TriCo Bancshares — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. TriCo is the holding company for Tri Counties Bank, a California community bank operating across 26 counties. The October 2014 North Valley Bancorp acquisition materially affects comparisons with Q1 2014, which excludes North Valley’s results.
Financial performance and condition
Amounts below are in millions unless stated otherwise.
| Metric | Q1 2015 / March 31, 2015 | Comparable / prior period |
|---|---|---|
| Net interest income, GAAP | $36.34 | $26.07 in Q1 2014 |
| Net interest income, FTE | $36.44; net interest margin 4.10% | $26.15; margin 4.10% in Q1 2014 |
| Provision for loan losses | $0.20 expense | $1.36 benefit in Q1 2014 |
| Noninterest income | $10.18 | $8.30 in Q1 2014 |
| Noninterest expense | $32.28 | $23.32 in Q1 2014 |
| Net income | $8.34 | $7.37 in Q1 2014 |
| Diluted earnings per share | $0.36 | $0.45 in Q1 2014 |
| Loans, net of allowance | $2,284.83 | $2,245.94 at December 31, 2014 |
| Total deposits | $3,349.49 | $3,380.42 at December 31, 2014 |
| Total assets | $3,895.86 | $3,916.46 at December 31, 2014 |
| Shareholders’ equity | $424.83; equity/assets 10.90% | $418.17 at December 31, 2014 |
- Net income rose 13.2% year over year, while diluted EPS fell from $0.45 to $0.36. The share count increased substantially following the North Valley transaction; average diluted shares were 22.95 million versus 16.32 million.
- FTE net interest income increased 39.3%, driven mainly by higher average loan and securities balances, including acquired balances. Lower average asset yields partly offset volume gains: loan yield declined to 5.46% from 5.68%, and investment yield to 2.76% from 3.13%. Purchased-loan discount accretion was $2.79 million.
- Noninterest income increased 22.7%, primarily reflecting the acquisition and higher deposit service charges and ATM/interchange fees. Noninterest expense rose 38.4%; management attributed much of the increase to the acquired operation and integration. The efficiency ratio was 69.2% versus 67.6% (FTE basis).
- Annualized return on assets was 0.86% versus 1.08%; return on equity was 7.85% versus 11.56%. The FTE net interest margin was unchanged at 4.10%.
- Loan balances increased 1.7% from year-end, with real estate mortgage loans comprising 71.0% of loans. Deposits decreased 0.9%; noninterest-bearing deposits fell while interest-bearing deposits increased.
- Cash and cash equivalents declined to $281.23 million from $610.73 million at year-end, principally as funds were deployed into securities and loans. Q1 operating cash flow was $12.96 million; investing activities used $309.23 million and financing activities used $33.23 million. Available-for-sale securities were $225.13 million and held-to-maturity securities $802.48 million at quarter-end.
- Management reported $441.36 million of excess Federal Reserve/other-bank cash and available-for-sale securities, or 11.3% of assets. Unused secured credit capacity included $978.74 million at the FHLB and $138.45 million at the Federal Reserve; $15 million of correspondent lines were also available.
- Debt included $56.32 million of junior subordinated debt and $9.10 million of other borrowings. Capital remained above regulatory requirements: consolidated total risk-based capital was 15.23%, Tier 1 capital 13.98%, common equity Tier 1 12.11%, and Tier 1 leverage 10.68%. The filing states the Company and Bank exceeded fully phased-in Basel III requirements.
- The allowance for loan losses was $36.06 million, or 1.55% of loans, versus $36.59 million and 1.60% at year-end. Q1 net charge-offs were $0.73 million, compared with net recoveries of $1.43 million in Q1 2014. Nonperforming assets rose to $55.11 million (1.97% of assets) from $52.48 million (1.88%); nonperforming loans were 2.12% of loans and allowance coverage of nonperforming loans was 73%, versus 77% at year-end.
Material changes and notable items
- North Valley Bancorp was acquired in October 2014. The acquisition added loans, securities, deposits, branches, employees and approximately 6.58 million TriCo shares issued as consideration. Accordingly, year-over-year growth in balances and many income and expense lines is not a like-for-like comparison.
- During Q1, four Tri Counties branches and four former North Valley branches were consolidated. The company recorded $0.59 million of merger expense in Q1, including data-processing, professional, lease-resolution and facility-related costs.
- After quarter-end, the bank announced plans to close five additional branches, including two former North Valley locations, by September 30, 2015.
- The company paid a quarterly dividend of $0.11 per share. It reported no shares repurchased under its public stock-repurchase plan during the quarter; shares tendered by employees under equity compensation plans are separate from that plan.
Outlook, risks and contingencies
- The filing gives no quantified earnings, loan-growth, margin or expense guidance. Management described loan demand as moderate and said it considered the allowance adequate, while cautioning that adverse economic conditions or other circumstances could increase credit losses.
- Management identified lower market yields as a headwind to loan and investment yields. It also noted that faster mortgage prepayments reduced mortgage-servicing-rights value; MSRs were $7.06 million after a $0.51 million Q1 fair-value decline.
- Credit risks include the California-centered lending footprint, commercial real estate exposure, borrower and collateral performance, and a Q1 increase in nonperforming assets. The allowance depends on management estimates, including collateral values and expected cash flows on acquired loans.
- Acquisition fair-value estimates for certain assets and liabilities remained provisional, subject to further analysis for up to one year after acquisition. Goodwill was $63.46 million; no impairment was reported.
- Commitments to extend credit totaled $668.25 million; standby letters of credit were $16.31 million and available overdraft privileges $99.00 million. These are contractual amounts, not necessarily expected cash outflows.
- Legal matters include a North Valley merger-related shareholder suit subject to a settlement memorandum and court approval, and two California employment-related class actions. The company and bank deny the employment allegations and intend to defend them; management did not expect pending proceedings to have a material adverse effect. The filing also describes potential Visa litigation-related effects on the value/conversion ratio of restricted Visa shares.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Forward-looking statements are subject to risks, are not guaranteed, and the company said it did not intend to update them after the report date.
Important facts for investors to verify
- How much of reported earnings and balance-sheet growth reflects North Valley, and what recurring cost savings or integration expenses remain?
- Whether margin stability can be maintained as asset yields decline and acquired-loan discount accretion contributes to interest income.
- Trends in nonperforming loans, new problem credits, charge-offs and allowance coverage, particularly in commercial real estate and home equity.
- Deposit stability and liquidity after the substantial Q1 deployment of cash into securities and loans, including continued access to secured borrowing facilities.
- Timing, costs and expected savings from the five announced branch closures, as well as any remaining acquisition-related fair-value adjustments.
- Developments in the merger settlement, employment litigation and Visa-related contingencies; the filing text does not provide a clear quantified loss estimate for these matters.