Sierra Bancorp — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014 unless noted. Sierra Bancorp is the holding company for Bank of the Sierra, serving communities in Central and Southern California. The 2014 comparison is affected by the Santa Clara Valley Bank acquisition, which closed in November 2014 and was included in results from that date.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparison |
|---|---|---|
| Net income | $3.738 million | $3.799 million in Q1 2014, down 2% |
| EPS | $0.27 basic and diluted | Q1 2014: $0.27 basic, $0.26 diluted |
| Net interest income | $14.718 million | $12.215 million, up 20% |
| Net interest margin | 4.12% tax-equivalent | 4.00% in Q1 2014 |
| Non-interest income / expense | $4.007 million / $13.460 million | $3.707 million / $10.729 million in Q1 2014 |
| Provision for loan losses | None | $150,000 in Q1 2014 |
| Total assets | $1.733 billion | $1.637 billion at year-end |
| Gross loans and leases | $1.066 billion | $970.653 million at year-end, up 10% |
| Total deposits | $1.391 billion | $1.367 billion at year-end |
| Shareholders’ equity | $188.484 million | $187.091 million at year-end |
- Profitability and costs: Annualized return on average assets was 0.93% and return on average equity was 8.06%, versus 1.09% and 8.36% in Q1 2014. The efficiency ratio increased to 70.47% from 66.16%.
- Cash flow: Operating activities used $2.362 million, compared with $4.782 million provided in Q1 2014. Investing activities used $99.119 million, primarily reflecting $95.615 million of net loan growth. Financing activities provided $99.291 million, including $76.6 million of increased borrowings and $24.320 million of deposit growth. Cash and cash equivalents ended at $47.905 million, down $2.190 million during the quarter.
- Debt and liquidity: At quarter-end, short-term borrowings were $98.8 million, long-term borrowings $2.0 million, subordinated debentures $30.928 million, and federal funds purchased and repurchase agreements $7.985 million. Short-term borrowing rose from $18.2 million at year-end, largely to fund loan growth. Management reported $166 million available on lines with correspondent banks and the FHLB, additional FHLB capacity subject to collateral and stock requirements, and approximately $55 million of Federal Reserve Discount Window capacity.
- Capital: Sierra Bancorp’s total risk-based capital ratio was 17.82% and Tier 1 leverage ratio 12.46%; the Bank’s corresponding ratios were 17.67% and 12.35%. Ratios declined from year-end as risk-weighted assets grew, but management said both entities remained well capitalized.
Material changes versus comparable periods
- Net income slipped despite higher net interest income and non-interest income. The increase in net interest income reflected higher average earning assets, partly from the acquisition and loan growth, plus a 12-basis-point margin improvement. Management noted $366,000 of non-recurring net interest income in Q1 2015, versus $8,000 in Q1 2014.
- Non-interest expense rose 25%. Management cited ongoing costs from the core banking conversion and SCVB acquisition, staffing and salary increases, higher data and deposit processing costs, and debit-card fraud losses. The comparison also includes substantially higher net foreclosed-asset costs in 2015 because Q1 2014 included larger gains on OREO sales.
- Loans grew $95 million quarter over quarter, primarily from higher mortgage warehouse line utilization and a $28 million purchase of residential mortgage loans. Mortgage warehouse balances nearly doubled to $204.233 million; management cautioned that this activity can fluctuate with rates and refinancing.
- Deposits increased $24 million, including $37 million growth in core non-maturity deposits, partly offset by time-deposit runoff and the maturity of $5 million in brokered deposits. Non-deposit interest-bearing liabilities increased by approximately $77 million.
- Nonperforming assets declined to $22.960 million from $24.669 million at year-end; the ratio to gross loans plus foreclosed assets fell to 2.15% from 2.53%. Nonperforming loans were $19.766 million, and the allowance was $10.718 million, or 1.01% of gross loans, versus 1.16% at year-end.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided in the filing. Management expected commercial real estate loan growth to resume as the year progressed and planned a new Bakersfield branch, then expected to open in Q1 2016; neither outcome is assured.
- Management attributed the absence of a loan-loss provision to credit-quality improvement and loan growth in segments with historically low loss rates. Net charge-offs nevertheless increased to $530,000 from $336,000 in Q1 2014. The filing notes that allowance estimates involve judgment and that losses could exceed the allowance.
- Credit risks include drought conditions and local economic weakness, particularly potential effects on agriculture. Other stated risks include interest-rate and liquidity exposure, changing credit losses, securities valuation declines, staffing and technology execution, acquisition and branch-expansion performance, and regulatory requirements.
- The bank described itself as asset-sensitive: modeled net interest income declined 10.74% under an immediate 100-basis-point rate decrease and rose 3.07% under a 100-basis-point increase. The modeled decline exceeded internal policy guidelines; management said it would continue monitoring the exposure. These are model estimates, not forecasts.
- SCVB acquisition costs of $112,000 were recorded in Q1 2015. The filing also identifies $366,000 of non-recurring interest income and heightened debit-card fraud losses. Management reported no impairment of goodwill or other intangible assets and no material adverse effect expected from ordinary-course legal proceedings.
Important facts for investors to verify
- How much of the increase in earnings-asset yield and net interest margin came from non-recurring interest income, and whether those benefits continue.
- Whether rapid mortgage warehouse lending growth and its funding needs persist, and how exposed those balances are to rate and refinancing changes.
- Credit quality trends behind the zero provision, higher net charge-offs, declining allowance-to-loan ratio, and $23.0 million of troubled debt restructurings (including $11.9 million on non-accrual status).
- Whether elevated operating expenses, including core-system and acquisition-related costs, fraud losses, and staffing costs, moderate; and whether the efficiency ratio improves.
- The availability and terms of reported contingent liquidity sources, including FHLB capacity requiring additional collateral and the modeled exposure to falling interest rates.