TriCo Bancshares — Q2 2011 Form 10-Q
Business and period: Community-banking holding company operating through Tri Counties Bank, with lending concentrated in northern and central California. This unaudited report covers the quarter and six months ended June 30, 2011; comparisons are generally against 2010, and balance-sheet changes against December 31, 2010.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Interest and dividend income | $24.467m | $25.776m | $48.901m | $51.712m |
| Net interest income (FTE) | $21.833m | $22.245m | $43.620m | $44.346m |
| Net interest margin (FTE) | 4.31% | 4.41% | 4.31% | 4.40% |
| Provision for loan losses | $5.561m | $10.000m | $12.562m | $18.500m |
| Noninterest income | $8.251m | $8.104m | $17.601m | $15.651m |
| Noninterest expense | $20.095m | $18.408m | $39.766m | $37.211m |
| Net income | $2.771m | $1.320m | $5.571m | $2.878m |
| Diluted EPS | $0.17 | $0.08 | $0.35 | $0.18 |
Financial position, cash flow and asset quality
- Balance sheet at June 30: Total assets were $2.176bn, down from $2.190bn at year-end 2010. Loans were $1.396bn before the $43.962m allowance; net loans were $1.352bn. Deposits were $1.837bn, down 0.8% from year-end.
- Cash and liquidity: Cash and cash equivalents were $391.054m; available-for-sale securities were $264.992m. The company reported $603.172m in cash at the Federal Reserve and other banks plus securities available for sale. It also had $437.764m of unused FHLB borrowing capacity and $43.407m of unused Federal Reserve capacity, subject to collateral and other terms.
- Debt and capital: Other borrowings totaled $59.234m, including a $50m repurchase agreement callable quarterly and maturing in August 2012; junior subordinated debt was $41.238m. Shareholders’ equity was $204.915m. Tier 1 capital, total capital and leverage ratios were 13.28%, 14.55% and 10.38%, respectively, versus stated regulatory minimums of 4%, 8% and 4%.
- Cash flows, first half: Operating activities provided $17.348m, investing activities provided $23.755m and financing activities used $21.115m. Cash and cash equivalents increased $19.988m to $391.054m. Dividends paid were $2.866m.
- Credit quality: The allowance for loan losses was $43.962m, 3.15% of loans, versus $42.571m and 3.00% at year-end. First-half net charge-offs were $11.171m; the annualized net charge-off ratio was 1.60%, compared with 2.12% in first-half 2010. Nonperforming assets were $83.057m, or 3.82% of assets, versus $85.900m and 3.92% at year-end. Nonaccrual loans were $73.720m; the filing identifies $51.078m as performing nonaccrual and $22.642m as nonperforming nonaccrual.
- Restructured and foreclosed assets: Troubled debt restructurings classified as impaired totaled $50.337m, up from $36.423m at year-end. Foreclosed assets were $9.337m, with $1.636m in valuation allowance.
- Profitability and efficiency: Annualized return on assets and return on equity were 0.51% and 5.39% for Q2, compared with 0.24% and 2.61% a year earlier. The efficiency ratio increased to 66.8% from 60.7%.
Material changes and management commentary
- Q2 net income more than doubled year over year, and first-half net income rose to $5.571m from $2.878m. Lower loan-loss provisions were a major contributor; the provision fell $4.439m in Q2 and $5.938m in the first half.
- Net interest income declined despite lower funding costs. Management cited a 10-basis-point Q2 margin contraction and lower average loan balances, attributing pressure to weak loan demand and unattractive investment yields that limited deployment of deposits beyond low-yield cash.
- Noninterest income rose 1.8% in Q2 and 12.5% in the first half. Lower deposit service charges—attributed to overdraft rule changes—were offset by higher ATM/interchange fees, investment-product commissions and mortgage-related income. First-half noninterest income included a $1.836m increase in the FDIC indemnification asset.
- Noninterest expense increased 9.2% in Q2 and 6.9% in the first half, including higher salaries and benefits, data-processing costs and foreclosed-asset loss provisions. Management linked expense fluctuations in part to loan collection and foreclosed-asset activity.
- Loans declined 1.7% from year-end, although balances increased $8.402m during Q2—the first quarterly increase, excluding the Granite acquisition, since Q4 2008. Deposits decreased $15.442m from year-end.
- The 2010 comparison includes a $232,000 Granite acquisition bargain-purchase gain and a $400,000 legal-settlement gain in first-half noninterest income; neither was recorded in first-half 2011. Granite’s acquired assets are subject to FDIC loss-sharing, generally covering 80% of covered losses, subject to agreement terms.
Outlook, risks and contingencies
The filing provides no specific earnings, margin, credit-loss or growth guidance. Management said loan demand remained weak and investment yields unattractive. It believes the allowance was adequate at June 30, but cautioned that adverse economic conditions or other developments could increase losses. Key risks include California regional and real-estate credit conditions, further deterioration in criticized or nonperforming loans, valuation uncertainty in acquired Granite assets, and compliance with FDIC loss-share requirements; failure to comply could jeopardize coverage. The company also disclosed ordinary-course legal proceedings and Visa-related litigation exposure, but management did not expect legal matters to materially affect consolidated results or financial position. Forward-looking statements are not guaranteed, and the company disclaimed an intent to update them.
Important facts for investors to verify
- Whether lower provisions and reported profit improvement persist as credit performance evolves; monitor charge-offs, nonperforming assets and the rise in TDR balances.
- How much of first-half noninterest income growth reflects FDIC indemnification-asset remeasurement rather than recurring fee activity.
- The adequacy of the $43.962m loan-loss allowance and the assumptions supporting expected recoveries on Granite covered assets.
- Whether loan growth and net interest margin recover given management’s comments on demand, asset yields and excess cash.
- Funding and liquidity implications of deposit outflows, the callable $50m repurchase agreement and collateral requirements on available credit facilities.
- Capital and shareholder returns: dividends were $0.18 per share for the first half, and the filing reports no purchases under the open-market repurchase plan during that period.