Sierra Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are primarily with December 31, 2020. Sierra Bancorp is the holding company for Bank of the Sierra, a California community bank focused on retail and commercial banking, including agricultural, SBA and mortgage warehouse lending. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Net income; diluted EPS | $11.1 million; $0.72 | Q1 2020: $7.8 million; $0.51 |
| Net interest income | $28.6 million | Up 20% from $23.8 million in Q1 2020 |
| Net interest margin | 3.93% | 4.13% in Q1 2020 |
| Provision for loan losses | $0.25 million | $1.8 million in Q1 2020 |
| Noninterest income / expense | $6.8 million / $20.3 million | Q1 2020: $6.1 million / $17.8 million |
| Efficiency ratio | 56.43% | 58.88% in Q1 2020 |
| Total assets | $3.326 billion | $3.221 billion at year-end 2020 |
| Gross loans and leases | $2.288 billion | $2.463 billion at year-end 2020 |
| Deposits | $2.854 billion | $2.625 billion at year-end 2020 |
| Cash and cash equivalents | $346.2 million | $71.4 million at year-end 2020 |
| Shareholders’ equity | $348.0 million | $343.9 million at year-end 2020 |
| Bank leverage ratio | 10.36% | 10.12% at year-end 2020; 8.5% stated well-capitalized threshold |
Net income increased about 42% year over year. Higher loan interest income, including SBA Paycheck Protection Program (PPP) fee recognition, and lower funding costs more than offset lower asset yields. Interest expense fell 60%, principally reflecting lower deposit rates and a greater mix of noninterest-bearing deposits. Noninterest expense rose 14%, including higher salaries, data-processing and other costs.
Q1 operating cash flow was $14.7 million. Investing activities provided $159.5 million, mainly reflecting $175.6 million of net loan originations and payments (cash inflow from net loan repayments); financing activities provided $100.6 million, primarily from $229.3 million of deposit growth, partly offset by lower borrowings and dividends. Cash and cash equivalents increased $274.8 million during the quarter.
Material changes and balance-sheet developments
- Loans fell 7% from year-end, mainly due to a $119.7 million reduction in mortgage warehouse balances and PPP forgiveness. The bank originated $33.2 million of PPP loans and recorded $52.8 million of forgiveness during the quarter. Management described a strategic shift toward commercial and industrial lending, owner-occupied real estate and small business lending.
- Deposits rose 9%, largely through noninterest-bearing and low-cost transaction and savings accounts. Short-term borrowings declined substantially as deposit growth reduced reliance on FHLB overnight funding. Period-end short-term borrowings were $5.0 million and repurchase agreements were $51.5 million.
- Available-for-sale securities increased to $552.9 million. Their net unrealized gain declined to $20.4 million from $26.1 million at year-end, and accumulated other comprehensive income fell $4.1 million, reflecting higher market interest rates.
- Nonperforming assets increased 11% from year-end to $9.5 million; nonperforming loans were $8.6 million, or 0.38% of gross loans. Management attributed the increase to two loans to one borrower and stated it was not COVID-related. The allowance for loan and lease losses was $18.3 million, or 0.80% of gross loans, compared with 0.72% at year-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects slower loan demand than in 2020, including lower mortgage warehouse utilization and PPP activity, and anticipates lower 2021 originations as it shifts lending mix. It also expects ongoing pressure on net interest margin in the low-rate environment and possible continued weakness in certain fee streams.
- At March 31, $22.4 million of loans remained under COVID-related payment modifications; $10.4 million were internally classified. Management expects borrowers to resume full payments, but warns that failures to do so could increase classified or nonperforming assets, interest reversals and charge-offs. The ultimate effect of the pandemic and relief measures remains uncertain.
- The company plans to implement CECL on January 1, 2022. Its current estimate is that the allowance will increase approximately 50%; the estimated after-tax equity reduction is $5.8 million to $6.5 million. Management does not currently expect a need to raise capital.
- Five branches were scheduled to close effective June 18, 2021. Management projects annual expense savings of $0.8 million to $1.0 million once fully realized, with additional near-term depreciation and lease-related expense.
- Liquidity sources totaled approximately $1.737 billion, including cash, unpledged and excess pledged securities, borrowing availability and credit lines. Management considered liquidity sufficient, while noting no assurance that current levels will persist. The company had $99.8 million of approved PPP Lending Facility capacity and did not use it in Q1.
- Interest-rate simulations estimate that an immediate 100-basis-point rate decline would reduce next-12-month net interest income by 7.6% and economic value of equity by 20.1%. The modeled NII decline exceeds the company’s stated internal limit for that scenario. Conversely, a 400-basis-point increase was modeled to raise NII by 7.2%; these are model estimates, not forecasts.
- Off-balance-sheet commitments to extend credit were $476.9 million, with $8.4 million of standby letters of credit. The filing notes that commitments may be drawn and that actual future funding needs are uncertain. Management said pending routine legal proceedings were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether deposit growth is durable and how the unusually high cash balance is redeployed, particularly as loan balances and mortgage warehouse utilization change.
- Loan performance after COVID-related deferrals expire, including the $22.4 million still modified, classified credits, nonperforming loans and commercial real estate concentrations.
- The final CECL adoption impact versus the estimated 50% reserve increase and $5.8 million to $6.5 million after-tax equity reduction.
- Whether net interest margin stabilizes, and how actual results compare with modeled rate sensitivity, particularly the downside-rate exposure.
- Whether the five branch closures deliver projected savings and how related costs and service-charge trends affect expenses and fee income.
- Capital and liquidity resilience if credit losses rise, deposits reverse, or unused credit commitments are drawn.