TriCo Bancshares (NASDAQ: TCBK) — 2023 Form 10-K
Business context and reporting period. This is an annual report for the year ended December 31, 2023, not a standalone fourth-quarter report. TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank with approximately $9.9 billion in assets and operations across 31 California counties. The 2022 comparison includes Valley Republic Bancorp only from its March 25, 2022 acquisition date, which affects year-over-year comparisons.
Key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Net interest income (GAAP) | $356.7 million | $346.0 million |
| Net interest income (FTE, non-GAAP) | $358.2 million | $347.5 million |
| Net interest margin (FTE) | 3.96% | 3.88% |
| Net income | $117.4 million | $125.4 million |
| Diluted EPS | $3.52 | $3.83 |
| Provision for credit losses | $24.0 million | $18.5 million |
| Noninterest income | $61.4 million | $63.0 million |
| Noninterest expense | $233.2 million | $216.6 million |
| Efficiency ratio | 55.77% | 52.97% |
| Return on average assets / equity | 1.19% / 10.65% | 1.28% / 11.67% |
Balance sheet and funding at year-end: Total assets were $9.91 billion, loans $6.79 billion, investments $2.31 billion, deposits $7.83 billion, other borrowings $632.6 million, and junior subordinated debt $101.1 million. Shareholders’ equity was $1.16 billion; tangible common equity to tangible assets was 8.8%. Cash and cash equivalents were $98.7 million.
Cash flow and liquidity: Operating activities provided $138.9 million in cash. Investing activities provided $28.6 million, while financing activities used $176.0 million. Management reported $3.93 billion of primary liquidity, equal to 50% of deposits and 166% of estimated uninsured deposits of $2.37 billion. The bank had $600 million in FHLB advances outstanding at year-end, including $400 million due January 2, 2024 and $200 million due April 8, 2024.
Credit and securities: The allowance for credit losses was $121.5 million, or 1.79% of loans, versus $105.7 million, or 1.64%, in 2022. Net charge-offs were $6.6 million, compared with net recoveries of $0.3 million. Nonperforming loans rose to 0.47% of loans from 0.33%; nonperforming assets were $34.6 million, or 0.35% of assets. Available-for-sale securities had $232.3 million of gross unrealized losses at year-end; accumulated other comprehensive loss was $153.2 million, net of tax.
Material changes versus 2022
- Net income declined $8.0 million, or 6.4%, and diluted EPS fell 8.1%, despite higher net interest income.
- FTE net interest income increased 3.1%; the 8-basis-point NIM improvement reflected higher asset yields, partly offset by higher deposit and borrowing costs. Interest expense rose to $81.7 million from $9.5 million.
- Average loans increased 11.7%, while average securities decreased 7.3%. Year-end loans rose 5.3%; deposits fell 5.9%, including a decline in noninterest-bearing deposits from $3.50 billion to $2.72 billion. Borrowings increased substantially to help fund the balance sheet.
- Noninterest expense increased 7.6%, including higher staffing, technology, professional fees, and regulatory costs. The comparison also reflects 2022 VRB acquisition expenses of $6.3 million; none were recorded in 2023.
- Credit provision rose by $5.5 million, and nonperforming assets increased 39.7% from year-end 2022.
- Shareholders’ equity increased to $1.16 billion, partly reflecting $40.7 million of other comprehensive income, including a recovery in AFS securities values. The company paid $1.20 per share in dividends, up from $1.10.
Outlook, risks and unusual items
- Outlook: The filing provides no numerical earnings or growth guidance. Management said 2024 loan and deposit trends depend on economic conditions, competition, customer activity, and interest rates; it expected deposit competition to remain challenging. Management believed liquidity and capital were sufficient for foreseeable cash needs.
- Interest-rate exposure: Model estimates show a 300-basis-point instantaneous rate increase would reduce 12-month net interest income by 8.9%; a 300-basis-point decrease would increase it by 1.9%. These are scenario estimates, not forecasts, and assume no balance-sheet changes or mitigating actions.
- Credit and concentration: CRE represented 64.7% of loans, and approximately 90.5% of loans were secured by real estate, substantially all in California. CRE concentration net of owner-occupied loans was 328.6% of capital. Management cited California unemployment, elevated corporate bond yields, inflation, and potential recession conditions in its credit-reserve assessment.
- Deposit and liquidity sensitivity: Deposits decreased $495.0 million during 2023, and uninsured deposits were estimated at $2.37 billion. Management noted uncertainty around deposit retention and the potential need to use securities or borrowings for liquidity.
- Cybersecurity incident: A February 2023 attack temporarily disrupted internal systems and exposed data relating to approximately 86,000 individuals. Customer-facing banking operations resumed within two days; internal systems and communications took about a week to restore. The company did not pay ransom. Class-action litigation and governmental inquiries remain unresolved, and their outcomes and potential costs are uncertain.
- Regulatory threshold: The bank was just below $10 billion in assets at year-end. Crossing the threshold under applicable measurement rules could bring additional regulatory requirements, including CFPB examination authority and debit-interchange fee restrictions.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses’ qualitative forecast factors were identified as a critical audit matter.
Important facts for investors to verify
- How deposit balances, deposit pricing, uninsured deposits, and reliance on short-term borrowings evolved after year-end, including repayment or refinancing of the $600 million of FHLB advances due in early 2024.
- Whether credit quality weakened further, particularly in CRE and farmland exposures, and whether the $121.5 million allowance adequately reflects emerging losses.
- The size and duration of unrealized securities losses, available liquidity under stress, and any securities sales that could realize losses.
- Updates on the cyber incident’s litigation, regulatory inquiries, insurance coverage, remediation costs, and any recorded or potential loss contingencies.
- The bank’s asset trajectory relative to the $10 billion regulatory threshold and the related costs or revenue effects.