TriCo Bancshares — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are against December 31, 2011 unless otherwise noted. TriCo operates through Tri Counties Bank as a California community bank. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Interest and dividend income | $27.2 | $24.4 |
| Net interest income (FTE) | $25.1 | $21.8 |
| Net interest margin (FTE) | 4.30% | 4.31% |
| Provision for loan losses | $4.0 | $7.0 |
| Noninterest income | $8.3 | $9.4 |
| Noninterest expense | $22.9 | $19.7 |
| Net income | $3.9 | $2.8 |
| Diluted earnings per share | $0.25 | $0.17 |
Return on assets was 0.63% (0.51%); return on equity was 7.14% (5.50%). The efficiency ratio increased to 68.7% from 63.2%. The company paid a $0.09-per-share dividend, unchanged from Q1 2011.
Financial position, cash flow and credit
- Assets and funding: Total assets were $2.533 billion; deposits were $2.170 billion, down 0.9% from year-end. Loans were $1.511 billion gross and $1.466 billion net, down 2.6% and 2.6%, respectively, from year-end. Shareholders’ equity was $219.0 million.
- Liquidity: Cash and cash equivalents were $681.8 million. Cash at the Federal Reserve and other banks plus available-for-sale securities totaled $819.4 million. Operating cash flow was $18.2 million versus $10.3 million a year earlier; cash increased $44.5 million during the quarter.
- Debt: Other borrowings were $69.1 million and junior subordinated debt was $41.2 million. The $50 million repurchase-agreement borrowing carries a 4.72% fixed rate and is callable by the lender quarterly, with final maturity in August 2012. The Bank reported $501.3 million available under its FHLB line and $65.9 million under its Federal Reserve line, plus $5 million in correspondent lines.
- Credit quality: Nonperforming assets were $97.4 million, or 3.84% of assets, down from $102.1 million and 3.99% at year-end. Nonperforming loans were $82.6 million, or 5.46% of loans. Net charge-offs were $4.5 million; annualized net charge-offs to average loans were 1.17%, versus 1.82% a year earlier.
- Reserves and capital: The allowance for loan losses was $45.5 million, or 3.01% of loans; management judged it adequate but cautioned that adverse conditions could increase losses. The Bank was categorized as well capitalized; its total risk-based capital ratio was 14.28%, Tier 1 risk-based ratio 13.01%, and leverage ratio 9.53%.
Material changes and drivers
- Net income rose 40% year over year. FTE net interest income increased 15.2%, reflecting higher average loan balances and yields, partly related to the September 2011 Citizens acquisition, and lower deposit costs. The cost of deposits fell to 0.22% from 0.39%.
- Citizens contributed approximately $4.6 million of interest income in Q1 2012, including $2.0 million of acquired-loan discount accretion. Its reported Q1 contribution also included $1.5 million of loan-loss provision and $2.4 million of noninterest expense. Conversion-related items included a $230,000 fixed-asset disposal loss and $415,000 of outside data-processing expense. Citizens was acquired without FDIC loss sharing.
- Noninterest income declined 11.6%, principally because the change in the FDIC indemnification asset was negative $0.4 million versus positive $1.7 million a year earlier, and foreclosed-asset sale results worsened. Higher gains on loan sales and investment-product commissions partly offset the decline.
- Noninterest expense rose 16.5%, including higher salaries, staffing, occupancy, and data-processing costs; average full-time-equivalent staff increased to 731 from 670. The acquisition and ongoing credit-resolution activity contributed to expense growth.
- Gross loans decreased during the quarter amid weak demand. Loan balances at quarter-end were nevertheless higher year over year, with the comparison affected by the Citizens acquisition. Deposits declined $20.8 million during Q1.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue, or margin guidance. Management said weak loan demand and unattractive investment yields limited deployment of excess deposits into higher-yielding assets. Forward-looking statements are subject to risks and are not guaranteed; the company disclaims an obligation to update them.
- Management changed elements of its allowance methodology, including adopting historical loss migration analysis and using consumer credit scores to identify risk in certain junior-lien home-equity loans. The company reported a net $1.388 million reduction in the calculated allowance from the methodology changes. Separately, $6.541 million of performing junior liens were moved from Pass to Special Mention under regulatory guidance, adding $1.596 million to provision expense.
- Acquired-asset valuations are subject to estimation risk. Citizens has no FDIC loss-share protection; Granite assets have FDIC loss sharing, generally at 80%, subject to agreement requirements. Failure to comply could jeopardize coverage. The company reported $48.9 million of assets covered by the referenced loss-sharing arrangements.
- Commitments to extend credit totaled $544.2 million; standby letters of credit were $4.5 million and available overdraft privileges were $63.7 million. These commitments do not necessarily represent future cash requirements.
- Management said ordinary-course legal proceedings were not expected to materially affect financial position, results, or cash flows. Visa-related litigation could affect the value or conversion ratio of the Bank’s restricted Visa Class B shares; their estimated Class A equivalent value was $588,000 and was not recorded as an asset.
Important facts for investors to verify
- Whether weak loan demand persists and how it affects asset yields, loan growth, and excess-liquidity deployment.
- Trends in criticized, past-due, nonaccrual, and restructured loans—especially commercial real estate and junior-lien home-equity exposures—and whether charge-offs or provisions rise.
- The sustainability of earnings after acquired-loan discount accretion and Citizens integration costs; also reconcile the decline in noninterest income and rise in operating expenses.
- Whether the $45.5 million allowance remains adequate under the revised methodology and changing economic or collateral conditions.
- Deposit trends, near-term borrowing maturities and lender call rights, availability of contingent funding, and continued compliance with Granite FDIC loss-share requirements.