TriCo Bancshares — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are primarily to December 31, 2018. TriCo is a California bank holding company operating Tri Counties Bank across 29 California counties. Comparisons with Q1 2018 reflect the July 2018 acquisition of FNB Bancorp (FNBB), which added 12 Bay Area branches and materially expanded the company.
Financial performance and condition
- Earnings: Net income was $22.7 million, versus $13.9 million in Q1 2018; diluted EPS was $0.74 versus $0.60. Management also reported net income of $22.7 million and diluted EPS of $0.74 in the prior quarter.
- Interest income and margin: GAAP net interest income rose to $63.9 million from $45.0 million. Fully tax-equivalent (FTE) net interest income increased 41.7% to $64.2 million, and FTE net interest margin was 4.46%, up from 4.14% year over year but down 7 basis points sequentially. Acquisition-related average balance growth and higher market rates contributed; purchased-loan discount accretion was $1.7 million.
- Noninterest income and costs: Noninterest income declined 3.5% to $11.9 million, including a $645,000 mortgage-servicing-rights valuation loss. Noninterest expense increased 19.3% to $45.5 million, with higher staffing and acquired-branch occupancy, data-processing, advertising, and intangible-amortization costs. The efficiency ratio was 60.1%, improved from 66.63% year over year but above 59.1% in the prior quarter.
- Returns: Return on average assets was 1.41% and return on average equity was 10.78%, compared with 1.17% and 11.00%, respectively, in Q1 2018.
- Balance sheet and funding: Total assets were $6.47 billion, loans $4.03 billion, and deposits $5.43 billion at quarter-end. Loans increased 0.3% and deposits 1.2% from year-end; the loan-to-deposit ratio was 74.3%, versus 75.0% at year-end. Noninterest-bearing deposits were 32.4% of deposits. Other borrowings were $12.5 million and junior subordinated debt was $57.1 million.
- Credit quality: The allowance for loan losses was $32.1 million, or 0.79% of loans, versus $32.6 million, or 0.81%, at year-end. Nonperforming loans fell to $19.6 million from $27.5 million; nonperforming assets were 0.34% of assets. A $1.6 million reversal of loan-loss provision included the effect of $1.082 million in net recoveries and lower estimated reserve needs from certain qualitative factors.
- Cash flow and liquidity: Operating activities provided $22.1 million; investing activities provided $14.9 million; financing activities provided $54.3 million. Cash and cash equivalents increased $91.2 million to $318.7 million. Cash at the Federal Reserve and other banks plus available-for-sale securities totaled $1.31 billion, or 20.3% of assets. Management identified Bank dividends as a source of parent-company liquidity, subject to regulatory restrictions.
- Capital: Shareholders’ equity was $853.3 million, or 13.18% of assets. Consolidated total capital, Tier 1, common equity Tier 1, and leverage ratios were 14.73%, 14.00%, 12.83%, and 10.84%, respectively. The company and Bank exceeded applicable capital requirements; the Bank was well capitalized.
Material changes and notable items
- Compared with Q1 2018, reported assets rose $1.69 billion, including $1.46 billion attributed to acquired balances; organic assets increased $228.7 million (4.8%). Organic loans grew $129.9 million (4.2%) and organic deposits $353.9 million (8.7%).
- FNB Bancorp’s acquisition added $156.7 million of goodwill and $27.6 million of core deposit intangibles. Management cited higher ongoing operating costs associated with the acquired branches; no acquisition expense was recorded in Q1 2019, compared with $476,000 in Q1 2018.
- Adoption of lease accounting on January 1, 2019 added right-of-use assets and lease liabilities; the March 31 balances were $30.9 million and $30.2 million. The company said adoption did not materially affect income or cash flows.
- Other comprehensive income was $9.0 million, primarily reflecting improved fair value of available-for-sale securities; accumulated other comprehensive loss narrowed to $8.9 million from $17.9 million at year-end.
Outlook, risks, and contingencies
- The filing provides no specific earnings or growth guidance. Management described credit quality as improving, while remaining cautious about California real estate prices and housing affordability. It said deposit growth included seasonal factors and customer insurance proceeds related to Northern California wildfires.
- CECL is scheduled for adoption January 1, 2020. Management was evaluating its effect and expected a one-time cumulative adjustment to the allowance, but could not yet estimate the amount or overall impact.
- Disclosed risks include economic and interest-rate changes, California real estate values, deposit and liquidity competition, borrower performance, securities impairment, regulation, technology, and the costs and execution of FNBB integration. Management reported no material change in market-risk disclosures from its 2018 annual report.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect, although outcomes were not determinable. The Bank had $1.23 billion of commitments to extend credit, plus standby letters of credit and overdraft commitments; these are contingent exposures, not funded balances.
Important facts for investors to verify
- How much of earnings and margin performance is sustainable after separating FNBB-related scale, acquired-loan discount accretion, rate effects, and the loan-loss reversal.
- Whether deposit growth persists and how deposit pricing affects funding costs and net interest margin.
- Whether the decline in nonperforming loans and net recoveries continue, and whether the $32.1 million allowance remains adequate under changing economic or real-estate conditions.
- The ongoing cost and revenue contribution of FNBB, including branch integration and realization of expected merger benefits.
- The eventual CECL transition adjustment and its implications for reserves and capital; the filing does not provide a clear estimate.
- The composition and liquidity of the securities portfolio, including interest-rate exposure and unrealized losses, and the effect of potential deposit outflows or credit drawdowns.