Sierra Bancorp — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Sierra Bancorp is a California bank holding company whose principal subsidiary, Bank of the Sierra, operates 40 full-service branches and an online branch. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 / June 30, 2019 | Comparison |
|---|---|---|
| Net income | $8.829; diluted EPS $0.57 | Q2 2018: $7.992; diluted EPS $0.52 |
| Net interest income | $24.199 | Q2 2018: $22.800 |
| Net interest margin, tax-equivalent | 4.21% | Q2 2018: 4.24% |
| Noninterest income / expense | $5.855 / $17.656 | Q2 2018: $5.429 / $17.294 |
| Loan-loss provision | $0.400 | Q2 2018: $0.300 |
| Assets / loans and leases | $2,577 / $1,778 | December 31, 2018: $2,523 / $1,732 |
| Deposits / shareholders’ equity | $2,179 / $297 | December 31, 2018: $2,116 / $273 |
| Cash and cash equivalents | $67.790 | December 31, 2018: $74.132 |
- For the first half, net income was $17.724, up 21% from $14.702 in 2018; diluted EPS was $1.15 versus $0.95. Net interest income rose 8% to $48.172; tax-equivalent net interest margin increased to 4.25% from 4.22%.
- First-half cash flow: operating activities provided $18.694; investing activities used $42.947; financing activities provided $17.911. Cash and equivalents declined $6.342.
- Gross loans grew $46 million, or 3%, during the first half, driven notably by mortgage warehouse lines. Deposits grew $63 million, or 3%; noninterest-bearing deposits were $659 million.
- The allowance for loan and lease losses was $9.883 million, or 0.56% of gross loans. First-half net charge-offs were $0.567 million. Nonperforming assets were $4.890 million, 0.27% of loans plus foreclosed assets, down from $6.238 million and 0.36% at year-end 2018.
- Non-deposit borrowings fell to $8.5 million from $56.1 million at year-end; repurchase agreements rose to $24.2 million from $16.4 million. Subordinated debentures were $34.9 million.
- Regulatory capital ratios remained above “well capitalized” thresholds: Sierra Bancorp’s total risk-based capital ratio was 15.19% and leverage ratio 11.73%; Bank of the Sierra’s were 15.08% and 11.64%, respectively.
Changes, outlook, and risks
- Q2 net income increased 10%, supported by higher net interest income and noninterest income. Asset growth lifted interest income, but higher deposit and funding costs more than offset asset-yield improvements, reducing Q2 margin by three basis points year over year. The cost of interest-bearing deposits rose to 0.82% from 0.46%.
- Management reported improved efficiency: the tax-equivalent efficiency ratio was 58.17% for Q2 versus 60.44% a year earlier, and 58.46% for the first half versus 63.01%.
- Q2 noninterest income included nonrecurring gains of $232,000 from a restricted-stock valuation adjustment and $100,000 from the conclusion of a low-income housing tax-credit investment. Results also reflect volatile bank-owned life-insurance income and higher foreclosed-asset expense.
- No specific earnings or growth guidance is provided. Management emphasizes quality loan growth, but says qualifying lending opportunities are fewer and competition has intensified; mortgage warehouse balances may fluctuate. It offers no assurance of future loan or core-deposit growth.
- Interest-rate modeling showed estimated 12-month net interest income up 1.25% for an immediate +100 bp move, but down 3.86% for −100 bp and 16.39% for −300 bp. The −300 bp result exceeds the company’s stated internal policy limit; management said it would continue monitoring and consider remedial changes.
- Liquidity resources included $542 million of available correspondent-bank and FHLB lines, approximately $74 million of Federal Reserve borrowing capacity, and $416 million of unpledged or excess-pledged securities. Management considers resources sufficient for anticipated short-term needs, while noting liquidity levels are not assured.
- CECL is scheduled for adoption January 1, 2020. Management’s preliminary estimate indicates a potentially material effect, particularly on reserves and equity; the allowance could increase by 100% or more under a discounted-cash-flow approach with forecasting. The ultimate effect remains uncertain.
- Operating-lease accounting added right-of-use assets and liabilities at adoption; at June 30, 2019, these were $9.0 million and $9.7 million, respectively. Management reported no material change in risk factors from the 2018 Form 10-K and no significant change in internal controls. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- How CECL implementation affects the allowance, retained earnings, and regulatory capital when final estimates become available.
- Whether deposit-cost increases, including time and brokered deposits, continue to pressure net interest margin.
- Credit trends in commercial real estate, agricultural lending, and mortgage warehouse lines; monitor nonperforming loans, TDRs, charge-offs, and reserve coverage.
- Whether mortgage warehouse utilization and other loan growth remain sustainable, given management’s stated competitive and market uncertainty.
- Interest-rate exposure, especially the modeled downside in falling-rate scenarios and sensitivity to deposit runoff and deposit pricing.
- The recurring earnings contribution excluding identified nonrecurring gains and the effects of variable BOLI income and OREO expense.