TriCo Bancshares — Q2 2023 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2023. TriCo is a California bank holding company; Tri Counties Bank provides community banking across 33 California counties. Unless noted, financial amounts are in millions. The prior-year comparison is affected by the March 2022 Valley Republic Bancorp acquisition.
Financial performance and condition
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Interest and dividend income | $107.2 | $87.0 in Q2 2022 |
| Net interest income | $88.6 | $85.0 in Q2 2022 |
| Net interest margin, FTE | 3.96% | 3.67% in Q2 2022; 4.21% in Q1 2023 |
| Provision for credit losses | $9.7 | $2.1 in Q2 2022; $4.2 in Q1 2023 |
| Non-interest income | $15.7 | $16.4 in Q2 2022 |
| Non-interest expense | $61.2 | $56.3 in Q2 2022 |
| Net income / diluted EPS | $24.9 / $0.75 | $31.4 / $0.93 in Q2 2022 |
| Return on average assets / equity | 1.01% / 8.98% | 1.24% / 11.53% in Q2 2022 |
| Efficiency ratio | 58.69% | 55.45% in Q2 2022; 50.3% in Q1 2023 |
For the six months, net income was $60.7 million versus $51.7 million, and diluted EPS was $1.82 versus $1.62. Net interest income was $181.9 million versus $153.0 million. Higher asset yields supported interest income, but rapidly rising deposit and borrowing costs weighed on quarterly margin and earnings; Q2 net income was also below Q1’s $35.8 million.
At June 30, total assets were $9.85 billion, loans $6.52 billion, deposits $8.10 billion, and shareholders’ equity $1.09 billion. Loans increased 6.7% year over year, while deposits fell 7.6% and assets fell 2.6%. Commercial real estate represented 66.6% of loans. Noninterest-bearing deposits were 37.9% of deposits, down from 42.0% at year-end 2022.
Six-month cash flows were $56.2 million from operations, $89.8 million from investing, and negative $134.4 million from financing; cash and cash equivalents increased $11.6 million to $118.8 million. The company reported primary liquidity of $4.39 billion, equal to 54.2% of deposits and 174% of estimated uninsured deposits. Estimated uninsured deposits were $2.52 billion; no brokered deposits were reported.
Other borrowings were $392.7 million at quarter-end, including a $150 million borrowing at 5.11% due October 2023 and a $200 million borrowing at 4.75% due April 2024. Junior subordinated debt was $101.1 million. The allowance for credit losses was $117.3 million, or 1.80% of loans. Regulatory capital ratios included 11.97% consolidated common equity Tier 1 and 14.47% total capital; the Bank exceeded applicable well-capitalized thresholds.
Material changes, outlook and risks
- Quarterly deposit costs rose: average cost of total deposits was 0.58%, versus 0.25% in Q1 and 0.04% a year earlier. Management reported a 10.8% cycle-to-date deposit beta.
- Nonperforming assets increased to $40.5 million, or 0.41% of assets, from $19.5 million at March 31. Management attributed nearly all of the quarterly increase to one relationship; $31.7 million of nonperforming loans were current under original payment terms. Criticized loans rose, while classified loans were 1.00% of loans.
- Available-for-sale securities had $273.2 million of gross unrealized losses at quarter-end, which management attributed primarily to interest rates rather than credit deterioration. Management said it did not intend, and was not more likely than not required, to sell impaired securities before recovery. A forced sale to meet liquidity needs could crystallize losses.
- Management cited persistent inflation, rapid rate increases and an inverted or flattening yield curve as factors informing its expectation that the U.S. could enter a recession within 12 months. It maintained a cautious credit reserve and expected FHLB borrowing to remain necessary through the rest of 2023 and into 2024, with borrowing costs potentially rising. No numerical earnings guidance was provided.
- Q2 expense included higher salaries, technology and regulatory costs; management also noted an estimated $0.8 million in customer refunds related to non-sufficient-funds fees. Q2 included $1.1 million of operational losses. There were no VRB merger expenses in Q2 2023, compared with $2.2 million in Q2 2022.
- The Bank’s February 2023 cyber incident remains under investigation. The company said it restored systems without paying ransom, but data was posted by the threat actor and the scope of potentially affected information remained under review. Future notification, remediation, legal or regulatory costs are possible; insurance may not cover all losses.
- The filing identifies deposit competition and outflows, interest-rate and securities valuation risk, California real estate and borrower credit risk, regulatory changes, cybersecurity, and possible added FDIC assessment costs as material risks. Management said ordinary-course legal proceedings were not expected to materially harm results.
Important facts for investors to verify
- Whether deposit trends, uninsured deposit levels and funding costs remain manageable, particularly as scheduled borrowings mature.
- Performance and collateral status of the single borrower relationship associated with most of the Q2 increase in nonperforming assets, and any subsequent changes in criticized or classified loans.
- Whether the allowance remains adequate if California economic conditions, commercial real estate values or borrower repayment performance weaken.
- Liquidity and capital sensitivity to any need to sell securities with unrealized losses; the filing estimates primary liquidity at $4.39 billion.
- Final scope, customer impact, remediation expense and any litigation or regulatory consequences of the cyber incident.
- Q2 margin and efficiency trends: FTE net interest margin declined sequentially to 3.96%, while the efficiency ratio rose to 58.69%.