TriCo Bancshares (Tri Counties Bank) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results. Tri Counties Bank operates community banking branches across 26 California counties.
Financial performance and position
Unless otherwise noted, amounts are in millions.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income (FTE) | $44.1 | $41.7 | $86.7 | $83.7 |
| Noninterest income | $12.9 | $11.2 | $24.6 | $21.0 |
| Noninterest expense | $35.9 | $38.3 | $71.7 | $72.0 |
| Net income | $13.6 | $9.4 | $25.7 | $20.1 |
| Diluted earnings per share | $0.58 | $0.41 | $1.10 | $0.87 |
| Net interest margin (FTE) | 4.26% | 4.13% | 4.19% | 4.23% |
- Growth and profitability: Q2 net income rose about 44% year over year; first-half net income rose about 28%. Annualized ROA and ROE were 1.21% and 10.93% for Q2, versus 0.86% and 7.98% a year earlier. First-half figures were 1.14% and 10.46%, versus 0.93% and 8.61%.
- Balance sheet at June 30: Total assets were $4.520 billion, nearly unchanged from year-end 2016. Loans were $2.826 billion gross and $2.798 billion net, up 2.4% from year-end. Deposits were $3.878 billion, down 0.4%. Cash and cash equivalents fell to $167.6 million from $305.6 million.
- Liquidity and funding: Management reported $765.7 million of cash at the Federal Reserve and other banks in excess of reserve requirements plus available-for-sale securities, equal to 16.9% of assets. The filing cites loan growth and lower deposits as drivers of the decline in these liquid resources. FHLB and Federal Reserve credit lines were substantially available.
- Credit and allowance: The allowance for loan losses was $28.1 million, or 1.00% of loans, versus $32.5 million and 1.18% at year-end. Nonperforming loans were $17.4 million (0.62% of loans), down from $20.1 million (0.73%) at year-end; nonperforming assets were $20.9 million (0.46% of assets). The company recorded a $0.8 million Q2 and $2.4 million first-half benefit from reversals of loan-loss provision.
- Debt and capital: Other borrowings were $22.6 million and junior subordinated debt was $56.8 million. At June 30, consolidated total capital, Tier 1, common equity Tier 1, and leverage ratios were 14.63%, 13.76%, 12.22%, and 10.99%, respectively. The company said it exceeded fully phased-in Basel III capital requirements.
- Shareholder returns: Dividends were $0.17 per share for Q2 and $0.32 for the first half. Equity rose to $498.9 million; book value was $21.76 per share.
Changes versus comparable periods
- FTE net interest income increased 5.5% in Q2 and 3.6% in the first half. Higher average loan balances and investment yields contributed, while loan yields declined year over year and funding costs rose modestly.
- Noninterest income increased 14.8% in Q2 and 17.0% in the first half, led by deposit service charges and ATM/interchange fees. Q2 also included a $712,000 gain tied to termination of the FDIC loss-share agreements.
- Noninterest expense declined 6.2% in Q2 and 0.4% in the first half. Comparisons benefited from the absence of prior-year litigation settlement and branch-acquisition expenses; salary and benefit costs increased 2.2% in Q2 and 5.3% for the half.
- The Q2 net interest margin improved year over year, while the first-half margin declined slightly. The allowance and nonperforming loan ratios were lower than at year-end, although second-quarter net charge-offs increased to $2.1 million, including previously reserved acquired-loan losses.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management described loan demand as moderate to good and cited stable-to-improving economic conditions and low historical losses in explaining the provision reversals. It cautioned that adverse economic conditions could increase credit losses.
- On May 9, 2017, TriCo and the FDIC terminated the Granite-related loss-sharing agreements. TriCo paid $184,000 and recognized a $712,000 gain from release of the recorded payable.
- A consolidated settlement of two California employee class actions was executed, with estimated cost of approximately $1.45 million already accrued. Final settlement remained subject to court approval; a preliminary approval hearing was scheduled for August 25, 2017. The filing states that other pending proceedings were not expected to have a material adverse effect.
- Key exposures include credit quality in a geographically concentrated Northern California lending market, changes in interest rates and their effects on loan yields, deposits and securities, and valuation uncertainty for mortgage servicing rights. Management reported no material change in market-risk disclosures from the 2016 Form 10-K.
- The company was evaluating the impact of revenue-recognition guidance on certain deposit and interchange fees. It was also preparing for the expected January 1, 2020 adoption of CECL; management anticipated a one-time allowance adjustment but could not estimate its amount or broader impact.
- Forward-looking statements are subject to uncertainty; the company disclaimed an obligation to update them. Management concluded disclosure controls were effective at June 30, 2017.
Most important facts for investors to verify
- How much of earnings growth is sustainable after the FDIC termination gain, provision reversals, and favorable prior-year expense comparisons.
- Whether loan growth and credit quality remain sound, including trends in nonperforming loans, charge-offs, commercial real estate exposures, and allowance coverage.
- How rising rates affect net interest margin, deposit pricing, and the market value of the securities portfolio.
- The final court outcome and settlement cost for the employee class actions, and the eventual CECL transition impact.
- That reported liquidity, regulatory capital, and dividend capacity remain adequate as deposits, cash balances, and loan demand change.