TriCo Bancshares Announces Quarterly Results

TriCo Bancshares (NASDAQ: TCBK) (the "Company"), parent company of Tri Counties Bank, today announced earnings of $9,405,000, or $0.41 per diluted share, for the three months ended June 30, 2016. For the three months ended June 30, 2015 the Company reported earnings of $11,366,000, or $0.49 per diluted share. Diluted shares outstanding were 23,070,151 and 22,980,033 for the three months ended June 30, 2016 and 2015, respectively.

The Company’s results for the three months ended June 30, 2016 include an accrual of $1,450,000 in expenses associated with employment-related legal proceedings previously disclosed by the Company under the heading “Legal Proceedings” in several of the Company’s recent periodic reports filed with the U.S. Securities and Exchange Commission. Also included in the results of the Company for the three months ended June 30, 2016 was $162,000 of nonrecurring noninterest expense related to the Company’s acquisition of three bank branches from Bank of America on March 18, 2016. Excluding the legal proceedings expense and nonrecurring merger related expense noted above, diluted earnings per share for the three months ended June 30, 2016 would have been higher by $0.04 than reported above, and earnings would have been $10,340,000 for the three months ended June 30, 2016. There were no nonrecurring expenses recorded during the three months ended June 30, 2015. In addition to the legal proceedings expense and nonrecurring merger related expense noted above, there were other expense and revenue items during the three months ended June 30, 2016 and 2015 that may be considered nonrecurring, and these items are described below in various sections of this announcement.

The following is a summary of the components of the Company’s consolidated net income, average common shares, and average diluted common shares outstanding for the periods indicated:

The following is a summary of certain of the Company’s consolidated assets and deposits as of the dates indicated:

Included in the changes in the Company’s deposits from June 30, 2015 to June 30, 2016 is the addition of a $45 million certificate of deposit from the State of California on September 16, 2015, bringing the total of such certificates of deposit from the State of California to $50 million, and the addition of deposits from the acquisition of three bank branches from Bank of America, that totaled $161 million on the date of acquisition, March 18, 2016.

On March 18, 2016, Tri Counties Bank acquired three branches from Bank of America. The branches are located in the cities of Arcata, Eureka, and Fortuna in Humboldt County, California. The Bank paid $3,204,000 for deposit relationships with balances of $161,231,000 and loans with balances of $289,000.

The following table discloses the fair value of consideration transferred, the total identifiable net assets acquired and the resulting goodwill relating to the acquisition of three branch banking offices and certain deposits from Bank of America on March 18, 2016:

Also impacting the Company’s results of operations for the three months ended June 30, 2016 is the impact of the sale, on March 31, 2016, of twenty-seven nonperforming loans, nine substandard performing loans, and three purchased credit impaired loans with total recorded book value of approximately $24,810,000, and the purchase, on May 19, 2016 of seven performing multi-family commercial real estate loans valued at $22,503,000.

Loans acquired through purchase, or acquisition of other banks, are classified by the Company as Purchased Not Credit Impaired (PNCI), Purchased Credit Impaired – cash basis (PCI – cash basis), or Purchased Credit Impaired – other (PCI – other). Loans not acquired in an acquisition or otherwise “purchased” are classified as “originated”. Often, such purchased loans are purchased at a discount to face value, and part of this discount is accreted into (added to) interest income over the remaining life of the loan. A loans may also be purchased at a premium to face value, in which case, the premium is amortized into (subtracted from) 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. Further details regarding interest income from loans, including fair value discount accretion, may be found under the heading “Supplemental Loan Interest Income Data” in the Consolidated Financial Data table at the end of this press release.

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 net interest income for the periods indicated (dollars in thousands):

Net interest income (FTE) during the three months ended June 30, 2016 increased $3,030,000 (7.8%) from the same period in 2015 to $41,745,000. The increase in net interest income (FTE) was primarily due to a $223,910,000 (9.5%) increase in the average balance of loans to $2,579,774,000, and a $147,414,000 (13.9%) increase in the average balance of investments to $1,211,556,000 that were partially offset by a 12 basis point decrease in the average yield on loans from 5.44% during the three months ended June 30, 2015 to 5.32% during the three months ended June 30, 2016, and an 16 basis point decrease in the average yield on investments from 2.97% during the three months ended June 30, 2015 to 2.81% during the three months ended June 30, 2016. The decrease in average loan yields is primarily due to declines in market yields on new and renewed loans compared to yields on repricing, maturing, and paid off loans. The decrease in average investment yields is primarily due to declines in market yields on new investments compared to yields on existing investments, and to recent declines in mortgage rates that lead to an increase in mortgage refinancing activity that in turn lead to faster estimated mortgage prepayment speeds and an accelerated level of interest income-reducing premium amortization on existing mortgage backed investment securities. The increases in average loan and investment balances added $3,045,000 and $1,457,000, respectively, to net interest income (FTE) while the decreases in average loan and investment yields reduced net interest income (FTE) by $726,000 and $850,000, respectively, when compared to the year-ago quarter. Included in interest income during the three months ended June 30, 2015 was a special cash dividend of $626,000 from the Company’s investment in Federal Home Loan Bank stock, and $2,133,000 of discount accretion from purchased loans compared to $2,300,000 of discount accretion from purchased loans during the three months ended June 30, 2016. For more information related to loan interest income, including loan purchase discount accretion, see the Supplemental Loan Interest Income Data in the tables at the end of this announcement.

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

The Company recorded a reversal of provision for loan losses of $773,000 during the three months ended June 30, 2016 compared to a reversal of provision for loan losses of $633,000 during the three months ended June 30, 2015. The $773,000 reversal of provision for loan losses during the three months ended June 30, 2016 was due to a $879,000 decrease in the required allowance for loan losses from $36,388,000 at March 31, 2016 to $35,509,000 at June 30, 2016 that was partially offset by net loan charge offs of $106,000. The decrease in the required allowance for loan losses from March 31, 2016 to June 30, 2016 was primarily due to pay downs on certain nonperforming loans that had significant loss allowances assigned to them, and are now no longer required or are significantly reduced; that was partially offset by a $112,083,000 increase in loan balances from $2,541,547,000 at March 31, 2016 to $2,653,630,000 at June 30, 2016. During the three months ended June 30, 2016 nonperforming loans decreased $4,057,000 (16.9%) to $19,977,000, and represented a decrease from 1.47% of loans outstanding as of December 31, 2015, and 0.95% of loans outstanding at March 31, 2016, to 0.75% of loans outstanding as of June 30, 2016. The decrease in nonperforming loans was primarily due to the sale of nonperforming loans during the three months ended March 31, 2016, and the pay down of nonperforming loans during the three months ended June 30, 2016.

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

Noninterest income decreased $835,000 (6.9%) to $11,245,000 during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The decrease in noninterest income was primarily due to a $1,222,000 decrease in change in value of mortgage servicing rights (MSRs) to a negative $701,000 from a positive $521,000 in the year-ago quarter. A decrease in interest rates during the three months ended June 30, 2016 resulted in an increase in estimated prepayment speeds of serviced loans, that in turn resulted in a decrease in expected servicing cash flows, and thus, a lower value of such servicing rights. In the year-ago quarter, an increase in interest rates resulted in a decrease in estimated prepayment speeds of serviced loans that in turn resulted in an increase in expected servicing cash flows, and thus, a higher value of such servicing rights. Partially offsetting the decrease in change in value of mortgage servicing rights was a $509,000 (15.0%) increase in ATM fees and interchange revenue. The increase in ATM fees and interchange revenue was primarily due to the Company’s increased focus in this area, including the introduction of new services in this area during the quarter ended March 31, 2016. Other noninterest interest income increased $179,000 (20.4%) to $1,057,000 due to life insurance death benefits in excess of cash value of $238,000 that was partially offset by decreases in other items in this category during the three months ended June 30, 2016. The changes in noninterest income include the effects from the operation of three branches, including $161,231,000 of deposits, acquired from Bank of America on March 18, 2016.

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

Salary and benefit expenses increased $2,803,000 (16.3%) to $20,045,000 during the three months ended June 30, 2016 compared to $17,242,000 during the three months ended June 30, 2015. Base salaries, overtime and temporary help, net of deferred loan origination costs increased $1,466,000 (12.7%) to $12,968,000 of which base salaries and overtime, net of deferred loan origination costs increased $1,276,000 (11.1%) to $12,774,000 primarily due to annual merit increases, and an increase in average full-time equivalent employees of 57 (6.0%) to 1,001 for the three months ended June 30, 2016. Temporary help expense increased $189,000 to $194,000 during the three months ended June 30, 2016. The increase in temporary help was primarily due to the use of temporary help in the Company’s customer service call center during the three months ended June 30, 2016. Incentive compensation increased 1,081,000 (77.8%) to $2,471,000 during the three months ended June 30, 2016. All categories of incentive compensation expense were higher than the year-ago quarter except commission expense related to the sale of nondeposit investment products. The increases in the other categories of incentive compensation, compared to the year-ago quarter, were primarily due to increased loan production and other performance measures to which incentive compensation is tied compared to such measures in the year-ago quarter. Benefits & other compensation expense increased 256,000 (5.9%) to $4,606,000 during the three months ended June 30, 2016 primarily due to the increases in average full-time equivalent employees and salaries expense, and their effects on group insurance and employer payroll tax expenses.

Other noninterest expense increased $3,028,000 (19.9%) to $18,222,000 during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Included in other noninterest expense for the three months ended June 30, 2016 was the legal settlement expense of $1,450,000 as described above. Also contributing to the increase in other noninterest expense during the three months ended June 30, 2016 compared to the three months ended June 30, 2015 were a $521,000 (28.4%) increase in data processing and software expense, a $321,000 (31.0%) increase in professional fees, a $317,000 (20.8%) increase in equipment expense, and a $298,000 (271%) increase in provision for losses on unfunded commitments. The increase in data processing and software expense was primarily due to increased use of outside data processing services. The increase in professional fees was primarily due to increased consulting expense. The increase in equipment expense was primarily due to increase maintenance and repair expense associated with facilities maintenance. The increase in provision for losses on unfunded commitments was primarily due to a larger increase in unfunded construction loan commitments from March 31, 2016 to June 30, 2016 than from March 31, 2015 to June 30, 2015. Merger related expenses during the three months ended June 30, 2016 were $162,000, and consisted of consulting expenses related to the acquisition of three bank branches from B of A on March 18, 2016. There were no merger related expenses during the three months ended June 30, 2015.

Richard Smith, President and CEO of the Company commented, “While net income was negatively affected by recognition of legal expenses related to previously disclosed pending litigation, changes in mortgage servicing income due to lower interest rates, expenses related to core systems conversions and expenses related to our acquisition of three Bank of America branches, we experienced many positives from the quarter. Ending year over year balances were strong positives for the quarter. Total assets increased by 11.8% from a June 30, 2015 to June 30, 2016. Total loans increased year over year by over 10.9%. Loan quality also improved as nonperforming loans decreased from $39,880,000 on June 30, 2015 to $19,997,000 on June 30, 2016. Bank deposits, including deposits from the Bank of America branch acquisition, increased year over year by 12%.

Smith added, “We continue to move forward with our ambitious technology plans to upgrade our on-line products and core processing systems to better serve our customers. Completion of these projects is expected in the fall of 2016. This investment into new computer solutions will improve operational efficiencies and provide customers with added convenience and improved self-service banking options.”

In addition to the historical information contained herein, this press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company’s actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, interest rate fluctuations, economic conditions in the Company's primary market area, demand for loans, regulatory and accounting changes, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, competitive effects, fee and other noninterest income earned, the outcome of litigation, as well as other factors detailed in the Company's reports filed with the Securities and Exchange Commission which are incorporated herein by reference, including the Form 10-K for the year ended December 31, 2015. These reports and this entire press release should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. The Company does not intend to update any of the forward-looking statements after the date of this release.

Established in 1975, Tri Counties Bank is a wholly-owned subsidiary of TriCo Bancshares (NASDAQ: 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.

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