Sierra Bancorp — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter ended March 31, 2016; balance-sheet comparisons are to December 31, 2015, and earnings comparisons are to Q1 2015. Sierra Bancorp is the holding company for Bank of the Sierra, a California community bank operating primarily in Central California. Unless otherwise noted, dollar figures below are in millions.
Financial performance and position
- Earnings: Net income was $4.04 million, up 8% from $3.74 million; basic and diluted EPS were both $0.30 versus $0.27. Annualized return on average assets was 0.93%; return on average equity was 8.41% versus 0.93% and 8.06%, respectively.
- Interest income and margins: Net interest income increased 4% to $15.32 million. Net interest margin declined 16 basis points to 3.96% from 4.12%, as lower earning-asset yields outweighed growth in average earning assets. The filing reports total non-interest income of $4.29 million, up 7%; total non-interest expense was $13.48 million, nearly unchanged. The tax-equivalent efficiency ratio improved to 66.93% from 69.77%.
- Credit costs and asset quality: No loan-loss provision was recorded in either comparison quarter. Net charge-offs were $0.39 million versus $0.53 million. The allowance was $10.03 million, or 0.92% of gross loans, and covered 133.86% of nonperforming loans. Nonperforming assets fell to $10.61 million from $12.83 million; the ratio to loans plus foreclosed assets improved to 0.97% from 1.13%. Performing troubled debt restructurings totaled $13.46 million; total TDRs were $16.2 million, including $2.7 million on non-accrual.
- Balance sheet and funding: Assets were $1.764 billion, down 2% from year-end. Gross loans declined 3% to $1.094 billion, including a $27 million reduction in mortgage warehouse balances. Securities available for sale increased to $522.61 million. Deposits grew 2% to $1.488 billion, while other borrowings declined $55 million; short-term borrowings fell to $22.8 million from $75.3 million. Shareholders’ equity increased to $194.35 million.
- Cash flow and liquidity: Operating cash flow was $5.63 million, compared with an outflow of $2.36 million a year earlier; investing cash flow was $22.76 million versus an outflow of $99.12 million; financing cash flow was an outflow of $33.00 million versus an inflow of $99.29 million. Cash and cash equivalents ended at $44.01 million. Management reported $278 million available on correspondent-bank and FHLB lines, plus conditional additional FHLB and Federal Reserve borrowing capacity.
- Capital: Sierra Bancorp’s total risk-based capital ratio was 18.27%, up from 17.01% at year-end; its leverage ratio was 12.29%. Bank of the Sierra’s total risk-based capital ratio was 17.58%. Both entities exceeded the filing’s “well capitalized” thresholds.
Material changes versus comparable periods
- Year-over-year net income rose $0.30 million, supported by higher net interest income and fee income. Average interest-earning assets increased 7%, but NIM compressed as the yield on earning assets fell and funding costs edged up.
- Deposit service charges rose 19%, primarily on commercial account activity and overdrafts; other service charges and fees rose 5%. Bank-owned life insurance income declined $0.15 million, and securities sales produced a $0.02 million loss versus a $0.02 million gain.
- Quarter over quarter, loan runoff and lower mortgage warehouse utilization reduced assets, while deposit growth and loan runoff enabled a sharp reduction in FHLB borrowings. Nonperforming assets and the allowance both declined in dollars.
Outlook, commentary, risks and unusual items
- The company expected its acquisition of Coast Bancorp, which had $147 million in assets at year-end 2015, to close in July 2016, subject to approvals and other conditions. It forecast approximately $3.2 million of 2016 pretax acquisition costs; $0.21 million was recorded in Q1. A Citizens Business Bank branch acquisition involving approximately $13 million in deposits and $1 million in loans was scheduled for May, pending approvals.
- Management expected real estate loan growth to resume as the year progressed, based on its pipeline, but cited elevated prepayments and made no assurance. A new Sanger branch was scheduled to open in Q2; timing for a Bakersfield branch remained uncertain.
- Interest-rate modeling showed an asset-sensitive position: a parallel 100-basis-point increase was estimated to raise next-12-month net interest income 2.55%, while a 100-basis-point decrease was estimated to reduce it 10.37%, beyond internal policy guidelines. Management said it would continue monitoring the exposure.
- Risks cited include drought and local economic conditions, lower oil prices, interest-rate and liquidity changes, credit losses, securities-value declines, acquisition and expansion execution, staffing, technology, and regulatory requirements. Unused credit commitments were $375 million; standby letters of credit were approximately $17 million. These commitments may not be fully drawn, but could create funding needs.
- Q1 unusual items included a $0.17 million reversal of director retirement-plan accruals, $0.21 million in acquisition costs, and $0.16 million in stock-based compensation expense. The effective income-tax provision rose to 34% of pretax income from 29%, mainly reflecting lower available tax credits. Management reported no material legal-proceedings exposure, no material change in previously disclosed risk factors, and effective disclosure controls.
Most important facts for investors to verify
- Whether the Coast Bancorp and Citizens Business Bank transactions closed as expected, and their final purchase terms, integration costs and impact on capital and earnings.
- Whether loan production recovers after Q1 runoff, especially in mortgage warehouse lines, and whether deposit growth continues to fund assets without higher funding costs.
- Whether credit quality and reserves remain adequate as drought, oil-price and local economic risks evolve; monitor nonperforming loans, TDR performance, charge-offs and allowance coverage.
- How actual earnings respond to rate changes compared with the modeled downside, which exceeded internal limits for a 100-basis-point decline.
- Reconcile reported cash-flow movements and monitor the size and potential drawdown of off-balance-sheet commitments and contingent funding sources.