Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to Porterville, California-based Sierra Bancorp (NASDAQ: BSRR or “the company”). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to the Bank of the Sierra (“the bank”), the lead subsidiary. The Outlook for all long-term ratings is Stable.
The ratings are supported by the bank’s solid earnings history (pandemic impacted ROAs in the 1.3% to upper 1.4% range), with adequate revenue diversification that includes a peer-like ~20% stable fee income component to total revenue. Bottom-line profitability has generally outperformed rated peers in recent years, primarily due to maintaining above peer NIM, low credit costs, and relatively efficient operations. Indicative of BSRR’s low-cost deposit base, total deposit costs for 2Q21 were 0.09% reflective of 39% in noninterest-bearing deposits. The favorable deposit mix (complemented by abundant contingent sources of liquidity) underpins the ratings and has supported the bank's above average NIM despite pressure in the current low-rate environment. The bank’s better than peer credit performance reflects conservative loan underwriting, with minimal credit losses over the last five and a half years with NCOs peaking at 22 bps of average loans in 2018. KBRA notes that the credit profile materially changed in 2020 with significant growth in the investor CRE portfolio from 38% of total loans as of 4Q19 to 56% as of 2Q21. Approximately 20% of the new NOO CRE volume, concentrated in Retail and Office, was attributable to the out of footprint originations which boosted BSRR’s overall out-of-footprint portfolio to approximately 16% of total loans as of 2Q21. However, KBRA views the bank’s loss absorbing capacity as adequate with sufficient loan loss reserve coverage based on conservative underwriting, solid earnings and capital levels. KBRA expects the company to maintain current capital levels (leverage (CBLR) and TCE ratios of 10.7% and 10.1%, respectively, in 2Q21) which are commensurate with the elevated investor CRE concentration and overall risk profile. However, the bank has moderated investor CRE growth and is focused on building out its C&I lending. The ratings also recognize the relatively recent staffing enhancements among several key positions that have boosted the depth of management. Specifically, the CFO and CCO/CRO positions, which bring strength to the company’s senior management team with previous experience at larger regional banks in the area also adds in-depth knowledge of the local, or similarly sized, markets.
The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019 and KBRA’s ESG Global Rating Methodology published on June 16, 2021.
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Disclosures
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
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