PORTERVILLE — Sierra Bancorp, parent of Bank of the Sierra, today announced its unaudited financial results for the three- and six-month periods ended June 30, 2017.
Sierra Bancorp recognized consolidated net income of $5.202 million for the second quarter of 2017, reflecting an increase of $1.116 million, or 27%, relative to the second quarter of 2016 for the following reasons: net interest income increased by 17% due primarily to a higher average balance of interest-earning assets; the Company recorded a $300,000 provision for loan losses in the second quarter of 2017, to provide for loan growth and replenish reserves; non-interest income went up by 17%, due in part to fees earned on an expanding deposit account base and increased activity on commercial accounts, a non-recurring prepayment penalty on a large loan, and higher income on bank-owned life insurance; and, non-interest expense increased by 10%, with much of the increase coming from costs associated with our expanded branch network pursuant to the Coast acquisition in 2016 and de novo branch openings.
For the second quarter of 2017 the Company’s return on average assets was 1.02%, return on average equity was 9.75%, and diluted earnings per share were $0.37.
For the first six months of 2017 the Company recognized net income of $9.754 million, which represents an increase of 20% relative to the same period in 2016. The Company’s financial performance metrics for the first half of 2017 include an annualized return on average equity of 9.31%, a return on average assets of 0.98%, and diluted earnings per share of $0.70.
Total assets, loans, and deposits reached record levels at June 30, 2017, thanks to strong organic growth during the first six months of the year. Total assets increased by $45 million, or 2%, during the first half, ending the period at $2.1 billion. The increase in assets resulted primarily from organic growth in real estate loans and agricultural production loans and an increase in investment securities, partially offset by lower utilization on mortgage warehouse lines and a declining level of cash and balances due from banks. Gross loans totaled almost $1.3 billion at June 30, 2017. Total nonperforming assets were reduced by $797,000, or 9%, during the first half. Deposits were up $96 million, or 6%, ending the period at close to $1.8 billion due largely to strong growth in core non-maturity deposits.
“Therefore it is said that one may know how to win, but cannot necessarily do so.” – Sun Tzu
“We continue our commitment to growth and expansion, and during this past quarter we saw strong organic increases in loans and deposits in addition to striking agreements to acquire Ojai Community Bank and the Woodlake branch of Citizens Business Bank,” said Kevin McPhaill, President and CEO. “It is our bankers and their drive for excellence that sets us apart; our entire banking team has dedicated themselves to delivering the very best community banking experience for our customers.”
“We achieved new record highs in loans, deposits, and assets in the first half of the year and we move into the second half with the same energy and focus on growth, demonstrating not just our knowledge but our ability to execute and ‘win’,” McPhaill said.
As noted above, net income increased by $1.116 million, or 27%, in the second quarter of 2017 relative to the second quarter of 2016, and by $1.632 million, or 20%, for the first six months of 2017 as compared to the same period in 2016. Significant variances in the components of pre-tax income, including some items of a non-recurring nature, are noted below.
Net interest income was up by $2.645 million, or 17%, for the second quarter, and $4.213 million, or 14%, for the first half due primarily to growth in average interest-earning assets totaling $260 million, or 16%, for the second quarter of 2017 over the second quarter of 2016, and growth of $232 million, or 14%, for the first half of 2017 over the first half of 2016.
The increase in average earning assets came via organic growth, as well as our acquisition of Coast National Bank in mid-2016. The favorable impact of higher interest-earning assets was supplemented by an increase of four basis points in our net interest margin for the comparative quarters, which was caused primarily by higher loan yields partially offset by higher borrowing costs.
The comparative results were also impacted by non-recurring interest income, which totaled $83,000 in the second quarter of 2017 relative to $22,000 in the second quarter of 2016, and $219,000 in the first half of 2017 as compared to only $65,000 in the first half of 2016. Non-recurring interest income is comprised of interest recoveries on non-accrual loans less any interest reversals for loans placed on non-accrual status, as well as accelerated fee recognition for loan prepayments, and late fees.
The Company recorded a provision for loan losses in the second quarter of 2017, for the first time since the second quarter of 2014. The provision became necessary due to loan growth, and to replenish reserves subsequent to the unanticipated charge-off of a $224,000 overdraft on a business account.
Total non-interest income increased by $790,000, or 17%, for the quarterly comparison, and $1.630 million, or 18% for the comparative year-to-date periods. Significant variances in non-interest income include the following: increases in service charges on deposits totaling $298,000, or 12%, for the quarter and $500,000, or 10%, for the first six months, resulting from fees earned on a higher number of deposit accounts, as well as a higher level of commercial deposit account activity and fee increases for higher-risk accounts; increases in bank-owned life insurance (BOLI) income totaling $129,000 for the quarter and $372,000 for the first six months, due in large part to higher income on BOLI associated with deferred compensation plans but also reflecting higher income crediting rates on other BOLI; and increases in other non-interest income of $451,000, or 26%, for the second quarter, and $814,000, or 24%, for the first half, including a $141,000 prepayment penalty on a large dairy loan that paid off in the second quarter of 2017 and a rising level of non-deposit service charges and fees, particularly debit card interchange income.
Investment gains declined for the comparative periods, reflecting reductions of $88,000 for the second quarter and $56,000 for the first six months.
Total non-interest expense was up by $1.376 million, or 10%, for the second quarter of 2017 relative to the second quarter of 2016, and $3.598 million, or 13%, for the comparative six-month periods.
The largest component of non-interest expense, salaries and benefits, increased by $629,000, or 9%, for the second quarter and $1.648 million, or 12%, for the first half, largely because salaries and benefits in 2017 include expenses for former Coast employees retained subsequent to the acquisition in July of 2016, as well as staffing costs for our Sanger branch which opened in May of 2016 and our newest Bakersfield branch that commenced operations in March of 2017.
The increase also reflects salary adjustments in the normal course of business, a relatively large increase in group health insurance costs, and, for the year-to-date comparison, higher stock option expense stemming from options granted in February of 2017.
Those increases were partially offset by lower overtime and temporary staffing costs, which were down $60,000 for the quarter and $72,000 for the first six months due to costs incurred in preparation for the Coast acquisition and related systems conversion in 2016.
Compensation costs also benefited from stronger loan origination activity, since salaries directly related to successful loan originations, which are deferred and amortized as loan costs and thus reduce current period compensation expense, increased by $399,000 for the second quarter and $634,000 for the first six months.
Occupancy expense increased by $369,000, or 20%, in the second quarter of 2017 over the second quarter of 2016, and by $938,000, or 26%, for the comparative year-to-date periods, due to occupancy costs associated with the former Coast National Bank branches and our newer de-novo branches, higher rent and depreciation expense in other locations, and, for the year-to-date comparison, roughly $100,000 in non-recurring expenses associated with opening our newest Bakersfield branch in the first quarter of 2017.
Other non-interest expense was up by $378,000, or 7%, for the quarter, and $1.012 million, or 10%, for the first six months. This category includes an $85,000 non-recurring charge related to a legal settlement in the second quarter of 2017, as well as non-recurring acquisition costs which totaled $166,000 in the second quarter of 2017 relative to $128,000 in the second quarter of 2016, and $161,000 for the first six months of 2017 as compared to $342,000 in the first six months of 2016.
It also reflects recurring increases from the Coast acquisition in various core operating expense categories including data processing, deposit costs (including amortization expense on our core deposit intangible), telecommunications, supplies and travel expense.
Additional non-interest expense areas experiencing relatively large increases include: directors’ deferred compensation expense, in conjunction with the changes in BOLI income; stock option expense for directors; director retirement plan accruals, due to a non-recurring expense reversal of $173,000 in the first quarter of 2016; and, loan costs for the year-to-date comparison due to approximately $100,000 in non-recurring adjustments in the first quarter of 2017.
Partially offsetting the increases were reductions in net OREO expense totaling $296,000 for the quarter and $286,000 for the year-to-date period, lower regulatory assessments, and a drop in operations-related losses.
The Company’s provision for income taxes was 33% of pre-tax income in the second quarters of 2017 and 2016, and 31% for the first six months of 2017 relative to 33% for the first six months of 2016. The slightly lower tax accrual rate for the first half of 2017 is primarily the result of our adoption of FASB’s Accounting Standards Update 2016-09 effective January 1, 2017, and the subsequent change in accounting methodology associated with the disqualifying disposition of Company shares issued pursuant to the exercise of incentive stock options (ISOs).
Prior to January 1, 2017, the favorable tax impact of disqualifying dispositions was recorded directly to equity, whereas it is now reflected in the income statement as an adjustment to our income tax provision. The adoption of ASU 2016-09 will lead to volatility in our tax provision as the level of disqualifying dispositions fluctuates from quarter to quarter, as witnessed in the first and second quarters of 2017. There were a relatively large number of such transactions in the first quarter of 2017, which lowered our tax accrual rate, but a much smaller number of disqualifying dispositions in the second quarter of 2017.
Balance sheet changes during the first half of 2017 include an increase in total assets of $45 million, or 2%, due to higher loan and investment portfolio balances, partially offset by a reduction in cash and due from banks. Cash balances were down by $43 million, or 36%, including an almost $29 million reduction in interest-earning balances held in our Federal Reserve Bank account and close to a $15 million drop in non-earning balances. Shorter-term cash balances were generally deployed into longer-term investment securities, which reflect an increase of $49 million, or 9%, during the first six months of 2017.
Gross loans increased by $37 million, or 3%, due to strong organic growth in real estate loans and agricultural production loans during the first half of 2017. Non-agricultural real estate loans were up $68 million, or 9%, for the first six months.
Agricultural real estate loans increased by $2 million, or 2%, and agricultural production loans were up $8 million, or 18%, but as noted previously these categories were negatively impacted by the payoff of a $7 million dairy loan subsequent to the sale of the business in the second quarter of 2017. The increases in real estate and agricultural loans were partially offset by a drop of $36 million, or 22%, in mortgage warehouse loans, which declined as the utilization rate on mortgage warehouse lines dropped to 35% at June 30, 2017 from 48% at December 31, 2016.
Commercial loans and leases were also down by close to $5 million, or 4%. While we have experienced a higher level of real-estate secured and agricultural production lending activity in recent periods, and our pipeline of loans in process of approval remains relatively robust, no assurance can be provided with regard to future loan growth as payoffs remain at relatively high levels and mortgage warehouse loan volumes are difficult to predict.
Total nonperforming assets, namely non-accrual loans and foreclosed assets, were reduced by $797,000, or 9%, during the first six months of 2017. The Company’s ratio of nonperforming assets to loans plus foreclosed assets was 0.60% at June 30, 2017, compared to 0.68% at December 31, 2016. 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 $14 million in loans classified as restructured troubled debt (TDRs) that were included with performing loans as of June 30, 2017, down slightly from the level of TDRs at December 31, 2016.
The Company’s allowance for loan and lease losses was $9.2 million at June 30, 2017, down from $9.7 million at December 31, 2016. The decline resulted from the charge-off of certain impaired loan balances against previously-established reserves and was also enabled by improved credit quality in the overall loan portfolio, but those factors were partially offset by reserves provided for losses inherent in incremental loan balances and unanticipated charge-offs.
Net loans charged off against the allowance totaled $771,000 in the first six months of 2017, compared to $381,000 in the first six months of 2016. As noted above, charge-offs in the first half of 2017 include a $224,000 overdraft on a business account that did not previously have specifically allocated reserves.
Because of the drop in the level of the allowance and growth in our loan portfolio the allowance fell slightly as a percentage of loans, to 0.71% at June 30, 2017 from 0.77% at December 31, 2016. It should be noted that our reserve level has been favorably impacted by acquired loans, which were booked at their fair value on the acquisition date and thus did not initially require a loan loss allowance.
Furthermore, loss reserves allocated to mortgage warehouse loans are relatively low because we have not experienced any losses in that portfolio segment. 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 June 30, 2017, 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 $96 million, or 6%, during the six months ended June 30, 2017, due in large part to continued organic growth in core non-maturity deposits, including the addition of a few relatively large commercial deposit relationships. Junior subordinated debentures increased slightly from the accretion of the discount on trust-preferred securities acquired from Coast, but other non-deposit borrowings were reduced by $62 million, or 85%, in the first half of 2017, as facilitated by robust deposit growth.
Total capital of $216 million at June 30, 2017 reflects an increase of over $10 million, or 5%, for the year-to-date period due to the addition of income, the impact of stock options exercised, and a $3 million absolute increase in accumulated other comprehensive income, net of dividends paid. There were no share repurchases executed by the Company during the quarter.
About Sierra Bancorp
Sierra Bancorp is the holding company for Bank of the Sierra (www.bankofthesierra.com), which is in its 40th year of operations and is the largest independent bank headquartered in the South San Joaquin Valley. Bank of the Sierra is a community-centric regional bank, which offers a full range of retail and commercial banking services via 34 full-service branches located throughout California’s South San Joaquin Valley and neighboring communities, on the Central Coast, and in Southern California locations including the Santa Clara Valley. We also maintain a loan production office and an online branch, and provide specialized lending services through an agricultural credit center, a real estate industries center, and an SBA center.
As announced on April 24, 2017, the Company has entered into a definitive agreement to acquire OCB Bancorp and its wholly-owned banking subsidiary, Ojai Community Bank, which serves the communities of Ojai, Santa Paula, Ventura and Santa Barbara, California. OCB Bancorp had $270 million in assets, $212 million in loans, and $222 million in deposits as of March 31, 2017. We expect the transaction to be completed early in the fourth quarter of 2017, subject to customary conditions of closing including the receipt of required regulatory approvals and the consent of OCB Bancorp shareholders.
Furthermore, as announced on July 5, 2017, Bank of the Sierra, the banking subsidiary of Sierra Bancorp, has entered into an agreement with Citizens Business Bank, the banking subsidiary of CVB Financial Corp., to acquire the Citizens branch located in Woodlake, California, including branch deposits and certain fixed assets. The transaction is expected to close in the fourth quarter of 2017, subject to the receipt of all required regulatory approvals. At the present time, there are approximately $27 million in deposits at the Woodlake branch.
Further details from the earnings report are available here.
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