TriCo Bancshares — Q1 2020 Form 10-Q
Business context and reporting period. TriCo Bancshares is the holding company for Tri Counties Bank, a community bank operating in 29 California counties. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are primarily with December 31, 2019, and earnings comparisons with Q1 2019. The quarter coincided with the onset of the COVID-19 pandemic.
Financial performance and condition
- Earnings: Net income was $16.1 million, down 29% from $22.7 million in Q1 2019. Diluted EPS was $0.53 versus $0.74; the quarterly dividend was $0.22 per share, up from $0.19.
- Revenue and margins: Net interest income was $63.2 million, down 1.1% year over year; noninterest income was nearly flat at $11.8 million. Net interest margin (fully taxable-equivalent) was 4.34%, versus 4.52% a year earlier and 4.39% in Q4 2019. The filing attributes margin pressure principally to lower market rates.
- Credit costs and profit: The company recorded an $8.0 million provision for credit losses, compared with a $1.6 million reversal in Q1 2019. Management said $7.3 million of the current-quarter provision reflected pandemic-related economic forecast adjustments; loan growth and credit-quality changes accounted for the remainder, partly offset by net recoveries. Noninterest expense declined 1.4% to $44.8 million, while salaries and benefits rose 8.5% to $27.3 million.
- Loans and asset quality: Loans were $4.38 billion, up $71.7 million (1.7%) from year-end. The allowance for credit losses was $57.9 million, or 1.32% of loans, compared with $30.6 million and 0.71% at year-end. Nonperforming assets were $20.2 million, 0.31% of assets; nonperforming loans were $18.0 million. Loans past due 30 days or more increased during the quarter, with management identifying three loans totaling $17.2 million as the principal driver; each was less than 60 days past due and considered well-secured.
- Deposits, liquidity and cash flow: Deposits increased $35.7 million to $5.40 billion; noninterest-bearing deposits were $1.88 billion. Cash and cash equivalents were $185.5 million, down from $276.5 million at year-end. Cash at the Federal Reserve and other banks, together with available-for-sale securities, totaled $1.00 billion, or 15.7% of assets. Operating activities provided $33.5 million; investing activities used $137.3 million and financing activities provided $12.7 million. Cash declined $91.0 million during the quarter.
- Debt and capital: Other borrowings were $19.3 million and junior subordinated debt was $57.3 million. Consolidated total capital, Tier 1 and common equity Tier 1 ratios were 15.12%, 13.92% and 12.82%, respectively; the bank exceeded applicable well-capitalized thresholds. Shareholders’ equity was $866.4 million, down from $906.6 million at year-end.
Material changes and unusual items
- Effective January 1, 2020, adoption of CECL increased the opening loan allowance by $18.9 million and reduced retained earnings, net of tax, by $13.0 million. This adoption adjustment is distinct from the $8.0 million Q1 provision.
- Available-for-sale securities had $51.4 million of gross unrealized losses at March 31, primarily in asset-backed securities; the company recorded no credit-loss allowance on them, stating it did not intend, and was not more likely than not required, to sell before recovery. The securities-related decline contributed to a $19.9 million quarterly other comprehensive loss.
- The company repurchased 553,869 shares under its plan for approximately $17.1 million during the quarter. It subsequently paused further repurchases amid the pandemic.
- After quarter-end, as of April 30, the bank had approximately 2,150 SBA-authorized Paycheck Protection Program loans totaling $417.2 million and had approved payment deferrals on approximately 400 loans totaling $188.9 million. These are subsequent-period developments, not March 31 balances.
Outlook, management commentary and risks
The filing provides no numerical earnings or margin guidance. Management expected significant COVID-19-related borrower modifications and said it was responding to borrower requests for deferrals. It had implemented remote-work, social-distancing, customer-service and cost-saving measures, refreshed liquidity and capital stress forecasts, and paused share repurchases. Management’s CECL estimate used an approximately eight-quarter forecast; it noted rapidly changing economic projections and that most sources then indicated recovery during 2020.
Management cautioned that pandemic duration and severity were uncertain and could materially affect borrower repayment, collateral values, loan growth, interest and fee income, securities values, funding, operations and credit losses. The portfolio is concentrated in northern and central California, and the company specifically identified exposure to affected small and mid-sized businesses, including gas stations, retail, hotels, hospitality, food and beverage, and elective healthcare. Other stated risks include interest-rate changes, real-estate values, competition, cybersecurity and third-party disruptions. Ordinary-course legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether pandemic-related deferrals, subsequent PPP lending and borrower stress lead to higher delinquencies, nonperforming loans, charge-offs or further provisions.
- The assumptions and sensitivity underlying the CECL allowance, especially the economic forecasts and eight-quarter forecast period.
- The recovery and valuation of the asset-backed securities portfolio, including the reported CLO market value of approximately $202.0 million versus $239.9 million amortized cost.
- The effect of low interest rates on net interest margin, variable-rate loans at floors and future earnings.
- Liquidity and capital trends after the quarter, including the impact of dividends, repurchases and loan growth.
- The filing’s cash-flow discussion gives a different investing-cash-use figure in MD&A than the cash-flow statement; confirm the intended amount against the filed financial statements.