UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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		(I.R.S. Employer
of Incorporation or Organization)		Identification Number)

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.

þ Yes       o 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).

o Yes       o 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.

o Large accelerated filer		þ Accelerated filer		o Non-accelerated filer		o Smaller reporting company
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes       þ 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: 15,860,138 shares outstanding as of November 9, 2010

 

 

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			28
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3 — Quantitative and Qualitative Disclosures about Market Risk			51
Item 4 — Controls and Procedures			51
PART II — OTHER INFORMATION			51
Item 1 — Legal Proceedings			51
Item 1A — Risk Factors			51
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 6 — Exhibits			52
Signatures			53
Exhibits			54
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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, 2009, 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.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TRICO BANCSHARES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited)

		At September 30,				At December 31,
		2010				2009
Assets:
Cash and due from banks		$	47,930			$	61,033
Cash at Federal Reserve and other banks			350,261				285,556
Cash and cash equivalents			398,191				346,589
Securities available-for-sale			250,012				211,622
Restricted equity securities			9,157				9,274
Loans held for sale			9,455				4,641
Noncovered loans			1,392,881				1,495,570
Allowance for loan losses			(38,556	)			(35,473	)
Net noncovered loans			1,354,325				1,460,097
Covered loans, net of allowance			59,697				—
Total loans, net			1,414,022				1,460,097
Noncovered foreclosed assets			6,853				3,726
Covered foreclosed assets			4,319				—
Premises and equipment, net			18,947				18,742
Cash value of life insurance			49,972				48,694
Accrued interest receivable			7,318				7,763
Goodwill			15,519				15,519
Other intangible assets, net			665				325
Mortgage servicing rights			3,905				4,089
FDIC indemnification asset			5,098				—
Other assets			36,185				39,439
Total Assets		$	2,229,618			$	2,170,520
Liabilities:
Deposits:
Noninterest-bearing demand		$	389,315			$	377,334
Interest-bearing			1,499,226				1,451,178
Total deposits			1,888,541				1,828,512
Accrued interest payable			2,368				3,614
Reserve for unfunded commitments			2,840				3,640
Other liabilities			26,721				26,114
Other borrowings			67,182				66,753
Junior subordinated debt			41,238				41,238
Total Liabilities			2,028,890				1,969,871
Commitments and contingencies
Shareholders’ Equity:
Common stock, no par value: 50,000,000 shares authorized; issued and outstanding:
15,860,138 at September 30, 2010			81,288
15,787,753 at December 31, 2009							79,508
Retained earnings			115,834				118,863
Accumulated other comprehensive income (loss), net			3,606				2,278
Total Shareholders’ Equity			200,728				200,649
Total Liabilities and Shareholders’ Equity		$	2,229,618			$	2,170,520

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data; unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
Interest and dividend income:
Loans, including fees		$	24,489			$	24,909			$	70,003			$	75,640
Debt securities:
Taxable			2,375				2,616				7,857				8,595
Tax exempt			158				244				554				771
Dividends			11				19				23				19
Cash at Federal Reserve and other banks			200				101				508				178
Total interest income			27,233				27,889				78,945				85,203
Interest expense:
Deposits			2,554				4,186				8,339				14,166
Other borrowings			608				250				1,804				604
Junior subordinated debt			335				348				954				1,184
Total interest expense			3,497				4,784				11,097				15,954
Net interest income			23,736				23,105				67,848				69,249
Provision for loan losses			10,814				8,000				29,314				23,650
Net interest income after provision for loan losses			12,922				15,105				38,534				45,599
Noninterest income:
Service charges and fees			5,237				5,645				17,054				16,879
Gain on sale of loans			1,090				1,205				2,252				2,794
Commissions on sale of non-deposit investment products			239				380				868				1,361
Increase in cash value of life insurance			426				270				1,278				820
Other			171				293				1,362				550
Total noninterest income			7,163				7,793				22,814				22,404
Noninterest expense:
Salaries and related benefits			9,898				10,263				30,033				30,121
Other			10,626				9,114				27,702				25,801
Total noninterest expense			20,524				19,377				57,735				55,922
(Loss) income before income taxes			(439	)			3,521				3,613				12,081
(Benefit) provision for income taxes			(440	)			1,266				734				4,432
Net income		$	1			$	2,255			$	2,879			$	7,649
Average shares outstanding			15,860				15,787				15,848				15,782
Diluted average shares outstanding			15,972				16,016				16,052				16,011
Per share data:
Basic earnings		$	0.00			$	0.14			$	0.18			$	0.48
Diluted earnings		$	0.00			$	0.14			$	0.18			$	0.48
Dividends paid		$	0.09			$	0.13			$	0.31			$	0.39

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share data; unaudited)

														Accumulated
		Shares of												Other
		Common				Common				Retained				Comprehensive
		Stock				Stock				Earnings				Income (Loss)				Total
Balance at December 31, 2008			15,756,101			$	78,246			$	117,630			$	2,056			$	197,932
Comprehensive income:
Net income											7,649								7,649
Change in net unrealized gain on Securities available for sale, net															1,878				1,878
Total comprehensive income																			9,527
Stock option vesting							369												369
Stock option exercise			58,213				887												887
Tax benefit of stock options exercised							30												30
Repurchase of common stock			(26,561	)			(132	)			(520	)							(652	)
Dividends paid ($0.39 per share)											(6,156	)							(6,156	)
Balance at September 30, 2009			15,787,753			$	79,400			$	118,603			$	3,934			$	201,937
Balance at December 31, 2009			15,787,753			$	79,508			$	118,863			$	2,278			$	200,649
Comprehensive income:
Net income											2,879								2,879
Change in net unrealized gain on Securities available for sale, net															1,328				1,328
Total comprehensive income																			4,207
Stock option vesting							534												534
Stock options exercised			146,403				1,229												1,229
Tax benefit of stock options exercised							390												390
Repurchase of common stock			(74,018	)			(373	)			(991	)							(1,364	)
Dividends paid ($0.31 per share)											(4,917	)							(4,917	)
Balance at September 30, 2010			15,860,138			$	81,288			$	115,834			$	3,606			$	200,728

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)

		For the six months ended September 30,
		2010				2009
Operating activities:
Net income		$	2,879			$	7,649
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment			2,665				2,532
Amortization of intangible assets			222				264
Provision for loan losses			29,314				23,650
Amortization of investment securities premium, net			800				272
Originations of loans for resale			(121,750	)			(157,331	)
Proceeds from sale of loans originated for resale			118,145				158,747
Gain on sale of loans			(2,252	)			(2,794	)
Change in value of mortgage servicing rights			1,227				317
Provision for losses on other real estate owned			1,185				188
(Gain) loss on sale of other real estate owned			(409	)			(169	)
Loss on sale of fixed assets			40				9
Increase in cash value of life insurance			(1,278	)			(820	)
Stock option expense			534				369
Stock option tax benefits			(390	)			(30	)
Bargain purchase gain			(232	)			—
Change in:
Reserve for unfunded commitments			(800	)			1,075
Interest receivable			445				269
Interest payable			(1,246	)			(2,010	)
Other assets and liabilities, net			5,417				(3,746	)
Net cash provided by operating activities			34,516				28,442
Investing activities:
Proceeds from maturities of securities available-for-sale			67,310				67,963
Purchases of securities available-for-sale			(101,255	)			(29,396	)
Redemption (purchase) of restricted equity securities, net			813				(39	)
Loan principal (originations) reductions, net			75,109				40,043
Proceeds from sale of premises and equipment			3				1
Purchases of premises and equipment			(2,314	)			(1,423	)
Proceeds from sale of other real estate owned			2,861				1,698
Cash received from acquisitions			18,764				—
Net cash (used in) provided by investing activities			61,291				78,847
Financing activities:
Net (decrease) increase in deposits			(34,972	)			82,625
Payments of principal on long-term other borrowings			—				(67	)
Net change in short-term other borrowings			(4,571	)			(35,741	)
Stock option tax benefits			390				30
Repurchase of common stock			(338	)			—
Dividends paid			(4,917	)			(6,156	)
Exercise of stock options			203				235
Net cash provided by (used in) financing activities			(44,205	)			40,926
Net change in cash and cash equivalents			51,602				148,215
Cash and cash equivalents and beginning of period			346,589				86,355
Cash and cash equivalents at end of period		$	398,191			$	234,570
Supplemental disclosure of noncash activities:
Loans transferred to noncovered and covered foreclosed assets		$	6,454			$	2,905
Unrealized net gain (loss) on securities available for sale		$	2,291			$	3,240
Market value of shares tendered by employees in-lieu of cash to pay for exercise options and/or related taxes		$	1,026			$	652
Supplemental disclosure of cash flow activity:
Cash paid for interest expense		$	12,343			$	17,964
Cash paid for income taxes		$	2,825			$	9,092
Assets acquired in acquisition		$	100,282				—
Liabilities assumed in acquisition		$	100,050				—

See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — General Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The interim results are not necessarily indicative of the results expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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 assessments, income taxes, and the valuation of mortgage servicing rights are the only accounting estimates that materially affect the Company’s consolidated financial statements.

Significant Group Concentration of Credit Risk

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

Cash and Cash Equivalents

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

Investment Securities

The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the nine months ended September 30, 2010, and throughout 2009, the Company did not have any securities classified as either held-to-maturity or trading.

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 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.

Noncovered Loans

Noncovered loans refer to loans not covered by the Federal Deposit Insurance Corporation (“FDIC”) loss sharing agreements. Noncovered loans are reported at the principal amount outstanding, net of unearned income and the allowance for loan losses. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield over the actual life of the loan. Noncovered loans on which the accrual of interest has been discontinued are designated as nonaccrual noncovered loans. Accrual of interest on noncovered loans is generally discontinued either when reasonable doubt exists as to the full, timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When noncovered loans are 90 days past due, but in management’s judgment are well secured and in the process of collection, they may be classified as accrual. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such noncovered 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 noncovered loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the noncovered loans are estimated to be fully collectible as to both principal and interest. All impaired noncovered loans are classified as nonaccrual noncovered loans.

Allowance for Noncovered Loan Losses

The allowance for noncovered loan losses is established through a provision for noncovered loan losses charged to expense. Noncovered loans and noncovered deposit related overdrafts are charged against the allowance for noncovered loan losses when Management believes that the collectibility of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans and leases, based on evaluations of the collectibility, impairment and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. The Company defines a noncovered loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for noncovered loan losses to absorb losses inherent in the Company’s noncovered 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 noncovered loan losses is meant to be an

estimate of these unknown but probable losses inherent in the portfolio. For purposes of this discussion, “noncovered loans” shall include all noncovered loans and lease contracts that are part of the Company’s portfolio.

The Company formally assesses the adequacy of the allowance for noncovered loan losses on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding noncovered loan portfolio, and to a lesser extent the Company’s noncovered 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 noncovered loan losses includes specific allowances for impaired noncovered 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 noncovered loan portfolio as a whole. This process is explained in detail in the notes to the Company’s audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2009.

Covered Loans and Allowance for Covered Loan Losses

Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as “covered loans” and reported separately in our statements of financial condition. Covered loans are reported exclusive of the expected cash flow reimbursements expected from the FDIC.

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 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 acquired portfolios, the Company elected to account for all acquired loans under FASB ASC Topic 310-30. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, 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.

The covered loans acquired are and will continue to be subject to the Company’s internal and external credit review and monitoring. If credit deterioration is experienced subsequent to the initial acquisition fair value amount, such deterioration will be measured, and may result in the establishment of an allowance for covered loan losses and a provision for credit losses that will be charged to earnings. These provisions will be mostly offset by an increase to the FDIC indemnification asset, and will be recognized in noninterest income.

Noncovered Foreclosed Assets

Noncovered foreclosed assets include assets acquired through, or in lieu of, loan foreclosure that are not covered under a FDIC loss-share agreement. Noncovered 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. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense.

Covered Foreclosed Assets

All other real estate owned (“OREO”) and other 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” and reported separately in our statements of financial position. 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 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 premiums and minimum pension liability. Core deposit premiums are amortized using an accelerated method over a period of ten years. Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates.

Impairment of Long-Lived Assets and Goodwill

Long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

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

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.

FDIC 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 collectibility, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower’s or depositor’s ability to pay.

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.

Reclassifications

Certain amounts reported in previous 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

The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the away companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

FASB ASC Topic 805, “Business Combinations.” On January 1, 2009, new authoritative accounting guidance under ASC Topic 805, “Business Combinations,” became applicable to the Company’s accounting for business combinations closing on or after January 1, 2009. ASC Topic 805 applies to all transactions and other events in which one entity obtains control over one or more other businesses. ASC Topic 805 requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous accounting guidance whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. ASC Topic 805 requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under prior accounting guidance. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, “Contingencies.” Under ASC Topic 805, the requirements of ASC Topic 420, “Exit or Disposal Cost Obligations,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of ASC Topic 450, “Contingencies.”

Further new authoritative accounting guidance under ASC Topic 810 “Consolidation” amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

Further new authoritative accounting guidance (Accounting Standards Update No. 2010-6) under ASC Topic 820 requires new disclosures for transfers in and out of Levels 1 and 2, including separate disclosure of significant amounts and a description of the reasons for the transfers and separate presentation of information about purchases, sales, issuances, and settlements (on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The Update clarifies existing disclosure requirements for level of disaggregation, which provides measurement disclosures for each class of assets and liabilities. Emphasizing that judgment should be used in determining the appropriate classes of assets and liabilities, and inputs and valuation techniques for both recurring and nonrecurring Level 2 and Level 3 fair value measurements. This new authoritative accounting guidance also includes conforming amendments to the guidance on employer’s disclosures about postretirement benefit plan assets changing the terminology of major categories of assets to classes of assets and providing a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. The forgoing new authoritative accounting guidance under ASC Topic 820 became effective for the Company’s financial statements beginning January 1, 2010 and had no impact on the Company’s financial statements.

FASB ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 became effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

Note 2 — Business Combinations

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, OREO 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 for 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 operations of Granite are included in the Company’s operating results from May 28, 2010, and added revenue of $2,387,000, including a bargain purchase gain of $232,000, noninterest expense of $1,837,000 and a provision for covered loan losses of $214,000, that resulted in a contribution to net income after-tax of approximately $195,000 through September 30, 2010. Such operating results are not necessarily indicative of future operating results. Granite’s results of operations prior to the acquisition are not included in the Company’s operating results. During the quarter ended September 30, 2010, the Company completed the conversion of Granite’s information and product delivery systems. As of September 30, 2010, nonrecurring expenses related to the Granite acquisition and systems conversion were approximately $250,000.

The acquired loan portfolio and foreclosed assets are referred to as “covered loans” and “covered foreclosed assets”, respectively, and these are presented as separate line items in the Company’s consolidated balance sheet. Collectively these balances are referred to as “covered assets”.

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 foregoing fair value amounts are subject to change for up to one year after the closing date of each acquisition as additional information relating to closing date fair values becomes available. The amounts are also subject to adjustments based upon final settlement with the FDIC. In addition, 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:

		Granite
(in thousands)		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

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

Note 3 — Investment Securities

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at September 30, 2010 and December 31, 2009:

		September 30, 2010
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(in thousands)
Securities Available-for-Sale
Obligations of U.S. government corporations and agencies		$	225,873			$	10,410				—			$	236,283
Obligations of states and political subdivisions			12,871				341				(5	)			13,207
Corporate debt securities			1,000				—				(478	)			522
Total securities available-for-sale		$	239,744			$	10,751			$	(483	)		$	250,012

		December 31, 2009
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(in thousands)
Securities Available-for-Sale
Obligations of U.S. government corporations and agencies		$	184,962			$	8,168				—			$	193,130
Obligations of states and political subdivisions			17,683				341				(71	)			17,953
Corporate debt securities			1,000				—				(461	)			539
Total securities available-for-sale		$	203,645			$	8,509			$	(532	)		$	211,622

The amortized cost and estimated fair value of debt securities at September 30, 2010 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 September 30, 2010, obligations of U.S. government corporations and agencies with a cost basis totaling $225,873,000 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 September 30, 2010, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 2.5 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

						Estimated
		Amortized Cost				Fair Value
		(in thousands)
Investment Securities
Due in one year			—				—
Due after one year through five years		$	38,526			$	39,897
Due after five years through ten years			25,451				26,175
Due after ten years			175,767				183,940
Totals		$	239,744			$	250,012

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 in shareholders’ equity until realized. During the nine months ended September 30, 2010, and throughout 2009, the Company did not sell any investment securities.

Investment securities with an aggregate carrying value of $183,663,000 and $201,388,000 at September 30, 2010 and December 31, 2009, respectively, were pledged as collateral for specific borrowings, lines of credit and local agency deposits.

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
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
		(in thousands)
September 30, 2010
Securities Available-for-Sale:
Obligations of U.S. government corporations and agencies			—				—				—				—				—				—
Obligations of states and political subdivisions			—				—			$	538			$	(5	)		$	538			$	(5	)
Corporate debt securities			—				—				522				(478	)			522				(478	)
Total securities available-for-sale			—				—			$	1,060			$	(483	)		$	1,060			$	(483	)

		Less than 12 months								12 months or more								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
		(in thousands)
December 31, 2009
Securities Available-for-Sale:
Obligations of U.S. government corporations and agencies		$	15				—				—				—			$	15				—
Obligations of states and political subdivisions			898				(13	)		$	1,011			$	(58	)			1,909				(71	)
Corporate debt securities			—				—				539				(461	)			539				(461	)
Total securities available-for-sale		$	913			$	(13	)		$	1,550			$	(519	)		$	2,463			$	(532	)

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 has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. At September 30, 2010, no debt securities had an unrealized loss from the Company’s amortized cost basis.

Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by increases in required yields by investors in these types of securities. 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 has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. At September 30, 2010, one debt security representing obligations of states and political subdivisions had an unrealized loss with aggregate depreciation of .97% from the Company’s amortized cost basis.

Obligations of corporation debt securities: The unrealized losses on investments in corporate debt securities were caused by increases in required yields by investors in these types of securities. 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 has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. At September 30, 2010, one corporate debt security had an unrealized loss with aggregate depreciation of 47.78% from the Company’s amortized cost basis.

Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Unrealized losses due to fluctuations in fair value of securities held to maturity or available for sale are recognized through earnings when it is determined that an other than temporary decline in value has occurred.

Note 4 — Noncovered Loans, Allowance for Noncovered Loan Losses and Reserve for Unfunded Commitments

Noncovered loans refer to loans not covered by FDIC loss sharing agreements. Covered loans, and any allowance associated with them, are discussed in Note 5. The following table presents the major types of noncovered loans recorded in the balance sheets as of September 30, 2010 and December 31, 2009.

		September 30,				December 31,
		2010				2009
		(in thousands)
Noncovered Loans:
Mortgage loans on real estate:
Residential 1-4 family		$	107,460			$	113,034
Commercial			689,912				706,243
Total mortgage loan on real estate			797,372				819,277
Consumer:
Home equity lines of credit			336,339				342,612
Home equity loans			44,807				52,531
Auto Indirect			29,061				46,532
Other			5,159				14,003
Total consumer loans			415,366				455,678
Commercial			141,312				163,131
Construction:
Residential			5,365				11,563
Commercial			35,147				47,553
Total construction			40,512				59,116
			1,394,562				1,497,202
Deferred loan fees, net			(1,681	)			(1,632	)
Total noncovered loans		$	1,392,881			$	1,495,570

Noncovered loans with an aggregate carrying value of $1,024,586,000 and $1,034,145,000 at September 30, 2010 and December 31, 2009, respectively, were pledged as collateral for specific borrowings and lines of credit.

The following tables summarize the activity in the allowance for noncovered loan losses, reserve for unfunded commitments, and allowance for noncovered losses (which is comprised of the allowance for noncovered loan losses and the reserve for unfunded commitments) for the periods indicated (dollars in thousands):

		Three months ended								Nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
Allowance for noncovered loan losses:
Balance at beginning of period		$	38,430			$	33,624			$	35,473			$	27,590
Provision for noncovered loan losses			10,600				8,000				29,100				23,650
Total noncovered loans charged off			(11,163	)			(7,471	)			(27,688	)			(17,780	)
Total recoveries of previously charged off loans			689				398				1,671				1,091
Balance at end of period		$	38,556			$	34,551			$	38,556			$	34,551
Reserve for unfunded commitments:
Balance at beginning of period		$	2,840			$	3,140			$	3,640			$	2,565
Provision for losses — unfunded commitments			—				500				(800	)			1,075
Balance at end of period		$	2,840			$	3,640			$	2,840			$	3,640
Balance at end of period:
Allowance for noncovered loan losses										$	38,556			$	34,551
Reserve for unfunded commitments											2,840				3,640
Allowance for noncovered losses										$	41,396			$	38,191
As a percentage of total noncovered loans:
Allowance for noncovered loan losses											2.75	%			2.25	%
Reserve for unfunded commitments											0.20	%			0.24	%
Allowance for noncovered losses											2.95	%			2.49	%

Noncovered loans classified as nonaccrual or troubled-debt restructurings (“TDR”) are classified as impaired and are included in the recorded balance of impaired noncovered loans. The Company’s recorded investment in impaired noncovered loans was as follows (dollars in thousands):

		September 30,				December 31,				September 30,
		2010				2009				2009
Impaired noncovered loans with no allocated allowance		$	62,980			$	35,807			$	31,526
Impaired noncovered loans with allocated allowance			35,829				14,554				14,273
Total impaired noncovered loans		$	98,809			$	50,361			$	45,799
Allowance for noncovered loan losses allocated to impaired noncovered loans		$	9,092			$	6,089			$	5,086

The valuation allowance allocated to impaired noncovered loans is included in the allowance for noncovered loan losses shown above. The average recorded investment in impaired noncovered loans was $92,422,000 and $43,552,000 for the three months ended September 30, 2010 and 2009, respectively, and $74,585,000 and $36,569,000 for the nine months ended September 30, 2010 and 2009, respectively. The Company recognized interest income on impaired noncovered loans of $1,397,000 and $581,000 for the three months ended September 30, 2010 and 2009, respectively, and $2,605,000 and $1,186,000 for the nine months ended September 30, 2010 and 2009, respectively.

At September 30, 2010, $24,632,000 of noncovered loans were TDR and classified as impaired. The Company had obligations to lend $393,000 of additional funds on these TDR as of September 30, 2010.

Note 5 — Covered Loans, Allowance for Covered Loans, Covered Foreclosed Assets and FDIC Indemnification Asset

The following table reflects the estimated fair value of the acquired loans at the acquisition date:

		Granite
(in thousands)		May 28, 2010
Gross loans acquired		$	77,991
Discount			(13,189	)
Covered loans, net		$	64,802

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, and fair value of covered loans for each respective acquired loan portfolio at the acquisition dates:

		Granite
(in thousands)		May 28, 2010
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

The following table presents the major types of covered loans as of September 30, 2010. The classification of covered loan balances presented is reported in accordance with the regulatory reporting requirements.

		Granite
(in thousands)		September 30, 2010
Mortgage loans on real estate:
Residential 1-4 family		$	2,150
Commercial			31,358
Consumer loans			10,921
Commercial & industrial			10,206
Construction & land development			5,276
Covered loans			59,911
Allowance for covered loan losses			(214	)
Covered loans, net		$	59,697

The outstanding contractual principal balance, excluding purchase accounting adjustments, at September 30, 2010 was $70,063,000 for Granite.

The following table presents the changes in the accretable yield for the three and nine months ended September 30, 2010:

		Three months ended				Nine months ended
		September 30,				September 30,
(in thousands)		2010				2010
Balance at beginning of period		$	22,782				—
Acquisitions			—			$	23,151
Accretion to interest income			(1,530	)			(1,899	)
Reclassification (to)/from nonaccretable difference			(473	)			(473	)
Balance at end of period		$	20,779			$	20,779

The following table summarizes the activity related to the covered foreclosed assets since the acquisition date:

		Period ended
		September 30,
(in thousands)		2010
Balance, at acquisition (May 28, 2010)		$	4,629
Additions			620
Dispositions			(305	)
Valuation adjustments			(625	)
Ending balance		$	4,319

Changes in the FDIC indemnification asset since the acquisition date are as follows:

		Period ended
		September 30,
(in thousands)		2010
Balance, at acquisition (May 28, 2010)		$	7,466
Effect of actual covered losses and change in estimated future covered loss			(20	)
Reimbursable expenses incurred			65
Payments received			(2,413	)
Ending balance		$	5,098

Note 6 — Mortgage Servicing Rights

The following tables summarize the activity in, and the main assumptions used to determine the fair value of mortgage servicing rights for the periods indicated (dollars in thousands):

		Three months ended								Nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
Mortgage servicing rights:
Balance at beginning of period		$	4,033			$	3,895			$	4,089			$	2,972
Additions			481				553				1,043				1,378
Change in fair value			(609	)			(415	)			(1,227	)			(317	)
Balance at end of period		$	3,905			$	4,033			$	3,905			$	4,033
Servicing fees received		$	323			$	288			$	945			$	834
Balance of loans serviced at:
Beginning of period		$	527,436			$	468,360			$	505,947			$	431,195
End of period		$	542,386			$	492,830			$	542,386			$	492,830
Weighted-average prepayment speed (CPR)											20.2	%			17.1	%
Discount rate											9.0	%			9.0	%

Note 7 — Noncovered Foreclosed Assets

The following table presents the changes in noncovered foreclosed assets for the nine months ended September 30, 2010 and 2009 (in thousands):

		Nine months ended September 30,
		2010				2009
Balance at beginning of period		$	3,726			$	1,185
Additions			5,826				2,905
Dispositions			(2,139	)			(1,530	)
Valuation adjustments			(560	)			(188	)
Balance at end of period		$	6,853			$	2,372

Note 8 — Junior Subordinated Debentures

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 (the “Securities Act”), or applicable state securities laws and were sold pursuant to an exemption from registration under the Securities Act. 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 and applicable state securities laws.

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 or applicable state securities laws and were sold pursuant to an exemption from registration under the Securities Act. 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 and applicable state securities laws.

The $20,619,000 of junior subordinated debentures issued by TriCo Capital Trust I and 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 I and the common stock issued by TriCo Capital Trust II are 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 (the “Federal Reserve Board”).

Note 9 — Commitments and Contingencies

Lease Commitments— The Company leases 45 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.

Rent expense for the nine months ended September 30, 2010 was $1,959,000, compared to $1,628,000 in the comparable period in 2009. Rent expense was offset by rent income for the nine months ended September 30, 2010 of $89,000, compared to $89,000 in the comparable period in 2009.

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:

		September 30,				December 31,
		2010				2009
		(in thousands)
Financial instruments whose amounts represent risk:
Commitments to extend credit:
Commercial loans		$	123,494			$	118,151
Consumer loans			392,095				405,959
Real estate mortgage loans			15,997				16,674
Real estate construction loans			8,302				19,258
Standby letters of credit			3,742				5,896
Deposit account overdraft privilege			38,111				36,489

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 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—During 2007, Visa Inc. (“Visa”) announced that it completed restructuring transactions in preparation for an initial public offering of its Class A stock, and, as part of those transactions, the Bank’s membership interest was exchanged for 16,653 shares of Class B common stock in Visa. In March 2008, Visa completed its initial public offering. Following the initial public offering, the Company received $275,400 proceeds as a mandatory partial redemption of 6,439 shares, reducing the Company’s holdings from 16,653 shares to 10,214 shares of Class B common stock. A conversion ratio of 0.71429 was established for the conversion rate of Class B shares into Class A shares. Using the proceeds from this offering, Visa also established a $3.0 billion escrow account to cover settlements, resolution of pending litigation and related claims (“covered litigation”).

In October 2008, Visa announced that it had reached a settlement with Discover Card related to an antitrust lawsuit. The Bank and other Visa member banks were obligated to fund the settlement and share in losses resulting from this litigation that were not already provided for in the escrow account. In December 2008, Visa deposited additional funds into the escrow account to cover the remaining amount of the settlement. The deposit of funds into the escrow account further reduced the conversion ratio applicable to Class B common stock outstanding from 0.71429 per Class A share to 0.6296 per Class A share.

In July 2009, Visa deposited an additional $700 million into the litigation escrow account. While the outcome of the remaining litigation cases remains unknown, this addition to the escrow account provides additional reserves to cover potential losses. As a result of the deposit, the conversion ratio applicable to Class B common stock outstanding decreased further from 0.6296 per Class A share to 0.5824 per Class A share.

The remaining unredeemed shares of Visa Class B common stock are restricted and may not be transferred until the later of (1) three years from the date of the initial public offering or (2) the period of time necessary to resolve the covered litigation. 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.

As of September 30, 2010, the value of the Class A shares was $74.26 per share. Utilizing the new conversion ratio effective in July 2009, the value of unredeemed Class A equivalent shares owned by the Company was $442,000 as of September 30, 2010, and has not been reflected in the accompanying financial statements.

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 10 — Stock-Based Compensation

The following table shows the number, weighted-average exercise price, intrinsic value, weighted average remaining contractual life, average remaining vesting period, and remaining compensation cost to be recognized over the remaining vesting period of options exercisable, options not yet exercisable, and total options outstanding as of September 30, 2010:

						Currently
		Currently				Not				Total
(dollars in thousands except exercise price)		Exercisable				Exercisable				Outstanding
Number of options			1,082,065				343,120				1,425,185
Weighted average exercise price		$	14.98			$	18.30			$	15.78
Intrinsic value		$	2,901			$	44			$	2,945
Weighted average remaining contractual term (yrs.)			3.34				8.69				4.62

The options for 321,940 shares that are not currently exercisable as of September 30, 2010 are expected to vest, on a weighted-average basis, over the next 3.1 years, and the Company is expected to recognize $2,497,000 of compensation costs related to these options as they vest.

Note 11 — Earnings Per Share

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

Earnings per share have been computed based on the following:

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2010				2009				2010				2009
Net income		$	1			$	2,255			$	2,879			$	7,649
Average number of common shares outstanding			15,860				15,787				15,848				15,782
Effect of dilutive stock options			113				229				204				229
Average number of common shares outstanding used to calculate diluted earnings per share			15,973				16,016				16,052				16,011

There were 763,000 and 553,000 options excluded from the computation of diluted earnings per share for the three month periods ended September 30, 2010 and 2009, respectively, because the effect of these options was antidilutive.

Note 12 — Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income (loss) and related tax effects are as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2010				2009				2010				2009
Unrealized holding gains (losses) on available-for-sale securities		$	(909	)		$	2,781			$	2,291			$	3,240
Tax effect			(383	)			(1,169	)			(963	)			(1,362	)
Unrealized holding gains (losses) on available-for-sale securities, net of tax		$	(526	)		$	1,612			$	1,328			$	1,878

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

		September 30,				December 31,
		2010				2009
		(in thousands)
Net unrealized gains on available-for-sale securities		$	10,268			$	7,977
Tax effect			(4,317	)			(3,354	)
Unrealized holding gains on available-for-sale securities, net of tax			5,951				4,623
Minimum pension liability			(4,143	)			(4,143	)
Tax effect			1,742				1,742
Minimum pension liability, net of tax			(2,401	)			(2,401	)
Joint beneficiary agreement liability			97				97
Tax effect			(41	)			(41	)
Joint beneficiary agreement liability, net of tax			56				56
Accumulated other comprehensive income		$	3,606			$	2,278

Note 13 — Retirement Plans

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

		Three months								Nine months
		ended September 30,								ended September 30,
(in thousands)		2010				2009				2010				2009
Net pension cost included the following components:
Service cost-benefits earned during the period		$	131			$	99			$	393			$	297
Interest cost on projected benefit obligation			191				174				573				522
Amortization of net obligation at transition			1				—				1				—
Amortization of prior service cost			38				38				115				114
Recognized net actuarial loss			54				25				163				75
Net periodic pension cost		$	415			$	336			$	1,245			$	1,008

During the nine months ended September 30, 2010 and 2009, the Company contributed and paid out as benefits $556,000 and $562,000, respectively, to participants under the plans. For the year ending December 31, 2010, the Company currently expects to contribute and pay out as benefits $733,000 to participants under the plans.

Note 14 — Fair Value Measurement

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or impairment write-downs of individual assets.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the 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.

Noncovered impaired loans — Noncovered loans are not recorded at fair value on a recurring basis. However, from time to time, a noncovered loan is considered impaired and an allowance for loan losses is established. Noncovered 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 impaired noncovered loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired noncovered 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 noncovered 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 noncovered 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 noncovered loan as nonrecurring Level 3.

Covered and Noncovered 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.

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 September 30, 2010		Total				Level 1				Level 2				Level 3
Securities available-for-sale:
Obligations of U.S. government corporations and agencies		$	236,283				—			$	236,283				—
Obligations of states and political subdivisions			13,207				—				13,207				—
Corporate debt securities			522				—				522				—
Mortgage servicing rights			3,905				—				—				3,905
Total assets measured at fair value		$	253,917				—			$	250,012			$	3,905

Fair value at December 31, 2009		Total				Level 1				Level 2				Level 3
Securities available-for-sale:
Obligations of U.S. government corporations and agencies		$	193,130				—			$	193,130				—
Obligations of states and political subdivisions			17,953				—				17,953				—
Corporate debt securities			539				—				539				—
Mortgage servicing rights			4,089				—				—				4,089
Total assets measured at fair value		$	215,711				—			$	211,622			$	4,089

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 nine month periods ended September 30, 2010 and 2009. 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 September 30,		Balance				into Level 3				in Earnings				Issuances				Balance
2010: Mortgage servicing rights		$	4,033				—			$	(609	)		$	481			$	3,905
2009: Mortgage servicing rights		$	3,895				—			$	(415	)		$	553			$	4,033
Nine months ended September 30,
2010: Mortgage servicing rights		$	4,089				—			$	(1,227	)		$	1,043			$	3,905
2009: Mortgage servicing rights		$	2,972				—			$	(317	)		$	1,378			$	4,033