TriCo Bancshares — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. TriCo Bancshares is a California bank holding company; Tri Counties Bank operates community banking branches across Northern California. Unless otherwise indicated, amounts below are in millions. The 2014 comparison excludes North Valley Bancorp, acquired October 3, 2014, so year-over-year comparisons include a substantial change in company scale.
Financial performance and condition
- Q3 earnings: Net income was $12.7 million, up from $8.2 million; diluted EPS was $0.55 versus $0.50. For the first nine months, net income was $32.4 million versus $20.5 million, and diluted EPS was $1.41 versus $1.25.
- Revenue and margins: Q3 GAAP net interest income was $40.0 million, up from $28.0 million; fully tax-equivalent (FTE) net interest income was $40.3 million, up 43.3%. Q3 noninterest income rose 35.5% to $11.6 million. Q3 FTE net interest margin was 4.46%, versus 4.39%. For nine months, FTE net interest income was $115.4 million, up 41.3%; the filing reports the period’s margin as 4.30% in the detailed table and 4.32% in its financial summary.
- Expenses and returns: Q3 noninterest expense increased 23.9% to $31.4 million, primarily reflecting North Valley’s added operations and staffing. The financial summary reports a 60.5% Q3 efficiency ratio. Annualized Q3 return on assets was 1.28% and return on equity 11.56%.
- Balance sheet: At September 30, total assets were $4.02 billion, loans net of allowance were $2.43 billion, deposits were $3.46 billion, and shareholders’ equity was $443.3 million. Compared with December 31, 2014, gross loans rose 8.2% to $2.47 billion and deposits rose 2.3%.
- Credit quality: The allowance for loan losses was $36.5 million, or 1.48% of loans, versus $36.6 million and 1.60% at year-end. Nonperforming loans were $38.9 million (1.58% of loans), down from $47.6 million (2.08%); nonperforming assets were $44.2 million (1.10% of assets), down from $52.5 million (1.88%). Q3 included a $0.9 million reversal of loan-loss provision, while nine-month provision reversal was $1.3 million. The quarter’s net recoveries included a $1.7 million recovery on one residential construction loan.
- Cash flow and liquidity: Nine-month operating cash flow was $44.4 million, versus $21.8 million. Investing activities used $512.6 million, principally reflecting securities purchases and loan growth; financing activities provided $66.9 million, including $77.4 million of deposit growth. Cash and cash equivalents fell to $209.3 million from $610.7 million at year-end, largely as cash was deployed into securities and loans. Management reported $470.6 million of cash at the Federal Reserve and other banks above reserve requirements plus available-for-sale securities, and substantial unused secured borrowing capacity.
- Debt and capital: Other borrowings were $6.9 million; junior subordinated debt was $56.4 million. Consolidated total, Tier 1, common equity Tier 1, and leverage capital ratios were 15.17%, 13.92%, 12.28%, and 11.00%, respectively. The Bank’s ratios exceeded applicable “well-capitalized” thresholds; management said both the Company and Bank met capital requirements, including fully phased-in Basel III requirements.
Material changes and unusual items
- North Valley Bancorp’s acquisition materially increased reported assets, loans, deposits, revenue, and staffing; prior-year results did not include its operations. Integration included branch consolidations, with five additional branches closed by August 2015.
- Loan and investment growth drove higher net interest income, partly offset by lower yields on new and repricing assets. Purchased-loan discount accretion contributed $3.1 million to Q3 interest income and $7.8 million for nine months; Q3 included $0.9 million of accretion after two acquired credit-impaired loans were paid in full.
- Management changed the allowance methodology for home-equity lines nearing the end of their revolving periods and recently amortizing home-equity loans. The change increased required reserves by $0.9 million and $0.5 million, respectively. Management considered the $36.5 million allowance adequate but cautioned that adverse conditions could increase losses.
- Q3 noninterest income included $0.9 million of recoveries on loans charged off before earlier acquisitions. Available-for-sale securities unrealized gains drove $2.4 million of Q3 other comprehensive income, while mortgage-servicing-rights fair value declined $0.6 million in the quarter.
- After quarter-end, TriCo announced an agreement to acquire three Bank of America branches in Humboldt County, expected in Q1 2016 subject to regulatory approval. The company anticipated assuming about $245 million in deposits and paying a 1.91% deposit premium.
Outlook, risks and contingencies
The filing provides no quantified earnings or other financial guidance. Management described loan demand as moderate to strong. Forward-looking statements are subject to risks and actual results may differ; the company disclaimed an obligation to update them. Key exposures include credit losses, collateral values and California economic conditions, interest-rate movements affecting loan yields and securities, and valuation assumptions for mortgage servicing rights. The filing also discloses off-balance-sheet commitments to extend credit of $672.7 million, standby letters of credit of $10.5 million, and overdraft privileges of $94.7 million; commitments may not be fully drawn. The FDIC loss-share arrangement for certain Granite assets is winding down, and a $0.6 million estimated “true-up” liability is recorded. Employment-related class actions remained pending; the company denied the allegations and intended to defend them, and management did not expect pending proceedings to have a material adverse effect. A North Valley merger-related shareholder suit was approved for settlement after quarter-end, with a $250,000 fee award; the filing says the related liability had been recorded in acquisition accounting.
Investor verification priorities
- Reconcile the filing’s nine-month net interest margin figures (4.30% versus 4.32%) and its Q3 2014 efficiency-ratio figures (69.1% in the financial summary versus 63.9% in the detailed expense table).
- Assess how much earnings growth reflects North Valley’s inclusion, purchased-loan discount accretion, and acquired-loan recoveries versus ongoing organic performance.
- Review credit trends and reserve adequacy, particularly commercial real estate, residential construction, and home-equity loans transitioning to amortization; monitor the large recovery that contributed to the Q3 provision reversal.
- Evaluate liquidity after the significant decline in cash balances, securities purchases, and continued loan growth, including reliance on deposits and secured borrowing capacity.
- Track the Humboldt County branch transaction’s approvals, deposit retention and integration costs, and the resolution of employment litigation and the FDIC true-up obligation.