TriCo Bancshares — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; the filing also reports quarterly results, including Q4 2012. TriCo is a California bank holding company whose primary subsidiary, Tri Counties Bank, operates 66 branches in Northern and Central California. Figures below are consolidated unless stated otherwise; dollar amounts are in millions except per-share data.
Financial performance and condition
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Interest income | $108.7 | $103.0 |
| Net interest income | $101.4 | $92.7 |
| Net interest margin (FTE) | 4.32% | 4.43% |
| Noninterest income | $38.0 | $42.8 |
| Provision for loan losses | $9.4 | $23.1 |
| Noninterest expense | $98.0 | $82.7 |
| Net income | $19.0 | $18.6 |
| Diluted EPS | $1.18 | $1.16 |
| Return on average assets / equity | 0.75% / 8.44% | 0.82% / 8.93% |
- Net interest income plus noninterest income was $139.4 million, versus $135.6 million in 2011. The prior year included a $7.6 million Citizens acquisition bargain-purchase gain.
- Q4 net income was $4.7 million, or $0.29 diluted EPS, compared with $6.5 million, or $0.41, in Q4 2011. Q4 2012 net interest income was $24.8 million and provision expense was $1.5 million.
- Year-end assets were $2.61 billion, loans net of allowance $1.52 billion, deposits $2.29 billion, and shareholders’ equity $229.4 million. Loans increased 0.9% and deposits increased 4.5% year over year.
- Cash and cash equivalents were $748.9 million; available-for-sale securities were $163.0 million. Management reported cash and cash equivalents above reserve requirements plus available-for-sale securities of $880.3 million, or 33.7% of assets.
- Other borrowings fell to $9.2 million from $72.5 million; junior subordinated debt remained $41.2 million. Operating cash flow was $56.5 million; investing activities provided $24.8 million and financing activities provided $30.3 million. Cash increased $111.6 million.
- Capital remained above regulatory thresholds: Bank total risk-based capital was 14.42%, Tier 1 risk-based capital 13.16%, and Tier 1 leverage 9.73%. The Bank was categorized as well-capitalized.
- Annual dividends were $0.36 per share. The Bank could pay $23.6 million in dividends to the parent without prior state approval, subject to regulatory and other restrictions.
Changes versus the prior comparable period
- Net income rose 2.2% year over year, while diluted EPS rose from $1.16 to $1.18. Lower loan-loss provision and higher net interest income offset substantial expense growth and lower noninterest income.
- Net interest income increased 9.3%, primarily reflecting a full year of Citizens operations, lower deposit costs, and reduced higher-cost borrowings. Citizens contributed $17.9 million of 2012 net interest income, including $7.6 million of acquired-loan discount accretion. The net interest margin nevertheless declined 11 basis points.
- Provision for loan losses declined 59%; net charge-offs fell to $12.7 million from $19.7 million, and nonperforming assets fell to $80.0 million from $102.1 million. Nonperforming loans were 4.63% of loans versus 5.53%; allowance coverage of nonperforming loans was 59% versus 54%.
- Noninterest expense rose 18.5%, including higher salaries and benefits, costs associated with Citizens, and a $2.09 million employment-settlement accrual. The efficiency ratio worsened to 70.19% from 60.88%.
- Loans grew modestly overall, with real estate mortgage balances higher and consumer, commercial, and construction balances lower. Real estate mortgage and construction loans together represented approximately 66.6% of the loan portfolio.
Outlook, commentary, risks, and unusual items
- Management anticipated loan demand could remain weak in 2013 and said actual demand and deposits would depend on economic and competitive conditions. The filing gives no specific earnings or growth guidance.
- Management described the balance sheet as neutral to slightly asset-sensitive under its modeled assumptions: a 200-basis-point rate increase was estimated to raise 12-month net interest income 3.39%, while a 100-basis-point decrease was estimated to lower it 1.08%. These are simulations, not forecasts; assumptions include a flat balance sheet and deposit-rate changes tracking market rates by about 50%.
- Credit and geographic risks remain material: approximately 89.4% of loan book value was secured by real estate, substantially all real-estate collateral was in California, and the business is concentrated in Northern and Central California. Further deterioration in local economies or property values could increase losses.
- Allowance estimation is judgmental. In Q1 2012, changes to the allowance methodology reduced the calculated allowance by a net $1.388 million; management also changed consumer-loan risk monitoring. The year-end allowance was $42.6 million, or 2.73% of loans.
- The 2010 Granite FDIC loss-sharing agreement covers 80% of eligible losses and recoveries on covered assets; $43.4 million of assets, or 1.7% of total assets, were covered at year-end. Reimbursement depends on compliance with agreement terms and estimates of covered-asset cash flows.
- The Bank recorded a $2.09 million expense and liability for a tentative assistant-branch-manager class-action settlement, with total settlement payments expected to range from $2.04 million to $2.50 million pending court approval. Management said other routine legal proceedings were not expected to materially affect results.
- The company was constructing a Chico operations center, with an estimated $4.2 million of future contractual payments at year-end. Management expected completion in Q2 2013 and an approximate final cost basis of $9.3 million.
- Other stated risks include prolonged low rates and net-interest-margin pressure, competitive funding costs, changing regulation and compliance costs, execution/integration risks from acquisitions, and potential losses on real estate collateral. The filing reports effective internal controls and an unqualified audit opinion.
Most important facts for investors to verify
- Whether credit quality continues to improve: new problem-loan formation, charge-offs, nonperforming assets, and the adequacy of the allowance—especially in commercial real estate and home-equity exposures.
- How much earnings depend on acquired-loan discount accretion and whether Citizens-related revenue and costs are sustainable after integration.
- Whether expense growth and the 70.19% efficiency ratio improve, and how the settlement and new operations center affect future costs.
- Deposit mix, retention, and pricing, along with liquidity and the ability to fund loan growth without materially increasing borrowing costs.
- Whether modeled interest-rate sensitivity, capital ratios, dividend capacity, and Granite FDIC loss-sharing recoveries remain consistent with management’s assumptions.