TriCo Bancshares — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This annual filing also reports fourth-quarter results. TriCo is a California bank holding company; its principal subsidiary, Tri Counties Bank, serves Northern and Central California through 67 branches.
Financial results and condition
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net interest income | $156.0 million | $116.4 million |
| Net interest margin (FTE) | 4.32% | 4.17% |
| Noninterest income | $45.3 million | $34.5 million |
| Noninterest expense | $130.8 million | $110.4 million |
| Benefit from reversal of loan-loss provision | $2.2 million | $4.0 million |
| Net income | $43.8 million | $26.1 million |
| Diluted earnings per share | $1.91 | $1.46 |
| Return on average assets / equity | 1.11% / 10.04% | 0.87% / 8.67% |
| Efficiency ratio | 64.7% | 72.9% |
- Fourth quarter: Net income was $11.4 million and diluted EPS was $0.50, versus $5.7 million and $0.25 in Q4 2014.
- Balance sheet at year-end: Assets were $4.22 billion, loans net of allowance $2.49 billion, deposits $3.63 billion, and shareholders’ equity $452.1 million. Total loans before allowance were $2.52 billion, up 10.5% year over year.
- Asset quality: Nonperforming loans were $37.1 million, or 1.47% of loans, versus $47.6 million and 2.08% a year earlier. Nonperforming assets were $42.5 million, or 1.01% of assets. The $36.0 million loan-loss allowance equaled 1.43% of loans and 97% of nonperforming loans.
- Cash flow and liquidity: Operating activities provided $54.8 million; investing activities used $604.3 million, including net cash deployed into loans and securities; financing activities provided $242.2 million, mainly from deposit growth. Cash and cash equivalents fell to $303.5 million from $610.7 million. Available-for-sale securities plus cash and cash equivalents above reserve requirements totaled $637.7 million, or 15.1% of assets. The Bank also had $15 million of correspondent lines and substantial available secured borrowing capacity.
- Debt and capital: Year-end junior subordinated debt was $56.5 million carrying value ($62.9 million face value); other borrowings were $12.3 million. Consolidated total risk-based capital was 15.09%, common equity Tier 1 was 12.27%, and Tier 1 leverage was 10.79%. The Bank exceeded applicable “well capitalized” thresholds.
Material changes versus comparable periods
- Net income rose about 68% year over year. Net interest income (FTE) increased 34.4%, driven principally by growth in average loans and investments; the North Valley acquisition contributed to the larger balances. Average loan and investment yields declined.
- Noninterest income increased 31.4%, with higher deposit service charges and ATM/interchange fees. Management attributed much of the increase to the North Valley acquisition and also cited $870,000 of recoveries on previously charged-off acquired loans.
- Noninterest expense increased 18.5%, chiefly reflecting the acquired business and higher salaries, benefits, occupancy and operating costs. Merger expense declined to $586,000 from $4.9 million in 2014.
- The North Valley Bancorp acquisition closed in October 2014; therefore, 2015 includes a full year of its operations, while 2014 included only the post-acquisition period. It added approximately $935 million of assets at mid-2014 and involved issuing about 6.58 million TriCo shares.
- The provision benefit narrowed to $2.2 million from $4.0 million. Management cited improved collateral values, estimated cash flows and lower nonperforming loans, partly offset by loan growth. A 2015 allowance-methodology change increased the recorded allowance by $1.318 million relative to management’s estimate under the prior methodology.
Outlook, risks and unusual items
- TriCo agreed to acquire three Bank of America branches in Humboldt County, expected in March 2016, with approximately $235 million of deposits and $400,000 of loans; the deposit premium is 1.91%. Completion and integration remain prospective.
- Management expected continued dividends, subject to Board discretion, earnings, capital, asset quality and regulatory limits. The Bank could pay $73.3 million in dividends to the parent without prior state approval at year-end.
- Management highlighted sensitivity to interest rates, competition, California economic and real-estate conditions, and the state’s continuing drought. Approximately 91% of the loan portfolio was collateralized by real estate, substantially all in California; agricultural lending and related local businesses face drought exposure.
- Interest-rate simulations estimated a 1.95% decline in next-12-month net interest income under a +200 basis-point gradual-rate scenario, and a 10.9% decline in modeled market value of equity under an immediate +200-basis-point shock. These are model estimates with assumptions, not forecasts.
- Unusual income included $10.1 million of purchased-loan discount accretion and a $728,000 recovery of interest on one previously nonaccrual originated loan. The FHLB also paid a special $626,000 cash dividend.
- Two California employment-related class actions remained pending; TriCo and the Bank denied the allegations and planned mediation. A North Valley merger-related shareholder suit was settled, with a $250,000 fee award; the liability had been recorded in acquisition accounting. Management did not expect the pending proceedings to materially affect results.
- The filing identifies risks from loan losses and allowance estimates, California real-estate concentration, drought, low or changing interest rates, competition, regulation, acquisition integration, goodwill impairment, and technology or cybersecurity disruptions. Management and the auditor reported effective internal control over financial reporting at year-end.
Important facts for investors to verify
- How much of the 2015 earnings increase is attributable to the full-year North Valley contribution, loan-growth economics, purchase-accounting accretion, and provision reversals—and how sustainable those sources are.
- Whether credit quality and the $36.0 million allowance remain adequate as commercial real-estate and construction lending grow; review the $9.6 million environmental-factor allowance and the allowance-methodology change.
- Progress and final economics of the Humboldt County branch-and-deposit purchase, including deposit retention and integration costs.
- Deposit mix, funding costs and liquidity following the year’s significant investment purchases and decline in cash balances; also assess rate sensitivity against actual results.
- Potential consequences of California drought and real-estate conditions for collateral values, borrowers and nonperforming assets, as well as developments in the employment litigation.