TriCo Bancshares — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. TriCo is a California bank holding company operating Tri Counties Bank, a community bank serving 29 California counties. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $60.5 | $44.1 | $151.3 | $129.5 |
| Provision for loan losses | $2.7 | $0.8 | $1.8 | $(1.6) benefit |
| Noninterest income | $12.2 | $12.9 | $36.7 | $37.5 |
| Noninterest expense | $47.4 | $37.2 | $123.4 | $108.9 |
| Net income | $16.2 | $11.9 | $45.1 | $37.6 |
| Diluted EPS | $0.53 | $0.51 | $1.76 | $1.62 |
- Q3 net income rose about 36% year over year; diluted EPS rose about 4%, reflecting the increase in shares following the acquisition. Compared with Q2 2018, net income increased from $15.0 million, while diluted EPS fell from $0.65.
- Q3 net interest margin was 4.32% on a fully tax-equivalent basis, up from 4.14% in Q2. The detailed year-over-year table reports 4.24% for Q3 2017, while the financial highlights table reports 4.26%; investors should verify the comparable-period figure. Nine-month margin was 4.21% in both years.
- Annualized return on average assets/equity was 1.05%/9.11% for Q3 and 1.15%/10.44% for the nine-month period. The Q3 efficiency ratio was 65.2%.
- At September 30, assets were $6.32 billion, loans $4.03 billion, deposits $5.09 billion, and shareholders’ equity $802.1 million. Cash and cash equivalents were $226.5 million. The loan-to-deposit ratio was 79.1%.
- Other borrowings were $282.8 million and junior subordinated debt was $57.0 million. Regulatory capital ratios exceeded fully phased-in Basel III minimums; consolidated total capital was 13.90%, Tier 1 13.19%, common equity Tier 1 12.03%, and leverage 10.66%.
- For the first nine months, operating cash flow was $59.9 million, investing cash outflow $112.9 million, financing cash inflow $74.1 million, and cash increased $21.1 million to $226.5 million.
Changes versus comparable periods
- TriCo completed its acquisition of FNB Bancorp on July 6, 2018, issuing 7.41 million shares and paying $6.7 million to retire outstanding FNB options. It added 12 branches in San Mateo, San Francisco, and Santa Clara counties; system integration was completed two weeks later.
- The acquisition materially expanded the balance sheet. From December 2017, loans increased $1.01 billion and deposits $1.08 billion. Of these, $834.7 million of loans and $991.9 million of deposits came with FNB; organic loan growth was $177.6 million (7.9% annualized) and organic deposit growth $92.1 million (3.1% annualized) over nine months.
- Acquisition accounting added $156.7 million of goodwill and $27.6 million of core deposit intangibles. The reported results include FNB only from the acquisition date, so reported year-over-year growth is not like-for-like.
- Q3 interest income grew 40.6% year over year, while interest expense rose 122.3%. Management attributed higher net interest income primarily to greater average loan balances and higher loan yields; funding costs also increased. Nine-month purchased-loan discount accretion declined to $3.3 million from $5.1 million.
- Noninterest expense rose 27.3% in Q3 and 13.3% year to date. Reported merger-related costs were $4.2 million for Q3 and $5.2 million year to date. The federal corporate tax rate reduction contributed to lower effective tax rates: 28.6% for Q3 and 28.2% year to date, versus 37.5% and 37.1% in 2017.
- Noninterest income declined 5.8% in Q3 and 2.4% year to date, partly due to lower securities-sale gains and service-fee revenue. The year-to-date comparison also included $0.5 million of 2017 income from termination of an FDIC loss-sharing agreement.
Credit quality, outlook and risks
- Q3 provision for loan losses increased to $2.7 million from $0.8 million. Management cited a more cautious assessment of California real estate prices and housing affordability, as well as loan growth. The allowance was $31.6 million, or 0.78% of loans; management considered it adequate but cautioned that adverse conditions could increase losses.
- Nonperforming loans were $27.1 million, or 0.67% of loans, versus $24.4 million and 0.81% at year-end 2017. Nonperforming assets were $29.0 million, or 0.46% of assets, versus $27.6 million and 0.58%. Net charge-offs were $0.6 million in Q3 and $0.5 million year to date.
- Available-for-sale securities had $33.6 million of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $27.0 million, versus $5.2 million at year-end. Management attributed securities losses primarily to higher interest rates, stated it did not intend to sell and was not likely to be required to sell, and did not consider the securities other-than-temporarily impaired.
- No numerical earnings or growth guidance is provided in the supplied filing text. Management described the FNB transaction as supporting Bay Area expansion and anticipated benefits from cross-selling and cost savings; those benefits were not included in the acquisition’s pro forma results.
- Key stated risks include economic and interest-rate changes, California real estate values and borrower performance, deposit and liquidity competition, acquisition integration and realization of synergies, regulation, technology, and litigation. The company said ordinary-course legal matters were not expected to materially affect results or financial condition.
- Off-balance-sheet commitments included $1.23 billion of commitments to extend credit, $11.3 million of standby letters of credit, and $108.0 million of overdraft privileges. CECL was scheduled for adoption in 2020; management expected a one-time allowance adjustment but could not estimate its amount or overall effect.
Important facts for investors to verify
- Separate acquired growth from organic performance and confirm post-merger integration progress, realized cost savings, and any remaining integration costs.
- Reconcile the filing’s Q3 2017 net interest margin disclosure (4.24% in the detailed table versus 4.26% in the highlights) and assess the effect of rising deposit and borrowing costs.
- Track California property-market exposure, criticized and nonperforming loans, charge-offs, and allowance adequacy, including acquired loans and purchase discounts.
- Monitor available-for-sale securities’ unrealized losses and their potential effects on equity and liquidity if sales become necessary.
- Review capital and liquidity needs alongside acquisition-related funding, off-balance-sheet commitments, and the forthcoming CECL estimate.