Sierra Bancorp Reports Improved Financial Results for Second Quarter and First Six Months of 2023

PORTERVILLE, Calif.--(BUSINESS WIRE)-- Sierra Bancorp (Nasdaq: BSRR), parent of Bank of the Sierra, today announced its unaudited financial results for the three- and six-month periods ended June 30, 2023. Sierra Bancorp reported consolidated net income of $9.9 million, or $0.67 per diluted share, for the second quarter of 2023, compared to $9.2 million, or $0.61 per diluted share, in the second quarter of 2022. On a linked-quarter (three months ended March 31, 2023) basis, the Company increased diluted earnings per share by $0.09, or 15%.

Highlights for the second quarter of 2023:

• Improved Earnings
  • Net Income of $9.9 million, up 13% versus the first quarter of 2023 (the prior linked quarter)
  • Increased Return on Average Assets to 1.07% from 0.97% in the prior linked quarter
  • Higher Return on Average Equity of 13.06% compared to 11.53% in the prior linked quarter
  • Improved net interest income by $0.2 million as compared to the prior linked quarter

• Solid Asset Quality
  • Total Nonperforming Loans of $1.1 million, or 0.05% of total gross loans
  • No foreclosed assets at June 30, 2023
  • Net Charge-offs remained low at $0.2 million
  • Stable Allowance for Credit Losses on loans of $23.0 million

• Stable Deposits & Liquidity
  • Overall primary and secondary liquidity sources increased slightly to $2.59 billion at June 30, 2023
  • Total deposits declined by 1% during the quarter, but increased by $72.6 million, or 3% year-to-date
  • Noninterest-bearing deposits increased by $24.8 million and represent 37% of total deposits
  • Uninsured deposits declined from 30% to 27% of total deposit balances during the quarter

• Strong Capital and Solid Asset Growth
  • Record level of Total Assets at $3.76 billion, up 2% from prior linked quarter and 4% year-to-date
  • Maintained a diversified investment portfolio designed for interest rate risk management and liquidity
  • Total Loans grew by $60.4 million, or 3% during the quarter
  • Repurchased 235,148 shares of stock during the quarter
  • Tangible Book Value per share increased by 3% to $18.93 per share at June 30, 2023
  • Strong regulatory Community Bank Leverage Ratio of 10.86% for our subsidiary Bank
  • Tangible Common Equity Ratio of 7.5% on a consolidated basis and 9.3% for our subsidiary bank
  • Dividend declared of $0.23 per share, payable on August 14, 2023

“Success isn't always about greatness. It's about consistency. Consistent hard work leads to success.
Greatness will come.” - Dwayne Johnson

“Our community-centric approach to banking has benefitted the Bank and our customers for more than 45 years,” stated Kevin McPhaill, CEO and President. “We regularly evaluate our strategic plan based on market trends and always focus on maintaining strong fundamentals in our business. This approach helped us finish the second quarter strong with improved earnings including higher net interest income, good loan growth, stable deposit balances, higher capital, and continued strong asset quality. We are proud of our entire team working together to provide our customers with exceptional service that led to our solid performance during the second quarter. The strength and power of community-focused banking gives us great reasons to be excited about our opportunities for continued growth in the second half of 2023,” concluded Mr. McPhaill.

For the first six months of 2023, the Company recognized net income of $18.7 million, or $1.26 per diluted share, as compared to $16.6 million, or $1.10 per diluted share, for the same period in 2022. The Company's improved financial performance metrics for the first half of 2023 include an annualized return on average equity of 12.30%, a return on average assets of 1.02%, and net interest margin of 3.43%, as compared to an annualized return on average equity of 10.10%, a return on average assets of 0.98%, and a net interest margin of 3.31% for the same period in 2022.

Quarterly Income Changes (comparisons to the second quarter of 2022)

• Net income increased by $0.7 million, or 8%, to $9.9 million due to higher net interest income and a decrease in provision for credit losses partially offset by lower noninterest income and higher expenses.
• The $1.7 million, or 7%, increase in net interest income is due to an $12.7 million increase in interest income partially offset by an $10.9 million increase in interest expense. There was an increase in investment securities which contributed $10.0 million to the favorable interest income variance. This increase in investments primarily consisted of floating rate collateralized loan obligations (CLOs), which contributed to $7.3 million, or 57.5%, of the interest income favorable variance, partially offset by an unfavorable increase in interest expense due to a shift of deposit balances into higher cost time certificates and an increase in borrowed funds.
• Noninterest income decreased $2.4 million primarily from nonrecurring gains on the sale of other assets in the second quarter of 2022.
• Asset quality improved as demonstrated by a significant decline in non-performing assets to gross loans plus foreclosed assets. This ratio fell to 0.05% at June 30, 2023, from 1.47% at the same period in 2022. Nonperforming assets declined substantially from $29.7 million at June 30, 2022, to $1.1 million at June 30, 2023, a decline of 96%.
• Provision for credit losses declined by $2.5 million. The provision for credit losses for loans and leases was favorably impacted by an improvement in the qualitative reserve rate component as well as continued lower charge-offs.
• Liquidity continues to be substantial with the primary liquidity ratio at 32.2% and $2.6 billion in overall available liquidity at June 30, 2023. Further, overall deposits continued to increase with an additional 2.6% added in the first half of 2023.
• All capital ratios were above the regulatory requirements for a well-capitalized institution. The Community Bank Leverage ratio was 10.03% consolidated and 10.86% for the Bank.
• Sierra Bancorp repurchased 235,148 shares totaling $3.8 million in the second quarter of 2023.
• Our Board of Directors declared a cash dividend of $0.23 per share on July 20, 2023. This is the 98th consecutive quarterly dividend paid by Sierra Bancorp. The cash dividend is payable on August 14, 2023, to shareholders of record at the close of business on July 31, 2023.

Linked Quarter Income Changes (comparisons to the three months ended March 31, 2023)

• Net income improved by $1.2 million, or 13%, driven mostly by a $1.4 million increase in noninterest income, augmented by favorable changes in the provision for credit losses. Noninterest income increased by $1.4 million due to increased service charges on deposit accounts for $0.3 million, a gain on the sale of investments taking advantage of temporary favorable movements in the yield curve for $0.4 million, and a positive variance on BOLI income for $0.5 million tied to our nonqualified deferred compensation plan.
• There was a benefit for credit losses of $0.1 million which is down $0.3 million over the linked quarter due mostly to lower charge-offs in the second quarter and an improvement in the quantitative reserve rate component of the allowance for credit losses.

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

• Net income increased by $2.1 million, or 12%, due mostly to a $2.7 million decrease in the provision for credit losses, as well as higher net interest income on a change in mix of average earning assets, partially offset by lower noninterest income and higher noninterest expense.
• The provision for credit losses was $0.2 million, a decrease of $2.7 million, due to lower net charge-offs.
• Net interest income increased by $5.1 million, or 10%, due mostly to the change in mix of interest earning assets with both average loan and investment balances increasing. Partially offsetting the benefit from increased earning asset balances, the cost of interest-bearing liabilities was higher due to increases in index rates on certain floating rate liabilities.
• Noninterest income decreased $1.9 million, or 12%, for the same reasons as noted above in the quarterly comparison, combined with a $1.0 million gain on the sale of investment securities in 2022, partially offset by a $2.0 million positive variance in BOLI income tied to our nonqualified deferred compensation plan.

Balance Sheet Changes (comparisons to December 31, 2022)

• Total assets increased $153.9 million, or 4.3%, to $3.8 billion primarily due to increases in investment securities, mortgage warehouse and commercial and industrial loans. Deposits increased by $72.6 million, or 3%. The growth in deposits came primarily from higher-cost time deposits and brokered deposits. Noninterest bearing or low-cost transaction and savings accounts decreased $135.2 million.
• Gross loans increased $41.5 million, or 2%, due mostly to a $45.2 million increase in mortgage warehouse loans and a $18.6 million increase in commercial and industrial loans. These increases were offset by a $25.4 million decrease in real estate loans. Organic loan production for the first half of 2023 was $89.6 million, a 37% decrease, as compared to $142.1 million for the comparative period in 2022. The current interest rate environment is slowing loan demand and creating competitive pressures on new credits.
• Investment securities increased $84.2 million, or 7%, mostly in variable rate collateralized loan obligations.

Other financial highlights are reflected in the following table.

FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Data, Unaudited)
			As of or for the												As of or for the
			three months ended												six months ended
			6/30/2023				3/31/2023				6/30/2022				6/30/2023				6/30/2022
Net income		$	9,919			$	8,751			$	9,204			$	18,670			$	16,611
Diluted earnings per share		$	0.67			$	0.58			$	0.61			$	1.26			$	1.10
Return on average assets			1.07	%			0.97	%			1.07	%			1.02	%			0.98	%
Return on average equity			13.06	%			11.53	%			11.68	%			12.30	%			10.10	%
Net interest margin (tax-equivalent) (1)			3.39	%			3.47	%			3.40	%			3.43	%			3.31	%
Yield on average loans			4.74	%			4.50	%			4.31	%			4.62	%			4.31	%
Yield on investments			5.02	%			4.73	%			2.40	%			4.88	%			1.61	%
Cost of average total deposits			1.09	%			0.83	%			0.11	%			0.96	%			0.10	%
Efficiency ratio (tax-equivalent) (1) (2)			62.27	%			64.84	%			59.19	%			63.53	%			62.70	%
Total assets		$	3,762,461			$	3,693,984			$	3,396,635			$	3,762,461			$	3,396,635
Loans net of deferred fees		$	2,094,464			$	2,033,992			$	2,021,581			$	2,094,464			$	2,021,581
Noninterest demand deposits		$	1,066,498			$	1,041,748			$	1,120,413			$	1,066,498			$	1,120,413
Total deposits		$	2,918,759			$	2,948,988			$	2,850,999			$	2,918,759			$	2,850,999
Noninterest-bearing deposits over total deposits			36.5	%			35.3	%			39.3	%			36.5	%			39.3	%
Shareholders' equity / total assets			8.2	%			8.3	%			8.8	%			8.2	%			8.8	%
Tangible common equity ratio (2)			7.5	%			7.6	%			8.0	%			7.5	%			8.0	%
Book value per share		$	20.90			$	20.40			$	19.82			$	20.90			$	19.82
Tangible book value per share (2)		$	18.93			$	18.44			$	17.82			$	18.93			$	17.82

(1)		Computed on a tax equivalent basis utilizing a federal income tax rate of 21%.
(2)		See reconciliation of non-GAAP financial measures to the corresponding GAAP measurement in "Non-GAAP Financial Measures".

INCOME STATEMENT HIGHLIGHTS

Net Interest Income

Net interest income was $28.3 million for the second quarter of 2023, a $1.7 million increase, or 7% over the second quarter of 2022, and increased $5.1 million, or 10%, to $56.4 million for the first six months of 2023 relative to the same period in 2022.

For the second quarter of 2023, growth in average interest-earning assets totaled $243.8 million, or 8%, as compared to the second quarter of 2022. The yield on these balances was 125 basis points higher for the same period. Average loan balances increased $42.9 million with a 43 basis point increase in yield, while average investment balances increased $200.9 million with a 262 basis point increase in yield, mostly due to a $172.2 million increase in average collateralized loan obligation balances which have variable rates. There was a 185 basis point increase in the cost of our interest-bearing liabilities for the same period.

Net interest income for the comparative year-to-date periods increased $5.1 million due to the change in mix on interest earning assets, moderated by an increase in interest rates paid on interest-bearing liabilities. There was a $62.4 million, or 3%, increase in average loan and lease balances yielding 31 basis points higher for the same period, while average investment balances increased $153.1 million yielding 273 basis points higher for the same period. Average interest-bearing liabilities increased $332.2 million, of which $68.3 million is an increase in deposit balances, $174.6 million is overnight or short-term borrowings, while $36.5 million is longer term FHLB borrowings. The cost of interest-bearing liabilities was 164 bps higher for the comparative periods. The net impact of the mix and rate change was a 12 basis point increase in our net interest margin for the six-months ending June 30, 2023 as compared to the same period in 2022.

At June 30, 2023, approximately 17% of the Bank’s loan portfolio is scheduled to mature or reprice within twelve months and an additional 11% could reprice within three years. In addition, approximately $563.0 million, or 41.5%, of the securities portfolio consists of floating rate bonds that will reprice in less than 90 days. Office commercial real estate loans have adjustable rates with most rate adjustments occurring beyond two years. During the next twenty-four months, we have 43 office commercial real estate loans totaling $37.0 million that have scheduled interest rate resets. Additionally there are 13 office commercial real estate loans totaling $9.0 million that will mature during the same time frame. The Bank’s practice is to make commercial real estate loans with an “at origination” loan-to-value of 65% or lower.

Interest expense was $12.6 million for the second quarter of 2023, an increase of $10.9 million, relative to the second quarter of 2022. For the first six months of 2023, compared to the first six months of 2022, interest expense increased $18.9 million, to $21.8 million. The increase in interest expense is primarily attributable to an increase in interest rates paid on certain time deposits, a shift in deposits to higher interest rate accounts and higher cost overnight borrowed funds. There was an unfavorable shift in the deposit mix in the second quarter of 2023 as compared to the same period in 2022 that amplified the increase in interest expense. Higher cost customer time deposits increased by $244.7 million, wholesale brokered deposits increased by $118.7 million and other borrowed funds increased $167.3 million, while lower cost and noninterest bearing deposits decreased by $332.1 million. For the first half of 2023 as compared to the same period in 2022, customer time deposits increased $206.3 million, wholesale brokered deposits increased $110.7 million and borrowed funds increased $211.3 million, while lower cost or no cost deposits decreased $248.7 million.

Our net interest margin was 3.39% for the second quarter of 2023, as compared to 3.47% for the linked quarter and 3.40% for the second quarter of 2022. While the yield of interest-earning assets increased 26 basis points for the second quarter of 2023 as compared to the linked quarter, the cost of interest-bearing liabilities increased 48 basis points for the same period of comparison. The average balance of interest-earning assets increased $66.4 million for the linked quarter while the increase in interest-bearing liabilities was $98.3 million for the same period. The increase in interest rates on a larger volume of interest-bearing liabilities over interest-earning assets, combined with a shift in deposit balances from lower cost transaction accounts to higher cost time certificates exacerbates the margin compression in the linked quarter.

Provision for Credit Losses

The overall provision for credit losses resulted in a benefit of $0.1 million for the second quarter of 2023; there was a $0.1 provision for credit losses related to loans and leases offset by a benefit for credit losses from unfunded commitments and held-to-maturity investment securities, relative to $2.4 million in the second 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 $2.9 million for the same period in 2022. The Company's $2.5 million decrease in the provision for credit losses on loans and leases in the second quarter of 2023 as compared to the second quarter of 2022, and the $2.5 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 $4.1 million in net charge-offs in the first six months of 2022 with only $0.4 million in net charge offs for the first six months of 2023. The increase in net charge-offs in the second quarter of 2022 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. For the first six months of 2022, the increase in net charge-offs also included a single dairy loan relationship that defaulted in late March 2022.

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 decreased by $2.4 million, or 23%, for the quarter ended June 30, 2023, as compared to the same quarter in 2022 and decreased $1.9 million, or 12% for the comparable year-to-date periods. The quarterly comparison includes $3.2 million in non-recurring gains in 2022 resulting from the sale of Visa B stock of $2.6 million and a small business investment company fund investment of $0.6 million, as well as $0.4 million in life insurance proceeds, a $1.0 million recovery of prior year legal expenses, and a $0.2 million gain from a recovery on an acquired loan. In addition, the year-to-date comparison reflects a $1.0 million gain on the sale of investment securities in 2022 with a similar gain on investments in the first six months of 2023 of $0.4 million. These unfavorable variances to the quarter and year-to-date comparisons were partially offset by favorable increases of $1.2 million and $2.0 million respectively, in the value of separate account corporate-owned life insurance assets tied to non-qualified deferred compensation plans. Investments in the separate account variable life insurance policies are invested in a similar proportionate mix of asset classes that our deferred compensation participants have elected.

Service charges on customer deposit account income decreased by $0.2 million, or 4%, to $5.7 million in the second quarter of 2023 as compared to the second quarter of 2022. This service charge income was $0.4 million lower, or 13%, in the first six months of 2023, as compared to the same period in 2022. These decreases in the quarterly and year-to-date comparisons are primarily a result of decreased overdraft income and lower interchange fees.

Noninterest Expense

Total noninterest expense increased by $0.9 million, or 4%, in the second quarter of 2023 relative to the second quarter of 2022, and by $3.7 million, or 9%, in the first six months of 2023 as compared to the first six months of 2022.

Salaries and Benefits were $0.4 million, or 3%, higher in the second quarter of 2023 as compared to the second quarter of 2022 and $1.4 million, or 6% higher for the first six months of 2023 compared to the same period in 2022. The reason for this increase is primarily due to increased salary expense and benefit costs associated with those salaries for new lending teams and certain management staff for both the quarterly and year-to-date comparisons. Furthermore, health insurance costs increased in 2023 for the Company and are trending 13% higher in the year-to-date comparisons. Overall full-time equivalent employees were 501 at June 30, 2023, as compared to 491 at December 31, 2022 and 504 at June 30, 2022.

Occupancy expenses were relatively unchanged for the second quarter and the first half of 2023 as compared to the same periods in 2022.

Other noninterest expense increased $0.4 million, or 6%, for the second quarter 2023 as compared to the second quarter in 2022, and increased $2.2 million, or 16%, for the first half of 2023 as compared to the same period in 2022. FDIC assessment costs increased for the both the quarterly and year-to-date comparisons by $0.4 million; there were increases in deferred compensation expense for directors of $0.9 million for the quarterly comparison and $1.4 million for the year-to-date comparison, which is linked to the changes in life insurance income, increasing $1.2 million for the quarterly comparison and $2.0 million for the year-to-date comparison. There were also non-recurring increases in debit card processing and ATM network costs for both the quarterly and year-to-date comparisons due to a branding change from Mastercard to Visa and the subsequent conversion costs related to that change. Those non-recurring charges are estimated to be $0.5 million for both the quarterly and year-to-date comparisons. Additionally, we incurred a $0.3 million loss from a 2017 event that is reflected in noninterest expense. These increases were partially offset in both the quarterly and year-to-date comparisons by decreases in recruitment costs associated with new hires in 2022, decreased postage costs, and lower non-recurring costs associated with restitution payments made to customers in 2022 for customers charged nonsufficient fund fees in the past five years for representment. For the year-to-date comparison there was also elevated foreclosed assets costs for the first half of 2023 as compared to the same period in 2022, due to the foreclosure and then subsequent sale one large credit in the first quarter of 2023.

The Company's provision for income taxes was 26.2% of pre-tax income in the second quarter of 2023 relative to 26.3% in the second quarter of 2022, and 25.0% of pre-tax income for the first half of 2023 relative to 26.6% 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 Corporate Owned Life Insurance asset value associated with our non-qualified deferred compensation plans. In the second quarter and first half of 2023, the investments associated with the non-qualified deferred compensation plans increased in value, generating non-taxable income for the second quarter, and first half of 2023 while decreasing in value in the second quarter and first half of 2022 resulting in a non-deductible expense.

Balance Sheet Summary

Balance sheet changes during the first half of 2023 include an increase in total assets of $153.9 million, or 4%, primarily a result of a $41.5 million increase in gross loan balances, an $84.2 million increase in investment securities, and a $26.4 million increase in cash and due from banks.

The increase in gross loan balances as compared to December 31, 2022, was primarily a result of organic increases of $18.6 million in commercial and industrial loans, $8.6 million in commercial real estate loans and a favorable change of $45.2 million in mortgage warehouse balances. Counterbalancing these positive variances were loan paydowns and maturities resulting in net declines in many categories even with higher loan production. In particular, there was a $33.9 million net decrease in non-commercial real estate loans, mostly farmland.

As indicated in the loan roll forward table below, new credit extended for the second quarter of 2022, decreased $15.6 million over the linked quarter to $37.0 million and decreased $82.5 million over the same period in 2022. Sluggish organic loan growth is attributable to competitive pressures in our market and lower loan demand in the current interest rate environment. We also had $25.4 million in loan paydowns and maturities, offset by an increase of $42.1 million in mortgage warehouse line utilization and a $6.6 million increase in line of credit utilization.

LOAN ROLLFORWARD
(Dollars in Thousands, Unaudited)
		For the three months ended:												For the six months ended:
			June 30, 2023				March 31, 2023				June 30, 2022				June 30, 2023				June 30, 2022
Gross loans beginning balance		$	2,033,968			$	2,052,940			$	1,983,331			$	2,052,940			$	1,989,726
New credit extended			37,030				52,609				119,553				89,639				142,096
Loan purchases			—				—				46,364				—				173,082
Changes in line of credit utilization			6,622				(25,790	)			(17,837	)			(19,168	)			(37,390	)
Change in mortgage warehouse			42,145				3,033				956				45,178				(43,049	)
Pay-downs, maturities, charge-offs and amortization (1)			(25,374	)			(48,824	)			(109,705	)			(74,198	)			(201,803	)
Gross loans ending balance			2,094,391				2,033,968				2,022,662				2,094,391				2,022,662

(1)

Includes $1.6 million from the sale of a performing loan during the second quarter of 2022.

Unused commitments, excluding mortgage warehouse and overdraft lines, were $216.0 million at June 30, 2023, compared to $219.7 million at December 31, 2022. Total line utilization, excluding mortgage warehouse and overdraft lines, was 59.3% at June 30, 2023 and 58.7% at December 31, 2022. Mortgage warehouse utilization increased to 25.7% at June 30, 2023, as compared to 9.9% at December 31, 2022.

PPP loans continue to decline as borrowers receive forgiveness on these loans. There were ten loans for $0.5 million outstanding at June 30, 2023, compared to fourteen loans for $1.8 million at December 31, 2022.

Deposit balances reflect growth of $72.6 million, or 3%, during the first six months of 2023. Core non-maturity deposits decreased by $135.2 million, or 6%, while customer time deposits increased by $152.8 million, or 38%. Wholesale brokered deposits increased by $55.0 million. Overall noninterest-bearing deposits as a percent of total deposits at June 30, 2023, decreased to 36.5%, as compared to 38.2% at December 31, 2022 and 39.3% at June 30, 2022. Other interest-bearing liabilities of $483.8 million on June 30, 2023, consisted of $245.2 million in overnight borrowings, $80.0 million in term FHLB advances, $73.7 million in customer repurchase agreements, $35.6 million in trust preferred securities and $49.3 million in subordinated debentures.

Overall uninsured deposits are estimated to be approximately $799.7 million, or 27% of total deposit balances, excluding public agency deposits that are subject to collateralization through a letter of credit issued by the FHLB. In addition, uninsured deposits of the bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep (ICS) account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (CDARS). IntraFi allows for up to $225 million per customer of pass-through FDIC insurance which would more than cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance. The Bank maintains a diversified deposit base with no significant customer concentrations and does not bank any cryptocurrency companies. At June 30, 2023, the Company had approximately 121,000 accounts and the 25 largest deposit balance customers had balances of approximately 11% of overall deposits. During the second quarter of 2023, except for seasonality fluctuations in the normal course of business, there has been no change in the composition of our 25 largest deposit balance customers.

The Company continues to have substantial liquidity which is managed daily. At June 30, 2023, and December 31, 2022, the Company had the following sources of primary and secondary liquidity (Dollars in Thousands):

Primary and secondary liquidity sources			June 30, 2023			December 31, 2022
Cash and cash equivalents		$	103,483		$	77,131
Unpledged investment securities			872,991			1,097,164
Excess pledged securities			359,510			43,096
FHLB borrowing availability			656,318			718,842
Unsecured lines of credit			339,785			237,000
Funds available through fed discount window			256,846			42,278
Totals		$	2,588,933		$	2,215,511

Total capital of $309.6 million at June 30, 2023, reflects an increase of $6.0 million, or 2%, relative to year-end 2022. The increase in equity during the first half of 2023 was due to the addition of $18.7 million in net income, a $0.07 million favorable swing in accumulated other comprehensive income/loss due principally to changes in investment securities’ fair value, $3.8 million in share repurchases and net of $7.0 million in dividends paid. The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.

Asset Quality

Total nonperforming assets, comprised of nonaccrual loans and foreclosed assets, decreased by $18.4 million to $1.1 million for the first half of 2023. The Company's ratio of nonperforming loans to gross loans decreased to 0.05% at June 30, 2023 from 0.95% at December 31, 2022. The decrease resulted from a decrease in non-accrual loan balances, primarily as a result of the foreclosure and sale of one loan relationship in the dairy industry consisting of four separate loans in the first quarter of 2023. All the Company's nonperforming assets are individually evaluated for credit loss quarterly and management believes the established allowance for credit loss on such loans is appropriate.

The Company's allowance for credit losses on loans and leases was $23.0 million at June 30, 2023, as compared to $23.1 million at December 31, 2022. The relatively flat allowance for credit losses on loans and leases was due to fewer net charge offs during the first half of 2023 along with relatively low loan growth.

The allowance was 1.10% of gross loans at June 30, 2023, and 1.12% of gross loans at December 31, 2022, and 1.13% of gross loans at June 30, 2022. Management's detailed analysis indicates that the Company's allowance for credit losses on loans and leases should be sufficient to cover credit losses for the life of the loans and leases outstanding as of June 30, 2023, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the loan and lease loss allowance.

About Sierra Bancorp

Sierra Bancorp is the holding Company for Bank of the Sierra (www.bankofthesierra.com), which is in its 46^th year of operations and is the largest independent bank headquartered in the South San Joaquin Valley.

Bank of the Sierra is a community-centric regional bank, which offers a broad range of retail and commercial banking services through full-service branches located within the counties of Tulare, Kern, Kings, Fresno, Ventura, San Luis Obispo, and Santa Barbara. The Bank also maintains an online branch and provides specialized lending services through an agricultural credit center in Templeton, California, and a dedicated loan production office in Roseville, California. In 2023, Bank of the Sierra was recognized as one of the strongest and top-performing community banks in the country, with a 5-star rating from Bauer Financial.

Forward-Looking Statements

The statements contained in this release that are not historical facts are forward-looking statements based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. Readers are cautioned not to unduly rely on forward looking statements. Actual results may differ from those projected. These forward-looking statements involve risks and uncertainties including but not limited to the health of the national and local economies including the impact to the Company and its customers resulting from changes to, and the level of, inflation and interest rates; changes in laws, rules, regulations, or interpretations to which the Company is subject; the Company’s ability to maintain and grow its deposit base; loan demand and continued portfolio performance, the Company's ability to attract and retain skilled employees, customers' service expectations; cyber security risks: the Company's ability to successfully deploy new technology, the success of acquisitions and branch expansion; operational risks including the ability to detect and prevent errors and fraud; the effectiveness of the Company’s enterprise risk management framework; the impact of adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks that could affect stock price; changes to valuations of the Company’s assets and liabilities including the allowance for credit losses, earning assets, and intangible assets; changes to the availability of liquidity sources including borrowing lines and the ability to pledge or sell certain assets; costs related to litigation; the effects of severe weather events, pandemics, other public health crises, acts of war or terrorism, and other external events on our business; and other factors detailed in the Company's SEC filings, including the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of the Company's most recent Form 10‑K and Form 10‑Q.

STATEMENT OF CONDITION
(Dollars in Thousands, Unaudited)
ASSETS			6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
Cash and due from banks		$	103,483			$	83,506			$	77,131			$	86,683			$	161,875
Investment securities
Available-for-sale, at fair value			1,027,538				1,040,920				934,923				1,069,434				864,178
Held-to-maturity, at amortized cost, net of allowance for credit losses			328,478				332,728				336,881				156,211				161,399
Real estate loans
1-4 family residential construction			—				—				—				-				5,542
Other construction/land			16,020				15,653				18,412				18,315				20,816
1-4 family - closed-end			408,918				414,232				416,116				420,136				429,109
Equity lines			17,690				18,953				21,330				21,126				25,260
Multi-family residential			91,644				92,220				91,691				69,665				66,367
Commercial real estate - owner occupied			312,687				313,863				323,873				324,696				312,060
Commercial real estate - non-owner occupied			913,614				912,544				893,846				896,954				898,159
Farmland			92,728				92,906				113,394				117,385				101,675
Total real estate loans			1,853,301				1,860,371				1,878,662				1,868,277				1,858,988
Agricultural production loans			30,993				26,392				27,936				31,290				28,660
Commercial and industrial			95,367				74,726				76,779				70,147				72,616
Mortgage warehouse lines			110,617				68,472				65,439				46,553				58,134
Consumer loans			4,113				4,007				4,124				4,097				4,264
Gross loans			2,094,391				2,033,968				2,052,940				2,020,364				2,022,662
Deferred loan fees			73				24				(123	)			(348	)			(1,081	)
Allowance for credit losses on loans			(23,010	)			(23,090	)			(23,060	)			(23,790	)			(22,802	)
Net loans			2,071,454				2,010,902				2,029,757				1,996,226				1,998,779
Bank premises and equipment			22,072				22,321				22,478				22,688				22,937
Other assets			209,436				203,607				207,420				201,047				187,467
Total assets		$	3,762,461			$	3,693,984			$	3,608,590			$	3,532,289			$	3,396,635
LIABILITIES AND CAPITAL
Noninterest demand deposits		$	1,066,498			$	1,041,748			$	1,088,199			$	1,118,245			$	1,120,413
Interest-bearing transaction accounts			584,263				637,549				641,581				732,468				736,034
Savings deposits			415,793				441,758				456,981				481,882				482,140
Money market deposits			124,834				123,162				139,795				140,620				152,596
Customer time deposits			552,371				519,771				399,608				332,253				299,816
Wholesale brokered deposits			175,000				185,000				120,000				80,000				60,000
Total deposits			2,918,759				2,948,988				2,846,164				2,885,468				2,850,999
Long-term debt			49,259				89,236				49,214				49,196				49,173
Subordinated debentures			35,570				35,526				35,481				35,436				35,392
Other interest-bearing liabilities			398,922				270,861				328,169				215,112				118,014
Total deposits and interest-bearing liabilities			3,402,510				3,344,611				3,259,028				3,185,212				3,053,578
Allowance for credit losses on unfunded loan commitments			750				850				840				940				893
Other liabilities			49,609				41,513				45,140				51,065				43,117
Total capital			309,592				307,010				303,582				295,072				299,047
Total liabilities and capital		$	3,762,461			$	3,693,984			$	3,608,590			$	3,532,289			$	3,396,635

GOODWILL AND INTANGIBLE ASSETS
(Dollars in Thousands, Unaudited)
			6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
Goodwill		$	27,357			$	27,357			$	27,357			$	27,357			$	27,357
Core deposit intangible			1,837				2,056				2,275				2,517				2,769
Total intangible assets		$	29,194			$	29,413			$	29,632			$	29,874			$	30,126
CREDIT QUALITY
(Dollars in Thousands, Unaudited)
			6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
Non-accruing loans		$	1,141			$	938			$	19,579			$	26,772			$	29,745
Foreclosed assets			—				—				—				—				2
Total nonperforming assets		$	1,141			$	938			$	19,579			$	26,772			$	29,747
Quarterly net charge offs		$	157			$	220			$	7,268			$	224			$	2,276
Past due & still accruing (30-89)		$	1,873			$	1,241			$	1,203			$	1,242			$	1,037
Non-performing loans to gross loans			0.05	%			0.05	%			0.95	%			1.33	%			1.47	%
NPA's to loans plus foreclosed assets			0.05	%			0.05	%			0.95	%			1.33	%			1.47	%
Allowance for credit losses on loans			1.10	%			1.14	%			1.12	%			1.18	%			1.13	%
SELECT PERIOD-END STATISTICS
(Unaudited)
			6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
Shareholders' equity / total assets			8.2	%			8.3	%			8.4	%			8.4	%			8.8	%
Gross loans / deposits			71.8	%			69.0	%			72.1	%			70.0	%			70.9	%
Noninterest-bearing deposits / total deposits			36.5	%			35.3	%			38.2	%			38.8	%			39.3	%

CONSOLIDATED INCOME STATEMENT
(Dollars in Thousands, Unaudited)			For the three months ended:											For the six months ended:
			6/30/2023				3/31/2023			6/30/2022				6/30/2023			6/30/2022
Interest income		$	40,875			$	37,419		$	28,206			$	78,294		$	54,287
Interest expense			12,558				9,287			1,621				21,845			2,945
Net interest income			28,317				28,132			26,585				56,449			51,342
Provision for credit losses			(70	)			260			2,419				190			2,925
Net interest income after provision			28,387				27,872			24,166				56,259			48,417
Service charges and fees on deposit accounts			5,691				5,380			5,908				11,071			11,457
Gain on sale of investments			351				45			-				396			1,032
BOLI income (expense)			658				172			(582	)			830			(1,128	)
Other noninterest income			1,313				982			5,113				2,296			5,141
Total noninterest income			8,013				6,579			10,439				14,593			16,502
Salaries and benefits			12,129				12,816			11,745				24,944			23,550
Occupancy expense			2,438				2,330			2,406				4,769			4,699
Other noninterest expenses			8,401				7,846			7,962				16,247			14,037
Total noninterest expense			22,968				22,992			22,113				45,960			42,286
Income before taxes			13,432				11,459			12,492				24,892			22,633
Provision for income taxes			3,513				2,708			3,288				6,222			6,022
Net income		$	9,919			$	8,751		$	9,204			$	18,670		$	16,611
TAX DATA
Tax-exempt muni income		$	2,741			$	2,813		$	1,854			$	5,555		$	3,581
Interest income - fully tax equivalent		$	41,604			$	38,167		$	28,699			$	79,771		$	55,239

PER SHARE DATA
(Unaudited)			For the three months ended:												For the six months ended:
			6/30/2023				3/31/2023				6/30/2022				6/30/2023				6/30/2022
Basic earnings per share		$	0.67			$	0.58			$	0.62			$	1.26			$	1.11
Diluted earnings per share		$	0.67			$	0.58			$	0.61			$	1.26			$	1.10
Common dividends		$	0.23			$	0.23			$	0.23			$	0.47			$	0.46
Weighted average shares outstanding			14,735,568				14,971,842				14,931,701				14,853,052				14,976,774
Weighted average diluted shares			14,754,764				15,002,366				15,004,017				14,875,508				15,063,804
Book value per basic share (EOP)		$	20.90			$	20.40			$	19.82			$	20.90			$	19.82
Tangible book value per share (EOP)		$	18.93			$	18.44			$	17.82			$	18.93			$	17.82
Common shares outstanding (EOP)			14,811,736				15,050,740				15,090,792				14,811,736				15,090,792
KEY FINANCIAL RATIOS
(Unaudited)			For the three months ended:												For the six months ended:
			6/30/2023				3/31/2023				6/30/2022				6/30/2023				6/30/2022
Return on average equity			13.06	%			11.53	%			11.68	%			12.30	%			10.10	%
Return on average assets			1.07	%			0.97	%			1.07	%			1.02	%			0.98	%
Net interest margin (tax-equivalent) (1)			3.39	%			3.47	%			3.40	%			3.43	%			3.31	%
Efficiency ratio (tax-equivalent) (1) (2)			62.27	%			64.84	%			59.19	%			63.53	%			62.70	%
Net charge offs to avg loans (not annualized)			0.01	%			0.01	%			0.11	%			0.02	%			0.20	%

(1)		Computed on a tax equivalent basis utilizing a federal income tax rate of 21%.
(2)		See reconciliation of non-GAAP financial measures to the corresponding GAAP measurement in "Non-GAAP Financial Measures".

NON-GAAP FINANCIAL MEASURES
(Dollars in Thousands, Unaudited)
			6/30/2023				3/31/2023				6/30/2022
Total stockholders' equity		$	309,592			$	307,010			$	299,047
Less: goodwill and other intangible assets			29,194				29,413				30,126
Tangible common equity		$	280,398			$	277,597			$	268,921
Total assets		$	3,762,461			$	3,693,984			$	3,396,635
Less: goodwill and other intangible assets			29,194				29,413				30,126
Tangible assets		$	3,733,267			$	3,664,571			$	3,366,509
Common shares outstanding			14,811,736				15,050,740				15,090,792
Book value per common share		$	20.90			$	20.40			$	19.82
Tangible book value per common share		$	18.93			$	18.44			$	17.82
Equity ratio - GAAP (total stockholders' equity / total assets			8.23	%			8.31	%			8.80	%
Tangible common equity ratio (tangible common equity / tangible assets)			7.51	%			7.58	%			7.99	%
		For the three months ended:
Efficiency Ratio:			6/30/2023				3/31/2023				6/30/2022
Noninterest expense		$	22,968			$	22,992			$	22,113
Divided by:
Net interest income			28,317				28,132				26,585
Tax-equivalent interest income adjustments			729				748				493
Net interest income, adjusted			29,046				28,880				27,078
Noninterest income			8,013				6,579				10,439
Less gain on sale of securities			351				45				-
Tax-equivalent noninterest income adjustments			175				46				(155	)
Noninterest income, adjusted			7,837				6,580				10,284
Net interest income plus noninterest income, adjusted		$	36,883			$	35,459			$	37,362
Efficiency Ratio (tax-equivalent)			62.27	%			64.84	%			59.19	%

NONINTEREST INCOME/EXPENSE
(Dollars in Thousands, Unaudited)
		For the three months ended:												For the six months ended June 30,
Noninterest income:		6/30/2023				3/31/2023				6/30/2022				2023				2022
Service charges and fees on deposit accounts		$	5,691			$	5,380			$	5,908			$	11,071			$	11,457
Net gains on sale of securities available-for-sale			351				45				—				396				1,032
Bank-owned life insurance			658				172				(582	)			830				(1,128	)
Other			1,313				982				5,113				2,296				5,141
Total noninterest income		$	8,013			$	6,579			$	10,439			$	14,593			$	16,502
As a % of average interest earning assets (1)			0.93	%			0.79	%			1.31	%			0.86	%			1.04	%
Noninterest expense:
Salaries and employee benefits		$	12,129			$	12,816			$	11,745			$	24,944			$	23,550
Occupancy and equipment costs			2,438				2,330				2,406				4,769				4,699
Advertising and marketing costs			410				513				449				923				855
Data processing costs			1,536				1,528				1,525				3,064				3,010
Deposit services costs			2,532				2,023				2,417				4,555				4,662
Loan services costs
Loan processing			151				127				186				279				297
Foreclosed assets			(33	)			758				92				725				87
Other operating costs			1,490				989				2,047				2,479				2,968
Professional services costs
Legal & accounting services			483				646				673				1,129				1,219
Director's costs			725				275				—				308				—
Other professional service			832				515				259				2,039				402
Stationery & supply costs			125				141				116				265				201
Sundry & tellers			150				331				198				481				336
Total noninterest expense		$	22,968			$	22,992			$	22,113			$	45,960			$	42,286
As a % of average interest earning assets (1)			2.68	%			2.76	%			2.78	%			2.72	%			2.67	%
Efficiency ratio (tax-equivalent) (2)(3)			62.27	%			64.84	%			59.19	%			63.53	%			62.68	%

(1)		Annualized
(2)		Computed on a tax equivalent basis utilizing a federal income tax rate of 21%.
(3)		See reconciliation of non-GAAP financial measures to the corresponding GAAP measurement in "Non-GAAP Financial Measures".

AVERAGE BALANCES AND RATES
(Dollars in Thousands, Unaudited)
		For the quarter ended						For the quarter ended						For the quarter ended
		June 30, 2023						March 31, 2023						June 30, 2022
		Average Balance(1)		Income/ Expense		Yield/ Rate(2)		Average Balance(1)		Income/ Expense		Yield/ Rate(2)		Average Balance(1)		Income/ Expense		Yield/ Rate(2)
Assets
Investments:
Federal funds sold/interest-earning due from's		$	35,236	$	376	4.28%		$	5,312	$	70	5.34%		$	146,287	$	270	0.74%
Taxable			996,117		13,488	5.43%			972,051		11,986	5.00%			752,693		4,477	2.39%
Non-taxable			352,718		2,741	3.95%			361,328		2,813	4.00%			284,198		1,854	3.31%
Total investments			1,384,071		16,605	5.02%			1,338,691		14,869	4.73%			1,183,178		6,601	2.40%
Loans: (3)
Real estate			1,858,512		20,827	4.49%			1,869,112		19,899	4.32%			1,844,367		19,659	4.28%
Agricultural production			28,472		496	6.99%			28,028		433	6.27%			30,466		232	3.05%
Commercial			82,743		1,179	5.72%			70,887		993	5.68%			80,533		980	4.88%
Consumer			4,339		88	8.13%			4,137		87	8.53%			4,264		207	19.47%
Mortgage warehouse lines			78,187		1,658	8.51%			59,122		1,118	7.67%			49,884		493	3.96%
Other			2,483		22	3.55%			2,464		20	3.29%			2,354		34	5.79%
Total loans			2,054,736		24,270	4.74%			2,033,750		22,550	4.50%			2,011,868		21,605	4.31%
Total interest earning assets (4)			3,438,807	$	40,875	4.85%			3,372,441	$	37,419	4.59%			3,195,046	$	28,206	3.60%
Other earning assets			16,952						15,714						15,628
Non-earning assets			267,433						272,496						239,803
Total assets		$	3,723,192					$	3,660,651					$	3,450,477
Liabilities and shareholders' equity
Interest-bearing deposits:
Demand deposits		$	144,156	$	190	0.53%		$	150,139	$	129	0.35%		$	221,322	$	120	0.22%
NOW			454,395		76	0.07%			483,645		71	0.06%			542,915		82	0.06%
Savings accounts			428,222		62	0.06%			457,593		65	0.06%			480,654		70	0.06%
Money market			123,571		72	0.23%			135,434		25	0.07%			155,574		23	0.06%
Time deposits			540,540		6,022	4.47%			461,214		4,505	3.96%			295,850		441	0.60%
Wholesale brokered deposits			178,728		1,521	3.41%			162,560		1,204	3.00%			60,000		48	0.32%
Total interest-bearing deposits			1,869,612		7,943	1.70%			1,850,585		5,999	1.31%			1,756,315		784	0.18%
Borrowed funds:
Repurchase agreements			79,694		65	0.33%			103,426		81	0.32%			—		—	—
Other borrowings			279,633		3,430	4.92%			176,725		2,111	4.84%			112,586		77	0.27%
Long-term debt			49,247		429	3.49%			49,222		429	3.53%			49,160		430	3.51%
Subordinated debentures			35,547		691	7.80%			35,499		667	7.62%			35,365		330	3.74%
Total borrowed funds			444,121		4,615	4.17%			364,872		3,288	3.65%			197,111		837	1.70%
Total interest-bearing liabilities			2,313,733		12,558	2.18%			2,215,457		9,287	1.70%			1,953,426		1,621	0.33%
Demand deposits - noninterest-bearing			1,050,668						1,070,775						1,132,601
Other liabilities			54,139						66,632						48,458
Shareholders' equity			304,652						307,787						315,992
Total liabilities and shareholders' equity		$	3,723,192					$	3,660,651					$	3,450,477
Interest income/interest earning assets						4.85%						4.59%						3.60%
Interest expense/interest earning assets						1.46%						1.12%						0.20%
Net interest income and margin (5)				$	28,317	3.39%				$	28,132	3.47%				$	26,585	3.40%

(1)		Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
(2)		Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective federal tax rate.
(3)		Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were $(0.3) million and $0.4 million for the quarters ended June 30, 2023 and 2022, respectively, and $(0.1) million for the quarter ended March 31, 2023.
(4)		Non-accrual loans have been included in total loans for purposes of computing total earning assets.
(5)		Net interest margin represents net interest income as a percentage of average interest-earning assets.

AVERAGE BALANCES AND RATES
(Dollars in Thousands, Unaudited)
		For the six months ended									For the six months ended
		June 30, 2023									June 30, 2022
		Average Balance(1)			Income/ Expense			Yield/ Rate(2)		Average Balance(1)			Income/ Expense			Yield/ Rate(2)
Assets
Investments:
Interest-earning due from banks		$	20,357		$	446		4.42%		$	170,432		$	363		0.43%
Taxable			984,150			25,472		5.22%			756,061			7,966		2.12%
Non-taxable			356,999			5,555		3.97%			281,882			3,581		3.24%
Total investments			1,361,506			31,473		4.88%			1,208,375			11,910		2.15%
Loans:(3)
Real estate		$	1,863,783		$	40,726		4.41%		$	1,799,132		$	37,984		4.26%
Agricultural			28,251			929		6.63%			32,216			534		3.34%
Commercial			76,848			2,172		5.70%			88,784			2,378		5.40%
Consumer			4,239			176		8.37%			4,355			413		19.12%
Mortgage warehouse lines			68,707			2,776		8.15%			55,538			1,003		3.64%
Other			2,474			42		3.42%			1,922			65		6.82%
Total loans			2,044,302			46,821		4.62%			1,981,947			42,377		4.31%
Total interest earning assets (4)			3,405,808			78,294		4.72%			3,190,322			54,287		3.49%
Other earning assets			16,336								15,654
Non-earning assets			269,950								225,345
Total assets		$	3,692,094							$	3,431,321
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits		$	147,131		$	319		0.44%		$	212,193		$	226		0.21%
NOW			468,939			147		0.06%			544,589			164		0.06%
Savings accounts			442,826			127		0.06%			474,213			137		0.06%
Money market			129,470			96		0.15%			153,469			46		0.06%
Time deposits			501,096			10,528		4.24%			294,773			675		0.46%
Brokered deposits			170,688			2,726		3.22%			60,000			96		0.32%
Total interest bearing deposits			1,860,150			13,943		1.51%			1,739,237			1,344		0.16%
Borrowed funds:
Repurchase agreements			91,495			146		0.08%			108,762			158		0.29%
Other borrowings			228,463			5,541		4.89%			170			1		1.19%
Long-term debt			49,235			857		3.51%			49,152			857		3.52%
Subordinated debentures			35,523			1,358		7.71%			35,342			585		3.34%
Total borrowed funds			313,221			7,902		5.09%			193,426			1,601		1.67%
Total interest bearing liabilities			2,264,866			21,845		1.95%			1,932,663			2,945		0.31%
Demand deposits - noninterest bearing			1,060,666								1,113,262
Other liabilities			60,351								53,712
Shareholders' equity			306,211								331,684
Total liabilities and shareholders' equity		$	3,692,094							$	3,431,321
Interest income/interest earning assets								4.72%								3.49%
Interest expense/interest earning assets								1.29%								0.18%
Net interest income and margin(5)					$	56,449		3.43%					$	51,342		3.31%

(1)		Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
(2)		Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective federal tax rate.
(3)		Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were $(0.4) million and $0.8 million for the six months ended June 30, 2023 and 2022, respectively.
(4)		Non-accrual loans have been included in total loans for purposes of computing total earning assets.
(5)		Net interest margin represents net interest income as a percentage of average interest-earning assets.

Category: Financial

Source: Sierra Bancorp

View source version on businesswire.com: https://www.businesswire.com/news/home/20230724517932/en/

Kevin McPhaill, President/CEO

(559) 782‑4900 or (888) 454‑BANK

sierrabancorp.com

Source: Sierra Bancorp