SIERRA BANCORP annual report, FY2023

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Sierra Bancorp — 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. Sierra Bancorp is a California bank holding company; its principal subsidiary, Bank of the Sierra, operates 35 full-service branches and provides retail and commercial banking across California’s Central Valley and coastal markets. This is an annual report, not a standalone fourth-quarter filing.

Financial performance and condition

  • Earnings: Net income was $34.8 million, up 3.5% from $33.7 million in 2022. Diluted EPS was $2.36 versus $2.24. Return on average assets was 0.94% (0.97% in 2022) and return on average equity was 11.30% (10.66%).
  • Interest income and margins: Net interest income increased 3% to $112.4 million. Tax-equivalent net interest margin declined 10 basis points to 3.37%, as higher deposit and borrowing costs offset higher asset yields. Interest expense rose to $50.7 million from $12.2 million.
  • Other income and expenses: Noninterest income was $30.4 million, down 1%; noninterest expense rose 9% to $92.7 million. The efficiency ratio worsened to 63.9% from 60.2%. Income included a $15.3 million gain on a branch-property sale-leaseback and a $14.5 million securities loss.
  • Credit quality: Provision for credit losses on loans fell to $4.1 million from $10.9 million; net charge-offs were $3.6 million versus $11.5 million. Nonperforming assets declined to $8.0 million (0.38% of loans and foreclosed assets) from $19.6 million (0.95%). The allowance was $23.5 million, or 1.12% of gross loans.
  • Balance sheet: Assets increased 3% to $3.73 billion; net loans rose to $2.07 billion. Deposits fell 3% to $2.76 billion, while shareholders’ equity rose 11% to $338.1 million. Total securities were $1.34 billion.
  • Funding and debt: Noninterest-bearing deposits were 37.0% of deposits, down from 38.2%. Customer time deposits rose 39% to $555.1 million; brokered deposits were $135.0 million. Year-end borrowings included $360.5 million of other borrowings, $107.1 million of repurchase agreements, $49.3 million of long-term debt and $35.7 million of subordinated debentures.
  • Cash flow and liquidity: Operating cash flow was $53.2 million; investing activities used $83.7 million and financing activities provided $31.9 million. Cash and cash equivalents ended at $78.6 million. Reported primary and secondary liquidity sources totaled $2.61 billion; the primary liquidity ratio was 31%, against an internal minimum of 15%. The non-core funding dependence ratio was slightly above policy at 25.15% versus a limit below 25%.
  • Capital and shareholder returns: The community bank leverage ratio was 10.32% for the consolidated company and 11.29% for the Bank; both were classified as well capitalized. The company paid $13.7 million in dividends ($0.92 per share) and repurchased $8.5 million of shares during 2023.

Material changes and unusual items

  • Deposit balances declined as customers shifted from lower-cost transaction and savings accounts into higher-rate time deposits. Estimated uninsured deposits were $816.2 million, down from $919.5 million.
  • The December 2023 sale and leaseback of 11 branch buildings generated a $15.3 million gain and increased operating lease obligations. Management expects approximately $0.5 million of additional rent expense in 2024.
  • The company recognized a $14.5 million loss in 2023 on $196.7 million of securities identified for sale. Those bonds, yielding 2.61% on average, were sold in January 2024; proceeds were used to repay short-term borrowings averaging 5.52%. Management expects the transaction to improve net interest income beginning in 2024.
  • Unrealized securities losses improved: other comprehensive income was a $20.6 million gain in 2023, versus a $67.7 million loss in 2022. Accumulated other comprehensive loss remained $36.0 million at year-end.
  • Fourth-quarter net income was $6.3 million, compared with $9.9 million in the third quarter. Fourth-quarter results included a $3.5 million provision for credit losses.
  • RSM issued an unqualified opinion on the 2023 financial statements and on internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective.

Outlook, management commentary and risks

The filing gives no specific earnings, revenue, margin or loan-growth guidance. Management expects the January 2024 securities transaction to reduce funding costs and increase earnings, but results remain sensitive to rates, deposit competition and execution.

  • The loan portfolio is concentrated in real estate: 86.7% of gross loans were real-estate related, including commercial real estate at 63.4% of loans. One office-property loan of approximately $7.5 million accounted for most nonperforming loans at year-end, with foreclosure proceedings initiated.
  • Management identifies higher rates, deposit outflows and pricing pressure, declining commercial property values, agricultural conditions and California water availability, and potential credit deterioration as material risks. The company also cites cybersecurity, third-party, regulatory and operational risks.
  • Interest-rate modeling showed net interest income rising 1.84% under an immediate 100-basis-point increase and falling 4.87% under a 100-basis-point decrease. A 300-basis-point decline was projected to reduce net interest income 13.85% in the standard simulation; management’s stressed scenario indicated a possible 10% decline.
  • At the holding company, cash was $10.4 million. The company depends principally on dividends from the Bank to fund debt service and shareholder distributions; bank dividends are subject to regulatory and statutory limits.

Most important facts for investors to verify

  • Whether the post-year-end securities sale and borrowing repayment deliver the expected net interest income improvement, and how the $14.5 million realized loss affects reported comparisons.
  • Deposit trends, deposit pricing, uninsured-deposit retention and reliance on brokered deposits and wholesale funding.
  • Performance and collateral values of the office-property loan and broader commercial real estate portfolio, along with allowance adequacy and subsequent credit migration.
  • Actual liquidity and capital under stress, including the use and availability of pledged collateral and contingent funding lines.
  • The company’s ability to sustain dividends and repurchases given Bank dividend restrictions, holding-company cash needs and subordinated-debt obligations.
  • Reconcile the filing’s dividend-per-share references: it reports $0.92 paid per share in the dividend discussion, while selected financial data lists $0.93.