KBRA Affirms Ratings for TriCo Bancshares
25 Aug 2023 | New York
KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Chico, California-based TriCo Bancshares (NASDAQ: TCBK) (“the company” or “TriCo”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the lead subsidiary, Tri Counties Bank ("the bank"). The Outlook for all long-term ratings is Stable.
Key Credit Considerations
The ratings are underpinned by TCBK’s favorable funding profile, anchored by a diversified deposit franchise with historically low betas. The company’s attractive funding costs are supported by a consistently high level of noninterest-bearing deposits (38% of deposits at 2Q23) and limited reliance on wholesale funding. At just 69 bps for 1H23, TCBK’s cost of interest bearing deposits remained well below the average of KBRA rated peers (1.84%). TriCo has also consistently reflected solid earnings performance, driven by a historically above peer NIM (3.94% in 1H23) that benefits from solid loan yields and very low deposit costs (41 bps for 1H23). Earnings for 1H23 (ROA of 1.20%) were impacted by above average provisions, though it should be noted that the company's provisions reflect management’s conservative stance given the current economic uncertainties as opposed to the presence of tangible issues within the loan portfolio. While the ratings recognize TriCo’s modestly elevated investor CRE exposure (293% of RBC), we consider TCBK’s loan underwriting standards to be conservative, having produced favorable long-term asset quality performance highlighted by nominal credit losses. KBRA considers TCBK’s management team as highly experienced, with in depth operating knowledge of the bank’s key markets. The company’s noninterest income sources are comparatively less diverse relative to higher-rated peers and represented just 59 bps of average assets in 1H23 (or 14% of total revenues), thus remaining a minor constraint to the ratings. Bolstered by strong internal capital generation and measured loan growth, the company reflected improved capital measures relative to YE22, including the CET1 and TCE ratios of 12% and 8.1%, respectively, at end-2Q23. Overall, TCBK’s capital metrics were largely in line with peers as of the end of 2Q23. Therefore, considering the company’s overall risk profile and earnings strength, KBRA views TCBK’s capital position as adequate.
Greater fee income diversification, more in line with higher-rated peers, and maintenance of solid profitability and asset quality measures, along with comparatively strong capitalization, could lead to positive rating momentum over time. A substantial decline in regulatory capital levels or significant deterioration in asset quality or earnings performance metrics could have negative rating implications.
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