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Sierra
Bancorp with a strong 25-year record - provides the ultimate in personal service and is
positioned to take advantage of growth in the South San Joaquin Valley
Financial Services
Community Bank
(NASD: BSRR)
Sierra Bancorp
86 North Main Street
Porterville, CA 93257
Phone: 559-782-4900
James C. Holly
President and
Chief Executive Officer
Interview conducted by:
Lynn Fosse
Editor
CEOCFOinterviews.com
February 2003
Bio of CEO,
James C. Holly (or Jim as his friends call him) a native of Wisconsin and a graduate of
University of Wisconsin where he received his degree and completed his graduate work in
business. Following graduation from college, Jim served as a commissioned officer in the
U.S. Army.
Jim’s first banking job was in Whittier, CA with United California Bank. Despite
Jim’s rapid career advancement in the “big city”, Jim wanted to move to a
community where he could build business one customer at a time. So in 1967, Jim and his
new family migrated to Porterville, CA where he opened a former United California Bank
branch (that later became First Interstate and now Wells Fargo). Jim managed that branch
for 10 years during, which time the climate of bank relationships changed from customer
and community service-focused towards operations. Jim didn’t care for that kind of
banking. Jim believed the community needed a ‘country bank’.
In 1977, Jim joined a Porterville investment group
that listened to his banking concepts and believed in them. In January of 1978, the Bank
of the Sierra was incorporated.
Company Profile:
Bank of the Sierra
was reorganized into a one-bank holding company, Sierra Bancorp (Nasdaq:BSRR) in 2001 to
take advantage of the increased flexibility of a holding company, and to augment capital
with a Trust Preferred Security offering. Sierra Bancorp is now the largest bank holding
company in the South Valley and it has become a significant factor in the market. Bank of
the Sierra has commercial branch offices with convenient locations to serve you in
Porterville, Lindsay, Exeter, Visalia, Three Rivers, Dinuba, Bakersfield, Tulare, Hanford,
Fresno, Tehachapi, and California City. We also offer two Ag Credit Centers for your ag
lending needs, and a Bank Card Center. The Bank operates 16 full-service branch offices
and eight credit centers.
The Bank has
positioned itself as a multi-community independent bank, focusing on personal service,
serving individuals and businesses. Its principal retail lending services include home
equity and consumer loans. In early 2002, the Bank entered into an agreement with
Moneyline Lending Services, Inc. (Moneyline). Moneyline underwrites single-family mortgage
loans for qualifying Bank customers referred to them via Bank-branded delivery channels
such as Bank branches, the Bank's Internet site and a dedicated telephone line. The Bank
also engages in SBA lending and has been designated as a Preferred Lender since 1999. It
is anticipated that loans under this program will be an increasing segment of its loan
portfolio. In addition to its lending activities, offers a wide range of deposit products
for the retail banking market, including checking, interest-bearing transaction, savings,
time certificates of deposit and retirement accounts, as well as telephone banking and
Internet banking with bill pay options.
Sierra Bancorp is
now the largest bank holding company in the South Valley and it has become a significant
factor in the market. Sierra Bancorp, as parent company to Bank of the Sierra, has formed
and actively pursues alliances, equity investments and partnerships that have or will
strengthen the strategic initiatives of the company. These include:
Sierra Capital
Trust - A Grantor Trust that facilitates the issuance of trust-preferred securities on
behalf of Sierra Bancorp.
California
Economic Development Lending Initiative – Multi-bank community venture that
enables Sierra Bancorp to participate in the economic development of California
communities.
Low-Income
Housing Limited Partnerships – Partnerships that enable Sierra Bancorp to
participate in providing California communities with affordable (and low-income) housing.
Diversified
Holdings, Inc. – An equity investment that enables Sierra Bancorp.
CEOCFOinterviews: Mr. Holly, why the change to a holding
company in 2001?
Mr. Holly: There are several objectives; the one was to get
into position to issue a trust preferred security offering, which we did. We have a
$15million dollar offering on that. That augmented our capital and provided the
capital for future growth. Secondly, with the holding company there were other related
financial investments we wanted to make. For example, we bought an equity position
in a title insurance holding company. We did that in concert with 10 other community
banks. We’ve owned that interest now for about a year and a half and think that
investment has great potential. Then there are some other related financial investments
that we think would materialize in the next year or two. On that $15million we put $10
million downstream to the bank and retained $5million for other investments at the holding
company.
CEOCFOinterviews: Tell me a little bit about the Bank of Sierra.
Who is your target customer?
Mr. Holly: We like to call the Bank of Sierra a
multi-community, independent bank. What we mean by that is we are a very broad based
in our product line. We are in 12 cities with 16 branches; many of those cities are
smaller communities with a rural setting and we need a very broad product line to operate
effectively. We are also in larger cities such as Fresno and Bakersfield. We offer a broad
product line there too. This is not a niche bank or a specialty kind of a bank; this is a
very broad based bank. We have the business side, where we do acquisition development
loans for real estate development, commercial lending, FDA lending. We also have a
consumer side where we have a full array of consumer products, internet banking with
E-Bill Pay, various lines of credit, credit card base, merchant processing and a very
strong consumer banking program. We do that because we want to diversify our risk over a
broad array of business and consumer prospects and that has stabilized our earnings
through the years.
CEOCFOinterviews: What is the state of the economy in the area that
you service?
Mr. Holly: We were lucky to be in the South San Joaquin
Valley in California. This is an area unlike what most people think of when they think of
California. Most people think of San Diego, Los Angeles, or the East Bay. San
Joaquin Valley is a very rich, highly diversified agricultural farming area and on the
other hand it’s also the last large undeveloped area in California that has
potential. So, there is a lot of industry moving in from the Bay area and LA looking for
lower cost land, lower cost labor, lower cost housing and that brings in distribution
companies. Also, we have a very growing prison economy. California has determined to
lock up everyone in sight, so, we have a number of prisons throughout the south valley and
that is for lack of a better word, recession proof. So we have in this area, a large
public employment base with prisons, National Parks, government employment, a large state
hospital and this industrial base including distribution and a very large agricultural
economy. We have, in this county for example, over 60 crops that generate a million
dollars in sales revenue. Large numbers of dairies have moved in from Southern California;
this is the big citrus growing area in California, plus peaches, plums and nectarines,
large cattle operations and large real crop operations. There is a highly
diversified economy and it is a wonderful place to grow an independent bank because we
have a lot of places to put the money.
CEOCFOinterviews: Tell me a little bit about the special needs of
the agricultural community and the products and services that you provide for them.
Mr. Holly: An agricultural community, our main effort is
originating long-term farm mortgages, mostly for sale in the secondary market.
Although we keep some for our own investment and secondary effort, we also provide
production financing for crop production. That is not a large part of our business. That
is about 10% of our business. The rest of our business is in the other areas that I
had described.
CEOCFOinterviews: Do you do much in the way of mortgages?
Mr. Holly: Yes, consumer side we have a mortgage-banking
program that we offer with a strategic partner, MoneyLine. They are really the process
behind the scene. We call it Sierra Mortgage and Line so it is branded with our name, but
we actually originate long-term single-family residential mortgages through money line.
Coupled with that we also have an all in one construction loan program for custom homes.
We do a construction loan and then it rolls over into a conventional mortgage. Those we
sell directly in the secondary market without passing through MoneyLine. In this area, for
many people, they have a real choice for a custom home. The only choice for many people in
a big area is a track built home, but here in the Valley it is very possible to buy your
own lot and build your own custom built home. We do a lot of that, particularly in
Bakersfield and Fresno.
CEOCFOinterviews: Do many of your customers take advantage of
multiple products and services?
Mr. Holly: We have very active selling programs. When
customers have multiple products it stabilizes the customer base. So, our goal is to have,
at least, on the consumer side a three to three and a half products per household.
CEOCFOinterviews: Bank of Sierra provides “ the ultimate in
personal service.” What do you do that other banks don’t?
Mr. Holly: I think really it is the delivery system. We still
have in our branches the loan officers and people who can make decisions on the local
level. We try to front the bank through the 16 branches that we have and delegate
the lending authority and the responsibility of course to the branch officers to originate
all credit. That provides a level of service that people in this valley want to have. They
want to be able to come into a branch and get the job done, not to have someone package up
the material, mail it up to some processing center in San Francisco or Los Angeles and
have some unknown make the decision for them. We push everything down and the decision
making process to the lowest level possible. This is both on the business side and the
consumer side.
CEOCFOinterviews: How do you attract new business?
Mr. Holly: On the business side, we have an active calling
program; all branch officers have an assigned number of calls to make per month. We
advertise and we’ve been going for 25 years in many markets. Our reputation precedes
us in many cases. People know that we are here. We have been here for 25 years. We
get a lot of new activity through customer referrals, people speaking well of the bank and
its ability to deliver service.
CEOCFOinterviews: Is there much community involvement for the bank?
Mr. Holly: Yes indeed. We have community support
budgets for every branch. We encourage all of our people to join service clubs and public
service organizations at various times. We pay for that. Many of the major
banks have stopped doing that, but, we continue to do that and we have a charitable giving
budget for every city and every branch we are in. I would say that our people are the most
visible people of any bank of any market.
CEOCFOinterviews: How do you as an institution handle situations
such as the recent unprecedented rate cuts?
Mr. Holly: We did not see that coming; however, our net
interest margin last year was 5.56 and we have a very proactive billing management program
and a person dedicated to running the model, who used the bank lawyer model for liability
management. We have been able to aggressively reprised deposits and loans and maintain a
very profitable interest margin. How we do that is thinking ahead, planning and
anticipating as well as use of the model.
CEOCFOinterviews: You have recently a new tax strategy regarding
low income tax credits. Tell me a little about that.
Mr. Holly: That is not really unusual but we invested in two
tax advantage low income housing partnerships where we actually have equity interest and
the tax benefit of doing that is that you get tax credits in both in State Tax and Federal
Income Tax and those tax credits are in your return. We are equity investors in two of
those partnerships. Some of those low cost units are in our service area and some are not.
I anticipate that we have about $6 million invested in that area and I would anticipate
that we would make another reinvestment like that this year similar to that in the last
two years.
CEOCFOinterviews: Have how you been able to reduce expenses?
Mr. Holly: Well, there are two big sides to that. One is a
technology. Late last year, we brought back in-house proof of deposit operation, invested
a million six in equipment to in-house that process. We had that outsourced with
FiServ, but by bringing that back in and doing it ourselves with the new technology that
is available, we should save about $80,000 a month on proof of deposit item processing. It
also enabled image statements and image storing. So, there will be a considerable savings
there by use of technology. The other element, the biggest expense other than
interest is salaries and benefits and there we re-examined our bank staffing, making
significant staffing changes in the branch system, reduced hours to some extent and just
re-examined how we staff the branches. We had a million dollar reduction in overall
staffing from one year ago.
CEOCFOinterviews: How do you keep in touch with the teller on the
frontlines?
Mr. Holly: That is a good question. I think that there
is a feedback within the system; we have a system wide intranet. We have more PC’s
than people in this bank and we are all on that bank network and there is a feedback
mechanism there. I go out, and so do others, to the different branches from time to time
to get an onsite visitation and talk that way. I think within the structure that we
have set up there are good ways to get communication back and forth.
CEOCFOinterviews: How do you do in the way of non-performing loans
compared to your peers?
Mr. Holly: We are somewhat higher in that category, that is,
in non-performing loans. We have reduced that significantly in the last two years.
The largest single loan we have is an agricultural production loan that shows some promise
of coming into focus; I expect to have that by full accrual back by June of this year. We
have been working through a very depressed agricultural economy even though that is not a
large part of our business. A large part of our non-performing loans are in that
area. Agriculture, as you may know, is widely and pervasively depressed, partly
because of overproduction but more significantly from a level of global capitation that we
never experienced in the agricultural sector of this country. That will probably go on. In
the citrus field for example there is a huge amount of fruits coming in now, especially in
the summer months, from the Southern Hemisphere countries like Australia, New Zealand,
South Africa, in the on season like now, lots of fruit coming in from Morocco and Spain.
Foreign governments that come in largely duty free and often lessen our cost of
production heavily subsidize this brood. Agriculture is going to stay depressed and
that is going to continue to be a problem throughout the US, unless significant changes
become in US trade policy. That could happen. If we continue the way we are going,
we are going to become food dependent like we are oil dependent and that will become a
very poor national policy.
CEOCFOinterviews: Is SBA a growing factor for you?
Mr. Holly: Yes it is. We were, in dollar volume the largest
SBA loan originator in the Fresno district and we expect to continue that going forward.
CEOCFOinterviews: Do you see new branches and acquisitions in the
future?
Mr. Holly: Our strategy is to stay within our present
footprint. Basically, Bakersfield on the South and Fresno on the North. In
that area there are no acquisitions that are likely. Our strategy going forward is
to build this bank inside through new branches. We have a new branch that will open in
Fresno in April and we will probably open a new branch in Clovis, which is right next to
Fresno later this year. Our five-year plan, that we just finished, is to look at other
communities where we are not represented. In Bakersfield we only have two branches we will
most likely be opening up a new one in the next few years as well. But within the
Bakersfield and Fresno’s footprint there is enormous potential that is really being
recognized by other banks who are branching in from other areas and who are presenting a
competitive challenge we think we are well able to meet. We would like to build our
branch in a concentrated area where we are known, where our reputation precedes us and
where there is ample opportunity to grow this bank over time without having to enter new
geography.
CEOCFOinterviews: What should shareholders and potential investors
know about Sierra?
Mr. Holly: We were here for the longer run. Most investors
look at the last year or two. Look at this banks’ 25-year history. We started this
bank 25 years ago with a single office, $1.5 million dollars in capital and 11 employees.
I was the original president. Over time, we’ve built this bank to its present size
through generating capital internally. We did have a preferred offering to augment
capital, but there has been a very consistent earnings pattern. You look at the last 19
years we’ve increased net income in the last 18 of the 19 years. We have very
consistent earnings and very strong process going forward.
While we’ve had a
very good history, I think, this area it will grow faster than the rest of California.
We are well positioned to take advantage of that and the best is yet to come.
I like to say that we have not realized our full potential. This bank is well
positioned to grow in the future. We are not a bank that is resting on a strong history
and a wonderful record for 25 years. Records are just that, records; they are history.
What investors really want to know is what are the future prospects for this bank and I
think that the prospects for this bank is very strong.
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