TriCo Bancshares — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are primarily with Q1 2016. TriCo is a California bank holding company operating Tri Counties Bank, a community bank serving 26 California counties through 58 traditional and 10 in-store branches.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net interest income, GAAP | $42.0 million | $41.4 million, Q1 2016 |
| Net interest income, fully taxable-equivalent (FTE) | $42.6 million | $41.9 million, Q1 2016 |
| Net interest margin, FTE | 4.13% | 4.33%, Q1 2016 |
| Noninterest income | $11.7 million | $9.8 million, Q1 2016 |
| Noninterest expense | $35.8 million | $33.8 million, Q1 2016 |
| Net income | $12.1 million | $10.7 million, Q1 2016 |
| Diluted earnings per share | $0.52 | $0.46, Q1 2016 |
| Return on assets / return on equity | 1.08% / 9.97% | 1.01% / 9.25%, Q1 2016 |
| Efficiency ratio, FTE | 66.0% | 65.2%, Q1 2016 |
| Total assets | $4.528 billion | $4.518 billion, December 31, 2016 |
| Loans, net of allowance | $2.730 billion | $2.727 billion, December 31, 2016 |
| Total deposits | $3.899 billion | $3.896 billion, December 31, 2016 |
| Cash and cash equivalents | $323.7 million | $305.6 million, December 31, 2016 |
| Shareholders’ equity | $486.7 million | $477.3 million, December 31, 2016 |
All dollar figures above are rounded. Q1 2017 operating cash flow was $19.4 million, compared with $4.1 million in Q1 2016. Investing activities provided $1.2 million and financing activities used $2.6 million; cash and cash equivalents increased $18.1 million during the quarter.
At March 31, other borrowings were $15.2 million and junior subordinated debt was $56.7 million. The Bank had no outstanding borrowings on its $1.302 billion FHLB line or $127.4 million Federal Reserve line; $20 million of correspondent-bank federal funds lines were also available. Liquidity sources identified by management—cash at the Federal Reserve and other banks in excess of reserve requirements plus available-for-sale securities—totaled $813.7 million, or 18.0% of assets.
Regulatory capital remained strong: consolidated total capital, Tier 1, common equity Tier 1, and leverage ratios were 14.86%, 13.87%, 12.29%, and 10.77%, respectively. Management said the Company and Bank exceeded fully phased-in Basel III capital requirements; the Bank met the “well capitalized” thresholds.
Changes and drivers versus comparable periods
- Net income increased about 13% year over year. FTE net interest income rose 1.6%, but FTE net interest margin declined 20 basis points. Average loan balances grew 8.7%, while loan yield fell to 5.06% from 5.48%; management attributed the net interest income increase mainly to volume growth and stronger securities and cash yields.
- Noninterest income increased 19.5%, chiefly from higher ATM/interchange revenue and deposit service charges, and a smaller decline in mortgage servicing rights fair value than in Q1 2016.
- Noninterest expense increased 6.1%. Salaries and benefits rose 8.5%, reflecting higher staffing, compensation, and benefits costs. The efficiency ratio also worsened to 66.0% from 65.2%.
- The Company recorded a $1.557 million benefit from reversal of loan-loss provision, versus a $209,000 provision in Q1 2016. Management cited net recoveries, lower nonperforming loans, and low historical loss experience. The allowance declined to $31.0 million from $32.5 million at year-end; allowance-to-loans was 1.12% versus 1.18%.
- Nonperforming loans were $19.5 million, or 0.71% of loans, versus $20.1 million and 0.73% at year-end. Nonperforming assets were $23.0 million, or 0.51% of assets, down from $24.1 million. Management attributed the reduction primarily to loan paydowns, sales or upgrades, and foreclosed-asset dispositions.
- Comparability with Q1 2016 is affected by the March 2016 acquisition of three Bank of America branches, which added deposits and cash, and by $622,000 of acquisition-related expense in that quarter. Q1 2016 also included $1.237 million of interest recovered in a sale of nonperforming loans; Q1 2017 did not.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings, loan-growth, margin, or expense guidance. Management said loan demand was moderate in Q1 and considers the allowance adequate, while cautioning that adverse economic conditions or other circumstances could increase credit losses. Forward-looking statements are subject to risks, and the Company disclaims an obligation to update them.
- Credit exposure is concentrated in California and real estate: real estate mortgage loans were 75% of total loans at quarter-end. Management’s allowance estimates depend on borrower performance, collateral values, economic and interest-rate conditions, portfolio mix, and historical loss experience.
- Two employment-related class actions were being settled in principle. The Bank accrued an estimated $1.45 million; the settlement could cost up to $1.9 million and remains subject to customary conditions, including court approval.
- Off-balance-sheet exposures included $768.6 million of commitments to extend credit, $11.6 million of standby letters of credit, and $99.0 million of unused overdraft privileges. These contractual amounts are not necessarily expected cash outflows; commitments may expire unused.
- Available-for-sale securities had $10.25 million of gross unrealized losses at March 31, all reported as less than 12 months in duration. Management attributed them primarily to interest-rate and market-yield changes, and reported no other-than-temporary impairment.
- The Company adopted the stock-compensation accounting update in 2017; options exercised during the quarter produced $90,000 of excess tax benefits. It is evaluating the expected-credit-loss standard (CECL), effective for it in 2020, and cannot yet estimate the adoption adjustment or overall impact.
- The Company disclosed no material change in market-risk disclosures from its 2016 Form 10-K. Management concluded disclosure controls were effective at quarter-end, with no material control changes during the quarter.
Important facts for investors to verify
- Whether the loan-loss benefit is sustainable, and how allowance coverage and nonperforming-credit trends develop in subsequent quarters.
- Whether loan yields and net interest margin stabilize as rates, deposit costs, and loan mix change.
- Whether expense growth—especially staffing, data processing, and operational losses—moderates and improves the efficiency ratio.
- The court-approved outcome and final cost of the employment settlements, and any material developments in other contingencies.
- The Company’s future CECL estimate and implementation effects, which management said it could not yet quantify.