Sierra Bancorp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Sierra Bancorp is a California bank holding company whose principal subsidiary, Bank of the Sierra, provides retail and commercial banking services. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $18.435 | $16.907 | $53.159 | $47.417 |
| Provision for loan losses | — | — | $0.300 | — |
| Non-interest income | $5.910 | $4.991 | $16.408 | $13.859 |
| Non-interest expense | $15.445 | $16.121 | $46.238 | $43.315 |
| Net income | $5.742 | $3.929 | $15.496 | $12.050 |
| Diluted EPS | $0.41 | $0.28 | $1.11 | $0.89 |
| Tax-equivalent net interest margin | 3.97% | 3.93% | 3.93% | 3.93% |
- Q3 net income increased 46%; nine-month net income increased 29%. Q3 annualized return on average assets was 1.10% and return on average equity was 10.45%.
- At September 30, total assets were $2.078 billion, up from $2.033 billion at year-end 2016. Gross loans were $1.312 billion, up 4%; deposits were $1.780 billion, up 5%; and shareholders’ equity was $219.1 million, up 6%.
- Cash and cash equivalents were $54.6 million, down from $120.4 million at year-end. Securities available for sale were $583.2 million, up 10%.
- Reported borrowings included $10.5 million of short-term borrowings, $1.6 million of federal funds purchased, $8.7 million of repurchase agreements, and $34.5 million of subordinated debentures. Short-term borrowings declined from $65.0 million at year-end, primarily as deposit growth reduced funding needs.
- Nine-month cash flows: operating activities provided $25.7 million; investing activities used $118.3 million; financing activities provided $26.8 million. Cash and cash equivalents decreased $65.8 million.
- The allowance for loan and lease losses was $8.8 million, or 0.67% of gross loans, versus $9.7 million, or 0.77%, at year-end. Nonperforming assets were $6.8 million, or 0.52% of loans plus foreclosed assets, down from $8.6 million, or 0.68%, at year-end.
- Consolidated regulatory capital ratios were 14.28% CET1, 16.64% Tier 1 risk-based, 17.26% total risk-based, and 11.84% leverage. Management described capital as strong and above “well capitalized” thresholds.
Changes, outlook, and risks
- Earnings drivers: Q3 net interest income rose 9%, supported by 8% growth in average interest-earning assets and a four-basis-point margin increase. Nine-month net interest income rose 12%, primarily reflecting higher average earning assets, including the 2016 Coast acquisition.
- Unusual and nonrecurring items: Q3 non-interest income included a $918,000 gain from selling the company’s remaining community-bank equity investment. Lower acquisition costs helped reduce Q3 expenses year over year; nine-month expenses rose 7%, reflecting Coast-related operating costs and branch expansion. Q3 2017 included $424,000 of acquisition costs, compared with $1.695 million in Q3 2016.
- Credit: A $300,000 provision was recorded in Q2, the first since Q3 2014. Nine-month net charge-offs were $1.217 million, versus $543,000 a year earlier. Management said the allowance was adequate, but noted that credit quality and economic changes could require adjustments.
- Acquisitions and expansion: The Ojai Community Bank acquisition closed October 1, 2017, after the reporting date. It added approximately $220 million of loans and $231 million of deposits; the company issued 1.376 million shares and expected $2.5–$3.0 million of pretax acquisition costs, primarily in 2017. The Woodlake branch purchase closed November 3, 2017 and included approximately $26 million of deposits. Management reported post-acquisition assets above $2.3 billion.
- Liquidity: Management reported $398 million of available correspondent-bank and FHLB lines, another $105 million of potential FHLB capacity subject to collateral and stock requirements, and approximately $74 million of Federal Reserve borrowing capacity. It considered available liquidity sufficient for anticipated short-term needs.
- Interest-rate exposure: The company described itself as asset-sensitive. Its model projected a 1.22% increase in next-12-month net interest income from an immediate 100-basis-point rate increase, but a 7.31% decline from a 100-basis-point decrease. Management noted that downside sensitivity exceeded internal policy guidelines and said it would continue monitoring exposure.
- Accounting and other risks: The company expected adoption of CECL on January 1, 2020 to materially affect the allowance and shareholders’ equity; preliminary estimates suggested the allowance could rise to as much as twice current levels under one modeled approach. Other stated risks include economic weakness, credit losses, interest-rate changes, securities valuations, liquidity, acquisition integration, and regulation. No specific earnings guidance was provided.
- Unused commitments to extend credit totaled $639.2 million, up from $463.9 million at year-end; standby letters of credit were $7.9 million. The company cautioned that not all commitments are expected to be drawn.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. It reported no material change to previously disclosed risk factors and no significant third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How the Ojai acquisition’s purchase accounting, integration costs, dilution, and post-close performance affect earnings and capital.
- Whether the allowance remains adequate as loan growth, charge-offs, and CECL implementation evolve, including the potential for a materially higher reserve.
- Whether deposit costs rise faster than asset yields and how that affects net interest margin, particularly under falling-rate scenarios.
- Trends in real-estate concentration, nonperforming loans, performing and nonperforming TDRs, and the elevated unused-credit commitment balance.
- The sustainability of earnings excluding the Q3 securities-sale gain and the timing and amount of remaining acquisition and branch-expansion expenses.