Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Cautionary Statements Regarding Forward-Looking Information
The statements contained herein that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There can be no assurance that future developments affecting us will be the same as those anticipated by management. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations on the Company's business condition and financial operating results; the impact of changes in financial services industry policies, laws and regulations; technological changes; weather, natural disasters and other catastrophic events that may or may not be caused by climate change and their effects on economic and business environments in which the Company operates; the continuing adverse impact on the U.S. economy, including the markets in which we operate due to the COVID-19 global pandemic; the impact of a slowing U.S. economy and increased unemployment on the performance of our loan portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products; adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures and labor shortages on the economic recovery and our business; the impacts of international hostilities or geopolitical events; the costs or effects of mergers, acquisitions or dispositions we may make, whether we are able to obtain any required governmental approvals in connection with any such mergers, acquisitions or dispositions, and/or our ability to realize the contemplated financial business benefits associated with any such activities; the regulatory and financial impacts associated with exceeding $10 billion in total assets; the negative impact on our reputation and profitability in the event customers experience economic harm or in the event that regulatory violations are identified; the ability to execute our business plan in new lending markets; the future operating or financial performance of the Company, including our outlook for future growth and changes in the level of our nonperforming assets and charge-offs; the appropriateness of the allowance for credit losses, including the timing and effects of the implementation of the current expected credit losses model; any deterioration in values of California real estate, both residential and commercial; the effect of changes in accounting standards and practices; possible other-than-temporary impairment of securities held by us due to changes in credit quality or rates; changes in consumer spending, borrowing and savings habits; our ability to attract and maintain deposits and other sources of liquidity; the effects of changes in the level or cost of checking or savings account deposits on our funding costs and net interest margin; changes in the financial performance and/or condition of our borrowers; our noninterest expense and the efficiency ratio; competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers including retail businesses and technology companies; the challenges of integrating and retaining key employees; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber-attacks and the cost to defend against such attacks; breaches in data security, including as a result of work from home arrangements; failure to safeguard personal information; change to U.S. tax policies, including our effective income tax rate; the effect of a fall in stock market prices on our brokerage and wealth management businesses; the discontinuation of the London Interbank Offered Rate and other reference rates; and our ability to manage the risks involved in the foregoing. Additional factors that could cause results to differ materially from those described above can be found in our Annual Report on Form 10-K for the year ended December 31, 2021, which has been filed with the Securities and Exchange Commission (the “SEC”) and all subsequent filings with the SEC under Sections 13(a), 13(c), 14, and 15(d) of the Securities Act of 1934, as amended. Such filings are also available in the “Investor Relations” section of our website, https://www.tcbk.com/investor-relations and in other documents we file with the SEC. Annualized, pro forma, projections and estimates are not forecasts and may not reflect actual results. We undertake no obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
General
As TriCo Bancshares (referred to in this report as “we”, “our” or the “Company”) has not commenced any business operations independent of Tri Counties Bank (the “Bank”), the following discussion pertains primarily to the Bank. Average balances, including such balances used in calculating certain financial ratios, are generally comprised of average daily balances for the Company. Within Management’s Discussion and Analysis of Financial Condition and Results of Operations, interest income, net interest income, and net interest yield are generally presented on a FTE basis. The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provides additional clarity in assessing its results, and the presentation of these measures on a FTE basis is a common practice within the banking industry. Interest income and net interest income are shown on a non-FTE basis in the Part I - Financial Information section of this Form 10-Q, and a reconciliation of the FTE and non-FTE presentations is provided below in the discussion of net interest income.
The Company's results for the quarter ended September 30, 2022 reflect the full operational impact of the March 25, 2022 merger with VRB, whereas the results for the nine months ended September 30, 2022 do not include the operating results of VRB for the days prior to the merger date.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of
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America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those that materially affect the financial statements and are related to the adequacy of the allowance for loan losses, investments, mortgage servicing rights, fair value measurements, retirement plans and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A detailed discussion related to the Company’s accounting policies including those related to estimates on the allowance for credit losses, other than temporary impairment of investments and impairment of intangible assets, can be found in Note 1 of the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2021.
Geographical Descriptions
For the purpose of describing the geographical location of the Company’s operations, the Company has defined northern California as that area of California north of, and including, Stockton to the east and San Jose to the west; central California as that area of the state south of Stockton and San Jose, to and including, Bakersfield to the east and San Luis Obispo to the west; and southern California as that area of the state south of Bakersfield and San Luis Obispo.
Financial Highlights
Performance highlights and other developments for the Company as of or for the three and nine months ended September 30, 2022, included the following:
• For the three and nine months ended September 30, 2022, the Company’s return on average assets was 1.46% and 1.23%, while the return on average equity was 13.78% and 11.25%, respectively. The nine-month ratio was impacted by merger related expenses of $6,253,000 during the 2022 period.
• Organic loan growth, excluding PPP and acquired loans, totaled $216.7 million (14.2% annualized) for the current quarter and $824.3 million (17.4% annualized) for the trailing twelve-month period.
• As of September 30, 2022, the Company reported total loans, total assets and total deposits of $6.3 billion, $10.0 billion and $8.7 billion, respectively. As a direct result of organic loan growth during the quarter, the loan to deposit ratio has increased to 72.9% as of September 30, 2022, as compared to 69.8% as of the trailing quarter.
• The average rate of interest paid on deposits, including non-interest-bearing deposits, of 0.04% has remained unchanged during each of the prior four quarters, and represents a decrease of one basis point from the average rate paid of 0.05% during the same quarter of the prior year.
• Noninterest income related to service charges and fees was $12.7 million for the three month period ended September 30, 2022, an increase of 12.6% when compared to the same period in 2021.
• The provision for credit losses for loans and debt securities was approximately $3.8 million during the quarter ended September 30, 2022, as compared to a provision expense of $2.1 million during the trailing quarter ended June 30, 2022, and a reversal of provision expense totaling $1.4 million for the three month period ended September 30, 2021.
• The allowance for credit losses to total loans was 1.61% as of September 30, 2022, compared to 1.60% as of the trailing quarter end, and 1.72% as of September 30, 2021. Non-performing assets to total assets were 0.21% at September 30, 2022, as compared to 0.15% as of June 30, 2022, and 0.37% at September 30, 2021.
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TRICO BANCSHARES
Financial Summary
(In thousands, except per share amounts; unaudited)
Three months ended
September 30, Nine months ended
September 30,
2022 2021 2022 2021
Net interest income $ 94,106 $ 68,233 $ 247,076 $ 201,756
Reversal of (provision for) credit losses (3,795) 1,435 (14,225) 7,755
Non-interest income 15,640 15,095 47,166 47,162
Non-interest expense (54,465) (45,807) (157,176) (131,596)
Provision for income taxes (14,148) (11,534) (33,765) (35,644)
Net income $ 37,338 $ 27,422 $ 89,076 $ 89,433
Per Share Data:
Basic earnings per share $ 1.12 $ 0.92 $ 2.76 $ 3.01
Diluted earnings per share $ 1.12 $ 0.92 $ 2.74 $ 2.99
Dividends paid $ 0.30 $ 0.25 $ 0.80 $ 0.75
Book value at period end $ 29.71 $ 33.05
Average common shares outstanding 33,348 29,714 32,332 29,720
Average diluted common shares outstanding 33,463 29,851 32,469 29,887
Shares outstanding at period end 33,332 29,715
At period end:
Loans $ 6,314,290 $ 4,887,496
Total investment securities $ 2,668,145 $ 2,333,015
Total assets $ 9,976,879 $ 8,458,030
Total deposits $ 8,655,769 $ 7,236,822
Other borrowings $ 47,068 $ 45,601
Shareholders’ equity $ 990,338 $ 982,014
Financial Ratios:
During the period:
Return on average assets (annualized) 1.46 % 1.30 % 1.23 % 1.48 %
Return on average equity (annualized) 13.78 % 11.02 % 11.25 % 12.42 %
Net interest margin (1) (annualized)
4.02 % 3.50 % 3.71 % 3.61 %
Efficiency ratio 49.63 % 54.97 % 53.42 % 52.87 %
Average equity to average assets 10.61 % 11.82 % 10.94 % 11.89 %
At end of period:
Equity to assets 9.93 % 11.61 %
Total capital to risk-adjusted assets 13.97 % 15.41 %
(1) Fully Taxable Equivalent (FTE)
The Company reported net income of $37,338,000 for the quarter ended September 30, 2022, compared to $31,364,000 during the trailing quarter ended June 30, 2022, and $27,422,000 during the quarter ended September 30, 2021. Diluted earnings per share were $1.12 for the third quarter of 2022, compared to $0.93 for the second quarter of 2022 and $0.92 for the third quarter of 2021.
Results of Operations
The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to the Company and the Bank’s financial condition, operating results, asset and liability management, liquidity and capital resources and should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the Notes thereto located at Item 1 of this report.
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Net Interest Income
The Company’s primary source of revenue is net interest income, or the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Following is a summary of the components of FTE net income for the periods indicated.
Three months ended
(in thousands) September 30,
2022 June 30,
2022 Change % Change
Interest income $ 96,366 $ 86,955 $ 9,411 10.8 %
Interest expense (2,260) (1,909) (351) 18.4 %
Fully tax-equivalent adjustment (FTE) (1)
440 397 43 10.8 %
Net interest income (FTE) $ 94,546 $ 85,443 $ 9,103 10.7 %
Net interest margin (FTE) 4.02 % 3.67 %
Acquired loans discount accretion, net:
Amount (included in interest income) $ 714 $ 1,677 $ (963) (57.4) %
Net interest margin less effect of acquired loan discount accretion (1)
3.99 % 3.60 % 0.39 %
PPP loans yield, net:
Amount (included in interest income) $ 313 $ 964 $ (651) (67.5) %
Net interest margin less effect of PPP loan yield (1)
4.02 % 3.65 % 0.37 %
Acquired loans discount accretion and PPP loan yield, net: (1)
Amount (included in interest income) $ 1,027 $ 2,641 $ (1,614) (61.1) %
Net interest margin less effect of acquired loan discount accretion and PPP loan yield (1)
3.98 % 3.57 % 0.41 %
Three months ended September 30, 2022
(dollars in thousands) 2022 2021 Change % Change
Interest income $ 96,366 $ 69,628 $ 26,738 38.4 %
Interest expense (2,260) (1,395) (865) 62.0 %
Fully tax-equivalent adjustment (FTE) (1)
440 265 175 66.0 %
Net interest income (FTE) $ 94,546 $ 68,498 $ 26,048 38.0 %
Net interest margin (FTE) 4.02 % 3.50 %
Acquired loans discount accretion, net:
Amount (included in interest income) $ 714 $ 2,034 $ (1,320) (64.9) %
Net interest margin less effect of acquired loan discount accretion (1)
3.99 % 3.40 % 0.59 %
PPP loans yield, net:
Amount (included in interest income) $ 313 $ 3,507 $ (3,194) (91.1) %
Net interest margin less effect of PPP loan yield (1)
4.02 % 3.42 % 0.60 %
Acquired loans discount accretion and PPP loan yield, net:
Amount (included in interest income) $ 1,027 $ 5,541 $ (4,514) (81.5) %
Net interest margin less effect of acquired loan discount accretion and PPP loan yield (1)
3.98 % 3.31 % 0.67 %
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Nine months ended September 30, 2022
(dollars in thousands) 2022 2021 Change % Change
Interest income $ 252,516 $ 206,023 $ 46,493 22.6 %
Interest expense (5,440) (4,267) (1,173) 27.5 %
Fully tax-equivalent adjustment (FTE) (1)
1,120 797 323 40.5 %
Net interest income (FTE) $ 248,196 $ 202,553 $ 45,643 22.5 %
Net interest margin (FTE) 3.71 % 3.61 %
Acquired loans discount accretion, net:
Amount (included in interest income) $ 3,714 $ 6,311 $ (2,597) (41.2) %
Net interest margin less effect of acquired loan discount accretion (1)
3.65 % 3.50 % 0.15 %
PPP loans yield, net:
Amount (included in interest income) $ 2,374 $ 12,549 $ (10,175) (81.1) %
Net interest margin less effect of PPP loan yield (1)
3.69 % 3.53 % 0.16 %
Acquired loans discount accretion and PPP loan yield, net:
Amount (included in interest income) $ 6,088 $ 18,860 $ (12,772) (67.7) %
Net interest margin less effect of acquired loans discount and PPP loan yield (1)
3.63 % 3.41 % 0.22 %
(1) Certain information included herein is presented on a fully tax-equivalent (FTE) basis and / or to present additional financial details which may be desired by users of this financial information. The Company believes the use of these non-generally accepted accounting principles (non-GAAP) measures provide additional clarity in assessing its results, and the presentation of these measures are common practice within the banking industry.
Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or the discount is accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the dollar impact 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 increase in interest rates, the prepayment rate of portfolio loans, inclusive of those acquired at a premium or discount, declined throughout 2022. During the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, purchased loan discount accretion was $714,000, $1,677,000, and $2,034,000, respectively.
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Summary of Average Balances, Yields/Rates and Interest Differential
The following table presents, for the three month periods indicated, information regarding the Company’s consolidated average assets, liabilities and shareholders’ equity, the amounts of interest income from average interest-earning assets and resulting yields, and the amount of interest expense paid on interest-bearing liabilities. Average loan balances include nonperforming loans. Interest income includes proceeds from loans on nonaccrual loans only to the extent cash payments have been received and applied to interest income. Yields on securities and certain loans have been adjusted upward to reflect the effect of income thereon exempt from federal income taxation at the current statutory tax rate (dollars in thousands).
For the three months ended
September 30, 2022 September 30, 2021
Average
Balance Interest
Income/
Expense Rates
Earned
/Paid Average
Balance Interest
Income/
Expense Rates
Earned
/Paid
Assets:
Loans, excluding PPP $ 6,162,267 $ 75,643 4.87 % $ 4,684,492 $ 57,218 4.85 %
PPP loans 8,775 313 14.15 % 213,430 3,507 6.52 %
Investment securities - taxable 2,591,513 17,122 2.62 % 2,019,283 7,741 1.52 %
Investment securities - nontaxable (1)
210,606 1,908 3.59 % 130,028 1,147 3.50 %
Total investments 2,802,119 19,030 2.69 % 2,149,311 8,888 1.64 %
Cash at Federal Reserve and other banks 346,991 1,820 2.08 % 710,936 280 0.16 %
Total interest-earning assets 9,320,152 96,806 4.12 % 7,758,169 69,893 3.57 %
Other assets 810,966 589,942
Total assets $ 10,131,118 $ 8,348,111
Liabilities and shareholders’ equity:
Interest-bearing demand deposits $ 1,775,884 $ 119 0.03 % $ 1,507,697 $ 116 0.03 %
Savings deposits 3,011,145 685 0.09 % 2,407,368 328 0.05 %
Time deposits 321,100 188 0.23 % 321,381 411 0.51 %
Total interest-bearing deposits 5,108,129 992 0.08 % 4,236,446 855 0.08 %
Other borrowings 38,908 5 0.05 % 48,330 6 0.05 %
Junior subordinated debt 101,011 1,263 4.96 % 57,891 534 3.66 %
Total interest-bearing liabilities 5,248,048 2,260 0.17 % 4,342,667 1,395 0.13 %
Noninterest-bearing deposits 3,644,086 2,900,817
Other liabilities 164,208 117,601
Shareholders’ equity 1,074,776 987,026
Total liabilities and shareholders’ equity $ 10,131,118 $ 8,348,111
Net interest spread (2)
3.95 % 3.45 %
Net interest income and interest margin (3)
$ 94,546 4.02 % $ 68,498 3.50 %
(1) Fully taxable equivalent (FTE). All yields and rates are calculated using specific day counts for the period and year as applicable.
(2) Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of i nterest-earning assets, then annualized based on the number of days in the given period .
As compared to the same quarter in the prior year, average loan yields, excluding PPP, increased 2 basis points from 4.85% during the three months ended September 30, 2021, to 4.87% during the three months ended September 30, 2022. The accretion of discounts from acquired loans added 5 and 17 basis points to loan yields during the quarters ended September 30, 2022 and September 30, 2021, respectively. Therefore, the 2 basis point increase in yields on loans during the comparable three month periods ended September 30, 2022 and 2021 was the net effect of a 14 basis point increase in market loan rates, partially offset by a 12 basis point decline in the accretion of discounts.
The rates paid on interest bearing deposits increased by 1 basis point during the quarter ended September 30, 2022 compared to the trailing quarter. The cost of interest-bearing deposits remained flat at 8 basis points between the quarter ended September 30, 2022 and the same quarter of the prior year. In addition, the level of noninterest-bearing deposits continues to benefit the average cost of total deposits which remained flat at 0.04% in both the current and trailing quarter, compared to 0.5% in the third quarter of the prior year. Non-interest bearing deposit balances grew $74.0 million during the three months ended September 30, 2022. As of September 30, 2022, the ratio of average total noninterest-bearing deposits to total average deposits was 41.6%.
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Nine months ended September 30, 2022 Nine months ended September 30, 2021
Average
Balance Income/
Expense Yield/
Rate Average
Balance Income/
Expense Yield/
Rate
Assets
Loans, excluding PPP $ 5,668,055 $ 201,245 4.75 % $ 4,580,292 $ 168,916 4.93 %
PPP loans 32,287 2,374 9.83 % 300,006 12,549 5.59 %
Investments-taxable 2,487,111 41,695 2.24 % 1,838,023 21,324 1.55 %
Investments-nontaxable (1)
183,772 4,853 3.53 % 129,057 3,453 3.58 %
Total investments 2,670,883 46,548 2.33 % 1,967,080 24,777 1.68 %
Cash at Federal Reserve and other banks 573,252 3,469 0.81 % 656,912 578 0.12 %
Total earning assets 8,944,477 253,636 3.79 % 7,504,290 206,820 3.68 %
Other assets, net 737,721 591,983
Total assets $ 9,682,198 $ 8,096,273
Liabilities and shareholders’ equity
Interest-bearing demand deposits $ 1,724,787 $ 302 0.02 % $ 1,476,987 $ 269 0.02 %
Savings deposits 2,863,447 1,541 0.07 % 2,318,169 965 0.06 %
Time deposits 319,940 676 0.28 % 327,562 1,386 0.57 %
Total interest-bearing deposits 4,908,174 2,519 0.07 % 4,122,718 2,620 0.08 %
Other borrowings 39,609 15 0.05 % 40,732 15 0.05 %
Junior subordinated debt 87,804 2,906 4.42 % 57,790 1,632 3.78 %
Total interest-bearing liabilities 5,035,587 5,440 0.14 % 4,221,240 4,267 0.14 %
Noninterest-bearing deposits 3,435,487 2,790,828
Other liabilities 152,186 121,334
Shareholders’ equity 1,058,938 962,871
Total liabilities and shareholders’ equity $ 9,682,198 $ 8,096,273
Net interest rate spread (1) (2)
3.65 % 3.54 %
Net interest income and margin (1) (3)
$ 248,196 3.71 % $ 202,553 3.61 %
(1) Fully taxable equivalent (FTE). All yields and rates are calculated using specific day counts for the period and year as applicable.
(2) Net interest spread is the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(3) Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets.
Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid
The following table sets forth, for the period identified, a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components.
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Three months ended September 30, 2022
compared with three months ended September 30, 2021
(in thousands) Volume Rate Total
Increase (decrease) in interest income:
Loans, including PPP $ 36,188 $ (20,957) $ 15,231
Investment securities (1)
8,193 1,949 10,142
Cash at Federal Reserve and other banks (146) 1,686 1,540
Total interest-earning assets 44,235 (17,322) 26,913
Increase (decrease) in interest expense:
Interest-bearing demand deposits 20 (17) 3
Savings deposits 75 282 357
Time deposits — (223) (223)
Other borrowings (1) — (1)
Junior subordinated debt 395 334 729
Total interest-bearing liabilities 489 376 865
Increase (decrease) in net interest income $ 43,746 $ (17,698) $ 26,048
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021
(in thousands) Volume Rate Total
Increase (decrease) in interest income:
Loans, including PPP $ 86,269 $ (64,115) $ 22,154
Investment securities (1)
12,020 9,751 21,771
Cash at Federal Reserve and other banks (100) 2,991 2,891
Total interest-earning assets 98,189 (51,373) 46,816
Increase (decrease) in interest expense:
Interest-bearing demand deposits 50 (17) 33
Savings deposits 327 249 576
Time deposits (43) (667) (710)
Other borrowings (1) 1 —
Junior subordinated debt 1,135 139 1,274
Total interest-bearing liabilities 1,468 (295) 1,173
Increase (decrease) in net interest income $ 96,721 $ (51,078) $ 45,643
The following commentary regarding net interest income, interest income and interest expense may be best understood while referencing the Summary of Average Balances, Yields/Rates and Interest Differential and the Summary of Changes in Interest Income and Expense due to Changes in Average Asset and Liability Balances and Yields Earned and Rates Paid shown above.
Net interest income (FTE) during the three months ended September 30, 2022 increased $26,048,000 or 27.6% to $94,546,000 compared to $68,498,000 during the three months ended September 30, 2021. The overall increase in net interest income (FTE) was due to largely an increase in average investment and loan balances, which resulted in improvements in net interest income totaling $8,193,000 and $36,188,000, respectively, despite lower yields on loans partially offsetting those earnings by $20,957,000. In addition, interest income on cash reserves improved by $1,686,000 due to the increase in rates. Following the VRB merger during the first quarter of 2022, larger average balances of subordinated debt has resulted in $729,000 of additional net interest expense.
Net interest income (FTE) during the nine months ended September 30, 2022 increased $45,643,000 or 22.5% to $248,196,000 compared to $202,553,000 during the nine months ended September 30, 2021. The overall increase in net interest income (FTE) was due to largely an increase in average investment and loan balances, which resulted in improvements in net interest income totaling $12,020,000 and $86,269,000, respectively, despite lower yields on loans partially offsetting those earnings by $64,115,000. Following the VRB merger during the first quarter of 2022, larger average balances of subordinated debt has resulted in $1,274,000 of additional net interest expense.
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Asset Quality and Credit Loss Provisioning
During the three months ended September 30, 2022, the Company recorded a provision for credit losses of $3,795,000, as compared to a $2,100,000 provision during the trailing quarter, and a reversal of provision expense of $1,435,000 during the third quarter of 2021.
The following table presents details of the provision for (reversal of) credit losses for the periods indicated:
Three months ended
(dollars in thousands) September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021
Addition to (reversal of) allowance for credit losses $ 3,500 $ 1,940 $ 8,205 $ 715 $ (1,495)
Addition to reserve for unfunded loan commitments
295 160 125 265 60
Total provision for (reversal of) credit losses $ 3,795 $ 2,100 $ 8,330 $ 980 $ (1,435)
The following table presents the activity in the allowance for credit losses on loans for the periods indicated:
Three months ended Nine months ended
(dollars in thousands) September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Balance, beginning of period $ 97,944 $ 86,062 $ 85,376 $ 91,847
ACL at acquisition for PCD loans — — 2,037 —
Provision for (reversal of) credit losses 3,500 (1,495) 13,645 (7,880)
Loans charged-off (267) (1,582) (1,411) (2,195)
Recoveries of previously charged-off loans 311 1,321 1,841 2,534
Balance, end of period $ 101,488 $ 84,306 $ 101,488 $ 84,306
The allowance for credit losses (ACL) was $101,488,000 as of September 30, 2022, a net increase of $3,544,000 over the immediately preceding quarter. The provision for credit losses of $3,500,000 during the quarter was the net effect of increases in required reserves due to qualitative factors and individually analyzed credits. In addition to the aforementioned quarterly increase, the provision for credit losses of $13,645,000 during the nine months ended September 30, 2022 was comprised of $10,820,000 in association with the loans acquired from Valley Republic Bank in the first quarter of 2022, and a net provision for credit losses of $2,825,000 associated with organic loan portfolio growth and the net changes in quantitative and qualitative factors associated with overall borrower performance. For the quarter, the qualitative components of the ACL resulted in a net increase in required reserves, despite continued improvement in US employment rates, due to increased uncertainty in the global economic markets, concentration risks in commercial lending and the rapid rise in interest rates. Meanwhile, the quantitative component of the ACL increased reserve requirements over the trailing quarter due to loan volume growth and increases in specific reserves totaling approximately $1,237,000.
The Company utilizes a forecast period of approximately eight quarters and obtains the forecast data from publicly available sources as of the balance sheet date. This forecast data continues to evolve and included improving shifts in the magnitude of changes for both the unemployment and GDP factors leading up to the balance sheet date, particularly CA unemployment trends. Inflation remains elevated from continued disruptions in the supply chain and high energy prices Despite the expected continued benefit to the net interest income of the Company from the elevated rate environment, Management notes the rapid intervals of rate increases by the Federal Reserve and flattening or inversion of the yield curve, have boosted expectations of the US entering a recession within 12 months and has led to the lowest levels of consumer sentiment in decades. As a result, management continues to believe that certain credit weakness are likely present in the overall economy and that it is appropriate to cautiously maintain a reserve level that incorporates such risk factors.
Loans past due 30 days or more increased by $551,000 during the quarter ended September 30, 2022 to $6,471,000, as compared to $5,920,000 at June 30, 2022. Non-performing loans were $17,471,000 at September 30, 2022, an increase of $5,546,000 from $11,925,000 as of June 30, 2022, and a decrease of $11,319,000 from $28,790,000 as of September 30, 2021. The current quarter change in non-performing assets is nearly entirely attributed to a single agriculture production relationship, which also was the primary contributor to the increase in specific reserves for the quarter.
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The following table illustrates the total loans by risk rating and their respective percentage of total loans for the periods presented.
September 30, % of Total Loans June 30, % of Total Loans September 30, % of Total Loans
(dollars in thousands) 2022 2022 2021
Risk Rating:
Pass $ 6,133,805 97.1 % $ 5,960,781 97.5 % $ 4,698,475 96.1 %
Special Mention 126,273 2.0 % 105,819 1.7 % 138,699 2.9 %
Substandard 54,212 0.9 % 46,821 0.8 % 50,322 1.0 %
Total $ 6,314,290 $ 6,113,421 $ 4,887,496
Classified loans to total loans 0.86 % 0.77 % 1.03 %
Loans past due 30+ days to total loans 0.10 % 0.10 % 0.22 %
The ratio of classified loans increased to 0.86% as of September 30, 2022 as compared to 0.77% in the trailing quarter, but improved by 17 basis points from the equivalent period in 2021. The Company's criticized loan balances increased during the current quarter by approximately $27,846,000 to $180,486,000 as of September 30, 2022. There were no charge-offs incurred in connection with these loans and management continues to work toward resolution with the borrowers.
There were two properties added to other real estate owned totaling $443,000 during the quarter ended September 30, 2022, and two disposals totaling $394,000. As of September 30, 2022, other real estate owned consisted of nine properties with a carrying value of approximately $3,441,000.
Non-performing assets of $20,912,000 at September 30, 2022 represented 0.21% of total assets, a slight change but generally in line with the $15,304,000 or 0.15% and $31,440,000 or 0.37% as of June 30, 2022 and September 30, 2021, respectively.
SBA Paycheck Protection Program and COVID Deferrals
In March 2020 (Round 1) and subsequently in December 2020 (Round 2), the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was created to help small businesses keep workers employed during the COVID-19 crisis. Tri Counties Bank, through its online portal, facilitated the ability for borrowers to open a new deposit account and submit PPP applications during the entirety of the Programs. The SBA ended PPP and did not accept new borrowing applications, effective May 31, 2021. The following is a summary of PPP loan related information as of the periods indicated:
The following is a summary of PPP loan related information as of the periods indicated:
(dollars in thousands) September 30, 2022 December 31, 2021 September 30, 2021
Total number of PPP loans outstanding 16 450 1,449
PPP loan balance (TCBK round 1 origination), gross $ 433 $ 2,544 $ 9,302
PPP loan balance (TCBK round 2 origination), gross 533 60,767 148,159
Acquired PPP loan balance (VRB origination), gross 1,003 — —
Total PPP loans, gross outstanding $ 1,969 $ 63,311 $ 157,461
PPP deferred loan fees (Round 1 origination) — 1 40
PPP deferred loan fees (Round 2 origination) 27 2,163 5,973
Total PPP deferred loan fees (costs) outstanding $ 27 $ 2,164 $ 6,013
As of September 30, 2022, there was approximately $27,000 in net deferred fee income remaining to be recognized. During the three months ended September 30, 2022, the Company recognized $291,000 in fees on PPP loans as compared with $872,000 and $2,984,000 for the three months ended June 30, 2022 and September 30, 2021, respectively. Based on the payment guarantee provided by the SBA as well as the expected short-term duration of the PPP loans acquired from VRB, the fair value of these loans approximates the principal balance outstanding as of the merger date, and therefore, no purchase discount was recorded.
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Non-interest Income
The following table summarizes the Company’s non-interest income for the periods indicated (in thousands):
Three months ended
September 30,
(in thousands) 2022 2021 $ Change % Change
ATM and interchange fees $ 6,714 $ 6,516 $ 198 3.0 %
Service charges on deposit accounts 4,436 3,608 828 22.9 %
Other service fees 1,022 897 125 13.9 %
Mortgage banking service fees 477 476 1 0.2 %
Change in value of mortgage servicing rights 33 (232) 265 (114.2) %
Total service charges and fees 12,682 11,265 1,417 12.6 %
Increase in cash value of life insurance 659 644 15 2.3 %
Asset management and commission income 1,020 957 63 6.6 %
Gain on sale of loans 357 1,814 (1,457) (80.3) %
Lease brokerage income 252 183 69 37.7 %
Sale of customer checks 326 107 219 204.7 %
Gain on sale of investment securities — — — n/m
(Loss) gain on marketable equity securities (115) (14) (101) 721.4 %
Other 459 139 320 230.2 %
Total other non-interest income 2,958 3,830 (872) (22.8) %
Total non-interest income $ 15,640 $ 15,095 $ 545 3.6 %
Non-interest income increased $545,000 or 3.6% to $15,640,000 during the three months ended September 30, 2022, compared to $15,095,000 during the quarter ended September 30, 2021. Generally, the increases in recurring non-interest income items reflects the VRB merger timing. As noted above, decreasing mortgage related activity reduced the gain on sale of loans recorded during the quarter by $1,457,000 or 80.3%, as compared to the three months ended September 30, 2021. Further, changes in the value of mortgage service rights, while lesser in magnitude, typically have an inverse relationship with changes in mortgage banking activities.
Nine months ended September 30,
(in thousands) 2022 2021 $ Change % Change
ATM and interchange fees $ 19,941 $ 18,935 $ 1,006 5.3 %
Service charges on deposit accounts 12,433 10,339 2,094 20.3 %
Other service fees 3,183 2,682 501 18.7 %
Mortgage banking service fees 1,422 1,406 16 1.1 %
Change in value of mortgage servicing rights 443 (691) 1,134 (164.1) %
Total service charges and fees 37,422 32,671 4,751 14.5 %
Increase in cash value of life insurance 2,049 2,062 (13) (0.6) %
Asset management and commission income 2,946 2,738 208 7.6 %
Gain on sale of loans 2,145 7,908 (5,763) (72.9) %
Lease brokerage income 648 542 106 19.6 %
Sale of customer checks 871 342 529 154.7 %
Gain on sale of investment securities — — — n/m
Loss on marketable equity securities (346) (59) (287) 486.4 %
Other 1,431 958 473 49.4 %
Total other non-interest income 9,744 14,491 (4,747) (32.8) %
Total non-interest income $ 47,166 $ 47,162 $ 4 — %
The changes in non-interest income for the nine months ended September 30, 2022 and 2021 are generally consistent with changes in the three months periods discussed above.
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Non-interest Expense
The following table summarizes the Company’s non-interest expense for the periods indicated:
Three months ended
September 30,
(in thousands) 2022 2021 $ Change % Change
Base salaries, net of deferred loan origination costs $ 22,377 $ 17,673 $ 4,704 26.6 %
Incentive compensation 4,832 3,123 1,709 54.7 %
Benefits and other compensation costs 6,319 5,478 841 15.4 %
Total salaries and benefits expense 33,528 26,274 7,254 27.6 %
Occupancy 3,965 3,771 194 5.1 %
Data processing and software 3,449 3,689 (240) (6.5) %
Equipment 1,422 1,336 86 6.4 %
Intangible amortization 1,702 1,409 293 20.8 %
Advertising 990 966 24 2.5 %
ATM and POS network charges 1,694 1,692 2 0.1 %
Professional fees 1,172 1,090 82 7.5 %
Telecommunications 575 574 1 0.2 %
Regulatory assessments and insurance 828 673 155 23.0 %
Merger and acquisition expense — 651 (651) n/m
Postage 287 156 131 84.0 %
Operational losses 492 244 248 101.6 %
Courier service 497 286 211 73.8 %
Gain on sale or acquisition of foreclosed assets (148) (144) (4) 2.8 %
Loss (gain) on disposal of fixed assets 4 (19) 23 (121.1) %
Other miscellaneous expense 4,008 3,159 849 26.9 %
Total other non-interest expense 20,937 19,533 1,404 7.2 %
Total non-interest expense $ 54,465 $ 45,807 $ 8,658 18.9 %
Average full time equivalent staff 1,198 1,049 149 14.2 %
Generally, the increases in recurring non-interest expense items reflect the VRB merger timing of March 25, 2022, and therefore, related expenses for the combined entities, less certain realized cost savings, are only being captured within the most recent three months ended September 30, 2022. Total non-interest expense increased $8,658,000 or 18.9% to $54,465,000 during the three months ended September 30, 2022 as compared to $45,807,000 for the quarter ended September 30, 2021. Total salaries and benefits expense increased by $7,254,000 or 27.6% to $33,528,000, largely from a net increase of 99 full-time equivalent positions following the aforementioned merger with VRB, the build out of other loan production and compliance teams, and the continued strength of organic growth within the loan portfolio driving incentive compensation expense.
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Nine months ended September 30,
(in thousands) 2022 2021 $ Change % Change
Base salaries, net of deferred loan origination costs $ 62,762 $ 50,721 $ 12,041 23.7 %
Incentive compensation 11,697 11,025 672 6.1 %
Benefits and other compensation costs 18,782 16,939 1,843 10.9 %
Total salaries and benefits expense 93,241 78,685 14,556 18.5 %
Occupancy 11,536 11,197 339 3.0 %
Data processing and software 10,558 10,092 466 4.6 %
Equipment 4,208 4,060 148 3.6 %
Intangible amortization 4,632 4,271 361 8.5 %
Advertising 2,445 2,080 365 17.5 %
ATM and POS network charges 4,850 4,489 361 8.0 %
Professional fees 3,281 2,730 551 20.2 %
Telecommunications 1,660 1,719 (59) (3.4) %
Regulatory assessments and insurance 2,327 1,903 424 22.3 %
Merger and acquisition expense 6,253 651 5,602 n/m
Postage 828 478 350 73.2 %
Operational losses 765 665 100 15.0 %
Courier service 1,397 868 529 60.9 %
Gain on sale or acquisition of foreclosed assets (246) (210) (36) 17.1 %
Gain on disposal of fixed assets (1,069) (445) (624) 140.2 %
Other miscellaneous expense 10,510 8,363 2,147 25.7 %
Total other non-interest expense 63,935 52,911 11,024 20.8 %
Total non-interest expense $ 157,176 $ 131,596 $ 25,580 19.4 %
Average full-time equivalent staff 1,155 1,031 124 12.0 %
The changes in non-interest expense for the nine months ended September 30, 2022 and 2021 are generally consistent with changes in the comparable three months periods discussed above.
Income Taxes
The Company’s effective tax rate was 27.5% for the nine months ended September 30, 2022, as compared to 28.1% for the year ended December 31, 2021. Differences between the Company's effective tax rate and applicable federal and state blended statutory rate of approximately 29.6% are due to the proportion of non-taxable revenues, non-deductible expenses, and benefits from tax credits as compared to the levels of pre-tax earnings.
Financial Condition
For financial reporting purposes, the Company does not separately track the changes in assets and liabilities based on branch location or regional geography. The following is a comparison of the quarterly change in certain assets and liabilities:
Ending balances September 30, June 30, Annualized
% Change
(dollars in thousands) 2022 2022 $ Change
Total assets $ 9,976,879 $ 10,120,611 $ (143,732) (5.7) %
Total loans 6,314,290 6,113,421 200,869 13.1 %
Total loans, excluding PPP 6,312,348 6,095,667 216,681 14.2 %
Total investments 2,668,145 2,802,815 (134,670) (19.2) %
Total deposits $ 8,655,769 $ 8,756,775 $ (101,006) (4.6) %
Organic loan growth, excluding PPP, of $216,681,000 or 14.2% on an annualized basis was realized during the quarter ended September 30, 2022, primarily within commercial real estate. During the quarter, and exclusive of PPP balance changes, loan originations/draws totaled approximately $737.0 million while payoffs/repayments of loans totaled $536.0 million, which compares to origination/draws and payoff/repayments activity during the three months ended June 30, 2022 of $697.0 million and $397.0 million, respectively. While
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management believes that loan pipelines remain sufficient to support loan growth, loan pipeline activity may moderate as customer awareness of the rising interest rate environment weighs more heavily on their decision making criteria. Investment security balances decreased $134,670,000 or 19.2% on an annualized basis as the result of declines in market values grew, and prepayments or maturities from the portfolio were utilized to augment the Company's overall balance sheet position. Deposit balances also decreased, with a change of $101,006,000 or 4.6% annualized during the period.
The following is a comparison of the year over year change in certain assets and liabilities:
Ending balances As of September 30, 2022 Acquired Balances Organic
$ Change Organic
% Change
(dollars in thousands) 2022 2021 $ Change
Total assets $ 9,976,879 $ 8,458,030 $ 1,518,849 $ 1,363,529 $ 155,320 1.8 %
Total loans 6,314,290 4,887,496 1,426,794 773,390 653,404 13.4
Total loans, excluding PPP 6,312,348 4,736,048 1,576,300 751,978 824,322 17.4
Total investments 2,668,145 2,333,015 335,130 109,716 225,414 9.7
Total deposits $ 8,655,769 $ 7,236,822 $ 1,418,947 $ 1,215,479 $ 203,468 2.8 %
Non-PPP loan balances have increased as a result of organic activities by approximately $824.3 million during the twelve month period ending September 30, 2022. Investment securities increased to $2.7 billion at September 30, 2022, an organic change of $225.4 million or 9.7% from the prior year. When combined with balances acquired from Valley Republic Bank, this represents an increase of nearly $1.8 billion in earning assets during the last twelve months.
Investment Securities
Investment securities available for sale increased $272,327,000 to $2,480,265,000 as of September 30, 2022, compared to December 31, 2021. This increase is primarily supported by deposit growth and available cash reserves. There were no sales of investment securities during the three and nine months ended September 30, 2022 and 2021, respectively.
The following table presents the available for sale debt securities portfolio by major type as of September 30, 2022 and December 31, 2021:
September 30, 2022 December 31, 2021
(in thousands) Fair Value % Fair Value %
Debt securities available for sale :
Obligations of U.S. government agencies $ 1,389,915 56.0 % $ 1,257,389 57.0 %
Obligations of states and political subdivisions 283,123 11.5 % 192,244 8.7 %
Corporate bonds 5,858 0.2 % 6,756 0.3 %
Asset backed securities 453,801 18.3 % 409,552 18.5 %
Non-agency collateralized mortgage obligations 347,568 14.0 % 341,997 15.5 %
Total debt securities available for sale $ 2,480,265 100.0 % $ 2,207,938 100.0 %
September 30, 2022 December 31, 2021
(in thousands) Amortized
Cost % Amortized
Cost %
Debt securities held to maturity :
Obligations of U.S. government and agencies $ 161,581 96.2 % $ 192,068 96.1 %
Obligations of states and political subdivisions 6,457 3.8 % 7,691 3.9 %
Total debt securities held to maturity $ 168,038 100.0 % $ 199,759 100.0 %
Investment securities held to maturity decreased $31,721,000 to $168,038,000 as of September 30, 2022, as compared to December 31, 2021. This decrease is attributable to calls and principal repayments of $31,421,000, and amortization of net purchase premiums of $6,564,000.
Loans
The Company concentrates its lending activities in six principal areas: commercial real estate loans, consumer loans, commercial and industrial loans, construction loans, agriculture production loans and leases. The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loans, the borrower’s relationship with the Company and prevailing money market rates indicative of the Company’s cost of funds.
The majority of the Company’s loans are direct loans made to individuals, farmers and local businesses. The Company relies substantially
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on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions. The Company makes loans to borrowers whose applications include a sound purpose, a viable repayment source and a plan of repayment established at inception and generally backed by a secondary source of repayment.
The following table shows the Company’s loan balances, net deferred loan costs and discounts, as of the dates indicated:
(in thousands) September 30, 2022 December 31, 2021
Commercial real estate $ 4,238,930 67.1 % $ 3,306,054 67.2 %
Consumer 1,217,297 19.3 % 1,071,551 21.8 %
Commercial and industrial 534,960 8.5 % 259,355 5.3 %
Construction 243,571 3.9 % 222,281 4.5 %
Agriculture production 71,599 1.1 % 50,811 1.1 %
Leases 7,933 0.1 % 6,572 0.1 %
Total loans $ 6,314,290 100.0 % $ 4,916,624 100.0 %
Nonperforming Assets
The following tables set forth the amount of the Company’s NPAs as of the dates indicated. “Performing nonaccrual loans” are loans that may be current for both principal and interest payments, or are less than 90 days past due, but for which payment in full of both principal and interest is not expected, and are not well secured and in the process of collection:
(in thousands) September 30,
2022 December 31,
2021
Performing nonaccrual loans $ 15,215 $ 27,713
Nonperforming nonaccrual loans 2,251 2,637
Total nonaccrual loans 17,466 30,350
Loans 90 days past due and still accruing 5 —
Total nonperforming loans 17,471 30,350
Foreclosed assets 3,441 2,594
Total nonperforming assets $ 20,912 $ 32,944
Nonperforming assets to total assets 0.21 % 0.38 %
Nonperforming loans to total loans 0.27 % 0.62 %
Allowance for credit losses to nonperforming loans 581 % 294 %
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Changes in nonperforming assets during the three months ended September 30, 2022
(in thousands) Balance at
June 30, 2022 New NPA /
Valuation
Adjustments Pay-downs
/Sales
/Upgrades Charge-offs/ (1)
Write-downs
Transfers to
Foreclosed
Assets Balance at September 30, 2022
Commercial real estate:
CRE non-owner occupied $ 2,161 $ — $ (129) $ — $ — $ 2,032
CRE owner occupied 1,441 648 (27) — (284) 1,778
Multifamily 140 — (8) — — 132
Farmland 363 335 (3) — — 695
Total commercial real estate loans 4,105 983 (167) — (284) 4,637
Consumer
SFR 1-4 1st DT liens 3,323 349 (258) — (159) 3,255
SFR HELOCs and junior liens 3,315 479 (429) — — 3,365
Other 108 15 (2) (60) — 61
Total consumer loans 6,746 843 (689) (60) (159) 6,681
Commercial and industrial 954 67 (279) (82) — 660
Construction 120 — — — — 120
Agriculture production — 5,373 — — — 5,373
Leases — — — — — —
Total nonperforming loans 11,925 7,266 (1,135) (142) (443) 17,471
Foreclosed assets 3,379 13 (394) — 443 3,441
Total nonperforming assets $ 15,304 $ 7,279 $ (1,529) $ (142) $ — $ 20,912
(1) The table above does not include deposit overdraft charge-offs.
Nonperforming assets increased during the three months ended September 30, 2022 by $5,608,000 or 36.6% to $20,912,000 at September 30, 2022 compared to $15,304,000 at June 30, 2022. The increase in nonperforming assets during the third quarter of 2022 was primarily the result of nonperforming loans added during the period totaling $7,266,000. Management is actively engaged in the collection and recovery efforts for all nonperforming assets and believes that the credit loss reserves associated with these loans is sufficient as of September 30, 2022.
Loan charge-offs during the three months ended September 30, 2022
In the third quarter of 2022, the Company recorded $142,000 in loan charge-offs and $125,000 in deposit overdraft charge-offs less $281,000 in loan recoveries and $29,000 in deposit overdraft recoveries, which collectively resulted in $44,000 of net recoveries.
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Changes in nonperforming assets during the nine months ended September 30, 2022
(in thousands) Balance at
December 31, 2021 New NPA /
Valuation
Adjustments Pay-downs
/Sales
/Upgrades Charge-offs/ (1)
Write-downs
Transfers to
Foreclosed
Assets Balance at September 30, 2022
Commercial real estate:
CRE non-owner occupied $ 7,899 $ 2,214 $ (8,081) $ — $ — $ 2,032
CRE owner occupied 5,036 648 (3,622) — (284) 1,778
Multifamily 4,457 — (4,325) — — 132
Farmland 3,020 726 (2,444) (294) (313) 695
Total commercial real estate loans 20,412 3,588 (18,472) (294) (597) 4,637
Consumer
SFR 1-4 1st DT liens 3,596 722 (904) — (159) 3,255
SFR HELOCs and junior liens 3,801 2,092 (2,153) — (375) 3,365
Other 71 141 (28) (123) — 61
Total consumer loans 7,468 2,955 (3,085) (123) (534) 6,681
Commercial and industrial 2,415 711 (1,819) (647) — 660
Construction 55 85 (20) — — 120
Agriculture production — 5,373 — — — 5,373
Leases — — — — — —
Total nonperforming loans 30,350 12,712 (23,396) (1,064) (1,131) 17,471
Foreclosed assets 2,594 110 (393) — 1,131 3,442
Total nonperforming assets $ 32,944 $ 12,822 $ (23,789) $ (1,064) $ — $ 20,913
The Components of the Allowance for Credit Losses for Loans
The following table sets forth the allowance for credit losses as of the dates indicated:
(in thousands) September 30,
2022 December 31,
2021 September 30,
2021
Allowance for credit losses:
Qualitative and forecast factor allowance $ 67,825 $ 59,855 $ 58,998
Cohort model allowance reserves 31,844 24,539 24,475
Allowance for individually evaluated loans 1,819 982 833
Total allowance for credit losses $ 101,488 $ 85,376 $ 84,306
Allowance for credit losses for loans / total loans 1.61 % 1.74 % 1.72 %
For additional information regarding the allowance for loan losses, including changes in specific, formula, and environmental factors allowance categories, see “Asset Quality and Loan Loss Provisioning” at “Results of Operations” , above. Based on the current conditions of the loan portfolio, management believes that the $101,488,000 allowance for loan losses at September 30, 2022 is adequate to absorb probable losses inherent in the Bank’s loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio.
The following table summarizes the allocation of the allowance for credit losses between loan types and by percentage of the total allowance for loan losses as of the dates indicated:
(in thousands) September 30, 2022 December 31, 2021 September 30, 2021
Commercial real estate $ 58,640 57.8 % 51,140 59.9 % $ 50,729 60.2 %
Consumer 23,932 23.6 % 23,474 27.5 % 23,491 27.9 %
Commercial and industrial 10,400 10.2 % 3,862 4.5 % 3,427 4.1 %
Construction 6,132 6.0 % 5,667 6.7 % 5,528 6.6 %
Agriculture production 2,368 2.3 % 1,215 1.4 % 1,119 1.2 %
Leases 16 0.1 % 18 — % 12 — %
Total allowance for credit losses $ 101,488 100.0 % 85,376 100.0 % $ 84,306 100.0 %
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The following table summarizes the allocation of the allowance for credit losses as a percentage of the total loans for each loan category as of the dates indicated:
(in thousands) September 30, 2022 December 31, 2021 September 30, 2021
Commercial real estate 1.38 % 1.55 % 1.57 %
Consumer 1.97 % 2.19 % 2.22 %
Commercial and industrial 1.94 % 1.49 % 0.99 %
Construction 2.52 % 2.55 % 2.55 %
Agriculture production 3.31 % 2.39 % 2.52 %
Leases 0.20 % 0.27 % 0.24 %
Total loans 1.61 % 1.74 % 1.72 %
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The following table summarizes the activity in the allowance for credit losses for the periods indicated:
Three months ended
September 30, Nine months ended
September 30,
(in thousands) 2022 2021 2022 2021
Allowance for credit losses:
Balance at beginning of period $ 97,944 $ 86,062 $ 85,376 $ 91,847
ACL on PCD loans — — 2,037 —
Provision for (reversal of) loan losses 3,500 (1,495) 13,645 (7,880)
Loans charged-off:
Commercial real estate:
CRE non-owner occupied — — — —
CRE owner occupied — (18) — (18)
Multifamily — — — —
Farmland — (126) (294) (126)
Consumer:
SFR 1-4 1st DT liens — (145) — (145)
SFR HELOCs and junior liens — — — —
Other (185) (181) (470) (460)
Commercial and industrial (82) (1,112) (647) (1,446)
Construction — — — —
Agriculture production — — — —
Leases — — — —
Total loans charged-off (267) (1,582) (1,411) (2,195)
Recoveries of previously charged-off loans:
Commercial real estate:
CRE non-owner occupied 1 10 1 12
CRE owner occupied 1 793 2 794
Multifamily — — — —
Farmland — — — —
Consumer:
SFR 1-4 1st DT liens 38 1 79 12
SFR HELOCs and junior liens 98 63 426 860
Other 53 97 200 262
Commercial and industrial 119 355 1,130 570
Construction — — — —
Agriculture production 1 2 3 24
Leases — — — —
Total recoveries of previously charged-off loans 311 1,321 1,841 2,534
Net recoveries 44 (261) 430 339
Balance at end of period $ 101,488 $ 84,306 $ 101,488 $ 84,306
Average total loans $ 6,171,042 $ 4,897,922 $ 5,700,342 $ 4,880,298
Ratios (annualized):
Net recoveries (charge-offs) during period to average loans outstanding during period — % (0.02) % 0.02 % 0.01 %
Provision for credit losses (benefit from reversal of) to average loans outstanding during period 0.11 % (0.12) % 0.48 % (0.32) %
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Foreclosed Assets, Net of Allowance for Losses
The following table details the components and summarize the activity in foreclosed assets, net of allowances for losses, for the nine months ended September 30, 2022:
(in thousands) Balance at
December 31,
2021 Sales Valuation
Adjustments Transfers
from Loans Balance at September 30, 2022
Land & construction $ 155 $ — $ — $ 313 $ 468
Residential real estate 1,258 (394) — 534 1,398
Commercial real estate 1,181 — 110 284 1,575
Total foreclosed assets $ 2,594 $ (394) $ 110 $ 1,131 $ 3,441
Deposits
During the three months ended September 30, 2022, the Company’s deposits decreased by $101,006,000. During the 12-month period ended September 30, 2022, the Company's deposits have increased by $1,418,947,000, including $1,215,479,000 that were acquired through the VRB merger.
Off-Balance Sheet Arrangements
See Note 9 to the condensed consolidated financial statements at Item 1 of Part I of this report for information about the Company’s commitments and contingencies including off-balance-sheet arrangements.
Capital Resources
The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management.
On February 25, 2021 the Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company's common stock (the 2021 Repurchase Plan), which approximated 6.7% of the shares outstanding as of the approval date. The actual timing of any share repurchases will be determined by the Company's management and therefore the total value of the shares to be purchased under the 2021 Repurchase Plan is subject to change. The Company may repurchase its outstanding shares of common stock from time to time in open market or privately-negotiated transactions, including block trades, or pursuant to 10b5-1 trading plans. The 2021 Repurchase Plan has no expiration date (in accordance with applicable laws and regulations).
During the three and nine month period ended September 30, 2022, the Company repurchased 45,132 and 571,881 shares with a market value of $2,059,000 and $23,809,000, respectively. Management's decisions as to the timing and extent of share repurchases is influenced by a variety of factors, including but not limited to; the market ask price for TCBK stock, internal capital adequacy projections and projected regulatory capital ratios.
Total shareholders' equity decreased by $51,839,000 during the quarter ended September 30, 2022, as a result of an increase in accumulated other comprehensive losses of $76,740,000, share repurchases totaling approximately $2,059,000 and cash dividend payments on common stock of $10,004,000, partially offset by net income of $37,338,000. As a result, the Company’s book value was $29.71 per share at September 30, 2022 as compared to $31.25 and $33.05 at June 30, 2022, and September 30, 2021, respectively. Changes in the book value were also impacted by the issuance of common stock associated with the acquisition of VRB. The Company’s tangible book value per share, a non-GAAP measure, calculated by subtracting goodwill and other intangible assets from total shareholders’ equity and dividing that sum by total shares outstanding, was $19.92 per share at September 30, 2022, as compared to $21.41 and $25.16 at June 30, 2022, and September 30, 2021, respectively.
Trailing Quarter Balance Sheet Change
September 30, 2022 December 31, 2021
Ratio Minimum
Regulatory
Requirement Ratio Minimum
Regulatory
Requirement
Total risk based capital 14.0 % 10.5 % 15.4 % 10.5 %
Tier I capital 12.2 % 8.5 % 14.2 % 8.5 %
Common equity Tier 1 capital 11.4 % 7.0 % 13.2 % 7.0 %
Leverage 9.6 % 4.0 % 9.9 % 4.0 %
See Note 10 and Note 16 to the condensed consolidated financial statements at Item 1 of Part I of this report for additional information about the Company’s capital resources.
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As of September 30, 2022, we had an effective shelf registration statement on file with the Securities and Exchange Commission that allows us to issue various types of debt securities, as well as common stock, preferred stock, warrants, depository shares representing fractional interest in shares of preferred stock, purchase contracts and units from time to time in one or more offerings. Each issuance under the shelf registration statement will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. The registration statement does not limit the amount of securities that may be issued thereunder. Our ability to issue securities is subject to market conditions and other factors including, in the case of our debt securities, our credit ratings and compliance with current and prospective covenants in credit agreements.
Liquidity
The Company’s principal source of asset liquidity is cash maintained at the Federal Reserve Bank of San Francisco (“Federal Reserve”) and other banks and marketable investment securities classified as available for sale. As of September 30, 2022, Federal Reserve required cash reserve ratios continue to be temporarily reduced to zero as a response to the worldwide COVID-19 pandemic and on-going impact on supply chains and the energy markets. The Company’s profitability during the first nine months of 2022 generated cash flows from operations of $107,991,000 compared to $99,919,000 during the first nine months of 2021. Net cash used by investing activities was $648,487,000 for the nine months ended September 30, 2022, compared to net cash used by investing activities of $752,929,000 during the nine months ending 2021. Financing activities provided $18,584,000 during the nine months ended September 30, 2022, compared to $723,695,000 used during the nine months ended September 30, 2021. During the nine months ended September 30, 2022 cash acquired in connection with the VRB merger of $426,883,000 and proceeds from the maturity of available for sale securities of $212,501,000 were the largest contributors to the source of funding that facilitated net organic loan growth of approximately $626,000,000 and net organic investment security growth of approximately $162,000,000, inclusive of changes in the fair value of available for sale investment securities, compared to an increase of deposit balances of $730,888,000 during the same period in 2021.
The changes in contractual obligations of the Company and Bank, to include but not limited to term subordinated debt, operating leases, deferred compensation and supplemental retirement plans as well as off-balance sheet commitments such as unfunded loans and letters of credit. These contractual obligations increased as a result of the merger with VRB during the quarter ended March 31, 2022, but organically, remained otherwise consistent with similar balances or totals as of December 31, 2021.
The following table identified certain liquidity source and capacity available to the Company as of the dates indicated:
(in thousands) September 30, 2022 December 31, 2021
FHLB advances
Borrowing capacity $ 2,434,714 $ 2,251,285
Amount utilized — —
Letters of credit — —
Amount available 2,434,714 2,251,285
FRB discount window
Borrowing capacity $ 255,603 $ 184,694
Amount utilized — —
Amount available 255,603 184,694
Unsecured lines of credit available $ 60,000 $ 60,000
Unencumbered debt securities $ 2,071,334 $ 1,984,241
The Company is dependent upon the payment of cash dividends by the Bank to service its commitments, which have historically included dividends to shareholders, scheduled debt service payments, and general operations. Shareholder dividends are expected to continue subject to the Board’s discretion and management's continuing evaluation of capital levels, earnings, asset quality and other factors. The Company expects that the cash dividends paid by the Bank to the Company will be sufficient to cover the Company's cash flow needs. However, the Company and its ability to generate liquidity through either the issuance of stock or debt, also serves as a potential source of strength for the Bank. Dividends paid by the Company to holders of its common stock used $25,796,000 and $22,291,000 of cash during the nine months ended September 30, 2022 and 2021, respectively. The Company’s liquidity is dependent on dividends received from the Bank. Dividends from the Bank are subject to certain regulatory restrictions.
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TRICO BANCSHARES—NON-GAAP FINANCIAL MEASURES
(Unaudited. Dollars in thousands)
In addition to results presented in accordance with generally accepted accounting principles in the United States of America (GAAP), this filing contains certain non-GAAP financial measures. Management has presented these non-GAAP financial measures in this filing because it believes that they provide useful and comparative information to assess trends in the Company's core operations reflected in the current quarter's results, and facilitate the comparison of our performance with the performance of our peers. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, comparable earnings information using GAAP financial measures is also presented. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. For a reconciliation of these non-GAAP financial measures, see the tables below:
Three months ended Nine months ended
(dollars in thousands) September 30,
2022 June 30,
2022 September 30,
2021 September 30,
2022 September 30,
2021
Net interest margin
Acquired loans discount accretion, net:
Amount (included in interest income) $714 $1,677 $2,034 $3,714 $6,311
Effect on average loan yield 0.05 % 0.11 % 0.17 % 0.09 % 0.18 %
Effect on net interest margin (FTE) 0.03 % 0.07 % 0.10 % 0.06 % 0.11 %
Net interest margin (FTE) 4.02 % 3.67 % 3.50 % 3.71 % 3.61 %
Net interest margin less effect of acquired loan discount accretion (Non-GAAP) 3.99 % 3.60 % 3.40 % 3.65 % 3.50 %
PPP loans yield, net:
Amount (included in interest income) $313 $964 $3,507 $2,374 $12,549
Effect on net interest margin (FTE) 0.01 % 0.02 % 0.09 % 0.02 % 0.08 %
Net interest margin less effect of PPP loan yield (Non-GAAP) 4.02 % 3.65 % 3.42 % 3.69 % 3.53 %
Acquired loan discount accretion and PPP loan yield, net:
Amount (included in interest income) $1,027 $2,641 $5,541 $6,088 $18,860
Effect on net interest margin (FTE) 0.04 % 0.10 % 0.19 % 0.08 % 0.20 %
Net interest margin less effect of acquired loan discount accretion and PPP yields, net (Non-GAAP) 3.98 % 3.57 % 3.31 % 3.63 % 3.41 %
Three months ended Nine months ended
(dollars in thousands) September 30,
2022 June 30,
2022 September 30,
2021 September 30,
2022 September 30,
2021
Pre-tax pre-provision return on average assets or equity
Net income (GAAP) $37,338 $31,364 $27,422 $89,076 $89,433
Exclude income tax expense 14,148 11,748 11,534 33,765 35,644
Exclude provision (benefit) for credit losses 3,795 2,100 (1,435) 14,225 (7,755)
Net income before income tax and provision expense (Non-GAAP) $55,281 $45,212 $37,521 $137,066 $117,322
Average assets (GAAP) $10,131,118 $10,121,714 $8,348,111 $9,682,198 $8,096,273
Average equity (GAAP) $1,074,776 $1,091,454 $987,026 $1,058,938 $962,871
Return on average assets (GAAP) (annualized) 1.46 % 1.24 % 1.30 % 1.23 % 1.48 %
Pre-tax pre-provision return on average assets (Non-GAAP) (annualized) 2.16 % 1.79 % 1.78 % 1.89 % 1.94 %
Return on average equity (GAAP) (annualized) 13.78 % 11.53 % 11.02 % 11.25 % 12.42 %
Pre-tax pre-provision return on average equity (Non-GAAP) (annualized) 20.41 % 16.61 % 15.08 % 17.31 % 16.29 %
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Three months ended Nine months ended
(dollars in thousands) September 30,
2022 June 30,
2022 September 30,
2021 September 30,
2022 September 30,
2021
Return on tangible common equity
Average total shareholders' equity $1,074,776 $1,091,454 $987,026 $1,058,938 $962,871
Exclude average goodwill 307,942 307,942 220,872 281,151 220,872
Exclude average other intangibles 19,433 21,040 14,267 17,717 19,264
Average tangible common equity (Non-GAAP) $747,401 $762,472 $751,887 $760,070 $722,735
Net income (GAAP) $37,338 $31,364 $27,422 $89,076 $89,433
Exclude amortization of intangible assets, net of tax effect 1,199 1,199 992 3,263 3,008
Tangible net income available to common shareholders (Non-GAAP) $38,537 $32,563 $28,414 $92,339 $92,441
Return on average equity 13.78 % 11.53 % 11.02 % 11.25 % 12.42 %
Return on average tangible common equity (Non-GAAP) 20.46 % 17.13 % 14.99 % 16.24 % 17.10 %
Three months ended
(dollars in thousands) September 30,
2022 June 30,
2022 March 31,
2022 December 31,
2021 September 30,
2021
Tangible shareholders' equity to tangible assets
Shareholders' equity (GAAP) $990,338 $1,042,177 $1,109,182 $1,000,184 $982,014
Exclude goodwill and other intangible assets, net 326,314 328,016 329,718 233,241 234,434
Tangible shareholders' equity (Non-GAAP) $664,024 $714,161 $779,464 $766,943 $747,580
Total assets (GAAP) $9,976,879 $10,120,611 $10,118,328 $8,614,787 $8,458,030
Exclude goodwill and other intangible assets, net 326,314 328,016 329,718 233,241 234,434
Total tangible assets (Non-GAAP) $9,650,565 $9,792,595 $9,788,610 $8,381,546 $8,223,596
Shareholders' equity to total assets (GAAP) 9.93 % 10.30 % 10.96 % 11.61 % 11.61 %
Tangible shareholders' equity to tangible assets (Non-GAAP) 6.88 % 7.29 % 7.96 % 9.15 % 9.09 %
Three months ended
(dollars in thousands) September 30,
2022 June 30,
2022 March 31,
2022 December 31,
2021 September 30,
2021
Tangible common shareholders' equity per share
Tangible s/h equity (Non-GAAP) $664,024 $714,161 $779,464 $766,943 $747,580
Common shares outstanding at end of period 33,332,189 33,350,974 33,837,935 29,730,424 29,714,609
Common s/h equity (book value) per share (GAAP) $29.71 $31.25 $32.78 $33.64 $33.05
Tangible common shareholders' equity (tangible book value) per share (Non-GAAP) $19.92 $21.41 $23.04 $25.80 $25.16
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.