TriCo Bancshares — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. TriCo is a California bank holding company whose principal operating business is Tri Counties Bank, a community bank serving Northern California.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $26.4 million | $25.6 million | $75.5 million | $76.6 million |
| Net interest margin, FTE | 4.40% | 4.37% | 4.17% | 4.38% |
| Noninterest income | $9.1 million | $9.1 million | $29.5 million | $28.0 million |
| Noninterest expense | $23.6 million | $25.6 million | $68.7 million | $72.9 million |
| Net income | $7.4 million | $5.0 million | $22.2 million | $14.3 million |
| Diluted EPS | $0.45 | $0.31 | $1.37 | $0.89 |
- Q3 pretax income was $12.3 million, compared with $8.6 million a year earlier. The nine-month increase in earnings reflected substantially lower credit-loss provisions and lower expenses, despite a decline in net interest income.
- The company recorded a $393,000 loan-loss provision benefit in Q3 and an $887,000 benefit for the nine-month period, versus provisions of $532,000 and $7.9 million, respectively, in 2012. Q3 net interest income increased 2.9%; nine-month net interest income declined 1.4%.
- Management attributed Q3 net interest income growth to larger loan and investment balances, lower-cost funding, and reduced borrowings. Lower loan yields partly offset these benefits. Average loan yield was 6.14% in Q3, down from 6.49%; for nine months it was 6.10%, down from 6.58%.
- Q3 return on assets was 1.13% and return on equity was 12.08%; nine-month figures were 1.14% and 12.36%. The FTE efficiency ratio improved to 66.3% in Q3 from 73.5%, and to 65.3% for nine months from 69.6%.
Financial position, liquidity and capital
- At September 30, total assets were $2.63 billion, loans net of allowance were $1.62 billion, deposits were $2.29 billion, and shareholders’ equity was $245.5 million. Compared with year-end 2012, total loans grew 5.9% and deposits increased 0.2%.
- Cash and cash equivalents fell to $541.2 million from $748.9 million at year-end. Nine-month operating cash flow was $33.6 million; investing activities used $245.5 million, principally reflecting $194.9 million of held-to-maturity securities purchases and loan growth. Financing activities provided $4.2 million, and cash declined $207.7 million overall.
- The securities portfolio shifted materially: $193.3 million of held-to-maturity securities were reported at quarter-end, versus none at year-end 2012. Available-for-sale securities declined to $115.2 million from $163.0 million. Nine-month unrealized securities losses reduced other comprehensive income by $2.0 million after tax.
- Other borrowings were $14.6 million and junior subordinated debt was $41.2 million. The company reported $592.2 million of unused FHLB borrowing capacity, $109.4 million of unused Federal Reserve capacity, and $10 million of correspondent-bank lines.
- Consolidated capital ratios at quarter-end were 14.88% total risk-based capital, 13.62% Tier 1 risk-based capital, and 10.37% Tier 1 leverage. The Bank exceeded regulatory “well capitalized” thresholds. Management said it believed current capital levels would satisfy the phased-in Basel III rules if then in effect.
Credit quality, changes and unusual items
- Nonperforming assets were $65.5 million, down from $80.0 million at December 31, 2012. Nonperforming loans were $61.4 million, or 3.70% of total loans, versus $72.5 million, or 4.63%. The allowance for loan losses was $39.3 million; coverage of nonperforming loans was 64%, compared with 59% at year-end.
- Foreclosed assets declined to $4.1 million from $7.5 million. During the nine months, the company transferred $8.0 million of loans to foreclosed assets and received $12.3 million from foreclosed-asset sales.
- The allowance methodology changed during 2013. The Q3 environmental-factor methodology change increased the required allowance by $1.665 million; prior 2013 methodology changes also increased the required allowance by $494,000 and $1.314 million. Excluding methodology changes, management said the nine-month provision reversal would have been $4.36 million, rather than $887,000.
- Q3 noninterest expense included $339,000 for a California employee class-action settlement; the Bank paid the final $2.429 million settlement during September. The comparable 2012 quarter included a $2.09 million settlement accrual. Management considers other ordinary-course legal matters not likely to materially affect the company.
- Other income items included $1.48 million of gains on foreclosed-asset sales for nine months and a $311,000 positive change in mortgage-servicing-rights value, versus a $1.51 million negative change a year earlier. Mortgage-rate movements and prepayment assumptions affect MSR valuations.
- The company reported $530.4 million of commitments to extend credit, $2.0 million of standby letters of credit, and $70.4 million of unused overdraft privileges. These commitments are not necessarily expected to be drawn in full.
Outlook, commentary and risks
- The filing provides no specific earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management cited moderate loan demand and noted that lower market loan yields pressured interest income. It also linked improved credit results to fewer impaired loans, improved estimated cash flows and collateral values, and lower historical loss factors.
- Key risks include credit quality and collateral valuations, interest-rate effects on loan yields and securities values, mortgage prepayment effects on servicing rights, and the company’s concentration in Northern California. The filing also highlights FDIC loss-sharing estimates on covered assets and regulatory capital requirements.
- The company’s liquidity depends partly on dividends from the Bank, which are subject to regulatory restrictions. Forward-looking statements are subject to risks described in the company’s 2012 Form 10-K and this filing; the company disclaims an obligation to update them.
Investor verification priorities
- Review whether loan-loss reversals and allowance methodology changes adequately reflect underlying credit risk; verify trends in commercial real estate, home-equity, criticized loans, TDRs, and nonaccruals.
- Assess the sustainability of earnings growth, particularly the effects of lower loan yields, purchase-discount accretion, provision benefits, and reduced legal and foreclosed-asset expenses.
- Examine the liquidity implications of the substantial securities reallocation and investment outflows, including held-to-maturity securities’ unrealized losses and available borrowing capacity.
- Confirm capital headroom under applicable regulatory requirements and the effect of any future dividend, repurchase, or growth plans.
- Track FDIC indemnification assumptions, off-balance-sheet commitments, and remaining legal or contingent exposures.