TriCo Bancshares (NASDAQ: TCBK) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; the filing also reports unaudited fourth-quarter results. Filed March 1, 2022. TriCo is a California bank holding company whose principal subsidiary, Tri Counties Bank, operates a community banking business across 31 California counties.
Financial results and position
- Full-year earnings: Net income was $117.7 million, up 81.5% from $64.8 million in 2020. Diluted EPS was $3.94 versus $2.16. Return on average assets was 1.43% (0.91% in 2020), and return on average equity was 12.10% (7.18%).
- Revenue and margins: Net interest income was $271.5 million, up 5.4%; noninterest income was $63.7 million, up 15.3%. Fully tax-equivalent net interest margin declined to 3.58% from 3.96%. The efficiency ratio improved to 53.18% from 58.40%.
- Credit costs and asset quality: The company recorded a $6.8 million benefit from credit losses, compared with a $42.8 million provision in 2020. The allowance for loan credit losses was $85.4 million, or 1.74% of loans, versus $91.8 million, or 1.93%. Nonperforming loans were $30.4 million (0.61% of loans), compared with $26.9 million (0.56%) a year earlier.
- Balance sheet: Total assets were $8.61 billion, up 12.8%; loans were $4.92 billion, up 3.2% overall and 9.4% excluding PPP loans. Deposits increased 13.2% to $7.37 billion; noninterest-bearing deposits were $2.98 billion. Commercial real estate accounted for 67.2% of loans.
- Cash flow and liquidity: Operating activities provided $132.2 million of cash. Cash and cash equivalents were $768.4 million. The company reported $2.98 billion of available-for-sale securities and cash in excess of reserve requirements, equal to 34.5% of assets. It had up to $2.25 billion of FHLB borrowing capacity and $184.7 million from the Federal Reserve available against collateral.
- Debt and capital: Year-end other borrowings were $50.1 million and junior subordinated debt was $58.1 million. The consolidated total risk-based capital ratio was 15.42%, and CET1 was 13.19%. Shareholders’ equity was $1.00 billion; tangible book value was $25.80 per share.
- Shareholder returns: The company paid $1.00 per share in dividends during 2021. It repurchased 63,317 shares under its 2021 authorization. The board’s intention was to continue quarterly dividends, subject to earnings, capital needs, and regulatory constraints.
Fourth-quarter snapshot
Fourth-quarter net income was $28.2 million and diluted EPS was $0.94. Net interest income was $69.8 million; the quarter included a $1.0 million provision for credit losses, following credit-loss benefits in the first three quarters.
Material changes and unusual items
- Earnings rebounded from 2020, primarily reflecting the swing from a large pandemic-related credit provision to a credit-loss benefit in 2021, alongside higher net interest and noninterest income and lower total noninterest expense.
- Interest income increased, but yields on earning assets fell to 3.65% from 4.11%; lower funding costs partly offset asset-yield compression. FTE net interest margin fell 38 basis points.
- Noninterest income growth included higher ATM and interchange fees, PPP loan fees, and gains on loan sales. PPP fees recognized were $14.1 million; more than 90% of originated PPP loans had been forgiven and repaid by year-end.
- Noninterest expense fell to $178.3 million from $182.8 million. It included $1.5 million of expenses related to the proposed Valley Republic Bancorp merger. The allowance and credit-loss estimates remain sensitive to forecasts and management judgments.
- Available-for-sale securities generated a $13.8 million after-tax other comprehensive loss in 2021, reducing accumulated other comprehensive income to $1.0 million from $12.3 million.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Management warned that low or flat interest rates could pressure net interest income and profitability through at least 2022, while noting the Federal Reserve was expected to begin raising rates during 2022. Its year-end rate simulation estimated NII sensitivity of +3.6% under a +200-basis-point shock and -4.9% under a -100-basis-point shock; these are model estimates, not forecasts.
- The proposed all-stock Valley Republic Bancorp merger was valued at approximately $177.5 million. FDIC and California regulatory approvals had been received; Federal Reserve approval remained pending. The company expected closing in the first quarter of 2022. The combined bank was expected to exceed $10 billion in assets, potentially bringing additional regulatory oversight and costs.
- Key risks include California economic and real-estate concentration, with approximately 92.6% of loans collateralized by real estate; credit-loss uncertainty; interest-rate and securities valuation risk; inflation and supply-chain effects; continued COVID-19 impacts; competition for deposits and customers; and cybersecurity, operational, and regulatory risks. Estimated uninsured deposits were $2.19 billion.
- COVID-related modifications outstanding at year-end totaled $18.4 million, all in commercial real estate, and were expected to conclude during the first half of 2022. The company said it believed borrowers could resume normal payments but had downgraded risk ratings pending demonstrated performance.
- The company reported no material pending legal proceedings and no material cybersecurity incidents identified during 2021. Management and the auditor concluded internal control over financial reporting was effective; the auditor’s opinion on the financial statements was unqualified. The allowance for credit losses was identified as a critical audit matter.
Important facts for investors to verify
- Whether the Valley Republic merger closed as expected, its final accounting and integration costs, and the combined entity’s regulatory status and asset size.
- Subsequent trends in net interest margin, deposit pricing and composition, loan growth, and sensitivity to actual rate changes.
- Whether nonperforming loans and the allowance for credit losses remain appropriate, particularly for commercial real estate and farmland exposures.
- Whether COVID-modified borrowers resumed contractual payments and whether additional modifications or credit losses emerged after year-end.
- The effect of interest-rate changes on the securities portfolio, accumulated other comprehensive income, and tangible capital.
- Whether reported liquidity, uninsured deposit levels, and contingent borrowing capacity remain adequate under stress.