Sierra Bancorp — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Sierra Bancorp is the holding company for Bank of the Sierra, a California community bank. Amounts below are in millions unless otherwise stated.
Financial performance and condition
| Metric | Q3 2023 | Prior comparison |
|---|---|---|
| Net income | $9.9 | $9.9 in Q3 2022 |
| Diluted EPS | $0.68 | $0.66 in Q3 2022 |
| Net interest income | $28.1 | $28.9 in Q3 2022 |
| Net interest margin | 3.30% | 3.63% in Q3 2022 |
| Return on average assets / equity | 1.04% / 12.62% | 1.13% / 12.84% in Q3 2022 |
- Nine-month results: Net income was $28.6 million and diluted EPS was $1.93, versus $26.5 million and $1.76 in 2022. Net interest income rose 5% to $84.5 million; net interest margin was 3.39%, versus 3.41%.
- Costs and credit: Q3 interest expense rose to $14.3 million from $3.0 million. Nine-month provision for credit losses was $0.2 million, compared with $4.2 million. Noninterest expense increased 8% year to date to $68.5 million; noninterest income declined 3% to $22.4 million.
- Balance sheet at September 30: Assets were $3.74 billion; gross loans $2.10 billion; securities $1.33 billion; deposits $2.87 billion; and shareholders’ equity $308.9 million. Since year-end 2022, assets grew 3.8%, loans 2%, and deposits 1%.
- Credit quality: The allowance for loan losses was $23.1 million, or 1.10% of gross loans. Nonperforming loans were $0.8 million (0.04% of gross loans), down from $19.6 million (0.95%) at year-end 2022, largely following foreclosure and sale of a dairy borrower’s collateral.
- Funding and liquidity: Noninterest-bearing deposits were 36.9% of deposits, down from 38.2% at year-end. Other borrowings totaled $317 million; repurchase agreements $94.9 million; long-term debt $49.3 million; and subordinated debentures $35.6 million. Reported cash and cash equivalents were $88.5 million. Management reported $2.67 billion in primary and secondary liquidity sources and a 73% loan-to-deposit ratio.
- Cash flow, first nine months: Operating cash flow was $48.9 million; investing cash outflow $125.6 million; financing cash inflow $88.2 million. Cash and cash equivalents increased $11.4 million to $88.5 million.
- Capital and shareholder returns: Bank Tier 1 leverage ratio was 11.05%; Sierra Bancorp’s was 10.12%. The quarterly dividend was $0.23 per share. The company repurchased 481,094 shares for $8.5 million during the first nine months.
Material changes and management commentary
- Q3 net income was essentially flat as higher asset yields and noninterest income were offset by margin compression and higher expenses. Management attributed margin pressure to rising deposit and borrowing costs, including customers moving from lower-cost accounts into time deposits.
- For the first nine months, earnings increased primarily because of higher net interest income and lower credit-loss provision, partly offset by higher operating expenses and lower noninterest income. Prior-year noninterest income included asset and securities sale gains and a legal expense recovery.
- Loans grew modestly, led by mortgage warehouse utilization and commercial real estate and commercial lending; farmland balances declined. Management said it had been curbing new office and higher-risk CRE production. CRE loans were 243% of regulatory capital plus allowance; office loans were 48%.
- Unrealized losses remained material: available-for-sale securities had $59.8 million of gross unrealized losses, while held-to-maturity securities’ fair value was $33 million below amortized cost. Accumulated other comprehensive loss was $61.9 million. Management said it did not expect to sell securities before recovery, but a forced sale could crystallize losses.
- Management described liquidity as adequate, supported by cash, securities and borrowing facilities, while noting that deposit outflows, reduced collateral values, or loss of funding access could affect liquidity. Estimated uninsured deposits were $830 million, or 29% of deposits.
- The company’s rate model indicated modest liability sensitivity: a 100-basis-point increase was projected to reduce one-year net interest income by 0.4%; a 100-basis-point decrease by 3.2%. The filing identifies deposit migration, deposit pricing and interest-rate changes as key uncertainties.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management’s projections and forward-looking statements are subject to risks including interest rates, inflation, local economic conditions, deposit competition, credit losses, securities valuations, bank-sector confidence, cybersecurity and regulatory changes.
- Material control weakness: Management concluded disclosure controls were ineffective because certain real estate loans were miscoded in Call Report loan categories. The errors involved 21 loans totaling $58.8 million and were quantitatively material to loan-classification disclosures. Management reported correcting materially all affected coding and adding training, oversight and monthly independent review; remediation is not complete until controls operate effectively for a sufficient period and testing confirms effectiveness.
- Management stated that ordinary-course legal matters were not expected to have a material adverse effect. The filing also describes increased regulatory scrutiny as a potential cost and operational risk.
Important facts for investors to verify
- Progress and testing results for remediation of the material weakness, and whether it affects subsequent filings or Call Report data.
- Deposit retention, uninsured deposit trends, funding mix and the effect of continued repricing into higher-cost deposits and borrowings.
- Realized and unrealized securities losses, pledged collateral, and liquidity available under stressed conditions.
- Credit performance in commercial real estate, office lending and agricultural exposures, including the adequacy of the allowance.
- The filing’s nonperforming-loan table reports 0.04% of gross loans, while one MD&A sentence says 0.4%; verify the intended figure. Also verify the detailed liquidity and securities-pledging disclosures against the underlying tables.