TriCo Bancshares — Q1 2024 Form 10-Q
Business context and reporting period
TriCo Bancshares is the holding company for Tri Counties Bank, a California-chartered community bank operating in 33 California counties. This unaudited quarterly report covers the three months ended March 31, 2024; comparisons below are primarily with Q1 2023 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / change |
|---|---|---|
| Net interest income (GAAP) | $82.7 million | $93.3 million in Q1 2023 |
| Net interest margin (FTE) | 3.68% | 4.20% in Q1 2023; 3.81% in Q4 2023 |
| Net income; diluted EPS | $27.7 million; $0.83 | $35.8 million; $1.07 in Q1 2023 |
| Noninterest income / expense | $15.8 million / $56.5 million | $13.6 million / $53.8 million in Q1 2023 |
| Return on average assets / equity | 1.13% / 9.50% | 1.47% / 13.36% in Q1 2023 |
| Total assets | $9.81 billion | $9.91 billion at December 31, 2023 |
| Loans / deposits | $6.80 billion / $7.99 billion | Loans +0.4% and deposits +7.8% annualized from Q4; year-over-year loans +5.9%, deposits -0.5% |
| Cash and cash equivalents | $82.8 million | $98.7 million at December 31, 2023 |
| Other borrowings / junior subordinated debt | $392.4 million / $101.1 million | Other borrowings fell $240.2 million from year-end |
| Shareholders’ equity | $1.16 billion; book value $35.06 per share | Book value was $32.84 at March 31, 2023 |
Operating cash flow was $25.1 million, investing activities provided $60.0 million, and financing activities used $100.9 million. Cash and cash equivalents declined $15.9 million during the quarter. The dividend was $0.33 per share, and the company repurchased 99,332 shares for $3.4 million.
Capital ratios remained above regulatory minimums: consolidated total risk-based capital was 14.97%, common equity Tier 1 was 12.49%, and Tier 1 leverage was 11.01%. The Bank exceeded applicable “well-capitalized” thresholds. Primary liquidity was reported at $3.99 billion, equal to 50% of deposits and 163% of estimated uninsured deposits.
Material changes and management commentary
- Compared with Q1 2023, net interest income fell 11.4% on an FTE basis as higher deposit and borrowing costs more than offset higher loan yields. Interest expense rose to $32.7 million from $9.6 million; average loan yield increased to 5.72% from 5.21%, while total interest-bearing deposit cost rose to 1.83% from 0.43%.
- Noninterest income increased 15.7%, partly reflecting the absence of $0.9 million of deposit fees waived or reversed after a network outage in the prior-year quarter. Noninterest expense rose 5.0%, including higher compensation, technology spending, and regulatory assessments. The efficiency ratio was 57.36%, versus 50.29% a year earlier, but improved from 58.71% in Q4.
- Management said it expects net interest margin to reach an inflection point in the second half of 2024. This is commentary, not formal earnings guidance. It intends to use securities cash flows and organic deposit growth to support lending or reduce borrowings, and expects FHLB borrowing needs to continue through the rest of 2024 and into 2025.
- Loans were nearly flat quarter over quarter as management cited disciplined pricing and underwriting and subdued borrower demand. Deposits grew $153.6 million during the quarter, led by time deposits; noninterest-bearing deposits averaged 33.8% of total deposits, down from 41.0% in Q1 2023.
Credit, securities, risks and contingencies
- The allowance for credit losses was $124.4 million, or 1.83% of loans, versus 1.79% at year-end and 1.69% a year earlier. Q1 provision for credit losses was $4.3 million. Net loan charge-offs were approximately $1.1 million.
- Nonperforming loans rose to $34.2 million from $31.9 million at year-end; nonperforming assets were $36.7 million, or 0.37% of assets, versus $34.6 million and 0.35%. Management attributed the increase chiefly to non-owner-occupied commercial real estate and agricultural borrowers, including pressure from lower commodity prices. It believes reserves are adequate but cautions that adverse economic conditions could increase losses.
- Available-for-sale securities had $248.5 million of gross unrealized losses at quarter-end, compared with $232.3 million at year-end; management attributed the declines primarily to interest rates rather than credit deterioration and reported no security credit-loss provision. The unrealized losses may affect equity and could become more consequential if securities must be sold before recovery.
- Management cited inflation, elevated rates, yield-curve inversion and the possibility of a U.S. recession within 12 months as credit risks. In the disclosed instantaneous rate scenarios, a 300-basis-point increase was estimated to reduce 12-month net interest income by 7.6%; a 300-basis-point decrease was estimated to reduce market value of equity by 17.1%. These simulations assume no balance-sheet restructuring.
- Commitments to extend credit totaled approximately $2.21 billion, with additional standby letters of credit and overdraft privileges. The filing describes ordinary-course legal proceedings and says their resolution is not expected to materially adversely affect financial position, results, or cash flows. It also identifies cybersecurity, including the impact of a 2023 ransomware incident, among the company’s risks.
- Management reported effective disclosure controls as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter. The filing provides no formal numerical earnings or loan-growth guidance.
Important facts for investors to verify
- Whether deposit growth is durable and how continued migration to higher-cost time deposits affects funding costs, net interest margin, and reliance on FHLB advances.
- The size, collateral and resolution progress of nonperforming and criticized loans, particularly commercial real estate and agricultural exposures, and whether the allowance remains adequate as conditions evolve.
- The duration and potential liquidity implications of the securities portfolio’s unrealized losses, including whether any securities might need to be sold before recovery.
- Assumptions behind management’s second-half 2024 margin outlook and interest-rate sensitivity estimates, and whether actual results are tracking those expectations.
- Potential costs or effects of credit commitments, regulatory requirements, legal matters, and cybersecurity risks, including the previously disclosed ransomware incident.