TriCo Bancshares — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. TriCo Bancshares is a bank holding company whose principal business is community banking through Tri Counties Bank in Northern California. Unless otherwise noted, financial amounts below are in millions; filing financial statements are unaudited.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income, FTE | $24.7 | $26.0 | $49.3 | $51.1 |
| Net interest margin, FTE | 4.07% | 4.46% | 4.06% | 4.38% |
| Noninterest income | $10.1 | $10.6 | $20.3 | $18.8 |
| Noninterest expense | $23.5 | $24.4 | $45.1 | $47.3 |
| Net income | $6.3 | $5.3 | $14.8 | $9.3 |
| Diluted earnings per share | $0.39 | $0.33 | $0.92 | $0.58 |
| Net loan charge-offs / average loans, annualized | 0.22% | 0.78% | 0.32% | 0.97% |
At June 30, total assets were $2.588 billion, net loans $1.612 billion, deposits $2.267 billion, shareholders’ equity $239.3 million, other borrowings $6.6 million and junior subordinated debt $41.2 million. Loans rose 5.6% from year-end 2012; deposits declined 1.0% over that period. The Bank’s total, Tier 1 risk-based and Tier 1 leverage capital ratios were 14.64%, 13.38% and 10.15%, respectively, above the stated well-capitalized thresholds.
For the first half, operating cash flow was $17.6 million versus $31.3 million a year earlier; investing cash flow was a use of $145.4 million versus a source of $14.7 million; and financing cash flow was a use of $28.9 million versus $39.2 million. Cash and cash equivalents declined to $592.2 million from $748.9 million at year-end 2012. The filing cites $686.8 million in cash at the Federal Reserve and other banks above reserve requirements plus available-for-sale securities, and $607.3 million of unused FHLB, Federal Reserve and correspondent borrowing capacity.
Material changes versus comparable periods
- Q2 net income increased about 19% year over year; first-half net income increased about 60%. Lower provision expense was a major contributor: Q2 provision was $0.6 million versus $3.4 million, while the first half recorded a $0.5 million provision benefit versus $7.4 million of provision expense in 2012.
- Net interest income and margin weakened despite loan growth. Management attributed the decline mainly to lower loan yields: average loan yield fell 79 basis points in Q2 and 55 basis points for the first half. Lower borrowing costs partly offset the pressure.
- Q2 noninterest income declined 4%, while first-half noninterest income rose 8%. First-half growth included higher loan-sale gains and mortgage-servicing-rights valuation; deposit account service charges fell, largely with fewer customer overdrafts and related fees.
- Noninterest expense declined 3.5% in Q2 and 4.6% for the first half, primarily from lower foreclosed-asset costs, advertising and occupancy/equipment expense. Salaries and benefits increased. Management said the new Chico campus and operations center began operating at the end of June and is expected to add occupancy and equipment costs.
- Nonperforming assets declined to $66.5 million, or 2.57% of assets, from $80.0 million, or 3.07%, at December 31, 2012. Nonperforming loans fell to $61.5 million from $72.5 million; foreclosed assets were $5.1 million versus $7.5 million.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results and that forward-looking statements are uncertain and will not necessarily be updated.
- The allowance for loan losses was $39.6 million, or 2.40% of loans, compared with $42.6 million, or 2.73%, at year-end. During Q2, the Company expanded its historical loss look-back to include all available detailed loss data; this increased the June allowance by $1.314 million versus the former method. A Q1 change to collateral-sale cost estimates had increased the March allowance by $0.494 million. Management considers the allowance adequate but warns adverse conditions could increase losses.
- Credit risks include commercial real estate and consumer/home-equity exposures. At June 30, originated and purchased loans included $52.7 million and $1.6 million, respectively, in nonaccrual status; the filing also reports $50.3 million of performing nonaccrual loans. The allowance covers 64% of total nonperforming loans.
- Investment securities were affected by rising market yields. Available-for-sale securities had $3.642 million of first-half unrealized losses, net of tax, recorded in other comprehensive income; held-to-maturity securities had $3.863 million of gross unrealized losses. Management attributed declines to interest rates rather than credit deterioration and reported no other-than-temporary impairment.
- A California employee class-action settlement was preliminarily approved in May 2013. The Bank had accrued $2.090 million; the settlement amount was estimated at $2.040–$2.500 million, subject to final court approval and claims. Management said other ordinary-course legal matters were not expected to have a material effect.
- On July 2, 2013, regulators approved Basel III-related capital rules, with phased implementation beginning in 2015. Management believed the Company would comply if the rules were then in effect. The filing reports no material change in market-risk disclosures and states disclosure controls were effective.
Important facts for investors to verify
- Whether net interest margin stabilizes as loan yields and market rates change, and how much earnings continue to depend on acquired-loan discount accretion.
- Whether credit quality and nonperforming assets continue to improve, particularly in commercial real estate and home-equity loans, and whether the revised allowance assumptions remain adequate.
- Whether deposit trends, loan growth and the sharp first-half cash decline are sustainable; assess liquidity sources alongside planned lending and securities investment.
- The actual impact of the new campus operating costs, the final class-action settlement, and phased Basel III requirements on expenses, capital and capital distributions.
- Confirm current dividend capacity and capital ratios, noting that bank dividends to the parent are subject to regulatory restrictions.