TriCo Bancshares — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. TriCo is a California bank holding company whose principal subsidiary, Tri Counties Bank, operates across 29 Northern and Central California counties. The Bank had $6.5 billion in assets and 76 branches at year-end. The 2018 FNB Bancorp acquisition expanded the company into the Bay Area and affects year-over-year comparability.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $257.1 million | $215.3 million |
| Net interest margin, FTE | 4.47% | 4.30% |
| Provision for loan losses | $1.7 million benefit | $2.6 million expense |
| Noninterest income | $53.5 million | $49.1 million |
| Noninterest expense | $185.5 million | $168.5 million |
| Net income | $92.1 million | $68.3 million |
| Diluted earnings per share | $3.00 | $2.54 |
| Return on average assets / equity | 1.43% / 10.49% | 1.24% / 10.75% |
- Net income increased about 35%; net interest income, noninterest income and the loan-loss benefit contributed. FTE net interest income rose 19.2%, reflecting the acquired business and organic loan growth. The efficiency ratio improved to 59.71% from 63.72%.
- Year-end assets were $6.47 billion, loans $4.31 billion and deposits $5.37 billion. Loans rose 7.1%; deposits were essentially unchanged. Real estate mortgage loans made up 77.3% of loans, and approximately 91.5% of the loan portfolio was secured by real estate.
- Allowance for loan losses was $30.6 million, or 0.71% of loans, versus $32.6 million, or 0.81%, in 2018. Net charge-offs were $276,000; nonperforming loans fell to 0.39% of loans from 0.68%.
- Cash and cash equivalents were $276.5 million; investment securities totaled $1.35 billion. Operating activities provided $102.8 million of cash, investing activities used $29.8 million and financing activities used $24.0 million.
- Total shareholders’ equity was $906.6 million, or 14.01% of assets. The Bank’s total risk-based capital ratio was 14.98%, and its common equity Tier 1 ratio was 14.31%; management stated that capital requirements were met.
- Deposits were the principal funding source. Other borrowings were $18.5 million and junior subordinated debt was $57.2 million. The Bank reported $60 million in unused correspondent lines and substantial eligible collateral capacity for Federal Home Loan Bank and Federal Reserve borrowing.
Material changes and unusual items
- The 2019 earnings comparison includes a full year of FNB Bancorp operations, versus approximately six months in 2018. The 2018 acquisition issued 7.4 million TriCo shares and added $156.6 million of goodwill. No merger expenses were recorded in 2019, compared with $5.2 million in 2018.
- 2019 noninterest income included $831,000 of life-insurance death benefits. Mortgage servicing rights declined $1.8 million in value, versus a $146,000 decline in 2018, primarily due to prepayment and interest-rate changes.
- The company adopted lease accounting in 2019, recording $27.9 million of operating lease right-of-use assets and a $27.5 million lease liability at year-end; management said adoption did not materially affect income or cash flows.
- The Camp Fire reserve declined to $2.5 million from $3.25 million in 2018. The filing reports no material pending legal proceedings and no impairment charges on goodwill.
- Fourth-quarter 2019 net income was $22.9 million and diluted EPS was $0.75, compared with $23.2 million and $0.76 in fourth-quarter 2018.
Outlook, risks and contingencies
- The filing gives no quantified earnings or revenue guidance. Management said future loan demand and deposit growth depend on economic conditions, competition, customer activity and interest rates. The board intended to continue quarterly dividends, subject to earnings, capital, asset quality and regulatory limits; the Bank had $131 million available for dividends to the holding company under applicable rules.
- CECL was scheduled for adoption January 1, 2020. Management estimated the loan-loss allowance would increase from $30.6 million to approximately $42–$50 million, with an estimated after-tax reduction in equity of $8.0–$13.7 million. These were estimates sensitive to portfolio composition and economic forecasts; they excluded any significant effect on reserves for unfunded commitments.
- Key exposures include California economic and real estate conditions, the concentration of loans secured by California real estate, credit losses and allowance-estimation uncertainty, interest-rate and funding-cost movements, competition, regulatory costs, cybersecurity and data privacy, and natural disasters including fires, earthquakes, droughts and floods. The filing also noted uncertainty around LIBOR’s expected discontinuation after 2021 and the possible economic effects of the coronavirus first reported in January 2020.
- Interest-rate simulations estimated net interest income would rise 1.2% under a 200-basis-point rate shock and fall 3.7% under a 100-basis-point decline. Management cautioned that model assumptions and the hypothetical flat balance sheet mean these are estimates, not forecasts of actual results.
- Auditors issued an unqualified opinion on the 2019 financial statements and internal control over financial reporting; management also concluded controls were effective. The allowance for loan losses was identified as a critical audit matter.
Most important facts for investors to verify
- How actual CECL adoption compared with the estimated allowance and equity impacts, including subsequent economic assumptions.
- Whether loan and deposit trends support earnings growth, given flat year-end deposits and the sizable real-estate-secured loan concentration.
- The sustainability of the 2019 improvement in net interest margin and efficiency, separating organic performance from FNB acquisition effects and purchased-loan discount accretion.
- Credit quality and reserve adequacy, including nonperforming and criticized loans, collateral values, and the remaining Camp Fire exposure.
- Liquidity and funding capacity, the sensitivity of deposits to rates, and the terms and replacement plans for LIBOR-linked subordinated debt.