TriCo Bancshares — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 1, 2021. This is an annual report, with unaudited quarterly results also provided. TriCo is a California bank holding company whose principal subsidiary, Tri Counties Bank, operates 75 branches and two loan production offices across Northern and Central California.
Key financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net interest income | $257.7 million | $257.1 million | Up 0.3% |
| Provision for credit losses | $42.8 million | Benefit of $1.7 million | Significant increase |
| Noninterest income | $55.2 million | $53.5 million | Up 3.1% |
| Noninterest expense | $182.8 million | $185.5 million | Down 1.5% |
| Income before taxes | $87.4 million | $126.8 million | Down 31.1% |
| Net income | $64.8 million | $92.1 million | Down 29.6% |
| Diluted EPS | $2.16 | $3.00 | Down 28.0% |
| Return on average assets / equity | 0.91% / 7.18% | 1.43% / 10.49% | Lower |
| Net interest margin, FTE | 3.96% | 4.47% | Down 51 bps |
Fourth quarter: Net income was $23.7 million, or $0.79 diluted EPS, versus $22.9 million, or $0.75, in Q4 2019. Q4 2020 provision for credit losses was $4.9 million.
Balance sheet, liquidity and capital
- Total assets were $7.64 billion, up 18.1%; total loans were $4.76 billion, up 10.6%. Excluding Paycheck Protection Program (PPP) loans, loans grew 3.0%.
- Deposits increased 21.2% to $6.51 billion, including noninterest-bearing deposits of $2.58 billion, up from $1.83 billion. Cash and cash equivalents were $669.6 million; total investments were $1.72 billion.
- Reported operating cash flow was $114.8 million. Investing activities used $816.3 million, while financing activities provided $1.095 billion, primarily from deposit growth. Cash and cash equivalents ended the year at $669.6 million.
- Cash plus available-for-sale securities totaled $2.01 billion, or 26.3% of assets. The Bank had unused borrowing capacity of up to $1.93 billion at the FHLB and $157.9 million at the Federal Reserve, subject to collateral and terms.
- Other borrowings were $26.9 million; junior subordinated debt was $57.6 million recorded value, with $62.9 million face value of trust preferred securities outstanding. Total shareholders’ equity was $925.1 million.
- At year-end, the Bank’s CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 13.72%, 13.72%, 14.97% and 9.76%, respectively. The filing states the Bank and holding company met applicable capital requirements.
Material changes and credit developments
- CECL adoption on January 1, 2020 increased the allowance for credit losses by $18.9 million and reduced retained earnings by $13.0 million, net of tax. The year-end loan allowance reached $91.8 million, or 1.93% of gross loans, versus $30.6 million, or 0.71%, at year-end 2019. Management attributed much of the increase to deterioration in forecast unemployment and GDP assumptions; it considered the allowance adequate but warned actual losses could differ.
- Nonperforming loans rose to $26.9 million, or 0.56% of loans, from $16.9 million, or 0.39%. Total nonperforming assets increased to $29.7 million. The filing identifies a residential construction loan as a significant Q4 addition and describes it as well secured.
- PPP loans outstanding were $334.0 million across approximately 2,300 loans at year-end, against $438.5 million in originations. About $88.6 million was pending SBA forgiveness; $7.2 million of net deferred PPP fees remained to be recognized.
- COVID-related loan modifications totaled approximately $427.3 million during 2020; $48.4 million remained under modified terms at year-end. Of $5.84 million outstanding on borrowers with a second deferral, $2.0 million was classified as troubled debt restructurings.
- Loan concentration remains material: commercial real estate represented 62.0% of loans, and approximately 86.3% of the loan portfolio was secured by California real estate.
Management commentary, outlook and risks
- Lower interest rates reduced asset yields: total earning-asset yield fell to 4.11% from 4.74%, while the cost of interest-bearing liabilities declined to 0.25% from 0.42%. Higher average loan balances largely offset the lower yields, leaving FTE net interest income nearly unchanged.
- Management expected persistently low rates to weigh on net interest income, margin, borrowing costs and profitability at least through 2021. The filing provides no quantified earnings or balance-sheet guidance.
- Noninterest income benefited from mortgage loan sale gains, which rose to $9.1 million from $3.3 million, while service charges on deposit accounts fell to $13.9 million from $16.7 million. Salary and benefit expense increased 5.7%, including higher retirement and insurance costs; other operating expenses declined.
- Principal uncertainties include the pandemic and economic recovery, borrower repayment and collateral values, California unemployment and GDP, real-estate concentration, and sustained low rates. Other disclosed risks include competition, cybersecurity and vendor disruption, regulatory and compliance costs, and the transition away from LIBOR.
- The company paid $0.88 per share in 2020 dividends and repurchased 858,717 shares under its authorized plan. Management said quarterly dividends were intended to continue, subject to earnings, capital, asset quality, regulatory limits and Board discretion.
- The company reported no material pending legal proceedings. Management and the independent auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion and identified CECL, loan risk ratings and economic forecast assumptions as a critical audit matter.
Important facts for investors to verify
- How credit quality, criticized/classified loans, nonperforming loans and deferral outcomes developed after year-end, and whether the $91.8 million CECL allowance remains adequate as forecasts change.
- PPP forgiveness timing, remaining fee recognition, and performance of the subsequent PPP round; the filing’s estimate was that second-round originations could be 30%–50% of first-round originations.
- CRE and California property exposure, including the collateral and repayment outlook for the construction loan that entered nonperforming status in Q4.
- Whether margin pressure persists as assets reprice and deposit costs adjust, particularly given the filing’s stated expectation of low-rate headwinds through at least 2021.
- Actual use and availability of contingent borrowing capacity, deposit stability, and capital and dividend capacity under adverse conditions.
- Whether mortgage banking gains and lower operating expenses are sustainable, and the effect of share repurchases and dividends on capital and per-share results.