TriCo Bancshares Announces Quarterly Results

TriCo Bancshares (NASDAQ: TCBK) (the “Company”), parent company of Tri Counties Bank, today announced net income of $22,890,000 for the quarter ended December 31, 2019, compared to $23,395,000 during the trailing quarter ended September 30, 2019 and $23,211,000 during the quarter ended December 31, 2018. Diluted earnings per share were $0.75 for the fourth quarter of 2019, compared to $0.76 for the third quarter of 2019 and $0.76 for the fourth quarter of 2018.

Financial Highlights

Performance highlights and other developments for the Company as of or for the three and twelve months ended December 31, 2019 included the following:

• For the three and twelve months ended December 31, 2019, the Company’s return on average assets was 1.40% and 1.43%, respectively, and the return on average equity was 10.03% and 10.49%, respectively.
• The Company paid a cash dividend of $0.22 in December 2019, a 16% increase over the $0.19 cash dividend paid in December 2018.
• As of December 31, 2019, the Company reported total loans, total assets and total deposits of $4.31 billion, $6.47 billion and $5.37 billion, respectively.
• The loan to deposit ratio was 80.26% as of December 31, 2019, as compared to 78.98% at September 30, 2019 and 74.95% at December 31, 2018.
• For the current quarter, net interest margin was 4.39% on a tax equivalent basis as compared to 4.49% in the quarter ended December 31, 2018 and decreased 5 basis points from the trailing quarter.
• Non-interest bearing deposits as a percentage of total deposits were 34.14% at December 31, 2019, as compared to 33.56% at September 30, 2019 and 32.80% at December 31, 2018.
• The average rate of interest paid on deposits, including non-interest-bearing deposits, decreased to 0.22% for the fourth quarter of 2019 as compared with 0.23% for the trailing quarter, but increased by 2 basis points from the average rate paid during the same quarter of the prior year.
• Non-performing assets to total assets were 0.30% at December 31, 2019, as compared to 0.31% as of September 30, 2019, and 0.47% at December 31, 2018.
• The balance of nonperforming loans decreased by $1.7 million during the quarter and by $10.6 million for the 2019 year end. Net charge-offs (recoveries) for the fourth quarter 2019 and 2018 were $0.6 million and ($0.2) million, respectively, and for the twelve months ended December 31, 2019 and 2018 were $0.3 million and $0.3 million, respectively.
• The efficiency ratio was 59.92% for the fourth quarter of 2019, as compared to 58.82% in the trailing quarter and 59.11% in the same quarter of the 2018 year.

President and CEO, Rick Smith commented, “As we continue to refine our revenue generating activities and streamline our operational processes, we are pleased to report the results of those efforts through 2019, which are highlighted by average loan growth of over 8.5%, maintaining an efficiency ratio below 60.0% and preserving our low cost of funds. We further benefited from improvement in credit quality. While the headwinds of low interest rates continue to pressure net interest margins into 2020, we continue to benefit from strong loan demand and further improvements in operational efficiencies provided through our continued investment in technology.”

Summary Results

For the three and twelve months ended December 31, 2019, the Company’s return on average assets was 1.40% and 1.43%, respectively, and the return on average equity was 10.03% and 10.49%, respectively. For the three and twelve months ended December 31, 2018, the Company’s return on average assets was 1.46% and 1.24%, respectively, and the return on average equity was 11.33% and 10.75%, respectively. While there were no merger and acquisition expenses incurred during the 2019 periods nor during the quarter ended December 31, 2018, $5,227,000 in merger and acquisition expenses were incurred during the twelve months ended December 31, 2018.

The following is a summary of the components of the Company’s operating results and performance ratios for the periods indicated:

Balance Sheet

Total loans outstanding reached a record high of $4.31 billion as of December 31, 2019, an increase of 7.1% over the trailing twelve month period and an annualized increase of 12.0% over the trailing quarter. In general, cash flows from the maturity, prepayment and sales of investment securities were utilized to fund loan growth.

The retention of earnings generated from changes in the mix of earning assets was the primary driver in total equity increasing to $906,570,000 at December 31, 2019 as compared to $896,665,000 at September 30, 2019, which is inclusive of ($5,222,000) and $1,499,000 in accumulated other comprehensive (loss) income as of the same periods, respectively. As a result, the Company’s book value per share increased to $29.70 per share at December 31, 2019 from $29.39 at September 30, 2019. The Company’s tangible book value per share, calculated by subtracting goodwill and other intangible assets from total shareholders’ equity and dividing that sum by total shares outstanding, increased to $21.69 per share at December 31, 2019 from $21.33 per share at September 30, 2019.

Loan growth of $125,018,000 or 12.0% on an annualized basis during the fourth quarter of 2019 provided benefit to the yield on earning assets and net interest margin as prepayments and sales of investment securities were utilized to fund loans and to reduce the need for overnight borrowings from the Federal Home Loan Bank.

The growth in average loans of $88,745,000 or 8.6%, on an annualized basis, during the fourth quarter of 2019 was slightly above the annual year over year growth rate of 7.1% but less than the annualized period ended growth of 12.0% as a significant concentration of the quarterly activity occurred in the later half of the quarter.

Total assets grew by $118,740,000 or 1.9% between December 2018 and December 2019. This growth was led by $285,352,000 or 7.1% in loan growth which was funded by the retention of earnings but primarily by cash flows from the maturity, prepayment and sales of investment securities which decreased by $234,142,000 or 14.8% from the year ended 2018.

Net Interest Income and Net Interest Margin

The following is a summary of the components of net interest income for the periods indicated:

Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining (unaccreted) discount or (unamortized) premium is immediately taken into interest income; and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income. As a result of the declining rate environment, the prepayment rate of portfolio loans, inclusive of those acquired at a premium or discount, accelerated and this is evidenced by the increase in discount accretion included in interest income subsequent to the second quarter of 2019. During the three months ended December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019, purchased loan discount accretion was $2,218,000, $2,360,000, $1,904,000, and $1,655,000 respectively. Net accretion for the quarter ended March 31, 2019 was reduced by $259,000 from the early repayment of loans purchased at a premium several years ago.

The following table shows the components of net interest income and net interest margin on a fully tax-equivalent (FTE) basis for the quarterly periods indicated:

Net interest income (FTE) during the three months ended December 31, 2019 decreased $(509,000) or (0.8)% to $64,468,000 compared to $64,977,000 during the three months ended September 30, 2019. Over the same period net interest margin declined 5 basis points to 4.39% as compared to 4.44% in the trailing quarter. The decline in net interest income (FTE) was due primarily to a decline in yield on interest earning assets, which was 4.65% for the quarter ended December 31, 2019, which represents a decrease of 7 basis points over the trailing quarter and a decrease of 13 basis points over the same quarter in the prior year. The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, decreased by 25 basis points during the current quarter to 4.75% at December 31, 2019, as compared to 5.00% at September 30, 2109 and 5.50% at December 31, 2018. The index decreased by 25 basis points each month in both August and September, 2019. As such, there was minimal immediate change to interest income on loans during the trailing quarter.

As compared to the same quarter in the prior year, average loan yields decreased 15 basis points from 5.48% during the three months ended December 31, 2018 to 5.33% during the three months ended December 31, 2019. Of the 15 basis point decrease in yields on loans during the comparable three month periods ended December 31, 2019 and 2018, 16 basis points was attributable to decreases in market rates while 1 basis point was gained from the accretion of purchased loan discounts.

The decline in interest expense is attributed primarily to the reduction in average balances of other borrowings during the three months ended December 31, 2019, which had average balances of $20.2 million, $73.4 million and $122.8 million during the quarterly periods ended December 31, 2019, September 30, 2019 and December 31, 2018, respectively. Comparing the quarter ended December 31, 2019 to the same quarter in the prior year, the cost of interest bearing deposits increased by 4 basis points to 0.33% from 0.29% as a direct result of market competition.

The following table shows the components of net interest income and net interest margin on a fully tax-equivalent (FTE) basis for the year-to-date periods indicated:

Net interest income (FTE) during the twelve months ended December 31, 2019 increased $41,620,000 or 19.2% to $258,270,000 compared to $216,650,000 during the twelve months ended December 31, 2018. The increase was substantially attributable to changes in volume of earning assets from the acquisition of FNB Bancorp in July 2018, in addition to organic loan growth experienced during 2019. The yield on interest earning assets was 4.74% and 4.55% for the twelve months ended December 31, 2019 and 2018, respectively. This 19 basis point increase in total earning asset yield was primarily attributable to a 20 basis point increase in loan yields and a 11 basis point increase in yields on total investments. Of the 20 basis point increase in yields on loans, 15 basis points was attributable to increases in market rates while 5 basis points was from accretion of purchased loans.

The increases in yields on earning assets were partially offset by increased funding expenses as the costs of total interest bearing liabilities increased 3 basis points to 0.42% during the twelve months ended December 31, 2019, as compared to 0.39% for the twelve months ended December 31, 2018. During the same period, costs associated with interest bearing deposits increased by 10 basis points to 0.33% as compared to 0.23% in the prior year. The increase in interest expense for the twelve months ended December 31, 2019 as compared to the prior period was due largely to the increases in the average balances of interest-bearing liabilities associated with the acquisition of FNB Bancorp, offset partially by reductions in the average balance of other borrowings.

Asset Quality and Loan Loss Provisioning

The Company recorded a benefit from the reversal of loan losses of $298,000 and $329,000 during the three months ended December 31, 2019 and September 30, 2019, respectively, as compared to a provision of $806,000 during the three months ended December 31, 2018. The reversal of loan losses during the quarter ended December 31, 2019 was largely driven by a net reduction in calculated specific reserves associated with net reductions in non-performing loans of $1,701,000 and to a lesser extent the loan loss reserves associated with loans impacted by the 2018 wildfires. Additions to other real estate owned were $995,000 during three month period ended December 31, 2019. The amount of required provision reversal was partially offset by loan growth of $125,018,000 during the fourth quarter. Net charge-offs (recoveries) for the quarters ended December 31, 2019 and 2018 were $623,000 and ($172,000), respectively.

For the twelve months ended December 31, 2019 the Company recorded a benefit from the reversal of loan losses of $1,690,000. While year to date loan growth in 2019 totaled $285,352,000, nonperforming loans decreased by $10,630,000, and past due loans decreased by $8,344,000. These reductions were facilitated through loan repayments and performance based upgrades of approximately $6,351,000 and approximately $4,279,000 in sales of nonperforming loans. In addition, the outstanding balances of loans associated with wildfire activity continued to decline as illustrated by their balances of approximately $28.9 million and $10.7 million at December 31, 2018 and 2019, respectively. Net charge-offs (recoveries) for the year ended December 31, 2019 and 2018 were $276,000 and $324,000, respectively.

Provision for Income Taxes

The Company’s effective tax rate was 27.4% for the year ended December 31, 2019 as compared to 26.8% for the same period in the prior year. The increase in effective tax rate is due primarily to a lesser amount of non-taxable income as well as a greater level of non-deductible compensation to covered employees in 2019.

Non-interest Income

The following table presents the key components of non-interest income for the current and trailing quarterly periods indicated:

Non-interest income increased $78,000 or 0.6% to $14,186,000 during the three months ended December 31, 2019 compared to $14,108,000 during the trailing quarter September 30, 2019. Similar to the previous quarters of 2019, the value of mortgage servicing rights continued to decline, but to a lesser extent, which is consistent with changes in the rate environment and changes in the other assumptions utilized in determining their fair value. Specifically, continued trends associated with increased prepayment speeds resulting from decreases in the 15 and 30 year mortgage rates, as compared to the first half of 2019, continued to be the largest contributors to the decline in fair value of the mortgage servicing asset. Modest increases in rates during the fourth quarter softened the decline in the fair value of mortgage servicing rates, which decreased $(159,000) during the three months ended December 31, 2019, an improvement of $296,000 as compared to the $(455,000) decline during the trailing three months period ended. This improvement in the value of mortgage servicing assets was partially offset by a $(177,000) decrease in gains from the sale of loans due to a lower volume of mortgage loans sold.

The following table presents the key components of non-interest income for the current and prior year quarterly periods indicated:

Non-interest income increased $1,591,000 or 12.6% to $14,186,000 during the three months ended December 31, 2019 compared to $12,595,000 during the same period in 2018. As noted in previous quarters, the increase in non-interest income was largely driven by increases in fees charged for various services and increases in usage associated with both services and interchange transactions. As a result, ATM and interchange fees increased by $313,000 or 6.4% during the three months ended December 31, 2019 compared to 2018, and service charges on deposit accounts increased by $209,000 or 5.1% over the same period. Other significant increases in non-interest income for the three months ended December 31, 2019 include a $519,000 increase in gain on sale of loans to $1,059,000 and increases in other non-interest income of $474,000 to $624,000.

The following table presents the key components of non-interest income for the current and prior year-to-date periods indicated:

Non-interest income increased $4,459,000 or 9.1% to $53,520,000 during the twelve months ended December 31, 2019 compared to $49,061,000 during the comparable twelve month period in 2018. Non-interest income for the twelve months ended 2019 as compared to the same period in 2018 was impacted by changes in the fair value of the Company’s mortgage servicing assets, which contributed to a $1,665,000 decline. However, this was offset by previously discussed increase in income charged for interchange fees and service charges, which increased by $2,390,000 or 13.1% and $1,190,000 or 7.7%, respectively. Gains from the sale of mortgage loans, which resulted from increased volume, contributed $911,000 to the overall increase in non-interest income during the 2019 year. Other non-interest income was positively impacted by the recognition of $831,000 in life insurance death benefits during the twelve months ended December 31, 2019, compared to none in the equivalent period in 2018.

Non-interest Expense

The following table presents the key components of non-interest expense for the current and trailing quarterly periods indicated:

Non-interest expense for the quarter ended December 31, 2019 increased $620,000 or 1.3% to $46,964,000 as compared to $46,344,000 during the trailing quarter ended September 30, 2019. Salaries and benefits expenses comprised the largest component of this modest increase, contributing $420,000 or 1.6% to the total change in non-interest expense during the three months ending December 31, 2019 compared to the same period in the prior year.

Increases in base salaries and benefits were primarily attributable to compensation adjustments associated with changes in the Company's management structure. These increases were largely offset by reductions in incentive compensation earned on sales and production related activities which seasonally taper in the fourth quarter of the calendar year.

Regulatory assessment credits issued by the FDIC during the three month periods ended December 31, 2019 and September 30, 2019 totaled $432,000 and $430,000, respectively.

The following table presents the key components of non-interest expense for the current and prior year quarterly periods indicated:

Non-interest expense increased by $1,718,000 or 3.8% to $46,964,000 during the three months ended December 31, 2019 as compared to $45,246,000 for the three months ended December 31, 2018. This modest increase was driven by salary and benefit increases of $2,305,000 or 9.2% to $27,319,000 during the three months ended December 31, 2019 as compared to $25,014,000 for the same period in 2018. These increases were impacted equally by increased costs associated with production incentives and long term benefit obligation costs. To a lesser extent, increases of $248,000 in based salaries during these comparable fourth quarter periods were the result of annual merit increases as well as compensation adjustments associated with changes in the organizational structure of management.

The following table presents the key components of non-interest expense for the current and prior year to date periods indicated: