Sierra Bancorp — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Sierra Bancorp is the holding company for Bank of the Sierra, a California community bank serving the South San Joaquin Valley and other California markets. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $26.7 | $28.1 | $82.5 | $76.0 |
| Net income | $10.6 | $10.4 | $33.4 | $26.5 |
| Diluted earnings per share | $0.69 | $0.68 | $2.17 | $1.73 |
| Net interest margin, tax-equivalent | 3.46% | 3.98% | 3.66% | 3.97% |
| Return on average assets | 1.26% | 1.34% | 1.36% | 1.26% |
| Return on average equity | 11.62% | 12.34% | 12.60% | 10.90% |
Q3 pre-tax income was $14.0 million and income tax expense was $3.4 million. The nine-month effective tax rate was 25.0%, compared with 23.5% in 2020. Noninterest income was $7.5 million for Q3 and $21.0 million year to date; noninterest expense was $20.9 million and $61.4 million, respectively. The efficiency ratio was 59.75% for Q3 and 58.30% year to date.
Cash flow for the first nine months: operating activities provided $78.7 million, investing activities provided $126.5 million, and financing activities provided $145.7 million. Cash and cash equivalents increased $350.9 million to $422.4 million. Operating cash flow included a $46.6 million increase in other liabilities, attributed principally to a forward-settling securities accrual.
Balance sheet, liquidity and capital
- Total assets were $3.44 billion at September 30, up from $3.22 billion at year-end 2020. Total deposits were $2.82 billion, up 7%; noninterest-bearing deposits were $1.11 billion, or 39.4% of deposits.
- Gross loans and leases fell 13% to $2.14 billion. The decline reflected lower mortgage warehouse utilization, commercial real estate and construction balances, and SBA Paycheck Protection Program loan forgiveness. Available-for-sale securities rose 35% to $732.3 million.
- Shareholders’ equity was $364.5 million, up $20.6 million from year-end. Bank of the Sierra’s Community Bank Leverage Ratio was 10.66%, above the 8.5% applicable minimum for 2021.
- Long-term debt was $49.2 million net of issuance costs, following issuance of $50 million of 3.25% fixed-to-floating subordinated notes due 2031. Subordinated debentures were $35.3 million; repurchase agreements were $92.6 million. Short-term borrowings were zero at quarter-end.
- Management reported $2.19 billion of primary and secondary liquidity sources, including $422.4 million cash, $584.1 million unpledged securities, $773.1 million FHLB borrowing availability, and $305 million unsecured lines of credit.
Material changes versus comparable periods
- Q3 net income increased 2% year over year, despite a $1.4 million decrease in net interest income. The decline reflected lower earning-asset yields and average loan balances, plus more low-yield overnight cash. Q3 net interest margin contracted 52 basis points.
- Nine-month net income increased 26%. Net interest income rose 8%, supported by higher average loan balances and lower deposit costs, while the net interest margin still declined 31 basis points.
- Credit-loss expense turned into a benefit: the company recorded a $0.6 million loan-loss benefit for Q3 and a $2.5 million benefit for the first nine months, versus provisions of $2.4 million and $6.4 million in the respective 2020 periods.
- Noninterest expense increased 8% in Q3 and 11% year to date. Management cited higher compensation, deposit servicing, processing, and professional-service costs, including legal expenses. Year-to-date noninterest income increased 4%.
- Nonperforming assets declined to $6.9 million from $8.6 million at year-end 2020. Nonperforming loans were $6.8 million; the allowance for loan and lease losses was $15.6 million, or 0.73% of gross loans and 230% of nonperforming loans.
Outlook, risks and unusual items
- The filing provides no formal earnings guidance. Management expected slower loan and deposit growth than in 2020, continued PPP forgiveness, and mortgage warehouse utilization below 2020 levels. Management said loan originations could remain below paydowns and utilization reductions in 2021.
- Management planned to hire additional commercial lending teams, anticipated in Q4 2021, and purchased $121.6 million of jumbo mortgage loans in Q3 as a bridge to organic loan growth. The commercial real estate concentration ratio fell from 378% at year-end to 308%; management expected it to increase moderately in Q4 and 2022.
- The company planned to adopt CECL on January 1, 2022. Based on September 30 estimates, management expected an adoption adjustment of approximately 50%–75% of the then-current loan-loss allowance; actual impact could change with forecasts and assumptions.
- One customer relationship had $10.4 million of COVID-related loan modifications still on deferral; all were real-estate-secured and internally classified. The company had $7.8 million in troubled debt restructurings, including $2.3 million on nonaccrual status. Management noted that borrower performance after deferrals could affect future criticized or nonperforming assets and credit losses.
- Interest-rate and liquidity risks remain important. Management’s model showed net interest income increasing 5.7% under an immediate +100-basis-point shock but declining under a -100-basis-point shock. The filing’s sensitivity table reports an 11.0% decline ($11.9 million), while related narrative reports an 8% decline ($8.3 million); the figures do not reconcile.
- Five branches were closed in June 2021. Management projected annual expense savings of $0.8–$1.0 million; accelerated amortization of leasehold improvements added $0.5 million to year-to-date depreciation expense.
- On October 21, 2021, the board authorized a one-million-share repurchase plan, with repurchases expected to begin in Q4. It also approved a $25 million capital contribution to the Bank for Q4 and declared a $0.22-per-share dividend payable November 11, 2021.
- Management said liquidity and capital had not been adversely affected by COVID-19 and did not expect current legal proceedings to have a material adverse effect. It cautioned about economic conditions, COVID-19 effects on borrowers, credit losses, deposit runoff, interest rates, securities values, and regulatory risks. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Reconcile the filing’s conflicting -100-basis-point net interest income sensitivity figures ($11.9 million/11.0% versus $8.3 million/8%).
- Track performance and classification of the $10.4 million remaining COVID-modified loan relationship, and any further modifications or payment resumption.
- Assess the expected CECL adoption adjustment against the $15.6 million allowance, including the eventual impact on equity and capital.
- Monitor loan mix and concentration, particularly commercial real estate, mortgage warehouse utilization, and management’s planned commercial lending expansion.
- Evaluate whether deposit growth and excess cash can be deployed at adequate returns without weakening liquidity or net interest margin; monitor potential pandemic-related deposit runoff.
- Confirm the timing and scale of share repurchases, the planned $25 million Bank capital contribution, and the impact of rising operating expenses on efficiency.