Business Overview
Sierra Bancorp (NASDAQ:BSRR) is a well-established community bank that has been serving the South San Joaquin Valley, Central Coast, Ventura County, and Sacramento area of California since 1978. With a focus on providing personalized banking services, Sierra Bancorp has built a strong reputation and loyal customer base over the past four decades.
Sierra Bancorp is a California corporation headquartered in Porterville, California, and is a registered bank holding company under federal banking laws. The company was formed in 2001 to serve as the holding company for Bank of the Sierra, which has been its sole subsidiary since inception. Bank of the Sierra was incorporated in 1977 and opened for business in 1978 as a one-branch bank with $1.5 million in capital. The company’s growth in the ensuing years has largely been organic in nature, but includes four whole-bank acquisitions – Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in 2017.
Today, Sierra Bancorp operates 35 full-service branches and an online branch, maintaining ATMs at all but one branch location as well as at seven non-branch sites. The company has also established specialized lending units focused on agricultural borrowers, commercial real estate, and mortgage warehouse lending. To support organic growth in the agricultural and commercial lending sectors, the bank opened a loan production office in Templeton, CA in April 2022. Additionally, Sierra Bancorp maintains an administrative office in Roseville, CA.
Over the years, the company has faced various challenges, including navigating the 2008 financial crisis and the COVID-19 pandemic. During the financial crisis, the company worked to reduce its exposure to higher-risk commercial real estate loans, and in the aftermath of the pandemic, the company implemented operational changes to support its remote workforce and address evolving customer needs. Despite these challenges, the company has remained focused on organic growth and strategic acquisitions to expand its footprint and service offerings.
The Company and the Bank are defendants, from time to time, in legal proceedings in various points of the legal process arising from transactions conducted in the ordinary course of business. In the opinion of Management, in consultation with legal counsel, it is not probable that current legal actions will result in an unfavorable outcome that has a material adverse effect on the Company’s consolidated financial statements.
Financial Performance
As of September 30, 2024, Sierra Bancorp reported total assets of $3.70 billion, a modest decrease of 1.00% from the $3.73 billion reported at the end of 2023. This change was primarily driven by a 24.00% decrease in the company’s investment securities portfolio to $1.02 billion, as the bank strategically sold lower-yielding bonds to pay down higher-cost borrowings.
On the lending side, Sierra Bancorp’s gross loan portfolio increased by 11.00% to $2.32 billion during the first nine months of 2024. This growth was largely attributable to a 219.80 million, or 189.00%, increase in mortgage warehouse lines, a $13.30 million, or 19.70%, rise in farmland loans, and a $10.70 million, or 0.80%, increase in commercial real estate loans. These favorable variances were partially offset by a $23.90 million, or 5.80%, decrease in residential real estate loans due to payoffs and paydowns.
The company’s deposit base grew by 7.00% to $3.00 billion at September 30, 2024, compared to $2.76 billion at the end of 2023. This increase was driven by a $175.00 million, or 130.00%, surge in brokered deposits, which were used to fund the growth in mortgage warehouse lines, as well as a $40.60 million, or 6.00%, rise in transaction accounts. These positive variances were partially offset by smaller declines in customer non-transaction accounts.
For the fiscal year 2023, Sierra Bancorp reported revenue of $118.16 million and net income of $34.84 million. The company’s operating cash flow (OCF) for 2023 was $53.24 million, with free cash flow (FCF) of $51.83 million.
In the most recent quarter (Q3 2024), the company reported revenue of $52.587 million, representing a 4% year-over-year increase. Net income for Q3 2024 was $10.603 million, up 7% compared to the same period in 2023. The quarter’s OCF stood at $27.405 million, with FCF of $27.287 million.
The year-over-year growth in revenue and net income for Q3 2024 was primarily driven by higher net interest income due to increasing interest rates on earning assets, partially offset by higher interest expense on deposits and borrowings. Additionally, the company recognized a net gain of $0.073 million on the sale of securities in Q3 2024, compared to a net loss of $2.81 million in the same period of 2023.
Income Statement Analysis
Sierra Bancorp’s net interest income increased by 6.00% to $89.68 million for the first nine months of 2024, compared to $84.53 million for the same period in 2023. This improvement was primarily attributable to a 45 basis point increase in the yield on interest-earning assets, which more than offset a 28 basis point rise in the cost of interest-bearing liabilities. The company’s net interest margin expanded by 27 basis points to 3.66% during this period.
Noninterest income increased by 7.00% to $24.01 million for the first nine months of 2024, driven by a $1.00 million, or 6.00%, increase in service charge income on deposit accounts, as well as a $0.60 million gain from the aforementioned balance sheet restructuring. These positive variances were partially offset by a decrease in other noninterest income, primarily due to lower life insurance proceeds compared to the prior-year period.
On the expense side, noninterest expense increased by 2.00% to $70.03 million for the first nine months of 2024, primarily due to a $1.90 million, or 19.70%, rise in occupancy costs related to the sale-leaseback of certain branch locations. This was partially offset by a reduction in marketing and directors’ deferred compensation expenses.
Asset Quality
Sierra Bancorp’s asset quality remained relatively stable, with nonperforming assets increasing to $10.35 million, or 0.45% of total gross loans, at September 30, 2024, compared to $7.99 million, or 0.38%, at the end of 2023. The increase was primarily due to the addition of a loan collateralized by agricultural property and an office commercial real estate loan, partially offset by the foreclosure and sale of a previously nonperforming office commercial real estate property.
The company’s allowance for credit losses on loans stood at $22.71 million, or 0.98% of gross loans, at the end of the third quarter of 2024, compared to $23.50 million, or 1.12%, at the close of 2023. The decrease in the allowance was primarily attributable to a $3.05 million increase in net charge-offs during the first nine months of 2024, primarily related to the foreclosure and sale of the previously mentioned office commercial real estate property.
Capital Position and Liquidity
Sierra Bancorp’s capital position remains strong, with total shareholders’ equity of $358.70 million at September 30, 2024, representing a 6.00% increase from the $338.10 million reported at the end of 2023. This growth was driven by $30.20 million in net income, partially offset by $10.20 million in dividends paid and $8.30 million in share repurchases during the first nine months of the year. The company’s Tier 1 capital to adjusted average assets leverage ratio stood at 10.78% at the end of the third quarter, well above the 9.00% minimum requirement to be considered well-capitalized.
The company’s liquidity position is solid, with $132.80 million in cash as of September 30, 2024. Sierra Bancorp has a debt-to-equity ratio of 0.1376, indicating a conservative approach to leverage. The company has access to $504.79 million in unsecured lines of credit and $618.14 million in secured FHLB borrowing capacity, providing ample liquidity for potential growth opportunities or unforeseen circumstances.
Business Segments and Product Analysis
Sierra Bancorp’s core business is community banking, operating through its subsidiary Bank of the Sierra. The bank offers a wide range of retail and commercial banking services via branch offices located throughout California’s South San Joaquin Valley, the Central Coast, Ventura County, the Sacramento area, and neighboring communities.
The company’s lending portfolio is diversified across several key product segments:
Residential Real Estate: Comprising 16.77% of total loans, this segment includes 1-4 family mortgages and home equity lines of credit. Balances decreased by $23.9 million or 5.8% year-to-date, as payoffs and paydowns outpaced new originations in the rising interest rate environment.
Mortgage Warehouse Lines of Credit: Representing 14.48% of the total loan portfolio, this segment saw a significant surge in balances, increasing by $219.8 million or 189.5% during the first nine months of 2024. This growth was driven by increased utilization from existing customers and new customer relationships in this specialized lending niche.
Farmland and Agricultural Production: Together accounting for 6.96% of total loans, the Farmland segment grew by $13.2 million or 19.6%, while Agricultural Production loans remained relatively flat.
Other Commercial and Consumer Loans: Making up the remaining 4.23% of the loan portfolio, these segments saw more modest changes of $12.0 million and -$0.6 million, respectively, year-to-date.
Overall, the bank’s loan portfolio grew by $230.6 million or 11.0% during the first nine months of 2024, primarily driven by the strong growth in Mortgage Warehouse and Commercial Real Estate lending. The diversified nature of the loan book, with exposure across commercial, residential, and agricultural sectors, has allowed the bank to navigate the changing economic environment effectively.
Geographic Performance
Sierra Bancorp primarily operates in the South San Joaquin Valley, the Central Coast, Ventura County, the Sacramento area, and neighboring communities in California. As a small-cap company, BSRR does not have significant operations outside of the United States. The company’s performance is closely tied to the economic conditions and real estate markets in these California regions.
Outlook
Looking ahead, Sierra Bancorp continues to face challenges common to many community banks, such as the ongoing low-interest-rate environment, competitive pressures, and regulatory scrutiny. However, the company’s strong capital position, diversified loan portfolio, and focus on personalized customer service position it well to navigate these headwinds and continue delivering value to its shareholders.
The company’s management remains focused on prudently managing concentrations and credit quality across the portfolio while seeking opportunities for organic growth and potential strategic acquisitions. The recent growth in the Mortgage Warehouse segment and the steady performance of the Commercial Real Estate portfolio demonstrate the company’s ability to adapt to changing market conditions and capitalize on emerging opportunities.
As Sierra Bancorp continues to serve its core California markets, it will likely focus on maintaining its strong community presence while leveraging technology to enhance customer experience and operational efficiency. The company’s solid liquidity position and access to credit lines provide flexibility for future growth initiatives and the ability to weather potential economic uncertainties.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.