Sierra Bancorp Reports Financial Results for Third Quarter and First Nine Months of 2023

Sierra Bancorp (Nasdaq: BSRR), parent of Bank of the Sierra, today announced its unaudited financial results for the three-and nine-month periods ended September 30, 2023. Sierra Bancorp reported consolidated net income of $9.9 million, or $0.68 per diluted share, for the third quarter of 2023, and $28.5 million, or $1.93 per diluted shares, for the first nine months of 2023.

Highlights for the third quarter of 2023:

• Steady Earnings
  • Net Income of $9.9 million, consistent with the second quarter of 2023 (the prior linked quarter), and up 8% year-to-date compared to the same period last year
  • Return on Average Assets of 1.04%
  • Return on Average Equity of 12.62%

• Solid Asset Quality
  • Total Nonperforming Loans declined to $0.8 million, or 0.04% of total gross loans
  • Past due loans declined to $0.8 million, the lowest level for the past two years
  • No foreclosed assets at September 30, 2023
  • Net Charge-offs remained very low at just under $0.1 million
  • Stable Allowance for Credit Losses on loans of $23.1 million

• Stable Deposits & Liquidity
  • Overall primary and secondary liquidity sources increased to $2.67 billion at September 30, 2023
  • Total deposits declined by 1.6% during the quarter due mostly to declines in brokered deposits and interest-bearing transaction accounts
  • Total deposits have increased by $23.6 million, or 0.8% year-to-date
  • Noninterest-bearing deposits stable at 37% of total deposits

• Strong Capital and Solid Asset Growth
  • Total Assets at $3.74 billion, down 1% from prior linked quarter, but up 4% year-to-date
  • Maintained a diversified investment portfolio designed for interest rate risk management and liquidity
  • Repurchased 99,528 shares of stock during the quarter
  • Tangible Book Value per share increased by 1% to $19.04 per share at September 30, 2023 compared to the prior linked quarter
  • Strong regulatory Community Bank Leverage Ratio of 11.00% for our subsidiary Bank
  • Tangible Common Equity Ratio of 7.5% on a consolidated basis and 9.4% for our subsidiary bank
  • Dividend declared of $0.23 per share, payable on November 14, 2023, our 99^th consecutive quarterly dividend

“The elevator to success is out of order. You’ll have to use the stairs, one step at a time.” - Joe Girard

“We are proud of the many accomplishments of our team of focused bankers this past quarter,” stated Kevin McPhaill, CEO and President. “Our continued strong results are even more noteworthy, given the challenging banking environment. In particular, earnings per share increased from last quarter as did tangible common equity per share. Our quarterly results demonstrate our commitment to continued active balance sheet management. Much of our success is the result of our community bank foundation, which gives us unique positioning and strong connections with our customers. As we continue to look for opportunities to improve earnings, we are excited about the remainder of 2023 and the coming year!” concluded Mr. McPhaill.

For the first nine months of 2023, the Company recognized net income of $28.6 million, or $1.93 per diluted share, as compared to $26.5 million, or $1.76 per diluted share, for the same period in 2022. The year-over-year improvement is due primarily to higher net interest income of $4.3 million, along with a $4.0 million decrease in the provision for credit losses in 2023, partially offset by a $5.2 million increase in noninterest expense. The Company’s financial performance metrics for the first nine months of 2023 include an annualized return on average assets and a return on average equity of 1.03% and 12.41%, respectively, compared to 1.03% and 10.98%, respectively, for the same period in 2022.

Financial Highlights

Quarterly Changes (comparisons to the third quarter of 2022)

• Net income was unchanged at $9.9 million. Net interest income was negatively impacted by compression in the net interest margin. There was a favorable change in the provision for credit losses on loans while improvements made in noninterest income were offset by higher noninterest expenses.
• Net interest income was $0.8 million lower due to a 33 bp decrease in net interest margin. There was a $231.9 million increase in average interest earning assets with an increased yield of 94 bps, however this was more than offset by a $335.4 million increase in interest bearing liabilities at 184 bps higher cost.
• Noninterest income increased $1.2 million or 17% primarily due to a $0.6 million increase in bank-owned life insurance, $0.3 million in life insurance proceeds and a $0.2 million increase in service charges on deposit accounts.
• Asset quality improved considerably as demonstrated by a significant decline in non-performing assets to gross loans plus foreclosed assets. This ratio fell to 0.04% at September 30, 2023, from 1.33% at the same period in 2022. Nonperforming assets declined substantially from $26.8 million at September 30, 2022, to $0.8 million at September 30, 2023, a decline of 97%. Most of the nonperforming assets at September 30, 2022 were related to a single dairy relationship that was foreclosed upon and sold in early 2023.
• There was a benefit for credit losses for $0.03 million, as compared to a provision for credit losses of $1.3 million in the same quarter of 2022, due to a decrease in specific reserves for individually evaluated loans.
• Liquidity continues to be very substantial with the primary liquidity ratio at 31.5% and $2.7 billion in overall available liquidity at September 30, 2023.
• All required capital ratios were above the regulatory guidelines for a well-capitalized institution. The Community Bank Leverage ratio was 11.00% for Bank of the Sierra. The Sierra Bancorp Tier I leverage ratio was 10.08%.
• Sierra Bancorp repurchased 99,528 shares totaling $2.0 million in the third quarter of 2023.
• Our Board of Directors declared a cash dividend of $0.23 per share on October 19, 2023. This is the 99th consecutive quarterly dividend paid by Sierra Bancorp. The cash dividend is payable on November 14, 2023, to shareholders of record at the close of business on October 30, 2023.

Year to-Date Income Changes (comparisons to the first nine-months of 2022)

• Net income increased $2.0 million, or 8%. There was an increase of $4.3 million or 5% in net interest income, due mostly to an overall increase in interest rates. We experienced higher yields and balances on loans and investment securities, which were partly offset by higher overall funding costs.
• Earnings per share increased to $1.93, an increase of 10% from $1.76 per share.
• The provision for credit losses was $0.2 million, a decrease of $4.0 million due to a decrease in specific reserves on individual loans as well as lower net loan charge-offs.
• Noninterest income decreased by $0.8 million, or 3%. In 2022 there was a $1.0 million recovery of prior year legal expenses, a $1.0 million gain on the sale of investment securities, and a $3.2 million gain on the sale of other assets with no like corresponding event in 2023. Positively impacting the first nine months of 2023 there was a $2.8 million positive variance in deferred compensation BOLI and a $0.4 million increase in life insurance proceeds.
• Noninterest expense increased $5.2 million, or 8%, due mostly to the increases in salary expense for new loan production teams and a negative variance in director’s deferred compensation expense which is linked to the favorable changes in bank-owned life insurance income described above.

Statement of Condition Changes (comparisons to December 31, 2022)

• Total assets increased by $130.3 million, or 4%, to $3.7 billion, during the first nine months of the year due mostly to an increase in wholesale deposits and borrowed funds which facilitated the purchase of investment securities as well as modest loan growth.
• Cash and due from banks increased $11.4 million to $88.5 million during the first nine months of the year due to an increase in interest earning bank balances.
• Investment securities increased by $62.1 million, or 5%, to $1.2 billion primarily due to strategic purchases of high-quality AAA and AA rated, collateralized loan obligations and government agency securities.
• Gross loans increased $47.9 million predominantly due to a $42.2 million increase in mortgage warehouse line utilization. In addition, C&I and Agricultural production loans increased, but were partially offset by a decline in Farmland loans due to a foreclosure of a single dairy relationship in early 2023.
• Deposits totaled $2.9 billion at September 30, 2023, representing a year-to-date increase of $23.6 million, or 1%. The growth in deposits came mostly from a $45.0 million increase in brokered deposits primarily acquired prior to March 2023 as part of the Company’s interest rate risk management and liquidity strategy.
• Long term debt and subordinated debentures were relatively unchanged. Other interest-bearing liabilities increased $83.7 million, or 26%, and consisted primarily of long term FHLB advances.

Other financial highlights are reflected in the following table.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income was $28.1 million, for the third quarter of 2023, a $0.8 million decrease, or 3% over the third quarter of 2022, but increased $4.3 million, or 5%, to $84.5 million for the first nine months of 2023 relative to the same period in 2022.

For the third quarter of 2023, growth in average interest-earning assets totaled $231.9 million, or 7%, as compared to the third quarter of 2022. The yield on these balances was 94 basis points higher for the same period due mostly to an increase in investment securities as well as loan growth and the result of interest rate increases by the Federal Open Market Committee. This increase in yield was offset by a 184 basis point increase in the cost of our interest-bearing liabilities for the same period. Although transaction and savings deposit rates have not changed, higher costs of time deposits and borrowed funds including overnight purchases are the primary reasons for the increase in interest expense.

Net interest income for the comparative year-to-date periods increased $4.3 million, or 5%, due to a change in mix of average interest-earning assets, mostly the deployment of lower yielding interest earning due from bank balances into higher yielding investment securities. Investment balances, which includes overnight funds, with an average yield of 5.0% increased $157.0 million, while gross average loan balances yielding 4.7% increased $64.0 million. The overall yield on the average balances of earning assets was 114 basis points higher for the comparative periods, offset by a 171 basis point increase in interest paid on liabilities. The net impact of these various changes was a 2 basis point decrease in our net interest margin for the nine-months ending September 30, 2023, as compared to the same period in 2022.

Interest expense was $14.3 million for the third quarter of 2023, an increase of $11.3 million, relative to the third quarter of 2022. For the first nine months of 2023, compared to the same period in 2022, interest expense increased $30.2 million to $36.1 million. The significant increase in interest expense is attributable to an unfavorable shift in interest bearing liabilities and the impact of recent interest rate increases, as the average balance of deposits, including lower cost core deposits decreased $93.2 million while higher cost borrowed funds and wholesale brokered deposits increased by $352.7 million in the third quarter of 2023 as compared to the third quarter of 2022. For the year-to-date comparisons the increase is attributable to a shift from lower cost transaction accounts to higher cost time accounts as well as an increase in borrowed funds. For the first nine months of 2023, higher cost customer time deposits increased $218.9 million, wholesale brokered deposits increased $106.6 million and borrowed funds increased $247.5 million, while lower cost or no cost deposits decreased $278.4 million.

Our net interest margin was 3.30% for the third quarter of 2023, as compared to 3.39% for the linked quarter and 3.63% for the third quarter of 2022. While the yield of interest-earning assets increased 9 basis points for the third quarter of 2023 as compared to the linked quarter, the cost of interest-bearing liabilities increased 26 basis points for the same period of comparison. The average balance of interest-earning assets increased $24.7 million for the linked quarter while the increase in interest-bearing liabilities was $9.0 million for the same period. Even though the volume increase of interest earning assets was more than the increase in interest-bearing liabilities, the larger rate increase on liabilities caused the compression in the linked quarter. Any future FOMC rate hikes could cause further compression in the net interest margin, since overnight borrowing funds instantly reprice higher while there is a lag in the increased yield on interest-earning assets.

Provision for Loan and Lease Losses

The overall provision for credit losses resulted in a benefit of $0.03 million for the third quarter of 2023; there was a $0.1 million provision for credit losses related to loans and leases offset by a $0.2 million benefit for credit losses from unfunded commitments and no provision for held-to-maturity investment securities, relative to a provision for credit losses of $1.3 million in the third quarter of 2022, and a year-to-date provision for credit losses on loans and leases of $0.2 million in 2023 as compared to $4.2 million for the same period in 2022. The Company's $1.3 million decrease in the provision for credit losses on loans and leases in the third quarter of 2023 as compared to the third quarter of 2022, and the $4.0 million year to date decrease in the provision for credit losses, compared to the same period in 2022 was primarily due to the impact of $4.3 million in net charge-offs in the first nine months of 2022 with only $0.4 million in net charge offs for the first nine months of 2023. The decrease in net charge-offs in the first nine months of 2023 was primarily related to a single office building loan relationship that was sold at a discount due to an increased risk of default that would have likely led to a prolonged collection period and a single dairy loan relationship.

The Company did not record a provision for credit losses on available-for-sale debt securities. Although there were debt securities in an unrealized loss position the declines in market values were primarily attributable to changes in interest rates and volatility in the financial markets and not a result of an expected credit loss.

Noninterest Income

Total noninterest income increased $1.2 million, or 17%, for the quarter ended September 30, 2023, as compared to the same quarter in 2022, and decreased $.08 million, or 3% for the year-to-date period ended September 30, 2023, as compared to the same period in 2022. The quarterly and year-to-date comparisons were both impacted by favorable fluctuations in income on bank-owned life insurance (BOLI) with underlying investments mapped directly to the Company’s deferred compensation plan. The quarterly comparison was also positively impacted by an increase in service charges on deposit accounts for $0.2 million, life insurance proceeds for $0.3 million, and $0.4 million in income from an investment in an SBA loan fund. The year-to-date decrease is the result of 2022 events that did not recur in 2023, including a $1.0 million gain on the sale of debt securities, $3.6 million from gains on the sale of other assets, and the recovery of prior period legal expenses, partially offset by income from an investment in an SBA loan fund for $1.0 million in 2023. Service charges on customer deposit accounts were basically unchanged at $6.1 million in the third quarter of 2023 as compared to the third quarter of 2022, however for the year-to-date comparison there was a $0.3 million decrease primarily due to decreases in ATM and debit card income.

Noninterest Expense

Total noninterest expense increased by $1.6 million, or 7%, in the third quarter of 2023 relative to the third quarter of 2022, and by $5.2 million, or 8%, for the first nine months of 2023 as compared to the same period in 2022.

Salaries and Benefits were $1.1 million, or 10%, higher in the third quarter of 2023 as compared to the third quarter of 2022 and $2.5 million, or 7%, higher for the first nine months of 2023 compared to the same period in 2022. The reason for this increase is primarily due to the hiring of higher paid new lending teams and management staff for both the quarterly and year-to-date comparisons. There were 487 full-time equivalent employees at September 30, 2023 as compared to 491 at December 31, 2022 and 500 at September 30, 2022.

Occupancy expenses were relatively unchanged for the third quarter and the first nine-months of 2023 as compared to the same periods in 2022.

Other noninterest expense increased $0.5 million, or 6%, for the third quarter 2023 as compared to the third quarter in 2022, and increased $2.7 million, or 13%, for the first nine months of 2023 as compared to the same period in 2022. The variances for the third quarter of 2023 compared to the same period in 2022 were primarily driven by a $0.6 million unfavorable variance in directors deferred compensation expense, linked to the changes in BOLI income, higher FDIC assessment costs, increased marketing costs associated with a deposit acquisition campaign and elevated debit card losses. These increased expenses were partially offset by lower costs in core processing, debit card processing and ATM network costs. For the year-over-year comparison, the categories of increase were the same as with the quarterly comparison, along with a $0.2 million decrease in deposit statement costs offset by increased foreclosed asset costs related to the foreclosure and subsequent sale of one large loan relationship in the first quarter of 2023.

The Company's provision for income taxes was 25.8% of pre-tax income in the third quarter of 2023 relative to 25.1% in the third quarter of 2022, and 25.2% of pre-tax income for the first nine months of 2023 relative to 26.1% for the same period in 2022. The changes in effective tax rate for both the quarterly and year-to-date comparisons is due to the volatility in the Bank Owned Life Insurance asset value associated with our non-qualified deferred compensation plans.

Balance Sheet Summary

Balance sheet changes during the first nine months of 2023 include an increase in total assets of $130.3 million, or 4%, primarily a result of a $62.1 million increase in investments securities, and a $47.9 million increase in gross loans.

The increase in investment securities of $62.1 million for the year-to-date period consisted primarily of increases in AAA and AA tranches of collateralized loan obligations of $56.5 million and in callable government agency securities for $56.0 million, partially offset by decreases in mortgage-backed securities, corporate bonds and state and municipal bonds.

Gross loan balances increased $47.9 million during the first nine months of 2023, as compared to December 31, 2022. The increase was primarily a result of a $42.1 million increase in mortgage warehouse utilization, $22.6 million increase in commercial real estate, and a $35.4 million increase in other commercial loans. Negatively impacting these positive variances were loan paydowns and maturities resulting in net declines in many categories even with solid loan production. In particular there was a $22.4 million decrease in farmland, $11.1 million decrease in other construction and $18.7 million decrease in residential real estate. Further, SBA PPP loan forgiveness resulted in a $1.3 million decline in loan balances, included in the other commercial loan variance noted above.

As indicated in the loan roll forward below, new credit extended for the third quarter of 2023 decreased $14.0 million over the same period in 2022 and decreased $66.4 million for the year-to-date comparisons. This decline in organic loan growth is attributable to competitive pressures in our market and management’s unwillingness to compromise the quality of new loans originated, combined with a lack of demand due to the current high interest rate environment. We also had $37.0 million in loan paydowns and maturities, and a decrease in mortgage warehouse and credit line utilization of $25.5 million in the third quarter.