Sierra Bancorp — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. Sierra Bancorp is a California bank holding company operating Bank of the Sierra, with 35 full-service branches and lending offices. Figures below are in U.S. dollars; “million” and “billion” are abbreviated.
Financial performance and position
| Metric | FY2022 / year-end 2022 | FY2021 / year-end 2021 |
|---|---|---|
| Net income | $33.7 million | $43.0 million |
| Diluted earnings per share | $2.24 | $2.80 |
| Net interest income | $109.6 million | $109.0 million |
| Tax-equivalent net interest margin | 3.47% | 3.56% |
| Return on average assets / equity | 0.97% / 10.66% | 1.29% / 12.05% |
| Noninterest income / expense | $30.8 million / $84.8 million | $28.1 million / $83.6 million |
| Total assets | $3.61 billion | $3.37 billion |
| Gross loans and leases | $2.05 billion | $1.99 billion |
| Deposits | $2.85 billion | $2.78 billion |
| Shareholders’ equity | $303.6 million | $362.5 million |
| Allowance for loan credit losses | $23.1 million; 1.12% of gross loans | $14.3 million; 0.72% of gross loans |
| Nonperforming assets | $19.6 million; 0.95% of loans and foreclosed assets | $4.6 million; 0.23% |
| Regulatory leverage ratio under community bank framework | 10.30% | 10.43% |
Net interest income rose slightly, but higher credit costs and other items weighed on earnings. The company recorded a $10.9 million provision for loan credit losses, compared with a $3.7 million provision benefit in 2021. Net charge-offs were $11.5 million, primarily involving a dairy borrower and an office-building loan. Operating cash flow was $33.6 million; investing cash flow was negative $481.0 million and financing cash flow was positive $267.0 million. Cash and cash equivalents fell $180.4 million to $77.1 million.
At year-end, short-term borrowings were $219.0 million, repurchase agreements $109.2 million, long-term debt $49.2 million and subordinated debentures $35.5 million. The filing reports $2.22 billion in primary and secondary liquidity sources, including unpledged securities and available borrowing capacity. The company’s primary liquidity ratio was 40%; net loans to deposits were 71.32%. Estimated uninsured deposits were $919.5 million.
Material changes versus FY2021
- Net income declined 22% and diluted EPS declined from $2.80 to $2.24. The provision shift from a 2021 benefit to a 2022 expense was a principal factor.
- Net interest margin contracted 9 basis points as the cost of interest-bearing liabilities rose 39 basis points, outpacing the 15-basis-point increase in earning-asset yield.
- Assets grew 7%; gross loans grew 3%, including $173.1 million of purchased residential mortgage loans. Deposits rose 2%, while time deposits increased and non-maturity deposit balances declined.
- Nonperforming assets rose to $19.6 million from $4.6 million, largely reflecting a dairy relationship. Allowance coverage of nonaccrual loans fell to 118% from 315%.
- Shareholders’ equity declined $58.9 million. A $67.7 million after-tax adverse change in accumulated other comprehensive income, mainly from securities valuation declines, was a major driver. Tangible common equity ratio decreased to 7.65% from 9.93%.
- The company adopted CECL on January 1, 2022, recording a $7.3 million after-tax reduction to retained earnings, alongside increases in loan and unfunded-commitment reserves.
Outlook, commentary, risks and unusual items
- No quantitative earnings or revenue guidance is provided. Management cited strategic projects and anticipated approximately $1.0 million in annual savings from renegotiating its core processing contract; a debit-card processor change was also expected to reduce processing costs. These are expectations, not assurances.
- Subsequent to year-end, $18.1 million of nonaccrual loans tied to the dairy relationship were foreclosed and transferred to foreclosed assets. A portion sold in Q1 2023 for $7.7 million, equal to book value; the remaining assets were being marketed.
- The investment portfolio reached $1.27 billion, including $498.4 million in collateralized loan obligations. Available-for-sale securities had $50.4 million in gross unrealized losses at year-end; management attributed declines principally to interest rates and spreads, rather than credit deterioration. The company transferred $360.4 million of securities from available-for-sale to held-to-maturity during 2022. These actions reduce some reported equity volatility but do not remove economic or liquidity risks.
- Loans are concentrated in real estate: 91.4% of the portfolio. Commercial real estate represented 246% of Tier 1 capital plus allowance under the regulatory concentration measure; management said its underwriting and monitoring were adequate.
- Key exposures include higher rates and funding costs, deposit competition and uninsured-deposit outflows, real estate values, California agriculture and water availability, drought and other natural disasters, credit deterioration, securities valuation, cybersecurity, and regulatory/compliance costs. Management disclosed the FDIC’s 2023 assessment-rate increase.
- In 2022, the company paid $0.7 million in customer restitution for certain nonsufficient-funds fees and stopped charging NSF fees beginning in Q3. It also recorded $1.5 million in securities-sale gains and nonrecurring gains from asset sales, including $2.6 million from Visa B shares.
- The company paid $13.9 million in dividends in 2022 and repurchased approximately $4.9 million of shares. The board authorized a 630,000-share repurchase plan, with all authorized shares still available at year-end. Dividend capacity depends substantially on the Bank’s earnings and regulatory permissions.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting, and identified the allowance for credit losses as a critical audit matter. No material weakness was reported.
Investor verification priorities
- Track the dairy foreclosure and sale proceeds, remaining collateral, and any further credit losses or recoveries.
- Review deposit trends, uninsured-deposit retention, deposit pricing, wholesale funding use and liquidity availability as rates and competition evolve.
- Assess the loan portfolio’s real-estate and agricultural concentrations, nonperforming-loan migration, charge-offs and adequacy of the CECL allowance.
- Reconcile securities fair-value marks, accumulated other comprehensive loss, held-to-maturity treatment and actual liquidity needs.
- Verify whether anticipated processor savings materialize and monitor margin, operating expenses, capital ratios and the sustainability of dividends and repurchases.