TriCo Bancshares (NASDAQ: TCBK) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. TriCo is a California bank holding company; its subsidiary, Tri Counties Bank, operates in 31 California counties. Unless noted, financial amounts below are in millions.
Financial performance and condition
| Metric | Q3 2021 | Comparable period |
|---|---|---|
| Net interest income | $68.2 | $63.5 in Q3 2020; up 7.5% on an FTE basis |
| Noninterest income | $15.1 | $15.1 in Q3 2020 |
| Net income | $27.4 | $17.6 in Q3 2020; $28.4 in Q2 2021 |
| Diluted EPS | $0.92 | $0.59 in Q3 2020; $0.95 in Q2 2021 |
| FTE net interest margin | 3.50% | 3.72% in Q3 2020; 3.58% in Q2 2021 |
- For the first nine months, net income was $89.4 million versus $41.2 million in 2020; diluted EPS was $2.99 versus $1.37. FTE net interest margin was 3.61%, down from 4.02%.
- Q3 annualized return on average assets was 1.30% and return on average equity was 11.02%. The nine-month efficiency ratio was 52.87%, improved from 59.59%.
- At September 30, total assets were $8.46 billion, loans $4.89 billion, deposits $7.24 billion, and shareholders’ equity $982.0 million. Loans grew $124.4 million from year-end, while deposits grew $730.9 million.
- Cash and cash equivalents were $740.2 million. The loan-to-deposit ratio was 67.54%, down from 73.21% at year-end 2020. Management said it expected above-average liquidity levels to persist into 2022.
- Nine-month operating cash flow was $99.9 million; investing activities used $752.9 million, mainly reflecting securities purchases and loan activity; financing activities provided $723.7 million, principally from deposit growth.
- Other borrowings were $45.6 million and junior subordinated debt was $58.0 million. The bank reported regulatory capital ratios above minimums, including total capital of 15.26% and common equity Tier 1 of 14.01%.
Material changes and asset quality
- Q3 net income rose year over year, helped by higher net interest income and a $1.4 million reversal of credit-loss provision versus a $7.6 million provision in Q3 2020. The quarter’s net income and EPS were below Q2 2021.
- Nine-month noninterest income increased 22.1% to $47.2 million, including higher service charges and loan-sale gains. Noninterest expense fell 4.0% to $131.6 million, with lower salaries and benefits partly offset by higher incentive compensation and other costs.
- The allowance for credit losses was $84.3 million, or 1.72% of loans, versus $91.8 million and 1.93% at December 31, 2020. Management considered the allowance adequate, while noting potential economic credit weaknesses.
- Nonperforming assets were $31.4 million, or 0.37% of assets; nonperforming loans were $28.8 million. Loans past due 30 days or more totaled $10.5 million. Q3 net loan charge-offs, net of recoveries, were $261,000.
- Available-for-sale securities increased to $2.10 billion from $1.41 billion at year-end. The company recorded $8.6 million of nine-month other comprehensive loss, primarily from unrealized securities losses attributed by management to market yields rather than credit deterioration.
Outlook, transactions, and risks
- The filing provides no general earnings or revenue guidance. Management cited improving economic forecasts but also supply-chain disruptions, rising energy prices, continuing uncertainty around COVID-19 and government support, and the possibility of additional borrower modification requests.
- Management intends to deploy excess liquidity into higher-yielding earning assets, including loans, while maintaining elevated liquidity. It cautioned that loan yields could decline faster than deposit costs if rates remain low, pressuring net interest margin. Most variable-rate loans were at contractual floors.
- TriCo agreed to acquire Valley Republic Bancorp for 0.95 TriCo shares per Valley share, subject to adjustments, with stated aggregate consideration of $184.8 million. Management estimated the deal would add 5.5% to 2022 EPS, dilute tangible book value per share by 1.6%, and have a 2.0-year tangible-book-value earnback, based partly on expected cost savings equal to about 17% of Valley noninterest expense. These are estimates, not guarantees; regulatory and Valley shareholder approvals remained outstanding.
- Key risks include credit deterioration, California real estate values, interest-rate and liquidity conditions, competition, operational and cyber risks, and merger approval, closing, integration, employee-retention, and synergy risks. The company said ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether deposit growth and excess liquidity can be converted into profitable loan growth without further material margin compression.
- How PPP forgiveness and the remaining deferred PPP fees affect future reported interest income and loan balances.
- Whether credit quality, criticized loans, nonperforming assets, and the allowance remain consistent with management’s assumptions as temporary support programs fade.
- Whether the Valley transaction receives approvals and closes on the expected terms, and whether projected cost savings and EPS accretion are achieved.
- The sensitivity of earnings and economic value to rate movements: the filing estimates a 5.7% decline in net interest income under a 100-basis-point rate shock down, versus a 3.8% increase under a 200-basis-point shock up.