TriCo Bancshares (Nasdaq: TCBK) — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly comparisons are identified separately. Unless noted, amounts are in millions of dollars. TriCo is a California bank holding company whose principal subsidiary, Tri Counties Bank, operates across Northern and Central California.
Business context and material changes
- TriCo completed its acquisition of FNB Bancorp on July 6, 2018, expanding into San Mateo, San Francisco and Santa Clara counties and adding 12 branches. Consideration was $291.1 million, including 7.405 million TriCo shares and $6.7 million cash to retire options. The acquisition added $1,306.5 million of assets and $991.9 million of deposits; TriCo recorded $156.7 million of goodwill and $27.6 million of core deposit intangibles.
- Year-end scale increased substantially with the acquisition: total assets rose 33.4% to $6.352 billion, loans rose 33.4% to $4.022 billion, and deposits rose 33.9% to $5.366 billion. Excluding acquired balances, year-end loans grew 5.7% and deposits 9.1%, as reported by management.
Financial performance and condition
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Interest income | $228.2 | $181.4 |
| Net interest income | $215.3 | $174.6 |
| Net interest margin, fully tax-equivalent | 4.30% | 4.22% |
| Noninterest income | $49.3 | $50.0 |
| Noninterest expense | $168.7 | $147.0 |
| Provision for loan losses | $2.6 | $0.1 |
| Net income | $68.3 | $40.6 |
| Diluted earnings per share | $2.54 | $1.74 |
| Return on average assets / equity | 1.24% / 10.75% | 0.89% / 8.10% |
| Efficiency ratio | 60.79% | 63.53% |
- Net interest income (fully tax-equivalent) increased 22.3%, primarily from higher average loan and investment balances, including the acquisition. Average earning-asset yield rose to 4.55% from 4.39%; average interest-bearing liability cost rose to 0.39% from 0.25%, including higher time-deposit costs.
- Net income rose 68.5%, while the effective tax rate fell to 26.8% from 47.7%. The 2017 rate included a $7.4 million deferred-tax charge following federal tax reform; thus, the year-over-year earnings increase reflects both operating growth and a less burdensome tax comparison.
- Expenses increased 14.7%. Management attributed much of the increase to the FNB transaction, including $5.2 million of merger costs, higher salaries and benefits, and increased intangible amortization. Noninterest income declined 1.5%, partly reflecting lower mortgage loan-sale gains and service fees, offset in part by higher ATM and interchange fees.
- At year-end, shareholders’ equity was $827.4 million and equity-to-assets was 13.02%, versus $505.8 million and 10.62% a year earlier. Tangible book value per share was $18.97, little changed from $19.01. Total risk-based capital ratio was 14.40%; the Bank exceeded applicable well-capitalized thresholds.
- Cash and cash equivalents were $227.5 million. FY 2018 operating cash flow was $91.1 million, investing cash flow was negative $142.0 million, and financing cash flow was positive $73.0 million; cash increased $22.1 million. Management reported $1.226 billion of available-for-sale securities and cash equivalents in excess of reserve requirements, equal to 19.3% of assets, plus substantial secured borrowing capacity.
- Deposits were $5.366 billion, including $1.761 billion of noninterest-bearing demand deposits. Other borrowings fell to $15.8 million from $122.2 million, primarily as deposit growth replaced borrowing. Junior subordinated debt had a recorded balance of $57.0 million; its aggregate face value was $62.9 million.
Credit quality, risks and outlook
- Nonperforming loans were 0.68% of loans at year-end, down from 0.81%; nonperforming assets were 0.47% of assets. Net charge-offs declined to $0.3 million from $2.3 million. The allowance for loan losses was $32.6 million, or 0.81% of loans, compared with $30.3 million, or 1.01%, in 2017.
- The 2018 loan-loss provision included estimated Camp Fire-related losses; the company had established $3.25 million in reserves for the fire by year-end. The portfolio is geographically concentrated in California and is heavily secured by real estate: approximately 91.7% of loan book value was real-estate-collateralized, according to the filing.
- Interest-rate exposure remains a key risk. Management’s model estimated that a 200-basis-point instantaneous rate decline would reduce 12-month net interest income by 9.2% and market value of equity by 22.8%, compared with a flat-rate scenario. The filing cautions that these are model estimates based on assumptions, not forecasts of actual results.
- Management provided no specific earnings, revenue or loan-growth guidance. It said 2019 loan demand and deposit growth would depend on economic conditions, rates and competition, and expected Bank dividends to support the parent’s common dividends, subject to regulatory limits and board discretion. The board intended to continue quarterly cash dividends but gave no assurance they would be paid.
- CECL was expected to take effect for TriCo on January 1, 2020. Management anticipated a one-time cumulative adjustment to the allowance at adoption but could not estimate its amount or overall financial impact. The 2019 lease-accounting adoption was estimated to add approximately $31.5 million to assets and liabilities, with no material effect expected on earnings or cash flows.
- Other cited risks include California economic and real-estate downturns, natural disasters, competition, deposit pricing and funding, interest-rate movements, acquisition integration and goodwill impairment, regulatory and compliance costs, and cybersecurity or third-party technology disruptions. The company reported no material pending legal proceedings; management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- How much of 2018 earnings growth came from the acquired bank versus organic growth, and whether expected acquisition synergies are being realized. The filing says separate post-acquisition FNB results cannot practicably be isolated; unaudited pro forma information is provided in the filing.
- Whether underlying net interest income and margin can withstand rising deposit costs, and how actual results compare with the rate-sensitivity model assumptions.
- Whether Camp Fire-related credit losses exceed the $3.25 million reserve and whether nonperforming loans remain controlled as the larger, real-estate-heavy portfolio seasons.
- The ultimate CECL transition adjustment, capital implications, and effect on provisioning when the standard becomes effective in 2020.
- Integration costs, goodwill and core-deposit-intangible amortization, capital and tangible book value after the FNB acquisition, and the sustainability of dividends and deposit growth.