Sierra Bancorp — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016; comparisons are with the third quarter and first nine months of 2015 unless otherwise stated. Sierra Bancorp is a California bank holding company operating Bank of the Sierra. The July 8, 2016 Coast Bancorp acquisition expanded the bank to 33 full-service branches and materially affected year-over-year and year-to-date balance-sheet comparisons.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $16.9 million | $14.9 million | $47.4 million | $44.6 million |
| Net interest margin, tax-equivalent | 3.93% | 3.90% | 3.93% | 3.98% |
| Non-interest income | $5.0 million | $4.3 million | $13.9 million | $12.9 million |
| Non-interest expense | $16.1 million | $12.3 million | $43.3 million | $38.5 million |
| Net income | $3.9 million | $4.4 million | $12.1 million | $12.7 million |
| Diluted earnings per share | $0.28 | $0.33 | $0.89 | $0.93 |
Quarterly net income fell 11%; nine-month net income fell 5%. Management cited higher operating costs, including acquisition-related costs, as the primary drag, partly offset by increased net interest and non-interest income. Return on average assets/equity was 0.81%/7.50% in Q3 and 0.89%/8.08% for the nine months. The efficiency ratio increased to 72.02% in Q3 and 69.13% year to date.
At September 30, 2016, total assets were $1.973 billion, net loans $1.249 billion, securities available for sale $535.6 million, deposits $1.634 billion, total liabilities $1.765 billion, and shareholders’ equity $208.5 million. Compared with December 31, 2015, gross loans rose 11% to $1.256 billion and deposits rose 12%; both increases include the Coast acquisition. The allowance for loan and lease losses was $9.9 million, or 0.79% of gross loans, versus $10.4 million, or 0.92%, at year-end.
Net cash provided by operating activities was $16.4 million for the first nine months; investing activities used $25.0 million and financing activities provided $25.4 million. Cash and cash equivalents ended the period at $65.4 million, up from $48.6 million at year-end. The company reported $71.6 million in short-term borrowings and $34.4 million in junior subordinated debentures; long-term borrowings were zero.
Regulatory capital remained above well-capitalized thresholds: Sierra Bancorp’s total risk-based capital ratio was 17.04% and its Tier 1 leverage ratio was 11.89%; Bank of the Sierra’s corresponding ratios were 16.88% and 11.80%. Management described capital as strong.
Material changes and unusual items
- Coast Bancorp was acquired for 599,226 Sierra Bancorp shares and $3.3 million cash. It contributed approximately $94 million in loans and $129 million in deposits at acquisition. Purchase accounting recorded $1.0 million goodwill and a $1.8 million core deposit intangible; fair values remain preliminary.
- Acquisition costs were $1.695 million in Q3 and $2.037 million for the first nine months. Management expected additional non-recurring costs by year-end but could not yet estimate them.
- Average interest-earning assets rose 13% in Q3, helping net interest income increase 14%. Year-to-date margin declined five basis points, reflecting lower asset yields and slightly higher funding costs.
- Nonperforming assets declined to $9.1 million, or 0.72% of loans plus foreclosed assets, from $12.8 million and 1.13% at year-end 2015. Performing troubled debt restructurings were $14.5 million; total TDRs were $17.4 million, including $2.9 million on non-accrual.
- No loan-loss provision was recorded in the quarter or first nine months. Nine-month net charge-offs were $543,000, down from $836,000 a year earlier. Management increased qualitative reserve factors and noted higher-risk classification of certain energy-related credits.
- The company’s $399.3 million of unused commitments to extend credit and $8.5 million of standby letters of credit are off-balance-sheet exposures; utilization and resulting funding needs are uncertain.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management said it remained focused on loan growth but noted elevated prepayments and uncertainty about sustaining growth. A Bakersfield branch was under construction and expected to open in the first quarter of 2017; timing for a proposed Pismo Beach branch was uncertain.
Management identified drought and local economic conditions, interest-rate movements, credit losses and nonperforming assets, securities-value declines, liquidity, employee retention, technology deployment, acquisitions and branch expansion, and regulatory requirements as risks. Interest-rate simulations showed an asset-sensitive profile: a 100-basis-point increase was estimated to raise next-12-month net interest income 1.65%, while a 100-basis-point decrease was estimated to reduce it 9.96%; downside sensitivity exceeded internal policy guidelines. Management considered a material rate decline unlikely but said it would continue monitoring exposure.
Available liquidity included $258 million of existing correspondent and FHLB lines, an additional $114 million of conditional FHLB capacity, approximately $75 million of Federal Reserve Discount Window capacity, and $392 million of unpledged or excess-pledged securities. Management considered these resources adequate for anticipated short-term needs. Legal proceedings in the ordinary course were not expected to have a material adverse effect. Management reported disclosure controls were adequate and effective and no material third-quarter change in internal controls.
Important facts for investors to verify
- How Coast integration costs, expected additional charges, and acquisition-related operating expenses affect future earnings and efficiency.
- Whether organic loan and deposit growth can continue, apart from acquired balances, and how elevated loan prepayments affect growth.
- Credit quality and reserve adequacy, particularly energy-related exposures, TDR performance, and the allowance’s decline as a percentage of loans.
- Funding costs, deposit mix, and the company’s ability to manage its modeled downside exposure to falling interest rates.
- Use and potential funding demands from unused credit commitments, and whether liquidity and capital remain strong as the acquired franchise is integrated.