TriCo Bancshares — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. TriCo is a California bank holding company whose principal subsidiary, Tri Counties Bank, operates a community-banking business in Northern and Central California. Comparisons below are with Q3 or the first nine months of 2011, or with December 31, 2011 for balance-sheet figures.
Financial performance
Amounts are in millions except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $25.6 | $22.0 | $76.6 | $65.5 |
| Provision for loan losses | $0.5 | $5.1 | $7.9 | $17.6 |
| Noninterest income | $9.1 | $14.7 | $28.0 | $32.3 |
| Noninterest expense | $25.6 | $20.9 | $72.9 | $60.6 |
| Net income | $5.0 | $6.5 | $14.3 | $12.0 |
| Diluted EPS | $0.31 | $0.40 | $0.89 | $0.75 |
| Net interest margin, FTE | 4.37% | 4.34% | 4.38% | 4.32% |
| Efficiency ratio, FTE | 73.5% | 56.7% | 69.6% | 61.9% |
- Q3 net income declined despite stronger net interest income and a sharply lower loan-loss provision. The 2011 quarter included a $7.575 million Citizens acquisition bargain-purchase gain; excluding it, noninterest income increased year over year.
- Nine-month net income increased 18.5%. Net interest income growth reflected higher average loan balances and loan yields, partly associated with the Citizens acquisition. Acquisition-related loan discount accretion contributed $5.9 million of interest income in the first nine months of 2012.
- Q3 return on assets was 0.80% and return on equity 8.85%, versus 1.17% and 12.41%, respectively, in Q3 2011.
Financial position, cash flow, and capital
- At September 30, total assets were $2.515 billion, loans $1.576 billion, deposits $2.202 billion, and shareholders’ equity $227.2 million. Compared with year-end 2011, assets decreased $40.1 million; loans increased $24.6 million (about 1.6%); deposits increased $11.1 million; and equity increased $10.8 million.
- Cash and cash equivalents were $622.5 million, down from $637.3 million at year-end. Cash at the Federal Reserve and other banks plus available-for-sale securities totaled $741.9 million. The company reported $32.4 million of operating cash flow for the nine months, compared with $22.7 million in 2011.
- Financing activities used $56.4 million of cash, principally reflecting a $63.3 million reduction in other borrowings. Other borrowings were $9.3 million at quarter-end, compared with $72.5 million at year-end; junior subordinated debt remained $41.2 million.
- Deposits funded the majority of liabilities. The Bank reported no outstanding borrowings on its FHLB and Federal Reserve credit lines, with stated unused capacity of $486.5 million and $88.1 million, respectively, plus $5.0 million of correspondent-bank lines.
- The Bank was classified as well capitalized. Its total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 14.25%, 12.98%, and 9.76%; consolidated ratios were 14.36%, 13.09%, and 9.85%. Consolidated equity was 9.03% of assets.
Material changes, credit quality, and other developments
- Nonperforming assets fell to $91.8 million, or 3.65% of assets, from $102.1 million and 3.99% at year-end 2011. Nonperforming loans were $81.6 million, or 5.18% of total loans, compared with $85.7 million and 5.53% at year-end.
- The allowance for loan losses was $44.1 million, or 2.80% of loans, and equaled 54% of nonperforming loans. Nine-month net charge-offs were $9.7 million, down from $14.9 million in the comparable 2011 period. Management attributed the Q3 provision decline to improved collateral values and estimated cash flows on certain problem and acquired loans, and lower nonperforming loans.
- Commercial real estate was the largest loan category at $873.4 million. Management identified ongoing credit risks from borrower performance, collateral values, economic conditions, and real-estate market conditions. Originated troubled debt restructurings were $63.8 million at quarter-end; five previously restructured loans totaling $1.0 million defaulted during Q3.
- During Q1, management changed elements of its allowance methodology, including adopting loss-migration analysis and adding consumer credit-score and delinquency considerations. The filing reports a net $1.388 million reduction in the calculated allowance from the changes in Q1; its detailed discussion also describes offsetting methodology impacts.
- Noninterest expense included a $2.09 million accrual for a tentative employment-classification class-action settlement, subject to court approval. The stated settlement range was $2.04 million to $2.50 million, depending mainly on claims filed.
- The Citizens acquisition continued to affect comparisons and results, including staffing and operating expenses and acquired-loan discount accretion. The Bank completed systems conversion and consolidated the acquired Auburn branch in Q1 2012.
Outlook, risks, and contingencies
- The filing provides no specific earnings, revenue, or margin guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Key risks include credit losses and collateral valuation, particularly in real-estate and consumer lending; changes in economic conditions; and the accuracy of estimates for acquired loans and FDIC indemnification assets. Citizens loans have no FDIC loss-sharing protection; Granite covered assets are subject to an FDIC loss-sharing agreement and compliance requirements.
- Commitments to extend credit totaled approximately $527.7 million, with $2.7 million of standby letters of credit and $67.9 million of unused overdraft privileges. These are contractual amounts and are not necessarily expected to be drawn.
- Management reported effective disclosure controls as of September 30, 2012, and no material change in internal control over financial reporting during the quarter. It stated that market-risk disclosures had no material change from the 2011 Form 10-K.
- Forward-looking statements are subject to uncertainties; the company said it does not undertake to update them after the report date.
Important facts for investors to verify
- Whether credit quality continues to improve, including trends in nonperforming assets, charge-offs, TDR defaults, and collateral-dependent loans.
- The sustainability of earnings growth, given acquisition-related loan accretion, lower credit provisions, higher operating expenses, and the absence of the prior-year bargain-purchase gain.
- The final court-approved amount and timing of the employment-class action settlement.
- The adequacy of the loan-loss allowance and the effects of management’s revised estimation methodology.
- Liquidity and capital availability, including borrowing-line conditions, regulatory restrictions on Bank dividends, and requirements under the Granite FDIC loss-sharing agreement.