TriCo Bancshares — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2019. TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank operating in 29 counties. Unless stated otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net interest income | $64.7 | $60.5 | $192.9 | $151.3 |
| Net interest margin, FTE | 4.44% | 4.29% | 4.48% | 4.22% |
| Noninterest income | $14.1 | $12.3 | $39.3 | $36.5 |
| Noninterest expense | $46.3 | $47.5 | $138.5 | $123.2 |
| Net income | $23.4 | $16.2 | $69.2 | $45.1 |
| Diluted earnings per share | $0.76 | $0.53 | $2.25 | $1.76 |
| Efficiency ratio | 58.82% | 65.26% | 59.64% | 65.61% |
Q3 return on average assets was 1.44% and return on average equity was 10.42%; nine-month returns were 1.44% and 10.67%, respectively. Q3 net interest margin fell 6 basis points from the prior quarter. The loan-loss provision was a benefit of $0.3 million in Q3 2019, versus expense of $2.7 million in Q3 2018; for nine months, the benefit was $1.4 million versus expense of $1.8 million.
Financial position, cash flow, and liquidity
- At September 30, 2019, total assets were $6.385 billion, loans were $4.182 billion, deposits were $5.295 billion, and shareholders’ equity was $896.7 million. Loans were up 3.9% from year-end 2018; deposits were down 1.3% over that span.
- Cash and cash equivalents were $259.0 million, up from $227.5 million at December 31, 2018. Cash at the Federal Reserve and other banks, plus available-for-sale securities, totaled $1.001 billion, or 15.7% of assets, as reported by management.
- Nine-month operating cash flow was $76.3 million, investing activities provided $46.2 million, and financing activities used $91.0 million. Deposit outflows of $71.1 million and dividends of $18.3 million were major financing cash uses.
- Other borrowings were $16.4 million, down from $282.8 million at September 30, 2018; junior subordinated debt was $57.2 million. Total deposits were the principal funding source.
- Capital ratios remained above stated requirements: consolidated total capital was 15.23%, Tier 1 capital 14.52%, common equity Tier 1 13.37%, and leverage 11.31%. The Bank was reported well capitalized.
- The loan-to-deposit ratio was 79.0%, compared with 76.8% at June 30, 2019. Noninterest-bearing deposits were 33.6% of deposits.
Material changes versus comparable periods
- Net income rose 44.7% year over year in Q3 and 53.4% for the first nine months. Growth reflected higher interest income and net interest income, lower Q3 expenses, and a lower loan-loss provision/benefit comparison.
- The July 2018 FNB Bancorp acquisition expanded the comparison base. Management noted the nine-month increases in average loans, interest-earning assets, staffing, and operating costs were partly acquisition-related; therefore, year-over-year growth is not purely organic.
- Q3 FTE net interest income increased 6.8% year over year. Higher loan balances and yields supported revenue, while deposit costs rose: the cost of interest-bearing deposits reached 0.34% in Q3 versus 0.24% a year earlier. Repayment of overnight borrowings reduced interest expense.
- Q3 noninterest expense declined 2.5%, primarily because there were no merger and acquisition costs, compared with $4.2 million in Q3 2018. Nine-month noninterest expense increased 12.4%, reflecting acquisition-related scale and operating costs, partly offset by the absence of prior-year merger costs.
- Nonperforming loans fell to $18.6 million, or 0.44% of loans, from $27.5 million, or 0.68%, at December 31, 2018. Nonperforming assets were $20.1 million, or 0.31% of assets, versus $29.8 million, or 0.47%.
- The allowance for loan losses was $31.5 million, 0.75% of loans, versus $32.6 million, 0.81%, at year-end. Nine-month net recoveries were $0.3 million; Q3 net charge-offs were $1.0 million.
- Accumulated other comprehensive income improved to $1.5 million from a loss of $17.9 million at year-end, largely reflecting gains on available-for-sale securities.
Outlook, risks, contingencies, and unusual items
- The filing gives no quantified earnings, margin, loan growth, or other forward guidance. Management said it considers the allowance adequate but cautioned that adverse economic conditions or other circumstances could increase credit losses.
- Management identified economic and local-market conditions, interest-rate and policy changes, competition, deposit and liquidity availability, borrower and California real estate performance, regulatory changes, technology, litigation, and FNB integration and retention risks as factors that could cause results to differ from expectations.
- TriCo was preparing for CECL, effective January 1, 2020. Management expected a one-time cumulative adjustment to the allowance upon adoption but could not estimate its size or the overall financial-statement impact.
- The company adopted lease accounting in 2019, recording a $29.0 million right-of-use asset and $28.5 million lease liability at September 30. Adoption did not materially affect income or cash flows.
- Q3 loan-loss benefit reflected lower calculated reserves after sales and charge-offs of nonperforming loans, lower past-due balances, and a $0.25 million decrease in reserves associated with Camp Fire borrowers and collateral. Q3 included $1.392 million of loan charge-offs; management cited a fully reserved lending relationship among the larger items.
- Nine-month noninterest income included approximately $0.8 million of life-insurance death-benefit proceeds. Mortgage servicing rights valuation declines reduced noninterest income by $1.7 million for the nine-month period.
- Credit commitments, standby letters of credit, and overdraft privileges were substantial off-balance-sheet exposures. Ordinary-course legal proceedings were disclosed; management did not expect their ultimate resolution to materially adversely affect financial position, results, or cash flows.
Important facts for investors to verify
- Whether loan and deposit trends, deposit pricing, and the 6-basis-point sequential margin decline support future net interest income.
- The quality and concentration of the California loan portfolio, especially commercial real estate and acquired loans, and whether lower nonperforming balances persist after sales, charge-offs, and paydowns.
- The assumptions behind the $31.5 million allowance and the expected CECL transition adjustment, which management had not yet quantified.
- How much reported earnings growth is attributable to the FNB Bancorp acquisition, purchased-loan discount accretion, and unusual items rather than ongoing organic performance.
- Liquidity sensitivity to deposit outflows, the sizable commitment balances, and the continued ability to maintain capital and dividends under regulatory restrictions.