TriCo Bancshares — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2013. TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank operating 41 traditional branches and 25 in-store branches. The bank’s lending is concentrated in Northern and Central California.
Key financial metrics
| Metric | Q1 2013 | Comparable period / date |
|---|---|---|
| Interest and dividend income | $25.8 million | $27.2 million in Q1 2012 |
| Net interest income (GAAP) | $24.6 million | $25.0 million in Q1 2012 |
| Net interest margin (FTE) | 4.05% | 4.30% in Q1 2012 |
| Net income; diluted EPS | $8.5 million; $0.53 | $3.9 million; $0.25 in Q1 2012 |
| Noninterest income | $10.2 million | $8.3 million in Q1 2012 |
| Noninterest expense | $21.6 million | $22.9 million in Q1 2012 |
| Operating cash flow | $13.3 million | $18.0 million in Q1 2012 |
| Total assets | $2.61 billion | $2.61 billion at Dec. 31, 2012 |
| Loans, net of allowance | $1.49 billion | $1.52 billion at Dec. 31, 2012 |
| Deposits | $2.29 billion | $2.29 billion at Dec. 31, 2012 |
| Cash and cash equivalents | $802.3 million | $748.9 million at Dec. 31, 2012 |
| Other borrowings; junior subordinated debt | $8.1 million; $41.2 million | At March 31, 2013 |
| Shareholders’ equity | $236.0 million | $229.4 million at Dec. 31, 2012 |
Q1 operating cash flow was $13.3 million; investing activities provided $46.7 million and financing activities used $6.6 million. Cash and cash equivalents increased $53.4 million during the quarter. The company reported $911.2 million in cash at the Federal Reserve and other banks in excess of reserve requirements plus available-for-sale securities. Available borrowing capacity included $511.6 million at the FHLB and $80.1 million at the Federal Reserve; neither facility had an outstanding balance.
Credit measures: allowance for loan losses was $39.9 million, or 2.60% of loans. Nonperforming assets declined to $70.1 million from $80.0 million at year-end; nonperforming loans were $64.0 million, or 4.17% of total loans. Net charge-offs were $1.7 million, an annualized 0.43% of average loans. The bank reported regulatory capital ratios of 15.08% total risk-based, 13.81% Tier 1 risk-based and 9.85% Tier 1 leverage, and was categorized as well capitalized.
Material changes versus comparable periods
- Net income more than doubled year over year, while net interest income (FTE) declined 1.9% and net interest margin fell 25 basis points. Management attributed the pressure mainly to lower loan yields and a smaller average investment portfolio; lower funding costs partly offset it.
- Provision for loan losses shifted to a $1.1 million benefit in Q1 2013 from a $4.0 million provision in Q1 2012. Management cited reduced impaired loans, better estimated cash flows and collateral values, and lower historical loss factors. The allowance nevertheless declined from $42.6 million at year-end.
- Noninterest income increased 23.6%, primarily from higher gains on loan sales and foreclosed-asset sales. Foreclosed-asset sale gains were $551,000, compared with a $358,000 loss in Q1 2012.
- Noninterest expense declined 5.7%, mainly as foreclosed-asset costs and expenses fell and prior-year system-conversion costs did not recur. Salaries and benefits increased modestly.
- Loans declined 2.1% from year-end, and deposits declined 0.2%. Management reported weak loan demand and competitive pressure on loan yields. Cash and cash equivalents rose $53.4 million from year-end.
- Nonperforming assets fell 12.4% from year-end, aided by loan paydowns or upgrades, foreclosed-property sales and charge-offs. New nonperforming loans totaled $4.3 million in the quarter.
Outlook, risks, contingencies and unusual items
- No specific earnings or financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results. The filing’s forward-looking statements are subject to risks, and the company disclaims an obligation to update them.
- Management said weak loan demand and low yields limited opportunities to deploy excess deposits into higher-yielding assets. Interest-rate, borrower-credit, collateral-value and California economic conditions remain relevant risks; management reported no material change in market-risk disclosures from the 2012 Form 10-K.
- The company changed its estimate of net sale proceeds for impaired real-estate collateral-dependent loans. The change increased the March 31 allowance by $494,000 versus the prior method; management says it better reflects estimated selling costs and appraisal age.
- A settlement with a former employee in a proposed assistant-branch-manager class action remains subject to court approval. The expected settlement range is $2.04 million to $2.50 million; $2.09 million was accrued. The company says other ordinary-course legal matters are not expected to have a material effect.
- Commitments to extend credit totaled $559.2 million, standby letters of credit $2.0 million, and unused overdraft privileges $71.3 million. These contractual amounts do not necessarily represent future cash requirements.
- The FDIC loss-sharing agreement relates to covered Granite assets and reimburses 80% of covered losses and recoveries, subject to stated agreement terms and durations. The Citizens acquisition had no loss sharing.
- Investment securities recorded a $1.1 million pretax decrease in unrealized value during the quarter, reflected in other comprehensive loss; the filing reported no other-than-temporary impairment losses.
Important facts for investors to verify
- Whether the lower provision and improved asset-quality indicators are sustainable, including trends in nonperforming and criticized loans, charge-offs, and the allowance after the methodology change.
- How loan demand, loan yields and the large cash balance affect future net interest margin and earnings.
- The drivers and repeatability of gains on loan sales and foreclosed-asset sales, which supported the year-over-year earnings increase.
- The status and final cost of the employee class-action settlement, plus any developments in other legal or contingent matters.
- The source text’s MD&A financial-summary table displays year labels that appear inconsistent with its figures and the financial statements. Verify the intended comparison periods against the filed original.