Sierra Bancorp (NASDAQ: BSRR) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Sierra Bancorp is a California bank holding company whose subsidiary, Bank of the Sierra, provides retail and commercial banking services across California.
Financial results and condition
- Earnings: Net income was $9.33 million, up 7% from $8.75 million in Q1 2023. Diluted EPS was $0.64 versus $0.58. Annualized return on average assets was 1.06% (0.97% prior year); return on average equity was 11.09% (11.53% prior year).
- Interest income and margin: Net interest income increased 2% to $28.72 million. Net interest margin rose to 3.62% from 3.47%. Interest income increased $3.5 million, while interest expense rose $3.0 million, primarily as deposit balances shifted toward higher-cost time and brokered deposits.
- Credit costs: Loan provision was $0.10 million, compared with $0.25 million. Net loan charge-offs increased to $0.46 million from $0.22 million.
- Noninterest items and expenses: Noninterest income was $8.59 million, up 31%, including a $3.80 million gain on sale/leaseback of two branch properties and $1.22 million of bank-owned life insurance income; these were partly offset by a $2.88 million securities-sale loss. Noninterest expense rose 7% to $24.53 million, including higher rent after the sale/leaseback and increased deferred director compensation.
- Assets and loans: Total assets were $3.55 billion, down 5% from year-end. Gross loans were $2.16 billion, up $66.8 million; the increase was driven by $87.6 million higher mortgage warehouse utilization. Commercial real estate was $1.32 billion, or 61% of gross loans.
- Deposits and borrowings: Deposits increased $85.8 million to $2.85 billion, primarily from a $136.6 million increase in brokered deposits; customer deposits overall declined $50.9 million. Noninterest-bearing deposits fell to 34% of deposits from 37%. Other borrowings declined $280.5 million to $80.0 million after securities-sale proceeds were used to repay higher-cost funding. Repurchase agreements were $121.9 million; long-term debt was $49.3 million and subordinated debentures were $35.7 million.
- Capital and shareholder returns: Shareholders’ equity was $345.1 million, up $7.0 million from year-end. The Bank’s leverage ratio was 11.57% and Sierra Bancorp’s was 10.97%. The quarterly dividend was $0.23 per share; the Company repurchased 178,937 shares for approximately $3.45 million.
- Cash flow: Operating activities provided $7.0 million, investing activities provided $220.5 million, and financing activities used $186.8 million. Cash and cash equivalents increased $40.6 million to $119.2 million. Investing cash flow included $233.2 million of securities-sale proceeds.
Material changes and credit quality
- The balance-sheet restructuring reduced securities by $281.1 million and paid down short-term borrowings. The Company sold lower-yielding bonds with an average book yield of 2.61% to repay borrowings averaging 5.52%, recording a $2.9 million securities-sale loss.
- Nonperforming loans rose to $14.2 million, or 0.66% of gross loans, from $8.0 million, or 0.38%, at year-end. The increase was primarily a dairy-industry real-estate-secured loan. The allowance for loan losses was $23.1 million, or 1.07% of gross loans, versus $23.5 million, or 1.12%, at year-end.
- The filing reports $784.4 million of estimated uninsured deposits, about 28% of total deposits. Management cites a diversified depositor base and no significant customer concentrations.
Liquidity, outlook, and risks
- Management reported $2.55 billion of primary and secondary liquidity sources, including cash, unpledged and excess pledged securities, and available borrowing lines. The primary liquidity ratio was 24.09%, above the Company’s 15% internal minimum. Management said resources were sufficient for current and anticipated short-term needs, while noting liquidity cannot be assured at current levels.
- The Company is asset-sensitive in its interest-rate simulations: an immediate 100-basis-point increase is projected to raise next-12-month net interest income by 2.3%; a 100-basis-point decline is projected to reduce it by 5.5%, and a 200-basis-point decline by 10.9%. Down-rate scenarios exceed internal policy limits. Management is evaluating balance-sheet strategies to reduce this exposure.
- Key stated risks include interest-rate changes, deposit outflows and funding access, credit deterioration, economic weakness, bank-sector confidence, cyber and operational risks, and regulatory or legal developments. Management reported no material change in risk factors from its 2023 Form 10-K. It also said current legal proceedings are not expected to have a material adverse effect, though an unfavorable outcome could be material.
- No specific earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether brokered-deposit growth and declining noninterest-bearing deposits affect funding costs and margins in coming quarters.
- How the increase in nonperforming loans, particularly the dairy-related exposure, develops and whether additional provisions or charge-offs are needed.
- How securities-sale proceeds, remaining unrealized securities losses, and the reduced investment portfolio affect liquidity, earnings, and capital.
- Whether management’s plans address the modeled downside-rate sensitivity, which is outside internal policy limits.
- Reconcile off-balance-sheet commitment disclosures: the notes report $512.3 million of commitments to extend credit plus $4.8 million of standby letters, while MD&A cites $440.9 million of unused commitments including standby letters; the filing’s definitions or exclusions should be checked.