TriCo Bancshares — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed March 13, 2015. The filing also reports fourth-quarter results. TriCo is a California bank holding company; its principal subsidiary, Tri Counties Bank, operates in Northern and Central California.
Business context and material transaction
TriCo completed its acquisition of North Valley Bancorp on October 3, 2014, issuing approximately 6.58 million shares valued at $151.3 million and assuming North Valley’s junior subordinated debt. North Valley contributed approximately $935 million of assets and 22 banking offices before the transaction. Its operating results were included from October 4; systems conversion was completed in October, and eight branches were consolidated in January 2015.
Financial results and condition
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Interest income | $121.1 million | $106.6 million | Up 13.7%, including acquisition effects |
| Net interest income | $116.4 million | $101.9 million | Up 14.3%; FTE net interest income was $116.7 million versus $102.2 million |
| Net interest margin, FTE | 4.17% | 4.18% | Down 1 basis point |
| Noninterest income | $34.5 million | $36.8 million | Down 6.3% |
| Noninterest expense | $110.4 million | $93.6 million | Up 17.9%; includes $4.9 million merger expense |
| Net income | $26.1 million | $27.4 million | Down 4.7% |
| Diluted earnings per share | $1.46 | $1.69 | Down 13.6%; share count increased substantially after acquisition |
| Return on average assets / equity | 0.87% / 8.67% | 1.04% / 11.34% | Both declined |
| Efficiency ratio | 72.9% | 67.32% | Higher ratio reflects increased expenses |
The $4.0 million reversal of loan-loss provision in 2014 compared with a $0.7 million reversal in 2013 supported earnings. Management attributed improved credit estimates to lower impaired-loan balances, improved expected cash flows and collateral values, and lower historical loss factors. Annual net charge-offs were negative $2.4 million, representing net recoveries; the allowance for loan losses was $36.6 million, or 1.60% of loans, versus $38.2 million and 2.29% a year earlier. Management considered the allowance adequate, while noting future losses could exceed estimates.
Total assets were $3.92 billion, loans net of allowance were $2.25 billion, deposits were $3.38 billion, and shareholders’ equity was $418.2 million at year-end. Loans grew 36.5% from 2013, including $499.3 million acquired from North Valley and $32.0 million of purchased residential loans. Deposits rose 40.2%, including $802.0 million acquired. Approximately 70.7% of loans were real estate mortgage loans; management separately disclosed that 90.9% of the loan portfolio was collateralized by real estate.
Cash and cash equivalents were $610.7 million. Operating activities provided $27.4 million of cash; investing activities used $178.7 million and financing activities provided $163.7 million. Available-for-sale securities plus cash and cash equivalents in excess of reserve requirements totaled $636.3 million, or 16.2% of assets, compared with $664.7 million, or 24.2%, in 2013. Additional available borrowing capacity included $865.5 million from the FHLB, $138.5 million from the Federal Reserve, and $15.0 million in correspondent lines.
Year-end other borrowings were $9.3 million. Junior subordinated debt had a $56.3 million recorded balance and $62.9 million face value. Regulatory capital remained strong: consolidated total risk-based capital was 15.63%, Tier 1 risk-based capital 14.38%, and Tier 1 leverage 10.80%. The Bank was reported as well capitalized.
Fourth-quarter performance and comparison
Fourth-quarter 2014 net income was $5.65 million, compared with $5.24 million in fourth-quarter 2013; diluted EPS was $0.25 versus $0.32. Net interest income was $35.0 million versus $26.3 million. The quarter included a $1.4 million benefit from reversal of loan-loss provision, while noninterest expense rose to $36.6 million from $24.9 million. Nonperforming assets increased 14.75% during the quarter to $52.5 million, primarily reflecting $9.4 million of nonperforming loans and $0.7 million of foreclosed assets acquired with North Valley.
Outlook, risks, contingencies and unusual items
- The filing gives no quantified earnings, revenue, loan-growth, or margin guidance. Management said 2015 loan demand and deposit growth would depend on economic conditions, competition, interest rates, and customer activity; it expects Bank dividends to support holding-company needs, subject to regulatory limits and the Board’s discretion.
- Integration and realization of North Valley cost savings remain important uncertainties. Management reported $4.9 million of 2014 merger costs; pro forma information excludes expected cost-saving synergies and is not necessarily indicative of actual results.
- Interest-rate risk is material. The company’s simulation estimated that a 200-basis-point rate increase would reduce next-12-month net interest income by 1.11%; a 100-basis-point decline would reduce it by 0.79%, under the stated assumptions. These are model estimates, not forecasts.
- Major risks include California economic and real-estate concentration, borrower credit deterioration, continued drought and potential effects on agricultural borrowers, low or changing interest rates, competition, regulatory and compliance costs, deposit retention, acquisition integration, and goodwill or acquired-asset valuation.
- Two employment-related class actions were pending concerning meal periods and wage statements; the company and Bank denied the allegations and intended to defend them. The merger-related shareholder suit was subject to a proposed settlement requiring court approval. Management said the proceedings were not expected to materially adversely affect the company.
- Goodwill increased to $63.5 million, including $47.9 million from North Valley; the acquisition valuation of loans remained provisional for up to one year. Management reported no goodwill impairment at year-end. Acquisition accounting also increased the supplemental retirement-plan liability, and 2014 other comprehensive income included a $4.1 million after-tax pension-related loss.
- Management and the independent auditor concluded internal control over financial reporting was effective as of year-end, but North Valley—approximately 24% of year-end assets—was excluded from that control assessment and audit scope.
Important facts for investors to verify
- Whether North Valley integration, branch consolidation, and planned cost savings deliver the anticipated benefits without customer, deposit, or employee losses.
- Whether credit quality and nonperforming assets stabilize after the acquisition-related fourth-quarter increase, and whether the loan-loss allowance remains adequate.
- How much of reported growth in loans, deposits, revenue, and assets is organic versus acquisition-related, and how acquired loan marks and accretion affect future earnings.
- Whether margin, fee income, and expense trends improve; in particular, the effects of weaker mortgage-banking revenue, merger-related and integration costs, and the higher efficiency ratio.
- Actual regulatory capital ratios under Basel III requirements, liquidity and deposit composition, and the capacity to maintain dividends while funding growth.
- Resolution and potential costs of the pending employment and merger-related litigation, and the sensitivity of acquired goodwill and loan valuations to revised assumptions.