TriCo Bancshares
63 Constitution Drive
Chico, California 95973
October 1, 2009
Via EDGAR--CORRES
Hugh West
Accounting Branch Chief
U.S. Securities and Exchange Commission
Washington, D.C 20549
Mail Stop 4720
Re: TriCo Bancshares
Form 10-K for Fiscal Year Ended December 31, 2008
Form 10-Q for Quarterly Period Ended June 30, 2009
File Number 000-10611
Dear Mr. West:
We have reviewed your letter dated August 31, 2009 regarding your review of
TriCo Bancshares's (the "Company") Form 10-K for December 31, 2008 and Form 10-Q
for March 31, 2009 filed with the U.S. Securities and Exchange Commission (the
"SEC"). In our letter to you dated September 14, 2009, we requested additional
time in order to draft the enhanced disclosures you requested. We have since
drafted such enhancements and present them now as set forth below.
Form 10-Q filed for the period ended June 30, 2009
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Item 1. Financial Statements
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Notes to Unaudited Condensed Consolidated Financial Statements
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Allowance for Loan Losses, page 10
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1. Please revise your future filings to provide the disclosures required by
paragraph 20(a) of SFAS 114. Please note that such disclosures are required
as of each balance sheet date, including quarterly periods.
Response: The Company will include the disclosures required by paragraph 20(a)
of SFAS 114 in future filings. The Company intends to modify its
disclosure beginning with its September 30, 2009 10-Q to include the
following:
Loans classified as nonaccrual were classified as impaired and are included in
the recorded balance of impaired loans. The Company's recorded investment in
impaired loans were as follows (dollars in thousands):
September 30, December 31, September 30,
2009 2008 2008
-------------------------------------------
Impaired loans with no allocated allowance $14,813 $12,526
Impaired loans with allocated allowance 12,525 4,141
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Total impaired loans $27,338 $16,667
Allowance for loan losses -------------------------------------------
allocated to impaired loans $5,430 $1,738
===========================================
The valuation allowance allocated to impaired loans is included in the allowance
for loan losses shown above. The average recorded investment in impaired loans
was $xx.x million and $xx.x million for the three and nine months ended
September 30, 2009 and $xx.x million and $xx.x million for the three and nine
months ended September 30, 2008. The Company recognized interest income on
impaired loans of $xx.x million and $xx.x million for the three and nine months
ended September 30, 2009 and $xx.x million and $xx.x million for the three and
nine months ended September 30, 2008.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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Classified Assets, page 30
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2. We note that consumer loans (including HELOC and indirect auto loans)
comprise a significant amount of your overall loan portfolio. So that a
reader would have a clear understanding of how management identifies
problem loans within these specific loan categories as well as the steps
taken to address any potential problems, please expand your disclosure in
future filings to address the following:
o Discuss the specific risks associated with these types of loans;
o Discuss the processes taken by management in identifying potential
problem loans;
o Discuss the steps taken in identifying the nature and type of
underlying collateral supporting these loans;
o Discuss how management determines the value of the underlying
collateral (i.e. if appraisals are obtained, how often and under what
circumstance);
o Discuss how shortfalls are addressed, including the steps taken by
management to address these shortfalls (i.e. include the timeframe
followed); and
o Discuss the timing when both initial and any subsequent loan
charge-offs or additional loan loss provisions are recorded.
Provide us with your proposed future disclosures.
Response: The Company will enhance its future disclosures, beginning with the
Form 10-Q for the period ended September 30, 2009, to disclose how
management identifies problem consumer loans and the steps that it
takes to address potential problems with such loans. We expect that
such future enhancements will be similar to those shown below.
2
Classified Assets
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with high
credit risk. Asset reviews are performed using grading standards and criteria
similar to those employed by bank regulatory agencies. Assets receiving lesser
grades fall under the "classified assets" category, which includes all
nonperforming assets and potential problem loans, and receive an elevated level
of attention regarding collection.
Consumer loans, whether secured by real estate, automobiles, or other personal
property or unsecured, are primarily susceptible to 2 primary risks, non-payment
due to income loss or over-extension of credit, and, when borrower is unable to
pay, a third risk, shortfall in collateral value. Typically non-payment is due
to loss of job and will follow general economic trends in the marketplace driven
primarily by rises in the unemployment rate. Loss of collateral value can be due
to market demand shifts, damage to collateral itself or a combination of the
two.
Problem consumer loans are generally identified by payment history of the
borrower (delinquency). The Bank manages its consumer loan portfolios by
monitoring delinquency and contacting borrowers to encourage repayment, suggest
modifications if appropriate, and, when continued scheduled payments become
unrealistic, initiate repossession or foreclosure through appropriate channels.
Collateral values may be determined by appraisals obtained through Bank
approved, licensed appraisers, qualified independent third parties, public value
information (blue book values for autos), sales invoices, or other appropriate
means. Appropriate valuations are obtained at initiation of the credit and
periodically (every 3-12 months depending on collateral type) once repayment is
questionable and the loan has been classified.
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 suit and
attachment of wages or judgment liens on borrower's other assets
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. Loss in loans
secured by owner occupied real estate, equipment, or other personal property
generally are dictated by 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 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.
3
Collateral values may be determined by appraisals obtained through Bank
approved, licensed appraisers, qualified independent third parties, public value
information (blue book values for autos), sales invoices, or other appropriate
means. Appropriate valuations are obtained at initiation of the credit and
periodically (every 3-12 months depending on collateral type) once repayment is
questionable and the loan has been classified.
Once a loan becomes delinquent and repayment becomes questionable, a Bank
collection officer will address collateral shortfalls with the borrower and
attempt to obtain additional collateral. If this is not forthcoming and payment
in full is unlikely, the Bank will estimate its probable loss, using a recent
valuation as appropriate to the underlying collateral less estimated costs of
sale, and charge the loan down to the estimated net realizable amount. Depending
on the length of time until ultimate collection, the Bank may revalue the
underlying collateral and take additional charge-offs as warranted. Revaluations
may occur as often as every 3-12 months depending on the underlying collateral
and volatility of values. Final charge-offs or recoveries are taken when
collateral is liquidated and actual loss is known. Unpaid balances on loans
after or during collection and liquidation may also be pursued through suit and
attachment of wages or judgment liens on borrower's other assets
The following is a summary of classified assets on the dates indicated:
At September 30, 2009 At December 31, 2008
--------------------- -------------------------
Gross Guaranteed Net Gross Guaranteed Net
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(dollars in thousands)
Classified loans:
Real estate mortgage:
Residential $3,981 - $3,981
Commercial 27,426 5,225 22,201
Consumer:
Home equity lines 4,144 - 4,144
Home equity loans 377 - 377
Auto indirect 3,907 - 3,907
Other consumer 257 - 257
Commercial 4,505 154 4,351
Construction:
Residential 45 - 45
Commercial 19,208 - 19,208
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Total classified loans 63,850 $5,379 $58,471
Other classified assets 1,185 1,185
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Total classified assets $ $ $ $65,035 $5,379 $59,656
=====================================================
Allowance for loan losses/classified loans % 47.2%
Classified assets, net of guarantees of the U.S. Government, including its
agencies and its government-sponsored agencies, increased $_____ (____%) to
$_____at September 30, 2009 from $_____at December 31, 2008. The guarantees
noted above are provided by various government agencies including the United
States Department of Agriculture, Small Business Administration, Bureau of
Indian Affairs, Statewide Health Planning Development, California Capital
Financial Development Corporation, and Safe Bidco. These guarantees range from
50% to 100% of the loan amount with the majority at 80% or higher. We consider
these guarantees when considering the adequacy of the loan loss allowance.
The increase in classified loans during the third quarter was primarily due to
an increases of $______ in construction loans, $_______ in home equity lines and
loans, $_____ in auto indirect loans, $_______ in C & I Loans, and $_______ in
Residential First D/T Loans. The $______ increase in classified construction
loans was primarily the result of the addition of a $_____ lot development loan
in the San Joaquin Valley, California, a $_____ land loan in the San Joaquin
Valley, California, a $_____ lot development loan in the Sacramento Valley,
California, and a $288,000 charge on a lot development loan in Northern
California.
4
3. We note the continued deterioration in the credit quality of your loan
portfolio during fiscal 2008 and into fiscal 2009, which has resulted in a
significant increase in nonperforming loans and assets as well as
significant increases in both the loan loss provision and loan charge-offs
during that timeframe. So that a reader will reader will have a clear
understanding of the deterioration being experienced within your loan
portfolio, please revise your future filings to specifically discuss the
nature, geographical location and type of loans contributing to these
increases, the problems associated with the specific individual loans, the
charge-offs recorded, and the triggering events which lead to both the
charge-offs and the significantly increased loan loss provisions.
Additionally, discuss how these more recent and specific events and
circumstances have been factored into and considered in the determination
of the allowance for loan loss methodologies established by management.
Provide us with your proposed future disclosures.
Response: The Company will enhance its future disclosures, beginning with the
Form 10-Q for the period ended September 30, 2009, to provide
additional disclosures concerning changes in the credit quality of the
loan portfolio as requested. We expect such additional disclosure to
be similar in form to the following:
Provision for Loan Losses
The Company provided $_____ for loan losses in the third quarter of 2009 versus
$_____ in the third quarter of 2008. This also resulted in an $_____ increase in
the allowance for loan losses from the second quarter of 2009. The provisions
and addition to the allowance for loan and lease losses were primarily the
result of changes in the make-up of the loan portfolio and the Bank's loss
factors in reaction to increased losses in the Home Equity portfolio, the Home
Mortgage portfolio, and the Construction portfolio. Management re-evaluates it's
loss ratios and assumptions quarterly and makes changes as appropriate based
upon, among other things, changes in loss rates experienced, collateral support
for underlying loans, changes and trends in the economy, and changes in the loan
mix
In the third quarter of 2009, the Company recorded $_____ of net loan
charge-offs versus $______ of net loan charge-offs in the third quarter of 2008.
Primary causes of the charges taken in the third quarter of 2009 were net
charge-offs of $_____ in construction loans, $_____, in home equity lines and
loans, $_____ in auto indirect loans, $_____ in C & I Loans, and $_____ in
Residential First D/T Loans. The $_____ in charge-offs in construction loans
were primarily the result of a $_____ charge taken on a lot development loan in
San Joaquin Valley, California, an $_____ charge taken on a land loan in San
Joaquin Valley, California, a $_____ charge on a lot development loan in
Sacramento Valley, California, and a $_____ charge on a lot development loan in
Northern California. 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.
4. We note your tabular presentation of classified loans and other classified
assets. To enable a reader to have a clear understanding of the potential
exposure within each of your lending categories, please revise the
presentation to identify the level (or "grading") of classified loans and
other assets by specific loan type. Provide us with your proposed future
disclosures.
Response: Beginning with the Form 10-Q for the period ended September 30, 2009,
the Company will enhance its tabular presentation of classified loans
and assets to include levels or grades of classified loans and other
assets by specific loan type. See the response to Item 2 above for
example of proposed enhancement to presentation of classified loans by
specific loan type.
5. Tell us supplementally and revise your disclosure in future filings, to
explain the nature of the U.S. Government guarantees which are considered
by the Company both in the determination of the level of nonperforming
loans in the determination of the loan loss allowance.
5
Response: The guarantees are provided by various government agencies including
the United States Department of Agriculture, Small Business
Administration, Bureau of Indian Affairs, Statewide Health Planning
Development, California Capital Financial Development Corporation, and
Safe Bidco. These guarantees range from 50% to 100% of the loan amount
with the majority at 80% or higher. Historically, we have disclosed
the level of nonperforming loans before consideration of such
guarantees (gross) and after consideration (net) of such guarantees.
We consider these guarantees when considering the adequacy of the loan
loss allowance. See the response to Item 2 above for example of
proposed enhancement to discussion regarding loan guarantees.
Nonperforming Loans, page 30
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6. Given the significant increase in nonaccrual loans recognized during fiscal
2008 and into fiscal 2009, and in order to give the reader a clear
understanding of the problem loans, please revise the tabular presentation,
in future filings, to include a detail of nonaccrual loans by loan type.
Response: Beginning with the Form 10-Q for the period ended September 30, 2009,
the Company will enhance its tabular presentation of problem loans to
include a detail of nonaccrual loans by loan type. We expect that the
enhancement will be as follows:
Nonaccrual loans categorized by loan type were as follows:
At September 30, 2009 At December 31, 2008
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(dollars in thousands): Gross Guaranteed Net Gross Guaranteed Net
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Real estate mortgage:
Residential $3,189 - $3,189
Commercial 9,668 5,102 4,566
Consumer:
Home equity lines 2,318 - 2,318
Home equity loans 122 - 122
Auto indirect 2,228 - 2,228
Other consumer 123 - 123
Commercial 2,039 154 1,885
Construction:
Residential 12,483 - 12,483
Commercial 424 - 424
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$32,594 $5,256 $27,338
=======================================================
The increase in non-performing loans during the third quarter was primarily due
to a increases of $______ in construction loans, $_______ in home equity lines
and loans, $_____ in auto indirect loans, $_______ in C & I Loans, and $_______
in Residential First D/T Loans. The $______ increase in non-performing
construction loans was primarily the result of the addition of a $_____ lot
development loan in the San Joaquin Valley, California, a $_____ land loan in
the San Joaquin Valley, California, a $_____ lot development loan in the
Sacramento Valley, California, and a $288,000 charge on a lot development loan
in Northern California.
7. To the extent you continue to experience increase in OREO, consider
disclosing a roll-forward of activity within OREO in future filings (e.g.
beginning balance, additions, sales, gains or losses and impairment and
ending balance).
Response: The Company will continue to monitor its level of OREO and will
disclose roll-forward activity within OREO in future filings where
material.
6
The Company acknowledges that it is responsible for the adequacy and accuracy of
the disclosures included in its SEC filings. Additionally, the Company
acknowledges that comments from the SEC's staff or changes to disclosures in
response to staff comments do not foreclose the SEC from taking any action with
respect to the filings. The Company will not assert staff comments from the SEC
as a defense in any proceeding initiated by the SEC or any person under the
federal securities laws of the United States.
We appreciate your review and insights in the Company's filings. Should you need
additional information concerning the items during your review or the responses
noted above, please contact me at (530) 898-0300.
Sincerely,
/s/ Thomas J. Reddish
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Thomas J. Reddish
Executive Vice President and Chief Financial Officer
TriCo Bancshaers