TriCo Bancshares — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. TriCo Bancshares is the holding company for Tri Counties Bank, a community bank operating in 28 California counties. Financial amounts below are in U.S. dollars; balance-sheet amounts are as of June 30 unless otherwise noted.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $67.1 million | $64.7 million | $133.5 million | $127.9 million |
| Non-interest income | $16.0 million | $11.7 million | $32.1 million | $23.5 million |
| Non-interest expense | $44.2 million | $45.6 million | $85.8 million | $90.3 million |
| Net income | $28.4 million | $7.4 million | $62.0 million | $23.6 million |
| Diluted EPS | $0.95 | $0.25 | $2.07 | $0.78 |
| FTE net interest margin | 3.58% | 4.10% | 3.66% | 4.22% |
- Q2 net income was below Q1 2021’s $33.6 million ($1.13 diluted EPS), but substantially above Q2 2020. The comparison with 2020 reflects a $22.2 million credit-loss provision in Q2 2020 versus a $0.3 million reversal in Q2 2021.
- Q2 FTE net interest income increased 3.7% year over year, while NIM fell 52 basis points. Management attributed margin pressure to lower yields on non-PPP loans and investments; lower deposit costs and higher loan volume supported net interest income.
- Q2 non-interest income rose 36.9% year over year, notably from ATM/interchange fees and loan-sale gains. Six-month non-interest expense fell 5.0%; average full-time-equivalent staff declined 10.4% year over year.
- Q2 return on average assets was 1.40% and return on average equity was 11.85%. The efficiency ratio was 53.19% versus 59.69% a year earlier.
- Total assets were $8.17 billion, loans $4.94 billion, deposits $6.99 billion, and shareholders’ equity $966.8 million. Deposits increased $486.1 million from year-end 2020; noninterest-bearing deposits were 40.7% of deposits. The loan-to-deposit ratio was 70.72%.
- Cash and cash equivalents were $639.7 million. Investment securities totaled $2.10 billion, including $1.85 billion available for sale. Other borrowings were $40.6 million and junior subordinated debt was $57.9 million. The filing reports no clearer single total for debt beyond these balances.
- Six-month operating cash flow was $58.8 million; investing activities used $571.0 million, principally reflecting securities purchases, and financing activities provided $482.4 million, primarily from deposit growth. Cash and cash equivalents declined $29.8 million over the period.
- Regulatory capital ratios remained above applicable minimums: consolidated total risk-based capital was 15.31%, common equity Tier 1 was 13.04%, and Tier 1 leverage was 9.85%. The Bank exceeded the stated well-capitalized thresholds.
Material changes and asset quality
- Loans increased $181.8 million from December 31, 2020; organic loan growth excluding PPP was $99.2 million in Q2, or 8.6% annualized. Multifamily and residential real estate balances grew, while commercial and industrial and construction balances declined from year-end.
- Available-for-sale securities increased $433.3 million from year-end, as excess deposits were deployed into investments. Management said elevated liquidity was expected to continue through 2021 amid uncertainty about COVID-19’s economic effects and future stimulus.
- The allowance for credit losses was $86.1 million, or 1.74% of loans, versus 1.93% at year-end 2020. Management considered the allowance adequate but cautioned that adverse economic conditions could increase losses.
- Nonperforming assets were $35.0 million, or 0.44% of assets, versus $29.7 million and 0.39% at year-end. Nonperforming loans rose to $32.7 million; management said the new Q2 nonperforming loans were believed to be well-secured. Loans past due 30 days or more totaled $9.3 million.
- PPP loans outstanding were $248.6 million gross at June 30, against $640.4 million of originations. $9.0 million of net deferred PPP fees remained to be recognized; nearly 90% of round-one PPP loans had been forgiven and repaid.
Outlook, risks, and unusual items
- No general earnings or revenue guidance is provided. Management intended to deploy excess liquidity and seek higher-yielding assets, including loans, but warned that loan yields could fall faster than deposit costs if rates decline. Interest-rate simulations estimated NII increases of 3.4% under a +200-basis-point shock and 3.8% under a −100-basis-point shock; the −200-basis-point scenario was marked “nm.”
- After quarter-end, TriCo agreed to acquire Valley Republic Bancorp in a stock-and-cash transaction valued at approximately $165.6 million. Valley had approximately $1.36 billion of assets. The transaction was expected to close in Q4 2021, subject to approvals and other conditions. Management estimated 5.5% EPS accretion in 2022, 1.6% tangible-book-value-per-share dilution, and a 2.0-year tangible book value earnback, assuming cost savings of about 17% of Valley non-interest expense; these are estimates, not guarantees. The filing gives July 27 as the agreement date in one section and July 22 in another; verify the definitive agreement and related filings.
- Key risks include economic and COVID-19 developments, California real estate and borrower credit conditions, interest-rate and liquidity changes, competition, operational and cybersecurity events, and the pending acquisition’s regulatory approval, closing, employee/customer retention, and integration risks. The company said ordinary-course legal proceedings were not expected to materially affect its financial position, results, or cash flows.
- Unusual items included a $426,000 gain on disposal of a former branch building in Q2 and significant PPP fee income. Q2 credit-loss expense was a modest reversal, following much larger reversals in Q1 2021 and a large provision in Q2 2020.
Important facts for investors to verify
- Whether NIM pressure persists as excess liquidity is invested and PPP balances and associated fees run off.
- Whether nonperforming loans and criticized credits continue to rise, and whether the $86.1 million allowance remains sufficient under updated economic forecasts.
- Deposit growth, funding costs, liquidity levels, and the company’s ability to shift assets into higher-yielding categories.
- Valley acquisition approvals, final terms and timing, realized cost savings, integration costs, and actual EPS and tangible-book-value effects.
- Reported FTE and efficiency-ratio measures are non-GAAP; review the filing’s definitions and reconciliations when comparing them with other banks.