Sierra Bancorp — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Sierra Bancorp is a California bank holding company whose principal subsidiary, Bank of the Sierra, serves communities across California’s San Joaquin Valley, Central Coast, and Ventura County.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $109.0 million | $104.8 million |
| Noninterest income | $28.1 million | $26.2 million |
| Noninterest expense | $83.6 million | $75.9 million |
| Provision (benefit) for loan losses | ($3.7 million) | $8.6 million |
| Net income | $43.0 million | $35.4 million |
| Diluted earnings per share | $2.80 | $2.32 |
| Net interest margin, tax-equivalent | 3.56% | 3.95% |
| Return on average assets / equity | 1.29% / 12.05% | 1.22% / 10.80% |
| Total assets | $3.37 billion | $3.22 billion |
| Gross loans / deposits | $1.99 billion / $2.78 billion | $2.46 billion / $2.62 billion |
| Shareholders’ equity | $362.5 million | $343.9 million |
- Earnings and margins: Net income rose about 21%. Net interest income increased 4%, reflecting asset growth and lower funding costs, while net interest margin fell 39 basis points as asset yields declined more than liability costs. The efficiency ratio increased to 59.92% from 57.18%.
- Credit costs and quality: The 2021 loan-loss benefit reflected lower loan balances, improving credit quality, and lower historical loss rates. Net recoveries were $0.2 million. Nonperforming assets fell to $4.6 million from $8.6 million; nonperforming loans were 0.23% of gross loans.
- Balance sheet and liquidity: Assets grew 5%; deposits grew 6%, mainly in noninterest-bearing and other low-cost accounts. Net loans to deposits declined to 70.95% from 93.05%. Cash and cash equivalents were $257.5 million, and reported primary and secondary liquidity sources totaled $2.25 billion, including borrowing capacity and available securities.
- Cash flows: Operating activities provided $52.7 million; investing activities provided $20.6 million; financing activities provided $112.8 million. Cash and cash equivalents increased $186.1 million to $257.5 million.
- Capital and debt: The company and Bank were classified as well capitalized under the community bank leverage framework. The company’s leverage ratio was 10.43%, versus an 8.50% well-capitalized threshold. It issued $50 million of subordinated debt in 2021; year-end long-term debt, net, was $49.1 million, in addition to $35.3 million of subordinated debentures. It paid $13.2 million in dividends and repurchased $5.2 million of shares.
Material changes versus 2020
- Gross loans declined about 19%, largely from lower mortgage warehouse utilization, PPP loan forgiveness, and reductions in commercial real estate and construction lending. The company purchased $208 million of 1–4 family residential loans in the second half of 2021.
- Investment securities increased $429.3 million to $973.3 million; the portfolio included $332.8 million of collateralized loan obligations. Higher market rates reduced the portfolio’s net unrealized gain by $10.2 million, contributing to a $7.2 million decline in accumulated other comprehensive income, net of tax.
- Noninterest expense rose 10%, including higher professional services and data processing costs. Five branches were closed in June; management estimated annual expense savings of $0.8–$1.0 million.
- Deposits shifted further toward non-maturity accounts; time and brokered deposits decreased by a combined $159 million.
Outlook, risks, and unusual items
- Outlook: The filing provides no formal quantitative earnings or growth guidance. Management said expected 2022 interest-rate increases could support net interest margin, while acknowledging uncertainty. It expected most of the remaining $31.8 million of PPP loans to be forgiven in 2022 and described residential loan purchases and new lending teams as a bridge to organic loan growth.
- CECL: The company adopted the current expected credit loss standard on January 1, 2022. It reported a $10.4 million increase in the allowance for credit losses, including a $0.9 million reserve for unfunded commitments, as an adjustment to equity, net of deferred taxes.
- Credit concentration: Real estate loans were 87.5% of gross loans. Commercial real estate represented 249% of Tier 1 capital plus the allowance under the cited regulatory measure; this was below the 300% supervisory criterion, after being 378% in 2020. One borrower had $10.4 million of loans modified under COVID-related relief provisions at year-end.
- Funding and rate risks: Estimated uninsured deposits were $929.6 million. Management’s model showed the company was asset-sensitive at year-end, but a 100-basis-point rate decrease was estimated to reduce one-year net interest income by 10.29%. Rising rates also reduced securities values and could further pressure equity through accumulated other comprehensive income.
- Other risks and contingencies: Management highlighted COVID-19, regional agricultural and drought conditions, commercial real estate values, competition, talent costs, cybersecurity, and regulatory and litigation exposure. The Bank received a “needs to improve” CRA rating in December 2020. Management did not expect pending legal matters, beyond recorded reserves and applicable insurance, to have a material adverse effect, but noted outcomes remain uncertain.
- Audit: The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for loan and lease losses was identified as a critical audit matter.
Important facts for investors to verify
- How the January 2022 CECL allowance increase affects reported credit costs, capital, and future earnings.
- Whether loan growth recovers as mortgage warehouse balances and PPP loans run off, and whether new lending teams deliver prudent growth.
- Credit performance and collateral exposure in the real-estate-heavy loan book, including the $10.4 million modified borrower relationship.
- Stability and cost of the large uninsured-deposit base, and the company’s ability to retain low-cost core deposits.
- Effects of rate changes on net interest margin, securities fair values, and equity; review the company’s interest-rate sensitivity assumptions.
- Progress on the CRA rating, branch-closure savings, and the sources of higher professional-services and operating costs.