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 low-cost deposit franchise reflected by its total cost of deposits for 1H24 at 1.46%, which is 100 bps below rated peers, and benefits from nearly 35% 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 amid the higher rate environment. Furthermore, while BSRR maintains a lower yielding loan portfolio as well as a lower loan to earning asset ratio mix, the company benefits from a higher yielding securities portfolio which has further supported an above-peer NIM. The company recently sold $251 million AFS securities at a $17.3 million loss, offset by a $19.3 million gain from the sale/leaseback of branches, utilizing the proceeds to pay down more expensive borrowings and reinvest into higher yielding fixed-rate securities and loan growth, resulting in a 41 bp increase in NIM through 1H24 to 3.59%. Earnings performance has also been supported by stable fee income contributions representing ~20% of total revenue, combined with relatively efficient operations (5-yr average efficiency ratio: 57%). While NPAs and NCOs appear elevated compared to historical periods, these are largely related to the idiosyncratic charge-off of an office loan and a nonperforming dairy relationship; asset quality metrics remain largely in line with peer averages. KBRA views the 0.97% LLR as adequate, covering NPAs by over 300%, particularly when combined with the company’s historical credit performance, conservatively underwritten loan portfolio, solid earnings performance, 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 10.8% and 8.8%, respectively, at 2Q24, which are commensurate with the elevated investor CRE concentration and the company's overall risk profile. The ratings also recognize the 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, in our view.

Rating Sensitivities

A rating upgrade for BSRR is not likely over the medium term, though continued growth and geographic expansion, maintenance of better than peer earnings and capital, and asset quality outperformance, may have positive rating implications over time. 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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