Fair Value Measurement

6 Months Ended

Jun. 30, 2011

Fair Value Measurement [Abstract]

Fair Value Measurement

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.

Loans held for sale — Loans held for sale are carried at the lower of cost or market 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, market 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, 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. The fair value of foreclosed assets is established using current real estate appraisals. 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. As such, the Company classifies mortgage servicing rights subjected to recurring 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 June 30, 2011	Total		Level 1		Level 2		Level 3
Securities available-for-sale:
Obligations of U.S. government corporations and agencies	$	252,832		—	$	252,832		—
Obligations of states and political subdivisions		12,160		—		12,160		—
Mortgage servicing rights		4,818		—		—		4,818
Total assets measured at fair value	$	269,810		—	$	264,992	$	4,818

Fair value at December 31, 2010	Total		Level 1		Level 2		Level 3
Securities available-for-sale:
Obligations of U.S. government corporations and agencies	$	264,181		—	$	264,181		—
Obligations of states and political subdivisions		12,541		—		12,541		—
Corporate debt securities		549		—		549		—
Mortgage servicing rights		4,605		—		—		4,605
Total assets measured at fair value	$	281,876		—	$	277,271	$	4,605

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 three and six months ended June 30, 2011 and 2010. 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):

					Change
	Beginning		Transfers		Included					Ending
Three months ended June 30,	Balance		into Level 3		in Earnings			Issuances		Balance
2011: Mortgage servicing rights	$	4,808		—	$	(162	)	$	172	$	4,818
2010: Mortgage servicing rights	$	4,310		—	$	(569	)	$	292	$	4,033

					Change
	Beginning		Transfers		Included					Ending
Six months ended June 30,	Balance		into Level 3		in Earnings			Issuances		Balance
2011: Mortgage servicing rights	$	4,605		—	$	(222	)	$	435	$	4,818
2010: Mortgage servicing rights	$	4,089		—	$	(618	)	$	562	$	4,033

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis, as of the dates indicated, that had a write-down or an additional allowance provided during the periods indicated (in thousands):

As of June 30, 2011	Total		Level 1		Level 2		Level 3
Fair value:
Impaired originated loans	$	37,189		—		—	$	37,189
Noncovered foreclosed assets		5,864		—		—		5,864
Covered foreclosed assets		3,473		—		—		3,473
Total assets measured at fair value	$	46,526		—		—	$	46,526

As of June 30, 2010	Total		Level 1		Level 2		Level 3
Fair value:
Impaired originated loans	$	24,992		—		—	$	24,992
Noncovered foreclosed assets		5,621		—		—		5,621
Covered foreclosed assets		4,324		—		—		4,324
Total assets measured at fair value	$34,937			—		—	$	34,937

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

	Three months ended				Six months ended
	June 30,				June 30,
(in thousands)	2011		2010		2011		2010
Impaired originated loan	$	5,551	$	4,686	$	7,676	$	6,821
Non-covered foreclosed assets		425		55		493		55
Covered foreclosed assets		213		—		594		—
Total loss from nonrecurring fair value adjustments	$	6,189	$	4,741	$	8,763	$	6,876

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, accrued interest receivable and payable, and short-term borrowings are considered short-term instruments. For these short-term instruments their carrying amount approximates their fair value.

Securities - For all securities, fair values are based on quoted market prices or dealer quotes.

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 loans - The fair value of variable rate originated loans is the current carrying value. The interest rates on these originated loans are regularly adjusted to market rates. The fair value of other types of fixed rate originated 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 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.

Cash Value of Life Insurance - The fair values of insurance policies owned are based on the insurance contract’s cash surrender value.

FDIC Indemnification Asset — The FDIC indemnification asset is recorded at fair value, 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.

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 the Company’s financial instruments are as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)				(in thousands)
Financial assets:
Cash and due from banks	$	52,874	$	52,784	$	57,254	$	57,254
Cash at Federal Reserve and other banks		338,180		338,180		313,812		313,812
Securities available-for-sale		264,992		264,992		277,271		277,271
Restricted equity securities		9,199		9,199		9,133		9,133
Loans held for sale		4,379		4,379		4,988		4,988
Loans, net		1,396,062	1,461,021			1,377,000		1,451,151
Cash value of life insurance		51,441		51,441		50,541		50,541
Mortgage servicing rights		4,818		4,818		4,605		4,605
Indemnification asset		4,545		4,545		5,640		5,640
Financial liabilities:
Deposits		1,836,731	1,839,626			1,852,173		1,854,763
Other borrowings		59,234		61,716		62,020		65,716
Junior subordinated debt		41,238		23,093		41,238		21,444

	Contract		Fair		Contract		Fair
	Amount		Value		Amount		Value
Off-balance sheet:
Commitments	$	524,612	$	5,246	$	518,595	$	5,186
Standby letters of credit		5,017		50		5,022		50
Overdraft privilege commitments		55,993		560		38,600		386

TRICO BANCSHARES
Financial Summary
(dollars in thousands, except per share amounts; unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Net Interest Income (FTE)	$	21,833		$	22,245		$	43,620		$	44,346
Provision for loan losses		(5,561	)		(10,000	)		(12,562	)		(18,500	)
Noninterest income		8,251			8,104			17,601			15,651
Noninterest expense		(20,095	)		(18,408	)		39,766			(37,211	)
Provision for income taxes (FTE)		(1,657	)		(621	)		(3,322	)		(1,408	)
Net income	$	2,771		$	1,320		$	5,571		$	2,878
Earnings per share:
Basic	$	0.17		$	0.08		$	0.35		$	0.18
Diluted	$	0.17		$	0.08		$	0.35		$	0.18
Per share:
Dividends paid	$	0.09		$	0.09		$	0.18		$	0.22
Book value at period end	$	12.82		$	12.76
Tangible book value at period end	$	11.82		$	11.74
Average common shares outstanding		15,922			15,860			15,891			15,841
Average diluted common shares outstanding		15,953			16,108			15,988			16,091
Shares outstanding at period end		15,979			15,860
At period end:
Loans, net	$	1,352,100		$	1,466,669
Total assets		2,176,184			2,224,645
Total deposits		1,836,731			1,889,949
Other borrowings		59,234			60,452
Junior subordinated debt		41,238			41,238
Shareholders’ equity	$	204,915		$	202,422
Financial Ratios:
During the period (annualized):
Return on assets		0.51	%		0.24	%		0.51	%		0.26	%
Return on equity		5.39	%		2.61	%		5.44	%		2.82	%
Net interest margin1		4.31	%		4.41	%		4.31	%		4.40	%
Net loan charge-offs to average loans		1.38	%		2.16	%		1.60	%		2.12	%
Efficiency ratio1		66.8	%		60.7	%		65.0	%		62.0	%
Average equity to average assets		9.38	%		9.29	%		9.34	%		9.35	%
At period end:
Equity to assets		9.42	%		8.43	%
Total capital to risk-adjusted assets		14.55	%		13.55	%

¹ Fully taxable equivalent (FTE)