TriCo Bancshares — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. TriCo is a California bank holding company operating Tri Counties Bank, a community bank serving 26 California counties through 57 traditional branches, 9 in-store branches and 2 loan production offices. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest and dividend income | $48.5 | $45.0 | $95.6 | $88.5 |
| Net interest income, reported | $45.9 | $43.4 | $90.9 | $85.4 |
| Net interest income, fully tax-equivalent (FTE) | $46.2 | $44.1 | $91.5 | $86.7 |
| Noninterest income | $12.2 | $12.9 | $24.5 | $24.6 |
| Noninterest expense | $37.9 | $35.9 | $76.0 | $71.7 |
| Net income | $15.0 | $13.6 | $28.9 | $25.7 |
| Diluted earnings per share | $0.65 | $0.58 | $1.24 | $1.10 |
- Quarterly net income rose about 11% year over year; first-half net income rose about 13%. Lower income-tax expense, reflecting the federal rate reduction from 35% to 21%, contributed to the increases.
- FTE net interest margin was 4.14% in both the quarter and first half, versus 4.26% and 4.19%, respectively, in the comparable 2017 periods. The second-quarter efficiency ratio increased to 64.89% from 63.02%; first-half ratio was 65.58% versus 64.45%.
- At June 30, total assets were $4,863.2, loans net of allowance were $3,116.8, deposits were $4,077.2 and shareholders’ equity was $512.3. Since December 31, 2017, gross loans increased 4.4% to $3,146.3 and deposits increased 1.7%.
- Cash and cash equivalents were $184.1 at June 30, down from $205.4 at year-end. Management reported $853.2 of excess Federal Reserve/other-bank cash plus available-for-sale securities, equal to 17.5% of assets.
- Other borrowings totaled $152.8, including $136.0 of FHLB borrowings; junior subordinated debt was $57.0. The Bank had substantial unused secured borrowing capacity, including $1,486.6 available on its FHLB line and $142.0 on its Federal Reserve line.
- For the six months, operating cash flow was $32.9; investing activities used $144.8 and financing activities provided $90.5. Cash declined by $21.4. Loan growth was the principal investing cash use.
- At June 30, the Company’s total risk-based capital ratio was 13.91%, common equity Tier 1 ratio 11.68%, and leverage ratio 10.92%. The Bank exceeded applicable well-capitalized thresholds.
Material changes and credit quality
- Interest expense rose to $2.6 in Q2 from $1.6 a year earlier and to $4.7 for the first half from $3.1. Management attributed pressure to rising rates on time deposits, borrowings and junior subordinated debt. Loan growth supported net interest income, while lower purchased-loan discount accretion and lower yields on some assets weighed on margin.
- Noninterest expense rose 5.5% in Q2 and 6.0% for the first half. Salaries and benefits, technology and ATM/POS costs increased. Merger-related expense was $0.6 in Q2 and $1.1 for the first half; $0.7 of first-half merger expense was nondeductible for tax purposes.
- Noninterest income declined 5.7% in Q2 and 0.6% for the first half. Lower deposit service charges, including NSF fees, were partly offset by improved mortgage-servicing-rights valuation and other items. The prior-year comparison included a $0.7 gain from terminating the FDIC loss-sharing agreement.
- The allowance for loan losses was $29.5, or 0.94% of loans, compared with $30.3, or 1.01%, at year-end. The company recorded a $0.6 provision reversal in Q2 and a $0.9 reversal for the first half, citing low losses, improved collateral values and credit upgrades. First-half net loan recoveries were $0.1.
- Nonperforming loans were $25.4, or 0.81% of loans, versus $24.4 (0.81%) at year-end and $17.4 (0.62%) a year earlier. Nonperforming assets totaled $26.8, or 0.55% of assets; allowance coverage of nonperforming loans was 116%. Foreclosed assets fell to $1.4 from $3.2 at year-end.
- Available-for-sale debt securities had $25.3 of gross unrealized losses at June 30, versus $5.9 at year-end; accumulated other comprehensive loss widened to $21.1 from $5.2. Management attributed securities losses primarily to interest-rate movements, stated it did not intend to sell and did not expect to be required to sell, and recognized no other-than-temporary impairment.
Merger, outlook, risks and unusual items
- FNB Bancorp acquisition: The merger closed July 6, 2018, after the reporting period. TriCo issued 7,405,277 shares; stated aggregate shareholder consideration was approximately $284.4, with separate cash payments for fractional shares and FNB options. The combined company had approximately $6.1 billion in assets immediately after closing. FNB had approximately $1.3 billion in assets, $995 million in deposits and $868 million in loans immediately before the merger; purchase accounting values were still being determined.
- In July, TriCo sold approximately $292 million of acquired securities at no material gain or loss relative to their July 6 fair value. Proceeds were used to repay TriCo’s $136 million of FHLB borrowings and FNB’s $165 million of FHLB borrowings. Integration and realizing expected merger benefits remain execution risks; management cited geographic expansion, additional customer opportunities and a stronger core deposit base as strategic objectives.
- No specific earnings or revenue guidance is provided in the filing. Management said loan demand was moderate to good and described economic and credit factors as stable to improving, while cautioning that actual credit losses and results may differ from estimates. Key risks include interest-rate and funding changes, California economic and real-estate conditions, borrower performance, competition, regulation and merger integration.
- Off-balance-sheet commitments included $994.9 of commitments to extend credit, $11.5 of standby letters of credit and $97.7 of deposit overdraft privileges. The filing says commitments may expire undrawn and do not necessarily represent future cash needs. The company reported no material pending legal proceedings and did not expect ordinary-course matters to have a material adverse effect.
- CECL was scheduled for adoption in 2020; management expected a one-time cumulative adjustment but could not estimate its amount or overall impact. Adoption of the new lease standard was expected in 2019 to add approximately $24 million to both assets and liabilities, subject to change, with no material expected impact on operations or cash flows.
- Management reported effective disclosure controls as of June 30, 2018 and no material change in internal control over financial reporting during the first half.
Most important facts for investors to verify
- Post-merger results: final purchase-price allocation, goodwill and core deposit intangibles, integration costs, realized synergies, and the impact of the share issuance on per-share earnings.
- Funding and margin trends: deposit pricing, reliance on borrowings, loan and deposit growth, and whether asset yields keep pace with funding costs.
- Credit trends: increases in nonperforming loans versus the prior year, the adequacy of the $29.5 million allowance, and performance of commercial real-estate and construction portfolios.
- Interest-rate exposure: valuation and potential realization of securities losses, as well as sensitivity of variable-rate loans, deposits and borrowing costs.
- Whether expense growth and the efficiency ratio improve after merger-related spending, and whether lower deposit fees or other noninterest-income trends persist.
- Final CECL and lease-adoption effects, and the status and outcome of significant commitments or contingencies.