TriCo Bancshares (NASDAQ: TCBK) | 2019 Q2 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2019. TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank operating in 29 counties. The July 2018 FNB Bancorp acquisition added 12 branches and substantially affects year-over-year comparisons.
Financial and operating metrics
Amounts below are in millions, except per-share amounts and percentages. Comparisons are with the corresponding 2018 period unless stated otherwise.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Interest and dividend income | $68.2 | $48.5 | $135.6 | $95.6 |
| Net interest income | $64.3 | $45.9 | $128.2 | $90.9 |
| Net interest margin, FTE | 4.48% | 4.14% | 4.47% | 4.14% |
| Noninterest income | $13.6 | $12.2 | $25.4 | $24.5 |
| Noninterest expense | $46.9 | $37.9 | $92.4 | $76.0 |
| Net income | $23.1 | $15.0 | $45.8 | $28.9 |
| Diluted EPS | $0.75 | $0.65 | $1.49 | $1.24 |
| Efficiency ratio | 60.1% | 65.2% | 60.1% | 65.9% |
- At June 30, total assets were $6.40 billion, loans $4.10 billion, deposits $5.34 billion, and shareholders’ equity $875.9 million. Loans rose 2.0% and deposits fell $24.3 million from December 31, 2018.
- Cash and cash equivalents were $175.6 million. Cash at the Federal Reserve and other banks, together with available-for-sale securities, totaled $1.137 billion, or 17.8% of assets, excluding reserve requirements.
- Six-month cash flow: operating activities provided $33.9 million; investing activities used $47.4 million; financing activities used $38.4 million. Cash declined $52.0 million to $175.6 million.
- Interest-bearing deposits were $3.56 billion; other borrowings were $13.3 million and junior subordinated debt was $57.1 million. The loan-to-deposit ratio was 76.8%.
- The allowance for loan losses was $32.9 million, 0.80% of loans. Nonperforming loans were $21.7 million, or 0.53% of loans; nonperforming assets were $23.2 million. The Bank’s total capital ratio was 14.83%, and its leverage ratio was 11.00%; the filing says the Bank exceeded applicable well-capitalized requirements.
Material changes versus comparable periods
- Net income increased about 53% in Q2 and 58% for the first half. Net interest income growth reflected higher average loan balances and yields, with FNB acquisition effects a major contributor.
- Average loan yield rose to 5.49% from 5.06% in Q2; FTE margin expanded 34 basis points year over year. Acquired-loan discount accretion was $1.9 million in Q2 and $3.6 million in the first half, up from $0.6 million and $1.2 million, respectively.
- Noninterest expense increased 23.7% in Q2 and 21.5% in the first half, mainly reflecting the acquired branches, higher staffing, occupancy, technology, advertising, and intangible amortization. The efficiency ratio nevertheless improved year over year.
- Year-over-year balance-sheet growth includes $1.463 billion of acquired balances; the filing estimates organic year-over-year loan growth of $122.7 million and deposit growth of $273.0 million.
- Nonperforming assets fell 22% from December 31, 2018, although they increased from March 31, 2019. The allowance was broadly stable from year-end, while the first-half provision was a $1.1 million reversal; Q2 recorded a $0.5 million provision.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or growth guidance. Management said the allowance was adequate at June 30, but adverse economic conditions or other circumstances could cause higher credit losses. It highlighted California real-estate prices, economic trends, and credit concentrations as risks.
- CECL was scheduled for adoption January 1, 2020. Management expected a one-time cumulative adjustment to the allowance but could not estimate its size or overall financial impact.
- Q2 and first-half noninterest income included $0.7 million and $0.7 million, respectively, from a life-insurance death benefit; management said this also reduced the effective tax rate. Mortgage-servicing-right valuation changes reduced income by $0.6 million in Q2 and $1.2 million in the first half.
- Organic deposit growth was partly associated with seasonal patterns and customers’ receipt of insurance proceeds related to Northern California wildfires. Deposit balances declined during the first half, and liquidity depends in part on dividends from the Bank, which are subject to regulatory restrictions.
- Off-balance-sheet commitments to extend credit totaled $1.202 billion; standby letters of credit were $11.3 million. The company reported ordinary-course legal proceedings and did not expect their resolution to materially adversely affect its financial position, results, or cash flows.
- Management identified risks including interest-rate and economic changes, competition, borrower performance and real-estate values, deposit and liquidity access, acquisition integration and retention, regulation, litigation, and accounting changes. It reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Separate the FNB acquisition’s impact from organic earnings, loan, deposit, and expense trends; assess the sustainability of acquired-loan discount accretion.
- Review deposit mix, funding costs, deposit outflows, and the availability of liquidity if deposits continue to decline.
- Track nonperforming loans, criticized and past-due credits, recoveries, California real-estate exposures, and whether the allowance remains adequate.
- Monitor CECL implementation and the eventual reported transition adjustment; its amount was not yet estimable.
- Reconcile the filing’s nonperforming-assets ratio: the detailed table reports 0.36% at June 30, while the highlights state 0.35%. Also distinguish Q2 share tenders under equity compensation plans from repurchases under the public stock-repurchase program.