TriCo Bancshares 10-Q Summary
Reporting period: Unaudited first quarter ended March 31, 2014; comparisons are generally with the three months ended March 31, 2013. TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank operating 41 traditional and 22 in-store branches.
Financial performance and condition
| Metric | Q1 2014 | Comparable period / reference |
|---|---|---|
| Net interest income (FTE) | $26.2 million | $24.6 million; up 6.2% |
| Net interest margin (FTE) | 4.10% | 4.05% |
| Net income | $7.4 million | $8.5 million |
| Diluted EPS | $0.45 | $0.53 |
| Noninterest income | $8.3 million | $10.2 million |
| Noninterest expense | $23.3 million | $21.6 million |
| Return on assets / equity | 1.08% / 11.56% | 1.30% / 14.51% |
| Loans / deposits at March 31 | $1.687 billion / $2.411 billion | Loans $1.672 billion and deposits $2.410 billion at December 31, 2013 |
| Cash and cash equivalents at March 31 | $502.3 million | $598.4 million at December 31, 2013 |
| Shareholders’ equity at March 31 | $257.0 million | $250.9 million at December 31, 2013 |
Operating cash flow was $12.3 million, versus $12.6 million in Q1 2013. Investing activities used $107.8 million, primarily reflecting $107.8 million of purchases of held-to-maturity securities; cash declined by $96.1 million during the quarter. Management reported $557.8 million of available liquidity, defined as cash at the Federal Reserve and other banks in excess of reserve requirements plus available-for-sale securities.
Other borrowings were $6.7 million and junior subordinated debt was $41.2 million at March 31. The Bank had no borrowings outstanding on its $605.7 million Federal Home Loan Bank line or its $105.1 million Federal Reserve line. The Bank was classified as well capitalized: total risk-based capital was 14.73%, Tier 1 risk-based capital 13.47%, and Tier 1 leverage 10.15%.
Asset quality improved modestly from year-end: nonperforming loans were $52.0 million, or 3.08% of loans, versus $53.2 million, or 3.18%; nonperforming assets were $55.2 million versus $59.5 million. The allowance for loan losses was $38.3 million, 2.27% of loans and 74% of nonperforming loans. The company recorded a $1.4 million benefit from reversal of loan-loss provision.
Material changes versus the prior comparable period
- Net income declined 13.1% and diluted EPS fell from $0.53 to $0.45, despite higher net interest income. Management attributed the net interest income increase mainly to growth in average investment and loan balances; lower loan yields partly offset that benefit.
- Noninterest income fell 18.8%, chiefly because gain on loan sales dropped to $0.5 million from $2.3 million as higher mortgage rates reduced refinancing and mortgage originations. Service charges also declined. Gains on foreclosed-asset sales rose to $1.2 million from $0.6 million.
- Noninterest expense increased 7.9%. The filing cites higher occupancy costs, including $238,000 of accelerated depreciation on leasehold improvements for two branches closed during the quarter, and $296,000 of merger-related legal and consulting fees.
- Loans increased 0.9% from December 31, led by commercial real estate and construction lending. Management described loan demand as moderate to weak and noted competitive pressure on loan yields.
- Held-to-maturity securities increased by $104.0 million from year-end after $107.8 million of purchases. Their March 31 carrying amount was $344.5 million, versus estimated fair value of $342.0 million.
Outlook, risks, contingencies, and unusual items
- Merger: TriCo agreed to acquire North Valley Bancorp in a stock transaction at a fixed exchange ratio of 0.9433 TriCo shares per North Valley share. Management expected completion in the third quarter of 2014, subject to shareholder, regulatory, and other customary approvals. The agreement provides for a potential $3.8 million termination fee in specified circumstances. The filing gives no earnings guidance.
- Merger litigation: A shareholder lawsuit filed in January 2014 challenges the proposed transaction and seeks, among other relief, to prevent its completion. TriCo said it could not predict the outcome or impact.
- Credit and market risks: The bank’s lending is concentrated in Northern and Central California, and management’s allowance estimates depend on borrower performance, collateral values, economic conditions, and other assumptions. Interest-rate changes may affect loan yields, securities values, and mortgage servicing rights.
- Funding and capital: Liquidity depends in part on dividends from the Bank, which are subject to regulatory restrictions. Basel III capital rules were scheduled to phase in beginning in 2015; management stated that the company believed it would meet the final rules if then in effect.
- Other contingencies: The Bank disclosed restricted Visa Class B shares with an estimated $927,000 Class A equivalent value not recorded in the financial statements, subject to potential adjustments tied to Visa litigation settlements. A previously settled employee class action was paid in 2013. Management did not expect other routine proceedings to have a material adverse effect.
- The company added the California Home Affordability Index as a loan-loss environmental factor in Q1; management said the change did not alter the allowance at March 31. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Progress and closing conditions for the North Valley Bancorp merger, including shareholder and regulatory approvals, integration costs, and litigation developments.
- Whether loan demand and loan yields recover, and whether declining mortgage activity continues to weigh on loan-sale income and service charges.
- Credit trends, especially nonaccrual and troubled loans, net recoveries, and the adequacy of the allowance given its reliance on estimates.
- The sustainability of earnings given the quarter’s loan-loss provision reversal, lower noninterest income, higher operating costs, and merger-related spending.
- Liquidity and securities exposure after the substantial shift into held-to-maturity investments, including unrealized losses and access to contingent borrowing facilities.