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March 28
1934 - Bouquet Canyon Reservoir, replacement for ill-fated St. Francis Dam & reservoir, begins to fill with water [story]
Bouquet Reservoir


Sierra Bancorp LogoSierra Bancorp, parent of Bank of the Sierra, today announced its unaudited financial results for the quarter ended March 31, 2016.  Sierra Bancorp recognized consolidated net income of $4.036 million for the quarter, an improvement of $298,000, or 8%, relative to net income in the first quarter of 2015.  The increase over the prior year is primarily the result of higher net interest income driven by growth in interest-earning assets, and an increase in service charges stemming from a growing level of deposits and greater commercial deposit account activity.  Those favorable variances were partially offset by a higher tax accrual rate.  The Company’s return on average assets was 0.93% in the first quarter of 2016, the same as in the first quarter of 2015.  The Company’s return on average equity increased to 8.41% in the first quarter of 2016 from 8.06% in the first quarter of 2015, and diluted earnings per share also increased to $0.30 from $0.27.

Total assets were down $32 million, or 2%, during the first three months of 2016.  The drop in assets was due to a net decline of $39 million, or 3%, in gross loan balances and a reduction of $5 million, or 9%, in cash balances, partially offset by an increase of $15 million, or 3%, in investment securities.  Loan growth was unfavorably impacted by a $27 million drop in outstanding balances on mortgage warehouse lines resulting from lower line utilization, and other loan categories also fell by a combined $12 million.  Total nonperforming assets, including nonperforming loans and foreclosed assets, were reduced by $2 million, or 17%, during the first quarter.  Total deposits were up $23 million, or 2%, due to a $29 million increase in core non-maturity deposits that was partially offset by a $5 million reduction in time deposits.  Non-deposit borrowings were reduced by $55 million in the first quarter of 2016, due to deposit growth and loan runoff.

“Success is dependent on effort.” – Sophocles

“Throughout the Bank our efforts remain focused on quality growth, as this is how we will continue to realize strong net income,” stated Kevin McPhaill, President and CEO.  “The first quarter of 2016 demonstrated this commitment, as we saw an increase in income over the first quarter of last year due to higher average balances of loans and deposits,” noted McPhaill.  “Core deposits continued their favorable growth trend through the first three months of 2016, but we experienced a reduction in total loans subsequent to year-end due in large part to fluctuations in the mortgage warehouse portfolio and strong loan growth during the fourth quarter of last year.  We are optimistic that we will see loans resume growing this year as a result of the marketing and business development efforts of our banking team,” concluded McPhaill.

 

Financial Highlights

Net income increased by $298,000, or 8%, in the first quarter of 2016 relative to the first quarter of 2015.  Pre-tax income actually increased by 16% for the quarter, but the percentage change in net income was lower due to a higher tax accrual rate in 2016.  Significant variances in the components of pre-tax income, including some items of a nonrecurring nature, are noted below.

Net interest income was up by $597,000, or 4%, for the first quarter of 2016 over the first quarter of 2015, due primarily to growth in average interest-earning assets totaling $106 million, or 7%.  That growth was largely organic in nature, but includes the purchase of $28 million in residential mortgage loans in 2015.  The positive impact of higher interest-earning assets was partially offset by a drop of 16 basis points in our net interest margin, which resulted in part from continued competitive pressures on commercial real estate loan yields.  The first quarter comparison was also impacted by non-recurring interest income, which totaled only $42,000 in the first quarter of 2016 relative to $366,000 in the first quarter of 2015.  Non-recurring interest income is comprised of interest recoveries on non-accrual loans (net of any interest reversals for loans placed on non-accrual status), as well as penalties and accelerated fee recognition on loan prepayments.

Total non-interest income rose by $287,000, or 7%, for the quarterly comparison.  Service charges on deposit accounts, which represent the largest portion of non-interest income, were up $380,000, or 19%, for the quarter, due primarily to fees earned from increased activity on commercial accounts and higher overdraft income.  Bank-owned life insurance (BOLI) income was down as the result of a $24,000 loss on BOLI associated with deferred compensation plans in the first quarter of 2016 relative to a gain of $124,000 in the first quarter of 2015, representing an absolute decline of $148,000.  There was also a small loss on the sale of investments in the first quarter of 2016, as compared to a small gain in the first quarter of 2015.  Other non-interest income increased by $93,000, or 6%, in the first quarter of 2016 due in part to higher debit card interchange income.

Total non-interest expense reflects an increase of only $19,000, or less than 1%, for the first quarter comparison.  The largest component of non-interest expense, salaries and benefits, actually fell by $30,000, as increases in the normal course of business were offset by other factors.  Direct salaries were up $118,000, or 2%, mainly in conjunction with regular annual increases, and equity incentive compensation costs were $48,000higher due to stock options issued to Company officers during the first quarter of 2016.  Personnel expense benefited in the first quarter of 2016, however, from a higher level of deferred salaries directly related to successful loan originations (which lowers current period expense), a reduction in deferred compensation expense associated with the aforementioned drop in BOLI income, lower group insurance costs, and a decline in the cost of certain other employee benefits.

Occupancy expense increased by $89,000, or 5%, for the quarter, due primarily to higher rent and depreciation expense.  Other non-interest expense fell by $40,000, or 1%, for the first quarter, as significant increases within this category were more than offset by decreases.  One of the larger increases within other non-interest expense came in non-recurring acquisition costs, which totaled $214,000 in the first quarter of 2016 relative to$112,000 in the first quarter of 2015.  Other substantial expense increases include $101,000 in stock option expense for directors in the first quarter of 2016, a higher FDIC assessment resulting from asset growth, rising forms and supplies costs, higher debit card processing costs, and higher internet banking costs.  Significant favorable variances within other non-interest expense include the following:  a non-recurring expense reversal of $173,000 in director retirement plan accruals, subsequent to the death of a former director and the payment of split-dollar life insurance proceeds to his beneficiary; a $76,000 drop in deferred compensation costs for directors, related to the aforementioned drop in BOLI income; an $86,000 reduction in telecommunications costs; a $76,000 drop in marketing costs due to the timing of payments; and a $103,000 reduction in loan costs resulting mainly from declining collection and foreclosure costs.  Also impacting other non-interest expense was a significant reduction in debit card losses pursuant to our rollout of chipped debit cards incorporating EMV technology, but that reduction was offset by an increase in operations-related losses within our branch system.

The Company’s provision for income taxes was 34% of pre-tax income in the first quarter of 2016 relative to 29% in the first quarter of 2015.  The higher tax provisioning in 2016 is primarily the result of higher taxable income and a declining level of available tax credits, including those generated by our investments in low-income housing tax credit funds as well as certain hiring tax credits.

Balance sheet changes during the first three months of 2016 include a drop in total assets of $32 million, or 2%, due primarily to net runoff in loans that was partially offset by higher investment balances.  Gross loans fell by$39 million, or 3%, as the result of a $27 million decline in balances outstanding on mortgage warehouse lines from lower utilization, and net runoff in other major loan categories.  Utilization on mortgage warehouse lines has historically been difficult to predict, due to its dependency on residential real estate activity and the trend in mortgage rates among other factors.  The net runoff in other loan categories during the first quarter can be explained, in part, by the surge in loan growth in the latter part of 2015 that depleted the Company’s loan pipeline, thereby reducing the source of new volume that would typically offset loan payoffs in the normal course of business.  Payoffs during the first quarter of 2016 were also higher than we experienced in immediately preceding periods.  The loan pipeline has been steadily increasing since year-end, which in the opinion of management should positively impact new volume as the year progresses, but loan payoffs remain at relatively high levels and no assurance can be provided with regard to net loan growth.

Total nonperforming assets, including non-accrual loans and foreclosed assets, were reduced by over $2 million, or 17%, during the first three months of 2016, including the return to accrual status of our single largest remaining nonperforming loan.  The Company’s ratio of nonperforming assets to loans plus foreclosed assets was 0.97% at March 31, 2016 compared to 1.13% at December 31, 2015.  All of the Company’s impaired assets are periodically reviewed, and are either well-reserved based on current loss expectations or are carried at the fair value of the underlying collateral, net of expected disposition costs.  In addition to nonperforming assets, the Company had $13 million in loans classified as restructured troubled debt (TDRs) that were included with performing loans as of March 31, 2016, up by over $1 million compared to year-end 2015 due to the aforementioned upgrade of a non-performing restructured loan to performing status.

The Company’s allowance for loan and lease losses was $10.0 million at March 31, 2016, down slightly from the $10.4 million balance as of December 31, 2015 due to the charge-off of certain impaired loan balances against previously-established reserves.  Net loans charged off against the allowance totaled $393,000 in the first three months of 2016 compared to $530,000 in the first three months of 2015.  Despite the drop in the level of the allowance, it was 0.92% of total loans at both March 31, 2016 and December 31, 2015 due to the drop in aggregate loan balances during the first quarter.  Management’s detailed analysis indicates that the Company’s allowance for loan and lease losses should be sufficient to cover credit losses inherent in loan and lease balances outstanding as of March 31, 2016, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the allowance.

Deposit balances reflect net growth of $23 million, or 2%, during the three months ended March 31, 2016, due to continued growth in core non-maturity deposits that was partially offset by a $5 million reduction in time deposits.  Junior subordinated debentures remain the same, but other borrowings were reduced by $55 million, or 64%, during the first quarter of 2016, as facilitated by deposit growth and loan runoff.

Total capital of $194 million at March 31, 2016 reflects an increase of $4 million, or 2%, for the first three months of the year due to the rising level of retained earnings, the impact of stock options exercised, and an increase in accumulated other comprehensive income.  There were no shares repurchased during the first quarter of 2016.

 

About Sierra Bancorp

Sierra Bancorp is the holding company for Bank of the Sierra (www.bankofthesierra.com), which is in its 39thyear of operations and at approximately $1.8 billion in total assets is the largest independent bank headquartered in the South San Joaquin Valley.  The Company has over 400 employees and conducts business through 28 full-service branches, a loan production office, an online branch, a real estate industries center, an agricultural credit center, and an SBA center.  As announced on January 4, 2016 the Company has entered into a definitive agreement to acquire Coast Bancorp, which serves the communities of San Luis Obispo, Arroyo Grande, Paso Robles and Atascadero, California and had $147 million in assets as of year-end 2015.  We expect the transaction to be completed in mid-2016, subject to customary conditions of closing including the receipt of required regulatory approvals and the consent of Coast Bancorp shareholders.

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