Sierra Bancorp — 2015 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2015; comparisons are primarily with 2014. Sierra Bancorp is the holding company for Bank of the Sierra, a California community bank serving Central and selected Southern California markets. The bank provides commercial and consumer lending, mortgage warehouse financing, and deposit services. It completed its Santa Clara Valley Bank acquisition in November 2014.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $60.1 million | $52.3 million |
| Non-interest income | $17.7 million | $15.8 million |
| Net income | $18.1 million | $15.2 million |
| Diluted earnings per share | $1.33 | $1.08 |
| Total assets | $1.797 billion | $1.637 billion |
| Gross loans and leases | $1.133 billion | $971 million |
| Deposits | $1.465 billion | $1.367 billion |
| Shareholders’ equity | $190.3 million | $187.1 million |
Net income rose 19%. Net interest income increased 15%, chiefly from growth in average earning assets, including the 2014 acquisition, organic lending, and purchased residential mortgages. The tax-equivalent net interest margin edged down to 3.99% from 4.01%; competitive loan pricing and growth in lower-yielding mortgage warehouse balances offset volume benefits. The efficiency ratio improved to 63.98% from 66.48%.
No loan-loss provision was recorded in 2015, compared with $350,000 in 2014. Net charge-offs were $825,000; the allowance ended the year at $10.4 million, or 0.92% of gross loans. Nonperforming assets fell 48% to $12.8 million, equal to 1.13% of loans plus foreclosed assets, from $24.7 million and 2.53% a year earlier. Performing troubled-debt restructurings totaled $12.4 million.
Operating cash flow was $29.8 million. Investing activities used $171.1 million, primarily reflecting net loan growth; financing activities provided $139.8 million, including deposit growth and additional borrowings. Cash and cash equivalents ended at $48.6 million, down from $50.1 million. Available-for-sale securities totaled $507.6 million.
Total liabilities were $1.606 billion. Deposits were $1.465 billion; reported borrowings included $75.3 million of short-term borrowings, $2.0 million of long-term borrowings, $9.4 million of repurchase agreements, and $30.9 million of subordinated debentures. The company and bank remained well capitalized: company Common Equity Tier 1, Tier 1 risk-based, total risk-based, and leverage ratios were 13.98%, 16.17%, 17.01%, and 12.14%, respectively. The filing describes liquidity as strong, with $231 million available on correspondent and FHLB lines, additional FHLB capacity subject to collateral, and approximately $63 million available at the Federal Reserve Discount Window.
Material changes versus prior period
- Gross loans grew 17%; mortgage warehouse balances rose $74 million, and agricultural production loans increased 67%. The portfolio remained concentrated in real estate loans, 68.7% of total loans, and mortgage warehouse loans, 15.9%.
- Deposits increased 7%, primarily from core non-maturity deposits; brokered deposits declined to zero at year-end.
- Non-interest expense increased 9% to $50.7 million, partly reflecting ongoing costs from the 2014 acquisition and systems conversion, higher staffing and processing costs, and increased debit-card fraud losses. The 2014 comparison included $2.1 million of acquisition costs and substantial gains on OREO sales.
- Effective tax rate increased to 33.4% from 28.9%, reflecting higher taxable income and reduced tax credits.
- Capital ratios declined as risk-weighted assets grew and the company repurchased shares, but remained above well-capitalized thresholds.
Outlook, risks, contingencies, and unusual items
No formal earnings or revenue guidance is provided. Management expected potential growth in commercial real estate lending based on its pipeline, while noting that future growth and deposit trends are uncertain. The company’s interest-rate simulations showed an asset-sensitive position: a 100-basis-point rate increase was projected to raise 12-month net interest income by 2.12%, while a 100-basis-point decrease was projected to reduce it by 10.20%. Management noted that downside exposure in falling-rate scenarios exceeded its internal guidelines.
In January 2016, the company agreed to acquire Coast Bancorp, which had $145 million in assets and $127 million in deposits at year-end, with closing expected in the second quarter of 2016 subject to approvals and shareholder consent. Estimated one-time 2016 pre-tax acquisition costs were approximately $3.2 million. Sierra also agreed to acquire a Citizens Business Bank branch with approximately $22 million in deposits and $1 million in loans, subject to regulatory approval.
Key risks include exposure to California agricultural conditions and drought-related water availability, indirect exposure to the oil-sector downturn through $43 million of loans to oil-service-related borrowers, commercial real estate and construction concentrations, credit losses, interest-rate and funding pressures, competition, cyber and operational risks, and regulatory costs. Unused credit commitments totaled $355 million and standby letters of credit $16.7 million. Management stated that ordinary-course legal matters were not expected to materially affect financial condition. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether asset growth and earnings remain sustainable after separating recurring results from nonrecurring interest recoveries, securities gains, and other unusual items.
- Credit quality and reserve adequacy as loans expand, especially in commercial real estate, agriculture, mortgage warehouse lending, and areas affected by drought or oil-sector weakness.
- Funding costs, use of short-term FHLB advances, deposit retention, and sensitivity to changing interest rates.
- Capital and liquidity effects, integration costs, and expected benefits of the Coast Bancorp and Citizens branch transactions.
- The basis for the zero 2015 loan-loss provision and the potential effect of reduced affordable-housing tax credits on future tax rates.