TriCo Bancshares (NASDAQ: TCBK) (the “Company”), parent company of Tri Counties Bank, today announced net income of $33,649,000 for the quarter ended March 31, 2021, compared to $23,657,000 during the trailing quarter ended December 31, 2020 and $16,121,000 during the quarter ended March 31, 2020. Diluted earnings per share were $1.13 for the first quarter of 2021, compared to $0.79 for the fourth quarter of 2020 and $0.53 for the first quarter of 2020.

Financial Highlights

Performance highlights and other developments for the Company as of or for the three months ended March 31, 2021 included the following:

• For the three months ended March 31, 2021, the Company’s return on average assets was 1.75% and the return on average equity was 14.51%.
• Organic loan growth, excluding PPP was $68.19 million (6.16% annualized) for the quarter totaled while total loan growth, excluding PPP was $169.78 million (15.3% annualized) for the quarter.
• For the current quarter, net interest margin was 3.74% on a tax equivalent basis as compared to 4.34% in the quarter ended March 31, 2020, and a decrease of 5 basis points from the 3.79% in the trailing quarter.
• The efficiency ratio was 50.42% for the first quarter of 2021, as compared to 55.11% in the trailing quarter and 59.66% in the same quarter of the prior year.
• As of March 31, 2021, the Company reported total loans, total assets and total deposits of $4.97 billion, $8.03 billion and $6.86 billion, respectively. As a direct result of the considerable deposit growth experienced over the last twelve months, the loan to deposit ratio was 72.37% as of March 31, 2021, as compared to 73.21% at December 31, 2020 and 81.05% at March 31, 2020.
• Non-interest bearing deposits as a percentage of total deposits were 40.31% at March 31, 2021, as compared to 39.68% at December 31, 2020 and 34.86% at March 31, 2020.
• The average rate of interest paid on deposits, including non-interest-bearing deposits, decreased to 0.06% for the first quarter of 2021 as compared with 0.07% for the trailing quarter, and decreased by 13 basis points from the average rate paid of 0.19% during the same quarter of the prior year.
• Total outstanding loan deferral modifications under the CARES Act legislation was $48.27 million as of March 31, 2021, of which $18.0 million related to second deferrals, and an additional $1.9 million related to third deferrals.
• The reversal of provision for credit losses for loans and debt securities was $6.1 million during the quarter ended March 31, 2021, as compared to a provision expense of $4.9 million during the trailing quarter ended December 31, 2020, and a provision expense totaling $8.1 million for the three month period ended March 31, 2020.
• The allowance for credit losses to total loans was 1.73% as of March 31, 2021, compared to 1.93% as of December 31, 2020, and 1.15% as January 1, 2020, following the Company's adoption of CECL. Non-performing assets to total assets were 0.39% at March 31, 2021, as compared to 0.39% as of December 31, 2020, and 0.31% at March 31, 2020.
• Gain on sale of loans for the three months ended March 31, 2021 totaled $3.2 million, as compared to $3.5 million during the quarter ended December 31, 2020 and $0.9 million for the quarter ended March 31, 2020.

“We continued to benefit from significant growth in deposits during the quarter and we effectively deployed that liquidity to defend net interest income through strong organic and PPP loan growth, as well as additional purchases of whole loans and investment securities," commented Peter Wiese, EVP and Chief Financial Officer. Rick Smith, President and CEO added; "The actions and activities that we pursued during the second half of last year continue to benefit Tri Counties Bank as evidenced by the significant reduction in noninterest expenses and our efficiency ratio. In addition, we rewarded shareholders with an increase in our dividend which now equates to $1.00 per year paid in quarterly amounts of $0.25. Our entire team has become more energized by the idea and growing ability to return to our offices, as well as the increasing level of market activity and opportunities that we continue to pursue."

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Financial results reported in this document are preliminary. Final financial results and other disclosures will be reported in our Quarterly Report on Form 10-Q for the period ended March 31, 2021, and may differ materially from the results and disclosures in this document due to, among other things, the completion of final review procedures, the occurrence of subsequent events, or the discovery of additional information.

Summary Results

For the three months ended March 31, 2021, the Company’s return on average assets was 1.75% and the return on average equity was 14.51%. For the three months ended March 31, 2020, the Company’s return on average assets was 1.00% and the return on average equity was 7.14%.

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

SBA Paycheck Protection Program

In March 2020, the Small Business Administration ("SBA") Paycheck Protection Program ("PPP") was created to help small businesses keep workers employed during the COVID-19 crisis. In December 2020, the SBA announced plans for a second round of PPP lending with streamlined requirements for both borrowers and lenders. Effective Friday, January 15, 2021, Tri Counties Bank launched and began accepting applications via an improved on-line portal which allows borrowers to open a new account and submit PPP applications under the new PPP guidance.

The following is a summary of PPP loan related activity as of the periods indicated:

As of March 31, 2021, the total gross balance outstanding of PPP loans (Round 1) was $193,958,000 (948 loans) as compared to total round 1 PPP originations of $438,510,000. Included in the balance of outstanding PPP loans as of March 31, 2021 are approximately 115 loans totaling $75,669,000 that have been submitted to and are pending forgiveness by the SBA. In connection with the origination of these loans, the Company earned approximately $15,735,000 in loan fees, offset by deferred loan costs of approximately $763,000, the net of which will be recognized over the earlier of loan maturity (generally 24 months), repayment or receipt of forgiveness confirmation. As of March 31, 2021 there was approximately $2,358,000 in net deferred fee income remaining to be recognized. During the three months ended March 31, 2021, the Company recognized $4,854,000 in fees on round 1 PPP loans.

As of March 31, 2021, the total gross balance outstanding of PPP loans (Round 2) was $176,316,000 (1,536 loans) as compared to round 2 originations of the same amount. In connection with the origination of these loans, the Company earned approximately $7,850,000 in loan fees, offset by deferred loan costs of approximately $400,000, the net of which will be recognized over the earlier of loan maturity (generally 60 months), repayment or receipt of forgiveness confirmation. As of March 31, 2021 there was approximately $7,072,000 in net deferred fee income remaining to be recognized. During the three months ended March 31, 2021, the Company recognized $378,000 in fees on round 2 PPP loans. Based on application and approval activity occurring subsequent to March 31, 2021, management anticipates that total round 2 PPP originations will approximate 1,700 loans for $190,215,000 and which are expected generate $9,055,000 in fees from the SBA.

COVID Deferrals

Following the passage of the CARES Act legislation, the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" was issued by federal bank regulators, which offers temporary relief from troubled debt restructuring accounting for loan payment deferrals for certain customers whose businesses are experiencing economic hardship due to Coronavirus. The applicable period for this relief, originally expected to expire on December 31, 2020, was extended through 2021 by way of the Consolidated Appropriations Act. The Company continues to closely monitor the effects of the pandemic on our loan and deposit customers. Our management team continues to be focused on assessing the risks in our loan portfolio and working with our customers to mitigate where possible, the risk of potential losses. Beginning in April 2020, the Company implemented loan programs to allow certain consumers and businesses impacted by the pandemic to defer loan principal and interest payments.

The following is a summary of COVID related loan customer modifications with outstanding balances as of March 31, 2021:

Since inception, total loan modifications associated with CARES Act legislation totaled approximately $439,346,000, of which $48,266,000 and $48,358,000 remained outstanding under their modified terms as of March 31, 2021 and December 31, 2020, respectively. Of the remaining balance outstanding as of March 31, 2021, $18,039,000 is related to second deferrals which are expected to conclude their modification period by August, 2021 and $1,845,000 is related to third deferrals expected to conclude in October, 2021. The Company has elected to forgo the CARES Act Relief guidance for loans totaling $2,160,000 and including all borrowers requesting third deferrals and has deemed such loans along with a limited number of other loans to be impaired under traditional TDR guidance. The remaining balance of loans with modified terms are expected to conclude their modification period during fiscal 2021, however, as long as the current pandemic and recessionary economic conditions continue, it is anticipated that additional borrowers may request an initial or subsequent modification to their loan terms.

Management believes that its analysis of each borrower receiving a loan modification supports the ability of that borrower to return to their normal payment terms at the conclusion of the modification period. However, management determined that risk rating downgrades for each credit receiving a deferral modification was prudent until such time that the borrower's actual payment performance supported an upgrade to the pre-modification risk grade.

Balance Sheet

Total loans outstanding, excluding PPP, grew to $4.61 billion as of March 31, 2021, an increase of 5.2% over the same quarter of the prior year, and an annualized increase of 15.3% over the trailing quarter. Investments outstanding increased to $1.96 billion as of March 31, 2021, an increase of 56.7% annualized over the trailing quarter. Average earning assets to total average assets continued to increase to 92.7% at March 31, 2021, as compared to 92.4% and 90.4% at December 31, 2020, and March 31, 2020, respectively. The Company's loan to deposit ratio was 72.4% at March 31, 2021, as compared to 73.2% and 81.1% at December 31, 2020, and March 31, 2020, respectively.

Total shareholders' equity increased by $17,425,000 during the quarter ended March 31, 2021, primarily as a result of net income of $33,649,000, partially offset by a decrease in accumulated other comprehensive income of $9,319,000, and by $7,432,000 in cash dividends paid on common stock. As a result, the Company’s book value increased to $31.71 per share at March 31, 2021 as compared to $31.12 and $28.91 at December 31, 2020, and March 31, 2020, respectively. 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 $23.72 per share at March 31, 2021, as compared to $23.09 and $20.80 at December 31, 2020, and March 31, 2020, respectively.

Trailing Quarter Balance Sheet Change

The growth of deposit balances continued during the first quarter of 2021, increasing by $357,466,000 or 22.0% annualized. The available liquidity from deposit growth was allocated to fund non-PPP loan and investment growth during the period, which increased by $169,776,000 and $243,678,000, or 15.3% and 56.7% annualized, respectively. Approximately $101,466,000 of the non-PPP loan growth during the quarter is attributed to an acquired pool of mortgage loans. New originations of the second round of PPP stimulus more than offset the decline in loans outstanding from the first round of PPP following SBA forgiveness, resulting in an increase of total loans during the first quarter of 2021 by $203,850,000 or 17.1% on an annualized basis as compared to the trailing quarter.

Average Trailing Quarter Balance Sheet Change

The decline in average total loans of $4,690,000, or (0.4)% on an annualized basis, during the first quarter of 2021 was inconsistent with the actual period end growth as compared to the trailing quarter of $203,850,000 or 17.1%, primarily due to the Company's loan originations occurring in the latter half of the quarter. In addition, the Company purchased a pool of single family residential mortgages totaling approximately $101,466,000 on the final day of the quarter. These purchased loans had at weighted average coupon of approximately 2.72% and an expected yield of approximately 2.48%. The significant growth in both ending and average balances of investment securities was a direct result of management's focus on the deployment of excess cash balances which remained elevated due to continued deposit growth during the quarter.

Year Over Year Balance Sheet Change

As discussed in previous quarters, the PPP program generated significant increases in volume during the twelve months ended March 31, 2021 for both loan and deposit balances. Other forms of stimulus payments have further elevated deposit levels during the same period. While excess deposit proceeds are ratably being allocated to the purchase of investment securities with medium term durations to improve overall margin, we expect to maintain above average levels of liquidity through 2021, as the economic impacts of COVID-19 and amount of future stimulus both remain uncertain. Investment securities increased to $1,962,780,000 at March 31, 2021, a change of $580,754,000 or 42.0% from $1,382,026,000 at March 31, 2020.

Net Interest Income and Net Interest Margin

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

Loans may be acquired at a premium or discount to par value, in which case, the premium is amortized (subtracted from) or accreted (added to) interest income over the remaining life of the loan. Generally, as time goes on, the effects of loan discount accretion and loan premium amortization decrease as the purchased loans mature or pay off early. Upon the early pay off of a loan, any remaining unaccreted discount or unamortized premium is immediately taken into interest income; and as loan payoffs may vary significantly from quarter to quarter, so may the impact of discount accretion and premium amortization on interest income. As a result of the uptick in interest rates, the prepayment rate of portfolio loans, inclusive of those acquired at a premium or discount, decreased during the first quarter of 2021. During the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, purchased loan discount accretion was $1,712,000, $1,960,000, and $1,748,000, respectively.

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 March 31, 2021 increased $37,000 or 0.1% to $66,717,000 compared to $66,680,000 during the three months ended December 31, 2020. Over the same period, net interest margin decreased 5 basis points to 3.74% as compared to 3.79% in the trailing quarter. The 5 basis point decrease is attributed to a 2 basis point decrease in non-PPP loan yields, and a 7 basis point decline in investment security yields, which were 1.74% during the three months ended March 31, 2021, as compared to 1.81% during the trailing quarter. Conversely, those yield declines were partially offset due to a 2 basis point improvement in the rate paid on interest-bearing liabilities, and an increase in yields on the PPP loans, which earned 6.68% during the three months ended March 31, 2021, as compared to 5.59% during the trailing quarter. The quarterly increase in yield on PPP loans is due to an acceleration of deferred loan fee accretion resulting from approximately $140,024,000 in PPP loans being approved by the SBA for forgiveness during the quarter, as compared to $103,811,000 in forgiven loans during the last quarter of 2020.

As compared to the same quarter in the prior year, average loan yields, excluding PPP, decreased 21 basis points from 5.23% during the three months ended March 31, 2020, to 5.02% during the three months ended March 31, 2021. The 21 basis point decrease in yields on loans during the comparable three month periods ended March 31, 2021 and 2020 was entirely attributable to decreases in market rates and loan fees as the accretion of discounts from acquired loans added 16 basis points to loan yields in both quarterly periods. The index utilized in a significant portion of the Company’s variable rate loans, Wall Street Journal Prime, has remained unchanged at 3.25% since March 15, 2020, when it was reduced from 4.25%.

The decline in interest expense when compared to both the trailing quarter and the same quarter from the prior year was primarily attributed to reductions in the rates offered on deposit products. As a result, the cost of interest-bearing deposits, which decreased by 2 basis points as of March 31, 2021, to 0.10% from 0.12% at December 31, 2020.

In addition, the growth of noninterest-bearing deposits continues to benefit the average cost of total deposits as compared to historical periods. Specifically, the ratio of average total noninterest-bearing deposits to total average deposits was 39.9% and 40.3% as of March 31, 2021 and December 31, 2020, respectively, as compared to 34.4% in the quarter ended March 31, 2020. As a result, the average cost of total deposits decreased to 0.06% at March 31, 2021, compared to 0.19% in the same period of 2020.

Interest Rates and Loan Portfolio Composition

During the first quarter of 2020, several market interest rates, including many rates that serve as reference indices for variable rate loans, declined markedly from previous levels. This prolonged retraction in rates continued to apply downward pressure on the portfolio in the first quarter of 2021. As of March 31, 2021, the Company's loan portfolio consisted of approximately $4.97 billion in outstanding principal with a weighted average coupon rate of 4.20%, inclusive of the PPP program loans. Excluding PPP loans, the Company's loan portfolio has approximately $4.60 billion outstanding with a weighted average coupon rate of 4.46% as of March 31, 2021. Included in the March 31, 2021 loan total, exclusive of PPP loans, are variable rate loans totaling $3.01 billion of which 88.3% or $2.66 billion were at their floor rate. The remaining variable rate loans totaling $351.0 million, which carried a weighted average coupon rate of 4.91% as of March 31, 2021, are subject to further rate adjustment. If those remaining variable rate loans were to collectively, through future rate adjustments, be reduced to their respective floors, they would have a weighted average coupon rate of approximately 4.29% which would result in the reduction of the weighted average coupon rate of the total loan portfolio, exclusive of PPP loans, from 4.46% to approximately 4.41%.

As of December 31, 2020, the Company's loan portfolio consisted of approximately $4.80 billion in outstanding principal with a weighted average coupon rate of 4.35%, inclusive of the PPP program loans. Excluding PPP loans, the Company's loan portfolio has approximately $4.47 billion outstanding with a weighted average coupon rate of 4.60% as of December 31, 2020. Included in the December 31, 2020 loan total, exclusive of PPP loans, are variable rate loans totaling $3.02 billion of which 88.2% or $2.66 billion were at their floor rate. The remaining variable rate loans totaling $357.0 million, which carried a weighted average coupon rate of 5.03% as of December 31, 2020, are subject to further rate adjustment. If those remaining variable rate loans were to collectively, through future rate adjustments, be reduced to their respective floors, they would have a weighted average coupon rate of approximately 4.36% which would result in the reduction of the weighted average coupon rate of the total loan portfolio, exclusive of PPP loans, from 4.60% to approximately 4.55%.

Asset Quality and Credit Loss Provisioning

During the three months ended March 31, 2021, the Company recorded a reversal of provision for credit losses of $6,060,000, as compared to a provision expense of $4,850,000 for the trailing quarter, and a provision expense of $8,070,000 during the first quarter of 2020.

The following table presents details of the provision for credit losses for the periods indicated:

The allowance for credit losses (ACL) was $85,941,000 as of quarter ended March 31, 2021, a net decrease of $5,906,000 over the immediately preceding quarter. More specifically, the reversal of allowance for credit losses of $6,240,000 consisted of $5,906,000 in changes relating to qualitative factors, loan volume and changes in credit quality associated with levels of classified, past due and non-performing loans, plus net recoveries totaling $334,000 during the quarter. The portfolio-wide qualitative indicator associated with the forecast levels of US unemployment and the qualitative factors associated with portfolio concentration risks contributed approximately $3,540,000 and $2,954,000, respectively, to the reversal in credit reserves on loans as of March 31, 2021. Further reductions in required reserves of approximately $471,000 were associated with historical loss rates which have continued to remain low despite the recent economic uncertainty. California Unemployment factors, however, did not demonstrate a similar level of improvement and added approximately $834,000 to reserves as of March 31, 2021, as compared to December 31, 2020.

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 significant shifts in the magnitude of changes for both the unemployment and GDP factors leading up to the balance sheet date. Management noted that the majority of economic forecasts utilized in the ACL calculation seem to have rebounded in the current quarter, coinciding with the widespread availability of vaccines, continued easing of occupancy and social distancing restrictions, and continued government stimulus efforts.

Loans past due 30 days or more increased by $3,783,000 during the quarter ended March 31, 2021 to $10,550,000, as compared to $6,767,000 at December 31, 2020. Non-performing loans were $28,941,000 at March 31, 2021, an increase of $2,077,000 and $10,986,000, respectively, from $26,864,000 and $17,955,000 as of December 31, 2020, and March 31, 2020, respectively.

The following table illustrates the total loans by risk rating and their respective percentage of total loans for the periods presented.

The Company's loan portfolio for non-classified loans (loans graded special mention or better) remains generally consistent for the quarter ended March 31, 2021, as compared to the trailing quarter December 31, 2020, representing 98.8% and 99.0% of total loans outstanding, respectively. Loans risk graded special mention decreased by approximately $14,564,000 during the quarter ended March 31, 2021 as compared to the trailing quarter, while loans risk graded substandard increased by approximately $8,388,000 during the same periods. The change in both loan risk rating categories is largely due to the migration from special mention to substandard of three loans to separate borrowers, which totaled approximately $10,380,000. Only one of these loans is considered by management to be impaired as of March 31, 2021 and management believes that there is no ultimate risk of loss and therefore, no specific reserves have been recorded on this loan.

There were no additions to other real estate owned during the quarter ended March 31, 2021 and there was one sale for proceeds of approximately $576,000, which generated a gain of $51,000. As of March 31, 2021, other real estate owned consisted of six properties with a carrying value of $2,309,000.

Allocation of Credit Loss Reserves by Loan Type

For the periods presented in the table above and for purposes of calculating the "% of Loans Outstanding", PPP loans are included in the segment "Commercial and Industrial." PPP loans are fully guaranteed and therefore would not require any loss reserve allocation. Excluding the net outstanding balances of PPP loans from the ratio of the ACL to total loans results in a reserve ratio of approximately 1.87% as of March 31, 2021. In addition to the allowance for credit losses above, the Company has acquired various performing loans whose fair value as of the acquisition date was determined to be less than the principal balance owed on those loans. This difference represents the collective discount of credit, interest rate and liquidity measurements which is expected to be amortized over the life of the loans. As of March 31, 2021, the unamortized discount associated with acquired loans totaled $22,652,000 and if aggregated with the ACL would collectively represent 2.18% of total gross loans and 2.36% of total loans less PPP loans.

Non-interest Income

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

Non-interest income decreased $470,000 or 2.8% to $16,110,000 during the three months ended March 31, 2021 compared to $16,580,000 during the trailing quarter December 31, 2020. Mortgage loan origination volume declined slightly during the period ended March 31, 2021 as a result of an uptick in the interest rate environment, leading to a decrease in loans originated for sale and a $213,000 decrease in gain on sale of loans, as compared to the trailing quarter. Additionally, other non-interest income contributed $704,000 during the quarter ended March 31, 2021, a decrease of $431,000 from the trailing quarter. This decrease was primarily due to an absence of a one-time death benefit totaling $498,000 realized during the quarter ended December 31, 2020. As an offset to these decreases in non-interest income, the change in valuation of mortgage servicing rights increased by $12,000 during the quarter as the expected duration of loans serviced for others extended, which represented an improvement of $388,000 as compared to the trailing quarter ended December 31, 2020.

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

In addition to the discussion above within the non-interest income for the three months ended March 31, 2021 and trailing December 31, 2020, deposit account related fee revenue has declined $777,000 or 19.2% during the three months ended March 31, 2021 when compared to the same period in the prior year as a result of the pandemic related stimulus which has bolstered average deposit balances and reduced the volume of transactions with fees such as minimum account balance charges and non-sufficient funds. As an offset, social distancing guidelines resulted in more online and debit card payment transactions benefiting ATM and interchange fees, which increased by $750,000 or 14.7% over the same quarter in the prior year.

Non-interest Expense

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