TriCo Bancshares — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. TriCo is a California bank holding company; Tri Counties Bank operates a community banking business across 26 California counties. Figures below are in U.S. dollars; financial statement amounts are generally converted from thousands to millions.
Financial performance and position
- Quarterly earnings: Net income was $9.4 million, down 17.3% from $11.4 million a year earlier. Diluted EPS was $0.41 versus $0.49. For the first half, net income rose 1.9% to $20.1 million and diluted EPS was $0.87 versus $0.86.
- Net interest and margins: Q2 fully taxable-equivalent (FTE) net interest income increased 7.8% to $41.7 million; the FTE net interest margin declined to 4.13% from 4.35%. First-half FTE net interest income rose 11.4% to $83.7 million, while margin was 4.23% versus 4.22%. Loan and investment growth lifted income, partly offset by lower yields.
- Other income and expenses: Q2 noninterest income fell 6.9% to $11.2 million, primarily reflecting a $0.7 million decline in mortgage-servicing-rights value (versus a $0.5 million gain a year earlier). Noninterest expense rose 18.0% to $38.3 million, including a $1.45 million legal accrual, higher salaries and benefits, and other operating costs. The efficiency ratio increased to 72.2% from 63.9%. First-half noninterest income was $21.0 million and expense was $72.0 million.
- Assets and funding: At June 30, total assets were $4.35 billion, loans $2.65 billion, deposits $3.74 billion, and shareholders’ equity $473.9 million. Since year-end 2015, these increased from $4.22 billion, $2.52 billion, $3.63 billion, and $452.1 million, respectively. Cash and cash equivalents declined to $216.8 million from $303.5 million.
- Debt and capital: Other borrowings were $19.5 million and junior subordinated debt $56.6 million. Regulatory capital ratios were 14.73% total capital, 13.57% Tier 1, 11.98% common equity Tier 1, and 10.40% leverage; management said the Company and Bank exceeded fully phased-in Basel III requirements and qualified as well capitalized.
- Cash flow and liquidity: First-half operating cash flow was $23.6 million; investing activities used $59.5 million and financing activities used $50.8 million, reducing cash by $86.7 million. Management reported $668.6 million of cash above reserve requirements plus available-for-sale securities, or 15.4% of assets. No borrowings were outstanding on the $1.22 billion FHLB and $101.7 million Federal Reserve secured lines; $15 million of correspondent lines were also available.
Changes, unusual items, and asset quality
- On March 18, 2016, the Bank acquired three Bank of America branches in Humboldt County, paying $3.2 million for deposit relationships. The acquired deposits were $161.2 million; the transaction also included $159.5 million cash and $0.3 million in loans. The branches were integrated into Tri Counties Bank’s systems.
- On March 31, the Company sold loans with $31.5 million of contractual principal and $24.8 million recorded value for $27.0 million net proceeds. The sale included $1.237 million of recovered interest previously applied to principal. The Company also recorded a $103,000 gain on the nonperforming-loan portion of the sale.
- Nonperforming assets declined to $23.8 million (0.55% of assets) from $42.5 million (1.01%) at December 31, 2015; nonperforming loans were 0.75% of total loans versus 1.47%. The decline reflected loan sales, paydowns/upgrades, and foreclosed-asset dispositions. The allowance for loan losses was $35.5 million, or 1.34% of loans, versus $36.0 million and 1.43% at year-end. The Company recorded a $0.773 million Q2 benefit from reversal of loan-loss provision and reported $0.106 million of net charge-offs for the quarter.
- Litigation: Two California employee class-action matters involving meal/rest periods and wage statements led to a $1.45 million second-quarter accrual. The Company said further losses are reasonably possible but could not estimate any additional amount.
- Outlook and risks: The filing provides no numerical earnings or growth guidance. Management cited lower market yields and mortgage refinancing/prepayment speeds as pressures on asset yields and mortgage servicing rights. Credit estimates depend on borrower performance, collateral values, economic conditions, and portfolio growth. The filing points to the 2015 Form 10-K and its risk-factor section for broader risks; management reported no material change in market-risk disclosures. The Company was evaluating the expected-credit-loss standard (CECL), effective for it in 2020.
- Other items: First-half dividends were $0.30 per share. Available-for-sale securities’ unrealized gains boosted other comprehensive income; the reported $7.851 million first-half OCI contributed to equity growth. Management concluded disclosure controls were effective at June 30, 2016.
Key facts for investors to verify
- Whether elevated operating expenses, particularly compensation, integration costs, and the legal accrual, persist beyond this quarter.
- How much loan growth and net interest income depend on acquisition effects, purchased-loan discount accretion, and recovered interest from loan sales.
- Whether nonperforming-loan improvement is sustained, and how loan-loss reserves compare with subsequent credit trends and portfolio growth.
- Whether deposit flows, available liquidity, and the large securities portfolio remain adequate as funding needs and interest rates change.
- The outcome and potential additional cost of the employee litigation, and the effect of future CECL adoption on reserves and equity.