Sierra Bancorp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Sierra Bancorp is a California bank holding company whose subsidiary, Bank of the Sierra, provides retail and commercial banking primarily in Central California and selected Southern California markets. At quarter-end it reported $1.72 billion in assets, 28 full-service branches and more than 400 employees. The Santa Clara Valley Bank acquisition closed in November 2014, so 2015 comparisons include the acquired business while most of the 2014 comparable periods do not.
Financial performance and position
- Third-quarter earnings: Net income was $4.41 million, up 24% from $3.55 million; diluted EPS was $0.33 versus $0.25. Annualized return on average assets was 1.03% and return on average equity was 9.32%.
- Nine-month earnings: Net income was $12.70 million, up 10% from $11.59 million; diluted EPS was $0.93 versus $0.81.
- Interest income and margin: Third-quarter net interest income rose 12% to $14.88 million; nine-month net interest income rose 16% to $44.61 million. Tax-equivalent net interest margin was 3.90% for the quarter, down 11 basis points year over year, and 3.98% for nine months, down 3 basis points.
- Other income and expenses: Non-interest income increased 13% for the quarter to $4.26 million and 12% for nine months to $12.92 million. Non-interest expense rose 5% to $12.29 million for the quarter and 15% to $38.50 million for nine months. The efficiency ratio was 63.38% for the quarter versus 66.94%; for nine months it was 65.74% versus 65.25%.
- Credit costs: No loan-loss provision was recorded in the first nine months of 2015, compared with $350,000 in 2014. Nine-month net charge-offs were $836,000, down from $1.02 million. The allowance was $10.41 million, or 0.99% of gross loans, versus $11.25 million, or 1.16%, at year-end 2014.
- Loans and credit quality: Gross loans grew 9% from year-end to $1.054 billion, including growth in mortgage warehouse, real estate and agricultural lending. Nonperforming assets fell to $17.88 million from $24.67 million; nonperforming assets were 1.69% of loans plus foreclosed assets, versus 2.53% at year-end. Total troubled debt restructurings were $23.2 million, including $11.3 million on non-accrual.
- Deposits, debt and liquidity: Deposits rose 5% from year-end to $1.429 billion, although they declined $43 million during the third quarter from their June peak. Non-deposit interest-bearing liabilities increased by $22 million during the first nine months; quarter-end short-term borrowings were $41.5 million and junior subordinated debentures were $30.9 million. Cash and cash equivalents were $48.99 million. Management reported $246 million available on existing credit lines, with additional borrowing capacity subject to collateral and other requirements.
- Cash flow: For nine months, operating activities provided $16.31 million, investing activities used $90.06 million, and financing activities provided $72.65 million. Cash and cash equivalents declined $1.11 million to $48.99 million.
- Capital and shareholder returns: Shareholders’ equity was $187.05 million, approximately unchanged from year-end. The consolidated total risk-based capital ratio was 17.71%, down from 18.44%; management said the company and bank remained well-capitalized. Nine-month cash dividends were $4.21 million and share repurchases were $7.96 million.
Material changes and management commentary
- Earnings growth was driven principally by higher average earning assets and loan growth, alongside lower funding costs and higher deposit-related fees. These benefits were partly offset by margin compression and higher operating expenses.
- Management attributed expense growth to acquisition-related operations, personnel, data processing and telecommunications costs, among other items. The quarter also included higher debit-card losses. A $245,000 special dividend on FHLB stock contributed to year-to-date non-interest income.
- Non-interest income included $431,000 in net securities gains for the first nine months. Bank-owned life insurance income fell year over year, partly reflecting losses on separate-account BOLI and corresponding deferred-compensation expense reversals.
- The company reported a $2.1 million one-time acquisition cost in 2014 and $101,000 of residual acquisition costs in 2015. It planned a Bakersfield branch for mid-2016 and said a Sanger branch could open in the first quarter of 2016 subject to approval.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management anticipated possible continued commercial real estate loan growth based on its pipeline but cautioned that it could not assure such growth.
- Management identified drought, local economic conditions, lower oil prices, credit losses, interest-rate movements, liquidity, employee retention, technology deployment, acquisitions and branch expansion, and regulatory requirements as risks.
- The company described itself as asset-sensitive: its model projected 12-month net interest income to decline 9.25% under an immediate 100-basis-point rate decrease and rise 2.11% under a 100-basis-point increase. The modeled decline exceeded internal policy guidelines; management said it would monitor the exposure and take corrective action as appropriate. Results depend on model assumptions and do not include every potential effect.
- Unused commitments to extend credit were $370.8 million and standby letters of credit were $16.9 million. Their eventual funding and liquidity effects are uncertain. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect; the filing reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- Whether loan growth, particularly in mortgage warehouse and commercial real estate lending, is sustainable and appropriately risk-managed.
- Whether the lower allowance and absence of a 2015 provision remain adequate as loans grow, and how drought, oil prices and other local conditions affect credit quality and TDR performance.
- Whether margin pressure persists, especially in a falling-rate scenario that the company’s model places outside its policy limits.
- How deposit balances develop after the third-quarter decline and whether increased borrowings remain necessary to fund loan growth.
- How acquisition and expansion costs, debit-card losses, and nonrecurring income items affect underlying earnings and efficiency.