SIERRA BANCORP (BSRR) stock intrinsic value fair value estimate & owner earnings analysis

Sierra Bancorp owns Bank of the Sierra, a community bank founded in 1977 and based in Porterville, California. It takes deposits and makes loans through 34 branches in California's South San Joaquin Valley, the Central Coast and Ventura County, and runs a mortgage-warehouse business that provides short-term funding lines to mortgage lenders. At December 31, 2025 loans were $2.55 billion (72% real estate, 20% mortgage warehouse, 8% commercial and agricultural); at June 30, 2026 loans were $2.46 billion, deposits $2.93 billion and shareholders' equity $366.9 million, of which $27.4 million is goodwill. How we measure earnings. We start from the bank's operating cash flow, remove timing swings in other assets and liabilities, charge stock compensation as a real cost, and deduct the spending needed to maintain the branch network. On that basis the bank generated between $39.4 million (2023) and $51.0 million (2022) a year over 2019-2025, a median of $45.2 million. We use 2019-2025 because it spans near-zero rates in 2020-2021, the 2022-2023 rate increases that squeezed funding costs, and the recovery since. Cash-flow statements add back a bank's loan-loss provision as a non-cash item, but loans that go bad are real money lost, so we charge a normal credit cost of 0.25% of loans a year - close to the bank's 2023-2025 average net charge-off ratio of 0.18%, 0.15% and 0.39% - which on today's $2.46 billion loan book is about $6.1 million before tax and $4.6 million after. That leaves normalized earning power of about $40.6 million, or $3.13 per share on the 12.96 million diluted shares outstanding in mid-2026. As a bank, its deposits and borrowings are its raw material, so we value earnings after all interest costs and do not subtract its debt separately; the holding company's subordinated debt is serviced from the earnings we value. Recent trend. Cash earnings fell 3.2% in total dollars in 2025 (they rose per share only because buybacks shrank the share count). Our base case assumes no growth in the first year. The first half of 2026 was better - net income of $22.4 million against $19.7 million a year earlier - but one half-year does not move our earnings level. Base case - about $57.82 per share (about $749 million). Normalized earnings of $40.6 million hold flat next year, then grow 1.5% a year through year ten, reaching about $46.4 million, and hold at that level thereafter on the strength of a core-deposit franchise that has operated for nearly fifty years. We give no credit to growth in the mortgage-warehouse business, new markets, acquisitions, or wider margins, and no credit for buybacks, since the bank paid out more than it earned in 2025 ($13.7 million of dividends and $31.8 million of buybacks against $42.3 million of net income) and is not retaining capital to fund faster loan growth. Bear case - about $40.88 per share (about $530 million). This case runs the bank through a credit cycle sized on its own record in the last one: net charge-offs were 1.40% of loans in 2009 and 2.26% in 2010, net income fell to $8.9 million and $7.4 million, and the bank raised $22 million of new equity in 2010. We apply losses of 1.4%, 2.3% and 1.2% of the non-warehouse loan book (about $1.96 billion) over three years, which costs about $61 million after tax on top of the normal credit charge, together with a repeat of the 2023 deposit-cost squeeze costing about $4 million a year. Earnings fall to about $19.7 million, $6.5 million and $22.6 million in those three years, then settle at about $34.8 million - the 2023 level after a normal credit charge - with no growth ever again. The bank stays profitable every year in this case, and the excess losses are about one-sixth of current equity, so we do not assume a dilutive capital raise. Agricultural credit is the most likely trigger: nonperforming assets of $14.8 million at year-end 2025 were mostly two agricultural relationships totalling $13.0 million, a single agricultural production relationship produced $7.5 million of charge-offs in 2025, and a dairy relationship drove $8.7 million of the $11.5 million charged off in 2022. About 25% of deposits ($703 million) are uninsured. The bear value is well above tangible book value of about $26 per share because even through this cycle the branch deposit franchise keeps earning; the losses consume earnings, not the capital base. Bull case - about $70.18 per share (about $909 million). Earnings return to the 2024-2025 average after a normal credit charge, about $44.9 million - a level already reached under current conditions - and grow 2.5% a year for ten years to about $57.4 million, then hold. The growth rests on the mortgage-warehouse lines and the 2024 bond-portfolio restructuring, which lifted the net interest margin to 3.75% in 2025 from 3.37% in 2023, continuing to perform as they have. We exclude any benefit from falling interest rates. What changed since our last estimate. The previous figures were built on a different basis and are not comparable. On the business itself, little has changed: credit costs eased in the first half of 2026 and the share count kept falling. Our case values are lower mainly because the downside now carries a full credit cycle of the kind this bank actually lived through in 2009-2010, and because we no longer assume growth beyond year ten. What would make this wrong. On the downside, a multi-year agricultural downturn in the Central Valley (water allocation, commodity prices or export disruption, all named in the bank's own risk disclosures) running deeper than 2009-2010, or a lasting rise in deposit costs. On the upside, profitable growth in mortgage warehouse lending, which we have not counted in the base case. Margin-of-safety price. We are reasonably confident in the earnings level: seven years of cash earnings in a $39-51 million band through a full rate cycle. The worst plausible outcome is a severe agricultural credit cycle; with a 10.8% leverage ratio and equity roughly six times the excess losses in our bear case, the bank should survive it without wiping out shareholders, though a deeper cycle could again force a capital raise at a low price. If we are wrong about credit costs and about growth - normal charge-offs nearer 0.4% and no growth at all - the shares would be worth roughly $50. The bank pays $1.04 a year in dividends over the holding period. From $31, the base case implies about 27% a year if value is recognized within three years and about 20% a year over five, including dividends, and a three-year path through the bear case implies roughly 17% a year. The margin-of-safety price is $31.