Business context and reporting period
TriCo Bancshares, the bank holding company for Tri Counties Bank, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The Bank operates in 29 California counties, with community banking as its sole reported segment.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $63.5 million | $64.7 million | $191.3 million | $192.9 million |
| Provision for credit losses | $7.6 million | ($0.3) million reversal | $38.0 million | ($1.4) million reversal |
| Non-interest income | $15.1 million | $14.1 million | $38.6 million | $39.3 million |
| Non-interest expense | $46.7 million | $46.3 million | $137.0 million | $138.5 million |
| Net income | $17.6 million | $23.4 million | $41.2 million | $69.2 million |
| Diluted EPS | $0.59 | $0.76 | $1.37 | $2.25 |
| FTE net interest margin | 3.72% | 4.44% | 4.02% | 4.48% |
| Efficiency ratio | 59.44% | 58.82% | 59.59% | 59.64% |
At September 30, 2020, total assets were $7.45 billion, loans were $4.83 billion before the allowance ($4.74 billion net), deposits were $6.34 billion, and shareholders’ equity was $902.3 million. Cash and cash equivalents were $652.6 million, compared with $276.5 million at year-end 2019. The loan-to-deposit ratio was 76.12%. Other borrowings were $27.1 million and junior subordinated debt was $57.5 million. The Bank’s capital ratios exceeded “well-capitalized” regulatory thresholds; its total capital ratio was 15.14%, and common equity Tier 1 was 13.89%.
For the first nine months, operating cash flow was $78.6 million; investing activities used $639.9 million, while financing activities provided $937.4 million, principally reflecting a $973.6 million increase in deposits. The quarterly dividend was $0.22 per share.
Material changes versus comparable periods
- Q3 net income fell 24.7% year over year, and nine-month net income fell 40.5%, largely reflecting higher credit-loss provisioning and lower net interest margin.
- Q3 FTE net interest margin declined 72 basis points year over year and 38 basis points from the prior quarter. Lower market rates reduced asset yields, partly offset by lower deposit and borrowing costs.
- The allowance for credit losses rose to $87.6 million, or 1.81% of loans, from $30.6 million at year-end 2019. The increase includes the $18.9 million CECL adoption adjustment and pandemic-related forecast and qualitative reserves.
- Loans increased 12.0% from year-end; growth included $437.8 million of outstanding PPP loans. Deposits grew 18.1%, leaving excess funds temporarily placed in cash and securities.
- Nonperforming assets increased to $25.0 million, or 0.34% of assets, from $19.4 million at year-end. Loans graded Special Mention rose to $147.3 million from $44.2 million at year-end; management attributed a substantial portion of the quarter’s increase to one commercial real estate relationship.
- Q3 loan-sale gains increased to $3.0 million from $1.2 million, while deposit service charges fell $1.0 million. Nine-month expenses declined modestly, with lower travel, advertising and other costs partly offset by higher salaries and benefits.
Outlook, commentary and risks
The filing provides no specific earnings or growth guidance. Management said economic forecasts used in its credit-loss estimate pointed to an extended pandemic-related recession, partly offset by government stimulus, and considered the allowance adequate at quarter-end; it cautioned that actual losses could be higher. COVID-19, unemployment, borrower performance, California real estate values, low interest rates, deposit retention, and market and operational disruptions are identified as significant risks.
At September 30, $130.9 million of COVID-related modified loans remained outstanding, out of approximately $422.5 million modified during the first nine months. Management believed borrowers could generally resume normal payments but gave no assurance and downgraded the risk grades of deferral-modified credits pending payment performance. PPP participation also carries forgiveness, SBA-guaranty, compliance and litigation risks. Management said ordinary-course legal proceedings were not expected to materially affect results. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Track future credit deterioration, criticized loans, delinquencies and COVID-related deferral performance, especially in commercial real estate and among PPP borrowers.
- Assess whether the $87.6 million allowance adequately reflects the duration and severity of economic stress and the assumptions in the CECL forecast.
- Monitor margin sensitivity to persistently low rates, including the filing’s disclosure that most variable-rate loans were already at their floor.
- Reconcile the filing’s differing PPP balance disclosures: $437.8 million in the loan notes and MD&A versus $425.9 million in the risk-factor discussion.
- Reconcile share repurchase disclosures: the notes report $24.8 million of plan repurchases for the first nine months, while MD&A reports $7.7 million under the plan. The distinction is not clear from the filing text.
- Evaluate the sustainability of earnings excluding PPP fees and elevated mortgage loan-sale gains, and the impact of deposit growth on cash deployment and asset yields.