Sierra Bancorp(BSRR) - 2021 Q2 - Quarterly Report

Part I Item 1. Financial Statements (Unaudited) The unaudited consolidated financial statements for the period ended June 30, 2021, show an increase in total assets to $3.3 billion from $3.2 billion at year-end 2020, driven by a significant rise in cash and cash equivalents, with net income for Q2 2021 at $11.7 million Consolidated Balance Sheets As of June 30, 2021, total assets increased to $3.27 billion from $3.22 billion at December 31, 2020, primarily driven by a substantial increase in cash and cash equivalents to $373.9 million Consolidated Balance Sheet Highlights | Account | June 30, 2021 (Unaudited) ($ thousands) | December 31, 2020 (Audited) ($ thousands) | | :--- | :--- | :--- | | Total Assets | $3,272,048 | $3,220,742 | | Total cash & cash equivalents | $373,902 | $71,417 | | Net loans and leases | $2,124,540 | $2,442,226 | | Total Liabilities | $2,914,319 | $2,876,846 | | Total deposits | $2,775,914 | $2,624,606 | | Short-term borrowings | $0 | $142,900 | | Total Shareholders' Equity | $357,729 | $343,896 | Consolidated Statements of Income For the second quarter ended June 30, 2021, net income was $11.7 million, a 41% increase from $8.3 million in the same period of 2020, driven by a $2.1 million benefit for loan losses and a 12.6% increase in net interest income Income Statement Summary | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | H1 2021 ($ thousands) | H1 2020 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $27,189 | $24,142 | $55,744 | $47,929 | | (Benefit) Provision for Loan Losses | $(2,100) | $2,200 | $(1,850) | $4,000 | | Net Income | $11,708 | $8,303 | $22,786 | $16,110 | | Earnings per share diluted | $0.76 | $0.54 | $1.48 | $1.05 | | Cash dividends per share | $0.21 | $0.20 | $0.42 | $0.40 | Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash provided by operating activities was $21.3 million, with a significant increase in cash and cash equivalents of $302.5 million due to investing and financing activities Cash Flow Summary for Six Months Ended June 30 | Cash Flow Category | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $21,301 | $21,765 | | Net cash provided by (used in) investing activities | $247,793 | $(433,905) | | Net cash provided by financing activities | $33,391 | $488,674 | | Increase in cash and cash equivalents | $302,485 | $76,534 | | Cash and cash equivalents, end of period | $373,902 | $156,611 | Notes to Consolidated Financial Statements (Unaudited) The notes provide critical details on accounting policies and financial statement components, including the deferred implementation of CECL, loan deferrals under the CARES Act, and the allowance for loan and lease losses totaling $16.4 million - The Company elected to defer the implementation of the Current Expected Credit Losses (CECL) methodology to January 1, 2022, under the provisions of the CARES Act and subsequent extensions, to better assess the impact of the COVID-19 pandemic[30] - As of June 30, 2021, the company had $10.4 million in loans with payment deferrals under CARES Act provisions, which are not classified as Troubled Debt Restructurings (TDRs)[90] - The allowance for loan and lease losses was $16.4 million at June 30, 2021, comprised of a $1.3 million specific reserve for impaired loans and a $15.1 million general reserve for unimpaired loans[131][126] Item 2. Management's Discussion & Analysis of Financial Condition & Results of Operations Management's discussion highlights strong earnings for Q2 and H1 2021, driven by a significant negative provision for loan losses and increased net interest income, alongside strategic balance sheet shifts and ongoing COVID-19 impact management Overview of the Results of Operations and Financial Condition Q2 2021 net income rose to $11.7 million, driven by a $2.1 million negative provision for loan losses and increased net interest income, while total assets grew to $3.3 billion and loan balances declined by $318.3 million - Q2 2021 net income increased to $11.7 million, primarily due to a $2.1 million negative provision for loan losses and a $3.0 million increase in net interest income[150] - Loan balances declined by $318.3 million (13%) in H1 2021, mainly due to decreases in mortgage warehouse lines ($157.3 million), real estate loans ($100.0 million), and SBA PPP loans ($49.0 million)[155] - The company deferred CECL implementation to January 1, 2022, to better assess the impact of the COVID-19 pandemic on lifetime credit losses[178] - In June 2021, the company permanently closed five branch locations due to changing customer behaviors, projecting annual noninterest expense savings of $0.8 to $1.0 million[182][184] Earnings Performance Earnings performance improved significantly, with net interest income increasing by 13% in Q2 2021 and 16% in H1 2021 year-over-year, primarily due to a $2.1 million negative provision for loan losses Net Interest Income and Margin | Period | Net Interest Income ($ millions) | Net Interest Margin | | :--- | :--- | :--- | | Q2 2021 | $27.2 | 3.60% | | Q2 2020 | $24.1 | 3.81% | | H1 2021 | $55.7 | 3.76% | | H1 2020 | $47.9 | 3.97% | - The company recorded a net benefit (negative provision) for loan losses of $2.1 million in Q2 2021 and $1.9 million in H1 2021, compared to provisions of $2.2 million and $4.0 million in the respective 2020 periods, reflecting improved economic conditions[219] - Noninterest expense increased by $2.2 million (12%) in Q2 2021, primarily due to a $1.2 million rise in salaries and benefits (from lower loan origination cost deferrals) and a $0.5 million increase in data processing costs[234][235][238] Balance Sheet Analysis The balance sheet analysis reveals a strategic shift in asset composition, with the loan portfolio decreasing by $318.3 million to $2.1 billion, while deposits grew by $151.3 million and nonperforming assets remained low - Gross loans and leases decreased by $318.3 million (13%) in H1 2021, primarily from a $157.3 million drop in mortgage warehouse lines and forgiveness of SBA PPP loans[254][255] - The regulatory commercial real estate (CRE) concentration ratio was strategically lowered from 378% at year-end 2020 to 335% at June 30, 2021[257] Asset Quality Ratios | Metric | June 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Nonperforming loans to gross loans | 0.34% | 0.31% | | Nonperforming assets to total assets | 0.38% | 0.35% | | Allowance for loan losses to gross loans | 0.77% | 0.72% | - Deposits grew by $151.3 million in H1 2021, with non-maturity deposits increasing by $283.4 million while time deposits declined by $117.1 million[288] Liquidity and Market Risk Management The company maintains a strong liquidity position, with primary and secondary sources totaling $1.93 billion at June 30, 2021, and is asset-sensitive to interest rate changes, projecting a 4.1% NII increase from a 100 bps rate rise Primary and Secondary Liquidity Sources | Source | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $373,902 | $71,417 | | Unpledged investment securities | $482,039 | $311,983 | | FHLB borrowing availability | $662,641 | $535,404 | | Total Sources | $1,930,741 | $1,259,823 | Net Interest Income Sensitivity (1-Year Projection) | Rate Shock (bps) | % Change in NII (June 30, 2021) | | :--- | :--- | | +200 | +6.9% | | +100 | +4.1% | | -100 | (8.1)% | Capital Resources Total shareholders' equity increased to $357.7 million at June 30, 2021, driven by net income, and the company's leverage ratio of 10.43% comfortably exceeds the 'well capitalized' threshold under the CBLR framework - Total shareholders' equity increased by $13.8 million in H1 2021 to $357.7 million, primarily due to $22.8 million in net income, partially offset by dividends and an unfavorable change in AOCI[160][323] Bank of the Sierra - Leverage Ratio | Date | Leverage Ratio | Minimum to be Well Capitalized | | :--- | :--- | :--- | | June 30, 2021 | 10.43% | 8.50% | - The Company has elected to measure capital adequacy under the Community Bank Leverage Ratio (CBLR) framework, which simplifies capital requirements for qualifying institutions[328] Item 3. Qualitative & Quantitative Disclosures about Market Risk This section cross-references the detailed discussion on market risk provided in Item 2, under the heading 'Liquidity and Market Risk Management', identifying interest rate risk as the company's primary market risk exposure - The report directs readers to the 'Liquidity and Market Risk Management' section within Item 2 (MD&A) for all qualitative and quantitative disclosures about market risk[329] Item 4. Controls and Procedures The company's CEO and CFO have evaluated the disclosure controls and procedures and concluded they were adequate and effective as of June 30, 2021, with no significant changes in internal controls over financial reporting during the first half of 2021 - The CEO and CFO certified that the Company's disclosure controls and procedures were effective as of the end of the reporting period[331] - No significant changes to internal controls over financial reporting were identified during the first six months of 2021[333] Part II - Other Information Item 1. - Legal Proceedings The company is involved in various legal proceedings in the normal course of business, with management believing that any resulting liability will not have a material adverse effect on its financial condition or results of operations - Management does not expect any legal proceedings to have a material adverse effect on the Company's financial condition or operations[336] Item 1A. - Risk Factors There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - No material changes to risk factors were reported compared to the Form 10-K for the year ended December 31, 2020[337] Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds The company's stock repurchase program remains suspended as of June 30, 2021, with no repurchases made since March 2020, and 268,301 shares remaining authorized for purchase - The stock repurchase program has been suspended since March 2020[338] - As of June 30, 2021, 268,301 shares remained authorized for repurchase under the existing plan[338] Item 5. - Other Information Items 3 (Defaults upon Senior Securities), 4 (Mine Safety Disclosures), and 5 (Other Information) are reported as 'Not applicable' for this reporting period - Items concerning Defaults upon Senior Securities, Mine Safety Disclosures, and Other Information were not applicable[339] Item 6. - Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, descriptions of securities, various agreements, and CEO/CFO certifications, along with XBRL interactive data files - A list of 24 exhibits and various XBRL files are included or incorporated by reference, covering governance, agreements, and required certifications[342]