Sierra Bancorp(BSRR) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Sierra Bancorp's unaudited consolidated financial statements for the period ended September 30, 2021, detailing balance sheets, income, comprehensive income, equity changes, cash flows, and explanatory notes Consolidated Balance Sheets Consolidated Balance Sheets (dollars in thousands) | ASSETS (dollars in thousands) | Sep 30, 2021 (unaudited) | Dec 31, 2020 (audited) | |:------------------------------|:-------------------------|:-----------------------| | Total cash & cash equivalents | $422,350 | $71,417 | | Securities available-for-sale | $732,312 | $543,974 | | Net loans and leases | $2,121,597 | $2,442,226 | | Total assets | $3,442,739 | $3,220,742 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total deposits | $2,820,646 | $2,624,606 | | Total liabilities | $3,078,232 | $2,876,846 | | Total shareholders' equity | $364,507 | $343,896 | | Total liabilities and shareholders' equity | $3,442,739 | $3,220,742 | Consolidated Statements of Income Consolidated Statements of Income (dollars in thousands) | Income Statement (dollars in thousands) | Three months ended Sep 30, 2021 | Three months ended Sep 30, 2020 | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | |:----------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Total interest income | $27,629 | $29,043 | $85,179 | $80,481 | | Total interest expense | $913 | $969 | $2,719 | $4,478 | | Net interest income | $26,716 | $28,074 | $82,460 | $76,003 | | (Benefit) provision for loan losses | $(600) | $2,350 | $(2,450) | $6,350 | | Total noninterest income | $7,535 | $7,105 | $20,977 | $20,112 | | Total noninterest expense | $20,875 | $19,303 | $61,381 | $55,156 | | Income before taxes | $13,976 | $13,526 | $44,506 | $34,609 | | Provision for income taxes | $3,371 | $3,170 | $11,115 | $8,144 | | Net income | $10,605 | $10,356 | $33,391 | $26,465 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (dollars in thousands) | Comprehensive Income (dollars in thousands) | Three months ended Sep 30, 2021 | Three months ended Sep 30, 2020 | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | |:--------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Net income | $10,605 | $10,356 | $33,391 | $26,465 | | Other comprehensive (loss) income | $(413) | $1,315 | $(3,421) | $11,562 | | Comprehensive income | $10,192 | $11,671 | $29,970 | $38,027 | Consolidated Statements of Changes In Shareholders' Equity Consolidated Statements of Changes In Shareholders' Equity (dollars in thousands) | Shareholders' Equity (dollars in thousands) | Balance, Dec 31, 2020 | Net Income | Other Comprehensive Loss, net of tax | Cash Dividends Paid | Balance, Sep 30, 2021 | |:--------------------------------------------|:----------------------|:-----------|:-------------------------------------|:--------------------|:----------------------| | Common Stock Amount | $113,384 | — | — | — | $114,096 | | Additional Paid In Capital | $3,736 | — | — | — | $3,710 | | Retained Earnings | $208,371 | $33,391 | — | $(9,842) | $231,717 | | Accumulated Other Comprehensive Income | $18,405 | — | $(3,421) | — | $14,984 | | Total Shareholders' Equity | $343,896 | $33,391 | $(3,421) | $(9,842) | $364,507 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (dollars in thousands) | Cash Flows (dollars in thousands) | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | |:----------------------------------|:-------------------------------|:-------------------------------| | Net cash provided by operating activities | $78,740 | $27,212 | | Net cash provided by (used in) investing activities | $126,457 | $(579,159) | | Net cash provided by financing activities | $145,736 | $560,803 | | Increase in cash and cash equivalents | $350,933 | $8,856 | | Cash and cash equivalents, end of period | $422,350 | $88,933 | Notes to Consolidated Financial Statements (Unaudited) Note 1 – The Business of Sierra Bancorp - Sierra Bancorp, a California-based bank holding company, operates Bank of the Sierra, offering retail and commercial banking services through 35 branches, an online platform, and specialized lending units across California[24][25] Key Metrics (September 30, 2021) | Metric | September 30, 2021 | |:-------|:-------------------| | Total Assets | $3.4 billion | | Total Deposits | $2.8 billion | Note 2 – Basis of Presentation - The unaudited consolidated financial statements are presented in a condensed format, reflecting all necessary management adjustments, with interim results not indicative of full-year performance, and certain 2020 amounts reclassified for consistency[26] Note 3 – Current Accounting Developments - The Company deferred CECL methodology implementation until January 1, 2022, to better assess COVID-19's impact on expected credit losses, with an estimated adjustment of approximately 50% to 75% of the current allowance for loan and lease losses[28] - Loan modifications made in response to COVID-19, in accordance with the CARES Act and Interagency Statement, are exempt from Troubled Debt Restructuring (TDR) classification, with no material impact through September 30, 2021[29] Note 4 – Share Based Compensation - The Company's 2017 Stock Incentive Plan allows for stock options and restricted stock awards to employees, officers, directors, and consultants, with compensation costs amortized over the vesting period, totaling $0.2 million in Q3 2021 and $0.7 million year-to-date 2021[31][32] Restricted Stock Awards (Nine months ended Sep 30) | Restricted Stock Awards (Nine months ended Sep 30) | 2021 Shares | 2020 Shares | |:---------------------------------------------------|:------------|:------------| | Unvested shares, January 1 | 148,885 | — | | Granted | 18,180 | 148,885 | | Vested | (39,449) | — | | Forfeited | (17,777) | — | | Unvested shares, September 30 | 109,839 | 148,885 | Stock Options (Nine months ended Sep 30) | Stock Options (Nine months ended Sep 30) | 2021 Shares | 2020 Shares | |:-----------------------------------------|:------------|:------------| | Outstanding at January 1 | 495,489 | 457,959 | | Granted | — | 126,000 | | Exercised | (7,480) | (19,770) | | Canceled | (39,719) | (16,400) | | Outstanding at September 30 | 448,290 | 547,789 | | Exercisable at September 30 | 384,690 | 373,189 | Note 5 – Earnings per Share - Basic EPS is calculated based on weighted average shares outstanding, excluding unvested restricted stock, while diluted EPS includes the effect of potential common shares from 'in-the-money' stock options and unvested restricted stock awards[39][40] Weighted Average Shares Outstanding | Weighted Average Shares Outstanding | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | |:------------------------------------|:-------------|:-------------|:-------------|:-------------| | Basic | 15,257,367 | 15,192,838 | 15,247,477 | 15,215,167 | | Dilutive effect (shares added) | 86,176 | 45,586 | 121,772 | 58,595 | | Anti-dilutive options (excluded) | 327,346 | 362,407 | 339,546 | 344,814 | Note 6 – Comprehensive Income - Comprehensive income includes net income and other comprehensive income, with the latter primarily consisting of unrealized gains and losses on available-for-sale investment securities[41] Note 7 – Commitments and Contingent Liabilities - The Company is exposed to off-balance-sheet risk from unused commitments to extend credit and standby letters of credit, applying the same credit policies as for originating loans[42][45] Off-Balance-Sheet Credit Risk (dollars in thousands) | Off-Balance-Sheet Credit Risk (dollars in thousands) | Sep 30, 2021 | Dec 31, 2020 | |:-----------------------------------------------------|:-------------|:-------------| | Commitments to extend credit | $532,891 | $441,816 | | Standby letters of credit | $7,151 | $8,104 | - A $105 million letter of credit from the Federal Home Loan Bank secures certain deposits and credit arrangements, backed by pledged loans[46] Note 8 – Fair Value Disclosures and Reporting and Fair Value Measurements - The Company measures and reports available-for-sale debt securities and certain impaired loans at fair value, using a three-level hierarchy based on input observability, with estimates relying on market data and assumptions[48][49][50][52] Financial Assets and Liabilities (dollars in thousands) | Financial Assets (dollars in thousands) | Carrying Amount (Sep 30, 2021) | Fair Value (Sep 30, 2021) | |:----------------------------------------|:-------------------------------|:--------------------------| | Cash and cash equivalents | $422,350 | $422,350 | | Investment securities available for sale| $732,312 | $732,312 | | Loans and leases, net held for investment | $2,121,337 | $2,103,993 | | Collateral dependent impaired loans | $260 | $374 | | Financial Liabilities | | | | Deposits | $2,820,646 | $2,820,112 | | Repurchase agreements | $92,553 | $92,553 | | Long-term debt | $49,221 | $49,782 | | Subordinated debentures | $35,258 | $33,929 | - Collateral-dependent impaired loans are carried at fair value when collection is improbable and the loan is written down to collateral value, while foreclosed assets are carried at the lower of cost or fair value, determined by appraisals less disposition costs[56][57] Note 9 – Investments - All investment securities are classified as 'available for sale' for flexibility in interest rate risk and liquidity management, carried at estimated fair market values with monthly mark-to-market adjustments[63] Investment Securities (dollars in thousands) | Investment Securities (dollars in thousands) | Amortized Cost (Sep 30, 2021) | Estimated Fair Value (Sep 30, 2021) | |:---------------------------------------------|:------------------------------|:------------------------------------| | U.S. government agencies | $1,644 | $1,693 | | Mortgage-backed securities | $320,919 | $327,645 | | State and political subdivisions | $277,690 | $292,079 | | Corporate bonds | $16,195 | $16,307 | | Collateralized loan obligations | $94,591 | $94,588 | | Total securities | $711,039 | $732,312 | - The Company had 58 securities with gross unrealized losses at September 30, 2021, but management does not believe these losses are other than temporary, with net gains on sale of securities available-for-sale totaling $11 thousand for both the three and nine months ended September 30, 2021[66][67] Note 10 – Credit Quality and Nonperforming Assets - The Company monitors loan credit quality using classifications: Pass, Special Mention, Substandard, and Impaired, with impaired loans including nonperforming loans and Troubled Debt Restructurings (TDRs)[82][83][84][85] Credit Quality (dollars in thousands) | Credit Quality (dollars in thousands) | Pass (Sep 30, 2021) | Special Mention (Sep 30, 2021) | Substandard (Sep 30, 2021) | Impaired (Sep 30, 2021) | Total (Sep 30, 2021) | |:--------------------------------------|:--------------------|:-------------------------------|:---------------------------|:------------------------|:---------------------| | Total real estate | $1,740,548 | $54,058 | $28,168 | $10,150 | $1,832,924 | | Agricultural | $41,377 | — | $1,448 | $471 | $43,296 | | Commercial and industrial | $120,857 | $9,697 | $226 | $1,512 | $132,292 | | Mortgage warehouse | $126,486 | — | — | — | $126,486 | | Consumer loans | $4,561 | $35 | $69 | $163 | $4,828 | | Total gross loans and leases | $2,033,829 | $63,790 | $29,911 | $12,296 | $2,139,826 | - Nonperforming assets decreased by $1.7 million (20%) to $6.9 million during the first nine months of 2021, while nonperforming loans to gross loans increased slightly to 0.32% due to a decrease in the overall loan portfolio, and performing TDRs decreased by $5.9 million (52%) to $5.5 million[265][266] Note 11 – Allowance for Loan and Lease Losses - The Allowance for Loan and Lease Losses (ALLL) is maintained to absorb probable losses on impaired loans and inherent losses in the remaining portfolio, using a systematic methodology including individual analysis for impaired loans and pooled evaluations for unimpaired loans, incorporating quantitative and qualitative risk factors[113][123] ALLL Activity (dollars in thousands) | ALLL Activity (dollars in thousands) | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | |:-------------------------------------|:-------------------------------|:-------------------------------| | Beginning balance | $17,738 | $9,923 | | (Benefit) provision | $(2,450) | $6,350 | | Charge-offs | $(1,030) | $(1,556) | | Recoveries | $1,359 | $869 | | Ending balance | $15,617 | $15,586 | ALLL Ratios | ALLL Ratios | Sep 30, 2021 | Dec 31, 2020 | Sep 30, 2020 | |:-------------------------------------|:-------------|:-------------|:-------------| | ALLL to gross loans and leases | 0.73% | 0.72% | 0.65% | | ALLL to nonperforming loans | 230.07% | 233.46% | 216.89% | Note 12 – Long-Term Debt Long-Term Debt (dollars in thousands) | Long-Term Debt (dollars in thousands) | Principal (Sep 30, 2021) | Unamortized Debt Issuance Costs (Sep 30, 2021) | |:----------------------------------------|:-------------------------|:-----------------------------------------------| | Fixed - floating rate subordinated debentures, due 2031 | $50,000 | $(779) | | Total long-term debt | $50,000 | $(779) | - The Company issued $50 million in 3.25% fixed-to-floating subordinated debt with a ten-year maturity in Q3 2021, with the holding company planning to contribute $25 million of this capital to the Bank in Q4 2021[297] Note 13 – Revenue Recognition - Revenue from customer contracts (ASC 606), such as service charges and debit card interchange fees, is recognized as noninterest income when services are rendered, while revenue from financial instruments and other noninterest income (e.g., BOLI) is accounted for on an accrual basis under other GAAP provisions[132][136] Noninterest Income (dollars in thousands) | Noninterest Income (dollars in thousands) | Three months ended Sep 30, 2021 | Three months ended Sep 30, 2020 | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | |:------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Service charges on deposits | $3,186 | $2,950 | $8,677 | $8,752 | | Other income | $4,349 | $4,155 | $12,300 | $11,360 | | Total noninterest income | $7,535 | $7,105 | $20,977 | $20,112 | Note 14 – Subsequent Events - On October 21, 2021, the Board approved a new 2021 Share Repurchase Plan authorizing 1,000,000 shares for repurchase, incorporating the 268,301 remaining shares from the previous plan, with repurchases expected to commence in Q4 2021[137] Item 2. Management's Discussion & Analysis of Financial Condition & Results of Operations Management discusses Sierra Bancorp's financial performance, condition, key drivers, trends, COVID-19 impacts, and risk management Forward-Looking Statements - The report contains forward-looking statements based on management's current expectations, which are subject to inherent risks and uncertainties, with actual results potentially differing materially due to factors including economic conditions, COVID-19 impacts, interest rate fluctuations, and regulatory changes[140][141][142] Critical Accounting Policies - Critical accounting policies involve complex judgments and estimates, primarily in establishing the allowance for loan and lease losses, valuing impaired loans and foreclosed assets, assessing income taxes and deferred tax assets, and evaluating goodwill and other intangible assets for impairment[146][147] Overview of the Results of Operations and Financial Condition Results of Operations Summary Results of Operations Summary (dollars in millions) | Metric (dollars in millions) | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | |:-----------------------------|:--------|:--------|:---------|:---------| | Net Income | $10.6 | $10.4 | $33.4 | $26.5 | | Diluted EPS | $0.69 | $0.68 | $2.17 | $1.73 | | Return on Average Equity | 11.62% | 12.34% | 12.60% | 10.90% | | Return on Average Assets | 1.26% | 1.34% | 1.36% | 1.26% | - Q3 2021 net income increased slightly due to a $0.6 million negative provision for loan losses (vs. $2.4 million provision in Q3 2020), offset by a $1.4 million decrease in net interest income and a $1.6 million increase in noninterest expense[149][150][151][152][153] - Year-to-date 2021 net income increased significantly due to a $2.5 million negative provision for loan losses (vs. $6.4 million provision in YTD 2020) and a $6.5 million increase in net interest income, partially offset by a $6.2 million increase in noninterest expense[153][155] Financial Condition Summary Financial Condition Summary (dollars in millions) | Balance Sheet Item (dollars in millions) | Sep 30, 2021 | Dec 31, 2020 | Change (YTD) | |:-----------------------------------------|:-------------|:-------------|:-------------| | Total Assets | $3,400 | $3,200 | +$200 | | Cash and due from banks | $422.4 | $71.4 | +$350.9 | | Investment securities | $732.3 | $544.0 | +$188.3 | | Gross loans | $2,139.8 | $2,463.1 | $(323.3) | | Deposits | $2,800 | $2,600 | +$196.0 | | Long-term debt | $49.2 | — | +$49.2 | | Total shareholders' equity | $364.5 | $343.9 | +$20.6 | - Gross loans declined primarily due to a $181.2 million decrease in mortgage warehouse line utilization, a $63.0 million decline in real estate loans, and a $76.8 million decrease in commercial and industrial loans (mostly SBA PPP loan forgiveness)[158] - Deposit growth was driven by core transaction and savings accounts, while higher-cost time and wholesale brokered deposits decreased[160] Impact of Coronavirus Disease 2019 (COVID-19) Pandemic on the Company's Operations - The Company offered short-term payment deferrals and SBA PPP loans to mitigate credit loss impacts, with $10.4 million in loans with payment deferrals remaining as of September 30, 2021, all fully secured by real estate and internally graded as classified assets[177][271] - The Company deferred CECL implementation until January 1, 2022, to better assess COVID-19's impact on credit losses, as the pandemic has negatively impacted net interest margin due to lower interest rates and increased liquidity deployed in low-yielding overnight funding[180][181] - COVID-19 has not adversely affected capital or financial resources, with shareholders' equity increasing by $20.6 million YTD 2021, and the Company closed five branch locations in June 2021 due to changing customer behaviors, expecting annual noninterest expense savings of $0.8-$1.0 million[182][185] Earnings Performance - The Company's income primarily derives from net interest income (interest income from earning assets minus interest expense on liabilities) and noninterest income (customer service charges, fees, BOLI, and non-debt investments), with noninterest expense mainly covering operating costs for banking services[191] Net Interest Income and Net Interest Margin Net Interest Income and Net Interest Margin (dollars in millions) | Metric (dollars in millions) | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | |:-----------------------------|:--------|:--------|:---------|:---------| | Net Interest Income | $26.7 | $28.1 | $82.5 | $76.0 | | Net Interest Margin | 3.46% | 3.98% | 3.66% | 3.97% | - Q3 2021 net interest income decreased by $1.4 million due to a 54 bps decline in earning asset yield and lower average loan balances, partially offset by a 2 bps decrease in interest-bearing liability costs[193][194][195] - YTD 2021 net interest income increased by $6.5 million, driven by higher average loan balances and a favorable deposit mix, despite a lower net interest margin[208][209] - Average loan balances decreased by $161.9 million (7%) in Q3 2021 YoY, mainly due to a 55% decrease in mortgage warehouse lines and a 38% decrease in commercial loans (SBA PPP forgiveness), while YTD 2021, average loan balances increased by $254.3 million (13%), primarily from a 20% increase in real estate loans[194][195] - Interest expense declined due to a favorable shift in deposit mix, with average total time deposits decreasing by 31% in Q3 2021 YoY and 22% YTD 2021, and non-interest bearing demand deposits increasing by 15% in Q3 2021 YoY and 27% YTD 2021[213][215] Provision for Loan and Lease Losses Provision for Loan Losses (dollars in millions) | Provision for Loan Losses (dollars in millions) | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | |:------------------------------------------------|:--------|:--------|:---------|:---------| | (Benefit) Provision | $(0.6) | $2.4 | $(2.5) | $6.4 | - The Company recorded a net benefit for loan and lease loss provision of $0.6 million in Q3 2021 and $2.5 million YTD 2021, a significant favorable change from provisions in 2020, attributed to lower historical loan loss rates, declining loan balances, a shift in loan mix, and net recoveries[217] - No provision was made for SBA PPP loans due to their 100% SBA guarantee, and the Company deferred CECL adoption until January 1, 2022, to better assess COVID-19's impact on credit losses[218][219] Net Loan (Recoveries) Charge-offs (dollars in millions) | Net Loan (Recoveries) Charge-offs (dollars in millions) | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | |:--------------------------------------------------------|:--------|:--------|:---------|:---------| | Net Charge-offs (Recoveries) | $0.2 | $0.3 | $(0.3) | $0.7 | Noninterest Income and Noninterest Expense Noninterest Income (dollars in thousands) | Noninterest Income (dollars in thousands) | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | |:------------------------------------------|:--------|:--------|:---------|:---------| | Total Noninterest Income | $7,535 | $7,105 | $20,977 | $20,112 | | As a % of average interest earning assets | 0.96% | 0.99% | 0.92% | 1.04% | - Total noninterest income increased by $0.4 million (6%) in Q3 2021 and $0.9 million (4%) YTD 2021, primarily due to increased check-card interchange fees from higher customer debit card usage, while BOLI income decreased in Q3 but increased YTD due to fluctuations in underlying asset values[228][230][232] Noninterest Expense (dollars in thousands) | Noninterest Expense (dollars in thousands) | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | |:-------------------------------------------|:--------|:--------|:---------|:---------| | Total Noninterest Expense | $20,875 | $19,303 | $61,381 | $55,156 | | As a % of average interest earning assets | 2.66% | 2.70% | 2.68% | 2.85% | | Efficiency ratio | 59.75% | 53.74% | 58.30% | 56.64% | - Total noninterest expense increased by $1.6 million (8%) in Q3 2021 and $6.2 million (11%) YTD 2021, mainly driven by higher salaries and employee benefits (due to lower salary deferrals), increased legal and accounting costs, and higher data processing and check-card processing costs, while occupancy expenses decreased in Q3 due to branch closures but slightly increased YTD due to accelerated leasehold improvements[234][235][237][238] Provision for Income Taxes Provision for Income Taxes | Provision for Income Taxes | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | |:---------------------------|:--------|:--------|:---------|:---------| | As a % of pre-tax income | 24.1% | 23.4% | 25.0% | 23.5% | - The effective tax rate increased in Q3 2021 and YTD 2021 because tax credits and tax-exempt income represented a smaller percentage of total taxable income[240] Balance Sheet Analysis Earning Assets - Earning assets, comprising loans and investments, including overnight investments and surplus balances at the Federal Reserve Bank, are key determinants of the Company's financial condition, with their composition, growth, and credit quality being significant factors[242] Investments Investment Portfolio (dollars in thousands) | Investment Portfolio (dollars in thousands) | Sep 30, 2021 | Dec 31, 2020 | |:--------------------------------------------|:-------------|:-------------| | Total investment securities | $732,312 | $543,974 | | % of total assets | 21% | 17% | | Surplus interest earning balances (Fed Res) | $356,200 | $3,500 | - The net unrealized gain on the investment portfolio decreased by $4.9 million to $21.3 million at September 30, 2021, due to increased long-term market interest rates, with municipal bonds constituting 40% of the portfolio[247][248][249] - New corporate bonds are subordinated debentures of bank holding companies, and purchases of AAA and AA rated Collateralized Loan Obligations (CLOs) in Q3 2021 were for asset class diversification and asset sensitivity[250][253] - Pledged investment securities totaled $148.2 million at September 30, 2021, leaving $584.1 million in unpledged debt securities available for liquidity[254] Loan and Lease Portfolio Loan and Lease Distribution (dollars in thousands) | Loan and Lease Distribution (dollars in thousands) | Sep 30, 2021 | Dec 31, 2020 | |:---------------------------------------------------|:-------------|:-------------| | Total real estate | $1,832,924 | $1,895,923 | | Agricultural | $43,296 | $44,872 | | Commercial and industrial | $132,292 | $209,048 | | Mortgage warehouse lines | $126,486 | $307,679 | | Consumer loans | $4,828 | $5,589 | | Total loans and leases | $2,139,826 | $2,463,111 | - Gross loans and leases decreased by $323.3 million (13%) to $2.1 billion at September 30, 2021, primarily due to declines in mortgage warehouse lines ($181.2 million), real estate loans ($63.0 million), and commercial and industrial loans ($76.8 million, mainly SBA PPP loan forgiveness)[258][259][260][261] - The Company strategically lowered its regulatory commercial real estate concentration ratio from 378% to 308%, with the decline in real estate loans partially offset by an $80.4 million increase in 1-4 family residential loans, including a $121.6 million purchase of jumbo mortgage loans[260] Nonperforming Assets Nonperforming Assets (dollars in thousands) | Nonperforming Assets (dollars in thousands) | Sep 30, 2021 | Dec 31, 2020 | Sep 30, 2020 | |:--------------------------------------------|:-------------|:-------------|:-------------| | Total Nonperforming Loans | $6,788 | $7,598 | $7,186 | | Foreclosed assets | $93 | $971 | $2,970 | | Total Nonperforming Assets | $6,881 | $8,569 | $10,156 | | Performing TDRs | $5,509 | $11,382 | $7,708 | | Nonperforming loans as a % of total gross loans and leases | 0.32% | 0.31% | 0.30% | - Total nonperforming assets decreased by $1.7 million (20%) to $6.9 million, with nonperforming loans decreasing by $0.8 million, but their ratio to gross loans increased slightly due to a smaller loan portfolio, and performing TDRs decreased by $5.9 million (52%) to $5.5 million[265][266] - Foreclosed assets decreased to $0.1 million (2 properties) from $1.0 million (7 properties) at year-end 2020, with all impaired assets actively managed and well-reserved or carried at fair value[267][268] - The Company had $10.4 million in outstanding loan modifications under the CARES Act for one customer relationship, all fully secured by real estate and internally graded as classified assets[271] Allowance for Loan and Lease Losses - The ALLL decreased by $2.1 million (12%) to $15.6 million at September 30, 2021, driven by a $2.5 million loan loss benefit and $0.3 million in net recoveries, reflecting improved historical loan loss rates and decreased loan balances[274] - The ALLL to total loans ratio was 0.73% at September 30, 2021, and the ALLL to nonperforming loans ratio was 230.1%, with management believing the ALLL is adequate, though future losses are not assured[276][282] - A separate allowance of $0.2 million for potential losses on unused commitments is included in other liabilities[277] Off-Balance Sheet Arrangements - Unused commitments to extend credit, including standby letters of credit, totaled $540.0 million at September 30, 2021, an increase from $449.9 million at December 31, 2020, largely due to increased unfunded mortgage warehouse lines[284] - The Company uses a $100 million FHLB letter of credit to secure certain local agency deposits, backed by pledged loans[285] Other Assets - Non-earning cash and due from banks was $66.2 million at September 30, 2021, while net premises and equipment decreased by $3.0 million due to branch closures, and goodwill remained unchanged at $27 million, with no impairment triggering events in the first nine months of 2021[287][288] Deposits and Interest Bearing Liabilities Deposits Deposit Distribution (dollars in thousands) | Deposit Distribution (dollars in thousands) | Sep 30, 2021 | Dec 31, 2020 | |:--------------------------------------------|:-------------|:-------------| | Noninterest bearing demand deposits | $1,111,411 | $943,664 | | Interest bearing demand deposits | $154,773 | $109,938 | | NOW | $611,050 | $558,407 | | Savings | $451,248 | $368,420 | | Money market | $141,348 | $131,232 | | Time | $290,816 | $412,945 | | Brokered deposits | $60,000 | $100,000 | | Total deposits | $2,820,646 | $2,624,606 | | Percentage of Total Deposits | | | | Noninterest bearing demand deposits | 39.40% | 35.95% | - Deposit balances grew by $196.0 million (7%) YTD 2021, driven by non-maturity deposit growth of $358.2 million, while time deposits decreased by $122.1 million (primarily due to non-renewal of public time deposits), and brokered deposits decreased by $40.0 million[292] Other Interest Bearing Liabilities - Total non-deposit interest-bearing liabilities decreased by $40.1 million (18%) YTD 2021, mainly due to reduced federal funds purchased and FHLB borrowings, while repurchase agreements increased to $92.6 million, representing customer 'sweep accounts'[295][296] - Long-term debt increased to $49.2 million from the issuance of $50 million in subordinated debt, and junior subordinated debentures totaled $35.3 million[297][298] Noninterest Bearing Liabilities - Other liabilities increased by $45.5 million to $80.6 million at September 30, 2021, primarily due to a forward settling investment securities accrual[300] Liquidity and Market Risk Management Liquidity - The Company manages liquidity through cash flow projections, stress scenarios, and monitoring liquidity ratios, with primary and secondary liquidity sources including cash and cash equivalents, unpledged investment securities, FHLB borrowing availability, and unsecured lines of credit[302][303][304] Liquidity Sources (dollars in thousands) | Liquidity Sources (dollars in thousands) | Sep 30, 2021 | Dec 31, 2020 | |:-----------------------------------------|:-------------|:-------------| | Cash and cash equivalents | $422,350 | $71,417 | | Unpledged investment securities | $584,066 | $311,983 | | FHLB borrowing availability | $773,125 | $535,404 | | Unsecured lines of credit | $305,000 | $230,000 | | Totals | $2,189,654 | $1,259,823 | - The significant increase in cash and cash equivalents in 2021 is due to deposit growth and lower loan balances, with management believing current liquidity is strong and sufficient, and ratios like net loans to assets (62.08%) and available investments to assets (28.57%) well within policy guidelines[305][308][309] Interest Rate Risk Management - The Company's primary market risk is interest rate risk, managed through policies, procedures, and monthly earnings simulations using commercially available modeling software, with scenarios including upward and downward rate shocks to assess net interest income and economic value of equity (EVE) sensitivity[311][312][314] Net Interest Income Sensitivity (12-month % Change) | Net Interest Income Sensitivity (12-month) | Sep 30, 2021 (% Change) | Sep 30, 2020 (% Change) | |:-------------------------------------------|:------------------------|:------------------------| | +400 bps | 16.1% | (0.4)% | | +300 bps | 13.2% | 0.1% | | +200 bps | 9.8% | 0.7% | | +100 bps | 5.7% | 0.9% | | -100 bps | (11.0)% | (5.8)% | - At September 30, 2021, the Company was asset sensitive, with net interest income projected to increase significantly in a rising rate environment, largely due to higher overnight cash balances, though a continued drop in rates could have a substantial negative impact, exceeding internal policy guidelines for a 100 bps downward shock[315][316][320] Economic Value of Equity (EVE) Sensitivity (% Change) | Economic Value of Equity (EVE) Sensitivity | Sep 30, 2021 (% Change) | Sep 30, 2020 (% Change) | |:-------------------------------------------|:------------------------|:------------------------| | +400 bps | 38.1% | 33.5% | | +300 bps | 35.7% | 30.1% | | +200 bps | 29.9% | 24.2% | | +100 bps | 17.6% | 14.4% | | -100 bps | (23.1)% | (7.9)% | - EVE is modeled to deteriorate in moderate declining rate scenarios but benefits from upward shifts in the yield curve, with sensitivity increasing with higher interest rates due to increased noninterest-bearing deposits[324] Capital Resources Shareholders' Equity (dollars in millions) | Shareholders' Equity (dollars in millions) | Sep 30, 2021 | Dec 31, 2020 | |:-------------------------------------------|:-------------|:-------------| | Total Shareholders' Equity | $364.5 | $343.9 | - The increase in shareholders' equity was driven by net income, stock options exercised, and restricted stock accruals, partially offset by an unfavorable swing in accumulated other comprehensive income and cash dividends paid[328] Regulatory Capital Ratios (Bank of the Sierra) | Regulatory Capital Ratios (Bank of the Sierra) | Sep 30, 2021 | Dec 31, 2020 | Minimum Required Community Bank Leverage Ratio | |:-----------------------------------------------|:-------------|:-------------|:-----------------------------------------------| | Tier 1 Capital to Adjusted Average Assets | 10.66% | 10.12% | 8.50% | - The Company and Bank meet the Community Bank Leverage Ratio (CBLR) framework criteria, with the Bank's leverage ratio exceeding the 8.5% minimum, and the CBLR is set to increase to 9% on January 1, 2022[330][331] Item 3. Qualitative & Quantitative Disclosures about Market Risk Market risk disclosures, especially interest rate risk, are detailed in Management's Discussion and Analysis under 'Liquidity and Market Risk Management' - Qualitative and quantitative disclosures about market risk are included in Part I, Item 2, under 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management'[334] Item 4. Controls and Procedures Disclosure controls and procedures are effective, with no significant changes to internal controls over financial reporting in the first nine months of 2021 - The CEO and CFO concluded that the Company's disclosure controls and procedures were adequate and effective as of September 30, 2021, ensuring material information is communicated and reported timely[334][335] - There were no significant changes in internal controls over financial reporting during the first nine months of 2021 that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting[336] PART II - OTHER INFORMATION Item 1. Legal Proceedings Ordinary course legal proceedings are not expected to materially adversely affect the Company's financial condition or results - The Company and Bank are defendants in legal proceedings arising from ordinary business transactions, which management, in consultation with legal counsel, believes are not probable to have a material adverse effect on the Company's consolidated financial condition, results of operations, comprehensive income, or cash flows[339] Item 1A. Risk Factors No material changes to risk factors were reported from the Company's Form 10-K for the fiscal year ended December 31, 2020 - No material changes were reported from the risk factors disclosed in the Company's Form 10-K for the fiscal year ended December 31, 2020[340] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details stock repurchase activities, including a new 2021 Share Repurchase Plan and Q3 2021 repurchases - The Board approved a new 2021 Share Repurchase Plan authorizing 1,000,000 shares for repurchase, terminating the previous plan and rolling over its remaining 268,301 shares, with repurchases planned to commence in Q4 2021[341] Stock Repurchases (Q3 2021) | Stock Repurchases (Q3 2021) | July 31, 2021 | August 31, 2021 | September 30, 2021 | |:----------------------------|:--------------|:----------------|:-------------------| | Total shares repurchased (1)| — | 12,122 | — | | Average per share price | N/A | $24.12 | N/A | | Maximum shares remaining | 268,301 | 268,301 | 268,301 | - The repurchased shares in August 2021 relate to net settlements by employees for vested, restricted stock awards to satisfy income tax liabilities, and do not impact the publicly announced repurchase plan shares[342] Item 3. Defaults upon Senior Securities There are no applicable defaults upon senior securities - Not applicable[343] Item 4. Mine Safety Disclosures There are no applicable mine safety disclosures - Not applicable[343] Item 5. Other Information There is no other information to disclose - Not applicable[344] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including organizational documents, securities descriptions, and various agreements - The exhibits include Restated Articles of Incorporation, Amended and Restated By-laws, Description of Securities, 3.25% Fixed to Floating Subordinated Debt, Salary Continuation Agreements, Split Dollar Agreements, Deferred Compensation Plan, Indentures, Stock Incentive Plans, and Employment Agreements[345] Signatures This section contains the signatures of the President & CEO, CFO, and Principal Accounting Officer, certifying the report on November 4, 2021 - The report is signed by Kevin J. McPhaill (President & CEO), Christopher G. Treece (CFO), and Cindy L. Dabney (Principal Accounting Officer) on November 4, 2021[347]