Sierra Bancorp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Sierra Bancorp is a California bank holding company; its Bank of the Sierra subsidiary provides retail and commercial banking services primarily in California’s San Joaquin Valley. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $12.00 | $13.13 | $36.12 | $38.17 |
| Provision for loan losses | $0.80 | $4.70 | $2.85 | $10.61 |
| Non-interest income | $4.32 | $4.38 | $12.46 | $12.60 |
| Non-interest expense | $11.49 | $11.50 | $34.03 | $34.02 |
| Income before taxes | $4.03 | $1.31 | $11.70 | $6.14 |
| Income tax provision | $0.66 | $(0.32) | $2.20 | $0.05 |
| Net income | $3.37 | $1.64 | $9.50 | $6.09 |
| Diluted EPS | $0.23 | $0.12 | $0.67 | $0.43 |
- Margins and returns: Tax-equivalent net interest margin was 3.99% for Q3 and 4.00% for the first nine months, down 28 and 29 basis points year over year, respectively. Q3 annualized return on average assets/equity was 0.97%/7.60%; nine-month returns were 0.91%/7.23%.
- Cash flow: For the first nine months, operating activities provided $25.2 million and investing activities provided $35.2 million, while financing activities used $61.2 million. Cash and cash equivalents decreased $0.8 million to $61.0 million.
- Balance sheet at September 30: Assets were $1.383 billion, down 4% from December 31, 2012. Gross loans were $810.3 million, down 8%; available-for-sale securities were $406.1 million, up 7%. Deposits totaled $1.151 billion, down 2%. Shareholders’ equity was $178.1 million.
- Debt and liquidity: The company had $30.9 million of junior subordinated debentures and $5.7 million of repurchase agreements; short- and long-term borrowings were nil at period end. Reported cash and cash equivalents were $61.0 million. Management reported $199 million of available credit lines, plus potential FHLB and Federal Reserve borrowing capacity subject to collateral and other requirements. Unpledged or excess-pledged securities totaled $306 million.
- Capital: Sierra Bancorp’s total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 21.04%, 19.75%, and 14.15%; the Bank’s corresponding ratios were 20.64%, 19.39%, and 13.89%. Both were classified as well capitalized.
Material changes versus comparable periods
- Net income rose 106% in Q3 and 56% for the first nine months, primarily because loan-loss provisions fell substantially. Net interest income declined in both comparisons, and the nine-month tax provision increased versus 2012.
- Net interest margin compression reflected lower earning-asset yields, including competitive loan pricing and lower investment yields. Deposit and borrowing costs also declined, but less than asset yields.
- Loan balances fell mainly because mortgage warehouse line utilization dropped: balances declined about $90 million, with utilization at 26% versus nearly 80% at year-end 2012. Farmland, agricultural production, and commercial real estate lending grew.
- Nonperforming assets fell 33% to $48.9 million from $72.8 million at year-end 2012. Nonperforming loans were $40.0 million and foreclosed assets were $8.9 million. The allowance declined to $11.8 million, or 1.46% of gross loans, from $13.9 million, or 1.58%.
- Available-for-sale securities shifted from a $6.3 million net unrealized gain at year-end 2012 to a $24,000 net unrealized loss, principally reflecting higher longer-term interest rates. This reduced accumulated other comprehensive income.
- Deposits declined $22.6 million; time deposits ran off while non-maturity deposits increased $12 million. Non-deposit interest-bearing liabilities were reduced by about $37 million.
Outlook, commentary, risks, and unusual items
- Guidance: The filing provides no specific earnings or financial guidance. Management said it believed liquidity resources were sufficient for current and anticipated short-term needs and preliminarily expected to absorb upcoming regulatory capital rule changes without constraining organic growth; it cautioned that this was not assured.
- Credit and contingencies: Total troubled debt restructurings were $42.4 million, including $25.5 million on non-accrual status; $16.9 million were performing TDRs. The allowance includes management estimates and could prove insufficient. Unused commitments to extend credit were $438.1 million, up from $225.4 million at year-end; standby and commercial letters of credit totaled $16.7 million. Commitments may not be drawn, but could create funding and credit exposure.
- Interest-rate risk: Management characterized the balance sheet as asset-sensitive. Its simulation estimated a 12-month net interest income decline of 8.28% under an immediate 100-basis-point rate decrease, exceeding the company’s stated policy limit for that scenario; a 100-basis-point increase was estimated to improve net interest income by 2.45%. Results depend on assumptions and exclude potential competitive or credit deterioration effects.
- Other risks: The filing cites local economic conditions, interest-rate and liquidity changes, credit losses, recovery and sale of foreclosed property, securities valuation, staffing, technology, branch expansion, and regulatory changes. New capital rules begin taking effect in 2015. Management said legal proceedings in the ordinary course were not expected to have a material adverse effect; no material risk-factor changes were reported.
- Unusual items and accounting: 2013 earnings benefited from sharply lower credit provisions; tax expense was affected by taxable income and available tax credits. A $100,000 merchant-processing signing incentive was included in year-to-date other service charges. The filing reported no material changes in internal controls and said disclosure controls were adequate and effective.
Important facts for investors to verify
- Whether the lower loan-loss provision and improved asset-quality measures are sustainable, including trends in nonperforming loans, TDRs, charge-offs, and foreclosed-asset sales.
- Whether mortgage warehouse lending, deposit balances, and overall loan growth stabilize, given lower line utilization and the increase in unused credit commitments.
- Whether net interest margin can stabilize as earning-asset yields remain under pressure, and how actual results compare with the disclosed interest-rate sensitivity scenarios.
- Whether liquidity and capital remain adequate as commitments are funded and new regulatory capital requirements take effect.
- The effect of securities-market values, deferred tax asset assumptions, and management’s estimates for impaired loans and foreclosed assets on future reported equity and earnings.