TRICO BANCSHARES quarterly report, Q3 FY2011

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TriCo Bancshares — Form 10-Q Summary

Business context and reporting period

TriCo Bancshares, through Tri Counties Bank, operates as a community bank in Northern California. This unaudited report covers the quarter and nine months ended September 30, 2011; comparisons are principally with the corresponding 2010 periods and December 31, 2010 balance-sheet amounts.

Financial performance and position

  • Third-quarter results: Net income was $6.47 million, or $0.40 per diluted share, versus $1,000, or $0.00 per share, a year earlier. Income before taxes was $10.79 million versus a $439,000 loss.
  • Nine-month results: Net income was $12.04 million, or $0.75 diluted EPS, versus $2.88 million, or $0.18, in 2010. The filing’s EPS note separately shows nine-month 2011 net income of $12.401 million, inconsistent with the income statement and financial summary; verify the correct figure.
  • Interest income and margin: Third-quarter net interest income was $22.01 million, down 7.3%; nine-month net interest income was $65.46 million, down 3.5%. Fully tax-equivalent net interest margin was 4.34% for the quarter and 4.32% for nine months, compared with 4.63% and 4.48%, respectively.
  • Credit costs: Provision for loan losses declined to $5.07 million for the quarter from $10.81 million, and to $17.63 million for nine months from $29.31 million. Nine-month net charge-offs were $14.90 million versus $26.02 million.
  • Noninterest income and expenses: Third-quarter noninterest income rose to $14.72 million from $7.16 million, primarily due to a $7.58 million Citizens acquisition bargain-purchase gain. Noninterest expense was $20.87 million, up from $20.52 million. Nine-month totals were $32.32 million and $60.64 million, respectively.
  • Margins and returns: The efficiency ratio was 56.7% for the quarter and 61.9% for nine months, versus 66.2% and 63.5%. Annualized return on assets was 1.17% for the quarter and 0.73% for nine months; return on equity was 12.41% and 7.79%.
  • Balance sheet and liquidity: Assets were $2.49 billion, loans net of allowance $1.53 billion, and deposits $2.12 billion at September 30. Cash and cash equivalents were $522.64 million and available-for-sale securities $257.30 million. Assets, loans, and deposits increased from year-end, substantially reflecting the Citizens acquisition.
  • Funding, debt and capital: Other borrowings were $82.92 million and junior subordinated debt $41.24 million. Shareholders’ equity was $210.82 million; equity to assets was 8.47%. Regulatory capital ratios were 12.21% Tier 1, 13.47% total capital, and 10.48% leverage.
  • Cash flow: Nine-month operating cash flow was $22.67 million, investing cash flow $106.22 million, and financing cash flow $22.69 million; cash and cash equivalents increased $151.57 million. Investing cash flow included $80.71 million received in the Citizens transaction.

Material changes versus comparable periods

  • On September 23, 2011, the Bank assumed Citizens Bank of Northern California’s operations without FDIC loss sharing, adding seven branches, $239.90 million of deposits, and $167.48 million of loans. The transaction generated a $7.58 million bargain-purchase gain. Citizens contributed approximately $4.45 million to net income after tax through September 30, but the filing cautions that this short period is not indicative of future results.
  • Loan balances increased 11.0% from year-end to $1.58 billion; deposits increased 14.5% to $2.12 billion. Total assets increased from $2.19 billion to $2.49 billion.
  • Despite lower loan-loss provisions and charge-offs than in 2010, nonperforming assets reached $102.94 million, up 23.9% from June 30. Management attributed much of the quarterly increase to Citizens-acquired problem loans and foreclosed assets. Total nonperforming assets were $85.90 million at December 31, 2010.
  • Nonaccrual loans were $85.07 million, including $10.74 million of acquired PCI loans; foreclosed assets were $17.87 million. The allowance for loan losses was $45.30 million, or 2.87% of loans, versus $42.57 million and 3.00% at year-end.
  • Net interest margin contracted as loan yields and investment yields declined, while management said weak loan demand and unattractive investment yields left substantial funds in low-yielding Federal Reserve balances.

Outlook, commentary, risks and unusual items

  • The filing provides no specific earnings or operating guidance. Management says interim results are not necessarily indicative of full-year results and does not undertake to update forward-looking statements.
  • Management considered the $45.30 million loan-loss allowance adequate, but stated that adverse economic conditions or other circumstances could produce additional losses. Credit risks include commercial real estate, construction, home equity, commercial and industrial, and indirect auto lending.
  • Citizens was acquired without loss sharing, leaving TriCo responsible for acquired-credit losses. Granite’s acquired assets are subject to an 80% FDIC loss-sharing arrangement, but coverage depends on compliance with detailed agreement terms; covered assets were reported at $51.28 million.
  • Other risks include uncertainty in acquired-asset fair values and cash-flow estimates, geographic concentration in Northern California, interest-rate and mortgage-servicing-right valuation sensitivity, and off-balance-sheet lending commitments. Available credit facilities included $415.45 million remaining under the FHLB line and $85.85 million under the Federal Reserve line, subject to collateral and other terms.
  • Legal proceedings arise in the ordinary course; management does not expect them to materially affect financial condition, results, or cash flows. Visa-related litigation could affect the value or conversion terms of the Bank’s restricted Visa Class B shares; the reported equivalent value was not recorded in the financial statements.
  • Management reported effective disclosure controls as of September 30, 2011 and no material subsequent change in internal controls. The filing reports no material market-risk change from the 2010 Form 10-K.

Important facts for investors to verify

  1. Reconcile the nine-month 2011 net income discrepancy: $12.041 million in the income statement and summary versus $12.401 million in the EPS note.
  2. Assess the Citizens acquisition’s acquired-loan quality, bargain-purchase accounting, ongoing integration costs, and lack of FDIC loss sharing.
  3. Track new nonperforming loans and foreclosed assets, especially acquired PCI loans, commercial real estate, home equity, and commercial and industrial credits; assess adequacy of the allowance.
  4. Monitor net interest margin and the ability to deploy substantial cash balances profitably amid weak loan demand and low yields.
  5. Review capital, liquidity, borrowings and the conditions governing FDIC reimbursement for Granite-covered assets.