Sierra Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Sierra Bancorp is a California bank holding company whose principal subsidiary, Bank of the Sierra, operates 35 full-service branches and an online branch.
Financial performance and condition
| Metric | Q2 2023 | Comparable period / context |
|---|---|---|
| Net income | $9.9 million; diluted EPS $0.67 | Q2 2022: $9.2 million; $0.61 |
| Net interest income | $28.3 million | Q2 2022: $26.6 million |
| Net interest margin | 3.39% | Q2 2022: 3.40%; Q1 2023: 3.47% |
| Noninterest income | $8.0 million | Q2 2022: $10.4 million |
| Noninterest expense | $23.0 million | Q2 2022: $22.1 million |
- For the first six months, net income was $18.7 million, or $1.26 diluted EPS, versus $16.6 million, or $1.10, in 2022. Net interest income was $56.4 million versus $51.3 million; net interest margin was 3.43% versus 3.31%.
- Q2 return on average equity was 13.06% and return on average assets was 1.07%. First-half returns were 12.30% and 1.02%, respectively.
- At June 30, total assets were $3.76 billion, up 4.3% from year-end 2022. Gross loans were $2.09 billion, up 2%; deposits were $2.92 billion, up 3%. Shareholders’ equity was $309.6 million, compared with $303.6 million at year-end.
- Six-month cash flows: $25.9 million provided by operating activities, $129.4 million used in investing, and $129.9 million provided by financing. Cash and cash equivalents rose $26.4 million to $103.5 million.
- Loan allowance was $23.0 million, or 1.10% of gross loans. Nonperforming loans fell to $1.1 million (0.05% of gross loans) from $19.6 million (0.95%) at year-end, mainly after foreclosure and sale of a large dairy-related credit. Net loan charge-offs were $0.4 million for the first half, down from $4.1 million.
- Borrowings increased: other borrowings were $325.2 million, versus $219.0 million at year-end, including $165 million of overnight Fed funds and $80 million of long-term FHLB advances. Long-term debt was $49.3 million and subordinated debentures were $35.6 million.
- The Bank’s leverage ratio was 10.86%; Sierra Bancorp’s was 10.03%. Management reported $2.59 billion in primary and secondary liquidity sources and a 71.8% net-loans-to-deposits ratio.
Material changes and management commentary
- Higher yields and larger investment and loan balances lifted interest income, but rapidly higher deposit and borrowing costs weighed on margin. Q2 interest expense increased to $12.6 million from $1.6 million a year earlier. Management cited deposit migration into higher-cost time and brokered deposits and increased borrowing.
- Noninterest income fell year over year, largely because 2022 included nonrecurring gains, including Visa B stock and other asset sales, legal-expense recovery, and other recoveries. Q2 2023 included $0.4 million of securities gains. BOLI income improved, with related deferred-compensation expense also increasing.
- Noninterest expense rose 4% in Q2 and 9% for the first half. Drivers included staffing and benefit costs, FDIC assessments, card-processing and ATM conversion costs associated with a Mastercard-to-Visa change, and first-half foreclosure costs. The filing also reports a $0.3 million loss related to a 2017 event.
- Deposits grew, but lower-cost non-maturity deposits declined $135.2 million in the first half; time and brokered deposits increased. Estimated uninsured deposits were $799.7 million, or 27% of deposits, excluding public-agency deposits secured by an FHLB letter of credit.
- Loan production was $89.6 million for the first half, down 37% from 2022; management attributed weaker production to interest rates and competitive pressure. Mortgage warehouse utilization increased, while unused mortgage warehouse commitments declined as the Bank strategically reduced availability on certain lines.
- The securities portfolio included $1.03 billion of available-for-sale securities with $50.9 million of gross unrealized losses, primarily attributed by management to market-rate movements rather than credit deterioration. Held-to-maturity securities had a fair value of $318.1 million versus $328.5 million carrying value. Accumulated other comprehensive loss was $56.5 million.
- Management stated that stress testing indicated sufficient liquidity, but cautioned that deposit outflows, funding access, securities values, and broader confidence in regional banks could adversely affect liquidity, earnings, capital, or share price. The company did not participate in the Federal Reserve’s Term Funding Program.
Outlook, risks, and contingencies
- The filing gives no formal earnings or financial guidance. Management says it expects available investments, borrowing facilities, and other liquidity sources to meet current and anticipated short-term needs, while noting there is no assurance liquidity will remain at current levels.
- Interest-rate sensitivity modeling at June 30, 2023 indicates a slightly liability-sensitive position: modeled 12-month net interest income declines 0.4% with an immediate +100-basis-point shock and 2.1% with a −100-basis-point shock. Management identified deposit migration and deposit pricing as important sensitivities.
- Key risks include interest-rate and inflation changes; deposit competition and outflows; unrealized securities losses if assets must be sold; credit deterioration, particularly in weak economic conditions; adverse banking-sector developments; regulatory scrutiny; cyber, fraud, vendor, operational, and legal risks; and severe weather or other external events.
- Unused commitments to extend credit were $607.7 million and standby letters of credit were $6.0 million at June 30. The company also reported an FHLB letter of credit used to secure certain deposits and customer arrangements. Management did not believe ordinary-course legal matters would materially affect the financial statements, but noted an adverse outcome could have a material effect.
- The company repurchased 381,566 shares for $6.5 million in the first half and paid $7.0 million in dividends. Its repurchase plan authorized 630,000 shares and was due to expire October 31, 2023.
Important facts for investors to verify
- Confirm the trajectory of deposit costs, brokered and time deposits, and lower-cost deposit balances; assess implications for net interest margin and funding needs.
- Review the size, composition, duration, and liquidity of the securities portfolio, including unrealized losses and the consequences of any need to sell securities.
- Monitor commercial real estate exposure, loan production, mortgage warehouse utilization, criticized loans, charge-offs, and the adequacy of the credit-loss allowance.
- Reconcile the interest-rate sensitivity discussion: the table reports a 2023 −100-basis-point net interest income impact of $2.5 million (2.1%), while a later narrative passage cites an $8.3 million (8%) decline. The filing text does not clearly reconcile these figures.
- Assess the sustainability of earnings growth given the decline in noninterest income, higher funding and operating costs, and the nonrecurring items affecting both comparison periods.