TriCo Bancshares Announces Quarterly Results

TriCo Bancshares TCBK (the "Company"), parent company of Tri Counties Bank, today announced net income of $23,061,000 for the quarter ended June 30, 2019, compared to $22,726,000 during the trailing quarter ended March 31, 2019 and $15,029,000 during the quarter ended June 30, 2018. Diluted earnings per share were $0.75 for the second quarter of 2019, compared to $0.74 for the first quarter of 2019 and $0.65 for the second quarter of 2018.

Financial Highlights

Performance highlights and other developments for the Company as of or for the three and six months ended June 30, 2019 included the following:

• For the three and six months ended June 30, 2019, the Company's return on average assets was 1.44% and 1.43%, respectively, and the return on average equity was 10.65% and 10.71%, respectively.
• As of June 30, 2019, the Company reported total loans, total assets and total deposits of $4.10 billion, $6.40 billion and $5.34 billion, respectively.
• The loan to deposit ratio was 76.8% as of June 30, 2019 as compared to 74.3% at March 31, 2019 and 77.2% at June 30, 2018.
• Net interest margin grew 34 basis points to 4.48% on a tax equivalent basis as compared to 4.14% in the quarter ended June 30, 2018 and increased 2 basis points from the trailing quarter.
• Non-interest bearing deposits as a percentage of total deposits were 33.3% at June 30, 2019, as compared to 32.4% at March 31, 2019 and 33.6% at June 30, 2018.
• The average rate of interest paid on deposits, including noninterest-bearing deposits, remained low but increased slightly to 0.22% for the second quarter of 2019 as compared with 0.20% for the trailing quarter, and an increase of 10 basis points from the average rate paid during the same quarter of the prior year.
• Non-performing assets to total assets were 0.35% at June 30, 2019 as compared to 0.34% as of March 31, 2019 and 0.47% at December 31, 2018.
• The balance of nonperforming loans increased by $1.0 million, however recoveries on previously charged-off loans were $0.3 million and loans past due thirty days or more decreased by $2.18 million during the quarter.
• The efficiency ratio remained flat at 60.15% as compared to the trailing quarter, which had an efficiency ratio of 60.10%.

President and CEO, Rick Smith commented, "We are pleased with our second quarter operating results which were benefited by organic loan growth of nearly 7.0% on an annualized basis as well as our ability to hold operating costs not associated with incentive compensation flat. The strength and depth of our lending team continues to grow and we look forward to further expansion of both new and existing markets. We previously announced that Richard O'Sullivan, our EVP Chief Commercial Lending Officer, will be retiring after 35 years of dedicated service this month. I would like to thank Richard for all that he has done for the Bank, our shareholders and our customers. As part of our succession management efforts we now look toward Dan Bailey, our EVP Chief Banking Officer, to continue to drive our positive momentum and performance levels into the future."

Summary Results

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

Balance Sheet

Loan growth of $69,356,000 or 6.9% on an annualized basis during the second quarter of 2019 provided benefit to the yield on earning assets and net interest margin as excess liquidity maintained at the Federal Reserve was utilized to fund loans and facilitate seasonal fluctuations in interest-bearing deposit balances.

The growth in average loans of $20,180,000 or 2.0% on an annualized basis during the second quarter was less than the end of period growth as nearly all of the quarterly growth occurred during the last month of the quarter.

In addition to the balance sheet changes which resulted from the acquisition of FNB Bancorp in July 2018, total assets have grown by $68,819,000 or 1.4% between June 2018 and June 2019. This growth was led by $122,691,000 or 3.9% in organic loan growth which was funded by $273,016,000 or 6.7% in organic deposit growth.

Total equity increased to $875,886,000 at June 30, 2019 as compared to $853,278,000 at March 31, 2019 and inclusive of $2,198,000 and $8,927,000 in accumulated other comprehensive loss at the same periods, respectively. As a result, the Company's book value per share increased to $28.71 at June 30, 2019 from $28.04 per share at March 31, 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 $20.60 per share at June 30, 2019 from $19.86 per share March 31, 2019. Excluding accumulated other comprehensive losses from total equity for both quarters, tangible book value per share increased to $20.68 at June 30, 2019 from $20.16 at March 31, 2019.

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. During the three months ended June 30, 2019, March 31, 2019 and December 31, 2018, purchased loan discount accretion was $1,904,000, $1,655,000, and $1,982,000, respectively. During the three months ended March 31, 2019, loans purchased at net premiums several years ago were repaid prior to expected maturity resulting in approximately $259,000 of accelerated amortization.

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 June 30, 2019 increased $421,000 or 0.7% to $64,613,000 compared to $64,192,000 during the three months ended March 31, 2019. The increase in net interest income (FTE) was due primarily to a shift in average balances from excess liquidity maintained with the Federal Reserve yielding 2.34% during the second quarter to loans which yielded 5.49% during the same period. The yield on interest earning assets was 4.75% for the quarter ended June 30, 2019, which represents an increase of 4 basis points over the trailing quarter and an increase of 37 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, has increased by 50 basis points to 5.50% at June 30, 2019 as compared to 5.00% at June 30, 2018. The most recent increase of the index was during December 2018, with an increase of 25 basis points. As such, there were minimal changes to loan yields as compared to the trailing quarter. However, as compared to the same quarter in the prior year, average loan yields increased 43 basis points from 5.06% during the three months ended June 30, 2018 to 5.49% during the three months ended June 30, 2019. Of the 43 basis point increase in yields on loans, 31 basis points was attributable to increases in market rates while 12 basis points was from increased accretion of purchased loans.

Despite decreases in the average balances of savings deposits, these benefits to interest income were partially offset by a 3 basis point increase in the cost of interest bearing liabilities which were 0.42% for the second quarter of 2019. The impact of changes in rates and volumes of interest bearing liabilities resulted in an increase in interest expense of $278,000 during the current quarter. Comparing the quarter ended June 30, 2019 to the trailing quarter, the cost of interest bearing deposits increased by 3 basis points to 0.33% and increased 15 basis points from the same quarter in the prior year due in part to differences in market rates associated with deposits acquired from FNB Bancorp and also due to ongoing competitive pressures associated with deposit accounts in many of the markets we serve.

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 six months ended June 30, 2019 increased $37,324,000 or 40.8% to $128,804,000 compared to $91,480,000 during the six months ended June 30, 2018. The increases were nearly all attributable to changes in volume of earning assets which were acquired from FNB Bancorp in July 2018. The yield on interest earning assets was 4.73% and 4.35% for the six months ended June 30, 2019 and 2018, respectively. This 38 basis point increase in earning asset yields were primarily attributable to a 40 basis point increase in loan yields and a 24 basis point increase in yields on investments. Of the 40 basis point increase in yields on loans, 30 basis points was attributable to increases in market rates while 10 basis points was from increased accretion of purchased loans.

The increases in yields on earning assets were partially offset by increased funding costs as the costs of total interest bearing liabilities increased 7 basis points to 0.40% for the first half of 2019 as compared to 0.33% for the first half of 2018. During the same period, costs associated with interest bearing deposits increased by 15 basis points to 0.32% as compared to 0.17% in the prior year. The decline in interest expense for the first half of 2019 as compared to the prior period was due entirely to the decreases in volume associated with overnight borrowings.

Asset Quality and Loan Loss Provisioning

The Company recorded provision for loan losses of $537,000 during the three months ended June 30, 2019 as compared to benefits from the reversal of provisions of $1,600,000 for the trailing quarter as well as $638,000 in the same quarter of the prior year. The need for a provision for loan losses during the quarter ended June 30, 2019 was driven by loan growth of $69,356,000 and a slight increase in total nonperforming loans of $1,020,000 but partially offset by net recoveries of $267,000 and a decline in past due loans of $2,181,000. For the six month ended June 30, 2019 the Company recorded a benefit from the reversal of loan losses of $1,063,000. While year to date loan growth in 2019 totaled $81,673,000, nonperforming loans decreased by $6,909,000, past due loans decreased by $2,788,000 and net recoveries were $1,349,000 during the same period.

Provision for Income Taxes

The Company's effective tax rate was 24.4% for the quarter ended June 30, 2019 as compared to 27.8% for the same quarter in the prior year. During the second quarter of 2019 the Company received a $696,000 non-taxable death benefit from life insurance proceeds. In addition, the ratio of non-deductible expenses to pre-tax income declined in the year over year comparable second quarter periods.

Non-interest Income

The following table presents the key components of noninterest income for the periods indicated:

Noninterest income increased $1,714,000 (14.4%) to $13,578,000 during the three months ended June 30, 2019 compared to the trailing quarter March 31, 2019. The increase in noninterest income was due primarily to a $823,000 (18.0%) increase in ATM and interchange fees which was the result of increased usage. Other noninterest income includes $696,000 and $32,000 in death benefit insurance proceeds during the second and first quarters of 2019, respectively. The declining interest rate environment provided a $163,000 benefit associated with loan sale gains in the second quarter of 2019 as compared to the trailing quarter. However, the fair value of the mortgage servicing asset continued to decrease during the second quarter due to changes in the assumptions utilized in determining the fair value. Specifically, further increases in prepayment speeds resulting from decreases in the 15 and 30 year mortgage rates continued to be the largest contributors to the decline in fair value of the mortgage servicing asset.

With the exception of the following items the differences in noninterest income for the three months ended June 30, 2019 and 2018 were largely attributable to the acquisition of FNB Bancorp in July 2018. As noted previously, other noninterest income includes $696,000 and $32,000 in death benefit insurance proceeds during the second and first quarters of 2019, respectively.

Noninterest income increased $978,000 (4.0%) to $25,442,000 during the six months ended June 30, 2019 compared to the comparable six month period in 2018. In addition to the impacts resulting from the FNB Bancorp acquisition, noninterest income for the first half of 2019 as compared to the first half of 2018 were impacted by changes in the fair value of the Company's mortgage servicing assets which contributed to a $1,272,000 decline, death benefits from life insurance policies contributed to a $728,000 increase in other, and changes in the value of equity securities contributed to a $148,000 increase in noninterest income.

Non-interest Expense

The following table presents the key components of the Company's noninterest expense for the periods indicated:

Noninterest expense for the quarter ended June 30, 2019 increased $1,339,000 or 2.9% to $46,852,000 as compared to $45,513,000 for the quarter ended March 31, 2019. Increases in salaries were primarily attributable to annual merit increases, and to a lesser extent temporary labor also contributed to the $454,000 or 2.7% increase over the trailing quarter. The increase in incentive compensation cost contributed a $1,139,000 increase in noninterest expense as compared to the trailing quarter and relates directly to loan originations and net loan growth realized the latter half of the second quarter. While other miscellaneous expenses declined by $576,000 in the second quarter of 2019 as compared to the trailing quarter, there were no singularly significant items other than donations expense which decreased by $125,000 during the current period.

Salary and benefit expenses increased $5,266,000 (24.5%) to $26,719,000 during the three months ended June 30, 2019 compared to $21,453,000 during the three months ended June 30, 2018. Base salaries, net of deferred loan origination costs increased $2,782,000 (19.3%) to $17,211,000. The increase in base salaries was due primarily to a 13.6% increase in average full time equivalent employees to 1,138 from 1,002 in the year-ago quarter. Commissions and incentive compensation increased $1,547,000 (71.7%) to $3,706,000 during the three months ended June 30, 2019 compared to the year-ago quarter due primarily to organic loan and deposit growth. Benefits and other compensation expense increased $937,000 (19.3%) to $5,802,000 during the three months ended June 30, 2019 due primarily to increases in the average full time equivalent employees, related to the acquisition of FNB Bancorp in July 2018.

Noninterest expense increased by $16,333,000 or 21.5% to $92,365,000 during the six months ended June 30, 2019 as compared to the $76,032,000 for the six months ended June 30, 2018. Nearly all of this increase was due to the acquisition of FNB Bancorp, in addition to the aforementioned annual merit increases and incentive compensation costs.

About TriCo Bancshares

Established in 1975, Tri Counties Bank is a wholly-owned subsidiary of TriCo Bancshares TCBK headquartered in Chico, California, providing a unique brand of customer Service with Solutions available in traditional stand-alone and in-store bank branches in communities throughout Northern and Central California. Tri Counties Bank provides an extensive and competitive breadth of consumer, small business and commercial banking financial services, along with convenient around-the-clock ATM, online and mobile banking access. Brokerage services are provided by the Bank's investment services through affiliation with Raymond James Financial Services, Inc. Visit www.TriCountiesBank.com to learn more.

Forward-Looking Statement

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; the impact of changes in financial services policies, laws and regulations; technological changes; mergers and acquisitions; changes in the level of our nonperforming assets and charge-offs; 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; changes in consumer spending, borrowing and savings habits; our ability to attract deposits and other sources of liquidity; changes in the financial performance and/or condition of our borrowers; the impact of competition from other financial service providers; the possibility that any of the anticipated benefits of our recent merger with FNBB will not be realized or will not be realized within the expected time period, or that integration of FNBB's operations will be more costly or difficult than expected; the challenges of integrating and retaining key employees; unanticipated regulatory or judicial proceedings; the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; 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, 2018, which is on file with the Securities and Exchange Commission (the "SEC") and 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.