TriCo Bancshares — Q3 2016 Form 10-Q
Business context and reporting period. TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank operating across 26 counties. This unaudited report covers the quarter and nine months ended September 30, 2016. Amounts below are in millions unless otherwise noted. The March 2016 acquisition of three Bank of America branches is included in results from the acquisition date.
Financial performance and condition
- Q3 earnings: Net interest income was $42.3 million (FTE: $42.9 million), up 5.7% (FTE: 6.4%) year over year. A $4.0 million reversal of loan-loss provision supported results. Net income was $12.2 million, down 3.9%; diluted EPS was $0.53 versus $0.55.
- Nine-month earnings: Net interest income was $124.8 million (FTE: $126.5 million), up 8.7% (FTE: 9.6%). Net income was $32.3 million, approximately flat year over year; diluted EPS was $1.40 versus $1.41.
- Margins and returns: Q3 FTE net interest margin was 4.23%, down from 4.46% a year earlier; nine-month margin was 4.23% versus 4.30%. Q3 return on assets and equity were 1.11% and 10.15%, respectively, compared with 1.28% and 11.56%. The efficiency ratio rose to 69.4% from 60.5%.
- Revenue and expenses: Q3 noninterest income fell 4.9% to $11.1 million, while noninterest expense increased 19.0% to $37.4 million. Nine-month noninterest income declined 5.3% to $32.1 million and expense rose 13.8% to $109.4 million. Higher salaries, benefits, incentive pay, and operating costs contributed to expense growth.
- Balance sheet: At September 30, total assets were $4.47 billion, loans net of allowance were $2.68 billion, deposits were $3.84 billion, and shareholders’ equity was $481.9 million. From December 31, 2015, total assets rose 5.8%, loans 7.7%, deposits 5.6%, and equity 6.6%. Loan growth was primarily organic.
- Credit quality: Nonperforming assets were $25.1 million, or 0.56% of assets, versus $42.5 million and 1.01% at year-end 2015; they rose 5.3% from June 30. Nonperforming loans were 0.77% of total loans. The allowance was $33.5 million, 1.23% of loans and 160% of nonperforming loans. The quarter included a $4.0 million provision reversal; nine-month net charge-offs were $2.0 million.
- Cash flow and liquidity: For the first nine months, operating cash flow was $38.9 million, investing cash use $67.4 million, and financing cash provided $40.1 million; cash and equivalents increased $11.6 million to $315.1 million. Cash at the Federal Reserve and other banks plus available-for-sale securities totaled $746.5 million, or 16.7% of assets. The Bank reported $1.27 billion of unused FHLB capacity and $115.4 million of unused Federal Reserve capacity.
- Debt and capital: Other borrowings were $19.2 million and junior subordinated debt $56.6 million. Consolidated total risk-based capital was 14.66%, Tier 1 capital 13.58%, common equity Tier 1 12.02%, and leverage 10.56%; the filing reports compliance with applicable capital requirements. The quarterly dividend was $0.15 per share.
Material changes, outlook, and risks
- The March 18 branch acquisition added $161.2 million of deposits and three Humboldt County offices; the Bank paid a $3.2 million premium and recorded $849,000 of goodwill. Acquisition-related costs included $784,000 in the first nine months.
- Loan sales included nonperforming and other credits sold in March and August. The August sale contributed net recoveries and helped drive the Q3 provision reversal. Purchased-loan discount accretion declined to $2.2 million in Q3 from $3.1 million a year earlier; reported Q3 loan interest also included $488,000 recovered from loans sold.
- Q3 results included a $716,000 write-down of a former branch property, subsequently sold. Nine-month results included a $1.45 million litigation accrual. Management estimated settlement costs of approximately $1.45 million, up to $1.9 million, for two employment-related class actions; settlement remained subject to court approval.
- Management cited lower market yields on new and renewed loans and investments as pressure on yields and margin. Mortgage refinancing and faster prepayments also affected securities premium amortization and mortgage-servicing-rights valuations; MSRs declined $2.2 million in fair value over nine months.
- Risks include credit losses, borrower and collateral conditions, interest-rate and prepayment changes, deposit and funding liquidity, and the estimation of loan-loss reserves and fair values. The filing gives no specific earnings or growth guidance. Management said the market-risk disclosures had no material change from the 2015 Form 10-K.
- New accounting guidance on expected credit losses (CECL) was scheduled to become effective for the Company January 1, 2020; management was evaluating its impact. Forward-looking statements are subject to uncertainty, and the Company disclaimed an obligation to update them.
Important facts for investors to verify
- Whether loan growth and lower nonperforming assets persist, and whether new Q3 problem credits—particularly the large commercial real estate exposure—develop further.
- Whether the $4.0 million quarterly provision reversal is repeatable; review the allowance methodology, coverage, net charge-offs, and recoveries from loan sales.
- How much of earnings and margin depends on purchased-loan discount accretion and unusual interest recoveries, and how rate changes could affect asset yields and deposit costs.
- The final amount and court approval status of the employment-litigation settlements, and any further costs from branch integration or system conversions.
- Deposit stability, available borrowing capacity, and capital headroom, including the effect of dividends and share repurchases on regulatory buffers.
- The assumptions underlying mortgage-servicing-rights fair values, securities prepayment estimates, and the eventual adoption impact of CECL.