TriCo Bancshares — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. TriCo Bancshares is a California bank holding company; its community-banking subsidiary operated 57 traditional and 9 in-store branches across 26 California counties. Financial statements are unaudited.
Financial performance and position
- Q3 results: Net interest income was $44.1 million, up 4.3% year over year; fully taxable-equivalent (FTE) net interest income was $44.7 million. Noninterest income rose 16.8% to $12.9 million. Net income was $11.9 million versus $12.2 million; diluted EPS was $0.51 versus $0.53.
- First nine months: Net interest income was $129.5 million, up 3.7%; FTE net interest income was $131.4 million, up 3.8%. Noninterest income increased 17.0% to $37.5 million. Net income grew 16.4% to $37.6 million; diluted EPS was $1.62 versus $1.40.
- Margins and efficiency: FTE net interest margin was 4.24% in Q3 (4.23% a year earlier) and 4.21% for nine months (4.23%). The efficiency ratio improved to 64.6% for Q3 from 69.4%, and to 64.5% for nine months from 69.0%.
- Assets and lending: Total assets were $4.66 billion, up 3.1% from year-end 2016. Loans were $2.93 billion, up 6.2%; commercial real estate was the largest category. The allowance for loan losses was $28.7 million, or 0.98% of loans, down from $32.5 million, or 1.18%, at year-end.
- Credit quality: Nonperforming loans were $22.0 million, or 0.75% of loans, versus 0.73% at year-end 2016. Nonperforming assets totaled $25.0 million, up from $24.1 million. Q3 net charge-offs were $161,000; nine-month net charge-offs were $2.17 million, including $1.83 million of previously reserved purchased-credit-impaired loan charge-offs.
- Funding and debt: Deposits totaled $3.93 billion, up 0.8% from year-end. Other borrowings rose to $98.7 million from $17.5 million; most were short-term collateralized borrowings outstanding at quarter-end. Junior subordinated debt was $56.8 million.
- Cash flow and liquidity: Nine-month operating cash flow was $45.8 million; investing activities used $263.9 million and financing activities provided $100.5 million. Cash and cash equivalents declined $117.6 million to $188.0 million. Management reported $787.0 million of Federal Reserve/other-bank cash and available-for-sale securities, or 16.9% of assets, and substantial unused secured borrowing capacity.
- Capital: Shareholders’ equity was $506.7 million, up 6.2% from year-end; equity-to-assets was 10.9%. Consolidated total, Tier 1, and common-equity Tier 1 risk-based capital ratios were 14.42%, 13.55%, and 12.06%, respectively. The Company and Bank exceeded applicable Basel III requirements.
Material changes and management commentary
- Loan growth and higher investment balances lifted net interest income, but lower loan yields and higher funding costs partly offset the benefit. Q3 average loan yield fell to 5.18% from 5.36%; the nine-month average was 5.16% versus 5.38%.
- Q3 included a $961,000 gain on sale of available-for-sale securities. Nine-month results also included a $712,000 gain from terminating the FDIC loss-sharing agreements; the Company paid the FDIC $184,000. These gains and $847,000 of equity-compensation excess tax benefits supported reported nine-month results.
- Credit-loss provision was $765,000 in Q3, compared with a $4.0 million reversal in Q3 2016. For nine months, the Company reversed $1.6 million of provision, versus a $4.5 million reversal in 2016. Management cited low historical losses and stable-to-improving economic factors, offset by higher nonperforming loans and increased nonowner-occupied commercial real estate concentration.
- Available-for-sale securities increased to $678.2 million from $550.2 million at year-end; held-to-maturity securities declined to $536.6 million from $602.5 million. Management attributed unrealized securities losses primarily to interest-rate movements, not credit deterioration, and reported no other-than-temporary impairment.
- Management provided no specific earnings or financial guidance in the supplied filing text. It said the allowance was adequate, while cautioning that adverse economic conditions could produce increased losses. The filing also cautions that forward-looking statements are uncertain and need not be updated.
Risks, contingencies, and unusual items
- California wildfires: Fires beginning October 8, 2017 affected the Company’s market area. By October 24, it had identified 39 loans totaling $15.8 million collateralized by property in evacuation zones. Properties securing 10 loans, with recorded balances totaling $6.7 million, were reported partially or totally destroyed. Management was assessing effects and did not then expect a material financial impact; borrowers are required to maintain property and casualty insurance.
- Employment litigation: Two related class-action matters were consolidated. The Bank agreed in principle to a settlement of up to $1.9 million and recorded an estimated $1.45 million liability. Final settlement remained subject to court approval and other customary conditions.
- Off-balance-sheet commitments: Commitments to extend credit totaled $909.9 million; standby letters of credit were $12.7 million and overdraft privileges were $96.7 million. Commitment amounts do not necessarily represent expected cash outflows.
- Interest-rate and valuation exposure: The securities portfolio is concentrated in mortgage-backed securities, and mortgage servicing rights depend on prepayment and discount-rate assumptions. Most variable-rate loans are tied to prime or five-year Treasury indices, but contractual floors can delay repricing.
- Accounting changes: The Company planned to adopt the new revenue standard in January 2018 and was evaluating affected fee streams. It was also preparing for CECL, effective January 2020, and expected a one-time allowance adjustment but could not estimate its size.
Important facts for investors to verify
- Whether the increase in nonperforming loans and commercial real estate concentration persists, and whether the allowance remains adequate as loans grow.
- How much earnings growth is recurring versus attributable to the securities-sale gain, FDIC termination gain, purchased-loan accretion, and equity-compensation tax benefits.
- The eventual insurance recoveries and credit impact of wildfire-damaged collateral, including any changes to management’s initial materiality assessment.
- Final court approval and actual cost of the consolidated employment-litigation settlement.
- Borrowing levels, funding costs, liquidity trends, and the sensitivity of net interest income to rates and loan repricing.
- The implementation impact of CECL and the revenue-recognition standard, including any resulting reserve or fee-recognition changes.