TriCo Bancshares — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2022. TriCo Bancshares is the holding company for Tri Counties Bank, a California community bank. Results include Valley Republic Bancorp (VRB) from its March 25, 2022 acquisition; quarter-end balance-sheet growth therefore reflects both acquired balances and organic activity.
Financial results and condition
| Metric | Q1 2022 | Comparable period / reference |
|---|---|---|
| Net interest income (GAAP) | $67.9 million | $66.4 million in Q1 2021 |
| Net interest margin (FTE) | 3.39% | 3.74% in Q1 2021; 3.29% excluding acquired-loan discount accretion and PPP yield, versus 3.48% a year earlier |
| Noninterest income | $15.1 million | $16.1 million in Q1 2021 |
| Noninterest expense | $46.4 million | $41.6 million in Q1 2021, including $4.0 million of VRB merger costs in 2022 |
| Net income / diluted EPS | $20.4 million / $0.67 | $33.6 million / $1.13 in Q1 2021 |
| Operating cash flow | $34.8 million | $41.2 million in Q1 2021 |
- Management reported return on average assets of 0.94%, return on average equity of 8.19%, and an efficiency ratio of 55.95% for the quarter.
- At March 31, assets were $10.12 billion, loans $5.85 billion, deposits $8.71 billion, and shareholders’ equity $1.11 billion. Organic loan growth excluding PPP and acquired loans was $187.9 million, or 15.5% annualized. Deposits increased $1.35 billion from year-end, including $1.22 billion acquired with VRB and $131.8 million of organic growth.
- Cash and cash equivalents were $1.04 billion. The loan-to-deposit ratio was 67.15%. The company reported $36.2 million of other borrowings and $101.0 million of junior subordinated debt. Its FHLB line could provide up to $2.22 billion; none was outstanding.
- Operating, investing, and financing activities provided $34.8 million, $121.9 million, and $110.5 million, respectively. Investing cash flow included $426.9 million of cash acquired in the VRB transaction.
- Allowance for credit losses on loans was $96.0 million, or 1.64% of loans, versus 1.74% at year-end. Nonperforming assets were $17.0 million, or 0.17% of assets, versus $32.9 million and 0.38% at year-end. Past-due loans of 30 days or more rose to $8.4 million from $4.3 million.
- Regulatory capital remained above required levels: consolidated total risk-based capital was 14.96%, Tier 1 capital 13.09%, and common equity Tier 1 capital 12.28%. The bank was reported well capitalized.
Material changes and notable items
- Net income declined year over year, primarily reflecting an $8.3 million credit-loss provision compared with a $6.1 million provision reversal in Q1 2021, higher expenses, and lower noninterest income. Net interest income increased modestly, but lower PPP-related income and loan yields weighed on results.
- VRB was acquired for approximately $174.0 million in cash and stock; TriCo issued about 4.1 million shares. The transaction added approximately $1.36 billion of assets, including $771.4 million of loans, and $1.28 billion of liabilities, including $1.22 billion of deposits. Goodwill recognized was $87.1 million. Acquisition-date fair values remain subject to adjustment during the measurement period.
- Unrealized losses on available-for-sale securities increased substantially as interest rates rose. At quarter-end, gross unrealized losses were $115.4 million; the quarter’s other comprehensive loss was $78.3 million after tax, reducing accumulated other comprehensive income to a loss of $77.4 million. Management attributed the declines primarily to interest rates rather than credit quality and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Nonperforming assets fell mainly after approximately $12.0 million of nonperforming loan sales and other paydowns or upgrades. The allowance rose in part because of the acquired VRB portfolio and related provision requirements.
- Book value was $32.78 per share, down from $33.64 at December 31, 2021; tangible book value was $23.04 per share, down from $25.80. The filing attributes the quarter’s equity pressure in part to the securities-related AOCI decline.
Outlook, commentary, and risks
- The filing gives no specific earnings or revenue guidance. Management said it intended to deploy excess liquidity and shift earning assets toward higher-yielding categories, including loans, to stabilize or increase net interest income.
- Management described economic forecasts as generally improving, but noted supply-chain disruption, rising energy prices, inflation, geopolitical conflict, and the possibility of higher short-term rates and a flatter or inverted yield curve. It considered continued credit-loss reserves prudent.
- Interest-rate sensitivity modeling estimated that an immediate +200 basis-point shock would increase net interest income by 4.0% and reduce market value of equity by 7.1%; a -100-basis-point shock would reduce net interest income by 4.4% and market value of equity by 16.2%. These are modeled estimates, not forecasts.
- Key disclosed risks include California and broader economic conditions, interest-rate and market volatility, inflation, real-estate values, borrower credit quality, liquidity and deposit gathering, and successful integration and realization of VRB merger benefits. The company specifically added global instability and the Russia-Ukraine conflict as risks, including potential energy-price volatility, supply interruptions, and cyberattacks.
- The company anticipated possible consolidation of overlapping Bakersfield and Fresno locations, subject to regulatory approval. It resumed planned share-repurchase activity after the merger announcement, but made no purchases under its repurchase plan during the quarter.
- Ordinary-course legal proceedings were disclosed; management did not expect their resolution to materially adversely affect financial position, results, or cash flows. Management concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- How much of future earnings growth comes from organic operations versus VRB, and whether expected merger efficiencies are realized relative to integration costs.
- Whether loan growth, deposit trends, and loan pricing sustain net interest income as rates change and PPP balances run off.
- Credit quality in the enlarged loan portfolio, particularly criticized loans, past-due balances, and the adequacy of the allowance under changing economic conditions.
- The potential effects of additional rate increases on the fair value and liquidity of securities, accumulated other comprehensive loss, and tangible book value.
- Capital, liquidity, and shareholder distributions, including the planned pace of repurchases and regulatory constraints on bank dividends.