Overview

TriCo Bancshares (TCBK) is an $8.6 billion community bank based in Chico, California. TriCo operates 68 banking centers, 86 ATMs and serves 31 counties in California. Inorganic growth is an important part of growth initiatives. Below is a list of offers from recent years:

• 2014 Acquisition of North Valley Bancorp: Continue to build Bakersfield’s presence in Crescent City;
• 2018 Bancorp FNB Acquisition: Expand Bay Area footprint to serve a growing community; and
• 2021 Acquisition of Valley Republic Bancorp: Expand footprint to Bakersfield MSA to become 4th in deposit market share; enter Northern California and the San Joaquin Valley

From a lending perspective, the bank is primarily a real estate lender, with over 65% commercial real estate lending by YE 2021. About 70% of the total loan portfolio is lent to real estate, including residential construction single-family and multi-family. C&I only represent less than 10% of the total loan portfolio. Most of the loan portfolio is conservatively structured, with an average LTV of 56% for CRE’s non-owner occupied loan portfolio.

From a deposit perspective, the bank has a very high quality deposit franchise. The CD represents only less than 5% of the sources of funding for deposits. DDA represents 39% of the total deposit base and savings and money market represent 54% of the deposit base.

Transaction Review

TriCo Bancshares (TCBK) reported net income of $117.7 million for fiscal 2021, compared to $64.8 million for the prior year. Earnings per share were $3.94 versus $2.16 a year earlier. Revenue for the year increased to $341.7 million from $269.5 million in fiscal 2020. During the fourth quarter, TriCo Bancshares recorded an ROA and ROE of 1.3% and 11.4%, respectively. Net interest income/income is 82.5% and Tier 1 capital ratio is 14.2%

From a profitability perspective, reported ROA has been consistently above 1% for the past several years, with the exception of FY20, when provisioning increased significantly. That being said, performance is still impressive in FY20, the bank delivered 92 basis points on ROA. Negative provisioning in FY21 indicates recovery of credit losses in FY20, which is a good sign as the actual loan loss is not as severe.

Credit quality is strong for the bank. Even in the worst year of the pandemic, NPLs rose to 56 basis points, generally in line with the historical average. This largely reflects portfolio composition and conservative underwriting, with an average LTV of 56% the risk of NPL is significantly reduced.

An additional element to highlight is that the bank has focused on reducing the efficiency ratio. With a significant improvement, the efficiency ratio is 53% in FY21 compared to 67% in FY16.

Evaluation

The share price is attractive at 11.1x P/E and 1.7x P/TBV. The bank’s relatively expensive book value can be a currency of acquisition to further expand geographic presence.

Risk/Reward

From a risk perspective, with the acquisition of Valley Republic Bancorp, total assets will reach $9.6 billion. Given the bank’s expertise in mergers and acquisitions, we continue to expect the bank to grow through acquisition. Investors should watch the “pressure for growth” as the bank nears the $10 billion mark in assets. Additionally, irrational competitive pressure and higher inflationary pressure can potentially harm the bank’s earning potential.

From a compensation perspective, the bank has over time grown its assets by double digits. The bank has proven to be a successful acquirer to benefit from the consolidation. Thus, the bank will likely acquire other banks. Additionally, the bank focused on loan and fee growth. The management team has indicated strong interest in driving fee growth, although we have seen no indication of deal actions as the bank’s earnings are primarily balance sheet driven.

Conclusion

In summary, the bank is at an interesting crossroads. As a serial acquirer, the bank has developed expertise in acquiring and integrating banks. Given its current size and valuation, the bank is also a potential target. The bank has a very strong deposit franchise, but the weak lack of commission income somewhat limits its ability to generate higher incremental ROA. Despite the lack of fee income, the management team is very capable and well aware of the challenges of the operating environment, and has been prudent in creating shareholder value. The valuation is attractive for a bank that benefits from acquisition potential and double-digit asset growth. We like the risk/reward setup.