TRICO BANCSHARES annual report, FY2013

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Business context and reporting period

TriCo Bancshares’ Form 10-K covers the fiscal year ended December 31, 2013; it is an annual filing, not a standalone fourth-quarter report. TriCo operates primarily through Tri Counties Bank, a community bank serving Northern and Central California through 63 branches. The bank focuses on retail customers and small to midsize businesses.

Financial performance and condition

  • Full-year earnings: Net income was $27.4 million, or $1.69 per diluted share, versus $19.0 million, or $1.18 per diluted share, in 2012. Return on average assets was 1.04%; return on average equity was 11.34%.
  • Revenue and margins: Net interest income was $101.9 million and noninterest income was $36.8 million. Together, these totaled $138.7 million before loan-loss provision. The fully tax-equivalent net interest margin was 4.18%, down from 4.32%; the efficiency ratio improved to 67.32% from 70.19%.
  • Credit costs and asset quality: The company recorded a $715,000 benefit from loan-loss provision, versus a $9.4 million provision in 2012. Net charge-offs declined to $3.7 million from $12.7 million. Nonperforming assets fell to $59.5 million, or 2.30% of assets, from $80.0 million, or 3.07%. The $38.2 million allowance equaled 2.29% of loans and 72% of nonperforming loans.
  • Balance sheet and funding: Assets were $2.744 billion, up from $2.609 billion; loans, net of allowance, were $1.634 billion, up from $1.522 billion. Deposits rose 5.3% to $2.410 billion, including growth in noninterest-bearing demand deposits. Shareholders’ equity was $250.9 million.
  • Debt and capital: Other borrowings were $6.3 million and junior subordinated debt was $41.2 million. The bank’s total risk-based capital ratio was 14.67%, Tier 1 risk-based ratio 13.41%, and Tier 1 leverage ratio 10.09%; regulators classified the bank as well capitalized.
  • Cash flow and liquidity: Operating activities provided $41.1 million; investing activities used $302.9 million, largely reflecting purchases of held-to-maturity securities and loan growth; financing activities provided $111.3 million, mainly from deposit growth. Cash and cash equivalents declined $150.5 million to $598.4 million. Management reported $664.7 million of available-for-sale securities and cash equivalents in excess of reserve requirements, or 24.2% of assets, compared with $880.3 million, or 33.7%, a year earlier. Additional borrowing capacity included $575.7 million at the FHLB and $106.9 million at the Federal Reserve.
  • Fourth-quarter detail: Net income was $5.2 million, or $0.32 per diluted share, compared with $4.7 million, or $0.29, in fourth-quarter 2012. Net interest income was $26.3 million versus $24.8 million; noninterest income was $7.4 million versus $10.0 million.

Material changes versus the prior comparable period

  • Full-year net income increased 44% from 2012, with lower loan-loss costs and lower noninterest expense contributing to the improvement. Noninterest expense fell 4.5% to $93.6 million, while noninterest income declined 3.0%.
  • Net interest income increased modestly, but the margin narrowed as yields on loans and other earning assets declined. Lower funding costs partly offset that pressure.
  • Loan balances increased 6.8%; commercial real estate remained the largest portfolio component. The allowance fell from $42.6 million to $38.2 million, while the company made several changes to its allowance estimation methods during 2013. Management said the changes increased the year-end allowance by about $3.5 million compared with the amount that would have resulted without those changes.
  • Available-for-sale securities decreased to $104.6 million, while the company established a $240.5 million held-to-maturity portfolio. The held-to-maturity securities had $7.0 million of gross unrealized losses at year-end; management attributed these mainly to interest rates and reported no other-than-temporary impairment.
  • The quarterly common dividend increased during 2013 from $0.09 to $0.11 per share. The company paid $0.42 per share for the year.

Outlook, commentary, risks, contingencies, and unusual items

  • Management expected loan demand to be modest in 2014, subject to economic and competitive conditions. The filing provides no earnings or revenue guidance.
  • On January 21, 2014, TriCo agreed to acquire North Valley Bancorp in a stock transaction at a fixed exchange ratio of 0.9433 TriCo shares per North Valley share. North Valley shareholders would own about 28.6% of the combined company; closing was expected in the second or third quarter of 2014, subject to approvals and other conditions. The pro forma company would have had approximately $3.61 billion in assets. A shareholder lawsuit seeking, among other relief, to block the merger was filed in January 2014; TriCo said the outcome was not predictable. Certain termination circumstances could require a $3.8 million fee.
  • Key operating risks include California economic conditions, the concentration of lending in real estate (about 90.4% of loan-book value was real-estate-collateralized), interest-rate movements, and the ongoing California drought’s potential effects on agricultural borrowers and local businesses. The company also cited competition, regulatory and compliance costs, and credit-loss estimation risk.
  • The bank paid a $2.429 million employment-class-action settlement in September 2013. A separate former-employee termination lawsuit remained pending; the company denied the allegations. The filing also describes potential exposure related to Visa litigation through the bank’s restricted Class B shares.
  • Management and the external auditor concluded that internal control over financial reporting was effective as of December 31, 2013. The financial statements received an unqualified audit opinion.

Most important facts an investor should verify

  • Whether the North Valley merger closed as planned, its final terms and costs, and whether projected integration benefits were achieved.
  • Whether the 2013 improvement in earnings is sustainable without another unusually low or negative loan-loss provision, and how allowance methodology changes affect comparability.
  • Subsequent trends in nonperforming loans, charge-offs, criticized and classified credits, and collateral values—especially in commercial real estate and agricultural lending.
  • How deposit growth, liquidity, and the large cash and securities position evolve, including the effect of held-to-maturity securities’ unrealized losses and changes in interest rates.
  • Whether the drought, pending litigation, regulatory changes, or other contingencies result in material credit losses, expenses, or constraints on dividends.