Executive Summary / Key Takeaways

• TriCo Bancshares, operating as Tri Counties Bank across 31 California counties, maintains a relationship-based community banking model, leveraging its extensive branch network as a key competitive advantage against more digitally-focused peers.
• First quarter 2025 results showed a slight decrease in net income to $26.4 million ($0.80 diluted EPS) compared to Q4 2024 ($29.0 million, $0.88 diluted EPS), primarily influenced by a higher provision for credit losses and increased non-interest expense, partially offset by stable net interest income and growth in certain non-interest income categories.
• Asset quality metrics saw some deterioration in Q1 2025, with non-performing assets increasing to 0.59% of total assets (from 0.48% in Q4 2024), driven by an increase in non-performing loans, although management believes current reserves are adequate.
• Deposit growth in Q1 2025 was robust at 5.8% annualized, reaching $8.21 billion, while loan growth was more modest at 3.1% annualized, totaling $6.82 billion, reflecting a strategic focus on funding earning asset strategies through organic deposit gathering.
• While facing competitive pressures from peers with lower cost structures and more advanced digital platforms, TCBK's local presence and diversified loan portfolio, particularly in commercial real estate and agriculture, provide a foundation for future performance, supported by strong capital ratios exceeding regulatory requirements.

A Foundation in California: TriCo Bancshares' Enduring Model

Established in 1975, TriCo Bancshares operates through its wholly-owned subsidiary, Tri Counties Bank, as a California-chartered commercial bank deeply embedded across 31 counties in the state. Headquartered in Chico, California, the bank has built its business on a foundation of relationship banking, serving individuals and local/regional businesses with a diversified portfolio of agribusiness, commercial, consumer, and residential loans, alongside comprehensive deposit products and other banking services. This model is supported by an extensive physical branch network, which the company views as a critical asset in fostering customer loyalty and providing personalized service, particularly in its core Northern California markets and expanding presence in Central and Southern California.

The company's history includes strategic growth initiatives, such as the acquisition of North Valley Bancorp, which expanded its footprint and integrated new elements into its structure, as reflected in its junior subordinated debt. More recently, corporate actions like the Visa stock exchange in 2024 demonstrate active management of its investment portfolio. The company also maintains a stock repurchase program, authorized in 2021, signaling a commitment to returning value to shareholders and managing its capital structure.

In a banking landscape increasingly defined by digital transformation, TCBK's competitive positioning is nuanced. While some peers, like Pacific Premier Bancorp (PPBI), emphasize rapid expansion through acquisitions and digital integration, and others, like Westamerica Bancorporation (WABC) and CVB Financial Corp (CVBF), focus on cost efficiency, TCBK leans into its community ties and physical presence. This strategy offers tangible benefits, such as potentially faster in-person service and deeper local market penetration, particularly in niche areas like agricultural lending where relationships are paramount. However, this approach also presents vulnerabilities, notably higher operating costs associated with maintaining a large branch network and potentially slower adoption of digital tools compared to more technologically aggressive rivals. The competitive analysis highlights that TCBK's EPS ($0.88 in Q4 2024) and net interest margin (3.76% in Q4 2024) have recently compared favorably to some peers like CVBF (Q1 2025 EPS $0.65, NIM 3.5%) and PPBI (Q1 2025 EPS $0.62, NIM 3.4%), suggesting effective interest income generation despite its cost structure. Yet, competitors like PPBI and Banner Corporation (BANR) have shown stronger recent revenue growth (7% and 6% respectively), indicating potential market share gains in a dynamic environment.

TCBK's operational focus is on managing its loan and deposit portfolios effectively within its geographic footprint. The company's loan portfolio is heavily weighted towards commercial real estate (67.9% of total loans as of March 31, 2025), followed by consumer (18.8%), commercial and industrial (6.7%), construction (4.4%), agriculture production (2.1%), and leases (0.1%). This diversification across loan types and geographies within California is a strategic strength, providing exposure to various economic drivers. Deposit gathering is critical for funding, with noninterest-bearing demand deposits representing 30.9% of total deposits as of March 31, 2025, a key factor in managing funding costs.

Recent Performance and Financial Health

TriCo Bancshares reported net income of $26.4 million, or $0.80 per diluted share, for the first quarter of 2025. This compares to $29.0 million, or $0.88 per diluted share, in the trailing fourth quarter of 2024, and $27.7 million, or $0.83 per diluted share, in the first quarter of 2024. The sequential decrease in net income was primarily driven by a higher provision for credit losses and increased non-interest expense, partially offset by stable net interest income and growth in certain non-interest income categories.

Net interest income (FTE) for Q1 2025 was $82.8 million, a slight decrease of $0.2 million from $83.0 million in Q1 2024. The net interest margin (FTE) improved to 3.73% in Q1 2025 from 3.68% in Q1 2024. This expansion was attributed to a slight improvement in yields on interest-earning assets and interest-bearing liabilities. The yield on average earning assets was 5.15% in Q1 2025, compared to 5.13% in Q1 2924. The cost of total deposits increased to 1.43% in Q1 2025 from 1.21% in Q1 2024, reflecting the competitive environment for deposits and a shift towards interest-bearing accounts. The average balance of noninterest-bearing deposits decreased by $132.0 million year-over-year, contributing to the higher overall deposit cost. Purchased loan discount accretion added 12 basis points to loan yields in Q1 2025, compared to 8 basis points in Q1 2024, providing a modest boost to interest income.

Non-interest income saw a modest increase of $0.3 million, or 1.9%, to $16.1 million in Q1 2025 compared to $15.8 million in Q1 2024. This was primarily boosted by $1.2 million in excess cash flows from life insurance death benefit proceeds (recorded in other income) and a $0.4 million (31.9%) increase in asset management and commission income due to elevated activity. These gains helped offset a $1.1 million loss on the sale of investment securities during the quarter.

Total non-interest expense rose by $3.1 million, or 5.5%, to $59.6 million in Q1 2025 from $56.5 million in Q1 2024. The primary driver was a $2.6 million (7.4%) increase in total salaries and benefits expense. This increase reflects routine merit increases, strategic hiring focused on loan and deposit production, and higher incentive compensation tied to elevated production levels in Q1 2025 compared to Q1 2024.

Asset quality metrics showed some signs of deterioration in the first quarter. Loans past due 30 days or more increased by $12.0 million to $44.8 million at March 31, 2025, from $32.7 million at December 31, 2024. Non-performing loans increased by $10.8 million to $54.9 million at March 31, 2025, compared to $44.1 million at December 31, 2024, and $34.2 million at March 31, 2024. Non-performing assets, including foreclosed assets, totaled $57.5 million, representing 0.59% of total assets at March 31, 2025, up from 0.48% at December 31, 2024. The allowance for credit losses (ACL) on loans stood at $128.4 million, or 1.88% of total loans, at March 31, 2025, slightly up from 1.85% at December 31, 2024. The provision for credit losses was $3.7 million in Q1 2025, higher than the $1.7 million in Q4 2024, primarily due to increased reserves on individually evaluated loans and unfunded commitments, partially offset by net recoveries and adjustments to qualitative factors. Management asserts that the ACL is adequate to absorb expected losses, despite the increase in non-performing assets.

Total assets grew modestly to $9.82 billion at March 31, 2025, from $9.67 billion at December 31, 2024. This growth was fueled by a $117.8 million increase in deposits (5.8% annualized) and a $52.3 million increase in loans (3.1% annualized). Investment securities decreased by $57.5 million (11.3% annualized) due to maturities, sales, and prepayments, partially offset by purchases and market value increases.

The company maintains a strong capital position, with capital ratios exceeding all regulatory requirements under Basel III. As of March 31, 2025, the Total Capital to Risk Weighted Assets ratio was 15.78% (minimum 10.50%), Tier 1 Capital to Risk Weighted Assets was 14.05% (minimum 8.50%), Common Equity Tier 1 Capital to Risk Weighted Assets was 13.34% (minimum 7.00%), and Tier 1 Capital to Average Assets (Leverage) was 11.73% (minimum 4.00%). The Bank also exceeded the minimums to be considered well-capitalized. Total shareholders equity increased by $34.6 million during the quarter, driven by net income and a decrease in accumulated other comprehensive losses, partially offset by dividends and share repurchases. Book value per share increased to $38.17, and tangible book value per share (non-GAAP) increased to $28.73 at quarter-end.

Outlook and Risks

While no specific quantitative financial guidance was provided in the latest filing, management's commentary and actions offer insight into the company's forward-looking strategy. Management intends to continue deploying excess liquidity and migrating earning assets into higher-yielding categories to support net interest income growth and margin expansion. The utilization of FHLB borrowings, expected to continue through 2026, is part of this strategy to fund earning asset growth. Management also expressed the view that potential future changes in the financial services industry could create significant opportunities for TCBK to differentiate and elevate its performance. The recent restructuring of business and commercial banking teams is a concrete step aimed at enhancing specialized service and lending capabilities for California businesses, positioning the bank for growth in these key areas.

However, the company faces several pertinent risks. Macroeconomic conditions, including potential slowing economic growth, elevated inflation relative to wage increases, and uncertainty surrounding future interest rate movements by the Federal Reserve, could adversely impact borrower repayment capacity, real estate values, and overall loan demand. Geopolitical risks also remain elevated and could negatively affect domestic economic outcomes. The increase in non-performing assets and classified loans in the first quarter of 2025 highlights the ongoing credit risk inherent in the portfolio, particularly in the current economic climate. While management is actively working on resolutions and believes reserves are sufficient, a significant downturn could necessitate higher provisions. Liquidity risk, while currently managed through diverse sources including FHLB lines and organic deposit growth, could be pressured if deposit balances contract significantly. Regulatory changes and the costs associated with compliance also pose ongoing challenges. Furthermore, competition from both traditional banks and fintech firms, particularly those with lower operating costs and more advanced digital offerings, could pressure margins and market share if TCBK cannot effectively leverage its relationship-based model and selectively enhance its digital capabilities. The lingering effects of the 2023 cyber security incident and potential future security breaches also represent operational and reputational risks.

Conclusion

TriCo Bancshares, with its deep roots in California and a business model centered on community relationships and a diversified portfolio, delivered a solid, albeit sequentially softer, performance in the first quarter of 2025. The bank's ability to grow deposits organically and maintain a healthy net interest margin in a challenging rate environment, coupled with its strong capital position, provides a stable foundation. While the increase in non-performing assets warrants careful monitoring, management's proactive approach to credit quality and strategic focus on enhancing key lending areas like business and commercial banking are positive indicators.

The investment thesis for TCBK hinges on its ability to leverage its established local presence and relationship banking strength to drive profitable growth and manage credit risk effectively amidst evolving economic conditions and increasing digital competition. While the lack of specific quantitative forward guidance requires investors to rely on management's stated intentions and strategic initiatives, the bank's consistent profitability, robust capital levels, and efforts to enhance its business banking capabilities suggest a potential for continued value creation, provided it can successfully navigate the macroeconomic uncertainties and competitive pressures, particularly in the digital arena.