TriCo Bancshares — Q3 2014 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2014; unaudited results cover TriCo Bancshares and Tri Counties Bank, a California community bank operating in 26 counties. Results exclude North Valley Bancorp, acquired October 3, 2014, after quarter-end.
Financial performance and position
Amounts are in millions except per-share data. Comparisons are with the same 2013 period unless noted.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income (GAAP) | $28.0 | $26.4 | $81.5 | $75.5 |
| Net interest income (FTE) | $28.1 | $26.5 | $81.7 | $75.8 |
| Net income | $8.2 | $7.4 | $20.5 | $22.2 |
| Diluted EPS | $0.50 | $0.45 | $1.25 | $1.37 |
| Net interest margin (FTE) | 4.39% | 4.40% | 4.26% | 4.17% |
| Noninterest income | $8.6 | $9.1 | $24.8 | $29.5 |
| Noninterest expense | $25.4 | $23.6 | $73.8 | $68.7 |
- Q3 net income rose 11.9%; nine-month net income fell 7.7%. The nine-month comparison reflects lower fee and mortgage-sale income and higher expenses, partly offset by stronger net interest income and larger loan-loss reversals.
- Q3 FTE net interest income increased 6.2%, supported by higher average investment and loan balances; lower loan yields offset some of the benefit. The FTE efficiency ratio worsened to 69.1% from 66.3% for Q3 and to 69.3% from 65.3% year to date.
- At September 30, total assets were $2.795 billion, loans $1.766 billion, deposits $2.437 billion, and shareholders’ equity $267.4 million. Since December 31, 2013, loans increased 5.6% and deposits 1.1%; cash and cash equivalents declined to $369.7 million from $598.4 million.
- Nine-month operating cash flow was $21.8 million, investing cash use $278.9 million, and financing cash flow $28.4 million; cash declined $228.7 million. Cash and available-for-sale securities totaled $409.5 million, down 38.4% from year-end, mainly reflecting securities purchases and loan growth.
- Other borrowings were $12.7 million and junior subordinated debt $41.2 million. The Bank had no FHLB or Federal Reserve advances outstanding and reported $671.2 million and $110.3 million, respectively, in available lines. The Bank was classified as well capitalized; its total risk-based, Tier 1 risk-based, and leverage ratios were 14.71%, 13.45%, and 10.42%.
Changes, outlook, risks, and unusual items
- Credit indicators improved: nonperforming assets were $45.7 million, versus $59.5 million at year-end 2013; nonperforming loans were 2.30% of loans, versus 3.18%. The $37.9 million allowance equaled 2.15% of loans and 93% of nonperforming loans.
- The company recorded a $3.0 million Q3 reversal of loan-loss provision and a $2.6 million reversal for the first nine months. Management attributed the improvement to better collateral values and estimated cash flows and lower nonperforming balances. Q3 included a $769,000 recovery on a previously charged-off residential construction loan and a $670,000 reversal related to payoff of a purchased-credit-impaired loan. Management said the reversal would have been $1.5 million for Q3 and $1.2 million year to date excluding those items.
- Noninterest income declined year to date, notably because mortgage refinancing activity and gains on loan sales fell after mortgage rates increased in 2013; deposit service charges also decreased. Merger-related expenses were $799,000 in Q3 and $1.43 million year to date, including legal, consulting, and system-conversion work.
- North Valley Bancorp had approximately $935 million in assets at June 30. TriCo issued 6,575,550 shares and paid $6.8 million for fractional shares; stated consideration was approximately $151.3 million. Purchase accounting valuations were still in process, and goodwill and a core deposit intangible were expected; goodwill would not be tax deductible. Management provided no specific earnings guidance in the supplied filing text.
- Key risks include successful integration and realization of merger savings, possible customer or employee losses and systems disruption, credit losses and allowance estimates, interest-rate effects on loan yields and securities, and liquidity or capital constraints. A shareholder suit challenging the merger had a settlement memorandum of understanding; court approval and final settlement were not assured. Management did not expect other ordinary-course legal matters to have a material adverse effect.
- The filing states the Bank met applicable capital requirements and management believed the company would comply with forthcoming Basel III requirements. Disclosure controls were assessed as effective; no material change in internal controls was reported.
Important facts for investors to verify
- Post-acquisition North Valley purchase accounting, final goodwill and intangible amounts, merger costs, and realized cost savings.
- Whether lower nonperforming assets and loan-loss reversals persist, including the concentration of troubled and restructured loans.
- Loan-yield trends, deposit mix and pricing, net interest margin, and the effect of interest-rate changes on the securities portfolio.
- Liquidity after the substantial cash decline and the shift toward held-to-maturity securities and loans.
- Final status of the merger-related lawsuit settlement and any related costs or conditions.