UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30,2008 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 October 31, 2008: 15,744,881,
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 17
Item 2 - Management's Discussion and Analysis of Financial 18
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 28
Item 4 - Controls and Procedures 29
PART II - OTHER INFORMATION 30
Item 1 - Legal Proceedings 30
Item 1A - Risk Factors 30
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 6 - Exhibits 31
Signatures 31
Exhibits 32
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, 2007, and Part II, Item 1A of this report for further
discussion of factors which could affect the Company's business and cause actual
results to differ materially from those suggested by any forward-looking
statement made in this report. Such Form 10-K and this report should be read to
put any forward-looking statements in context and to gain a more complete
understanding of the risks and uncertainties involved in the Company's business.
Any forward-looking statement may turn out to be wrong and cannot be guaranteed.
The Company does not intend to update any forward-looking statement after the
date of this report.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TRICO BANCSHARES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited)
At September 30, At December 31,
2008 2007 2007
-------------------------- ---------------
Assets:
Cash and due from banks $67,300 $70,791 $88,798
Federal funds sold - 488 -
-------------------------- --------------
Cash and cash equivalents 67,300 71,279 88,798
Securities available-for-sale 241,900 239,242 232,427
Federal Home Loan Bank stock, at cost 9,147 8,652 8,766
Loans, net of allowance for loan losses
of $24,588, $17,139 and $17,331 1,538,648 1,517,937 1,534,635
Foreclosed assets, net of allowance for
losses of $214, $180 and $180 1,178 187 187
Premises and equipment, net 19,094 20,804 20,492
Cash value of life insurance 46,061 44,751 44,981
Accrued interest receivable 7,874 8,865 8,554
Goodwill 15,519 15,519 15,519
Other intangible assets, net 786 1,298 1,176
Other assets 28,960 24,989 25,086
-------------------------- ------------
Total Assets $1,976,467 $1,953,523 $1,980,621
========================== ============
Liabilities:
Deposits:
Noninterest-bearing demand $334,015 $345,467 $378,680
Interest-bearing 1,229,826 1,186,675 1,166,543
-------------------------- ------------
Total deposits 1,563,841 1,532,142 1,545,223
Federal funds purchased 67,000 66,000 56,000
Accrued interest payable 5,217 6,899 7,871
Reserve for unfunded commitments 3,365 2,040 2,090
Other liabilities 24,831 22,483 23,195
Other borrowings 79,873 99,996 116,126
Junior subordinated debt 41,238 41,238 41,238
-------------------------- ------------
Total Liabilities 1,785,365 1,770,798 1,791,743
-------------------------- ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, no par value: 50,000,000 shares
authorized; issued and outstanding:
15,744,881 at September 30, 2008 78,008
15,891,300 at September 30, 2007 78,331
15,911,550 at December 31, 2007 78,775
Retained earnings 115,549 108,022 111,655
Accumulated other comprehensive loss, net (2,455) (3,628) (1,552)
-------------------------- ------------
Total Shareholders' Equity 191,102 182,725 188,878
-------------------------- ------------
Total Liabilities and Shareholders' Equity $1,976,467 $1,953,523 $1,980,621
========================== =============
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 Nine months ended
September 30, September 30,
2008 2007 2008 2007
---------------------------------------------------------
Interest and dividend income:
Loans, including fees $26,790 $30,099 $81,531 $88,404
Debt securities:
Taxable 2,756 1,874 8,607 5,216
Tax exempt 287 354 910 1,123
Dividends 138 109 382 332
Federal funds sold - 6 3 14
---------------------------------------------------------
Total interest income 29,971 32,442 91,433 95,089
---------------------------------------------------------
Interest expense:
Deposits 5,776 8,078 18,603 23,016
Federal funds purchased 430 922 1,953 2,458
Other borrowings 473 768 2,060 1,764
Junior subordinated debt 573 834 1,872 2,475
--------------------------------------------------------
Total interest expense 7,252 10,602 24,488 29,713
---------------------------------------------------------
Net interest income 22,719 21,840 66,945 65,376
---------------------------------------------------------
Provision for loan losses 2,600 700 15,500 1,682
---------------------------------------------------------
Net interest income after provision for loan losses 20,119 21,140 51,445 63,694
---------------------------------------------------------
Noninterest income:
Service charges and fees 5,224 5,218 16,178 15,654
Gain on sale of loans 341 211 915 756
Commissions on sale of non-deposit investment products 594 583 1,539 1,633
Increase in cash value of life insurance 360 405 1,080 1,215
Other 273 430 1,210 1,218
---------------------------------------------------------
Total noninterest income 6,792 6,847 20,922 20,476
---------------------------------------------------------
Noninterest expense:
Salaries and related benefits 9,431 8,975 28,556 28,336
Other 7,158 7,777 23,450 22,819
---------------------------------------------------------
Total noninterest expense 16,589 16,752 52,006 51,155
---------------------------------------------------------
Income before income taxes 10,322 11,235 20,361 33,015
Provision for income taxes 4,087 4,442 7,804 13,023
---------------------------------------------------------
Net income $6,235 $6,793 $12,557 $19,992
=========================================================
Average shares outstanding 15,744,881 15,889,061 15,777,282 15,894,768
Diluted average shares outstanding 15,951,668 16,310,631 16,021,886 16,396,615
Per share data:
Basic earnings $0.40 $0.43 $0.80 $1.26
Diluted earnings $0.39 $0.42 $0.78 $1.22
Dividends paid $0.13 $0.13 $0.39 $0.39
See accompanying notes to unaudited condensed consolidated financial statements.
3
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share and per share data; unaudited)
Accumulated
Shares of Other
Common Common Retained Comprehensive
Stock Stock Earnings Loss Total
---------------------------------------------------------------
Balance at December 31, 2006 15,857,207 $73,739 $100,218 ($4,521) $169,436
--------
Comprehensive income:
Net income 19,992 19,992
Change in net unrealized gain on
securities available for sale, net 893 893
-------
Total comprehensive income 20,885
Stock option vesting 579 579
Stock options exercised 362,100 3,863 3,863
Tax benefit of stock options exercised 1,707 1,707
Repurchase of common stock (328,007) (1,557) (5,987) (7,544)
Dividends paid ($0.39 per share) (6,201) (6,201)
---------------------------------------------------------------
Balance at September 30, 2007 15,891,300 $78,331 $108,022 ($3,628) $182,725
===============================================================
Balance at December 31, 2007 15,911,550 $78,775 $111,655 ($1,552) $188,878
Comprehensive income:
Net income 12,557 12,557
Change in net unrealized gain on
securities available for sale, net (903) (903)
---------
Total comprehensive income 11,654
Cumulative effect of change in
accounting principle, net of tax (522) (522)
Stock option vesting 502 502
Reversal of tax benefit from
exercise of stock options (444) (444)
Repurchase of common stock (166,669) (825) (1,996) (2,821)
Dividends paid ($0.39 per share) (6,145) (6,145)
---------------------------------------------------------------
Balance at September 30, 2008 15,744,881 $78,008 $115,549 ($2,455) $191,102
===============================================================
See accompanying notes to unaudited condensed consolidated financial statements.
4
TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)
For the nine months ended
September 30,
2008 2007
-------------------------
Operating activities:
Net income $12,557 $19,992
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment, and amortization 2,586 2,829
Amortization of intangible assets 389 367
Provision for loan losses 15,500 1,682
Amortization of investment securities premium, net 250 528
Originations of loans for resale (61,109) (48,628)
Proceeds from sale of loans originated for resale 61,403 48,878
Gain on sale of loans (915) (756)
Change in value of mortgage servicing rights 743 226
Provision for losses on other real estate owned 34 -
Loss on disposal of fixed assets 2 5
Increase in cash value of life insurance (1,080) (1,215)
Stock option vesting expense 502 579
Stock option tax benefits 444 (1,707)
Change in:
Reserve for unfunded commitments 1,275 191
Interest receivable 680 (138)
Interest payable (2,654) (649)
Other assets and liabilities, net (2,677) 1,334
------------------------
Net cash provided by operating activities 27,930 23,518
------------------------
Investing activities:
Proceeds from maturities of securities available-for-sale 38,938 38,954
Proceeds from sales of securities available-for-sale - -
Purchases of securities available-for-sale (50,219) (78,822)
Purchases of Federal Home Loan Bank stock (381) (332)
Loan originations and principal collections, net (20,538) (26,841)
Proceeds from sale of premises and equipment 2 11
Purchases of premises and equipment (1,185) (2,610)
------------------------
Net cash used by investing activities (33,383) (69,640)
------------------------
Net (decrease) increase in deposits 18,618 (67,007)
Net increase in Federal funds purchased 11,000 28,000
Payments of principal on long-term other borrowings (58) (51)
Proceeds from issuance of long-term other borrowings - 50,000
Net change in short-term other borrowings (36,195) 10,136
(Reversal of) stock option tax benefit (444) 1,707
Repurchase of common stock (2,821) (2,685)
Dividends paid (6,145) (6,201)
Exercise of stock options - 488
-------------------------
Net cash (used by) provided by financing activities (16,045) 14,387
-------------------------
Net change in cash and cash equivalents (21,498) (31,735)
-------------------------
Cash and cash equivalents and beginning of period 88,798 103,014
-------------------------
Cash and cash equivalents at end of period $67,300 $71,279
=========================
Supplemental disclosure of noncash activities:
Loans transferred to other real estate owned $1,025 187
Unrealized gain on securities available for sale ($1,558) $1,541
Income tax benefit from stock option exercises ($444) $1,707
Value of common stock tendered, in lieu of cash,
to pay for exercise of stock options - $4,859
Supplemental disclosure of cash flow activity:
Cash paid for interest expense $27,142 $30,362
Cash paid for income taxes $10,350 $12,300
See accompanying notes to unaudited condensed consolidated financial statements
5
Note 1: General Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. The results of operations reflect interim
adjustments, all of which are of a normal recurring nature and which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. The interim results are not necessarily
indicative of the results expected for the full year. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes as well as other
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2007.
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 assets,
income taxes, and the valuation of mortgage servicing rights, are the
significant accounting estimates that materially affect the Company's
consolidated financial statements.
Reclassifications
Certain amounts previously reported in the 2007 financial statements have been
reclassified to conform to the 2008 presentation. These reclassifications did
not affect previously reported net income or total shareholders' equity.
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.
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.
6
Investment Securities
The Company classifies its debt and marketable equity securities into one of
three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling in the
near term. Held-to-maturity securities are those securities which the Company
has the ability and intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
During the nine months ended September 30, 2008, and throughout 2007, the
Company did not have any securities classified as either held-to-maturity or
trading.
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 September 30, 2008 and 2007, and December 31, 2007, 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 fair value allocated to the associated mortgage servicing rights.
Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related
mortgage loans sold.
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 estimated 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.
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 and the reserve for unfunded commitments includes specific allowances for
identified problem loans and leases, 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 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, 2007.
Based on the current conditions of the loan portfolio, Management believes that
the allowance for loan losses and the reserve for unfunded commitments, which
collectively stand at $27,953,000 at September 30, 2008, 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, Nine months ended
September 30, September 30,
------------------------------------------
Allowance for loan losses: 2008 2007 2008 2007
------------------------------------------
Balance at beginning of period $24,281 $16,999 $17,331 $16,914
Provision for loan losses 2,600 700 15,500 1,682
Loans charged off:
Real estate mortgage:
Residential (140) - (361) -
Commercial - - (19) -
Consumer:
Home equity lines (1,004) - (1,952) (242)
Home equity loans (8) - (258) -
Auto indirect (1,014) (464) (2,186) (1,047)
Other consumer (239) (256) (818) (727)
Commercial (142) (123) (531) (317)
Construction:
Residential (31) - (3,014) -
Commercial - - - -
----------------------------------------
Total loans charged off (2,578) (843) (9,139) (2,333)
Recoveries of previously
charged-off loans:
Real estate mortgage:
Residential - - - -
Commercial 15 13 43 43
Consumer:
Home equity lines 12 - 12 1
Home equity loans - - - 5
Auto indirect 104 94 295 246
Other consumer 146 143 520 445
Commercial 8 33 26 136
Construction:
Residential - - - -
Commercial - - - -
-----------------------------------------
Total recoveries of
previously charged off loans 285 283 896 876
-----------------------------------------
Net charge-offs (2,293) (560) (8,243) (1,457)
-----------------------------------------
Balance at end of period $24,588 $17,139 $24,588 $17,139
=========================================
Reserve for unfunded commitments:
Balance at beginning of period $3,465 $2,040 $2,090 $1,849
Provision for losses -
unfunded commitments (100) - 1,275 191
-----------------------------------------
Balance at end of period $3,365 $2,040 $3,365 $2,040
=========================================
Balance at end of period:
Allowance for loan losses $24,588 $17,139
Reserve for unfunded commitments 3,365 2,040
-----------------
Allowance for losses $27,953 $19,179
=================
As a percentage of total loans:
Allowance for loan losses 1.57% 1.12%
Reserve for unfunded commitments 0.22% 0.13%
-----------------
Allowance for losses 1.79% 1.25%
=================
9
Loans classified as nonaccrual, net of guarantees of the U.S. government,
including its agencies and its government-sponsored agencies, amounted to
approximately $16,667,000 and $7,511,000 at September 30, 2008 and December 31,
2007, respectively. These nonaccrual loans were classified as impaired and are
included in the recorded balance of impaired loans. As of September 30, 2008 and
December 31, 2007 the Company's recorded investment in impaired loans, net of
guarantees of the U.S. government, and the related valuation allowance were as
follows (in thousands):
At September 30, At December 31,
2008 2007
-----------------------------------
Impaired loans with no allocated allowance, $12,526 $4,299
net of guarantees
Impaired loans with allocated allowance, 4,141 3,212
net of guarantees -----------------------------------
Total impaired loans $16,667 $7,511
===================================
Allowance for loan losses allocated $1,738 $1,395
to impaired loans ===================================
Reserve for Unfunded Commitments
The reserve for unfunded commitments is established through a provision for
losses on 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.
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 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. MSRs are
carried at fair value, with changes in fair value reported in noninterest income
in the period in which the change occurs.
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 discount rates.
10
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):
Nine months ended September 30,
-------------------------------
2008 2007
Mortgage servicing rights: -------------------------------
Balance at beginning of period $4,088 $3,912
Additions 621 506
Change in fair value (743) (226)
-------------------------------
Balance at end of period $3,966 $4,192
===============================
Servicing fees received $767 $737
Balance of loans serviced at:
Beginning of period $406,743 $389,636
End of period $425,783 $402,806
Weighted-average prepayment speed (CPR) 11.2% 11.6%
Discount rate 13.0% 10.0%
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to
extend credit, including commitments under credit card arrangements, commercial
letters of credit, and standby letters of credit. Such financial instruments are
recorded when they are funded.
Premises and Equipment
Land is carried at cost. Buildings and equipment, including those acquired under
capital lease, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization expenses are computed using the
straight-line method over the estimated useful lives of the related assets or
lease terms. Asset lives range from 3-10 years for furniture and equipment and
15-40 years for land improvements and buildings.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, management periodically performs
valuations and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other noninterest expense.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of 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 tested its goodwill intangible and determined it was not impaired as of
September 30, 2008 and December 31, 2007.
The following table summarizes the Company's goodwill intangible as of September
30, 2008 and December 31, 2007.
December 31, September 30,
2007 Additions Reductions 2008
(Dollar in Thousands) --------------------------------------------------
Goodwill $15,519 - - $15,519
==================================================
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.
11
The following table summarizes the Company's core deposit intangibles as of
September 30, 2008 and December 31, 2007.
December 31, September 30,
2007 Additions Reductions 2008
(Dollar in Thousands) -------------------------------------------------
Core deposit intangibles $3,365 - - $3,365
Accumulated amortization (2,189) - (390) (2,579)
-------------------------------------------------
Core deposit intangibles, net $1,176 - ($390) $786
=================================================
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
----------- -------------------------
2008 $523
2009 $328
2010 $260
2011 $65
Thereafter -
Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as premises and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
On December 31 of each year, goodwill is tested for impairment, and is tested
for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value. This determination is made at
the reporting unit level and consists of two steps. First, the Company
determines the fair value of a reporting unit and compares it to its carrying
amount. Second, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any excess of the carrying amount of
the reporting unit's goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill.
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.
12
Stock-Based Compensation
The following table shows the number, weighted-average exercise price, intrinsic
value, weighted average remaining contractual life, average remaining vesting
period, and remaining compensation cost to be recognized over the remaining
vesting period of options exercisable, options not yet exercisable, and total
options outstanding as of September 30, 2008:
Currently Currently Not Total
(dollars in thousands except exercise price) Exercisable Exercisable Outstanding
Number of options 1,168,911 265,570 1,434,481
Weighted average exercise price $13.44 $20.48 $14.74
Intrinsic value $9,768 $498 $10,266
Weighted average remaining contractual term (yrs.) 2.32 8.77 3.51
The options for 265,570 shares that are not currently exercisable as of
September 30, 2008 are expected to vest, on a weighted-average basis, over the
next 3.14 years, and the Company is expected to recognize $1,672,000 of
compensation costs related to these options as they vest.
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 Nine months ended
September 30, September 30,
----------------------------------------------
2008 2007 2008 2007
(in thousands) ----------------------- -------------------
Net income $6,235 $6,793 $12,557 $19,992
Average number of common shares outstanding 15,745 15,889 15,777 15,895
Effect of dilutive stock options 206 422 245 502
----------------------- --------------------
Average number of common shares outstanding
used to calculate diluted earnings per share 15,951 16,311 16,022 16,397
======================= ====================
There were 595,143 and 302,050 options excluded from the computation of diluted
earnings per share for the nine month periods ended September 30, 2008 and 2007,
respectively, because the effect of these options was antidilutive.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income (loss) and related tax effects are
as follows:
Three months ended Nine months ended
September 30, September 30,
------------------------------------------
2008 2007 2008 2007
(in thousands) --------------------- ------------------
Unrealized holding gains (losses) on
available-for-sale securities $906 $1,987 ($1,558) $1,541
Tax effect (381) (836) 655 (648)
---------------------- -------------------
Unrealized holding gains (losses) on
available-for-sale securities, net of tax $525 $1,151 ($903) $893
====================== ===================
13
The components of accumulated other comprehensive loss, included in
shareholders' equity, are as follows:
September 30, December 31,
2008 2007
(in thousands) --------------------------
Net unrealized (losses) gains on available-
for-sale securities ($266) $1,292
Tax effect 112 (543)
Unrealized holding (losses) gains on -------------------------
available-for-sale securities, net of tax ($154) 749
-------------------------
Minimum pension liability (3,970) (3,970)
Tax effect 1,669 1,669
-------------------------
Minimum pension liability, net of tax (2,301) (2,301)
-------------------------
Accumulated other comprehensive loss ($2,455) ($1,552)
=========================
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 to use the cash values of these policies to pay the
retirement obligations.
The following table sets forth the net periodic benefit cost recognized for the
plans:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(in thousands) 2008 2007 2008 2007
---- ---- ---- ----
Net pension cost included the following components:
Service cost-benefits earned during the period $138 $150 $416 $450
Interest cost on projected benefit obligation 166 146 498 438
Amortization of net obligation at transition 1 1 1 1
Amortization of prior service cost 45 45 135 135
Recognized net actuarial loss 37 28 111 84
------------------------------------
Net periodic pension cost $387 $370 $1,161 $1,108
=====================================
During the nine months ended September 30, 2008 and 2007, the Company
contributed and paid out as benefits $453,000 and $405,000, respectively, to
participants under the plans. For the year ending December 31, 2008, the Company
expects to contribute and pay out as benefits $593,000 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.
14
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
represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. At September 30, 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:
Fair value at September 30, 2008 Total Level 1 Level 2 Level 3
Securities available-for-sale $241,900 - $241,900 -
Mortgage servicing rights 3,966 - - 3,966
----------------------------------------
Total assets measured at fair value $245,866 - $241,900 3,966
========================================
T
he table below presents the recorded amount of assets and liabilities measured
at fair value on a nonrecurring basis:
Fair value at September 30, 2008 Total Level 1 Level 2 Level 3
Impaired loans $20,244 - - $20,244
----------------------------------------
Total assets measured at fair value $20,244 - - $20,244
========================================
15
Recent Accounting Pronouncements
In September 2006, the FASB issued FASB Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 was effective for the Company on January 1, 2008 and did not have a
significant impact on the Company's consolidated financial statements.
In September 2006, the FASB issued FASB Statement of Financial Accounting
Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R)
(SFAS 158). SFAS 158 requires an employer to recognize the overfunded or
underfunded status of defined benefit postretirement plans as an asset or a
liability in its statement of financial position. The funded status is measured
as the difference between plan assets at fair value and the benefit obligation
(the projected benefit obligation for pension plans or the accumulated benefit
obligation for other postretirement benefit plans). An employer is also required
to measure the funded status of a plan as of the date of its year-end statement
of financial position with changes in the funded status recognized through
comprehensive income. SFAS 158 also requires certain disclosures regarding the
effects on net periodic benefit cost for the next fiscal year that arise from
delayed recognition of gains or losses, prior service costs or credits, and the
transition asset or obligation. The Company was required to recognize the funded
status of its defined benefit post-retirement benefit plans in its consolidated
financial statements for the year ended December 31, 2006. The Company had
previously recognized the funded status of its Executive and Director
Supplemental Retirement plans in prior consolidated financial statements. The
Company has no other defined benefit post-retirement benefit plans. The
requirement to measure plan assets and benefit obligations as of the date of the
year-end statement of financial position is effective for the Company's
consolidated financial statements beginning with the fiscal year ended after
December 15, 2008. The Company currently uses December 31 as the measurement
date for its defined benefit post-retirement benefit plans.
In February 2007, the FASB issued FASB Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment to FASB Statement No. 115 (SFAS 159). SFAS
159 permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 was effective for
the Company on January 1, 2008 and did not have a significant impact on the
Company's consolidated financial statements.
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.
16
TRICO BANCSHARES
Financial Summary
(In thousands, except per share amounts; unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------
2008 2007 2008 2007
---------------------------------------------------
Net Interest Income (FTE) $22,889 $22,031 $67,464 $66,005
Provision for loan losses 2,600 700 15,500 1,682
Noninterest income 6,792 6,847 20,922 20,476
Noninterest expense 16,589 16,752 52,006 51,155
Provision for income taxes (FTE) 4,257 4,633 8,323 13,652
--------------------------------------------------
Net income $6,235 $6,793 $12,557 $19,992
==================================================
Earnings per share:
Basic $0.40 $0.43 $0.80 $1.26
Diluted $0.39 $0.42 $0.78 $1.22
Per share:
Dividends paid $0.13 $0.13 $0.39 $0.39
Book value at period end $12.14 $11.50
Tangible book value at period end $11.10 $10.44
Average common shares outstanding 15,745 15,889 15,777 15,895
Average diluted shares outstanding 15,952 16,311 16,022 16,397
Shares outstanding at period end 15,745 15,891
At period end:
Loans, net $1,538,648 $1,517,937
Total assets 1,976,467 1,953,523
Total deposits 1,563,841 1,532,142
Other borrowings 79,873 99,996
Junior subordinated debt 41,238 41,238
Shareholders' equity $191,102 $182,725
Financial Ratios:
During the period (annualized):
Return on assets 1.26% 1.44% 0.84% 1.42%
Return on equity 13.04% 14.92% 8.71% 14.94%
Net interest margin(1) 5.07% 5.12% 4.96% 5.16%
Net loan charge-offs to average loans 0.59% 0.15% 0.71% 0.13%
Efficiency ratio(1) 55.89% 58.01% 58.84% 59.15%
At Period End:
Equity to assets 9.67% 9.35%
Total capital to risk assets 12.38% 11.66%
Allowance for losses to loans(2) 1.79% 1.25%
(1) Fully taxable equivalent (FTE)
(2) Allowance for losses includes allowance for loan losses and reserve for
unfunded commitments.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As TriCo Bancshares (the "Company") has not commenced any business operations
independent of Tri Counties Bank (the "Bank"), the following discussion pertains
primarily to the Bank. Average balances, including such balances used in
calculating certain financial ratios, are generally comprised of average daily
balances for the Company. Within Management's Discussion and Analysis of
Financial Condition and Results of Operations, interest income and net interest
income are generally presented on a fully tax-equivalent (FTE) basis. The
presentation of interest income and net interest income on a FTE basis is a
common practice within the banking industry. Interest income and net interest
income are shown on a non-FTE basis in the Part I - Financial Information
section of this Form 10-Q, and a reconciliation of the FTE and non-FTE
presentations is provided below in the discussion of net interest income.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowance for loan
losses, intangible assets, and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. (See caption "Allowance for
Loan Losses" for a more detailed discussion).
Results of Operations
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
the Bank's financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Condensed Consolidated Financial Statements of the Company and the
Notes thereto located at Item 1 of this report.
Following is a summary of the components of fully taxable equivalent ("FTE") net
income for the periods indicated (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------
2008 2007 2008 2007
-----------------------------------------------
Net Interest Income (FTE) 22,889 $22,031 $67,464 $66,005
Provision for loan losses 2,600 700 15,500 1,682
Noninterest income 6,792 6,847 20,922 20,476
Noninterest expense 16,589 16,752 52,006 51,155
Provision for income taxes (FTE) 4,257 4,633 8,323 13,652
-----------------------------------------------
Net income $6,235 $6,793 $12,557 $19,992
===============================================
The Company had quarterly earnings of $6,235,000 for the three months ended
September 30, 2008. This represents a decrease of $558,000 (8.2%) when compared
with earnings of $6,793,000 for the quarter ended September 30, 2007. Diluted
earnings per share for the quarter ended September 30, 2008 decreased 7.1% to
$0.39 compared to $0.42 for the quarter ended September 30, 2007. The decrease
in earnings from the prior year quarter was primarily due to a $1,900,000
increase in provision for loans losses.
The Company reported earnings of $12,557,000 for the nine months ended September
30, 2008. These results represent a decrease of $7,435,000 (37.2%) when compared
with earnings of $19,992,000 for the nine months ended September 30, 2007.
Diluted earnings per share for the nine months ended September 30, 2008
decreased 36.1% to $0.78 compared to $1.22 for the nine months ended September
30, 2007. The decrease in earnings from the nine month period ended September
30, 2007 was primarily due to a $13,818,000 increase in provision for loan
losses.
18
Net Interest Income
The Company's primary source of revenue is net interest income, or the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Following is a summary of the
components of net interest income for the periods indicated (dollars in
thousands):
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------
2008 2007 2008 2007
-----------------------------------------------
Interest income $29,971 $32,442 $91,433 $95,089
Interest expense (7,252) (10,602) (24,488) (29,713)
FTE adjustment 170 191 519 629
-----------------------------------------------
Net interest income (FTE) $22,889 $22,031 $67,464 $66,005
===============================================
Average interest-earning assets $1,806,010 $1,721,547 $1,814,103 $1,704,342
Net interest margin (FTE) 5.07% 5.12% 4.96% 5.16%
The Company's primary source of revenue is net interest income, or the
difference between interest income on interest-earning assets and interest
expense in interest-bearing liabilities.
Net interest income (FTE) during the third quarter of 2008 increased $858,000
(3.9 %) from the same period in 2007 to $22,889,000. The increase in net
interest income (FTE) was due to an $84,463,000 (4.9%) increase in average
balances of interest-earning assets to $1,806,010,000 that was substantially
offset by a 0.05% decrease in net interest margin (FTE) to 5.07%.
Net interest income (FTE) during the first nine months of 2008 increased
$1,459,000 (2.2%) from the same period in 2007 to $67,464,000. The increase in
net interest income (FTE) was due to a $109,761,000 (6.4%) increase in average
balances of interest-earning assets to $1,814,103,000 that was partially offset
by a 0.20% decrease in net interest margin (FTE) to 4.96%.
Interest and Fee Income
Interest and fee income (FTE) for the third quarter of 2008 decreased $2,492,000
(7.6%) from the third quarter of 2007. The decrease was due to a 0.90% decrease
in the yield on average interest-earning assets to 6.68% that was partially
offset by an $84,463,000 (4.9%) increase in average interest-earning assets to
$1,806,010,000. The growth in interest-earning assets was due to a $31,590,000
(21%) increase in average loan balances to $1,549,009,000 and an increase of
$53,253,000 (26.1%) in average balances of investments to $256,926,000. The
decrease in the yield on average interest-earning assets was mainly due to a
1.01% decrease in yield on loans to 6.92%. The decrease in loan yields from the
third quarter of 2007 was mainly due to a 3.25% decrease in the prime lending
rate from 8.25% at June 30, 2007 to 5.00% at September 30, 2008.
Interest and fee income (FTE) for the nine months ended September 30, 2008
decreased $3,766,000 (3.9%) from the same period of 2007. The decrease was due
to a 0.73% decrease in the yield on average interest-earning assets to 6.76%
that was partially offset by a $109,761,000 (6.4%) increase in average
interest-earning assets to $1,814,103,000. The growth in interest-earning assets
was due to a $38,706,000 (2.6%) increase in average loan balances to
$1,543,571,000 and an increase of $71,240,000 (35.8%) in average balances of
investments to $270,339,000. The decrease in the yield on average
interest-earning assets was mainly due to a 0.79% decrease in yield on loans to
7.04%. The decrease in loan yields from the nine months ended September 30, 2007
was mainly due to a 3.25% decrease in the prime lending rate from 8.25% at June
30, 2007 to 5.00% at September 30, 2008.
19
Interest Expense
Interest expense decreased $3,350,000 (31.6%) to $7,252,000 in the third quarter
of 2008 compared to the third quarter of 2007. The average balance of
interest-bearing liabilities increased $74,375,000 (5.6%) to $1,408,323,000 in
the third quarter of 2008 compared to the third quarter of 2007. The increase in
the average balance of interest-bearing liabilities was due primarily to
increases of $49,536,000 (9.0%) in the average balance of time deposits from the
third quarter of 2007. The average rate paid on interest-bearing liabilities in
the quarter ended September 30, 2008 decreased 1.12% to 2.06% compared to the
quarter ended September 30, 2007 as a result of lower market rates for almost
all types of interest-bearing liabilities.
Interest expense decreased $5,225,000 (17.6%) to $24,488,000 for the nine months
ended September 30, 2008 compared to $29,713,000 for the nine months ended
September 30, 2007. The average balance of interest-bearing liabilities
increased $97,066,000 (7.4%) to $1,410,614,000 for the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007. The
increase in the average balance of interest-bearing liabilities was due
primarily to increases of $43,994,000 (70.8%) and $40,544,000 (81.7%) in the
average balances of Federal funds purchased and other borrowings, respectively,
from the nine months ended September 30, 2007. The average rate paid on
interest-bearing liabilities in the nine month period ended September 30, 2008
decreased 0.71% to 2.31% compared to the nine months ended September 30, 2007 as
a result of lower market rates for almost all types of interest-bearing
liabilities.
Net Interest Margin (FTE)
The following table summarizes the components of the Company's net interest
margin for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------
2008 2007 2008 2007
---------------------------------------------
Yield on interest-earning assets 6.68% 7.58% 6.76% 7.49%
Rate paid on interest-bearing
Liabilities 2.06% 3.18% 2.31% 3.02%
---------------------------------------------
Net interest spread 4.62% 4.40% 4.45% 4.47%
Impact of all other net
noninterest-bearing funds 0.45% 0.72% 0.51% 0.69%
---------------------------------------------
Net interest margin 5.07% 5.12% 4.96% 5.16%
=============================================
Net interest margin for the three months ended September 30, 2008 decreased
0.05% compared to the three months ended September 30, 2007. This decrease in
net interest margin was mainly due to an 0.27% decrease in the impact of net
noninterest-bearing funds to 0.45% from 0.72% in the three months ended
September 30, 2007 that was partially offset by a 0.22% increase in net interest
spread as the average yield on interest-earning assets decreased 0.90% while the
average rate paid on interest-bearing liabilities decreased 1.12% from the three
months ended September 30, 2007.
Net interest margin for the nine months ended September 30, 2008 decreased 0.20%
compared to the nine months ended September 30, 2007. This decrease in net
interest margin was due to a 0.18% decrease in the impact of net
noninterest-bearing funds to 0.51% from 0.69% in the nine months ended September
30, 2007, and a 0.02% decrease in net interest spread as the average yield on
interest-earning assets decreased 0.73% while the average rate paid on
interest-bearing liabilities decreased 0.71% from the nine months ended
September 30, 2007.
20
Summary of Average Balances, Yields/Rates and Interest Differential
The following table presents, for the periods indicated, information regarding
the Company's consolidated average assets, liabilities and shareholders' equity,
the amounts of interest income from average interest-earning assets and
resulting yields, and the amount of interest expense paid on interest-bearing
liabilities. Average loan balances include nonperforming loans. Interest income
includes proceeds from loans on nonaccrual loans only to the extent cash
payments have been received and applied to interest income. Yields on securities
and certain loans have been adjusted upward to reflect the effect of income
thereon exempt from federal income taxation at the current statutory tax rate
(dollars in thousands).
For the three months ended
---------------------------------------------------------------
September 30, 2008 September 30, 2007
----------------------------- -----------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- ------------------------------
Assets:
Loans $1,549,009 $26,790 6.92% $1,517,419 $30,009 7.93%
Investment securities - taxable 232,419 2,894 4.98% 174,472 1,983 4.55%
Investment securities - nontaxable 24,507 457 7.46% 29,201 545 7.47%
Federal funds sold 75 - 1.19% 455 6 5.27%
----------------------------- -----------------------------
Total interest-earning assets 1,806,010 30,141 6.68% 1,721,547 32,633 7.58%
------- ------
Other assets 168,382 170,445
---------- ----------
Total assets $1,974,392 $1,891,992
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $226,843 239 0.42% 220,582 114 0.21%
Savings deposits 376,594 1,041 1.11% 388,315 1,761 1.81%
Time deposits 597,765 4,496 3.01% 548,229 6,203 4.53%
Federal funds purchased 84,851 430 2.03% 70,602 922 5.22%
Other borrowings 81,032 473 2.33% 64,982 768 4.73%
Junior subordinated debt 41,238 573 5.56% 41,238 834 8.09%
---------------------------- ----------------------------
Total interest-bearing liabilities 1,408,323 7,252 2.06% 1,333,948 10,602 3.18%
------ ------
Noninterest-bearing deposits 344,233 342,667
Other liabilities 30,625 33,297
Shareholders' equity 191,211 182,080
---------- ----------
Total liabilities and shareholders' equity $1,974,392 $1,891,992
========== ==========
Net interest spread(1) 4.62% 4.40%
Net interest income and interest margin(2) $22,889 5.07% $22,031 5.12%
==================== ===================
(1) Net interest spread represents the average yield earned on interest-earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of
interest-earning assets.
21
For the nine months ended
---------------------------------------------------------------
September 30, 2008 Septembere 30, 2007
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income/ Earned Average Income/ Earned
Balance Expense Paid Balance Expense Paid
----------------------------- ------------------------------
Assets:
Loans $1,543,571 $81,531 7.04% $1,504,865 $88,404 7.83%
Investment securities - taxable 244,833 8,989 4.90% 168,363 5,548 4.39%
Investment securities - nontaxable 25,506 1,429 7.47% 30,736 1,752 7.60%
Federal funds sold 193 3 2.07% 378 14 4.94%
----------------------------- -----------------------------
Total interest-earning assets 1,814,103 91,952 6.76% 1,704,342 95,718 7.49%
------- ------
Other assets 169,092 171,978
---------- ----------
Total assets $1,983,195 $1,876,320
========== ==========
Liabilities and shareholders' equity:
Interest-bearing demand deposits $220,366 460 0.28% $225,402 343 0.20%
Savings deposits 385,624 3,715 1.28% 384,366 4,418 1.53%
Time deposits 567,089 14,428 3.39% 550,783 18,255 4.42%
Federal funds purchased 106,109 1,953 2.45% 62,115 2,458 5.28%
Other borrowings 90,188 2,060 3.05% 49,644 1,764 4.74%
Junior subordinated debt 41,238 1,872 6.05% 41,238 2,475 8.00%
------------------------------ -----------------------------
Total interest-bearing liabilities 1,410,614 24,488 2.31% 1,313,548 29,713 3.02%
------ ------
Noninterest-bearing deposits 348,483 351,050
Other liabilities 31,882 33,309
Shareholders' equity 192,216 178,413
---------- ----------
Total liabilities and shareholders' equity $1,983,195 $1,876,320
========== ==========
Net interest spread(1) 4.45% 4.47%
Net interest income and interest margin(2) $67,464 4.96% $66,005 5.16%
================ =================
(1) Net interest spread represents the average yield earned on interest-earning
assets minus the average rate paid on interest-bearing liabilities.
(2) Net interest margin is computed by calculating the difference between
interest income and expense, divided by the average balance of
interest-earning assets.
22
Summary of Changes in Interest Income and Expense due to Changes in Average
Asset and Liability Balances and Yields Earned and Rates Paid
The following tables set forth a summary of the changes in interest income (FTE)
and interest expense from changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated.
Changes not solely attributable to volume or rates have been allocated in
proportion to the respective volume and rate components (dollars in thousands).
Three months ended September 30, 2008
compared with three months
ended September 30, 2007
-------------------------------------
Volume Rate Total
-------------------------------------
Increase (decrease) in interest income:
Loans $626 ($3,935) ($3,309)
Investment securities 571 252 823
Federal funds sold (5) (1) (6)
-------------------------------------
Total interest-earning assets 1,192 (3,684) (2,492)
-------------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits 3 122 125
Savings deposits (53) (667) (720)
Time deposits 561 (2,268) (1,707)
Federal funds purchased 186 (678) (492)
Other borrowings 190 (485) (295)
Junior subordinated debt - (261) (261)
-------------------------------------
Total interest-bearing liabilities 887 (4,237) (3,350)
-------------------------------------
Increase in Net Interest Income $305 $553 $858
=====================================
Nine months ended September 30, 2008
compared with nine months ended
September 30, 2007
-------------------------------------
Volume Rate Total
-------------------------------------
Increase (decrease) in interest income:
Loans $2,273 ($9,146) ($6,873)
Investment securities 2,220 898 3,118
Federal funds sold (7) (4) (11)
-------------------------------------
Total interest-earning assets 4,486 (8,252) (3,766)
-------------------------------------
Increase (decrease) in interest expense:
Interest-bearing demand deposits (8) 125 117
Savings deposits 14 (717) (703)
Time deposits 541 (4,368) (3,827)
Federal funds purchased 1,742 (2,247) (505)
Other borrowings 1,441 (1,145) 296
Junior subordinated debt - (603) (603)
-------------------------------------
Total interest-bearing liabilities 3,730 (8,955) (5,225
-------------------------------------
Increase in Net Interest Income $756 $703 $1,459
=====================================
Provision for Loan Losses
The Company provided $2,600,000 for loan losses in the third quarter of 2008
versus $700,000 in the third quarter of 2007. In the third quarter of 2008, the
Company recorded $2,293,000 of net loan charge-offs versus $560,000 of net loan
charge-offs in the third quarter of 2007. In addition, net charge-offs of
$1,000,000 on home equity lines and loans and $910,000 on auto indirect loans
were taken during the third quarter of 2008.
The Company provided $15,500,000 for loan losses during the nine months ended
September 30, 2008 versus $1,682,000 during the nine months ended September 30,
2007. In the nine months ended September 30, 2008, the Company recorded
$8,243,000 of net loan charge-offs versus $1,457,000 of net loan charge-offs in
the nine months ended September 30, 2007. During the second quarter of 2008, the
Company re-appraised all of its larger residential development projects. As a
result of this effort, the Company charged-off $1,007,000 on a twenty-eight unit
residential condominium project and $640,000 on a twenty-seven lot residential
construction project. In addition to the re-appraisal effort during the second
quarter of 2008 which resulted in charge-offs of $1,647,000, the Company
charged-off $1,078,000 on a thirty-two lot residential construction project
during the first quarter of 2008. In addition, net charge-offs of $2,198,000 on
home equity lines and loans and $1,891,000 on auto indirect loans were taken
during the nine months ended September 30, 2008.
23
Noninterest Income
The following table summarizes the components of noninterest income for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------
Service charges on deposit accounts $4,080 $3,819 $11,881 $11,236
ATM fees and interchange revenue 1,164 1,016 3,411 3,011
Other service fees 551 523 1,629 1,633
Change in value of mortgage servicing rights (571) (141) (743) (226)
Gain on sale of loans 341 211 915 756
Commissions on sale of
nondeposit investment products 594 583 1,539 1,633
Increase in cash value of life insurance 360 405 1,080 1,215
Gain from VISA IPO - - 396 -
Other noninterest income 273 431 814 1,218
-------------------------------------------------
Total noninterest income $6,792 $6,847 $20,922 $20,476
=================================================
Noninterest income for the third quarter of 2008 decreased $55,000 (0.8%) from
the third quarter of 2007, mainly due to a $430,000 decrease in the value of
mortgage servicing rights to a negative $571,000 from a negative $141,000 in the
third quarter of 2007. The negative impact of the decrease in the value of
mortgage servicing rights was partially offset by a $261,000 (6.8%) increase in
service charges on deposit accounts to $4,080,000, and a $148,000 (14.6%)
increase in ATM fees and interchange to $1,164,000. The increases in service
charges on deposit accounts and ATM fees and interchange revenue were primarily
due to increased numbers of customers.
Noninterest income for the nine months ended September 30, 2008 increased
$446,000 (2.2%) to $20,922,000 from the same period in 2007. The increase in
noninterest income from the nine months ended September 30, 2007 was mainly due
to a $396,000 gain from the Company's membership in VISA, Inc. and VISA's
initial public offering (IPO) in March 2008, a $645,000 (5.7%) increase in
service charges on deposit accounts to $11,881,000, and a $400,000 (13.3%)
increase in ATM fees and interchange to $3,411,000. The increases in service
charges on deposit accounts and ATM fees and interchange revenue were primarily
due to increased numbers of customers.
Noninterest Expense
The following table summarizes the components of noninterest expense for the
periods indicated (dollars in thousands).
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------
Base salaries, net of
deferred loan origination costs $6,331 $6,143 $18,980 $18,077
Incentive compensation 675 451 2,065 2,936
Benefits and other compensation costs 2,425 2,381 7,511 7,323
----------------------------------------------------
Total salaries and related benefits 9,431 8,975 28,556 28,336
----------------------------------------------------
Occupancy 1,289 1,178 3,705 3,526
Equipment 1,017 1,052 2,997 3,222
Data processing and software 600 564 1,811 1,482
ATM network charges 506 463 1,529 1,389
Advertising and marketing 451 620 1,204 1,624
Telecommunications 402 412 1,629 1,240
Professional fees 300 408 1,302 1,217
Courier service 258 285 796 867
Postage 185 178 683 602
Intangible amortization 133 122 389 367
Assessments 118 82 283 247
Operational losses 81 128 286 313
Provisions for losses-unfunded commitments (100) 0 1,275 191
Other 1,918 2,285 5,561 6,532
----------------------------------------------------
Total other noninterest expense 7,158 7,777 23,450 22,819
----------------------------------------------------
Total noninterest expense $16,589 $16,752 $52,006 $51,155
====================================================
Average full time equivalent staff 668 646 638 636
Noninterest expense to revenue (FTE) 55.89% 58.01% 58.84% 59.12%
24
Noninterest expense for the third quarter of 2008 decreased $163,000 (1.0%)
compared to the third quarter of 2007. Salaries and benefits expense increased
$456,000 (5.1%) to $9,431,000 due to increases in all areas including salaries,
commissions and incentives, and benefits. Other noninterest expense decreased
$619,000 (8.0%) due to decreases over a broad range of other expense categories.
Noninterest expense for the nine months ended September 30, 2008 increased
$851,000 (1.7%) compared to the nine months ended September 30, 2007. Salaries
and benefits expense increased $220,000 (0.8%) to $28,556,000 mainly due to a
$903,000 (5.0%) increase in base salaries and a $188,000 (2.6%) increase in
benefits expense that were partially offset by an $871,000 (29.7%) decrease
incentive compensation. Other noninterest expense increased $631,000 (2.8%)
primarily due to a $1,084,000 increase in provision for losses on unfunded
commitments.
Provision for Income Tax
The effective tax rate for the three months ended September 30, 2008 was 39.6%
and reflects no change from 39.6% for the three months ended September 30, 2007.
The effective tax rate for the nine months ended September 30, 2008 was 38.3%
and reflects a decrease from 39.5% for the nine months ended September 30, 2007.
The provision for income taxes for all periods presented is primarily
attributable to the respective level of earnings and the incidence of allowable
deductions, particularly from increase in cash value of life insurance,
tax-exempt loans and state and municipal securities.
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention regarding collection.
The following is a summary of classified assets on the dates indicated (dollars
in thousands):
At September 30, 2008 At December 31, 2007
---------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
---------------------------------------------------
Classified loans $61,529 $5,545 $55,984 $18,570 $5,948 $12,622
Other classified assets 1,178 - 1,178 187 - 187
---------------------------------------------------
Total classified assets $62,707 $5,545 $57,162 $18,757 $5,948 $12,809
===================================================
Allowance for loan losses/classified loans 43.9% 137.3%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies, increased $44,353,000 (346%) to
$57,162,000 at September 30, 2008 from $12,809,000 at December 31, 2007.
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.
25
Interest income on nonaccrual loans, which would have been recognized during the
nine months ended September 30, 2008, if all such loans had been current in
accordance with their original terms, totaled $1,759,000. Interest income
actually recognized on these loans during the nine months ended September 30,
2008 was $882,000.
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.
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 $10,521,000 (136.7%) to $18,219,000 during the first nine
months of 2008. Nonperforming assets net of guarantees represented 0.92% of
total assets at September 30, 2008. All nonaccrual loans are considered to be
impaired when determining the need for a specific valuation allowance. The
Company continues to make a concerted effort to work problem and potential
problem loans to reduce risk of loss.
At September 30, 2008 At December 31, 2007
------------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
------------------------------------------------------
(dollars in thousands)
Performing nonaccrual loans $14,534 $5,419 $9,115 $9,098 $5,814 $3,284
Nonperforming, nonaccrual loans 7,552 - 7,552 4,227 - 4,227
------------------------------------------------------
Total nonaccrual loans 22,086 5,419 16,667 13,325 5,814 7,511
Loans 90 days past due and still accruing 374 - 374 - - -
------------------------------------------------------
Total nonperforming loans 22,460 5,419 17,041 13,325 5,814 7,511
Other real estate owned 1,178 - 1,178 187 - 187
------------------------------------------------------
Total nonperforming assets $23,638 $5,419 $18,219 $13,512 $5,814 $7,698
======================================================
Nonperforming loans to total loans 1.09% 0.48%
Nonperforming assets to total assets 0.92% 0.39%
Allowance for loan losses/nonperforming loans 144% 231%
Assets
During the first nine months of 2008, total assets decreased $4,154,000 (0.2%)
to $1,967,467,000 from $1,980,621,000 at December 31, 2007. This decrease in
assets primarily reflects a decrease in cash and cash equivalents of $21,498,000
and a $7,257,000 increase in allowance for loan losses that were partially
offset by a $9,473,000 increase in securities available for sale and an
$11,270,000 increase in loans. The decrease in cash and cash equivalents is
reflective of a seasonal effect whereby the Company experiences a spike up in
deposits during the year-end holiday season. Historically, this year-end spike
up in deposits lasts only a week or two, can be as high as several tens of
millions of dollars, and appears to be the result of holiday seasons shopping
and increases in deposit balances of the Company's business customers. The
following table shows the Company's loan balances, including net deferred loan
costs:
September 30, December 31,
2008 2007
(dollars in thousands) ----------------------------
Commercial, financial and agricultural $189,837 $164,815
Consumer installment 513,132 535,819
Real estate mortgage 770,553 716,013
Real estate construction 89,714 135,319
----------------------------
Total loans $1,563,236 $1,551,966
============================
26
Liabilities
During the first nine months of 2008, total liabilities decreased $6,378,000
(0.4%) to $1,785,365,000 from $1,791,743,000 at December 31, 2007. This decrease
in liabilities primarily reflects a decrease in other borrowings of $36,253,000
that was partially offset by an $18,618,000 increase in deposits and an
$11,000,000 increase in Federal funds purchased. The decrease in other
borrowings is due to the maturity and repayment of $20,000,000 of term
borrowings from the FHLB in April 2008, and $16,253,000 of net reductions in
other overnight collateralized borrowings. The increase in deposits is primarily
due to a $40,000,000 increase in certificate of deposits from the State of
California to $80,000,000 during March of 2008 that was partially offset by
seasonal fluctuations in deposits, including the year-end fluctuation noted in
the description of Assets above. The Bank participates in a deposit program
offered by the State of California whereby the State may make deposits at the
Bank's request subject to collateral and credit worthiness constraints. The
negotiated rates on these State deposits are generally more favorable than other
wholesale funding sources available to the Bank.
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 September 30, 2008, 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
$191,102,000 at September 30, 2008. This amount represents a increase of
$2,224,000 from December 31, 2007, the net result of comprehensive income for
the period of $11,654,000 and the effect of stock option vesting of $502,000
partially offset by the repurchase of common stock with value of $2,821,000,
dividends paid of $6,145,000, the cumulative effect of a change in accounting
principle, net of tax, of $522,000, and a $444,000 reversal of tax benefit from
the exercise of stock options. The Company's ratio of equity to total assets was
9.67%, 9.35%, and 9.54% as of September 30, 2008, September 30, 2007, and
December 31, 2007, respectively.
The following summarizes the ratios of capital to risk-adjusted assets for the
periods indicated:
At September 30, At Minimum Well Capitalized
---------------- December 31, Regulatory by Regulatory
2008 2007 2007 Requirement Definition
------------------------------------------------------------
Tier I Capital 11.13% 10.68% 10.90% 4.00% 6.00%
Total Capital 12.38% 11.66% 11.90% 8.00% 10.00%
Leverage ratio 11.08% 11.28% 11.16% 4.00% 5.00%
Liquidity
The discussion of "Liquidity" under Item 3 of this report is incorporated herein
by reference.
Off-Balance Sheet Items
The Bank has certain ongoing commitments under operating and capital leases. As
of September 30, 2008 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 $653,764,000 and $690,633,000 at
September 30, 2008 and December 31, 2007, respectively, and represent 41.8% and
44.5% of the total loans outstanding at September 30, 2008 and December 31,
2007, respectively. Commitments related to the Bank's deposit overdraft
privilege product totaled $37,997,000 and $33,517,000 at September 30, 2008 and
December 31, 2007, respectively.
27
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 September 30, 2008, the results of the simulations noted above indicate that
given a "flat" balance sheet scenario, and if deposit rates track general
interest rate changes by approximately 50%, the Company's balance sheet is
slightly liability sensitive. "Liability sensitive" implies that earnings
decrease when interest rates rise, and increase when interest rates decrease.
The magnitude of all the simulation results noted above is within the Bank's
policy guidelines. The asset liability management policy limits aggregate market
risk, as measured in this fashion, to an acceptable level within the context of
risk-return trade-offs.
The simulation results noted above do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
At September 30, 2008 and 2007, the Company had no material derivative financial
instruments.
28
Liquidity
The Company's principal source of asset liquidity is federal funds sold and
marketable investment securities available for sale. At September 30, 2008,
federal funds sold and investment securities available for sale totaled
$241,900,000, representing an increase of $9,473,000 (4.1%) from December 31,
2007, and an increase of $2,170,000 (0.9%) from September 30, 2007. In addition,
the Company generates additional liquidity from its operating activities. The
Company's profitability during the first nine months of 2008 generated cash
flows from operations of $27,930,000 compared to $23,518,000 during the first
nine months of 2007. 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
$38,938,000 during the nine months ended September 30, 2008 compared to
$38,954,000 for the nine months ended September 30, 2007. During the nine months
ended September 30, 2008, the Company invested $50,219,000 and $20,538,000 in
securities and net loan principal increases, respectively, compared to
$78,822,000 and $26,841,000 in securities and net loan principal increases,
respectively, during the first nine months of 2007. These changes in investment
and loan balances contributed to net cash used by investing activities of
$33,383,000 during the nine months ended September 30, 2008, compared to net
cash used by investing activities of $69,640,000 during the nine months ended
September 30, 2007. Financing activities used net cash of $16,045,000 during the
nine months ended September 30, 2008, compared to net cash provided by financing
activities of $14,387,000 during the nine months ended September 30, 2007.
Deposit balance increases accounted for $18,618,000 of financing sources of
funds during the nine months ended September 30, 2008, compared to $67,007,000
of funds used by decreases in deposits during the nine months ended September
30, 2007. A net decrease in short-term other borrowings accounted for
$36,195,000 of financing uses of funds during the nine months ended September
30, 2008, compared to $10,136,000 of funds provided by an increase in short-term
other borrowings during the nine months ended September 30, 2007. Dividends paid
used $6,145,000 and $6,201,000 of cash during the nine months ended September
30, 2008 and 2007, respectively. An increase in Federal funds purchased provided
$11,000,000 and $28,000,000 of cash during the nine months ended September 30,
2008 and 2007, respectively. 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 September 30, 2008 ("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 nine months of 2008 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
29
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, 2007 other than as follows:
The Corporation may be adversely affected by the soundness of other financial
institutions.
Financial services institutions are interrelated as a result of clearing,
counterparty, or other relationships. The Corporation has exposure to many
different industries and counterparties, and routinely executes transactions
with counterparties in the financial services industry, including commercial
banks, brokers and dealers, and other institutional clients. Many of these
transactions expose the Corporation to credit risk in the event of a default by
a counterparty or client. In addition, the Corporation's credit risk may be
exacerbated when the collateral held by the Corporation cannot be realized upon
or is liquidated at prices not sufficient to recover the full amount of the
credit or derivative exposure due to the Corporation. Any such losses could have
a material adverse affect on the Corporation's financial condition and results
of operations.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing extreme volatility and
disruption for more than 12 months. In recent weeks, the volatility and
disruption have reached unprecedented levels. In some cases, the markets have
exerted downward pressure on stock prices, security prices and credit capacity
for certain issuers without regard to those issuers' underlying financial
strength. If the current levels of market disruption and volatility continue or
worsen, there can be no assurance that we will not experience adverse effects,
which may be material, on our ability to access capital and on our results of
operations.
The Corporation and the Bank could be aversely affected by new regulations.
Federal and state governments and regulators could pass legislation and adopt
policies responsive to current credit conditions that would have an adverse
affect on the Company and its financial performance. For example, the Company
could experience higher credit losses because of federal or state legislation or
regulatory action that limits the Bank's ability to foreclose on property or
other collateral or makes foreclosure less economically feasible.
The Federal Deposit Insurance Corporation ("FDIC") insures deposits at FDIC
insured financial institutions up to certain limits. The FDIC charges insured
financial institutions premiums to maintain the Deposit Insurance Fund. Due to
recent bank failures, the FDIC insurance fund reserve ratio has fallen below
statutory minimums. The FDIC has developed a proposed restoration plan that will
uniformly increase insurance assessments by 7 basis points (annualized) and also
proposes changes to the deposit insurance assessment system requiring riskier
institutions to pay a larger share. If the FDIC adopts this or a similar plan,
the Bank could be required to pay higher premiums for deposit insurance.
The Emergency Economic Stabilization Act of 2008 included a provision for an
increase in the amount of deposits insured by the FDIC to $250,000. On October
14, 2008, the FDIC announced a new program -- the Temporary Liquidity Guarantee
Program that provides unlimited deposit insurance on funds in
noninterest-bearing transaction deposit accounts not otherwise covered by the
existing deposit insurance limit of $250,000. All eligible institutions will be
covered under the program for the first 30 days without incurring any costs.
After the initial period, participating institutions will be assessed a 10 basis
point surcharge on the additional insured deposits.
There are no other material changes to the risk factors disclosed in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
30
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 second quarter of 2008 pursuant to the Company's stock
repurchase plan adopted on August 21, 2007, which is discussed in more detail
under "Capital Resources" in this report and is incorporated herein by
reference:
Period (a) Total number (b) Average price (c) Total number of (d) Maximum number
of shares purchased paid per share shares purchased as of shares that may yet
part of publicly be purchased under the
announced plans or plans or programs
programs
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
July 1-31, 2008 - - - 333,400
Aug. 1-31, 2008 - - - 333,400
Sep. 1-30, 2008 - - - 333,400
---------------------------------------------------------------------------------------------------
Total - - - 333,400
Item 6 - Exhibits
31.2 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
32.1 Section 1350 Certification of CEO
32.2 Section 1350 Certification of CFO
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRICO BANCSHARES
(Registrant)
Date: November 7, 2008 /s/Thomas J. Reddish
--------------------
Thomas J. Reddish
Executive Vice President and Chief Financial Officer
(Principal financial officer)
31
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 quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly 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 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 quarterly 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 quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly 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 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 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:
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 7, 2008 /s/Richard P. Smith
--------------------
Richard P. Smith
President and Chief Executive Officer
32
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of CFO
I, Thomas J. Reddish, certify that;
1. I have reviewed this quarterly report on Form 10-Q of TriCo
Bancshares;
2. Based on my knowledge, this quarterly 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 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 quarterly 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 quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this quarterly 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 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 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:
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial data;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 7, 2008 /s/Thomas J. Reddish
---------------------
Thomas J. Reddish
Executive Vice President and
Chief Financial Officer
33
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 September 30, 2008 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 September 30, 2008 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.
34