TriCo Bancshares — Q2 2014 Form 10-Q
Business context and period. TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank operating 60 branches. This unaudited report covers the quarter and six months ended June 30, 2014; balance-sheet comparisons are principally with December 31, 2013. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and condition
- Q2 earnings: Net interest income was $27.3 million, up 11.2% year over year; net income was $4.9 million, down 23.2%, and diluted EPS was $0.30 versus $0.39. Net interest income on a fully tax-equivalent (FTE) basis was $27.4 million, up 11.1%.
- First-half earnings: Net interest income was $53.4 million versus $49.2 million; net income was $12.2 million versus $14.8 million, and diluted EPS was $0.75 versus $0.92. FTE net interest income rose 8.6% to $53.6 million.
- Drivers and margins: Q2 interest income increased with growth in average loans and securities, while average loan yield fell to 5.70% from 5.94%. FTE net interest margin improved to 4.28% from 4.07% in Q2 and to 4.19% from 4.06% for the first half. Noninterest income fell 22.2% in Q2 and 20.5% in the first half, mainly from lower mortgage loan-sale gains and deposit service charges. Noninterest expense rose 6.8% in Q2 and 7.4% for the first half. The efficiency ratio worsened to 71.7% from 67.5% in Q2 and 69.5% from 64.8% for the first half.
- Credit costs: The Q2 loan-loss provision was $1.7 million versus $0.6 million a year earlier. For the first half it was $0.4 million, compared with a $0.5 million benefit in 2013. Management said the June-quarter provision included a $1.4 million reserve increase from a refinement to the loss-rate methodology; excluding that refinement, the Q2 provision would have been $0.3 million. For the first half, excluding methodology changes, the provision would have been a $1.1 million benefit. The allowance for loan losses was $40.0 million, or 2.30% of loans.
- Asset quality: Nonperforming assets were $50.0 million, 1.93% of assets, versus $59.5 million and 2.17% at year-end. Nonperforming loans were $44.2 million, or 2.54% of loans, versus $53.2 million and 3.18%. Q2 net charge-offs were $62,000; first-half net recoveries were $1.4 million.
- Balance sheet and liquidity: Total assets were $2.72 billion; loans were $1.74 billion, up 4.0% from year-end; deposits were $2.39 billion, down 1.1%. Cash and cash equivalents declined to $344.4 million from $598.4 million, largely as funds were deployed into securities and loans. Held-to-maturity securities increased to $422.5 million from $240.5 million. Management reported $393.4 million of cash above reserve requirements plus available-for-sale securities, and substantial unused secured borrowing capacity.
- Capital and debt: Shareholders’ equity was $260.9 million, or 9.58% of assets. The Bank was reported as well capitalized; its total risk-based capital ratio was 14.56%, Tier 1 risk-based ratio 13.30%, and Tier 1 leverage ratio 10.29%. Debt included $41.2 million of junior subordinated debt and $6.1 million of other borrowings. No FHLB or Federal Reserve line borrowings were outstanding at quarter-end.
- Cash flow and shareholder returns: First-half operating cash flow was $11.4 million versus $17.6 million a year earlier; investing used $236.7 million, principally reflecting securities and loan deployment. Dividends paid were $3.5 million, or $0.22 per share for the first half. No shares were repurchased under the announced open-market plan during the first half.
Material changes, outlook and risks
- The earnings decline reflected weaker noninterest income and higher operating expenses, partly offset by higher net interest income and lower credit losses year over year. Lower mortgage refinancing activity reduced loan-sale gains; reduced customer overdrafts lowered service charges.
- TriCo agreed to acquire North Valley Bancorp in an all-stock merger. The filing expected completion in Q3 2014, subject to shareholder and regulatory approvals and other closing conditions. North Valley had approximately $935 million in assets and 22 offices. TriCo could owe a $3.8 million termination fee in specified circumstances. Merger-related expenses were $631,000 for the first half.
- A shareholder lawsuit challenging the North Valley merger was pending. On July 31, 2014, after quarter-end, the parties signed a memorandum of understanding contemplating settlement and additional disclosures; settlement remained subject to a definitive stipulation and court approval.
- The allowance methodology refinement increased the reserve requirement by $1.438 million, primarily for home-equity lines with a “Pass-Watch” risk grade. Management considered the allowance adequate but cautioned that adverse economic conditions could increase losses.
- Other risks include California and regional borrower and collateral conditions, interest-rate and mortgage-prepayment changes, securities fair-value fluctuations, and execution and integration of the proposed merger. Management said market-risk disclosures had no material change from the 2013 Form 10-K. The filing provides no numeric full-year earnings guidance; interim results are not necessarily indicative of full-year results.
- Basel III capital changes were scheduled to phase in beginning in 2015. Management stated it believed the company would comply if the final rules were then in effect. The shareholder-rights plan expired July 1, 2014.
Important facts for investors to verify
- Merger approval, regulatory conditions, completion timing, integration costs, and any final resolution of the shareholder lawsuit.
- How much of the Q2 credit provision reflects the $1.438 million methodology refinement, and whether home-equity and other criticized-credit trends continue.
- Whether the improvement in nonperforming assets and first-half net recoveries is sustained, alongside the adequacy of the $40.0 million loan-loss allowance.
- Loan yields, net interest margin, deposit levels, and liquidity after the substantial first-half shift from cash into securities and loans.
- Drivers of declining fee income and higher expenses, including ongoing merger, professional-fee, and systems-conversion costs.