Dear Fellow Shareholders:
In many ways, 2022 was a time-honored example of “we owe a good portion of our success to ignoring the noise and distractions around us and simply focusing on what we do well”. Amid a background that included continued supply chain and COVID-related constraints, a dramatic and historic rise in interest rates along with the equally dramatic rise and subsequent bust of the cryptocurrency markets, our employees’ continuing focus on delivering on TriCo’s core mission of improving the financial success and well-being of our shareholders, customers, and communities kept us right on course for an outstanding year.
Before I recap our performance and offer my perspective on 2022, I’d be remiss if I didn’t speak to the issues that have so dramatically affected our industry over the past several weeks. The failures of two larger, regional banks in March 2023 are stark reminders of the importance of risk management, diversification – in all aspects of our balance sheet and business model – and the reputational harm done to our industry when banks stumble.
As a result of these failures, there is much talk recently of the need for different or more regulation. We hope those tasked with crafting any revisions remain keenly aware of the importance of the role of community banks throughout our economy. Addressing the risks that resulted in the closing of the two banks won’t be resolved in a single – and hastily assembled - piece of legislation but rather through the thoughtful analysis of the roles of banks in supporting economic growth. The large, global banks play a critical role in meeting the needs of multi-national firms but just as importantly, Tri Counties Bank – like America’s other community banks - are the primary provider of critical financing for small businesses, single and multi-family residential housing, and commercial real estate projects in smaller towns and rural communities. Our Company was built on and continues to thrive by providing solutions to a broadly diverse range of consumers and business customers – numbering in the hundreds of thousands - in communities of all types and sizes, from Crescent City to San Diego.
We often remark that “we do vanilla pretty well” which is our way of saying that we try to excel in the areas we know and avoid the flashy or trendy ideas that so often result in trouble. These events and their attendant collateral damage are great reminders of our simple goals - to serve a wide variety of consumers, businesses, and communities – both large and small, across California and to ensure the safe, steady and sound navigation of any economy so all of our stakeholders can continue to count on Tri Counties Bank. We’re keenly aware that our reputation for maintaining a strong capital base and reserves often runs counter to the strategies of many others, however, these resources ensure we are here to consistently serve those who place their trust in us.
Our team’s ability to continue their focus on consistent execution delivered the strongest financial performance in your Company’s history in 2022 with TriCo Bancshares reporting net earnings of $125.4 million, or $3.83 per diluted share. Our results for 2022 included additional one-time costs associated with the Valley Republic Bancorp merger of approximately $10.8 million for required reserves on loans and $6.3 million for other related costs, which reduced earnings per share by $0.38.
While the completion of our merger with Valley Republic Bancorp accounted for the bulk of the Company’s $1.3 billion of growth in total assets in 2022, the team’s performance in growing loans – our principal revenue generating product, was outstanding. TriCo’s total loans grew by over $1.5 billion in 2022, with growth split almost evenly between balances acquired from Valley Republic Bank and loans generated by our team. Said differently, without the contribution of Valley Republic, our own organic loan growth exceeded 17 percent for 2022. A strong year of performance given the challenges of rising interest rates.
Rising or falling interest rates can have a material impact on many areas of our business. For example, with rates rising steadily through 2022, our residential mortgage lending business slowed as homeowners were confronted with rates that hadn’t been seen in decades. At the same time, loans and investments with rates that periodically reset continued to increase with each action by the Federal Reserve – resulting in consistently higher net interest revenue over the course of the year. This long awaited move to higher rates will benefit depositors; and also should achieve the Federal Reserve’s goal of slowing inflation through increased rates on all types of loans.
It is likely that 2023 will be a year that continues to test the business models of many financial institutions. As the combined effects of fewer Federal stimulus payments to consumers and actions by the Federal Reserve to pull money from the financial system – at the time of this writing, this “quantitative tightening” action amounts to approximately $95 billion per month - we’ll likely see a pattern of strained liquidity in many banks. Ensuring that funds are available to continue to meet the future loan needs of our customers, as well as reserves to protect the bank during a recession are a fundamental tenet of our operating culture. While we anticipate the Federal Reserve’s continued rate increases will inevitably increase the pressure on borrowers and result in some weakness in overall credit conditions next year, your management team believes Tri Counties Bank is well-prepared.
Expanding Our Efforts To Support Our Communities
Our success is contingent upon, and a reflection of, the successful economic growth and vitality of each of the communities we serve and each year, we work hard to provide a wider range of financial resources and services with the goal of reaching those who may have traditionally been ignored by larger banks. To this end, in 2022, Tri Counties Bank continued to demonstrate its leadership by:
- Developing and fully funding a down payment assistance program for low and moderate-income borrowers throughout California in partnership with our Community Development Financial Institution partners.
- Creating our Homeownership Access Program specifically focused on increasing homeownership in historically disadvantaged Black and Hispanic communities throughout California and partnering with Self Help Enterprises to offer a unique mortgage that recognizes the sweat equity contributions of homeowners.
- Partnering with 3CORE , the economic development district that serves a three county area by providing business financing and collaboration in economic development, to create a support network through the Tri Counties Bank / 3CORE Minority Owned Business Campaign that provides mentorship and customized technical assistance to minority and BIPOC business owners.
- Partnering with CHIP, American Red Cross, FannieMae, North Valley Community Foundation in creating an innovative model to bring affordable rental units to areas that have been devastated by natural disasters.
- Partnering with the Federal Home Loan Bank of San Francisco’s Empowering Black Home Ownership programs which provided total grants of $200,000 to support sustainable homeownership across aspiring and at-risk homeowners.
- FHLB Affordable Housing Program grants of more than $2.1 million to support affordable housing projects – including 149 units of affordable housing for low-income senior citizens and unhoused veterans.
Since its beginning more than 48 years ago, our Company’s directors have applied an exceptional level of guidance, expertise, and experience to overseeing our growth throughout California. Through a wide range of economic and interest rate cycles and an ever-evolving regulatory environment, individually and collectively, they are an important ingredient to our success. For TriCo, there have been no two better examples than Craig Compton and Gage Chrysler who served our shareholders for more than 33 years and 14 years, respectively.. Both Craig and Gage, who retired as directors in May of 2022, are recognized for their leadership in their own business endeavors but more importantly, for their selfless and steadfast leadership, support and contributions to TriCo, its employees and our local communities. They remain champions of Tri Counties Bank and their impact in the boardroom will be missed. In July, we were saddened by the passing of Don Amaral who had served TriCo for more than 19 years as a director. He was a great asset to our Company and his wit and business acumen will be missed.
In 2022, we welcomed Anthony Leggio and Jon Nakamura as directors of TriCo Bancshares. Each brings substantial experience and insight to your Company and we look forward to their continued contributions.
Always Positioning Ourselves For Our Future
Although we continue to be challenged by the volume and significance of the various legislative and regulatory initiatives enacted over the past few years - and those likely to follow in the years ahead - we will continue to make the necessary investments to ensure the safe and sound operation of your bank. We continue to upgrade our technologies to ensure we offer our customers a range of contemporary financial solutions via personal service in our branches and through our mobile and online platforms in addition to continuing to invest in the tools and talent necessary to navigate future growth and an increasing cyber-risk environment.
Our team is excited about the opportunity of 2023 – knowing full well that having our customers recognize us as the #1 community bank in California is the cornerstone of everything we do. We have the best employees in the business and are fortunate to welcome the team from the former Valley Republic Bank.
As always, and on behalf of our more than 1,100 employees and our board of directors, I thank you for your continued confidence and ongoing support of TriCo Bancshares.
Richard P. Smith
Tri Counties Bank
President, CEO and Chairman of the Board