in thousands):
At March 31, 2009 At December 31, 2008
------------------------ -----------------------
Gross Guaranteed Net Gross Guaranteed Net
----------------------------------------------------
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 $22,459,000 (37.6%) to
$82,115,000 at March 31, 2009 from $59,656,000 at December 31, 2008.
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
three months ended March 31, 2009 and 2008, if all such loans had been current
in accordance with their original terms, totaled $889,000 and $445,000,
respectively. Interest income actually recognized on these loans during the
three months ended March 31, 2009 and 2008 was $146,000 and $155,000,
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.
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.
24
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 $8,057,000 (28%) to $36,767,000 during the first three
months of 2009. Nonperforming assets net of guarantees represent 1.77% 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 March 31, 2009 At December 31, 2008
At September 30, 2008 At December 31, 2007
------------------------- -------------------------
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%
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. This plan has no
stated expiration date for the repurchases. As of March 31, 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
$200,546,000 at March 31, 2009. This amount represents an increase of $2,614,000
from December 31, 2008, the net result of comprehensive income for the period of
$4,300,000, the effect of stock option vesting of $137,000, the exercise of
stock options for $828,000 and the tax benefit from the exercise of stock
options of $53,000 that were partially offset by the repurchase of common stock
with value of $652,000, and dividends paid of $2,052,000. The Company's ratio of
equity to total assets was 9.65%, 9.47%, and 9.69% as of March 31, 2009, March
31, 2008, and December 31, 2008, respectively.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At March 31, At Minimum
----------------- December 31, Regulatory
2009 2008 2008 Requirement
-------------------------------------------------
Tier I Capital 11.42% 10.88% 11.17% 4.00%
Total Capital 12.68% 12.02% 12.42% 8.00%
Leverage ratio 10.86% 10.77% 11.09% 4.00%
25
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 March 31,
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 $641,709,000 and $643,365,000 at March 31,
2009 and December 31, 2008, respectively, and represent 40.9% of the total loans
outstanding at March 31, 2009 and 40.4% at December 31, 2008. Commitments
related to the Bank's deposit overdraft privilege product totaled $34,599,000
and $35,883,000 at March 31, 2009 and December 31, 2008, respectively.
26
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.
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 March 31, 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 March 31, 2009 and 2008, the Company had no material derivative financial
instruments.
27
Liquidity
The Company's principal source of asset liquidity is Federal funds sold and
marketable investment securities available for sale. At March 31, 2009, federal
funds sold and investment securities available for sale totaled $279,122,000,
representing an increase of $12,561,000 (4.7%) from December 31, 2008, and an
increase of $6,846,000 (2.5%) from March 31, 2008. In addition, the Company
generates additional liquidity from its operating activities. During the first
three months of 2009 and 2008, the Company's operations generated cash in-flows
of $11,827,000 and $10,824,000, respectively. Additional cash flows may be
provided by financing activities, primarily the acceptance of deposits and
borrowings from banks. Sales and maturities of investment securities produced
cash inflows of $19,205,000 during the three months ended March 31, 2009
compared to $13,007,000 for the three months ended March 31, 2008. During the
three months ended March 31, 2009, the Company invested $29,396,000 in
securities and received $19,893,000 of net loan principal reductions, compared
to $50,338,000 and $1,325,000 invested in securities and net loan principal
reductions, respectively, during the first three months of 2008. These changes
in investment and loan balances contributed to net cash provided by investing
activities of $9,370,000 during the three months ended March 31, 2009, compared
to net cash used by investing activities of $37,229,000 during the three months
ended March 31, 2008. Financing activities provided net cash of $29,689,000
during the three months ended March 31, 2009, compared to net cash provided by
financing activities of $12,320,000 during the three months ended March 31,
2008. Deposit balance increases accounted for $57,436,000 of the funds provided
by financing during the three months ended March 31, 2009, compared to
$16,748,000 of funds used by decreases in deposits during the three months ended
March 31, 2008. Net decreases in short-term other borrowings accounted for
$25,902,000 and $12,339,000 of financing uses of funds during the three months
ended March 31, 2009 and March 31, 2008, respectively. Dividends paid used
$2,052,000 and $2,052,000 of cash during the three months ended March 31, 2009
and 2008, respectively. An increase in Federal funds purchased provided
$46,300,000 of cash during the quarter ended March 31, 2008. Also, the Company's
liquidity is dependent on dividends received from the Bank. Dividends from the
Bank are subject to certain regulatory restrictions.
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 of March 31, 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 this Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms for Form 10-Q.
No changes in the Company's internal control over financial reporting occurred
during the first quarter of 2009 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
28
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 first 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
---------------------------------------------------------------------------------------------------
Jan. 1-31, 2009 - - - 333,400
Feb. 1-28, 2009 - - - 333,400
Mar. 1-31, 2009 - - - 333,400
Total - - - 333,400
During the quarter ended March 31, 2009 employees tendered 26,561 shares of the
Company's common stock with an average market value of $24.55 per share in lieu
of cash to exercise options as permitted by the Company's shareholder-approved
stock option plans. The tendered shares were retired. The market value of
tendered shares is the last market trade price at closing on the day the option
is exercised.
29
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.
4* Certificate of Determination of Preferences of Series AA Junior
Participating Preferred Stock filed as Exhibit 3.3 to TriCo's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001.
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 Bruce Belton, Dan
Bailey, 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.
10.6* 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).
10.7* 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.
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.
30
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.
31
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.
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.
32
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: May 8, 2009 /s/ Thomas J. Reddish
---------------------
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
(Duly authorized officer and principal financial
officer)
33
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: May 8, 2009 /s/Richard P. Smith
-------------------
Richard P. Smith
President and Chief Executive Officer
34
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: May 8, 2009 /s/Thomas J. Reddish
--------------------
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
35
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 March 31, 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 March 31, 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.
36