California bank bets on two new markets to reverse lending slump

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Sierra Bancorp in Porterville, Calif., is hoping a pair of key hires can snap its lending out of the doldrums.

The $2.6 billion-asset company announced on Tuesday that it had hired banking teams in Santa Clarita and Sacramento.

The moves come shortly after Sierra reported that its loan book increased by a scant 2% in 2019 from a year earlier, to $1.8 billion. Similar-size banks in the Western U.S. reported, on average, nearly 5% loan growth in the first nine months of 2019, based on the most recent data from the Federal Deposit Insurance Corp.

While the new additions will immediately increase expenses, CEO Kevin McPhaill said he expects the teams to boost the bottom line in the second half of 2020 as they settle into their roles.

“I the long-term benefit is certainly worth that short-term effort with a little bit of an additional expense for the first few months,” McPhaill said.

A decision to rev up lending across California could be questioned, given growing concerns about credit quality. Several California companies have had issues with higher charge-offs in recent years.

Still, hiring lenders is a lower-risk alternative to an acquisition, Kevin Swanson, an analyst at Hovde Group, wrote in a note to clients. And entering new markets should provide Sierra with more lending opportunities — with experienced bankers, he added.

McPhaill made a similar point.

“With an acquisition ... you do an examination of the loan book, you do an interest-rate mark and a credit mark," McPhaill said. "Then, you kind of hope for the best."

By hiring teams, "you control every single asset before it comes on your books,” he added.

Adding lenders who specialize in commercial real estate should help Sierra reduce its exposure to warehouse lending, said Tim Coffey, an analyst at Janney Montgomery Scott.

Warehouse loans made about a tenth of total loans at Sierra on Dec. 31. While overall growth was stagnant, the warehouse loan book more than doubled last year, to $189 million.

“The bottom line is management recognized loan growth was too low and reliance on mortgage warehouse lending — loan balances were flat excluding the warehouse line — [was] too volatile,” Coffey wrote in a note to clients.

While Sierra has experience in owner-occupied and investor CRE, deals in the new markets are typically larger than those in the company's core footprint, so the added lenders "will be able to move a little bit further upstream,” McPhaill said.

“We’re going to get a chance to look at the same type of loans in terms of commercial real estate, but we’re looking at higher-ticket items,” he added.

Bigger loans, with the proper underwriting, could give Sierra's lending a boost at a time when increased payoffs are offsetting new originations.

“It seems to be, from an aggregate level, the loan pipeline is shrinking a little bit for all banks," McPhaill said.

"We’re going after a little smaller pie,” he added. "Kind of every month that goes by, it seems to be just slightly shrinking. ... That creates some challenges.”

Credit quality remains solid at Sierra. Nonperforming assets made up 0.37% of total assets on Dec. 31. Charge-offs fell by 35% from a year earlier, to $2.4 million.

The hirings also reflect the opportunities being created by consolidation in California.

The Sacramento group is being led by Deepak Bhakoo, who recently left Robobank. The $17.3 billion-asset Mechanics bought Rabobank's U.S. operations in September.

The group in Southern California, led by Bill Nethercott, is looking to take advantage of the recently announced sale of Opus Bank in Irvine to Pacific Premier Bancorp. Nethercott had been a lender for Premier America Credit Union in Chatsworth, Calif.

"Many bankers have discovered through consolidation ... that institutional loyalty is not reciprocal," said Rod Taylor, CEO of executive recruiting firm Taylor & Co.

But overall merger activity in California has been rather tepid. Only six deals on the West Coast have topped $600 million since 2017, including Pacific Premier-Opus and Mechanics-Rabobank.

“The merger-and-acquisition market has been a little more challenging from a buyer’s perspective over the past couple of years,” McPhaill said. “I think that’s because the market is doing so well. People are feeling pretty good about their prospects as a bank.”

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