TriCo Bancshares — Q3 2022 Form 10-Q
Business context and reporting period. Unaudited quarterly report for the three and nine months ended September 30, 2022. TriCo Bancshares is a California bank holding company operating Tri Counties Bank, a community bank serving 31 California counties. Results reflect the March 25, 2022 acquisition of Valley Republic Bancorp (VRB); Q3 includes the combined operations for the full quarter, while year-to-date results include VRB only after closing.
Key financial metrics
| Metric | Q3 2022 / September 30, 2022 | Comparison |
|---|---|---|
| Net interest income | $94.1 million | Up 38.0% from Q3 2021; FTE net interest margin was 4.02%, versus 3.50%. |
| Net income and diluted EPS | $37.3 million; $1.12 | Net income rose from $27.4 million and diluted EPS from $0.92 in Q3 2021. |
| Noninterest income and expense | $15.6 million; $54.5 million | Income rose 3.6% and expense rose 18.9% year over year. Q3 efficiency ratio was 49.63%. |
| Credit provision | $3.8 million | Compared with a $1.4 million provision reversal in Q3 2021. |
| Loans and deposits | $6.31 billion; $8.66 billion | Loans increased $1.43 billion and deposits $1.42 billion year over year, including VRB balances. Organic loans, excluding PPP and acquired loans, grew $216.7 million in Q3, or 14.2% annualized. |
| Assets, cash and securities | Total assets $9.98 billion; cash and cash equivalents $246.5 million; investment securities $2.67 billion | Assets were $8.61 billion and cash $768.4 million at December 31, 2021. AFS securities had $318.2 million of gross unrealized losses at September 30, 2022. |
| Credit quality | Allowance for credit losses $101.5 million, or 1.61% of loans; nonperforming assets $20.9 million, or 0.21% of assets | Allowance was 1.72% of loans and NPAs were 0.37% of assets at September 30, 2021. Q3 nonperforming loans increased $5.5 million from the prior quarter, largely due to one agriculture production relationship. |
| Cash flow, nine months | Operating cash flow $108.0 million; investing cash use $648.5 million; financing cash flow $18.6 million | Cash and equivalents declined $521.9 million from the start of the year to $246.5 million. |
| Debt and capital | Other borrowings $47.1 million; junior subordinated debt $101.0 million. Company total capital ratio 13.97%; Bank 13.86%. | Company and Bank exceeded applicable capital requirements; the Bank remained well capitalized. |
Material changes versus comparable periods
- Q3 net interest income and margin strengthened, with larger earning-asset balances and higher rates contributing. Net interest margin excluding acquired-loan discount accretion and PPP yield was 3.98%.
- For the first nine months, net income was $89.1 million, slightly below $89.4 million in 2021; diluted EPS was $2.74 versus $2.99. Nine-month net interest income rose 22.5% on an FTE basis, while noninterest expense increased 19.4%, including $6.3 million in merger and acquisition costs.
- Rapid rate increases drove a significant decline in AFS securities fair value: accumulated other comprehensive loss shifted from $1.0 million of income at year-end 2021 to a $222.7 million loss. Shareholders’ equity was $990.3 million; book value per share was $29.71, down from $33.64 at year-end.
- VRB contributed acquired assets of $1.36 billion, including $771.4 million of loans and $1.22 billion of deposits. The transaction added $87.1 million of goodwill.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management said higher interest rates were benefiting interest income but noted that rapid Federal Reserve increases, a flattening or inverted yield curve, and weaker consumer sentiment raised recession concerns. It cited inflation, supply-chain disruption and energy-price volatility, and maintained a cautious credit reserve posture.
- Management reported that loan pipelines remained sufficient to support growth, while noting rising rates could moderate customer borrowing decisions. Deposit balances declined $101.0 million during Q3; the loan-to-deposit ratio increased to 72.9%.
- Interest-rate sensitivity simulations estimated that an instantaneous +300 basis-point shock would increase 12-month net interest income 0.5% but reduce market value of equity 2.5%. A -300 basis-point shock was estimated to reduce them 14.0% and 30.1%, respectively. These are model estimates based on a static balance sheet and stated assumptions, not forecasts.
- Risks include California economic and real-estate conditions, recession and borrower performance, deposit funding costs and availability, interest-rate and securities valuation exposure, acquisition integration, and regulatory effects if assets exceed $10 billion. The filing also identifies geopolitical and market volatility, including the war in Ukraine, as risks.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic loan growth persists and how deposit outflows, funding costs and the loan-to-deposit ratio evolve.
- Whether securities-related AOCI losses remain unrealized and whether liquidity or capital needs could require securities sales.
- Trends in criticized and nonperforming loans, particularly the agriculture relationship, and whether the $101.5 million allowance remains adequate.
- Realized benefits and integration costs from VRB, including expense trends and the implications of approaching $10 billion in assets.
- How actual net interest income and deposit repricing compare with the filing’s interest-rate sensitivity assumptions.