Sierra Bancorp — Q2 2016 Form 10-Q
Business context and period. Sierra Bancorp is a California bank holding company operating through Bank of the Sierra. This unaudited report covers the quarter and six months ended June 30, 2016; balance-sheet comparisons are with December 31, 2015. The July 8, 2016 Coast Bancorp acquisition closed after quarter-end and is not reflected in the June 30 balance sheet.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $15.195 million | $15.018 million | $30.510 million | $29.736 million |
| Non-interest income | $4.574 million | $4.654 million | $8.868 million | $8.661 million |
| Net income | $4.086 million | $4.557 million | $8.122 million | $8.295 million |
| Diluted EPS | $0.31 | $0.33 | $0.61 | $0.60 |
| Net interest margin, tax-equivalent | 3.89% | 3.94% | 3.92% | 4.03% |
| Efficiency ratio, tax-equivalent | 68.10% | 64.13% | 67.51% | 66.91% |
- Q2 net income declined 10% year over year; first-half net income declined 2%. Q2 return on average assets was 0.93% and return on average equity was 8.38%.
- Net interest income rose on earning-asset growth, but margin pressure from lower asset yields and higher funding costs offset part of that benefit. Operating expense increased 8% in Q2, including higher personnel, occupancy, foreclosed-asset and acquisition-related costs.
- No loan-loss provision was recorded in either comparable quarter or first-half period. First-half net charge-offs were $381,000, versus $699,000 a year earlier; Q2 had $12,000 in net recoveries.
Financial position, cash flow and credit
- At June 30, assets were $1.843 billion, up 3% from year-end; gross loans were $1.155 billion, up 2%; available-for-sale securities were $528.5 million; and deposits were $1.486 billion, up 1%.
- Cash and cash equivalents were $53.0 million. Shareholders’ equity was $198.3 million, compared with $190.3 million at year-end. Total risk-based capital ratio was 17.51% for Sierra Bancorp and 16.98% for Bank of the Sierra; both exceeded the stated “well capitalized” thresholds.
- Borrowings increased during the first half: short-term borrowings were $93.7 million, federal funds purchased were $4.1 million, repurchase agreements were $10.2 million, and junior subordinated debentures were $30.9 million. The $2.0 million long-term borrowing outstanding at year-end was repaid.
- For the first six months, operating cash flow was $10.2 million, investing cash flow was negative $45.5 million, and financing cash flow was positive $39.7 million; cash increased $4.4 million.
- Nonperforming assets fell to $8.8 million from $12.8 million at year-end; the ratio to gross loans and foreclosed assets declined to 0.76% from 1.13%. The allowance was $10.0 million, or 0.87% of gross loans, versus $10.4 million, or 0.92%, at year-end. Performing troubled debt restructurings totaled $14.7 million; total TDRs were $17.2 million, including $2.5 million on non-accrual.
- Liquidity sources included $221 million of available correspondent-bank and FHLB lines, a further $99 million of potential FHLB capacity subject to collateral and stock requirements, and approximately $75 million of Federal Reserve Discount Window capacity. Unpledged or excess-pledged securities totaled $404 million.
Material changes, outlook and risks
- Coast acquisition: Closed July 8 for 599,242 Sierra Bancorp shares and $3.3 million cash; added approximately $95 million of loans, $31 million of investments and $129 million of deposits. Management expected about $3.2 million of 2016 pre-tax acquisition costs. Fair-value purchase accounting, goodwill and the core deposit intangible were not yet finalized in this filing.
- A May branch transaction added $10 million in deposits and $1 million in loans. The company also opened a Sanger branch; a Bakersfield branch was under construction and expected to open by first-quarter 2017.
- No formal earnings guidance was provided. Management said it remained focused on loan growth, while noting elevated prepayments and uncertainty about maintaining growth in loans and core deposits.
- Interest-rate simulations showed an asset-sensitive profile: an immediate 100-basis-point rate increase was estimated to raise next-12-month net interest income 2.19%; a 100-basis-point decline was estimated to reduce it 10.27%, exceeding the company’s stated internal limit. Management said it would continue monitoring this exposure.
- Management cited drought, lower oil prices, local economic conditions, competition, interest rates, liquidity, credit deterioration, securities valuation, acquisition execution, staffing, technology and regulation among key risks. It noted that certain energy-related credits were moved to a higher-risk classification. The company expected adoption of the new credit-loss standard to increase its allowance, but was still evaluating the effect.
- Legal proceedings were described as ordinary-course matters not expected by management to have a material adverse effect. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Post-close Coast integration, purchase-accounting estimates, goodwill and intangible asset amounts, and actual acquisition costs versus the approximately $3.2 million estimate.
- Whether margin pressure and the simulated downside to net interest income persist as rates, deposit costs and competition change.
- Credit trends in energy-exposed and other criticized loans, TDR performance, nonperforming assets and the adequacy of the allowance despite no recent provision.
- Funding mix and liquidity as borrowings rise, and the potential cash demands of $325.4 million in unused credit commitments and $9.0 million in standby letters of credit.