TriCo Bancshares — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. TriCo Bancshares is a California bank holding company; its principal subsidiary, Tri Counties Bank, operates in 29 California counties. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest and dividend income | $67.1 | $68.2 | $133.7 | $135.6 |
| Net interest income | $64.7 | $64.3 | $127.9 | $128.2 |
| Provision for (reversal of) credit losses | $22.1 | $0.5 | $30.1 | ($1.1) |
| Non-interest income | $11.7 | $13.4 | $23.5 | $25.2 |
| Non-interest expense | $45.7 | $46.7 | $90.5 | $92.1 |
| Net income | $7.4 | $23.1 | $23.6 | $45.8 |
| Diluted EPS | $0.25 | $0.75 | $0.78 | $1.49 |
- Q2 fully tax-equivalent net interest margin was 4.10%, down from 4.50% a year earlier and 4.34% in Q1 2020. Six-month margin was 4.22% versus 4.51% a year earlier.
- Q2 return on average assets was 0.43% and return on average equity 3.39%; the efficiency ratio was 59.89%.
- At June 30, total assets were $7.36 billion, loans $4.80 billion, deposits $6.25 billion and shareholders’ equity $885.7 million. Cash and cash equivalents were $705.9 million.
- Deposits increased $881.3 million from year-end 2019, including substantial PPP-related and other pandemic-era inflows. The loan-to-deposit ratio was 76.84%.
- Other borrowings were $38.5 million and junior subordinated debt was $57.4 million. Regulatory capital ratios exceeded applicable minimums: consolidated total capital 15.13%, Tier 1 13.87%, common equity Tier 1 12.76% and leverage 10.28%.
- For the first six months, operating cash flow was $63.7 million, investing cash flow was negative $497.5 million and financing cash flow was positive $863.1 million; cash increased $429.3 million to $705.9 million.
Material changes versus comparable periods
- Q2 net income fell 67.8% year over year, chiefly reflecting the $22.1 million credit-loss provision. Management attributed most of the quarter’s reserve increase to forward-looking economic factors, including California unemployment and GDP forecasts.
- Loan balances rose $494.0 million from December 31, 2019. This included $423.4 million in PPP loans outstanding at quarter-end; excluding PPP, management said loan balances were effectively unchanged during Q2.
- Q2 net interest income edged up year over year, but lower asset yields pressured margin. Lower deposit and borrowing costs partly offset reduced yields on loans, investments and cash.
- Non-interest income declined 13.2% in Q2, including lower deposit service charges and a larger mortgage-servicing-rights valuation decline; higher mortgage loan-sale gains provided a partial offset. Six-month non-interest income declined 6.9%.
- Non-interest expense decreased 2.1% in Q2 and 1.8% for the first half. PPP processing costs and higher employee benefit costs partly offset lower advertising and other expenses.
- On adopting CECL January 1, the company recorded an $18.9 million increase in the loan allowance and a $13.0 million after-tax reduction to retained earnings. The loan allowance was $79.7 million at June 30, or 1.66% of loans, versus $30.6 million and 0.71% at year-end.
- Available-for-sale securities’ unrealized gains contributed to a $25.8 million Q2 increase in other comprehensive income. The company repurchased 813,862 shares for $24.8 million during the first half and paid $0.44 per share in dividends.
Outlook, risks and unusual items
- The filing provides no quantified earnings or financial guidance. Management warned that prolonged low interest rates were expected to pressure net interest income, margin, borrowing costs and profitability for the remainder of 2020.
- COVID-19 created significant uncertainty around borrower repayment, collateral values, loan demand, deposits, securities values and operations. Management said economic forecasts used in the allowance shifted expected recovery from late 2020 toward mid-2021 or later; actual credit losses could exceed current estimates.
- At June 30, COVID-related payment modifications covered $340.9 million of loans, or 7.1% of total loans. Most were principal-and-interest deferrals; approximately half had 90-day terms and half 180-day terms.
- The company originated 2,908 PPP loans totaling $436.7 million. It reported approximately $15.7 million of PPP loan fees, with $13.3 million of net deferred fees remaining to be recognized. Although management believed most loans would be forgiven and were SBA-guaranteed, it warned that SBA guarantee claims, borrower eligibility or compliance issues, and PPP-related litigation could create losses or costs.
- Nonperforming assets were $23.5 million, or 0.32% of assets, versus $19.4 million at year-end 2019. Nonperforming loans were $21.6 million; management reported that two nonaccrual loans totaling $2.0 million were paid in full shortly after quarter-end.
- Off-balance-sheet commitments included $1.37 billion to extend credit, $11.0 million in standby letters of credit and $110.5 million in overdraft privileges. The company stated ordinary-course legal proceedings were not expected to have a material adverse effect.
- Interest-rate simulations estimated a 5.3% increase in net interest income under a +200-basis-point shock and a 0.6% increase under a -100-basis-point shock; the estimated market-value-of-equity effects were +31.8% and -38.5%, respectively. The filing marked the -200-basis-point scenario “nm.”
Important facts for investors to verify
- Track loan delinquencies, nonperforming assets, criticized loans, charge-offs and reserve adequacy as COVID-related deferrals expire.
- Assess the sensitivity of future provision expense and earnings to unemployment, GDP, borrower performance and the timing of economic recovery.
- Monitor PPP forgiveness, fee recognition, SBA guarantee compliance and any related litigation or reimbursement exposure.
- Check deposit stability, liquidity and funding costs as unusually high pandemic-related balances change, and review the interest-rate sensitivity assumptions.
- Review capital and shareholder distributions, including continued repurchases, dividends and regulatory limits on bank-to-parent dividends.