Sierra Bancorp — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited interim results; balance-sheet comparisons are with December 31, 2014. Sierra Bancorp is the holding company for Bank of the Sierra, a Central California community bank. The Santa Clara Valley Bank acquisition closed in November 2014, so its results are included in 2015 but not in the full comparable 2014 periods.
Financial performance and condition
Amounts are in millions except per-share data, percentages, and where stated otherwise.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net interest income | $15.018 | $12.950 | $29.736 | $25.165 |
| Non-interest income | $4.654 | $4.018 | $8.661 | $7.725 |
| Non-interest expense | $12.751 | $11.008 | $26.211 | $21.736 |
| Provision for loan losses | $0 | $0.200 | $0 | $0.350 |
| Pre-tax income | $6.921 | $5.760 | $12.186 | $10.804 |
| Net income | $4.557 | $4.237 | $8.295 | $8.036 |
| Basic / diluted EPS | $0.34 / $0.33 | $0.30 / $0.30 | $0.61 / $0.60 | $0.57 / $0.56 |
| Tax-equivalent net interest margin | 3.94% | 4.01% | 4.03% | 4.01% |
| Efficiency ratio | 64.13% | 63.28% | 66.91% | 64.37% |
| Annualized return on average assets / equity | 1.07% / 9.67% | 1.16% / 9.13% | 1.00% / 8.87% | 1.12% / 8.75% |
- Q2 net income rose 8% year over year; first-half net income increased 3%. Net interest income increased 16% and 18%, respectively, largely on higher average earning assets, partly offset by lower asset yields and a narrower Q2 margin.
- At June 30, assets were $1.734 billion, up 6% from year-end; gross loans were $1.073 billion, up 11%; deposits were $1.472 billion, up 8%. Cash and cash equivalents were $46.7 million and available-for-sale securities were $506.9 million.
- Shareholders’ equity was $186.1 million, down $1.0 million from year-end. Total risk-based capital was 17.36% at the holding company and 17.10% at the Bank; both remained above regulatory “well capitalized” thresholds.
- Deposits were the principal funding source. Period-end borrowings included $11.3 million in federal funds purchased and repurchase agreements, $11.7 million in short-term borrowings, $2.0 million in long-term borrowings, and $30.9 million in junior subordinated debentures.
- For the first half, operating cash flow was $11.7 million, investing cash flow was negative $105.9 million, and financing cash flow was positive $90.7 million. Cash and cash equivalents declined $3.4 million to $46.7 million.
Material changes versus comparable periods
- Loan growth included higher utilization of mortgage warehouse lines, a $28 million residential mortgage loan purchase, and organic growth in other real estate and agricultural production lending. Mortgage warehouse balances rose $74 million, or 70%, from year-end.
- Core deposit growth supported lending: non-maturity deposits increased $102 million, or 10%, in the first half. Non-deposit interest-bearing liabilities declined $6 million, or 10%.
- Nonperforming assets fell to $20.5 million from $24.7 million at year-end and $33.7 million a year earlier. The nonperforming-assets ratio declined to 1.90% from 2.53% and 3.76%, respectively.
- Non-interest expense rose 16% in Q2 and 21% in the first half. Management cited acquisition-related operating costs, personnel additions and compensation, higher processing and telecommunications costs, and increased debit-card fraud losses.
- The effective income-tax provision increased to 34% of pre-tax income in Q2 and 32% for the first half, versus 26% in both comparable 2014 periods, primarily because of higher taxable income and fewer available tax credits.
Outlook, commentary, risks, and unusual items
- The filing provides no formal earnings or financial guidance. Management expected continued commercial real estate loan growth but cautioned that growth is not assured. A new Bakersfield branch was expected to open in Q1 2016.
- Management reported no loan-loss provision in the first half despite higher net charge-offs: $0.699 million versus $0.393 million in the first half of 2014. The allowance was $10.5 million, or 0.98% of gross loans, versus $11.2 million, or 1.16%, at year-end. Management attributed the absence of provision to prior reserves, loan growth in lower-loss segments, and improved credit quality; it cautioned that losses could exceed the allowance.
- Credit exposure includes $23.4 million of troubled debt restructurings, of which $11.6 million was non-accrual. The allowance covered 61.65% of nonperforming loans. Drought conditions and, in Q2, lower oil prices were considered in credit-risk assessments.
- The bank reported $337.8 million of unused commitments to extend credit and $17.2 million of standby letters of credit. These are contingent exposures and may not be fully drawn. Management cited $273 million of available correspondent-bank and FHLB lines, a further $194 million of FHLB capacity subject to collateral and stock requirements, and approximately $61 million of Federal Reserve Discount Window borrowing capacity.
- Interest-rate modeling showed an asset-sensitive position: an immediate 100-basis-point rate increase was projected to raise 12-month net interest income 3.43%; a 100-basis-point decline was projected to reduce it 9.87%, exceeding internal policy limits. Management said it would continue monitoring the exposure. These are model estimates, not forecasts.
- Unusual or nonrecurring items included a $245,000 special FHLB stock dividend in Q2 and securities gains of $307,000 in Q2. Acquisition costs of $101,000 were recorded in the first half. The company also repurchased shares and paid dividends, contributing to the decline in equity; Q2 repurchases totaled 237,546 shares.
- Principal stated risks include drought and local economic conditions, agricultural and other industry exposures, interest-rate and liquidity risk, credit losses, securities-value declines, employee retention, technology deployment, acquisition and branch-expansion execution, and regulatory requirements. Management said routine legal proceedings were not expected to have a material adverse effect; no material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan growth—particularly mortgage warehouse lending—and deposit growth are sustainable, and how the acquisition affects operating costs and returns.
- Credit trends, including charge-offs, the allowance relative to rapidly growing loans, nonperforming assets, TDR performance, and exposure to drought and lower oil prices.
- Whether net interest margin and profitability can withstand rate competition, lower asset yields, and the modeled downside in falling-rate scenarios.
- The recurring contribution of fee income versus securities gains and the special FHLB dividend, and the trajectory of expenses, fraud losses, and the efficiency ratio.
- Capital and liquidity after loan growth, dividends, and repurchases; confirm current availability and conditions on contingent borrowing facilities and unused credit commitments.