TriCo Bancshares — Q2 2012 Form 10-Q
Business context and reporting period
TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank operating 41 traditional and 27 in-store branches. This unaudited report covers the quarter and six months ended June 30, 2012. Comparisons are affected by the September 2011 acquisition of Citizens Bank of Northern California; Citizens’ results are included in 2012 but not in the comparable 2011 periods.
Financial performance and position
- Q2 earnings: Net income was $5.321 million, or $0.33 per diluted share, versus $2.771 million, or $0.17, in Q2 2011. For the first six months, net income was $9.252 million, or $0.58 per diluted share, versus $5.571 million, or $0.35.
- Revenue and margin: Q2 net interest income on a fully taxable-equivalent basis was $25.998 million, up 19.1%; net interest margin was 4.46%, versus 4.31%. Six-month FTE net interest income rose 17.2% to $51.099 million and margin was 4.38%, versus 4.31%. Noninterest income increased 28.2% in Q2 to $10.577 million and 7.1% for the half-year to $18.842 million.
- Credit costs and operating expenses: Q2 provision for loan losses was $3.371 million, down from $5.561 million a year earlier; six-month provision was $7.367 million, versus $12.562 million. Q2 noninterest expense rose 21.3% to $24.367 million; six-month expense rose 18.9% to $47.282 million. The efficiency ratio was 66.6% in Q2 (66.8% in Q2 2011) and 67.6% for the half-year (65.0% in 2011).
- Balance sheet and capital: At June 30, assets were approximately $2.526 billion, loans $1.552 billion, deposits $2.166 billion, and shareholders’ equity $223.2 million. Loans were nearly unchanged from year-end; deposits declined 1.1%. The Bank was categorized as well capitalized; its total risk-based capital ratio was 14.18%, Tier 1 risk-based ratio 12.92%, and Tier 1 leverage ratio 9.64%.
- Liquidity and debt: Cash and cash equivalents were $644.1 million. Cash at the Federal Reserve and other banks plus available-for-sale securities totaled $779.3 million. Six-month operating cash flow was $31.3 million, versus $17.3 million. Other borrowings were $60.8 million and junior subordinated debt $41.2 million. A $50 million repurchase-agreement borrowing bears 4.72%, is callable quarterly, and has final maturity August 30, 2012. The Bank reported substantial unused FHLB and Federal Reserve borrowing capacity.
- Asset quality: Nonperforming assets were $95.6 million, or 3.79% of assets, down from $102.1 million and 3.99% at year-end. Nonperforming loans were $82.9 million, or 5.34% of loans, versus $85.7 million and 5.53%. The allowance for loan losses was $45.8 million, 2.95% of loans, and 55% of nonperforming loans. Q2 annualized net charge-offs were 0.78% of average loans, versus 1.38% a year earlier.
Material changes and notable items
- Higher average loan balances and yields—primarily reflecting Citizens—as well as lower deposit funding costs drove much of the increase in net interest income. Citizens contributed approximately $5.0 million of Q2 interest income, including $2.3 million of purchase-discount accretion; its contribution is not equivalent to recurring organic growth.
- Q2 noninterest income included a $600,000 life-insurance death-benefit gain. Loan-sale gains also increased, reflecting greater residential mortgage refinance activity. The indemnification-asset income reflects estimates of losses on FDIC-covered portfolios.
- During Q1, management revised its allowance methodology, including adopting loss-migration analysis and adjusting consumer risk grading and environmental factors. The net effect was a $1.388 million reduction in the calculated allowance. Management stated the changes were intended to better reflect portfolio risk.
- Citizens was acquired without FDIC loss sharing; Granite, acquired in 2010, has an FDIC loss-sharing agreement generally covering 80% of specified losses. Management cautions that acquired-loan fair-value and collectability estimates may prove inaccurate and that Granite reimbursement depends on compliance with agreement terms.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management states interim results are not necessarily indicative of full-year results. Principal risks include credit deterioration, real estate collateral values, economic conditions, interest-rate and mortgage-prepayment changes, estimates for acquired loans and mortgage servicing rights, and compliance with FDIC loss-sharing requirements. The company reported ordinary-course legal proceedings and did not expect them to materially affect financial position, results, or cash flows. Management concluded disclosure controls were effective as of June 30, 2012.
Important facts for investors to verify
- How much of reported earnings and net interest margin depends on Citizens’ acquired-loan discount accretion, and how that contribution may change.
- Whether the decline in nonperforming assets and charge-offs continues, particularly given new problem loans and the material home-equity and commercial-real-estate exposures.
- Whether the allowance methodology changes and its $1.388 million net effect remain appropriate as loan performance and economic conditions evolve.
- The renewal, repayment, or refinancing of the $50 million repurchase-agreement borrowing due August 30, 2012, and the trend in deposits and other funding.
- Future FDIC reimbursements and continued eligibility for loss sharing on Granite-covered assets, alongside Citizens’ unprotected credit-loss exposure.