Sierra Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Sierra Bancorp is the holding company for Bank of the Sierra, a California community bank operating 35 full-service branches and an online branch.
Financial performance
| Metric | Q1 2023 | Prior comparison |
|---|---|---|
| Net income | $8.8 million | $7.4 million in Q1 2022 |
| Diluted earnings per share | $0.58 | $0.49 in Q1 2022 |
| Net interest income | $28.1 million | $24.8 million in Q1 2022 |
| Net interest margin | 3.47% | 3.21% in Q1 2022 |
| Provision for credit losses | $0.3 million | $0.5 million in Q1 2022 |
| Noninterest income | $6.6 million | $6.1 million in Q1 2022 |
| Noninterest expense | $23.0 million | $20.2 million in Q1 2022 |
Net income rose about 18% year over year. Net interest income increased 14%, as higher asset yields and investment balances outweighed much higher funding costs. Interest expense increased to $9.3 million from $1.3 million, reflecting deposit repricing, higher-cost time and brokered deposits, and greater borrowings. Noninterest expense rose 14%, including higher staffing and foreclosed-asset costs. Annualized return on average assets was 0.97% and return on average equity was 11.53%.
Financial position, cash flow and liquidity
- Assets and loans: Total assets were $3.694 billion, up $85.4 million from year-end. Gross loans were $2.034 billion, down $19.0 million; net loans were $2.011 billion. Securities totaled $1.374 billion, up $101.8 million.
- Deposits: Total deposits were $2.949 billion, up $102.8 million. Customer time deposits and brokered deposits increased, while core non-maturity deposits declined. Noninterest-bearing deposits were 35.3% of deposits, versus 38.2% at year-end. Management estimated uninsured deposits at approximately $858 million, or 30% of deposits, excluding public agency deposits secured by an FHLB letter of credit.
- Borrowings: Other borrowings were $216.8 million, including $150 million in overnight Fed funds purchased and $26.8 million in overnight FHLB advances; the company also had $40 million of long-term FHLB advances. Repurchase agreements were $94.1 million, long-term debt $49.2 million, and subordinated debentures $35.5 million.
- Liquidity: Cash and cash equivalents were $83.5 million. The company reported $2.452 billion of primary and secondary liquidity sources, including unpledged securities and available borrowing lines. The loan-to-deposit ratio was 69%; the primary liquidity ratio was 32.4%. Management said liquidity was sufficient, while cautioning that current levels are not assured.
- Cash flow: Operating activities provided $10.5 million; investing activities used $83.5 million; financing activities provided $79.3 million. Cash and cash equivalents increased $6.4 million to $83.5 million. Investing cash flow included $149.2 million of AFS securities purchases and $19.2 million of proceeds from foreclosed-asset sales.
- Capital: Shareholders’ equity was $307.0 million, including accumulated other comprehensive loss of $56.1 million. The company’s leverage ratio was 10.13%, down from 10.30% at year-end; the Bank’s was 10.74%. The quarter included $2.7 million of share repurchases and $3.5 million of dividends.
Material changes and asset quality
- Nonperforming assets declined to $0.9 million, or 0.05% of gross loans, from $19.6 million, or 0.95%, at year-end. The decrease primarily followed foreclosure and sale of a dairy borrower relationship. The filing reports $18.1 million of related loans foreclosed and subsequently sold during the quarter.
- Nonaccrual loans were $0.9 million at March 31, compared with $19.6 million at year-end. Net loan charge-offs were $0.2 million, versus $1.8 million in Q1 2022. The allowance for loan losses was $23.1 million, or 1.14% of gross loans.
- AFS securities had $50.4 million of gross unrealized losses and $0.9 million of gross unrealized gains. HTM securities had a $325.6 million fair value against $332.8 million carrying value. Management attributed unrealized losses primarily to market-rate changes and said it did not expect to need to sell securities; forced sales could realize losses.
- The company’s $40 million long-term FHLB advance was taken as a partial hedge on longer-term adjustable-rate loans. The investment portfolio includes $561.0 million of floating-rate CLOs, which management said could also support liquidity.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management said it continued to monitor funding costs, liquidity and interest-rate exposure. Its modeling showed the company as slightly liability-sensitive at March 31: the sensitivity table projects net interest income declines of 0.6% under an immediate 100-basis-point increase and 2.6% under a 100-basis-point decrease. The filing’s accompanying narrative gives different sensitivity amounts for some rate scenarios; investors should consult the underlying table and clarify the inconsistency.
Principal risks highlighted include deposit outflows and confidence effects following bank failures, rising funding costs, interest-rate-driven declines in securities and loan values, liquidity pressure, credit deterioration, and increased regulatory scrutiny. The company noted that selling securities to meet liquidity needs could result in losses affecting capital and earnings. Management reported no material legal proceedings expected to adversely affect the company and no goodwill impairment at March 31.
Important facts for investors to verify
- Reconcile the interest-rate sensitivity table with the conflicting amounts in the related narrative.
- Track deposit mix, brokered and time-deposit reliance, uninsured balances, and funding costs in subsequent quarters.
- Assess the size, duration and potential liquidity impact of unrealized securities losses, including securities classified as HTM.
- Monitor commercial real estate concentrations, credit quality, and whether the low nonperforming-asset level persists after resolution of the dairy relationship.
- Review capital and liquidity trends alongside any additional regulatory requirements or developments in the banking sector.