TRICO BANCSHARES annual report, FY2016

Full document

Business context and reporting period

TriCo Bancshares’ Form 10-K reports the fiscal year ended December 31, 2016, with comparative results for 2015 and 2014. TriCo is a California bank holding company whose principal subsidiary, Tri Counties Bank, serves retail customers and small-to-medium-sized businesses across 26 Northern and Central California counties through 68 branches. The Bank had approximately $4.5 billion in assets at year-end. This is an annual filing; fourth-quarter figures are included where noted.

In March 2016, the Bank acquired three Bank of America branches in Humboldt County, adding $161.2 million of deposits. It paid a $3.204 million premium for the deposit relationships and received $159.5 million in cash.

Financial performance and condition

  • Profitability: 2016 net income was $44.8 million, up 2.3% from $43.8 million in 2015; diluted EPS was $1.94 versus $1.91. Fourth-quarter net income was $12.5 million and diluted EPS was $0.54.
  • Revenue and margins: Net interest income was $168.0 million, up 7.7%; fully taxable-equivalent net interest income rose 8.6% to $170.3 million. Net interest margin eased to 4.23% from 4.32%. Noninterest income declined 1.7% to $44.6 million.
  • Expenses and returns: Noninterest expense increased 11.6% to $146.0 million, including higher staffing, system and capacity costs, a $1.45 million litigation accrual, and a $0.716 million write-down of a closed branch building. The efficiency ratio worsened to 67.9% from 64.7%; return on average assets was 1.02% versus 1.11%, and return on average equity was 9.46% versus 10.04%.
  • Credit costs and asset quality: The Company recorded a $5.97 million benefit from reversal of loan-loss provisions, compared with a $2.21 million benefit in 2015. Nonperforming loans fell to $20.1 million from $37.1 million; nonperforming assets declined to $24.1 million from $42.5 million. The allowance was $32.5 million, or 1.18% of loans, versus $36.0 million, or 1.43%, a year earlier. Management considered the allowance adequate but cautioned that future losses could exceed estimates.
  • Balance sheet and funding: Total assets grew 7.0% to $4.52 billion; loans, net of allowance, rose to $2.73 billion from $2.49 billion, and deposits increased to $3.90 billion from $3.63 billion. Real estate mortgage loans were 74.6% of total loans; management disclosed that approximately 91% of the loan portfolio was collateralized by real estate.
  • Cash flow and liquidity: Operating activities provided $48.2 million; investing activities used $139.4 million and financing activities provided $93.3 million. Cash and cash equivalents ended at $305.6 million, compared with $303.5 million. Cash and available-for-sale securities in excess of reserve requirements totaled $777.7 million, or 17.2% of assets. The Company also reported unused borrowing capacity of $1.304 billion at the FHLB, $133.7 million at the Federal Reserve, and $20 million in correspondent lines.
  • Debt and capital: Year-end other borrowings were $17.5 million and junior subordinated debt carrying value was $56.7 million; the latter had a face value of $62.9 million. Shareholders’ equity was $477.3 million. Consolidated total capital, Tier 1 capital, and common equity Tier 1 ratios were 14.65%, 13.62%, and 12.07%, respectively. The Bank was classified as well-capitalized.
  • Shareholder returns: Dividends were $0.60 per share for 2016, up from $0.52 in 2015. The Board intended to continue quarterly cash dividends, subject to earnings, capital, financial condition, and regulatory limits.

Material changes versus the prior comparable period

  • Net interest income increased principally from higher average loan and investment balances; average loan yield declined 15 basis points, and the net interest margin narrowed 9 basis points.
  • Loan growth was 9.4% year over year. Deposit growth included the acquired Bank of America branch balances.
  • Noninterest expense growth outpaced revenue growth, reflecting a 5.3% increase in average full-time-equivalent staff, technology and capacity spending, and identified unusual items.
  • Credit measures improved, with lower nonperforming loans and assets and net loan recoveries of $2.46 million for the year. The lower allowance ratio and provision reversal should be considered alongside loan growth and the year’s loan sales.
  • Available-for-sale securities increased to $550.2 million from $404.9 million, while held-to-maturity securities declined to $602.5 million from $726.5 million. The year-end securities portfolio included $11.0 million of gross unrealized losses on available-for-sale securities.

Outlook, commentary, risks and unusual items

The filing provides no specific earnings, growth, or margin guidance. Management reported strong demand for commercial real estate and residential mortgage lending during 2016, moderate home-equity demand, and anticipated that 2017 loan demand would depend on economic and competitive conditions. Deposit growth was also described as uncertain. Management cited potential cost savings and growth opportunities from the acquired branches.

  • Loan sales and recoveries: The Company sold nonperforming and other loans during 2016. It reported $37.9 million of proceeds from sales of loans other than loans originated for resale in the cash-flow statement. Loan sales and recoveries contributed to reported credit results; management estimated that without one year-end sale, the reversal of provision would have been about $0.503 million smaller.
  • Litigation: Two employee class-action matters concerning meal/rest periods and wage statements were agreed in principle to settle for up to $1.9 million. The Company accrued an estimated $1.45 million; settlement remained subject to final agreement and court approval.
  • Interest-rate risk: Under the Company’s modeled scenarios, a 200-basis-point rate increase reduced projected 12-month net interest income by 1.65% and market value of equity by 12.0%; a 100-basis-point decrease reduced projected net interest income by 1.59% and market value of equity by 4.8%. These are model estimates based on assumptions, not forecasts.
  • Principal risks: The Bank is concentrated in Northern and Central California, and real estate collateral is predominantly located in California. Risks include regional economic or property-market weakness, borrower defaults, competition for loans and deposits, changing interest rates, deposit retention, regulatory and compliance costs, operational or cybersecurity disruptions, and natural disasters including earthquakes, drought, and fires. The filing also notes goodwill impairment risk and potential constraints on dividends.
  • Other notable items: Mortgage servicing rights lost $2.184 million in fair value during 2016, attributed to market discount-rate and prepayment assumptions. Other comprehensive loss was $6.135 million, including securities valuation losses; year-end accumulated other comprehensive loss was $7.913 million. Management and the independent auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  • Whether loan growth and improved asset-quality indicators persist, and whether the $32.5 million allowance remains adequate as the portfolio expands.
  • How much earnings benefited from provision reversals, loan-sale proceeds and recoveries, purchased-loan discount accretion, and other nonrecurring items.
  • Whether expense growth, branch-acquisition integration costs, and technology spending moderate enough to improve the efficiency ratio.
  • How securities valuation changes, mortgage prepayments, and different interest-rate scenarios affect net interest margin, earnings, and capital.
  • The final cost and court approval status of the employee settlements, and the Company’s capacity to maintain dividends while meeting regulatory capital requirements.