Sierra Bancorp — Q2 2021 Form 10-Q
Business context and reporting period. Sierra Bancorp is a California bank holding company whose principal subsidiary, Bank of the Sierra, provides retail and commercial banking services. This unaudited report covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Interest and dividend income | $28.1 | $25.4 | $57.6 | $51.4 |
| Net interest income | $27.2 | $24.1 | $55.7 | $47.9 |
| Provision (benefit) for loan losses | ($2.1) benefit | $2.2 expense | ($1.9) benefit | $4.0 expense |
| Noninterest income | $6.6 | $6.9 | $13.4 | $13.0 |
| Noninterest expense | $20.2 | $18.0 | $40.5 | $35.9 |
| Net income | $11.7 | $8.3 | $22.8 | $16.1 |
| Diluted EPS | $0.76 | $0.54 | $1.48 | $1.05 |
| Net interest margin | 3.60% | 3.81% | 3.76% | 3.97% |
| Efficiency ratio | 58.79% | 57.78% | 57.58% | 58.33% |
- Q2 diluted EPS and net income rose year over year, mainly reflecting higher net interest income and a loan-loss benefit, partly offset by increased operating costs. Management cited higher real-estate loan interest income and lower funding costs; higher salaries, data-processing and legal costs weighed on results.
- At June 30, assets were $3,272.0, including cash and cash equivalents of $373.9 and available-for-sale securities of $607.5. Gross loans were $2,144.8, down $318.3 (13%) from year-end; deposits were $2,775.9, up $151.3 (6%).
- Cash and cash equivalents increased $302.5 in the first half. Operating cash flow was $21.3 versus $21.8 in the prior-year period; investing activities provided $247.8 versus using $433.9, and financing activities provided $33.4 versus $488.7.
- Shareholders’ equity was $357.7, up $13.8 from year-end. The Bank’s leverage ratio was 10.43%, compared with the 8.5% 2021 Community Bank Leverage Ratio minimum.
Material changes and credit quality
- Loan balances fell primarily from lower mortgage warehouse utilization (down $157.3), lower real-estate lending (down $100.0), and PPP loan forgiveness. Management said it was shifting origination emphasis toward commercial and industrial lending, including owner-occupied CRE and small business loans. CRE concentration declined to 335% from 378% at year-end.
- Funding mix improved toward lower-cost deposits: noninterest-bearing deposits were 38.7% of deposits, versus 36.0% at year-end. Time deposits declined, and short-term borrowings were paid off; repurchase agreements rose to $70.5 from $39.1. Subordinated debentures were $35.2.
- The allowance for loan and lease losses was $16.4, or 0.77% of gross loans, down from $17.7 at year-end. Nonperforming loans were $7.3; nonperforming assets were $8.1, or 0.38% of gross loans and foreclosed assets. The allowance equaled 225.7% of nonperforming loans.
- Remaining COVID-related loan deferrals were $10.4 and were internally classified; all were secured by real estate. Total TDRs were $12.4, including $1.7 on nonaccrual status. Management cautioned that repayment performance after deferrals could affect future credit quality and provisions.
Outlook, risks and unusual items
- No formal earnings or financial guidance is provided. Management expects loan and deposit demand to continue at a slower pace than in 2020, mortgage warehouse utilization to remain below 2020 levels, and PPP forgiveness to continue. It cautioned that strategic loan-mix changes and paydowns could mean originations do not outpace loan runoff in 2021.
- Management reported strong liquidity sources totaling $1,930.7, including cash, unpledged and excess-pledged securities, FHLB availability, unsecured lines and discount-window capacity. It noted the risk that pandemic-related deposit growth could partly reverse and that surplus low-yield cash pressures net interest margin.
- Interest-rate sensitivity modeling showed a projected 8.1% decline in 12-month net interest income under an immediate 100-basis-point rate decrease, exceeding the company’s stated 5% policy limit for that scenario. A 100-basis-point increase was projected to raise net interest income 4.1%. Results depend on modeling assumptions and deposit behavior.
- The company plans to adopt CECL on January 1, 2022; the adoption impact had not been definitively determined. Management cited changing economic forecasts and model inputs as uncertainties.
- Five branches were permanently closed in June 2021 following changed customer behavior and an efficiency review. Accelerated leasehold-improvement amortization added $0.4 to Q2 expense and $0.5 year to date; management projected annual expense savings of $0.8–$1.0.
- Available-for-sale securities’ net unrealized gain fell to $21.9 from $26.1 at year-end, which management attributed to higher long-term interest rates. The company reported no goodwill impairment and said ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the $10.4 of classified COVID-related deferrals resume scheduled payments, and how criticized, nonperforming and TDR balances evolve.
- Whether the allowance remains adequate as the portfolio mix changes and CECL adoption approaches; the filing does not yet quantify the expected CECL adjustment.
- Whether deposit balances remain stable and excess cash can be deployed without further material pressure on net interest margin.
- Whether loan runoff, mortgage warehouse activity and PPP forgiveness align with management’s 2021 outlook and diversification plans.
- Whether branch closures deliver the projected annual savings and whether expense growth moderates.
- Whether interest-rate exposure and securities valuations remain within risk limits; the modeled down-100-basis-point NII impact exceeded policy guidelines.