TriCo Bancshares — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; quarterly results include the three months ended December 31, 2011. TriCo is a California bank holding company whose principal business is Tri Counties Bank, a community bank operating in Northern and Central California.
Financial performance and position
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Net interest income | $92.7 million | $90.4 million | Up 2.5%; fully tax-equivalent NII was $93.1 million, up 2.4%. |
| Net interest margin (FTE) | 4.43% | 4.45% | Down 2 basis points. |
| Provision for loan losses | $23.1 million | $37.5 million | Down $14.4 million. |
| Noninterest income | $42.8 million | $32.7 million | Up 30.9%, including a $7.6 million Citizens bargain-purchase gain. |
| Noninterest expense | $82.7 million | $77.2 million | Up 7.1%. |
| Net income / diluted EPS | $18.6 million / $1.16 | $6.0 million / $0.37 | Profit increased substantially; 2011 included acquisition-related and other unusual income. |
| Return on assets / equity | 0.82% / 8.93% | 0.27% / 2.94% | Both improved. |
| Loans / deposits at year-end | $1.55 billion / $2.19 billion | $1.42 billion / $1.85 billion | Loans up 9.3%; deposits up 18.3%, with acquisition effects. |
| Total assets / shareholders’ equity | $2.56 billion / $216.4 million | $2.19 billion / $200.4 million | Assets up 16.7%; equity up 8.0%. |
| Allowance for loan losses | $45.9 million; 2.96% of loans | $42.6 million; 3.00% of loans | Allowance grew in dollars, while coverage ratio edged down. |
Net cash provided by operating activities was $31.7 million, versus $51.2 million in 2010. Investing activities provided $153.4 million, including cash received in the Citizens acquisition; financing activities provided $81.2 million, including $98.5 million of deposit growth. Cash and cash equivalents ended the year at $637.3 million, up from $371.1 million.
Liquidity was supported by cash and available-for-sale securities totaling $846.4 million, or 33.1% of assets. The Bank reported $499.8 million of available FHLB borrowing capacity, $70.8 million at the Federal Reserve and $5.0 million in correspondent credit lines. Year-end other borrowings were $72.5 million and junior subordinated debt was $41.2 million. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 13.93% and Tier 1 leverage ratio was 9.44%.
The company paid $0.36 per share in dividends in 2011, down from $0.40 in 2010. Management said the Bank could pay $14.0 million in dividends without prior California regulator approval, subject to other capital and regulatory restrictions.
Material changes and notable items
- Citizens Bank of Northern California was acquired from the FDIC on September 23, 2011, adding seven branches and $167.5 million of loans and $239.9 million of deposits. TriCo paid no consideration; the transaction generated a $7.6 million bargain-purchase gain. Citizens contributed $6.2 million of interest income through year-end, including $3.1 million of purchase-discount accretion.
- Loan balances rose partly because of the Citizens acquisition. Management said organic loan payoffs exceeded production during 2011 and demand for commercial real estate and home-equity lending remained weak to modest.
- Net charge-offs declined to $19.7 million from $30.4 million; the net charge-off ratio fell to 1.37% from 2.07%. However, nonperforming assets rose to $102.1 million from $85.9 million, and nonperforming loans increased to 5.53% of loans from 5.35%.
- Foreclosed assets increased to $16.3 million from $9.9 million. Nonperforming assets include acquired/problem credits; Citizens-related nonperforming loans and foreclosed assets contributed to the third-quarter increase.
- Other notable 2011 income included a $0.8 million life-insurance death-benefit gain and a $2.1 million increase in the FDIC indemnification asset. The 2010 comparison included a $0.2 million bargain-purchase gain and a $0.4 million legal settlement.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management anticipated weak loan demand in 2012, dependent on economic and competitive conditions, and noted that deposit growth and funding costs were uncertain.
- Key risks include continued weakness in California and local real estate markets, borrower defaults, collateral value declines, and the possibility that the allowance may not cover actual losses. Approximately 88.8% of the loan portfolio was real-estate collateralized, substantially all in California.
- Low interest rates and changes in market rates may pressure asset yields, refinancing activity, funding costs and net interest income. Management’s model estimated that a 100-basis-point rate decline would reduce next-12-month NII by 0.84%, while a 200-basis-point increase would raise it by 1.57%; the estimates rely on assumptions and are not forecasts.
- The Granite acquisition’s loss-sharing agreement covers specified assets, with the FDIC generally absorbing 80% of covered losses and sharing 80% of recoveries. Reimbursement depends on compliance with agreement terms. Citizens was acquired without loss sharing.
- Commitments to extend credit were $534.4 million; deposit-overdraft privilege commitments were $61.6 million. These are not necessarily expected cash outflows. Management reported no material pending legal proceedings and considered routine claims not expected to have a material adverse effect.
- Dodd-Frank implementation and other banking regulation could raise compliance, deposit-insurance or capital costs. Dividend capacity is subject to regulatory limits. The company also identified acquisition integration, FDIC asset valuation, competition, and technology/security as risks.
Investor verification priorities
- Separate recurring earnings from the Citizens bargain gain, loan-discount accretion and life-insurance death-benefit gain; assess the sustainability of post-acquisition results.
- Review the acquired and originated loan portfolios, nonperforming assets, foreclosed assets, net charge-offs and allowance assumptions, especially California real-estate exposures.
- Confirm the extent and duration of Granite FDIC loss-share coverage, compliance requirements, reimbursement timing and remaining indemnification asset.
- Assess post-acquisition organic loan growth, deposit mix and retention, liquidity deployment, and the effect of low yields on net interest margin.
- Verify capital and regulatory dividend capacity, near-term borrowing maturities, and the company’s ability to maintain the quarterly dividend.