TriCo Bancshares (TCBK) — Q3 2023 Form 10-Q
Business context and reporting period
TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank operating in 31 counties. This unaudited quarterly report covers the three and nine months ended September 30, 2023. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net interest income | $88.1 | $94.1 in Q3 2022 |
| Net interest margin, FTE | 3.88% | 4.02% in Q3 2022 |
| Provision for credit losses | $4.2 | $3.8 in Q3 2022 |
| Noninterest income | $16.0 | $15.6 in Q3 2022 |
| Noninterest expense | $57.9 | $54.5 in Q3 2022 |
| Net income | $30.6 | $37.3 in Q3 2022 |
| Diluted EPS | $0.92 | $1.12 in Q3 2022 |
| Return on average assets | 1.23% | 1.46% in Q3 2022 |
For the first nine months, net income was $91.3 million versus $89.1 million; diluted EPS was $2.74 in both periods. FTE net interest margin was 4.01% versus 3.71%. Noninterest expense rose 10.0% to $172.9 million, while noninterest income fell 3.8% to $45.4 million. The nine-month efficiency ratio increased to 54.82% from 53.42%.
At September 30, total assets were $9.90 billion, loans $6.71 billion, deposits $8.01 billion, and shareholders’ equity $1.07 billion. Versus December 31, 2022, loans rose $258.2 million while deposits declined $319.4 million. Noninterest-bearing deposits were 35.7% of deposits, down from 42.0%. Other borrowings were $538.0 million, including $500.0 million of short-term FHLB borrowing; junior subordinated debt was $101.1 million. The Bank reported no brokered deposits and no FRB borrowings.
Cash and cash equivalents were $111.1 million. For the nine months, operating cash flow was $102.4 million, investing cash outflow $13.6 million, and financing cash outflow $84.9 million. Primary liquidity was reported at $4.20 billion, or 52.5% of deposits; this included borrowing capacity, unpledged AFS securities and cash. Regulatory capital ratios included 14.51% total capital, 12.03% consolidated CET1 and 10.60% leverage; the Bank exceeded well-capitalized thresholds.
The AFS debt portfolio had $2.51 billion amortized cost and $2.17 billion fair value, a $335.7 million gross unrealized loss. Management attributed losses primarily to higher interest rates and stated it did not intend, and was more likely than not not required, to sell the securities before recovery. Accumulated other comprehensive loss was $225.4 million.
Material changes versus prior periods
- Q3 net income declined 18.1% year over year. Higher asset yields did not offset sharply higher deposit and borrowing costs: Q3 interest expense increased to $24.3 million from $2.3 million, while FTE net interest income fell 6.4%.
- Average cost of total deposits reached 0.86% in Q3, compared with 0.04% a year earlier; management reported an 82-basis-point increase since FOMC rate actions began and a 15.6% cycle-to-date deposit beta.
- Loans grew 2.9% and deposits declined 1.1% during Q3. Year over year, deposits fell 7.5% and other borrowings increased by $490.9 million.
- Credit indicators were mixed: nonperforming assets fell to $32.7 million, or 0.33% of assets, from $40.5 million at June 30, but were above $20.9 million a year earlier. Classified loans rose to 1.22% of loans from 0.86% a year earlier; criticized loans improved during Q3 by $44.6 million to $176.2 million.
- Q3 loan charge-offs included $3.6 million on a previously reserved CRE owner-occupied relationship. The allowance for credit losses was $115.8 million, or 1.73% of loans, versus 1.64% at year-end 2022.
- Book value per share was $32.18 and tangible book value per share $22.67, both lower than at June 30, primarily reflecting Q3 AFS securities-related OCI losses.
Outlook, risks, contingencies and unusual items
- No specific earnings or full-year financial guidance is provided. Management said the loan pipeline was sufficient to support its objectives and intends to use securities cash flows to support loan growth or reduce borrowings. It anticipated at least $60 million of securities principal cash flows in Q4 2023 and at least $300 million in 2024 under stated rate and prepayment assumptions.
- Management cited elevated living costs, rapid rate increases and a flat or inverted yield curve as factors informing its expectation that the U.S. could enter a recession within 12 months. It said reserves were being maintained cautiously, including for potential credit weakness and softening California employment data.
- Interest-rate sensitivity scenarios estimated that an instantaneous +300-basis-point move would reduce projected 12-month net interest income by 6.8%; a -300-basis-point move would reduce it by 0.9%. The filing also identifies deposit competition, uninsured deposits, funding costs, California real estate and CRE exposure, and unrealized securities losses as risks.
- The Bank disclosed a February 2023 cyberattack. Its core banking systems were not affected and systems were restored without paying ransom, but the review completed in October identified personal information that may have been impacted. A former employee filed a putative class action in October 2023; the company could not estimate the outcome or potential loss and expects further costs. Insurance may not cover all losses.
- Other unusual cost items included $0.7 million of ATM burglary-related operational losses year to date, estimated customer refunds of $0.8 million related to changes in regulatory requirements, and increased regulatory assessments. Management expects assessments could rise if conditions deteriorate. No material effect from ordinary-course legal proceedings was expected beyond the cyber-related matter.
Most important facts for investors to verify
- Deposit trends, uninsured deposit levels, deposit pricing and the extent and cost of continued FHLB borrowing.
- Whether net interest margin stabilizes as deposit costs and borrowing needs change, and how planned asset mix shifts affect earnings.
- Credit performance—especially CRE and agriculture exposures, classified and nonperforming loans, charge-offs, and allowance assumptions if economic conditions weaken.
- The persistence and capital impact of AFS securities unrealized losses, and the liquidity consequences if securities must be sold.
- The number of people affected by the cyber incident, litigation developments, remediation expenses and insurance recovery.