KBRA Affirms Ratings for Sierra Bancorp

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Porterville, California-based Sierra Bancorp (NASDAQ: BSRR) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the lead subsidiary, Bank of the Sierra. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the company’s solid earnings history, with adequate revenue diversification that includes a peer-like ~20% stable fee income component to total revenue. While earnings performance has slipped in recent quarters due to NIM pressure, bottom line profitability remains above rated peers in 1H23, further supported by low credit costs and relatively efficient operations. Indicative of BSRR’s low-cost deposit base, total cost of deposits for 1H23 was 0.96%, which is 66 bps below rated peers, reflective of nearly 40% in noninterest-bearing deposits. The favorable deposit mix (complemented by abundant contingent sources of liquidity) underpins the ratings and has supported the company's NIM despite compression in 1H23 due to pressure in the current rising interest rate environment. Asset quality metrics improved significantly after selling the OREO assets related to a single dairy relationship in 1Q23 with NPAs and NCOs improving beyond pre-pandemic levels to 0.04% and 0.03% in 2Q23, respectively, compared to 0.35% and 0.14%, respectively, in 2019. KBRA views the 1.10% LLR as adequate, covering NPAs by over 20x, combined with the company’s historical credit performance, conservatively underwritten loan portfolio, liquid balance sheet, and solid capital position. KBRA expects the company to maintain current capital levels represented by the leverage ratio (CBLR) and TCE ratio of 10.0% and 7.5%, respectively, in 2Q23, which are commensurate with the elevated investor CRE concentration and overall risk profile. The ratings also recognize the relatively recent staffing enhancements among several key positions that have boosted the depth of management, providing prior experience from larger regional banks and/or adding local market knowledge of similarly sized markets. Most recently, the CRO position (added September 2023), which had been previously a dual role combined with the CCO, brings strength to the company’s senior management team.

Rating Sensitivities

A rating upgrade for BSRR is not likely over the medium term. The ratings are similarly unlikely to be downgraded in the near term; however, a more aggressive approach to capital management or deterioration in asset quality that materially impedes the company’s earnings performance could negatively impact ratings.

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