TriCo Bancshares — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. TriCo Bancshares is the holding company for Tri Counties Bank, a California-chartered community bank operating in 33 California counties. Figures below are in U.S. dollars; financial amounts are generally shown in millions.
Financial performance and condition
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Net interest income, GAAP | $93.3 million | $67.9 million in Q1 2022 |
| Net interest margin, FTE | 4.21% | 3.39% in Q1 2022; down 13 basis points from Q4 2022 |
| Net income | $35.8 million | $20.4 million in Q1 2022; $36.3 million in Q4 2022 |
| Diluted EPS | $1.07 | $0.67 in Q1 2022; $1.09 in Q4 2022 |
| Noninterest income / expense | $13.6 million / $53.8 million | Down 9.7% / up 15.8% year over year |
| Return on average assets / equity | 1.47% / 13.36% | 0.94% / 8.19% in Q1 2022 |
| Loans / deposits at quarter-end | $6.42 billion / $8.03 billion | Loans up 9.7% year over year; deposits down 7.9% |
| Cash and cash equivalents | $110.3 million | $107.2 million at December 31, 2022 |
| Other borrowings | $434.1 million | $264.6 million at December 31, 2022 |
| Shareholders’ equity | $1.09 billion | Book value $32.84 per share; tangible book value $23.22 per share |
Net interest income rose year over year as loan and investment yields and average balances increased. Higher funding costs were a headwind: deposit and borrowing interest expense increased substantially year over year. Compared with Q4 2022, FTE net interest income fell $5.6 million and margin declined 13 basis points, primarily reflecting higher deposit and borrowing costs.
Operating cash flow was $39.0 million, investing activities provided $115.3 million, and financing activities used $151.1 million. Deposits fell $303.1 million during the quarter; other borrowings rose $169.5 million. The company reported primary liquidity sources of $4.41 billion, equal to 54.9% of deposits and 190.7% of estimated uninsured deposits. The Bank did not use brokered deposits or Federal Reserve borrowing facilities during the reported periods; it did use FHLB advances.
Credit, capital, and material changes
- The allowance for credit losses on loans was $108.4 million, or 1.69% of loans, versus 1.64% at year-end 2022. Q1 credit-loss provision was $4.2 million, compared with $8.3 million in Q1 2022; the prior-year provision included acquisition-related reserves for Valley Republic Bancorp.
- Nonperforming assets were $19.5 million, or 0.20% of assets, down from $24.8 million and 0.25% at year-end. Loans past due 30 days or more increased to $7.9 million from $4.9 million at year-end. Management said it considers the allowance adequate but cautioned that adverse conditions could increase losses.
- Commercial real estate represented 67.8% of loans. Management cited possible recession risk, elevated inflation and rapid interest-rate increases as factors supporting cautious credit reserves.
- Available-for-sale securities had $256.6 million of gross unrealized losses at quarter-end; held-to-maturity securities had $9.9 million. Management attributed the declines primarily to interest rates, said it did not intend, and was not more likely than not required, to sell the securities, and recorded no securities credit-loss allowance. A forced sale to meet liquidity needs could crystallize losses.
- Regulatory capital ratios exceeded applicable minimums. The Bank’s total risk-based capital ratio was 14.42%, common equity Tier 1 was 13.16%, and leverage ratio was 10.57% at March 31, 2023.
- Q1 other comprehensive income was $24.4 million, mainly reflecting improvement in the fair value of available-for-sale securities; accumulated other comprehensive loss narrowed to $169.5 million from $193.9 million at year-end.
Outlook, risks, and unusual items
- The filing gives no specific earnings or financial guidance. Management said loan originations moderated amid higher rates and disciplined underwriting, and expected FHLB borrowing needs could continue to grow through the rest of 2023 and into 2024, with associated funding costs potentially rising.
- A cybersecurity incident disclosed in February disrupted internal system, email and telephone access. Core banking transaction systems were believed unaffected and customer-facing operations resumed within two days; internal access and communications took about a week to restore. The investigation remained ongoing. The company had incurred related costs and anticipated additional expenses, notifications and possible legal or regulatory exposure; insurance may not cover all losses.
- Service-charge income was affected by fee waivers or reversals related to a network outage. Professional fees increased partly due to the cybersecurity incident. Management said additional incident-related expenses could occur.
- The filing highlights deposit outflows and industry confidence concerns following 2023 bank failures, competition for deposits, liquidity and funding risk, interest-rate and securities valuation exposure, California real-estate and credit risk, and possible higher FDIC assessments or regulatory requirements. Interest-rate scenarios estimated declines in net interest income and market value of equity under both rising and falling rate shocks.
- The company repurchased 150,000 shares for $7.0 million under its repurchase plan and paid a $0.30-per-share dividend. Ordinary-course legal proceedings were reported; management did not expect them to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Deposit trends, uninsured-deposit composition, customer concentration and the durability and cost of funding from FHLB advances.
- Available liquidity under stressed conditions, including access to borrowing facilities and whether securities sales could be required while unrealized losses remain.
- Progress and final financial, legal, regulatory and customer impacts of the cybersecurity incident, including insurance recovery and future remediation costs.
- Credit migration, delinquencies and loss exposure across commercial real estate, consumer and other loan categories, and the assumptions underlying the allowance.
- Net interest margin and earnings sensitivity as deposit pricing and borrowing costs adjust to interest rates.