TriCo Bancshares — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. TriCo Bancshares is a California bank holding company; its principal subsidiary, Tri Counties Bank, serves northern and central California. Unless otherwise stated, dollar amounts below are in millions.
Financial performance and condition
- Earnings: Net income was $40.6 million, down 9.5% from $44.8 million in 2016. Diluted EPS was $1.74 versus $1.94. The effective tax rate rose to 47.7% from 38.2%, including a $7.4 million deferred-tax remeasurement charge from the December 2017 federal tax law change. Excluding that charge and merger-related expenses, management reported adjusted net income of $48.5 million and adjusted diluted EPS of $2.08; these are non-GAAP measures.
- Interest revenue and margin: Net interest income increased 3.9% to $174.6 million; fully tax-equivalent net interest income rose 4.0% to $177.1 million. Net interest margin was 4.22%, essentially flat with 4.23% in 2016. Average loans grew 8.1%, while average loan yield declined 21 basis points and funding costs increased.
- Other revenue and expenses: Noninterest income rose 12.2% to $50.0 million, led by deposit fees and ATM/interchange revenue; it included a $961,000 securities-sale gain and a $712,000 gain associated with terminating FDIC loss-sharing agreements. Noninterest expense increased 0.7% to $147.0 million. The efficiency ratio improved to 64.7% from 67.9%.
- Credit quality: The loan-loss provision was $89,000, compared with a $6.0 million provision reversal in 2016. Net charge-offs were $2.3 million, versus net recoveries of $2.5 million. Nonperforming loans increased to $24.4 million from $20.1 million; nonperforming assets were $27.6 million, or 0.58% of assets. The allowance for loan losses was $30.3 million, 1.01% of loans, down from $32.5 million and 1.18% a year earlier.
- Balance sheet and funding: Assets were $4.76 billion, loans net of allowance $2.98 billion, deposits $4.01 billion, and shareholders’ equity $505.8 million. Loans grew 9.3% and deposits 2.9% year over year. Other borrowings rose to $122.2 million from $17.5 million; junior subordinated debt was $56.9 million. Approximately 80.9% of gross loans were real estate loans, including construction.
- Cash flow and liquidity: Operating activities provided $55.4 million. Investing activities used $357.4 million, primarily reflecting loan and investment growth; financing activities provided $201.9 million, including deposit growth and increased borrowings. Cash and cash equivalents ended at $205.4 million, down from $305.6 million. Available-for-sale securities plus cash in excess of reserve requirements totaled $854.2 million. The Bank also reported $1.26 billion of available FHLB borrowing capacity, $134.7 million at the Federal Reserve, and $20 million in correspondent lines.
- Capital and shareholder returns: At year-end, consolidated total risk-based capital was 14.07%, common equity Tier 1 was 11.72%, and Tier 1 leverage was 10.80%; the Bank exceeded applicable “well-capitalized” requirements. The annual dividend increased to $0.66 per share from $0.60. The Bank could pay $85.3 million in dividends to the holding company without prior regulatory approval.
Material changes and unusual items
- Profitability declined despite growth in net interest income and noninterest income, mainly because of the $7.4 million tax-remeasurement charge and the shift from a 2016 loan-loss reserve release to a small 2017 provision. Excluding the tax charge and merger costs, management’s adjusted results were higher year over year.
- Fourth-quarter net income was $3.0 million, versus $11.9 million in the third quarter. Fourth-quarter income-tax expense was $14.8 million, including the tax-law remeasurement. Quarterly provision expense was $1.7 million, compared with provision benefits in the first and second quarters.
- Loans and investments expanded while cash balances fell; available-for-sale securities increased to $730.9 million from $550.2 million, while held-to-maturity securities declined to $514.8 million from $602.5 million.
- The company entered into a proposed stock-for-stock merger with FNB Bancorp on December 11, 2017. The stated transaction value was approximately $315.3 million based on TriCo’s December 8 share price; FNBB shareholders were expected to own about 24% of the combined company. Closing was expected in the second quarter of 2018, subject to shareholder, regulatory, and other conditions.
- Two employment-related class actions were consolidated and settled. The court approved the settlement on January 12, 2018; total cost was $1.469 million, of which $1.450 million had been accrued at year-end.
Outlook, commentary, and risks
- Management said the lower federal corporate tax rate was expected to benefit net income beginning in 2018 and estimated a combined statutory tax rate of 29.6%; the full effects of tax reform remained uncertain.
- Management expected liquidity sources to remain available and considered capital adequate for anticipated growth, dividends, and regulatory requirements. It did not provide quantified earnings or loan-growth guidance.
- Interest-rate simulations estimated that a gradual 200-basis-point increase would reduce next-12-month net interest income by 1.91%; an immediate 200-basis-point increase was estimated to reduce market value of equity by 9.6%. These are model estimates based on assumptions, not forecasts.
- Key risks include California economic and real-estate concentration, credit losses and allowance estimation, competition for loans and deposits, interest-rate sensitivity, regulatory and compliance costs, cybersecurity and third-party technology risk, natural disasters, and successful integration of the proposed merger. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Track nonperforming loans, charge-offs, criticized credits, and allowance coverage after the 2017 increase in problem loans and the decline in allowance-to-loan ratio.
- Reconcile reported earnings with adjusted results, especially the tax-remeasurement charge, future effective tax rate, and sustainability of noninterest income and margin.
- Review the merger’s final terms, approvals, tangible-equity condition, expected costs and synergies, dilution, and integration progress.
- Monitor the higher use of borrowings, cash reduction, deposit mix and pricing, and upcoming time-deposit maturities.
- Assess the sensitivity of earnings and securities values to interest rates, including the assumptions behind management’s simulations.