Sierra Bancorp — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Sierra Bancorp is the parent of Bank of the Sierra, a California community bank. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Interest and dividend income | $17.902 | $16.033 |
| Net interest income | $16.883 | $15.315 |
| Non-interest income | $5.133 | $4.294 |
| Non-interest expense | $15.701 | $13.479 |
| Provision for loan losses | $0 | $0 |
| Net income | $4.551 | $4.036 |
| Basic / diluted EPS | $0.33 / $0.32 | $0.30 / $0.30 |
| Net interest margin, tax-equivalent | 3.90% | 3.96% |
| Efficiency ratio, tax-equivalent | 69.21% | 66.93% |
Net income rose 13% year over year. Annualized return on average assets was 0.94% versus 0.93%; return on average equity was 8.85% versus 8.41%.
- Net interest income increased 10%, mainly on 13% growth in average interest-earning assets, including the Coast Bancorp acquisition; the six-basis-point margin decline partly offset volume growth.
- Non-interest income increased 20%, led by deposit charges, bank-owned life insurance income, and other fees. Non-interest expense rose 16%, reflecting Coast-related and branch operating costs, compensation and occupancy increases, and other items.
- Income tax expense was $1.764 million, or 28% of pretax income, versus $2.094 million, or 34%, a year earlier. Management attributed the lower rate primarily to adoption of stock-compensation accounting guidance and tax effects of incentive stock option dispositions; absent those dispositions, the rate would have been about 32%.
Financial position, cash flow and credit
- Total assets were $2.000 billion, down from $2.033 billion at year-end. Shareholders’ equity was $210.4 million, up from $205.9 million.
- Gross loans and leases were $1.236 billion, down $26.6 million (2%) from year-end, as mortgage warehouse line balances fell $66 million amid lower line utilization and reduced mortgage activity. Real estate and agricultural lending grew. Available-for-sale securities were $551.3 million, up $21.2 million.
- Deposits increased $24.9 million to $1.720 billion. Non-interest-bearing deposits declined $20.3 million to $504.2 million, while interest-bearing deposits grew. Cash and cash equivalents fell $27.7 million to $92.8 million.
- Short-term borrowings declined from $65 million at year-end to zero; federal funds purchased and repurchase agreements were $9.4 million, and subordinated debentures were $34.5 million.
- Operating cash flow was $8.0 million versus $5.5 million in Q1 2016; investing activities provided $4.2 million versus $22.9 million; financing activities used $40.0 million versus $33.0 million. The financing outflow included repayment of $65 million in borrowed funds and $1.9 million in dividends.
- The allowance for loan and lease losses was $9.6 million, or 0.78% of gross loans, versus $9.7 million and 0.77% at year-end. There was no loan-loss provision; net charge-offs were $113,000 versus $393,000 in Q1 2016.
- Nonperforming assets were $8.1 million, or 0.65% of loans plus foreclosed assets, versus $8.6 million and 0.68% at year-end. Non-accrual loans were $5.9 million. Total troubled debt restructurings were $16.4 million, including $2.4 million on non-accrual status.
- Cash, available borrowing lines and potentially liquid securities supported management’s assessment that short-term liquidity was adequate. Available correspondent-bank and FHLB lines totaled $365 million, with further contingent borrowing capacity subject to collateral and other requirements.
- Consolidated total risk-based capital was 17.86% and the leverage ratio was 12.10%; both exceeded stated “well capitalized” thresholds. The Bank’s corresponding ratios were 17.67% and 11.96%.
Changes, outlook and risks
- On April 24, 2017, after quarter-end, Sierra Bancorp agreed to acquire OCB Bancorp, parent of Ojai Community Bank, for Sierra Bancorp stock equivalent to $14 per OCB share, subject to adjustments. Closing was expected in October 2017, subject to customary conditions, including regulatory and shareholder approvals. Ojai had $257 million of assets, $209 million of loans and $208 million of deposits at December 31, 2016. Estimated one-time 2017 pretax acquisition costs were $2.5–$3.0 million.
- The Coast Bancorp acquisition closed in July 2016 and affects year-over-year average balances, income and expenses. The filing also attributes higher costs to acquired operations and branch expansion.
- No formal earnings guidance was provided. Management said it remained focused on loan growth, but cautioned that mortgage warehouse lending can fluctuate with interest rates and refinancing activity. Timing of a planned Pismo Beach branch opening was uncertain.
- Interest-rate simulations show an asset-sensitive profile: an immediate 100-basis-point increase was projected to raise next-12-month net interest income 2.35%, while a 100-basis-point decline was projected to reduce it 8.29%, beyond the company’s stated policy limit. Management said it would continue monitoring exposure.
- Key disclosed risks include adverse local economic conditions, interest-rate and liquidity changes, credit losses, declines in securities values, staffing and technology execution, acquisition and expansion outcomes, and regulatory requirements. Management noted that the expected-credit-loss standard (CECL) could affect reserves and shareholders’ equity; the extent was still under evaluation. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect.
- The company adopted stock-compensation accounting guidance effective January 1, 2017 and expects increased volatility in reported tax expense. The 2017 Stock Incentive Plan was subject to shareholder approval. Disclosure controls were assessed as effective, with no significant first-quarter change in internal controls reported.
Important facts for investors to verify
- Progress, approvals, final terms, integration costs and expected benefits of the OCB Bancorp acquisition.
- Whether mortgage warehouse utilization recovers and offsets continued loan runoff; monitor commercial real estate and agricultural portfolio growth and concentrations.
- Trends in nonperforming loans, TDRs, charge-offs and allowance adequacy, particularly given the absence of a quarterly provision.
- Net interest margin, deposit pricing and actual performance relative to the disclosed downside interest-rate sensitivity.
- Whether elevated operating expenses and efficiency ratio improve after Coast integration and branch expansion, and how much earnings depend on variable BOLI income and tax effects from stock-option dispositions.