TriCo Bancshares — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. TriCo Bancshares is a California bank holding company; its principal subsidiary, Tri Counties Bank, operates a community banking business in Northern California. Financial amounts below are in U.S. dollars; millions are used unless stated otherwise.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior date |
|---|---|---|
| Net interest income (GAAP) | $41.4 million | $36.3 million, Q1 2015 |
| Net interest income (fully tax-equivalent) | $41.9 million; up 15.1% | $36.4 million, Q1 2015 |
| Net interest margin (fully tax-equivalent) | 4.33% | 4.10%, Q1 2015 |
| Noninterest income / expense | $9.8 million / $33.8 million | $10.2 million / $32.3 million, Q1 2015 |
| Net income / diluted EPS | $10.7 million / $0.46 | $8.3 million / $0.36, Q1 2015 |
| Return on assets / equity (annualized) | 1.01% / 9.25% | 0.86% / 7.85%, Q1 2015 |
| Efficiency ratio | 65.2% | 69.2%, Q1 2015 |
| Total assets | $4,395 million | $4,221 million, Dec. 31, 2015 |
| Loans, net / total deposits | $2,505 million / $3,785 million | $2,487 million / $3,631 million, Dec. 31, 2015 |
| Cash and cash equivalents | $389 million | $303 million, Dec. 31, 2015 |
| Allowance for loan losses | $36.4 million; 1.43% of loans | $36.0 million; 1.43%, Dec. 31, 2015 |
| Borrowings | $18.7 million other borrowings; $56.5 million junior subordinated debt | $12.3 million and $56.5 million, respectively, Dec. 31, 2015 |
| Shareholders’ equity / equity-to-assets | $463 million / 10.55% | $452 million / 10.90%, Dec. 31, 2015 |
Cash flow from operations was $4.1 million, compared with $13.0 million in Q1 2015. Investing activities provided $85.7 million, largely reflecting $156.3 million of net cash received in the branch acquisition; financing activities used $4.3 million. Cash-flow categories therefore reflect material acquisition-related movements as well as normal operations.
Changes versus comparable periods
- Net income rose 28% year over year, primarily as net interest income increased with higher average loan, investment, and deposit balances. The average loan yield was broadly steady; the taxable investment yield declined 12 basis points.
- Noninterest income fell 3.8%, including lower investment-product commissions and service charges and a larger negative mortgage-servicing-rights valuation change. ATM and interchange income increased.
- Noninterest expense increased 4.6%; salary and benefit costs rose 6.4%. The efficiency ratio improved despite higher expenses, reflecting stronger revenue.
- Compared with year-end, loans grew 0.7% and deposits grew 4.2%. Available-for-sale securities increased to $477 million; held-to-maturity securities declined to $705 million.
- Nonperforming assets declined to $28.5 million from $42.5 million; nonperforming loans fell to $24.0 million from $37.1 million. Nonperforming loans were 0.95% of total loans, versus 1.47% at year-end. The allowance covered 151% of nonperforming loans, versus 97%.
Outlook, commentary, risks, and unusual items
- Branch acquisition: On March 18, the Bank acquired three Bank of America branches in Humboldt County, including $161.2 million of deposits and $0.3 million of loans. The transaction added $0.8 million of goodwill and a $2.0 million core-deposit intangible. Management cited strategic fit, potential cost savings, and growth potential. Q1 included $622,000 of acquisition-related expense, primarily system-conversion and customer-communication costs.
- Loan sale: On March 31, the Company sold 39 loans, including 27 nonperforming loans, for $27.0 million in net proceeds. The sale reduced nonperforming assets; it included $1.237 million of interest income recovered from amounts previously applied to nonaccrual-loan principal. Management also disclosed a $21,000 net write-down and a $103,000 gain on sale. For three PCI loans, revised expected cash flows imply $469,000 less interest income over the remaining lives of the associated pools than previously estimated.
- Capital and liquidity: Management said the Company and Bank exceeded applicable Basel III capital requirements, including fully phased-in thresholds, and the Bank remained “well capitalized.” The Company reported $787 million of cash above reserve requirements plus available-for-sale securities, or 17.9% of assets. It also reported substantial unused secured borrowing capacity at the FHLB and Federal Reserve.
- Credit and market risks: The loan portfolio is concentrated in California, particularly commercial real estate. Management considers the allowance adequate but cautions that adverse economic conditions could increase losses. Interest-rate changes can affect asset yields, securities values, deposit costs, and mortgage servicing rights; MSR fair value relies on assumptions including prepayment speeds and discount rates. Management reported no material change in market-risk disclosures from the 2015 Form 10-K.
- Contingencies: The Bank faces two California employee class-action matters involving meal/rest periods and wage statements; mediation was being arranged. Management did not expect pending legal proceedings to materially affect the Company. The filing also discloses $710.7 million of commitments to extend credit, $8.2 million of standby letters of credit, and $97.0 million of overdraft privileges; these are not equivalent to funded liabilities.
- Guidance: The filing provides no specific earnings or financial guidance. Management’s forward-looking statements are subject to risks and are not guaranteed; the Company disclaims an obligation to update them.
Important facts for investors to verify
- Whether the acquired Humboldt County branches deliver the anticipated growth and cost benefits, and how much integration expense continues after Q1.
- Whether improved nonperforming-asset measures persist; review the impact of the loan sale, subsequent delinquencies, charge-offs, and recoveries when assessing underlying credit trends.
- How sustainable net interest margin and earnings growth are as investment yields, deposit costs, and interest rates change; note that Q1 included $1.264 million of interest income associated with the loan sale and purchased-loan discount accretion affected margin.
- Whether the $36.4 million loan-loss allowance remains appropriate given portfolio composition, collateral values, and the commercial real estate concentration.
- The effects of off-balance-sheet commitments, regulatory capital and dividend restrictions, the disclosed litigation, and the valuation assumptions for mortgage servicing rights.