Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended: March 31, 2012

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from            to             .

Commission File Number: 000-10661

 

 

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

CALIFORNIA   94-2792841

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

63 Constitution Drive

Chico, California 95973

(Address of Principal Executive Offices)(Zip Code)

(530) 898-0300

(Registrant’s Telephone Number, Including Area Code)

 

 

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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:

Common stock, no par value: 15,982,958 shares outstanding as of May 4, 2012

 

 

 


Table of Contents

TriCo Bancshares

FORM 10-Q

TABLE OF CONTENTS

 

     Page  

Forward-Looking Statements

     1   

PART I – FINANCIAL INFORMATION

     2   

Item 1 – Financial Statements

     2   

Financial Summary

     44   

Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     45   

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

     61   

Item 4 – Controls and Procedures

     61   

PART II – OTHER INFORMATION

     61   

Item 1 – Legal Proceedings

     61   

Item 1A – Risk Factors

     62   

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     62   

Item 5 – Other Information

     62   

Item 6 – Exhibits

     63   

Signatures

     64   

Exhibits

  


Table of Contents

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the “Company”) that are subject to the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current knowledge and belief of the Company’s management (“Management”) and include information concerning the Company’s possible or assumed future financial condition and results of operations. When you see any of the words “believes”, “expects”, “anticipates”, “estimates”, or similar expressions, it may mean the Company is making forward-looking statements. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. The reader is directed to the Company’s annual report on Form 10-K for the year ended December 31, 2011, 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.

 

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TRICO BANCSHARES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data; unaudited)

 

     At March 31,
2012
    At December 31,
2011
 

Assets:

    

Cash and due from banks

   $ 74,542      $ 73,652   

Cash at Federal Reserve and other banks

     607,218        563,623   
  

 

 

   

 

 

 

Cash and cash equivalents

     681,760        637,275   

Securities available-for-sale

     212,157        229,223   

Restricted equity securities

     10,508        10,610   

Loans held for sale

     5,869        10,219   

Loans

     1,511,085        1,551,032   

Allowance for loan losses

     (45,452     (45,914
  

 

 

   

 

 

 

Total loans, net

     1,465,633        1,505,118   

Foreclosed assets, net

     14,789        16,332   

Premises and equipment, net

     19,814        19,893   

Cash value of life insurance

     50,853        50,403   

Interest receivable

     7,095        7,312   

Goodwill

     15,519        15,519   

Other intangible assets, net

     1,248        1,301   

Mortgage servicing rights

     4,784        4,603   

Indemnification asset

     3,405        4,405   

Other assets

     39,474        43,384   
  

 

 

   

 

 

 

Total assets

   $ 2,532,908      $ 2,555,597   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 564,143      $ 541,276   

Interest-bearing

     1,605,603        1,649,260   
  

 

 

   

 

 

 

Total deposits

     2,169,746        2,190,536   

Interest payable

     1,587        1,674   

Reserve for unfunded commitments

     2,550        2,740   

Other liabilities

     29,675        30,427   

Other borrowings

     69,074        72,541   

Junior subordinated debt

     41,238        41,238   
  

 

 

   

 

 

 

Total liabilities

     2,313,870        2,339,156   
  

 

 

   

 

 

 

Commitments and contingencies (Note 18)

    

Shareholders’ equity:

    

Common stock, no par value: 50,000,000 shares authorized; issued and outstanding:

    

15,978,958 at March 31, 2012

     84,336     

15,978,958 at December 31, 2011

       84,079   

Retained earnings

     131,044        128,551   

Accumulated other comprehensive income, net of tax

     3,658        3,811   
  

 

 

   

 

 

 

Total shareholders’ equity

     219,038        216,441   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,532,908      $ 2,555,597   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data; unaudited)

 

     Three months ended
March 31,
 
     2012     2011  

Interest and dividend income:

    

Loans, including fees

   $ 24,929      $ 21,722   

Debt securities:

    

Taxable

     1,746        2,374   

Tax exempt

     108        140   

Dividends

     13        7   

Interest bearing cash at

    

Federal Reserve and other banks

     368        191   
  

 

 

   

 

 

 

Total interest and dividend income

     27,164        24,434   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     1,184        1,827   

Other borrowings

     606        593   

Junior subordinated debt

     338        310   
  

 

 

   

 

 

 

Total interest expense

     2,128        2,730   
  

 

 

   

 

 

 

Net interest income

     25,036        21,704   

Provision for loan losses

     3,996        7,001   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     21,040        14,703   
  

 

 

   

 

 

 

Noninterest income:

    

Service charges and fees

     5,952        5,782   

Gain on sale of loans

     1,650        725   

Commissions on sale of non-deposit investment products

     819        360   

Increase in cash value of life insurance

     450        450   

Other

     (606     2,033   
  

 

 

   

 

 

 

Total noninterest income

     8,265        9,350   
  

 

 

   

 

 

 

Noninterest expense:

    

Salaries and related benefits

     12,762        10,793   

Other

     10,153        8,878   
  

 

 

   

 

 

 

Total noninterest expense

     22,915        19,671   
  

 

 

   

 

 

 

Income before income taxes

     6,390        4,382   
  

 

 

   

 

 

 

Provision for income taxes

     2,459        1,582   
  

 

 

   

 

 

 

Net income

   $ 3,931      $ 2,800   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.25      $ 0.18   

Diluted

   $ 0.25      $ 0.17   

The accompanying notes are an integral part of these consolidated financial statements.

 

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands; unaudited)

 

     Three months ended
March 31,
 
     2012     2011  

Net income

   $ 3,931      $ 2,800   

Other comprehensive income, net of tax:

    

Unrealized holding losses on securities arising during the period

     (153     (224
  

 

 

   

 

 

 

Other comprehensive loss

     (153     (224
  

 

 

   

 

 

 

Comprehensive income

   $ 3,778      $ 2,576   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data; unaudited)

 

     Shares of
Common
Stock
     Common
Stock
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  

Balance at December 31, 2010

     15,860,138       $ 81,554       $ 117,533      $ 1,310      $ 200,397   

Comprehensive income:

            

Net income

           2,800          2,800   

Other comprehensive loss

             (224     (224

Stock option vesting

        265             265   

Dividends paid ($0.09 per share)

           (1,427       (1,427
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

     15,860,138       $ 81,819       $ 118,906      $ 1,086      $ 201,811   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     15,978,958       $ 84,079       $ 128,551      $ 3,811      $ 216,441   

Comprehensive income:

            

Net income

           3,931          3,931   

Other comprehensive loss

             (153     (153

Stock option vesting

        257             257   

Dividends paid ($0.09 per share)

           (1,438       (1,438
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     15,978,958       $ 84,336       $ 131,044      $ 3,658      $ 219,038   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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TRICO BANCSHARES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

 

     For the three months ended March 31,  
     2012     2011  

Operating activities:

    

Net income

   $ 3,931      $ 2,800   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation of premises and equipment, and amortization

     1,765        830   

Amortization of intangible assets

     53        85   

Provision for loan losses

     3,996        7,001   

Amortization of investment securities premium, net

     329        377   

Originations of loans for resale

     (58,041     (32,499

Proceeds from sale of loans originated for resale

     63,491        35,131   

Gain on sale of loans

     (1,650     (725

Change in market value of mortgage servicing rights

     369        60   

Provision for losses on foreclosed assets

     83        449   

Loss (gain) on sale of foreclosed assets

     358        (200

Loss on disposal of fixed assets

     235        9   

Increase in cash value of life insurance

     (450     (450

Stock option vesting expense

     257        265   

Change in reserve for unfunded commitments

     (190     50   

Change in:

    

Interest receivable

     217        190   

Interest payable

     (87     (107

Other assets and liabilities, net

     3,522        (2,951
  

 

 

   

 

 

 

Net cash from operating activities

     18,188        10,315   
  

 

 

   

 

 

 

Investing activities:

    

Proceeds from maturities of securities available-for-sale

     20,060        22,139   

Purchases of securities available-for-sale

     (3,588     (25,456

Net redemption of restricted equity securities

     102        —     

Loan principal (increases) decreases, net

     33,795        24,056   

Proceeds from sale of foreclosed assets

     3,021        2,205   

Improvements of foreclosed assets

     (225     (17

Proceeds from sale of premises and equipment

     —          1   

Purchases of premises and equipment

     (1,173     (88
  

 

 

   

 

 

 

Net cash from investing activities

     51,992        22,840   
  

 

 

   

 

 

 

Financing activities:

    

Net (decrease) increase in deposits

     (20,790     7,739   

Net change in short-term other borrowings

     (3,467     (4,239

Dividends paid

     (1,438     (1,427
  

 

 

   

 

 

 

Net cash from financing activities

     (25,695     2,073   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     44,485        35,228   
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     637,275        371,066   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 681,760      $ 406,294   
  

 

 

   

 

 

 

Supplemental disclosure of noncash activities:

    

Loans transferred to other real estate owned

   $ 1,694      $ 1,523   

Unrealized net loss on securities available for sale

   $ (265   $ (387

Supplemental disclosure of cash flow activity:

    

Cash paid for interest expense

   $ 2,215      $ 2,837   

Cash paid for income taxes

     —        $ 2,620   

The accompanying notes are an integral part of these consolidated financial statements.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 –Summary of Significant Accounting Policies

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.

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, fair value of assets acquired and liabilities assumed in business combinations, and the valuation of mortgage servicing rights are the only accounting estimates that materially affect the Company’s consolidated financial statements.

As described in Note 2, the Bank assumed the banking operations of two failed financial institutions from the FDIC under whole bank purchase agreements. The acquired assets and assumed liabilities were measured at estimated fair value values as required by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations. The Company made significant estimates and exercised significant judgment in accounting for the acquisitions. The Company determined loan fair values based on loan file reviews, loan risk ratings, appraised collateral values, expected cash flows and historical loss factors. Foreclosed assets were primarily valued based on appraised values of the repossessed loan collateral. An identifiable intangible was also recorded representing the fair value of the core deposit customer base based on an evaluation of the cost of such deposits relative to alternative funding sources. The fair value of time deposits and borrowings were determined based on the present value of estimated future cash flows using current rates as of the acquisition date.

Significant Group Concentration of Credit Risk

The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into one business segment that it denotes as community banking.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold.

Investment Securities

The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the three months ended March 31, 2012 and the year ended December 31, 2011, 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 are derived from the amortized cost of the security sold.

The Company assesses other-than-temporary impairment (“OTTI”) based on whether it intends to sell a security or if it is likely that the Company would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. The accretion of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above. No OTTI losses were recognized during the three months ended March 31, 2012 and the year ended December 31, 2011.

 

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Restricted Equity Securities

Restricted equity securities represent the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”) and are carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. The Company may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.

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 noninterest income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on the sale of loans that are held for sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights.

Loans and Allowance for Loan Losses

Loans originated by the Company, i.e., not purchased or acquired in a business combination, are referred to as originated loans. Originated loans are reported at the principal amount outstanding, net of deferred loan fees and costs. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield over the actual life of the loan. Originated loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.

Originated loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal, or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the process of collection. When an originated 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 loan is estimated to be fully collectible as to both principal and interest.

An allowance for loan losses for originated loans is established through a provision for loan losses charged to expense. Originated loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectability 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 collectability, 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 an originated 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 originated 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.

In situations related to originated loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that result in the loan being classified as a TDR, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with respect to their restructured principal balance.

 

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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 originated loan portfolio. This is maintained through periodic charges to earnings. These charges are included in the Consolidated Statements of Income 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 originated loan losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio.

The Company formally assesses the adequacy of the allowance for originated loan losses on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding originated loan portfolio, and to a lesser extent the Company’s originated loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.

The Company’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for impaired originated 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 were based on historical loss experience by product type and prior risk rating. For the period ended March 31, 2012, management changed some of the assumptions utilized in the Allowance for Loan Losses estimate calculation. These changes were intended to more accurately reflect the current risk in the loan portfolio and to better estimate the losses inherent but not yet quantifiable. These changes included the conversion to a historical loss migration analysis intended to better determine the appropriate formula reserve ratio by loan category and risk rating, the addition of an environmental factor related to the delinquency rate of loans not classified as impaired by loan category, the elimination of an unspecified reserve allocation previously intended to account for imprecision inherent in the overall calculation, and the reclassification of risk rating of certain consumer loans based on current credit score in an attempt to better identify the risk in the portfolio. The financial effect of these changes resulted in a net reduction in the calculated Allowance for Loan Losses of $1,388,000. Allowances for impaired 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 originated loan portfolio as a whole. The allowance for originated loans is included in the allowance for loan losses.

Loans purchased or acquired in a business combination are referred to as acquired loans. Acquired loans are valued as of acquisition date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805, Business Combinations. Loans acquired with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI) loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. Default rates, loss severity, and prepayment speed assumptions are periodically reassessed and our estimate of future payments is adjusted accordingly. The difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The difference between estimated future payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable yield represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be more than the originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining estimated life of the loan. If, after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be less than the previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous present value however, the discount rate may not be lowered below its original level at acquisition. If the discount rate has been lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans on nonaccrual status are accounted for using the cost recovery method or cash basis method of income recognition. PCI loans are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan. The Company elected to use the “pooled” method of ASC 310-30 for PCI – other loans in both the Citizens and Granite acquisitions.

Acquired loans that are not PCI loans are referred to as purchased not credit impaired (PNCI) loans. PNCI loans are accounted for under FASB ASC Topic 310-20, Receivables – Nonrefundable Fees and Other Costs, in which interest income is accrued on a level-yield basis for performing loans. For income recognition purposes, this method assumes that all contractual cash flows will be collected, and no

 

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allowance for loan losses is established at the time of acquistion. Post-acquisition date, an allowance for loan losses may need to be established for acquired loans through a provision charged to earnings for credit losses incurred subsequent to acquisition. Under ASC 310-20, the loss would be measured based on the probable shortfall in relation to the contractual note requirements, consistent with our allowance for loan loss policy for similar loans.

When referring to PNCI and PCI loans we will use the terms “nonaccretable difference”, “accretable yield”, or “purchase discount”. Nonaccretable difference is the difference between undiscounted contractual cash flows due and undiscounted cash flows we expect to collect, or put another way, it is the undiscounted contractual cash flows we do not expect to collect. Accretable yield is the difference between undiscounted cash flows we expect to collect and the value at which we have recorded the loan on our financial statements. On the date of acquisition, all purchased loans are recorded on our consolidated financial statements at estimated fair value. Purchase discount is the difference between the estimated fair value of loans on the date of acquisition and the principal amount owed by the borrower, net of charge offs, on the date of acquisition. We may also refer to “discounts to principal balance of loans owed, net of charge-offs”. Discounts to principal balance of loans owed, net of charge-offs is the difference between principal balance of loans owed, net of charge-offs, and loans as recorded on our financial statements. Discounts to principal balance of loans owed, net of charge-offs arise from purchase discounts, and equal the purchase discount on the acquisition date.

Loans are also categorized as “covered” or “noncovered”. Covered loans refer to loans covered by a Federal Deposit Insurance Corporation (“FDIC”) loss sharing agreement. Noncovered loans refer to loans not covered by a FDIC loss sharing agreement.

Foreclosed Assets

Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value less estimated costs to sell 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. Foreclosed assets that are not subject to a FDIC loss-share agreement are referred to as noncovered foreclosed assets.

Foreclosed assets acquired through FDIC-assisted acquisitions that are subject to a FDIC loss-share agreement, and all assets acquired via foreclosure of covered loans are referred to as covered foreclosed assets. Covered foreclosed assets are reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered foreclosed assets at the loan’s carrying value, inclusive of the acquisition date fair value discount.

Covered foreclosed assets are initially recorded at estimated fair value less estimated costs to sell on the acquisition date based on similar market comparable valuations less estimated selling costs. Any subsequent valuation adjustments due to declines in fair value will be charged to noninterest expense, and will be mostly offset by noninterest income representing the corresponding increase to the FDIC indemnification asset for the offsetting loss reimbursement amount. Any recoveries of previous valuation adjustments will be credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to the FDIC.

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.

Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.

The Company has identifiable intangible assets consisting of core deposit intangibles (CDI) and minimum pension liability. CDI 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.

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 consolidated balance sheet.

 

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As of December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Currently, and historically, the Company is comprised of only one reporting unit that operates within the business segment it has identified as “community banking”.

Mortgage Servicing Rights

Mortgage servicing rights (MSR) represent the Company’s right to a future stream of cash flows based upon the contractual servicing fee associated with servicing mortgage loans. Our MSR arise from residential mortgage loans that we originate and sell, but retain the right to service the loans. For sales of residential mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on the fair values of the loan and the servicing right. The net gain from the retention of the servicing right is included in gain on sale of loans in noninterest income when the loan is sold. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. MSR are included in other assets. Servicing fees are recorded in noninterest income when earned.

The determination of fair value of our MSR requires management judgment because they are not actively traded. The determination of fair value for MSR 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 MSR, which we believe are consistent with assumptions used by market participants valuing similar MSR, and from data obtained on the performance of similar MSR. The key assumptions used in the valuation of MSR 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 MSR are prepayment speed and changes in interest rates. The Company uses an independent third party to determine fair value of MSR.

Indemnification Asset

The Company has elected to account for amounts receivable under loss-share agreements with the FDIC as indemnification assets in accordance with FASB ASC Topic 805, Business Combinations. FDIC indemnification assets are initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the fair value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted into noninterest income over the life of the FDIC indemnification asset. FDIC indemnification assets are reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolios. These adjustments are measured on the same basis as the related covered loans and covered other real estate owned. Any increases in cash flow of the covered assets over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is established through a provision for losses – unfunded commitments charged to noninterest expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits, and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectability, 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.

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.

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.

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that area of California north of, and including, Stockton; central California as that area of the state south of Stockton, to and including, Bakersfield; and southern California as that area of the state south of Bakersfield.

 

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Reclassifications

Certain amounts reported in previous consolidated financial statements have been reclassified to conform to the presentation in this report. These reclassifications did not affect previously reported net income or total shareholders’ equity.

Recent Accounting Pronouncements

FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This Update provides additional guidance relating to when creditors should classify loan modifications as troubled debt restructurings. This Update also ends the deferral issued in January 2010 of the disclosures about troubled debt restructurings required by ASU No. 2010-20. The provisions of ASU No. 2011-02 and the disclosure requirements of ASU No. 2010-20 are effective for the Company’s interim reporting period ending September 30, 2011. The guidance applies retrospectively to restructurings occurring on or after January 1, 2011. The adoption of this Update did not have a material impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. This Update is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 amends Topic 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income. ASU 2011-05 amends Topic 220, Comprehensive Income, to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment. ASU 2011-08 amends Topic 350, Intangibles – Goodwill and Other, to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim impairment tests beginning after December 15, 2011, and did not have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2011-11, Balance Sheet—Disclosures about Offsetting Assets and Liabilities (Topic 210). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Update is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB issued ASU 2011-12, Comprehensive Income—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 updates and supersedes certain pending paragraphs relating to the presentation on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. This Update is effective concurrent with ASU 2011-05, and did not have a significant impact on the Company’s consolidated financial statements.

 

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Note 2—Business Combinations

On September 23, 2011, the California Department of Financial Institutions closed Citizens Bank of Northern California (“Citizens”), Nevada City, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Citizens from the FDIC under a whole bank purchase and assumption agreement without loss sharing. With this agreement, the Bank added one administration building and seven traditional bank branches, including two in Grass Valley, and one in each of Nevada City, Penn Valley, Lake of the Pines, Truckee, and Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and provides further opportunity to fill in the Bank’s market presence in the Northern California market.

The assets acquired and liabilities assumed for the Citizens acquisition have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The fair values of the assets acquired and liabilities assumed were determined based on the requirements of the Fair Value Measurements and Disclosures topic of the FASB ASC. The tax treatment of FDIC assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date. The terms of the agreement provide for the FDIC to indemnify the Bank against claims with respect to liabilities of Citizens not assumed by the Bank and certain other types of claims identified in the agreement. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $7,575,000 in the Citizens acquisition.

A summary of the net assets received in the Citizens acquisition, at their estimated fair values, is presented below:

 

     Citizens  
(In thousands)    September 23, 2011  

Asset acquired:

  

Cash and cash equivalents

   $ 80,707   

Securities available-for-sale

     9,353   

Restricted equity securities

     1,926   

Loans

     167,484   

Core deposit intangible

     898   

Foreclosed assets

     8,412   

Other assets

     1,524   
  

 

 

 

Total assets acquired

   $ 270,304   
  

 

 

 

Liabilities assumed:

  

Deposits

   $ 239,899   

Other borrowings

     22,038   

Other liabilities

     792   
  

 

 

 

Total liabilities assumed

   $ 262,729   
  

 

 

 

Net assets acquired/bargain purchase gain

   $ 7,575   
  

 

 

 

In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer. In the Citizens acquisition, net assets with a cost basis of $26,682,000 were transferred to the Bank. In the Citizens acquisition, the Company recorded a bargain purchase gain of $7,575,000 representing the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

A summary of the estimated fair value adjustments resulting in the bargain purchase gain in the Citizens acquisition are presented below:

 

     Citizens  
(In thousands)    September 23, 2011  

Cost basis net assets acquired

   $ 26,682   

Cash payment received from FDIC

     44,140   

Fair value adjustments:

  

Cash and cash equivalents

     539   

Loans

     (57,745

Foreclosed assets

     (5,609

Core deposit intangible

     898   

Deposits

     (382

Borrowings

     (28

Other

     (920
  

 

 

 

Bargain purchase gain

   $ 7,575   
  

 

 

 

 

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The Bank acquired only certain assets and assumed certain liabilities of Citizens. A significant portion of Citizens’s operations, its facilities and its central operations and administrative functions were not retained by the Bank. Therefore, disclosure of supplemental pro forma financial information, especially prior period comparison is deemed neither practical nor meaningful given the troubled nature of Citizens prior to the date of acquisition. The Bank did not immediately acquire all the banking facilities, furniture or equipment of Citizens as part of the purchase and assumption agreement. However, the Bank had the option to lease the real estate and purchase the furniture and equipment from the FDIC. The term of this option expired 90 days from the acquisition date. Prior to the expiration of the option, the Bank agreed to purchase essentially all of the furniture and equipment, and assume all of the property leases except for the administration building and Citizen’s Auburn branch. During the three months ended March 31, 2012, the Bank transferred the operations of Citizen’s Auburn branch to the Bank’s existing branch in Auburn, and vacated the Citizen’s administration building.

The Company identified the loans acquired in the Citizens acquisition as either PNCI or PCI loans. The Company identified certain of the Citizens PCI loans as having cash flows that were not reasonably estimable and elected to place these loans in nonaccrual status under the cash basis method for income recognition (“PCI – cash basis” loans). The Company elected to use the ASC 310-30 “pooled” method of accounting for all other Citizens PCI loans (“PCI – other” loans).

The following table presents a reconciliation of the undiscounted contractual cash flows, nonaccretable difference, accretable yield, fair value, purchase discount, and principal balance of loans for the various categories of Citizens PNCI and PCI loans as of the acquisition date. For PCI loans, the purchase discount does not necessarily represent cash flows to be collected as a portion of it is a nonaccretable difference:

 

     Citizens Loans – September 23, 2011  
(In thousands)    PNCI     PCI -
other
    PCI -
cash basis
    Total  

Undiscounted contractual cash flows

   $ 230,106      $ 69,346      $ 35,205      $ 334,657   

Undiscounted cash flows not expected to be collected (nonaccretable difference)

     —          (26,846     (24,517     (51,363
  

 

 

   

 

 

   

 

 

   

 

 

 

Undiscounted cash flows expected to be collected

     230,106        42,500        10,688        283,295   

Accretable yield at acquisition

     (105,664     (10,146     —          (115,810
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated fair value of loans acquired at acquisition

     124,442        32,354        10,688        167,484   

Purchase discount

     20,364        23,207        14,174        57,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

Principal balance loans acquired

   $ 144,806      $ 55,561      $ 24,863      $ 225,229   
  

 

 

   

 

 

   

 

 

   

 

 

 

In estimating the fair value of Citizens PNCI loans at the acquisition date, the Company calculated the contractual amount and timing of undiscounted principal and interest payments on an individual loan basis and then discounted those cash flows using an appropriate market rate of interest adjusted for liquidity and credit loss risks inherent in each loan. The Citizens PNCI loans expected accretable yield above represents undiscounted interest, and along with the purchase discount, is accounted for using an effective interest method consistent with our accounting for originated loans.

In estimating the fair value of Citizens PCI – cash basis loans at the acquisition date, the Company calculated the contractual amount and timing of undiscounted principal and interest payments and estimated the amount of undiscounted expected principal recovery using historic loss rates or estimated collateral values if applicable. The difference between these two amounts represents the nonaccretable difference. The Company used its estimate of the amount of undiscounted expected principal recovery as the fair value of the Citizens PCI – cash basis loans, and placed these loans in nonaccrual status. Interest income and principal reductions on these PCI – cash basis loans are recorded only when they are received. At each financial reporting date, the carrying value of each PCI – cash basis loan is compared to an updated estimate of expected principal payment or recovery for each loan. To the extent that the loan carrying amount exceeds the updated expected principal payment or recovery, a provision for loan loss would be recorded as a charge to income and an allowance for loan loss established.

In estimating the fair value of Citizens PCI – other loans at the acquisition date, the Company calculated the contractual amount and timing of undiscounted principal and interest payments and estimated the amount and timing of undiscounted expected principal and interest payments. The difference between these two amounts represents the nonaccretable difference. On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. For PCI loans the accretable yield is accreted into interest income over the life of the estimated remaining cash flows. For further information regarding the accounting for PCI – other loans, and acquired loans in general, see the discussion under the heading “Loans and Allowance for Loan Losses” in Note 1 above.

 

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The following table presents the contractual maturity schedule of loans acquired in the Citizens acquisition and provides separate analyses with respect to fixed rate loans and floating rate loans as of September 23, 2011:

 

     Maturing  
(In thousands)    Due
Within one
year
     Due after
one through
five years
     Due after
five years
     Total      % of
total loans
 

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 155       $ 362       $ 2,467       $ 2,984         1.3

Commercial

     7,131         20,563         104,169         131,863         58.5
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loan on real estate

     7,286         20,925         106,636         134,847         59.8

Consumer:

              

Home equity lines of credit

     16,907         16,129         16,954         49,990         22.2

Home equity loans

     —           387         636         1,023         0.5

Auto Indirect

     3         102         —           105         0.0

Other

     36         431         3,726         4,193         1.9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     16,946         17,049         21,316         55,311         24.6

Commercial

     4,966         11,572         1,389         17,927         8.0

Construction:

              

Residential

     5,187         7,733         191         13,111         5.8

Commercial

     8         1,844         2,181         4,033         1.8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     5,195         9,577         2,372         17,144         7.6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of deferred loan fees

   $ 34,393       $ 59,123       $ 131,713       $ 225,229         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed rate loans

   $ 10,467       $ 17,214       $ 50,232       $ 77,913         34.6

Total variable rate loans

     23,926         41,909         81,481         147,316         65.4
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 34,393       $ 59,123       $ 131,713       $ 225,229         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The weighted average contractual loan yield for Citizens loans acquired on September 23, 2011 was 6.01%.

The Citizens acquisition increased the Bank’s deposits by $239,899,000 on September 23, 2011. The following table shows a summary of the deposits acquired and the weighted average interest rates in effect at the acquisition date:

 

     September 23, 2011  
(In thousands)    Amount      Weighted average
interest rate
 

Noninterest-bearing demand

   $ 79,814         —     

Interest-bearing demand

     37,551         0.02

Savings

     67,379         0.25

Time deposits less than $100,000

     28,714         0.91

Time deposits greater than $100,000

     26,059         1.01

Time deposit fair value adjustment

     382      
  

 

 

    

Total deposits

   $ 239,899      
  

 

 

    

At September 23, 2011, scheduled maturities of Citizens time deposits were as follows:

 

Maturing during the 12-month period ending September 23,    (In thousands)  

2012

   $ 45,250   

2013

     5,858   

2014

     1,074   

2015

     1,180   

Thereafter

     1,411   
  

 

 

 

Total

   $ 54,773   
  

 

 

 

As of September 23, 2011, Citizens had $26,059,000 in time deposits of $100,000 or more. The following table provides the scheduled maturities of these time deposits:

 

Maturing:    (In thousands)  

3 months of less

   $ 9,450   

Over 3 through 6 months

     5,135   

Over 6 through 12 months

     5,998   

Over 12 months

     5,476   
  

 

 

 

Total

   $ 26,059   
  

 

 

 

 

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Table of Contents

The operations of Citizens, included in the Company’s operating results from September 23, 2011 to December 31, 2011, added approximately $6,171,000 and $54,000 to interest income and interest expense, respectively, $1,462,000 to provision for loan losses, $8,029,000 to noninterest income, including a bargain purchase gain of $7,575,000, and $1,865,000 to noninterest expense. Included in the $6,171,000 of Citizens related interest income recorded from September 23, 2011 to December 31, 2011, is $3,146,000 of interest income from fair value discount accretion. Such operating results are not necessarily indicative of future operating results. Citizens’ results of operations prior to the acquisition are not included in the Company’s operating results. As of December 31, 2011, nonrecurring expenses related to the Citizens acquisition were insignificant.

During the three months ended March 31, 2012, the Company completed the conversion of Citizens’ information and data processing systems to the Bank’s systems, and consolidated the Citizens Auburn branch into the Bank’s existing Auburn branch. The operations of Citizens, included in the Company’s operating results from January 1, 2012 to March 31, 2012, added approximately $4,584,000 and $8,000 to interest income and interest expense, respectively, $1,467,000 to provision for loan losses, $145,000 to noninterest income, and $2,354,000 to noninterest expense. Included in the $4,584,000 of Citizens related interest income recorded from January 1, 2012 to March 31, 2012, is $1,972,000 of interest income from fair value discount accretion. Included in the $145,000 of Citizens related noninterest income recorded from January 1, 2012 to March 31, 2012, is a $230,000 loss on disposal of fixed assets related to the system conversion noted above. Included in the $2,354,000 of Citizens related noninterest expense recorded from January 1, 2012 to March 31, 2012, is $415,000 of outside data processing expenses related to the system conversion noted above. Such operating results are not necessarily indicative of future operating results. Citizens’ results of operations prior to the acquisition are not included in the Company’s operating results.

On May 28, 2010, the Office of the Comptroller of the Currency closed Granite Community Bank (“Granite”), Granite Bay, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Granite from the FDIC under a whole bank purchase and assumption agreement with loss sharing. Under the terms of the loss sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, other real estate owned (OREO)/foreclosed assets and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the covered assets acquired from Granite. The loss sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. With this agreement, the Bank added one traditional bank branch in each of Granite Bay, Roseville and Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and provides further opportunity to fill in the Bank’s market presence in the greater Sacramento, California market.

The assets acquired and liabilities assumed for the Granite acquisition have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition dates. The fair values of the assets acquired and liabilities assumed were determined based on the requirements of the Fair Value Measurements and Disclosures topic of the FASB ASC. The tax treatment of FDIC assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date. The terms of the agreements provide for the FDIC to indemnify the Bank against claims with respect to liabilities of Granite not assumed by the Bank and certain other types of claims identified in the agreement. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $232,000 in the Granite acquisition. A summary of the net assets received in the Granite acquisition, at their estimated fair values, is presented below:

 

(In thousands)    Granite  
   May 28, 2010  

Asset acquired:

  

Cash and cash equivalents

   $ 18,764   

Securities available-for-sale

     2,954   

Restricted equity securities

     696   

Covered loans

     64,802   

Premises and equipment

     17   

Core deposit intangible

     562   

Covered foreclosed assets

     4,629   

FDIC indemnification asset

     7,466   

Other assets

     392   
  

 

 

 

Total assets acquired

   $ 100,282   
  

 

 

 

Liabilities assumed:

  

Deposits

   $ 95,001   

Other borrowings

     5,000   

Other liabilities

     49   
  

 

 

 

Total liabilities assumed

     100,050   
  

 

 

 

Net assets acquired/bargain purchase gain

   $ 232   
  

 

 

 

The loan portfolio and foreclosed assets acquired in the Granite acquisition are covered by a loss sharing agreement between the Bank and the FDIC, and are referred to as “covered loans” and “covered foreclosed assets”, respectively. These covered loans and covered foreclosed assets are recorded in Loans and Foreclosed assets, respectively, in the Company’s consolidated balance sheet. Collectively these balances are referred to as “covered assets”.

 

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Table of Contents

In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer. In the Granite acquisition, net assets with a cost basis of $4,345,000 were transferred to the Bank. In the Granite acquisition, the Company recorded a bargain purchase gain of $232,000 representing the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

The Bank did not immediately acquire all the real estate, banking facilities, furniture or equipment of Granite as part of the purchase and assumption agreement. However, the Bank had the option to purchase or lease the real estate and furniture and equipment from the FDIC. During the quarter ended September 30, 2010, the Bank elected to close the Roseville branch and assume the leases for the Granite Bay and Auburn branches. The Bank purchased the existing furniture and equipment in the Granite Bay and Auburn branches from the FDIC for approximately $100,000.

A summary of the estimated fair value adjustments resulting in the bargain purchase gain in the Granite acquisition are presented below:

 

     Granite  
(In thousands)    May 28, 2010  

Cost basis net assets acquired

   $ 4,345   

Cash payment received from FDIC

     3,940   

Fair value adjustments:

  

Securities available-for-sale

     (118

Loans

     (13,189

Foreclosed assets

     (2,616

Core deposit intangible

     562   

FDIC indemnification asset

     7,466   

Deposits

     (209

Other

     51   
  

 

 

 

Bargain purchase gain

   $ 232   
  

 

 

 

Because of the significant credit discounts associated with the loans acquired in the Granite acquisition, the Company elected to account for all loans acquired in the Granite acquisition using the ASC 310-30 “pooled” method of accounting and thus categorize them as PCI – other loans.

In estimating the fair value of the covered loans at the acquisition date, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments and (b) estimated the amount and timing of undiscounted expected principal and interest payments. The difference between these two amounts represents the nonaccretable difference.

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

The following table presents a reconciliation of the undiscounted contractual cash flows, nonaccretable difference, accretable yield, fair value, purchase discount, and principal balance of loans for the Granite loans as of the acquisition date. For PCI loans, the purchase discount does not necessarily represent cash flows to be collected as a portion of it is a nonaccretable difference:

 

     Granite Loans  
     May 28, 2010  
(In thousands)    PCI - other  

Undiscounted contractual cash flows

   $ 99,179   

Undiscounted cash flows not expected to be collected (nonaccretable difference)

     (11,226
  

 

 

 

Undiscounted cash flows expected to be collected

     87,953   

Accretable yield at acquisition

     (23,151
  

 

 

 

Estimated fair value of loans acquired at acquisition

     64,802   

Purchase discount

     13,189   
  

 

 

 

Principal balance loans acquired

   $ 77,991   
  

 

 

 

 

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Table of Contents

Note 3 – Investment Securities

The amortized cost and estimated fair values of investments in debt and equity securities are summarized in the following tables:

 

     March 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair

Value
 

Securities Available-for-Sale

          (in thousands)        

Obligations of U.S. government corporations and agencies

   $ 190,479       $ 9,854       $ (39   $ 200,294   

Obligations of states and political subdivisions

     9,561         415         —          9,976   

Corporate debt securities

     1,852         35         —          1,887   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale

   $ 201,892       $ 10,304       $ (39   $ 212,157   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair

Value
 

Securities Available-for-Sale

          (in thousands)        

Obligations of U.S. government corporations and agencies

   $ 207,284       $ 10,100         —        $ 217,384   

Obligations of states and political subdivisions

     9,561         467         —          10,028   

Corporate debt securities

     1,848         —         $ (37     1,811   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale

   $ 218,693       $ 10,567       $ (37   $ 229,223   
  

 

 

    

 

 

    

 

 

   

 

 

 

No investment securities were sold during the three months ended March 31, 2012 or the year ended December 31, 2011. Investment securities with an aggregate carrying value of $105,082,000 and $110,763,000 at March 31, 2012 and December 31, 2011, respectively, were pledged as collateral for specific borrowings, lines of credit and local agency deposits.

The amortized cost and estimated fair value of debt securities at March 31, 2012 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2012, obligations of U.S. government corporations and agencies with a cost basis totaling $190,480,000 consist almost entirely of mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At March 31, 2012, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 3.2 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

 

     Amortized
Cost
     Estimated
Fair Value
 

Investment Securities

   (in thousands)  

Due in one year

   $ 1,381       $ 1,437   

Due after one year through five years

     14,755         15,569   

Due after five years through ten years

     61,147         62,911   

Due after ten years

     124,609         132,240   
  

 

 

    

 

 

 

Totals

   $ 201,892       $ 212,157   
  

 

 

    

 

 

 

 

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Table of Contents

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

 

     Less than 12 months     12 months or more      Total  
March 31, 2012:    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 
                (in thousands)                

Securities Available-for-Sale:

                

Obligations of U.S. government corporations and agencies

   $ 3,543       $ (39     —           —         $ 3,543       $ (39

Obligations of states and political subdivisions

     —           —          —           —           —           —     

Corporate debt securities

     —           —          —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 3,543       $ (39     —           —         $ 3,543       $ (39
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months     12 months or more      Total  
December 31, 2011    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 
                (in thousands)                

Securities Available-for-Sale:

                

Obligations of U.S. government corporations and agencies

   $ 10         —          —           —         $ 10         —     

Obligations of states and political subdivisions

     —           —          —           —           —           —     

Corporate debt securities

     1,811       $ (37     —           —           1,811       $ (37
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 1,821       $ (37     —           —         $ 1,821       $ (37
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. government corporations and agencies: Unrealized losses on investments in obligations of U.S. government corporations and agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At March 31, 2012, two debt securities representing obligations of U.S. government corporations and agencies had an unrealized loss with aggregate depreciation of 1.09% from the Company’s amortized cost basis.

 

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Table of Contents

Note 4 – Loans

A summary of loan balances follows (in thousands):

 

     March 31, 2012  
     Originated     PNCI     PCI -
Cash basis
    PCI -
Other
    Total  

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 115,609      $ 8,689        —        $ 6,202      $ 130,500   

Commercial

     695,349        89,047        28        32,435        816,859   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loan on real estate

     810,958        97,736        28        38,637        947,359   

Consumer:

          

Home equity lines of credit

     315,987        19,808        8,492        5,775        350,062   

Home equity loans

     13,991        363        49        156        14,559   

Auto Indirect

     8,397        —          —          —          8,397   

Other

     20,737        2,886        —          48        23,671   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

     359,112        23,057        8,541        5,979        396,689   

Commercial

     114,583        1,392        1,090        11,278        128,343   

Construction:

          

Residential

     13,175        —          —          9,189        22,364   

Commercial

     12,666        —          —          3,664        16,330   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction

     25,841        —          —          12,853        38,694   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of deferred loan fees

   $ 1,310,494      $ 122,185      $ 9,659      $ 68,747      $ 1,511,085   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total principal balance of loans owed, net of charge-offs

   $ 1,312,252      $ 139,680      $ 22,103      $ 89,379      $ 1,563,414   

Unamortized net deferred loan fees

     (1,758     —          —          —          (1,758

Discounts to principal balance of loans owed, net of charge-offs

     —          (17,495     (12,444     (20,632     (50,571
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees

   $ 1,310,494      $ 122,185      $ 9,659      $ 68,747      $ 1,511,085   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncovered loans

   $ 1,310,494      $ 122,185      $ 9,659      $ 23,105      $ 1,465,443   

Covered loans

     —          —          —          45,642        45,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees

   $ 1,310,494      $ 122,185      $ 9,659      $ 68,747      $ 1,511,085   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan loss

   $ (40,292   $ (373   $ (1,294   $ (3,493   $ (45,452
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Note 4 – Loans (continued)

 

A summary of loan balances follows (in thousands):

 

     December 31, 2011  
     Originated     PNCI     PCI -
Cash basis
    PCI -
Other
    Total  

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 118,320      $ 14,750        —        $ 6,516      $ 139,586   

Commercial

     699,682        93,428        —          33,226        826,336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loan on real estate

     818,002        108,178        —          39,742        965,922   

Consumer:

          

Home equity lines of credit

     321,834        20,902      $ 8,615        5,954        357,305   

Home equity loans

     14,320        367        —          157        14,844   

Auto Indirect

     10,821        —          —          —          10,821   

Other

     20,270        3,041        —          49        23,360   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

     367,245        24,310        8,615        6,160        406,330   

Commercial

     123,486        1,805        811        13,029        139,131   

Construction:

          

Residential

     13,908        —          —          8,214        22,122   

Commercial

     12,744        —          —          4,783        17,527   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction

     26,652        —          —          12,997        39,649   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of deferred loan fees

   $ 1,335,385      $ 134,293      $ 9,426      $ 71,928      $ 1,551,032   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total principal balance of loans owed, net of charge-offs

   $ 1,337,693      $ 152,549      $ 22,137      $ 94,660      $ 1,607,039   

Unamortized net deferred loan fees

     (2,308     —          —          —          (2,308

Discounts to principal balance of loans owed, net of charge-offs

     —          (18,256     (12,711     (22,732     (53,699
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees

   $ 1,335,385      $ 134,293      $ 9,426      $ 71,928      $ 1,551,032   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncovered loans

   $ 1,335,385      $ 134,293      $ 9,426      $ 22,857      $ 1,501,961   

Covered loans

     —          —          —          49,071        49,071   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unamortized deferred loan fees

   $ 1,335,385      $ 134,293      $ 9,426      $ 71,928      $ 1,551,032   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan loss

   $ (41,458   $ (245   $ (1,034   $ (3,177   $ (45,914
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a summary of the change in accretable yield for PCI – other loans during the periods indicated (in thousands):

 

     Three months ended
March 31,
 
     2012     2011  

Change in accretable yield:

    

Balance at beginning of period

   $ 25,145      $ 17,717   

Acquisitions

     —          —     

Accretion to interest income

     (1,959     (1,034

Reclassification (to) from nonaccretable difference

     1,429        (2,284
  

 

 

   

 

 

 

Balance at end of period

   $ 24,615      $ 14,399   
  

 

 

   

 

 

 

Throughout these consolidated financial statements, and in particular in this Note 4 and Note 5, when we refer to “Loans” or “Allowance for loan losses” we mean all categories of loans, including Originated, PNCI, PCI – cash basis, and PCI—other. When we are not referring to all categories of loans, we will indicate which we are referring to – Originated, PNCI, PCI – cash basis, or PCI—other.

 

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Table of Contents

Note 5 – Allowance for Loan Losses

The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the periods indicated.

 

     Allowance for Loan Losses – Three months ended March 31, 2012  
     RE Mortgage     Home Equity     Auto
Indirect
    Other
Consum.
    C&I     Construction      Total  
(In thousands)    Resid.     Comm.     Lines     Loans           Resid.     Comm.     

Beginning balance

   $ 2,404      $ 13,217      $ 18,258      $ 1,101      $ 215      $ 932      $ 6,545      $ 1,817      $ 1,425       $ 45,914   

Charge-offs

     (223     (1,305     (2,625     (41     (40     (339     (281     (68     —           (4,922

Recoveries

     —          36        63        3        57        255        50        —          —           464   

Provision

     976        (1,967     6,336        204        343        (248     (1,764     (77     193         3,996   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 3,157      $ 9,981      $ 22,032      $ 1,267      $ 575      $ 600      $ 4,550      $ 1,672      $ 1,618       $ 45,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance:

                     

Individ. evaluated for impairment

   $ 582      $ 1,041      $ 1,578      $ 59      $ 14      $ 17      $ 357      $ 80      $ 1,048       $ 4,776   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans pooled for evaluation

   $ 2,463      $ 8,939      $ 18,949      $ 1,096      $ 560      $ 584      $ 2,563      $ 625      $ 110       $ 35,889   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans acquired with deteriorated credit quality

   $ 113        —        $ 1,505      $ 111        —          —        $ 1,630      $ 967      $ 461       $ 4,787   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Loans, net of unearned fees – As of March 31, 2012  
     RE Mortgage     Home Equity     Auto
Indirect
    Other
Consum.
    C&I     Construction      Total  
(In thousands)    Resid.     Comm.     Lines     Loans           Resid.     Comm.     

Ending balance:

                     

Total loans

   $ 130,500      $ 816,859      $ 350,062      $ 14,559      $ 8,397      $ 23,671      $ 128,343      $ 22,364      $ 16,330       $ 1,511,085   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Individ. evaluated for impairment

   $ 10,490      $ 69,817      $ 8,777      $ 549      $ 404      $ 177      $ 9,286      $ 5,606      $ 7,114       $ 112,220   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans pooled for evaluation

   $ 113,808      $ 714,579      $ 327,018      $ 13,805      $ 7,993      $ 23,446      $ 106,689      $ 7,569      $ 5,552       $ 1,320,459   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans acquired with deteriorated credit quality

   $ 6,202      $ 32,463      $ 14,267      $ 205        —        $ 48      $ 12,368      $ 9,189      $ 3,664       $ 78,406   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Allowance for Loan Losses – Three months ended March 31, 2011  
     RE Mortgage     Home Equity      Auto
Indirect
    Other
Consum.
    C&I     Construction     Total  
(In thousands)    Resid.     Comm.     Lines     Loans            Resid.     Comm.    

Beginning balance

   $ 3,007      $ 12,700      $ 15,054      $ 795       $ 1,229      $ 701      $ 5,991      $ 1,824      $ 1,270      $ 42,571   

Charge-offs

     (1,125     (368     (3,601     —           (135     (229     (1,556     (35     —          (7,049

Recoveries

     112        28        161        2         127        209        21        2        39        701   

Provision

     1,550        (333     4,682        114         (740     23        2,511        (396     (410     7,001   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,544      $ 12,027      $ 16,296      $ 911       $ 481      $ 704      $ 6,967      $ 1,395      $ 899      $ 43,224   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

                     

Individ. evaluated for impairment

   $ 1,055      $ 917      $ 1,772      $ 14       $ 161      $ 16      $ 166      $ 136      $ 595      $ 4,832   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans pooled for evaluation

   $ 2,471      $ 10,953      $ 13,972      $ 897       $ 319      $ 689      $ 4,781      $ 1,258      $ 143      $ 35,483   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

   $ 18      $ 157      $ 553        —           —          —        $ 2,020        —        $ 161      $ 2,909   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Loans, net of unearned fees – As of March 31, 2011  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consum.
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

Ending balance:

                             

Total loans

   $ 128,474       $ 695,089       $ 335,682       $ 16,035       $ 20,240       $ 16,185       $ 131,242       $ 23,772       $ 20,941       $ 1,387,660   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Individ. evaluated for impairment

   $ 12,735       $ 55,867       $ 9,091       $ 779       $ 1,125       $ 77       $ 5,158       $ 6,756       $ 7,471       $ 99,059   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans pooled for evaluation

   $ 109,338       $ 614,255       $ 319,471       $ 15,256       $ 19,115       $ 16,108       $ 117,068       $ 12,535       $ 13,470       $ 1,236,616   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans acquired with deteriorated credit quality

   $ 6,401       $ 24,967       $ 7,120         —           —           —         $ 9,016       $ 4,481         —         $ 51,985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

Note 5 – Allowance for Loan Losses (Continued)

 

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including, but not limited to, trends relating to (i) the level of criticized and classified loans, (ii) net charge-offs, (iii) non-performing loans, and (iv) delinquency within the portfolio.

The Company utilizes a risk grading system to assign a risk grade to each of its loans. Loans are graded on a scale ranging from Pass to Loss. A description of the general characteristics of the risk grades is as follows:

 

   

Pass – This grade represents loans ranging from acceptable to very little or no credit risk. These loans typically meet most if not all policy standards in regard to: loan amount as a percentage of collateral value, debt service coverage, profitability, leverage, and working capital.

 

   

Special Mention – This grade represents “Other Assets Especially Mentioned” in accordance with regulatory guidelines and includes loans that display some potential weaknesses which, if left unaddressed, may result in deterioration of the repayment prospects for the asset or may inadequately protect the Company’s position in the future. These loans warrant more than normal supervision and attention.

 

   

Substandard – This grade represents “Substandard” loans in accordance with regulatory guidelines. Loans within this rating typically exhibit weaknesses that are well defined to the point that repayment is jeopardized. Loss potential is, however, not necessarily evident. The underlying collateral supporting the credit appears to have sufficient value to protect the Company from loss of principal and accrued interest, or the loan has been written down to the point where this is true. There is a definite need for a well defined workout/rehabilitation program.

 

   

Doubtful – This grade represents “Doubtful” loans in accordance with regulatory guidelines. An asset classified as Doubtful has all the weaknesses inherent in a loan classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and financing plans.

 

   

Loss – This grade represents “Loss” loans in accordance with regulatory guidelines. A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan, even though some recovery may be affected in the future. The portion of the loan that is graded loss should be charged off no later than the end of the quarter in which the loss is identified.

The following tables present ending loan balances by loan category and risk grade as of the dates indicated:

 

     Credit Quality Indicators – As of March 31, 2012  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

Originated loans:

                             

Pass

   $ 100,541       $ 580,788       $ 297,041       $ 12,760       $ 6,748       $ 19,952       $ 98,541       $ 6,874       $ 5,215       $ 1,128,460   

Special mention

     2,048         40,584         6,894         616         951         610         7,457         43         571         59,774   

Substandard

     13,020         73,977         12,051         615         698         175         8,585         6,256         6,880         122,257   

Loss

     —           —           1         —           —           —           —           2         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Originated loans

   $ 115,609       $ 695,349       $ 315,987       $ 13,991       $ 8,397       $ 20,737       $ 114,583       $ 13,175       $ 12,666       $ 1,310,494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PNCI loans:

                             

Pass

   $ 8,427       $ 81,623       $ 18,482       $ 363         —         $ 2,700       $ 1,392         —           —         $ 112,987   

Special mention

     —           5,167         1,042         —           —           106         —           —           —           6,315   

Substandard

     262         2,257         284         —           —           80         —           —           —           2,883   

Loss

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 8,689       $ 89,047       $ 19,808       $ 363         —         $ 2,886       $ 1,392         —           —         $ 122,185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PCI loans

   $ 6,202       $ 32,463       $ 14,267       $ 205         —         $ 48       $ 12,368       $ 9,189       $ 3,664       $ 78,406   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 130,500       $ 816,859       $ 350,062       $ 14,559       $ 8,397       $ 23,671       $ 128,343       $ 22,364       $ 16,330       $ 1,511,085   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

Note 5 – Allowance for Loan Losses (Continued)

 

     Credit Quality Indicators – As of December 31, 2011  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

Originated loans:

                             

Pass

   $ 103,611       $ 574,167       $ 305,290       $ 13,478       $ 9,686       $ 19,871       $ 107,877       $ 6,872       $ 5,387       $ 1,146,239   

Special mention

     1,020         46,518         1,295         —           33         10         6,709         903         430         56,918   

Substandard

     13,689         78,997         15,249         842         1,102         389         8,900         6,133         6,927         132,228   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Originated loans

   $ 118,320       $ 699,682       $ 321,834       $ 14,320       $ 10,821       $ 20,270       $ 123,486       $ 13,908       $ 12,744       $ 1,335,385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PNCI loans:

                             

Pass

   $ 14,576       $ 83,735       $ 20,053       $ 367         —         $ 3,034       $ 1,707         —           —         $ 123,472   

Special mention

     —           9,693         548         —           —           4         —           —           —           10,245   

Substandard

     174         —           301         —           —           3         98         —           —           576   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 14,750       $ 93,428       $ 20,902       $ 367         —         $ 3,041       $ 1,805         —           —         $ 134,293   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PCI loans

   $ 6,516       $ 33,226       $ 14,569       $ 157         —         $ 49       $ 13,840       $ 8,214       $ 4,783       $ 81,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 139,586       $ 826,336       $ 357,305       $ 14,844       $ 10,821       $ 23,360       $ 139,131       $ 22,122       $ 17,527       $ 1,551,032   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans, whether unsecured or secured by real estate, automobiles, or other personal property, are primarily susceptible to three primary risks; non-payment due to income loss, over-extension of credit and, when the borrower is unable to pay, shortfall in collateral value. Typically non-payment is due to loss of job and will follow general economic trends in the marketplace driven primarily by rises in the unemployment rate. Loss of collateral value can be due to market demand shifts, damage to collateral itself or a combination of the two.

Problem consumer loans are generally identified by payment history of the borrower (delinquency) or significant changes in the borrower’s credit rating. Current credit scores are obtained for all consumer loans on a quarterly basis, and risk ratings are adjusted appropriately. The Bank manages its consumer loan portfolios by monitoring delinquency and contacting borrowers to encourage repayment, suggest modifications if appropriate, and, when continued scheduled payments become unrealistic, initiate repossession or foreclosure through appropriate channels. Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable and the loan has been classified.

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner occupied real estate are primarily susceptible to changes in the business conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual fortunes of the business owner, and general economic conditions and changes in business cycles. These same risks apply to commercial loans whether secured by equipment or other personal property or unsecured. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often these shifts are a result of changes in general economic or market conditions or overbuilding and resultant over-supply. Losses are dependent on value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.

Construction loans, whether owner occupied or non-owner occupied commercial real estate loans or residential development loans, are not only susceptible to the related risks described above but the added risks of construction itself including cost over-runs, mismanagement of the project, or lack of demand or market changes experienced at time of completion. Again, losses are primarily related to underlying collateral value and changes therein as described above.

Problem commercial loans are generally identified by periodic review of financial information which may include financial statements, tax returns, rent rolls and payment history of the borrower (delinquency). Based on this information the Bank may decide to take any of several courses of action including demand for repayment, additional collateral or guarantors, and, when repayment becomes unlikely through borrower’s income and cash flow, repossession or foreclosure of the underlying collateral.

Collateral values may be determined by appraisals obtained through Bank approved, licensed appraisers, qualified independent third parties, public value information (blue book values for autos), sales invoices, or other appropriate means. Appropriate valuations are obtained at initiation of the credit and periodically (every 3-12 months depending on collateral type) once repayment is questionable and the loan has been classified.

 

23


Table of Contents

Once a loan becomes delinquent and repayment becomes questionable, a Bank collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss, using a recent valuation as appropriate to the underlying collateral less estimated costs of sale, and charge the loan down to the estimated net realizable amount. Depending on the length of time until ultimate collection, the Bank may revalue the underlying collateral and take additional charge-offs as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when collateral is liquidated and actual loss is known. Unpaid balances on loans after or during collection and liquidation may also be pursued through lawsuit and attachment of wages or judgment liens on borrower’s other assets.

The following table shows the ending balance of current, past due, and nonaccrual originated loans by loan category as of the date indicated:

 

     Analysis of Past Due and Nonaccrual Originated Loans – As of March 31, 2012  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

Originated loan balance:

                             

Past due:

                             

30-59 Days

   $ 3,051       $ 6,641       $ 1,638       $ 79       $ 138       $ 8       $ 481       $ 220       $ 161       $ 12,417   

60-89 Days

     221         3,118         2,476         393         14         3         811         97         —           7,133   

> 90 Days

     2,134         11,125         2,303         35         105         10         4,902         780         39         21,433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     5,406         20,884         6,417         507         257         21         6,194         1,097         200         40,983   

Current

     110,203         674,465         309,570         13,484         8,140         20,716         108,389         12,078         12,466         1,269,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Originated loans

   $ 115,609       $ 695,349       $ 315,987       $ 13,991       $ 8,397       $ 20,737       $ 114,583       $ 13,175       $ 12,666       $ 1,310,494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —           —           —           —           —           —         $ 111         —           —         $ 111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 8,296       $ 41,040       $ 7,001       $ 485       $ 348       $ 100       $ 7,085       $ 5,647       $ 651       $ 70,653   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the ending balance of current, past due, and nonaccrual PNCI loans by loan category as of the date indicated:

 

     Analysis of Past Due and Nonaccrual PNCI Loans – As of March 31, 2012  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

PNCI loan balance:

                             

Past due:

                             

30-59 Days

   $ 4,592       $ 462       $ 521         —           —           —           —           —           —         $ 5,575   

60-89 Days

     175         —           226         —           —           —           —           —           —           401   

> 90 Days

     —           —           53         —           —           —           —           —           —           53   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     4,767         462         800         —           —           —           —           —           —           6,029   

Current

     3,922         88,585         19,008         363         —           2,886         1,392         —           —           116,156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 8,689       $ 89,047       $ 19,808       $ 363         —         $ 2,886       $ 1,392         —           —         $ 122,185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

     —         $ 1,693       $ 406         —           —         $ 47         —           —           —         $ 2,146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the ending balance of current, past due, and nonaccrual originated loans by loan category as of the date indicated:

 

     Analysis of Past Due and Nonaccrual Originated Loans – As of December 31, 2011  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

Originated loan balance:

                             

Past due:

                             

30-59 Days

   $ 1,715       $ 7,509       $ 2,586       $ 52       $ 181       $ 46       $ 683       $ 921         —         $ 13,693   

60-89 Days

     750         1,171         2,629         281         56         153         1,334         92         —           6,466   

> 90 Days

     3,279         9,892         3,129         114         130         5         4,929         2,088         —           23,566   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     5,744         18,572         8,344         447         367         204         6,946         3,101         —           43,725   

Current

     112,576         681,110         313,490         13,873         10,454         20,066         116,540         10,807         12,744         1,291,660   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Originated loans

   $ 118,320       $ 699,682       $ 321,834       $ 14,320       $ 10,821       $ 20,270       $ 123,486       $ 13,908       $ 12,744       $ 1,335,385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —         $ 500         —           —           —           —           —           —           —         $ 500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

   $ 8,525       $ 43,765       $ 8,307       $ 509       $ 509       $ 109       $ 7,257       $ 5,627       $ 667       $ 75,275   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

24


Table of Contents

The following table shows the ending balance of current, past due, and nonaccrual PNCI loans by loan category as of the date indicated:

 

     Analysis of Past Due and Nonaccrual PNCI Loans – As of December 31, 2011  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

PNCI loan balance:

                             

Past due:

                             

30-59 Days

     —         $ 118       $ 63         —           —           —           —           —           —         $ 181   

60-89 Days

   $ 76         —           39         —           —           —           —           —           —           115   

> 90 Days

     —           420         14         —           —           —           —           —           —           434   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     76         538         116         —           —           —           —           —           —           730   

Current

     14,674         92,890         20,786       $ 367         —         $ 3,041       $ 1,805         —           —           133,563   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total PNCI loans

   $ 14,750       $ 93,428       $ 20,902       $ 367         —         $ 3,041       $ 1,805         —           —         $ 134,293   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 Days and still accruing

     —         $ 420         —           —           —           —           —           —           —         $ 420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans

     —           —         $ 110         —           —           —           —           —           —         $ 110   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired originated loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due under the contractual terms. The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated.

 

     Impaired Originated Loans – As of March 31, 2012  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

With no related allowance recorded:

                             

Recorded investment

   $ 7,288       $ 61,224       $ 4,039       $ 188       $ 311       $ 55       $ 8,453       $ 4,631       $ 629       $ 86,818   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 9,377       $ 72,273       $ 6,755       $ 488       $ 568       $ 80       $ 9,110       $ 9,642       $ 953       $ 109,246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 8,079       $ 52,833       $ 5,053       $ 479       $ 467       $ 44       $ 6,597       $ 5,315       $ 3,570       $ 82,437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 22       $ 375       $ 4       $ 1       $ 1         —         $ 33         —         $ 3       $ 439   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                             

Recorded investment

   $ 3,040       $ 6,521       $ 4,332       $ 361       $ 93       $ 45       $ 833       $ 975       $ 6,485       $ 22,685   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 3,524       $ 7,010       $ 5,389       $ 720       $ 117       $ 47       $ 873       $ 2,071       $ 6,523       $ 26,274   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 559       $ 1,043       $ 1,498       $ 59       $ 14       $ 17       $ 357       $ 78       $ 1,048       $ 4,673   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 3,399       $ 10,714       $ 3,690       $ 188       $ 297       $ 46       $ 704       $ 815       $ 3,725       $ 23,578   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 6       $ 62       $ 11         —           —           —         $ 7       $ 2       $ 94       $ 182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Impaired PNCI Loans – As of March 31, 2012  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

With no related allowance recorded:

                             

Recorded investment

     —         $ 2,072       $ 326         —           —         $ 77         —           —           —         $ 2,475   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

     —         $ 2,075       $ 363         —           —         $ 78         —           —           —         $ 2,516   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

     —         $ 1,036       $ 163         —           —         $ 39         —           —           —         $ 1,238   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

     —         $ 26         —           —           —         $ 1         —           —           —         $ 27   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                             

Recorded investment

   $ 162         —         $ 80         —           —           —           —           —           —         $ 242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 162         —         $ 84         —           —           —           —           —           —         $ 246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 23         —         $ 80         —           —           —           —           —           —         $ 103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 81         —         $ 40         —           —           —           —           —           —         $ 121   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 3         —           —           —           —           —           —           —           —         $ 3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated and PNCI loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated.

 

     Impaired Originated Loans – As of December 31, 2011  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.     Comm.     

With no related allowance recorded:

                            

Recorded investment

   $ 6,921       $ 61,205       $ 5,101       $ 224       $ 424       $ 39       $ 8,473       $ 1,809      $ 571       $ 84,767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Unpaid principal

   $ 8,663       $ 72,408       $ 8,519       $ 528       $ 777       $ 56       $ 9,229       $ 2,857      $ 916       $ 103,953   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average recorded Investment

   $ 6,557       $ 53,346       $ 5,228       $ 458       $ 569       $ 44       $ 6,687       $ 3,942      $ 3,590       $ 80,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Interest income Recognized

   $ 58       $ 2,235       $ 99       $ 7       $ 15       $ 2       $ 381         —        $ 4       $ 2,801   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

With an allowance recorded:

                            

Recorded investment

   $ 3,246       $ 10,688       $ 4,177       $ 350       $ 147       $ 70       $ 964       $ 3,818      $ 6,328       $ 29,788   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Unpaid principal

   $ 3,760       $ 11,094       $ 4,977       $ 666       $ 193       $ 75       $ 1,040       $ 8,698      $ 6,330       $ 36,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Related allowance

   $ 460       $ 1,613       $ 2,365       $ 73       $ 29       $ 24       $ 200       $ 258      $ 971       $ 5,993   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Average recorded Investment

   $ 4,611       $ 10,019       $ 4,770       $ 215       $ 407       $ 52       $ 1,023       $ 2,334      $ 3,578       $ 27,009   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Interest income Recognized

   $ 77       $ 588       $ 122       $ 3       $ 2       $ 2       $ 36       $ (16   $ 387       $ 1,201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     Impaired PNCI Loans – As of December 31, 2011  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consumer
     C&I      Construction      Total  
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

With no related allowance recorded:

                             

Recorded investment

     —           —         $ 110       $ 87         —           —         $ 89         —           —         $ 286   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

     —           —         $ 126       $ 89         —           —         $ 98         —           —         $ 313   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

     —           —         $ 55       $ 44         —           —         $ 45         —           —         $ 144   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

     —           —         $ 5       $ 2         —           —         $ 3         —           —         $ 10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                             

Recorded investment

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

     —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, $67,348,000 of Originated loans were TDR and classified as impaired. The Company had obligations to lend $333,000 of additional funds on these TDR as of March 31, 2012. At March 31, 2012, $495,000 of PNCI loans were TDR and classified as impaired. The Company had no obligations to lend additional funds on these TDR as of March 31, 2012.

At December 31, 2011, $66,160,000 of Originated loans were TDR and classified as impaired. The Company had obligations to lend $258,000 of additional funds on these TDR as of December 31, 2011. At December 31, 2011, $176,000 of PNCI loans were TDR and classified as impaired. The Company had no obligations to lend additional funds on these TDR as of December 31, 2011.

 

26


Table of Contents

The following tables show the recorded investment (financial statement balance), unpaid principal balance, average recorded investment, and interest income recognized for impaired Originated loans, segregated by those with no related allowance recorded and those with an allowance recorded for the periods indicated.

 

     Impaired Originated Loans – As of March 31, 2011  
     RE Mortgage      Home Equity      Auto
Indirect
     Other
Consum.
     C&I      Construction      Total  
(in thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

With no related allowance recorded:

                             

Recorded investment

   $ 8,870       $ 44,442       $ 6,067       $ 769       $ 623       $ 32       $ 4,740       $ 5,999       $ 6,510       $ 78,052   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 11,234       $ 52,148       $ 9,260       $ 1,088       $ 1,155       $ 36       $ 5,824       $ 11,276       $ 6,699       $ 98,720   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 6,484       $ 35,963       $ 5,386       $ 511       $ 584       $ 55       $ 3,031       $ 9,517       $ 3,905       $ 65,436   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 6       $ 261       $ 2       $ 1       $ 3         —         $ 19       $ 1       $ 94       $ 387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                             
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment

   $ 3,757       $ 14,907       $ 3,048       $ 14       $ 501       $ 46       $ 575       $ 654       $ 964       $ 24,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal

   $ 4,149       $ 15,085       $ 3,599       $ 14       $ 602       $ 49       $ 618       $ 708       $ 1,006       $ 25,830   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related allowance

   $ 1,054       $ 917       $ 1,772       $ 14       $ 161       $ 16       $ 166       $ 136       $ 596       $ 4,832   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded Investment

   $ 2,763       $ 10,849       $ 4,379       $ 142       $ 881       $ 90       $ 1,069       $ 748       $ 710       $ 21,631   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income Recognized

   $ 3       $ 190       $ 1         —         $ 1         —         $ 3         —         $ 5       $ 203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2011, $46,326,000 of originated loans were TDR and classified as impaired. The Company had obligations to lend $378,000 of additional funds on these TDR as of March 31, 2011. At March 31, 2011, the Company had no PNCI loans.

The following tables show certain information regarding Troubled Debt Restructurings (TDRs) that occurred during the period indicated:

 

     TDR Information for the Three Months Ended March 31, 2012  
     RE Mortgage      Home Equity     

Auto

Indirect

    

Other

Consum.

    

C&I

     Construction     

Total

 
(In thousands)    Resid.      Comm.      Lines      Loans               Resid.      Comm.     

Number

     2         7         2         —           —           1         1         2         —           15   

Pre-modification out-standing principal balance

   $ 650       $ 1,561       $ 436         —           —         $ 38       $ 249       $ 230         —         $ 3,164   

Post-modification out-standing principal balance

   $ 669       $ 1,523       $ 464         —           —         $ 38       $ 249       $ 232         —         $ 3,175   

Financial Impact due to troubled debt restructure taken as additional provision

     —           —         $ 16         —           —           —           —           —           —         $ 16   

Number that defaulted during the period

     1         4         —           —           —           —           —           —           1         6   

Recorded investment of TDRs that defaulted during the period

   $ 112       $ 2,632         —           —           —           —           —           —         $ 39       $ 2,783   

Financial Impact due to the default of previous troubled debt restructure taken as charge-offs or additional provisions

     —           —           —           —           —           —           —           —           —           —     

Modifications classified as Troubled Debt Restructurings can include one or a combination of the following:

 

   

Rate modifications

 

   

Term extensions

 

   

Interest only modifications, either temporary or long-term

 

   

Payment modifications

 

   

Collateral substitutions/additions

 

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Table of Contents

For all new Troubled Debt Restructurings, an impairment analysis is conducted. If the loan is determined to be collateral dependent, any additional amount of impairment will be calculated based on the difference between estimated collectible value and the current carrying balance of the loan. This difference could result in an increased provision and is typically charged off. If the asset is determined not to be collateral dependent, the impairment is measured on the net present value difference between the estimated cash flows of the restructured loan and the cash flows which would have been received under the original terms. The effect of this could result in a requirement for additional provision to the reserve. The effect of these required provisions for the period are indicated above.

Typically if a TDR defaults during the period, the loan is then considered collateral dependent and, if it was not already considered collateral dependent, an appropriate provision will be reserved or charge will be taken. The additional provisions required resulting from default of previously modified TDR’s are noted above.

Note 6 – Foreclosed Assets

A summary of the activity in the balance of foreclosed assets follows (in thousands):

 

     Three months ended March 31, 2012     Three months ended March 31, 2011  
     Noncovered     Covered     Total     Noncovered     Covered     Total  

Beginning balance, net

   $ 13,268      $ 3,064      $ 16,332      $ 5,000      $ 4,913      $ 9,913   

Additions/transfers from loans

     1,694        225        1,919        1,523        —          1,523   

Dispositions/sales

     (3,379     —          (3,379     (1,983     (21     (2,004

Valuation adjustments

     (83     —          (83     (68     (381     (449
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net

   $ 11,500      $ 3,289      $ 14,789      $ 4,472      $ 4,511      $ 8,983   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending valuation allowance

   $ (977   $ (776   $ (1,753   $ (505   $ (996   $ (1,501
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending number of foreclosed assets

     52        11        63        32        13        45   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proceeds from sale of foreclosed assets

   $ 3,021        —        $ 3,021      $ 2,175      $ 30      $ 2,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain (loss) on sale of foreclosed assets

   $ (358     —        $ (358   $ 191      $ 9      $ 200   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 7 – Premises and Equipment

Premises and equipment were comprised of:

 

     March 31,
2012
    December 31,
2011
 
     (In thousands)  

Premises

   $ 21,197      $ 20,975   

Furniture and equipment

     24,733        24,340   
  

 

 

   

 

 

 
     45,930        45,315   

Less: Accumulated depreciation

     (30,241     (29,562
  

 

 

   

 

 

 
     15,689        15,753   

Land and land improvements

     4,125        4,140   
  

 

 

   

 

 

 
   $ 19,814      $ 19,893   
  

 

 

   

 

 

 

Depreciation expense for premises and equipment amounted to $782,000 and $646,000 for the three months ended March 31, 2012 and 2011, respectively.

Note 8 – Cash Value of Life Insurance

A summary of the activity in the balance of cash value of life insurance follows (in thousands):

 

     Three months ended March 31,  
         2012              2011      

Beginning balance

   $ 50,403       $ 50,541   

Increase in cash value of life insurance

     450         450   
  

 

 

    

 

 

 

Ending balance

   $ 50,853       $ 50,991   
  

 

 

    

 

 

 

As of March 31, 2012, the Bank was the owner and beneficiary of 139 life insurance policies, issued by six life insurance companies, covering 38 current and former employees and directors. These life insurance policies are recorded on the Company’s financial statements at their reported cash (surrender) values. As a result of current tax law and the nature of these policies, the Bank records any increase in cash value of these policies as nontaxable noninterest income. If the Bank decided to surrender any of the policies prior to the death of the insured, such surrender may result in a tax expense related to the life-to-date cumulative increase in cash value of the policy. If the Bank retains such policies until the death of the insured, the Bank would receive nontaxable proceeds from the insurance company equal to the death benefit of the policies. The Bank has entered into Joint Beneficiary Agreements (JBAs) with certain of the insureds that for certain of the policies provide some level of sharing of the death benefit, less the cash surrender value, among the Bank and the beneficiaries of the insured upon the receipt of death benefits. See Note 15 of these consolidated financial statements for additional information on of JBAs.

 

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Table of Contents

Note 9 – Goodwill and Other Intangible Assets

The following table summarizes the Company’s goodwill intangible as of the dates indicated.

 

(In thousands)    March 31,
2012
     Additions      Reductions      December 31,
2011
 

Goodwill

   $ 15,519         —           —         $ 15,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the Company’s core deposit intangibles as of the dates indicated.

 

(In thousands)

   March 31,
2012
    Additions      Reductions     December 31,
2011
 

Core deposit intangibles

   $ 1,460        —           —        $ 1,460   

Accumulated amortization

     (212     —         $ (53     (159
  

 

 

   

 

 

    

 

 

   

 

 

 

Core deposit intangibles, net

   $ 1,248        —         $ (53   $ 1,301   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company recorded additions to core deposit intangibles of $898,000 and $562,000 in conjunction with the Citizens and Granite acquisition on September 23, 2011 and May 28, 2010, respectively. The following table summarizes the Company’s estimated core deposit intangible amortization (in thousands):

 

Years Ended    Estimated Core Deposit
Intangible Amortization
 

2012

   $ 209   

2013

     209   

2014

     209   

2015

     209   

2016

     209   

Thereafter

   $ 256   

Note 10 – Mortgage Servicing Rights

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 (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Mortgage servicing rights:

    

Balance at beginning of period

   $ 4,603      $ 4,605   

Additions

     550        263   

Change in fair value

     (369     (60
  

 

 

   

 

 

 

Balance at end of period

   $ 4,784      $ 4,808   
  

 

 

   

 

 

 

Servicing, late and ancillary fees received

   $ 372      $ 361   

Balance of loans serviced at:

    

Beginning of period

   $ 598,185      $ 573,300   

End of period

   $ 615,867      $ 583,625   

Weighted-average prepayment speed (CPR)

     18.4     14.8

Discount rate

     9.0     9.0

The changes in fair value of MSRs that occurred during the three months ended March 31, 2012 and 2011 were mainly due to principal reductions and changes in estimated life of the MSRs.

Note 11 – Indemnification Asset

A summary of the activity in the balance of indemnification asset follows (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Beginning balance

   $ 4,405      $ 5,640   

Effect of actual covered losses and change in estimated future covered losses

     (418     1,681   

Reimbursable expenses incurred

     58        122   

Payments received

     (640     (754
  

 

 

   

 

 

 

Ending balance

   $ 3,405      $ 6,689   
  

 

 

   

 

 

 

 

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Table of Contents

Note 12 – Other Assets

Other assets were comprised of (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Deferred tax asset, net

   $ 26,963       $ 27,810   

Prepaid expense including FDIC assessment and taxes

     6,773         8,459   

Software

     1,839         1,530   

Life insurance proceeds receivable

     —           2,811   

Advanced compensation

     1,328         1,363   

TriCo Capital Trust I & II

     1,238         1,238   

Mmiscellaneous other assets

     1,333         173   
  

 

 

    

 

 

 

Total other assets

   $ 39,474       $ 43,384   
  

 

 

    

 

 

 

Note 13 – Deposits

A summary of the balances of deposits follows (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Noninterest-bearing demand

   $ 564,143       $ 541,276   

Interest-bearing demand

     488,573         431,565   

Savings

     724,449         797,182   

Time certificates, $100,000 and over

     204,663         220,374   

Other time certificates

     187,918         200,139   
  

 

 

    

 

 

 

Total deposits

   $ 2,169,746       $ 2,190,536   
  

 

 

    

 

 

 

Certificate of deposit balances of $5,000,000 and $5,000,000 from the State of California were included in time certificates, $100,000 and over, at March 31, 2012 and December 31, 2011, respectively. 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. Overdrawn deposit balances of $1,168,000 and $1,343,000 were classified as consumer loans at March 31, 2012 and December 31, 2011, respectively.

Note 14 – Reserve for Unfunded Commitments

The following tables summarize the activity in reserve for unfunded commitments for the periods indicated (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Balance at beginning of period

   $ 2,740      $ 2,640   

Provision for losses – unfunded commitments

     (190     50   
  

 

 

   

 

 

 

Balance at end of period

   $ 2,550      $ 2,690   
  

 

 

   

 

 

 

Note 15 – Other Liabilities

Other liabilities were comprised of (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Deferred compensation

   $ 8,320       $ 8,209   

Supplemental retirement

     11,567         11,201   

Additional minimum pension liability

     3,802         3,802   

Joint beneficiary agreements

     2,382         2,323   

Miscellaneous other liabilities

     3,604         4,892   
  

 

 

    

 

 

 

Total other liabilities

   $ 29,675       $ 30,427   
  

 

 

    

 

 

 

Note 16 – Other Borrowings

A summary of the balances of other borrowings follows:

 

(In thousands)    March 31,
2012
     December 31,
2011
 

Borrowing under security repurchase agreement, rate is fixed at 4.72%and principal is callable in its entirety by lender on a quarterly basis until final maturity on August 30, 2012

   $ 50,000       $ 50,000   

FHLB fixed rate borrowings:

     

Matured January 25, 2012, effective rate 0.24%

     —           3,000   

Matures April 6, 2012, effective rate 0.26%

     5,000         5,013   

Matures April 25, 2012, effective rate 0.26%

     3,000         3,001   

Matures July 25, 2012, effective rate 0.34%

     3,000         3,000   

Other collateralized borrowings, fixed rate, as of March 31, 2012 of 0.05% payable on April 2, 2012

     8,074         8,527   
  

 

 

    

 

 

 

Total other borrowings

   $ 69,074       $ 72,541   
  

 

 

    

 

 

 

 

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Table of Contents

During August 2007, the Company entered into a security repurchase agreement with principal balance of $50,000,000 and terms as described above. As of March 31, 2012, the Company has pledged as collateral and sold under an agreement to repurchase investment securities with fair value of $58,365,000 under this security repurchase agreement. The Company did not enter into any other repurchase agreements during the three months ended March 31, 2012 or the year ended December 31, 2011. The average balance of repurchase agreements during the three months ended March 31, 2012 was $50,000,000, with an average rate of 4.72%.

The Company had $8,074,000 and $8,527,000 of other collateralized borrowings at March 31, 2012 and December 31, 2011, respectively. Other collateralized borrowings are generally overnight maturity borrowings from non-financial institutions that are collateralized by securities owned by the Company. As of March 31, 2012, the Company has pledged as collateral and sold under agreements to repurchase investment securities with fair value of $8,074,000 under these other collateralized borrowings.

As part of the Citizens acquisition on September 23, 2011, the Company assumed borrowings with principal balances totaling $22,000,000 and fair values totaling $22,028,000. These borrowings from the Federal Home Loan Bank of San Francisco (FHLB) are now collateralized under the Bank’s line of credit at the FHLB as described below. As of March 31, 2012, borrowings with principal balances totaling $11,000,000 remain from the $22,000,000 assued in the Citizens acquisition.

The Company maintains a collateralized line of credit with the Federal Home Loan Bank of San Francisco. Based on the FHLB stock requirements at March 31, 2012, this line provided for maximum borrowings of $512,266,000 of which $11,000,000 was outstanding, leaving $501,266,000 available. As of March 31, 2012, the Company has designated loans totaling $1,035,990,000 as potential collateral under this collateralized line of credit with the FHLB.

The Company maintains a collateralized line of credit with the Federal Reserve Bank of San Francisco. As of March 31, 2012, this line provided for maximum borrowings of $65,918,000 of which none was outstanding, leaving $65,918,000 available. As of March 31, 2012, the Company has designated investment securities with fair value of $291,000 and loans totaling $65,627,000 as potential collateral under this collateralized line of credit with the FRB.

The Company has available unused correspondent banking lines of credit from commercial banks totaling $5,000,000 for federal funds transactions at March 31, 2012.

Note 17 – Junior Subordinated Debt

On July 31, 2003, the Company formed a subsidiary business trust, TriCo Capital Trust I, to issue trust preferred securities. Concurrently with the issuance of the trust preferred securities, the trust issued 619 shares of common stock to the Company for $1,000 per share or an aggregate of $619,000. In addition, the Company issued a Junior Subordinated Debenture to the Trust in the amount of $20,619,000. The terms of the Junior Subordinated Debenture are materially consistent with the terms of the trust preferred securities issued by TriCo Capital Trust I. Also on July 31, 2003, TriCo Capital Trust I completed an offering of 20,000 shares of cumulative trust preferred securities for cash in an aggregate amount of $20,000,000. The trust preferred securities are mandatorily redeemable upon maturity on October 7, 2033 with an interest rate that resets quarterly at three-month LIBOR plus 3.05%. TriCo Capital Trust I has the right to redeem the trust preferred securities on or after October 7, 2008. The trust preferred securities were issued through an underwriting syndicate to which the Company paid underwriting fees of $7.50 per trust preferred security or an aggregate of $150,000. The net proceeds of $19,850,000 were used to finance the opening of new branches, improve bank services and technology, repurchase shares of the Company’s common stock under its repurchase plan and increase the Company’s capital. The trust preferred securities have not been and will not be registered under the Securities Act of 1933, as amended, or applicable state securities laws and were sold pursuant to an exemption from registration under the Securities Act of 1933. The trust preferred securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933, as amended, and applicable state securities laws.

The $20,619,000 of junior subordinated debentures issued by TriCo Capital Trust I are reflected as junior subordinated debt in the consolidated balance sheets. The common stock issued by TriCo Capital Trust I are recorded in other assets in the consolidated balance sheets.

On June 22, 2004, the Company formed a second subsidiary business trust, TriCo Capital Trust II, to issue trust preferred securities. Concurrently with the issuance of the trust preferred securities, the trust issued 619 shares of common stock to the Company for $1,000 per share or an aggregate of $619,000. In addition, the Company issued a Junior Subordinated Debenture to the Trust in the amount of $20,619,000. The terms of the Junior Subordinated Debenture are materially consistent with the terms of the trust preferred securities issued by TriCo Capital Trust II. Also on June 22, 2004, TriCo Capital Trust II completed an offering of 20,000 shares of cumulative trust preferred securities for cash in an aggregate amount of $20,000,000. The trust preferred securities are mandatorily redeemable upon maturity on July 23, 2034 with an interest rate that resets quarterly at three-month LIBOR plus 2.55%. TriCo Capital Trust II has the right to redeem the trust preferred securities on or after July 23, 2009. The trust preferred securities were issued through an underwriting syndicate to which the Company paid underwriting fees of $2.50 per trust preferred security or an aggregate of $50,000. The net proceeds of $19,950,000 were used to finance the opening of new branches, improve bank services and technology, repurchase shares of the Company’s common stock under its repurchase plan and increase the Company’s capital. The trust preferred securities have not been and will not be registered under the Securities Act of 1933, as amended, or applicable state securities laws and were sold pursuant to an exemption from registration under the Securities Act of 1933. The trust preferred securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933, as amended, and applicable state securities laws.

 

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Table of Contents

The $20,619,000 of junior subordinated debentures issued by TriCo Capital Trust II are reflected as junior subordinated debt in the consolidated balance sheets. The common stock issued by TriCo Capital Trust II is recorded in other assets in the consolidated balance sheets.

The debentures issued by TriCo Capital Trust I and TriCo Capital Trust II, less the common securities of TriCo Capital Trust I and TriCo Capital Trust II, continue to qualify as Tier 1 or Tier 2 capital under interim guidance issued by the Board of Governors of the Federal Reserve System (Federal Reserve Board). As of March 31, 2012, the interest rates on the junior subordinated debentures issued by TriCo Capital Trust I and II were 3.622% and 3.111%, respectively.

Note 18 – Commitments and Contingencies

Restricted Cash Balances— Reserves (in the form of deposits with the Federal Reserve Bank) of $24,042,000 and $20,143,000 were maintained to satisfy Federal regulatory requirements at March 31, 2012 and December 31, 2011, respectively. These reserves are included in cash and due from banks in the accompanying balance sheets.

Lease Commitments— The Company leases 51 sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term.

At December 31, 2011, future minimum commitments under non-cancelable operating leases with initial or remaining terms of one year or more are as follows:

 

     Operating
Leases
 
     (In thousands)  

2012

   $ 2,773   

2013

     2,260   

2014

     1,658   

2015

     1,032   

2016

     446   

Thereafter

     712   
  

 

 

 

Future minimum lease payments

   $ 8,881   
  

 

 

 

Rent expense under operating leases was $832,000 and $693,000 during the three months ended March 31, 2012 and 2011, respectively

Financial Instruments with Off-Balance-Sheet Risk— The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and deposit account overdraft privilege. Those instruments involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same

credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company’s exposure to loss in the event of nonperformance by the other party to the financial instrument for deposit account overdraft privilege is represented by the overdraft privilege amount disclosed to the deposit account holder.

The following table presents a summary of the Bank’s commitments and contingent liabilities:

 

(In thousands)    March 31,
2012
     December 31,
2011
 

Financial instruments whose amounts represent risk:

     

Commitments to extend credit:

     

Commercial loans

   $ 137,896       $ 119,634   

Consumer loans

     379,371         380,489   

Real estate mortgage loans

     20,893         22,277   

Real estate construction loans

     6,017         6,646   

Standby letters of credit

     4,536         5,324   

Deposit account overdraft privilege

     63,697         61,623   

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of one year or less or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of

 

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Table of Contents

collateral obtained, if deemed necessary by the Company upon extension of credit, is based on Management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential properties, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most standby letters of credit are issued for one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral requirements vary, but in general follow the requirements for other loan facilities.

Deposit account overdraft privilege amount represents the unused overdraft privilege balance available to the Company’s deposit account holders who have deposit accounts covered by an overdraft privilege. The Company has established an overdraft privilege for certain of its deposit account products whereby all holders of such accounts who bring their accounts to a positive balance at least once every thirty days receive the overdraft privilege. The overdraft privilege allows depositors to overdraft their deposit account up to a predetermined level. The predetermined overdraft limit is set by the Company based on account type.

Legal Proceedings—The Bank owns 10,214 shares of Class B common stock of Visa Inc. which are convertible into Class A common stock at a conversion ratio of 0.4881 per Class A share. As of March 31, 2012, the value of the Class A shares was $118.00 per share. Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the Company was $588,000 as of March 31, 2012, and has not been reflected in the accompanying financial statements. The shares of Visa Class B common stock are restricted and may not be transferred. Visa Member Banks are required to fund an escrow account to cover settlements, resolution of pending litigation and related claims. If the funds in the escrow account are insufficient to settle all the covered litigation, Visa may sell additional Class A shares, use the proceeds to settle litigation, and further reduce the conversion ratio. If funds remain in the escrow account after all litigation is settled, the Class B conversion ratio will be increased to reflect that surplus.

The Company is a defendant in legal actions arising from normal business activities. Management believes, after consultation with legal counsel, that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company’s consolidated financial position or results from operations.

Other Commitments and Contingencies—The Company has entered into employment agreements or change of control agreements with certain officers of the Company providing severance payments and accelerated vesting of benefits under supplemental retirement agreements to the officers in the event of a change in control of the Company and termination for other than cause or after a substantial and material change in the officer’s title, compensation or responsibilities.

Mortgage loans sold to investors may be sold with servicing rights retained, with only the standard legal representations and warranties regarding recourse to the Bank. Management believes that any liabilities that may result from such recourse provisions are not significant.

Note 19 – Shareholders’ Equity

Dividends Paid

The Bank paid to the Company cash dividends in the aggregate amounts of $1,625,000 during the three months ended March 31, 2012. The Bank is regulated by the FDIC and the State of California Department of Financial Institutions. Absent approval from the Commissioner of Financial Institutions of California, California banking laws generally limit the Bank’s ability to pay dividends to the lesser of (1) retained earnings or (2) net income for the last three fiscal years, less cash distributions paid during such period.

Shareholders’ Rights Plan

On June 25, 2001, the Company announced that its Board of Directors adopted and entered into a Shareholder Rights Plan designed to protect and maximize shareholder value and to assist the Board of Directors in ensuring fair and equitable benefit to all shareholders in the event of a hostile bid to acquire the Company. On July 8, 2011, the Company amended the Rights Plan to extend its maturity until July 10, 2021.

The Company adopted this Rights Plan to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, the Rights Plan imposes a significant penalty upon any person or group that acquires 15% or more of the Company’s outstanding common stock without approval of the Company’s Board of Directors. The Rights Plan was not adopted in response to any known attempt to acquire control of the Company.

Under the Rights Plan, a dividend of one Preferred Stock Purchase Right was declared for each common share held of record as of the close of business on July 10, 2001. No separate certificates evidencing the rights will be issued unless and until they become exercisable.

The rights generally will not become exercisable unless an acquiring entity accumulates or initiates a tender offer to purchase 15% or more of the Company’s common stock. In that event, each right will entitle the holder, other than the unapproved acquirer and its affiliates, to purchase either the Company’s common stock or shares in an acquiring entity at one-half of market value.

The rights’ initial exercise price, which is subject to adjustment, is $49.00 per right. The Company’s Board of Directors generally will be entitled to redeem the rights at a redemption price of $0.01 per right until an acquiring entity acquires a 15% position.

 

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Table of Contents

Stock Repurchase Plan

On August 21, 2007, the Board of Directors adopted a plan to repurchase, as conditions warrant, up to 500,000 shares of the Company’s common stock on the open market. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. The 500,000 shares authorized for repurchase under this stock repurchase plan represented approximately 3.2% of the Company’s 15,814,662 outstanding common shares as of August 21, 2007. This stock repurchase plan has no expiration date. As of March 31, 2012, the Company had repurchased 166,600 shares under this plan.

Stock Repurchased Under Equity Compensation Plans

During the three months ended March 31, 2012 employees tendered no shares of the Company’s common stock in lieu of cash to exercise options to purchase shares of the Company’s stock or to pay income taxes related to such exercises as permitted by the Company’s shareholder-approved equity compensation plans. Such tendered shares are considered repurchased shares but are not counted against the repurchase plan noted above.

Note 20 – Stock Options and Other Equity-Based Incentive Instruments

In March 2009, the Company’s Board of Directors adopted the TriCo Bancshares 2009 Equity Incentive Plan (2009 Plan) covering officers, employees, directors of, and consultants to, the Company. The 2009 Plan was approved by the Company’s shareholders in May 2009. The 2009 Plan allows for the granting of the following types of “stock awards” (Awards): incentive stock options, nonstatutory stock options, performance awards, restricted stock, restricted stock unit awards and stock appreciation rights. Subject to certain adjustments, the maximum aggregate number of shares of TriCo’s common stock which may be issued pursuant to or subject to Awards is 650,000. The number of shares available for issuance under the 2009 Plan shall be reduced by: (i) one share for each share of common stock issued pursuant to a stock option or a Stock Appreciation Right and (ii) two shares for each share of common stock issued pursuant to a Performance Award, a Restricted Stock Award or a Restricted Stock Unit Award. When Awards made under the 2009 Plan expire or are forfeited or cancelled, the underlying shares will become available for future Awards under the 2009 Plan. To the extent that a share of common stock pursuant to an Award that counted as two shares against the number of shares again becomes available for issuance under the 2009 Plan, the number of shares of common stock available for issuance under the 2009 Plan shall increase by two shares. Shares awarded and delivered under the 2009 Plan may be authorized but unissued, or reacquired shares. As of March 31, 2012, 399,000 options for the purchase of common shares remain outstanding, and 251,000 remain available for grant, under the 2009 Plan.

In May 2001, the Company adopted the TriCo Bancshares 2001 Stock Option Plan (2001 Plan) covering officers, employees, directors of, and consultants to, the Company. Under the 2001 Plan, the option exercise price cannot be less than the fair market value of the Common Stock at the date of grant except in the case of substitute options. Options for the 2001 Plan expire on the tenth anniversary of the grant date. Vesting schedules under the 2001 Plan are determined individually for each grant. As of March 31, 2012, 851,935 options for the purchase of common shares remain outstanding under the 2001 Plan. No new options may be granted under the 2001 Plan. Stock option activity is summarized in the following table for the time period indicated:

 

    

Number

of Shares

   

Option Price

per Share

   Weighted
Average
Exercise
Price
     Weighted
Average Fair
Value on
Date of Grant
 

Outstanding at December 31, 2011

     1,250,935      $11.72 to $25.91    $ 17.18      

Options granted

     —        —  to—        —           —     

Options exercised

     —        —  to—        —        

Options forfeited

     —        —  to—        —        

Outstanding at March 31, 2012

     1,250,935      $11.72 to $25.91    $ 17.18      

The following table shows the number, weighted-average exercise price, intrinsic value, and weighted average remaining contractual life of options exercisable, options not yet exercisable and total options outstanding as of March 31, 2012:

 

(In thousands except exercise price)    Currently
Exercisable
     Currently Not
Exercisable
     Total
Outstanding
 

Number of options

     861,845         369,090         1,250,935   

Weighted average exercise price

   $ 17.60       $ 16.26       $ 17.18   

Intrinsic value (thousands)

   $ 1,429       $ 636       $ 2,065   

Weighted average remaining contractual term (yrs.)

     3.4         8.6         5.0   

The 369,090 options that are currently not exercisable as of March 31, 2012 are expected to vest, on a weighted-average basis, over the next 3.2 years, and the Company is expected to recognize $2,274,000 of pre-tax compensation costs related to these options as they vest. The Company did not modify any option grants in 2011 or 2012.

 

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Table of Contents

Note 21 – Noninterest Income and Expenses

The components of other noninterest income were as follows (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Service charges on deposit accounts

   $ 3,527      $ 3,430   

ATM and interchange fees

     1,819        1,645   

Other service fees

     603        406   

Mortgage banking service fees

     372        361   

Change in value of mortgage servicing rights

     (369     (60
  

 

 

   

 

 

 

Total service charges and fees

     5,952        5,782   
  

 

 

   

 

 

 

Gain on sale of loans

     1,650        725   

Commissions on sale of non-deposit investment products

     819        360   

Increase in cash value of life insurance

     450        450   

Change in indemnification asset

     (353     1,692   

(Loss) gain on sale of foreclosed assets

     (358     200   

Sale of customer checks

     73        59   

Lease brokerage income

     58        33   

Loss on disposal of fixed assets

     (235     (9

Commission rebates

     (16     (17

Other

     225        75   
  

 

 

   

 

 

 

Total other noninterest income

     2,313        3,568   
  

 

 

   

 

 

 

Total noninterest income

   $ 8,265      $ 9,350   
  

 

 

   

 

 

 

Mortgage loan servicing fees, net of change in fair value of mortgage loan servicing rights, totaling $3,000 and $301,000 were recorded in service charges and fees noninterest income for the three months ended March 31, 2012 and 2011, respectively.

The components of noninterest expense were as follows (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Base salaries, net of deferred loan origination costs

   $ 8,159      $ 7,004   

Incentive compensation

     1,375        916   

Benefits and other compensation costs

     3,228        2,873   
  

 

 

   

 

 

 

Total salaries and benefits expense

     12,762        10,793   
  

 

 

   

 

 

 

Occupancy

     1,716        1,460   

Equipment

     1,117        921   

Data processing and software

     1,429        852   

ATM network charges

     567        482   

Telecommunications

     555        406   

Postage

     256        216   

Courier service

     189        208   

Advertising

     498        432   

Assessments

     606        867   

Operational losses

     116        109   

Professional fees

     423        287   

Foreclosed assets expense

     525        167   

Provision for foreclosed asset losses

     83        449   

Change in reserve for unfunded commitments

     (190     50   

Intangible amortization

     53        85   

Other

     2,210        1,887   
  

 

 

   

 

 

 

Total other noninterest expense

     10,153        8,878   
  

 

 

   

 

 

 

Total noninterest income

   $ 22,915      $ 19,671   
  

 

 

   

 

 

 

 

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Table of Contents

Note 22 – Income Taxes

The provisions for income taxes applicable to income before taxes differ from amounts computed by applying the statutory Federal income tax rates to income before taxes. The effective tax rate and the statutory federal income tax rate are reconciled for the periods indicated as follows:

 

     Three months ended
March  31,
 
     2012     2011  

Federal statutory income tax rate

     35.0     35.0

State income taxes, net of federal tax benefit

     6.3        5.7   

Tax-exempt interest on municipal obligations

     (0.6     (1.1

Increase in cash value of insurance policies

     (2.5     (3.6

Other

     0.3        0.1   
  

 

 

   

 

 

 

Effective Tax Rate

     38.5     36.1
  

 

 

   

 

 

 

Note 23 – Earnings Per Share

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate solely from outstanding stock options, and are determined using the treasury stock method. Earnings per share have been computed based on the following:

 

     Three months ended
March 31,
 
(In thousands)    2012      2011  

Net income

   $ 3,931       $ 2,800   

Average number of common shares outstanding

     15,979         15,860   

Effect of dilutive stock options

     64         163   
  

 

 

    

 

 

 

Average number of common shares outstanding used to calculate diluted earnings per share

     16,043         16,023   
  

 

 

    

 

 

 

Options excluded from diluted earnings per share because the effect of these options was antidilutive

     869         763   

Note 24 – 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 and related tax effects are as follows:

 

     Three months ended
March 31,
 
(In thousands)    2012     2011  

Unrealized holding gains (losses) on available-for-sale securities

   $ (265   $ (387

Tax effect

     112        163   
  

 

 

   

 

 

 

Other comprehensive income

   $ (153   $ (224
  

 

 

   

 

 

 

The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:

 

     March 31,
2012
    December 31,
2011
 
     (In thousands)  

Net unrealized gains (losses) on available-for-sale securities

   $ 10,265      $ 10,530   

Tax effect

     (4,315     (4,427
  

 

 

   

 

 

 

Unrealized holding gains (losses) on available-for-sale securities, net of tax

     5,950        6,103   
  

 

 

   

 

 

 

Minimum pension liability

     (3,802     (3,802

Tax effect

     1,598        1,598   
  

 

 

   

 

 

 

Minimum pension liability, net of tax

     (2,204     (2,204
  

 

 

   

 

 

 

Joint beneficiary agreement liability

     (152     (152

Tax effect

     64        64   
  

 

 

   

 

 

 

Joint beneficiary agreement liability, net of tax

     (88     (88
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

   $ 3,658      $ 3,811   
  

 

 

   

 

 

 

 

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Table of Contents

Note 25 – Retirement Plans

The Company has supplemental retirement plans for current and former directors and key executives. These plans are non-qualified defined benefit plans and are unsecured and unfunded. The Company has purchased insurance on the lives of the participants and intends (but is not required) to use the cash values of these policies to pay the retirement obligations. The following table sets forth the net periodic benefit cost recognized for the plans:

 

     Three months ended March 31,  
     2012      2011  
     (In thousands)  

Net pension cost included the following components:

     

Service cost-benefits earned during the period

   $ 170       $ 164   

Interest cost on projected benefit obligation

     172         210   

Amortization of net obligation at transition

     —           1   

Amortization of prior service cost

     38         38   

Recognized net actuarial loss

     72         96   
  

 

 

    

 

 

 

Net periodic pension cost

   $ 452       $ 509   
  

 

 

    

 

 

 

During the three months ended March 31, 2012 and 2011, the Company contributed and paid out as benefits $106,000 and $177,000, respectively, to participants under the plans. For the year ending December 31, 2012, the Company expects to contribute and pay out as benefits $472,000 to participants under the plans.

Note 26 – Related Party Transactions

Certain directors, officers, and companies with which they are associated were customers of, and had banking transactions with, the Company or the Bank in the ordinary course of business. It is the Company’s policy that all loans and commitments to lend to officers and directors be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers of the Bank.

The following table summarizes the activity in these loans for the periods indicated (in thousands):

 

Balance December 31, 2010

   $ 2,571   

Advances/new loans

     378   

Removed/payments

     (1,185
  

 

 

 

Balance December 31, 2011

   $ 1,764   

Advances/new loans

     365   

Removed/payments

     (34
  

 

 

 

Balance March 31, 2012

   $ 2,095   
  

 

 

 

Note 27 – 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. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, income approach, and/or the cost approach. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. 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. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process.

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 observable nature of the assumptions used to determine fair value. These levels are:

 

Level 1 -    Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 -    Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 -    Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Securities available-for-sale-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.

 

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Table of Contents

Loans held for sale – Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subjected to nonrecurring fair value adjustments as Level 2.

Impaired originated loans – Originated loans are not recorded at fair value on a recurring basis. However, from time to time, an originated loan is considered impaired and an allowance for loan losses is established. Originated loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of an impaired originated loan is estimated using one of several methods, including collateral value, fair value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired originated 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. Impaired originated 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 originated 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 unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the impaired originated loan as nonrecurring Level 3.

Foreclosed assets – Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets 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. When the fair value of foreclosed assets is based on an observable market price or a current appraised value which uses substantially observable data, the Company records the impaired originated 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 unobservable assumption, such as deviations from comparable sales, and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. The Company records foreclosed assets as nonrecurring Level 3.

Mortgage servicing rights – 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 computation 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 and is therefore considered an unobservable input. As such, the Company classifies mortgage servicing rights subjected to recurring fair value adjustments as Level 3. Additional information regarding mortgage servicing rights can be found in Note 10 in the consolidated financial statements at Item 1 of this report.

Goodwill and other intangible assets – Goodwill and other intangible assets are subject to impairment testing. A projected cash flow valuation method is used in the completion of impairment testing. This valuation method requires a significant degree of management judgment as there are unobservable inputs for these assets. In the event the projected undiscounted net operating cash flows are less than the carrying value, the asset is recorded at fair value as determined by the valuation model. As such, the Company classifies goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):

 

Fair value at March 31, 2012    Total      Level 1      Level 2      Level 3  

Securities available-for-sale:

           

Obligations of U.S. government corporations and agencies

   $ 200,294         —         $ 200,294         —     

Obligations of states and political subdivisions

     9,976         —           9,976         —     

Corporate debt securities

     1,887         —           1,887         —     

Mortgage servicing rights

     4,784         —           —         $ 4,784   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 216,941         —         $ 212,157       $ 4,784   
  

 

 

    

 

 

    

 

 

    

 

 

 
Fair value at December 31, 2011    Total      Level 1      Level 2      Level 3  

Securities available-for-sale:

           

Obligations of U.S. government corporations and agencies

   $ 217,384         —         $ 217,384         —     

Obligations of states and political subdivisions

     10,028         —           10,028         —     

Corporate debt securities

     1,811         —           1,811         —     

Mortgage servicing rights

     4,603         —           —         $ 4,603   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 233,826         —         $ 229,223       $ 4,603   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended March 31, 2012 and 2011. The amount included in the “Transfer into Level 3” column represents the beginning balance of an item in the period (interim quarter) for which it was designated as a Level 3 fair value measure (in thousands):

 

Three months ended March 31,    Beginning
Balance
     Transfers
into Level 3
     Change
Included
in Earnings
    Issuances      Ending
Balance
 

2012: Mortgage servicing rights

   $ 4,603         —           (369     550       $ 4,784   

2011: Mortgage servicing rights

   $ 4,605         —           (60     263       $ 4,808   

The tables below present information about assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated (in thousands):

 

March 31, 2012    Total      Level 1      Level 2      Level 3  

Fair value:

           

Impaired loans

   $ 18,151         —           —         $ 18,151   

Noncovered foreclosed assets

     11,500         —           —           11,500   

Covered foreclosed assets

     3,289         —           —           3,289   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 32,940         —           —         $ 32,940   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

March 31, 2011    Total      Level 1      Level 2      Level 3  

Fair value:

           

Impaired loans

   $ 19,634         —           —         $ 19,634   

Noncovered foreclosed assets

     4,472         —           —           4,472   

Covered foreclosed assets

     4,511         —           —           4,511   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 28,617         —           —         $ 28,617   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the losses resulting from nonrecurring fair value adjustments that occurred in the periods indicated:

 

     Three months ended March 31,  
(In thousands)    2012      2011  

Impaired Originated loans

   $ 1,469       $ 3,462   

Noncovered foreclosed assets

     83         68   

Covered foreclosed assets

     —           381   
  

 

 

    

 

 

 

Total loss from nonrecurring fair value adjustments

   $ 1,552       $ 3,911   
  

 

 

    

 

 

 

In addition to the methods and assumptions used to estimate the fair value of each class of financial instrument noted above, the following methods and assumptions were used to estimate the fair value of other classes of financial instruments for which it is practical to estimate the fair value.

Short-term Instruments – Cash and due from banks, fed funds purchased and sold, interest receivable and payable, and short-term borrowings are considered short-term instruments. For these short-term instruments their carrying amount approximates their fair value.

Restricted Equity Securities – The carrying value of restricted equity securities approximates fair value as the shares can only be redeemed by the issuing institution at par.

Originated and PNCI loans – The fair value of variable rate originated and PNCI loans is the current carrying value. The interest rates on these originated and PNCI loans are regularly adjusted to market rates. The fair value of other types of fixed rate originated and PNCI loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. The allowance for loan losses is a reasonable estimate of the valuation allowance needed to adjust computed fair values for credit quality of certain originated and PNCI loans in the portfolio.

PCI Loans – PCI loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value.

FDIC Indemnification Asset – The fair value of the FDIC indemnification asset is based on the discounted value of expected future cash flows under the loss-share agreement.

Deposit Liabilities – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. These values do not consider the estimated fair value of the Company’s core deposit intangible, which is a significant unrecognized asset of the Company. The fair value of time deposits and other borrowings is based on the discounted value of contractual cash flows.

Other Borrowings – The fair value of other borrowings is calculated based on the discounted value of the contractual cash flows using current rates at which such borrowings can currently be obtained.

 

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Table of Contents

Junior Subordinated Debentures – The fair value of junior subordinated debentures is estimated using a discounted cash flow model. The future cash flows of these instruments are extended to the next available redemption date or maturity date as appropriate based upon the spreads of recent issuances or quotes from brokers for comparable bank holding companies compared to the contractual spread of each junior subordinated debenture measured at fair value.

Commitments to Extend Credit and Standby Letters of Credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counter parties at the reporting date.

Fair values for financial instruments are management’s estimates of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including, any mortgage banking operations, deferred tax assets, and premises and equipment. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of these estimates.

The estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in thousands):

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets:

           

Level 1 inputs:

           

Cash and due from banks

   $ 74,542       $ 74,542       $ 73,652       $ 73,652   

Cash at Federal Reserve and other banks

     607,218         607,218         563,623         563,623   

Level 2 inputs:

           

Restricted equity securities

     10,508         10,508         10,610         10,610   

Loans held for sale

     5,869         5,869         10,219         10,219   

Level 3 inputs:

           

Loans, net

     1,465,633         1,538,156         1,505,118         1,579,084   

Indemnification asset

     3,405         3,405         4,405         4,405   

Financial liabilities:

           

Level 2 inputs:

           

Deposits

     2,169,746         2,172,109         2,190,536         2,193,170   

Other borrowings

     69,074         69,989         72,541         74,027   

Junior subordinated debt

     41,238         25,155         41,238         25,980   
     Contract
Amount
     Fair
Value
     Contract
Amount
     Fair
Value
 

Off-balance sheet:

           

Level 3 inputs:

           

Commitments

   $ 544,177       $ 5,442       $ 529,046       $ 5,290   

Standby letters of credit

     4,536         45         5,324         53   

Overdraft privilege commitments

     63,697         637         61,623         616   

 

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Table of Contents

Note 28 – TriCo Bancshares Parent Only Financial Statements

 

Balance Sheets    March 31,
2012
     December 31,
2011
 
Assets    (In thousands)  

Cash and Cash equivalents

   $ 627       $ 706   

Investment in Tri Counties Bank

     258,698         256,010   

Other assets

     1,238         1,238   
  

 

 

    

 

 

 

Total assets

   $ 260,563       $ 257,954   
  

 

 

    

 

 

 

Liabilities and shareholders’ equity

     

Other liabilities

   $ 287       $ 275   

Junior subordinated debt

     41,238         41,238   
  

 

 

    

 

 

 

Total liabilities

     41,525         41,513   

Shareholders’ equity:

     

Common stock, no par value: authorized 50,000,000 shares; issued and outstanding 15,978,958 and 15,978,958 shares, respectively

     84,336         84,079   

Retained earnings

     131,044         128,551   

Accumulated other comprehensive loss, net

     3,658         3,811   
  

 

 

    

 

 

 

Total shareholders’ equity

     219,038         216,441   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 260,563       $ 257,954   
  

 

 

    

 

 

 

 

Statements of Income    Three months ended March 31,  
     2012     2011  
     (In thousands)  

Interest expense

   $ 338      $ 310   

Administration expense

     131        147   
  

 

 

   

 

 

 

Loss before equity in net income of Tri Counties Bank

     (469     (457

Equity in net income of Tri Counties Bank:

    

Distributed

     1,625        1,675   

(Over) under distributed

     2,583        1,389   

Income tax benefit

     192        193   
  

 

 

   

 

 

 

Net income

   $ 3,931      $ 2,800   
  

 

 

   

 

 

 

 

Statements of Comprehensive Income    Three months ended March 31,  
     2012     2011  
     (In thousands)  

Net income

   $ 3,931      $ 2,800   

Other comprehensive income, net of tax:

    

Unrealized holding gains (losses) on securities arising during the period

     (153     (224
  

 

 

   

 

 

 

Other comprehensive loss

     (153     (224
  

 

 

   

 

 

 

Comprehensive income

   $ 3,778      $ 2,576   
  

 

 

   

 

 

 

 

Statements of Cash Flows    Three months ended March 31,  
     2012     2011  
     (In thousands)  

Operating activities:

    

Net income

   $ 3,931      $ 2,800   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Over (under) distributed equity in earnings of Tri Counties Bank

     (2,583     (1,389

Stock option vesting expense

     257        265   

Net change in other assets and liabilities

     (246     (270
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,359        1,406   

Investing activities: None

    

Financing activities:

    

Cash dividends paid — common

     (1,438     (1,427
  

 

 

   

 

 

 

Net cash used for financing activities

     (1,438     (1,427
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (79     (21
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of year

     706        633   
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 627      $ 612   
  

 

 

   

 

 

 

 

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Table of Contents

Note 29 – Regulatory Matters

The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of March 31, 2012, that the Company meets all capital adequacy requirements to which it is subject.

As of March 31, 2012, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that Management believes have changed the institution’s category. The Bank’s actual capital amounts and ratios are also presented in the table.

 

     Actual     Minimum
Capital Requirement
    Minimum to be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (dollars in thousands)  

As of March 31, 2012:

               

Total Capital (to Risk Weighted Assets):

               

Consolidated

   $ 261,310         14.28   $ 146,344         8.0     N/A         N/A   

Tri Counties Bank

   $ 260,954         14.28   $ 146,244         8.0   $ 182,805         10.0

Tier 1 Capital (to Risk Weighted Assets):

               

Consolidated

   $ 238,133         13.02   $ 73,172         4.0     N/A         N/A   

Tri Counties Bank

   $ 237,793         13.01   $ 73,122         4.0   $ 109,683         6.0

Tier 1 Capital (to Average Assets):

               

Consolidated

   $ 238,133         9.54   $ 99,892         4.0     N/A         N/A   

Tri Counties Bank

   $ 237,793         9.53   $ 99,840         4.0   $ 124,800         5.0

As of December 31, 2011:

               

Total Capital (to Risk Weighted Assets):

               

Consolidated

   $ 258,871         13.94   $ 148,529         8.0     N/A         N/A   

Tri Counties Bank

   $ 258,425         13.93   $ 148,429         8.0   $ 185,536         10.0

Tier 1 Capital (to Risk Weighted Assets):

               

Consolidated

   $ 235,349         12.68   $ 74,265         4.0     N/A         N/A   

Tri Counties Bank

   $ 234,919         12.66   $ 74,214         4.0   $ 111,322         6.0

Tier 1 Capital (to Average Assets):

               

Consolidated

   $ 235,349         9.46   $ 99,563         4.0     N/A         N/A   

Tri Counties Bank

   $ 234,919         9.44   $ 99,511         4.0   $ 124,389         5.0

 

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Table of Contents

Note 30 – Summary of Quarterly Results of Operations (unaudited)

The following table sets forth the results of operations for the quarters of 2012 and 2011, and is unaudited; however, in the opinion of Management, it reflects all adjustments (which include only normal recurring adjustments) necessary to present fairly the summarized results for such periods.

 

     2012 Quarters Ended  
     March 31,  
    

(In thousands,

except per share data)

 

Interest and dividend income:

  

Loans:

  

Discount accretion PCI – cash basis

   $ 18   

Discount accretion PCI – other

     776   

Discount accretion PNCI

     1,286   

Regular interest Purchased loans

     3,420   

All other loan interest income

     19,429   

Total loan interest income

     24,929   

Debt securities, dividends and interest bearing cash at Banks (not FTE)

     2,235   

Total interest income

     27,164   

Interest expense

     2,128   

Net interest income

     25,036   

Provision for loan losses

     3,996   

Net interest income after provision for loan losses

     21,040   

Noninterest income

     8,265   

Noninterest expense

     22,915   

Income before income taxes

     6,390   

Income tax expense

     2,459   

Net income

   $ 3,931   

Per common share:

  

Net income (diluted)

   $ 0.25   

Dividends

   $ 0.09   

 

     2011 Quarters Ended  
     December 31,      September 30,      June 30,      March 31,  
     (In thousands, except per share data)  

Interest and dividend income:

           

Loans:

           

Discount accretion PCI – cash basis

   $ 418       $ 28         —           —     

Discount accretion PCI – other

     949         223       $ 185       $ 136   

Discount accretion PNCI

     1,738         —           —           —     

Regular interest Purchased loans

     3,651         978         872         835   

All other loan interest income

     20,491         20,758         20,678         20,751   

Total loan interest income

     27,247         21,987         21,735         21,722   

Debt securities, dividends and interest bearing cash at Banks (not FTE)

     2,362         2,485         2,732         2,712   

Total interest income

     29,609         24,472         24,467         24,434   

Interest expense

     2,329         2,465         2,714         2,730   

Net interest income

     27,280         22,007         21,753         21,704   

Provision for loan losses

     5,429         5,069         5,561         7,001   

Net interest income after provision for loan losses

     21,851         16,938         16,192         14,703   

Noninterest income

     10,489         14,723         8,251         9,350   

Noninterest expense

     22,076         20,873         20,095         19,671   

Income before income taxes

     10,264         10,788         4,348         4,382   

Income tax expense

     3,715         4,318         1,577         1,582   

Net income

   $ 6,549       $ 6,470       $ 2,771       $ 2,800   

Per common share:

           

Net income (diluted)

   $ 0.41       $ 0.40       $ 0.17       $ 0.17   

Dividends

   $ 0.09       $ 0.09       $ 0.09       $ 0.09   

 

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Table of Contents

TRICO BANCSHARES

Financial Summary

(In thousands, except per share amounts; unaudited)

 

     Three months ended
March 31,
 
     2012     2011  

Net Interest Income (FTE)

   $ 25,101      $ 21,787   

Provision for loan losses

     (3,996     (7,001

Noninterest income

     8,265        9,350   

Noninterest expense

     (22,915     (19,671

Provision for income taxes (FTE)

     (2,524     (1,665
  

 

 

   

 

 

 

Net income

   $ 3,931      $ 2,800   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.25      $ 0.18   

Diluted

   $ 0.25      $ 0.17   

Per share:

    

Dividends paid

   $ 0.09      $ 0.09   

Book value at period end

   $ 13.71      $ 12.72   

Tangible book value at period end

   $ 12.66      $ 11.71   

Average common shares outstanding

     15,979        15,860   

Average diluted common shares outstanding

     16,043        16,023   

Shares outstanding at period end

     15,979        15,860   

At period end:

    

Loans, net

   $ 1,465,633      $ 1,344,436   

Total assets

     2,532,908        2,195,738   

Total deposits

     2,169,746        1,859,912   

Other borrowings

     69,074        57,781   

Junior subordinated debt

     41,238        41,238   

Shareholders’ equity

   $ 219,038      $ 201,811   

Financial Ratios:

    

During the period (annualized):

    

Return on assets

     0.63     0.51

Return on equity

     7.14     5.50

Net interest margin1

     4.30     4.31

Net loan charge-offs to average loans

     1.17     1.82

Efficiency ratio1

     68.7     63.2

Average equity to average assets

     8.76     9.30

At period end:

    

Equity to assets

     8.65     9.19

Total capital to risk-adjusted assets

     14.28     14.45

Allowance for losses to loans2

     3.01     3.31

 

1 

Fully taxable equivalent (FTE)

2 

Allowance for losses includes allowance for loan losses and reserve for unfunded commitments.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

As TriCo Bancshares (referred to in this report as “we”, “our” or the “Company”) has not commenced any business operations independent of Tri Counties Bank (the “Bank”), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income 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 of America. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those that materially affect the consolidated financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans, acquired loans, indemnification asset and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company’s policies related to estimates can be found in Note 1 in the consolidated financial statements at Item 1 of this report.

As the Company has not commenced any business operations independent of the Bank, the following discussion pertains primarily to the Bank. Average balances, including 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, certain performance measures including interest income, net interest income, net interest yield, and efficiency ratio are generally presented on a fully tax-equivalent (FTE) basis. The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results.

On September 23, 2011, the California Department of Financial Institutions closed Citizens Bank of Northern California (“Citizens”), Nevada City, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Citizens from the FDIC under a whole bank purchase and assumption agreement without loss sharing. With this agreement, the Bank added seven traditional bank branches including two in Grass Valley, and one in each of Nevada City, Penn Valley, Lake of the Pines, Truckee, and Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and provides further opportunity to fill in the Bank’s market presence in the Northern California market. During the quarter ended March 31, 2012, the Bank consolidated the operations of Citizens’ Auburn branch with the Bank’s existing Auburn branch.

On May 28, 2010, the Office of the Comptroller of the Currency closed Granite Community Bank (“Granite”), Granite Bay, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Granite from the FDIC under a whole bank purchase and assumption agreement with loss sharing. Under the terms of the loss sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, other real estate owned (OREO)/foreclosed assets and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the covered assets acquired from Granite. The loss sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. With this agreement, the Bank added one traditional bank branch in each of Granite Bay and Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and provides further opportunity to fill in the Bank’s market presence in the greater Sacramento, California market.

The Company refers to loans and foreclosed assets that are covered by loss sharing agreements as “covered loans” and “covered foreclosed assets”, respectively. In addition, the Company refers to loans purchased or obtained in a business combination as “purchased credit impaired” (PCI) loans, or “purchased non-credit impaired” (PNCI) loans. The Company refers to loans that it originates as “Originated” loans. Additional information regarding the Citizens and Granite Bank acquisitions can be found in Note 2 in the consolidated financial statements at Item 1 of this report. Additional information regarding the definitions and accounting for originated, PNCI and PCI loans can be found in Notes 1, 2, 4 and 5 in the consolidated financial statements at Item 1 of this report, and under the heading Asset Quality and Non-Performing Assets below.

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that area of California north of, and including, Stockton; central California as that area of the State south of Stockton, to and including, Bakersfield; and southern California as that area of the State south of Bakersfield.

 

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Table of Contents

Results of Operations

Overview

The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report.

Following is a summary of the components of fully taxable equivalent (“FTE”) net income for the periods indicated (dollars in thousands):

 

     Three months ended
March 31,
 
     2012     2011  

Net Interest Income (FTE)

   $ 25,101      $ 21,787   

Provision for loan losses

     (3,996     (7,001

Noninterest income

     8,265        9,350   

Noninterest expense

     (22,915     (19,671

Provision for income taxes (FTE)

     (2,524     (1,665
  

 

 

   

 

 

 

Net income

   $ 3,931      $ 2,800   
  

 

 

   

 

 

 

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
March 31,
 
     2012     2011  

Interest income

   $ 27,164      $ 24,434   

Interest expense

     (2,128     (2,730

FTE adjustment

     65        83   
  

 

 

   

 

 

 

Net interest income (FTE)

   $ 25,101      $ 21,787   
  

 

 

   

 

 

 

Net interest margin (FTE)

     4.30     4.31
  

 

 

   

 

 

 

Net interest income (FTE) during the first quarter of 2012 increased $3,314,000 (15.2%) from the same period in 2011 to $25,101,000. The increase in net interest income (FTE) was due to a $131,205,000 (9.4%) increase in average balance of loans and a 31 basis point increase in average yield on loans, both of which are due to the Citizens acquisition in September 2011. The operations of Citizens from January 1, 2012 to March 31, 2012 added approximately $4,584,000 and $8,000 to interest income and interest expense, respectively. Included in the $4,584,000 of Citizens related interest income recorded from January 1, 2012 to March 31, 2012, is $1,972,000 of interest income from fair value discount accretion. For more information related to the increase in average yield on loans, see the details of loan interest income and purchase discount accretion at Note 30 to the consolidated financial statements at Part I, Item 1 of this report. Also contributing to the increase in net interest margin during this first quarter of 2012 was a 17 basis decrease in the cost of deposits from 0.39% during the three months ended March 31, 2011 to 0.22% during the three months ended March 31, 2012. Despite these positive factors noted above, the Company’s ability to deploy excess deposits into some interest-earning asset other than short-term low-yield interest-earning cash at the Federal Reserve Bank has been limited. This limitation is the result of weak loan demand and investment yields that have been unattractive given their interest rate risk profile.

 

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Table of Contents

Summary of Average Balances, Yields/Rates and Interest Differential

The following table presents, for the periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).

 

     For the three months ended  
     March 31, 2012     March 31, 2011  
     Average
Balance
     Interest
Income/
Expense
     Rates
Earned
/Paid
    Average
Balance
     Interest
Income/
Expense
     Rates
Earned
/Paid
 

Assets:

                

Loans

   $ 1,527,536       $ 24,929         6.53   $ 1,396,331       $ 21,722         6.22

Investment securities - taxable

     224,737         1,759         3.13     276,497         2,381         3.44

Investment securities - nontaxable

     9,561         173         7.24     12,063         223         7.38

Cash at Federal Reserve and other banks

     573,008         368         0.26     339,394         191         0.23
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     2,334,842         27,229         4.66     2,024,285         24,517         4.84

Other assets

     179,699              165,078         
  

 

 

         

 

 

       

Total assets

     2,514,541              2,189,363         
  

 

 

         

 

 

       

Liabilities and shareholders’ equity:

                

Interest-bearing demand deposits

     439,786         217         0.20     402,267         349         0.35

Savings deposits

     790,590         297         0.15     592,084         367         0.25

Time deposits

     402,985         670         0.67     432,166         1,111         1.03

Other borrowings

     70,104         606         3.46     59,223         593         4.01

Junior subordinated debt

     41,238         338         3.28     41,238         310         3.01
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,744,703         2,128         0.49     1,526,978         2,730         0.72

Noninterest-bearing deposits

     515,851              425,089         

Other liabilities

     33,621              33,761         

Shareholders’ equity

     220,366              203,535         
  

 

 

         

 

 

       

Total liabilities and shareholders’ equity

   $ 2,514,541            $ 2,189,363         
  

 

 

         

 

 

       

Net interest spread(1)

           4.17           4.12

Net interest income and interest margin(2)

      $ 25,101         4.30      $ 21,787         4.31
     

 

 

    

 

 

      

 

 

    

 

 

 

 

(1) 

Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

(2) 

Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.

Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid

The following table sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components (in thousands).

 

     Three months ended March 31, 2012
compared with three months
ended March 31, 2011
 
     Volume     Rate     Total  

Increase (decrease) in interest income:

      

Loans

   $ 2,040      $ 1,167      $ 3,207   

Investment securities

     (491     (181     (672

Cash at Federal Reserve and other banks

     134        43        177   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     1,683        1,029        2,712   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in interest expense:

      

Interest-bearing demand deposits

     33        (165     (132

Savings deposits

     124        (194     (70

Time deposits

     (75     (366     (441

Other borrowings

     109        (96     13   

Junior subordinated debt

     —          28        28   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     191        (793     (602
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in Net Interest Income

   $ 1,492      $ 1,822      $ 3,314   
  

 

 

   

 

 

   

 

 

 

 

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Provision for Loan Losses

The Company provided $3,996,000 for loan losses in the first quarter of 2012 versus $5,429,000 in the fourth quarter of 2011 and $7,001,000 in the first quarter of 2011. In accordance with industry guidance, related to real estate 1-4 family junior lien mortgages, issued by bank regulators during the first quarter of 2012, $6,541,000 of performing junior liens were reclassified from a Pass rating to a rating of Special Mention due to concerns regarding the performance of the associated priority liens. This reclassification resulted in additional provisions for loan losses of $1,596,000. Also included in the provision for loan losses during the quarter ended March 31, 2012, was $1,467,000 related to Citizens loans. The allowance for loan losses decreased $462,000 from $45,914,000 at December 31, 2011 to $45,452,000 at March 31, 2012. The decreases in provision for loan losses and in the allowance for loan and lease losses during the first quarter of 2012 were primarily the result of a decrease in nonperforming loans that was partially offset by the increased provision related to real estate 1-4 family junior lien mortgages and the provision related to Citizens loans noted above.

Management re-evaluates the loss ratios and assumptions of its Originated and PNCI loan portfolios and makes changes as appropriate based upon, among other things, changes in loss rates experienced, collateral support for underlying loans, changes and trends in the economy, and changes in the loan mix. Management also re-evaluates expected cash flows for its PCI loan portfolio quarterly and makes changes as appropriate based upon, among other things, changes in loan repayment experience, changes in loss rates experienced, and collateral support for underlying loans.

The provision for loan losses related to Originated and PNCI loans is based on management’s evaluation of inherent risks in these loan portfolios and a corresponding analysis of the allowance for loan losses. The provision for loan losses related to PCI loan portfolio is based on changes in estimated cash flows expected to be collected on PCI loans. Additional discussion on loan quality, our procedures to measure loan impairment, and the allowance for loan losses is provided under the heading Asset Quality and Non-Performing Assets below.

Noninterest Income

The following table summarizes the Company’s noninterest income for the periods indicated (in thousands):

 

     Three months ended
March 31,
 
     2012     2011  

Service charges on deposit accounts

   $ 3,527      $ 3,430   

ATM fees and interchange

     1,819        1,645   

Other service fees

     603        406   

Mortgage banking service fees

     372        361   

Change in value of mortgage servicing rights

     (369     (60
  

 

 

   

 

 

 

Total service charges and fees

     5,952        5,782   

Gain on sale of loans

     1,650        725   

Commissions on sale of nondeposit investment products

     819        360   

Increase in cash value of life insurance

     450        450   

Change in indemnification asset

     (353     1,692   

(Loss) gain on disposition of foreclosed assets

     (358     200   

Other noninterest income

     105        141   
  

 

 

   

 

 

 

Total noninterest income

   $ 8,265      $ 9,350   
  

 

 

   

 

 

 

Noninterest income decreased $1,085,000 (11.6%) to $8,265,000 in the three months ended March 31, 2012 when compared to the three months ended March 31, 2011. The decrease in noninterest income was primarily due to a $2,045,000 decrease in change in indemnification asset to a negative $353,000, and a $558,000 decrease in gain on sale of foreclosed assets, that were partially offset by a $925,000 increase in gain on sale of loans, and a $459,000 increase in commissions on sale of nondeposit investment products (NDIP). The decrease in change in indemnification offset is further offset by a reduced provision for loan losses and increased interest income related to covered loans, and is related to improved credit metrics of covered loans. The increase in gain on sale of loans is due to increased residential real estate loan refinance activity and our focus to service that activity. The increase in commissions on sale of NDIP is due to our application of additional resources in that area. The operations of Citizens from January 1, 2012 to March 31, 2012 accounted for $145,000 of the $8,265,000 of noninterest income during the three months ended March 31, 2012. Included in the $145,000 of Citizens related noninterest income recorded from January 1, 2012 to March 31, 2012, is a $230,000 loss on disposal of fixed assets related to system conversions.

 

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Noninterest Expense

The following table summarizes the Company’s noninterest expense for the periods indicated (in thousands):

 

     Three months ended
March 31,
 
     2012     2011  

Salaries and related benefits:

    

Base salaries, net of deferred loan origination costs

   $ 8,159      $ 7,004   

Incentive compensation

     1,375        916   

Benefits and other compensation costs

     3,228        2,873   
  

 

 

   

 

 

 

Total salaries and related benefits

     12,762        10,793   
  

 

 

   

 

 

 

Other noninterest expense:

    

Occupancy

     1,716        1,460   

Equipment

     1,117        921   

Data processing and software

     1,429        852   

ATM network charges

     567        482   

Telecommunications

     555        406   

Postage

     256        216   

Courier service

     189        208   

Advertising and marketing

     498        432   

Assessments

     606        867   

Operational losses

     116        109   

Professional fees

     423        287   

Foreclosed asset expense

     525        167   

Provision for foreclosed asset losses

     83        449   

Change in reserve for unfunded commitments

     (190     50   

Intangible amortization

     53        85   

Other

     2,210        1,887   
  

 

 

   

 

 

 

Total other noninterest expenses

     10,153        8,878   
  

 

 

   

 

 

 

Total noninterest expense

   $ 22,915      $ 19,671   
  

 

 

   

 

 

 

Average full time equivalent staff

     731        670   

Noninterest expense to revenue (FTE)

     68.7     63.2

Salary and benefit expenses increased $1,969,000 (18.2%) to $12,762,000 during the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Base salaries increased $1,155,000 (16.5%) to $8,159,000 during the three months ended March 31, 2012. The increase in base salaries was mainly due to a 9.1% increase in average full time equivalent staff to 731 and annual merit increases when compared to the three months ended March 31, 2011. The increase in full time equivalent staff is mainly due to the Citizens acquisition on September 23, 2011. Incentive and commission related salary expenses increased $459,000 (50.1%) to $1,375,000 during three months ended March 31, 2012 due primarily to increases in production related incentives and incentives tied to net income. Benefits expense, including retirement, medical and workers’ compensation insurance, and taxes, increased $355,000 (12.4%) to $3,228,000 during the three months ended March 31, 2012 primarily due to the increase in average full time equivalent staff noted above. The operations of Citizens from January 1, 2012 to March 31, 2012 added $894,000 to salaries and benefits expense.

Other noninterest expenses increased $1,275,000 (14.4%) to $10,153,000 during the three months ended March 31, 2012 when compared to the three months ended March 31, 2011. Changes in the various categories of other noninterest expense are reflected in the table above. The changes are indicative of the Citizens acquisition, and the economic environment which has led to increases, or fluctuations, in professional loan collection expenses, provision for foreclosed asset losses, and foreclosed asset expenses. The operations of Citizens from January 1, 2012 to March 31, 2012 added $1,460,000 to other noninterest expense including $621,000 of loan and OREO expenses, and $415,000 of outside data processing expenses related to the system conversions.

Income Taxes

The effective tax rate on income was 38.5% and 36.1% for the three months ended March 31, 2012 and 2011, respectively. The effective tax rate was greater than the federal statutory tax rate due to state tax expense of $660,000 and $381,000, respectively, in these periods. Tax-exempt income of $108,000 and $140,000, respectively, from investment securities, and $450,000 and $450,000, respectively, from increase in cash value of life insurance in these periods, along with relatively low levels of net income before taxes, helped to reduce the effective tax rate.

 

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Table of Contents

Financial Condition

Investment Securities

Investment securities available for sale decreased $17,066,000 to $212,157,000 as of March 31, 2012, as compared to December 31, 2011. This decrease is attributable to maturities of $20,060,000, a decrease in fair value of investments securities available for sale of $265,000, and amortization of net purchase price premiums of $329,000, that were partially offset by investment purchases of $3,588,000.

The following table presents the available for sale investment securities portfolio by major type as of March 31, 2012 and December 31, 2011:

 

(In thousands)    March 31, 2012     December 31, 2011  
   Fair Value      %     Fair Value      %  
Securities Available-for-Sale:           

Obligations of U.S. government corporations and agencies

   $ 200,294         94.4   $ 217,384         94.8

Obligations of states and political subdivisions

     9,976         4.7     10,028         4.4

Corporate debt securities

     1,887         0.9     1,811         0.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities available-for-sale

   $ 212,157         100.0   $ 229,223         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Additional information about the investment portfolio is provided in Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Restricted Equity Securities

Restricted equity securities were $10,508,000 at March 31, 2012 and $10,610,000 at December 31, 2011. The entire balance of restricted equity securities at March 31, 2012 and December 31, 2011 represent the Bank’s investment in the Federal Home Loan Bank of San Francisco (“FHLB”).

FHLB stock is carried at par and does not have a readily determinable fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.

Loans

The Bank concentrates its lending activities in four principal areas: real estate mortgage loans (residential and commercial loans), consumer loans, commercial loans (including agricultural loans), and real estate construction loans. The interest rates charged for the loans made by the Bank vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Bank and prevailing money market rates indicative of the Bank’s cost of funds.

The majority of the Bank’s loans are direct loans made to individuals, farmers and local businesses. The Bank relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Bank makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.

The following table shows the Company’s loan balances, including net deferred loan costs, as of the dates indicated:

 

(In thousands)    March 31,
2012
     December 31,
2011
 

Real estate mortgage

   $ 947,359       $ 965,922   

Consumer

     396,689         406,330   

Commercial

     128,343         139,131   

Real estate construction

     38,694         39,649   
  

 

 

    

 

 

 

Total loans

   $ 1,511,085       $ 1,551,032   
  

 

 

    

 

 

 

At March 31, 2012 loans, including net deferred loan costs, totaled $1,511,085,000 which was a 2.6% ($39,947,000) decrease over the balances at December 31, 2011. Demand for all categories of loans was weak during the three months ended March 31, 2012.

 

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The following table shows the Company’s loan balances, including net deferred loan costs, as a percentage of total loans for the periods indicated:

 

     March 31,
2012
    December 31,
2011
 

Real estate mortgage

     62.6     62.2

Consumer

     26.3     26.2

Commercial

     8.5     9.0

Real estate construction

     2.6     2.6
  

 

 

   

 

 

 

Total loans

     100.0     100.0
  

 

 

   

 

 

 

Asset Quality and Nonperforming Assets

Nonperforming Assets

Loans originated by the Company, i.e., not purchased or acquired in a business combination, are reported at the principal amount outstanding, net of deferred loan fees and costs. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield over the actual life of the loan. Originated loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.

Originated loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal, or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the process of collection. When an originated 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 loan is estimated to be fully collectible as to both principal and interest.

An allowance for loan losses for originated loans is established through a provision for loan losses charged to expense. Originated loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectability 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 collectability, 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 an originated 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 originated 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.

In situations related to originated loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that result in the loan being classified as a TDR, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with respect to their restructured principal balance.

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 originated loan portfolio. This is maintained through periodic charges to earnings. These charges are included 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 originated loan losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio.

The Company formally assesses the adequacy of the allowance for originated loan losses on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding originated loan portfolio, and to a lesser extent the Company’s originated 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

 

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Table of Contents

demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.

The Company’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for impaired originated 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 historical loss experience by product type. Allowances for impaired 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 originated loan portfolio as a whole. The allowance for originated loans is included in the allowance for loan losses.

Acquired loans are valued as of acquisition date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805, Business Combinations. Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI) loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In addition, because of the significant credit discounts associated with the loans acquired in the Granite acquisition, the Company elected to account for all loans acquired in the Granite acquisition under FASB ASC Topic 310-30, and classify them all as PCI loans. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The difference between estimated future payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable yield represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company determines that the future cash flows of a PCI loan are expected to be more than the originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining estimated life of the loan. If after acquisition, the Company determines that the future cash flows of a PCI loan are expected to be less than the previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous present value however, the discount rate may not be lowered below its original level. If the discount rate has been lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan.

Acquired loans that are not PCI loans are referrd to as purchased not credit impaired (PNCI) loans. PNCI loans are accounted for under FASB ASC Topic 310-20, Receivables – Nonrefundable Fees and Other Costs, in which interest income is accrued on a level-yield basis for performing loans. For income recognition purposes, this method assumes that all contractual cash flows will be collected, and no allowance for loan losses is established at the time of acquistion. Post-acquisition date, an allowance for loan losses may need to be established for acquired PNCI loans through a provision charged to earnings for credit losses incurred subsequent to acquisition. Under ASC 310-20, the loss would be measured based on the shortfall in relation to the contractual note requirements.

Loans are also categorized as “covered” or “noncovered”. Covered loans refer to loans covered by a FDIC loss sharing agreement. Noncovered loans refer to loans not covered by a FDIC loss sharing agreement.

Originated loans and PNCI 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 on originated nonaccrual loans that would have been recognized during the months ended March 31, 2012 and 2011, if all such loans had been current in accordance with their original terms, totaled $1,587,000 and $1,601,000, respectively. Interest income actually recognized on these originated loans during the three months ended March 31, 2012 and 2011 was $30,000 and $108,000, respectively. Interest income on PNCI nonaccrual loans that would have been recognized during the three months ended March 31, 2012, if all such loans had been current in accordance with their original terms, totaled $65,000. Interest income actually recognized on these PNCI loans during the three months ended March 31, 2012 was $34,000. During the three months ended March 31, 2012, the Company had no PNCI loans.

 

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Table of Contents

The Company’s policy is to place originated loans and PNCI loans 90 days or more past due on nonaccrual status. In some instances when an originated 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 foreclosed assets.

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.

The following table sets forth the amount of the Bank’s nonperforming assets as of the dates indicated. For purposes of the following table, PCI loans that are 90 days past and still accruing are not considered nonperforming loans:

 

(In thousands)    March 31,
2012
    December 31,
2011
 

Performing nonaccrual loans

   $ 60,933      $ 61,164   

Nonperforming nonaccrual loans

     21,531        23,647   
  

 

 

   

 

 

 

Total nonaccrual loans

     82,464        84,811   

Originated loans 90 days past due and still accruing

     111        920   
  

 

 

   

 

 

 

Total nonperforming loans

     82,575        85,731   

Noncovered foreclosed assets

     11,500        13,268   

Covered foreclosed assets

     3,289        3,064   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 97,364      $ 102,063   
  

 

 

   

 

 

 

U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans

   $ 218      $ 3,061   

Indemnified portion of covered foreclosed assets

   $ 2,631      $ 2,451   

Nonperforming assets to total assets

     3.84     3.99

Nonperforming loans to total loans

     5.46     5.53

Allowance for loan losses to nonperforming loans

     55     54

Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed

     6.25     6.34

The following table sets forth the amount of the Bank’s nonperforming assets as of the dates indicated. For purposes of the following table, PCI loans that are ninety days past and still accruing are not considered nonperforming loans:

 

     March 31, 2012  
(In thousands)    Originated     PNCI     PCI –cash basis     PCI -other     Total  

Performing nonaccrual loans

   $ 49,331      $ 2,093      $ 9,509        —        $ 60,933   

Nonperforming nonaccrual loans

     21,322        53        156        —          21,531   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     70,653        2,146        9,665        —          82,464   

Originated and PNCI loans 90 days past due and still accruing

     111        —          —          —          111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     70,764        2,146        9,665        —          82,575   

Noncovered foreclosed assets

     6,481        —          —          5,019        11,500   

Covered foreclosed assets

     —          —          —          3,289        3,289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 77,245      $ 2,146      $ 9,665      $ 8,308      $ 97,364   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans

   $ 218        —          —          —        $ 218   

Indemnified portion of covered foreclosed assets

     —          —          —        $ 2,631      $ 2,631   

Nonperforming assets to total assets

             3.84

Nonperforming loans to total loans

     5.40     1.76     100     —          5.46

Allowance for loan losses to nonperforming loans

     57     17     13     n/m        55

Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed

     3.21     12.79     61.96     26.99     6.25

 

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Table of Contents
     December 31, 2011  
(In thousands)    Originated     PNCI     PCI – cash basis     PCI -other     Total  

Performing nonaccrual loans

   $ 52,208      $ 97      $ 8,859        —        $ 61,164   

Nonperforming nonaccrual loans

     23,067        13        567        —          23,647   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     75,275        110        9,426        —          84,811   

Originated and PNCI loans 90 days past due and still accruing

     500        420        —          —          920   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     75,775        530        9,426        —          85,731   

Noncovered foreclosed assets

     6,209        —          —          7,059        13,268   

Covered foreclosed assets

     —          —          —          3,064        3,064   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 81,984      $ 530      $ 9,426      $ 10,123      $ 102,063   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

U.S. government, including its agencies and its government-sponsored agencies, guaranteed portion of nonperforming loans

   $ 3,061        —          —          —        $ 3,061   

Indemnified portion of covered foreclosed assets

     —          —          —        $ 2,451      $ 2,451   

Nonperforming assets to total assets

             3.99

Nonperforming loans to total loans

     5.67     0.39     100.00     —          5.53

Allowance for loan losses to nonperforming loans

     55     46     11     n/m        54

Allowance for loan losses, unamortized loan fees, and discounts to loan principal balances owed

     3.27     12.13     62.09     27.37     6.34

n/m – not meaningful

The following table and narrative describe the activity in the balance of nonperforming assets during the three-month period ended March 31, 2012:

Changes in nonperforming assets during the three months ended March 31, 2012

 

(In thousands):    Balance at
March 31,
2012
     New
NPA
     Advances/
Capitalized
Costs
     Pay-
downs /
Sales
    Charge-offs/
Write-downs
    Transfers to
Foreclosed
Assets
    Category
Changes
     Balance at
December 31,
2011
 

Real estate mortgage:

                    

Residential

   $ 8,296       $ 774       $ 15       $ (592   $ (223   $ (203     —         $ 8,525   

Commercial

     42,761         4,050         —           (3,977     (1,305     (692     —           44,685   

Consumer

                    

Home equity lines

     15,905         2,467         387         (508     (2,625     (799     —           16,983   

Home equity loans

     534         45         —           (28     (41     —          —           558   

Auto indirect

     348         68         1         (189     (40     —          —           508   

Other consumer

     147         202         —           (30     (135     —          —           110   

Commercial

     8,286         457         406         (364     (281     —          —           8,068   

Construction:

                    

Residential

     5,647         269         —           (181     (68     —          —           5,627   

Commercial

     651         —           —           (16     —          —          —           667   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total nonperforming loans

     82,575         8,332         809         (5,885     (4,718     (1,694     —           85,731   

Noncovered foreclosed assets

     11,500         —           —           (3,379     (83     1,694        —           13,268   

Covered foreclosed assets

     3,289         —           225         —          —          —          —           3,064   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total nonperforming assets

   $ 97,364       $ 8,332       $ 1,034       $ (9,264   $ (4,801     —          —         $ 102,063   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Nonperforming assets decreased during the first quarter of 2012 by $4,699,000 (4.6%) to $97,364,000 at March 31, 2012 compared to $102,063,000 at December 31, 2011. The decrease in nonperforming assets during the first quarter of 2012 was primarily the result of new nonperforming loans of $8,332,000, advances on existing nonperforming loans and capitalized costs on foreclosed assets of $1,034,000, less pay-downs or upgrades of nonperforming loans to performing status totaling $5,885,000, less dispositions of foreclosed assets totaling $3,379,000, less loan charge-offs of $4,718,000, and less write-downs of foreclosed assets of $83,000.

The primary causes of the $8,332,000 in new nonperforming loans during the first quarter of 2012 were increases of $774,000 on six residential real estate loans, $4,050,000 on 12 commercial real estate loans, $2,512,000 on 42 home equity lines and loans, $68,000 on 16 indirect auto loans, $202,000 on 20 consumer loans, $457,000 on 10 C&I loans, and $269,000 on four residential construction loans.

The $4,050,000 in new nonperforming commercial real estate loans was primarily comprised of four loans totaling $1,913,000 secured by commercial office buildings in northern California, a $962,000 loan secured by a commercial retail building in northern California and a $470,000 loan secured by a commercial warehouse in northern California.

 

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Table of Contents

Loan charge-offs during the three months ended March 31, 2012

In the first quarter of 2012, the Company recorded $4,718,000 in loan charge-offs and $204,000 in deposit overdraft charge-offs less $244,000 in loan recoveries and $220,000 in deposit overdraft recoveries resulting in $4,458,000 of net charge-offs. Primary causes of the charges taken in the first quarter of 2012 were gross charge-offs of $223,000 on nine residential real estate loans, $1,305,000 on six commercial real estate loans, $2,666,000 on 47 home equity lines and loans, $40,000 on 13 auto indirect loans, $135,000 on 17 other consumer loans, $281,000 on 15 C&I loans, and $2,000 on two residential construction loans.

The $1,305,000 in charge-offs the bank took in its commercial real estate portfolio was primarily the result of a $607,000 charge on a loan secured by a commercial warehouse in northern California and a $541,000 charge on a loan secured by an industrial plant facility in northern California. The remaining $157,000 was spread over four loans spread throughout the Company’s footprint.

Differences between the amounts explained in this section and the total charge-offs listed for a particular category are generally made up of individual charges of less than $250,000 each. Generally losses are triggered by non-performance by the borrower and calculated based on any difference between the current loan amount and the current value of the underlying collateral less any estimated costs associated with the disposition of the collateral.

Allowance for Loan Losses

The Company’s allowance for loan losses is comprised of allowances for originated, PNCI and PCI loans. All such allowances are established through a provision for loan losses charged to expense.

Originated and PNCI loans, and deposit related overdrafts are charged against the allowance for originated loan losses when Management believes that the collectability of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowances for originated and PNCI loan losses are amounts that Management believes will be adequate to absorb probable losses inherent in existing originated loans and leases, based on evaluations of the collectability, impairment and prior loss experience of those 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 an originated or PNCI 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 originated and PNCI 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.

In situations related to originated and PNCI loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that provide for a reduction of either interest or principal, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with respect to their restructured principal balance.

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 originated and PNCI loan portfolios. These are maintained through periodic charges to earnings. These charges are included 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 allowances for originated and PNCI loan losses are meant to be an estimate of these unknown but probable losses inherent in these portfolios.

The Company formally assesses the adequacy of the allowance for originated and PNCI loan losses on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding originated and PNCI loan portfolios, and to a lesser extent the Company’s originated and PNCI 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 or acquired. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.

 

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Table of Contents

The Company’s method for assessing the appropriateness of the allowance for originated and PNCI loan losses includes specific allowances for impaired 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 historical loss experience by product type and prior risk rating. Allowances for impaired 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 originated or PNCI loan portfolio as a whole. The allowances for originated and PNCI loans are included in the allowance for loan losses.

As noted above, the allowances for originated and PNCI loan losses consists of a specific allowance, a formula allowance, and an allowance for environmental factors. The first component, the specific allowance, results from the analysis of identified credits that meet management’s criteria for specific evaluation. These loans are reviewed individually to determine if such loans are considered impaired. Impaired loans are those where management has concluded that it is probable that the borrower will be unable to pay all amounts due under the contractual terms. Impaired loans are specifically reviewed and evaluated individually by management for loss potential by evaluating sources of repayment, including collateral as applicable, and a specified allowance for loan losses is established where necessary.

The second component of the allowance for originated and PNCI loan losses, the formula allowance, is an estimate of the probable losses that have occurred across the major loan categories in the Company’s originated and PNCI loan portfolios. This analysis is based on loan grades by pool and the loss history of these pools. This analysis covers the Company’s entire originated and PNCI loan portfolios including unused commitments but excludes any loans that were analyzed individually and assigned a specific allowance as discussed above. The total amount allocated for this component is determined by applying loss estimation factors to outstanding loans and loan commitments. The loss factors were previously based primarily on the Company’s historical loss experience tracked over a five-year period and adjusted as appropriate for the input of current trends and events. Because historical loss experience varies for the different categories of originated loans, the loss factors applied to each category also differed. In addition, there is a greater chance that the Company would suffer a loss from a loan that was risk rated less than satisfactory than if the loan was last graded satisfactory. Therefore, for any given category, a larger loss estimation factor was applied to less than satisfactory loans than to those that the Company last graded as satisfactory. The resulting formula allowance was the sum of the allocations determined in this manner.

For the period ended March 31, 2012, the Company converted to a loss migration analysis to determine the formula allowance. Under this method, the Company reviewed the loss experience of each quarter over the previous three years and determined an annualized loss rate by loan category as well as risk rating at the beginning of each period reviewed. A weighted average was then applied to arrive at the average annualized loss rate for each loan category and risk rating, which was then applied against the net recorded investment for all loans by category and risk rating not classified as impaired. The effect of this change in methodology resulted in a net reduction in formula allowance required of $3,296,000.

In addition to updating the method by which the estimated formula allowance required is calculated, management also improved the monitoring and risk recognition within its consumer portfolio. Previously, consumer loans with no identified credit weakness had a risk rating of “Pass” assigned, and this would generally only change if the loan went 90 days past due, at which time the risk rating was systematically downgraded to “Substandard” and the loan was placed in nonaccrual. For the period ended March 31, 2012, management has chosen to monitor consumer loans based on current credit score and assign a risk rating of “Special Mention” for those scores below a certain threshold. This change is primarily intended to more effectively monitor and manage the risk in the Company’s portfolio of consumer loans and lines of credit secured by junior liens on 1-4 family residential properties. The current credit score allows us to better account for increasing default risk in these types of loans. It is also the only reasonably available tool that can be used to attempt to monitor the performance of the senior lien on the associated properties, as the Company does not generally service both the 1st and 2nd loans in these instances. The result of this change in methodology resulted in an additional required formula allowance of $1,874,000. $1,596,000 of this additional requirement is specifically related to loans and lines of credit secured by junior liens on 1-4 family residential properties.

The third component of the allowances for originated and PNCI loan losses, the environmental factor allowance, is a component that is not allocated to specific loans or groups of loans, but rather is intended to absorb losses that may not be provided for by the other components.

There are several primary reasons that the other components discussed above might not be sufficient to absorb the losses present in the originated and PNCI loan portfolios, and the environmental factor allowance is used to provide for the losses that have occurred because of them.

The first reason is that there are limitations to any credit risk grading process. The volume of originated and PNCI loans makes it impractical to re-grade every loan every quarter. Therefore, it is possible that some currently performing originated or PNCI loans not recently graded will not be as strong as their last grading and an insufficient portion of the allowance will have been allocated to them. Grading and loan review often must be done without knowing whether all relevant facts are at hand. Troubled borrowers may deliberately or inadvertently omit important information from reports or conversations with lending officers regarding their financial condition and the diminished strength of repayment sources.

The second reason is that the loss estimation factors are based primarily on historical loss totals. As such, the factors may not give sufficient weight to such considerations as the current general economic and business conditions that affect the Company’s borrowers and specific industry conditions that affect borrowers in that industry. The factors might also not give sufficient weight to other environmental factors such as changing economic conditions and interest rates, portfolio growth, entrance into new markets or products, and other characteristics as may be determined by Management.

 

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Table of Contents

Specifically, in assessing how much environmental factor allowance needed to be provided, management considered the following:

 

   

with respect to the economy, management considered the effects of changes in GDP, unemployment, CPI, debt statistics, housing starts, housing sales, auto sales, agricultural prices, and other economic factors which serve as indicators of economic health and trends and which may have an impact on the performance of our borrowers, and

 

   

with respect to changes in the interest rate environment, management considered the recent changes in interest rates and the resultant economic impact it may have had on borrowers with high leverage and/or low profitability; and

 

   

with respect to changes in energy prices, management considered the effect that increases, decreases or volatility may have on the performance of our borrowers, and

 

   

with respect to loans to borrowers in new markets and growth in general, management considered the relatively short seasoning of such loans and the lack of experience with such borrowers, and

 

   

with respect to the potential imprecision in the total Allowance for Loan Losses calculation, management previously included an unspecified reserve equal to 1.00% of the total allowance and reserve for unfunded commitments calculated. For the period ended March 31, 2012, this unspecified reserve was eliminated resulting in a reduction in allowances required of $425,000, and

 

   

with respect to loans that have not yet been identified as impaired, management considered the volume and severity of past due loans. This environmental consideration was added to the Company’s Allowance for Loan Losses methodology for the period ended March 31, 2012 and resulted in additional allowances required of $459,000.

Each of these considerations was assigned a factor and applied to a portion or the entire originated and PNCI loan portfolios. Since these factors are not derived from experience and are applied to large non-homogeneous groups of loans, they are available for use across the portfolio as a whole.

Acquired loans are valued as of acquisition date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805, Business Combinations. Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI) loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In addition, because of the significant credit discounts associated with the loans acquired in the Granite acquisition, the Company elected to account for all loans acquired in the Granite acquisition under FASB ASC Topic 310-30, and classify them all as PCI loans. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The difference between estimated future payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable yield represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company determines that the future cash flows of a PCI loan are expected to be more than the originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining estimated life of the loan. If after acquisition, the Company determines that the future cash flows of a PCI loan are expected to be less than the previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous present value however, the discount rate may not be lowered below its original level. If the discount rate has been lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan.

 

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Table of Contents

The Components of the Allowance for Loan Losses

The following table sets forth the Bank’s allowance for loan losses as of the dates indicated (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Allowance for originated and PNCI loan losses:

    

Specific allowance

   $ 4,776      $ 5,993   

Formula allowance

     31,449        32,023   

Environmental factors allowance

     4,440        3,687   
  

 

 

   

 

 

 

Allowance for originated and PNCI loan losses

     40,665        41,703   

Allowance for PCI loan losses

     4,787        4,211   
  

 

 

   

 

 

 

Allowance for loan losses

   $ 45,452      $ 45,914   
  

 

 

   

 

 

 

Allowance for loan losses to loans

     3.01     2.96

Based on the current conditions of the loan portfolio, management believes that the $45,452,000 allowance for loan losses at March 31, 2012 is adequate to absorb probable losses inherent in the Bank’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.

The following table summarizes the allocation of the allowance for loan losses between loan types as of the dates indicated:

 

(In thousands)    March 31,
2012
     December 31,
2011
 

Real estate mortgage

   $ 13,138       $ 15,621   

Consumer

     24,474         20,506   

Commercial

     4,550         6,545   

Real estate construction

     3,290         3,242   
  

 

 

    

 

 

 

Total allowance for loan losses

   $ 45,452       $ 45,914   
  

 

 

    

 

 

 

The following table summarizes the allocation of the allowance for loan losses between loan types as a percentage of the total allowance for loan losses as of the dates indicated:

 

(In thousands)    March 31,
2012
    December 31,
2011
 

Real estate mortgage

     28.9     34.0

Consumer

     53.8     44.7

Commercial

     10.0     14.2

Real estate construction

     7.3     7.1
  

 

 

   

 

 

 

Total allowance for loan losses

     100.0     100.0
  

 

 

   

 

 

 

 

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Table of Contents

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 (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Allowance for loan losses:

    

Balance at beginning of period

   $ 45,914      $ 42,571   

Provision for loan losses

     3,996        7,001   

Loans charged off:

    

Real estate mortgage:

    

Residential

     (223     (1,125

Commercial

     (1,305     (368

Consumer:

    

Home equity lines

     (2,625     (3,601

Home equity loans

     (41     —     

Auto indirect

     (40     (135

Other consumer

     (339     (229

Commercial

     (281     (1,556

Construction:

    

Residential

     (68     (35

Commercial

     —          —     
  

 

 

   

 

 

 

Total loans charged off

     (4,922     (7,049

Recoveries of previously charged-off loans:

    

Real estate mortgage:

    

Residential

     —          112   

Commercial

     36        28   

Consumer:

    

Home equity lines

     63        161   

Home equity loans

     3        2   

Auto indirect

     57        127   

Other consumer

     255        209   

Commercial

     50        21   

Construction:

    

Residential

     —          2   

Commercial

     —          39   
  

 

 

   

 

 

 

Total recoveries of previously charged off loans

     464        701   
  

 

 

   

 

 

 

Net charge-offs

     (4,458     (6,348
  

 

 

   

 

 

 

Balance at end of period

   $ 45,452      $ 43,224   
  

 

 

   

 

 

 

 

     Three months ended March 31,  
     2012     2011  

Reserve for unfunded commitments:

    

Balance at beginning of period

   $ 2,740      $ 2,640   

Provision for losses –unfunded commitments

     (190     50   
  

 

 

   

 

 

 

Balance at end of period

   $ 2,550      $ 2,690   
  

 

 

   

 

 

 

Balance at end of period:

    

Allowance for loan losses

   $ 45,452      $ 43,224   

Reserve for unfunded commitments

     2,550        2,690   
  

 

 

   

 

 

 

Allowance for loan losses and Reserve for unfunded commitments

   $ 48,002      $ 45,914   
  

 

 

   

 

 

 

As a percentage of total loans at end of period:

    

Allowance for loan losses

     3.01     3.12

Reserve for unfunded commitments

     0.17     0.19
  

 

 

   

 

 

 

Allowance for loan losses and Reserve for unfunded commitments

     3.18     3.31
  

 

 

   

 

 

 

Average total loans

   $ 1,527,536      $ 1,396,331   

Ratios:

    

Net charge-offs during period to average loans outstanding during period

     1.17     1.82

Provision for loan losses to average loans outstanding

     1.05     2.01

 

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Foreclosed Assets, Net of Allowance for Losses

The following tables detail the components and summarize the activity in foreclosed assets, net of allowances for losses for the years indicated (in thousands):

 

(In thousands):   

Balance at

March 31,
2012

     New
NPA
     Advances/
Capitalized
Costs
     Sales     Valuation
Adjustments
    Transfers
from Loans
     Category
Changes
     Balance at
December,
2011
 

Noncovered:

                     

Land & Construction

   $ 3,966         —           —         $ (1,068     —          —           —         $ 5,034   

Residential real estate

     3,296         —           —           (812     (83     1,001         —           3,190   

Commercial real estate

     4,238         —           —           (1,499     —          693         —           5,044   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total noncovered

     11,500         —           —           (3,379     (83     1,694         —           13,268   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Covered:

                     

Land & Construction

     1,799         —           —           —          —          —           —           1,799   

Residential real estate

     180         —           —           —          —          —           —           180   

Commercial real estate

     1,310         —           225         —          —          —           —           1,085   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total covered

     3,289         —           225         —          —          —           —           3,064   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total foreclosed assets

   $ 14,789         —         $ 225       $ (3,379   $ (83   $ 1,694         —         $ 16,332   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Intangible Assets

Intangible assets were comprised of the following as of the dates indicated:

 

(In thousands)    March 31,
2012
     December 31,
2011
 

Core-deposit intangible

   $ 1,248       $ 1,301   

Goodwill

     15,519         15,519   
  

 

 

    

 

 

 

Total intangible assets

   $ 16,767       $ 16,820   
  

 

 

    

 

 

 

The core-deposit intangible assets resulted from the Bank’s acquisitions of Citizens in 2011 and Granite in 2010. The goodwill intangible asset resulted from the North State National Bank acquisition in 2003. Amortization of core deposit intangible assets amounting to $53,000 and $85,000 were recorded during the three months ended March 31, 2012 and 2011, respectively.

Deposits

Deposits at March 31, 2012 decreased $20,790,000 (0.9%) over 2011 year-end balances to $2,169,746,000. Included in the March 31, 2012 and December 31, 2011 certificate of deposit balances is $5,000,000 from the State of California. 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 creditworthiness constraints. The negotiated rates on these State deposits are generally favorable to other wholesale funding sources available to the Bank. Information on average deposit balances and average rates paid is included under the Net Interest Income section of this report. See Note 13 to the consolidated financial statements at Item 1 of this report for information about the Company’s deposits.

Long-Term Debt

See Note 16 to the consolidated financial statements at Item 1 of this report for information about the Company’s other borrowings, including long-term debt.

Junior Subordinated Debt

See Note 17 to the consolidated financial statements at Item 1 of this report for information about the Company’s junior subordinated debt.

Off-Balance Sheet Arrangements

See Note 18 to the consolidated financial statements at Item 1 of this report for information about the Company’s commitments and contingencies including off-balance-sheet arrangements.

Capital Resources

The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management.

The Company adopted and announced a stock repurchase plan on August 21, 2007 for the repurchase of up to 500,000 shares of the Company’s common stock from time to time as market conditions allow. The 500,000 shares authorized for repurchase under this plan represented approximately 3.2% of the Company’s approximately 15,815,000 common shares outstanding as of August 21, 2007. The Company did not repurchase any shares during the three months ended March 31, 2011. This plan has no stated expiration date for the repurchases. As of March 31, 2012, the Company had repurchased 166,600 shares under this plan, which left 333,400 shares available for repurchase under the plan. Shares that are repurchased in accordance with the provisions of a Company stock option plan or equity compensation plan are not counted against the number of shares repurchased under the repurchase plan adopted on August 21, 2007.

 

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The Company’s primary capital resource is shareholders’ equity, which was $219,038,000 at March 31, 2012. This amount represents an increase of $2,597,000 from December 31, 2011, the net result of comprehensive income for the period of $3,778,000, and the effect of stock option vesting of $257,000, that were partially offset by dividends paid of $1,438,000. The Company’s ratio of equity to total assets was 8.65% and 8.47% as of March 31, 2012 and December 31, 2011, respectively.

The following summarizes the Company’s ratios of capital to risk-adjusted assets as of the dates indicated:

 

     As of
March 31,
2012
    As
December 31,
2011
    Minimum
Regulatory
Requirement
 

Total Capital

     14.28     13.94     8.00

Tier I Capital

     13.02     12.68     4.00

Leverage ratio

     9.54     9.46     4.00

See Note 19 and Note 29 to the consolidated financial statements at Item 1 of this report for information about the Company’s capital resources.

Liquidity

The Bank’s principal source of asset liquidity is cash at Federal Reserve and other banks and marketable investment securities available for sale. At March 31, 2012, cash at Federal Reserve and other banks and investment securities available for sale totaled $819,375,000, representing an increase of $26,529,000 (3.3%) from December 31, 2011. In addition, the Company generates additional liquidity from its operating activities. The Company’s profitability during the first three months of 2012 generated cash flows from operations of $18,188,000 compared to $10,315,000 during the first three months of 2011. Maturities of investment securities produced cash inflows of $20,060,000 during the three months ended March 31, 2012 compared to $22,139,000 for the three months ended March 31, 2011. During the three months ended March 31, 2012, the Company invested $3,588,000 in securities and received $33,795,000 of net loan principal reductions, compared to $25,456,000 invested in securities and $24,056,000 of net loan principal reductions, respectively, during the first three months of 2011. These changes in investment and loan balances contributed to net cash provided by investing activities of $51,992,000 during the three months ended March 31, 2012, compared to net cash provided by investing activities of $22,840,000 during the three months ended March 31, 2011. Financing activities used net cash of $25,695,000 during the three months ended March 31, 2012, compared to net cash provided by financing activities of $2,073,000 during the three months ended March 31, 2011. Deposit balance decreases accounted for $20,790,000 of financing uses of funds during the three months ended March 31, 2012, compared to $7,739,000 of financing sources of funds during the three months ended March 31, 2011. Net decrease in short-term other borrowings accounted for $3,467,000 and $4,239,000 of financing uses of funds during the three months ended March 31, 2012 and 2011, respectively. Dividends paid used $1,438,000 and $1,427,000 of cash during the three months ended March 31, 2012 and 2011, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our assessment of market risk as of March 31, 2012 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 4. Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2012. Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012.

During the quarter ended March 31, 2012, there were no changes in our internal controls or in other factors that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

See Note 18, Commitments and Contingencies, for a discussion of the Company’s involvement in litigation pertaining to Visa, Inc.

 

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Item 1A – Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I—Item 1A—Risk Factors” in our Form 10-K for the year ended December 31, 2011, as supplemented and updated by the discussion below. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

Risks related to Tri Counties Bank’s purchase and assumption of the banking operations of Citizens Bank of Northern California and Granite Community Bank from the FDIC.

Our decisions regarding the fair value of assets acquired in FDIC-assisted transactions could be inaccurate, which could materially and adversely affect our business, financial condition, results of operations, and future prospects.

On September 23, 2011, we acquired certain of the banking operations of Citizens from the FDIC under a whole bank purchase and assumption agreement without loss sharing. On May 28, 2010, we acquired certain of the banking operations of Granite Community Bank from the FDIC under a whole bank purchase and assumption agreement with loss-share.

Management makes various assumptions and judgments about the collectability of the loans acquired in these transactions, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. If our assumptions or judgments are incorrect, we may need to make credit loss provisions based on the creditworthiness of borrowers, the value of collateral securing repaying of loans, different economic conditions or adverse developments in the acquired loan portfolio. Our acquisition of Citizens’ banking operations does not include a loss sharing agreement with FDIC and, therefore, we would be required to recognize any such credit provisions or losses in their entirety. Our acquisition of Granite’s banking operations includes a loss sharing agreement with FDIC that generally provides that the FDIC will reimburse the Bank for 80% of credit losses and related expenses the Bank experiences from loans acquired in the Granite acquisition for a period of five or ten years depending on the loan type. If actual losses from Granite loans exceed our initial estimate, a credit loss provision of 20% of the loss above our initial estimate may be needed.

Any increases in future loan losses could have a negative effect on our operating results.

Our ability to obtain reimbursement from FDIC under the loss sharing agreement on covered assets acquired in the Granite acquisition depends on our compliance with the terms of the loss sharing agreement. Management must certify to the FDIC on a quarterly basis our compliance with the terms of the FDIC loss sharing agreement as a prerequisite to obtaining reimbursement from the FDIC for realized losses on covered assets. The required terms of the agreement are extensive and our failure to comply with any of the guidelines could result in a specific asset or group of assets permanently losing their loss sharing coverage. Additionally, Management may decide to forgo loss share coverage on certain assets to allow greater flexibility over the management of certain assets. As of March 31, 2012, $48,931,000, or 1.9%, of the Company’s assets were covered by the aforementioned FDIC loss sharing agreements.

Under the terms of the FDIC loss sharing agreement, the assignment or transfer of a loss sharing agreement to another entity generally requires the written consent of the FDIC. In addition, we may not assign or otherwise transfer a loss sharing agreement during its term without the prior written consent of the FDIC. No assurances can be given that we will manage the covered assets in such a way as to always maintain loss share coverage on all such assets.

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 three months ended March 31, 2012 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
of shares purchased
     (b) Average price
paid per share
     (c) Total number of
shares purchased as
part of publicly  announced
plans or programs
     (d) Maximum number
of shares that may yet
be purchased under
the plans or programs
 

Jan. 1-31, 2012

     —           —           —           333,400   

Feb. 1-29, 2012

     —           —           —           333,400   

Mar. 1-31, 2012

     —           —           —           333,400   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           —           333,400   

Item 5 – Other Information

After considering the vote of shareholders regarding the frequency of future votes regarding executive compensation at the 2011 annual meeting of shareholders, the company has determined that that it will include a non-binding shareholder vote regarding compensation for named executive officers in the company’s annual proxy materials on an annual basis until at least the next required vote on the frequency of shareholder votes on executive compensation.

 

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Item 6 – Exhibits

 

    2.1    Purchase and Assumption Agreement Whole Bank All Deposits, among the Federal Deposit Insurance Corporation, receiver of Granite Community Bank, N.A., Granite Bay, California, the Federal Deposit Insurance Corporation and Tri Counties Bank, dated as of May 28, 2010, and related addendum filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed June 3, 2010.
    2.2    Purchase and Assumption Agreement Whole Bank All Deposits, among the Federal Deposit Insurance Corporation, receiver of Citizens Bank of Northern California, Nevada City, California, the Federal Deposit Insurance Corporation and Tri Counties Bank, dated as of September 23, 2011, and related addendum, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed September 27, 2011.
    3.1    Restated Articles of Incorporation, filed as Exhibit 3.1 to TriCo’s Current Report on Form 8-K filed on March 16, 2009.
    3.2    Bylaws of TriCo Bancshares, as amended, filed as Exhibit 3.1 to TriCo’s Current Report on Form 8-K filed February 17, 2011.
    4.1    Certificate of Determination of Preferences of Series AA Junior Participating Preferred Stock filed as Exhibit 3.3 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
    4.2    Rights Agreement dated as of June 25, 2001 between TriCo Bancshares and Mellon Investor Services LLC (incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A filed on July 5, 2001).
    4.3    Amendment to Rights Agreement dated as of July 8, 2011 between TriCo Bancshares and BNY Mellon Investor Services LLC (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on July 8, 2011).
    4.4    Amended and Restated Form of Right Certificate (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on July 8, 2011).
  10.2*    Form of Change of Control Agreement dated as of August 23, 2005, between TriCo, Tri Counties Bank and each of Dan Bailey, Bruce Belton, Craig Carney, Gary Coelho, Rick Miller, Richard O’Sullivan, Thomas Reddish, and Ray Rios filed as Exhibit 10.2 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
  10.5*    TriCo’s 1995 Incentive Stock Option Plan filed as Exhibit 4.1 to TriCo's Form S-8 Registration Statement dated August 23, 1995 (No. 33-62063).
  10.6*    TriCo’s 2001 Stock Option Plan, as amended, filed as Exhibit 10.7 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
  10.7*    TriCo’s 2009 Equity Incentive plan, included as Appendix A to TriCo’s definitive proxy statement filed on April 4, 2009.
  10.8*    Amended Employment Agreement between TriCo and Richard Smith dated as of August 23, 2005 filed as Exhibit 10.8 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
  10.9*    Tri Counties Bank Executive Deferred Compensation Plan restated April 1, 1992, and January 1, 2005 filed as Exhibit 10.9 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
  10.10*    Tri Counties Bank Deferred Compensation Plan for Directors effective January 1, 2005 filed as Exhibit 10.10 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
  10.11*    2005 Tri Counties Bank Deferred Compensation Plan for Executives and Directors effective January 1, 2005 filed as Exhibit 10.11 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
  10.13*    Tri Counties Bank Supplemental Retirement Plan for Directors dated September 1, 1987, as restated January 1, 2001, and amended and restated January 1, 2004 filed as Exhibit 10.12 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
  10.14*    2004 TriCo Bancshares Supplemental Retirement Plan for Directors effective January 1, 2004 filed as Exhibit 10.13 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
  10.15*    Tri Counties Bank Supplemental Executive Retirement Plan effective September 1, 1987, as amended and restated January 1, 2004 filed as Exhibit 10.14 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
  10.16*    2004 TriCo Bancshares Supplemental Executive Retirement Plan effective January 1, 2004 filed as Exhibit 10.15 to TriCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
  10.17*    Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of George Barstow, Dan Bay, Ron Bee, Craig Carney, Robert Elmore, Greg Gill, Richard Miller, Richard O’Sullivan, Thomas Reddish, Jerald Sax, and Richard Smith, filed as Exhibit 10.14 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
  10.18*    Form of Joint Beneficiary Agreement effective March 31, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Vereschagin, filed as Exhibit 10.15 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
  10.19*    Form of Tri-Counties Bank Executive Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Craig Carney, Richard Miller, Richard O’Sullivan, and Thomas Reddish, filed as Exhibit 10.16 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
  10.20*    Form of Tri-Counties Bank Director Long Term Care Agreement effective June 10, 2003 between Tri Counties Bank and each of Don Amaral, William Casey, Craig Compton, John Hasbrook, Michael Koehnen, Donald Murphy, Carroll Taresh, and Alex Vereschagin, filed as Exhibit 10.17 to TriCo's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
  10.21*    Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of the directors of TriCo Bancshares/Tri Counties Bank effective on the date that each director is first elected, filed as Exhibit 10.18 to TriCo’S Annual Report on Form 10-K for the year ended December 31, 2003.
  10.22*    Form of Indemnification Agreement between TriCo Bancshares/Tri Counties Bank and each of Dan Bailey, Craig Carney, Rick Miller, Richard O'Sullivan, Thomas Reddish, Ray Rios, and Richard Smith filed as Exhibit 10.21 to TriCo's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

 

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Table of Contents
  21.1    Tri Counties Bank, a California banking corporation, TriCo Capital Trust I, a Delaware business trust, and TriCo Capital Trust II, a Delaware business trust, are the only subsidiaries of Registrant.
  31.1    Rule 13a-14(a)/15d-14(a) Certification of CEO
  31.2    Rule 13a-14(a)/15d-14(a) Certification of CFO
  32.1    Section 1350 Certification of CEO
  32.2    Section 1350 Certification of CFO
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Management contract or compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

           TRICO BANCSHARES
                       (Registrant)
                    Date: May 10, 2012   

/s/ Thomas J. Reddish

   Thomas J. Reddish
   Executive Vice President and Chief Financial Officer
   (Duly authorized officer and principal financial officer)

 

64