TriCo Bancshares — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. TriCo Bancshares is a California bank holding company whose subsidiary, Tri Counties Bank, operates a community banking business across 26 California counties.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars. Income-statement and cash-flow comparisons are with Q1 2017; balance-sheet comparisons are with December 31, 2017.
- Earnings: Net income was $13.9 million, up 15.2% from $12.1 million. Diluted EPS was $0.60 versus $0.52. Return on assets was 1.17% (1.08% prior year) and return on equity was 11.00% (9.97%).
- Revenue and margins: Net interest income on a fully tax-equivalent basis was $45.3 million, up 6.3%; net interest margin was 4.14% versus 4.13%. Noninterest income rose 5.0% to $12.3 million. The efficiency ratio was 66.27%, compared with 66.00%.
- Expenses and taxes: Noninterest expense increased 6.5% to $38.2 million, including $0.5 million of merger-related costs. The effective tax rate fell to 28.1% from 37.8%, primarily reflecting the federal corporate tax-rate reduction to 21%.
- Loans and credit: Gross loans were $3.070 billion, up 1.8% from year-end and 11.2% from March 2017. The allowance for loan losses was $30.0 million, or 0.98% of loans, versus 1.01% at year-end. Nonperforming loans were $24.4 million, or 0.79% of loans, compared with $24.4 million and 0.81% at year-end and $19.5 million and 0.71% a year earlier. Nonperforming assets were $25.9 million, or 0.54% of assets, down from $27.6 million and 0.58% at year-end. Net loan charge-offs were $0.1 million.
- Deposits, borrowings and liquidity: Deposits increased 1.9% from year-end to $4.084 billion. Other borrowings fell to $65.0 million from $122.2 million; junior subordinated debt was $56.9 million. Cash and cash equivalents were $183.0 million, down from $205.4 million. Management reported $827.0 million of cash at the Federal Reserve and other banks in excess of reserve requirements plus available-for-sale securities, equal to 17.3% of assets. The company also reported $1.550 billion of unused FHLB borrowing capacity and $140.9 million available under a Federal Reserve line.
- Cash flow: Operating activities provided $23.7 million; investing activities used $60.4 million, principally reflecting $54.7 million of net loan growth and securities purchases; financing activities provided $14.2 million, including $75.3 million of deposit growth offset partly by lower borrowings and $3.9 million of dividends. Cash and cash equivalents declined $22.4 million during the quarter.
- Capital and equity: Shareholders’ equity was $505.3 million, or 10.57% of assets. At March 31, consolidated total capital, Tier 1 capital, common equity Tier 1 and leverage ratios were 13.91%, 13.03%, 11.61% and 10.84%, respectively. The company and bank exceeded fully phased-in Basel III capital requirements; the bank remained well capitalized under prompt-corrective-action standards.
Material changes and notable items
- Year-over-year net interest income growth reflected higher average loan and investment balances. Increased interest expense and a slight decline in loan yield partly offset that growth; purchased-loan discount accretion declined to $0.6 million from $1.5 million.
- Available-for-sale debt securities had a $15.6 million pretax fair-value decline during the quarter. Other comprehensive loss was $10.9 million after tax, leaving accumulated other comprehensive loss of $17.2 million. Management attributed security declines primarily to higher interest rates, stated it did not intend to sell and did not expect to be required to sell, and recorded no other-than-temporary impairment.
- Effective January 1, the company adopted accounting changes for equity securities and elected to reclassify $1.1 million of tax effects from accumulated other comprehensive loss to retained earnings. The quarter included a $48,000 unrealized loss on marketable equity securities.
- The allowance reversal for loan losses was $0.2 million, smaller than the $1.6 million reversal in Q1 2017. The company also recorded a $0.7 million provision for unfunded commitments, primarily associated with increased unfunded construction-loan commitments.
Outlook, merger and risks
- Merger: TriCo’s proposed acquisition of FNB Bancorp remained pending, subject to regulatory and shareholder approvals and other closing conditions. Management expected closing in Q2 2018. The agreement provides for 0.98 TriCo shares per FNB Bancorp share; the filing estimated aggregate consideration of about $315.3 million using TriCo’s December 8, 2017 share price. FNB Bancorp shareholders were expected to own approximately 24% of the combined company. A market-price collar may permit termination or an exchange-ratio adjustment in specified circumstances.
- Outlook: The filing provides no specific earnings, revenue or margin guidance. Management said loan demand was moderate in Q1 and considered the allowance adequate, while noting that adverse economic conditions or other circumstances could increase credit losses.
- Key risks and contingencies: Merger completion, timing, integration costs and expected benefits are uncertain; the transaction could divert management attention and affect customer relationships. Credit risk is concentrated in lending in northern and central California, and the loan portfolio is predominantly real-estate secured. Off-balance-sheet commitments to extend credit totaled approximately $1.001 billion, in addition to $11.6 million of standby letters of credit. The company reported no material pending legal proceedings and did not expect ordinary-course matters to have a material adverse effect.
- Management reported effective disclosure controls as of March 31, 2018 and no material change in internal control over financial reporting during the quarter. The filing reported no material change in market-risk disclosures from the 2017 Form 10-K.
Most important facts for investors to verify
- Progress toward merger approvals and closing, the applicable exchange-ratio collar, and potential integration costs and benefits.
- Whether loan growth, nonperforming loans and criticized-credit trends continue to evolve as reported, and whether the $30.0 million loan-loss allowance remains adequate.
- Effects of interest-rate movements on deposit costs, net interest margin, available-for-sale securities and accumulated other comprehensive loss.
- Liquidity and funding trends, including deposit composition, borrowing needs and the use of available credit facilities.
- Whether expense growth, including merger and unfunded-commitment costs, affects operating efficiency and earnings in subsequent quarters.