Business context and reporting period
TriCo Bancshares, parent of Tri Counties Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The bank operates in 26 California counties. Comparisons with 2014 are materially affected by the October 2014 acquisition of North Valley Bancorp: the 2015 results include North Valley, while the 2014 periods do not.
Financial performance and condition
Amounts are in millions except per-share data and ratios.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $38.5 | $27.3 | $74.9 | $53.4 |
| Noninterest income | $12.1 | $7.9 | $22.3 | $16.2 |
| Noninterest expense | $32.4 | $25.1 | $64.7 | $48.4 |
| Net income | $11.4 | $4.9 | $19.7 | $12.2 |
| Diluted EPS | $0.49 | $0.30 | $0.86 | $0.75 |
| FTE net interest margin | 4.35% | 4.28% | 4.22% | 4.19% |
| Efficiency ratio | 63.9% | 71.7% | 66.4% | 69.5% |
- Q2 net income rose 134% year over year; six-month net income rose 61%. Growth reflects the acquired business and higher net interest income and fee income, partly offset by higher operating costs.
- Q2 provision for loan losses was a $0.6 million benefit, versus a $1.7 million provision in Q2 2014. For the six-month period, the benefit was $0.4 million, versus a $0.4 million provision in 2014.
- Annualized return on assets and return on equity were 1.17% and 10.56% for Q2; for the six months they were 1.01% and 9.21%, respectively. FTE ratios are non-GAAP measures.
- At June 30, total assets were $3.894 billion, loans net of allowance were $2.358 billion, deposits were $3.342 billion, and shareholders’ equity was $431.1 million. Since December 31, 2014, loans increased 4.9%, deposits declined 1.1%, and assets declined 0.6%.
- Cash and cash equivalents were $169.5 million, down from $610.7 million at year-end, primarily reflecting securities purchases and loan growth. The cash-flow statement reports six-month operating cash flow of $25.6 million, investing cash use of $420.6 million, and financing cash use of $46.2 million.
- Total debt included $6.7 million of other borrowings and $56.4 million of junior subordinated debt. The company reported $1.086 billion of available FHLB borrowing capacity and $119.6 million of available Federal Reserve capacity, both subject to collateral and other conditions.
- Capital remained strong: consolidated total capital to risk-weighted assets was 15.16%, Tier 1 capital 13.91%, common equity Tier 1 12.08%, and Tier 1 leverage 10.91%. Management said the company and bank exceeded fully phased-in Basel III capital requirements and well-capitalized thresholds.
Material changes versus comparable periods
- FTE net interest income increased 41.2% in Q2 and 40.3% in the first half, primarily due to larger average loan and securities balances, including North Valley. Average loan and securities yields declined, partially offsetting volume gains.
- Noninterest income increased 53.4% in Q2 and 37.6% for the first half. Higher deposit service charges and ATM/interchange fees contributed; North Valley’s inclusion was a principal driver.
- Noninterest expense increased 29.1% in Q2 and 33.6% for the first half. Salaries and benefits rose with the enlarged workforce following the acquisition; the average full-time equivalent count increased about 30% year over year.
- The allowance for loan losses was $35.5 million, down from $36.6 million at year-end; it equaled 1.48% of loans versus 1.60%. Net nonperforming assets declined to $45.3 million from $52.5 million, and nonperforming loans to total loans fell to 1.67% from 2.08%.
- Unrealized losses on available-for-sale securities reduced six-month other comprehensive income by $2.7 million after tax. The available-for-sale portfolio’s fair value rose to $284.4 million from $83.2 million at year-end, reflecting purchases as well as valuation changes.
Outlook, commentary, risks and unusual items
- Management reported moderate to strong loan demand during the first half but provided no specific earnings, growth, margin or credit-loss guidance. Results for the interim period are not necessarily indicative of full-year results.
- Following acquisition-related consolidation work, the bank identified five additional branches for closure; one was closed by June 30, and the other four were expected to close by September 30, 2015.
- Key risks include credit quality and allowance estimates, California economic and real-estate conditions, interest-rate movements and securities valuation, and the uncertain valuation of mortgage servicing rights. Management reported no material change in market-risk disclosures from its 2014 Form 10-K.
- Q2 included a $0.6 million special cash dividend from FHLB stock and $2.1 million of purchased-loan discount accretion. The first half included $4.7 million of purchased-loan discount accretion. These items contribute to interest income and may not recur at the same level.
- The filing describes a merger-related shareholder lawsuit settlement subject to final court approval, scheduled for October 19, 2015; the plaintiff agreed to seek no more than $375,000 in fees and costs. The bank also faces California employee class-action claims, which it denies and intends to defend. Management did not expect pending proceedings to materially affect results or financial position.
- A $0.571 million estimated FDIC loss-sharing “true-up” liability is recorded; the related agreement provides for a potential payment in 2020, subject to its terms and loss experience. The filing also identifies off-balance-sheet credit commitments, including $656.1 million of commitments to extend credit, $11.5 million of standby letters of credit, and $97.9 million of overdraft privileges.
- The filing’s MD&A reports six-month operating cash flow of $25.370 million and investing cash use of $420.408 million, while the cash-flow statement reports $25.567 million and $420.605 million, respectively. The source text does not reconcile these differences.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying organic loan, deposit, fee-income and expense trends; 2014 comparatives exclude North Valley.
- Review the sustainability of earnings contributions from purchased-loan discount accretion and the FHLB special dividend, alongside falling loan and investment yields.
- Track commercial real-estate credit performance, nonaccrual and criticized loans, charge-offs, and the adequacy of the $35.5 million allowance.
- Confirm the reported cash-flow figures against the filed financial statements and investigate the MD&A discrepancies.
- Monitor branch closures and integration-related cost savings, the final court outcome of the merger settlement, and the exposure to the FDIC true-up and employee litigation.